AMERICAN INTERNATIONAL GROUP INC - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 31, 2003: 2,608,397,880.

1) These statements are unaudited. In the opinion of management, all adjustments consisting only of normal recurring accruals have been made for a fair statement of the results presented herein. All material intercompany accounts and transactions have been eliminated. Certain accounts have been reclassified in the 2002 financial statements to conform to their 2003 presentation. For further information, refer to the Annual Report on Form 10-K of American International Group, Inc. (AIG) for the year ended December 31, 2002.

The following table summarizes the operations by major operating segment for the three months ended March 31, 2003 and 2002 (in millions):


^(a)	Represents the sum of general net premiums earned, life premium income, net investment income, financial services commissions, transaction and other fees, retirement savings & asset management commissions and other fees, and realized capital gains (losses).

^(b)	Represents income before income taxes and minority interest.

The following is AIG’s Consolidated Statement of Segment Operations for the three months ended March 31, 2003 and 2002:

The following table summarizes AIG’s general insurance operations by major operating unit for the three months ended March 31, 2003 and 2002 (in millions):

The following table summarizes AIG’s life insurance operations by major operating unit for the three months ended March 31, 2003 and 2002 (in millions):

The following table summarizes AIG’s financial services operations by major operating unit for the three months ended March 31, 2003 and 2002 (in millions):

3) Earnings per share of AIG are based on the weighted average number of common shares outstanding during the period.

The quarterly dividend rate per common share, commencing with the dividend paid September 20, 2002 is $0.047.

4) Cash flow information for the three month periods ended March 31, 2003 and 2002 is as follows:

During the third quarter of 2001, American General Corporation (AGC) was acquired and consolidated into AIG; charges in connection with this acquisition totaled $1.36 billion for that quarter. During the second quarter of 2001, AGC incurred $654 million in connection with the termination of its merger agreement with Prudential plc. Thus, for all of 2001, AIG incurred $2.02 billion of charges in connection with the acquisition of AGC.

With respect to the charges of $1.36 billion incurred in the third quarter of 2001, approximately $512 million was related to direct costs of the acquisition. Of the $512 million, $85 million was attributable to investment banking, legal and accounting fees. The remaining direct costs of $427 million were related to employee severance and other termination benefits, and other compensation costs related to change in control agreements with AGC executives. The costs were also based in part on a projected elimination of positions, in accordance with AIG’s post-business combination plans, which were intended to enhance the effectiveness and efficiency of the combined operations.

Of the total direct costs of $512 million, $423 million or 83 percent have been paid as of March 31, 2003, including approximately $7 million, $111 million and $305 million paid during the first three months of 2003, and the twelve months of 2002 and 2001, respectively. In addition, during 2002, $32 million of liabilities were utilized to absorb other insignificant merger-related expenses. The balance, $57 million, is recorded as a component of “Other Liabilities” as of March 31, 2003.

With respect to the elimination of positions, 2,287 terminations were included in AIG’s original post-business combination plans. As of March 31, 2003, terminations totaled 1,848; including 134, 1,105 and 609 made during 2003, 2002 and 2001, respectively. The remaining 439 terminations are scheduled to occur in 2003, in accordance with AGC’s employee termination program.

The indirect costs of $851 million represented charges resulting from post-business combination plans, recognizing that certain assets will have no future economic benefit or ability to generate future revenues. Such charges include asset impairment charges related to software, leasehold improvements and certain goodwill. Also included were certain adjustments associated with conforming AGC’s balances to AIG’s existing accounting policies and methodologies. Of the $851 million, $784 million had been applied as at March 31, 2003, including $2 million, $113 million and $669 million in the first three months of 2003, and the twelve months of 2002 and 2001, respectively. The balance, $67 million, remains outstanding and is reflected as a component of “Other Liabilities” as at March 31, 2003.

Starr International Company, Inc. (SICO) provides a Deferred Compensation Profit Participation Plan (SICO Plan) to certain AIG employees. The SICO Plan came into being in 1975 when the voting shareholders and Board of Directors of SICO, a private holding company whose principal asset consists of AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including AIG. Participation in the SICO Plan by any person, and the amount of such participation, is at the sole discretion of SICO’s Board of Directors, and none of the costs of the various benefits provided under such plan is paid by or charged to AIG. The SICO Plan provides that shares currently owned by SICO may be set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors may permit an early pay-out under certain circumstances. Prior to pay-out, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture

under certain conditions, including but not limited to the participant’s voluntary termination of employment with AIG prior to normal retirement age. In addition, SICO’s Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock. If the expenses of the SICO Plan had been reflected by AIG, the pre-tax amounts accrued would have been $32.1 million for the first three months of 2003 and $12.3 million for the same period of 2002.

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 have not deviated materially from December 31, 2002 at which time they approximated $400 million. AIG uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. AIG evaluates each counterparty’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by AIG upon extension of credit, is based on management’s credit evaluation of the counterparty.

b) AIG and certain of its subsidiaries become parties to financial instruments with market risk resulting from both dealer and end user activities and to reduce currency, interest rate, equity and commodity exposures. To the extent those instruments are carried at their estimated fair value, the elements of currency, interest rate, equity and commodity risks are reflected in the consolidated balance sheet. 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. The recorded estimated fair values of such instruments may be different than the values that might be realized if AIGFP were required 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 involve the exchange of specific currencies or the cashflows based on the underlying equity securities or indices. Also, they 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 March 31, 2003, the notional principal amount of the sum of the swap pays and receives approximated $848.83 billion, primarily related to interest rate swaps of approximately $603.17 billion.

The following tables provide the contractual and notional amounts of derivatives transactions of AIGFP at March 31, 2003.

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. 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 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 March 31, 2003 and December 31, 2002:

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 March 31, 2003 the contractual amount of AIGFP’s futures and forward contracts approximated $51.86 billion.

The following table presents AIGFP’s futures and forward contracts portfolio by maturity and type of derivative at March 31, 2003 and December 31, 2002:

AIGFP enters into credit derivative transactions in the ordinary course of its business. The overwhelming majority of AIGFP’s credit derivatives require AIGFP to provide credit protection on a designated portfolio of loans or debt securities. AIGFP provides such credit protection only on a “second loss” basis, under which AIGFP’s payment obligations arise only after credit losses in the designated portfolio exceed a specified threshold amount or level of “first losses.” The threshold amount of credit losses that must be realized before AIGFP has any payment obligation is negotiated by AIGFP for each transaction to provide that the likelihood of any payment obligation by AIGFP under each transaction is remote, even in severe recessionary market scenarios.

In many cases, the credit risk associated with a designated portfolio is tranched into different layers of risk, which are then analyzed and rated by the credit rating agencies. Typically, there will be an equity layer covering the first credit losses in respect of the portfolio up to a specified percentage of the total portfolio, and then successive layers that are rated, generally a BBB rated layer, an A rated layer, an AA rated layer and an AAA rated layer. In transactions that are rated, the risk layer or tranche that is immediately junior to the threshold level above which AIGFP’s payment obligation would arise is rated AAA by the rating agencies. For that reason, the risk layer assumed by AIGFP with respect to the designated portfolio in these transactions is often called the “super senior” risk layer, defined as the layer of credit risk senior to a risk layer that has been rated AAA by the credit rating agencies or if the transaction is not rated, equivalent thereto. For example, in a transaction with an equity layer covering credit losses from 0 to 2 percent of the total portfolio, a BBB rated layer covering credit losses from 2 to 4 percent, an A rated layer from 4 to 6 percent, an AA rated layer from 6 to 8 percent and a AAA rated layer from 8 to 11 percent, AIGFP would cover credit losses arising in respect of

AIGFP continually monitors the underlying portfolios to determine whether the credit loss experience for any particular portfolio has caused the likelihood of AIGFP having a payment obligation under the transaction to be greater than super senior risk. AIGFP maintains the ability opportunistically to hedge specific securities in a portfolio thereby further limiting its exposure to loss and has hedged outstanding transactions in this manner on occasion. AIGFP has never had a payment obligation under these credit derivatives transactions. Furthermore, based on portfolio credit losses experienced to date under all outstanding transactions, no transaction has experienced credit losses in an amount that has made the likelihood of AIGFP having to make a payment, in AIGFP’s view, to be greater than remote, even in severe recessionary market scenarios. At March 31, 2003, the notional amount with respect to AIGFP’s credit derivative portfolio was $151.1 billion.

AIGFP utilizes various credit enhancements, including letters of credit, guarantees, collateral, credit triggers, credit derivatives and margin agreements 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. 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 $14.95 billion at March 31, 2003 and $14.98 billion at December 31, 2002. The net replacement value for futures and forward contracts approximated $22 million at March 31, 2003 and $110 million at December 31, 2002. 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 March 31, 2003 and December 31, 2002, the counterparty credit quality by derivative product with respect to the net replacement value of AIGFP’s derivatives portfolio was as follows:

At March 31, 2003 and December 31, 2002, the counterparty breakdown by industry with respect to the net replacement value of AIGFP’s derivatives portfolio was as follows:

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 potentially significant counterparty defaults.

Revenues for both the three months ended March 31, 2003 and 2002 from AIGFP’s operations were $272 million.

d) AIG Trading Group Inc. (AIGTG) becomes a party to derivative 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. 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. 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. Risks arise as a result of movements in current market prices from contracted prices, and the potential inability of the counterparties to meet their obligations under the contracts. At March 31, 2003, the contractual amount of AIGTG’s futures, forward and option contracts approximated $467.6 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 March 31, 2003 and December 31, 2002. The gross replacement values presented represent the sum of the estimated positive fair values of all of AIGTG’s derivatives contracts at March 31, 2003 and December 31, 2002. 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 March 31, 2003, the net replacement value of AIGTG’s futures, forward and option contracts and interest rate and currency swaps approximated $2.09 billion.

^(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.
^(c)	Notional amount is not representative of either market risk or credit risk.

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 March 31, 2003 and December 31, 2002, the counterparty credit quality and counterparty breakdown by industry with respect to the net replacement value of AIGTG’s derivatives portfolio were as follows:

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 March 31, 2003, AIGTG did not have a significant concentration of credit risk from either an individual counterparty or group of counterparties.

AIG has issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIGFP and AIGTG arising from transactions entered into by AIGFP and AIGTG.

e) At March 31, 2003, ILFC had committed to purchase 487 aircraft deliverable from 2003 through 2010 at an estimated aggregate purchase price of $27.9 billion and had options to purchase 18 aircraft deliverable from 2003 through 2008 at an estimated aggregate purchase price of $1.3 billion. ILFC will be required to find customers for any aircraft acquired, and it must arrange financing for portions of the purchase price of such equipment.

f) AIG and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims for punitive damages, in the normal course of their business. AIG does not believe that such litigation will have a material adverse effect on its financial condition, future operating results or liquidity. However, the recent trend of increasing jury awards and settlements makes it somewhat more difficult to assess the ultimate outcome of such litigation. (See also Management’s Discussion and Analysis of Financial Condition and Results of Operations.)

In late 2002, a shareholder derivative action was filed in Delaware Chancery Court alleging breaches of fiduciary duty of loyalty and care against AIG’s directors. AIG management believes the allegations of the

complaint are without merit. AIG’s Board of Directors has appointed a special committee of independent directors to review the complaint and respond to the lawsuit.

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 March 31, 2003 ($2.01 billion gross; $651 million net) are believed to be adequate as these reserves are based on known facts and current law.

AIG’s general insurance companies have a special asbestos and environmental (A & E) claims unit actively managing A & E claims. AIG’s experienced claims professionals evaluate case reserves for AIG losses at the earliest possible time, reserving to ultimate probable loss based upon known facts, current law, jurisdiction, policy language and other factors. AIG routinely reviews the adequacy of A & E case reserves. AIG does not discount A & E reserves.

AIG uses primarily two methods to test the A & E reserves. One method, the Market Share method, produces indicated A & E reserve needs by applying the appropriate AIG company market share to estimated potential industry ultimate loss/ loss expense based on the latest estimates from A.M. Best and Tillinghast. A second method, a frequency/ severity approach, is also utilized. This approach utilizes current information as the basis of an analysis that predicts, for the next 10 years, the number of future environmental claims expected and the average severity of each. The trend in frequency created is based upon assumptions judged by AIG to be the most reasonable. The trend in severity starts with initial severities based on actual average current severity (under the varying case adequacy assumptions) and trending forward under assumptions deemed most reasonable by AIG. A similar report year claim projection analysis is also performed for asbestos. This analysis predicts future asbestos losses for the next 20 years based on the actual claim activity.

A summary of reserve activity for the three months ended March 31, 2003 and 2002, including estimates for applicable incurred but not reported losses and loss expenses, relating to asbestos and environmental claims separately and combined, is as follows:

g) SAI Deferred Compensation Holdings, Inc., a wholly-owned subsidiary of AIG, has established a deferred compensation plan for registered representatives of certain AIG subsidiaries, 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 SAI Deferred Compensation Holdings, Inc. to pay the deferred compensation under the plan.

At March 31, 2003, AIG’s debt outstanding of $74.37 billion, shown below, included borrowings of $65.63 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.

The maturity distributions of total borrowings at March 31, 2003 and December 31, 2002 were as follows:

During the first three months of 2003, AIGFP decreased the aggregate principal amount outstanding of its notes and bonds payable to $16.48 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” in Management’s Discussion and Analysis.)

AIG Funding, Inc. (Funding), through the issuance of commercial paper, helps fulfill the short-term cash requirements of AIG and its subsidiaries. Funding intends to continue to meet AIG’s funding requirements through the issuance of commercial paper guaranteed by AIG. The issuance of Funding’s commercial paper is subject to the approval of AIG’s Board of Directors.

ILFC and American General Finance, Inc. and its subsidiaries (AGF) 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 March 31, 2003, AIG did not guarantee the commercial paper of any of its subsidiaries other than Funding. On July 8, 2002, AGC ceased issuing commercial paper under its program. AGC’s funding requirements are now being met through Funding’s commercial paper program. (See also the discussion under “Derivatives” in Management’s Discussion and Analysis.)

AIG and Funding are parties to unsecured syndicated revolving credit facilities (collectively, the Facility) aggregating $2.75 billion. The Facility consists of $1.375 billion in a short-term revolving credit facility and $1.375 billion in a five year revolving credit facility. The Facility can be used for general corporate purposes and also to provide backup for Funding’s commercial paper programs. There are currently no borrowings outstanding under the Facility, nor were any borrowings outstanding as of March 31, 2003.

AGF is a party to unsecured syndicated revolving credit facilities aggregating $3.0 billion. The facilities consist of $1.5 billion in a short-term revolving credit facility and $1.5 billion in a five year revolving credit facility, which support AGF’s commercial paper borrowings. There are currently no borrowings under these facilities, nor were any borrowings outstanding as of March 31, 2003. AGF had $4.0 billion in aggregate principal amount of debt securities registered and available for issuance at March 31, 2003. AGF uses the proceeds from the issuance of notes and bonds for the funding of its finance receivables.

As of November 2001, AIG guaranteed the notes and bonds of AGC. During 2002, AGC issued $200 million in notes which matured in March 2003.

ILFC is a party to unsecured syndicated revolving credit facilities aggregating $3.15 billion to support its commercial paper program. The facilities consist of $2.15 billion in a short-term revolving credit facility and $1.0 billion in a three year revolving credit facility. There are currently no borrowings outstanding under these facilities, nor were any borrowings outstanding as of March 31, 2003.

At March 31, 2003, ILFC had increased the aggregate principal amount outstanding of its medium term and long term notes to $16.45 billion, a net increase of $1.65 billion from December 31, 2002, and recorded a net decline in its capital lease obligations of $19 million and a net decrease in its commercial paper of $212 million. At March 31, 2003, ILFC had $6.08 billion of debt securities registered for public sale. During the quarter ended March 31, 2003, $2.35 billion of debt securities were issued. During the second quarter of 2002, ILFC expanded its Euro Medium Term Note Program to $4.0 billion, under which $2.31 billion in notes were sold through March 31, 2003. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

ILFC had a $4.3 billion Export Credit Facility for use in connection with the purchase of approximately 75 aircraft delivered through 2001. This facility was guaranteed by various European Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90 percent on these borrowings depending on the delivery date of the aircraft. At March 31, 2003, ILFC had $2.03 billion outstanding under this facility. The debt is collateralized by a pledge of the shares of a subsidiary of ILFC, which holds title to the aircraft financed under the facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the preceding 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” in Management’s Discussion and Analysis.)

AIGFP has established a Euro Medium Term Note Program under which an aggregate principal amount of up to $4.0 billion of notes may be issued. As of March 31, 2003, $2.53 billion of notes had been issued under the program, $2.32 billion of which are outstanding. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

During the first three months of 2003, AIG did not issue any medium term notes and no previously issued notes matured. At March 31, 2003, AIG had $140 million in aggregate principal amount of debt securities registered for issuance from time to time.

On November 9, 2001, AIG received proceeds of approximately $1 billion from the issuance of Zero Coupon Convertible Senior Debentures Due 2031 with an aggregate principal amount at maturity of approximately $1.52 billion. Commencing January 1, 2002, the debentures are convertible into shares of AIG common stock at a conversion rate of 6.0627 shares per $1,000 principal amount of debentures if AIG common stock trades at certain levels for certain time periods. The debentures are callable by AIG on or after November 9, 2006. Also, holders can require AIG to repurchase these debentures once every five years beginning on November 9, 2006.

In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN45). FIN45 requires that, for guarantees within its scope that are issued or amended after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be established and recognized through earnings.

AIG guarantees the indebtedness of third parties principally in connection with AIG SunAmerica Inc.’s (AIG SunAmerica) investments in affordable housing properties. The guarantees are issued primarily to facilitate financing for the construction of the underlying properties, and range in duration of up to ten years. The loans are secured by the underlying real estate. Since the inception of this investment program over ten

years ago, payments under these guarantees have been insignificant. This is due to the fact that the loans are first backed by the creditworthiness of the third party general partner, and secondly, are secured by the underlying properties. The maximum exposure under these guarantees as of March 31, 2003 is approximately $3.4 billion.

In addition, AIG’s real estate investment operations will occasionally extend similar guarantees to real estate partnerships in which they are an investor. The guarantees facilitate financing for the construction, and/or purchase of land. There have been no payments to date under these guarantees. This is due to the fact that the loans are first backed by the creditworthiness of the third party general partner, and secondly, are secured by the underlying properties. The maximum exposure under these guarantees as of March 31, 2003 is approximately $70 million.

Through its ILFC subsidiary, AIG has also provided other types of guarantees. From time to time, ILFC participates with airlines, banks and other financial institutions to assist in financing aircraft by providing asset guarantees, put options or loan guarantees. Historically, losses arising from these guarantees have been immaterial, as ILFC has recourse to the value of the underlying aircraft, which offsets ILFC’s exposure, should ILFC be called upon to fulfill its obligations under these guarantees. The maximum exposure of these guarantees as of March 31, 2003 is approximately $1.0 billion.

In January 2003, FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN46). FIN46 changes the method of determining whether certain entities should be consolidated in AIG’s consolidated financial statements. An entity is subject to FIN46 and is called a Variable Interest Entity (VIE) if it has (i) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (ii) equity investors that cannot make significant decisions about the entity’s operations, or that do not absorb the expected losses or receive the expected returns of the entity. All other entities are evaluated for consolidation under existing guidance. A VIE is consolidated by its primary beneficiary, which is the party that has a majority of the expected losses or a majority of the expected residual returns of the VIE, or both.

The provisions of FIN46 are to be applied immediately to VIEs created after January 31, 2003, and to VIEs in which AIG obtains an interest after that date. For VIEs in which AIG holds a variable interest that it acquired before February 1, 2003, FIN46 applies to the fiscal quarter ended September 30, 2003. For any VIEs that must be consolidated under FIN46 that were created before February 1, 2003, the assets, liabilities and noncontrolling interest of the VIEs would be initially measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change.

AIG is currently evaluating the impact of applying FIN46 to existing VIEs in which it has a variable interest, and believes that the impact on its results of operations and financial condition will not be significant.

Effective January 1, 2003, AIG adopted the recognition provisions of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (FAS 123). This statement establishes the financial accounting and reporting standards for stock-based employee compensation plans, such as AIG’s stock purchase plan, stock option plan and stock incentive plan. Under the recognition provisions of FAS 123, costs with respect to stock compensation are measured using the fair value of the shares subscribed or granted as at the date of grant recognized ratably over the vesting period. Such fair value is derived through an option pricing model.

Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment to FASB Statement No. 123” (FAS 148) was issued in 2002. This statement amended FAS 123 and provides alternative methods of transition for a voluntary change to the recognition provisions of FAS 123. Also, FAS 148 amended certain of the disclosure requirements of FAS 123.

AIG has elected the “Prospective Method” in the application of the recognition provisions as prescribed by FAS 123. Such method provides for the recognition of the fair value with respect to stock-based compensation for shares subscribed or granted on or after January 1, 2003.

Prior to adoption of the recognition provisions of FAS 123, as amended, AIG recognized stock compensation in accordance with the provisions of APB Opinion No. 25 “Accounting for Stock Issued to Employees”.

With respect to net income for the three month periods ended March 31, 2003 and 2002, the following table provides a pro forma reconciliation as if AIG had adopted the recognition provisions of FAS 123 at its inception:


*	Actual stock-based compensation earnings per share impact is substantially less than one cent.

The following condensed consolidating financial statements are provided in compliance with Regulation S-X of the Securities and Exchange Commission. AGC is a holding company and a wholly-owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all outstanding debt of AGC.

This Quarterly Report on Form 10-Q 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 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.

Set forth below are reconciliations of each “non-GAAP financial measure” used in this Quarterly Report on Form 10-Q to its most equivalent measure presented on a GAAP basis. For an explanation of why AIG management considers these “non-GAAP measures” useful, see Executive Summary in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is designed to provide the reader a narrative with respect to AIG’s operations, financial condition and liquidity and certain other significant matters.

AIG’s operations are conducted principally through four business segments: general insurance, life insurance, financial services and retirement savings & asset management. Within each of these business segments are various operating groups generally formed based upon products or services which may be offered in different geographic locations.

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, AIG presents its operations in the way it believes will be most meaningful, as well as most transparent. Operating income is shown exclusive of realized capital gains (losses) because the determination to realize capital gains or losses is generally independent of the insurance underwriting process. Moreover, the equity analysts who follow AIG exclude such realized transactions in their analyses for

the same reason. Premium income, gross premiums written, statutory underwriting profit (loss) and combined ratios are presented in accordance with accounting principles prescribed by insurance regulatory authorities because these are standard measures of performance used in the insurance industry and thus allow more meaningful comparisons with AIG’s insurance competitors. A reconciliation of these measurements to the most equivalent measurements presented in accordance with Generally Accepted Accounting Principles (GAAP) is presented on page 28.

AIG’s revenues in the first three months of 2003 increased 17.3 percent to $18.9 billion when compared to $16.1 billion in the same period of 2002. Growth in revenues was primarily attributable to the growth in net premiums earned from the global insurance operations. This growth was negatively impacted by realized capital losses incurred. The following tables reconcile results reported on a GAAP basis to the presentation AIG management believes is most meaningful.

AIG’s income before income taxes and minority interest decreased 1.2 percent in the first three months of 2003 when compared to the same period of 2002. The factor causing the decrease was the increase in realized capital losses. If the realized capital losses were excluded from the first three months of 2003 and the same period of 2002, growth in AIG’s income before taxes and minority interest would be 11.4 percent.

AIG’s net income in the first three months of 2003 decreased 1.4 percent to $1.95 billion when compared to $1.98 billion in the same period of 2002. Excluding realized capital gains (losses), net of taxes, AIG’s net income in the first three months of 2003 increased 11.1 percent.

The following table summarizes the operations of each principal segment for the first three months of 2003 and 2002:

^(a) Represents the sum of net premiums earned, net investment income and realized capital gains (losses).

^(b) Represents the sum of life premium income, net investment income and realized capital gains (losses).

^(d) Represents retirement savings & asset management commissions and other fees.

General Insurance: General insurance operating income increased 22.6 percent in the first three months of 2003 compared to the same period in 2002. Excluding realized capital gains (losses), general insurance operating income increased 24.8 percent, reflecting strong growth in adjusted underwriting profit.

Life Insurance: Life insurance operating income decreased 9.9 percent in the first three months of 2003 compared to the same period in 2002. Excluding realized capital gains (losses), life insurance operating income increased 13.6 percent, reflecting operating income growth in each of AIG’s principal life insurance businesses.

Financial Services: Financial services operating income increased 11.9 percent in the first three months of 2003 compared to the same period in

Retirement Savings & Asset Management: Retirement savings & asset management operating income decreased 5.6 percent in the first three months of 2003 when compared to the same period in 2002. Results in the individual variable annuity and mutual fund businesses continue to be impacted by weak equity markets in the United States and around the world.

Realized Capital Losses: During the first three months of 2003, AIG incurred net realized capital losses of $632 million. These realized capital losses reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings.

Capital Resources: At March 31, 2003, AIG had total capital funds of $62.26 billion and total borrowings of $74.37 billion. At that date, $65.63 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.

During the period from January 1, 2003 through March 31, 2003, AIG repurchased in the open market 1,625,000 shares of its common stock.

Liquidity: At March 31, 2003, consolidated invested assets were $459.94 billion including $14.92 billion in cash and short-term investments. Consolidated net cash provided from operating activities in the first three months of 2003 amounted to $8.89 billion.

Premium rates in the General Insurance business are continuing to strengthen both domestically and in key international markets, along with policy restrictions and exclusions. AIG expects that such rate increases will continue through 2003. Such increases will have a strong positive impact on cash flow available for investment. Thus, General Insurance’s net investment income is expected to rise in future quarters even in the low interest rate environment.

In the Life Insurance segment, AIG expects continued growth with respect to its domestic individual fixed annuity operation, while in overseas markets, AIG’s life insurance operations are expected to continue double digit growth. AIG continues to expand its operations in China, becoming the first foreign insurance organization to have wholly owned life insurance operations in Beijing, Suzhou, Dongguan and Jiangmen as well as previously established operations in Shanghai, Foshan, Guangzhou and Shenzhen. AIG also expects India and Vietnam to offer additional opportunities for growth.

AIG expects that ILFC will continue its growth and operating profitability even as the airline industry remains under stress. ILFC derives over 80 percent of its lease revenues from foreign carriers, thus limiting its exposure to the domestic commercial aviation market which is significantly more depressed than the rest of the industry. AIG is also optimistic about opportunities for growth in its consumer finance business through continued expansion of overseas credit card operations and alternative distribution systems such as the use of the Internet. During 2003, AIG also expects to expand its recently formed international retirement savings operations.

The outbreak of Severe Acute Respiratory Syndrome (SARS) did not impact AIG’s operations during the first quarter of 2003. However, SARS may impede agents from freely visiting prospects and will have some impact on new sales in certain Asian markets during the second quarter of 2003. As a result, AIG has increased its direct marketing efforts, including telephone marketing. There is growing demand for some of AIG’s traditional policyholder protection and critical illness products. AIG expects SARS to have only a slight impact on operating income.

AIG considers its most critical accounting estimates those with respect to reserves for losses and loss expenses, future policy benefits for life and accident and health contracts, deferred policy acquisition costs, and fair value determinations with respect to certain assets and liabilities of certain of the subsidiaries of AIG’s financial services operations. These accounting estimates require the use of assumptions about matters that are highly uncertain at the time of estimation. Reserves for losses and loss expenses are estimated using data where the more recent accident years of long tail casualty lines have limited statistical credibility in reported net losses. (See also the discussions “Reserve for Losses and Loss Expenses”, and “Asbestos and

Environmental Claims” herein.) The liability for future policy benefits for life and accident and health contracts include estimates for interest rates, mortality and surrender rates and invested asset performance. (See also the discussion “Life Insurance Operations”.) Recoverability of deferred policy acquisition costs are contingent upon the underlying insurance operations being profitable. (See also the discussions “General Insurance Operations”, “Life Insurance Operations” and “Retirement Savings and Asset Management Operations” herein.) Fair value determinations with respect to certain assets and liabilities of certain subsidiaries of AIG’s financial services operations are arrived at through the use of valuation models. (See also the discussion “Managing Market Risk” herein.)

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); Transatlantic Holdings, Inc. (Transatlantic); Personal Lines, including 21st Century Insurance Group (21st Century); and Mortgage Guaranty.

DBG is AIG’s primary domestic general 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.

Transatlantic offers through its reinsurance company subsidiaries reinsurance capacity, both domestically and overseas, on treaty and facultative basis for a full range of property and casualty products.

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 primarily 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. (See also Note 2 of Notes to Financial Statements.)

General insurance operations for the three month periods ending March 31, 2003 and 2002 were as follows:

During the first three months of 2003, net premiums written and net premiums earned increased 30.1 percent and 32.3 percent, respectively, from those of 2002.

Commencing in the latter part of 1999 and continuing through and into the current quarter, the commercial property-casualty market place has experienced rate increases. Virtually all areas of DBG have experienced rate increases, as well as maintaining an excellent retention rate for desired renewal business. The vast majority of the increase in the first three months of 2003 resulted from rate increases with respect to renewed business. Overall, DBG’s net premiums written increased $1.09 billion or 31.7 percent in the first three months of 2003 over 2002. Adjusting this growth for cancelled or non-renewed business, such growth would have approximated 37 percent.

Personal Lines’ net premiums written increased 21.8 percent or $158 million in the first three months of 2003 from 2002, reflecting auto insurance rate increases in many states.

Foreign General insurance net premiums written increased 30.7 percent and net premiums earned increased 38.6 percent in the first three months of 2003 when compared to the same period of 2002.

In comparing the average foreign currency exchange rates used to translate the results of AIG’s foreign general operations during the first three months of 2003 to those average foreign currency exchange rates used to translate AIG’s Foreign General results during the same period of 2002, the U.S. dollar weakened slightly in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, when foreign net premiums written were translated into U.S. dollars for the purposes of the preparation of the consolidated financial statements, total general insurance net premiums written were approximately 1.7 percentage points more than they would have been if translated utilizing those average foreign currency exchange rates which prevailed during that same period of 2002.

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 for the three months ending March 31, 2003 and 2002 were as follows:

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, in general, requires immediate expense recognition and ignores the matching of revenues and expenses as required by GAAP. That is, for statutory purposes, expenses are recognized immediately, not over the same period that the revenues are earned.

A basic premise of GAAP accounting is the recognition of expenses at the same time revenues are earned, the principle of matching. Therefore, to convert underwriting results to a GAAP basis, acquisition expenses are deferred (deferred acquisition costs — DAC) and amortized over the period the related premiums written are earned. 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. DAC is reviewed for recoverability and such review requires management judgment.

A major part of the discipline of a successful general insurance company is to produce an underwriting profit, exclusive of investment income. When underwriting is not profitable, premiums are inadequate to pay for losses and expenses. 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. (See also the discussion under “Liquidity” herein.)

The underwriting environment varies from country to country, as does the degree of litigation activity. Regulation, product type and competition have a direct impact on pricing and consequently profitability as reflected by adjusted underwriting profit and statutory general insurance ratios.

The effects of catastrophes incurred in the first three months of 2003 and 2002 were insignificant. With respect to catastrophe losses, AIG believes that it has taken appropriate steps to reduce the magnitude of possible future losses. The occurrence of one or more catastrophic events of unanticipated frequency or severity, such as a terrorist attack, earthquake, or hurricane, that causes insured losses, however, could have a material adverse effect on AIG’s results of operations, liquidity or financial condition. Current techniques and models may not accurately predict in the future the probability of catastrophic events and the extent of the resulting losses. Moreover, one or more catastrophe losses could impact negatively AIG’s reinsurers and result in an inability of AIG to collect reinsurance recoverables. The impact of losses caused by catastrophes can fluctuate widely from period to period, making comparisons of recurring type business more difficult.

General insurance net investment income in the first three months of 2003 increased 5.2 percent when compared to the same period of 2002. The cash flow resulting from the growth in net premiums written had a positive impact on net investment income. (See also the discussion under “Liquidity” herein.)

General insurance realized capital losses were $173 million and $122 million in the first three months of 2003 and 2002, respectively. These realized capital losses resulted from the ongoing management of the general insurance investment portfolios within the overall objectives of the general insurance operations and reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings. (See the discussion on “Valuation of Invested Assets” herein.)

The following table reconciles general insurance operating income on a GAAP basis to management’s presentation herein:

General insurance operating income for the first three months of 2003 increased 22.6 percent to $1.14 billion. Excluding realized capital gains (losses), general insurance operating income in-

creased 24.8 percent over the same period of 2002. The contribution of general insurance operating income to income before income taxes and minority interest was 39.1 percent during the first three months of 2003 compared to 31.5 percent in the same period of 2002. Excluding realized capital losses from income before income taxes and minority interest during the first three months of 2003 and 2002, the contribution of general insurance operating income was 37.0 percent and 33.1 percent, respectively.

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 general 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 $29.85 billion at March 31, 2003 and resulted from AIG’s reinsurance arrangements. Thus, a credit exposure existed at March 31, 2003 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, 2002, approximately 40 percent of the general reinsurance assets were from unauthorized reinsurers. In order to obtain statutory recognition, the majority of these balances were collateralized. The remaining 60 percent of the general reinsurance assets were from authorized reinsurers and over 90 percent of such balances are from reinsurers rated A-(excellent) or better, as rated by A.M. Best. Through March 31, 2003, these distribution percentages have not changed significantly. This rating is a measure of financial strength. The terms authorized and unauthorized pertain to regulatory categories, not creditworthiness.

AIG’s allowance for estimated unrecoverable reinsurance has not changed significantly from December 31, 2002 when AIG had allowances for unrecoverable reinsurance approximating $120 million. At March 31, 2003, 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 March 31, 2003, the consolidated general reinsurance assets of $29.85 billion include reinsurance recoverables for paid losses and loss expenses of $4.18 billion and $22.01 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 thereto are reflected in income currently. It is AIG’s belief that the ceded reserves at March 31, 2003 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.

The table below classifies as of March 31, 2003 the components of the general insurance reserve for

These loss reserves represent the accumulation of estimates of ultimate losses, including IBNR and loss expenses. Certain of these loss reserves are discounted. These discounted reserves relate primarily to certain workers’ compensation claims.

At March 31, 2003, general insurance net loss reserves increased $1.17 billion from prior year end to $31.52 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 March 31, 2003. While AIG annually reviews the adequacy of established loss reserves, there can be no assurance that AIG’s ultimate loss reserves will not adversely develop and materially exceed AIG’s loss reserves as of March 31, 2003. In the future, if the general insurance net loss reserves develop deficiently, such deficiency would have an adverse impact on 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. The other group is short tail lines of business consisting principally of property lines, personal lines and certain classes of casualty lines.

Estimation of ultimate net losses and loss expenses (net losses) for long tail casualty lines of business is a complex process and depends on a number of factors, including the line and volume of the business involved. In the more recent accident years of long tail casualty lines there is limited statistical credibility in reported net losses. That is, a relatively low proportion of net losses would be reported claims and expenses and an even smaller proportion would be net losses paid. A relatively high proportion of net losses would therefore be IBNR.

A variety of actuarial methods and assumptions are normally employed to estimate net losses for long tail casualty lines. These methods ordinarily involve the use of loss trend factors intended to reflect the estimated annual growth in loss costs from one accident year to the next. For the majority of long tail casualty lines, net loss trend factors approximated six percent. Loss trend factors reflect many items including changes in claims handling, exposure and policy forms; current and future estimates of monetary inflation and social inflation and increases in litigation and awards. 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, 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 the property’s exposure to fire loss can be approximated by the amount of insurance purchased.

AIG’s annual reserve review does not calculate a range of loss reserve estimates. Because AIG’s general insurance business is primarily in volatile long tail casualty lines driven almost entirely by severity rather than frequency of claims, developing

a range around loss reserve estimates would not be meaningful. An estimate is calculated which AIG’s actuaries believe provides a reasonable estimate of the required reserve. This amount is evaluated against actual carried reserves.

It should also be noted that the overall AIG property/casualty reserves are the combined total of dozens of insurance company subsidiaries of AIG. Each subsidiary’s reserves are generally reviewed individually, except in some cases where the business is written on a pooled basis and the subsidiaries therefore pool their reserves as well.

A number of actuarial assumptions are made in the review of reserves for each individual segment. For segments in longer tail lines of business, actuarial assumptions generally are made with respect to the following:


	1.	Loss development factors (used to project the reported losses for each accident year to an ultimate basis).

	2.	Loss trend factors (used to establish expected loss ratios for subsequent accident years based on the projected loss ratio for prior accident years).

	3.	Expected loss ratios for the latest accident year (i.e. accident year 2002 for the year end 2002 loss reserve analysis) and in some cases, for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend (See 2 above) and the impact of rate changes and all other factors which can be quantified. For low frequency, high severity classes such as Excess Casualty and Directors and Officers Liability, expected loss ratios generally are utilized for at least the three most recent accident years.

To the extent the actual loss development factors, loss trend factors, or other factors used to establish expected loss ratios differ from those assumed in AIG’s loss reserve studies, AIG’s loss reserve position would be directly impacted. While it may be possible to assume loss reserve “ranges” for high frequency, shorter tail classes of business, it is AIG’s judgment that the concept of a meaningful loss reserve range does not apply to low frequency, high severity, long tail classes such as Excess Casualty and Directors and Officers Liability (D & O). The past decade has shown that actual loss trends from year to year, and the resulting adequacy of expected loss ratios and of the resulting carried loss reserves, cannot reasonably be expected to fall within any particular range. For example, loss costs nearly doubled during just a three accident year period for AIG’s Excess Casualty and D & O segments, while loss costs for these same two classes actually declined for several years in the early 1990s. The causes of the spike in loss costs include irrational jury awards and liability inflation that could not have been anticipated in pricing (tort system out of control), an explosion in medical costs and related liabilities, and the dot.com bubble and corporate governance related issues that have affected D & O.

Additionally, it is important to note that most of AIG’s business falls into the category of longer tail lines of business. Due to the multitude of such classes and the volume of detail for each, it would not be possible to provide complete claim frequency, settlement, closure and other data for all such segments, nor does AIG believe that such disclosure by class of business would be meaningful or useful to the reader. It should be noted that none of the other segments or classes reflects the highly uncertain qualities that apply to the asbestos and environmental claims as more fully described below. For example, traditional actuarial methodologies can be applied to classes such as excess casualty, directors and officers liability, healthcare, and the other long tail coverages that AIG writes. These methodologies cannot be applied to asbestos and environmental exposures. Other than asbestos and environmental exposures, there is no area of significant exposure to AIG for which traditional actuarial methodologies cannot be applied.

For other property and short tail casualty lines, the loss trend is implicitly assumed to develop at the rate that reported net losses develop 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.

The vast majority of these asbestos and environmental claims emanate from policies written in 1984 and prior years. AIG established over a decade ago specialized toxic tort and environmental claim units, which investigate and adjust all such asbestos and environmental claims. These units utilize a comprehensive ground up approach to claim adjusting by thoroughly evaluating each exposure on a claim by claim basis. Commencing in 1985, standard policies contained an absolute exclusion for pollution related damage and an absolute asbestos exclusion was also implemented. 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.

In the interim, AIG and other industry members have and will continue to litigate the broadening judicial interpretation of the policy coverage and the liability issues. At the current time, it is not possible to determine the future development of asbestos and environmental claims with the same degree of reliability as is the case for other types of claims. Such development will be affected by the extent to which courts continue to expand the intent of the policies and the scope of the coverage, as they have in the past, as well as by the changes in Superfund and waste dump site coverage issues. Although the estimated liabilities for these claims are subject to a significantly greater margin of error than for other claims, the reserves carried for these claims at March 31, 2003 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.

In asbestos, for example, AIG has resolved all claims with respect to miners and product manufacturers (Tier I), for which payments are completed or reserves are established to cover future payment obligations. Asbestos claims with respect to products containing asbestos (Tier 2) accounts are generally very mature losses, and have been appropriately recognized and reserved by AIG’s asbestos claims operation. AIG believes that the vast majority of the incoming claims, with respect to products containing small amounts of asbestos and companies in the distribution chain and parties with remote, ill-defined involvement with asbestos (Tier 3 and 4), should not impact its coverage; this is due to a combination of factors, including the increasingly peripheral companies being named in asbestos litigation, smaller limits issued to peripheral defendants, tenuous liability cases against peripheral defendants, attachment points of the excess policies, and the manner in which resolution of these weaker cases would be allocated among all insurers, including non-AIG companies, over a long period of time.

A summary of reserve activity for the three months ended March 31, 2003 and 2002, including estimates for applicable IBNR, relating to asbestos and environmental claims separately and combined, is as follows:

The gross and net IBNR included in the aforementioned reserve for losses and loss expenses at March 31, 2003 and December 31, 2002 were estimated as follows:

A summary of asbestos and environmental claims count activity for the three month periods ended March 31, 2003 and 2002 was as follows:

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 pay-

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 2002 were $76 million. Based upon current information, AIG does not anticipate that its net assessment will be significantly different in 2003.

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.

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 fixed and variable annuities, guaranteed investment contracts and pensions.

AIG’s three principal overseas life operations are American Life Insurance Company (ALICO), American International Assurance Company, Limited together with American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and all of its business is written outside of the United States. ALICO has operations either directly or through subsidiaries in approximately 50 countries located in Europe, Africa, Latin America, the Caribbean, the Middle East, and the Far East, with Japan being the largest territory. In 2001, AIG added significantly to its presence in Japan with the acquisition of AIG Star Life Insurance Co., Ltd., (AIG Star Life) as a result of the reorganization of Chiyoda Mutual Life Insurance Company. AIA operates primarily in China (including Hong Kong), Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. AIG’s principal domestic life insurance subsidiaries include AIG American General Life Companies, AIG Annuity Insurance Company and SunAmerica Life Insurance Company. These companies utilize multiple distribution channels including brokerage and career and general agents to offer traditional life products as well as financial investment products. (See also Note 2 of Notes to Financial Statements.)

Life insurance operations presented on a major product basis for the three month periods ending March 31, 2003 and 2002 were as follows:

^(a) Represents a non-GAAP measurement used by AIG to help manage its life insurance operation, and may not be comparable to similarly captioned measurements used by other life insurance companies.

Life insurance operating income decreased 9.9 percent to $1.20 billion during the first three months of 2003 when compared to the same period last year. Excluding realized capital gains (losses), life insurance operating income increased 13.6 percent in 2003 over the same period of 2002.

The following table reconciles the life operating income reported on a GAAP basis to the presentation AIG management believes is most meaningful:

The contribution of life insurance operating income to income before income taxes and minority interest amounted to 40.9 percent during the first three months of 2003 compared to 44.8 percent in the same period of 2002. Excluding realized capital losses from income before income taxes and minority interest during the first three months of 2003 and 2002, the contribution of life insurance operating income was 43.3 percent and 42.5 percent, respectively.

AIG’s GAAP life premium income during the first three months of 2003 represented an 18.3 percent increase from the same period in 2002. Foreign life operations produced 76.6 percent and 77.4 percent of the GAAP life premium income in 2003 and 2002, respectively.

The traditional life products, particularly individual life products, were major contributors to the growth in foreign premium income. These tradi-

tional 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 and AIG Star Life.

Since AIG purchased AIG Star Life, a part of income earned by AIG Star Life has resulted from surrender charges earned on policies that were either surrendered or lapsed. This favorable impact on operating income was anticipated when AIG took control. As these surrenders diminish in subsequent periods, operating income from that source will also be impacted. The majority of AIG Star Life’s future income is expected to be related to continuing premiums paid on renewal business, and new business to be generated from a growing agency force.

As previously discussed, the U.S. dollar weakened slightly in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, for the first three months of 2003, when foreign life premium income was translated into U.S. dollars for purposes of the preparation of the consolidated financial statements, total life premium income was approximately 2.6 percentage points more than it would have been if translated utilizing average exchange rates prevailing in 2002.

Life insurance net investment income increased 11.6 percent during the first three months of 2003. The growth in net investment income was primarily 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 for the first three months were $345 million in 2003 and $29 million in 2002. 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 reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings. (See the discussion on “Valuation of Invested Assets” herein.)

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 primarily 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 foreign life companies limit their maximum underwriting exposure on traditional life insurance of a single life to approximately $1.5 million of coverage and AIG’s domestic life companies, limit their maximum underwriting exposure on traditional life insurance of a single life to $2.5 million of coverage by using yearly renewable term reinsurance.

The investment risk represents the exposure to loss resulting from the cash flows from the invested assets, primarily long-term fixed rate investments, being less than the cash flows required to meet the obligations of the expected policy and contract liabilities and the necessary return on investments.

To minimize its exposure to investment risk, AIG tests the cash flows from the invested assets and the policy and contract liabilities using various interest rate scenarios to assess whether there is a liquidity excess or deficit. If a rebalancing of the invested assets to the policy and contract claims became necessary and did not occur, a demand could be placed upon liquidity. (See also the discussion under “Liquidity” herein.)

The asset-liability relationship is appropriately managed in AIG’s foreign operations, as it has been throughout AIG’s history, even though certain territories lack qualified long-term investments or there are investment restrictions imposed by the local regulatory authorities. For example, in Japan and several Southeast Asia territories, the duration of the investments is often for a shorter period than the effective maturity of the related policy liabilities. Therefore, there is a risk that the reinvestment of the proceeds at the maturity of the initial investments may be at a yield below that of the interest required for the accretion of the policy liabilities. Additionally, there exists a future investment risk 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.

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 while continuing to maintain satisfactory 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.)

The asset-liability relationship is appropriately managed in AIG’s domestic operations, as there is ample supply of qualified long-term investments.

AIG uses asset-liability matching as a management tool worldwide to determine the composition of the invested assets and appropriate 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.

For the ALICO operations in Japan, the variable life contract separate account fund performance has varied from the level assumed in the original pricing of the product. Thus, a general account liability has been established for the potential shortfall of future contract revenues. The ultimate liability is predominately dependent upon the fund performance in the future.

Deferred policy acquisition costs (DAC) for life insurance products arises from the deferral of those costs that vary with, and are directly related to, the acquisition of new or renewal business. Policy acquisition costs for traditional life insurance products are generally deferred and amortized over the premium paying period of the policy. Policy acquisition costs which relate to universal life and investment-type products (non-traditional life products) are deferred and amortized, with interest, in relation to the historical and future incidence of estimated gross profits to be realized over the estimated lives of the contracts. Estimated gross profits include investment income and gains and losses on investments less interest required as well as other charges in the contract less actual mortality and expenses. Current experience and changes in the expected future gross profits are analyzed to determine the impact on the amortization of DAC. The estimation of projected gross profits requires significant management judgment. The elements with respect to the current and projected gross profits are reviewed and analyzed quarterly and are appropriately adjusted.

DAC for both traditional life and non-traditional life products are subject to review for recoverability, which involve estimating the future profitability of current business. This review also involves significant management judgment.

AIG’s financial services subsidiaries engage in diversified financial products and services including aircraft leasing, consumer and insurance premium financing, and capital markets structuring and market-making activities.

International Lease Finance Corporation (ILFC) engages primarily in the acquisition of 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 2 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. AIGFP does not engage in trading activities with respect to commodity contracts. AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various commodity and foreign exchange trading and market making activities. (See also Note 2 of Notes to Financial Statements.)

AIG’s Consumer Finance operations include American General Finance, Inc. and its subsidiaries (AGF) as well as AIG Consumer Finance Group, Inc. and its subsidiaries (CFG). AGF and CFG provide a wide variety of consumer finance products, including mortgages, consumer loans, retail sales finance and credit related insurance to customers both domestically and overseas, particularly in emerging markets. (See also Note 2 of Notes to Financial Statements.)

Financial services operations for the three month periods ending March 31, 2003, and 2002 were as follows:

Financial services operating income increased 11.9 percent in the first three months of 2003 over the same period of 2002. Financial services operating income represented 18.1 percent of AIG’s income before income taxes and minority interest in the first three months of 2003. This compares to 16.0 percent in the same period of 2002.

ILFC generates its revenues primarily from leasing new and used commercial jet aircraft to domestic and foreign airlines. Revenues also result from the remarketing of commercial jets for its own account, for airlines and for financial institutions. Revenues in the first three months of 2003 increased 12.7 percent from the same period of 2002. The revenue growth resulted primarily from the increase in flight equipment under operating lease and the increase in the relative cost of the leased fleet. ILFC has historically derived over 80 percent of its lease revenues with respect to flight equipment from airlines based outside the United States and is not significantly exposed to current domestic airline difficulties.

ILFC has historically re-leased aircraft returning at lease termination prior to aircraft being returned to ILFC. For aircraft returning due to early lease termination, ILFC has generally been able to re-lease such aircraft within two to three months of its return. As a lessor, ILFC considers an aircraft “idle” or “off lease” when the aircraft is not subject to a signed lease agreement or signed letter of intent. ILFC had one aircraft off lease at March 31, 2003 which had been off lease for less than three months. No impairments have been recognized related to these aircraft as ILFC believes that the existing service potential of the aircraft in ILFC’s portfolio has not been diminished and ILFC has been able to re-lease the aircraft without diminution in lease rates from those previously obtained that would require an impairment write-down.

ILFC management is very active in the airline industry. Management formally reviews regularly, and no less frequently than quarterly, issues affecting ILFC’s fleet, including events and circumstances that may cause impairment of aircraft values. Management evaluates aircraft in the fleet as necessary, based on these events and circumstances in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144). No impairments have been recognized related to these aircraft. (See also the discussions under “Liquidity” herein.)

During the first three months of 2003, operating income increased 0.7 percent from the same period of 2002. ILFC finances its purchases of aircraft primarily through the issuance of a variety of debt instruments. The composite borrowing rates at the end of the first three months of 2003 and 2002 were 4.57 percent and 4.93 percent, respectively. (See also the discussions under “Capital Resources” and “Liquidity” herein and Note 2 of Notes to Financial Statements.)

ILFC is exposed to operating loss and liquidity strain 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. As a result of these measures and its own contingency planning, ILFC did not suffer any material losses from airline shutdowns in the aftermath of the September 11 terrorist attacks, but there can be no assurance that ILFC will successfully manage the risks relating to the impact of possible future deterioration in the airline industry. Approximately 86 percent of ILFC’s fleet is leased to non-U.S. carriers, and this fleet, the most efficient in the airline industry, continues to be in high demand from such carriers.

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.

As a dealer, AIGFP marks its transactions daily to fair value. Thus, a gain or loss on each transaction is recognized daily. AIGFP hedges the market risks arising from its transactions. Therefore, revenues and operating income are not significantly exposed to or affected by market fluctuations and volatility. Revenues of AIGFP and the percentage change in revenues for any given period are significantly affected by the number and size of transactions entered into by AIGFP during that period relative to those entered into during the prior period. Operating income and the percentage change in operating income for any period are determined by the number, size and profitability of the transactions attributable to that period relative to those attributable to the prior period. The realization of operating income as measured by the receipt of funds is not a significant reporting event as the profit or loss on each of AIGFP’s transactions has already been reflected in operating income.

Revenues in the first three months of 2003 decreased 0.1 percent from the same period of 2002. During the first three months of 2003, operating income increased 11.2 percent from the same period of 2002. As AIGFP is a transaction-oriented operation, current and past revenues and operating results may not provide a basis for predicting future performance. The breakdown by percentage contribution of revenues and operating income for AIGFP in the first three months of 2003 and 2002 is set forth below. The percentages for operating income are the same as those for revenues because expenses are allocated across all products in proportion to the revenues generated by that product. Material changes in the distribution of revenues and operating income are not meaningful because of the transactional nature of AIGFP’s business.

Financial market conditions in the first three months of 2003 compared with the comparable period in 2002 were characterized by lower interest rates across fixed income markets globally, a worldwide slump in credit prices combined with a widening of credit spreads, and lower equity valuations.

Derivative transactions are entered into in the ordinary course of AIGFP’s business. Therefore, income on interest rate, equity and credit derivatives along with their related hedges are recorded on a mark to market value or at estimated fair value where market prices are not readily available with the resulting unrealized gains or losses reflected in the income statement in the current year. In the first three months of 2003, less than five percent of revenues resulted from transactions valued at estimated fair value. The mark to fair value of derivative transactions is reflected in the balance sheet in the captions “Unrealized gain on interest rate and currency swaps, options and forward transactions” and “Unrealized loss on interest rate and currency swaps, options and forward transactions”. The unrealized gain represents the aggregate of each net receivable by counterparty, and the unrealized loss represents the aggregate of each net payable by counterparty. These amounts will change from one period to the next due to changes in interest rates, currency rates, equity prices and other market variables, as well as cash movements, execution of new transactions and the maturing of existing transactions. Spread income on investments and borrowings are recorded on an accrual basis over the life of the transaction. Investments are classified as available for sale securities and are marked to market with the resulting unrealized gains or losses reflected in the equity section.

The most significant component of AIGFP’s operating expenses is compensation, which approximated 29 percent and 32 percent of revenues in the first three months of 2003 and 2002, respectively.

Domestically, AIG’s consumer finance operations derive a substantial portion of their revenues from finance charges assessed on outstanding mortgages and finance receivables from the sub-prime market, while overseas operations are engaged in

developing a multi-product consumer finance business with an emphasis on emerging markets. Revenues increased 4.2 percent in the first three months of 2003 from the same period in 2002; operating income increased 19.1 percent compared to the 2002 period. The increase in revenues was the result of growth in average finance receivables.

Consumer finance operations are exposed to loss when contractual payments are not received. Collection exposure is managed through the mix of tight underwriting controls, types of loans and security thereon. (See also the discussions under “Capital Resources” and “Liquidity” herein and Note 2 of Notes to Financial Statements.)

AIG’s retirement savings & asset management operations offer a wide variety of investment products, including variable annuities, mutual funds, and investment asset management. Such products and services are offered to individuals and institutions both domestically and overseas.

AIG’s principal retirement savings & asset management operations are conducted through AIG SunAmerica Inc. (AIG SunAmerica), AIG VALIC, and AIG Global Investment Group, Inc. and its subsidiaries (Global Investment). AIG SunAmerica develops and sells variable annuities and other investment products, sells and manages mutual funds and provides financial services. AIG VALIC provides tax qualified annuities to the employees of educational, healthcare and governmental entities. Global Investment manages third-party institutional, retail and private equity funds invested assets on a global basis, provides securities lending and custodial services and organizes, and manages the invested assets of institutional private equity investment funds. Each of these subsidiary operations receives fees for investment products and services provided.

For variable annuities, AIG’s policy has been to adjust amortization assumptions for deferred acquisition costs (DAC) when estimates of current or future gross profits to be realized from these contracts are revised. With respect to variable annuities sold domestically (representing the vast majority of AIG’s variable annuity business), the assumption for the long-term annual net growth rate of the equity markets used in the determination of DAC amortization is approximately 10 percent. A methodology referred to as “reversion to the mean” is used to maintain this long-term net growth rate assumption, while giving consideration to short-term variations in equity markets.

A number of guaranteed minimum death benefits (GMDB) and other similar benefits are offered on variable annuities. GMDB-related contract benefits incurred, net of reinsurance were $25 million and $9 million for the three months ended March 31, 2003 and 2002, respectively. In accordance with GAAP, AIG expenses these benefits in the period paid.

Retirement savings & asset management operations for the three month periods ending March 31, 2003 and 2002 were as follows:

Retirement savings & asset management operating income in the first three months of 2003 decreased 5.6 percent when compared to the same period of 2002 reflecting the continued volatility in worldwide equity markets.

Retirement savings & asset management operating income represented 9.7 percent of AIG’s income before income taxes and minority interest in the first three months of 2003. This compares to 10.1 percent in the same period of 2002.

At March 31, 2003, AIG’s third party assets under management, including both retail mutual funds and institutional accounts, approximated $41 billion.

Other realized capital losses amounted to $114 million, and $81 million in the first three months of 2003 and 2002, respectively.

Other income (deductions)-net includes income generated by the investment of capital held by AIG SunAmerica outside of its life insurance subsidiaries, AIG’s equity in certain minor majority-owned subsidiaries and certain partially-owned companies, realized foreign exchange transaction gains and losses in substantially all currencies and unrealized gains and losses in hyperinflationary currencies, as well as the income and expenses of the parent holding company and other miscellaneous income and expenses. In the first three months of 2003, other income (deductions) — net amounted to $(114) million. In the same period of 2002, other income (deductions) — net amounted to $6 million. This decline was primarily the result of weaker performance of AIG SunAmerica investments in partnerships.

Income before income taxes and minority interest amounted to $2.92 billion in the first three months of 2003 compared to $2.96 billion in the same period of 2002.

In the first three months of 2003, AIG recorded a provision for income taxes of $876 million compared to the provision of $892 million in the same period of 2002. These provisions represent effective tax rates of 30.0 percent in the first three months of 2003 and 30.1 percent in the same period of 2002.

Minority interest represents minority shareholders’ equity in income of certain majority-owned consolidated subsidiaries. Minority interest amounted to $94 million and $87 million in the first three months of 2003 and 2002, respectively.

Net income amounted to $1.95 billion in the first three months of 2003 and $1.98 billion in the same period of 2002. The decreases in net income over the periods resulted from those factors described above.

At March 31, 2003, AIG had total capital funds of $62.26 billion and total borrowings of $74.37 billion. At that date, $65.63 billion of such borrowings were either not guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable.

Total borrowings and borrowings not guaranteed or matched at March 31, 2003 and December 31, 2002 were as follows:

At March 31, 2003, the commercial paper issued and outstanding was as follows:

The maturity distributions of total borrowings at March 31, 2003 and December 31, 2002 were as follows:


*	Including commercial paper and excluding that portion of long-term debt maturing in less than one year.

ILFC and AGF 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 March 31, 2003, AIG did not guarantee the commercial paper of any of its subsidiaries other than Funding. On July 8, 2002, AGC ceased issuing commercial paper under its program. AGC’s funding requirements are now being met through Funding’s commercial paper program. (See also the discussion under “Derivatives” herein.)

As of November 2001, AIG guaranteed the notes and bonds of AGC. During 2002, AGC issued $200 million in notes which matured in March 2003.

were issued. During the second quarter of 2002, ILFC expanded its Euro Medium Term Note Program to $4.0 billion, under which $2.31 billion in notes were sold through March 31, 2003. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

On May 8, 2003, AIG entered into a purchase agreement with a syndicate of investment bankers to sell $1,500,000,000 principal amount of notes in a Rule 144A/ Regulation S offering. $500,000,000 of the notes will bear interest at a rate of 2.875 percent per annum and mature in 2008 and $1,000,000,000 of the notes will bear interest at a rate of 4.250 percent per annum and mature in 2013. The notes will be unsecured senior obligations of AIG and will rank equally with all of AIG’s other senior debt outstanding. AIG expects the sale of the notes to close on May 15, 2003.

AIG’s capital funds increased $3.15 billion during the first three months of 2003. Unrealized appreciation of investments, net of taxes increased $1.25 billion. During the first three months of 2003, the cumulative translation adjustment loss, net of taxes, decreased $33 million. The change from period to period with respect to the unrealized appreciation of investments, net of taxes was primarily impacted by the decrease in domestic interest rates. During the first three months of 2003, there was a gain of $138 million, net of taxes, relating to derivative contracts designated as cash flow hedging instruments. (See also the discussion under Notes to Financial Statements and the Consolidated Statement of Comprehensive Income.) During the first three months of 2003, retained earnings increased $1.83 billion, resulting from net income less dividends.

During the quarter ended March 31, 2003, AIG repurchased in the open market 1,625,000 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 March 31, 2003, 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.)

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 inherent in its overall operations. At March 31, 2003, 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. Federal, state or local legislation may affect AIG’s ability to operate and expand its various financial services businesses and changes in the current laws, regulations or interpretations thereof may have a material adverse effect on these businesses.

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.

The maturity schedule of AIG’s most significant contractual obligations at March 31, 2003 is presented in the following table:

The maturity schedule of AIG’s most significant Other Commercial Commitments at March 31, 2003 is presented in the following table:

AIG uses special purposes vehicles (SPVs) primarily in connection with certain guaranteed investment contract programs (GIC Programs) written by its life insurance subsidiaries, certain products provided by AIGFP, and certain invested asset and asset management activities.

In the GIC Programs, AIG’s life insurance subsidiaries (principally SunAmerica Life Insurance Company) provide guaranteed investment contracts (GICs) to SPVs which are not controlled by AIG. The SPVs issue notes or bonds which are sold to third party institutional investors. Neither AIG nor the insurance company issuing the GICs has any obligation to the investors in the notes or bonds. The proceeds from the securities issued by the SPV are invested by the SPV in the GICs. The insurance company subsidiaries use their proceeds to invest in a diversified portfolio of securities, primarily investment grade bonds (see also the discussion under “Liquidity: Insurance Invested Assets”). Both the assets and the liabilities of the insurance companies arising from these GIC Programs are presented in AIG’s consolidated balance sheet. Thus, at March 31, 2003, approximately $31 billion of policyholders’ contract deposits represented liabilities from issuances of GICs included in these GIC Programs, offset by the proceeds from the issuances, which are included as insurance invested assets.

AIGFP uses SPVs as an integral part of its ongoing operations with respect to specific structured transactions with independent third parties. In most instances, AIGFP controls and manages the assets and liabilities with respect to these SPVs, subject to certain transaction specific limitations. These SPVs are fully consolidated by AIG (see the discussions of AIGFP under “Operations Review: Financial Services Operations”). AIGFP also sponsors an SPV that issues commercial paper and secured liquidity notes to third-party institutional investors. This SPV uses the proceeds of these offerings to obtain beneficial interests in certain financial assets (total assets of approximately $994 million), which serve as collateral for the securities issued by the SPV. AIGFP provides credit and liquidity support to this SPV, which is not consolidated by AIG.

AIG’s insurance operations also invest in assets of SPVs. These SPVs are established by unrelated third parties. Investments include collateralized mortgage backed securities and similar securities backed by pools of mortgages, consumer receivables or other assets. The investment in an SPV allows AIG’s insurance entities to purchase assets permitted by insurance regulations while maximizing the return on these assets.

AIG provides investment management services to certain SPVs. AIG receives management fees for these services and may take a minority ownership interest in these SPVs, which interests are then included as investments in AIG’s consolidated balance sheet. AIG services may be terminated with or without cause.

To facilitate and expand certain retirement savings & asset management activities, AIG establishes SPVs. AIG receives fees for management of

the assets held in the SPV which support the issuance of securities such as collateralized bond obligations sold by the SPV to independent third party investors. These SPVs serve a variety of business purposes, including financing, liquidity, or to facilitate independent third party management participation.

AIG has established stringent guidelines with respect to the formation of and investment in SPVs. See also the discussion under “Accounting Standards” herein.

AIG’s liquidity is primarily derived from the operating cash flows of its general and life insurance operations.

At March 31, 2003, AIG’s consolidated invested assets included $14.92 billion of cash and short-term investments. Consolidated net cash provided from operating activities in the first three months of 2003 amounted to $8.89 billion.

Sources of funds considered in meeting the objectives of AIG’s financial services operations include guaranteed investment agreements, issuance of long-term 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 discussion 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 $10.8 billion in pre-tax cash flow during the first three months of 2003. Cash flow includes periodic premium collections, including policyholders’ contract deposits, cash flows from investment operations and paid loss recoveries less reinsurance premiums, losses, benefits and 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 $4.1 billion in investment income cash flow during the first three months of 2003. Investment income cash flow is primarily derived from interest and dividends received and includes realized capital gains net of realized capital losses.

With respect to general insurance operations, if paid losses accelerated beyond AIG’s ability to fund such paid losses from current operating cash flows, AIG would need to liquidate a portion of its general insurance investment portfolio and/or arrange for financing. Potential events causing such a liquidity strain could be the result of several catastrophic events occurring in a relatively short period of time. Additional strain on liquidity could occur if the investments sold to fund such paid losses were sold into a depressed market place and/or reinsurance recoverable on such paid losses became uncollectible or collateral supporting such reinsurance recoverable decreased significantly in value. (See also the discussions under “Operational Review: General Insurance Operations” herein.)

With respect to life insurance operations, if a substantial portion of the life insurance operations bond portfolio diminished significantly in value and/or defaulted, AIG would need to liquidate other portions of its life insurance investment portfolio and/or arrange financing. Potential events causing such a liquidity strain could be the result of economic collapse of a nation or region in which AIG life insurance operations exist, nationalization, terrorist acts or other such economic or political upheaval. (See also the discussions under “Operational Review: Life Insurance Operations” herein.)

In addition to the combined insurance pre-tax operating cash flow, AIG’s insurance operations held $13.54 billion in cash and short-term investments at March 31, 2003. 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 predominantly 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 $38 billion from the maturities, sales and redemptions of fixed income securities and from the sale of equity securities was used to purchase approximately $49 billion of fixed income securities and marketable equity securities during the first three months of 2003.

The following table is a summary of AIG’s invested assets by significant segment, including investment income due and accrued of $4.53 billion and $4.30 billion and real estate of $3.39 billion and $3.30 billion, respectively, at March 31, 2003 and December 31, 2002:

The following tables summarize the composition of AIG’s insurance invested assets by insurance segment, including investment income due and accrued and real estate, at March 31, 2003 and December 31, 2002:

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 fair value of the fixed maturity available for sale portfolio is subject to decline as interest rates rise and is subject to increase as interest rates decline. Such changes in fair value are presented as a component of comprehensive income in unrealized appreciation of investments, net of taxes.

At March 31, 2003, approximately 69 percent of the fixed maturities investments were domestic securities. Approximately 32 percent of such domestic securities were rated AAA by one or more of the principal rating agencies. Approximately 10 percent were below investment grade or not rated.

A significant portion of the foreign insurance fixed income portfolio is rated by Moody’s, Standard & Poor’s (S&P) or similar foreign services. Similar credit quality rating services are not available in all overseas locations. AIG annually reviews the credit quality of the foreign portfolio nonrated fixed income investments, including mortgages. At March 31, 2003, approximately 17 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 11 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.

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 or depreciation of investments, net of taxes as a component of comprehensive income.

The valuation of invested assets involves obtaining a market value for each security. The source for the market value is generally from market exchanges or dealer quotations, with the exception of non-traded securities.

Another aspect of valuation is an assessment of impairment. As a matter of policy, the determination that a security has incurred an other-than-temporary decline in value and the amount of any loss recognition requires the judgment of AIG’s management and a continual review of its investments.

In general, a security is considered a candidate for impairment if it meets any of the following criteria:


	•	Trading at a significant discount to par, amortized cost (if lower) or cost for an extended period of time;

	•	The occurrence of a discrete credit event resulting in (i) the issuer defaulting on a material outstanding obligation; or (ii) the issuer seeking protection from creditors under the bankruptcy laws or any similar laws intended for the court supervised reorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value of their claims; or,

	•	In the opinion of AIG’s management, it is unlikely that AIG will realize a full recovery on its investment, irrespective of the occurrence of one of the foregoing events.

Once a security has been identified as potentially impaired, the amount of such impairment is determined by reference to that security’s contemporaneous market price. However, the market price following a significant credit event of any issuer may

be volatile after such an event. Factors such as market liquidity, hedge fund activity, sensitivity to “headline” risk, and the widening of bid/ask spreads contribute to price volatility. Because of such volatility, the market price may not be indicative of the fair value of such an investment; and consequently, not indicative of a reasonable estimate of realizable value.

AIG has the ability to hold any security to its stated maturity. Therefore, the decision to sell reflects the judgment of AIG’s management that the security sold is unlikely to provide, on a relative value basis, as attractive a return in the future as alternative securities entailing comparable risks. With respect to distressed securities, the sale decision reflects management’s judgment that the risk-discounted anticipated ultimate recovery is less than the value achievable on sale.

As a result of these policies, AIG recorded in the first three months of 2003 impairment losses net of taxes of approximately $479 million.

No impairment charge with respect to any one single credit was significant to AIG’s consolidated financial condition or results of operations and no individual impairment loss exceeded 1.6 percent of consolidated net income for the first three months of 2003.

Excluding the impairments noted above, the changes in market value for AIG’s available for sale portfolio, which constitutes the vast majority of AIG’s investments, were recorded in equity as unrealized gains or losses.

At March 31, 2003, the unrealized losses after taxes of the fixed maturity securities were approximately $2.5 billion. At March 31, 2003, the unrealized losses after taxes of the equity securities portfolio were approximately $426 million.

At March 31, 2003, aggregate unrealized gains after taxes were $11.2 billion and aggregate unrealized losses after taxes were $2.9 billion. No single issuer accounted for more than three percent of the unrealized losses.

At March 31, 2003, the fair value of AIG’s fixed maturities and equity securities aggregated to $264.1 billion. Of this aggregate fair value, 1.0 percent represented securities trading at or below 75 percent of amortized cost or cost.

The impact on net income of unrealized losses after taxes will be further mitigated upon realization, because certain realized losses will be charged to participating policyholders accounts, or realization will result in current decreases in the amortization of certain deferred acquisition costs.

At March 31, 2003, the unrealized losses after taxes for fixed maturity securities and equity securities included the following industry concentrations:

The amortized cost of fixed maturities available for sale in an unrealized loss position at March 31, 2003, by contractual maturity, is shown below.

In the three months ended March 31, 2003, the pre-tax realized losses incurred with respect to the sale of fixed maturities and equity securities were $2.5 billion. The aggregate fair value of securities sold was $35.0 billion, which was approximately 93 percent of amortized cost. The average period of time that securities sold at a loss during the quarter ended March 31, 2003 were trading continuously at a price below book value was approximately seven months.

The “aging” of pre-tax unrealized loss positions at March 31, 2003, is shown below:


*	As more fully described above, upon realization, certain realized losses will be charged to participating policyholder accounts, or realization will result in a current decrease in the amortization of certain deferred acquisition costs.

As stated previously, the valuation for AIG’s investment portfolio comes from market exchanges or dealer quotations, with the exception of non-traded securities. AIG considers non-traded securities to mean certain fixed income investments, certain structured securities, direct private equities, limited partnerships and hedge funds. The aggregate carrying value of these securities at March 31, 2003 was approximately $34.0 billion.

The methodology used to estimate fair value of non-traded fixed income investments is by reference to traded securities with similar attributes and using a matrix pricing methodology. This technique takes into account such factors as the industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer, and other relevant factors. The change in fair value is recognized as a component of unrealized appreciation.

For certain structured securities, the carrying value is based on an estimate of the security’s future cash flows pursuant to the requirements of Emerging Issues Task Force Issue No. 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” The change in carrying value is recognized in income.

Direct private equities, hedge funds and limited partnerships in which AIG holds in the aggregate less than a five percent interest, are carried at fair value. The change in fair value is recognized as a component of Other comprehensive income.

With respect to hedge funds and limited partnerships in which AIG holds in the aggregate a five percent or greater interest, AIG’s carrying value is the net asset value. The changes in such net asset values are recorded in income.

AIG obtains the fair value of its investments in limited partnerships and hedge funds from information provided by the sponsors of each of these investments, the accounts of which are generally audited on an annual basis.

Each of these investment categories is regularly tested to determine if impairment in value exists. Various valuation techniques are used with respect to each category in this determination.

Mortgage loans on real estate, policy and collateral loans comprised 5.6 percent of AIG’s insurance invested assets at March 31, 2003. AIG’s insurance operations’ holdings of real estate mortgages amounted to $11.57 billion of which 87.6 percent was domestic. At March 31, 2003, only a nominal amount was in default. It is AIG’s practice to maintain a maximum loan to value ratio of 75 percent at loan origination. At March 31, 2003, AIG’s insurance holdings of collateral loans amounted to $1.40 billion, all of which were foreign. It is AIG’s strategy to enter into mortgage and collateral loans as an adjunct primarily to life insurance fixed maturity investments. AIG’s policy loans increased from $6.05 billion at December 31, 2002 to $6.06 billion at March 31, 2003.

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 limited partnerships and hedge 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. (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 March 31, 2003 and December 31, 2002. AIG uses the historical simulation methodology which 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 percent confidence (i.e., only 5 percent of historical scenarios show losses greater than the VaR figure). A one month holding period was assumed in computing the VaR figure.

The following table presents the VaR on a combined basis and of each component of market risk for each of AIG’s insurance segments as of March 31, 2003 and December 31, 2002. VaR with respect to combined operations cannot be derived by aggregating the individual risk or segment amounts presented herein.

The following table presents the average, high and low VaRs on a combined basis and of each component of market risk for each of AIG’s insurance segments as of March 31, 2003 and December 31, 2002.

The following table is a summary of the composition of AIG’s financial services invested assets at March 31, 2003 and December 31, 2002. (See also the discussions under “Operational Review: Financial Services Operations”, “Capital Resources” and “Derivatives” herein.)

As previously discussed, the cash used for the purchase of flight equipment is derived primarily from the proceeds of ILFC’s debt financings. The primary sources for the repayment of this debt and the interest expense thereon are the cash flow from operations, proceeds from the sale of flight equipment and the rollover and refinancing of the prior debt. During the first three months of 2003, ILFC acquired flight equipment costing $1.76 billion. (See also the discussion under “Operational Re-

ILFC is exposed to market risk and the risk of loss of fair value and possible liquidity strain resulting from adverse fluctuations in interest rates. As of March 31, 2003 and December 31, 2002, AIG statistically measured the 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 historical simulation methodology, as previously described. As of March 31, 2003 and December 31, 2002, the average VaR with respect to the aforementioned net fair value of ILFC was approximately $8 million and $20 million, respectively.

AIG’s Consumer Finance operations provide a wide variety of consumer finance products both domestically and overseas. Such products include real estate mortgages, consumer loans, and retail sales finance. These products are funded through various borrowings including commercial paper and medium term notes. AIG’s Consumer Finance operations are exposed to credit risk and risk of loss resulting from adverse fluctuations in interest rates. Over half of the loan balance is related to real estate loans which are substantially collateralized by the related properties.

With respect to credit losses, the allowance for finance receivable losses is maintained at a level considered adequate to absorb anticipated credit losses existing in that portfolio.

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 required to sell or close out the transactions prior to maturity. AIG believes that the impact of any such limited liquidity would not be significant to AIG’s financial condition or its overall liquidity. (See also the discussion under “Operational Review: Financial Services Operations” and “Derivatives” herein.)

AIGFP uses the proceeds from the issuance of notes and bonds and GIA borrowings to invest in a diversified portfolio of securities, including securities available for sale, at market, and derivative transactions. The funds may also be temporarily invested in securities purchased under agreements to resell. The proceeds from the disposal of the aforementioned securities available for sale and securities purchased under agreements to resell have been used to fund the maturing GIAs or other AIGFP financings. (See also the discussion under “Capital Resources” herein.)

Securities available for sale is mainly a portfolio of debt securities, where the individual securities have varying degrees of credit risk. At March 31, 2003, 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 $66 million of these securities. Securities deemed below investment grade at March 31, 2003 amounted to approximately $100 million in fair value representing 0.6 of one percent of the total AIGFP securities available for sale. $30 million of this amount is hedged with a credit derivative. There have been no significant downgrades through May 1, 2003. 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.

AIGFP is exposed to credit risk. If its securities available for sale portfolio were to suffer significant default and the collateral held declined significantly in value with no replacement or the credit default swap counterparty failed to perform, AIGFP could have a liquidity strain. AIG guarantees AIGFP’s debt and, as a result, is responsible for all of AIGFP’s obligations.

AIGTG conducts, as principal, market making and trading activities in foreign exchange and com-

modities, primarily 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 March 31, 2003 were as follows:

AIGFP’s interest rate and currency risks on securities available for sale, at market, are managed by taking offsetting positions on a security by security basis, thereby offsetting a significant portion of the unrealized appreciation or depreciation. At March 31, 2003, the unrealized gains and losses remaining after the benefit of the offsets were $76 million and $121 million, respectively.

Trading securities, at market value, and securities and spot commodities sold but not yet purchased, at market value are marked to market daily with the unrealized gain or loss being recognized in income at that time. These securities are held to meet the short-term risk management objectives of AIGFP and AIGTG.

The senior management of AIG defines the policies and establishes general operating parameters for AIGFP and AIGTG. AIG’s senior management has established various oversight committees to review the various financial market, operational and credit issues of AIGFP and AIGTG. The senior managements of AIGFP and AIGTG report the results of their respective operations to and review future strategies with AIG’s senior management.

AIG actively manages the exposures to limit potential losses, while maximizing the rewards afforded by these business opportunities. In doing so, AIG must 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, including interest rate swaps, currency swaps, equity swaps, swaptions, options and forwards, at market value or estimated fair value when market values are not readily available. Unrealized gains and losses, with respect to this portfolio are reflected in income currently. 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. Estimated fair values are based upon the use of valuation models. These models utilize, among other things, market liquidity and current interest, foreign exchange and volatility rates. AIGFP attempts to secure reliable and independent current market prices, such as published exchange prices, external subscription services such as from Bloomberg or Reuters or third party broker quotes for use in this model. When such prices are not available, AIGFP uses an internal methodology which includes interpolation or extrapolation from verifiable prices nearest to the dates of the transactions. Historically, actual results have not materially deviated from these models. 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. Based upon this evaluation, AIGFP determines what, if any, offsetting transactions are necessary to reduce the market risk exposure 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. The recorded values of these transactions may be different than the values that might be realized if AIGFP were required 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.

Additionally, depending upon the changes in interest rates and other market movements during the day, AIGFP’s system will produce reports for management’s consideration for intra-day offsetting positions. Overnight, the system generates reports which recommend the types of offsets management should consider for the following day. Additionally, AIGFP operates in major business centers overseas and is essentially open for business 24 hours a day. Thus, the market exposure and offset strategies are monitored, reviewed and coordinated around the clock. Therefore, offsetting adjustments can be made as and when necessary from any AIGFP office in the world.

As part of its monitoring and controlling of its exposure to market risk, AIGFP applies various testing techniques which reflect potential market movements. These techniques vary by currency and are regularly changed to reflect factors affecting the derivatives portfolio. In addition to the daily monitoring, AIGFP’s senior management and local risk managers conduct a weekly review of the derivatives portfolio and existing hedges. This review includes an examination of the portfolio’s risk measures, such as aggregate option sensitivity to movements in market variables. AIGFP’s management may change these measures to reflect their judgment and evaluation of the dynamics of the markets. This management group will also determine whether additional or alternative action is required in order to manage the portfolio.

All of AIGTG’s market risk sensitive instruments are entered into for trading purposes. The fair

values of AIGTG’s financial instruments are exposed to market risk as a result of adverse market changes in interest rates, foreign currency exchange rates, commodity prices and adverse changes in the liquidity of the markets in which AIGTG trades.

AIGTG’s approach to managing market risk is to establish an appropriate offsetting position to a particular transaction or group of transactions depending upon the extent of market risk AIGTG expects to reduce.

AIGTG’s senior management has established positions and stop-loss limits for each line of business. AIGTG’s traders are required to maintain positions within these limits. These positions are monitored during the day either manually and/or through on-line computer systems. In addition, these positions are reviewed by AIGTG’s management. Reports which present each trading books’ position and the prior day’s profit and loss are reviewed by traders, head traders and AIGTG’s senior management. Based upon these and other reports, AIGTG’s senior management may determine to adjust AIGTG’s risk profile.

AIGTG attempts to secure reliable current market prices, such as published prices or third party quotes, to value its derivatives. Where such prices are not available, AIGTG uses an internal methodology which includes interpolation or extrapolation from verifiable prices nearest to the dates of the transactions. Historically, actual results have not materially deviated from these models. The methodology may reflect interest and exchange rates, commodity prices, volatility rates, market liquidity and other relevant factors. Unrealized gains and losses with respect to AIGTG’s positions are reflected in income currently.

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, market liquidity 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. Because 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 March 31, 2003 and December 31, 2002. AIG uses the historical simulation methodology which 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 percent confidence (i.e., only 5 percent 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 March 31, 2003 and December 31, 2002. VaR with respect to combined operations cannot be derived by aggregating the individual risk presented herein.

The following table presents the average, high and low VaRs on a combined basis and of each component of AIGFP’s and AIGTG’s market risk as of March 31, 2003 and December 31, 2002.

Derivatives are financial arrangements among two or more parties. The returns of the derivatives 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 and options. In the normal course of business, with the agreement of the original counterparty, these contracts may be terminated early or assigned to another counterparty.

The overwhelming majority of AIG’s derivatives activities are conducted through AIGFP and AIGTG, thus 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. AIG’s customers such as corporations, financial institutions, multinational organizations, sovereign entities, government agencies and municipalities use derivatives to hedge their own market exposures. 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 a positive fair value to AIG. To help manage this risk, the credit departments of AIGFP and AIGTG operate within the guidelines set by the AIG Credit Risk Committee. This committee establishes the credit policy, sets 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 statis-

tical 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, 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.

Discussions with respect to AIGFP’s and AIGTG’s counterpart credit quality, fair value source and notional amounts follow.

The following tables provide the counterparty credit quality amounts of AIGFP’s and AIGTG’s derivatives transactions at March 31, 2003 and December 31, 2002.

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 excluding collateral held. 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 $14.95 billion at March 31, 2003, including $2.3 billion of collateral held; and $14.98 billion at December 31, 2002, including $1.9 billion of collateral held. The net replacement value for futures and forward contracts approximated $22 million at March 31, 2003 and $110 million at December 31, 2002. The net replacement value most closely represents the net credit risk to AIGFP or the maximum amount exposed to potential loss and is used for financial reporting purposes.

AIGFP determines counterparty credit quality by reference to ratings from independent rating agencies or, where such ratings are not available, by internal analysis. At March 31, 2003 and December 31, 2002, the concentration of credit exposure with respect to counterparties judged A or higher by AIGFP was 92 percent and 92 percent, respectively.

The counterparty credit quality determined by AIGFP by derivative product with respect to the net replacement value of AIGFP’s derivatives portfolio was as follows:

At March 31, 2003 and December 31, 2002, the counterparty breakdown by industry with respect to the net replacement value of AIGFP’s derivatives portfolio was as follows:

With respect to AIGTG’s derivatives contracts at March 31, 2003 and December 31, 2002, the net replacement values 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.

Subsequent to the application of such credit enhancements, the net exposure to credit risk or the net replacement value of all futures, forwards, swaptions and purchased options contracts and interest rate and currency swaps was $2.09 billion and $2.29 billion at March 31, 2003 and December 31, 2002, respectively.

AIGTG’s net replacement value at March 31, 2003 and December 31, 2002 was as follows:

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.

AIGTG determines counterparty credit quality by reference to ratings from independent rating agencies or, where such ratings are not available, internal analysis. At March 31, 2003 and December 31, 2002, the concentration of credit exposure with respect to counterparties judged A or higher by AIGTG was 63 percent and 75 percent, respectively.

Also, as of March 31, 2003 and December 31, 2002, the counterparty credit quality and counterparty breakdown by industry with respect to the net replacement value of AIGTG’s derivatives portfolio were as follows:


*	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.

The fair value sources of the net replacement values of AIGFP’s derivatives portfolio were based on valuation models. Although these models are proprietary, the inputs were obtained from independently published exchange prices, external subscription services’ prices such as Bloomberg or Reuters or third party broker quotes for use in these models. In the minimal instances when such prices are not available, AIGFP uses an internal methodology which includes interpolation or extrapolation from verifiable prices nearest to the dates of the transactions.

At March 31, 2003 and December 31, 2002, the fair value source of the net replacement value of AIGTG’s derivatives portfolio was as follows:

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 following table presents the contractual and notional amounts by maturity and type of derivatives of AIGFP’s derivatives portfolio at March 31, 2003 and December 31, 2002.

In many cases, the credit risk associated with a designated portfolio is tranched into different layers of risk, which are then analyzed and rated by the credit rating agencies. Typically, there will be an equity layer covering the first credit losses in respect of the portfolio up to a specified percentage of the total portfolio, and then successive layers that are rated, generally a BBB rated layer, an A rated layer, an AA rated layer and an AAA rated layer. In transactions that are rated, the risk layer or tranche that is immediately junior to the threshold level above which AIGFP’s payment obligation would arise is rated AAA by the rating agencies. For that reason, the risk layer assumed by AIGFP with respect to the designated portfolio in these transactions is often called the “super senior” risk layer, defined as the layer of credit risk senior to a risk layer that has been rated AAA by the credit rating agencies or if the transaction is not rated, equivalent thereto. For example, in a transaction with an equity layer covering credit losses from 0 to 2 percent of the total portfolio, a BBB rated layer covering credit losses from 2 to 4 percent, an A rated layer from 4 to 6 percent, an AA rated layer from 6 to 8 percent and an AAA rated layer from 8 to 11 percent, AIGFP would cover credit losses arising in respect of the portfolio that exceed an 11 percent first loss threshold amount, and thereby bear risk that is senior to the 8 to 11 percent AAA rated risk layer.

remote, even in severe recessionary market scenarios. At March 31, 2003 the notional amount with respect to AIGFP’s credit derivative portfolio was $151.1 billion.

The following table provides the contractual and notional amounts by maturity and type of derivative of AIGTG’s derivatives portfolio at March 31, 2003 and December 31, 2002.

In addition to its role as derivatives dealer through AIGFP and AIGTG, AIG and its subsidiaries, including its insurance subsidiaries, use derivatives primarily to minimize AIG’s asset-liability exposure and foreign currency and interest rate exposures. These transactions are generally executed with AIGFP and AIGTG as counterparty, who in turn hedge these transactions in the market place. Thus, AIGFP and AIGTG assume the credit risk exposure.

AIG also uses derivatives to help match assets and liabilities in several of its businesses, including its insurance operations. For example, AIG can use currency and interest rate swaps to convert foreign-currency investment contract liabilities into U.S. dollar-based exposures. Thus, these liabilities are more properly matched with U.S. dollar assets. In life insurance, AIG uses swaps to reduce the mismatch between long dated life insurance liabilities and shorter dated local currency assets. Swaps also enable AIG to balance its asset and liability durations in consumer finance operations.

AIG’s Derivatives Review Committee 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.

Generally, AIG conducts 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.

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.)

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (FAS 142). As of January 1, 2002, AIG adopted FAS 142. FAS 142 requires AIG to discontinue the amortization of goodwill in its consolidated income statement.

FAS 142 requires goodwill to be subject to an assessment of impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment

of impairment involves a two-step process prescribed in FAS 142, whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of impairment, if any. FAS 142 also requires the completion of a transitional impairment test in the year of adoption, with any identified impairments recognized as a cumulative effect of a change in accounting principles. During the second quarter, AIG completed its transitional impairment test for 2002, resulting in no impairment.

Changes in the carrying amount of goodwill are primarily caused as a result of foreign currency translation adjustments.

AIG guarantees the indebtedness of third parties principally in connection with AIG SunAmerica’s investments in affordable housing properties. The guarantees are issued primarily to facilitate financing for the construction of the underlying properties, and range in duration of up to ten years. The loans are secured by the underlying real estate. Since the inception of this investment program over ten years ago, payments under these guarantees have been insignificant. This is due to the fact that the loans are first backed by the creditworthiness of the third party general partner, and secondly, are secured by the underlying properties. The maximum exposure under these guarantees as of March 31, 2003 is approximately $3.4 billion.

In January 2003, FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN46). FIN46 changes the method of determining whether certain entities should be consolidated in AIG’s consolidated financial statements. An entity is subject to FIN46 and is called a variable interest entity (VIE) if it has (i) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (ii) equity investors that cannot make significant decisions about the entity’s operations, or that do not absorb the expected losses or receive the expected returns of the entity. All other entities are evaluated for consolidation under existing guidance. A VIE is consolidated by its primary beneficiary, which is the party that has a majority of the expected losses or a majority of the expected residual returns of the VIE, or both.

The provisions of FIN46 are to be applied immediately to VIEs created after January 31, 2003, and to VIEs in which AIG obtains an interest after that date. For VIEs in which AIG holds a variable interest that it acquired before February 1, 2003, FIN46 applies to the fiscal quarter ended September 30, 2003. For any VIE that must be consolidated under FIN46 that were created before February 1, 2003, the assets, liabilities and noncontrolling interest of the VIE would be initially measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change.

Effective January 1, 2003, AIG adopted the recognition provision of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (FAS 123). This statement establishes the financial accounting and reporting standards for stock-based employee compensation plans, such as AIG’s stock purchase plan, stock option plan and stock incentive plan. Under the recognition provisions of FAS 123, costs with respect to stock compensation are measured using the fair value of the shares subscribed or granted as at the date of grant recognized ratably over the vesting period. Such fair value is derived through an option pricing model.

AIG’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that AIG files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by AIG in the reports that it files or submits under the Exchange Act is accumulated and communicated to AIG’s management, including AIG’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. AIG’s Chief Executive Officer and the Chief Financial Officer have reviewed the effectiveness of AIG’s disclosure controls and procedures within 90 days of the filing date of this Quarterly Report on Form 10-Q and have concluded that the disclosure controls and procedures are effective. There were no significant changes in AIG’s internal controls or in other factors that could significantly affect these controls subsequent to the most recent date of evaluation by AIG’s Chief Executive Officer and Chief Financial Officer.


	(a)	Exhibits See accompanying Exhibit Index.

	(b)	Reports on Form 8-K

		During the three months ended March 31, 2003, Current Reports on Form 8-K were filed as follows:

		On February 13, 2003, AIG filed a Current Report on Form 8-K to file excerpts from a press release issued by American International Group, Inc. on February 13, 2003 announcing its results for the quarter and year ended December 31, 2002.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	AMERICAN INTERNATIONAL GROUP, INC.

	(Registrant)

	/s/ HOWARD I. SMITH

	Howard I. Smith
	Vice Chairman,
	Chief Financial Officer and
	Chief Administrative Officer


	1. I have reviewed this quarterly report on Form 10-Q of American International Group, Inc.;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	1. I have reviewed this quarterly report on Form 10-Q of American International Group, Inc.;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ HOWARD I. SMITH

	Howard I. Smith
	Vice Chairman, Chief Financial Officer and
	Chief Administrative Officer



Delaware (State or other jurisdiction of incorporation or organization)		13-2592361 (I.R.S. Employer Identification Number)

70 Pine Street, New York, New York (Address of principal executive offices)		10270 (Zip Code)
Registrant’s telephone number, including area code (212) 770-7000
NONE Former name, former address and former fiscal year, if changed since last report.


CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
NOTES TO FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF SEGMENT OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II -- OTHER INFORMATION
SIGNATURE
EXHIBIT INDEX
EX-12: STATEMENT RE COMPUTATION OF RATIOS


				March 31,			December 31,
				2003			2002

LIABILITIES:
	Reserve for losses and loss expenses			$	53,526		$	51,539
	Reserve for unearned premiums				17,664			16,336
	Future policy benefits for life and accident and health insurance contracts				76,162			72,547
	Policyholders’ contract deposits				146,893			142,160
	Other policyholders’ funds				7,867			7,582
	Reserve for commissions, expenses and taxes				3,364			3,429
	Insurance balances payable				3,598			3,273
	Funds held by companies under reinsurance treaties				3,879			3,425
	Income taxes payable:
		Current			967			793
		Deferred			5,184			4,289
	Financial services liabilities:
		Borrowings under obligations of guaranteed investment agreements			15,029			14,850
		Securities sold under agreements to repurchase, at contract value			11,564			9,162
		Trading liabilities			2,768			3,825
		Securities and spot commodities sold but not yet purchased, at market value			9,906			11,765
		Unrealized loss on interest rate and currency swaps, options and forward transactions			11,864			11,265
		Trust deposits and deposits due to banks and other depositors			2,973			2,987
		Commercial paper			7,812			7,467
		Notes, bonds, loans and mortgages payable			43,889			43,233
	Commercial paper				3,229			1,645
	Notes, bonds, loans and mortgages payable				4,412			4,690
	Separate and variable accounts				45,954			46,248
	Minority interest				1,679			1,580
	Securities lending payable				25,924			23,694
	Other liabilities				21,663			12,189

			Total liabilities		527,770			499,973

	Preferred shareholders’ equity in subsidiary companies				1,782			2,153

CAPITAL FUNDS:
	Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2003 — 2,751,327,476; 2002 — 2,751,327,476				6,878			6,878
	Additional paid-in capital				599			607
	Retained earnings				54,101			52,270
	Accumulated other comprehensive income (loss)				2,073			691
	Treasury stock, at cost; 2003 — 142,929,596; 2002 — 141,726,645 shares of common stock				(1,394	)		(1,343	)

			Total capital funds		62,257			59,103

			Total liabilities, preferred shareholders’ equity in subsidiary companies and capital funds	$	591,809		$	561,229



		Three Months
		Ended March 31,

		2003			2002

Revenues:
	Premiums and other considerations	$	12,946		$	10,290
	Net investment income		4,024			3,648
	Realized capital gains (losses)		(632	)		(232	)
	Other revenues		2,589			2,431

	Total revenues		18,927			16,137

Benefits and expenses:
	Incurred policy losses and benefits		11,292			9,167
	Insurance acquisition & other operating expenses		4,711			4,011

	Total benefits and expenses		16,003			13,178

Income before income taxes and minority interest			2,924			2,959

Income taxes:
	Current		689			628
	Deferred		187			264

			876			892

Income before minority interest			2,048			2,067

Minority interest			(94	)		(87	)

Net income		$	1,954		$	1,980

Earnings per common share:
	Basic	$	0.75		$	0.76

	Diluted	$	0.74		$	0.75

Cash dividends per common share		$	0.047		$	0.042

Average shares outstanding:
	Basic		2,610			2,615

	Diluted		2,628			2,641



		Three Months
		Ended March 31,

		2003			2002

Cash Flows From Operating Activities:
Net Income		$	1,954		$	1,980

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		6,017			843
	Premiums and insurance balances receivable and payable — net		(1,058	)		(683	)
	Reinsurance assets		(1,387	)		(380	)
	Deferred policy acquisition costs		(771	)		(597	)
	Investment income due and accrued		(229	)		(172	)
	Funds held under reinsurance treaties		454			129
	Other policyholders’ funds		285			(833	)
	Current and deferred income taxes — net		361			611
	Reserve for commissions, expenses and taxes		(65	)		(132	)
	Other assets and liabilities — net		1,373			2,823
	Trading assets and liabilities — net		409			1,024
	Trading securities, at market value		(2,027	)		966
	Spot commodities, at market value		(117	)		6
	Net unrealized (gain) loss on interest rate and currency swaps, options and forward transactions		357			(628	)
	Securities purchased under agreements to resell		1,461			34
	Securities sold under agreements to repurchase		2,402			(231	)
	Securities and spot commodities sold but not yet purchased, at market value		(1,859	)		(142	)
	Realized capital (gains) losses		632			232
	Equity in income of partially-owned companies and other invested assets		(44	)		(26	)
	Amortization of premium and discount on securities		(2	)		(32	)
	Depreciation expenses, principally flight equipment		447			388
	Change in cumulative translation adjustments		59			(270	)
	Provision for finance receivable losses		102			85
	Other — net		136			(65	)

	Total Adjustments		6,936			2,950

Net cash provided by operating activities		$	8,890		$	4,930


^(a)	Includes insignificant derivative gains and losses arising from hedges of net investments in foreign operations.



		Operating Segments


		Three Months
		Ended March 31,

		2003			2002

Revenues^(a):
	General Insurance	$	7,898		$	6,130
	Life Insurance		8,554			7,657
	Financial Services		1,693			1,566
	Retirement Savings & Asset Management		896			865
	Other		(114	)		(81	)

Total Reportable Segments			18,927			16,137
	Reclassifications and Eliminations		—			—

Consolidated		$	18,927		$	16,137

Operating income^(b):
	General Insurance	$	1,144		$	933
	Life Insurance		1,195			1,327
	Financial Services		530			474
	Retirement Savings & Asset Management		283			300
	Other		(228	)		(75	)

Total Reportable Segments			2,924			2,959
	Reclassifications and Eliminations		—			—

Consolidated		$	2,924		$	2,959



		General Insurance


		Three Months
		Ended March 31,

		2003			2002

Revenues:
	Domestic Brokerage Group	$	4,322		$	3,345
	Transatlantic		758			600
	Personal Lines		888			688
	Mortgage Guaranty		178			165
	Foreign General		1,762			1,326

Total Reportable Segment			7,908			6,124
	Reclassifications and Eliminations		(10	)		6

Total General Insurance		$	7,898		$	6,130



		Life Insurance


		Three Months
		Ended March 31,

		2003			2002

Revenues:
	American International Assurance and Nan Shan Life	$	3,042		$	2,762
	ALICO and AIG Star Life		1,944			1,777
	Domestic Life		3,407			3,015
	Other		161			103

Total Reportable Segment			8,554			7,657
	Reclassifications and Eliminations		—			—

Total Life Insurance		$	8,554		$	7,657

Operating income:
	American International Assurance and Nan Shan Life	$	408		$	392
	ALICO and AIG Star Life		398			311
	Domestic Life		664			632
	Other		70			21

Total Reportable Segment			1,540			1,356
	Reclassifications and Eliminations		—			—

Operating income before realized capital gains (losses)			1,540			1,356
	Realized capital gains (losses)		(345	)		(29	)

Total Life Insurance		$	1,195		$	1,327



		Financial Services


		Three Months
		Ended March 31,

		2003			2002

Revenues:
	International Lease Finance Corporation	$	722		$	641
	AIG Financial Products Corp.		272			272
	Consumer Finance		639			613
	Other*		128			112

Total Reportable Segment			1,761			1,638
	Reclassifications and Eliminations		(68	)		(72	)

Total Financial Services		$	1,693		$	1,566

Operating income:
	International Lease Finance Corporation	$	174		$	173
	AIG Financial Products Corp.		196			176
	Consumer Finance		148			124
	Other*		32			26

Total Reportable Segment			550			499
	Reclassifications and Eliminations		(20	)		(25	)

Total Financial Services		$	530		$	474


	2003		2002


	(in millions)
Income taxes paid	$	413	$	199
Interest paid	$	829	$	845



		Remaining Life of Notional Amount*

		One		Two Through		Six Through		After Ten		Total		Total
		Year		Five Years		Ten Years		Years		2003		2002


AIGFP interest rate, currency and equity swaps and swaptions:
Notional amount:
	Interest rate swaps	$	152,383	$	302,043	$	134,473	$	14,273	$	603,172	$	579,994
	Currency swaps		47,252		84,748		44,599		6,375		182,974		176,987
	Swaptions and equity swaps		21,948		24,176		9,863		6,698		62,685		60,436

Total		$	221,583	$	410,967	$	188,935	$	27,346	$	848,831	$	817,417



	Remaining Life

	One		Two Through		Six Through		After Ten		Total		Total
	Year		Five Years		Ten Years		Years		2003		2002


Futures and forward contracts:
Exchange traded futures contracts contractual amount	$	6,726	$	—	$	—	$	—	$	6,726	$	10,524

Over the counter forward contracts contractual amount	$	44,727	$	214	$	188	$	—	$	45,129	$	43,627



		Net Replacement Value

		Swaps and		Futures and		Total		Total
		Swaptions		Forward Contracts		2003		2002



Counterparty credit quality:
	AAA	$	6,252	$	5	$	6,257	$	7,177
	AA		3,647		17		3,664		3,871
	A		3,882		—		3,882		2,887
	BBB		1,133		—		1,133		1,120
	Below investment grade		31		—		31		35

Total		$	14,945	$	22	$	14,967	$	15,090



		Net Replacement Value

		2003		2002


Counterparty credit quality:
	AAA	$	336	$	347
	AA		508		622
	A		482		739
	BBB		186		193
	Below investment grade		59		63
	Exchange traded futures and options*		519		328

Total		$	2,090	$	2,292

Counterparty breakdown by industry:
	Non-U.S. banks	$	712	$	927
	U.S. industrials		169		369
	Governmental		35		37
	Non-U.S. financial service companies		65		105
	Non-U.S. industrials		167		144
	U.S. banks		68		157
	U.S. financial service companies		355		225
	Exchanges*		519		328

Total		$	2,090	$	2,292


	YES [ X ]	NO [ ]


	YES [ X ]	NO [ ]



(in millions)

		2003		2002


Borrowings under obligations of GIAs — AIGFP		$	15,029	$	14,850

Commercial Paper:
	ILFC^(a)		4,001		4,213
	AGF^(a)		3,519		2,956
	AIG Funding, Inc.		3,229		1,645
	AIG Credit Card Company (Taiwan)^(a)		232		234
	AIG Finance (Taiwan) Limited^(a)		60		64

	Total		11,041		9,112

Medium Term Notes:
	AGF^(a)		7,933		7,719
	ILFC^(a)		5,561		4,970
	AIG		998		998

	Total		14,492		13,687

Notes and Bonds Payable:
	AIGFP		16,483		16,940
	ILFC^(a)(b)		10,887		9,825
	AGF^(a)		1,661		2,266
	AIG		1,615		1,608
	AGC		1,243		1,542

	Total		31,889		32,181

Loans and Mortgages Payable:
	AIG		705		697
	AIGCFG^(a)		621		735
	ILFC^(a)(c)		242		261
	AIG Finance (Hong Kong) Limited^(a)		217		229
	Other subsidiaries^(a)		135		133



(dollars in millions)

			Unamortized				Weighted			Weighted
	Net		Discount				Average			Average
	Book		and Accrued		Face		Interest			Maturity
	Value		Interest		Amount		Rate			In Days


ILFC	$	4,001	$	4	$	4,005		1.26	%	25
AGF		3,519		3		3,522		1.25		28
Funding		3,229		2		3,231		1.20		23
AIGCCC — Taiwan*		232		1		233		2.21		76
AIGF — Taiwan*		60		—		60		4.35		61

Total	$	11,041	$	10	$	11,051		—		—


*	All amounts pertain to policies underwritten in prior years.


*	Issued in Taiwan N.T. dollars at prevailing local interest rates.


	2003		2002


Short-term borrowings	$	20,443	$	22,468
Long-term borrowings*		53,928		49,417

Total borrowings	$	74,371	$	71,885


			2003			2002
(in millions, except per share amounts)
Net income, as reported			$	1,954		$	1,980
Actual stock-based compensation recognized, net of tax*				2			—

				1,956			1,980
Pro forma stock-based compensation, net of tax				14			14
Actual stock-based compensation recognized, net of tax				2			—

Net income, pro forma			$	1,940		$	1,966

Earnings per common share:
	Basic:
		Net income, as reported	$	0.75		$	0.76
		Stock-based compensation, net of tax		(0.01	)		(0.01	)

		Net income, pro forma	$	0.74		$	0.75

	Diluted:
		Net income, as reported	$	0.74		$	0.75
		Stock-based compensation, net of tax		(0.01	)		(0.01	)

		Net income, pro forma	$	0.73		$	0.74

Average shares outstanding:
Basic				2,610			2,615
Diluted				2,628			2,641


March 31, 2003		American
		International
		Group, Inc.		AGC		Other					Consolidated
		Guarantor		Issuer		Subsidiaries		Eliminations			AIG
(in millions)
Assets:
	Invested assets	$	1,077	$	—	$	457,084	$	(6,794	)	$	451,367
	Cash		4		2		654		—			660
	Carrying value of subsidiaries and partially owned companies, at equity		62,244		18,931		9,166		(89,012	)		1,329
	Other assets		2,666		2,693		136,722		(3,628	)		138,453

Total Assets		$	65,991	$	21,626	$	603,626	$	(99,434	)	$	591,809

Liabilities:
	Insurance liabilities	$	361	$	—	$	308,681	$	32		$	309,074
	Debt		2,614		2,822		76,066		(7,131	)		74,371
	Other liabilities		759		3,606		143,383		(3,423	)		144,325

Total Liabilities			3,734		6,428		528,130		(10,522	)		527,770

Preferred shareholders’ equity in subsidiary companies			—		—		1,782		—			1,782
Total Capital Funds			62,257		15,198		73,714		(88,912	)		62,257

Total Liabilities, Preferred Shareholders’ Equity in Subsidiary Companies and Capital Funds		$	65,991	$	21,626	$	603,626	$	(99,434	)	$	591,809


December 31, 2002		American
		International
		Group, Inc.		AGC		Other					Consolidated
		Guarantor		Issuer		Subsidiaries		Eliminations			AIG
(in millions)
Assets:
	Invested assets	$	1,208	$	—	$	428,496	$	(6,108	)	$	423,596
	Cash		18		1		1,146		—			1,165
	Carrying value of subsidiaries and partially owned companies, at equity		59,003		17,981		12,607		(88,016	)		1,575
	Other assets		2,450		2,714		130,049		(320	)		134,893

Total Assets		$	62,679	$	20,696	$	572,298	$	(94,444	)	$	561,229

Liabilities:
	Insurance liabilities	$	422	$	—	$	296,474	$	(30	)	$	296,866
	Debt		2,606		3,200		72,356		(6,277	)		71,885
	Other liabilities		548		3,197		127,716		(239	)		131,222

Total liabilities			3,576		6,397		496,546		(6,546	)		499,973

Preferred shareholders’ equity in subsidiary companies			—		—		2,153		—			2,153
Total Capital Funds			59,103		14,299		73,599		(87,898	)		59,103

Total Liabilities, Preferred Shareholders’ Equity in Subsidiary Companies and Capital Funds		$	62,679	$	20,696	$	572,298	$	(94,444	)	$	561,229


Three months ended March 31, 2003	American
	International
	Group, Inc.			AGC		Other						Consolidated
	Guarantor			Issuer		Subsidiaries			Eliminations			AIG
(in millions)
Operating income	$	116		$	—	$	3,036		$	—		$	3,152
Equity in undistributed net income of consolidated subsidiaries		1,800			466		—			(2,266	)		—
Dividend income from consolidated subsidiaries		209			5		—			(214	)		—
Other		(86	)		—		(142	)		—			(228	)
Income taxes (benefits)		85			11		780			—			876
Minority interest		—			—		(94	)		—			(94	)

Net income (loss)	$	1,954		$	460	$	2,020		$	(2,480	)	$	1,954


Three months ended March 31, 2002	American
	International
	Group, Inc.			AGC			Other						Consolidated
	Guarantor			Issuer			Subsidiaries			Eliminations			AIG
(in millions)
Operating income	$	154		$	—		$	2,880		$	—		$	3,034
Equity in undistributed net income of consolidated subsidiaries		1,613			214			—			(1,827	)		—
Dividend income from consolidated subsidiaries		241			249			—			(490	)		—
Other		(29	)		(33	)		(13	)					(75	)
Income taxes (benefits)		(1	)		15			878			—			892
Minority interest		—			—			(87	)		—			(87	)

Net income (loss)	$	1,980		$	415		$	1,902		$	(2,317	)	$	1,980


			Page

Executive Summary				29
	Consolidated Results			30
	Critical Accounting Estimates			31
	Operational Review			32
	General Insurance Operations			32
		General Insurance Results		33
		Reinsurance		35
		Reserve for Losses and Loss Expenses		35
		Asbestos and Environmental Claims		37
	Life Insurance Operations			40
		Life Insurance Results		41
		Underwriting and Investment Risk		42
	Financial Services Operations			43
		Financial Services Results		44
	Retirement Savings & Asset Management Operations			46
		Retirement Savings & Asset Management Results		46
	Other Operations			46
Capital Resources				47
	Borrowings			47
	Capital Funds			49
	Stock Repurchase			49
	Dividends from Insurance Subsidiaries			49
	Regulation and Supervision			50
	Contractual Obligations and Other Commercial Commitments			50
	Special Purpose Vehicles			51
Liquidity				52
Invested Assets				53
	Insurance Invested Assets			53
		Fixed Maturity Investments		54
		Credit Quality		54
		Equity Investments		54
		Valuation of Invested Assets		54
		Mortgage Investments		56
		Short-term Investments		56
		Real Estate Investments		56
		Other Investments		57
		Managing Market Risk		57
	Financial Services Invested Assets			58
		Managing Market Risk		60
Derivatives				63
	Counterparty Credit Quality			64
	Fair Value Source			66
	Notional Amounts			66
Accounting Standards				68
Controls and Procedures				70


		2003		2002


Domestic General:
	Loss Ratio		77.20		78.42
	Expense Ratio		17.00		18.07

Combined Ratio			94.20		96.49

Foreign General:
	Loss Ratio		63.42		63.36
	Expense Ratio		25.48		28.59

Combined Ratio			88.90		91.95

Consolidated:
	Loss Ratio		74.15		75.24
	Expense Ratio		18.98		20.52

Combined Ratio			93.13		95.76



(in millions)

Other Liability Occurrence	$	14,813
Other Liability Claims Made		9,189
Workers Compensation		6,384
Auto Liability		4,468
International		2,963
Property		2,871
Reinsurance		1,767
Medical Malpractice		1,592
Aircraft		1,490
Products Liability		1,275
Accident & Health		1,072
Fidelity/Surety		919
Other		4,723

Total	$	53,526


*	Presented pursuant to statutory reporting requirements as prescribed by the National Association of Insurance Commissioners.



	2003				2002

	Gross		Net		Gross		Net


Combined	$	995	$	275	$	1,022	$	283





		2003									2002

		Asbestos			Environmental			Combined			Asbestos			Environmental			Combined


Claims at beginning of year			7,085			8,995			16,080			6,670			9,364			16,034
Claims during year:
	Opened		99			387			486			202			484			686
	Settled		(30	)		(54	)		(84	)		(49	)		(206	)		(255	)
	Dismissed or otherwise resolved		(23	)		(787	)		(810	)		(134	)		(313	)		(447	)

Claims at end of period			7,131			8,541			15,672			6,689			9,329			16,018


			2003		2002


GAAP premiums:
	Domestic:
		Life Insurance	$	431	$	396
		Individual Fixed Annuities		12		11
		Guaranteed Investment Contracts		4		1
		Home Service		209		216
		Group Life/Health		232		238
		Pension and Investment Products		434		219

	Total Domestic:			1,322		1,081

	Foreign:
		Life Insurance		3,268		2,793
		Personal Accident		691		566
		Group Products		350		316
		Guaranteed Investment Contracts		28		27

	Total Foreign:			4,337		3,702

	Total GAAP premiums		$	5,659	$	4,783

Premium income, deposits and other considerations^{(a) (b)}:
	Domestic:
		Life Insurance	$	652	$	656
		Individual Fixed Annuities		2,773		2,262
		Guaranteed Investment Contracts^(c)		2,470		3,492
		Home Service		235		216
		Group Life/Health		237		245
		Pension and Investment Products		567		401

	Total Domestic			6,934		7,272




	2003			2002


Spread Income on Investments and Borrowings		53	%		46	%
Interest Rate Products		34			24
Equity Linked Products		1			3
Credit Linked Products		11			26
Other revenue		1			1


*	Includes Global Investment, John McStay Investment Counsel, L.P. and certain overseas variable annuity operations.



(dollars in millions)

			Unamortized				Weighted			Weighted
	Net		Discount				Average			Average
	Book		and Accrued		Face		Interest			Maturity
	Value		Interest		Amount		Rate			In Days


ILFC	$	4,001	$	4	$	4,005		1.26	%		25
AGF		3,519		3		3,522		1.25			28
Funding		3,229		2		3,231		1.20			23
AIGCCC — Taiwan*		232		1		233		2.21			76
AIGF — Taiwan*		60		—		60		4.35			61

Total	$	11,041	$	10	$	11,051		—			—



		Payments due by Period

						2004		2006		Remaining
						through		through		years after
March 31, 2003		Total		2003		2005		2007		2007


Borrowings*		$	63,330	$	20,443	$	14,979	$	10,412	$	17,496
Aircraft Purchase Commitments			27,874		2,907		9,338		9,346		6,283
Other Long-Term Obligations:
	ILFC		843		381		462		—		—

Total		$	92,047	$	23,731	$	24,779	$	19,758	$	23,779


*	Excludes commercial paper and includes ILFC’s capital lease obligations.