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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
For the fiscal year ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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:
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 |_|
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, 2001 was
approximately $152,474,241,000 computed upon the basis of the closing sales
price of the Common Stock on that date.
As of January 31, 2001, there were outstanding 2,333,119,315 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 16, 2001 is incorporated by reference in
Part III of this Form 10-K.
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2
PART I
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ITEM 1. Business
American International Group, Inc. ("AIG"), a Delaware corporation, is a holding
company which through its subsidiaries is engaged in a broad range of insurance
and insurance-related activities and financial services in the United States and
abroad. AIG's primary activities include both general and life insurance
operations. Other significant activities include financial services and asset
management. 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"), The Hartford Steam
Boiler Inspection and Insurance Company ("HSB"), Transatlantic Reinsurance
Company, American International Underwriters Overseas, Ltd. ("AIUO"), American
Life Insurance Company ("ALICO"), American International Assurance Company,
Limited together with American International Assurance Company (Bermuda) Limited
("AIA"), Nan Shan Life Insurance Company, Ltd. ("Nan Shan"), American
International Reinsurance Company, Ltd. and United Guaranty Residential
Insurance Company. The merger of SunAmerica Inc., a leading company in the
retirement savings and asset accumulation business, with and into AIG became
effective January 1, 1999. The transaction was treated as a pooling of interests
for accounting purposes. AIG issued 0.855 shares of common stock in exchange for
each share of SunAmerica Inc. stock outstanding at the effective time of the
merger for an aggregate issuance of approximately 187.5 million shares. For
information on AIG's business segments, see Note 18 of Notes to Financial
Statements.
All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 2001, beneficial ownership of
approximately 13.6 percent, 2.7 percent and 2.0 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, 2000, AIG and its subsidiaries had approximately 61,000
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, financial services operations, asset
management operations, equity in income of minority-owned insurance companies
and other realized capital losses. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes 1 and 18 of
Notes to Financial Statements.)
(dollars in millions)
- -----------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996
=====================================================================================================
General insurance operations:
Gross premiums written $ 25,050 $ 22,569 $ 20,684 $ 18,742 $ 18,319
Net premiums written 17,526 16,224 14,586 13,408 12,692
Net premiums earned 17,407 15,544 14,098 12,421 11,855
Adjusted underwriting profit(a) 785 669 531 490 450
Net investment income 2,701 2,517 2,192 1,854 1,691
Realized capital gains 38 295 205 128 65
Operating income 3,524 3,481 2,928 2,472 2,206
Identifiable assets 85,270 76,725 73,226 62,386 58,792
- -----------------------------------------------------------------------------------------------------
Loss ratio 75.3 75.5 75.6 75.3 75.9
Expense ratio 21.4 20.8 20.8 20.9 20.6
- -----------------------------------------------------------------------------------------------------
Combined ratio 96.7 96.3 96.4 96.2 96.5
=====================================================================================================
Life insurance operations:
Premium income 13,610 11,942 10,293 9,956 8,995
Net investment income 7,123 6,206 5,201 4,521 3,805
Realized capital gains (losses) (162) (148) (74) (9) 4
Operating income 3,387 2,858 2,373 2,048 1,657
Identifiable assets 142,045 128,697 103,611 87,747 72,275
Insurance in-force at end of year 583,059 584,959 503,649 443,323 429,992
Financial services operations:
Commissions, transaction and other fees 4,052 3,340 3,044 3,042 2,379
Operating income 1,293 1,081 869 671 501
Identifiable assets 81,016 66,567 59,198 51,110 43,074
Asset management operations:
Commissions and other fees 1,217 985 707 555 444
Operating income 430 314 191 127 101
Identifiable assets 1,590 1,132 915 646 787
Equity in income of minority-owned
insurance operations -- -- 57 114 99
Other realized capital losses (14) (25) (7) (29) (12)
Revenues (b) 45,972 40,656 35,716 32,553 29,325
Total assets 306,577 268,238 233,676 199,614 172,330
=====================================================================================================
(a) Adjusted underwriting profit is statutory underwriting income 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) Represents the sum of general net premiums earned, life premium income,
net investment income, financial services commissions, transaction and
other fees, asset management commissions and other fees, equity in income
of minority-owned insurance operations, and realized capital gains
(losses). Commencing in 1997, agency operations were presented as a
component of general insurance and 1996 agency results have been
reclassified to conform to this presentation.
1
3
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, 2000. (See also Note 18 of Notes to
Financial Statements.)
(dollars in millions)
- -----------------------------------------------------------------------------------------------------------------
Percent of Total
--------------------------
United States Other United States Other
Total and Canada Countries and Canada Countries
=================================================================================================================
General insurance operations:
Net premiums earned $17,407 $11,739 $ 5,668 67.4% 32.6%
Adjusted underwriting profit 785 450 335 57.3 42.7
Net investment income 2,701 2,076 625 76.9 23.1
Realized capital gains 38 34 4 89.8 10.2
Operating income 3,524 2,560 964 72.7 27.3
Identifiable assets 85,270 64,381 20,889 75.5 24.5
Life insurance operations:
Premium income 13,610 1,255 12,355 9.2 90.8
Net investment income 7,123 3,926 3,197 55.1 44.9
Realized capital gains (losses) (162) (168) 6 -- --
Operating income 3,387 1,143 2,244 33.8 66.2
Identifiable assets 142,045 79,174 62,871 55.7 44.3
Financial services operations:
Commissions, transaction and other fees 4,052 3,250 802 80.2 19.8
Operating income 1,293 934 359 72.3 27.7
Identifiable assets 81,016 67,727 13,289 83.6 16.4
Asset management operations:
Commissions and other fees 1,217 1,028 189 84.4 15.6
Operating income 430 405 25 94.1 5.9
Identifiable assets 1,590 818 772 51.4 48.6
Other realized capital losses (14) (14) -- -- --
Income before income taxes and minority interest 8,349 4,797 3,552 57.5 42.5
Revenues 45,972 23,126 22,846 50.3 49.7
Total Assets 306,577 207,914 98,663 67.8 32.2
=================================================================================================================
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 approximately 70 foreign countries.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group, which includes the domestic operations of Transatlantic
Holdings, Inc. ("Transatlantic") and HSB, Personal Lines, including 21st Century
Insurance Group (21st Century), and Mortgage Guaranty.
Commencing with the third quarter of 1998, Transatlantic and 21st Century
were consolidated into AIG's financial statements, as a result of AIG obtaining
majority ownership.
AIG's primary domestic division is the Domestic Brokerage Group (DBG).
DBG's business is derived from brokers in the United States and Canada and is
conducted through its general insurance subsidiaries including American Home,
National Union, Lexington, Transatlantic and certain other insurance company
subsidiaries of AIG. The risk management division of DBG provides insurance and
risk management programs for large corporate customers. The AIG Risk Finance
division designs and implements creative risk financing alternatives using the
insurance and financial services capabilities of AIG. Also included are the
operations of DBG's environmental unit which focuses specifically on providing
specialty products to clients with environmental exposures.
DBG writes substantially all classes of business insurance accepting such
business mainly from insurance brokers. This provides DBG the opportunity to
select specialized markets and retain underwriting control. Any licensed broker
is able to submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no authority to commit DBG
to accept a risk.
In addition to writing substantially all classes of business insurance,
including large commercial or industrial property insurance, excess liability,
inland marine, environmental, workers' compensation and excess and umbrella
coverages, DBG offers many specialized forms of insurance such as equipment
breakdown, 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.
AIG engages in mass marketing of personal lines coverages, primarily
private passenger auto and homeowners and personal umbrella coverages,
principally through American International Insurance Company and 21st Century.
2
4
The business of United Guaranty Corporation ("UGC") and its subsidiaries
is also included in the domestic operations 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 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. UGC had approximately $22 billion of mortgage guarantee
risk in-force at December 31, 2000.
AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters ("AIU"), a marketing unit consisting
of wholly owned agencies and insurance companies. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General group uses various
marketing methods to write both business and personal lines insurance with
certain refinements for local laws, customs and needs. AIU operates in over 70
countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America. Transatlantic's foreign operations are included in this group.
During 2000, DBG and the Foreign General insurance group accounted for
50.2 percent and 32.9 percent, respectively, of AIG's net premiums written.
AIG's general insurance company subsidiaries worldwide operate primarily
by underwriting and accepting risks 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:
(in millions)
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Years Ended December 31, Written Earned
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2000
Gross premiums $25,050 $24,062
Ceded premiums (7,524) (6,655)
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Net premiums $17,526 $17,407
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1999
Gross premiums $22,569 $21,187
Ceded premiums (6,345) (5,643)
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Net premiums $16,224 $15,544
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1998
Gross premiums $20,684 $20,092
Ceded premiums (6,098) (5,994)
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Net premiums $14,586 $14,098
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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 9 percent of AIG's net premiums written. This line is well
diversified geographically.
The majority of AIG's general 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 Losses and Loss Expense Reserve Development and Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
3
5
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.)
(dollars in millions)
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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*
===============================================================================================================================
2000 $17,526 $17,407 75.3 21.4 96.7 3.3 109.6
1999 16,224 15,544 75.5 20.8 96.3 3.7 107.1
1998 14,586 14,098 75.6 20.8 96.4 3.6 104.9
1997 13,408 12,421 75.3 20.9 96.2 3.8 101.5
1996 12,692 11,855 75.9 20.6 96.5 3.5 106.3
===============================================================================================================================
*Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders); the ratio for 2000 reflects estimated results.
During 2000, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 12.7 percent and 6.9 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 general insurance results
of operations from the economic environments in any one state, country or
geographic region for the year ended December 31, 2000. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
Discussion and Analysis of Consolidated Net Losses and Loss Expense Reserve
Development
The reserve for net losses and loss expenses represents the accumulation
of estimates for reported losses ("case basis reserves") and provisions for
losses incurred but not reported ("IBNR"), both reduced by applicable
reinsurance recoverable. Losses and loss expenses are charged to income as
incurred. AIG discounts certain of its loss reserves principally related to
workers' compensation lines of business.
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.)
Management continually reviews the adequacy of established loss reserves
through the utilization of a number of analytical reserve development
techniques. Through the use of these techniques, management is able to monitor
the adequacy of its established reserves and determine appropriate assumptions
for inflation. Also, analysis of emerging specific development patterns, such as
case reserve redundancies or deficiencies and IBNR emergence, allows management
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 Losses and Loss Expense Reserve
Development", which follows, presents the development of net losses and loss
expense reserves for calendar years 1990 through 2000. 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 losses and loss
expense reserve of $17.56 billion as of December 31, 1993, by the end of 2000
(seven years later) $14.97 billion 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 $17.56 billion was reestimated to be $18.63 billion at
December 31, 2000. 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 $335 million at December 31, 2000 related to December 31, 1999 net
losses and loss expense reserves of $24.60 billion represents the cumulative
amount by which reserves for 1999 and prior years have developed redundantly
during 2000. The reserve for net losses and loss expenses with respect to
Transatlantic and 21st Century are included only in the consolidated net losses
and loss expenses commencing with the year ended December 31, 1998. Reserve
development for these operations is included only for 1998 and subsequent
periods.
Over the past several years, AIG has strengthened its net loss and loss
expense reserves with respect to asbestos and environmental losses. This
strengthening is the primary cause of the adverse development reflected in
certain calendar years in the net loss and loss expense reserves shown in the
following table.
4
6
Analysis of Consolidated Net Losses and
Loss Expense Reserve Development
(in millions)
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
===================================================================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $14,699 $15,840 $16,757 $17,557 $18,419 $19,693 $20,407 $21,171 $24,619 $24,600 $24,952
Paid (Cumulative) as of:
One Year Later 4,315 4,748 4,883 5,146 4,775 5,281 5,616 5,716 6,779 7,783
Two Years Later 7,350 8,015 8,289 8,242 8,073 8,726 9,081 9,559 11,565
Three Years Later 9,561 10,436 10,433 10,404 10,333 11,024 11,456 12,442
Four Years Later 11,224 11,815 11,718 12,095 12,107 12,591 13,376
Five Years Later 12,112 12,611 12,931 13,378 13,270 13,994
Six Years Later 12,615 13,472 13,894 14,179 14,290
Seven Years Later 13,235 14,193 14,502 14,968
Eight Years Later 13,804 14,654 15,105
Nine Years Later 14,147 15,158
Ten Years Later 14,573
Net Liability Reestimated as of:
End of Year 14,699 15,840 16,757 17,557 18,419 19,693 20,407 21,171 24,619 24,600 24,952
One Year Later 14,596 15,828 16,807 17,434 18,139 19,413 20,009 20,890 24,237 24,265
Two Years Later 14,595 15,903 16,603 17,479 18,269 19,330 19,999 20,886 23,864
Three Years Later 14,724 15,990 16,778 17,782 18,344 19,327 20,151 20,572
Four Years Later 14,965 16,254 17,182 18,090 18,344 19,604 19,916
Five Years Later 15,361 16,712 17,600 18,300 18,535 19,500
Six Years Later 15,845 17,095 17,844 18,537 18,575
Seven Years Later 16,161 17,356 18,148 18,629
Eight Years Later 16,385 17,679 18,320
Nine Years Later 16,687 17,872
Ten Years Later 16,915
Redundancy/(Deficiency) (2,216) (2,032) (1,563) (1,072) (156) 193 491 599 755 335
===================================================================================================================================
5
7
The following table excludes for each calendar year the net loss and loss
expense reserves and the development thereof with respect to asbestos and
environmental claims. Thus, AIG's loss and loss expense reserves excluding
asbestos and environmental claims are developing adequately. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
Analysis of Consolidated Net Losses and Loss Expense
Reserve Development Excluding Asbestos and
Environmental Net Losses and Loss Expense Reserve
Development
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
====================================================================================================================================
Reserve for Net Losses and
Loss Expenses, Excluding
Asbestos and Environmental
Losses and Loss Expenses,
December 31, $14,539 $15,639 $16,503 $17,249 $18,089 $19,186 $19,664 $20,384 23,754 $23,709 $24,097
Paid (Cumulative) as of:
One Year Later 4,260 4,691 4,766 5,061 4,700 5,174 5,507 5,576 6,657 7,712
Two Years Later 7,237 7,842 8,088 8,082 7,891 8,515 8,832 9,305 11,373
Three Years Later 9,333 10,178 10,157 10,137 10,048 10,673 11,094 12,122
Four Years Later 10,912 11,483 11,337 11,726 11,683 12,128 12,948
Five Years Later 11,727 12,175 12,448 12,871 12,734 13,466
Six Years Later 12,126 12,935 13,274 13,560 13,689
Seven Years Later 12,646 13,519 13,771 14,285
Eight Years Later 13,079 13,870 14,310
Nine Years Later 13,312 14,311
Ten Years Later 13,677
Net Liability Reestimated as of:
End of Year 14,539 15,639 16,503 17,249 18,089 19,186 19,664 20,384 23,754 23,709 24,097
One Year Later 14,341 15,518 16,382 17,019 17,556 18,568 19,118 19,903 23,229 23,345
Two Years Later 14,232 15,422 16,073 16,813 17,355 18,347 18,910 19,771 22,827
Three Years Later 14,190 15,403 15,997 16,790 17,293 18,141 18,934 19,428
Four Years Later 14,327 15,417 16,081 16,960 17,090 18,292 18,670
Five Years Later 14,472 15,562 16,362 16,969 17,155 18,161
Six Years Later 14,648 15,808 16,404 17,080 17,169
Seven Years Later 14,828 15,869 16,582 17,146
Eight Years Later 14,854 16,067 16,731
Nine Years Later 15,032 16,238
Ten Years Later 15,241
Redundancy/(Deficiency) (702) (599) (228) 103 920 1,025 994 956 927 364
====================================================================================================================================
Reconciliation of Net Reserve for Losses and
Loss Expenses
(in millions)
- ----------------------------------------------------------------------------
2000 1999 1998
============================================================================
Net reserve for losses and loss
expenses at beginning of year $24,600 $24,619 $21,171
Acquisitions (a) 236 -- 2,896
- ----------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 13,356 12,122 10,938
Prior years (b) (252) (384) (281)
- ----------------------------------------------------------------------------
13,104 11,738 10,657
- ----------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 5,205 4,978 4,389
Prior years 7,783 6,779 5,716
- ----------------------------------------------------------------------------
12,988 11,757 10,105
- ----------------------------------------------------------------------------
Net reserve for losses and loss
expenses at end of year (c) $24,952 $24,600 $24,619
============================================================================
(a) Acquisitions include the opening balances with respect to HSB in 2000 and
Transatlantic and 21st Century in 1998.
(b) Does not include the effects of foreign exchange adjustments which are
reflected in the "Net Losses and Loss Expense Reserve Development" table.
(c) See also Note 6(a) of Notes to Financial Statements.
Approximately 48 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, 2000, differs from the total reserve reported in
the Annual Statements filed with state insurance departments and, where
appropriate, with foreign regulatory authorities. The differences at December
31, 2000 relate primarily to reserves for 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 loss reserves in the manner previously described
for net loss reserves.
6
8
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 1992 through 2000. As with the net losses
and loss expense reserve development, the deficiencies of $2.30 billion and
$1.50 billion for 1992 and 1993, and redundancies of $307 million, $622 million,
$1.04 billion, $590 million, $351 million and $254 million for 1994, 1995, 1996,
1997, 1998 and 1999 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
(in millions)
- ------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999 2000
==================================================================================================================
Gross Losses and
Loss Expenses,
December 31, $28,157 $30,046 $31,435 $33,047 $33,430 $33,400 $38,310 $38,252 $40,613
Paid (Cumulative)
as of:
One Year Later 7,281 8,807 7,640 8,392 9,199 9,185 10,344 12,543
Two Years Later 13,006 13,279 13,036 15,496 15,043 14,696 19,155
Three Years Later 16,432 17,311 17,540 18,837 18,721 19,706
Four Years Later 18,550 20,803 20,653 21,811 21,729
Five Years Later 21,322 22,895 22,634 23,463
Six Years Later 22,807 23,779 24,205
Seven Years Later 23,684 25,239
Eight Years Later 25,060
Gross Liability Reestimated
as of:
End of Year 28,157 30,046 31,435 33,047 33,430 33,400 38,310 38,252 40,613
One Year Later 28,253 29,866 30,759 32,372 32,777 32,337 37,161 37,998
Two Years Later 27,825 29,537 30,960 32,398 31,719 32,251 37,959
Three Years Later 27,727 30,362 30,825 31,759 31,407 32,810
Four Years Later 28,625 31,020 30,508 31,604 32,388
Five Years Later 29,701 30,881 30,417 32,425
Six Years Later 29,605 30,969 31,128
Seven Years Later 29,929 31,546
Eight Years Later 30,452
Redundancy/(Deficiency) (2,295) (1,500) 307 622 1,042 590 351 254
==================================================================================================================
Life Insurance Operations
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group life,
annuity, endowment and accident and health policies. Financial and investment
products consist of single premium annuity, variable annuities, guaranteed
investment contracts, universal life and pensions. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
Life insurance operations in foreign countries comprised 90.8 percent of
life premium income and 66.2 percent of operating income in 2000. AIG operates
overseas principally through American Life Insurance Company (ALICO), American
International Assurance Company, Limited together with American International
Assurance Company (Bermuda) Limited (AIA) and Nan Shan Life Insurance Company,
Ltd. (Nan Shan). ALICO is incorporated in Delaware and all of its business is
written outside of the United States. ALICO has operations either directly or
through subsidiaries in approximately 50 countries located in Europe, Africa,
Latin America, the Caribbean, the Middle East, and the Far East, with Japan
being the largest territory. AIA operates primarily in Hong Kong, Singapore,
Malaysia and Thailand. Nan Shan operates in Taiwan. These operations comprised
88.1 percent of AIG's consolidated life premium income in 2000. (See also Note
18 of Notes to Financial Statements.)
AIG's domestic life operations are comprised of two separate operations,
AIG's domestic life companies and the life insurance subsidiaries of SunAmerica.
AIG's domestic life subsidiaries are American International Life Assurance
Company of New York and AIG Life Insurance Company. These companies utilize
multiple distribution channels including brokerage and career and general agents
to offer primarily life insurance, financial and investment products and
specialty forms of accident and health coverage for individuals and groups,
including employee benefit plans. SunAmerica sells primarily financial and
investment type products. The domestic life operations comprised 9.2 percent of
total life premium income in 2000.
There was no significant adverse effect on AIG's life insurance results of
operations from economic environments in any one state, country or geographic
region for the year ended December 31, 2000. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
7
9
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 the
Philippines, Canada, Mexico, Poland, Switzerland, Puerto Rico, and conducts life
insurance business through AIUO subsidiary companies in Russia, Israel and in
certain countries in Central and South America.
The foreign life companies have over 140,000 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 tables summarize the life insurance operating results for
the years ended December 31, 2000, 1999 and 1998. (See also Management's
Discussion and Analysis of Financial Condition and Results of
Operations.)
(dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------
Average
Net Termination Rate
Premium Investment Operating Insurance -----------------
December 31, 2000 Income Income Income(a) In-Force Lapse Other
=======================================================================================================================
Individual:
Life $ 9,533 $3,081 $1,664 $427,108(b) 8.3% 1.5%
Annuity 490 1,467 289 (c)
Accident and health 1,945 130 529 (c)
Group:
Life 653 40 83 155,951 7.7% 4.2%
Pension 351 2,383 952 (c)
Accident and health 638 31 41 (c)
Realized capital losses -- -- (162) (c)
Consolidation adjustments -- (9) (9) (c)
- -----------------------------------------------------------------------------------------------------------------------
Total $13,610 $7,123 $3,387 $583,059
=======================================================================================================================
(a) Including income related to investment type products.
(b) Including $282.7 billion of whole life insurance and endowments.
(c) Not applicable.
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------
Average
Net Termination Rate
Premium Investment Operating Insurance -----------------
December 31, 1999 Income Income Income(a) In-Force Lapse Other
=======================================================================================================================
Individual:
Life $ 8,491 $2,630 $1,487 $431,507(b) 7.0% 1.6%
Annuity 334 1,600 244 (c)
Accident and health 1,643 115 432 (c)
Group:
Life 619 37 66 153,452 8.5% 2.7%
Pension 252 1,805 765 (c)
Accident and health 603 27 20 (c)
Realized capital losses -- -- (148) (c)
Consolidation adjustments -- (8) (8) (c)
- ----------------------------------------------------------------------------------------------------------------------
Total $11,942 $6,206 $2,858 $584,959
=======================================================================================================================
(a) Including income related to investment type products.
(b) Including $304.7 billion of whole life insurance and endowments.
(c) Not applicable.
- ----------------------------------------------------------------------------------------------------------------------
Average
Net Termination Rate
Premium Investment Operating Insurance -----------------
December 31, 1998 Income Income Income(a) In-Force Lapse Other
=======================================================================================================================
Individual:
Life $ 7,391 $2,260 $1,244 $381,181(b) 6.8% 1.4%
Annuity 284 1,598 292 (c)
Accident and health 1,297 95 361 (c)
Group:
Life 513 32 55 122,468 10.6% 5.1%
Pension 229 1,197 480 (c)
Accident and health 579 27 23 (c)
Realized capital losses -- -- (74) (c)
Consolidation adjustments -- (8) (8) (c)
- -----------------------------------------------------------------------------------------------------------------------
Total $10,293 $5,201 $2,373 $503,649
=======================================================================================================================
(a) Including income related to investment type products.
(b) Including $280.1 billion of whole life insurance and endowments.
(c) Not applicable.
8
10
AIG's individual life insurance and group life insurance portfolio
accounted for 49 percent, 52 percent and 53 percent of AIG's consolidated life
insurance operating income before realized capital losses for the years ended
December 31, 2000, 1999 and 1998, respectively. For the years ended December 31,
2000, 1999 and 1998, 63.1 percent, 64.7 percent and 68.0 percent, respectively,
of consolidated life operating income before realized capital losses was derived
from foreign operations.
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 18 of Notes to Financial Statements.)
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, 2000 and 1999:
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
General Life Percent ---------------------
December 31, 2000 Insurance Insurance Total of Total Domestic Foreign
==================================================================================================================================
Fixed maturities:
Available for sale, at market value (a) $18,168 $72,159 $ 90,327 63.8% 51.8% 48.2%
Held to maturity, at amortized cost 11,533 -- 11,533 8.1 100.0 --
Equity securities, at market value (b) 4,666 2,309 6,975 4.9 55.4 44.6
Mortgage loans on real estate, policy and collateral loans 65 10,563 10,628 7.5 58.6 41.4
Short-term investments, including time deposits, and cash 1,448 4,066 5,514 3.9 44.8 55.2
Real estate 408 1,359 1,767 1.3 16.6 83.4
Investment income due and accrued 584 1,689 2,273 1.6 46.8 53.2
Other invested assets 6,020 6,566 12,586 8.9 88.3 11.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total $42,892 $98,711 $141,603 100.0% 58.9% 41.1%
==================================================================================================================================
(a) Includes $846 million of bonds trading securities, at market value.
(b) Includes $1.04 billion of non-redeemable preferred stocks, at market
value.
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
General Life Percent ---------------------
December 31, 1999 Insurance Insurance Total of Total Domestic Foreign
====================================================================================================================================
Fixed maturities:
Available for sale, at market value (a) $16,903 $61,022 $ 77,925 61.6% 53.5% 46.5%
Held to maturity, at amortized cost 12,078 -- 12,078 9.5 100.0 --
Equity securities, at market value (b) 4,000 2,503 6,503 5.1 50.2 49.8
Mortgage loans on real estate, policy and collateral loans 70 10,420 10,490 8.3 57.0 43.0
Short-term investments, including time deposits, and cash 977 5,710 6,687 5.3 45.1 54.9
Real estate 381 1,141 1,522 1.2 18.5 81.5
Investment income due and accrued 576 1,421 1,997 1.6 48.0 52.0
Other invested assets 4,150 5,138 9,288 7.4 85.1 14.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total $39,135 $87,355 $126,490 100.0% 59.5% 40.5%
====================================================================================================================================
(a) Includes $1.04 billion of bonds trading securities, at market value.
(b) Includes $697 million of non-redeemable preferred stocks, at market value.
9
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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.)
(dollars in millions)
- --------------------------------------------------------------------------------------------------------------------------------
Annual Average Cash and Invested Assets
------------------------------------------
Cash
(including Net Realized
short-term Invested Investment Rate of Return on Capital
Years Ended December 31, investments) Assets(a) Total Income(b) Invested Assets Gains
================================================================================================================================
2000 $1,212 $39,801 $41,013 $2,701 6.6%(c) 6.8%(d) $ 38
1999 925 38,084 39,009 2,517 6.5 (c) 6.6 (d) 295
1998 745 34,619 35,364 2,192 6.2 (c) 6.3 (d) 205
1997 611 29,704 30,315 1,854 6.1 (c) 6.2 (d) 128
1996 630 27,048 27,678 1,691 6.1 (c) 6.3 (d) 65
================================================================================================================================
(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.
(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.
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.)
(dollars in millions)
- --------------------------------------------------------------------------------------------------------------------------------
Annual Average Cash and Invested Assets
------------------------------------------
Cash Realized
(including Net Capital
short-term Invested Investment Rate of Return on Gains
Years Ended December 31, investments) Assets(a) Total Income(b) Invested Assets (Losses)
================================================================================================================================
2000 $4,888 $88,145 $93,033 $7,123 7.7%(c) 8.1%(d) $(162)
1999 5,772 75,444 81,216 6,206 7.6 (c) 8.2 (d) (148)
1998 4,619 65,796 70,415 5,201 7.4 (c) 7.9 (d) (74)
1997 2,467 57,849 60,316 4,521 7.5 (c) 7.8 (d) (9)
1996 1,809 48,158 49,967 3,805 7.6 (c) 7.9 (d) 4
================================================================================================================================
(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.
(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.
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.)
Financial Services Operations
AIG's financial services subsidiaries engage in diversified financial products
and services including aircraft, consumer and premium financing, and banking
services.
International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. Also, ILFC provides,
for a fee, fleet management services to certain third-party operators. (See also
Note 18 of Notes to Financial Statements.)
AIG Financial Products Corp. and its subsidiaries (AIGFP) structure
financial transactions, including long-dated interest rate and currency swaps
and structures borrowing through notes, bonds and guaranteed investment
agreements. (See also Note 18 of Notes to Financial Statements.)
AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various
commodities trading, foreign exchange trading, interest rate swaps and market
making activities. (See also Note 18 of Notes to Financial Statements.)
Together these three operations comprise 92.6 percent of the commissions,
transaction and other fees of AIG's consolidated financial services operations.
10
12
The following table is a summary of the composition of AIG's financial
services and asset management invested assets and liabilities at December 31,
2000 and 1999. (See also Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 1 of Notes to Financial
Statements.)
(in millions)
- ----------------------------------------------------------------------------
2000 1999
============================================================================
Financial services and asset management
invested assets:
Flight equipment primarily under operating
leases, net of accumulated depreciation $19,325 $17,334
Unrealized gain on interest rate and currency
swaps, options and forward transactions 10,235 7,931
Securities available for sale, at market value 14,669 12,954
Trading securities, at market value 7,347 4,391
Securities purchased under agreements to
resell, at contract value 14,979 10,897
Trading assets 7,045 5,793
Spot commodities, at market value 363 683
Other, including short-term investments 2,785 2,565
- ----------------------------------------------------------------------------
Total $76,748 $62,548
============================================================================
Financial services and asset management liabilities:
Borrowings under obligations of guaranteed
investment agreements $13,595 $ 9,430
Securities sold under agreements to
repurchase, at contract value 11,308 6,116
Trading liabilities 4,352 3,821
Securities and spot commodities sold but not
yet purchased, at market value 7,701 6,413
Unrealized loss on interest rate and currency
swaps, options and forward transactions 8,581 8,624
Trust deposits and deposits due to banks and
other depositors 1,895 2,175
Commercial paper 4,259 2,958
Notes, bonds and loans payable 17,923 16,806
- ----------------------------------------------------------------------------
Total $69,614 $56,343
============================================================================
The following table is a summary of the revenues and operating income of
AIG's principal financial services operations for the year ended December 31,
2000, 1999 and 1998. (See also Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 1 of Notes to Financial
Statements.)
(in millions)
- ----------------------------------------------------------------------------
Operating
Revenues Income
============================================================================
2000
ILFC $2,441 $654
AIGFP* 1,056 648
AIGTG* 254 62
- ----------------------------------------------------------------------------
1999
ILFC $2,194 $590
AIGFP* 737 482
AIGTG* 227 109
- ----------------------------------------------------------------------------
1998
ILFC $2,002 $496
AIGFP* 550 323
AIGTG* 374 123
============================================================================
*Revenues represent commissions, transaction and other fees.
A.I. Credit Corp. also contributes to financial services income. This
operation engages principally in premium financing. AIG Consumer Finance Group,
Inc., through its subsidiaries, is engaged in developing a multi-product
consumer finance business with an emphasis on emerging markets. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1, 9 and 12 of Notes to Financial Statements.)
Asset Management Operations
AIG's asset management operations offer a wide variety of investment vehicles
and services, including variable annuities, mutual funds, and investment asset
management. Such products and services are offered to individuals and
institutions both domestically and internationally.
AIG's three principal asset management operations are SunAmerica's asset
management operations (SAAMCo), AIG Global Investment Group, Inc. and its
subsidiaries (Global Investment) and AIG Capital Partners, Inc. (Cap Partners).
SAAMCo develops and sells variable annuities and other investment products,
sells and manages mutual funds and provides financial services. Global
Investment manages third-party institutional, retail and private equity funds
invested assets on a global basis, and provides custodial services. Cap Partners
organizes, and manages the invested assets of institutional investment funds and
may also invest in such funds. Each of these subsidiary operations receives fees
for investment products and services provided.
Other Operations
Small AIG subsidiaries provide insurance-related services such as adjusting
claims and marketing specialized products. AIG has several other relatively
minor subsidiaries which carry on various businesses. American International
Technology Enterprises, Inc. provides information technology and processing
services to businesses worldwide. Mt. Mansfield Company, Inc. owns and operates
the ski slopes, lifts, school and an inn located at Stowe, Vermont.
Additional Investments
AIG holds a 24.4 percent interest in IPC Holdings, Ltd., a reinsurance
holding company and a 19.9 percent interest in Richmond Insurance Company, Ltd.,
a reinsurer. (See also Note 1(o) of Notes to Financial Statements.)
Locations of Certain Assets
As of December 31, 2000, approximately 32 percent of the consolidated
assets of AIG were located in foreign countries (other than Canada), including
$816 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
11
13
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, 2 and 18 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 11 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
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 adjusted
statutory capital 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.
The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 2000.
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.
Privacy provisions of the Gramm-Leach-Bliley Act are fully effective in
2001 and establish new consumer protections regarding the security,
confidentiality, and uses of nonpublic personal information of individuals. The
law also requires financial institutions to disclose their privacy policies to
their customers. Additional privacy legislation pending in the United States
Congress, several states, and other countries is designed to provide further
privacy protections to consumers of financial products and services. These
statutes and regulations may result in additional regulatory compliance costs,
limit AIG's ability to market its products, or otherwise constrain the nature
or scope of AIG's insurance and financial services operations.
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
on 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. In some countries,
regulations governing constitution of technical reserves and remittance balances
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 3,000 other
stock companies, specialty insurance organizations, mutual companies and other
underwriting organizations. AIG's life insurance companies compete in the United
States with some 1,700 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 360 offices in the
United States, 5 offices in Canada and numerous offices in approximately 100
foreign countries. The offices in Springfield, Illinois; Houston, Texas;
Atlanta, Georgia; Baton Rouge,
12
14
Louisiana; Wilmington, Delaware; Hato Rey, Puerto Rico; San Diego, California;
Greensboro, North Carolina; Livingston, New Jersey; 70 Pine Street, 72 Wall
Street and 175 Water Street in New York City; and offices in approximately 30
foreign countries including Bermuda, Chile, Hong Kong, the Philippines, Japan,
England, Singapore, Switzerland, 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 Losses 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 2000.
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.
- ------------------------------------------------------------------------------------------------------------------------------------
Served as
Director or
Officer
Name Title Age Since
====================================================================================================================================
M. Bernard Aidinoff* Director 72 1984
Eli Broad Director 67 1999
Pei-yuan Chia Director 62 1996
Marshall A. Cohen Director 66 1992
Barber B. Conable, Jr. Director 78 1991
Martin S. Feldstein Director 61 1987
Ellen V. Futter Director 51 1999
M. R. Greenberg* Director, Chairman and Chief Executive Officer 75 1967
Carla A. Hills Director 67 1993
Frank J. Hoenemeyer* Director 81 1985
Richard C. Holbrooke Director 59 2001
Edward E. Matthews* Director and Vice Chairman-Investments and Financial Services 69 1973
Howard I. Smith Director, Executive Vice President and Chief Financial Officer 56 1984
Thomas R. Tizzio* Director and Senior Vice Chairman-General Insurance 63 1982
Edmund S. W. Tse Director and Vice Chairman-Life Insurance 63 1991
Jay S. Wintrob Director 44 1999
Frank G. Wisner Director and Vice Chairman-External Affairs 62 1997
Frank G. Zarb Director 65 2001
Kristian P. Moor Executive Vice President-Domestic General Insurance 41 1998
R. Kendall Nottingham Executive Vice President-Life Insurance 62 1998
Robert M. Sandler Executive Vice President, Senior Casualty Actuary and Senior Claims Officer 58 1980
Martin J. Sullivan Executive Vice President-Foreign General Insurance 46 1997
William N. Dooley Senior Vice President-Financial Services 48 1992
Lawrence W. English Senior Vice President-Administration 59 1985
Axel I. Freudmann Senior Vice President-Human Resources 54 1986
Win J. Neuger Senior Vice President and Chief Investment Officer 51 1995
Ernest T. Patrikis Senior Vice President and General Counsel 57 1998
Michael J. Castelli Vice President and Comptroller 45 1998
Donald P. Kanak Vice President and Chief Executive Officer of AIG Companies in Japan and Korea 48 1998
Robert E. Lewis Vice President and Chief Credit Officer 50 1993
Charles M. Lucas Vice President and Director of Market Risk Management 62 1996
Carol A. McFate Vice President and Treasurer 48 1998
Frank Petralito II Vice President and Director of Taxes 64 1978
Kathleen E. Shannon Vice President and Secretary 51 1986
John T. Wooster, Jr. Vice President-Communications 61 1989
====================================================================================================================================
*Member of Executive Committee.
13
15
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. 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. Prior to joining AIG
in 1998, Mr. Patrikis was First Vice President at the Federal Reserve Bank of
New York, previously having served as Executive Vice President and General
Counsel. Ms. McFate was Assistant Treasurer of AIG and Director of Financial
Analysis of AIG prior to being elected Treasurer of AIG in 1998. Mr. Wisner
served as a career foreign service officer with the United States Department of
State from 1961 through July, 1997, with his last position being Ambassador to
India.
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 on the New York Stock Exchange Composite Tape, for each
quarter of 2000 and 1999, as adjusted for the common stock split in the form of
a 50 percent common stock dividend paid July 28, 2000 and the common stock split
in the form of a 25 percent common stock dividend paid July 30, 1999.
- ----------------------------------------------------------------------------
2000 1999
---------------- ---------------
High Low High Low
============================================================================
First Quarter 76.04 54.29 65.40 52.00
Second Quarter 82.17 67.75 70.90 59.47
Third Quarter 95.69 78.79 66.50 56.33
Fourth Quarter 103.69 90.13 74.46 54.67
============================================================================
(b) In 2000, AIG paid a quarterly dividend of 3.3 cents in March and June
and 3.7 cents in September and December for a total cash payment of 14 cents per
share of common stock. In 1999, AIG paid a quarterly dividend of 3.0 cents in
March and June and 3.3 cents in September and December for a total cash payment
of 12.6 cents per share of common stock. These amounts reflect the adjustment
for common stock splits described above. 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.
See Note 11(a) 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,
2001, based upon the number of record holders, was 32,000.
================================================================================
14
16
ITEM 6. Selected Financial Data
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data, which has been restated to
include the operations of SunAmerica Inc., the Maryland corporation which was
merged into AIG on January 1, 1999, on a pooling of interest basis, is presented
in accordance with generally accepted accounting principles. This data should be
read in conjunction with the financial statements and accompanying notes
included elsewhere herein.
(in millions, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996
===============================================================================================================================
Revenues (a) $ 45,972 $ 40,656 $ 35,716 $ 32,553 $ 29,325
General insurance:
Net premiums written 17,526 16,224 14,586 13,408 12,692
Net premiums earned 17,407 15,544 14,098 12,421 11,855
Adjusted underwriting profit 785 669 531 490 450
Net investment income 2,701 2,517 2,192 1,854 1,691
Realized capital gains 38 295 205 128 65
Operating income 3,524 3,481 2,928 2,472 2,206
Life insurance:
Premium income 13,610 11,942 10,293 9,956 8,995
Net investment income 7,123 6,206 5,201 4,521 3,805
Realized capital gains (losses) (162) (148) (74) (9) 4
Operating income 3,387 2,858 2,373 2,048 1,657
Financial services operating income 1,293 1,081 869 671 501
Asset management operating income 430 314 191 127 101
Equity in income of minority-owned insurance operations -- -- 57 114 99
Other realized capital losses (14) (25) (7) (29) (12)
Other income (deductions)-net (271) (197) (134) (93) (84)
Income before income taxes and minority interest 8,349 7,512 6,277 5,310 4,468
Income taxes 2,458 2,219 1,785 1,525 1,234
Income before minority interest 5,891 5,293 4,492 3,785 3,234
Minority interest (255) (238) (210) (74) (63)
Net income 5,636 5,055 4,282 3,711 3,171
Earnings per common share (b):
Basic 2.43 2.18 1.87 1.63 1.39
Diluted 2.41 2.15 1.83 1.60 1.37
Cash dividends per common share (c) .14 .13 .11 .10 .09
Total assets 306,577 268,238 233,676 199,614 172,330
Long-term debt (d) 25,242 22,896 22,720 18,950 18,079
Capital funds (shareholders' equity) 39,619 33,306 30,123 26,585 23,705
===============================================================================================================================
(a) Represents the sum of general net premiums earned, life premium income,
net investment income, financial services commissions, transaction and
other fees, asset management commissions and other fees, equity in income
of minority-owned insurance operations, and realized capital gains
(losses). Commencing in 1997, agency operations were presented as a
component of general insurance and 1996 agency results have been
reclassified to conform to this presentation.
(b) Per share amounts for all periods presented have been retroactively
adjusted to reflect all stock dividends and splits and reflect the
adoption of the Statement of Financial Accounting Standards No. 128
"Earnings per Share."
(c) Cash dividends have not been restated to reflect dividends paid by
SunAmerica Inc.
(d) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
15
17
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
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
Cautionary Statement Regarding Forward-Looking Information
This Annual Report and other publicly available documents may include, and AIG's
officers and representatives may from time to time make, statements which may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are not historical
facts but instead represent only AIG's belief regarding future events, many of
which, by their nature, are inherently uncertain and outside of AIG's control.
These statements may address, among other things, AIG's strategy for growth,
product development, regulatory approvals, market position, financial results
and reserves. It is possible that AIG's actual results and financial condition
may differ, possibly materially, from the anticipated results and financial
condition indicated in these forward-looking statements. Important factors that
could cause AIG's actual results to differ, possibly materially, from those in
the specific forward-looking statements are discussed throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. AIG is not under any obligation to (and expressly disclaims any such
obligations to) update or alter any forward-looking statement, whether written
or oral, that may be made from time to time, whether as a result of new
information, future events or otherwise.
Operational Review
General Insurance Operations
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group (DBG), which includes The Hartford Steam Boiler Inspection and
Insurance Company (HSB) and the domestic operations of Transatlantic Holdings,
Inc. (Transatlantic), Personal Lines, including 21st Century Insurance Group
(21st Century), and Mortgage Guaranty.
Commencing with the latter part of the fourth quarter of 2000, HSB, and
the third quarter of 1998, Transatlantic and 21st Century were consolidated into
AIG's financial statements, as a result of AIG obtaining majority ownership.
DBG is AIG's primary domestic division. DBG writes substantially all
classes of business insurance, accepting such business mainly from insurance
brokers. This provides DBG the opportunity to select specialized markets and
retain underwriting control. Any licensed broker is able to submit business to
DBG without the traditional agent-company contractual relationship, but such
broker usually has no authority to commit DBG to accept a risk.
Personal Lines engages in the mass marketing of personal lines insurance,
primarily private passenger auto and homeowners and personal umbrella coverages.
Mortgage Guaranty provides guaranty insurance on conventional first
mortgage loans on single family dwellings and condominiums.
AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters (AIU), a marketing unit consisting
of wholly owned agencies and insurance entities. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General insurance group uses
various marketing methods to write both business and personal lines insurance
with certain refinements for local laws, customs and needs. AIU operates in over
70 countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America. Transatlantic's foreign operations are included in this group. (See
also Note 18 of Notes to Financial Statements.)
General insurance operations for the twelve month periods ending December
31, 2000, 1999 and 1998 were as follows:
(in millions)
- ----------------------------------------------------------------------------
2000 1999 1998
============================================================================
Net premiums written*:
Domestic $11,768 $10,856 $ 9,976
Foreign 5,758 5,368 4,610
- ----------------------------------------------------------------------------
Total $17,526 $16,224 $14,586
============================================================================
Net premiums earned*:
Domestic $11,739 $10,263 $ 9,659
Foreign 5,668 5,281 4,439
- ----------------------------------------------------------------------------
Total $17,407 $15,544 $14,098
============================================================================
Adjusted underwriting profit*:
Domestic $ 450 $ 368 $ 15
Foreign 335 301 516
- ----------------------------------------------------------------------------
Total $ 785 $ 669 $ 531
============================================================================
Net investment income:
Domestic $ 2,076 $ 1,995 $ 1,754
Foreign 625 522 438
- ----------------------------------------------------------------------------
Total $ 2,701 $ 2,517 $ 2,192
============================================================================
Operating income before
realized capital gains*:
Domestic $ 2,526 $ 2,363 $ 1,769
Foreign 960 823 954
- ----------------------------------------------------------------------------
Total 3,486 3,186 2,723
Realized capital gains 38 295 205
- ----------------------------------------------------------------------------
Operating income $ 3,524 $ 3,481 $ 2,928
============================================================================
*Reflects the realignment of certain internal divisions.
In AIG's general insurance operations, 2000 net premiums written and net
premiums earned increased 8.0 percent and 12.0 percent, respectively, from those
of 1999. During 2000, AIG cancelled or non-renewed approximately $380 million of
business worldwide that did not meet AIG's underwrit-
16
18
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
ing standards. In 1999, net premiums written increased 11.2 percent and net
premiums earned increased 10.3 percent when compared to 1998.
General insurance domestic net premiums written and net premiums earned
were as follows:
(in millions)
- ----------------------------------------------------------------------------
2000 1999 1998
============================================================================
Net premiums written:
DBG* $ 8,805 $ 8,297 $8,191
Personal Lines 2,510 2,162 1,422
Mortgage Guaranty 453 397 363
- ----------------------------------------------------------------------------
Total* $11,768 $10,856 $9,976
============================================================================
Net premiums earned:
DBG* $ 8,886 $ 7,788 $8,002
Personal Lines 2,401 2,079 1,280
Mortgage Guaranty 452 396 377
- ----------------------------------------------------------------------------
Total* $11,739 $10,263 $9,659
============================================================================
*Reflects the realignment of certain internal divisions.
Commencing in the latter part of 1999 and continuing through 2000, the
commercial property-casualty market place has experienced rate increases.
Virtually all areas of DBG have experienced rate increases. Overall, DBG's net
premiums written increased $508 million or 6.1 percent in 2000 over 1999. These
increases compared to an increase of $106 million or 1.3 percent in 1999 over
1998.
Personal Lines' net premiums written increased 16.1 percent or $348
million in 2000 over 1999, compared to an increase of 52.0 percent or $740
million in 1999 over 1998. The growth in 2000 primarily resulted from an
increase in the number of policies issued with respect to preferred, standard
and non-standard auto risks. 21st Century was consolidated into AIG's Personal
Lines results for the twelve months of 1999 and last six months of 1998.
Approximately half the growth in 1999 over 1998 was attributable to the
inclusion of twelve months of operations of 21st Century. The remainder of the
growth was due to the aforementioned growth in policy issuance. AIG has filed
for rate increases in a number of states where inadequate rates persist.
Growth of 7.3 percent for both foreign general insurance net premiums
written and net premiums earned in 2000 over 1999 reflect growth of operations
in the United Kingdom, Continental Europe and the Far East. Growth of 16.4
percent and 19.0 percent for foreign general insurance net premiums written and
net premiums earned, respectively, reflect growth of operations in the same
aforementioned geographic regions and the consolidation of Transatlantic's
foreign operations for twelve months in 1999 compared to six months in 1998.
Foreign general insurance operations produced 32.9 percent of the general
insurance net premiums written in 2000, 33.1 percent in 1999 and 31.6 percent in
1998.
Differences in foreign exchange rates during 2000 relative to 1999 had a
negligible effect on foreign general insurance net premiums written when
translated from original currencies into U.S. dollars. (See also the discussion
under "Capital Resources" herein.)
Because of the nature and diversity of AIG's operations and the continuing
rapid changes in the insurance industry worldwide, together with the factors
discussed above, it is difficult to assess further or project future growth in
AIG's net premiums written and reserve for losses and loss expenses.
Net premiums written are initially deferred and earned based upon the
terms of the underlying policies. The net unearned premium reserve constitutes
deferred revenues which are generally earned ratably over the policy period.
Thus, the net unearned premium reserve is not fully recognized as net premiums
earned until the end of the policy period.
AIG, along with most general insurance entities, uses the loss ratio, the
expense ratio and the combined ratio as measures of performance. The loss ratio
is the sum of losses and loss expenses incurred divided by net premiums earned.
The expense ratio is statutory underwriting expenses divided by net premiums
written. The combined ratio is the sum of the loss ratio and the expense ratio.
These ratios are relative measurements that describe for every $100 of net
premiums earned or written, the cost of losses and statutory expenses,
respectively. The combined ratio presents the total cost per $100 of premium
production. A combined ratio below 100 demonstrates underwriting profit; a
combined ratio above 100 demonstrates underwriting loss. The statutory general
insurance ratios were as follows:
- ----------------------------------------------------------------------------
2000 1999 1998
============================================================================
Domestic:
Loss Ratio 81.00 81.30 83.98
Expense Ratio 16.94 16.33 16.06
- ----------------------------------------------------------------------------
Combined Ratio 97.94 97.63 100.04
============================================================================
Foreign:
Loss Ratio 63.44 64.27 57.32
Expense Ratio 30.65 29.95 30.96
- ----------------------------------------------------------------------------
Combined Ratio 94.09 94.22 88.28
============================================================================
Consolidated:
Loss Ratio 75.28 75.51 75.59
Expense Ratio 21.45 20.84 20.77
- ----------------------------------------------------------------------------
Combined Ratio 96.73 96.35 96.36
============================================================================
AIG believes that underwriting profit is the true measure of the
performance of the core business of a general insurance company.
Underwriting profit is measured in two ways: statutory underwriting profit
and Generally Accepted Accounting Principles (GAAP) underwriting profit.
Statutory underwriting profit is arrived at by reducing net premiums earned
by net losses and loss expenses incurred and net expenses incurred. Statutory
accounting differs from GAAP, as statutory accounting requires immediate expense
recognition and ignores the matching of revenues and expenses as required by
GAAP. That is, for statutory purposes, all expenses, most specifically
acquisition expenses, are recognized immediately, not consistent with the
revenues earned.
17
19
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
A basic premise of GAAP accounting is the recognition of expenses at the
same time revenues are earned, the principle of matching. Therefore, to convert
underwriting results to a GAAP basis, acquisition expenses are deferred and
recognized together with the related revenues. Accordingly, the statutory
underwriting profit has been adjusted as a result of acquisition expenses being
deferred as required by GAAP. Thus, "adjusted underwriting profit" is a GAAP
measurement which can be viewed as gross margin or an intermediate subtotal in
calculating operating income and net income.
A major part of the discipline of a successful general insurance company
is to produce an underwriting profit, exclusive of investment income. If
underwriting is not profitable, losses incurred are a major factor. The result
is that the premiums are inadequate to pay for losses and expenses and produce a
profit; therefore, investment income must be used to cover underwriting losses.
If assets and the income therefrom are insufficient to pay claims and expenses
over extended periods, an insurance company cannot survive. For these reasons,
AIG views and manages its underwriting operations separately from its investment
operations.
The adjusted underwriting profits were $785 million in 2000, $669 million
in 1999 and $531 million in 1998. Domestic adjusted underwriting profit
increased primarily as a result of the disciplined underwriting of DBG. In 1999,
foreign underwriting profit declined primarily as a result of catastrophe losses
from European storms. The regulatory, product type and competitive environment
as well as the degree of litigation activity in any one country varies
significantly. These factors have a direct impact on pricing and consequently
profitability as reflected by adjusted underwriting profit and statutory general
insurance ratios. (See also Notes 4 and 18 of Notes to Financial Statements.)
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $44 million in 2000, $156 million in 1999 and $110 million in
1998. AIG's gross incurred losses from catastrophes approximated $112 million in
2000, $472 million in 1999 and $625 million in 1998. The impact of losses caused
by catastrophes can fluctuate widely from year to year, making comparisons of
recurring type business more difficult. The pro forma table below excludes
catastrophe losses in order to present comparable results of AIG's recurring
core underwriting operations. The pro forma consolidated statutory general
insurance ratios would be as follows:
- --------------------------------------------
2000 1999 1998
============================================
Loss Ratio 75.03 74.51 74.81
Expense Ratio 21.45 20.84 20.77
- --------------------------------------------
Combined Ratio 96.48 95.35 95.58
============================================
AIG's historic ability to maintain its combined ratio below 100 is
primarily attributable to the profitability of AIG's foreign general insurance
operations and AIG's emphasis on maintaining its disciplined underwriting,
especially in the domestic specialty markets. In addition, AIG does not seek net
premium growth where rates do not adequately reflect its assessment of
exposures.
General insurance net investment income in 2000 increased 7.3 percent when
compared to 1999. In 1999, net investment income increased 14.8 percent over
1998. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment and the consolidation of
Transatlantic and 21st Century for twelve months in 1999 compared to six months
in 1998. The new cash flow was generated from net general insurance operating
cash flow and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein and Note 8
of Notes to Financial Statements.)
General insurance realized capital gains were $38 million in 2000, $295
million in 1999 and $205 million in 1998. These realized gains resulted from the
ongoing management of the general insurance investment portfolios within the
overall objectives of the general insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.
General insurance operating income in 2000 increased 1.3 percent when
compared to 1999. The 1999 results reflect an increase of 18.9 percent from
1998. The contribution of general insurance operating income to income before
income taxes and minority interest was 42.2 percent in 2000 compared to 46.3
percent in 1999 and 46.6 percent in 1998.
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 70 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $22.90 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 2000 with respect to reinsurance recoverable to the extent that any
reinsurer may not be able to reimburse AIG under the terms of these reinsurance
arrangements. AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound, and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods on an individual
reinsurer basis. At December 31, 2000, approximately 43 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, nearly all of these balances were collateralized. The
remaining 57 percent of the general reinsurance assets were from authorized
reinsurers and over 95 percent of such balances
18
20
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
are from reinsurers rated A-(excellent) or better, as rated by A.M. Best. This
rating is a measure of financial strength. The terms authorized and unauthorized
pertain to regulatory categories, not creditworthiness.
AIG maintains an allowance for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 2000,
AIG had allowances for unrecoverable reinsurance approximating $76 million. At
that date AIG had no significant reinsurance recoverables from any individual
reinsurer which is financially troubled (e.g., liquidated, insolvent, in
receivership or otherwise subject to formal or informal regulatory restriction).
AIG's Reinsurance Security Department conducts ongoing detailed
assessments of the reinsurance markets and current and potential reinsurers,
both foreign and domestic. Such assessments include, but are not limited to,
identifying if a reinsurer is appropriately licensed, and has sufficient
financial capacity, and the local economic environment in which a foreign
reinsurer operates. This department also reviews the nature of the risks ceded
and the need for collateral. In addition, AIG's Credit Risk Committee reviews
the credit limits for and concentrations with any one reinsurer.
AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
At December 31, 2000, the consolidated general reinsurance assets of
$22.90 billion include reinsurance recoverables for paid losses and loss
expenses of $3.33 billion and $15.66 billion with respect to the ceded reserve
for losses and loss expenses, including ceded losses incurred but not reported
(IBNR) (ceded reserves). The ceded reserves represent the accumulation of
estimates of ultimate ceded losses including provisions for ceded IBNR and loss
expenses. The methods used to determine such estimates and to establish the
resulting ceded reserves are continually reviewed and updated. Any adjustments
therefrom are reflected in income currently. It is AIG's belief that the ceded
reserves at December 31, 2000 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, 2000, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $40.61 billion. These loss reserves
represent the accumulation of estimates of ultimate losses, including IBNR, and
loss expenses and amounts of discounting related to certain workers'
compensation claims. At December 31, 2000, general insurance net loss reserves
increased $117 million from prior year end to $24.95 billion. The net loss
reserves represent loss reserves reduced by reinsurance recoverables, net of an
allowance for unrecoverable reinsurance. The methods used to determine such
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting therefrom are reflected in operating income
currently. It is management's belief that the general insurance net loss
reserves are adequate to cover all general insurance net losses and loss
expenses as at December 31, 2000. In the future, if the general insurance net
loss reserves develop deficiently, such deficiency would have an adverse impact
on such future results of operations.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business. Such
lines include excess and umbrella liability, directors and officers' liability,
professional liability, medical malpractice, general liability, products'
liability, and related classes. These lines account for approximately one-half
of net losses and loss expenses. The other group is short tail lines of business
consisting principally of property lines, certain classes of casualty lines and
includes personal lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. For the majority of
long tail casualty lines, net loss trend factors approximated four percent. Loss
trend factors reflect many items including changes in claims handling, exposure
and policy forms and current and future estimates of monetary inflation and
social inflation. Thus, many factors are implicitly considered in estimating the
year to year growth in loss costs. Therefore, AIG's carried net long tail loss
reserves are judgmentally set as well as tested for reasonableness using the
most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. These
factors are periodically reviewed and subsequently adjusted, as appropriate, to
reflect emerging trends which are based upon past loss experience.
Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in property's exposure to fire loss can be approximated by
the amount of insurance purchased.
19
21
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter referred to
collectively as environmental claims) and indemnity claims asserting injuries
from asbestos. The vast majority of these asbestos and environmental claims
emanate from policies written in 1984 and prior years. AIG has established a
specialized claims unit which investigates and adjusts all such asbestos and
environmental claims. Commencing in 1985, standard policies contained an
absolute exclusion for pollution related damage. However, AIG currently
underwrites environmental impairment liability insurance on a claims made basis
and excluded such claims from the analyses included herein.
Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends which
influence the development of asbestos and environmental claims are the
inconsistent court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current case law can be
characterized as still evolving and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves issues such as allocation
of responsibility among potentially responsible parties and the government's
refusal to release parties. The cleanup cost exposure may significantly change
if potential Congressional reauthorization of Superfund dramatically changes the
current program.
In the interim, AIG and other industry members have and will continue to
litigate the broadening judicial interpretation of the policy coverage and the
liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims with the same degree of
reliability as is the case for other types of claims. Such development will be
affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
the changes in Superfund and waste dump site coverage issues. Although the
estimated liabilities for these claims are subject to a significantly greater
margin of error than for other claims, the reserves carried for these claims at
December 31, 2000 are believed to be adequate as these reserves are based on the
known facts and current law. Furthermore, as AIG's net exposure retained
relative to the gross exposure written was lower in 1984 and prior years, the
potential impact of these claims is much smaller on the net loss reserves than
on the gross loss reserves. In the future, if the environmental claims develop
deficiently, such deficiency would have an adverse impact on future results of
operations. (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.
20
22
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and environmental claims separately and combined at
December 31, 2000, 1999 and 1998 follows.
(in millions)
- --------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Gross Net Gross Net Gross Net
==========================================================================================================================
Asbestos:
Reserve for losses and loss expenses at beginning of year $1,093 $306 $ 964 $ 259 $ 842 $ 195
Losses and loss expenses incurred 405 80 404 101 375 111
Losses and loss expenses paid (398) (48) (275) (54) (253) (47)
- --------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,100 $338 $1,093 $ 306 $ 964 $ 259
==========================================================================================================================
Environmental:
Reserve for losses and loss expenses at beginning of year $1,519 $585 $1,535 $ 605 $1,467 $ 592
Losses and loss expenses incurred (44) (45) 127 47 284 107
Losses and loss expenses paid (130) (23) (143) (67) (216) (94)
- --------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,345 $517 $1,519 $ 585 $1,535 $ 605
==========================================================================================================================
Combined:
Reserve for losses and loss expenses at beginning of year $2,612 $891 $2,499 $ 864 $2,309 $ 787
Losses and loss expenses incurred 361 35 531 148 659 218
Losses and loss expenses paid (528) (71) (418) (121) (469) (141)
- --------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $2,445 $855 $2,612 $ 891 $2,499 $ 864
==========================================================================================================================
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at December 31, 2000, 1999 and 1998 were estimated as follows:
(in millions)
- --------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Gross Net Gross Net Gross Net
==========================================================================================================================
Combined $1,042 $314 $930 $352 $979 $359
- --------------------------------------------------------------------------------------------------------------------------
A summary of asbestos and environmental claims count activity for the years
ended December 31, 2000, 1999 and 1998 was as follows:
- -------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
Asbestos Environmental Combined Asbestos Environmental Combined
===================================================================================================================
Claims at beginning of year 6,746 13,432 20,178 6,388 16,560 22,948
Claims during year:
Opened 650 1,697 2,347 946 2,040 2,986
Settled (101) (584) (685) (225) (876) (1,101)
Dismissed or otherwise resolved (499) (3,222) (3,721) (363) (4,292) (4,655)
- -------------------------------------------------------------------------------------------------------------------
Claims at end of year 6,796 11,323 18,119 6,746 13,432 20,178
===================================================================================================================
- --------------------------------------------------------------------------
1998
-------------------------------------
Asbestos Environmental Combined
==========================================================================
Claims at beginning of year 6,150 17,422 23,572
Claims during year:
Opened 887 3,502 4,389
Settled (81) (677) (758)
Dismissed or otherwise resolved (568) (3,687) (4,255)
- --------------------------------------------------------------------------
Claims at end of year 6,388 16,560 22,948
==========================================================================
21
23
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
The average cost per claim settled, dismissed or otherwise resolved for
the years ended December 31, 2000, 1999 and 1998 was as follows:
- --------------------------------------------
Gross Net
============================================
2000
Asbestos $663,300 $80,000
Environmental 34,200 6,000
Combined 119,800 16,100
============================================
1999
Asbestos $467,700 $91,800
Environmental 27,700 13,000
Combined 72,600 21,000
============================================
1998
Asbestos $389,800 $72,400
Environmental 49,500 21,500
Combined 93,600 28,100
============================================
A.M. Best, an insurance rating agency, has developed a survival ratio to
measure the number of years it would take a company to exhaust both its asbestos
and environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. This is a ratio
derived by taking the current ending losses and loss expense reserves and
dividing by the average annual payments for the prior three years. Therefore,
the ratio derived is a simplistic measure of an estimate of the number of years
it would be before the current ending losses and loss expense reserves would be
paid off using recent average payments. The higher the ratio, the more years the
reserves for losses and loss expenses cover these claims payments. These ratios
are computed based on the ending reserves for losses and loss expenses over the
respective claims settlements during the fiscal year. Such payments include
indemnity payments and legal and loss adjustment payments. It should be noted,
however, that this is an extremely simplistic approach to measuring asbestos and
environmental reserve levels. Many factors, such as aggressive settlement
procedures, mix of business and level of coverage provided, have significant
impact on the amount of asbestos and environmental losses and loss expense
reserves, ultimate payments thereof and the resultant ratio.
The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments are primarily attributable to court
judgments, court orders, covered claims with no coverage defenses, state
mandated cleanup costs, claims where AIG's coverage defenses are minimal, and
settlements made less than six months before the first trial setting. Also, AIG
considers all legal and loss adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios for the years ended December 31, 2000, 1999 and 1998 were as follows:
- ---------------------------------------------------
Gross Net
===================================================
2000
Involuntary survival ratios:
Asbestos 3.6 6.8
Environmental 20.0 16.9
Combined 7.6 11.5
===================================================
1999
Involuntary survival ratios:
Asbestos 4.1 6.3
Environmental 17.3 17.5
Combined 8.2 11.7
===================================================
1998
Involuntary survival ratios:
Asbestos 3.7 5.2
Environmental 17.0 17.2
Combined 7.8 10.8
===================================================
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 2000, 1999 and 1998
were $15 million, $15 million and $16 million, respectively.
AIG is also required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated.
Life Insurance Operations
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. Traditional products consist of
individual and group life, annuity, endowment and accident and health policies.
Financial and investment products consist of single premium annuity, variable
annuities, guaranteed investment contracts, universal life and pensions.
AIG's three principal overseas life operations are American Life Insurance
Company (ALICO), American International Assurance Company, Limited together with
American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan
Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and
all of its business is written outside of the United States. ALICO has
22
24
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
operations either directly or through subsidiaries in approximately 50 countries
located in Europe, Africa, Latin America, the Caribbean, the Middle East, and
the Far East, with Japan being the largest territory. AIA operates primarily in
Hong Kong, Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. AIG's
domestic life operations are comprised of two separate operations, AIG's
domestic life companies and the life insurance subsidiaries of SunAmerica Inc.
(SunAmerica), a Delaware corporation which owns substantially all of the
subsidiaries which were owned by SunAmerica Inc., the Maryland corporation which
was merged into AIG in January 1999. Both of these operations sell primarily
financial and investment type products. (See also Note 18 of Notes to Financial
Statements.)
Life insurance operations for the twelve month periods ending December 31,
2000, 1999 and 1998 were as follows:
(in millions)
- ----------------------------------------------------------------------------
2000 1999 1998
============================================================================
Premium income:
Domestic $ 1,255 $ 947 $ 784
Foreign 12,355 10,995 9,509
- ----------------------------------------------------------------------------
Total $ 13,610 $ 11,942 $ 10,293
============================================================================
Net investment income:
Domestic $ 3,926 $ 3,497 $ 2,889
Foreign 3,197 2,709 2,312
- ----------------------------------------------------------------------------
Total $ 7,123 $ 6,206 $ 5,201
============================================================================
Operating income before
realized capital losses:
Domestic $ 1,311 $ 1,062 $ 782
Foreign 2,238 1,944 1,665
- ----------------------------------------------------------------------------
Total 3,549 3,006 2,447
Realized capital losses (162) (148) (74)
- ----------------------------------------------------------------------------
Operating income $ 3,387 $ 2,858 $ 2,373
============================================================================
Life insurance in-force:
Domestic $ 88,743 $103,049 $ 65,705
Foreign 494,316 481,910 437,944
- ----------------------------------------------------------------------------
Total $583,059 $584,959 $503,649
============================================================================
AIG's life premium income in 2000 represented a 14.0 percent increase from
the prior year. This compares with an increase of 16.0 percent in 1999 over
1998. Foreign life operations produced 90.8 percent, 92.1 percent and 92.4
percent of the life premium income in 2000, 1999 and 1998, respectively. (See
also Notes 1, 4 and 6 of Notes to Financial Statements.)
The traditional life products, particularly individual life products, were
major contributors to the growth in foreign premium income. These traditional
life products, coupled with the increased distribution of financial and
investment products contributed to the growth in foreign investment income. A
mixture of traditional, accident and health and financial products are being
sold in Japan through ALICO.
Differences in foreign exchange rates during 2000 relative to 1999 had a
negligible effect on foreign life premium income when translated from original
currencies into U.S. dollars.
Life insurance net investment income increased 14.8 percent in 2000
compared to an increase of 19.3 percent in 1999. The growth in net investment
income in 2000 and 1999 was attributable to both foreign and domestic new cash
flow for investment. The new cash flow was generated from life insurance
operations and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein.)
Life insurance realized capital losses were $162 million in 2000, $148
million in 1999 and $74 million in 1998. These realized capital losses resulted
from the ongoing management of the life insurance investment portfolios within
the overall objectives of the life insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities. The increase in realized capital losses
from 1998 to 2000 reflects the impact of higher interest rates, wider spreads
between governmental and non-governmental obligations and weaker Asian markets
on the customary trading activities of the life insurance investment operations.
Life insurance operating income in 2000 increased 18.5 percent to $3.39
billion compared to an increase of 20.5 percent in 1999. Excluding realized
capital gains and losses from life insurance operating income, the percent
increases would be 18.1 percent and 22.8 percent in 2000 and 1999, respectively.
The contribution of life insurance operating income to income before income
taxes and minority interest amounted to 40.6 percent in 2000 compared to 38.0
percent in 1999 and 37.8 percent in 1998.
The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with the
financial and investment contract products is investment risk.
Underwriting risk represents the exposure to loss resulting from the
actual policy experience adversely emerging in comparison to the assumptions
made in the product pricing associated with mortality, morbidity, termination
and expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately one million dollars
of coverage by using yearly renewable term reinsurance. (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.)
23
25
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term investments or there are investment
restrictions imposed by the local regulatory authorities. For example, in Japan
and several Southeast Asia territories, the duration of the investments is often
for a shorter period than the effective maturity of the related policy
liabilities. Therefore, there is a risk that the reinvestment of the proceeds at
the maturity of the initial investments may be at a yield below that of the
interest required for the accretion of the policy liabilities. At December 31,
2000, the average duration of the investment portfolio in Japan was 6.0 years.
Additionally, there exists a future investment risk associated with
certain policies currently in force which will have premium receipts in the
future. That is, the investment of these future premium receipts may be at a
yield below that required to meet future policy liabilities. The anticipated
average period for the receipt and investment of these future premium receipts
is 6.1 years. These durations compare with an estimated average duration of 10.4
years for the corresponding policy liabilities. To maintain an adequate yield to
match the interest necessary to support future policy liabilities, constant
management focus is required to reinvest the proceeds of the maturing securities
and to invest the future premium receipts without sacrificing investment
quality. To the extent permitted under local regulation, AIG may invest in
qualified longer-term securities outside Japan to achieve a closer matching in
both duration and the required yield. AIG is able to manage any asset-liability
duration difference through maintenance of sufficient global liquidity and to
support any operational shortfall through its international financial network.
(See also the discussion under "Liquidity" herein.)
AIG uses asset-liability matching as a management tool to determine the
composition of the invested assets and marketing strategies. As a part of these
strategies, AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest rate or other
economic changes.
Financial Services Operations
AIG's financial services subsidiaries engage in diversified financial products
and services including premium financing, banking services and consumer finance
services.
International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. Also, ILFC provides,
for a fee, fleet management services to certain third-party operators. (See also
Note 18 of Notes to Financial Statements.)
AIG Financial Products Corp. and its subsidiaries (AIGFP) structure
financial transactions, including long-dated interest rate and currency swaps
and structured borrowings through notes, bonds and guaranteed investment
agreements. (See also Note 18 of Notes to Financial Statements.)
AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various
commodities trading, foreign exchange trading, interest rate swaps and market
making activities. (See also Note 18 of Notes to Financial Statements.)
Financial services operations for the twelve month periods ending December
31, 2000, 1999 and 1998 were as follows:
(in millions)
- --------------------------------------------------------------------------------
2000 1999 1998
================================================================================
Revenues:
International Lease Finance
Corporation $2,441 $2,194 $2,002
AIG Financial Products Corp.* 1,056 737 550
AIG Trading Group Inc.* 254 227 374
Other 301 182 118
- --------------------------------------------------------------------------------
Total $4,052 $3,340 $3,044
================================================================================
Operating income:
International Lease Finance
Corporation $ 654 $ 590 $ 496
AIG Financial Products Corp. 648 482 323
AIG Trading Group Inc. 62 109 123
Other, including intercompany
adjustments (71) (100) (73)
- --------------------------------------------------------------------------------
Total $1,293 $1,081 $ 869
================================================================================
*Represents commissions, transaction and other fees.
Financial services operating income increased 19.5 percent in 2000 over
1999. This compares with an increase of 24.4 percent in 1999 over 1998.
Financial services operating income represented 15.5 percent of AIG's
income before income taxes and minority interest in 2000. This compares to 14.4
percent and 13.8 percent in 1999 and 1998, respectively.
ILFC generates its revenues primarily from leasing new and used commercial jet
aircraft to domestic and foreign airlines. Revenues also result from the
remarketing of commercial jets for its own account, for airlines and for
financial institutions. Revenues in 2000 increased 11.3 percent from 1999
compared to a 9.6 percent increase during 1999 from 1998. The revenue growth in
each year resulted primarily from the increase in flight equipment available for
operating lease, the increase in the relative cost of the leased fleet and the
increase in the relative composition of the fleet with wide bodies which
typically receive higher lease payments. Approximately 20 percent of ILFC's
operating lease revenues are derived from U.S. and Canadian airlines. During
2000, operating income increased 10.8 percent from 1999 and 19.0 percent during
1999 from 1998. ILFC finances its purchases of aircraft primarily through the
issuance of a variety of debt instruments. The composite borrowing rates at
December 31, 2000, 1999 and 1998 were 6.37 percent, 6.14 percent and 6.03
percent, respectively. (See also the discussions under "Capital Resources" and
"Liquidity" herein and Note 18 of Notes to Financial Statements.)
24
26
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to sell or re-lease at
acceptable rates at lease expiration and through committing to purchase aircraft
which it would be unable to lease. ILFC manages its lessee non-performance
exposure through credit reviews and security deposit requirements. At December
31, 2000, there were 380 aircraft subject to operating leases and there were
three aircraft off lease. Two of the off lease aircraft were re-leased in early
2001. (See also the discussions under "Capital Resources" and "Liquidity"
herein.)
AIGFP participates in the derivatives dealer market conducting, primarily
as principal, an interest rate, currency, equity and credit derivative products
business. AIGFP also enters into structured transactions including long-dated
forward foreign exchange contracts, option transactions, liquidity facilities
and investment agreements and invests in a diversified portfolio of securities.
AIGFP derives substantially all its revenues from proprietary positions entered
in connection with counterparty transactions rather than from speculative
transactions. Revenues in 2000 increased 43.3 percent from 1999 compared to a
33.9 percent increase during 1999 from 1998. During 2000, operating income
increased 34.5 percent from 1999 and increased 49.4 percent during 1999 from
1998. As AIGFP is a transaction-oriented operation, current and past revenues
and operating results may not provide a basis for predicting future performance.
(See also the discussions under "Capital Resources," "Liquidity" and
"Derivatives" herein and Note 18 of Notes to Financial Statements.)
AIGTG derives a substantial portion of their revenues from market making
and trading activities, as principals, in foreign exchange, interest rates and
precious and base metals. Revenues in 2000 increased 11.6 percent from 1999
compared to a 39.2 percent decrease during 1999 from 1998. During 2000,
operating income decreased 43.2 percent from 1999 compared to a 11.4 percent
decrease during 1999 from 1998. As AIGTG is a transaction-oriented operation,
current and past revenues and operating results may not provide a basis for
predicting future performance or for comparing revenues to operating income.
(See also the discussions under "Capital Resources," "Liquidity" and
"Derivatives" herein and Note 18 of Notes to Financial Statements.)
AIG Consumer Finance Group, Inc., through its subsidiaries, is engaged in
developing a multi-product consumer finance business with an emphasis on
emerging markets.
Asset Management Operations
AIG's asset management operations offer a wide variety of investment vehicles
and services, including variable annuities, mutual funds, and investment asset
management. Such products and services are offered to individuals and
institutions both domestically and internationally.
AIG's three principal asset management operations are SunAmerica's asset
management operations (SAAMCo), AIG Global Investment Group, Inc. and its
subsidiaries (Global Investment) and AIG Capital Partners, Inc. (Cap Partners).
SAAMCo develops and sells variable annuities and other investment products,
sells and manages mutual funds and provides financial services. Global
Investment manages third-party institutional, retail and private equity funds
invested assets on a global basis, and provides custodial services. Cap Partners
organizes, and manages the invested assets of institutional investment funds and
may also invest in such funds. Each of these subsidiary operations receives fees
for investment products and services provided.
Asset management operations for the twelve month periods ending December
31, 2000, 1999 and 1998 were as follows:
(in millions)
- --------------------------------------------
2000 1999 1998
- --------------------------------------------
Revenues $1,217 $985 $707
Operating income 430 314 191
- --------------------------------------------
These increases were primarily attributable to increased fees from the
management of the variable annuity business and mutual fund assets by SAAMCo.
Asset management operating income increased 37.0 percent in 2000 over
1999. This compares with an increase of 64.3 percent in 1999 over 1998.
Asset management operating income represented 5.2 percent of AIG's income
before income taxes and minority interest in 2000. This compares to 4.2 percent
and 3.0 percent in 1999 and 1998, respectively.
At December 31, 2000, AIG's third party assets under management, including
both retail mutual funds and institutional accounts, approximated $35 billion.
Other Operations
In 1998, AIG's equity in income of minority-owned insurance operations was $57
million and represented 0.9 percent of income before income taxes and minority
interest. In 2000 and 1999, AIG did not report equity in income of
minority-owned insurance operations as a result of the consolidation of the
operations of Transatlantic and SELIC Holdings, Ltd. into general insurance
operating results. IPC Holdings, Ltd., the remaining operation included in
equity in income of minority-owned insurance operations in previous periods is
now reported as a component of other income (deductions)-net.
Other realized capital losses amounted to $14 million, $25 million and $7
million in 2000, 1999 and 1998, respectively.
25
27
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
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 2000, net deductions amounted to $271 million. In 1999 and
1998, net deductions amounted to $197 million and $134 million, respectively.
(See also the discussion under "Recent Developments" herein.)
Income before income taxes and minority interest amounted to $8.35 billion
in 2000, $7.51 billion in 1999 and $6.28 billion in 1998.
In 2000, AIG recorded a provision for income taxes of $2.46 billion
compared to the provisions of $2.22 billion and $1.79 billion in 1999 and 1998,
respectively. These provisions represent effective tax rates of 29.4 percent in
2000, 29.5 percent in 1999 and 28.4 percent in 1998. (See Note 3 of Notes to
Financial Statements.)
Minority interest represents minority shareholders' equity in income of
certain majority-owned consolidated subsidiaries. Minority interest amounted to
$255 million, $238 million and $210 million in 2000, 1999 and 1998,
respectively.
Net income amounted to $5.64 billion in 2000, $5.06 billion in 1999 and
$4.28 billion in 1998. The increases in net income over the three year period
resulted from those factors described above.
Capital Resources
At December 31, 2000, AIG had total capital funds of $39.62 billion and total
borrowings of $40.23 billion. At that date, $36.30 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
Total borrowings and borrowings not guaranteed or matched at December 31,
2000 and 1999 were as follows:
(in millions)
- ----------------------------------------------------------------------------
December 31, 2000 1999
- ----------------------------------------------------------------------------
GIAs -- AIGFP $13,595 $ 9,430
- ----------------------------------------------------------------------------
Commercial Paper:
AIG Funding, Inc. (Funding) 968 888
ILFC (a) 4,259 2,958
A.I. Credit Corp. 597 475
AIG Finance (Taiwan) Limited (a) 104 83
AIG Credit Card Company (Taiwan) (a) 36 --
- ----------------------------------------------------------------------------
Total 5,964 4,404
- ----------------------------------------------------------------------------
Medium Term Notes:
ILFC (a) 3,175 3,226
AIG 582 481
- ----------------------------------------------------------------------------
Total 3,757 3,707
- ----------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC (a) (b) 5,529 5,016
AIGFP 8,755 7,895
AIG 720 705
- ----------------------------------------------------------------------------
Total 15,004 13,616
- ----------------------------------------------------------------------------
Loans and Mortgages Payable:
ILFC (a) (c) 463 670
AIG Finance (Hong Kong) Limited (a) 346 566
AIG Consumer Finance Group, Inc. (a) 662 334
AIG 440 257
- ----------------------------------------------------------------------------
Total 1,911 1,827
- ----------------------------------------------------------------------------
Total Borrowings 40,231 32,984
- ----------------------------------------------------------------------------
Borrowings not guaranteed by AIG 14,574 12,853
Matched GIA borrowings 13,595 9,430
Matched notes and bonds payable -- AIGFP 8,127 7,370
- ----------------------------------------------------------------------------
36,296 29,653
- ----------------------------------------------------------------------------
Remaining borrowings of AIG $ 3,935 $ 3,331
============================================================================
(a) AIG does not guarantee or support these borrowings.
(b) Includes borrowings under Export Credit Facility of $2.07 billion.
(c) Capital lease obligations.
See also Note 9 of Notes to Financial Statements.
During 2000, AIGFP increased the aggregate principal amount outstanding of
its notes and bonds payable to $8.76 billion. AIGFP uses the proceeds from the
issuance of notes and bonds and GIA borrowings to invest in a diversified
portfolio of securities and derivative transactions. The funds may also be
temporarily invested in securities purchased under agreements to resell. (See
also the discussions under "Operational Review", "Liquidity" and "Derivatives"
herein and Notes 1, 8, 9, 12 and 18 of Notes to Financial Statements.)
26
28
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its non-insurance
subsidiaries. Funding intends to continue to meet AIG's funding requirements
through the issuance of commercial paper guaranteed by AIG. This issuance of
Funding's commercial paper is subject to the approval of AIG's Board of
Directors. ILFC and A.I. Credit Corp. (AICCO) as well as AIG Credit Card Company
(Taiwan) - (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited - (AIGF-Taiwan),
both consumer finance subsidiaries in Taiwan, have issued commercial paper for
the funding of their own operations. At December 31, 2000, AIG did not guarantee
or support the commercial paper of any of its subsidiaries other than Funding
and AICCO. In early 2001, AICCO ceased issuing commercial paper under its
program and the agreement which AIG had provided supporting the commercial paper
was terminated; AICCO's funding requirements are now met through Funding's
program. (See also the discussion under "Derivatives" herein and Note 9 of Notes
to Financial Statements.)
AIG and Funding have entered into syndicated revolving credit facilities
(collectively, the Facility) aggregating $1.5 billion. The Facility consists of
$1.0 billion in short-term revolving credit facilities and a $500 million five
year revolving credit facility. The Facility can be used for general corporate
purposes and also to provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under the
Facility, nor were any borrowings outstanding as of December 31, 2000.
At December 31, 2000, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $8.70 billion, a net increase
of $462 million, and recorded a net decline in its capital lease obligations of
$207 million and a net increase in its commercial paper of $1.30 billion. At
December 31, 2000, ILFC had $75 million in aggregate principal amount of debt
securities registered for issuance from time to time, which debt had been sold
as of March 16, 2001. An additional $2.0 billion principal amount of debt
securities was registered as of January 5, 2001, under which $800 million in
notes were sold as of March 16, 2001. A $750 million Medium Term Note program
was implemented on January 19, 2001 under which $200 million has been sold as of
March 16, 2001. In addition, ILFC established a Euro Medium Term Note Program
for $2.0 billion, under which $771 million in notes were sold through December
31, 2000.
ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for
approximately 75 aircraft to be delivered through 2001. ILFC has the right, but
is not required, to use the facility to fund 85 percent of each aircraft's
purchase price. This facility is guaranteed by various European Export Credit
Agencies. The interest rate varies from 5.75 percent to 5.90 percent on the
first 75 aircraft depending on the delivery date of the aircraft. Through March
9, 2001, ILFC borrowed $2.2 billion under this facility. Borrowings with respect
to this facility are included in Notes and Bonds Payable in the accompanying
table of borrowings.
The proceeds of ILFC's debt financing are primarily used to purchase
flight equipment, including progress payments during the construction phase. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. (See also the discussions
under "Operational Review" and "Liquidity" herein.)
During 2000, AIG issued $233 million principal amount of Medium Term Notes
and $132 million of previously issued notes matured or were called. At December
31, 2000, AIG had $781 million in aggregate principal amount of debt securities
registered for issuance from time to time. In early 2001, AIG established a new
Medium Term Note program under which these securities may be issued.
AIG's capital funds increased $6.31 billion during 2000. Unrealized
appreciation of investments, net of taxes increased $177 million. During 2000,
the cumulative translation adjustment loss, net of taxes, increased $210
million. The change from year to year with respect to the unrealized
appreciation of investments, net of taxes was primarily impacted by the decline
in domestic interest rates. The cumulative translation adjustment loss, net of
taxes was primarily impacted by the general strength in the U.S. dollar relative
to certain currencies in Southeast Asia and South America. (See also the
discussion under "Operational Review" and "Liquidity" herein.) Retained earnings
increased $3.26 billion, resulting from net income less dividends.
During 2000, AIG repurchased in the open market 10,351,600 shares of its
common stock. Through March 22, 2001, AIG repurchased in the open market
2,525,000 shares of its common stock. AIG intends to continue to buy its common
shares in the open market for general corporate purposes, including to satisfy
its obligations under various employee benefit plans.
Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At December 31, 2000, there
were no significant statutory or regulatory issues which would impair AIG's
financial condition, results of operations or liquidity. To AIG's knowledge, no
AIG company is on any regulatory or similar "watch list". (See also the
discussion under "Liquidity" herein and Note 11 of Notes to Financial
Statements.)
AIG's insurance subsidiaries, in common with other insurers, are subject
to regulation and supervision by the states and jurisdictions in which they do
business. The National Association of Insurance Commissioners (NAIC) has
developed Risk-Based Capital (RBC) requirements. RBC relates an individual
insurance company's statutory surplus to the risk inher-
27
29
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
ent in its overall operations. At December 31, 2000, the adjusted capital of
each of AIG's domestic general companies and of each of AIG's domestic life
companies exceeded each of their RBC standards by considerable margins.
A substantial portion of AIG's general insurance business and a majority
of its life insurance business are conducted in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification and revocation. Thus, AIG's insurance subsidiaries could be
prevented from conducting future business in certain of the jurisdictions where
they currently operate. AIG's international operations include operations in
various developing nations. Both current and future foreign operations could be
adversely affected by unfavorable political developments up to and including
nationalization of AIG's operations without compensation. Adverse effects
resulting from any one country may impact AIG's results of operations, liquidity
and financial condition depending on the magnitude of the event and AIG's net
financial exposure at that time in that country.
Liquidity
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
At December 31, 2000, AIG's consolidated invested assets included $6.09
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in 2000 amounted to $5.94 billion.
Sources of funds considered in meeting the objectives of AIG's financial
services operations include guaranteed investment agreements, issuance of long
and short-term debt, maturities and sales of securities available for sale,
securities sold under repurchase agreements, trading liabilities, securities and
spot commodities sold but not yet purchased, issuance of equity, and cash
provided from such operations. AIG's strong capital position is integral to
managing this liquidity, as it enables AIG to raise funds in diverse markets
worldwide. (See also the discussions under "Capital Resources" herein.)
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated approximately $15.2 billion in
pre-tax cash flow during 2000. Cash flow includes periodic premium collections,
including policyholders' contract deposits, paid loss recoveries less
reinsurance premiums, losses, benefits, acquisition and operating expenses.
Generally, there is a time lag from when premiums are collected and, when as a
result of the occurrence of events specified in the policy, the losses and
benefits are paid. AIG's insurance investment operations generated approximately
$9.4 billion in investment income cash flow during 2000. Investment income cash
flow is primarily derived from interest and dividends received and includes
realized capital gains net of realized capital losses.
In addition to the combined insurance pre-tax operating cash flow, AIG's
insurance operations held $5.52 billion in cash and short-term investments at
December 31, 2000. The aforementioned operating cash flow and the cash and
short-term balances held provided AIG's insurance operations with a significant
amount of liquidity.
This liquidity is available, among other things, to purchase high quality
and diversified fixed income securities and to a lesser extent marketable equity
securities and to provide mortgage loans on real estate, policy loans and
collateral loans. This cash flow coupled with proceeds of approximately $36
billion from the maturities, sales and redemptions of fixed income securities
and from the sale of equity securities was used to purchase approximately $46
billion of fixed income securities and marketable equity securities during 2000.
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued of $2.42 billion and $2.05
billion and real estate of $1.87 billion and $1.62 billion, at December 31, 2000
and 1999, respectively:
(dollars in millions)
- ----------------------------------------------------------------------------
Invested Percent
Assets of Total
============================================================================
2000
General insurance $ 42,892 19.6%
Life insurance 98,711 45.0
Financial services and asset management 76,748 35.0
Other 831 0.4
- ----------------------------------------------------------------------------
Total $219,182 100.0%
============================================================================
1999
General insurance $ 39,135 20.6%
Life insurance 87,355 46.1
Financial services and asset management 62,548 33.0
Other 651 0.3
- ----------------------------------------------------------------------------
Total $189,689 100.0%
============================================================================
28
30
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
Insurance Invested Assets
The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at December 31, 2000 and 1999:
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
General Life Percent --------------------
December 31, 2000 Insurance Insurance Total of Total Domestic Foreign
==================================================================================================================================
Fixed maturities:
Available for sale, at market value (a) $18,168 $72,159 $ 90,327 63.8% 51.8% 48.2%
Held to maturity, at amortized cost 11,533 -- 11,533 8.1 100.0 --
Equity securities, at market value (b) 4,666 2,309 6,975 4.9 55.4 44.6
Mortgage loans on real estate, policy and collateral loans 65 10,563 10,628 7.5 58.6 41.4
Short-term investments, including time deposits, and cash 1,448 4,066 5,514 3.9 44.8 55.2
Real estate 408 1,359 1,767 1.3 16.6 83.4
Investment income due and accrued 584 1,689 2,273 1.6 46.8 53.2
Other invested assets 6,020 6,566 12,586 8.9 88.3 11.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total $42,892 $98,711 $141,603 100.0% 58.9% 41.1%
==================================================================================================================================
(a) Includes $846 million of bonds trading securities, at market value.
(b) Includes $1.04 billion of non-redeemable preferred stocks, at market
value.
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
General Life Percent --------------------
December 31, 1999 Insurance Insurance Total of Total Domestic Foreign
==================================================================================================================================
Fixed maturities:
Available for sale, at market value (a) $16,903 $61,022 $ 77,925 61.6% 53.5% 46.5%
Held to maturity, at amortized cost 12,078 -- 12,078 9.5 100.0 --
Equity securities, at market value (b) 4,000 2,503 6,503 5.1 50.2 49.8
Mortgage loans on real estate, policy and collateral loans 70 10,420 10,490 8.3 57.0 43.0
Short-term investments, including time deposits, and cash 977 5,710 6,687 5.3 45.1 54.9
Real estate 381 1,141 1,522 1.2 18.5 81.5
Investment income due and accrued 576 1,421 1,997 1.6 48.0 52.0
Other invested assets 4,150 5,138 9,288 7.4 85.1 14.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total $39,135 $87,355 $126,490 100.0% 59.5% 40.5%
==================================================================================================================================
(a) Includes $1.04 billion of bonds trading securities, at market value.
(b) Includes $697 million of non-redeemable preferred stocks, at market value.
Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.
With respect to fixed maturities, AIG's general strategy is to invest in
high quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)
The fixed maturity available for sale portfolio is subject to decline in
fair value as interest rates rise. Such declines in fair value are presented as
a component of comprehensive income in unrealized appreciation of investments,
net of taxes.
The fixed maturities held to maturity portfolio is exposed to adverse
interest rate fluctuations. However, AIG has the ability and intent to hold such
securities to maturity. Therefore, there would be no detrimental impact to AIG's
results of operations or financial condition as a result of such fluctuations.
At December 31, 2000, approximately 57 percent of the fixed maturities
investments were domestic securities. Approximately 37 percent of such domestic
securities were rated AAA. Approximately 13 percent were below investment grade
or not rated.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations. AIG
annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At December 31, 2000, approximately 11
percent of the foreign fixed income investments were either rated AAA or, on the
basis of AIG's internal analysis, were equivalent from a credit standpoint to
securities so rated. Approximately 16 percent were below investment grade or not
rated at that date. A large portion of the foreign insurance fixed income
portfolio are sovereign fixed maturity securities supporting the policy
liabilities in the country of issuance.
At December 31, 2000, approximately 17 percent of the fixed maturities
portfolio was collateralized mortgage obligations (CMOs), including commercial
mortgage backed securities. Substantially all of the CMOs were
invest-
29
31
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
ment grade and approximately 16 percent of the CMOs were backed by various U.S.
government agencies. CMOs are exposed to interest rate risk as the duration and
ultimate realized yield would be affected by the accelerated prepayments of the
underlying mortgages.
Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date.
AIG invests in equities for various reasons, including diversifying its
overall exposure to interest rate risk. Equity securities are subject to
declines in fair value. Such declines in fair value are presented in unrealized
appreciation of investments, net of taxes as a component of comprehensive
income.
Mortgage loans on real estate, policy and collateral loans comprised 7.5
percent of AIG's insurance invested assets at December 31, 2000. AIG's insurance
operations' holdings of real estate mortgages amounted to $6.73 billion of which
78.3 percent was domestic. At December 31, 2000, only a nominal amount were in
default. It is AIG's practice to maintain a maximum loan to value ratio of 75
percent at loan origination. At December 31, 2000, AIG's insurance holdings of
collateral loans amounted to $868 million, all of which were foreign. It is
AIG's strategy to enter into mortgage and collateral loans as an adjunct
primarily to life insurance fixed maturity investments. AIG's policy loans
increased from $2.82 billion at December 31, 1999 to $3.03 billion at December
31, 2000.
Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash held.
AIG's real estate investment properties are primarily occupied by AIG's
various operations. The current market value of these properties considerably
exceeds their carrying value.
Other invested assets were primarily comprised of both foreign and
domestic private placements, limited partnerships and outside managed funds.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as end users. To
date, such activities have not been significant. (See also the discussion under
"Derivatives" herein.)
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.
AIG believes that statistical models alone do not provide a reliable
method of monitoring and controlling market risk. While VaR models are
relatively sophisticated, the quantitative market risk information generated is
limited by the assumptions and parameters established in creating the related
models. Therefore, such models are tools and do not substitute for the
experience or judgment of senior management.
AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.
Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.
AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of December 31, 2000 and December 31, 1999. AIG has
refined its methodology for calculating VaR and the results of the calculations
presented herein were performed using historical simulation. Using historical
simulation over the delta-normal approach does not significantly change the
results of this disclosure. The historical simulation methodology entails
re-pricing all assets and liabilities under explicit changes in market rates
within a specific historical time period. In this case, the most recent three
years of historical market information for interest rates, foreign exchange
rates, and equity index prices were used to construct the historical scenarios.
For each scenario, each transaction was re-priced. Portfolio, business unit and
finally AIG-wide scenario values were then calculated by netting the values of
all the underlying assets and liabilities. The final VaR number represents the
maximum potential loss incurred by these scenarios with 95% confidence (i.e.,
only 5% of historical scenarios show losses greater than the VaR figure). A one
month holding period was assumed in computing the VaR figure. At December 31,
2000 and December 31, 1999 the VaR of AIG's insurance segments was approximately
$744 million and $863 million for general insurance, respectively, and $1.16
billion
30
32
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
and $1.19 billion for life insurance, respectively. The average VaR for 2000 for
each of AIG's insurance segments was approximately $811 million for general
insurance and $1.16 billion for life insurance. The high and low VaRs for
general insurance during 2000 were approximately $954 million and $737 million,
respectively. The high and low VaRs for life insurance during 2000 were
approximately $1.21 billion and $1.11 billion, respectively.
The following table presents the VaR of each component of market risk for
each of AIG's insurance segments as of December 31, 2000 and December 31, 1999.
VaR with respect to combined operations cannot be derived by aggregating the
individual risk or segment amounts presented herein.
(in millions)
- -----------------------------------------------------------------------------
General Life
Insurance Insurance
----------------- ------------------
2000 1999 2000 1999
=============================================================================
Market Risk:
Interest rate $454 $338 $1,119 $950
Currency 59 29 373 566
Equity 603 798 293 396
- -----------------------------------------------------------------------------
The average, high and low VaRs for the interest rate component of market
risk for the year ended December 31, 2000 were approximately $419 million, $454
million and $338 million, respectively, for general insurance and approximately
$1.09 billion, $1.21 billion and $950 million, respectively, for life insurance.
The average, high and low VaRs for the currency component were approximately $49
million, $65 million and $29 million, respectively, for general insurance and
approximately $430 million, $566 million and $372 million, respectively, for
life insurance; and the average, high and low VaRs for the equity component were
approximately $694 million, $828 million and $603 million, respectively, for
general insurance and approximately $315 million, $396 million and $293 million,
respectively, for life insurance.
Financial Services and Asset Management Invested Assets
The following table is a summary of the composition of AIG's financial services
and asset management invested assets at December 31, 2000 and 1999. (See also
the discussions under "Operational Review: Financial Services Operations",
"Operational Review: Asset Management Operations", "Capital Resources" and
"Derivatives" herein.)
(dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------- -----------------------
Invested Percent Invested Percent
Assets of Total Assets of Total
===================================================================================================================================
Flight equipment primarily under operating leases,
net of accumulated depreciation $19,325 25.2% $17,334 27.7%
Unrealized gain on interest rate and currency swaps,
options and forward transactions 10,235 13.3 7,931 12.7
Securities available for sale, at market value 14,669 19.1 12,954 20.7
Trading securities, at market value 7,347 9.6 4,391 7.0
Securities purchased under agreements to resell, at contract value 14,979 19.5 10,897 17.4
Trading assets 7,045 9.2 5,793 9.3
Spot commodities, at market value 363 0.5 683 1.1
Other, including short-term investments 2,785 3.6 2,565 4.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total $76,748 100.0% $62,548 100.0%
===================================================================================================================================
As previously discussed, the cash used for the purchase of flight
equipment is derived primarily from the proceeds of ILFC's debt financings. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. During 2000, ILFC acquired
flight equipment costing $3.43 billion.
At December 31, 2000, ILFC had committed to purchase 488 aircraft
deliverable from 2001 through 2009 at an estimated aggregate purchase price of
$27.3 billion and had options to purchase 51 aircraft deliverable from 2001
through 2008 at an estimated aggregate purchase price of $3.0 billion. As of
March 15, 2001, ILFC has entered into leases for all of the aircraft to be
delivered in 2001 and 96 of 421 aircraft to be delivered subsequent to 2001.
ILFC will be required to find customers for any aircraft presently on order and
any aircraft to be ordered, and it must arrange financing for portions of the
purchase price of such equipment. In a rising interest rate environment, ILFC
negotiates higher lease rates on any new contracts. ILFC has been successful to
date both in placing its new aircraft on lease or under sales contract and
obtaining adequate financing.
ILFC is exposed to market risk and the risk of loss of fair value
resulting from adverse fluctuations in interest rates. As of December 31, 2000
and December 31, 1999, AIG statistically measured the aforementioned loss of
fair value through the application of a VaR model. In this analysis, the net
fair value of ILFC was determined using the financial instrument assets which
included the tax adjusted future flight equipment lease revenue and the
financial instrument liabilities which included the future servicing of the
current debt. The estimated impact of the current derivative positions was also
taken into account.
AIG calculated the VaR with respect to the net fair value of ILFC using
the variance-covariance (delta-normal) methodology. This calculation also used
daily historical interest rates for the two years ending December 31, 2000 and
December 31, 1999. The VaR model estimated the volatility of each of these
interest rates and the correlation among them. The yield curve
31
33
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
was constructed using eleven key points on the curve to model possible curve
movements. Thus, the VaR measured the sensitivity of the assets and liabilities
to the calculated interest rate exposures. These sensitivities were then applied
to a database, which contained the historical ranges of movements in interest
rates and the correlation among them. The results were aggregated to provide a
single amount that depicts the maximum potential loss in fair value of a
confidence level of 95 percent for a time period of one month. As of December
31, 2000 and December 31, 1999, the VaR with respect to the aforementioned net
fair value of ILFC was approximately $11 million and $50 million, respectively.
AIGFP's derivative transactions are carried at market value or at
estimated fair value when market prices are not readily available. AIGFP reduces
its economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were to sell or close out the transactions prior to maturity. AIG
believes that the impact of any such limited liquidity would not be significant
to AIG's financial condition or its overall liquidity. (See also the discussion
under "Operational Review: Financial Services Operations" and "Derivatives"
herein.)
AIGFP uses the proceeds from the issuance of notes and bonds and GIA
borrowings to invest in a diversified portfolio of securities, including
securities available for sale, at market, and derivative transactions. The funds
may also be temporarily invested in securities purchased under agreements to
resell. The proceeds from the disposal of the aforementioned securities
available for sale and securities purchased under agreements to resell have been
used to fund the maturing GIAs or other AIGFP financings. (See also the
discussion under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At December
31, 2000, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. AIGFP has also
entered into credit derivative transactions to hedge its credit risk associated
with $182 million of these securities. There were no securities deemed below
investment grade at December 31, 2000. There have been no significant downgrades
through March 1, 2001. Securities purchased under agreements to resell are
treated as collateralized transactions. AIGFP takes possession of or obtains a
security interest in securities purchased under agreements to resell. AIGFP
further minimizes its credit risk by monitoring counterparty credit exposure
and, when AIGFP deems necessary, it requires additional collateral to be
deposited. Trading securities, at market value are marked to market daily and
are held to meet the short-term risk management objectives of AIGFP.
AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates and precious and base metals. AIGTG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements of interest rates, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities largely through trading liabilities, unrealized losses on swaps,
short-term borrowings, securities sold under agreements to repurchase and
securities and commodities sold but not yet purchased. (See also the discussions
under "Capital Resources" and "Derivatives" herein.)
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at December 31, 2000
were as follows:
(in millions)
- ----------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Gains Losses
- ----------------------------------------------------------------------------
Securities available for sale, at market value (a) $ 810 $ 777
Unrealized gain/loss on interest rate
and currency swaps, options
and forward transactions (b) (c) 10,235 8,581
Trading assets 8,852 5,744
Spot commodities, at market value 32 --
Trading liabilities -- 3,372
Securities and spot commodities sold but
not yet purchased, at market value 491 --
- ----------------------------------------------------------------------------
(a) See also Note 8(e) of Notes to Financial Statements.
(b) These amounts are also presented as the respective balance sheet amounts.
(c) At December 31, 2000, AIGTG's replacement values with respect to interest
rate and currency swaps were $484 million.
AIGFP's interest rate and currency risks on securities available for sale,
at market, are managed by taking offsetting positions on a security by security
basis, thereby offsetting a significant portion of the unrealized appreciation
or depreciation. At December 31, 2000, the unrealized gains and losses remaining
after the benefit of the offsets were $44 million and $11 million, respectively.
Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities are held to meet the short-term risk management objectives of AIGFP
and AIGTG.
The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.
32
34
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
AIG actively manages the exposures to limit potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must continually manage a variety of exposures including credit, market,
liquidity, operational and legal risks.
Market risk arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
exchange rates, and equity and commodity prices. AIG generally controls its
exposure to market risk by taking offsetting positions. AIG's philosophy with
respect to its financial services operations is to minimize or set limits for
open or uncovered positions that are to be carried. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk below.)
AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This department determines whether AIG's market risks, as well as
those market risks of individual subsidiaries, are within the parameters
established by AIG's senior management. Well established market risk management
techniques such as sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain subsidiaries are managed
and hedged by that subsidiary.
AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.
AIGFP is exposed to market risk due to changes in and volatility of
foreign currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.
AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.
AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market risk exposure. AIGFP values its
portfolio at market value or estimated fair value when market values are not
readily available. These valuations represent an assessment of the present
values of expected future cash flows of AIGFP's transactions and may include
reserves for such risks as are deemed appropriate by AIGFP's and AIG's
management. AIGFP evaluates the portfolio's discounted cash flows with reference
to current market conditions, maturities within the portfolio and other relevant
factors. Based upon this evaluation, AIGFP determines what, if any, offsetting
transactions are necessary to reduce the market risk exposure of the portfolio.
The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.
Additionally, depending upon the changes in interest rates and other
market movements during the day, the system will produce reports for
management's consideration for intra-day offsetting positions. Overnight, the
system generates reports which recommend the types of offsets management should
consider for the following day. Additionally, AIGFP operates in major business
centers overseas and is essentially open for business 24 hours a day. Thus, the
market exposure and offset strategies are monitored, reviewed and coordinated
around the clock. Therefore, offsetting adjustments can be made as and when
necessary from any AIGFP office in the world.
As part of its monitoring and controlling of its exposure to market risk,
AIGFP applies various testing techniques which reflect potential market
movements. These techniques vary by currency and are regularly changed to
reflect factors affecting the derivatives portfolio. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges. This review includes an
examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables. AIGFP's management may change
these measures to reflect their judgment and evaluation of the dynamics of the
markets. This management group will also determine whether additional or
alternative action is required in order to manage the portfolio.
All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.
AIGTG's approach to managing market risk is to establish an appropriate
offsetting position to a particular transaction or group of transactions
depending upon the extent of market risk AIGTG expects to reduce.
AIGTG's senior management has established positions and stop-loss limits
for each line of business. AIGTG's traders are required to maintain positions
within these limits. These positions are monitored during the day either
manually and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading books
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management. Based upon these and other reports,
AIGTG's senior management may determine to adjust AIGTG's risk profile.
AIGTG attempts to secure reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses
33
35
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations (CONTINUED)
an internal methodology which includes interpolation or extrapolation from
verifiable prices nearest to the dates of the transactions. The methodology may
reflect interest and exchange rates, commodity prices, volatility rates and
other relevant factors.
A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels and the effect of time.
AIGFP and AIGTG are both exposed to the risk of loss of fair value from
adverse fluctuations in interest rate and foreign currency exchange rates and
equity and commodity prices. AIG statistically measured the losses of fair value
through the application of a VaR model. AIG separately calculated the VaR with
respect to AIGFP and AIGTG, as AIG manages these operations separately.
AIGFP's and AIGTG's asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange traded
investments, derivative instruments and commodities. Since the market risk with
respect to securities available for sale, at market is substantially hedged,
segregation of market sensitive instruments into trading and other than trading
was not deemed necessary.
AIG calculated the VaR with respect to AIGFP and AIGTG as of December 31,
2000 and December 31, 1999. AIG has refined its methodology for calculating VaR
and the results of the calculations presented herein were performed using
historical simulation. Using historical simulation over the delta-normal
approach does not significantly change the results of this disclosure. The
historical simulation methodology entails re-pricing all assets and liabilities
under explicit changes in market rates within a specific historical time period.
In this case, the most recent three years of historical market information for
interest rates, foreign exchange rates, and equity index prices were used to
construct the historical scenarios. For each scenario, each transaction was
re-priced. Portfolio, business unit and finally AIG-wide scenario values were
then calculated by netting the values of all the underlying assets and
liabilities. The final VaR number represents the maximum potential loss incurred
by these scenarios with 95% confidence (i.e., only 5% of historical scenarios
show losses greater than the VaR figure).
The following table presents the VaR on a combined basis and of each
component of AIGFP's and AIGTG's market risk as of December 31, 2000 and
December 31, 1999. VaR with respect to combined operations cannot be derived by
aggregating the individual risk presented herein.
(in millions)
- ----------------------------------------------------------------------------
AIGFP(a) AIGTG(b)
--------------- --------------
2000 1999 2000 1999
============================================================================
Market Risk:
Combined $15 $24 $ 6 $ 5
Interest rate 15 23 4 3
Currency -- -- 3 4
Equity/Commodity -- 1 -- --
============================================================================
(a) A one month holding period was used to measure the market exposures of
AIGFP.
(b) A one day holding period was used to measure the market exposures of
AIGTG.
The average, high and low VaRs on a combined basis for the year ended
December 31, 2000 were approximately $15 million, $24 million and $8 million,
respectively, for AIGFP and approximately $5 million, $6 million and $4 million,
respectively, for AIGTG. The average, high and low VaRs for the interest rate
component of market risk were approximately $15 million, $23 million and $7
million, respectively, for AIGFP and approximately $3 million, $4 million and $3
million, respectively, for AIGTG for that year. The average, high and low VaRs
for the currency component were approximately $267,000, $396,000 and $118,000,
respectively, for AIGFP and approximately $3 million, $4 million and $2 million,
respectively, for AIGTG; and the average, high and low VaRs for the
equity/commodity component were approximately $1 million, $2 million and
$371,000, respectively, for AIGFP.
Derivatives
Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying equity, debt, commodity or other
asset, liability, or index. Derivatives payments may be based on interest rates
and exchange rates and/or prices of certain securities, certain commodities, or
financial or commodity indices. The more significant types of derivative
arrangements in which AIG transacts are swaps, forwards, futures, options and
related instruments.
The most commonly used swaps are interest rate swaps, currency swaps,
equity swaps and swaptions. Such derivatives are traded over the counter. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. Currency and equity swaps are similar to
interest rate swaps but may involve the exchange of principal amounts at the
commencement and termination of the swap. Swaptions are options where the holder
has the right but not the obligation to enter into a swap transaction or cancel
an existing swap transaction.
34
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a commodity,
security, currency, financial index or other instrument, at a specified price. A
futures contract is traded on an exchange, while a forward contract is executed
over the counter.
Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and options.
An option contract generally provides the option purchaser with the right
but not the obligation to buy or sell during a period of time or at a specified
date the underlying instrument at a set price. The option writer is obligated to
sell or buy the underlying item if the option purchaser chooses to exercise his
right. The option writer receives a nonrefundable fee or premium paid by the
option purchaser. Options may be traded over the counter or on an exchange.
Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange
traded securities and the terms of over the counter derivatives are non-standard
and unique to each contract. However, in the normal course of business, with the
agreement of the original counterparty, these contracts may be terminated early
or assigned to another counterparty.
All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.
A counterparty may default on any obligation to AIG, including a
derivative contract. Credit risk is a consequence of extending credit and/or
carrying trading and investment positions. Credit risk exists for a derivative
contract when that contract has an estimated positive fair value. To help manage
this risk, the credit departments of AIGFP and AIGTG operate within the
guidelines of the AIG Credit Risk Committee, which sets credit policy and limits
for counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements. Management believes that such
agreements provide for legally enforceable set-off in the event of default.
Also, under such agreements, in connection with a counterparty desiring to
terminate a contract prior to maturity, AIGFP may be permitted to set-off its
receivables from that counterparty against AIGFP's payables to that same
counterparty arising out of all included transactions. Excluding regulated
exchange transactions, AIGTG, whenever possible, enters into netting agreements
with its counterparties which are similar in effect to those discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivatives transactions at December 31, 2000 and December
31, 1999.
The notional amounts used to express the extent of AIGFP's and AIGTG's
involvement in swap transactions represent a standard of measurement of the
volume of AIGFP's and AIGTG's swaps business. Notional amount is not a
quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.
The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.
The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, netting under ISDA Master Agreements and applying
collateral held. Prior to the application of these credit enhancements, the
gross credit risk with respect to these derivative instruments was $33.4 billion
at December 31, 2000 and $16.90 billion at December 31, 1999. Subsequent to the
application of such credit enhancements, the net exposure to credit risk or the
net replacement value of all interest rate, currency and equity swaps, swaptions
and forward commitments approximated $9.51 billion at December 31, 2000 and
$7.53 billion at December 31, 1999. The net replacement value for
35
37
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
futures and forward contracts approximated $204 million at December 31, 2000 and
$5 million at December 31, 1999. The net replacement value most closely
represents the net credit risk to AIGFP or the maximum amount exposed to
potential loss.
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 2000 and December 31, 1999:
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining Life
-----------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 2000 1999
====================================================================================================================================
Interest rate, currency and equity/commodity
swaps and swaptions:
Notional amount:
Interest rate swaps $ 70,847 $173,892 $ 90,745 $ 8,719 $344,203 $281,682
Currency swaps 34,507 44,271 33,185 5,829 117,792 83,673
Swaptions and equity swaps 12,216 30,835 10,692 5,283 59,026 48,002
- ------------------------------------------------------------------------------------------------------------------------------------
Total $117,570 $248,998 $134,622 $19,831 $521,021 $413,357
====================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts contractual amount $ 11,082 -- -- -- $ 11,082 $6,587
====================================================================================================================================
Over the counter forward contracts contractual amount $ 22,263 $ 502 $ 44 -- $ 22,809 $ 21,873
====================================================================================================================================
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 2000 and
December 31, 1999, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
(in millions)
- ------------------------------------------------------------------------------------------------------------
Net Replacement Value
------------------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 2000 1999
============================================================================================================
Counterparty credit quality:
AAA $3,778 $ -- $3,778 $2,067
AA 2,621 204 2,825 2,839
A 1,801 -- 1,801 1,576
BBB 1,059 -- 1,059 997
Below investment grade 252 -- 252 55
- ------------------------------------------------------------------------------------------------------------
Total $9,511 $204 $9,715 $7,534
============================================================================================================
At December 31, 2000 and December 31, 1999, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(in millions)
- ------------------------------------------------------------------------------------------------------------
Net Replacement Value
------------------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 2000 1999
============================================================================================================
Non-U.S. banks $2,419 $ 98 $2,517 $2,515
Insured municipalities 595 -- 595 352
U.S. industrials 1,945 -- 1,945 780
Governmental 463 -- 463 180
Non-U.S. financial service companies 309 -- 309 158
Non-U.S. industrials 1,372 -- 1,372 1,117
Special purpose 1,204 -- 1,204 716
U.S. banks 114 106 220 510
U.S. financial service companies 894 -- 894 1,112
Supranationals 196 -- 196 94
- ------------------------------------------------------------------------------------------------------------
Total $9,511 $204 $9,715 $7,534
============================================================================================================
36
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
The gross replacement values presented in the following table represent
the sum of the estimated positive fair values of all of AIGTG's derivatives
contracts at December 31, 2000 and December 31, 1999. These values do not
represent the credit risk to AIGTG.
The net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master netting
agreements and collateral held. The net replacement values most closely
represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.
The following table provides the contractual and notional amounts and
credit exposure, if applicable, by maturity and type of derivative of AIGTG's
derivatives portfolio at December 31, 2000 and December 31, 1999. In addition,
the estimated positive fair values associated with the derivatives portfolio are
also provided and include a maturity profile for the December 31, 2000 balances
based upon the expected timing of the future cash flows.
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining Life
-------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 2000 1999
====================================================================================================================================
Contractual amount of futures, forwards and options:
Exchange traded futures and options $ 13,715 $ 4,318 $ 31 $ -- $ 18,064 $ 18,908
====================================================================================================================================
Forwards $216,062 $16,160 $ 2,094 $ -- $234,316 $220,428
====================================================================================================================================
Over the counter purchased options $ 59,922 $19,581 $25,222 $ 194 $104,919 $ 83,871
====================================================================================================================================
Over the counter sold options (a) $ 58,754 $19,369 $25,422 $ 197 $103,742 $ 86,726
====================================================================================================================================
Notional amount:
Interest rate swaps and forward rate agreements $ 18,960 $36,598 $ 7,592 $ 114 $ 63,264 $ 80,436
Currency swaps 1,071 6,668 834 -- 8,573 8,359
Swaptions 2,398 10,978 1,970 73 15,419 9,996
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 22,429 $54,244 $10,396 $ 187 $ 87,256 $ 98,791
====================================================================================================================================
Credit exposure:
Futures, forwards, swaptions and purchased options
contracts and interest rate and currency swaps:
Gross replacement value $ 7,219 $ 2,263 $ 831 $ 6 $ 10,319 $ 7,889
Master netting arrangements (4,061) (1,467) (602) (6) (6,136) (4,580)
Collateral (65) (34) (8) -- (107) (209)
- ----------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b) $ 3,093 $ 762 $ 221 $ -- $ 4,076 $ 3,100
====================================================================================================================================
(a) Sold options obligate AIGTG to buy or sell the underlying item if the
option purchaser chooses to exercise. The amounts do not represent credit
exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts and purchased over the counter options are
presented as a component of trading assets in the accompanying balance
sheet. The net replacement values with respect to interest rate and
currency swaps are presented as a component of unrealized gain on interest
rate and currency swaps, options and forward transactions in the
accompanying balance sheet.
37
39
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 2000 and
December 31, 1999, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio were as follows:
(in millions)
- ----------------------------------------------------------------------------
Net Replacement Value
---------------------
2000 1999
==========================================================================
Counterparty credit quality:
AAA $ 442 $ 276
AA 1,807 1,241
A 1,139 1,010
BBB 460 256
Below investment grade 48 49
Not externally rated, including
exchange traded futures and options* 180 268
- --------------------------------------------------------------------------
Total $4,076 $3,100
==========================================================================
Counterparty breakdown by industry:
Non-U.S. banks $2,076 $ 926
U.S. industrials 67 70
Governmental 70 178
Non-U.S. financial service companies 282 698
Non-U.S. industrials 243 176
U.S. banks 468 401
U.S. financial service companies 690 383
Exchanges* 180 268
- --------------------------------------------------------------------------
Total $4,076 $3,100
==========================================================================
*Exchange traded futures and options are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly settled
on a daily basis.
Generally, AIG manages and operates its businesses in the currencies of
the local operating environment. Thus, exchange gains or losses occur when AIG's
foreign currency net investment is affected by changes in the foreign exchange
rates relative to the U.S. dollar from one reporting period to the next.
AIG, through its Foreign Exchange Operating Committee, evaluates each of
its worldwide consolidated foreign currency net asset or liability positions and
manages AIG's translation exposure to adverse movement in currency exchange
rates. AIG may use forward exchange contracts and purchase options where the
cost of such is reasonable and markets are liquid to reduce these exchange
translation exposures. The exchange gain or loss with respect to these hedging
instruments is recorded on an accrual basis as a component of comprehensive
income in capital funds.
As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and its insurance operations; to date, such
activities have not been significant.
AIG has formed a Derivatives Review Committee. This committee, with
certain exceptions, provides an independent review of any proposed derivative
transaction. The committee examines, among other things, the nature and purpose
of the derivative transaction, its potential credit exposure, if any, and the
estimated benefits. This committee does not review those derivative transactions
entered into by AIGFP and AIGTG for their own accounts.
Legal risk arises from the uncertainty of the enforceability, through
legal or judicial processes, of the obligations of AIG's clients and
counterparties, including contractual provisions intended to reduce credit
exposure by providing for the netting of mutual obligations. (See also the
discussion on master netting agreements above.) AIG seeks to eliminate or
minimize such uncertainty through continuous consultation with internal and
external legal advisors, both domestically and abroad, in order to understand
the nature of legal risk, to improve documentation and to strengthen transaction
structure.
Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (FASB 133). In June 2000, FASB issued Statement of
Financial Accounting Standards No. 138 "Accounting for Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No.133" (FASB 138).
Together, these Statements require AIG to recognize all derivatives in the
consolidated balance sheet at fair value. The financial statement recognition of
the change in the fair value of a derivative depends on a number of factors,
including the intended use of the derivative and the extent to which it is
effective as part of a hedge transaction. Due to the operating nature of AIGFP
and AIGTG, the changes in fair value of their derivative transactions are
currently presented, in all material respects, as a component of AIG's operating
income. FASB 133 and FASB 138 are effective for AIG for the year commencing
January 1, 2001. AIG estimates that it will record in its first quarter of 2001
consolidated statement of income, in accordance with the transition provisions
of FASB 133, a cumulative effect of an accounting change adjustment gain of $17
million. This gain represents the net fair value of all previously unrecorded
derivative instruments as of January 1, 2001, net of taxes and after the
application of hedge accounting. AIG also estimates that it will record in its
first quarter of 2001 consolidated statement of comprehensive income, a
cumulative effect of an accounting change adjustment loss of $211 million. The
loss represents the reduction of other comprehensive income, net of taxes,
arising from the fair value of all derivative contracts designated as cash flow
hedging instruments.
Recent Developments
On November 22, 2000, AIG completed its acquisition of HSB Group, Inc. (HSB),
which through its subsidiary, The Hartford Steam Boiler Inspection and Insurance
Company, provides equipment breakdown and other specialty insurance coverages.
Each of the outstanding shares of HSB common stock was exchanged for 0.4178 of a
share of AIG common stock resulting in the issuance of 12.2 million shares of
AIG com-
38
40
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
mon stock. The acquisition has been accounted for as a purchase and HSB's
results of operations have been consolidated with those of AIG since the date of
acquisition.
On February 23, 2001, AIG announced that it had been named the exclusive sponsor
for the reorganization of The Chiyoda Mutual Life Insurance Company (Chiyoda) by
its Legal Trustee. In connection with the reorganization, AIG expects to make a
capital contribution to Chiyoda of approximately $522 million. AIG expects to
close the transaction by mid-April, subject to the approval of Japanese
regulatory authorities.
39
41
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk
Included in Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
ITEM 8. Financial Statements and Supplementary Data
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
- --------------------------------------------------------------------------------
Page
- --------------------------------------------------------------------------------
Report of Independent Accountants 41
Consolidated Balance Sheet at
December 31, 2000 and 1999 42
Consolidated Statement of Income for the
years ended December 31, 2000, 1999
and 1998 44
Consolidated Statement of Capital Funds
for the years ended December 31, 2000,
1999 and 1998 45
Consolidated Statement of Cash Flows for
the years ended December 31, 2000,
1999 and 1998 46
Consolidated Statement of Comprehensive Income
for the years ended December 31, 2000, 1999
and 1998 48
Notes to Financial Statements 49
Schedules:
I--Summary of Investments--Other Than
Investments in Related
Parties as of
December 31, 2000 S-1
II--Condensed Financial Information of
Registrant as of December 31, 2000
and 1999 and for the years ended
December 31, 2000, 1999 and 1998 S-2
III--Supplementary Insurance Information as
of December 31, 2000, 1999 and
1998 and for the years then ended S-4
IV--Reinsurance as of December 31, 2000,
1999 and 1998 and for the years
then ended S-5
40
42
- --------------------------------------------------------------------------------
Report of Independent Accountants
The Board of Directors and Shareholders
American International Group, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the consolidated financial
position of American International Group, Inc. and its subsidiaries (the
"Company") at December 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedules listed in the accompanying index present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 7, 2001
41
43
- --------------------------------------------------------------------------------
Consolidated Balance Sheet
American International Group, Inc. and Subsidiaries
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
==============================================================================================================================
Assets:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized cost: 2000-$89,461;
1999-$78,218) $ 89,631 $ 77,028
Bonds held to maturity, at amortized cost (market value: 2000-$12,053;
1999-$12,202) 11,533 12,078
Bonds trading securities, at market value (cost: 2000-$838; 1999-$1,057) 846 1,038
Equity securities:
Common stocks (cost: 2000-$6,371; 1999-$5,496) 6,125 6,002
Non-redeemable preferred stocks (cost: 2000-$1,166; 1999-$718) 1,056 712
Mortgage loans on real estate, net of allowance (2000-$87; 1999-$78) 7,127 7,139
Policy loans 3,032 2,822
Collateral and guaranteed loans, net of allowance (2000-$40; 1999-$74) 2,084 2,173
Financial services and asset management assets:
Flight equipment primarily under operating leases, net of accumulated depreciation
(2000-$2,723; 1999-$2,200) 19,325 17,334
Securities available for sale, at market value (amortized cost: 2000-$14,636;
1999-$12,920) 14,669 12,954
Trading securities, at market value 7,347 4,391
Spot commodities, at market value 363 683
Unrealized gain on interest rate and currency swaps, options and forward transactions 10,235 7,931
Trading assets 7,045 5,793
Securities purchased under agreements to resell, at contract value 14,991 10,897
Other invested assets 13,394 9,900
Short-term investments, at cost (approximates market value) 5,831 7,007
Cash 256 132
- ------------------------------------------------------------------------------------------------------------------------------
Total investments and cash 214,890 186,014
Investment income due and accrued 2,420 2,054
Premiums and insurance balances receivable-net of allowance (2000-$170; 1999-$133) 11,832 12,236
Reinsurance assets 23,135 19,368
Deferred policy acquisition costs 10,189 9,624
Investments in partially-owned companies 251 346
Real estate and other fixed assets, net of accumulated depreciation
(2000-$2,101; 1999-$1,892) 3,578 2,933
Separate and variable accounts 31,328 29,666
Other assets 8,954 5,997
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $306,577 $268,238
==============================================================================================================================
See Accompanying Notes to Financial Statements.
42
44
- --------------------------------------------------------------------------------
Consolidated Balance Sheet (continued)
American International Group, Inc. and Subsidiaries
(in millions, except share amounts)
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
==============================================================================================================================
Liabilities:
Reserve for losses and loss expenses $ 40,613 $ 38,252
Reserve for unearned premiums 12,510 11,450
Future policy benefits for life and accident and health insurance contracts 38,165 34,608
Policyholders' contract deposits 47,209 42,549
Other policyholders' funds 3,475 3,236
Reserve for commissions, expenses and taxes 2,807 2,598
Insurance balances payable 2,380 2,254
Funds held by companies under reinsurance treaties 1,435 861
Income taxes payable:
Current 197 138
Deferred 1,873 751
Financial services and asset management liabilities:
Borrowings under obligations of guaranteed investment agreements 13,595 9,430
Securities sold under agreements to repurchase, at contract value 11,308 6,116
Trading liabilities 4,352 3,821
Securities and spot commodities sold but not yet purchased, at market value 7,701 6,413
Unrealized loss on interest rate and currency swaps, options and forward transactions 8,581 8,624
Trust deposits and deposits due to banks and other depositors 1,895 2,175
Commercial paper 4,259 2,958
Notes, bonds and loans payable 17,923 16,806
Commercial paper 1,705 1,446
Notes, bonds, loans and mortgages payable 2,749 2,344
Separate and variable accounts 31,328 29,666
Minority interest 1,465 1,350
Other liabilities 8,086 6,191
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 265,611 234,037
- ------------------------------------------------------------------------------------------------------------------------------
Preferred shareholders' equity in subsidiary companies 1,347 895
- ------------------------------------------------------------------------------------------------------------------------------
Capital funds:
Common stock, $2.50 par value; 5,000,000,000 shares authorized;
shares issued 2000-2,475,663,919; 1999-1,660,707,090 6,189 4,152
Additional paid-in capital 2,668 2,080
Retained earnings 34,304 31,040
Accumulated other comprehensive income (2,136) (2,103)
Treasury stock, at cost; 2000-142,950,798; 1999-111,579,044 shares of common stock
(including 132,388,146 and 87,540,027 shares, respectively, held by subsidiaries) (1,406) (1,863)
- ------------------------------------------------------------------------------------------------------------------------------
Total capital funds 39,619 33,306
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and capital funds $ 306,577 $ 268,238
==============================================================================================================================
See Accompanying Notes to Financial Statements.
43
45
- --------------------------------------------------------------------------------
Consolidated Statement of Income
American International Group, Inc. and Subsidiaries
(in millions, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
================================================================================================================
General insurance operations:
Net premiums written $ 17,526 $ 16,224 $ 14,586
Change in unearned premium reserve (119) (680) (488)
- ----------------------------------------------------------------------------------------------------------------
Net premiums earned 17,407 15,544 14,098
Net investment income 2,701 2,517 2,192
Realized capital gains 38 295 205
- ----------------------------------------------------------------------------------------------------------------
20,146 18,356 16,495
- ----------------------------------------------------------------------------------------------------------------
Losses incurred 11,379 9,819 9,164
Loss expenses incurred 1,725 1,919 1,493
Underwriting expenses (principally policy acquisition costs) 3,518 3,137 2,910
- ----------------------------------------------------------------------------------------------------------------
16,622 14,875 13,567
- ----------------------------------------------------------------------------------------------------------------
Operating income 3,524 3,481 2,928
- ----------------------------------------------------------------------------------------------------------------
Life insurance operations:
Premium income 13,610 11,942 10,293
Net investment income 7,123 6,206 5,201
Realized capital losses (162) (148) (74)
- ----------------------------------------------------------------------------------------------------------------
20,571 18,000 15,420
- ----------------------------------------------------------------------------------------------------------------
Death and other benefits 5,461 5,000 4,543
Increase in future policy benefits 8,154 6,870 5,699
Acquisition and insurance expenses 3,569 3,272 2,805
- ----------------------------------------------------------------------------------------------------------------
17,184 15,142 13,047
- ----------------------------------------------------------------------------------------------------------------
Operating income 3,387 2,858 2,373
- ----------------------------------------------------------------------------------------------------------------
Financial services operating income 1,293 1,081 869
- ----------------------------------------------------------------------------------------------------------------
Asset management operating income 430 314 191
- ----------------------------------------------------------------------------------------------------------------
Equity in income of minority-owned insurance operations -- -- 57
- ----------------------------------------------------------------------------------------------------------------
Other realized capital losses (14) (25) (7)
- ----------------------------------------------------------------------------------------------------------------
Other income (deductions)-net (271) (197) (134)
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 8,349 7,512 6,277
- ----------------------------------------------------------------------------------------------------------------
Income taxes:
Current 1,337 1,813 1,100
Deferred 1,121 406 685
- ----------------------------------------------------------------------------------------------------------------
2,458 2,219 1,785
- ----------------------------------------------------------------------------------------------------------------
Income before minority interest 5,891 5,293 4,492
- ----------------------------------------------------------------------------------------------------------------
Minority interest (255) (238) (210)
- ----------------------------------------------------------------------------------------------------------------
Net income $ 5,636 $ 5,055 $ 4,282
================================================================================================================
Earnings per common share:
Basic $ 2.43 $ 2.18 $ 1.87
Diluted 2.41 2.15 1.83
================================================================================================================
Average shares outstanding:
Basic 2,318 2,322 2,278
Diluted 2,343 2,350 2,331
================================================================================================================
See Accompanying Notes to Financial Statements.
44
46
- --------------------------------------------------------------------------------
Consolidated Statement of Capital Funds
American International Group, Inc. and Subsidiaries
(in millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
========================================================================================================================
Preferred stock:
Balance at beginning of year $ -- $ 248 $ 248
Conversion to common stock -- (248) --
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of year -- -- 248
- ------------------------------------------------------------------------------------------------------------------------
Common stock:
Balance at beginning of year 4,152 3,284 2,334
Issuance of common stock -- -- 1
Stock split effected as dividend 2,037 818 949
Issued in conversion of Series E preferred stock to common stock -- 24 --
Issued in connection with redemption of Premium Equity
Redemption Cumulative Security Units (PERCS Units) -- 21 --
Issued under stock option and stock purchase plans -- 5 --
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of year 6,189 4,152 3,284
- ------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year 2,080 1,319 1,335
Issuance of common stock -- -- (1)
Excess of cost over proceeds of common stock issued under
stock option and stock purchase plans (145) (84) (22)
Excess of redemption value of Series E preferred
stock over par value of common stock issued -- 224 --
Excess of proceeds over par value of common stock
issued in connection with redemption of PERCS Units -- 410 --
Excess of proceeds over par value of common stock
issued under stock option and stock purchase plans -- 83 --
Excess of proceeds over cost of common stock
issued in connection with acquisitions 616 -- --
Other 117 128 7
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of year 2,668 2,080 1,319
- ------------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 31,040 27,110 24,101
Net income 5,636 5,055 4,282
Stock dividends to shareholders (2,037) (818) (949)
Cash dividends to shareholders:
Preferred -- -- (12)
Common ($.14, $.13 and $.13 per share, respectively) (335) (303) (312)
Other -- (4) --
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of year 34,304 31,040 27,110
- ------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income:
Balance at beginning of year (2,103) (10) 382
Unrealized appreciation (depreciation) of investments-net
of reclassification adjustments 351 (2,541) (387)
Deferred income tax (expense) benefit on changes (174) 895 95
Foreign currency translation adjustments (273) (432) (137)
Applicable income tax benefit (expense) on changes 63 (15) 37
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (33) (2,093) (392)
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of year (2,136) (2,103) (10)
- ------------------------------------------------------------------------------------------------------------------------
Treasury stock, at cost:
Balance at beginning of year (1,863) (1,828) (1,815)
Cost of shares acquired during year (947) (275) (81)
Issued under stock option and stock purchase plans 277 240 68
Issued in connection with acquisitions 1,127 -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,406) (1,863) (1,828)
- ------------------------------------------------------------------------------------------------------------------------
Total capital funds at end of year $ 39,619 $ 33,306 $ 30,123
========================================================================================================================
See Accompanying Notes to Financial Statements.
45
47
- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
American International Group, Inc. and Subsidiaries
(in millions)
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
=================================================================================================================================
Summary:
Net cash provided by operating activities $ 5,936 $ 10,321 $ 7,439
Net cash used in investing activities (16,577) (20,758) (16,207)
Net cash provided by financing activities 10,765 10,266 8,984
- ---------------------------------------------------------------------------------------------------------------------------------
Change in cash 124 (171) 216
Cash at beginning of year 132 303 87
- ---------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 256 $ 132 $ 303
=================================================================================================================================
Cash flows from operating activities:
Net income $ 5,636 $ 5,055 $ 4,282
=================================================================================================================================
Adjustments to reconcile net income to net cash provided by operating
activities:
Non-cash revenues, expenses, gains and losses included in income:
Change in:
General and life insurance reserves 6,488 6,684 6,990
Premiums and insurance balances receivable and payable-net 577 (586) (733)
Reinsurance assets (3,752) (1,624) (972)
Deferred policy acquisition costs (480) (1,543) (1,025)
Investment income due and accrued (346) (185) (111)
Funds held under reinsurance treaties 572 24 370
Other policyholders' funds 239 516 368
Current and deferred income taxes-net 1,210 319 225
Reserve for commissions, expenses and taxes 68 373 455
Other assets and liabilities-net (1,319) (1,314) (411)
Trading assets and liabilities-net (721) (407) (216)
Trading securities, at market value (2,956) 1,277 (1,693)
Spot commodities, at market value 320 (207) (16)
Net unrealized gain on interest rate and currency swaps,
options and forward transactions (2,347) 3,519 (1,382)
Securities purchased under agreements to resell (4,094) (6,059) (287)
Securities sold under agreements to repurchase 5,192 1,643 1,767
Securities and spot commodities sold but not yet purchased,
at market value 1,288 1,956 (715)
Realized capital gains (losses) 138 (122) (124)
Equity in income of partially-owned companies and other invested assets (327) (186) (176)
Depreciation expenses, principally flight equipment 1,176 1,071 952
Change in cumulative translation adjustments (273) (432) (137)
Other-net (353) 549 28
- ---------------------------------------------------------------------------------------------------------------------------------
Total adjustments 300 5,266 3,157
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 5,936 $ 10,321 $ 7,439
=================================================================================================================================
See Accompanying Notes to Financial Statements.
46
48
- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows (CONTINUED)
American International Group, Inc. and Subsidiaries
(in millions)
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
===============================================================================================================================
Cash flows from investing activities:
Cost of fixed maturities, at amortized cost matured or redeemed $ 1,227 $ 1,062 $ 1,578
Cost of bonds, at market sold 22,220 27,375 28,110
Cost of bonds, at market matured or redeemed 7,359 8,178 8,315
Cost of equity securities sold 5,162 3,703 2,784
Realized capital gains (losses) (138) 122 124
Purchases of fixed maturities (40,229) (50,365) (43,659)
Purchases of equity securities (6,085) (3,821) (3,277)
Acquisitions, net of cash acquired -- -- (515)
Mortgage, policy and collateral loans granted (2,666) (3,498) (2,942)
Repayments of mortgage, policy and collateral loans 2,568 3,105 2,341
Sales of securities available for sale 5,588 4,787 2,618
Maturities of securities available for sale 1,559 787 1,848
Purchases of securities available for sale (8,890) (7,869) (5,967)
Sales of flight equipment 713 1,699 687
Purchases of flight equipment (3,432) (3,365) (3,160)
Net additions to real estate and other fixed assets (1,033) (602) (624)
Sales or distributions of other invested assets 4,397 2,995 2,869
Investments in other invested assets (6,285) (4,827) (5,109)
Change in short-term investments 1,309 (268) (2,227)
Investments in partially-owned companies 79 44 (1)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $(16,577) $(20,758) $(16,207)
===============================================================================================================================
Cash flows from financing activities:
Change in policyholders' contract deposits $ 4,707 $ 8,625 $ 4,474
Change in trust deposits and deposits due to banks and other depositors (280) 493 (595)
Change in commercial paper 1,560 (232) 1,261
Proceeds from notes, bonds, loans and mortgages payable 10,477 8,539 7,909
Repayments on notes, bonds, loans and mortgages payable (9,130) (7,486) (4,973)
Proceeds from guaranteed investment agreements 9,957 7,927 6,540
Maturities of guaranteed investment agreements (5,792) (7,685) (5,353)
Proceeds from common stock issued 144 244 40
Proceeds from subsidiary company issuance of preferred stock 350 -- --
Cash dividends to shareholders (335) (303) (324)
Acquisition of treasury stock (947) (275) (81)
Proceeds from redemption of Premium Equity Redemption
Cumulative Security Units -- 431 --
Other-net 54 (12) 86
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 10,765 $ 10,266 $ 8,984
===============================================================================================================================
Supplementary information:
Taxes paid $ 1,014 $ 1,625 $ 1,334
===============================================================================================================================
Interest paid $ 2,634 $ 1,993 $ 2,076
===============================================================================================================================
See Accompanying Notes to Financial Statements.
47
49
- --------------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income
American International Group, Inc. and Subsidiaries
(in millions)
- ----------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
==========================================================================================================
Comprehensive income:
Net income $ 5,636 $ 5,055 $ 4,282
- ----------------------------------------------------------------------------------------------------------
Other comprehensive income:
Unrealized appreciation (depreciation) of investments-net
of reclassification adjustments 351 (2,541) (387)
Deferred income tax (expense) benefit on changes (174) 895 95
Foreign currency translation adjustments (273) (432) (137)
Applicable income tax benefit (expense) on changes 63 (15) 37
- ----------------------------------------------------------------------------------------------------------
Other comprehensive income (33) (2,093) (392)
- ----------------------------------------------------------------------------------------------------------
Comprehensive income $ 5,603 $ 2,962 $ 3,890
==========================================================================================================
See Accompanying Notes to Financial Statements.
48
50
- --------------------------------------------------------------------------------
Notes to Financial Statements
American International Group, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies
(a) Principles of Consolidation: On January 1, 1999 (the merger date),
SunAmerica Inc., a Maryland corporation, merged with and into AIG. AIG issued
187.5 million shares of its common stock in exchange for all the outstanding
common stock and Class B stock of SunAmerica Inc., based on an exchange ratio of
0.855 shares of AIG common stock for each share of SunAmerica Inc. stock. A
newly formed Delaware company, SunAmerica Inc. (SunAmerica) holds substantially
all of the assets previously held by the Maryland corporation. The merger was
accounted for as a pooling of interests and the accompanying financial
statements for 1998 have been restated to combine SunAmerica Inc.'s financial
statements for its fiscal year ended September 30 with AIG's December 31
financial statements.
The following is a reconciliation of the individual company results to the
combined results for the 1998 twelve month period:
(in millions)
- --------------------------------------------------------------------------------
AIG SunAmerica
December 31, September 30, Total
================================================================================
1998
Revenues $33,296 $2,420 $35,716
Net income 3,766 516 4,282
================================================================================
The financial statements for the quarter ended March 31, 1999, included in
the AIG Quarterly Report on Form 10-Q reflected the operations of SunAmerica on
a pooling of interests basis and the change of its fiscal year from September 30
to December 31. For the period October 1, 1998 through December 31, 1998,
SunAmerica Inc.'s revenues were $318 million, operating income was $52 million
and net income was $29 million; dividends distributed were $33 million. Thus,
capital funds at December 31, 1999 reflect the net decrease in SunAmerica Inc.'s
retained earnings of $4 million and the decline of $94 million in accumulated
other comprehensive income.
AIG subsidiaries write property, casualty, marine, life and financial
lines insurance in approximately 130 countries and jurisdictions. Certain of
AIG's foreign subsidiaries included in the consolidated financial statements
report on a fiscal year ending November 30. All material intercompany accounts
and transactions have been eliminated.
Commencing with the third quarter 1998, Transatlantic and 21st Century
were consolidated into AIG's financial statements as AIG became the majority
shareholder of these entities.
(b) Basis of Presentation: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Certain accounts have been reclassified in the 1999 and 1998 financial
statements to conform to their 2000 presentation.
General Insurance Operations: AIG's general insurance subsidiaries are
multiple line companies writing substantially all lines of property and casualty
insurance. Premiums are earned primarily on a pro rata basis over the term of
the related coverage. The reserve for unearned premiums represents the portion
of premiums written relating to the unexpired terms of coverage.
Acquisition costs represent those costs, including commissions, that vary
with and are primarily related to the acquisition of new business. These costs
are deferred and amortized over the period in which the related premiums written
are earned. Investment income is not anticipated in the deferral of acquisition
costs. (See Note 4.)
Losses and loss expenses are charged to income as incurred. The reserve
for losses and loss expenses represents the accumulation of estimates for
reported losses and includes provisions for losses incurred but not reported.
The methods of determining such estimates and establishing resulting reserves,
including amounts relating to reserves for estimated unrecoverable reinsurance,
are continually reviewed and updated. Adjustments resulting therefrom are
reflected in income currently. AIG discounts certain of its loss reserves which
are primarily related to certain workers' compensation claims. (See Note 6.)
Life Insurance Operations: AIG's life insurance subsidiaries offer a wide
range of traditional insurance and financial and investment products.
Traditional products consist of individual and group life, annuity, endowment
and accident and health policies. Financial and investment products consist of
single premium annuity, variable annuities, guaranteed investment contracts,
universal life and pensions. Premiums for traditional life insurance products
and life contingent annuities, excluding accident and health products, are
recognized as revenues when due. Estimates for premiums due but not yet
collected are accrued. Benefits and expenses are provided against such revenues
to recognize profits over the estimated life of the policies. Revenues for
universal life and investment-type products consist of policy charges for the
cost of insurance, administration and surrenders during the period. Expenses
include interest credited to policy account balances and benefit payments made
in excess of policy account balances. Accident and health products are accounted
for in a manner similar to general insurance products described above.
Investment income reflects certain 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. Policy acquisition costs
with respect to universal life and investment-type products
49
51
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
are deferred and amortized, with interest, in relation to the incidence of
estimated gross profits to be realized over the estimated lives of the
contracts. Estimated gross profits are composed of net interest income, net
realized investment gains and losses, variable annuity fees, surrender charges
and direct administrative expenses.
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to deferred policy acquisition costs equal to
the change in amortization that would have been recorded if such securities had
been sold at their stated aggregate fair value and the proceeds reinvested at
current yields. The change in this adjustment, net of tax, is included with the
change in net unrealized gains/losses on debt and equity securities available
for sale that is credited or charged directly to comprehensive income. Deferred
policy acquisition costs have been increased by $99 million at December 31, 2000
and increased by $130 million at December 31, 1999 for this adjustment. (See
Note 4.)
The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.
Financial Services Operations: AIG participates in the derivatives dealer
market conducting, primarily as principal, an interest rate, currency, equity
and credit derivative products business. AIG also enters into structured
transactions including long-dated forward foreign exchange contracts, option
transactions, liquidity facilities and investment agreements and invests in a
diversified portfolio of securities.
AIG engages in market making and trading activities, as principal, in
foreign exchange, interest rates and precious and base metals. AIG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIG, as lessor, leases flight equipment principally under operating
leases. Accordingly, income is reported over the life of the lease as rentals
become receivable under the provisions of the lease or, in the case of leases
with varying payments, under the straight-line method over the noncancelable
term of the lease. In certain cases, leases provide for additional amounts
contingent on usage. AIG is also a remarketer of flight equipment for its own
account and for airlines and financial institutions, and provides, for a fee,
fleet management services to certain third-party operators. AIG's revenues from
such operations consist of net gains on sales of flight equipment and
commissions.
Asset Management Operations: AIG's asset management operations offer a
wide variety of investment vehicles and services, including variable annuities,
mutual funds and investment asset management. Such products and services are
offered to individuals and institutions both domestically and internationally.
The fees generated with respect to asset management operations are recognized as
revenues when earned. Costs incurred in the sale of variable annuities and
mutual funds are deferred and subsequently amortized. With respect to variable
annuities, acquisition costs are amortized in relation to the incidence of
estimated gross profits to be realized over the estimated lives of the variable
annuity contracts. With respect to the sale of mutual funds, acquisition costs
are amortized over the estimated lives of the funds obtained.
(c) Non-cash Transactions: During 2000, AIG issued 17.77 million common
shares in connection with acquisitions. In July 1998, 224,950 shares of 21st
Century's Series A preferred stock were converted into 19,584,368 shares of 21st
Century's common stock.
(d) Investments in Fixed Maturities and Equity Securities: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at current market values.
Interest income with respect to fixed maturity securities is accrued currently.
Included in the bonds available for sale are collateralized mortgage
obligations (CMOs). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments over their estimated lives.
Bond trading securities are carried at current market values, as it is
AIG's intention to sell these securities in the near term.
Common and non-redeemable preferred stocks are carried at current market
values. Dividend income is generally recognized when receivable.
Unrealized gains and losses from investments in equity securities and
fixed maturities available for sale are reflected as a separate component of
comprehensive income, net of deferred income taxes in capital funds currently.
Unrealized gains and losses from investments in trading securities are reflected
in income currently.
Realized capital gains and losses are determined principally by specific
identification. Where declines in values of securities below cost or amortized
cost are considered to be other than temporary, a charge is reflected in income
for the difference between cost or amortized cost and estimated net realizable
value.
(e) Mortgage Loans on Real Estate, Policy and Collateral Loans-net:
Mortgage loans on real estate, policy loans and collateral loans are carried at
unpaid principal balances. Interest income on such loans is accrued currently.
Impairment of mortgage loans on real estate and collateral loans is
generally measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate subject to the fair value of
underlying collateral. Interest income on such loans is recognized as cash is
received.
There is no allowance for policy loans, as these loans serve to reduce the
death benefit paid when the death claim is made and the balances are effectively
collateralized by the cash surrender value of the policy.
50
52
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies (CONTINUED)
(f) Flight Equipment: Flight equipment is stated at cost. Major additions
and modifications are capitalized. Normal maintenance and repairs, airframe and
engine overhauls and compliance with return conditions of flight equipment on
lease are provided by and paid for by the lessee. Under the provisions of most
leases for certain airframe and engine overhauls, the lessee is reimbursed for
costs incurred up to but not exceeding contingent rentals paid to AIG by the
lessee. AIG provides a charge to income for such reimbursements based upon the
expected reimbursements during the life of the lease. Depreciation and
amortization are computed on the straight-line basis to a residual value of
approximately 15 percent over the estimated useful lives of the related assets
but not exceeding 25 years. AIG monitors the global aircraft market and the
values of various types and models of aircraft within that market relative to
the values of its own fleet. If events or circumstances were such that the
carrying amount of AIG's aircraft might be impaired, AIG would determine if such
impairment existed and recognize such impairment. This caption also includes
deposits for aircraft to be purchased.
At the time the assets are retired or disposed of, the cost and associated
accumulated depreciation and amortization are removed from the related accounts
and the difference, net of proceeds, is recorded as a gain or loss.
(g) Securities Available for Sale, at market value: These securities are
held to meet long term investment objectives and are accounted for as available
for sale, carried at current market values and recorded on a trade date basis.
Unrealized gains and losses from valuing these securities and any related hedges
are reflected in capital funds currently, net of any related deferred income
taxes. When the underlying security is sold, the realized gain or loss resulting
from the hedging derivative transaction is recognized in income in that same
period as the realized gain or loss of the hedged security.
(h) Trading Securities, at market value: Trading securities are held to
meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and carried at current market
values. Unrealized gains and losses are reflected in income currently.
(i) Spot Commodities, at market value: Spot commodities are carried at
current market values and are recorded on a settlement date basis. The exposure
to market risk may be reduced through the use of forwards, futures and option
contracts. Unrealized gains and losses of both commodities and any derivative
transactions are reflected in income currently.
(j) Unrealized Gain and Unrealized Loss on Interest Rate and Currency
Swaps, Options and Forward Transactions: Interest rate swaps, currency swaps,
equity swaps, swaptions, options and forward transactions are accounted for as
contractual commitments recorded on a trade date basis and are carried at
current market values or estimated fair values when market values are not
available. Unrealized gains and losses are reflected in income currently.
Estimated fair values are based on the use of valuation models that utilize,
among other things, current interest, foreign exchange and volatility rates.
These valuations represent an assessment of the present values of expected
future cash flows of these transactions and may include reserves for market risk
as deemed appropriate. The portfolio's discounted cash flows are evaluated with
reference to current market conditions, maturities within the portfolio and
other relevant factors. Based upon this evaluation, it is determined what
offsetting transactions, if any, are necessary to reduce the market risk of the
portfolio. AIG manages its market risk with a variety of transactions, including
swaps, trading securities, futures and forward contracts and other transactions
as appropriate. Because of the limited liquidity of some of these instruments,
the recorded values of these transactions may be different than the values that
might be realized if AIG were to sell or close out the transactions prior to
maturity. AIG believes that such differences are not significant to the results
of operations, financial condition or liquidity. Such differences would be
immediately recognized when the transactions are sold or closed out prior to
maturity.
(k) Trading Assets and Trading Liabilities: Trading assets and trading
liabilities include option premiums paid and received and receivables from and
payables to counterparties which relate to unrealized gains and losses on
futures, forwards and options and balances due from and due to clearing brokers
and exchanges.
Futures, forwards and options purchased and written are accounted for as
contractual commitments on a trade date basis and are carried at fair values.
Unrealized gains and losses are reflected in income currently. The fair values
of futures contracts are based on closing exchange quotations. Commodity forward
transactions are carried at fair values derived from dealer quotations and
underlying commodity exchange quotations. For long dated forward transactions,
where there are no dealer or exchange quotations, fair values are derived using
internally developed valuation methodologies based on available market
information. Options are carried at fair values based on the use of valuation
models that utilize, among other things, current interest or commodity rates and
foreign exchange and volatility rates, as applicable.
(l) Securities Purchased (Sold) Under Agreements to Resell (Repurchase),
at contract value: Purchases of securities under agreements to resell and sales
of securities under agreements to repurchase are accounted for as collateralized
lending transactions and are recorded at their contracted resale or repurchase
amounts, plus accrued interest. Generally, it is AIG's policy to take possession
of or obtain a security interest in securities purchased under agreements to
resell.
AIG minimizes the credit risk that counterparties to transactions might be
unable to fulfill their contractual obligations by monitoring customer credit
exposure and collateral value and generally requiring additional collateral to
be deposited with AIG when deemed necessary.
51
53
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
(m) Other Invested Assets: Other invested assets consist primarily of
investments by AIG's insurance operations in joint ventures and partnerships and
other investments not classified elsewhere herein. The joint ventures and
partnerships are carried at equity or cost depending on the nature of the
invested asset and the ownership percentage thereof. Other investments are
carried at cost or market values depending upon the nature of the underlying
assets. Unrealized gains and losses from the revaluation of those investments
carried at market values are reflected in comprehensive income, net of any
related deferred income taxes.
(n) Reinsurance Assets: Reinsurance assets include the balances due from
both reinsurance and insurance companies under the terms of AIG's reinsurance
agreements for paid and unpaid losses and loss expenses, ceded unearned premiums
and ceded future policy benefits for life and accident and health insurance
contracts and benefits paid and unpaid. It also includes funds held under
reinsurance treaties. Amounts related to paid and unpaid losses and loss
expenses with respect to these reinsurance agreements are substantially
collateralized.
(o) Investments in Partially-Owned Companies: The equity method of
accounting is used for AIG's investment in companies in which AIG's ownership
interest approximates twenty but is not greater than fifty percent
(minority-owned companies). In years prior to 1999, equity in income of
minority-owned insurance operations was presented separately in the consolidated
statement of income. In 2000 and 1999, AIG did not report equity in income of
minority-owned insurance operations as a result of the consolidation of the
operations of Transatlantic and SELIC Holdings, Ltd. into general insurance
operating results. IPC Holdings, Ltd., the remaining operation included in
equity in income of minority-owned insurance operations in previous periods is
now reported as a component of other income (deductions) -- net. Equity in net
income of other unconsolidated companies is principally included in other income
(deductions)-net. At December 31, 2000, AIG's significant investments in
partially-owned companies included its 24.4 percent interest in IPC Holdings,
Ltd. This balance sheet caption also includes investments in less significant
partially-owned companies and in certain minor majority-owned subsidiaries. The
amounts of dividends received from unconsolidated entities owned less than 50
percent were $3 million, $13 million and $24 million in 2000, 1999 and 1998
respectively. The undistributed earnings of unconsolidated entities owned less
than 50 percent was $58 million as of December 31, 2000.
(p) Real Estate and Other Fixed Assets: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs are
charged to income as incurred; expenditures for betterments are capitalized and
depreciated.
From time to time, AIG assesses the carrying value of its real estate
relative to the market values of real estate within the specific local area. At
December 31, 2000, there were no impairments.
(q) Separate and Variable Accounts: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of each
account are legally segregated and are not subject to claims which arise out of
any other business of AIG.
(r) Securities and Spot Commodities Sold but not yet Purchased, at market
value: Securities and spot commodities sold but not yet purchased represent
sales of securities and spot commodities not owned at the time of sale. The
obligations arising from such transactions are recorded on a trade date basis
and carried at the respective current market values or current commodity prices.
Unrealized gains or losses are reflected in income currently.
(s) Preferred Shareholders' Equity in Subsidiary Companies: Preferred
shareholders' equity in subsidiary companies relates to outstanding preferred
stock or interest of ILFC and certain subsidiaries of SunAmerica and HSB, wholly
owned subsidiaries of AIG. Cash distributions on such preferred stock or
interest are accounted for as interest expense and included as minority interest
in the consolidated statement of income.
(t) Translation of Foreign Currencies: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FASB 52). Under FASB 52, functional currency assets and
liabilities are translated into U.S. dollars generally using current rates of
exchange prevailing at the balance sheet date of each respective subsidiary and
the related translation adjustments are recorded as a separate component of
comprehensive income, net of any related taxes in capital funds. Functional
currencies are generally the currencies of the local operating environment.
Income statement accounts expressed in functional currencies are translated
using average exchange rates. The adjustments resulting from translation of
financial statements of foreign entities operating in highly inflationary
economies are recorded in income. Exchange gains and losses resulting from
foreign currency transactions are also recorded in income currently. The
exchange gain or loss with respect to utilization of foreign exchange hedging
instruments is recorded as a component of comprehensive income.
(u) Income Taxes: Deferred federal and foreign income taxes are provided
for temporary differences for the expected future tax consequences of events
that have been recognized in AIG's financial statements or tax returns.
(v) Earnings Per Share: Basic earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. Diluted earnings per share are
based on
52
54
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies (continued)
those shares used in basic earnings per share plus shares that would have been
outstanding assuming issuance of common shares for all dilutive potential common
shares outstanding, retroactively adjusted to reflect all stock dividends and
stock splits.
The computation of earnings per share for December 31, 2000, 1999 and 1998
was as follows:
(in millions, except per share amounts)
- ----------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
========================================================================================
Numerator for basic earnings per share:
Net income $ 5,636 $ 5,055 $ 4,282
Less:
Dividends on convertible
preferred stock -- -- (12)
- ----------------------------------------------------------------------------------------
Net income applicable to
common stock $ 5,636 $ 5,055 $ 4,270
========================================================================================
Denominator for basic earnings
per share:
Average shares outstanding used in the
computation of per share earnings:
Common stock issued 2,484 2,496 2,448
Common stock in treasury (166) (174) (166)
Common stock contingently issuable -- -- (4)
- ----------------------------------------------------------------------------------------
Average shares outstanding-- basic 2,318 2,322 2,278
========================================================================================
Numerator for diluted earnings per share:
Net income applicable to
common stock $ 5,636 $ 5,055 $ 4,282
========================================================================================
Denominator for diluted earnings
per share:
Average shares outstanding 2,318 2,322 2,282
Incremental shares from potential
common stock:
Average number of shares arising
from outstanding employee stock
plans (treasury stock method) 25 28 22
Average number of shares issuable
upon conversion of convertible
securities and preferred stock -- -- 27
- ----------------------------------------------------------------------------------------
Average shares outstanding-- diluted 2,343 2,350 2,331
========================================================================================
Earnings per share:
Basic $ 2.43 $ 2.18 $ 1.87
Diluted 2.41 2.15 1.83
========================================================================================
(w) Accounting Standards: In June 1998, FASB issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (FASB 133). In June 2000, FASB issued Statement of Financial
Accounting Standards No. 138 "Accounting for Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133" (FASB 138).
Together, these Statements require AIG to recognize all derivatives in the
consolidated balance sheet at fair value. The financial statement recognition of
the change in the fair value of a derivative depends on a number of factors,
including the intended use of the derivative and the extent to which it is
effective as part of a hedge transaction. Due to the operating nature of AIGFP
and AIGTG, the changes in fair value of their derivative transactions are
currently presented, in all material respects, as a component of AIG's operating
income. FASB 133 and FASB 138 are effective for AIG for the year commencing
January 1, 2001. The impact of the adoption of FASB 133 and FASB 138 at January
1, 2001 with respect to AIG's results of operations, financial condition and
liquidity is deemed insignificant.
2. Foreign Operations
Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds which
generally cause a delay in the outward remittance of such funds. Approximately
32 percent of consolidated assets at December 31, 2000 and 1999 and 50 percent,
50 percent and 48 percent of revenues for the years ended December 31, 2000,
1999 and 1998, respectively, were located in or derived from foreign countries
(other than Canada). (See Note 18.)
3. Federal Income Taxes
(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal income
tax return. Revenue Agent's Reports assessing additional taxes for the years
1987, 1988, 1989 and 1990 have been issued and Letters of Protest contesting the
assessments have been filed with the Internal Revenue Service. In addition,
Revenue Agent's Reports assessing additional taxes for the years ended September
30, 1993 and 1994 have been issued to SunAmerica. Such assessments relate to
years prior to the acquisition of SunAmerica by AIG. Letters of Protest
contesting the assessments have been filed with the Internal Revenue Service.
Issues regarding SunAmerica's tax years ending November 30, 1988 and September
30, 1989, 1990, 1991 and 1992 have recently been agreed to with the Internal
Revenue Service. It is management's belief that there are substantial arguments
in support of the positions taken by AIG and SunAmerica in their Letters of
Protest. AIG also believes that the impact of the results of these examinations
will not be significant to AIG's financial condition, results of operations or
liquidity.
53
55
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
3. Federal Income Taxes (continued)
Foreign income not expected to be taxed in the United States has arisen
because AIG's foreign subsidiaries were generally not subject to U.S. income
taxes on income earned prior to January 1, 1987. Such income would become
subject to U.S. income taxes at current tax rates if remitted to the United
States or if other events occur which would make these amounts currently
taxable. The cumulative amount of translated undistributed earnings of AIG's
foreign subsidiaries currently not subject to U.S. income taxes was
approximately $3.5 billion at December 31, 2000. Management presently has not
subjected and has no intention of subjecting these accumulated earnings to
material U.S. income taxes and no provision has been made in the accompanying
financial statements for such taxes.
(b) The U.S. Federal income tax rate is 35 percent for 2000, 1999 and
1998. Actual tax expense on income differs from the "expected" amount computed
by applying the Federal income tax rate because of the following:
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
------------------- ------------------- ------------------
Percent Percent Percent
of pre-tax of pre-tax of pre-tax
Amount income Amount income Amount income
==================================================================================================================================
"Expected" tax expense $ 2,922 35.0% $ 2,629 35.0% $ 2,197 35.0%
Adjustments:
Tax exempt interest (277) (3.3) (280) (3.7) (284) (4.5)
Dividends received deduction (50) (0.6) (38) (0.5) (30) (0.5)
State income taxes 35 0.4 55 0.7 34 0.5
Foreign income not expected to be taxed in the U.S.,
less foreign income taxes (110) (1.3) (81) (1.1) (85) (1.4)
Affordable housing tax credits (48) (0.6) (55) (0.7) (39) (0.6)
Other (14) (0.2) (11) (0.2) (8) (0.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 2,458 29.4% $ 2,219 29.5% $ 1,785 28.4%
==================================================================================================================================
Foreign and domestic components of actual tax expense:
Foreign:
Current $ 450 $ 403 $ 386
Deferred 131 123 31
Domestic*
Current 887 1,410 714
Deferred 990 283 654
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 2,458 $ 2,219 $ 1,785
==================================================================================================================================
*Including U.S. tax on foreign income.
(c) The components of the net deferred tax liability as of December 31,
2000 and December 31, 1999 were as follows:
(in millions)
- --------------------------------------------------------------------------------
2000 1999
================================================================================
Deferred tax assets:
Loss reserve discount $1,311 $1,357
Unearned premium reserve reduction 401 380
Accruals not currently deductible 458 466
Adjustment to life policy reserves 1,165 1,126
Cumulative translation adjustment 225 137
Unrealized depreciation of investments 19 191
Other 82 68
- --------------------------------------------------------------------------------
3,661 3,725
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 2,725 2,305
Financial service products mark to market
differential 599 454
Depreciation of flight equipment 1,504 1,210
Acquisition net asset basis adjustments 27 63
Other 679 444
- --------------------------------------------------------------------------------
5,534 4,476
- --------------------------------------------------------------------------------
Net deferred tax liability $1,873 $ 751
================================================================================
54
56
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
4. Deferred Policy Acquisition Costs
The following reflects the policy acquisition costs deferred for amortization
against future income and the related amortization charged to income for general
and life insurance operations, excluding certain amounts deferred and amortized
in the same period:
(in millions)
- ----------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
========================================================================================
General insurance operations:
Balance at beginning of year $ 2,132 $1,852 $1,637
- ----------------------------------------------------------------------------------------
Acquisition costs deferred
Commissions 876 799 664
Other 1,138 1,009 909
- ----------------------------------------------------------------------------------------
2,014 1,808 1,573
- ----------------------------------------------------------------------------------------
Amortization charged to income
Commissions 748 642 568
Other 960 886 790
- ----------------------------------------------------------------------------------------
1,708 1,528 1,358
- ----------------------------------------------------------------------------------------
Balance at end of year $ 2,438 $2,132 $1,852
========================================================================================
Life insurance operations:
Balance at beginning of year $ 7,492 $6,229 $5,515
- ----------------------------------------------------------------------------------------
Acquisition costs deferred
Commissions 1,047 1,068 892
Other 565 951 421
- ----------------------------------------------------------------------------------------
1,612 2,019 1,313
- ----------------------------------------------------------------------------------------
Amortization charged to income
Commissions 500 502 450
Other 458 389 309
- ----------------------------------------------------------------------------------------
958 891 759
- ----------------------------------------------------------------------------------------
Increase (decrease) due to foreign
exchange (395) 135 160
- ----------------------------------------------------------------------------------------
Balance at end of year $ 7,751 $7,492 $6,229
========================================================================================
Total deferred policy acquisition costs $10,189 $9,624 $8,081
========================================================================================
5. Reinsurance
In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.
General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Ceded premiums are considered prepaid reinsurance premiums
and are amortized into income over the contract period in proportion to the
protection received. Amounts recoverable from general reinsurers are estimated
in a manner consistent with the claims liabilities associated with the
reinsurance and presented as a component of reinsurance assets.
AIG life companies limit exposure to loss on any single life. For ordinary
insurance, AIG retains a maximum of approximately one million dollars of
coverage per individual life. There are smaller retentions for other lines of
business. Life reinsurance is effected principally under yearly renewable term
treaties. The premiums with respect to these treaties are considered prepaid
reinsurance premiums and are amortized into income over the contract period in
proportion to the protection provided. Amounts recoverable from life reinsurers
are estimated in a manner consistent with the assumptions used for the
underlying policy benefits and are presented as a component of reinsurance
assets.
General insurance premiums written and earned were comprised of the
following:
(in millions)
- ----------------------------------------------------------------------------------------
Years Ended December 31, Written Earned
========================================================================================
2000
Gross premiums $25,050 $24,062
Ceded premiums (7,524) (6,655)
- ----------------------------------------------------------------------------------------
Net premiums $17,526 $17,407
========================================================================================
1999
Gross premiums $22,569 $21,187
Ceded premiums (6,345) (5,643)
- ----------------------------------------------------------------------------------------
Net premiums $16,224 $15,544
========================================================================================
1998
Gross premiums $20,684 $20,092
Ceded premiums (6,098) (5,994)
- ----------------------------------------------------------------------------------------
Net premiums $14,586 $14,098
========================================================================================
For the years ended December 31, 2000, 1999 and 1998, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $6.00
billion, $5.13 billion and $5.36 billion, respectively.
Life insurance net premium income was comprised of the following:
(in millions)
- ----------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
========================================================================================
Gross premium income $13,928 $12,252 $10,578
Ceded premiums (318) (310) (285)
- ----------------------------------------------------------------------------------------
Net premium income $13,610 $11,942 $10,293
========================================================================================
Life insurance recoveries, which reduced death and other benefits,
approximated $156 million, $168 million and $176 million, respectively, for the
years ended December 31, 2000, 1999 and 1998.
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.
55
57
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
5. Reinsurance (continued)
Life insurance ceded to other insurance companies was as follows:
(in millions)
- ----------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
========================================================================================
Life insurance in-force $56,927 $69,535 $62,768
========================================================================================
Life insurance assumed represented 0.2 percent of gross life insurance
in-force at December 31, 2000, 0.2 percent for 1999 and 0.3 percent for 1998 and
life insurance premium income assumed represented 0.3 percent of gross premium
income for each of the periods ended December 31, 2000, 1999 and 1998.
Supplemental information for gross loss and benefit reserves net of ceded
reinsurance at December 31, 2000 and 1999 follows:
(in millions)
- ----------------------------------------------------------------------------------------
As Net of
Reported Reinsurance
========================================================================================
2000
Reserve for losses and loss expenses $(40,613) $(24,952)
Future policy benefits for life and accident
and health insurance contracts (38,165) (37,926)
Premiums and insurance balances
receivable-net 11,832 15,164
Funds held under reinsurance treaties -- 578
Reserve for unearned premiums (12,510) (9,185)
Reinsurance assets 23,135 --
========================================================================================
1999
Reserve for losses and loss expenses $(38,252) $(24,600)
Future policy benefits for life and accident
and health insurance contracts (34,608) (34,372)
Premiums and insurance balances
receivable-net 12,236 14,776
Funds held under reinsurance treaties -- 484
Reserve for unearned premiums (11,450) (8,994)
Reinsurance assets 19,368 --
========================================================================================
6. Reserve for Losses and Loss Expenses and Future Life Policy Benefits and
Policyholders' Contract Deposits
(a) The following analysis provides a reconciliation of the activity in the
reserve for losses and loss expenses:
(in millions)
- ----------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
========================================================================================
At beginning of year:
Reserve for losses and
loss expenses $ 38,252 $ 38,310 $ 33,400
Reinsurance recoverable (13,652) (13,691) (12,229)
- ----------------------------------------------------------------------------------------
24,600 24,619 21,171
- ----------------------------------------------------------------------------------------
Acquisitions 236 -- 2,896
- ----------------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 13,356 12,122 10,938
Prior years (252) (384) (281)
- ----------------------------------------------------------------------------------------
Total 13,104 11,738 10,657
========================================================================================
Losses and loss expenses paid:
Current year 5,205 4,978 4,389
Prior years 7,783 6,779 5,716
- ----------------------------------------------------------------------------------------
Total 12,988 11,757 10,105
========================================================================================
At end of year:
Net reserve for losses and
loss expenses 24,952 24,600 24,619
Reinsurance recoverable 15,661 13,652 13,691
- ----------------------------------------------------------------------------------------
Total $ 40,613 $ 38,252 $ 38,310
========================================================================================
(b) The analysis of the future policy benefits and policyholders' contract
deposits liabilities as at December 31, 2000 and 1999 follows:
(in millions)
- ----------------------------------------------------------------------------------------
2000 1999
========================================================================================
Future policy benefits:
Long duration contracts $37,400 $33,670
Short duration contracts 765 938
- ----------------------------------------------------------------------------------------
Total $38,165 $34,608
========================================================================================
Policyholders' contract deposits:
Annuities $15,987 $18,027
Guaranteed investment contracts (GICs) 25,344 18,905
Corporate life products 1,862 1,891
Universal life 3,109 2,962
Other investment contracts 907 764
- ----------------------------------------------------------------------------------------
Total $47,209 $42,549
========================================================================================
(c) Long duration contract liabilities included in future policy benefits,
as presented in the table above, result from traditional life products. Short
duration contract liabilities are primarily accident and health products. The
liability for future life policy benefits has been established based upon the
following assumptions:
(i) Interest rates (exclusive of immediate/terminal funding annuities),
which vary by territory, year of issuance and products, range from 1.5 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.
56
58
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
6. Reserve for Losses and Loss Expenses and Future Life Policy Benefits and
Policyholders' Contract Deposits (continued)
(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 8.1 percent.
(iii) The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the benefit of AIG are
restricted in some cases by the insurance contracts and by the local insurance
regulations of the countries in which the policies are in force.
(iv) Participating life business represented approximately 31 percent of
the gross insurance in-force at December 31, 2000 and 43 percent of gross
premium income in 2000. The amount of annual dividends to be paid is determined
locally by the Boards of Directors. Provisions for future dividend payments are
computed by jurisdiction, reflecting local regulations.
(d) The liability for policyholders' contract deposits has been
established based on the following assumptions:
(i) Interest rates credited on deferred annuities, which vary by territory
and year of issuance, range from 2.0 percent to 9.0 percent. Credited interest
rate guarantees are generally for a period of one year. Withdrawal charges
generally range from zero percent to 10.0 percent grading to zero over a period
of zero 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 4.0 percent to 9.4 percent. The vast majority of these GICs
mature within 10 years. Overseas, interest rates credited on GICs generally
range from 4.8 percent to 7.3 percent and maturities range from 1 to 6 years.
(iii) Interest rates on corporate life insurance products are guaranteed
at 4.0 percent and the weighted average rate credited in 2000 was 6.8 percent.
(iv) The universal life funds have credited interest rates of 4.5 percent
to 7.5 percent and guarantees ranging from 4.0 percent to 5.5 percent depending
on the year of issue. Additionally, universal life funds are subject to
surrender charges that amount to 11.0 percent of the fund balance grading to
zero over a period not longer than 20 years.
(e) Certain products, which are short duration contracts, are subject to
experience adjustments. These include group life and group medical products,
credit life contracts, accident & health insurance contracts/riders attached to
life policies and, to a limited extent, reinsurance agreements with other direct
insurers. Ultimate premiums from these contracts are estimated and recognized as
revenue and the unearned portions of the premiums are held as reserves.
Experience adjustments vary according to the type of contract and the territory
in which the policy is in force and are subject to local regulatory guidance.
7. Statutory Financial Data
Statutory surplus and net income for general insurance and life insurance
operations as reported to regulatory authorities were as follows:
(in millions)
- ----------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
========================================================================================
Statutory surplus:
General insurance $16,934 $16,225 $15,523
Life insurance 12,564 10,230 8,177
Statutory net income*:
General insurance 2,508 2,458 2,252
Life insurance 1,378 1,431 925
========================================================================================
*Includes net realized capital gains and losses.
AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with GAAP vary between domestic and foreign jurisdictions. The principal
differences are that statutory financial statements do not reflect deferred
policy acquisition costs and deferred income taxes, all bonds are carried at
amortized cost and reinsurance assets and liabilities are presented net of
reinsurance. AIG's use of permitted statutory accounting practices does not have
a significant impact on statutory surplus.
8. Investment Information
(a) Statutory Deposits: Cash and securities with carrying values of $5.37
billion and $4.34 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 2000 and 1999,
respectively.
(b) Net Investment Income: An analysis of the net investment income from
the general and life insurance operations follows:
(in millions)
- ----------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
========================================================================================
General insurance:
Fixed maturities $1,815 $1,852 $1,663
Equity securities 214 101 80
Short-term investments 70 52 73
Other invested assets 556 399 202
Miscellaneous (net of interest
expense on funds held) 189 256 279
- ----------------------------------------------------------------------------------------
Total investment income 2,844 2,660 2,297
Investment expenses 143 143 105
- ----------------------------------------------------------------------------------------
Net investment income $2,701 $2,517 $2,192
========================================================================================
Life insurance:
Fixed maturities $5,125 $4,427 $3,683
Equity securities 98 91 72
Short-term investments 226 338 308
Interest on mortgage, policy
and collateral loans 889 824 820
Other 1,031 769 627
- ----------------------------------------------------------------------------------------
Total investment income 7,369 6,449 5,510
Investment expenses 246 243 309
- ----------------------------------------------------------------------------------------
Net investment income $7,123 $6,206 $5,201
========================================================================================
57
59
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
8. Investment Information (continued)
(c) Investment Gains and Losses: The realized capital gains (losses) and
increase (decrease) in unrealized appreciation of investments were as follows:
(in millions)
- ----------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------
Realized capital gains (losses) on investments:
Fixed maturities (a) $ (384) $ (191) $ 121
Equity securities 328 410 105
Other (82) (97) (102)
- ----------------------------------------------------------------------------------------
Realized capital gains (losses) $ (138) $ 122 $ 124
========================================================================================
Increase (decrease) in unrealized appreciation of investments:
Fixed maturities $1,360 $(3,634) $ 555
Equity securities (856) 327 (484)
Other (b) (153) 766 (458)
- ----------------------------------------------------------------------------------------
Increase (decrease) in unrealized
appreciation $ 351 $(2,541) $(387)
========================================================================================
(a) The realized gains (losses) resulted from the disposition of available for
sale fixed maturities.
(b) Includes $51 million increase, $264 million decrease and $301 million
increase in unrealized appreciation attributable to participating
policyholders at December 31, 2000, 1999 and 1998, respectively.
The gross gains and gross losses realized on the disposition of available
for sale securities were as follows:
(in millions)
- ----------------------------------------------------------------------------------------
Gross Gross
Realized Realized
Gains Losses
========================================================================================
2000
Bonds $ 251 $ 621
Common stocks 754 372
Preferred stocks 47 27
Financial services securities available for sale 8 --
- ----------------------------------------------------------------------------------------
Total $1,060 $1,020
========================================================================================
1999
Bonds $ 197 $ 401
Common stocks 806 336
Preferred stocks 35 11
Financial services securities available for sale 26 --
- ----------------------------------------------------------------------------------------
Total $1,064 $ 748
========================================================================================
1998
Bonds $ 502 $ 363
Common stocks 542 454
Preferred stocks 12 11
Financial services securities available for sale 4 2
- ----------------------------------------------------------------------------------------
Total $1,060 $ 830
========================================================================================
(d) Market Value of Fixed Maturities and Unrealized Appreciation of
Investments: At December 31, 2000 and 1999, the balance of the unrealized
appreciation of investments in equity securities (before applicable taxes)
included gross gains of approximately $670 million and $1.2 billion and gross
losses of approximately $1 billion and $706 million, respectively.
The deferred tax asset related to the net unrealized depreciation of
investments was $19 million at December 31, 2000 and the deferred tax asset
related to the net unrealized depreciation of investments was $191 million at
December 31, 1999.
The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 2000 and 1999 were as
follows:
(in millions)
- ----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
========================================================================================
2000
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 67 $ 3 $ -- $ 70
States (b) 11,461 523 6 11,978
Other 5 -- -- 5
- ----------------------------------------------------------------------------------------
Total fixed maturities $11,533 $526 $ 6 $12,053
========================================================================================
1999
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 30 $ -- $ -- $ 30
States (b) 12,042 275 149 12,168
Other 4 -- -- 4
- ----------------------------------------------------------------------------------------
Total bonds 12,076 275 149 12,202
Preferred stocks 2 -- 2 --
- ----------------------------------------------------------------------------------------
Total fixed maturities $12,078 $275 $151 $12,202
========================================================================================
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
58
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
8. Investment Information (continued)
The amortized cost and estimated market value of bonds available for sale
and carried at market value at December 31, 2000 and 1999 were as follows:
(in millions)
- ----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
========================================================================================
2000
Fixed maturities available
for sale:
Bonds:
U.S. Government (a) $ 1,794 $ 103 $ 23 $ 1,874
States (b) 10,131 427 102 10,456
Foreign governments 17,725 890 208 18,407
All other corporate 59,811 1,312 2,229 58,894
- ----------------------------------------------------------------------------------------
Total bonds $89,461 $2,732 $2,562 $89,631
========================================================================================
1999
Fixed maturities available
for sale:
Bonds:
U.S. Government (a) $ 2,470 $ 62 $ 77 $ 2,455
States (b) 9,470 145 384 9,231
Foreign governments 14,780 461 84 15,157
All other corporate 51,498 782 2,095 50,185
- ----------------------------------------------------------------------------------------
Total bonds $78,218 $1,450 $2,640 $77,028
========================================================================================
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market values of fixed maturities held to
maturity and fixed maturities available for sale at December 31, 2000, 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.
(in millions)
- ----------------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
========================================================================================
Fixed maturities held to maturity:
Due in one year or less $ 661 $ 687
Due after one year through five years 2,066 2,151
Due after five years through ten years 3,579 3,753
Due after ten years 5,227 5,462
- ----------------------------------------------------------------------------------------
Total held to maturity $11,533 $12,053
========================================================================================
Fixed maturities available for sale:
Due in one year or less $ 5,391 $ 5,403
Due after one year through five years 27,555 27,634
Due after five years through ten years 28,118 27,689
Due after ten years 28,397 28,905
- ----------------------------------------------------------------------------------------
Total available for sale $89,461 $89,631
========================================================================================
(e) Securities Available for Sale: AIGFP follows a policy of minimizing
interest rate, equity and currency risks associated with securities available
for sale by entering into swap or other transactions. In addition, to reduce its
credit risk, AIGFP has entered into credit derivative transactions with respect
to $182 million of securities available for sale. At December 31, 2000, the
cumulative increase in carrying value of the securities available for sale and
related hedges as a result of marking to market such securities net of hedging
transactions was $33 million.
The amortized cost, related hedges and estimated market value of
securities available for sale and carried at market value at December 31, 2000
and 1999 were as follows:
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Gains
Gross Gross (Losses) - net Estimated
Amortized Unrealized Unrealized on Hedging Market
Cost Gains Losses Transactions Value
===================================================================================================================================
2000
Securities available for sale:
Corporate and bank debt $ 8,140 $ 82 $275 $ 219 $ 8,166
Foreign government obligations 30 -- 21 20 29
Asset-backed and collateralized 4,946 113 77 (37) 4,945
Preferred stocks 1,328 9 4 5 1,338
U.S. Government obligations 192 4 4 (1) 191
- -----------------------------------------------------------------------------------------------------------------------------------
Total $14,636 $208 $381 $ 206 $14,669
===================================================================================================================================
1999
Securities available for sale:
Corporate and bank debt $ 7,477 $ 54 $199 $ 167 $ 7,499
Foreign government obligations 354 311 1 (311) 353
Asset-backed and collateralized 3,985 6 165 163 3,989
Preferred stocks 957 13 -- (4) 966
U.S. Government obligations 147 4 7 3 147
- -----------------------------------------------------------------------------------------------------------------------------------
Total $12,920 $388 $372 $ 18 $12,954
===================================================================================================================================
The amortized cost and estimated market values of securities available for
sale at December 31, 2000, 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.
59
61
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
8. Investment Information (continued)
(in millions)
- ----------------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
========================================================================================
Securities available for sale:
Due in one year or less $ 1,473 $ 1,478
Due after one year through five years 5,096 5,122
Due after five years through ten years 1,822 1,828
Due after ten years 1,299 1,296
Asset-backed and collateralized 4,946 4,945
- ----------------------------------------------------------------------------------------
Total securities available for sale $14,636 $14,669
- ----------------------------------------------------------------------------------------
No securities available for sale were below investment grade at December
31, 2000.
(f) CMOs: At December 31, 2000, CMOs, held by AIG's life companies, were
presented as a component of bonds available for sale, at market value.
Substantially all of the CMOs were investment grade and approximately 16 percent
of the CMOs were backed by various U.S. government agencies. The remaining 84
percent were corporate issuances.
The distribution of the CMOs at December 31, 2000 and 1999 was as follows:
- ----------------------------------------------------------------------------------------
2000 1999
========================================================================================
GNMA 2% 1%
FHLMC 8 10
FNMA 6 6
VA -- 1
Non-governmental 84 82
- ----------------------------------------------------------------------------------------
100% 100%
========================================================================================
AIG is not exposed to any significant credit concentration risk of a
single or group non-governmental issuer.
At December 31, 2000, the gross weighted average coupon of this portfolio
was 6.96 percent. The gross weighted average life of this portfolio was
approximately 6.30 years.
At December 31, 2000 and 1999, the market value of the CMO portfolio was
$17.61 billion and $14.94 billion, respectively; the amortized cost was
approximately $17.58 billion in 2000 and $15.63 billion in 1999. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 2000 and 1999.
(g) Fixed Maturities Below Investment Grade: At December 31, 2000, fixed
maturities held by AIG that were below investment grade or not rated totaled
$14.23 billion.
(h) At December 31, 2000, non-income producing invested assets were
insignificant.
9. Debt Outstanding
At December 31, 2000, AIG's debt outstanding of $40.23 billion, shown below,
included borrowings of $36.30 billion which were either not guaranteed by AIG or
were matched borrowings under obligations of guaranteed investment agreements
(GIAs) or matched notes and bonds payable.
(in millions)
========================================================================================
Borrowings under obligations of GIAs -- AIGFP $13,595
- ----------------------------------------------------------------------------------------
Commercial Paper:
Funding 968
ILFC (a) 4,259
AICCO 597
AIGF - Taiwan (a) 104
AIGCCC - Taiwan (a) 36
- ----------------------------------------------------------------------------------------
Total 5,964
- ----------------------------------------------------------------------------------------
Medium Term Notes:
ILFC (a) 3,175
AIG 582
- ----------------------------------------------------------------------------------------
Total 3,757
- ----------------------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC (a) (b) 5,529
AIGFP 8,755
AIG 720
- ----------------------------------------------------------------------------------------
Total 15,004
- ----------------------------------------------------------------------------------------
Loans and Mortgages Payable:
ILFC (a) (c) 463
AIG Finance (Hong Kong) Limited (a) 346
AIG Consumer Finance Group, Inc. (a) 662
AIG 440
- ----------------------------------------------------------------------------------------
Total 1,911
- ----------------------------------------------------------------------------------------
Total Borrowings 40,231
- ----------------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 14,574
Matched GIA borrowings 13,595
Matched notes and bonds payable -- AIGFP 8,127
- ----------------------------------------------------------------------------------------
36,296
- ----------------------------------------------------------------------------------------
Remaining borrowings of AIG $ 3,935
========================================================================================
(a) AIG does not guarantee or support these borrowings.
(b) Includes borrowings under Export Credit Facility of $2.07 billion.
(c) Capital lease obligations.
The amount of long-term borrowings is $25.24 billion and the amount of
short-term borrowings is $14.99 billion. Long-term borrowings include commercial
paper; short-term borrowings represent borrowings that mature in less than one
year.
(a) Commercial Paper: At December 31, 2000, the commercial paper issued
and outstanding was as follows:
(dollars in millions)
- ---------------------------------------------------------------------------------------------
Weighted
Net Average Weighted
Book Unamortized Face Interest Average
Value Discount Amount Rate Maturity
=============================================================================================
Funding $ 968 $ 2 $ 970 6.50% 19 days
ILFC 4,259 30 4,289 6.63 111 days
AICCO 597 2 599 6.51 16 days
AIGF - Taiwan* 104 2 106 6.04 177 days
AIGCCC - Taiwan* 36 -- 36 5.87 161 days
- ---------------------------------------------------------------------------------------------
Total $5,964 $36 $6,000 -- --
=============================================================================================
*Issued in Taiwan N.T. dollars at prevailing local interest rates.
60
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
9. Debt Outstanding (continued)
Commercial paper issued by Funding is guaranteed by AIG. At December 31,
2000, AIG did not guarantee or support the commercial paper of any of its
subsidiaries other than Funding and AICCO. In early 2001, AICCO ceased issuing
commercial paper under its program and the agreement which AIG had provided
supporting the commercial paper was terminated; AICCO's funding requirements are
now met through Funding's program.
(b) Borrowings under Obligations of Guaranteed Investment Agreements:
Borrowings under obligations of guaranteed investment agreements, which are
guaranteed by AIG, are recorded at the amount outstanding under each contract.
Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings are primarily fixed, vary
by maturity, and range up to 9.8 percent.
Payments due under these investment agreements in each of the next five
years ending December 31, and the periods thereafter based on the earliest call
dates, were as follows:
(in millions)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
2001 $ 6,061
2002 1,464
2003 280
2004 72
2005 106
Remaining years after 2005 5,612
- --------------------------------------------------------------------------------
Total $13,595
================================================================================
At December 31, 2000, the market value of securities pledged as collateral
with respect to these obligations approximated $3.8 billion.
Funds received from GIA borrowings are invested in a diversified portfolio
of securities and derivative transactions.
(c) Medium Term Notes Payable:
(i) Medium Term Notes Payable Issued by AIG: AIG's Medium Term Notes are
unsecured obligations which normally may not be redeemed by AIG prior to
maturity and bear interest at either fixed rates set by AIG at issuance or
variable rates determined by reference to an interest rate or other formula.
An analysis of AIG's Medium Term Notes for the year ended December 31,
2000 was as follows:
(in millions)
- --------------------------------------------------------------------------------
AIG SunAmerica Total
================================================================================
Balance December 31, 1999 $ 283 $198 $ 481
Issued during year 233 -- 233
Redeemed during year (130) (2) (132)
- --------------------------------------------------------------------------------
Balance December 31, 2000 $ 386 $196 $ 582
================================================================================
The interest rates on AIG's Medium Term Notes range from 0.50 percent to
7.15 percent. To the extent deemed appropriate, AIG may enter into swap
transactions to reduce its effective borrowing rates with respect to these
notes.
At December 31, 2000, AIG's Medium Term Notes also included notes in
aggregate principal amount of $196 million issued by SunAmerica Inc. with
maturity dates from 2001 to 2026 at interest rates ranging from 6.03 percent to
7.34 percent. AIG does not intend to have SunAmerica issue its own debt.
During 1997, AIG issued $100 million principal amount of equity-linked
Medium Term Notes due July 30, 2004. These notes accrued interest at the rate of
2.25 percent and the total return on these notes was linked to the appreciation
in market value of AIG's common stock. In conjunction with the issuance of these
notes, AIG entered into a series of swap transactions which effectively
converted its interest expense to a fixed rate of 5.87 percent and transferred
the equity appreciation exposure to a third party. These notes were redeemed
during 2000.
During 2000, AIG issued $210 million principal amount of equity-linked
Medium Term Notes due May 15, 2007. These notes accrue interest at the rate of
0.50 percent and the total return on these notes is linked to the appreciation
in market value of AIG's common stock. The notes may be redeemed, at the option
of AIG, as a whole but not in part, at any time on or after May 15, 2003. In
conjunction with the issuance of these notes, AIG entered into a series of swap
transactions which effectively converted its interest expense to a fixed rate of
7.17 percent and transferred the equity appreciation exposure to a third party.
AIG is exposed to credit risk with respect to the counterparties to these swap
transactions.
At December 31, 2000, the maturity schedule for AIG's outstanding Medium
Term Notes, including those issued by SunAmerica Inc., was as follows:
(in millions)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
2001 $176
2002 48
2003 25
2004 20
2005 55
Remaining years after 2005 258
- --------------------------------------------------------------------------------
Total $582
================================================================================
At December 31, 2000, AIG had $781 million principal amount of debt
securities registered and available for issuance from time to time. In early
2001, AIG established a new Medium Term Note program under which these
securities may be issued.
(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.
61
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- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
9. Debt Outstanding (continued)
As of December 31, 2000, notes in aggregate principal amount of $3.18
billion were outstanding with maturity dates from 2001 to 2005 at interest rates
ranging from 5.20 percent to 8.55 percent. These notes provide for a single
principal payment at the maturity of each note.
At December 31, 2000, the maturity schedule for ILFC's outstanding Medium
Term Notes was as follows:
(in millions)
- --------------------------------------------------------------------------------
Principal
Amount
- --------------------------------------------------------------------------------
2001 $1,217
2002 1,328
2003 485
2004 120
2005 25
- --------------------------------------------------------------------------------
Total $3,175
================================================================================
(d) Notes and Bonds Payable:
(i) Notes, Bonds and Debentures Issued by AIG.
(A) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of $750
million. The notes were offered at 12 percent of principal amount at stated
maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG
from the issuance were $86 million. The notes are redeemable at any time in
whole or in part at the option of AIG at 100 percent of their principal amount
at stated maturity. The notes are also redeemable at the option of AIG or bearer
notes may be redeemed at the option of the holder in the event of certain
changes involving taxation in the United States at prices ranging from 65.26
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 2000 and 1999, no notes were
repurchased. At December 31, 2000, the notes outstanding after prior purchases
had a face value of $189 million, an unamortized discount of $62 million and a
net book value of $127 million. The amortization of the original issue discount
was recorded as interest expense.
(B) 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.
(C) Notes and Debentures Issued by SunAmerica Inc.: As of December 31,
2000, Notes and Debentures issued by SunAmerica Inc. in aggregate principal
amount of $433 million (net of amortized discount of $42 million) were
outstanding with maturity dates from 2007 to 2097 at interest rates ranging from
5.60 percent to 9.95 percent.
(ii) Term Notes Issued by ILFC: ILFC has issued unsecured obligations
which may not be redeemed prior to maturity.
As of December 31, 2000, notes in aggregate principal amount of $3.46
billion were outstanding with maturity dates from 2001 to 2004 and interest
rates ranging from 5.63 percent to 8.88 percent. Term notes in the aggregate
principal amount of $350 million are at floating interest rates and the
remainder are at fixed rates. These notes provide for a single principal payment
at maturity.
At December 31, 2000, the maturity schedule for ILFC's Term Notes was as
follows:
(in millions)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
2001 $1,075
2002 1,283
2003 450
2004 649
- --------------------------------------------------------------------------------
Total $3,457
================================================================================
At December 31, 2000, ILFC had $75 million in aggregate principal amount
of debt securities registered for issuance from time to time, which debt had
been sold as of March 16, 2001. An additional $2.0 billion principal amount of
debt securities was registered as of January 5, 2001, under which $800 million
in notes were sold as of March 16, 2001. A $750 million Medium Term Note program
was implemented on January 19, 2001 under which $200 million has been sold as of
March 16, 2001. In addition, ILFC established a Euro Medium Term Note program
for $2.0 billion, under which $771 million in notes were sold through December
31, 2000.
ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for
approximately 75 aircraft to be delivered through 2001. ILFC has the right, but
is not required, to use the facility to fund 85 percent of each aircraft's
purchase price. This facility is guaranteed by various European Export Credit
Agencies. The interest rate varies from 5.75 percent to 5.90 percent on the
first 75 aircraft depending on the delivery date of the aircraft. Through
December 31, 2000, ILFC borrowed $2.07 billion under this facility. Borrowings
with respect to this facility are included in Notes and Bonds Payable in the
62
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
9. Debt Outstanding (continued)
accompanying table of borrowings. At December 31, 2000, the future minimum
payments for ILFC's borrowings under the Export Credit Facility were as follows:
(in millions)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
2001 $ 229
2002 229
2003 229
2004 229
2005 229
Remaining years after 2005 927
- --------------------------------------------------------------------------------
Total $2,072
================================================================================
AIG does not guarantee any of the debt obligations of ILFC.
(iii) Notes and Bonds Payable Issued by AIGFP: At December 31, 2000,
AIGFP's notes and bonds outstanding, the proceeds of which are invested in a
segregated portfolio of securities available for sale, were as follows:
(dollars in millions)
- ----------------------------------------------------------------------------------------
Range of Range of U.S. Dollar
Maturities Currency Interest Rates Carrying Value
========================================================================================
2001-2029 US dollar 4.88-7.72% $4,140
2001-2005 Euro 4.60-7.19 1,781
2001-2005 United Kingdom pound 5.74-7.65 790
2001-2002 New Zealand dollar 8.51-9.43 596
2002 Japanese yen 4.50 190
- ----------------------------------------------------------------------------------------
Total $7,497
========================================================================================
AIGFP is also obligated under various notes maturing from 2001 through
2026. The majority of these notes are denominated in U.S. dollars and Euros and
bear interest at various interest rates. At December 31, 2000, these notes had a
U.S. dollar carrying value of $1.3 billion.
AIG guarantees all of AIGFP's debt.
(e) Loans and Mortgages Payable: Loans and mortgages payable at December
31, 2000, consisted of the following:
(in millions)
- ----------------------------------------------------------------------------------------
AIG
AIGF-- Consumer
ILFC Hong Kong Finance AIG Total
========================================================================================
Uncollateralized
loans payable $ -- $346 $662 $350 $1,358
Collateralized loans and
mortgages payable 463 -- -- 90 553
- ----------------------------------------------------------------------------------------
Total $463 $346 $662 $440 $1,911
========================================================================================
At December 31, 2000, ILFC's capital lease obligations were $463 million.
Fixed interest rates with respect to these obligations range from 6.18 percent
to 6.89 percent; variable rates are referenced to LIBOR. These obligations
mature through 2005. The flight equipment associated with the capital lease
obligations had a net book value of $1.01 billion.
At December 31, 2000, the maturity schedule for ILFC's capital lease
obligations, were as follows:
(in millions)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
2001 $127
2002 127
2003 127
2004 113
2005 46
- --------------------------------------------------------------------------------
Total minimum lease obligations 540
Less amount representing interest 77
- --------------------------------------------------------------------------------
Present value of net minimum capital lease obligations $463
================================================================================
(f) As of December 31, 2000, the combined principal payments due of all
significant debt, excluding commercial paper, in each of the next five years and
periods thereafter were as follows:
(in millions)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
2001 $14,989
2002 5,565
2003 2,967
2004 1,836
2005 829
Remaining years after 2005 8,081
- --------------------------------------------------------------------------------
Total $34,267
================================================================================
(g) Revolving Credit Facilities: AIG and Funding have entered into
syndicated revolving credit facilities (collectively, the Facility) aggregating
$1.5 billion. The Facility consists of $1.0 billion in short-term revolving
credit facilities and a $500 million five year revolving credit facility. The
Facility can be used for general corporate purposes and also to provide backup
for AIG's commercial paper programs administered by Funding. There are currently
no borrowings outstanding under the Facility, nor were any borrowings
outstanding as of December 31, 2000.
(h) Interest Expense for All Indebtedness: Total interest expense for all
indebtedness, net of capitalized interest, aggregated $2.72 billion in 2000,
$2.19 billion in 1999 and $1.99 billion in 1998. Cash distributions on the
preferred shareholders' equity in subsidiary companies of ILFC and certain
SunAmerica and HSB subsidiaries are accounted for as interest expense and
included as minority interest in the consolidated statement of income. The cash
distributions for ILFC were approximately $19 million for the year ended
December 31, 2000 and $17 million in each of the years ended December 31, 1999
and 1998. The cash distributions for the SunAmerica subsidiaries were
approximately $62 million for the year ended December 31, 2000 and $40 million
in each of the years ended December 31, 1999 and 1998.
63
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- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
10. Preferred Shareholders' Equity in Subsidiary Companies
Preferred shareholders' equity in subsidiary companies represents preferred
stocks issued by ILFC and certain SunAmerica and HSB subsidiaries, wholly owned
subsidiaries of AIG.
(a) ILFC: The preferred stock consists of 4,000 shares of market auction
preferred stock ("MAPS") in eight series of 500 shares each. Each of these
shares has a liquidation value of $100,000 per share and is not convertible. The
dividend rate, other than the initial rate, for each dividend period for each
series is reset approximately every seven weeks (49 days) on the basis of orders
placed in an auction. At December 31, 2000, the dividend rate ranged from 4.98
percent to 5.25 percent.
(b) SunAmerica: The preferred stock consists of $185 million liquidation
amount of 8.35% Trust Originated Preferred Securities issued by SunAmerica
Capital Trust II in October 1995, $310 million liquidation amount of 8.30% Trust
Originated Preferred Securities issued by SunAmerica Capital Trust III in
November 1996, and $350 million liquidation amount of 7.5% Non-Voting Preferred
Interests issued by Total Return LLC, a wholly owned subsidiary of SunAmerica,
in March 2000.
In connection with the issuance of the 8.35% Trust Originated Preferred
Securities and the related purchase by SunAmerica Inc. of the grantor trust's
common securities, SunAmerica Inc. issued to the grantor trust $191 million
principal amount of 8.35% junior subordinated debentures, due 2044.
In March 2001, SunAmerica Capital Trust II redeemed the 8.35% Trust
Originated Preferred Securities for a cash payment equal to the liquidation
amount of $185 million plus accrued and unpaid dividends at redemption date.
Concurrently, SunAmerica redeemed all of the related 8.35% junior subordinated
debentures, due 2044, for a liquidation amount of $191 million plus accrued
interest.
In connection with the issuance of the 8.30% Trust Originated Preferred
Securities and the related purchase by SunAmerica Inc. of the grantor trust's
common securities, SunAmerica Inc. issued to the grantor trust $321 million
principal amount of 8.30% junior subordinated debentures, due 2045, which are
redeemable at the option of AIG on or after November 13, 2001 at a redemption
price of $25 per debenture plus accrued and unpaid interest.
The interest and other payment dates on the debentures correspond to the
distribution and other payment dates on the preferred and common securities. The
preferred and common securities will be redeemed on a pro rata basis, to the
same extent as the debentures are repaid. Under certain circumstances involving
a change in law or legal interpretation, the debentures may be distributed to
holders of the preferred and common securities in liquidation of the grantor
trust(s). AIG's obligations under the debentures and related agreements, taken
together, provide a full and unconditional guarantee of payments due on the
preferred securities.
The grantor trusts are accounted for as wholly owned subsidiaries of AIG.
The debentures issued to the grantor trusts and the common securities purchased
by SunAmerica Inc. from the grantor trusts are eliminated in the consolidated
balance sheet.
In connection with the issuance of 7.5% Non-Voting Preferred Interests by
Total return LLC in March 2000, SunAmerica issued a $350 million promissory note
to Total Return LLC, due 2003. The preferred interests receive cash
distributions and the note bears interest at a rate of 7.5%. The common
interests in Total Return LLC are wholly owned by SunAmerica, and the common
interests and the note are eliminated in the consolidated balance sheet.
(c) HSB: The preferred stock consists of $110 million liquidation amount
of Exchange Capital Securities issued by HSB Capital I, a statutory business
trust wholly owned by HSB, which has invested $113.4 million in debt securities
of HSB. The capital securities accrue and pay quarterly cash distributions at a
variable rate equal to 90 day LIBOR plus 0.91% of the stated liquidation amount
of $1,000 per capital security, which rate was 6.6% at December 31, 2000. The
capital securities are not redeemable prior to July 15, 2007 and are mandatorily
redeemable upon the maturity of the debt securities on July 15, 2027 or the
earlier redemption of the debt securities. AIG has issued a guarantee of the
obligations of HSB, which together with the terms of the debt securities, the
guarantee of HSB with respect to the capital securities, the indenture and the
trust agreement with respect to the trust provide a full and unconditional
guarantee of payments due on the capital securities. The trust is accounted for
as a wholly owned subsidiary of AIG. The debt securities issued to the trust and
the common securities issued by the trust to HSB are eliminated in the
consolidated balance sheet.
11. Capital Funds
(a) AIG parent depends on its subsidiaries for cash flow in the form of loans,
advances and dividends. AIG's insurance subsidiaries are subject to regulatory
restrictions on the amount of dividends which can be remitted to AIG parent.
These restrictions vary by state. For example, unless permitted by the New York
Superintendent of Insurance, general insurance companies domiciled in New York
may not pay dividends to shareholders which in any twelve month period exceed
the lesser of 10 percent of the company's statutory policyholders' surplus or
100 percent of its "adjusted net investment income", as defined. Generally, less
severe restrictions applicable to both general and life insurance companies
exist in most of the other states in which AIG's insurance subsidiaries are
domiciled. Certain foreign jurisdictions have restrictions which generally cause
only a temporary delay in the remittance of dividends. There are
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
11. Capital Funds (continued)
also various local restrictions limiting cash loans and advances to AIG by its
subsidiaries. Largely as a result of the restrictions, approximately 61 percent
of consolidated capital funds were restricted from immediate transfer to AIG
parent at December 31, 2000.
(b) At December 31, 2000, there were 6,000,000 shares of AIG's $5 par
value serial preferred stock authorized, issuable in series.
(c) The activity for preferred stock issued by SunAmerica Inc. prior to
the merger with AIG for the year ended December 31, 1999 and the year ended
September 30, 1998 was as follows:
- ----------------------------------------------------------------------------------------
1999 1998
========================================================================================
Shares outstanding at beginning of year 4,000,000 4,000,000
Redemption of Series E Depositary Shares (4,000,000) --
- ----------------------------------------------------------------------------------------
Shares outstanding at end of year -- 4,000,000
========================================================================================
On November 1, 1995, SunAmerica Inc. issued 4,000,000 $3.10 Depositary
Shares (the "Series E Depositary Shares"), each representing one-fiftieth of a
share of Series E Mandatory Conversion Premium Dividend Preferred Stock, with a
liquidation preference of $62 per share. On October 30, 1998, SunAmerica Inc.
redeemed all of its Series E Depositary Shares, which resulted in the issuance
of 11,250,709 shares of SunAmerica Inc. common stock and cash payment of all
accrued and unpaid dividends through the redemption date.
(d) The common stock activity for the three years ended December 31, 2000
was as follows:
- ----------------------------------------------------------------------------------------
2000 1999 1998(a)
========================================================================================
Shares outstanding at
beginning of year 1,549,128,046 1,217,136,817 866,541,676
Acquired during the year (11,567,886) (2,797,287) (974,815)
Conversion of Series E
Preferred Stock -- 9,619,356 --
Conversion of PERCS
Units -- 8,642,535 --
Issued pursuant to
Restricted Stock
Unit Obligations -- 538,649 --
Issued under stock option
and purchase plans 5,875,271 6,427,942 1,556,136
Issued in connection with
acquisitions 17,774,094 -- --
Issued under contractual
obligations 63,277 7,094 37,123
Stock split effected as
stock dividend 814,956,829 327,061,951 379,536,828
Other (b) (43,516,510) (17,509,011) (29,560,131)
- ----------------------------------------------------------------------------------------
Shares outstanding at
end of year 2,332,713,121 1,549,128,046 1,217,136,817
========================================================================================
(a) Outstanding shares have been adjusted to reflect the conversion of all
outstanding SunAmerica Inc. shares by converting each outstanding share of
SunAmerica Inc. to 0.855 shares of AIG.
(b) Primarily shares issued to AIG and subsidiaries as part of stock split
effected as stock dividend and conversion of SunAmerica Inc.
non-transferrable Class B stock to common stock.
Common stock increased and retained earnings decreased $2.04 billion in
2000, $818 million in 1999 and $949 million in 1998 as a result of common stock
splits in the form of 50 percent, 25 percent and 50 percent common stock
dividends paid July 28, 2000, July 30, 1999 and July 31, 1998, respectively.
(e) On November 6, 1996, SunAmerica Inc. issued 11,500,000 8 1/2% Premium
Equity Redemption Cumulative Security Units (the "Units") with a stated amount
of $37.50 per Unit. Each Unit consisted of a stock purchase contract (the
"Contract") and a United States Treasury Note (the "Treasury Note") having a
principal amount equal to the stated amount. These Units were scheduled to
mature on October 31, 1999. The holders of the Units received interest on the
Treasury Notes payable by the United States Government at a rate of 7 1/2% per
annum and Contract fees payable at a rate of 1% per annum (both, the "Unit
Payments") based upon the stated amount. The Units provided that SunAmerica Inc.
would deliver on October 31, 1999 to the holder of each Unit one and one-half
shares of common stock of SunAmerica Inc., subject to adjustment under certain
defined circumstances, and obligated the holder of the Unit to pay to SunAmerica
Inc. $37.50 per Unit. The Treasury Notes were held by a collateral agent to
secure payment to SunAmerica Inc. as required under the Contract, but could be
redeemed by the holders of the Units under certain defined circumstances.
SunAmerica Inc. redeemed all of its Units on December 6, 1998. In connection
with this redemption, SunAmerica Inc. issued 10,108,229 shares of SunAmerica
Inc. common stock and made a cash payment for all accrued and unpaid Contract
fees.
(f) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB
130) was adopted by AIG effective January 1, 1998. FASB 130 establishes
standards for reporting comprehensive income and its components as part of
capital funds. The reclassification adjustments with respect to available for
sale securities were $(138) million, $122 million and $124 million for December
31, 2000, 1999 and 1998, respectively.
12. Commitments and Contingent Liabilities
In the normal course of business, various commitments and contingent liabilities
are entered into by AIG and certain of its subsidiaries. In addition, AIG
guarantees various obligations of certain subsidiaries.
(a) Commitments to extend credit are agreements to lend subject to certain
conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. These commitments
approximated $500 million and $150 million for December 31, 2000 and 1999,
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.
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- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
12. Commitments and Contingent Liabilities (continued)
(b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the elements
of currency, interest rate, equity and commodity risks are reflected in the
consolidated balance sheet. In addition, these instruments involve, to varying
degrees, elements of credit risk not explicitly recognized in the consolidated
balance sheet. Collateral is required, at the discretion of AIG, on certain
transactions based on the creditworthiness of the counterparty.
(c) AIGFP becomes a party to derivative financial instruments in the
normal course of its business and to reduce its currency, interest rate and
equity exposures. Interest rate, currency and equity risks related to such
instruments are reflected in the consolidated financial statements to the extent
these instruments are carried at a market or a fair value, whichever is
appropriate. Because of limited liquidity of certain of these instruments, the
recorded estimated fair values of such instruments may be different than the
values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity.
AIGFP, in the ordinary course of its operations and as principal,
structures derivative transactions to meet the needs of investors who may be
seeking to hedge certain aspects of such investors' operations. AIGFP may also
enter into derivative transactions for its own account. Such derivative
transactions include interest rate, currency and equity swaps, swaptions and
forward commitments. Interest rate swap transactions generally involve the
exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. AIGFP typically becomes a
principal in the exchange of interest payments between the parties and,
therefore, may be exposed to loss, if counterparties default. Currency and
equity swaps are similar to interest rate swaps, but may involve the exchange of
principal amounts at the beginning and end of the transaction. Swaptions are
options where the holder has the right but not the obligation to enter into a
swap transaction or cancel an existing swap transaction. At December 31, 2000,
the notional principal amount of the sum of the swap pays and receives
approximated $521.0 billion, primarily related to interest rate swaps of
approximately $344.2 billion.
The following tables provide the contractual and notional amounts of
derivatives transactions of AIGFP and AIGTG at December 31, 2000.
The notional amounts used to express the extent of involvement in swap
transactions represent a standard of measurement of the volume of swaps business
of AIGFP and AIGTG. Notional amount is not a quantification of market risk or
credit risk and it may not necessarily be recorded on the balance sheet.
Notional amounts represent those amounts used to calculate contractual cash
flows to be exchanged and are not paid or received, except for certain contracts
such as currency swaps.
The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 2000 and December 31, 1999:
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining Life
--------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 2000 1999
====================================================================================================================================
Interest rate, currency and equity/commodity swaps
and swaptions:
Notional amount:
Interest rate swaps $ 70,847 $173,892 $ 90,745 $ 8,719 $344,203 $281,682
Currency swaps 34,507 44,271 33,185 5,829 117,792 83,673
Swaptions and equity swaps 12,216 30,835 10,692 5,283 59,026 48,002
- ------------------------------------------------------------------------------------------------------------------------------------
Total $117,570 $248,998 $134,622 $ 19,831 $521,021 $413,357
====================================================================================================================================
Futures and forward contracts are contracts for delivery of foreign
currencies or financial indices in which the seller/purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise as a result of movements in current market
prices from contracted prices and the potential inability of counterparties to
meet their obligations under the contracts. At December 31, 2000, the
contractual amount of AIGFP's futures and forward contracts approximated $33.9
billion.
The following table presents AIGFP's futures and forward contracts
portfolio by maturity and type of derivative at December 31, 2000 and December
31, 1999:
(in millions)
- --------------------------------------------------------------------------------------------------------------------------------
Remaining Life
----------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 2000 1999
================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts contractual amount $11,082 -- -- -- $11,082 $ 6,587
================================================================================================================================
Over the counter forward contracts contractual amount $22,263 $502 $44 -- $22,809 $21,873
================================================================================================================================
66
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
12. Commitments and Contingent Liabilities (continued)
These instruments involve, to varying degrees, elements of credit risk not
explicitly recognized in the consolidated financial statements.
AIGFP utilizes various credit enhancements, including collateral, credit
triggers and credit derivatives to reduce the credit exposure relating to these
off-balance sheet financial instruments. AIGFP requires credit enhancements in
connection with specific transactions based on, among other things, the
creditworthiness of the counterparties and the transaction's size and maturity.
In addition, AIGFP's derivative transactions are generally documented under ISDA
Master Agreements. Management believes that such agreements provide for legally
enforceable set-off and close out netting of exposures to specific
counterparties. Under such agreements, in connection with an early termination
of a transaction, AIGFP is permitted to set off its receivables from a
counterparty against its payables to the same counterparty arising out of all
included transactions. As a result, the net replacement value represents the net
sum of estimated positive fair values after the application of such strategies,
agreements and collateral held. Prior to the application of the aforementioned
credit enhancements, the gross exposure to credit risk with respect to these
derivative instruments was $33.4 billion at December 31, 2000 and $16.90 billion
at December 31, 1999. Subsequent to the application of such credit enhancements,
the net exposure to credit risk or the net replacement value of all interest
rate, currency, and equity swaps, swaptions and forward commitments approximated
$9.51 billion at December 31, 2000 and $7.53 billion at December 31, 1999. The
net replacement value for futures and forward contracts approximated $204
million at December 31, 2000 and $5 million at December 31, 1999. The net
replacement value most closely represents the net credit risk to AIGFP or the
maximum amount exposed to potential loss.
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.
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 2000 and
December 31, 1999, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
(in millions)
- -------------------------------------------------------------------------------------------------------------------
Net Replacement Value
----------------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 2000 1999
===================================================================================================================
Counterparty credit quality:
AAA $3,778 $ -- $3,778 $2,067
AA 2,621 204 2,825 2,839
A 1,801 -- 1,801 1,576
BBB 1,059 -- 1,059 997
Below investment grade 252 -- 252 55
- -------------------------------------------------------------------------------------------------------------------
Total $9,511 $204 $9,715 $7,534
===================================================================================================================
At December 31, 2000 and December 31, 1999, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(in millions)
- -------------------------------------------------------------------------------------------------------------------1
Net Replacement Value
----------------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 2000 1999
====================================================================================================================
Non-U.S. banks $2,419 $ 98 $2,517 $2,515
Insured municipalities 595 -- 595 352
U.S. industrials 1,945 -- 1,945 780
Governmental 463 -- 463 180
Non-U.S. financial service companies 309 -- 309 158
Non-U.S. industrials 1,372 -- 1,372 1,117
Special purpose 1,204 -- 1,204 716
U.S. banks 114 106 220 510
U.S. financial service companies 894 -- 894 1,112
Supranationals 196 -- 196 94
- --------------------------------------------------------------------------------------------------------------------
Total $9,511 $204 $9,715 $7,534
====================================================================================================================
67
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- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
12. Commitments and Contingent Liabilities (continued)
Securities sold, but not yet purchased represent obligations of AIGFP to
deliver specified securities at their contracted prices, and thereby create a
liability to repurchase the securities in the market at prevailing prices.
AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, believes that it
has in place effective procedures for evaluating and limiting the credit and
market risks to which it is subject. Management is not aware of any potential
counterparty defaults.
Commissions, transaction and other fees for the twelve months ended
December 31, 2000, 1999 and 1998 from AIGFP's operations were $1.06 billion,
$737 million and $550 million, respectively.
(d) AIGTG becomes a party to off-balance sheet financial instruments in
the normal course of its business and to reduce its currency, interest rate and
commodity exposures.
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. Options are
contracts that allow the holder of the option to purchase or sell the underlying
commodity, currency or index at a specified price and within, or at, a specified
period of time. Risks arise as a result of movements in current market prices
from contracted prices, and the potential inability of the counterparties to
meet their obligations under the contracts. As a writer of options, AIGTG
generally receives an option premium and then manages the risk of any
unfavorable change in the value of the underlying commodity, currency or index.
At December 31, 2000, the contractual amount of AIGTG's futures, forward and
option contracts approximated $461.0 billion.
The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
2000 and December 31, 1999. These values do not represent the credit risk to
AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss within a product category. At December 31, 2000, the net
replacement value of AIGTG's futures, forward and option contracts and interest
rate and currency swaps approximated $4.1 billion.
The following table provides the contractual and notional amounts and
credit exposure, if applicable, by maturity and type of derivative of AIGTG's
derivatives portfolio at December 31, 2000 and December 31, 1999. In addition,
the estimated positive fair values associated with the derivatives portfolio are
also provided and include a maturity profile for the December 31, 2000 balances
based upon the expected timing of the future cash flows.
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining Life
------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 2000 1999
====================================================================================================================================
Contractual amount of futures, forwards and options:
Exchange traded futures and options $ 13,715 $ 4,318 $ 31 $ -- $ 18,064 $ 18,908
===================================================================================================================================
Forwards $ 216,062 $ 16,160 $ 2,094 $ -- $ 234,316 $ 220,428
===================================================================================================================================
Over the counter purchased options $ 59,922 $ 19,581 $ 25,222 $ 194 $ 104,919 $ 83,871
===================================================================================================================================
Over the counter sold options (a) $ 58,754 $ 19,369 $ 25,422 $ 197 $ 103,742 $ 86,726
===================================================================================================================================
Notional amount:
Interest rate swaps and forward rate agreements $ 18,960 $ 36,598 $ 7,592 $ 114 $ 63,264 $ 80,436
Currency swaps 1,071 6,668 834 -- 8,573 8,359
Swaptions 2,398 10,978 1,970 73 15,419 9,996
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 22,429 $ 54,244 $ 10,396 $ 187 $ 87,256 $ 98,791
===================================================================================================================================
Credit exposure:
Futures, forwards swaptions and purchased options
contracts and interest rate and currency swaps:
Gross replacement value $ 7,219 $ 2,263 $ 831 $ 6 $ 10,319 $ 7,889
Master netting arrangements (4,061) (1,467) (602) (6) (6,136) (4,580)
Collateral (65) (34) (8) -- (107) (209)
- -----------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b) $ 3,093 $ 762 $ 221 $ -- $ 4,076 $ 3,100
===================================================================================================================================
(a) Sold options obligate AIGTG to buy or sell the underlying item if the option
purchaser chooses to exercise. The amounts do not represent credit exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts and purchased over the counter options are presented
as a component of trading assets in the accompanying balance sheet. The net
replacement values with respect to interest rate and currency swaps are
presented as a component of unrealized gain on interest rate and currency swaps,
options and forward transactions in the accompanying balance sheet.
68
70
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
12. Commitments and Contingent Liabilities (continued)
AIGTG independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGTG's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The maximum potential loss will increase or decrease during the life
of the derivative commitments as a function of maturity and market conditions.
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 2000 and
December 31, 1999, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio were as follows:
(in millions)
- -------------------------------------------------------------------------------
Net Replacement Value
---------------------------
2000 1999
===============================================================================
Counterparty credit quality:
AAA $ 442 $ 276
AA 1,807 1,241
A 1,139 1,010
BBB 460 256
Below investment grade 48 49
Not externally rated, including
exchange traded futures and options* 180 268
- -------------------------------------------------------------------------------
Total $4,076 $3,100
===============================================================================
Counterparty breakdown by industry:
Non-U.S. banks $2,076 $ 926
U.S. industrials 67 70
Governmental 70 178
Non-U.S. financial service companies 282 698
Non-U.S. industrials 243 176
U.S. banks 468 401
U.S. financial service companies 690 383
Exchanges* 180 268
- -------------------------------------------------------------------------------
Total $4,076 $3,100
===============================================================================
*Exchange traded futures and options are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly settled
on a daily basis.
Spot commodities sold but not yet purchased represent obligations of AIGTG
to deliver spot commodities at their contracted prices and thereby create a
liability to repurchase the spot commodities in the market at prevailing prices.
AIGTG limits its risks by holding offsetting positions. In addition, AIGTG
monitors and controls its risk exposures through various monitoring systems
which evaluate AIGTG's market and credit risks, and through credit approvals and
limits. At December 31, 2000, AIGTG did not have a significant concentration of
credit risk from either an individual counterparty or group of counterparties.
Commissions, transaction and other fees for the twelve months ended
December 31, 2000, 1999 and 1998 from AIGTG's operations were $254 million, $227
million and $374 million, respectively.
At December 31, 2000, AIGTG had issued and outstanding a $28 million
principal amount letter of credit. This letter of credit was issued to a central
bank.
AIG has issued unconditional guarantees with respect to the prompt
payment, when due, of all present and future obligations and liabilities of
AIGFP and AIGTG arising from transactions entered into by AIGFP and AIGTG.
(e) As a component of its asset and liability management strategy,
SunAmerica utilizes swap agreements to match more closely the cash flows of its
assets to the cash flows of its liabilities. SunAmerica uses these swap
agreements to hedge against the risk of interest rate changes. At December 31,
2000, SunAmerica's swap agreements had an aggregate notional principal amount of
$12.25 billion. These agreements mature in various years through 2030.
For investment purposes, SunAmerica has entered into various total return
agreements with an aggregate notional amount of $28 million (the "notional
amount") at December 31, 2000. The total return agreements effectively exchange
a fixed rate of interest (the "payment amount") on the notional amount for the
coupon income plus or minus the increase or decrease in the fair value of
specified non-investment grade bonds (the "bonds"). SunAmerica is exposed to
potential loss with respect to credit risk on the underlying non-investment
grade bonds and fair value risk resulting from the payment amount and any
depreciation in the aggregate fair value of the bonds below the notional amount.
SunAmerica is also exposed to potential credit loss in the event of
nonperformance by the investment grade rated counterparty with respect to any
increase in the aggregate market value of the bonds above the notional amount.
However, nonperformance is not anticipated and, therefore, no collateral is held
or pledged. The agreements are marked to market and the change in market value
is recognized currently in life investment income. Net amounts received (paid)
are included in operating income and totaled ($39 million) and ($12 million) for
the years ended December 31, 2000 and 1999, respectively, and ($34 million) for
the year ended September 30, 1998. AIG guarantees the payment obligations of
SunAmerica under such agreements.
(f) At December 31, 2000, ILFC had committed to purchase 488 aircraft
deliverable from 2001 through 2009 at an estimated aggregate purchase price of
$27.3 billion and had options to purchase 51 aircraft deliverable from 2001
through 2008 at an estimated aggregate purchase price of $3.0 billion. ILFC will
be required to find customers for any aircraft presently on order and any
aircraft to be ordered, and it must arrange financing for portions of the
purchase price of such equipment.
(g) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.
69
71
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
12. Commitments and Contingent Liabilities (continued)
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter collectively
referred to as environmental claims) and indemnity claims asserting injuries
from asbestos. Estimation of asbestos and environmental claims loss reserves is
a difficult process, as these claims, which emanate from policies written in
1984 and prior years, cannot be estimated by conventional reserving techniques.
Asbestos and environmental claims development is affected by factors such as
inconsistent court resolutions, the broadening of the intent of policies and
scope of coverage and increasing number of new claims. AIG and other industry
members have and will continue to litigate the broadening judicial
interpretation of policy coverage and the liability issues. If the courts
continue in the future to expand the intent of the policies and the scope of the
coverage, as they have in the past, additional liabilities would emerge for
amounts in excess of reserves held. This emergence cannot now be reasonably
estimated, but could have a material impact on AIG's future operating results.
The reserves carried for these claims as at December 31, 2000 ($2.45 billion
gross; $855 million net) are believed to be adequate as these reserves are based
on known facts and current law.
A summary of reserve activity, including estimates for applicable incurred
but not reported losses and loss expenses, relating to asbestos and
environmental claims separately and combined at December 31, 2000, 1999 and 1998
follows.
(in millions)
- --------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
Gross Net Gross Net Gross Net
- --------------------------------------------------------------------------------------------------------------------------
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 1,093 $ 306 $ 964 $ 259 $ 842 $ 195
Losses and loss expenses incurred 405 80 404 101 375 111
Losses and loss expenses paid (398) (48) (275) (54) (253) (47)
- --------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 1,100 $ 338 $ 1,093 $ 306 $ 964 $ 259
==========================================================================================================================
Environmental:
Reserve for losses and loss expenses at beginning of year $ 1,519 $ 585 $ 1,535 $ 605 $ 1,467 $ 592
Losses and loss expenses incurred (44) (45) 127 47 284 107
Losses and loss expenses paid (130) (23) (143) (67) (216) (94)
- --------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 1,345 $ 517 $ 1,519 $ 585 $ 1,535 $ 605
==========================================================================================================================
Combined:
Reserve for losses and loss expenses at beginning of year $ 2,612 $ 891 $ 2,499 $ 864 $ 2,309 $ 787
Losses and loss expenses incurred 361 35 531 148 659 218
Losses and loss expenses paid (528) (71) (418) (121) (469) (141)
- --------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 2,445 $ 855 $ 2,612 $ 891 $ 2,499 $ 864
==========================================================================================================================
(h) 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 adjusted
statutory capital 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.
The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 2000.
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.
(i) SunAmerica has established a deferred compensation plan for its
registered representatives, pursuant to which participants have the opportunity
to invest deferred commissions and fees on a notional basis. The value of the
deferred compensation fluctuates with the value of the deferred investment
alternatives chosen. AIG has provided a full and unconditional guarantee of the
obligations of SunAmerica to pay the deferred compensation under the plan.
13. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FASB 107) requires disclosure of fair value
information about financial instruments, as defined therein, for which it is
practicable to estimate such fair value. These financial instruments may or may
not be recognized in the consolidated balance sheet. In the measurement of the
fair value of certain of the financial instruments, quoted market prices were
not available and other valuation techniques were utilized. These derived fair
value estimates are significantly affected by the assumptions used. FASB 107
excludes certain financial instruments, including those related to insurance
contracts.
70
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
13. 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 securities as AIG believes it would have to expend excessive
costs for the benefits derived.
Equity securities: Fair values for equity securities were based upon
quoted market prices.
Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.
Trading assets and trading liabilities: Fair values for trading assets and
trading liabilities approximate the carrying values presented in the
consolidated balance sheet.
Securities available for sale: Fair values for securities available for
sale and related hedges were based on quoted market prices. For securities and
related hedges for which market prices were not readily available, fair values
were estimated using quoted market prices of comparable investments.
Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.
Spot commodities: Fair values for spot commodities were based on current
market prices.
Unrealized gains and losses on interest rate and currency swaps, options
and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among other
things, current interest, foreign exchange and volatility rates, as applicable.
Securities purchased (sold) under agreements to resell (repurchase), at
contract value: As these securities (obligations) are short-term in nature, the
contract values approximate fair values.
Other invested assets: For assets for which market prices were not readily
available, fair valuation techniques were not applied as AIG believes it would
have to expend excessive costs for the benefits derived.
Policyholders' contract deposits: Fair values of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
GIAs: Fair values of AIG's obligations under investment type agreements
were estimated using discounted cash flow calculations based on interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued. Additionally, AIG follows a
policy of minimizing interest rate risks associated with GIAs by entering into
swap transactions.
Securities and spot commodities sold but not yet purchased: The carrying
amounts for the financial instruments approximate fair values. Fair values for
spot commodities sold short were based on current market prices.
Trust deposits and deposits due to banks and other depositors: To the
extent certain amounts are not demand deposits or certificates of deposit which
mature in more than one year, fair values were not calculated as AIG believes it
would have to expend excessive costs for the benefits derived.
Commercial paper: The carrying amount of AIG's commercial paper borrowings
approximates fair value.
Notes, bonds, loans and mortgages payable: Where practical, the fair
values of these obligations were estimated using discounted cash flow
calculations based upon AIG's current incremental borrowing rates for similar
types of borrowings with maturities consistent with those remaining for the debt
being valued.
71
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- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
13. Fair Value of Financial Instruments (continued)
The carrying values and fair values of AIG's financial instruments at
December 31, 2000 and December 31, 1999 and the average fair values with respect
to derivative positions during 2000 and 1999 were as follows: (in millions)
2000 1999
------------------------------- ------------------------------
Average Average
Carrying Fair Fair Carrying Fair Fair
Value Value Value Value Value Value
===============================================================================================================================
Assets:
Fixed maturities $102,010 $102,530 $ -- $ 90,144 $ 90,268 $ --
Equity securities 7,181 7,181 -- 6,714 6,714 --
Mortgage loans on real estate, policy and collateral loans 12,243 12,416 -- 12,134 12,086 --
Securities available for sale 14,669 14,669 13,489 12,954 12,954 11,992
Trading securities 7,347 7,347 5,063 4,391 4,391 5,438
Spot commodities 363 363 557 683 683 536
Unrealized gain on interest rate and currency swaps,
options and forward transactions 10,235 10,235 8,985 7,931 7,931 8,045
Trading assets 7,045 7,045 7,792 5,793 5,793 5,297
Securities purchased under agreements to resell 14,991 14,991 -- 10,897 10,897 --
Other invested assets 13,394 13,394 -- 9,900 9,900 --
Short-term investments 5,831 5,831 -- 7,007 7,007 --
Cash 256 256 -- 132 132 --
Liabilities:
Policyholders' contract deposits 47,209 47,019 -- 42,549 41,266 --
Borrowings under obligations of guaranteed
investment agreements 13,595 14,260 -- 9,430 9,308 --
Securities sold under agreements to repurchase 11,308 11,308 -- 6,116 6,116 --
Trading liabilities 4,352 4,352 3,953 3,821 3,821 4,177
Securities and spot commodities sold but not yet purchased 7,701 7,701 7,831 6,413 6,413 6,314
Unrealized loss on interest rate and currency swaps,
options and forward transactions 8,581 8,581 8,278 8,624 8,624 8,630
Trust deposits and deposits due to banks and other depositors 1,895 1,915 -- 2,175 2,163 --
Commercial paper 5,964 5,964 -- 4,404 4,404 --
Notes, bonds, loans and mortgages payable 20,672 20,128 -- 19,150 18,702 --
===============================================================================================================================
Off-balance sheet financial instruments: Financial instruments which are
not currently recognized in the consolidated balance sheet of AIG are
principally commitments to extend credit and financial guarantees. The
unrecognized fair values of these instruments represent fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
current agreements and the counterparties' credit standings. No valuation was
made as AIG believes it would have to expend excessive costs for the benefits
derived.
14. Stock Compensation Plans
At December 31, 2000, AIG had two types of stock-based compensation plans. One
was a stock option plan; the other, an employee stock purchase plan. AIG applies
APB Opinion 25 "Accounting for Stock Issued to Employees" and related
Interpretations (APB 25) in accounting for its plans. Accordingly, no
compensation costs have been recognized for either plan.
Had compensation costs for these plans been determined consistent with the
method of Statement of Financial Accounting Standards No. 123 "Accounting for
Awards of Stock Based Compensation to Employees" (FASB 123), AIG's net income
and earnings per share for the years ended December 31, 2000, 1999 and 1998
would have been reduced to the pro forma amounts as follows:
(in millions, except per share amounts)
- --------------------------------------------------------------------------------------
2000 1999 1998
======================================================================================
Net income:
As reported $ 5,636 $ 5,055 $ 4,282(a)
Pro forma 5,589 5,028 4,235
Earnings per share -- diluted (b):
As reported $ 2.41 $ 2.15 $ 1.83
Pro forma 2.38 2.14 1.82
======================================================================================
(a) Post merger amounts.
(b) Includes SunAmerica Inc. shares which were exchanged for AIG shares at an
exchange ratio of 0.855 shares of AIG common stock for each share of
SunAmerica Inc. common stock for 1998.
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American International Group, Inc. and Subsidiaries
14. Stock Compensation Plans (continued)
(i) Stock Option Plan: On September 15, 1999, the AIG Board of Directors
adopted a 1999 stock option plan (the 1999 Plan), which provides that options to
purchase a maximum of 15,000,000 shares of common stock can be granted to
certain key employees and members of the Board of Directors at prices not less
than fair market value at the date of grant. The 1999 Plan limits the maximum
number of shares as to which stock options may be granted to any employee in any
one year to 375,000 shares. Options granted under this Plan expire not more than
10 years from the date of the grant. Options with respect to 13,500 shares and
12,000 shares were granted to non-employee members of the Board of Directors on
September 15, 1999 and May 17, 2000, respectively. These options become
exercisable on the first anniversary of the date of grant, expire 10 years from
the date of grant and do not qualify for Incentive Stock Option Treatment under
the Economic Recovery Tax Act of 1981 (ISO Treatment). The Plan, and the options
previously granted thereunder, were approved by the shareholders at the 2000
Annual Meeting of Shareholders. At December 31, 2000, 12,842,155 shares were
reserved for future grants under the 1999 Plan. The 1999 Plan superceded the
1991 employee stock option plan (the 1991 Plan) and the previously superceded
1987 employee stock option plan (the 1987 Plan), although outstanding options
granted under both the 1991 Plan and the 1987 Plan continue in force until
exercise or expiration. At December 31, 2000, there were 15,991,621 shares
reserved for issuance under the 1999, 1991, and 1987 Plans.
During 2000 and 1999, AIG granted options with respect to 413,500 shares
and 574,500 shares, respectively, which become exercisable on the fifth
anniversary of the date of grant and expire 10 years from the date of grant.
These options do not qualify for ISO Treatment. The agreements with respect to
all other options granted to employees under these plans provide that 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 expire 10 years from
the date of the grant. As of December 31, 2000, outstanding options granted with
respect to 8,875,310 shares qualified for ISO Treatment.
At January 1, 1999, the merger date, SunAmerica Inc. had five stock-based
compensation plans pursuant to which options, restricted stock and deferred
share and share unit obligations had been issued and remained outstanding.
Options granted under these plans had an exercise price equal to the market
price on the date of grant, had a maximum term of ten years and generally became
exercisable ratably over a five-year period. Substantially all of the SunAmerica
Inc. options outstanding at the merger date became fully vested on that date and
were converted into options to purchase AIG common stock at the exchange ratio
of 0.855 shares of AIG common stock for each share of SunAmerica Inc. common
stock. No further options can be granted under the SunAmerica Inc. plans, but
outstanding options so converted continue in force until exercise or expiration.
At December 31, 2000, there were 20,574,062 shares of AIG common stock reserved
for issuance on exercise of options under these plans. None of these options
qualified for ISO Treatment as of December 31, 2000.
During 1999, AIG issued 1,009,968 shares of AIG common stock which vested
on the effectiveness of the merger with SunAmerica Inc., and an additional
993,031 shares were issued pursuant to deferred share and share unit
obligations. During 2000, deferred share and share unit obligations with respect
to an additional 1,224,214 shares of AIG common stock vested, 142,105 shares
were issued pursuant to deferred share and share unit obligations and an
additional 1,082,109 shares were delivered into a trust in connection with a
deferred compensation plan. No additional deferred share or share unit
obligations may be granted under the SunAmerica plans. As of December 31, 2000,
deferred share and share unit obligations representing 173,615 shares were
outstanding but not yet vested.
In 1999, the AIG Board of Directors amended the AIG stock option plans to
allow deferral of delivery of AIG shares otherwise deliverable upon the exercise
of an option to a date or dates specified by the optionee upon the request of an
optionee. During 2000, options with respect to 760,070 shares were exercised
with delivery deferred. At December 31, 2000, optionees had made valid elections
to defer delivery of 858,703 shares of AIG common stock upon exercise of options
expiring during 2001.
As a result of the acquisition of HSB Group, Inc. (HSB) in November 2000,
HSB options outstanding at the acquisition date were fully vested and were
converted into options to purchase AIG common stock at the exchange ratio of
0.4178 shares of AIG common stock for each share of HSB common stock. No further
options can be granted under the HSB option plans, but outstanding options so
converted continue in force until exercise or expiration. At December 31, 2000,
there were 1,605,468 shares of AIG common stock reserved for issuance under the
HSB option plans, none of which qualified for ISO Treatment.
73
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- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
14. Stock Compensation Plans (continued)
Additional information with respect to AIG's plans at December 31, 2000,
and changes for the three years then ended, were as follows:
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999(a) 1998
----------------------- ------------------------ ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
===============================================================================================================================
Shares Under Option:
Outstanding at beginning of year 41,415,126 $23.29 44,583,495 $19.87 17,456,277 $17.41
Granted 2,179,220 95.48 2,748,556 62.43 1,716,222 46.63
Assumed upon acquisition from HSB 1,605,468 81.43 -- -- -- --
Exercised (5,796,592) 13.80 (5,673,366) 14.97 (2,236,634) 9.77
Exercised, delivery deferred (760,070) 3.06 -- -- -- --
Forfeited (472,001) 36.70 (243,559) 31.97 (281,071) 24.99
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 38,171,151 $31.53 41,415,126 $23.29 16,654,794 $21.33
- -------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 32,778,411 $24.87 35,973,468 $19.10 11,779,257 $15.13
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per share
of options granted $38.76 $26.00 $16.36
===============================================================================================================================
(a) Includes those options that vested January 1, 1999 as a result of the
merger of SunAmerica Inc. with and into AIG.
In addition, at December 31, 2000, options to purchase 403,595 shares at a
weighted average exercise price of $19.81 had been previously granted to AIG
non-employee directors and remained outstanding.
Information about stock options outstanding at December 31, 2000, is
summarized as follows:
- -----------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------------
Weighted Weighted Weighted
Number Average Remaining Average Number Average
Outstanding Contractual Life Exercise Price Exercisable Exercise Price
=============================================================================================================================
Range of Exercise Prices:
$ 1.46 - 7.67 6,216,737 3.1 years $ 4.87 6,216,737 $ 4.87
8.64 - 14.44 5,487,959 3.2 years 11.33 5,487,959 11.33
15.25 - 22.28 5,502,345 5.2 years 17.49 5,502,345 17.49
23.41 - 29.45 5,390,113 6.5 years 25.12 5,389,228 25.12
31.02 - 37.87 6,000,473 7.6 years 36.94 5,589,123 36.88
41.51 - 63.40 5,240,479 8.3 years 53.39 2,985,681 51.59
66.80 - 100.57 4,333,045 8.6 years 87.26 1,607,338 81.43
- -----------------------------------------------------------------------------------------------------------------------------
38,171,151 $31.53 32,778,411 $24.87
=============================================================================================================================
The fair values of stock options granted during the years ended December
31, 2000, 1999 and 1998 were $85 million, $71 million and $28 million,
respectively. The fair value of each option is estimated on the date of the
grant using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for grants in 2000,
1999 and 1998, respectively: dividend yields of 0.17 percent, 0.20 percent and
0.24 percent; expected volatilities of 27.0 percent, 25.0 percent and 22.0
percent; risk-free interest rates of 5.42 percent, 5.33 percent and 4.73 percent
and expected terms of 7 years.
Using the Black-Scholes option-pricing model applicable to SunAmerica Inc.
for 1998, the fair value of stock options granted by SunAmerica Inc. was $49
million.
(ii) Employee Stock Purchase Plan: AIG's 1996 Employee Stock Purchase Plan
was adopted at its 1996 shareholders' meeting and became effective as of July 1,
1996. Eligible employees may receive privileges to purchase up to an aggregate
of 4,218,750 shares of AIG common stock, at a price equal to 85 percent of the
fair market value on the date of the grant of the purchase privilege. Purchase
privileges are granted annually and were originally limited to the number of
whole shares that could be purchased by an amount equal to 5 percent of an
employee's annual salary or $5,500, whichever was less. Beginning with the
January 1, 1998 subscription, the maximum allowable purchase limitation
increased to 10 percent of an employee's annual salary or $10,000 per year,
whichever is less, and the eligibility requirement was reduced from two years to
one year.
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American International Group, Inc. and Subsidiaries
14. Stock Compensation Plans (continued)
There were 742,773 shares, 892,929 shares and 638,284 shares issued under
the 1996 plan at weighted average prices of $52.66, $38.24 and $28.74 for the
years ended December 31, 2000, 1999 and 1998, respectively. The excess or
deficit of the proceeds over the par value or cost of the common stock issued
under these plans was credited or charged to additional paid-in capital.
As of December 31, 2000, there were 542,479 shares of common stock
subscribed to at a weighted average price of $69.11 per share pursuant to grants
of privileges under the 1996 plan. There were 988,605 shares available for the
grant of future purchase privileges under the 1996 plan at December 31, 2000.
The fair values of purchase privileges granted during the years ended
December 31, 2000, 1999 and 1998 were $13 million, $13 million and $10 million,
respectively. The weighted average fair values per share of those purchase
rights granted in 2000, 1999 and 1998 were $19.36, $14.04 and $10.31,
respectively. The fair value of each purchase right is estimated on the date of
the subscription using the Black-Scholes model.
The following weighted average assumptions were used for grants in 2000,
1999 and 1998, respectively: dividend yields of 0.17 percent, 0.20 percent and
0.24 percent; expected volatilities of 34.0 percent, 34.0 percent and 33.0
percent; risk-free interest rates of 5.95 percent, 5.33 percent and 5.26
percent; and expected terms of 1 year.
During 1999, there were 42,577 shares of AIG common stock issued under the
SunAmerica Inc. employee stock purchase plan at a weighted average price of
$32.60. There are no further shares available for grant under this plan.
15. Employee Benefits
(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation.
AIG's U.S. retirement plan is a qualified, noncontributory, defined
benefit plan. All qualified employees, other than those of SunAmerica, 21st
Century and HSB Group, Inc. who have attained age 21 and completed twelve months
of continuous service are eligible to participate in this plan. An employee with
5 or more years of service is entitled to pension benefits beginning at normal
retirement at age 65. Benefits are based upon a percentage of average final
compensation multiplied by years of credited service limited to 44 years of
credited service. The average final compensation is subject to certain
limitations. Annual funding requirements are determined based on the "projected
unit credit" cost method which attributes a pro rata portion of the total
projected benefit payable at normal retirement to each year of credited service.
AIG has adopted a Supplemental Executive Retirement Plan (Supplemental
Plan) to provide additional retirement benefits to designated executives and key
employees. Under the Supplemental Plan, the annual benefit, not to exceed 60
percent of average final compensation, accrues at a percentage of average final
pay multiplied for each year of credited service reduced by any benefits from
the current and any predecessor retirement plans, Social Security, if any, and
from any qualified pension plan of prior employers. The Supplemental Plan also
provides a benefit equal to the reduction in benefits payable under the AIG
retirement plan as a result of Federal limitations on benefits payable
thereunder. Currently, the Supplemental Plan is unfunded.
Eligibility for participation in the various non-U.S. retirement plans is
either based on completion of a specified period of continuous service or date
of hire, subject to age limitation. Where non-U.S. retirement plans are defined
benefit plans, they are generally based on the employees' years of credited
service and average compensation in the years preceding retirement.
In addition to AIG's defined benefit pension plan, AIG and its
subsidiaries provide a postretirement benefit program for medical care and life
insurance, domestically and in certain foreign countries. Eligibility in the
various plans is generally based upon completion of a specified period of
eligible service and reaching a specified age. Benefits vary by geographic
location.
AIG's U.S. postretirement medical and life insurance benefits are based
upon the employee electing immediate retirement and having a minimum of ten
years of service. Retirees and their dependents who were age 65 by May 1, 1989
participate in the medical plan at no cost. Employees who retired after May 1,
1989 and on or prior to January 1, 1993 pay the active employee premium if under
age 65 and 50 percent of the active employee premium if over age 65. Retiree
contributions are subject to adjustment annually. Other cost sharing features of
the medical plan include deductibles, coinsurance and Medicare coordination and
a lifetime maximum benefit of $1.5 million. The lifetime maximum benefit of the
medical plan was increased to $2.0 million effective January 1, 2000. The
maximum life insurance benefit prior to age 70 is $32,500, with a maximum of
$25,000 thereafter.
Effective January 1, 1993, both plans' provisions were amended. Employees
who retire after January 1, 1993 are required to pay the actual cost of the
medical benefits premium reduced by a credit which is based on years of service
at retirement. The life insurance benefit varies by age at retirement from
$5,000 for retirement at ages 55 through 59; $10,000 for retirement at ages 60
through 64 and $15,000 for retirement at ages 65 and over.
75
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- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
15. Employee Benefits (continued)
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k)
plan), which, during the three years ended December 31, 2000, provided for
salary reduction contributions by employees and matching contributions by AIG of
up to 6 percent of annual salary depending on the employees' years of service.
(c) SunAmerica sponsors a voluntary savings plan for its employees (the
SunAmerica 401(k) plan), which, during the three years ended December 31, 2000,
provided for salary reduction contributions by qualifying employees and matching
contributions by SunAmerica of up to 4 percent of qualifying employees' annual
salaries. Under an Executive Savings Plan, designated SunAmerica executives also
could defer up to 90 percent of cash compensation during the three years ended
December 31, 2000, and SunAmerica matched 4 percent of the participants' base
salaries deferred.
(d) HSB sponsors a voluntary savings plan for its employees (the HSB
401(k) plan), which provides for salary reduction contributions by employees and
matching contributions by HSB of up to 6 percent of annual salary.
(e) AIG has certain benefits provided to former or inactive employees who
are not retirees. Certain of these benefits are insured and expensed currently;
other expenses are provided for currently. Such uninsured expenses include long
and short-term disability medical and life insurance continuation, short-term
disability income continuation and COBRA medical subsidies. The provision for
these benefits at December 31, 2000 was $6 million. The incremental expense was
insignificant.
The following table sets forth the change in benefit obligation, change in
plan assets and weighted average assumptions associated with various pension
plan and postretirement benefits. The amounts are recognized in the accompanying
consolidated balance sheet as of December 31, 2000 and 1999:
(in millions)
- --------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------------------- -------------------------------
Non-U.S. U.S. Non-U.S. U.S.
2000 Plans Plans Total Plans Plans Total
==========================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 476 $ 472 $ 948 $ 8 $ 66 $ 74
Service cost 32 34 66 1 2 3
Interest cost 15 38 53 -- 6 6
Participant contributions 5 -- 5 -- -- --
Actuarial loss 8 56 64 1 8 9
Plan amendment -- 2 2 -- -- --
Benefits paid (24) (12) (36) -- (4) (4)
Effect of foreign currency fluctuation (50) -- (50) -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 462 $ 590 $ 1,052 $ 10 $ 78 $ 88
==========================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 300 $ 436 $ 736 $ -- $ -- $ --
Actual return on plan assets net of expenses (17) 17 -- -- -- --
Employer contributions 23 4 27 -- 5 5
Participant contributions 5 -- 5 -- -- --
Benefits paid (25) (12) (37) -- (5) (5)
Asset adjustment -- (1) (1) -- -- --
Effect of foreign currency fluctuation (31) -- (31) -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year* $ 255 $ 444 $ 699 $ -- $ -- $ --
==========================================================================================================================
Reconciliation of funded status:
Funded status $(207) $(146) $ (353) $(10) $(78) $(88)
Unrecognized actuarial (gain)/loss 44 (19) 25 -- 9 9
Unrecognized transition obligation 9 4 13 -- -- --
Unrecognized prior service cost 5 19 24 -- (18) (18)
- --------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $(149) $(142) $ (291) $(10) $(87) $(97)
==========================================================================================================================
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 1 $ -- $ 1 $ -- $ -- $ --
Accrued benefit liability (182) (145) (327) (10) (87) (97)
Intangible asset 32 3 35 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $(149) $(142) $ (291) $(10) $(87) $(97)
==========================================================================================================================
Weighted-average assumptions as of December 31,
Discount rate 3.0-10.0% 7.5% 7.0-7.5% 7.5%
Expected return on plan assets 3.5-13.0 9.0 N/A N/A
Rate of compensation increase 2.0- 8.0 5.0 N/A N/A
==========================================================================================================================
For measurement purposes, an 8.5 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 2000.
The rate was assumed to decrease gradually to 5.0 percent for 2007 and remain at
that level thereafter.
*Plan assets are invested primarily in fixed-income securities and listed
stocks.
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
15. Employee Benefits (continued)
(in millions)
- ---------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
--------------------------------- -------------------------------
Non-U.S. U.S. Non-U.S. U.S.
1999 Plans Plans Total Plans Plans Total
=================================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 427 $ 499 $ 926 $ 7 $ 78 $ 85
Service cost 37 40 77 1 3 4
Interest cost 17 35 52 -- 5 5
Participant contributions 5 -- 5 -- -- --
Prior service costs (3) -- (3) -- -- --
Actuarial gain (22) (92) (114) -- (16) (16)
Benefits paid (22) (10) (32) -- (4) (4)
Effect of foreign currency fluctuation 37 -- 37 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 476 $ 472 $ 948 $ 8 $ 66 $ 74
=================================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 208 $ 399 $ 607 $-- $-- $--
Asset adjustment -- (1) (1) -- -- --
Actual return on plan assets net of expenses 66 38 104 -- -- --
Employer contributions 28 10 38 -- 4 4
Participant contributions 5 -- 5 -- -- --
Benefits paid (22) (10) (32) -- (4) (4)
Effect of foreign currency fluctuation 15 -- 15 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year* $ 300 $ 436 $ 736 $-- $-- $--
=================================================================================================================================
Reconciliation of funded status:
Funded status $(176) $ (36) $(212) $(8) $(66) $(74)
Unrecognized actuarial (gain)/loss 7 (100) (93) -- 1 1
Unrecognized transition obligation 12 6 18 -- -- --
Unrecognized prior service cost 9 19 28 -- (20) (20)
- ---------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $(148) $(111) $(259) $(8) $(85) $(93)
=================================================================================================================================
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 3 $ -- $ 3 $-- $ -- $ --
Accrued benefit liability (184) (114) (298) (8) (85) (93)
Intangible asset 33 3 36 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $(148) $(111) $(259) $(8) $(85) $(93)
=================================================================================================================================
Weighted-average assumptions as of December 31,
Discount rate 3.0-10.0% 8.0% 7.0-7.75% 8.0%
Expected return on plan assets 3.5-13.0 9.0 N/A N/A
Rate of compensation increase 2.0- 8.0 5.0 N/A N/A
=================================================================================================================================
For measurement purposes, a 9.0 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1999.
The rate was assumed to decrease to 5.0 percent for 2007 and remain at that
level thereafter.
*Plan assets are invested primarily in fixed-income securities and listed
stocks.
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- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
15. Employee Benefits (continued)
The net benefit cost for the years ended December 31, 2000, 1999, and 1998
included the following components:
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------------------- ---------------------------------
Non-U.S. U.S. Non-U.S. U.S.
Plans Plans Total Plans Plans Total
=============================================================================================================================
2000
Components of net period benefit cost:
Service cost $ 32 $ 34 $ 66 $ 1 $ 2 $ 3
Interest cost 15 39 54 -- 6 6
Expected return on assets (12) (38) (50) -- -- --
Amortization of prior service cost 2 2 4 -- (1) (1)
Amortization of transitional liability 2 2 4 -- -- --
Recognized actuarial loss 2 (4) (2) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 41 $ 35 $ 76 $ 1 $ 7 $ 8
=============================================================================================================================
1999
Components of net period benefit cost:
Service cost $ 36 $ 40 $ 76 $ 1 $ 3 $ 4
Interest cost 17 35 52 -- 5 5
Expected return on assets (10) (35) (45) -- -- --
Amortization of prior service cost 3 2 5 -- (1) (1)
Amortization of transitional liability 2 2 4 -- -- --
Recognized actuarial loss 3 1 4 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 51 $ 45 $ 96 $ 1 $ 7 $ 8
=============================================================================================================================
1998
Components of net period benefit cost:
Service cost $ 32 $ 33 $ 65 $ 1 $ 2 $ 3
Interest cost 16 29 45 1 5 6
Expected return on assets (9) (29) (38) -- -- --
Amortization of prior service cost 2 2 4 -- (1) (1)
Amortization of transitional (asset)/liability 2 1 3 (1) -- (1)
Recognized actuarial loss 3 1 4 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 46 $ 37 $ 83 $ 1 $ 6 $ 7
=============================================================================================================================
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $300 million, $256 million and $51 million,
respectively, as of December 31, 2000 and $291 million, $251 million and $54
million as of December 31, 1999.
On December 31, 1998, AIG amended its retirement and postretirement
healthcare plan to provide increased benefits to certain employees who retire
prior to age 65. Assumed healthcare cost trend rates have a significant effect
on the amounts reported for the healthcare plan.
A one-percentage-point change in assumed healthcare cost trend rates would
have the following effects:
(in millions)
- ----------------------------------------------------------------------------------------
1-Percentage 1-Percentage
Point Increase Point Decrease
========================================================================================
Effect on total of service and interest
cost components $1 $--
Effect on postretirement benefit obligation 4 (4)
========================================================================================
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, 2000, the future minimum lease payments under operating
leases were as follows:
(in millions)
================================================================================
2001 $ 355
2002 277
2003 212
2004 190
2005 148
Remaining years after 2005 540
- --------------------------------------------------------------------------------
Total $1,722
================================================================================
Rent expense approximated $342 million, $318 million and $287 million for
the years ended December 31, 2000, 1999 and 1998 respectively.
78
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
16. Leases (continued)
(b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 2000 was as follows:
(in millions)
================================================================================
2001 $ 1,875
2002 1,667
2003 1,425
2004 1,224
2005 923
Remaining years after 2005 3,019
- --------------------------------------------------------------------------------
Total $10,133
================================================================================
Flight equipment is leased, under operating leases, with remaining terms
ranging from one to 14 years.
17. Ownership and Transactions with Related Parties
(a) Ownership: The directors and officers of AIG, together with C.V. Starr
& Co., Inc. (Starr), a private holding company, The Starr Foundation and Starr
International Company, Inc. (SICO), a private holding company, own or otherwise
control approximately 24 percent of the voting stock of AIG. Six directors of
AIG also serve as directors of Starr and SICO.
(b) Transactions with Related Parties: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries
for the production and management of insurance business. There are no
significant receivables from/payables to related parties at December 31, 2000.
Net commission payments to Starr aggregated approximately $60 million in 2000,
$45 million in 1999 and $46 million in 1998, from which Starr is required to pay
commissions due originating brokers and its operating expenses. AIG also
received approximately $13 million in 2000, $11 million in 1999 and $13 million
in 1998 from Starr and paid approximately $41,000 in 2000, $42,000 in 1999 and
$37,000 in 1998 to Starr in rental fees. AIG also received approximately $1
million in 2000, 1999 and 1998 from SICO and paid approximately $1 million in
each of the years 2000, 1999 and 1998 to SICO as reimbursement for services
rendered at cost. AIG also paid to SICO $4 million in 2000, 1999 and 1998 in
rental fees.
18. Segment Information
(a) AIG's operations are conducted principally through four business segments.
These segments and their respective operations are as follows:
General Insurance: AIG's general insurance subsidiaries are multiple line
companies writing substantially all lines of property and casualty insurance.
DBG writes substantially all classes of business insurance accepting such
business mainly from insurance brokers. This provides DBG the opportunity to
select specialized markets and retain underwriting control. Any licensed broker
is able to submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no authority to commit DBG
to accept a risk. Transatlantic's and HSB's domestic operations are included in
this group.
AIG's Foreign General insurance group accepts risks primarily underwritten
through AIU, a marketing unit consisting of wholly owned agencies and insurance
entities. The Foreign General insurance group also includes business written by
AIG's foreign-based insurance subsidiaries for their own accounts. The Foreign
General group uses various marketing methods to write both business and personal
lines insurance with certain refinements for local laws, customs and needs. AIU
operates in over 70 countries in Asia, the Pacific Rim, Europe, Africa, Middle
East and Latin America. Transatlantic's foreign operations are included in this
group.
Life Insurance: AIG's life insurance subsidiaries offer a wide range of
traditional insurance and financial and investment products. Traditional
products consist of individual and group life, annuity, endowment and accident
and health policies. Financial and investment products consist of single premium
annuity, variable annuities, guaranteed investment contracts, universal life and
pensions.
AIG's three principal overseas life operations are ALICO, AIA and Nan Shan.
ALICO is incorporated in Delaware and all of its business is written outside of
the United States. ALICO has operations either directly or through subsidiaries
in approximately 50 countries located in Europe, Africa, Latin America, the
Caribbean, the Middle East, and the Far East, with Japan being the largest
territory. AIA operates primarily in Hong Kong, Singapore, Malaysia and
Thailand. Nan Shan operates in Taiwan. AIG's domestic life operations are
comprised of two separate operations, AIG's domestic life companies and the life
insurance subsidiaries of SunAmerica.
Both of these operations sell primarily financial and investment type
products.
Financial Services: AIG's financial services subsidiaries engage in
diversified financial products and services including premium financing, banking
services and consumer finance services.
ILFC engages primarily in the acquisition of new and used commercial jet
aircraft and the leasing and remarketing of such aircraft to airlines around the
world.
AIGFP structures financial transactions, including long-dated interest rate
and currency swaps and structured borrowings through notes, bonds and guaranteed
investment agreements.
AIGTG engages in various commodities trading, foreign exchange trading,
interest rate swaps and market making activities.
Asset Management: AIG's asset management operations offer a wide variety of
investment vehicles and services, including variable annuities, mutual funds and
investment asset management. Such products and services are offered to
individuals and institutions both domestically and internationally.
79
81
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
18. Segment Information (continued)
AIG's three principal asset management operations are SAAMCo, Global
Investment and Cap Partners. SAAMCo develops and sells variable annuities and
other investment products, sells and manages mutual funds and provides financial
services. Global Investment manages third-party institutional, retail and
private equity funds invested assets on a global basis, and provides custodial
services. Cap Partners organizes, and manages the invested assets of
institutional investment funds and may also invest in such funds. Each of these
subsidiary operations receives fees for investment products and services
provided.
(b) The following table summarizes the operations by major operating
segment for the years ended December 31, 2000, 1999 and 1998:
Operating Segments-2000
-----------------------------------------------------------------------
General Life Financial Asset
(in millions) Insurance Insurance Services Management Other(a) Consolidated
==========================================================================================================================
Revenues (b) $ 20,146 $ 20,571 $ 4,052 $ 1,217 $ (14) $ 45,972
Interest revenue -- -- 1,938 94 -- 2,032
Interest expense 5 144 2,582 15 40 2,786
Realized capital gains (losses) 38 (162) -- -- (14) (138)
Operating income (loss) before minority interest 3,524 3,387 1,293 430 (285) 8,349
Income taxes (benefits) 931 1,080 450 151 (154) 2,458
Depreciation expense 149 105 812 4 106 1,176
Capital expenditures 278 414 3,725 18 173 4,608
Identifiable assets 85,270 142,045 81,016 1,590 (3,344) 306,577
==========================================================================================================================
Operating Segments-1999
-----------------------------------------------------------------------
General Life Financial Asset
(in millions) Insurance Insurance Services Management Other(a) Consolidated
==========================================================================================================================
Revenues (b) $ 18,356 $ 18,000 $ 3,340 $ 985 $ (25) $ 40,656
Interest revenue -- -- 1,381 84 -- 1,465
Interest expense 8 159 2,042 5 37 2,251
Realized capital gains (losses) 295 (148) -- -- (25) 122
Operating income (loss) before minority interest 3,481 2,858 1,081 314 (222) 7,512
Income taxes (benefits) 831 961 388 103 (64) 2,219
Depreciation expense 134 92 743 5 97 1,071
Capital expenditures 215 212 3,453 35 117 4,032
Identifiable assets 76,725 128,697 66,567 1,132 (4,883) 268,238
==========================================================================================================================
Operating Segments-1998
-----------------------------------------------------------------------
General Life Financial Asset
(in millions) Insurance Insurance Services Management Other(a) Consolidated
==========================================================================================================================
Revenues (b) $ 16,495 $ 15,420 $ 3,044 $ 707 $ 50 $ 35,716
Interest revenue -- -- 1,203 63 -- 1,266
Interest expense 7 184 1,835 14 36 2,076
Realized capital gains (losses) 205 (74) -- -- (7) 124
Operating income (loss) before minority interest 2,928 2,373 869 191 (84) 6,277
Income taxes 646 728 297 45 69 1,785
Equity in income of minority-owned insurance
operations 57 -- -- -- -- 57
Depreciation expense 109 82 662 4 95 952
Capital expenditures 220 277 3,233 33 142 3,905
Identifiable assets 73,226 103,611 59,198 915 (3,274) 233,676
==========================================================================================================================
(a) Includes AIG Parent and other operations which are not required to be
reported separately, other income (deductions)-net and adjustments and
eliminations.
(b) Represents the sum of general net premiums earned, life premium income,
net investment income, financial services commissions, transaction and
other fees, asset management commissions and other fees, equity in income
of minority-owned insurance operations and realized capital gains
(losses).
80
82
American International Group, Inc. and Subsidiaries
18. Segment Information (continued)
(c) The following table summarizes AIG's general insurance operations by
major internal reporting group for the years ended December 31, 2000, 1999 and
1998:
General Insurance-2000
---------------------------------------------------------
Domestic Total
Brokerage Foreign General
(in millions) Group General Other(a) Insurance
====================================================================================================================================
Net premiums written $ 8,805 $ 5,758 $ 2,963 $17,526
Net premiums earned 8,886 5,668 2,853 17,407
Losses & loss expenses incurred 7,419 3,595 2,090 13,104
Underwriting expenses 1,250 1,738 530 3,518
Adjusted underwriting profit (b) 217 335 233 785
Net investment income 1,793 625 283 2,701
Operating income before realized capital gains (c) 2,010 960 516 3,486
Depreciation expense 53 72 24 149
Capital expenditures 103 96 79 278
Identifiable assets 59,644 20,889 4,737 85,270
====================================================================================================================================
General Insurance-1999
---------------------------------------------------------
Domestic Total
Brokerage Foreign General
(in millions) Group General Other(a) Insurance
====================================================================================================================================
Net premiums written $ 8,297 $ 5,368 $ 2,559 $16,224
Net premiums earned 7,788 5,281 2,475 15,544
Losses & loss expenses incurred 6,615 3,394 1,729 11,738
Underwriting expenses 1,106 1,586 445 3,137
Adjusted underwriting profit (b) 67 301 301 669
Net investment income 1,738 522 257 2,517
Operating income before realized capital gains (c) 1,805 823 558 3,186
Depreciation expense 39 73 22 134
Capital expenditures 79 80 56 215
Identifiable assets 54,007 18,588 4,130 76,725
====================================================================================================================================
General Insurance-1998
---------------------------------------------------------
Domestic Total
Brokerage Foreign General
(in millions) Group General Other(a) Insurance
====================================================================================================================================
Net premiums written $ 8,191 $ 4,610 $ 1,785 $14,586
Net premiums earned 8,002 4,439 1,657 14,098
Losses & loss expenses incurred 6,995 2,545 1,117 10,657
Underwriting expenses 1,218 1,378 314 2,910
Adjusted underwriting profit (loss) (b) (211) 516 226 531
Net investment income 1,570 438 184 2,192
Operating income before realized capital gains (c) 1,359 954 410 2,723
Equity in income of minority-owned insurance operations 57 -- -- 57
Depreciation expense 34 63 12 109
Capital expenditures 66 110 44 220
Identifiable assets 53,844 16,060 3,322 73,226
====================================================================================================================================
(a) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(b) Adjusted underwriting profit (loss) represents statutory underwriting
profit or loss adjusted primarily for changes in deferred acquisition
costs.
(c) Realized capital gains are not deemed to be an integral part of AIG's
general insurance operations' internal reporting groups.
81
83
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
18. Segment Information (continued)
(d) The following table summarizes AIG's life insurance operations by
major internal reporting group for the years ended December 31, 2000, 1999 and
1998:
Life Insurance-2000
----------------------------------------------------------------
AIA Total
and Domestic Life
(in millions) ALICO Nan Shan Life Other(a) Insurance
====================================================================================================================================
Premium income $ 4,135 $ 7,859 $ 1,255 $ 361 $ 13,610
Net investment income 1,362 1,688 3,926 147 7,123
Operating income before realized capital gains (b) 754 1,409 1,311 75 3,549
Depreciation expense 46 33 18 8 105
Capital expenditures 313 58 11 32 414
Identifiable assets 28,532 32,697 79,174 1,642 142,045
====================================================================================================================================
Life Insurance-1999
----------------------------------------------------------------
AIA Total
and Domestic Life
(in millions) ALICO Nan Shan Life Other(a) Insurance
====================================================================================================================================
Premium income $ 3,714 $ 7,014 $ 947 $ 267 $ 11,942
Net investment income 1,222 1,357 3,497 130 6,206
Operating income before realized capital gains (b) 680 1,200 1,062 64 3,006
Depreciation expense 41 30 15 6 92
Capital expenditures 62 92 39 19 212
Identifiable assets 26,294 28,310 72,358 1,735 128,697
====================================================================================================================================
Life Insurance-1998
----------------------------------------------------------------
AIA Total
and Domestic Life
(in millions) ALICO Nan Shan Life Other(a) Insurance
====================================================================================================================================
Premium income $ 3,212 $ 6,052 $ 784 $ 245 $ 10,293
Net investment income 1,019 1,189 2,889 104 5,201
Operating income before realized capital gains (b) 576 1,040 782 49 2,447
Depreciation expense 31 25 21 5 82
Capital expenditures 201 64 1 11 277
Identifiable assets 23,495 23,860 54,869 1,387 103,611
====================================================================================================================================
(a) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(b) Realized capital gains are not deemed to be an integral part of AIG's life
insurance operations' internal reporting groups.
82
84
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
18. Segment Information (continued)
(e) The following table summarizes AIG's financial services operations by
major internal reporting group for the years ended December 31, 2000, 1999 and
1998:
Financial Services-2000
----------------------------------------------------------------
Total
Financial
(in millions) ILFC AIGFP(a) AIGTG Other(b) Services
====================================================================================================================================
Commissions, transaction and other fees (c) $ 2,441 $ 1,056 $ 254 $ 301 $ 4,052
Interest revenue 38 1,540 46 314 1,938
Interest expense 824 1,552 25 181 2,582
Operating income (loss) 654 648 62 (71) 1,293
Depreciation expense 729 8 14 61 812
Capital expenditures 3,435 216 8 66 3,725
Identifiable assets 19,984 41,837 14,322 4,873 81,016
====================================================================================================================================
Financial Services-1999
----------------------------------------------------------------
Total
Financial
(in millions) ILFC AIGFP(a) AIGTG Other(b) Services
====================================================================================================================================
Commissions, transaction and other fees (c) $ 2,194 $ 737 $ 227 $ 182 $ 3,340
Interest revenue 30 1,066 50 235 1,381
Interest expense 732 1,189 27 94 2,042
Operating income (loss) 590 482 109 (100) 1,081
Depreciation expense 664 6 10 63 743
Capital expenditures 3,366 11 11 65 3,453
Identifiable assets 17,854 33,965 9,960 4,788 66,567
====================================================================================================================================
Financial Services-1998
----------------------------------------------------------------
Total
Financial
(in millions) ILFC AIGFP(a) AIGTG Other(b) Services
====================================================================================================================================
Commissions, transaction and other fees (c) $ 2,002 $ 550 $ 374 $ 118 $ 3,044
Interest revenue 49 941 74 139 1,203
Interest expense 694 997 59 85 1,835
Operating income (loss) 496 323 123 (73) 869
Depreciation expense 581 6 8 67 662
Capital expenditures 3,160 3 13 57 3,233
Identifiable assets 16,846 28,080 10,526 3,746 59,198
====================================================================================================================================
(a) AIGFP's interest revenue and interest expense are reported as net
revenues.
(b) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(c) Commissions, transaction and other fees are the sum of the net gain or
loss of trading activities, the net change in unrealized gain or loss, the
net interest revenues from forward rate agreements and interest rate
swaps, and where applicable, management and incentive fees from asset
management activities.
83
85
- --------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)
18. Segment Information (continued)
(f) A substantial portion of AIG's operations is conducted in countries
other than the United States and Canada. The following table summarizes AIG's
operations by major geographic segment. Allocations have been made on the basis
of the location of operations and assets.
Geographic Segments-2000
----------------------------------------------------
Other
(in millions) Domestic(a) Far East Foreign Consolidated
====================================================================================================================================
Revenues (b) $ 23,126 $ 15,311 $ 7,535 $ 45,972
Real estate and other fixed assets, net of accumulated depreciation 1,556 1,264 758 3,578
Flight equipment primarily under operating leases, net of
accumulated depreciation 19,325 -- -- 19,325
====================================================================================================================================
Geographic Segments-1999
----------------------------------------------------
Other
(in millions) Domestic(a) Far East Foreign Consolidated
====================================================================================================================================
Revenues (b) $ 20,525 $ 13,242 $ 6,889 $ 40,656
Real estate and other fixed assets, net of accumulated depreciation 1,172 1,006 755 2,933
Flight equipment primarily under operating leases, net of
accumulated depreciation 17,334 -- -- 17,334
====================================================================================================================================
Geographic Segments-1998
----------------------------------------------------
Other
(in millions) Domestic(a) Far East Foreign Consolidated
====================================================================================================================================
Revenues (b) $ 18,426 $ 10,571 $ 6,719 $ 35,716
Real estate and other fixed assets, net of accumulated depreciation 1,062 895 781 2,738
Flight equipment primarily under operating leases, net of
accumulated depreciation 16,330 -- -- 16,330
====================================================================================================================================
(a) Including general insurance operations in Canada.
(b) Represents the sum of general net premiums earned, life premium income,
net investment income, financial services commissions, transaction and
other fees, asset management commissions and other fees, equity in income
of minority-owned insurance operations and realized capital gains
(losses).
19. Summary of Quarterly Financial Information - Unaudited
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 2000 and 1999 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.
Three Months Ended
-----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------------- ----------------- ----------------- -----------------
(in millions, except per share amounts) 2000 1999 2000 1999 2000 1999 2000 1999
====================================================================================================================================
Revenues $10,890 $ 9,825 $11,426 $10,195 $11,141 $ 9,638 $12,515 $10,998
Net income 1,346 1,199 1,407 1,277 1,386 1,267 1,497 1,312
====================================================================================================================================
Net income per common share:
Basic $ 0.58 $ 0.51 $ 0.61 $ 0.55 $ 0.60 $ 0.55 $ 0.64 $ 0.57
Diluted 0.57 0.51 0.60 0.54 0.60 0.54 0.64 0.56
Average shares outstanding:
Basic 2,320 2,322 2,313 2,323 2,314 2,322 2,320 2,323
Diluted 2,346 2,352 2,339 2,353 2,340 2,351 2,346 2,351
====================================================================================================================================
84
86
- --------------------------------------------------------------------------------
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, 2000.
- --------------------------------------------------------------------------------
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 accompanying Index to Financial
Statements.
2. Exhibits.
1--Distribution Agreement.
2--Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession.
3--Articles of Incorporation and By-Laws.
4--Instruments Defining the Rights of Security Holders.
8--Opinion re Tax Matters.
10--Material Contracts.
11--Computation of Earnings Per Share for the Years Ended December 31,
2000, 1999, 1998, 1997 and 1996.
12--Computation of Ratios of Earnings to Fixed Charges for the Years
Ended December 31, 2000, 1999, 1998, 1997 and 1996.
21--Subsidiaries of Registrant.
23--Consent of Experts and Counsel.
24--Power of Attorney.
(b) Reports on Form 8-K.
There have been no reports on Form 8-K filed during the quarter ended
December 31, 2000.
85
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant 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 30th of March,
2001.
AMERICAN INTERNATIONAL GROUP, INC.
By /s/ M.R. GREENBERG
--------------------------------
(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 30th of March, 2001 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.
Signature Title
--------- -----
/s/ M.R. Greenberg Chairman and Director
----------------------------- (Principal Executive Officer)
(M.R. Greenberg)
/s/ Howard I. Smith Executive Vice President,
----------------------------- Chief Financial Officer and
(Howard I. Smith) Director (Principal
Financial Officer)
/s/ Michael J. Castelli Vice President and Comptroller
----------------------------- (Principal Accounting Officer)
(Michael J. Castelli)
/s/ M. Bernard Aidinoff Director
-----------------------------
(M. Bernard Aidinoff)
/s/ Eli Broad Director
-----------------------------
(Eli Broad)
/s/ Pei-yuan Chia Director
-----------------------------
(Pei-yuan Chia)
/s/ Marshall A. Cohen Director
-----------------------------
(Marshall A. Cohen)
/s/ Barber B. Conable, Jr. Director
-----------------------------
(Barber B. Conable, Jr.)
/s/ Martin S. Feldstein Director
-----------------------------
(Martin S. Feldstein)
II-1
88
SIGNATURES--(Continued)
Signature Title
--------- -----
/s/ Ellen V. Futter Director
-----------------------------
(Ellen V. Futter)
/s/ Carla A. Hills Director
-----------------------------
(Carla A. Hills)
/s/ Frank J. Hoenemeyer Director
-----------------------------
(Frank J. Hoenemeyer)
/s/ Richard C. Holbrooke Director
-----------------------------
(Richard C. Holbrooke)
/s/ Edward E. Matthews Director
-----------------------------
(Edward E. Matthews)
/s/ Thomas R. Tizzio Director
-----------------------------
(Thomas R. Tizzio)
/s/ Edmund S.W. Tse Director
-----------------------------
(Edmund S.W. Tse)
/s/ Jay S. Wintrob Director
-----------------------------
(Jay S. Wintrob)
/s/ Frank G. Wisner Director
-----------------------------
(Frank G. Wisner)
/s/ Frank G. Zarb Director
-----------------------------
(Frank G. Zarb)
II-2
89
EXHIBIT INDEX
Exhibit
Number Description Location
- ------ ----------- --------
1 Distribution Agreement .......................... Filed herewith.
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession .......... Agreement and Plan of Merger, dated as
of August 19, 1998, between
SunAmerica Inc. and AIG,
incorporated herein by reference to
Exhibit 2 to AIG's Registration
Statement on Form S-4 (File No.
333-65441).
3(i)(a) Restated Certificate of Incorporation of
AIG ............................................. Incorporated by reference to Exhibit
3(i) to AIG's Annual Report on Form
10-K for the year ended December 31,
1996 (File No. 1-8787).
3(i)(b) Certificate of Amendment of Certificate of
Incorporation of AIG, filed June 3, 1998 ........ Incorporated by reference to Exhibit
3(i) to AIG's Quarterly Report on
Form 10-Q for the quarter ended June
30, 1998 (File No. 1-8787).
3(i)(c) Certificate of Merger of SunAmerica Inc.
with and into AIG, filed December 30, 1998
and effective January 1, 1999 ................... Incorporated by reference to Exhibit
3(i) to AIG's Annual Report on Form
10-K for the year ended December 31,
1998 (File No. 1-8787).
3(i)(d) Certificate of Amendment of Certificate of
Incorporation of AIG, filed June 5, 2000 ........ Incorporated by reference to Exhibit
3(i)(c) to AIG's Registration
Statement on Form S-4 (File No.
333-45828).
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.*
(b) Indenture dated as of July 15,
1989 between AIG and The Bank of
New York .............................. Not required to be filed.*
(c) Subordinated Indenture, dated as
of October 28, 1996, between
SunAmerica Inc. and The First
National Bank of Chicago, as
Trustee ............................... Not required to be filed.*
(d) Senior Indenture, dated as of
April 15, 1993, between
SunAmerica Inc. and The First
National Bank of Chicago, as
Trustee ............................... Not required to be filed.*
(e) Supplemental Indenture, dated as
of June 28, 1993, between
SunAmerica Inc. and The First
National Bank of Chicago, as
Trustee, supplementing the
Senior Indenture, dated as of
April 15, 1993 ........................ Not required to be filed.*
(f) Supplemental Indenture, dated as
of October 28, 1996, between
SunAmerica Inc. and The First
National Bank of Chicago, as
Trustee, supplementing the
Senior Indenture, dated as of
April 15, 1993 ........................ Not required to be filed.*
(g) Third Supplemental Indenture,
dated as of January 1, 1999,
among SunAmerica Inc., AIG and
The First National Bank of
Chicago, as Trustee,
supplementing the Senior
Indenture, dated as of April 15,
1993 .................................. Not required to be filed.*
II-3
90
Exhibit
Number Description Location
- ------ ----------- --------
(h) Junior Subordinated Indenture,
dated as of March 15, 1995,
between SunAmerica Inc. and The
First National Bank of Chicago,
as Trustee ............................ Not required to be filed.*
(i) First Supplemental Indenture,
dated as of March 15, 1995,
between SunAmerica Inc. and The
First National Bank of Chicago,
as Trustee, supplementing the
Junior Subordinated Indenture,
dated as of March 15, 1995 ............ Not required to be filed.*
(j) Second Supplemental Indenture,
dated as of October 11, 1995,
between SunAmerica Inc. and The
First National Bank of Chicago,
as Trustee, supplementing the
Junior Subordinated Indenture
dated as of March 15, 1995 ............ Not required to be filed.*
(k) Supplemental Indenture, dated as
of October 28, 1996, between
SunAmerica Inc. and The First
National Bank of Chicago, as
Trustee, supplementing the
Junior Subordinated Indenture,
dated as of March 15, 1995 ............ Not required to be filed.*
(l) Fourth Supplemental Indenture,
dated as of November 13, 1996,
between SunAmerica Inc. and The
First National Bank of Chicago,
as Trustee, supplementing the
Junior Subordinated Indenture,
dated as of March 15, 1995 ............ Not required to be filed.*
(m) Fifth Supplemental Indenture,
dated as of January 1, 1999,
among SunAmerica Inc., AIG and
The First National Bank of
Chicago, as Trustee,
supplementing the Junior
Subordinated Indenture, dated as
of March 15, 1995 ..................... Not required to be filed.*
(n) Senior Indenture, dated as of
November 15, 1991, between
SunAmerica Inc. (as successor in
interest to Broad Inc.) and
Security Pacific National Bank,
as Trustee ............................ Not required to be filed.*
(o) Tri-Party Agreement, dated as of
July 1, 1993, among The First
National Bank of Chicago, Bank
of America, NT & SA and
SunAmerica Inc., appointing The
First National Bank of Chicago
as Successor Trustee to Bank of
America NT & SA (as successor in
interest to Security Pacific
National Bank), amending the
Senior Indenture, dated as of
November 15, 1991 ..................... Not required to be filed.*
(p) First Supplemental Indenture,
dated as of January 1, 1999,
among SunAmerica Inc., AIG and
The First National Bank of
Chicago, as Trustee,
supplementing Senior Indenture,
dated November 15, 1991 ............... Not required to be filed.*
II-4
91
Exhibit
Number Description Location
- ------ ----------- --------
(q) Amended and Restated Declaration
of Trust of SunAmerica Capital
Trust I, dated as of June 6,
1995, among SunAmerica Inc. and
the Trustees of the Trust ............. Not required to be filed.*
(r) Amended and Restated Declaration
of Trust of SunAmerica Capital
Trust II, dated as of October
11, 1995, among SunAmerica Inc.
and the Trustees of the Trust ......... Not required to be filed.*
(s) Amended and Restated Declaration
of Trust of SunAmerica Capital
Trust III, dated as of November
13, 1996, among SunAmerica Inc.
and the Trustees of the Trust ......... Not required to be filed.*
(t) Guarantee Agreement, dated as of
October 11, 1995, between
SunAmerica Inc. and The Bank of
New York, as Guaranty Trustee,
relating to the Preferred
Securities of SunAmerica Capital
Trust II .............................. Not required to be filed.*
(u) Amendment to Guarantee, dated as
of January 1, 1999, among
SunAmerica Inc., AIG and The
Bank of New York, as Guaranty
Trustee, amending Guarantee
Agreement, dated as of October
11, 1995, between SunAmerica
Inc. and The Bank of New York,
as Guaranty Trustee ................... Not required to be filed.*
(v) Guarantee Agreement, dated as of
November 13, 1996, between
SunAmerica Inc. and The Bank of
New York, as Guaranty Trustee,
relating to the Preferred
Securities of SunAmerica Capital
Trust III ............................. Not required to be filed.*
(w) Amendment to Guarantee, dated as
of January 1, 1999, among
SunAmerica Inc., AIG and The
Bank of New York, as Guaranty
Trustee, amending Guarantee
Agreement, dated November 13,
1996, between SunAmerica Inc.
and The Bank of New York, as
Guaranty Trustee ...................... Not required to be filed.*
(x) Form of Fixed Rate Medium Term
Note, Series F ........................ Filed herewith.
(y) Form of Floating Rate
Medium Term Note, Series F ............ Filed herewith.
8 Opinion of Sullivan & Cromwell re Tax Matters.... Filed herewith.
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.
II-5
92
Exhibit
Number Description Location
- ------ ----------- --------
(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 1996 Employee Stock Purchase
Plan .................................. Filed as exhibit to AIG's Definitive
Proxy Statement dated April 2, 1996
(File No. 1-8787) and incorporated
herein by reference.
(f) 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.
(g) AIG 1982 Employee Stock Option
Plan .................................. Filed as exhibit to AIG's Registration
Statement (File No. 2-78291) and
incorporated herein by reference.
(h) AIG 1987 Employee Stock Option
Plan .................................. Filed as exhibit to AIG's Definitive
Proxy Statement dated April 6, 1987
(File No. 0-4652) and incorporated
herein by reference.
(i) AIG 1991 Employee Stock Option
Plan .................................. Filed as exhibit to AIG's Definitive
Proxy Statement dated April 4, 1997
(File No. 1-8787) and incorporated
herein by reference.
(j) AIG 1999 Stock Option Plan ............ Filed as exhibit to AIG's Definitive
Proxy Statement dated April 6, 2000
(File No. 1-8787) and incorporated
herein by reference.
(k) AIRCO 1972 Employee Stock Option
Plan .................................. Incorporated by reference to AIG's Joint
Proxy Statement and Prospectus (File
No. 2-61994).
(l) AIRCO 1977 Stock Option and
Stock Appreciation Rights Plan ........ Incorporated by reference to AIG's Joint
Proxy Statement and Prospectus (File
No. 2-61994).
(m) Purchase Agreement between AIA
and Mr. E.S.W. Tse. ................... Incorporated by reference to Exhibit
10(l) to AIG's Annual Report on Form
10-K for the year ended December 31,
(n) Retention and Employment 1997 (File No. 1-8787).
Agreement between AIG and Jay S.
Wintrob ............................... Incorporated by reference to Exhibit
10(m) to AIG's Annual Report on Form
10-K for the year ended December 31,
1998 (File No. 1-8787).
(o) SunAmerica Inc. 1988 Employee
Stock Plan ............................ Incorporated by reference to Exhibit
4(a) to AIG's Registration Statement
on Form S-8 (File No. 333-70069).
(p) SunAmerica 1997 Employee
Incentive Stock Plan .................. Incorporated by reference to Exhibit
4(b) to AIG's Registration Statement
on Form S-8 (File No. 333-70069).
(q) SunAmerica Non-employee
Directors' Stock Option Plan .......... Incorporated by reference to Exhibit
4(c) to AIG's Registration Statement
on Form S-8 (File No. 333-70069).
(r) SunAmerica 1995 Performance
Stock Plan ............................ Incorporated by reference to Exhibit
4(d) to AIG's Registration Statement
on Form S-8 (File No. 333-70069).
(s) SunAmerica Inc. 1998 Long-Term
Performance-Based Incentive Plan
For the Chief Executive Officer ....... Incorporated by reference to Exhibit
4(e) to AIG's Registration Statement
on Form S-8 (File No. 333-70069).
(t) SunAmerica Inc. Long-Term
Performance-Based Incentive Plan
Amended and Restated 1997 ............. Incorporated by reference to Exhibit
4(f) to AIG's Registration Statement
on Form S-8 (File No. 333-70069).
II-6
93
Exhibit
Number Description Location
- ------ ----------- --------
(u) SunAmerica Five Year Deferred
Cash Plan ............................. Incorporated by reference to Exhibit
4(a) to AIG's Registration Statement
on Form S-8 (File No. 333-31346).
(v) SunAmerica Executive Savings
Plan .................................. Incorporated by reference to Exhibit
4(b) to AIG's Registration Statement
on Form S-8 (File No. 333-31346).
(w) HSB Group, Inc. 1995 Stock
Option Plan ........................... Incorporated by reference to Exhibit
10(iii)(f) to HSB's Annual Report on
Form 10-K for the year ended
December 31, 1999 (File No.
1-13135).
(x) HSB Group, Inc. 1985 Stock
Option Plan ........................... Incorporated by reference to Exhibit
10(iii)(a) HSB's Quarterly Report on
Form 10-Q for the quarter ended
September 30, 1998 (File No.
1-13135).
(y) HSB Group, Inc. Employee's
Thrift Incentive Plan ................. Incorporated by reference to Exhibit
4(i)(c) to The Hartford Steam Boiler
Inspection and Insurance Company's
Registration Statement on Form S-8
(File No. 33-36519).
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.
23.1 Consent of PricewaterhouseCoopers LLP ........... Filed herewith.
23.2 Consent of Sullivan & Cromwell .................. Included in Exhibit 8.
24 Power of attorney ............................... Included on the signature page hereof.
99 Additional exhibits ............................. None.
- ----------
* 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.
** All material contracts are management contracts or compensatory plans or
arrangements.
II-7