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Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from___________________to____________________
Commission file number 1-8787
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American International Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2592361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Pine Street, New York, New York 10270
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-7000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $2.50 Per Share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|.
The aggregate market value of the shares of all classes of voting stock of
the registrant held by non-affiliates of the registrant on January 31, 1998 was
approximately $55,311,490,000 computed upon the basis of the closing sales price
of the Common Stock on that date.
As of January 31, 1998, there were outstanding 699,418,258 shares of
Common Stock, $2.50 par value, of the registrant.
Documents Incorporated by Reference:
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 20, 1998 is incorporated by reference in
Part III of this Form 10-K.
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PART I
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ITEM 1. Business
American International Group, Inc. ("AIG"), a Delaware corporation, is a holding
company which through its subsidiaries is primarily engaged in a broad range of
insurance and insurance-related activities and financial services in the United
States and abroad. AIG's primary activities include both general and life
insurance operations. The principal insurance company subsidiaries are American
Home Assurance Company ("American Home"), National Union Fire Insurance Company
of Pittsburgh, Pa. ("National Union"), New Hampshire Insurance Company ("New
Hampshire"), Lexington Insurance Company ("Lexington"), American International
Underwriters Overseas, Ltd. ("AIUO"), American Life Insurance Company ("ALICO"),
American International Assurance Company, Limited ("AIA"), Nan Shan Life
Insurance Company, Ltd. ("Nan Shan"), The Philippine American Life and General
Insurance Company ("PHILAM"), American International Reinsurance Company, Ltd.
and United Guaranty Residential Insurance Company. For information on AIG's
business segments, see Note 17 of Notes to Financial Statements.
All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 1998, beneficial ownership of
approximately 16.2 percent, 3.5 percent and 2.4 percent of AIG's Common Stock,
$2.50 par value ("Common Stock"), was held by Starr International Company, Inc.
("SICO"), The Starr Foundation and C. V. Starr & Co., Inc. ("Starr"),
respectively.
At December 31, 1997, AIG and its subsidiaries had approximately 40,000
employees.
The following table shows the general development of the business of AIG
on a consolidated basis, the contributions made to AIG's consolidated revenues
and operating income and the assets held, in the periods indicated by its
general insurance, life insurance, financial services operations, equity in
income of minority-owned insurance companies and other realized capital losses.
(See also Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes 1 and 17 of Notes to Financial Statements.)
(dollars in thousands)
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Years Ended December 31, 1997 1996 1995 1994 1993
==============================================================================================================================
General insurance operations:
Gross premiums written $ 18,742,055 $ 18,319,132 $ 17,895,120 $ 16,392,409 $ 14,901,255
Net premiums written 13,407,529 12,691,679 11,893,022 10,865,753 10,025,903
Net premiums earned 12,421,040 11,854,815 11,405,731 10,286,831 9,566,640
Adjusted underwriting profit (a) 490,168 449,784 416,637 200,484 68,735
Net investment income 1,853,523 1,690,798 1,547,572 1,436,254 1,342,383
Realized capital gains 128,175 64,985 68,077 51,360 60,719
Operating income 2,471,866 2,205,567 2,032,286 1,688,098 1,471,837
Identifiable assets 62,386,262 58,791,735 56,223,416 51,556,410 47,161,017
- ------------------------------------------------------------------------------------------------------------------------------
Loss ratio 75.3 75.9 75.9 77.8 79.2
Expense ratio 20.9 20.6 20.7 20.5 20.3
- ------------------------------------------------------------------------------------------------------------------------------
Combined ratio 96.2 96.5 96.6 98.3 99.5
==============================================================================================================================
Life insurance operations:
Premium income 9,925,639 8,978,246 8,038,150 6,724,321 5,746,046
Net investment income 2,896,469 2,675,881 2,264,905 1,748,428 1,499,714
Realized capital gains 21,186 34,798 32,703 86,706 54,576
Operating income 1,571,483 1,323,758 1,090,605 952,484 781,611
Identifiable assets 52,103,905 48,376,033 43,280,484 34,496,652 28,381,164
Insurance in-force at end of year 436,573,123 421,983,133 376,097,107 333,378,811 257,162,102
Financial services operations:
Commissions, transaction and other fees 3,273,478 2,555,477 2,204,090 1,783,239 1,529,079
Operating income 701,337 523,906 417,741 404,853 390,038
Identifiable assets 51,756,123 43,861,592 36,833,772 30,660,776 25,514,258
Equity in income of minority-owned
insurance operations 113,636 99,359 81,722 56,005 39,589
Other realized capital losses (30,846) (11,792) (28,946) (51,213) (8,197)
Revenues (b) 30,602,300 27,942,567 25,614,004 22,121,931 19,830,549
Total assets 163,970,687 148,431,002 134,136,398 114,346,117 101,014,848
==============================================================================================================================
(a) Adjusted underwriting profit is statutory underwriting income adjusted
primarily for changes in deferral of acquisition costs. This adjustment is
necessary to present the financial statements in accordance with generally
accepted accounting principles.
(b) Represents the sum of general net premiums earned, life premium income,
net investment income, financial services commissions, transaction and
other fees, equity in income of minority-owned insurance operations and
realized capital gains (losses). In 1997, agency operations were
insignificant and were presented as a component of general insurance.
Agency operations for years prior to 1997 have been reclassified to
conform to the 1997 presentation.
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The following table shows identifiable assets, revenues and income derived
from operations in the United States and Canada and from operations in other
countries for the year ended December 31, 1997. (See also Note 17 of Notes to
Financial Statements.)
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
Percent of Total
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United States Other United States Other
Total and Canada Countries and Canada Countries
========================================================================================================================
General insurance operations:
Net premiums earned $ 12,421,040 $ 8,352,231 $ 4,068,809 67.2% 32.8%
Adjusted underwriting profit (loss) 490,168 (7,188) 497,356 -- --
Net investment income 1,853,523 1,484,558 368,965 80.1 19.9
Realized capital gains 128,175 57,017 71,158 44.5 55.5
Operating income 2,471,866 1,534,387 937,479 62.1 37.9
Identifiable assets 62,386,262 48,409,832 13,976,430 77.6 22.4
Life insurance operations:
Premium income 9,925,639 553,203 9,372,436 5.6 94.4
Net investment income 2,896,469 838,931 2,057,538 29.0 71.0
Realized capital gains (losses) 21,186 (2,163) 23,349 -- --
Operating income 1,571,483 122,775 1,448,708 7.8 92.2
Identifiable assets 52,103,905 14,435,626 37,668,279 27.7 72.3
Financial services operations:
Commissions, transaction and other fees 3,273,478 2,808,131 465,347 85.8 14.2
Operating income 701,337 424,846 276,491 60.6 39.4
Identifiable assets 51,756,123 45,451,790 6,304,333 87.8 12.2
Equity in income of minority-owned
insurance operations 113,636 80,410 33,226 70.8 29.2
Other realized capital gains (losses) (30,846) (30,988) 142 -- --
Income before income taxes 4,698,898 2,015,556 2,683,342 42.9 57.1
Revenues 30,602,300 14,141,330 16,460,970 46.2 53.8
Total Assets 163,970,687 105,757,551 58,213,136 64.5 35.5
========================================================================================================================
General Insurance Operations
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance. One or more of these
companies is licensed to write substantially all of these lines in all states of
the United States and in approximately 100 foreign countries.
AIG's business derived from brokers in the United States and Canada is
conducted through its domestic brokerage group, consisting of American Home,
National Union, Lexington and certain other insurance company subsidiaries of
AIG. The primary casualty/risk management division of this group provides
insurance and risk management programs for large corporate customers. The AIG
Risk Finance division designs and implements creative risk financing
alternatives using the insurance and financial services capabilities of AIG.
Also included are the operations of New Hampshire and its subsidiaries, which
focus specifically on providing AIG products and services through brokers to
middle market companies, and regional insurance companies which service the
commercial middle market.
The domestic brokerage division accepts business mainly from insurance
brokers, enabling selection of specialized markets and retention of underwriting
control. Any licensed broker is able to submit business to these companies
without the traditional agent-company contractual relationship, but such broker
usually has no authority to commit the companies to accept a risk.
In addition to writing substantially all classes of business insurance,
including large commercial or industrial property insurance, excess liability,
inland marine, workers' compensation and excess and umbrella coverages, the
domestic brokerage division offers many specialized forms of insurance such as
directors and officers liability, difference-in-conditions, kidnap-ransom,
export credit and political risk, and various types of professional errors and
omissions coverages. Lexington writes surplus lines, those risks for which
conventional insurance companies do not readily provide insurance coverage,
either because of complexity or because the coverage does not lend itself to
conventional contracts.
Audubon Insurance Company and its subsidiaries ("Audubon") conduct agency
marketing of personal and small commercial coverages in certain Southern and
Western States.
AIG engages in mass marketing of personal lines coverages, primarily
private passenger auto, through American International Insurance Company and New
Hampshire Indemnity Company, Inc. as well as through a joint venture with 20th
Century Industries.
The business of United Guaranty Corporation ("UGC") and its subsidiaries
is also included in the domestic operations of AIG. The principal business of
the UGC subsidiaries is the writing of residential mortgage loan insurance,
which is guaranty insurance on conventional first mortgage loans on
single-family dwellings and condominiums. Such insurance
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protects lenders against loss if borrowers default. UGC subsidiaries also write
home equity and property improvement loan insurance on loans to finance
residential property improvements, alterations and repairs and for other
purposes not necessarily related to real estate. UGC had approximately $16
billion of mortgage guarantee risk in-force at December 31, 1997.
AIG's foreign general insurance business is comprised primarily of risks
underwritten through American International Underwriters ("AIU"), a marketing
unit consisting of wholly owned agencies and insurance companies. It also
includes business written by foreign-based insurance subsidiaries of AIUO for
their own accounts. In general, the same types of policies and marketing
methods, with certain refinements for local laws, customs and needs, are used in
these foreign operations as have been described above in connection with the
domestic operations.
During 1997, domestic general and foreign general insurance business
accounted for 67.4 percent and 32.6 percent, respectively, of AIG's net premiums
written.
AIG's general insurance company subsidiaries worldwide operate primarily
by underwriting and accepting any size risk for their direct account and
securing reinsurance on that portion of the risk in excess of the limit which
they wish to retain. This operating policy differs from that of many insurance
companies which will underwrite only up to their net retention limit, thereby
requiring the broker or agent to secure commitments from other underwriters for
the remainder of the gross risk amount.
The following table summarizes general insurance premiums written and
earned:
(in thousands)
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Years Ended December 31, Written Earned
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1997
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Gross premiums $ 18,742,055 $ 17,565,566
Ceded premiums (5,334,526) (5,144,526)
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Net premiums $ 13,407,529 $ 12,421,040
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1996
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Gross premiums $ 18,319,132 $ 17,579,868
Ceded premiums (5,627,453) (5,725,053)
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Net premiums $ 12,691,679 $ 11,854,815
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1995
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Gross premiums $ 17,895,120 $ 17,243,829
Ceded premiums (6,002,098) (5,838,098)
- --------------------------------------------------------------------------------
Net premiums $ 11,893,022 $ 11,405,731
================================================================================
The utilization of reinsurance is closely monitored by an internal
reinsurance security committee, consisting of members of AIG's senior
management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 5 of Notes to Financial Statements.)
AIG is well diversified both in terms of lines of business and geographic
locations. Of the general insurance lines of business, workers' compensation was
approximately 12 percent of AIG's net premiums written. This line is well
diversified geographically.
The majority of AIG's insurance business is in the casualty classes, which
tend to involve longer periods of time for the reporting and settling of claims.
This may increase the risk and uncertainty with respect to AIG's loss reserve
development. (See also the Discussion and Analysis of Consolidated Net Losses
and Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
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The following table is a summary of the general insurance operations,
including ratios, by major operating category for the year ended December 31,
1997. (See also Note 17(b) of Notes to Financial Statements.)
(dollars in thousands)
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Ratio of Ratio of
Losses and Underwriting
Loss Expenses Expenses
Net Premiums Incurred to Incurred to
------------------------------- Net Premiums Net Premiums Combined
Written Earned Earned Written Ratio
==============================================================================================================
Foreign $ 4,369,989 $ 4,068,809 56.6 31.2 87.8
Commercial casualty (a) 7,041,086 6,428,763 83.2 15.0 98.2
Commercial property 485,621 408,437 101.1 12.3 113.4
Pools and associations (b) 358,275 369,294 136.3 26.1 162.4
Personal lines (c) 811,742 790,448 80.6 16.9 97.5
Mortgage guaranty 340,816 355,289 41.4 27.0 68.4
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Total $13,407,529 $12,421,040 75.3 20.9 96.2
==============================================================================================================
(a) Including workers' compensation and retrospectively rated risks.
(b) Including involuntary pools.
(c) Including mass marketing and specialty programs.
Loss and expense ratios of AIG's consolidated general insurance operations
are set forth in the following table. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of
Losses and Underwriting
Loss Expenses Expenses
Net Premiums Incurred to Incurred to Industry
--------------------------- Net Premiums Net Premiums Combined Underwriting Combined
Years Ended December 31, Written Earned Earned Written Ratio Margin Ratio*
=================================================================================================================================
1997 $13,407,529 $12,421,040 75.3 20.9 96.2 3.8 103.6
1996 12,691,679 11,854,815 75.9 20.6 96.5 3.5 106.3
1995 11,893,022 11,405,731 75.9 20.7 96.6 3.4 106.7
1994 10,865,753 10,286,831 77.8 20.5 98.3 1.7 108.9
1993 10,025,903 9,566,640 79.2 20.3 99.5 0.5 107.9
=================================================================================================================================
* Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders) and the ratio for 1997 reflects estimated
results provided by Conning & Company.
During 1997, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 8.1 percent and 7.7 percent were
written in New York and California , respectively (no other state accounted for
more than 5 percent of such premiums).
There was no significant adverse effect on AIG's general insurance results
of operations from the economic environments in any one state, country or
geographic region for the year ended December 31, 1997. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
Discussion and Analysis of Consolidated Net Losses and Loss Expense Reserve
Development
The reserve for net losses and loss expenses is exclusive of applicable
reinsurance and represents the accumulation of estimates for reported losses
("case basis reserves") and provisions for losses incurred but not reported
("IBNR"). AIG does not discount its loss reserves other than for minor amounts
related to workers' compensation claims.
Loss reserves established with respect to foreign business are set and
monitored in terms of the respective local or functional currency. Therefore, no
assumption is included for changes in currency rates. (See also Note 1(s) of
Notes to Financial Statements.) Losses and loss expenses are charged to income
as incurred.
Management continually reviews the adequacy of established loss reserves
through the utilization of a number of analytical reserve development
techniques. Through the use of these techniques, management is able to monitor
the adequacy of its established reserves and determine appropriate assumptions
for inflation. Also, analysis of emerging specific development patterns, such as
case reserve redundancies or deficiencies and IBNR emergence, allows management
to currently determine any required adjustments. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
The "Analysis of Consolidated Net Losses and Loss Expense Reserve
Development", which follows, presents the development of net losses and loss
expense reserves for calendar years 1987 through 1997. The upper half of the
table shows the cumulative amounts paid during successive years related to the
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opening loss reserves. For example, with respect to the net losses and loss
expense reserve of $14,699.2 million as of December 31, 1990, by the end of 1997
(seven years later) $13,235.3 million had actually been paid in settlement of
these net loss reserves. In addition, as reflected in the lower section of the
table, the original reserve of $14,699.2 million was reestimated to be $16,160.8
million at December 31, 1997. This increase from the original estimate would
generally be a combination of a number of factors, including reserves being
settled for larger amounts than originally estimated. The original estimates
will also be increased or decreased as more information becomes known about the
individual claims and overall claim frequency and severity patterns. The
redundancy (deficiency) depicted in the table, for any particular calendar year,
shows the aggregate change in estimates over the period of years subsequent to
the calendar year reflected at the top of the respective column heading. For
example, the redundancy of $398.6 million at December 31, 1997 related to
December 31, 1996 net losses and loss expense reserves of $20,407.3 million
represents the cumulative amount by which reserves for 1996 and prior years have
developed redundantly during 1997.
Over the past several years, AIG has significantly strengthened its net
loss and loss expense reserves with respect to asbestos and environmental
losses. This strengthening is the primary cause of the adverse development
reflected in certain calendar years in the net loss and loss expense reserves
shown in the following table.
Analysis of Consolidated Net Losses and
Loss Expense Reserve Development
(in millions)
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1987 1988 1989 1990 1991 1992 1993 1994
================================================================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $ 8,670.7 $11,086.1 $12,958.5 $14,699.2 $15,839.9 $16,756.8 $17,557.0 $18,418.9
Paid (Cumulative) as of:
One Year Later 2,619.2 3,266.9 3,940.3 4,315.2 4,747.8 4,882.7 5,146.3 4,775.0
Two Years Later 4,315.9 5,451.5 6,476.6 7,349.7 8,015.4 8,289.4 8,241.7 8,072.6
Three Years Later 5,496.6 6,904.5 8,350.8 9,561.0 10,436.2 10,433.1 10,403.5 10,333.1
Four Years Later 6,207.5 7,966.2 9,721.3 11,223.5 11,814.8 11,718.1 12,095.1
Five Years Later 6,757.2 8,792.1 10,764.8 12,111.6 12,611.4 12,930.5
Six Years Later 7,246.1 9,449.6 11,284.8 12,614.9 13,472.0
Seven Years Later 7,616.7 9,737.0 11,517.3 13,235.3
Eight Years Later 7,771.9 9,813.0 11,952.7
Nine Years Later 7,764.7 10,139.5
Ten Years Later 8,040.3
Net Liability Reestimated as of:
End of Year 8,670.7 11,086.1 12,958.5 14,699.2 15,839.9 16,756.8 17,557.0 18,418.9
One Year Later 8,523.6 10,923.8 12,844.5 14,596.2 15,828.1 16,807.0 17,434.3 18,138.5
Two Years Later 8,492.4 10,856.9 12,843.9 14,595.4 15,902.9 16,603.4 17,479.1 18,268.9
Three Years Later 8,488.1 10,811.9 12,809.2 14,723.7 15,989.7 16,778.3 17,781.7 18,344.4
Four Years Later 8,472.3 10,774.9 12,896.4 14,965.4 16,254.2 17,181.7 18,089.8
Five Years Later 8,472.0 10,805.1 13,064.6 15,361.2 16,712.4 17,600.1
Six Years Later 8,470.0 10,953.6 13,426.0 15,844.5 17,094.9
Seven Years Later 8,577.4 11,301.5 13,930.7 16,160.8
Eight Years Later 8,912.3 11,798.9 14,179.7
Nine Years Later 9,391.1 12,024.9
Ten Years Later 9,646.0
Redundancy/(Deficiency) (975.3) (938.8) (1,221.2) (1,461.6) (1,255.0) (843.3) (532.8) 74.5
================================================================================================================================
(in millions)
- ------------------------------------------------------------------
1995 1996 1997
==================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $19,692.8 $20,407.3 $21,171.5
Paid (Cumulative) as of:
One Year Later 5,281.4 5,615.7
Two Years Later 8,726.1
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Liability Reestimated as of:
End of Year 19,692.8 20,407.3 21,171.5
One Year Later 19,412.8 20,008.7
Two Years Later 19,329.9
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Redundancy/(Deficiency) 362.9 398.6
==================================================================
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The following table excludes for each calendar year the net loss and loss
expense reserves and the development thereof with respect to asbestos and
environmental claims. Thus, AIG's loss and loss expense reserves excluding
asbestos and environmental claims are developing adequately. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
Analysis of Consolidated Net Losses and Loss Expense
Reserve Development Excluding Asbestos and
Environmental Net Losses and Loss Expense Reserve
Development
(in millions)
- ---------------------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994
===========================================================================================================================
Reserve for Net Losses and Loss
Expenses, Excluding Asbestos
and Environmental Losses and
Loss Expenses, December 31, $ 8,630.6 $11,005.9 $12,838.3 $14,538.9 $15,639.5 $16,503.4 $17,248.7 $18,088.6
Paid (Cumulative) as of:
One Year Later 2,619.2 3,266.9 3,940.3 4,259.7 4,690.8 4,766.1 5,060.9 4,699.6
Two Years Later 4,315.9 5,451.5 6,422.0 7,237.4 7,842.0 8,087.9 8,081.5 7,890.5
Three Years Later 5,496.6 6,850.5 8,240.1 9,332.8 10,178.1 10,157.3 10,137.0 10,047.8
Four Years Later 6,155.7 7,856.9 9,495.6 10,911.6 11,482.9 11,336.9 11,726.0
Five Years Later 6,655.0 8,569.4 10,456.3 11,726.6 12,174.8 12,447.5
Six Years Later 7,032.7 9,145.1 10,904.3 12,125.9 12,934.5
Seven Years Later 7,322.1 9,361.6 11,033.5 12,646.3
Eight Years Later 7,407.3 9,338.8 11,370.0
Nine Years Later 7,306.3 9,569.5
Ten Years Later 7,489.2
Net Liability Reestimated as of:
End of Year 8,630.6 11,005.9 12,838.3 14,538.9 15,639.5 16,503.4 17,248.7 18,088.6
One Year Later 8,443.4 10,803.6 12,684.2 14,340.7 15,518.4 16,382.3 17,019.2 17,556.0
Two Years Later 8,372.2 10,696.6 12,590.9 14,231.6 15,422.4 16,072.6 16,812.6 17,355.2
Three Years Later 8,327.8 10,562.2 12,449.4 14,190.1 15,402.9 15,996.7 16,790.0 17,292.7
Four Years Later 8,227.0 10,419.9 12,367.5 14,326.7 15,416.9 16,081.1 16,959.7
Five Years Later 8,127.6 10,282.2 12,430.8 14,472.0 15,562.1 16,361.5
Six Years Later 7,961.4 10,325.8 12,544.1 14,648.3 15,807.8
Seven Years Later 7,962.8 10,429.9 12,747.8 14,828.3
Eight Years Later 8,056.3 10,635.4 12,861.2
Nine Years Later 8,254.5 10,727.7
Ten Years Later 8,377.6
Redundancy/(Deficiency): 253.0 278.2 (22.9) (289.4) (168.3) 141.9 289.0 795.9
===========================================================================================================================
(in millions)
- -----------------------------------------------------------------
1995 1996 1997
=================================================================
Reserve for Net Losses and Loss
Expenses, Excluding Asbestos
and Environmental Losses and
Loss Expenses, December 31, $19,185.6 $19,664.4 $20,384.2
Paid (Cumulative) as of:
One Year Later 5,174.1 5,507.0
Two Years Later 8,515.2
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Liability Reestimated as of:
End of Year 19,185.6 19,664.4 20,384.2
One Year Later 18,567.7 19,118.0
Two Years Later 18,347.1
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Redundancy/(Deficiency): 838.5 546.4
=================================================================
Reconciliation of Net Reserve for Losses and
Loss Expenses
(in millions)
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Net reserve for losses and loss
expenses at beginning of year $20,407.3 $19,692.8 $18,418.9
- --------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 9,732.6 9,272.4 8,935.4
Prior years* (376.4) (276.0) (275.6)
- --------------------------------------------------------------------------------
9,356.2 8,996.4 8,659.8
- --------------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 2,976.3 3,000.5 2,610.9
Prior years 5,615.7 5,281.4 4,775.0
- --------------------------------------------------------------------------------
8,592.0 8,281.9 7,385.9
- --------------------------------------------------------------------------------
Net reserve for losses and loss
expenses at end of year $21,171.5 $20,407.3 $19,692.8
================================================================================
* Does not include the effects of foreign exchange adjustments which are
reflected in the "Net Losses and Loss Expense Reserve Development" table.
Approximately 45 percent of the net losses and loss expense reserves are
paid out within two years of the date incurred. The remaining net losses and
loss expense reserves, particularly those associated with the casualty lines of
business, may extend to 20 years or more.
For further discussion regarding net reserves for losses and loss
expenses, see Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The reserve for losses and loss expenses as reported in AIG's Consolidated
Balance Sheet at December 31, 1997, differs from the total reserve reported in
the Annual Statements filed with state insurance departments and, where
appropriate, with foreign regulatory authorities. The differences at
December 31, 1997 relate primarily to estimates for unrecoverable reinsurance
and additional reserves relating to certain foreign operations. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
The reserve for gross losses and loss expenses is prior to reinsurance and
represents the accumulation for reported losses and
6
8
IBNR. Management reviews the adequacy of established gross loss reserves in the
manner previously described for net loss reserves.
The "Analysis of Consolidated Gross Losses and Loss Expense Reserve
Development", which follows, presents the development of gross losses and loss
expense reserves for calendar years 1992 through 1997. As with the net losses
and loss expense reserve development, the deficiencies of $1.54 billion and
$973.5 million for 1992 and 1993, and redundancies of $610.7 million, $649.2
million and $653.0 million for 1994, 1995 and 1996, respectively, are relatively
insignificant both in terms of an aggregate amount and as a percentage of the
initial reserve balance.
Analysis of Consolidated Gross Losses and
Loss Expense Reserve Development
(in millions)
- -------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
===========================================================================================
Gross losses and
loss expenses,
December 31, $28,156.8 $30,046.2 $31,435.4 $33,046.7 $33,429.8 $33,400.1
Paid (cumulative)
as of:
One Year Later 7,280.9 8,807.1 7,640.0 8,392.1 9,199.2
Two Years Later 13,006.0 13,278.7 13,035.8 15,496.1
Three Years Later 16,432.3 17,311.4 17,539.5
Four Years Later 18,550.0 20,803.0
Five Years Later 21,321.7
Gross Liability
Reestimated
as of:
End of Year 28,156.8 30,046.2 31,435.4 33,046.7 33,429.8 33,400.1
One Year Later 28,253.4 29,865.9 30,758.9 32,371.7 32,776.8
Two Years Later 27,824.8 29,536.5 30,960.0 32,397.5
Three Years Later 27,726.8 30,362.0 30,824.7
Four Years Later 28,625.0 31,019.7
Five Years Later 29,700.7
Redundancy/(Deficiency) (1,543.9) (973.5) 610.7 649.2 653.0
===========================================================================================
Life Insurance Operations
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group life,
annuity, and accident and health policies. Financial and investment products
consist of single premium annuity, variable annuities, guaranteed investment
contracts, universal life and pensions. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
In the United States, AIG has four domestic life subsidiaries: American
International Life Assurance Company of New York, AIG Life Insurance Company,
Delaware American Life Insurance Company, and Pacific Union Assurance Company.
These companies utilize multiple distribution channels including brokerage and
career and general agents to offer primarily life insurance, financial and
investment products and specialty forms of accident and health coverage for
individuals and groups, including employee benefit plans. The domestic life
business comprised 5.6 percent of total life premium income in 1997.
Life insurance operations in foreign countries comprised 94.4 percent of
life premium income and 92.2 percent of operating income in 1997. AIG operates
overseas principally through four subsidiary companies, ALICO, AIA , Nan Shan
and PHILAM. Although ALICO is incorporated in Delaware, all of its business is
written outside of the United States. ALICO has operations either directly or
through subsidiaries in approximately 50 countries located in Europe, Africa,
Latin America, the Caribbean, the Middle East, and the Far East, with Japan
being the largest territory. AIA operates primarily in Hong Kong, Singapore,
Malaysia and Thailand. Nan Shan operates in Taiwan while PHILAM operates in the
Philippines. There was no significant adverse effect on AIG's life insurance
results of operations from economic environments in any one state, country or
geographic region for the year ended December 31, 1997. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial products
are sold in Japan.
In addition to the above, AIG also has subsidiary operations in
Switzerland (American Security Life Insurance Company, Ltd.), Puerto Rico (AIG
Life Insurance Company of Puerto Rico) and conducts life insurance business
through AIUO subsidiary companies in certain countries in Central and South
America.
The foreign life companies have approximately 115,000 career agents and
sell their products largely to indigenous persons in local currencies. In
addition to the agency outlets, these companies also distribute their products
through direct marketing channels, such as mass marketing, and through brokers
and other distribution outlets such as financial institutions.
7
9
The following table summarizes the life insurance operating results for
the year ended December 31, 1997. (See also Management's Discussion and Analysis
of Financial Condition and Results of Operations.)
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Average
Net Direct Termination Rate
Premium Investment Operating Insurance ----------------
Income Income Income(a) In-Force Lapse Other
====================================================================================================================================
Individual:
Life $7,543,752 $2,023,008 $1,016,859 $328,203,146(b) 7.1% 1.7%
Annuity 144,030 465,373 73,039 (c)
Accident and health 1,225,932 98,208 344,664 (c)
Group:
Life 433,100 28,358 55,635 108,369,977 6.9% 7.2%
Pension 99,217 267,127 30,374 (c)
Accident and health 479,608 24,744 40,075 (c)
Realized capital gains -- -- 21,186 (c)
Consolidation adjustments -- (10,349) (10,349) (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $9,925,639 $2,896,469 $1,571,483 $436,573,123
====================================================================================================================================
(a) Including income related to investment type products.
(b) Including $231.4 billion of whole life insurance and endowments.
(c) Not applicable.
Insurance Investment Operations
A significant portion of AIG's general and life operating revenues are derived
from AIG's insurance investment operations. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 1, 2, 8
and 17 of Notes to Financial Statements.)
The following table is a summary of the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at December 31, 1997:
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
Percent --------------------
General Life Total of Total Domestic Foreign
====================================================================================================================================
Fixed maturities:
Available for sale, at market value(a) $11,326,246 $27,340,210 $38,666,456 53.0% 37.8% 62.2%
Held to maturity, at amortized cost(b) 12,769,646 -- 12,769,646 17.5 100.0 --
Equity securities, at market value(c) 3,314,603 1,815,849 5,130,452 7.0 43.5 56.5
Mortgage loans on real estate, policy
and collateral loans 50,297 6,147,606 6,197,903 8.5 39.0 61.0
Short-term investments, including
time deposits, and cash 616,683 2,409,353 3,026,036 4.2 33.1 66.9
Real estate 401,995 979,543 1,381,538 1.9 16.8 83.2
Investment income due and accrued 528,164 817,348 1,345,512 1.9 39.7 60.3
Other invested assets 2,836,450 1,537,060 4,373,510 6.0 76.7 23.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total $31,844,084 $41,046,969 $72,891,053 100.0% 51.0% 49.0%
====================================================================================================================================
(a) Includes $718,548 of bonds trading securities, at market value.
(b) Includes $239,331 of preferred stocks, at amortized cost.
(c) Includes $111,609 of preferred stocks, at market value.
The following table summarizes the investment results of the general
insurance operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Average Cash and Invested Assets
-------------------------------------------
Cash
(including Net Realized
short-term Invested Investment Rate of Return on Capital
Years Ended December 31, investments) Assets(a) Total Income(b) Invested Assets Gains
====================================================================================================================================
1997 $ 611,023 $29,704,089 $30,315,112 $1,853,523 6.1% (c) 6.2% (d) $128,175
1996 630,031 27,047,770 27,677,801 1,690,798 6.1 (c) 6.3 (d) 64,985
1995 825,200 24,417,024 25,242,224 1,547,572 6.1 (c) 6.3 (d) 68,077
1994 1,441,800 21,837,304 23,279,104 1,436,254 6.2 (c) 6.6 (d) 51,360
1993 1,824,622 19,734,571 21,559,193 1,342,383 6.2 (c) 6.8 (d) 60,719
====================================================================================================================================
(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and
excludes realized capital gains.
(c) Net investment income divided by the annual average sum of cash and
invested assets.
(d) Net investment income divided by the annual average invested assets.
8
10
The following table summarizes the investment results of the life
insurance operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Annual Average Cash and Invested Assets
-----------------------------------------
Cash
(including Net Realized
short-term Invested Investment Rate of Return on Capital
Years Ended December 31, investments) Assets(a) Total Income(b) Invested Assets Gains
=====================================================================================================================
1997 $1,705,707 $38,063,713 $39,769,420 $2,896,469 7.3%(c) 7.6%(d) $21,186
1996 1,116,938 35,563,517 36,680,455 2,675,881 7.3(c) 7.5(d) 34,798
1995 1,222,375 29,557,181 30,779,556 2,264,905 7.4(c) 7.7(d) 32,703
1994 2,045,747 22,317,914 24,363,661 1,748,428 7.2(c) 7.8(d) 86,706
1993 2,697,282 17,286,171 19,983,453 1,499,714 7.5(c) 8.7(d) 54,576
=====================================================================================================================
(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and
excludes realized capital gains.
(c) Net investment income divided by the annual average sum of cash and
invested assets.
(d) Net investment income divided by the annual average invested assets.
AIG's worldwide insurance investment policy places primary emphasis on
investments in high quality, fixed income securities in all of its portfolios
and, to a lesser extent, investments in marketable common stocks in order to
preserve policyholders' surplus and generate net investment income. The ability
to implement this policy is somewhat limited in certain territories as there may
be a lack of qualified long term investments or investment restrictions may be
imposed by the local regulatory authorities. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
Financial Services Operations
AIG operations which contribute to financial services income include primarily
A.I. Credit Corp. ("AICCO"), AIG Financial Products Corp. and its subsidiary
companies ("AIGFP"), AIG Trading Group Inc. and its subsidiaries ("AIGTG"),
International Lease Finance Corporation ("ILFC") and UeberseeBank AG. AICCO's
business is principally in premium financing. AIGFP structures financial
transactions, including long-dated interest rate and currency swaps and
structures borrowings through notes, bonds and guaranteed investment agreements.
AIGTG engages in various commodities trading, foreign exchange trading and
market making activities. ILFC is engaged primarily in the acquisition of new
and used commercial jet aircraft and the leasing and remarketing of such
aircraft to airlines around the world. UeberseeBank AG operates as a Swiss bank.
Other financial services operations are AIG Global Investment Group, Inc. whose
operations manage the investment portfolios of various AIG subsidiaries, as
well as third-party assets, and are responsible for product design and
origination, marketing and distribution of third-party asset management
products, including retail mutual funds, direct investment, and real estate
investment, management and development. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes 1, 9 and 11
of Notes to Financial Statements.)
The following table is a summary of the composition of AIG's financial
services invested assets and liabilities at December 31, 1997. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)
(in thousands)
================================================================================
Financial services invested assets:
Flight equipment primarily under operating leases,
net of accumulated depreciation $14,438,074
Securities available for sale, at market value 9,145,317
Trading securities, at market value 3,974,561
Spot commodities, at market value 459,517
Unrealized gain on interest rate and currency
swaps, options and forward transactions 7,422,290
Trading assets 6,715,486
Securities purchased under agreements to resell,
at contract value 4,551,191
Other, including short-term investments 2,192,691
- --------------------------------------------------------------------------------
Total financial services invested assets $48,899,127
================================================================================
Financial services liabilities:
Borrowings under obligations of guaranteed
investment agreements $ 8,000,326
Securities sold under agreements to repurchase,
at contract value 2,706,310
Trading liabilities 5,366,421
Securities and spot commodities sold but
not yet purchased, at market value 5,171,680
Unrealized loss on interest rate and currency
swaps, options and forward transactions 5,979,571
Deposits due to banks and other depositors 972,423
Commercial paper 2,208,167
Notes, bonds and loans payable 12,608,891
- --------------------------------------------------------------------------------
Total financial services liabilities $43,013,789
================================================================================
9
11
The following table is a summary of the revenues and operating income of
AIG's principal financial services operations for the year ended December 31,
1997. (See also Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 1 of Notes to Financial Statements.)
Operating
(in thousands) Revenues Income
================================================================================
ILFC $1,856,763 $ 382,431
AIGFP* 452,052 240,970
AIGTG* 561,784 126,536
================================================================================
* Represents net trading revenues.
Other Operations
Small AIG subsidiaries provide insurance-related services such as adjusting
claims and marketing specialized products. AIG has several other relatively
minor subsidiaries which carry on various businesses. American International
Technology Enterprises, Inc. provides information technology and processing
services to businesses worldwide. Mt. Mansfield Company, Inc. owns and operates
the ski slopes, lifts, school and an inn located at Stowe, Vermont.
Additional Investments
On January 29, 1998, AIG purchased the 76.1 percent interest in SELIC Holdings,
Ltd. which it previously did not own. As of March 15, 1998, AIG holds a 48.9
percent interest in Transatlantic Holdings, Inc., a reinsurance holding company,
and a 19.9 percent interest in Richmond Insurance Company, Ltd., a reinsurer.
(See also Note 1(n) of Notes to Financial Statements.) AIG holds a 24.4 percent
interest in IPC Holdings, Ltd., a reinsurance holding company. Another
significant investment includes a minority position in 20th Century Industries.
Locations of Certain Assets
As of December 31, 1997, approximately 36 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $929.6
million of cash and securities on deposit with foreign regulatory authorities.
Foreign operations and assets held abroad may be adversely affected by political
developments in foreign countries, including such possibilities as tax changes,
nationalization and changes in regula tory policy, as well as by consequence of
hostilities and unrest. The risks of such occurrences and their overall effect
upon AIG vary from country to country and cannot easily be predicted. If
expropriation or nationalization does occur, AIG's policy is to take all
appropriate measures to seek recovery of such assets. Certain of the countries
in which AIG's business is conducted have currency restrictions which generally
cause a delay in a company's ability to repatriate assets and profits. (See also
Notes 1, 2 and 17 of Notes to Financial Statements.)
Insurance Regulation and Competition
Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such requirements.
(See also Note 10 of Notes to Financial Statements.)
AIG's insurance subsidiaries, in common with other insurers, are subject
to regulation and supervision by the states and by other jurisdictions in which
they do business. Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate regulatory and
supervisory powers to an insurance official. The regulation and supervision
relate primarily to approval of policy forms and rates, the standards of
solvency that must be met and maintained, including risk based capital
measurements, the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the size of risks which may be
insured under a single policy, deposits of securities for the benefit of
policyholders, methods of accounting, periodic examinations of the affairs of
insurance companies, the form and content of reports of financial condition
required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of policyholders
rather than security holders. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Risk Based Capital (RBC) is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Thus, inadequately capitalized general and life insurance companies may be
identified.
The RBC formula develops a risk adjusted target level of adjusted
statutory capital by applying certain factors to various asset, premium and
reserve items. Higher factors are applied to more risky items and lower factors
are applied to less risky items. Thus, the target level of statutory surplus
varies not only as a result of the insurer's size, but also on the risk profile
of the insurer's operations.
The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control.
The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 1997.
10
12
To the extent that any of AIG's insurance entities would fall below
prescribed levels of surplus, it would be AIG's intention to infuse necessary
capital to support that entity.
A substantial portion of AIG's general insurance business and a majority
of its life insurance business is carried on in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification or revocation by such authorities, and AIU or other AIG
subsidiaries could be prevented from conducting business in certain of the
jurisdictions where they currently operate. In the past, AIU has been allowed to
modify its operations to conform with new licensing requirements in most
jurisdictions.
In addition to licensing requirements, AIG's foreign operations are also
regulated in various jurisdictions with respect to currency, policy language and
terms, amount and type of security deposits, amount and type of reserves, amount
and type of local investment and the share of profits to be returned to
policyholders on participating policies. Some foreign countries regulate rates
in various types of policies. Certain countries have established reinsurance
institutions, wholly or partially owned by the state, to which admitted insurers
are obligated to cede a portion of their business on terms which do not always
allow foreign insurers, including AIG, full compensation. In some countries,
regulations governing constitution of technical reserves and remittance balances
may hinder remittance of profits and repatriation of assets.
The insurance industry is highly competitive. Within the United States,
AIG's general insurance subsidiaries compete with approximately 3,000 other
stock companies, specialty insurance organizations, mutual companies and other
underwriting organizations. AIG's life insurance companies compete in the United
States with some 1,700 life insurance companies and other participants in
related financial service fields. Overseas, AIG subsidiaries compete for
business with foreign insurance operations of the larger U.S. insurers and local
companies in particular areas in which they are active.
AIG's financial services subsidiaries, particularly AIGTG and AIGFP,
operate in a highly competitive environment, both domestically and overseas.
Principal sources of competition are banks, investment banks and other non-bank
financial institutions.
ITEM 2. Properties
AIG and its subsidiaries operate from approximately 350 offices in the United
States, 5 offices in Canada and numerous offices in other foreign countries. The
offices in Springfield, Illinois; Houston, Texas; Atlanta, Georgia; Baton Rouge,
Louisiana; Wilmington, Delaware; Hato Rey, Puerto Rico; San Diego, California;
Greensboro, North Carolina; Livingston, New Jersey; 70 Pine Street, 72 Wall
Street and 175 Water Street in New York City; and offices in approximately 30
foreign countries including Bermuda, Chile, Hong Kong, the Philippines, Japan,
England, Singapore, Switzerland, Taiwan and Thailand are located in buildings
owned by AIG and its subsidiaries. The remainder of the office space utilized
by AIG subsidiaries is leased.
ITEM 3. Legal Proceedings
AIG and its subsidiaries, in common with the insurance industry in general, are
subject to litigation, including claims for punitive damages, in the normal
course of their business. AIG does not believe that such litigation will have a
material adverse effect on its financial condition, future operating results or
liquidity. (See also the Discussion and Analysis of Consolidated Net Losses and
Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of 1997.
11
13
Directors and Executive Officers of the Registrant
Set forth below is certain information concerning the directors and executive
officers of AIG. All directors are elected at the annual meeting of
shareholders. All officers serve at the pleasure of the Board of Directors, but
subject to the foregoing, are elected for terms of one year expiring in May of
each year.
- ---------------------------------------------------------------------------------------------------------------------------------
Served as
Director or
Officer
Name Title Age Since
=================================================================================================================================
M. Bernard Aidinoff* Director 69 1984
Lloyd M. Bentsen Director 77 1995
Pei-yuan Chia Director 59 1996
Marshall A. Cohen Director 62 1992
Barber B. Conable, Jr. Director 75 1991
Martin S. Feldstein Director 58 1987
Leslie L. Gonda Director 78 1990
Evan G. Greenberg* Director, President and Chief Operating Officer 43 1995
M. R. Greenberg* Director, Chairman and Chief Executive Officer 72 1967
Carla A. Hills Director 64 1993
Frank J. Hoenemeyer* Director 78 1985
Edward E. Matthews* Director and Vice Chairman-Investments and Financial Services 66 1973
Dean P. Phypers Director 69 1979
Howard I. Smith Director, Executive Vice President, Chief Financial Officer and Comptroller 53 1984
Thomas R. Tizzio* Director and Senior Vice Chairman-General Insurance 60 1982
Edmund S. W. Tse Director and Vice Chairman-Life Insurance 60 1991
Frank G. Wisner Director and Vice Chairman-External Affairs 59 1997
Edwin E. Manton Senior Advisor 89 1967
John J. Roberts Senior Advisor 75 1967
Ernest E. Stempel Senior Advisor 81 1967
Robert M. Sandler Executive Vice President, Senior Casualty Actuary and Senior Claims Officer 55 1980
Lawrence W. English Senior Vice President-Administration 56 1985
Axel I. Freudmann Senior Vice President-Human Resources 51 1986
Win J. Neuger Senior Vice President and Chief Investment Officer 48 1995
Martin J. Sullivan Senior Vice President-Foreign General Insurance 43 1997
Florence A. Davis Vice President and General Counsel 43 1995
William N. Dooley Vice President and Treasurer 44 1992
Robert E. Lewis Vice President and Chief Credit Officer 47 1993
Frank Petralito II Vice President and Director of Taxes 61 1978
Kathleen E. Shannon Vice President and Secretary 48 1986
John T. Wooster, Jr. Vice President-Communications 58 1989
=================================================================================================================================
* Member of Executive Committee.
Except as hereinafter noted, each of the directors who is also an
executive officer of AIG and each of the other executive officers has, for more
than five years, occupied an executive position with AIG or companies that are
now its subsidiaries, or with Starr. Evan G. Greenberg is the son of M.R.
Greenberg. There are no other arrangements or understandings between any
director or officer and any other person pursuant to which the director or
officer was elected to such position. Ms. Davis was a Principal in the legal
department and Worldwide Director of Compliance at Morgan Stanley &Co.
Incorporated prior to joining AIG in April, 1995. Mr. Lewis was Assistant
General Manager for North America, Chief Credit Officer, and senior executive
responsible for risk and exposure management of ING Bank in New York, the bank
division of Internationale Nederlanden Group, from 1988 until joining AIG in
October, 1993. Mr. Neuger was Managing Director, Global Investment
Management-Equity at Bankers Trust Company prior to joining AIG in February,
1995. Mr. Wisner served as a career foreign service officer with the United
States Department of State from 1961 through July, 1997, with his last position
being Ambassador to India.
12
14
PART II
================================================================================
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
(a) The table below shows the high and low closing sales prices per share of
AIG's common stock, as reported on the New York Stock Exchange Composite Tape,
for each quarter of 1997 and 1996, as adjusted for the common stock split in the
form of a 50 percent common stock dividend paid July 25, 1997. All prices are as
reported by the National Quotation Bureau, Incorporated.
- --------------------------------------------------------------------------------
1997 1996
------------------- ----------------
High Low High Low
================================================================================
First Quarter 85 5/16 71 11/16 68 1/2 59 9/16
Second Quarter 100 3/16 76 65 3/4 58 3/4
Third Quarter 106 1/2 94 3/8 67 1/4 60 1/16
Fourth Quarter 111 15/16 98 76 3/4 67 11/16
================================================================================
(b) In 1997, AIG paid a quarterly dividend of 6.7 cents in March and June
and 7.5 cents in September and December for a total cash payment of 28.4 cents
per share of common stock. In 1996, AIG paid a quarterly dividend of 5.7 cents
in March and June and 6.7 cents in September and December for a total cash
payment of 24.8 cents per share of common stock. These amounts reflect the
adjustment for a common stock split in the form of a 50 percent common stock
dividend paid July 25, 1997. Subject to the dividend preference of any of AIG's
serial preferred stock which may be outstanding, the holders of shares of common
stock are entitled to receive such dividends as may be declared by the Board of
Directors from funds legally available therefor.
See Note 10(b) of Notes to Financial Statements for a discussion of
certain restrictions on the payment of dividends to AIG by some of its insurance
subsidiaries.
(c) The approximate number of holders of Common Stock as of January 31,
1998, based upon the number of record holders, was 20,700.
13
15
ITEM 6. Selected Financial Data
American INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data is presented in accordance
with generally accepted accounting principles. This data should be read in
conjunction with the financial statements and accompanying notes included
elsewhere herein.
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995 1994 1993
====================================================================================================================================
Revenues (a) $ 30,602,300 $ 27,942,567 $ 25,614,004 $ 22,121,931 $ 19,830,549
General insurance:
Net premiums written 13,407,529 12,691,679 11,893,022 10,865,753 10,025,903
Net premiums earned 12,421,040 11,854,815 11,405,731 10,286,831 9,566,640
Adjusted underwriting profit 490,168 449,784 416,637 200,484 68,735
Net investment income 1,853,523 1,690,798 1,547,572 1,436,254 1,342,383
Realized capital gains 128,175 64,985 68,077 51,360 60,719
Operating income 2,471,866 2,205,567 2,032,286 1,688,098 1,471,837
Life insurance:
Premium income 9,925,639 8,978,246 8,038,150 6,724,321 5,746,046
Net investment income 2,896,469 2,675,881 2,264,905 1,748,428 1,499,714
Realized capital gains 21,186 34,798 32,703 86,706 54,576
Operating income 1,571,483 1,323,758 1,090,605 952,484 781,611
Financial services operating income 701,337 523,906 417,741 404,853 390,038
Equity in income of minority-owned insurance
operations 113,636 99,359 81,722 56,005 39,589
Other realized capital losses (30,846) (11,792) (28,946) (51,213) (8,197)
Income before income taxes and cumulative
effect of accounting changes 4,698,898 4,013,222 3,465,883 2,951,979 2,601,081
Income taxes 1,366,563 1,115,965 955,500 776,464 683,003
Income before cumulative effect of accounting changes 3,332,335 2,897,257 2,510,383 2,175,515 1,918,078
Cumulative effect of accounting changes, net of tax:
Minority-owned insurance operations -- -- -- -- 20,695
Net income 3,332,335 2,897,257 2,510,383 2,175,515 1,938,773
Earnings per common share (b):
Income before cumulative effect of
accounting changes 4.75 4.10 3.53 3.05 2.68
Cumulative effect of accounting changes, net of tax:
Minority-owned insurance operations -- -- -- -- .03
Basic 4.75 4.10 3.53 3.05 2.71
Diluted 4.73 4.08 3.52 3.05 2.70
Cash dividends per common share .28 .25 .21 .19 .17
Total assets 163,970,687 148,431,002 134,136,398 114,346,117 101,014,848
Long-term debt (c) 17,813,908 17,506,359 14,452,851 12,613,907 10,955,963
Capital funds (shareholders' equity) 24,001,127 22,044,224 19,827,103 16,421,661 15,224,195
====================================================================================================================================
(a) Represents the sum of general net premiums earned, life premium income,
net investment income, financial services commissions, transaction and
other fees, equity in income of minority-owned insurance operations and
realized capital gains (losses). In 1997, agency operations were
insignificant and were presented as a component of general insurance.
Agency operations for years prior to 1997 have been reclassified to
conform to the 1997 presentation. (See also tables under Item 1,
"Business".)
(b) Per share amounts for all periods presented reflect the adoption of the
Statement of Financial Accounting Standards No. 128 "Earnings per Share."
(c) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
14
16
Management's Discussion and Analysis of
Financial Condition and Results of Operations
American International Group, Inc. and Subsidiaries
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operational Review
General Insurance Operations
General insurance operations for the twelve month periods ending December 31,
1997, 1996 and 1995 were as follows:
(in thousands)
- -------------------------------------------------------------------------------------------
1997 1996 1995
===========================================================================================
Net premiums written:
Domestic $ 9,037,540 $ 8,366,832 $ 7,690,207
Foreign 4,369,989 4,324,847 4,202,815
- -------------------------------------------------------------------------------------------
Total $ 13,407,529 $12,691,679 $11,893,022
===========================================================================================
Net premiums earned:
Domestic $ 8,352,231 $ 7,821,605 $ 7,322,531
Foreign 4,068,809 4,033,210 4,083,200
- -------------------------------------------------------------------------------------------
Total $ 12,421,040 $11,854,815 $11,405,731
===========================================================================================
Adjusted underwriting profit (loss):
Domestic $ (7,188) $ 51,819 $ 111,606
Foreign 497,356 397,965 305,031
- -------------------------------------------------------------------------------------------
Total $ 490,168 $ 449,784 $ 416,637
===========================================================================================
Net investment income:
Domestic $ 1,484,558 $ 1,351,563 $ 1,241,994
Foreign 368,965 339,235 305,578
- -------------------------------------------------------------------------------------------
Total $ 1,853,523 $ 1,690,798 $ 1,547,572
===========================================================================================
Operating income before realized capital gains:
Domestic $ 1,477,370 $ 1,403,382 $ 1,353,600
Foreign 866,321 737,200 610,609
- -------------------------------------------------------------------------------------------
Total 2,343,691 2,140,582 1,964,209
Realized capital gains 128,175 64,985 68,077
- -------------------------------------------------------------------------------------------
Operating income $ 2,471,866 $ 2,205,567 $ 2,032,286
===========================================================================================
In AIG's general insurance operations, 1997 net premiums written and net
premiums earned increased 5.6 percent and 4.8 percent, respectively, from those
of 1996. In 1996, net premiums written increased 6.7 percent and net premiums
earned increased 3.9 percent when compared to 1995.
The growth in net premiums written in 1997 and 1996 resulted from a
combination of several factors. Domestically, AIG continued to achieve volume
growth in some specialty markets, mortgage guaranty insurance and in personal
lines. Foreign general insurance operations produced 32.6 percent of the general
insurance net premiums written in 1997, 34.1 percent in 1996 and 35.3 percent in
1995.
In comparing the foreign exchange rates used to translate the results of
AIG's foreign general operations during 1997 to those foreign exchange rates
used to translate AIG's foreign general results during 1996, the U.S. dollar
strengthened 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 2.0 percentage points less than they would have been if
translated utilizing those exchange rates which prevailed during 1996. (See also
the discussion under "Capital Resources" herein.)
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.
The statutory general insurance ratios were as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Domestic:
Loss Ratio 84.44 85.21 85.11
Expense Ratio 15.90 14.79 14.17
- --------------------------------------------------------------------------------
Combined Ratio 100.34 100.00 99.28
================================================================================
Foreign:
Loss Ratio 56.61 57.82 59.46
Expense Ratio 31.16 31.77 32.49
- --------------------------------------------------------------------------------
Combined Ratio 87.77 89.59 91.95
================================================================================
Consolidated:
Loss Ratio 75.33 75.89 75.93
Expense Ratio 20.87 20.58 20.65
- --------------------------------------------------------------------------------
Combined Ratio 96.20 96.47 96.58
================================================================================
Adjusted underwriting profit or loss (operating income less net investment
income and realized capital gains) represents statutory underwriting profit or
loss adjusted primarily for changes in deferred acquisition costs. The adjusted
underwriting profits were $490.2 million in 1997, $449.8 million in 1996 and
$416.6 million in 1995. (See also Notes 4 and 17 of Notes to Financial
Statements.)
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $16 million in 1997, $78 million in 1996 and $100 million in 1995.
AIG's gross incurred losses from catastrophes approximated $22 million in 1997,
$240 million in 1996 and $190 million in 1995. The Kobe Japan earthquake which
struck in early 1995 resulted in gross and net incurred losses to AIG of
approximately $73 million and $30 million, respectively. If these catastrophes
were excluded from the losses incurred in each period, the pro forma
consolidated statutory general insurance ratios would be as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Loss Ratio 75.20 75.23 75.05
Expense Ratio 20.87 20.58 20.65
- --------------------------------------------------------------------------------
Combined Ratio 96.07 95.81 95.70
================================================================================
AIG's ability to maintain its combined ratio below 100 is primarily
attributable to the profitability of AIG's foreign general insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.
15
17
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
General insurance net investment income in 1997 increased 9.6 percent when
compared to 1996. In 1996, net investment income increased 9.3 percent over
1995. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment. The new cash flow was
generated from net general insurance operating cash flow and included the
compounding of previously earned and reinvested net investment income. (See also
the discussion under "Liquidity" herein and Note 8 of Notes to Financial
Statements.)
General insurance realized capital gains were $128.2 million in 1997,
$65.0 million in 1996 and $68.1 million in 1995. These realized gains resulted
from the ongoing management of the general insurance investment portfolios
within the overall objectives of the general insurance operations and arose
primarily from the disposition of equity securities and available for sale fixed
maturities as well as redemptions of fixed maturities.
General insurance operating income in 1997 increased 12.1 percent when
compared to 1996. The 1996 results reflect an increase of 8.5 percent from 1995.
The contribution of general insurance operating income to income before income
taxes was 52.6 percent in 1997 compared to 55.0 percent in 1996 and 58.6 percent
in 1995.
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 100 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $15.98 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 1997 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, 1997, approximately 50 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, nearly all of these balances were collateralized. The
remaining 50 percent of the general reinsurance assets were from authorized
reinsurers and over 94 percent of such balances are from reinsurers rated A-
(excellent) or better, as rated by A.M. Best. This rating is a measure of
financial strength. The terms authorized and unauthorized pertain to regulatory
categories, not creditworthiness.
AIG maintains an allowance for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 1997,
AIG had allowances for unrecoverable reinsurance approximating $120 million. At
that date, and prior to this allowance, AIG had no significant reinsurance
recoverables from any individual reinsurer which is financially troubled (e.g.,
liquidated, insolvent, in receivership or otherwise subject to formal or
informal regulatory restriction).
AIG's Reinsurance Security Department conducts ongoing detailed
assessments of the reinsurance markets and current and potential reinsurers both
foreign and domestic. Such assessments include, but are not limited to,
identifying if a reinsurer is appropriately licensed, and has sufficient
financial capacity, and the local economic environment in which a foreign
reinsurer operates. This department also reviews the nature of the risks ceded
and the need for collateral. In addition, AIG's Credit Risk Committee reviews
the credit limits for and concentrations with any one reinsurer.
AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
At December 31, 1997, the consolidated general reinsurance assets of
$15.98 billion include reinsurance recoverables for paid losses and loss
expenses of $2.02 billion and $12.23 billion with respect to the ceded reserve
for losses and loss expenses, including ceded losses incurred but not reported
(IBNR) (ceded reserves). The ceded reserves represent the accumulation of
estimates of ultimate ceded losses including provisions for ceded IBNR and loss
expenses. The methods used to determine such estimates and to establish the
resulting ceded reserves are continually reviewed and updated. Any adjustments
therefrom are reflected in income currently. It is AIG's belief that the ceded
reserves at December 31, 1997 were representative of the ultimate losses
recoverable. In the future, as the ceded reserves continue to develop to
ultimate amounts, the ultimate loss recoverable may be greater or less than the
reserves currently ceded.
At December 31, 1997, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $33.40 billion, a decrease of $29.6 million
or 0.1 percent from the prior year end, and represent the accumulation of
estimates of ultimate losses, including IBNR, and loss expenses and minor
amounts of discounting related to certain workers' compensation claims. General
insurance net loss reserves increased $764.2 million or 3.7 percent to $21.2
billion and represent loss reserves reduced by reinsurance recoverable, net of
an allowance for unrecoverable reinsurance. The methods used to determine such
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting therefrom are reflected in operating income
currently. It is management's belief that the
16
18
American International Group, Inc. and Subsidiaries
general insurance net loss reserves are adequate to cover all general insurance
net losses and loss expenses as at December 31, 1997. In the future, if the
general insurance net loss reserves develop deficiently, such deficiency would
have an adverse impact on such future results of operations.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business; the
other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. For the majority of
long tail casualty lines, net loss trend factors approximated seven percent.
Loss trend factors reflect many items including changes in claims handling,
exposure and policy forms and current and future estimates of monetary inflation
and social inflation. Thus, many factors are implicitly considered in estimating
the year to year growth in loss costs. Therefore, AIG's carried net long tail
loss reserves are judgmentally set as well as tested for reasonableness using
the most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. These
factors are periodically reviewed and subsequently adjusted, as appropriate, to
reflect emerging trends which are based upon past loss experience.
Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in property's exposure to fire loss can be approximated by
the amount of insurance purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter referred to
collectively as environmental claims) and indemnity claims asserting injuries
from asbestos. The vast majority of these asbestos and environmental claims
emanate from policies written in 1984 and prior years. AIG has established a
specialized claims unit which investigates and adjusts all such asbestos and
environmental claims. Commencing in 1985, standard policies contained an
absolute exclusion for pollution related damage. However, AIG currently
underwrites pollution 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 caselaw can be
characterized as still evolving and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves issues such as allocation
of responsibility among potentially responsible parties and the government's
refusal to release parties. The cleanup cost exposure may significantly change
if the Congressional reauthorization of Superfund dramatically changes, thereby
reducing or increasing litigation and cleanup costs.
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
changes in Superfund and waste dump site coverage issues. Although the estimated
liabilities for these claims are subject to a significantly greater margin of
error than for other claims, the reserves carried for these claims at December
31, 1997 are believed to be adequate as these reserves are based on the known
facts and current law. Furthermore, as AIG's net exposure retained relative to
the gross exposure written was lower in 1984 and prior years, the potential
impact of these claims is much smaller on the net loss reserves than on the
gross loss reserves. (See the previous discussion on reinsurance collectibility
herein.)
The majority of AIG's exposures for asbestos and environmental claims are
excess casualty coverages, not primary coverages. Thus, the litigation costs are
treated in the same manner as indemnity reserves. That is, litigation expenses
are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.
17
19
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and environmental claims separately and combined at
December 31, 1997, 1996 and 1995 was as follows:
(in millions)
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Gross Net Gross Net Gross Net
- ----------------------------------------------------------------------------------------------------------------------------
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 875.9 $ 172.3 $ 744.8 $ 127.9 $ 686.0 $ 130.2
Losses and loss expenses incurred 238.4 68.3 392.5 102.7 197.7 20.5
Losses and loss expenses paid (272.2) (45.5) (261.4) (58.3) (138.9) (22.8)
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 842.1 $ 195.1 $ 875.9) $ 172.3 $ 744.8 $ 127.9
- ----------------------------------------------------------------------------------------------------------------------------
Environmental:
Reserve for losses and loss expenses at beginning of year $1,427.4 $ 570.6 $1,197.9 $ 379.3 $ 728.1 $ 200.1
Losses and loss expenses incurred 223.1 85.0 379.6 240.3 684.9 231.7
Losses and loss expenses paid (183.4) (63.4) (150.1) (49.0) (215.1) (52.5)
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,467.1 $ 592.2 $1,427.4 $ 570.6 $1,197.9 $ 379.3
- ----------------------------------------------------------------------------------------------------------------------------
Combined:
Reserve for losses and loss expenses at beginning of year $2,303.3 $ 742.9 $1,942.7 $ 507.2 $1,414.1 $ 330.3
Losses and loss expenses incurred 461.5 153.3 772.1 343.0 882.6 252.2
Losses and loss expenses paid (455.6) (108.9) (411.5) (107.3) (354.0) (75.3)
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $2,309.2 $ 787.3 $2,303.3 $ 742.9 $1,942.7 $ 507.2
- ----------------------------------------------------------------------------------------------------------------------------
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at December 31, 1997, 1996 and 1995 were estimated as follows:
(in thousands)
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------- ----------------------- --------------------
Gross Net Gross Net Gross Net
=============================================================================================================
Combined $1,004,000 $393,900 $1,070,000 $436,500 $665,000 $218,000
=============================================================================================================
18
20
American International Group, Inc. and Subsidiaries
A summary of asbestos and environmental claims count activity for the
years ended December 31, 1997, 1996 and 1995 was as follows:
- -------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------------ -----------------------------------
Asbestos Environmental Combined Asbestos Environmental Combined
===================================================================================================================
Claims at beginning of year 5,668 17,395 23,063 5,244 17,858 23,102
Claims during year:
Opened 1,073 3,624 4,697 1,083 3,836 4,919
Settled (169) (644) (813) (117) (466) (583)
Dismissed or otherwise resolved (422) (2,953) (3,375) (542) (3,833) (4,375)
- -------------------------------------------------------------------------------------------------------------------
Claims at end of year 6,150 17,422 23,572 5,668 17,395 23,063
===================================================================================================================
- -------------------------------------------------------------------------
1995
----------------------------------
Asbestos Environmental Combined
=========================================================================
Claims at beginning of year 5,947 16,223 22,170
Claims during year:
Opened 1,026 5,045 6,071
Settled (93) (663) (756)
Dismissed or otherwise resolved (1,636) (2,747) (4,383)
- -------------------------------------------------------------------------
Claims at end of year 5,244 17,858 23,102
=========================================================================
The average cost per claim settled, dismissed or otherwise resolved for
the years ended December 31, 1997, 1996 and 1995 was as follows:
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------- ---------------------- ----------------------
Gross Net Gross Net Gross Net
==============================================================================================================
Asbestos $460,600 $77,000 $396,700 $88,500 $80,300 $13,200
Environmental 51,000 17,600 34,900 11,400 63,100 15,400
Combined 108,800 26,000 83,000 21,600 68,900 14,700
==============================================================================================================
An insurance rating agency has developed a survival ratio to measure the
number of years it would take a company to exhaust both its asbestos and
environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. The higher the
ratio, the more years the reserves for losses and loss expenses cover these
claims payments. These ratios are computed based on the ending reserves for
losses and loss expenses over the respective claims settlements during the
fiscal year. Such payments include indemnity payments and legal and loss
adjustment payments. It should be noted, however, that this is an extremely
simplistic approach to measuring asbestos and environmental reserve levels. Many
factors, such as aggressive settlement procedures, mix of business and level of
coverage provided, have significant impact on the amount of asbestos and
environmental losses and loss expense reserves, ultimate payments thereof and
the resultant ratio.
The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments include court judgments, court orders,
covered claims with no coverage defenses, state mandated cleanup costs, claims
where AIG's coverage defenses are minimal, and settlements made less than six
months before the first trial setting. Also, AIG considers all legal and loss
adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios for the years ended December 31, 1997, 1996 and 1995 were as follows:
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ---------------------- ------------------------
Gross Net Gross Net Gross Net
===========================================================================================================================
Involuntary survival ratios:
Asbestos 3.8 4.6 5.1 4.6 5.5 4.2
Environmental 14.6 18.0 16.2 18.8 15.6 12.4
Combined 7.7 11.2 9.4 11.5 9.7 8.8
===========================================================================================================================
19
21
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
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 1997, 1996 and 1995
were $15.4 million, $18.8 million and $23.5 million, respectively.
AIG is also required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated. (See also Note 17 of Notes to Financial Statements.)
Life Insurance Operations
Life insurance operations for the twelve month periods ending December 31, 1997,
1996 and 1995 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Premium income:
Domestic $ 553,203 $ 535,579 $ 463,533
Foreign 9,372,436 8,442,667 7,574,617
- --------------------------------------------------------------------------------
Total $ 9,925,639 $ 8,978,246 $ 8,038,150
================================================================================
Net investment income:
Domestic $ 838,931 $ 930,350 $ 846,345
Foreign 2,057,538 1,745,531 1,418,560
- --------------------------------------------------------------------------------
Total $ 2,896,469 $ 2,675,881 $ 2,264,905
================================================================================
Operating income before
realized capital gains:
Domestic $ 124,938 $ 100,487 $ 59,014
Foreign 1,425,359 1,188,473 998,888
- --------------------------------------------------------------------------------
Total 1,550,297 1,288,960 1,057,902
Realized capital gains 21,186 34,798 32,703
- --------------------------------------------------------------------------------
Operating income $ 1,571,483 $ 1,323,758 $ 1,090,605
================================================================================
Life insurance in-force:
Domestic $ 59,516,720 $ 60,419,342 $ 54,272,118
Foreign 377,056,403 361,563,791 321,824,989
- --------------------------------------------------------------------------------
Total $436,573,123 $421,983,133 $376,097,107
================================================================================
AIG's life insurance operations, demonstrating the strength of its
franchise, continued to show growth primarily as a result of overseas
operations, particularly in Asia. AIG's life premium income in 1997 represented
a 10.6 percent increase from the prior year. This compares with an increase of
11.7 percent in 1996 over 1995. Foreign life operations produced 94.4 percent,
94.0 percent and 94.2 percent of the life premium income in 1997, 1996 and 1995,
respectively. (See also Notes 1, 4 and 6 of Notes to Financial Statements.)
As previously discussed, the U.S. dollar strengthened in value in relation
to most major foreign currencies in which AIG transacts business. Accordingly,
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 6.5 percentage points less than it would have been if
translated utilizing exchange rates prevailing in 1996. (See also the discussion
under "Capital Resources" herein.)
Life insurance net investment income increased 8.2 percent in 1997
compared to an increase of 18.1 percent in 1996. The slowing of the growth rate
was impacted by the redemption of policy loans with respect to some large
corporate owned life insurance policies (COLI) beginning in 1996 and continuing
into 1997. Such redemptions had an insignificant impact on operating income,
financial condition and liquidity. The growth in net investment income in 1997
and 1996 was primarily attributable to foreign 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.)
The traditional life products, such as whole and term life and endowments,
were the major contributors to the growth in foreign premium income and
investment income, particularly in Asia, and continue to be the primary source
of growth in the life segment. A mixture of traditional, accident and health and
financial products are being sold in Japan.
Life insurance realized capital gains were $21.2 million in 1997, $34.8
million in 1996 and $32.7 million in 1995. These realized gains resulted from
the ongoing management of the life insurance investment portfolios within the
overall objectives of the life insurance operations and arose primarily from the
disposition of equity securities and available for sale fixed maturities as well
as redemptions of fixed maturities.
Life insurance operating income in 1997 increased 18.7 percent to $1.57
billion compared to an increase of 21.4 percent in 1996. Excluding realized
capital gains from life insurance operating income, the percent increases would
be 20.3 percent and 21.8 percent in 1997 and 1996, respectively. The
contribution of life insurance operating income to income before income taxes
amounted to 33.4 percent in 1997 compared to 33.0 percent in 1996 and 31.5
percent in 1995.
The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with the
financial and investment contract products is investment risk.
20
22
American International Group, Inc. and Subsidiaries
Underwriting risk represents the exposure to loss resulting from the
actual policy experience adversely emerging in comparison to the assumptions
made in the product pricing associated with mortality, morbidity, termination
and expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately one million dollars
of coverage by using yearly renewable term reinsurance. The life insurance
operations have not entered into assumption reinsurance transactions or surplus
relief transactions during the three year period ended December 31, 1997. (See
also Note 5 of Notes to Financial Statements.)
The investment risk represents the exposure to loss resulting from the
cash flows from the invested assets, primarily long-term fixed rate investments,
being less than the cash flows required to meet the obligations of the expected
policy and contract liabilities and the necessary return on investments.
To minimize its exposure to investment risk, AIG tests the cash flows from
the invested assets and the policy and contract liabilities using various
interest rate scenarios to assess whether there is a liquidity excess or
deficit. If a rebalancing of the invested assets to the policy and contract
claims became necessary and did not occur, a demand could be placed upon
liquidity. (See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's foreign
operations, 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 such policy liabilities.
Therefore, there is a risk that the reinvestment of the proceeds at the maturity
of the investments may be at a yield below that of the interest required for the
accretion of the policy liabilities. At December 31, 1997, the average duration
of the investment portfolio in Japan was 5.7 years, while the related policy
liabilities were estimated to be 13.7 years. To maintain an adequate yield to
match the interest required over the duration of the liabilities, constant
management focus is required to reinvest the proceeds of the maturing securities
without sacrificing investment quality. To the extent permitted under local
regulation, AIG may invest in qualified longer-term securities outside Japan to
achieve a closer matching in both duration and the required yield. AIG is able
to manage any asset-liability duration difference through maintenance of
sufficient global liquidity and to support any operational shortfall through its
international financial network. Domestically, active monitoring assures
appropriate asset-liability matching as there are investments available to match
the duration and the required yield. (See also the discussion under "Liquidity"
herein.)
AIG uses asset-liability matching as a management tool to determine the
composition of the invested assets and marketing strategies. As a part of these
strategies, AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest rate or other
economic changes.
Financial Services Operations
Financial services operations for the twelve month periods ending December 31,
1997, 1996 and 1995 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Revenues:
International Lease Finance Corp. $ 1,856,763 $ 1,560,228 $ 1,378,353
AIG Financial Products Corp.* 452,052 369,194 289,020
AIG Trading Group Inc.* 561,784 288,551 317,207
Other 402,879 337,504 219,510
- --------------------------------------------------------------------------------
Total $ 3,273,478 $ 2,555,477 $ 2,204,090
================================================================================
Operating income:
International Lease Finance Corp. $ 382,431 $ 306,853 $ 263,790
AIG Financial Products Corp. 240,970 189,157 140,245
AIG Trading Group Inc. 126,536 80,156 68,765
Other, including intercompany
adjustments (48,600) (52,260) (55,059)
- --------------------------------------------------------------------------------
Total $ 701,337 $ 523,906 $ 417,741
================================================================================
* Represents net trading revenues.
Financial services operating income increased 33.9 percent in 1997 over
1996. This compares with an increase of 25.4 percent in 1996 over 1995.
Financial services operating income represented 14.9 percent of AIG's
income before income taxes in 1997. This compares to 13.1 percent and 12.1
percent in 1996 and 1995, respectively.
International Lease Finance Corporation (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
1997 increased 19.0 percent from 1996 compared to a 13.2 percent increase during
1996 from 1995. The revenue growth in each year resulted primarily from the
growth both in the size and relative cost of the fleet and the increase in the
number of aircraft sold. Approximately 20 percent of ILFC's operating lease
revenues are derived from U.S. and Canadian airlines. During 1997, operating
income increased 24.6 percent from 1996 and 16.3 percent during 1996 from 1995.
The composite borrowing rates at December 31, 1997, 1996 and 1995 were 6.44
percent, 6.23 percent and 6.47 percent, respectively. (See also the discussions
under "Capital Resources" and "Liquidity" herein.)
ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to sell or re-lease at
acceptable rates at lease expiration and through committing to purchase aircraft
which it would be unable to lease. ILFC manages its lessee non-performance
exposure through credit reviews and security deposit requirements. At December
31, 1997, there were 297 aircraft subject to operating leases. Two other
aircraft were committed for sale. (See also the discussions under "Capital
Resources" and "Liquidity" herein.)
21
23
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
AIG Financial Products Corp. and its subsidiaries (AIGFP) participate in
the derivatives dealer market conducting, primarily as principal, an interest
rate, currency, equity and credit derivative products business. AIGFP also
enters into structured transactions including long-dated forward foreign
exchange contracts, option transactions, liquidity facilities and investment
agreements and invests in a diversified portfolio of securities. AIGFP derives
substantially all its revenues from proprietary positions entered in connection
with counterparty transactions rather than from speculative transactions.
Revenues in 1997 increased 22.4 percent from 1996 compared to a 27.7 percent
increase during 1996 from 1995. During 1997, operating income increased 27.4
percent from 1996 and increased 34.9 percent during 1996 from 1995. As AIGFP is
a transaction-oriented operation, current and past revenues and operating
results may not provide a basis for predicting future performance. (See also the
discussions under "Capital Resources," "Liquidity" and "Derivatives" herein.)
AIG Trading Group Inc. and its subsidiaries (AIGTG) derive a substantial
portion of their revenues from market making and trading activities, as
principals, in foreign exchange, interest rates and precious and base metals.
Revenues in 1997 increased 94.7 percent from 1996 compared to a 9.0 percent
decrease during 1996 from 1995. During 1997, operating income increased 57.9
percent from 1996 and 16.6 percent during 1996 from 1995. A substantial portion
of AIGTG's improvement during 1997 over 1996 was currency trading activity in
volatile foreign exchange markets. As AIGTG is a transaction-oriented operation,
current and past revenues and operating results may not provide a basis for
predicting future performance. (See also the discussions under "Capital
Resources," "Liquidity" and "Derivatives" herein.)
In December 1997, AIGTG sold its energy operations. The sale of these
operations will not have a significant impact on AIG's results of operations.
Other Operations
In 1997, AIG's equity in income of minority-owned insurance operations was
$113.6 million compared to $99.4 million in 1996 and $81.7 million in 1995. In
1997, the equity interest in insurance companies represented 2.4 percent of
income before income taxes compared to 2.5 percent in 1996 and 2.4 percent in
1995.
Other realized capital losses amounted to $30.8 million, $11.8 million and
$28.9 million in 1997, 1996 and 1995, respectively.
Minority interest represents minority shareholders' equity in income of
certain consolidated subsidiaries. In 1997, minority interest amounted to $31.9
million. In 1996 and 1995, minority interest amounted to $43.2 million and $36.3
million, respectively.
Other income (deductions)-net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, realized
foreign exchange transaction gains and losses in substantially all currencies
and unrealized gains and losses in hyperinflationary currencies, as well as the
income and expenses of the parent holding company and other miscellaneous income
and expenses. In 1997, net deductions amounted to $96.7 million. In 1996 and
1995, net deductions amounted to $84.4 million and $91.2 million, respectively.
Income before income taxes amounted to $4.70 billion in 1997, $4.01
billion in 1996 and $3.47 billion in 1995.
In 1997, AIG recorded a provision for income taxes of $1.37 billion
compared to the provisions of $1.12 billion and $955.5 million in 1996 and 1995,
respectively. These provisions represent effective tax rates of 29.1 percent in
1997, 27.8 percent in 1996 and 27.6 percent in 1995. (See Note 3 of Notes to
Financial Statements.)
Net income amounted to $3.33 billion in 1997, $2.90 billion in 1996 and
$2.51 billion in 1995. The increases in net income over the three year period
resulted from those factors described above.
22
24
American International Group, Inc. and Subsidiaries
Capital Resources
At December 31, 1997, AIG had total capital funds of $24.00 billion and total
borrowings of $25.26 billion. At that date, $22.28 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
Total borrowings and borrowings not guaranteed or matched at December 31,
1997 and 1996 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
December 31, 1997 1996
================================================================================
GIAs -- AIGFP $ 8,000,326 $ 5,723,228
- --------------------------------------------------------------------------------
Commercial Paper:
Funding 307,997 1,018,510
ILFC (a) 2,208,167 2,739,388
AICCO 833,647 740,078
Universal Finance Company (UFC) (a) 25,096 --
- --------------------------------------------------------------------------------
Total 3,374,907 4,497,976
- --------------------------------------------------------------------------------
Medium Term Notes:
ILFC (a) 2,896,865 2,551,485
AIG 248,225 140,000
- --------------------------------------------------------------------------------
Total 3,145,090 2,691,485
- --------------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC (a) 3,950,000 3,500,000
AIGFP 4,858,706 5,243,042
AIGTG -- 10,442
AIG: Lire bonds 159,067 159,067
Zero coupon notes 91,179 81,761
- --------------------------------------------------------------------------------
Total 9,058,952 8,994,312
- --------------------------------------------------------------------------------
Loans and Mortgages Payable:
ILFC (a) (b) 903,320 1,007,836
SPC Credit Limited (SPC) (a) 538,988 398,837
AIG 239,062 206,840
- --------------------------------------------------------------------------------
Total 1,681,370 1,613,513
- --------------------------------------------------------------------------------
Total Borrowings 25,260,645 23,520,514
- --------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 10,522,436 10,197,546
Matched GIA borrowings 8,000,326 5,723,228
Matched notes and
bonds payable -- AIGFP 3,754,420 4,576,900
- --------------------------------------------------------------------------------
22,277,182 20,497,674
- --------------------------------------------------------------------------------
Remaining borrowings of AIG $ 2,983,463 $ 3,022,840
================================================================================
(a) AIG does not guarantee or support these borrowings.
(b) Primarily capital lease obligations.
See also Note 9 of Notes to Financial Statements.
During 1997, AIGFP decreased the aggregate principal amount outstanding of
its notes and bonds payable to $4.86 billion, a net decrease of $384.3 million
and increased its net GIA borrowings by $2.28 billion. AIGFP uses the proceeds
from the issuance of notes and bonds to invest in a segregated portfolio of
securities available for sale, although these funds may be temporarily invested
in securities purchased under agreements to resell. Funds received from GIA
borrowings are invested in a diversified portfolio of securities and derivative
transactions. (See also the discussions under "Operational Review", "Liquidity"
and "Derivatives" herein and Notes 1, 8, 9 and 11 of Notes to Financial
Statements.)
AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its non-insurance
subsidiaries. Funding intends to continue to meet AIG's funding requirements
through the issuance of commercial paper guaranteed by AIG. This issuance of
Funding's commercial paper is subject to the approval of AIG's Board of
Directors. ILFC, A.I. Credit Corp. (AICCO) and UFC, a consumer finance
subsidiary in Taiwan, issue commercial paper for the funding of their own
operations. AIG does not guarantee AICCO's, ILFC's or UFC's commercial paper.
However, AIG has entered into an agreement in support of AICCO's commercial
paper. From time to time, AIGFP may issue commercial paper, which AIG
guarantees, to fund its operations. At December 31, 1997, AIGFP had no
commercial paper outstanding. (See also the discussion under "Derivatives"
herein and Note 9 of Notes to Financial Statements.)
AIG and Funding have entered into two syndicated revolving credit
facilities (the Facilities) aggregating $1 billion. The Facilities consist of a
$500 million 364 day revolving credit facility and a $500 million five year
revolving credit facility. The Facilities can be used for general corporate
purposes and also provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under
either of the Facilities, nor were any borrowings outstanding as of December 31,
1997.
At December 31, 1997, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $6.85 billion, a net increase
of $795.4 million, and recorded a net decline in its capital lease obligations
of $92.6 million and a net decrease in its commercial paper of $531.2 million.
At December 31, 1997, ILFC had $610 million in aggregate principal amount of
debt securities registered for issuance from time to time. In February 1998,
ILFC reduced this registered amount to $230 million through the sale of debt
securities amounting to $380 million aggregate principal amount. Also, in
February 1998, ILFC registered $2.29 billion in aggregate principal amount of
debt securities for issuance from time to time. At that time, the aggregate
principal amount of registered debt available for issuance was $2.52 billion.
The proceeds of ILFC's debt financing are primarily used to purchase flight
equipment, including progress payments during the construction phase. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. (See also the discussions
under "Operational Review" and "Liquidity" herein.)
During 1997, AIG issued $108.2 million principal amount of Medium Term
Notes, Series E, including $100 million principal amount of 2 1/4% Cash
Exchangeable Equity-Linked Notes Due July 30, 2004. These notes accrue interest
at the rate of 2.25 percent and the total return on these notes is linked to the
appreciation in market value of AIG's common stock. The notes may be redeemed,
at the option of AIG, as a whole but not in part, at any time on or after July
30, 2000. In conjunction with the issuance of these notes, AIG entered into a
series of swap transactions which effectively converted its interest expense to
a fixed
23
25
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
rate of 5.87 percent and transferred the equity appreciation exposure to a third
party. The proceeds of these notes were used for general corporate purposes.
No notes previously issued by AIG matured during 1997. At December 31,
1997 AIG had $538.8 million in aggregate principal amount of debt securities
registered for issuance from time to time.
AIG's capital funds increased $1.96 billion during 1997. Unrealized
appreciation of investments, net of taxes decreased $28.1 million. During 1997,
the cumulative translation adjustment loss, net of taxes, increased $684.8
million. The changes from year to year with respect to the unrealized
appreciation of investments, net of taxes and the cumulative translation
adjustment loss, net of taxes were primarily impacted by the economic situation
in Japan and Southeast Asia and the general strength of the U.S. dollar against
most currencies in which AIG conducts operations. (See also the discussion under
"Operational Review" and "Liquidity" herein.) Retained earnings increased $2.50
billion, resulting from net income less dividends.
During 1997, AIG repurchased 5.7 million shares of its common stock in the
open market at a cost of $502.0 million. Shares repurchased prior to July 25,
1997, have been adjusted for the three for two stock split in the form of a 50
percent common stock dividend. AIG intends to continue to buy its common shares
in the open market to satisfy its obligations under various employee benefit
plans and, depending on market conditions, for other corporate purposes.
Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At December 31, 1997, there
were no significant statutory or regulatory issues which would impair AIG's
financial condition, results of operations or liquidity. To AIG's knowledge, no
AIG company is on any regulatory or similar "watch list". (See also the
discussion under "Liquidity" herein and Note 10 of Notes to Financial
Statements.)
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
December 31, 1997, the adjusted capital of each of AIG's domestic general
companies and of each of AIG's domestic life companies exceeded each of their
RBC standards by considerable margins.
A substantial portion of AIG's general insurance business and a majority
of its life insurance business are conducted in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Liquidity
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
At December 31, 1997, AIG's consolidated invested assets included
approximately $3.42 billion of cash and short-term investments. Consolidated net
cash provided from operating activities in 1997 amounted to approximately $3.04
billion.
Sources of funds considered in meeting the objectives of AIG's financial
services' operations include guaranteed investment agreements, issuance of long
and short-term debt, maturities and sales of securities available for sale,
securities sold under repurchase agreements, trading liabilities, securities and
spot commodities sold but not yet purchased, issuance of equity, and cash
provided from such operations. AIG's strong capital position is integral to
managing this liquidity, as it enables AIG to raise funds in diverse markets
worldwide. (See also the discussions under "Capital Resources" herein.)
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated over $6 billion in pre-tax cash
flow during 1997. Cash flow includes periodic premium collections, including
policyholders' contract deposits, paid loss recoveries less reinsurance
premiums, losses, benefits, acquisition and operating expenses. Generally, there
is a time lag from when premiums are collected and, when as a result of the
occurrence of events specified in the policy, the losses and benefits are paid.
AIG's insurance investment operations generated approximately $4.7 billion in
investment income cash flow during 1997. Investment income cash flow is
primarily derived from interest and dividends received and includes realized
capital gains.
The combined insurance pre-tax operating cash flow coupled with the cash
and short-term investments of $3.0 billion provided the insurance operations
with a significant amount of liquidity during 1997. This liquidity is available
to purchase high quality and diversified fixed income securities and to a lesser
extent marketable equity securities and to provide mortgage loans on real
estate, policy loans and collateral loans. This liquidity coupled with proceeds
of over $16 billion from the maturities, sales and redemptions of fixed income
securities and from the sale of equity securities was used to purchase nearly
$19 billion of fixed income securities and marketable equity securities during
1997.
24
26
American International Group, Inc. and Subsidiaries
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued and real estate, at
December 31, 1997 and 1996:
(dollars in thousands)
- --------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
------------------------ -------------------------
Invested Percent Invested Percent
Assets of Total Assets of Total
================================================================================
General insurance $ 31,844,084 26.0% $ 28,786,140 26.5%
Life insurance 41,046,969 33.5 38,491,870 35.4
Financial services 48,899,127 39.9 40,938,871 37.7
Other 661,701 0.6 401,248 0.4
- --------------------------------------------------------------------------------
Total $122,451,881 100.0% $108,618,129 100.0%
================================================================================
Insurance Invested Assets
The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at December 31, 1997 and 1996:
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
Percent --------------------
December 31, 1997 General Life Total of Total Domestic Foreign
====================================================================================================================================
Fixed Maturities:
Available for sale, at market value (a) $11,326,246 $27,340,210 $38,666,456 53.0% 37.8% 62.2%
Held to maturity, at amortized cost (b) 12,769,646 -- 12,769,646 17.5 100.0 --
Equity securities, at market value (c) 3,314,603 1,815,849 5,130,452 7.0 43.5 56.5
Mortgage loans on real estate, policy and collateral loans 50,297 6,147,606 6,197,903 8.5 39.0 61.0
Short-term investments, including time deposits, and cash 616,683 2,409,353 3,026,036 4.2 33.1 66.9
Real estate 401,995 979,543 1,381,538 1.9 16.8 83.2
Investment income due and accrued 528,164 817,348 1,345,512 1.9 39.7 60.3
Other invested assets 2,836,450 1,537,060 4,373,510 6.0 76.7 23.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total $31,844,084 $41,046,969 $72,891,053 100.0% 51.0% 49.0%
====================================================================================================================================
(a) Includes $718,548 of bonds trading securities, at market value.
(b) Includes $239,331 of preferred stock, at amortized cost.
(c) Includes $111,609 of preferred stock, at market value.
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
Percent --------------------
December 31, 1996 General Life Total of Total Domestic Foreign
====================================================================================================================================
Fixed Maturities:
Available for sale, at market value (a) $ 9,713,937 $26,058,027 $35,771,964 53.2% 34.6% 65.4%
Held to maturity, at amortized cost (b) 12,736,225 -- 12,736,225 18.9 100.0 --
Equity securities, at market value (c) 3,265,756 2,608,309 5,874,065 8.7 33.9 66.1
Mortgage loans on real estate, policy and collateral loans 50,578 6,224,878 6,275,456 9.3 43.1 56.9
Short-term investments, including
time deposits, and cash 605,363 1,002,060 1,607,423 2.4 19.3 80.7
Real estate 409,808 843,933 1,253,741 1.9 18.2 81.8
Investment income due and accrued 493,338 697,891 1,191,229 1.8 44.4 55.6
Other invested assets 1,511,135 1,056,772 2,567,907 3.8 51.6 48.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total $28,786,140 $38,491,870 $67,278,010 100.0% 47.9% 52.1%
====================================================================================================================================
(a) Includes $364,069 of bonds trading securities, at market value.
(b) Includes $477,247 of preferred stock, at amortized cost.
(c) Includes $46,732 of preferred stock, at market value.
Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.
With respect to fixed maturities, AIG's general strategy is to invest in
high quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)
The fixed maturity available for sale portfolio is subject to decline in
fair value as interest rates rise. Such declines in fair value are presented as
a component of capital funds in unrealized appreciation of investments, net of
taxes.
25
27
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
The fixed maturities held to maturity portfolio is exposed to adverse
interest rate fluctuations. However, AIG has the ability and intent to hold such
securities to maturity. Therefore, there would be no detrimental impact to AIG's
results of operations or financial condition as a result of such fluctuations.
At December 31, 1997, approximately 53.2 percent of the fixed maturities
investments were domestic securities. Approximately 41 percent of such domestic
securities were rated AAA. Approximately eight percent were below investment
grade or not rated.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations.
AIG annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At December 31, 1997, approximately 28
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 10 percent were below investment grade or not
rated at that date.
At December 31, 1997, approximately five percent of the fixed maturities
portfolio was Collateralized Mortgage Obligations (CMOs), including minor
amounts with respect to Commercial Mortgage Backed Securities. All of the CMOs
were investment grade and approximately 59 percent of the CMOs were backed by
various U.S. government agencies. CMOs are exposed to interest rate risk as the
duration and ultimate realized yield would be affected by the accelerated
prepayments of the underlying mortgages. There were no interest only or
principal only CMOs at December 31, 1997.
Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date. There have been no significant
downgrades as of March 1, 1998.
AIG invests in equities for reasons including diversifying its overall
exposure to interest rate risk. Equity securities are subject to declines in
fair value. Such declines in fair value are presented as components of capital
funds in unrealized appreciation of investments, net of taxes.
Mortgage loans on real estate, policy and collateral loans comprised 8.5
percent of AIG's insurance invested assets at December 31, 1997. AIG's insurance
operations' holdings of real estate mortgages amounted to $2.51 billion of which
36.1 percent was domestic. At December 31, 1997, no domestic mortgages and only
a nominal amount of foreign mortgages were in default. It is AIG's practice to
maintain a maximum loan to value ratio of 75 percent at loan origination. At
December 31, 1997, AIG's insurance holdings of collateral loans amounted to
$1.02 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 decreased from $3.00 billion at
December 31, 1996 to $2.67 billion at December 31, 1997. Nearly all of this
decrease relates to the redemption of COLI products.
Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash held.
AIG's real estate investment properties are primarily occupied by AIG's
various operations. The current market value of these properties considerably
exceeds their carrying value.
Other invested assets were primarily comprised of both foreign and
domestic private placements, limited partnerships and outside managed funds.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as end users. To
date, such activities have not been significant. (See also the discussion under
"Derivatives" herein.)
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.
AIG believes that statistical models alone do not provide a reliable
method of monitoring and controlling market risk. While VaR models are
relatively sophisticated, the quantitative market risk information generated is
limited by the assumptions and parameters established in creating the related
models. Therefore, such models are tools and do not substitute for the
experience or judgment of senior management.
AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.
26
28
American International Group, Inc. and Subsidiaries
Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.
AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of December 31, 1997. This calculation used the
variance-covariance (delta-normal) methodology. The calculation also used daily
historical interest and foreign currency exchange rates and equity prices in the
two years ending December 31, 1997. The VaR model estimated the volatility of
each of these rates and equity prices and the correlation among them. For
interest rates, each country's yield curve was constructed using eleven separate
points on this curve to model possible curve movements. Inter-country
correlations were also used. The redemption experience of municipal and
corporate fixed maturities and mortgage securities was taken into account as
well as the use of financial modeling. Thus, the VaR measured the sensitivity of
the asset and the liability portfolios to each of the aforementioned market risk
exposures. Each sensitivity was estimated separately to capture the market
exposures within each insurance segment. These sensitivities were then applied
to a data base which contained both historical ranges of movements in all market
factors and the correlations among them. The results were aggregated to provide
a single amount that depicts the maximum potential loss in fair value at a
confidence level of 95 percent for a time period of one month. At December 31,
1997 the VaR of AIG's insurance segments was approximately $520 million for
general insurance and $799 million for life insurance.
The following table presents the VaR of each component of market risk for
each of AIG's insurance segments as of December 31, 1997:
(in millions)
- --------------------------------------------------------------------------------
Market Risk General Insurance Life Insurance
================================================================================
Interest rate $ 235.6 $ 779.3
Currency 25.9 84.9
Equity 354.5 120.1
================================================================================
VaR with respect to combined operations cannot be derived by aggregating
the individual risk or segment amounts presented herein.
Financial Services Invested Assets
The following table is a summary of the composition of AIG's financial services
invested assets at December 31, 1997 and 1996. (See also the discussions under
"Operational Review: Financial Services Operations", "Capital Resources" and
"Derivatives" herein.)
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------- --------------------------
Invested Percent Invested Percent
Assets of Total Assets of Total
====================================================================================================================================
Flight equipment primarily under operating leases,
net of accumulated depreciation $14,438,074 29.5% $13,808,660 33.7%
Unrealized gain on interest rate and currency swaps,
options and forward transactions 7,422,290 15.2 6,906,012 16.9
Securities available for sale, at market value 9,145,317 18.7 9,785,909 23.9
Trading securities, at market value 3,974,561 8.1 2,357,812 5.7
Securities purchased under agreements to resell, at contract value 4,551,191 9.3 1,642,591 4.0
Trading assets 6,715,486 13.8 3,793,433 9.3
Spot commodities, at market value 459,517 0.9 204,705 0.5
Other, including short-term investments 2,192,691 4.5 2,439,749 6.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total $48,899,127 100.0% $40,938,871 100.0%
====================================================================================================================================
As previously discussed, the cash used for the purchase of flight
equipment is derived primarily from the proceeds of ILFC's debt financings. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. During 1997, ILFC acquired
flight equipment costing $3.44 billion.
At December 31, 1997, ILFC had committed to purchase or had secured
positions for 328 aircraft deliverable from 1998 through 2006 at an estimated
aggregate purchase price of $17.7 billion. As of March 9, 1998, ILFC has entered
into leases, letters of intent to lease or is in various stages of negotiation
for all of the aircraft to be delivered in 1998 and 84 of 268 aircraft to be
delivered subsequent to 1998. ILFC will be required to find customers for any
aircraft presently on order and any aircraft to be ordered, and it must arrange
financing for portions of the purchase price of such equipment. In a rising
interest rate environment, ILFC negotiates higher lease rates on any new
contracts. ILFC has been successful to date both in placing its new aircraft on
lease or under sales contract and obtaining adequate financing.
AIGFP's derivative transactions are carried at market value or at
estimated fair value when market prices are not readily available. AIGFP reduces
its economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were to sell or close out the transactions prior to maturity. AIG
believes that the impact of
27
29
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
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.)
Securities available for sale, at market value and securities purchased
under agreements to resell are purchased with the proceeds of AIGFP's GIA
financings and other long and short term borrowings. The proceeds from the
disposal of securities available for sale and securities purchased under
agreements to resell have been used to fund the maturing GIAs or other AIGFP
financing. (See also the discussion under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At December
31, 1997, 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 $444.0 million of these securities. There were no securities deemed below
investment grade at December 31, 1997. There have been no significant downgrades
through March 1, 1998. Securities purchased under agreements to resell are
treated as collateralized transactions. AIGFP takes possession of or obtains a
security interest in securities purchased under agreements to resell. AIGFP
further minimizes its credit risk by monitoring counterparty credit exposure
and, when AIGFP deems necessary, it requires additional collateral to be
deposited. Trading securities, at market value are marked to market daily and
are held to meet the short-term risk management objectives of AIGFP.
AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates and precious and base metals. AIGTG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements of interest rates, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities largely through trading liabilities, unrealized losses on swaps,
short-term borrowings, securities sold under agreements to repurchase and
securities and commodities sold but not yet purchased. (See also the discussions
under "Capital Resources" and "Derivatives" herein.)
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at December 31, 1997
were as follows:
(in thousands)
- --------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Gains Losses
================================================================================
Securities available for sale, at market value (a) $ 292,274 $ 292,201
Unrealized gain/loss on
interest rate and currency
swaps, options and forward
transactions (b) (c) 7,422,290 5,979,571
Trading assets 8,429,103 5,114,498
Spot commodities, at market value -- 59,712
Trading liabilities -- 4,323,000
Securities and spot commodities sold but
not yet purchased, at market value 344,783 --
================================================================================
(a) See also Note 8 (e) of Notes to Financial Statements.
(b) These amounts are also presented as the respective balance sheet amounts.
(c) At December 31, 1997, AIGTG's replacement values with respect to interest
rate and currency swaps were $610.4 million.
AIGFP's interest rate risk on securities available for sale, at market, is
managed by taking offsetting positions on a security by security basis, thereby
offsetting a significant portion of the unrealized appreciation or depreciation.
At December 31, 1997, the unrealized gains and losses remaining after the
benefit of the offsets were $6.6 million and $6.5 million, respectively.
Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities are held to meet the short-term risk management objectives of AIGFP
and AIGTG.
The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.
AIG actively manages the exposures to limit potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must manage a variety of exposures including credit, market, liquidity,
operational and legal risks.
Market risk arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
exchange rates, and equity and commodity prices. AIG generally controls its
exposure to market risk by taking offsetting positions. AIG's philosophy with
respect to its financial services operations is to minimize or set limits for
open or uncovered positions that are to be carried. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk below).
AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This
28
30
American International Group, Inc. and Subsidiaries
department determines whether AIG's market risks, as well as those market risks
of individual subsidiaries, are within the parameters established by AIG's
senior management. Well established market risk management techniques such as
sensitivity analysis are used. Additionally, this department verifies that
specific market risks of each of certain subsidiaries are managed and hedged by
that subsidiary.
AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.
AIGFP is exposed to market risk due to changes in and volatility of
foreign currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.
AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.
AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market risk exposure. AIGFP values its
portfolio at market value or estimated fair value when market values are not
readily available. These valuations represent an assessment of the present
values of expected future cash flows of AIGFP's transactions and may include
reserves for such risks as are deemed appropriate by AIGFP's and AIG's
management. AIGFP evaluates the portfolio's discounted cash flows with reference
to current market conditions, maturities within the portfolio and other relevant
factors. Based upon this evaluation, AIGFP determines what, if any, offsetting
transactions are necessary to reduce the market risk exposure of the portfolio.
The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.
Additionally, depending upon the changes in interest rates and other
market movements during the day, the system will produce reports for
management's consideration for intra-day offsetting positions. Overnight, the
system generates reports which recommend the types of offsets management should
consider for the following day. Additionally, AIGFP operates in major business
centers overseas and is essentially open for business 24 hours a day. Thus, the
market exposure and offset strategies are monitored, reviewed and coordinated
around the clock. Therefore, offsetting adjustments can be made as and when
necessary from any AIGFP office in the world.
As part of its monitoring and controlling of its exposure to market risk,
AIGFP applies various testing techniques which reflect potential market
movements. These techniques vary by currency and are regularly changed to
reflect factors affecting the derivatives portfolio. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges. This review includes an
examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables. AIGFP's management may change
these measures to reflect their judgment and evaluation of the dynamics of the
markets. This management group will also determine whether additional or
alternative action is required in order to manage the portfolio. AIG utilizes an
outside consultant to provide the managements of AIG and AIGFP with comfort that
the system produces representative values.
All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.
AIGTG's approach to managing market risk is to establish an appropriate
offsetting position to a particular transaction or group of transactions
depending upon the extent of market risk AIGTG expects to reduce.
AIGTG's senior management has established positions and stop-loss limits
for each line of business. AIGTG's traders are required to maintain positions
within these limits. These positions are monitored during the day either
manually and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading books
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management. Based upon these and other reports,
AIGTG's senior management may determine to adjust AIGTG's risk profile.
AIGTG attempts to secure reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses an internal methodology which includes interpolation
or extrapolation from verifiable prices nearest to the dates of the
transactions. The methodology may reflect interest and exchange rates, commodity
prices, volatility rates and other relevant factors.
A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels and the effect of time. Though not
indicative of the future, past volatile market scenarios have represented profit
opportunities for AIGTG.
AIGFP and AIGTG are both exposed to the risk of loss of fair value.
Sensitivity analysis is the statistical technique utilized to measure this
exposure. Such analysis is performed and
29
31
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
presented separately for AIGFP and AIGTG as AIG manages these operations
separately.
AIGFPand AIGTG used the sensitivity analysis model to measure the
potential loss in fair value of market risk sensitive instruments of each of
their respective portfolios. This potential loss in fair value results from
selected hypothetical changes in interest and foreign currency exchange rates,
equity prices and/or other market rates or prices over time.
The portfolios for which this analysis was performed included market risk
sensitive transactions entered into by AIGFP and AIGTG. This includes over the
counter and exchange traded investments, derivative transactions, borrowings and
hedged securities and commodities. As 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 hedging was not done.
In each of these models, the market risks of AIGFP and AIGTG have been
classified as changes in the level of either interest rates, foreign currency
exchange rates, equity prices or commodity prices and the respective volatility
of each. For each risk, four sensitivities were calculated under four scenarios
with respect to the fair values of the portfolios at December 31, 1997. The four
scenarios consisted of uniformly increasing or decreasing the relevant market
rates or prices by 10 percent; and uniformly increasing or decreasing the
relevant market volatility by 10 percent. For a given risk, the sensitivity
presented herein was the largest potential loss in fair value assuming trade
settlement under the most adverse of the four scenarios that could result in one
day.
Not all market risk exposures that are managed by AIGFP and AIGTG are
quantified by this analysis. In almost all currencies, changes in the slope and
shape of the yield curve or changes in the relative value between certain types
of financial instruments or between the same type of instruments in different
currencies could affect the results of this analysis. Additionally, the
following quantitative information does not take into account anticipated
management reaction to breaches of counterparty credit limitations caused by the
shocks within a given risk category. The actual results could differ from the
results of this analysis because market movements could be different from the
scenarios that were considered or because the composition of the portfolio could
change substantially with time. AIGFP is also exposed to uncertainty on the
amount of dividends paid or the cost of borrowing certain equities.
The following table presents the one day exposure to the potential loss in
fair value of each component of AIGFP's market risk as of December 31, 1997
under the most adverse scenario as mentioned above:
(in millions)
- --------------------------------------------------------------------------------
Market Risk
================================================================================
Interest rate $ 11.4
Currency 30.0
Equity 5.9
================================================================================
The following table presents the one day exposure to potential loss in
fair value of each component of AIGTG's market risk as of December 31, 1997
under the most adverse scenario as discussed above:
(in millions)
- --------------------------------------------------------------------------------
Market Risk
================================================================================
Interest rate $ 6.2
Currency 23.3
Commodity 1.3
================================================================================
Derivatives
Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying equity, debt, commodity or other
asset, liability, or index. Derivatives payments may be based on interest rates
and exchange rates and/or prices of certain securities, certain commodities, or
financial or commodity indices. The more significant types of derivative
arrangements in which AIG transacts are swaps, forwards, futures, options and
related instruments.
The most commonly used swaps are interest rate and currency swaps. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. A currency swap is similar but the notional
amounts are different currencies which are typically exchanged at the
commencement and termination of the swap based upon negotiated exchange rates.
A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a commodity,
security, currency, financial index or other instrument, at a specified price. A
futures contract is traded on an exchange, while a forward contract is executed
over the counter.
Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and options.
An option contract generally provides the option purchaser with the right
but not the obligation to buy or sell during a period of time or at a specified
date the underlying instrument at a set price. The option writer is obligated to
sell or buy the underlying item if the option purchaser chooses to exercise his
right. The option writer receives a nonrefundable fee or premium paid by the
option purchaser.
Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange
30
32
American International Group, Inc. and Subsidiaries
traded securities. However, in the normal course of business, with the agreement
of the original counterparty, these contracts may be terminated early or
assigned to another counterparty.
All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.
A counterparty may default on any obligation to AIG, including a
derivative contract. Credit risk is a consequence of extending credit and/or
carrying trading and investment positions. Credit risk exists for a derivative
contract when that contract has an estimated positive fair value. To help manage
this risk, the credit departments of AIGFP and AIGTG operate within the
guidelines of the AIG Credit Risk Committee, which sets credit policy and limits
for counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements that provide for legally enforceable
set-off and close out netting of exposures in the event of default. Under such
agreements, in connection with the early termination of a transaction, AIGFP is
permitted to set-off its receivables from a counterparty against AIGFP's
payables to that same counterparty arising out of all included transactions.
Excluding regulated exchange transactions, AIGTG, whenever possible, enters into
netting agreements with its counterparties which are similar in effect to those
discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivatives transactions at December 31, 1997.
The notional amounts used to express the extent of AIGFP's and AIGTG's
involvement in swap transactions represent a standard of measurement of the
volume of AIGFP's and AIGTG's swaps business. Notional amount is not a
quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.
The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.
The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, ISDA Master Agreements and collateral held.
31
33
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 1997 and December 31, 1996:
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining Life
-----------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 1997 1996
====================================================================================================================================
Interest rate, currency and equity/commodity
swaps and swaptions:
Notional amount:
Interest rate swaps $ 57,623,000 $ 85,484,000 $47,420,000 $ 9,964,000 $200,491,000 $165,771,800
Currency swaps 8,575,000 28,686,000 12,527,000 4,960,000 54,748,000 39,182,900
Swaptions and equity swaps 857,000 4,734,000 4,129,000 1,497,000 11,217,000 5,721,300
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 67,055,000 $118,904,000 $64,076,000 $16,421,000 $266,456,000 $210,676,000
====================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts contractual
amount $ 4,411,000 -- -- -- $ 4,411,000 $ 6,867,300
====================================================================================================================================
Over the counter forward contracts contractual
amount $ 13,271,000 -- -- -- $ 13,271,000 $ 5,952,200
====================================================================================================================================
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1997 and
December 31, 1996, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Replacement Value
---------------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 1997 1996
====================================================================================================================================
Counterparty credit quality:
AAA $2,326,502 $ -- $2,326,502 $1,732,315
AA 2,273,532 37,572 2,311,104 2,021,878
A 1,153,007 12,403 1,165,410 1,461,063
BBB 608,448 47 608,495 1,150,420
Below investment grade 289,563 -- 289,563 26,293
- ------------------------------------------------------------------------------------------------------------------------------------
Total $6,651,052 $50,022 $6,701,074 $6,391,969
====================================================================================================================================
At December 31, 1997 and December 31, 1996, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Replacement Value
---------------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 1997 1996
====================================================================================================================================
Non-U.S. banks $2,213,366 $49,939 $2,263,305 $2,330,481
Insured municipalities 757,514 -- 757,514 656,373
U.S. industrials 513,958 83 514,041 894,942
Governmental 677,230 -- 677,230 894,284
Non-U.S. financial service companies 64,787 -- 64,787 34,383
Non-U.S. industrials 1,034,792 -- 1,034,792 497,839
Special purpose 163,109 -- 163,109 121,137
U.S. banks 584,915 -- 584,915 251,641
U.S. financial service companies 433,710 -- 433,710 534,965
Supranationals 207,671 -- 207,671 175,924
- ------------------------------------------------------------------------------------------------------------------------------------
Total $6,651,052 $50,022 $6,701,074 $6,391,969
====================================================================================================================================
32
34
American International Group, Inc. and Subsidiaries
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 1997 and December 31, 1996. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the December 31,
1997 balances based upon the expected timing of the future cash flows.
The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
1997 and December 31, 1996. 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.
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1997 and December 31, 1996:
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining Life
--------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 1997 1996
====================================================================================================================================
Contractual amount of futures, forwards
and options:
Exchange traded futures and options $ 21,613,406 $ 2,931,347 $ 34,545 $ -- $ 24,579,298 $ 17,004,692
====================================================================================================================================
Forwards $253,917,460 $12,347,787 $1,694,038 $ -- $267,959,285 $216,775,766
====================================================================================================================================
Over the counter purchased options $ 39,756,245 $17,466,110 $2,932,703 $849,059 $ 61,004,117 $ 27,377,217
====================================================================================================================================
Over the counter sold options (a) $ 48,398,996 $ 9,595,654 $ 964,050 $134,771 $ 59,093,471 $ 31,049,529
====================================================================================================================================
Notional amount:
Interest rate swaps and forward rate agreements $ 60,017,945 $14,798,198 $2,376,472 $310,035 $ 77,502,650 $ 66,306,480
Currency swaps 628,542 5,134,893 725,898 -- 6,489,333 5,853,194
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 60,646,487 $19,933,091 $3,102,370 $310,035 $ 83,991,983 $ 72,159,674
====================================================================================================================================
Credit exposure:
Futures, forwards and purchased options contracts
and interest rate and currency swaps:
Gross replacement value $ 9,330,966 $ 1,364,417 $ 308,435 $ 15,899 $ 11,019,717 $ 7,489,766
Master netting arrangements (5,277,129) (442,284) (70,963) (7,935) (5,798,311) (3,872,291)
Collateral (135,303) (73,991) (15,384) -- (224,678) (149,347)
- ------------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b) $ 3,918,534 $ 848,142 $ 222,088 $ 7,964 $ 4,996,728 $ 3,468,128
====================================================================================================================================
(a) Sold options obligate AIGTG to buy or sell the underlying item if the
option purchaser chooses to exercise. The amounts do not represent credit
exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts and purchased over the counter options are
presented as a component of trading assets in the accompanying balance
sheet. The net replacement values with respect to interest rate and
currency swaps are presented as a component of unrealized gain on interest
rate and currency swaps, options and forward transactions in the
accompanying balance sheet.
33
35
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1997 and
December 31, 1996, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Replacement Value
--------------------------
1997 1996
====================================================================================================================================
Counterparty credit quality:
AAA $ 752,741 $ 447,236
AA 2,503,289 1,075,713
A 1,023,650 1,133,332
BBB 342,695 518,485
Below investment grade 98,425 115,810
Not externally rated, including exchange traded futures and options* 275,928 177,552
- ------------------------------------------------------------------------------------------------------------------------------------
Total $4,996,728 $3,468,128
====================================================================================================================================
Counterparty breakdown by industry:
Non-U.S. banks $2,685,998 $1,269,399
U.S. industrials 163,484 761,634
Governmental 135,269 121,278
Non-U.S. financial service companies 260,412 186,476
Non-U.S. industrials 167,835 192,669
U.S. banks 560,388 309,154
U.S. financial service companies 747,414 449,966
Exchanges* 275,928 177,552
- ------------------------------------------------------------------------------------------------------------------------------------
Total $4,996,728 $3,468,128
====================================================================================================================================
* Exchange traded futures and options are not deemed to have significant
credit exposure as the exchanges guarantee that every contract will be
properly settled on a daily basis.
Generally, AIG manages and operates its businesses in the currencies of
the local operating environment. Thus, exchange gains or losses occur when AIG's
foreign currency net investment is affected by changes in the foreign exchange
rates relative to the U.S. dollar from one reporting period to the next.
As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and insurance operations; to date, such
activities have not been significant.
AIG, through its Foreign Exchange Operating Committee, evaluates each of
its worldwide consolidated foreign currency net asset or liability positions and
manages AIG's translation exposure to adverse movement in currency exchange
rates. AIG may use forward exchange contracts and purchase options where the
cost of such is reasonable and markets are liquid to reduce these exchange
translation exposures. The exchange gain or loss with respect to these hedging
instruments is recorded on an accrual basis as a component of the cumulative
translation adjustment account in capital funds.
Legal risk arises from the uncertainty of the enforceability, through
legal or judicial processes, of the obligations of AIG's clients and
counterparties, including contractual provisions intended to reduce credit
exposure by providing for the netting of mutual obligations. (See also the
discussion on master netting agreements above.) AIG seeks to eliminate or
minimize such uncertainty through continuous consultation with internal and
external legal advisors, both domestically and abroad, in order to understand
the nature of legal risk, to improve documentation and to strengthen transaction
structure.
Accounting Standards
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FASB 125).
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This statement
provides consistent standards for distinguishing transfer of financial assets
that are sales from transfers that are secured borrowings. FASB 125 was
effective January 1, 1997.
In December 1996, FASB issued Statement of Financial Accounting Standards
No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" (FASB 127). FASB 127 delays the implementation of certain provisions of
FASB 125 for one year. AIG has adopted all requirements of FASB 125 herein.
In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128 "Earnings per Share" (FASB 128). This statement simplifies the existing
computational guidelines, revises the disclosure requirements and increases
earnings per share comparability on an international basis.
AIG has adopted all requirements of FASB 128 herein and all prior period
information has been restated.
34
36
American International Group, Inc. and Subsidiaries
In February 1997, the Securities and Exchange Commission (SEC) issued
Financial Reporting Release No. 48 "Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments"(FRR No. 48).
FRR No. 48 amends rules and forms for registrants and requires
clarification and expansion of existing disclosures for derivative financial
instruments, other financial instruments and derivative commodity instruments,
as defined therein. The amendments require enhanced disclosure with respect to
these derivative instruments in the footnotes to the financial statements.
Additionally, the amendments expand existing disclosure requirements to include
quantitative and qualitative discussions with respect to market risk inherent in
market risk sensitive instruments such as equity and fixed maturity securities,
as well as these derivative instruments. These amendments are designed to
provide additional information about market risk sensitive instruments which
investors can use to better understand and evaluate market risk exposures of
registrants, including AIG. FRR No. 48 has been adopted herein.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" (FASB 130) and Statement of Financial
Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information" (FASB 131).
FASB 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. FASB 130 is
effective for AIG as of January 1, 1998. FASB 130 will have no impact on AIG's
results of operations, financial condition or liquidity.
FASB 131 establishes standards for the way AIG is required to disclose
certain information about its operating segments in its annual financial
statements and certain selected information in its interim financial statements.
FASB 131 establishes, where practicable, standards with respect to geographic
areas, among other things. Certain descriptive information is also required.
FASB 131 is effective for the year ended December 31, 1998.
Recent Developments
AIG is subject to the Year 2000 computer program issue. That is, certain of
AIG's computer systems, software products or other business systems may not
accept, input, store, or output dates in the years 1999, 2000 and thereafter
without error or interruption. If such a deficiency is not corrected, it is
possible that some applications could fail or create erroneous results by or at
the year 2000.
AIG has already reviewed and identified its business systems, including
computer programs that are subject to such Year 2000 risk. Accordingly, AIG
commenced the remediation of such systems and such remediation and testing
thereof is anticipated to be complete in advance of the year 2000. The costs of
such remediation are expensed as incurred and are not material to AIG's results
of operations, financial condition or liquidity.
AIG has also initiated formal communications to those non-AIG entities
which have significant transactions with AIG to coordinate the Year 2000
conversions.
On January 1, 1999, certain of the member nations of the European Economic
and Monetary Union (EMU) will adopt a common currency, the Euro. Once the
national currencies are phased out, the Euro will be the sole legal tender of
each of these nations. During the transition period, commerce of these nations
will be transacted in the Euro or in the currently existing national currency.
AIG has identified the significant issues and will be prepared with
respect to the phase in of and ultimate redenomination to the Euro. Any costs
associated with the adoption of the Euro are expensed as incurred and are not
material to AIG's results of operations, financial condition or liquidity.
In January 1998, AIG purchased the 76.1 percent of the outstanding shares
of SELIC Holdings, Ltd. (SELIC) which AIG did not own. Prior to the purchase of
these shares, SELIC's operations were accounted for on an equity basis and
presented as a component of equity in income of minority-owned insurance
operations. Subsequent to the acquisition, SELIC will be consolidated as a
component of general insurance operations.
35
37
ITEM 8. Financial Statements and Supplementary Data
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
- --------------------------------------------------------------------------------
Page
- --------------------------------------------------------------------------------
Report of Independent Accountants 37
Consolidated Balance Sheet at
December 31, 1997 and 1996 38
Consolidated Statement of Income for the
years ended December 31, 1997, 1996
and 1995 40
Consolidated Statement of Capital Funds
for the years ended December 31, 1997,
1996 and 1995 41
Consolidated Statement of Cash Flows for
the years ended December 31, 1997,
1996 and 1995 42
Notes to Financial Statements 44
- --------------------------------------------------------------------------------
Page
- --------------------------------------------------------------------------------
Schedules:
I--Summary of Investments--Other Than
Investments in Related
Parties as of
December 31, 1997 S-1
II--Condensed Financial Information of
Registrant as of December 31, 1997
and 1996 and for the years ended
December 31, 1997, 1996 and 1995 S-2
III--Supplementary Insurance Information as
of December 31, 1997, 1996 and
1995 and for the years then ended S-4
IV--Reinsurance as of December 31, 1997,
1996 and 1995 and for the years
then ended S-5
36
38
Report of Independent Accountants
The Board of Directors and Shareholders
American International Group, Inc.:
We have audited the consolidated financial statements and the financial
statement schedules of American International Group, Inc. and subsidiaries
listed in the index on page 36 of this Form 10-K. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
International Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 10, 1998.
37
39
Consolidated Balance Sheet American International Group, Inc. and Subsidiaries
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
====================================================================================================================================
Assets:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized cost: 1997-$36,568,360;
1996-$34,243,127) $ 38,077,792 $ 35,524,932
Bonds held to maturity, at amortized cost (market value: 1997-$13,365,703;
1996-$12,865,357) 12,530,315 12,258,978
Bonds trading securities, at market value (cost: 1997-$699,614; 1996-$357,023) 718,548 364,069
Preferred stocks, at amortized cost (market value: 1997-$530,705; 1996-$591,091) 239,331 477,247
Equity securities:
Common stocks (cost: 1997-$4,625,433; 1996-$4,993,799) 5,209,274 5,989,572
Non-redeemable preferred stocks (cost: 1997-$138,412; 1996-$64,705) 138,745 76,068
Mortgage loans on real estate, policy and collateral loans-net 7,919,764 7,876,820
Financial services assets:
Flight equipment primarily under operating leases, net of accumulated depreciation
(1997-$1,657,313; 1996-$1,465,031) 14,438,074 13,808,660
Securities available for sale, at market value (cost: 1997-$9,145,244;
1996-$9,775,705) 9,145,317 9,785,909
Trading securities, at market value 3,974,561 2,357,812
Spot commodities, at market value 459,517 204,705
Unrealized gain on interest rate and currency swaps, options and forward transactions 7,422,290 6,906,012
Trading assets 6,715,486 3,793,433
Securities purchased under agreements to resell, at contract value 4,551,191 1,642,591
Other invested assets 4,681,423 2,915,302
Short-term investments, at cost (approximates market value) 3,332,542 2,008,123
Cash 86,917 58,740
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments and cash 119,641,087 106,048,973
Investment income due and accrued 1,368,404 1,198,348
Premiums and insurance balances receivable-net 10,282,987 9,617,061
Reinsurance assets 16,110,521 16,526,566
Deferred policy acquisition costs 6,592,506 6,471,357
Investments in partially-owned companies 1,121,173 951,352
Real estate and other fixed assets, net of accumulated depreciation
(1997-$1,512,617; 1996-$1,390,225) 2,342,187 2,122,762
Separate and variable accounts 3,993,971 3,271,716
Other assets 2,517,851 2,222,867
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $163,970,687 $148,431,002
====================================================================================================================================
See Accompanying Notes to Financial Statements.
38
40
Consolidated Balance Sheet (CONTINUED)
American International Group, Inc. and Subsidiaries
(in thousands, except share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
====================================================================================================================================
Liabilities:
Reserve for losses and loss expenses $ 33,400,160 $ 33,429,807
Reserve for unearned premiums 8,739,006 7,598,928
Future policy benefits for life and accident and health insurance contracts 24,502,005 24,002,860
Policyholders' contract deposits 10,323,112 9,803,409
Other policyholders' funds 2,352,514 2,219,907
Reserve for commissions, expenses and taxes 1,739,945 1,511,122
Insurance balances payable 1,702,578 1,832,649
Funds held by companies under reinsurance treaties 336,585 383,306
Income taxes payable:
Current 585,375 201,978
Deferred 470,706 586,703
Financial services liabilities:
Borrowings under obligations of guaranteed investment agreements 8,000,326 5,723,228
Securities sold under agreements to repurchase, at contract value 2,706,310 3,039,423
Trading liabilities 5,366,421 3,313,508
Securities and spot commodities sold but not yet purchased, at market value 5,171,680 1,568,542
Unrealized loss on interest rate and currency swaps, options and forward transactions 5,979,571 5,414,433
Deposits due to banks and other depositors 972,423 1,206,374
Commercial paper 2,208,167 2,739,388
Notes, bonds and loans payable 12,608,891 12,312,805
Commercial paper 1,166,740 1,758,588
Notes, bonds, loans and mortgages payable 1,276,521 986,505
Separate and variable accounts 3,993,971 3,271,716
Other liabilities 5,966,553 3,081,599
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 139,569,560 125,986,778
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred shareholders' equity in subsidiary company 400,000 400,000
- ------------------------------------------------------------------------------------------------------------------------------------
Capital funds:
Common stock, $2.50 par value; 1,000,000,000 shares authorized; shares issued
1997-759,121,505; 1996-506,084,172 1,897,804 1,265,210
Additional paid-in capital 105,689 127,415
Unrealized appreciation of investments, net of taxes 1,350,182 1,378,318
Cumulative translation adjustments, net of taxes (1,178,041) (493,218)
Retained earnings 22,920,991 20,420,881
Treasury stock; 1997-59,603,224; 1996-36,643,026 shares of common stock
(including 41,726,541 and 27,817,986 shares, respectively, held by subsidiaries) (1,095,498) (654,382)
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital funds 24,001,127 22,044,224
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and capital funds $163,970,687 $148,431,002
====================================================================================================================================
See Accompanying Notes to Financial Statements.
39
41
Consolidated Statement of Income
American International Group, Inc. and Subsidiaries
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
====================================================================================================================================
General insurance operations:
Net premiums written $13,407,529 $12,691,679 $11,893,022
Change in unearned premium reserve (986,489) (836,864) (487,291)
- ------------------------------------------------------------------------------------------------------------------------------------
Net premiums earned 12,421,040 11,854,815 11,405,731
Net investment income 1,853,523 1,690,798 1,547,572
Realized capital gains 128,175 64,985 68,077
- ------------------------------------------------------------------------------------------------------------------------------------
14,402,738 13,610,598 13,021,380
- ------------------------------------------------------------------------------------------------------------------------------------
Losses incurred 7,801,358 7,278,815 7,071,238
Loss expenses incurred 1,554,861 1,717,616 1,588,597
Underwriting expenses (principally policy acquisition costs) 2,574,653 2,408,600 2,329,259
- ------------------------------------------------------------------------------------------------------------------------------------
11,930,872 11,405,031 10,989,094
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 2,471,866 2,205,567 2,032,286
- ------------------------------------------------------------------------------------------------------------------------------------
Life insurance operations:
Premium income 9,925,639 8,978,246 8,038,150
Net investment income 2,896,469 2,675,881 2,264,905
Realized capital gains 21,186 34,798 32,703
- ------------------------------------------------------------------------------------------------------------------------------------
12,843,294 11,688,925 10,335,758
- ------------------------------------------------------------------------------------------------------------------------------------
Death and other benefits 4,052,180 3,733,523 3,348,058
Increase in future policy benefits 4,759,018 4,370,055 3,739,976
Acquisition and insurance expenses 2,460,613 2,261,589 2,157,119
- ------------------------------------------------------------------------------------------------------------------------------------
11,271,811 10,365,167 9,245,153
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 1,571,483 1,323,758 1,090,605
- ------------------------------------------------------------------------------------------------------------------------------------
Financial services operating income 701,337 523,906 417,741
- ------------------------------------------------------------------------------------------------------------------------------------
Equity in income of minority-owned insurance operations 113,636 99,359 81,722
- ------------------------------------------------------------------------------------------------------------------------------------
Other realized capital losses (30,846) (11,792) (28,946)
- ------------------------------------------------------------------------------------------------------------------------------------
Minority interest (31,926) (43,226) (36,317)
- ------------------------------------------------------------------------------------------------------------------------------------
Other income (deductions)-net (96,652) (84,350) (91,208)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,698,898 4,013,222 3,465,883
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefits):
Current 1,273,439 1,070,868 1,025,774
Deferred 93,124 45,097 (70,274)
- ------------------------------------------------------------------------------------------------------------------------------------
1,366,563 1,115,965 955,500
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,332,335 $ 2,897,257 $ 2,510,383
====================================================================================================================================
Earnings per common share:
Basic $4.75 $4.10 $3.53
Diluted 4.73 4.08 3.52
====================================================================================================================================
Average shares outstanding:
Basic 701,930 706,568 711,033
Diluted 704,984 709,316 713,512
====================================================================================================================================
See Accompanying Notes to Financial Statements.
40
42
Consolidated Statement of Capital Funds
American International Group, Inc. and Subsidiaries
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
====================================================================================================================================
Common stock:
Balance at beginning of year $ 1,265,210 $ 1,265,210 $ 843,477
Stock split effected as dividend 632,594 -- 421,733
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,897,804 1,265,210 1,265,210
- ------------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year 127,415 131,828 565,410
Excess of cost over proceeds of common stock issued
under stock option and stock purchase plans (29,659) (15,439) (15,097)
Stock split effected as dividend -- -- (421,733)
Other 7,933 11,026 3,248
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 105,689 127,415 131,828
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of investments, net of taxes:
Balance at beginning of year 1,378,318 1,395,064 184,556
Changes during year (116,981) 8,872 1,809,365
Deferred income tax benefit (expense) on changes 88,845 (25,618) (598,857)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,350,182 1,378,318 1,395,064
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustments, net of taxes:
Balance at beginning of year (493,218) (456,072) (288,074)
Changes during year (753,808) (66,993) (156,523)
Applicable income tax benefit (expense) on changes 68,985 29,847 (11,475)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,178,041) (493,218) (456,072)
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 20,420,881 17,697,739 15,340,928
Net income 3,332,335 2,897,257 2,510,383
Stock dividends to shareholders (632,594) -- --
Cash dividends to shareholders:
Common ($.28, $.25 and $.21 per share, respectively) (199,631) (174,115) (153,572)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 22,920,991 20,420,881 17,697,739
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock, at cost:
Balance at beginning of year (654,382) (206,666) (224,636)
Cost of shares acquired during year (507,707) (493,872) (17,646)
Issued under stock option and stock purchase plans 66,227 38,452 35,616
Other 364 7,704 --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,095,498) (654,382) (206,666)
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital funds at end of year $24,001,127 $22,044,224 $19,827,103
====================================================================================================================================
See Accompanying Notes to Financial Statements.
41
43
Consolidated Statement of Cash Flows
American International Group, Inc. and Subsidiaries
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
====================================================================================================================================
Summary:
Net cash provided by operating activities $ 3,034,988 $ 9,574,907 $ 6,693,625
Net cash used in investing activities (4,855,533) (14,455,657) (11,218,986)
Net cash provided by financing activities 1,848,722 4,851,119 4,537,495
- ------------------------------------------------------------------------------------------------------------------------------------
Change in cash 28,177 (29,631) 12,134
Cash at beginning of year 58,740 88,371 76,237
- ------------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 86,917 $ 58,740 $ 88,371
====================================================================================================================================
Cash flows from operating activities:
Net income $ 3,332,335 $ 2,897,257 $ 2,510,383
- ------------------------------------------------------------------------------------------------------------------------------------
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 1,767,124 4,130,962 5,182,203
Premiums and insurance balances receivable and payable-net (795,997) (260,630) (184,120)
Reinsurance assets 416,045 351,589 (588,548)
Deferred policy acquisition costs (121,149) (703,784) (635,328)
Investment income due and accrued (170,056) 14,600 (284,997)
Funds held under reinsurance treaties (46,721) 38,614 (38,161)
Other policyholders' funds 132,607 127,742 140,807
Current and deferred income taxes-net 476,521 (78,038) (165,730)
Reserve for commissions, expenses and taxes 228,823 253,876 (61,937)
Other assets and liabilities-net 467,683 (394,168) 511,489
Trading assets and liabilities-net (869,140) (56,439) 97,985
Trading securities, at market value (1,616,749) 283,624 (157,799)
Spot commodities, at market value (254,812) 178,669 533,459
Net unrealized gain on interest rate and currency swaps,
options and forward transactions 48,860 (130,914) (369,372)
Securities purchased under agreements to resell (2,908,600) 379,465 (812,653)
Securities sold under agreements to repurchase (333,113) 1,659,551 37,808
Securities and spot commodities sold but not yet
purchased, at market value 3,603,138 364,156 642,399
Realized capital gains (118,515) (87,992) (71,834)
Equity in income of partially-owned companies and other invested assets (157,408) (152,946) (119,116)
Depreciation expenses, principally flight equipment 872,905 805,581 734,560
Change in cumulative translation adjustments (753,807) (66,993) (156,523)
Other-net (164,986) 21,125 (51,350)
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments (297,347) 6,677,650 4,183,242
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 3,034,988 $ 9,574,907 $ 6,693,625
====================================================================================================================================
See Accompanying Notes to Financial Statements.
42
44
Consolidated Statement of Cash Flows (CONTINUED)
American International Group, Inc. and Subsidiaries
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
====================================================================================================================================
Cash flows from investing activities:
Cost of fixed maturities, at amortized cost matured or redeemed $ 1,225,643 $ 1,626,925 $ 1,111,864
Cost of bonds, at market sold 9,308,031 9,514,381 7,633,674
Cost of bonds, at market matured or redeemed 3,775,047 2,480,629 2,695,319
Cost of equity securities sold 2,261,655 2,758,264 2,517,697
Realized capital gains 118,515 87,992 71,834
Purchases of fixed maturities (16,921,756) (19,511,037) (16,947,508)
Purchases of equity securities (1,915,806) (3,218,375) (2,588,994)
Mortgage, policy and collateral loans granted (2,242,980) (3,276,378) (3,488,856)
Repayments of mortgage, policy and collateral loans 2,200,035 3,260,090 902,378
Sales of securities available for sale 4,310,088 2,061,776 1,896,109
Maturities of securities available for sale 3,232,530 1,603,215 1,183,742
Purchases of securities available for sale (6,915,594) (9,530,755) (3,210,125)
Sales of flight equipment 2,230,586 1,362,632 1,158,151
Purchases of flight equipment (3,435,274) (3,254,344) (3,279,356)
Net additions to real estate and other fixed assets (517,056) (581,221) (340,563)
Sales or distributions of other invested assets 1,274,229 1,197,620 294,855
Investments in other invested assets (1,478,658) (1,262,910) (970,580)
Change in short-term investments (1,324,419) 264,405 194,925
Investments in partially-owned companies (40,349) (38,566) (53,552)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (4,855,533) $(14,455,657) $(11,218,986)
====================================================================================================================================
Cash flows from financing activities:
Change in policyholders' contract deposits $ 1,014,703 $ 222,426 $ 3,093,557
Change in deposits due to banks and other depositors (233,951) 248,933 301,468
Change in commercial paper (1,123,069) 1,331,341 (622,924)
Proceeds from notes, bonds, loans and mortgages payable 7,604,295 6,150,471 6,115,546
Repayments on notes, bonds, loans and mortgages payable (7,015,646) (2,775,482) (4,290,938)
Liquidation of zero coupon notes payable (12,235) -- --
Proceeds from guaranteed investment agreements 4,930,022 3,583,158 2,940,563
Maturities of guaranteed investment agreements (2,652,924) (3,283,485) (3,052,326)
Proceeds from subsidiary company preferred stock issued -- (131) 197,144
Proceeds from common stock issued 36,568 23,013 20,519
Cash dividends to shareholders (199,631) (174,115) (153,572)
Acquisition of treasury stock (507,707) (493,872) (17,646)
Other-net 8,297 18,862 6,104
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 1,848,722 $ 4,851,119 $ 4,537,495
====================================================================================================================================
Supplementary information:
Taxes paid $ 807,800 $ 1,068,500 $ 1,065,700
====================================================================================================================================
Interest paid $ 1,733,900 $ 1,594,700 $ 1,318,700
====================================================================================================================================
See Accompanying Notes to Financial Statements.
43
45
Notes to Financial Statements
1. Summary of Significant Accounting Policies
(a) Principles of Consolidation: The consolidated financial statements include
the accounts of American International Group, Inc. and all significant
subsidiaries (AIG). Some of AIG's foreign subsidiaries report on a fiscal year
ending November 30. All material intercompany accounts and transactions have
been eliminated.
(b) Basis of Presentation: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Certain accounts have been reclassified in the 1996 and 1995 financial
statements to conform to their 1997 presentation.
General Insurance Operations: AIG's general insurance subsidiaries are
multiple line companies writing substantially all lines of property and casualty
insurance. One or more of these companies is licensed to write substantially all
of these lines in all states of the United States and in more than 100 foreign
countries. Premiums are earned primarily on a pro rata basis over the term of
the related coverage. The reserve for unearned premiums represents the portion
of premiums written relating to the unexpired terms of coverage.
Acquisition costs are deferred and amortized over the period in which the
related premiums written are earned. Investment income is not anticipated in the
deferral of acquisition costs. (See Note 4.)
Losses and loss expenses are charged to income as incurred. The reserve
for losses and loss expenses represents the accumulation of estimates for
reported losses and includes provisions for losses incurred but not reported.
The methods of determining such estimates and establishing resulting reserves,
including amounts relating to reserves for estimated unrecoverable reinsurance,
are continually reviewed and updated. Adjustments resulting therefrom are
reflected in income currently. AIG does not discount its loss reserves, other
than for minor amounts related to certain workers' compensation claims. (See
Note 6.)
Life Insurance Operations: AIG's life insurance subsidiaries offer a wide
range of traditional insurance and financial and investment products. One or
more of these subsidiaries is licensed to write life insurance in all states of
the United States and in over 70 foreign countries. Traditional products consist
of individual and group life, annuity, and accident and health policies.
Financial and investment products consist of single premium annuity, variable
annuities, guaranteed investment contracts and universal life. Premiums for
traditional life insurance products are generally recognized as revenues over
the premium paying period of the related policies. Benefits and expenses are
provided against such revenues to recognize profits over the estimated life of
the policies. Revenues for universal life and investment-type products consist
of policy charges for the cost of insurance, administration, and surrenders
during the period. Expenses include interest credited to policy account balances
and benefit payments made in excess of policy account balances. Investment
income reflects certain minor amounts of realized capital gains where the gains
are deemed to be an inherent element in pricing certain life products in some
foreign countries.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Deferred policy acquisition costs and policy initiation costs related to
universal life and investment-type products are amortized in relation to
expected gross profits over the life of the policies. (See Note 4.)
The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.
Financial Services Operations: AIG participates in the derivatives dealer
market conducting, primarily as principal, an interest rate, currency, equity
and credit derivative products business. AIG also enters into structured
transactions including long-dated forward foreign exchange contracts, option
transactions, liquidity facilities and investment agreements and invests in a
diversified portfolio of securities.
AIG engages in market making and trading activities, as principal, in
foreign exchange, interest rates and precious and base metals. AIG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIG, as lessor, leases flight equipment principally under operating
leases. Accordingly, income is reported over the life of the lease as rentals
become receivable under the provisions of the lease or, in the case of leases
with varying payments, under the straight-line method over the noncancelable
term of the lease. In certain cases, leases provide for additional amounts
contingent on usage. AIG is also a remarketer of flight equipment for its own
account and for airlines and financial institutions. AIG's revenues from such
operations consist of net gains on sales of flight equipment and commissions.
(c) Investments in Fixed Maturities and Equity Securities: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at current market values.
Interest income with respect to fixed maturity securities is accrued currently.
Included in the bonds available for sale are collateralized mortgage
obligations (CMOs). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments over their estimated life. Bond trading securities
are carried at current market values, as it is AIG's intention to sell these
securities in the near term. Common and non-redeemable
44
46
American International Group, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies (continued)
preferred stocks are carried at current market values. Dividend income is
generally recognized when payable.
Unrealized gains and losses from investments in equity securities and
fixed maturities available for sale are reflected in capital funds currently,
net of any related deferred income taxes. Unrealized gains and losses from
investments in trading securities are reflected in income currently.
Realized capital gains and losses are determined principally by specific
identification. Where declines in values of securities below cost or amortized
cost are considered to be other than temporary, a charge is reflected in income
for the difference between amortized cost and estimated net realizable value.
(d) Mortgage Loans on Real Estate, Policy and Collateral Loans--net:
Mortgage loans on real estate, policy loans and collateral loans are carried at
unpaid principal balances. Interest income on such loans is accrued currently.
Impairment of mortgage loans on real estate and collateral loans is
generally measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate subject to the fair value of
underlying collateral. Interest income on such loans is recognized as cash is
received.
(e) Flight Equipment: Flight equipment is stated at cost. Major additions
and modifications are capitalized. Normal maintenance and repairs, airframe and
engine overhauls and compliance with return conditions of flight equipment on
lease are provided by and paid for by the lessee. Under the provisions of most
leases for certain airframe and engine overhauls, the lessee is reimbursed for
costs incurred up to but not exceeding contingent rentals paid to AIG by the
lessee. AIG provides a charge to income for such reimbursements based upon the
expected reimbursements during the life of the lease. Depreciation and
amortization are computed on the straight-line basis to a residual value of
approximately 15 percent over the estimated useful lives of the related assets
but not exceeding 25 years. This caption also includes deposits for aircraft to
be purchased.
At the time the assets are retired or disposed of, the cost and associated
accumulated depreciation and amortization are removed from the related accounts
and the difference, net of proceeds, is recorded as a gain or loss.
(f) Securities Available for Sale, at market value: These securities are
held to meet long term investment objectives and are accounted for as available
for sale, carried at current market values and recorded on a trade date basis.
Unrealized gains and losses from valuing these securities and any related hedges
are reflected in capital funds currently, net of any related deferred income
taxes. When the underlying security is sold, the realized loss or gain resulting
from the hedging derivative transaction is recognized in income in that same
period as the realized gain or loss of the hedged security.
(g) Trading Securities, at market value: Trading securities are held to
meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and carried at current market
values. Unrealized gains and losses are reflected in income currently.
(h) Spot Commodities, at market value: Spot commodities are carried at
current market values and are recorded on a settlement date basis. The exposure
to market risk may be reduced through the use of forwards, futures and option
contracts. Unrealized gains and losses of both commodities and any derivative
transactions are reflected in income currently.
(i) Unrealized Gain and Unrealized Loss on Interest Rate and Currency
Swaps, Options and Forward Transactions: Swaps, options and forward transactions
are accounted for as contractual commitments recorded on a trade date basis and
are carried at current market values or estimated fair values when market values
are not available. Unrealized gains and losses are reflected in income
currently. Estimated fair values are based on the use of valuation models that
utilize, among other things, current interest, foreign exchange and volatility
rates. These valuations represent an assessment of the present values of
expected future cash flows of these transactions and may include reserves for
market risk as deemed appropriate. The portfolio's discounted cash flows are
evaluated with reference to current market conditions, maturities within the
portfolio and other relevant factors. Based upon this evaluation, it is
determined what offsetting transactions, if any, are necessary to reduce the
market risk of the portfolio. AIG manages its market risk with a variety of
transactions, including swaps, trading securities, futures contracts and other
transactions as appropriate. Because of the limited liquidity of some of these
instruments, the recorded values of these transactions may be different than the
values that might be realized if AIG were to sell or close out the transactions
prior to maturity. AIG believes that such differences are not significant to the
results of operations, financial condition or liquidity.
(j) Trading Assets and Trading Liabilities: Trading assets and trading
liabilities include option premiums paid and received and receivables from and
payables to counterparties which relate to unrealized gains and losses on
futures, forwards and options and balances due from and due to clearing brokers
and exchanges.
Futures, forwards and options purchased and written are accounted for as
contractual commitments on a trade date basis and are carried at fair values.
Unrealized gains and losses are reflected in income currently. The fair values
of futures contracts are based on closing exchange quotations. Commodity forward
transactions are carried at fair values derived from dealer quotations and
underlying commodity exchange quotations. For long dated forward transactions,
where there are no dealer or exchange quotations, fair values are derived using
internally developed valuation methodologies based on available market
information. Options are carried at fair values based on
45
47
Notes to Financial Statements (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
the use of valuation models that utilize, among other things, current interest
or commodity rates and foreign exchange and volatility rates, as applicable.
(k) Securities Purchased (Sold) Under Agreements to Resell (Repurchase),
at contract value: Purchases of securities under agreements to resell and sales
of securities under agreements to repurchase are accounted for as collateralized
transactions and are recorded at their contracted resale or repurchase amounts,
plus accrued interest. Generally, it is AIG's policy to take possession of or
obtain a security interest in securities purchased under agreements to resell.
AIG minimizes the credit risk that counterparties to transactions might be
unable to fulfill their contractual obligations by monitoring customer credit
exposure and collateral value and generally requiring additional collateral to
be deposited with AIG when deemed necessary.
(l) Other Invested Assets: Other invested assets consist primarily of
investments by AIG's insurance operations in joint ventures and partnerships and
other investments not classified elsewhere herein. The joint ventures and
partnerships are carried at equity or cost depending on the nature of the
invested asset and the ownership percentage thereof. Other investments are
carried at cost or market values depending upon the nature of the underlying
assets. Unrealized gains and losses from the revaluation of those investments
carried at market values are reflected in capital funds, net of any related
deferred income taxes.
(m) Reinsurance Assets: Reinsurance assets include the balances due from
both reinsurance and insurance companies under the terms of AIG's reinsurance
arrangements for paid and unpaid losses and loss expenses, ceded unearned
premiums and ceded future policy benefits for life and accident and health
insurance contracts and benefits paid and unpaid. It also includes funds held
under reinsurance treaties.
(n) Investments in Partially-Owned Companies: The equity method of
accounting is used for AIG's investment in companies in which AIG's ownership
interest approximates twenty but is not greater than fifty percent
(minority-owned companies). Equity in income of minority-owned insurance
operations is presented separately in the consolidated statement of income.
Equity in realized capital gains of such companies is included in other realized
capital gains (losses). Equity in net income of other unconsolidated companies
is principally included in other income (deductions)-net. At December 31, 1997,
AIG's significant investments in partially-owned companies included its 49.0
percent interest in Transatlantic Holdings, Inc. (Transatlantic), which derives
approximately 14 percent of its assumed reinsurance from AIG subsidiaries; its
19.9 percent interest in Richmond Insurance Company; its 23.9 percent interest
in SELIC Holdings, Ltd; and its 24.4 percent interest in IPC Holdings, Ltd. This
balance sheet caption also includes investments in less significant
partially-owned companies and in certain minor majority-owned subsidiaries. At
December 31, 1997, the market value of AIG's investment in Transatlantic
exceeded its carrying value by approximately $519.5 million. The amount of
dividends received from unconsolidated subsidiaries owned less than 50 percent
were $29,978,000, $13,431,000 and $6,515,000 in 1997, 1996 and 1995
respectively. The undistributed earnings of unconsolidated subsidiaries owned
less than 50 percent was $563,592,000 as of December 31, 1997.
In January 1998, AIG purchased the 76.1 percent of the outstanding shares
of SELIC Holdings, Ltd. (SELIC) which AIG did not own. Prior to the purchase of
these shares, SELIC's operations were accounted for on an equity basis and
presented as a component of equity in income of minority-owned insurance
operations. Subsequent to the acquisition, SELIC will be consolidated as a
component of general insurance operations.
(o) Real Estate and Other Fixed Assets: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs are
charged to income as incurred; expenditures for betterments are capitalized and
depreciated.
(p) Separate and Variable Accounts: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of each
account are legally segregated and are not subject to claims which arise out of
any other business of AIG.
(q) Securities and Spot Commodities Sold but not yet Purchased, at market
value: Securities and spot commodities sold but not yet purchased represent
sales of securities and spot commodities not owned at the time of sale.
Securities are recorded on a trade date basis and are carried at current market
values. Spot commodities are carried at current market values based upon current
commodity prices. Unrealized gains and losses are reflected in income currently.
(r) Preferred Shareholders' Equity in Subsidiary Company: Preferred
shareholders' equity in subsidiary company relates to outstanding market auction
preferred stock of International Lease Finance Corporation (ILFC), a wholly
owned subsidiary of AIG. Dividends on such preferred stock are accounted for as
interest expense and included as minority interest in the consolidated statement
of income.
(s) Translation of Foreign Currencies: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FASB 52). Under FASB 52, functional currency assets and
liabilities are translated into U.S. dollars generally using current rates of
exchange and the related translation adjustments are recorded as a separate
component of capital funds net of any related taxes. Functional currencies are
generally the currencies of the local operating environment. Income statement
accounts expressed in
46
48
American International Group, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies (continued)
functional currencies are translated using average exchange rates. The
adjustments resulting from translation of financial statements of foreign
entities operating in highly inflationary economies are recorded in income.
Exchange gains and losses resulting from foreign currency transactions are also
recorded in income currently. The exchange gain or loss with respect to
utilization of foreign exchange hedging instruments is recorded as a component
of capital funds.
(t) Income Taxes: Deferred federal and foreign income taxes are provided
for temporary differences for the expected future tax consequences of events
that have been recognized in AIG's financial statements or tax returns.
(u) Earnings Per Share: Basic earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. Diluted earnings per share are
based on those shares used in basic earnings per share plus shares that would
have been outstanding assuming issuance of common shares for all dilutive
potential common shares outstanding, retroactively adjusted to reflect all stock
dividends and stock splits.
The computation of earnings per share for December 31, 1997, 1996 and 1995
was as follows:
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
================================================================================
Numerator:
Net income applicable
to common stock $3,332,335 $2,897,257 $2,510,383
================================================================================
Denominator:
Average outstanding shares used
in the computation of per share
earnings:
Common stock issued 759,124 759,126 759,128
Common stock in treasury (57,194) (52,558) (48,095)
- --------------------------------------------------------------------------------
Average outstanding shares-basic 701,930 706,568 711,033
================================================================================
Stock options (treasury stock method) 3,025 2,716 2,452
Stock purchase plan 29 32 27
- --------------------------------------------------------------------------------
Average outstanding shares-diluted 704,984 709,316 713,512
================================================================================
Earnings per share:
Basic $4.75 $4.10 $3.53
Diluted 4.73 4.08 3.52
================================================================================
(v) Accounting Standards: In June 1996, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (FASB 125). This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. This statement provides consistent standards for distinguishing
transfer of financial assets that are sales from transfers that are secured
borrowings. FASB 125 was effective January 1, 1997.
In December 1996, FASB issued Statement of Financial Accounting Standards
No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" (FASB 127). FASB 127 delays the implementation of certain provisions of
FASB 125 for one year. AIG has adopted all requirements of FASB 125 herein.
In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128 "Earnings per Share" (FASB 128). This statement simplifies the existing
computational guidelines, revises the disclosure requirements and increases
earnings per share comparability on an international basis.
AIG has adopted all requirements of FASB 128 herein and all prior period
information has been restated.
In February 1997, the Securities and Exchange Commission (SEC) issued
Financial Reporting Release No. 48 "Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments" (FRR No. 48).
FRR No. 48 amends rules and forms for registrants and requires
clarification and expansion of existing disclosures for derivative financial
instruments, other financial instruments and derivative commodity instruments,
as defined therein. The amendments require enhanced disclosure with respect to
these derivative instruments in the footnotes to the financial statements.
Additionally, the amendments expand existing disclosure requirements to include
quantitative and qualitative discussions with respect to market risk inherent in
market risk sensitive instruments such as equity and fixed maturity securities,
as well as these derivative instruments. These amendments are designed to
provide additional information about market risk sensitive instruments which
investors can use to better understand and evaluate market risk exposures of
registrants, including AIG. FRR No. 48 has been adopted herein.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" (FASB 130) and Statement of Financial
Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information" (FASB 131).
FASB 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. FASB 130 is
effective for AIG as of January 1, 1998. FASB 130 will have no impact on AIG's
results of operations, financial condition or liquidity.
FASB 131 establishes standards for the way AIG is required to disclose
information about its operating segments in its annual financial statements and
selected information in its interim financial statements. FASB 131 establishes,
where practicable, standards with respect to geographic areas, among other
47
49
Notes to Financial Statements (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
things. Certain descriptive information is also required. FASB 131 is effective
for the year ended December 31, 1998.
2. Foreign Operations
Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds which
generally cause a delay in the outward remittance of such funds. Approximately
36 percent and 38 percent of consolidated assets at December 31, 1997 and 1996,
respectively, and 54 percent of revenues for each of the years ended December
31, 1997, 1996 and 1995, respectively, were located in or derived from foreign
countries (other than Canada). (See Note 17.)
3. Federal Income Taxes
(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal income
tax return. Revenue Agent's Reports assessing additional taxes for the years
1987, 1988, 1989 and 1990 have been issued and Letters of Protest contesting the
assessments have been filed with the Internal Revenue Service. It is
management's belief that there are substantial arguments in support of the
positions taken by AIG in its Letters of Protest. Management also believes that
the final result of these examinations will be immaterial to the financial
statements.
Foreign income not expected to be taxed in the United States has arisen
because AIG's foreign subsidiaries were generally not subject to U.S. income
taxes on income earned prior to January 1, 1987. Such income would become
subject to U.S. income taxes at current tax rates if remitted to the United
States or if other events occur which would make these amounts currently
taxable. The cumulative amount of translated undistributed earnings of AIG's
foreign subsidiaries currently not subject to U.S. income taxes was
approximately $2.9 billion at December 31, 1997. Management presently has not
subjected and has no intention of subjecting these accumulated earnings to
material U.S. income taxes and no provision has been made in the accompanying
financial statements for such taxes.
(b) The U.S. Federal income tax rate is 35 percent for 1997, 1996 and
1995. Actual tax expense on income differs from the "expected" amount computed
by applying the Federal income tax rate because of the following:
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
------------------------- -------------------------- ---------------------------
Percent Percent Percent
of pre-tax of pre-tax of pre-tax
Amount income Amount income Amount income
====================================================================================================================================
"Expected" tax expense $1,644,614 35.0% $1,404,627 35.0% $1,213,059 35.0%
Adjustments:
Tax exempt interest (286,824) (6.1) (278,545) (6.9) (274,090) (7.9)
Dividends received deduction (14,812) (0.3) (23,790) (0.6) (18,583) (0.5)
State income taxes 30,668 0.7 46,925 1.2 48,579 1.4
Foreign income not expected to be
taxed in the U.S., less foreign
income taxes (21,602) (0.5) (6,619) (0.2) (5,010) (0.1)
Other 14,519 0.3 (26,633) (0.7) (8,455) (0.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Actual tax expense $1,366,563 29.1% $1,115,965 27.8% $ 955,500 27.6%
====================================================================================================================================
Foreign and domestic components of
actual tax expense:
Foreign:
Current $ 316,738 $ 391,791 $ 341,998
Deferred 74,952 (1,333) 45,685
Domestic*:
Current 956,701 679,077 683,776
Deferred 18,172 46,430 (115,959)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,366,563 $1,115,965 $ 955,500
====================================================================================================================================
* Including U.S. tax on foreign income.
48
50
American International Group, Inc. and Subsidiaries
3. Federal Income Taxes (continued)
(c) The components of the net deferred tax liability as of December 31, 1997 and
December 31, 1996 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
1997 1996
================================================================================
Deferred tax assets:
Loss reserve discount $1,234,502 $1,236,858
Unearned premium reserve reduction 322,332 312,819
Accruals not currently deductible 505,376 385,892
Adjustment to life policy reserves 650,032 638,702
Cumulative translation adjustment 115,926 50,152
Other 17,665 9,122
- --------------------------------------------------------------------------------
2,845,833 2,633,545
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 1,386,970 1,338,501
Financial service products
mark to market differential 144,229 153,265
Depreciation of flight equipment 942,861 819,375
Acquisition net asset basis adjustments 118,839 175,698
Unrealized appreciation of investments 592,860 681,705
Other 130,780 51,704
- --------------------------------------------------------------------------------
3,316,539 3,220,248
- --------------------------------------------------------------------------------
Net deferred tax liability $ 470,706 $ 586,703
================================================================================
4. Deferred Policy Acquisition Costs
The following reflects the policy acquisition costs deferred for amortization
against future income and the related amortization charged to income for general
and life insurance operations, excluding certain amounts deferred and amortized
in the same period:
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
================================================================================
General insurance operations:
Balance at beginning of year $1,415,849 $1,289,788 $1,179,494
- --------------------------------------------------------------------------------
Acquisition costs deferred
Commissions 592,193 591,708 570,180
Other 845,169 714,491 648,154
- --------------------------------------------------------------------------------
1,437,362 1,306,199 1,218,334
- --------------------------------------------------------------------------------
Amortization charged to income
Commissions 552,493 557,092 590,415
Other 663,507 623,046 517,625
- --------------------------------------------------------------------------------
1,216,000 1,180,138 1,108,040
- --------------------------------------------------------------------------------
Balance at end of year $1,637,211 $1,415,849 $1,289,788
================================================================================
Life insurance operations:
Balance at beginning of year $5,055,508 $4,477,785 $3,952,751
- --------------------------------------------------------------------------------
Acquisition costs deferred
Commissions 930,930 941,491 819,596
Other 402,323 400,319 387,438
- --------------------------------------------------------------------------------
1,333,253 1,341,810 1,207,034
- --------------------------------------------------------------------------------
Amortization charged to income
Commissions 411,416 426,569 426,456
Other 220,047 201,145 194,031
- --------------------------------------------------------------------------------
631,463 627,714 620,487
- --------------------------------------------------------------------------------
Decrease due to foreign exchange (802,003) (136,373) (61,513)
- --------------------------------------------------------------------------------
Balance at end of year $4,955,295 $5,055,508 $4,477,785
================================================================================
Total deferred policy acquisition costs $6,592,506 $6,471,357 $5,767,573
================================================================================
5. Reinsurance
In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.
General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Amounts recoverable from general reinsurers are estimated in
a manner consistent with the claims liabilities associated with the reinsurance
and presented as a component of reinsurance assets.
AIG life companies limit exposure to loss on any single life. For ordinary
insurance, AIG retains a maximum of approximately one million dollars of
coverage per individual life. There are smaller retentions for other lines of
business. Life reinsurance is effected principally under yearly renewable term
treaties. Amounts recoverable from life reinsurers are estimated in a manner
consistent with the assumptions used for the underlying policy benefits and are
presented as a component of reinsurance assets.
General insurance premiums written and earned were comprised of the
following:
(in thousands)
- ------------------------------------------------------------------
Years Ended December 31, Written Earned
==================================================================
1997
Gross premiums $18,742,055 $17,565,566
Ceded premiums (5,334,526) (5,144,526)
- ------------------------------------------------------------------
Net premiums $13,407,529 $12,421,040
==================================================================
1996
Gross premiums $18,319,132 $17,579,868
Ceded premiums (5,627,453) (5,725,053)
- ------------------------------------------------------------------
Net premiums $12,691,679 $11,854,815
==================================================================
1995
Gross premiums $17,895,120 $17,243,829
Ceded premiums (6,002,098) (5,838,098)
- ------------------------------------------------------------------
Net premiums $11,893,022 $11,405,731
==================================================================
In the normal course of their operations, certain AIG subsidiaries are
provided reinsurance coverages from AIG's minority-
owned reinsurance companies. During 1997, 1996 and 1995, the premiums written
which were ceded to Transatlantic amounted to $182,000,000, $232,000,000 and
$189,000,000, respectively.
For the years ended December 31, 1997, 1996 and 1995, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $4.59
billion, $5.07 billion and $5.14 billion, respectively.
49
51
Notes to Financial Statements (CONTINUED)
5. Reinsurance (continued)
Life insurance net premium income was comprised of the following:
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
================================================================================
Gross premium income $ 10,211,778 $ 9,239,388 $ 8,245,422
Ceded premiums (286,139) (261,142) (207,272)
- --------------------------------------------------------------------------------
Net premium income $ 9,925,639 $ 8,978,246 $ 8,038,150
================================================================================
Life insurance recoveries, which reduced death and other benefits,
approximated $136.5 million, $113.5 million and $111.4 million, respectively,
for the years ended December 31, 1997, 1996 and 1995.
AIG's reinsurance arrangements do not relieve AIG from its direct
obligation to its insureds. Thus, a credit exposure exists with respect to both
general and life reinsurance ceded to the extent that any reinsurer is unable to
meet the obligations assumed under the reinsurance agreements. AIG holds
substantial collateral as security under related reinsurance agreements in the
form of funds, securities and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely
successful in prior recovery efforts.
AIG evaluates the financial condition of its reinsurers through an
internal reinsurance security committee consisting of members of AIG's senior
management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract.
Life insurance ceded to other insurance companies was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
================================================================================
Life insurance in-force $50,924,412 $44,691,358 $37,148,984
================================================================================
Life insurance assumed represented 0.3 percent of gross life insurance
in-force at December 31, 1997, 0.2 percent for 1996 and 0.1 percent for 1995,
and life insurance premium income assumed represented 0.1 percent of gross
premium income for each of the periods ended December 31, 1997, 1996 and 1995.
Supplemental information for gross loss and benefit reserves net of ceded
reinsurance at December 31, 1997 and 1996 follows:
(in thousands)
- --------------------------------------------------------------------------------
As Net of
Reported Reinsurance
================================================================================
December 31, 1997
Reserve for losses and loss expenses $(33,400,160) $(21,171,460)
Future policy benefits for life and accident
and health insurance contracts (24,502,005) (24,374,505)
Premiums and insurance balances
receivable-net 10,282,987 12,306,351
Funds held under reinsurance treaties -- 80,857
Reserve for unearned premiums (8,739,006) (7,088,906)
Reinsurance assets 16,110,521 --
================================================================================
December 31, 1996
Reserve for losses and loss expenses $(33,429,807) $(20,407,307)
Future policy benefits for life and accident
and health insurance contracts (24,002,860) (23,858,860)
Premiums and insurance balances
receivable-net 9,617,061 11,442,791
Funds held under reinsurance treaties -- 74,236
Reserve for unearned premiums (7,598,928) (6,138,828)
Reinsurance assets 16,526,566 --
================================================================================
6. Reserve for Losses and Loss Expenses and Future Life Policy Benefits and
Policyholders' Contract Deposits
(a) The following analysis provides a reconciliation of the activity in the
reserve for losses and loss expenses:
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
================================================================================
At beginning of year:
Reserve for losses and
loss expenses $ 33,429,800 $ 33,046,700 $ 31,435,400
Reinsurance recoverable (13,022,500) (13,353,900) (13,016,500)
- --------------------------------------------------------------------------------
20,407,300 19,692,800 18,418,900
- --------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 9,732,600 9,272,400 8,935,400
Prior year (376,400) (276,000) (275,600)
- --------------------------------------------------------------------------------
Total 9,356,200 8,996,400 8,659,800
================================================================================
Losses and loss expenses paid:
Current year 2,976,300 3,000,500 2,610,900
Prior year 5,615,700 5,281,400 4,775,000
- --------------------------------------------------------------------------------
Total 8,592,000 8,281,900 7,385,900
================================================================================
At end of year:
Net reserve for losses and
loss expenses 21,171,500 20,407,300 19,692,800
Reinsurance recoverable 12,228,700 13,022,500 13,353,900
- --------------------------------------------------------------------------------
Total $ 33,400,200 $ 33,429,800 $ 33,046,700
================================================================================
50
52
American International Group, Inc. and Subsidiaries
6. Reserve for Losses and Loss Expenses and Future Life Policy Benefits and
Policyholders' Contract Deposits (continued)
(b) The analysis of the future policy benefits and policyholders' contract
deposits liabilities as at December 31, 1997 and 1996 follows:
(in thousands)
- --------------------------------------------------------------------------------
1997 1996
================================================================================
Future policy benefits:
Long duration contracts $23,917,835 $23,382,945
Short duration contracts 584,170 619,915
- --------------------------------------------------------------------------------
Total $24,502,005 $24,002,860
================================================================================
Policyholders' contract deposits:
Annuities $ 4,758,872 $ 4,138,141
Guaranteed investments contracts (GICs) 2,676,447 2,329,558
Corporate-owned life insurance 1,967,060 2,323,788
Universal life 540,352 480,720
Other investment contracts 380,381 531,202
- --------------------------------------------------------------------------------
Total $10,323,112 $ 9,803,409
================================================================================
(c) Long duration contract liabilities included in future policy benefits,
as presented in the table above, result from traditional life products. Short
duration contract liabilities are primarily accident and health products. The
liability for future life policy benefits has been established based upon the
following assumptions:
(i) Interest rates (exclusive of immediate/terminal funding annuities),
which vary by territory, year of issuance and products, range from 2.5 percent
to 12.0 percent within the first 20 years. Interest rates on immediate/terminal
funding annuities are at a maximum of 12.2 percent and grade to not greater than
7.5 percent.
(ii) Mortality and surrender rates are based upon actual experience by
geographical area modified to allow for variations in policy form. The weighted
average lapse rate, including surrenders, for individual and group life
approximated 7.1 percent.
(iii) The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the benefit of AIG are
restricted in some cases by the insurance contracts and by the local insurance
regulations of the countries in which the policies are in force.
(iv) Participating life business represented approximately 30 percent of
the gross insurance in-force at December 31, 1997 and 49 percent of gross
premium income in 1997. The amount of dividends to be paid is determined
annually by the Boards of Directors. Anticipated dividends are considered as a
planned contractual benefit in computing the value of future policy benefits and
are provided ratably over the premium-paying period of the contracts.
(d) The liability for policyholders' contract deposits has been
established based on the following assumptions:
(i) Interest rates credited on deferred annuities vary by year of issuance
and range from 3.0 percent to 8.0 percent. Credited interest rate guarantees are
generally for a period of one year. Withdrawal charges generally range from 3.0
percent to 10.0 percent grading to zero over a period of 5 to 10 years.
(ii) Domestically, GICs have market value withdrawal provisions for any
funds withdrawn other than benefit responsive payments. Interest rates credited
generally range from 4.7 percent to 8.1 percent and maturities range from 3 to
20 years. Overseas, primarily in the United Kingdom, GIC type contracts are
credited at rates ranging from 5.0 percent to 6.6 percent with guarantees
generally being one year. Contracts in other foreign locations have interest
rates, maturities and withdrawal charges based upon local economic and
regulatory conditions.
(iii) Interest rates on corporate-owned life insurance business are
guaranteed at 4.0 percent and the weighted average rate credited in 1997 was 7.7
percent.
(iv) The universal life funds have credited interest rates of 4.5 percent
to 7.5 percent and guarantees ranging from 3.5 percent to 5.5 percent depending
on the year of issue. Additionally, universal life funds are subject to
surrender charges that amount to 11.0 percent of the fund balance grading to
zero over a period not longer than 20 years.
(e) Experience adjustments, relating to future policy benefits and
policyholders' contract deposits, vary according to the type of contract and the
territory in which the policy is in force. In general terms, investments,
mortality and morbidity results may be passed through by experience credits or
as an adjustment to the premium mechanism, subject to local regulatory guidance.
7. Statutory Financial Data
Statutory surplus and net income for general insurance and life insurance
operations as reported to regulatory authorities were as follows:
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
================================================================================
Statutory surplus:
General insurance $14,071,326 $12,311,358 $11,142,956
Life insurance 5,535,236 5,541,910 4,788,833
Statutory net income*:
General insurance 2,041,050 1,727,286 1,499,345
Life insurance 1,099,632 851,382 681,189
================================================================================
* Includes net realized capital gains and losses.
AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with GAAP vary between domestic and foreign jurisdictions. The principal
differences are that statutory financial statements do not reflect deferred
policy acquisition costs and deferred income taxes, all bonds are carried at
amortized cost and reinsurance assets and liabilities are presented net of
reinsurance. AIG's use of permitted statutory accounting practices does not have
a significant impact on statutory surplus.
51
53
Notes to Financial Statements (CONTINUED)
8. Investment Information
(a) Statutory Deposits: Cash and securities with carrying values of $3.86
billion and $3.94 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 1997 and 1996,
respectively.
(b) Net Investment Income: An analysis of the net investment income from
the general and life insurance operations follows:
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
================================================================================
General insurance:
Fixed maturities $1,489,997 $1,391,674 $1,323,321
Equity securities 55,150 75,265 53,059
Short-term investments 39,885 40,444 46,378
Other (net of interest
expense on funds held) 336,729 253,032 199,563
- --------------------------------------------------------------------------------
Total investment income 1,921,761 1,760,415 1,622,321
Investment expenses 68,238 69,617 74,749
- --------------------------------------------------------------------------------
Net investment income $1,853,523 $1,690,798 $1,547,572
================================================================================
Life insurance:
Fixed maturities $2,031,157 $1,773,211 $1,517,990
Equity securities 63,608 86,850 70,794
Short-term investments 70,421 62,268 67,218
Interest on mortgage, policy
and collateral loans 538,947 678,476 605,251
Other 309,456 193,614 105,119
- --------------------------------------------------------------------------------
Total investment income 3,013,589 2,794,419 2,366,372
Investment expenses 117,120 118,538 101,467
- --------------------------------------------------------------------------------
Net investment income $2,896,469 $2,675,881 $2,264,905
================================================================================
(c) Investment Gains and Losses: The realized capital gains (losses) and
increase (decrease) in unrealized appreciation of investments for 1997, 1996 and
1995 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
================================================================================
Realized capital gains (losses)
on investments:
Fixed maturities (a) $ 85,763 $ (32,600) $ 54,293
Equity securities 125,431 156,839 69,639
Other (92,679) (36,248) (52,098)
- --------------------------------------------------------------------------------
Realized capital gains $ 118,515 $ 87,991 $ 71,834
================================================================================
Increase (decrease) in unrealized
appreciation of investments:
Fixed maturities $ 227,627 $ (227,491) $ 1,905,315
Equity securities (422,962) 266,648 335,006
Other (b) 78,354 (30,285) (430,956)
- --------------------------------------------------------------------------------
Increase (decrease) in unrealized
appreciation $ (116,981) $ 8,872 $ 1,809,365
================================================================================
(a) The realized gains (losses) resulted from the sale of available for sale
fixed maturities.
(b) Includes $157.5 million decrease, $51.2 million increase and $480.9
million increase in unrealized appreciation attributable to participating
policyholders at December 31, 1997, 1996 and 1995, respectively.
The gross gains and gross losses realized on the disposition of available
for sale securities for 1997, 1996 and 1995 follow:
(in thousands)
- --------------------------------------------------------------------------------
Gross Gross
Realized Realized
Gains Losses
================================================================================
1997
Bonds $ 78,549 $ 72,290
Common stocks 535,657 413,135
Preferred stocks 3,267 358
Financial services securities available for sale 6,223 1,761
- --------------------------------------------------------------------------------
Total $623,696 $487,544
================================================================================
1996
Bonds $ 55,031 $ 80,337
Common stocks 353,865 200,837
Preferred stocks 4,304 493
Financial services securities available for sale 6,668 932
- --------------------------------------------------------------------------------
Total $419,868 $282,599
================================================================================
1995
Bonds $ 60,205 $ 42,633
Common stocks 276,036 215,162
Preferred stocks 10,189 1,510
Financial services securities available for sale 8,244 799
- --------------------------------------------------------------------------------
Total $354,674 $260,104
================================================================================
(d) Market Value of Fixed Maturities and Unrealized Appreciation of
Investments: At December 31, 1997 and 1996, the balance of the unrealized
appreciation of investments in equity securities (before applicable taxes)
included gross gains of approximately $1,847,900,000 and $1,683,000,000 and
gross losses of approximately $1,263,700,000 and $675,800,000, respectively.
The deferred tax payable related to the net unrealized appreciation of
investments was $592,860,000 at December 31, 1997 and $681,705,000 at December
31, 1996.
52
54
American International Group, Inc. and Subsidiaries
8. Investment Information (continued)
The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 1997 and 1996 were as
follows:
(in thousands)
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
================================================================================
1997
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 8,644 $ 867 $ 4 $ 9,507
States (b) 12,521,540 835,821 1,332 13,356,029
Foreign governments 131 36 -- 167
All other corporate -- -- -- --
- --------------------------------------------------------------------------------
Total bonds 12,530,315 836,724 1,336 13,365,703
Preferred stocks 239,331 291,618 244 530,705
- --------------------------------------------------------------------------------
Total fixed maturities $12,769,646 $ 1,128,342 $ 1,580 $13,896,408
================================================================================
1996
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 5,500 $ 368 $ 57 $ 5,811
States (b) 12,251,042 613,340 7,279 12,857,103
Foreign governments 937 2 -- 939
All other corporate 1,499 5 -- 1,504
- --------------------------------------------------------------------------------
Total bonds 12,258,978 613,715 7,336 12,865,357
Preferred stocks 477,247 114,088 244 591,091
- --------------------------------------------------------------------------------
Total fixed maturities $12,736,225 $ 727,803 $ 7,580 $13,456,448
================================================================================
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market value of bonds available for sale
and carried at market value at December 31, 1997 and 1996 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
================================================================================
1997
Fixed maturities available
for sale:
Bonds:
U.S. Government (a) $ 1,253,526 $ 117,215 $ 546 $ 1,370,195
States (b) 5,870,181 332,673 2,157 6,200,697
Foreign governments 8,311,342 373,808 104,534 8,580,616
All other corporate 21,133,311 904,520 111,547 21,926,284
- --------------------------------------------------------------------------------
Total bonds $36,568,360 $ 1,728,216 $ 218,784 $38,077,792
================================================================================
1996
Fixed maturities available
for sale:
Bonds:
U.S. Government(a) $ 1,520,202 $ 74,112 $ 24,023 $ 1,570,291
States(b) 5,430,777 216,421 13,046 5,634,152
Foreign governments 8,487,838 402,373 4,722 8,885,489
All other corporate 18,804,310 681,513 50,823 19,435,000
- --------------------------------------------------------------------------------
Total bonds $34,243,127 $ 1,374,419 $ 92,614 $35,524,932
================================================================================
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market values of fixed maturities held to
maturity and fixed maturities available for sale at December 31, 1997, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
(in thousands)
- --------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
================================================================================
Fixed maturities held to maturity:
Due in one year or less $ 944,201 $ 990,751
Due after one year through five years 1,487,542 1,739,065
Due after five years through ten years 2,506,819 2,805,494
Due after ten years 7,831,084 8,361,098
- --------------------------------------------------------------------------------
Total held to maturity $12,769,646 $13,896,408
================================================================================
Fixed maturities available for sale:
Due in one year or less $ 2,926,040 $ 2,970,054
Due after one year through five years 12,618,805 13,179,692
Due after five years through ten years 12,278,298 12,851,431
Due after ten years 8,745,217 9,076,615
- --------------------------------------------------------------------------------
Total available for sale $36,568,360 $38,077,792
================================================================================
(e) Securities Available for Sale: AIGFP follows a policy of minimizing
interest rate, equity and currency risks associated with securities available
for sale by entering into swap or other transactions. In addition, to reduce its
credit risk, AIGFP has entered into credit derivative transactions with respect
to $444.0 million of securities available for sale. At December 31, 1997, the
cumulative increase in carrying value of the securities available for sale and
related hedges as a result of marking to market such securities net of hedging
transactions was $73,000.
53
55
Notes to Financial Statements (CONTINUED)
8. Investment Information (continued)
The amortized cost, related hedges and estimated market value of
securities available for sale and carried at market value at December 31, 1997
and 1996 were as follows:
(in thousands)
- -------------------------------------------------------------------------------------------------------
Unrealized
Gains
Gross Gross (Losses) - net Estimated
Amortized Unrealized Unrealized on Hedging Market
Cost Gains Losses Transactions Value
=======================================================================================================
1997
Securities available for sale:
Corporate and bank debt $5,202,798 $ 45,144 $ 36,881 $ (10,314) $5,200,747
Foreign government obligations 337,592 1,577 29,603 28,814 338,380
Asset-backed and collateralized 2,343,883 34,314 15,622 (17,663) 2,344,912
Preferred stocks 675,221 84 1,496 1,715 675,524
U.S. Government obligations 585,750 11,679 -- (11,675) 585,754
- -------------------------------------------------------------------------------------------------------
Total $9,145,244 $ 92,798 $ 83,602 $ (9,123) $9,145,317
=======================================================================================================
1996
Securities available for sale:
Corporate and bank debt $4,800,081 $ 69,294 $ 20,140 $ (45,385) $4,803,850
Foreign government obligations 2,252,477 159,484 64,710 (88,683) 2,258,568
Asset-backed and collateralized 1,666,894 54,754 4,043 (50,268) 1,667,337
Preferred stocks 553,050 2,947 2,719 (30) 553,248
U.S. Government obligations 503,203 1,877 2,865 691 502,906
- -------------------------------------------------------------------------------------------------------
Total $9,775,705 $ 288,356 $ 94,477 $ (183,675) $9,785,909
=======================================================================================================
The amortized cost and estimated market values of securities available for
sale at December 31, 1997, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain borrowers have
the right to call or prepay certain obligations with or without call or
prepayment penalties.
(in thousands)
- --------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
================================================================================
Securities available for sale:
Due in one year or less $2,237,014 $2,237,403
Due after one year through five years 2,769,777 2,769,920
Due after five years through ten years 1,062,662 1,060,973
Due after ten years 731,908 732,109
Asset-backed and collateralized 2,343,883 2,344,912
- --------------------------------------------------------------------------------
Total available for sale $9,145,244 $9,145,317
================================================================================
No securities available for sale were below investment grade at December
31, 1997.
(f) CMOs: At December 31, 1997, CMOs, held by AIG's life companies, were
presented as a component of bonds available for sale, at market value. All of
the CMOs were investment grade and approximately 59 percent of the CMOs were
backed by various U.S. government agencies. The remaining 41 percent were
corporate issuances.
At December 31, 1997 and 1996, the market value of the CMO portfolio was
$2.58 billion and $2.24 billion, respectively; the amortized cost was
approximately $2.47 billion in 1997 and $2.18 billion in 1996. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 1997 and 1996.
The distribution of the CMOs at December 31, 1997 and 1996 was as follows:
- --------------------------------------------------------------------------------
1997 1996
================================================================================
GNMA 20% 25%
FHLMC 19 23
FNMA 16 20
VA 4 4
Other 41 28
- --------------------------------------------------------------------------------
100% 100%
================================================================================
At December 31, 1997, the gross weighted average coupon of this portfolio
was 7.5 percent. The gross weighted average life of this portfolio was 5.8
years.
(g) Fixed Maturities Below Investment Grade: At December 31, 1997, fixed
maturities held by AIG that were below investment grade or not rated totaled
$4.32 billion.
(h) At December 31, 1997, non-income producing invested assets were
insignificant.
54
56
American International Group, Inc. and Subsidiaries
9. Debt Outstanding
At December 31, 1997, AIG's debt outstanding of $25.26 billion, shown below,
included borrowings of $22.28 billion which were either not guaranteed by AIG or
were matched borrowings under obligations of guaranteed investment agreements
(GIAs) or matched notes and bonds payable.
(in thousands)
================================================================================
Borrowings under Obligations of
GIAs -- AIGFP $ 8,000,326
- --------------------------------------------------------------------------------
Commercial Paper:
AIG Funding Inc. (Funding) 307,997
ILFC (a) 2,208,167
A.I. Credit Corp. (AICCO) 833,647
Universal Finance Company (UFC) (a) 25,096
- --------------------------------------------------------------------------------
Total 3,374,907
- --------------------------------------------------------------------------------
Medium Term Notes:
ILFC (a) 2,896,865
AIG 248,225
- --------------------------------------------------------------------------------
Total 3,145,090
- --------------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC (a) 3,950,000
AIGFP 4,858,706
AIG: Lire bonds 159,067
Zero coupon notes 91,179
- --------------------------------------------------------------------------------
Total 9,058,952
- --------------------------------------------------------------------------------
Loans and Mortgages Payable:
ILFC (a) (b) 903,320
SPC Credit Limited (a) 538,988
AIG 239,062
- --------------------------------------------------------------------------------
Total 1,681,370
- --------------------------------------------------------------------------------
Total Borrowings 25,260,645
- --------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 10,522,436
Matched GIA borrowings 8,000,326
Matched notes and bonds payable -- AIGFP 3,754,420
- --------------------------------------------------------------------------------
22,277,182
- --------------------------------------------------------------------------------
Remaining borrowings of AIG $ 2,983,463
================================================================================
(a) AIG does not guarantee or support these borrowings.
(b) Capital lease obligations.
(a) Commercial Paper: At December 31, 1997, the commercial paper issued
and outstanding was as follows:
(dollars in thousands)
- --------------------------------------------------------------------------------
Weighted
Net Average Weighted
Book Unamortized Face Interest Average
Value Discount Amount Rate Maturity
================================================================================
Funding $ 307,997 $ 1,061 $ 309,058 5.86% 22 days
ILFC 2,208,167 17,434 2,225,601 5.88 66 days
AICCO 833,647 1,637 835,284 5.74 14 days
UFC* 25,096 883 25,979 7.90 176 days
- --------------------------------------------------------------------------------
Total $3,374,907 $ 21,015 $3,395,922 -- --
================================================================================
* Issued in Taiwan N.T. dollars at prevailing local interest rates.
Commercial paper issued by Funding is guaranteed by AIG. AIG has entered
into an agreement in support of AICCO's commercial paper. AIG does not guarantee
ILFC's or UFC's commercial paper.
(b) Borrowings under Obligations of Guaranteed Investment Agreements:
Borrowings under obligations of guaranteed investment agreements, which are
guaranteed by AIG, are recorded at the amount outstanding under each contract.
Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings are primarily fixed and
range up to 9.8 percent.
Payments due under these investment agreements in each of the next five
years ending December 31, and the periods thereafter based on the earliest call
dates, were as follows:
(in thousands)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
1998 $4,022,565
1999 881,114
2000 229,157
2001 55,776
2002 52,752
Remaining years after 2002 2,758,962
- --------------------------------------------------------------------------------
Total $8,000,326
================================================================================
At December 31, 1997, the market value of securities pledged as collateral
with respect to these obligations approximated $757.9 million.
Funds received from GIA borrowings are invested in a diversified portfolio
of securities and derivative transactions.
(c) Medium Term Notes Payable:
(i) Medium Term Notes Payable Issued by AIG: AIG's Medium Term Notes are
unsecured obligations which normally may not be redeemed by AIG prior to
maturity and bear interest at either fixed rates set by AIG at issuance or
variable rates determined by reference to an interest rate or other formula.
An analysis of the Medium Term Notes for the year ended December 31, 1997
was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Medium Term
Note Series: B E Total
================================================================================
Balance December 31, 1996 $40,000 $100,000 $ 140,000
Issued during year -- 108,225 108,225
- --------------------------------------------------------------------------------
Balance December 31, 1997 $40,000 $208,225 $248,225
================================================================================
The interest rates on this debt range from 2.25 percent to 8.12 percent.
To the extent deemed appropriate, AIG may enter into swap transactions to reduce
its effective borrowing rates with respect to these notes.
During 1997, AIG issued $100 million principal amount of equity-linked
Medium Term Notes due July 30, 2004. These notes accrue interest at the rate of
2.25 percent and the total return on these notes is linked to the appreciation
in market value of AIG's common stock. The notes may be redeemed, at the option
of AIG, as a whole but not in part, at any time on or after July 30, 2000. In
conjunction with the issuance of these notes, AIG entered into a series of swap
transactions
55
57
Notes to Financial Statements (CONTINUED)
9. Debt Outstanding (continued)
which effectively converted its interest expense to a fixed rate of 5.87 percent
and transferred the equity appreciation exposure to a third party.
At December 31, 1997, the maturity schedule for AIG's outstanding Medium
Term Notes was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
1998 $ 40,000
1999 108,225
Remaining years after 2002 100,000
- --------------------------------------------------------------------------------
Total $248,225
================================================================================
At December 31, 1997, AIG had $538.8 million principal amount of Term
Notes registered and available for issuance from time to time.
(ii) Medium Term Notes Payable Issued by ILFC: ILFC's Medium Term Notes
are unsecured obligations which may not be redeemed by ILFC prior to maturity
and bear interest at fixed rates set by ILFC at issuance.
As of December 31, 1997, notes in aggregate principal amount of $2.90
billion were outstanding with maturity dates from 1998 to 2005 at interest rates
ranging from 5.05 percent to 9.88 percent. These notes provide for a single
principal payment at the maturity of each note.
At December 31, 1997, the maturity schedule for ILFC's outstanding Medium
Term Notes was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
1998 $ 768,115
1999 673,250
2000 967,500
2001 266,000
2002 116,000
Remaining years after 2002 106,000
- --------------------------------------------------------------------------------
Total $2,896,865
================================================================================
(d) Notes and Bonds Payable:
(i) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of $750
million. The notes were offered at 12 percent of principal amount at stated
maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG
from the issuance were $85.6 million. The notes are redeemable at any time in
whole or in part at the option of AIG at 100 percent of their principal amount
at stated maturity. The notes are also redeemable at the option of AIG or bearer
notes may be redeemed at the option of the holder in the event of certain
changes involving taxation in the United States at prices ranging from 47.39
percent currently, to 89.88 percent after August 15, 2003, of the principal
amount at stated maturity together with accrued amortization of original issue
discount from the preceding August 15. During 1997 and 1996, no notes were
repurchased. At December 31, 1997, the notes outstanding had a face value of
$189.2 million, an unamortized discount of $98.0 million and a net book value of
$91.2 million. The amortization of the original issue discount was recorded as
interest expense.
(ii) Italian Lire Bonds: In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire. The principal amount of 200 billion Italian Lire
Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent
which is paid annually. These bonds are not redeemable prior to maturity, except
in the event of certain changes involving taxation in the United States or the
imposition of certain certification, identification or reporting requirements.
Simultaneous with the issuance of this debt, AIG entered into a swap
transaction which effectively converted AIG's net interest expense to a U.S.
dollar liability of approximately 7.9 percent, which requires the payment of
proceeds at maturity of approximately $159 million in exchange for 200 billion
Italian Lire and interest thereon.
(iii) Term Notes Issued by ILFC: ILFC has issued unsecured obligations
which may not be redeemed prior to maturity.
As of December 31, 1997, notes in aggregate principal amount of $3.95
billion were outstanding with maturity dates from 1998 to 2004 and interest
rates ranging from 5.50 percent to 8.88 percent. Term notes in the aggregate
principal amount of $500 million are at floating interest rates and the
remainder are at fixed rates. These notes provide for a single principal payment
at maturity.
At December 31, 1997, the maturity schedule for ILFC's Term Notes was as
follows:
(in thousands)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
1998 $ 950,000
1999 1,150,000
2000 900,000
2001 650,000
2002 200,000
Remaining years after 2002 100,000
- --------------------------------------------------------------------------------
Total $3,950,000
================================================================================
AIG does not guarantee any of the debt obligations of ILFC.
56
58
American International Group, Inc. and Subsidiaries
9. Debt Outstanding (continued)
(iv) Notes and Bonds Payable Issued by AIGFP: At December 31, 1997,
AIGFP's bonds outstanding, the proceeds of which are invested in a segregated
portfolio of securities available for sale, were as follows:
(dollars in thousands)
- --------------------------------------------------------------------------------
Year of Interest U.S. Dollar
Issue Maturity Currency Rate Carrying Value
================================================================================
1993 1999 French franc 4.60% $ 514,800
1995 2000 Great Britain pound 5.88 384,900
1995 1998 Italian lire 7.76 122,600
1996 2001 Great Britain pound 6.09 387,100
1996 1998 Italian lire 6.60 326,700
1996 1998 New Zealand dollar 8.51 354,200
1997 2002 US dollar 5.16 150,000
1997 1999 Irish punt 6.20 158,200
1997 2020 US dollar 8.75 356,200
1997 2000 Irish punt 6.19 294,400
1997 2000 Irish punt 5.96 147,600
1997 2002 New Zealand dollar 8.52 125,300
1997 1998 New Zealand dollar 9.43 117,100
1997 1998 Danish kroner 3.46 64,000
1997 2000 Great Britain pound 6.25 84,300
1997 1998 Great Britain pound 6.23 82,400
1997 2020 US dollar 8.75 90,000
1997 2020 US dollar 8.75 77,500
1997 2000 French franc 3.68 50,200
- --------------------------------------------------------------------------------
Total $3,887,500
================================================================================
AIGFP has also issued various credit linked notes maturing from 1998
through 2000. These notes have been issued to hedge certain credit risks in
AIGFP's portfolio of securities available for sale. The notes are primarily U.S.
dollar denominated and have U.S. dollar interest rates ranging from 5.3 percent
to 7.0 percent. AIGFP's payment obligations under these notes would be reduced
or eliminated upon the occurrence of a payment default or a bankruptcy event
with respect to certain third party credit that is being hedged. At December 31,
1997, these notes had a U.S. dollar carrying value of $503.4 million. No
obligations under these notes were reduced or eliminated during 1997.
AIGFP is also obligated under various notes maturing from 1998 through
2026. The majority of these notes are denominated in U.S. dollars and bear
interest at various interest rates. At December 31, 1997, these notes had a U.S.
dollar carrying value of $467.9 million.
AIG guarantees all of AIGFP's debt.
(e) Loans and Mortgages Payable: Loans and mortgages payable at December
31, 1997, consisted of the following:
(in thousands)
- --------------------------------------------------------------------------------
ILFC SPC AIG Total
================================================================================
Uncollateralized
loans payable $ -- $ 538,988 $ 138,198 $ 677,186
Collateralized loans and
mortgages payable 903,320 -- 100,864 1,004,184
- --------------------------------------------------------------------------------
Total $ 903,320 $ 538,988 $ 239,062 $1,681,370
================================================================================
At December 31, 1997, ILFC's capital lease obligations were $903.3
million. Fixed interest rates with respect to these obligations range from 6.18
percent to 6.89 percent; variable rates are referenced to LIBOR. These
obligations mature through 2005. The flight equipment associated with the
capital lease obligations had a net book value of $1.15 billion.
(f) Revolving Credit Facilities: AIG and Funding have entered into two
syndicated revolving credit facilities (the Facilities) aggregating $1 billion.
The Facilities consist of a $500 million 364 day revolving credit facility and a
$500 million five year revolving credit facility. The Facilities can be used for
general corporate purposes and also provide backup for AIG's commercial paper
programs administered by Funding. There are currently no borrowings outstanding
under either of the Facilities, nor were any borrowings outstanding as of
December 31, 1997.
(g) Interest Expense for All Indebtedness: Total interest expense for all
indebtedness, net of capitalized interest, aggregated $1,704,083,000 in 1997,
$1,491,318,000 in 1996 and $1,361,140,000 in 1995. Dividends on the preferred
stock of ILFC are accounted for as interest expense and included as minority
interest in the consolidated statement of income. The dividends for December 31,
1997, 1996 and 1995 were $16,348,000, $16,599,000 and $13,096,000, respectively.
10. Capital Funds
(a) At December 31, 1997, there were 6,000,000 shares of AIG's $5 par value
serial preferred stock authorized, issuable in series.
(b) AIG parent depends on its subsidiaries for cash flow in the form of
loans, advances and dividends. AIG's insurance subsidiaries are subject to
regulatory restrictions on the amount of dividends which can be remitted to AIG
parent. These restrictions vary by state. For example, unless permitted by the
New York Superintendent of Insurance, general insurance companies domiciled in
New York may not pay dividends to shareholders which in any twelve month period
exceed the lesser of 10 percent of the company's statutory policyholders'
surplus or 100 percent of its "adjusted net investment income", as defined.
Generally, less severe restrictions applicable to both general and life
insurance companies exist in most of the other states in which AIG's insurance
subsidiaries are domiciled. Certain foreign jurisdictions have restrictions
which generally cause only a temporary delay in the remittance of dividends.
There are also various local restrictions limiting cash loans and advances to
AIG by its subsidiaries. Largely as a
57
59
Notes to Financial Statements (CONTINUED)
10. Capital Funds (continued)
result of the restrictions, approximately 64 percent of consolidated capital
funds were restricted from immediate transfer to AIG parent at December 31,
1997.
(c) The common stock activity for the three years ended December 31, 1997
was as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Shares outstanding at
beginning of year 469,441,146 474,184,226 315,840,626
Acquired during year (4,657,254) (5,384,672) (236,443)
Issued under stock option
and purchase plans 986,289 540,768 517,844
Issued in connection with
acquisition 4,391 100,824 --
Stock split effected
as stock dividend 253,037,334 -- 168,693,199
Other* (19,293,625) -- (10,631,000)
- --------------------------------------------------------------------------------
Shares outstanding at end of year 699,518,281 469,441,146 474,184,226
================================================================================
* Shares issued to AIG and subsidiaries as part of stock split effected as stock
dividend.
Common stock increased and retained earnings decreased $632.6 million as a
result of a common stock split in the form of a 50 percent common stock dividend
paid July 25, 1997.
Common stock increased and additional paid-in capital decreased $421.7
million as a result of a common stock split in the form of a 50 percent common
stock dividend paid July 28, 1995.
11. Commitments and Contingent Liabilities
In the normal course of business, various commitments and contingent liabilities
are entered into by AIG and certain of its subsidiaries. In addition, AIG
guarantees various obligations of certain subsidiaries.
(a) Commitments to extend credit are agreements to lend subject to certain
conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. At December 31, 1997
and 1996, these commitments, made principally by AIG Capital Corp., approximated
$92,400,000 and $95,200,000, respectively. AIG uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. AIG evaluates each counterparty's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
AIG upon extension of credit, is based on management's credit evaluation of the
counterparty.
(b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the elements
of currency, interest rate, equity and commodity risks are reflected in the
consolidated balance sheet. In addition, these instruments involve, to varying
degrees, elements of credit risk not explicitly recognized in the consolidated
balance sheet. Collateral is required, at the discretion of AIG, on certain
transactions based on the creditworthiness of the counterparty.
(c) AIGFP becomes a party to off-balance sheet financial instruments in
the normal course of its business and to reduce its currency, interest rate and
equity exposures. Interest rate, currency and equity risks related to such
instruments are reflected in the consolidated financial statements to the extent
these instruments are carried at a market or a fair value, whichever is
appropriate. Because of limited liquidity of certain of these instruments, the
recorded estimated fair values of such instruments may be different than the
values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity.
AIGFP, as principal and for its own account, enters into interest rate,
currency and equity swaps, swaptions and forward commitments. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
AIGFP typically becomes a principal in the exchange of interest payments between
the parties and, therefore, may be exposed to loss, if counterparties default.
Currency and equity swaps are similar to interest rate swaps, but may involve
the exchange of principal amounts at the beginning and end of the transaction.
At December 31, 1997, the notional principal amount of the sum of the swap pays
and receives approximated $266.46 billion, primarily related to interest rate
swaps of approximately $200.49 billion.
The following tables provide the contractual and notional amounts of
AIGFP's, AIGTG's and ILFC's derivatives transactions at December 31, 1997.
The notional amounts used to express the extent of AIGFP's, AIGTG's and
ILFC's involvement in swap transactions represent a standard of measurement of
the volume of AIGFP's, AIGTG's and ILFC'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.
58
60
American International Group, Inc. and Subsidiaries
11. Commitments and Contingent Liabilities (continued)
The following table presents AIGFP's swaps and swaptions portfolio by
maturity and type of derivative at December 31, 1997 and December 31, 1996:
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining Life
---------------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 1997 1996
====================================================================================================================================
Interest rate, currency and equity/commodity
swaps and swaptions:
Notional amount:
Interest rate swaps $ 57,623,000 $ 85,484,000 $ 47,420,000 $ 9,964,000 $200,491,000 $165,771,800
Currency swaps 8,575,000 28,686,000 12,527,000 4,960,000 54,748,000 39,182,900
Swaptions and equity swaps 857,000 4,734,000 4,129,000 1,497,000 11,217,000 5,721,300
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 67,055,000 $118,904,000 $ 64,076,000 $ 16,421,000 $266,456,000 $210,676,000
====================================================================================================================================
Futures and forward contracts are contracts for delivery of foreign
currencies or financial indices in which the seller/purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise as a result of movements in current market
prices from contracted prices and the potential inability of counterparties to
meet their obligations under the contracts. At December 31, 1997, the
contractual amount of AIGFP's futures and forward contracts approximated $17.7
billion.
The following table presents AIGFP's futures and forward contracts
portfolio by maturity and type of derivative at December 31, 1997 and December
31, 1996:
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining Life
---------------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 1997 1996
====================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts
contractual amount $ 4,411,000 -- -- -- $ 4,411,000 $ 6,867,300
====================================================================================================================================
Over the counter forward contracts
contractual amount $ 13,271,000 -- -- -- $ 13,271,000 $ 5,952,200
====================================================================================================================================
These instruments involve, to varying degrees, elements of credit risk not
explicitly recognized in the consolidated financial statements. AIGFP utilizes
various credit enhancements, including collateral, credit triggers and credit
derivatives to reduce the credit exposure relating to these off-balance sheet
financial instruments. AIGFP requires credit enhancements in connection with
specific transactions based on, among other things, the creditworthiness of the
counterparties and the transaction's size and maturity. In addition, AIGFP's
derivative transactions are generally documented under ISDA Master Agreements.
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. The net replacement value
most closely represents the net credit risk to AIGFP or the maximum amount
exposed to potential loss. The net replacement value of all interest rate,
currency, and equity swaps, swaptions and forward commitments at December 31,
1997, approximated $6.65 billion. The net replacement value for futures and
forward contracts at December 31, 1997, approximated $50.0 million.
AIGFP independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGFP's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The average credit rating of AIGFP's counterparties as a whole (as
measured by AIGFP) is equivalent to AA. The maximum potential loss will increase
or decrease during the life of the derivative commitments as a function of
maturity and market conditions.
59
61
Notes to Financial Statements (CONTINUED)
11. Commitments and Contingent Liabilities (continued)
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1997 and
December 31, 1996, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
(in thousands)
- --------------------------------------------------------------------------------------
Net Replacement Value
----------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 1997 1996
======================================================================================
Counterparty credit quality:
AAA $2,326,502 $ -- $2,326,502 $1,732,315
AA 2,273,532 37,572 2,311,104 2,021,878
A 1,153,007 12,403 1,165,410 1,461,063
BBB 608,448 47 608,495 1,150,420
Below investment grade 289,563 -- 289,563 26,293
- --------------------------------------------------------------------------------------
Total $6,651,052 $ 50,022 $6,701,074 $6,391,969
======================================================================================
At December 31, 1997 and December 31, 1996, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(in thousands)
- ----------------------------------------------------------------------------------------------
Net Replacement Value
----------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 1997 1996
==============================================================================================
Non-U.S. banks $2,213,366 $ 49,939 $2,263,305 $2,330,481
Insured municipalities 757,514 -- 757,514 656,373
U.S. industrials 513,958 83 514,041 894,942
Governmental 677,230 -- 677,230 894,284
Non-U.S. financial service companies 64,787 -- 64,787 34,383
Non-U.S. industrials 1,034,792 -- 1,034,792 497,839
Special purpose 163,109 -- 163,109 121,137
U.S. banks 584,915 -- 584,915 251,641
U.S. financial service companies 433,710 -- 433,710 534,965
Supranationals 207,671 -- 207,671 175,924
- ----------------------------------------------------------------------------------------------
Total $6,651,052 $ 50,022 $6,701,074 $6,391,969
==============================================================================================
AIGFP has entered into commitments to provide liquidity for certain
tax-exempt variable rate demand notes issued by municipal entities. The
agreements allow the holders, in certain circumstances, to tender the notes to
the issuer at par value. In the event a remarketing agent of an issuer is unable
to resell such tendered notes, AIGFP would be obligated to purchase the notes at
par value. With respect to certain notes that have been issued, AIGFP has
fulfilled its liquidity commitments by arranging bank liquidity facilities.
These banks agree to purchase the notes that AIGFP is otherwise obligated to
purchase in connection with a failed remarketing. It is the intention of AIGFP
to arrange similar liquidity with respect to the $205.0 million aggregate amount
of notes that are expected to be issued through 1999.
Securities sold, but not yet purchased represent obligations of AIGFP to
deliver specified securities at their contracted prices, and thereby create a
liability to repurchase the securities in the market at prevailing prices.
AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, believes that it
has in place effective procedures for evaluating and limiting the credit and
market risks to which it is subject. Management is not aware of any potential
counterparty defaults.
The net trading revenues for the twelve months ended December 31, 1997,
1996 and 1995 from AIGFP's operations were $452.1 million, $369.2 million and
$289.0 million, respectively.
(d) AIG Trading Group Inc. and its subsidiaries (AIGTG) becomes a party to
off-balance sheet financial instruments in the normal course of its business and
to reduce its currency, interest rate and commodity exposures.
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 1997 and December 31, 1996. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the December 31,
1997 balances based upon the expected timing of the future cash flows.
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
60
62
American International Group, Inc. and Subsidiaries
11. Commitments and Contingent Liabilities (continued)
date of a specified instrument, at a specified price or yield. Risks arise as a
result of movements in current market prices from contracted prices and the
potential inability of counterparties to meet their obligations under the
contracts. Options are contracts that allow the holder of the option to purchase
or sell the underlying commodity, currency or index at a specified price and
within, or at, a specified period of time. Risks arise as a result of movements
in current market prices from contracted prices, and the potential inability of
the counterparties to meet their obligations under the contracts. As a writer of
options, AIGTG generally receives an option premium and then manages the risk of
any unfavorable change in the value of the underlying commodity, currency or
index. At December 31, 1997, the contractual amount of AIGTG's futures, forward
and option contracts approximated $412.64 billion.
The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
1997 and December 31, 1996. These values do not represent the credit risk to
AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss within a product category. At December 31, 1997, the net
replacement value of AIGTG's futures, forward and option contracts and interest
rate and currency swaps approximated $5.0 billion.
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1997 and December 31, 1996:
(in thousands)
- ----------------------------------------------------------------------------------------------------------------
Remaining Life
-------------------------------------------------------------
One Two Through Six Through After Ten
Year Five Years Ten Years Years
================================================================================================================
Contractual amount of futures, forwards
and options:
Exchange traded futures and options $ 21,613,406 $ 2,931,347 $ 34,545 $ --
================================================================================================================
Forwards $ 253,917,460 $ 12,347,787 $ 1,694,038 $ --
================================================================================================================
Over the counter purchased options $ 39,756,245 $ 17,466,110 $ 2,932,703 $ 849,059
================================================================================================================
Over the counter sold options (a) $ 48,398,996 $ 9,595,654 $ 964,050 $ 134,771
================================================================================================================
Notional amount:
Interest rate swaps and forward rate agreements $ 60,017,945 $ 14,798,198 $ 2,376,472 $ 310,035
Currency swaps 628,542 5,134,893 725,898 --
- ----------------------------------------------------------------------------------------------------------------
Total $ 60,646,487 $ 19,933,091 $ 3,102,370 $ 310,035
================================================================================================================
Credit exposure:
Futures, forwards and purchased options
contracts and interest rate and
currency swaps:
Gross replacement value $ 9,330,966 $ 1,364,417 $ 308,435 $ 15,899
Master netting arrangements (5,277,129) (442,284) (70,963) (7,935)
Collateral (135,303) (73,991) (15,384) --
- ----------------------------------------------------------------------------------------------------------------
Net replacement value (b) $ 3,918,534 $ 848,142 $ 222,088 $ 7,964
================================================================================================================
(in thousands)
- -------------------------------------------------------------------------------
Total Total
1997 1996
===============================================================================
Contractual amount of futures, forwards
and options:
Exchange traded futures and options $ 24,579,298 $ 17,004,692
===============================================================================
Forwards $ 267,959,285 $216,775,766
===============================================================================
Over the counter purchased options $ 61,004,117 $ 27,377,217
===============================================================================
Over the counter sold options (a) $ 59,093,471 $ 31,049,529
===============================================================================
Notional amount:
Interest rate swaps and forward rate agreements $ 77,502,650 $ 66,306,480
Currency swaps 6,489,333 5,853,194
- -------------------------------------------------------------------------------
Total $ 83,991,983 $ 72,159,674
===============================================================================
Credit exposure:
Futures, forwards and purchased options
contracts and interest rate and
currency swaps:
Gross replacement value $ 11,019,717 $ 7,489,766
Master netting arrangements (5,798,311) (3,872,291)
Collateral (224,678) (149,347)
- -------------------------------------------------------------------------------
Net replacement value (b) $ 4,996,728 $ 3,468,128
===============================================================================
(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.
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.
61
63
Notes to Financial Statements (CONTINUED)
11. Commitments and Contingent Liabilities (continued)
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1997 and
December 31, 1996, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Net Replacement Value
-----------------------
1997 1996
================================================================================
Counterparty credit quality:
AAA $ 752,741 $ 447,236
AA 2,503,289 1,075,713
A 1,023,650 1,133,332
BBB 342,695 518,485
Below investment grade 98,425 115,810
Not externally rated, including exchange
traded futures and options* 275,928 177,552
- --------------------------------------------------------------------------------
Total $4,996,728 $3,468,128
================================================================================
Counterparty breakdown by industry:
Non-U.S. banks $2,685,998 $1,269,399
U.S. industrials 163,484 761,634
Governmental 135,269 121,278
Non-U.S. financial service companies 260,412 186,476
Non-U.S. industrials 167,835 192,669
U.S. banks 560,388 309,154
U.S. financial service companies 747,414 449,966
Exchanges* 275,928 177,552
- --------------------------------------------------------------------------------
Total $4,996,728 $3,468,128
================================================================================
* Exchange traded futures and options are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly
settled on a daily basis.
Spot commodities sold but not yet purchased represent obligations of AIGTG
to deliver spot commodities at their contracted prices and thereby create a
liability to repurchase the spot commodities in the market at prevailing prices.
AIGTG limits its risks by holding offsetting positions. In addition, AIGTG
monitors and controls its risk exposures through various monitoring systems
which evaluate AIGTG's market and credit risks, and through credit approvals and
limits. At December 31, 1997, AIGTG did not have a significant concentration of
credit risk from either an individual counterparty or group of counterparties.
The net trading revenues for the twelve months ended December 31, 1997,
1996 and 1995 from AIGTG's operations were $561.8 million, $288.6 million and
$317.2 million, respectively.
At December 31, 1997, AIGTG had issued and outstanding $169.8 million
principal amount of letters of credit. These letters of credit were issued
primarily to various exchanges.
AIG has issued unconditional guarantees with respect to the prompt
payment, when due, of all present and future obligations and liabilities of
AIGFP and AIGTG arising from transactions entered into by AIGFP and AIGTG.
(e) At December 31, 1997, ILFC had committed to purchase or had secured
positions for 328 aircraft deliverable from 1998 through 2006 at an estimated
aggregate purchase price of $17.7 billion. ILFC will be required to find
customers for any aircraft presently on order and any aircraft to be ordered,
and it must arrange financing for portions of the purchase price of such
equipment.
In the normal course of business, ILFC enters into interest rate swaps,
swaptions and interest rate floors (derivatives transactions). The objective is
to lower ILFC's overall borrowing cost and to maintain an optimal mix of
variable and fixed rate interest obligations. ILFC accounts for its derivatives
transactions on an accrual basis. Accrued future payments or receipts are
reflected in operating income in the period incurred or earned.
Credit risk exposure arises from the potential that the counterparty may
not perform under these agreements with respect to the derivatives transactions.
ILFC minimizes such exposure through transacting with recognized U.S. derivative
dealers rated at least A by a recognized statistical rating organization. The
counterparties to the majority of the derivatives transactions are rated AAA.
ILFC monitors each counterparty's assigned credit rating throughout the life of
each of the derivatives transactions. ILFC currently does not require security
nor is security required by its counterparties for its positions. ILFC has the
right to require security under certain circumstances.
62
64
American International Group, Inc. and Subsidiaries
11. Commitments and Contingent Liabilities (continued)
The following table presents ILFC's notional amounts of its interest rate
swaps, swaptions and interest rate floors by maturity at December 31, 1997 and
1996:
(in thousands)
- --------------------------------------------------------------------------------
Remaining Life
----------------------------------
Two to After Five Total Total
One Year Five Years Years 1997 1996
================================================================================
Interest Rate:
Swaps $ 365,806 $ 659,931 $ 261,790 $1,287,527 $1,349,234
Swaptions* -- 100,000 -- 100,000 100,000
Floors 33,409 440,221 393,435 867,065 900,434
- -------------------------------------------------------------------------------
Total $ 399,215 $1,200,152 $ 655,225 $2,254,592 $2,349,668
================================================================================
* Swaptions obligate ILFC to convert certain fixed note obligations to
floating rate obligations if the swaption purchaser chooses to exercise.
These amounts do not represent credit exposure.
AIG does not anticipate any losses in connection with the aforementioned
activities that would have a material effect on its financial condition or
results of operations.
(f) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter collectively
referred to as environmental claims) and indemnity claims asserting injuries
from asbestos. Estimation of asbestos and environmental claims loss reserves is
a difficult process, as these claims, which emanate from policies written in
1984 and prior years, cannot be estimated by conventional reserving techniques.
Asbestos and environmental claims development is affected by factors such as
inconsistent court resolutions, the broadening of the intent of policies and
scope of coverage and increasing number of new claims. AIG and other industry
members have and will continue to litigate the broadening judicial
interpretation of policy coverage and the liability issues. If the courts
continue in the future to expand the intent of the policies and the scope of the
coverage, as they have in the past, additional liabilities would emerge for
amounts in excess of reserves held. This emergence cannot now be reasonably
estimated, but could have a material impact on AIG's future operating results.
The reserves carried for these claims as at December 31, 1997 ($2.31 billion
gross; $787.3 million net) are believed to be adequate as these reserves are
based on known facts and current law.
A summary of reserve activity, including estimates for applicable incurred
but not reported losses and loss expenses, relating to asbestos and
environmental claims separately and combined at December 31, 1997, 1996 and 1995
was as follows:
(in millions)
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Gross Net Gross Net Gross Net
======================================================================================================================
Asbestos:
Reserve for losses and loss expenses
at beginning of year $ 875.9 $ 172.3 $ 744.8 $ 127.9 $ 686.0 $ 130.2
Losses and loss expenses incurred 238.4 68.3 392.5 102.7 197.7 20.5
Losses and loss expenses paid (272.2) (45.5) (261.4) (58.3) (138.9) (22.8)
- ----------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 842.1 $ 195.1 $ 875.9 $ 172.3 $ 744.8 $ 127.9
======================================================================================================================
Environmental:
Reserve for losses and loss expenses
at beginning of year $1,427.4 $ 570.6 $1,197.9 $ 379.3 $ 728.1 $ 200.1
Losses and loss expenses incurred 223.1 85.0 379.6 240.3 684.9 231.7
Losses and loss expenses paid (183.4) (63.4) (150.1) (49.0) (215.1) (52.5)
- ----------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,467.1 $ 592.2 $1,427.4 $ 570.6 $1,197.9 $ 379.3
======================================================================================================================
Combined:
Reserve for losses and loss expenses
at beginning of year $2,303.3 $ 742.9 $1,942.7 $ 507.2 $1,414.1 $ 330.3
Losses and loss expenses incurred 461.5 153.3 772.1 343.0 882.6 252.2
Losses and loss expenses paid (455.6) (108.9) (411.5) (107.3) (354.0) (75.3)
- ----------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $2,309.2 $ 787.3 $2,303.3 $ 742.9 $1,942.7 $ 507.2
======================================================================================================================
63
65
Notes to Financial Statements (CONTINUED)
12. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FASB 107) requires disclosure of fair value
information about financial instruments, as defined therein, for which it is
practicable to estimate such fair value. These financial instruments may or may
not be recognized in the consolidated balance sheet. In the measurement of the
fair value of certain of the financial instruments, quoted market prices were
not available and other valuation techniques were utilized. These derived fair
value estimates are significantly affected by the assumptions used. FASB 107
excludes certain financial instruments, including those related to insurance
contracts.
The following methods and assumptions were used by AIG in estimating the
fair value of the financial instruments presented:
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Fixed maturity securities: Fair values for fixed maturity securities
carried at amortized cost or at market value were generally based upon quoted
market prices. For certain fixed maturity securities for which market prices
were not readily available, fair values were estimated using values obtained
from independent pricing services. No other fair valuation techniques were
applied to these securities as AIG believes it would have to expend excessive
costs for the benefits derived.
Equity securities: Fair values for equity securities were based upon
quoted market prices.
Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.
Trading assets and trading liabilities: Fair values for trading assets and
trading liabilities approximate the carrying values presented in the
consolidated balance sheet.
Securities available for sale: Fair values for securities available for
sale and related hedges were based on quoted market prices. For securities and
related hedges for which market prices were not readily available, fair values
were estimated using quoted market prices of comparable investments.
Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.
Spot commodities: Fair values for spot commodities were based on current
market prices.
Unrealized gains and losses on interest rate and currency swaps, options
and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among other
things, current interest, foreign exchange and volatility rates, as applicable.
Securities purchased (sold) under agreements to resell (repurchase), at
contract value: As these securities (obligations) are short-term in nature, the
contract values approximate fair values.
Other invested assets: For assets for which market prices were not readily
available, fair valuation techniques were not applied as AIG believes it would
have to expend excessive costs for the benefits derived.
Policyholders' contract deposits: Fair values of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
GIAs: Fair values of AIG's obligations under investment type agreements
were estimated using discounted cash flow calculations based on interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued. Additionally, AIG follows a
policy of minimizing interest rate risks associated with GIAs by entering into
swap transactions.
Securities and spot commodities sold but not yet purchased: The carrying
amounts for the financial instruments approximate fair values. Fair values for
spot commodities sold short were based on current market prices.
Deposits due to banks and other depositors: To the extent certain amounts
are not demand deposits or certificates of deposit which mature in more than one
year, fair values were not calculated as AIG believes it would have to expend
excessive costs for the benefits derived.
Commercial paper: The carrying amount of AIG's commercial paper borrowings
approximates fair value.
Notes, bonds, loans and mortgages payable: Where practical, the fair
values of these obligations were estimated using discounted cash flow
calculations based upon AIG's current incremental borrowing rates for similar
types of borrowings with maturities consistent with those remaining for the debt
being valued.
64
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American International Group, Inc. and Subsidiaries
12. Fair Value of Financial Instruments (continued)
The carrying values and fair values of AIG's financial instruments at
December 31, 1997 and December 31, 1996 and the average fair values with respect
to derivative positions during 1997 and 1996 were as follows:
(in thousands)
- ------------------------------------------------------------------------------------------------------
1997
---------------------------------------
Average
Carrying Fair Fair
Value Value Value
======================================================================================================
Fixed maturities $51,565,986 $52,692,748 $ --
Equity securities 5,348,019 5,348,019 --
Mortgage loans on real estate, policy and collateral loans 7,919,764 7,966,673 --
Securities available for sale 9,145,317 9,145,317 8,652,779
Trading securities 3,974,561 3,974,561 2,904,702
Spot commodities 459,517 459,517 450,292
Unrealized gain on interest rate and currency swaps, options
and forward transactions 7,422,290 7,422,290 7,225,716
Trading assets 6,715,486 6,715,486 5,480,796
Securities purchased under agreements to resell 4,551,191 4,551,191 --
Other invested assets 4,681,423 4,681,423 --
Short-term investments 3,332,542 3,332,542 --
Cash 86,917 86,917 --
Policyholders' contract deposits 10,323,112 10,432,709 --
Borrowings under obligations of guaranteed
investment agreements 8,000,326 8,675,838 --
Securities sold under agreements to repurchase 2,706,310 2,706,310 --
Trading liabilities 5,366,421 5,366,421 4,548,789
Securities and spot commodities sold but not yet purchased 5,171,680 5,171,680 3,647,536
Unrealized loss on interest rate and currency swaps, options
and forward transactions 5,979,571 5,979,571 5,270,414
Deposits due to banks and other depositors 972,423 972,423 --
Commercial paper 3,374,907 3,374,907 --
Notes, bonds, loans and mortgages payable 13,885,412 13,959,672 --
======================================================================================================
(in thousands)
- ------------------------------------------------------------------------------------------------------
1996
---------------------------------------
Average
Carrying Fair Fair
Value Value Value
======================================================================================================
Fixed maturities $48,625,226 $49,345,449 $ --
Equity securities 6,065,640 6,065,640 --
Mortgage loans on real estate, policy and collateral loans 7,876,820 7,881,348 --
Securities available for sale 9,785,909 9,785,909 6,172,883
Trading securities 2,357,812 2,357,812 2,344,717
Spot commodities 204,705 204,705 278,941
Unrealized gain on interest rate and currency swaps, options
and forward transactions 6,906,012 6,906,012 6,450,376
Trading assets 3,793,433 3,793,433 3,427,781
Securities purchased under agreements to resell 1,642,591 1,642,591 --
Other invested assets 2,915,302 2,915,302 --
Short-term investments 2,008,123 2,008,123 --
Cash 58,740 58,740 --
Policyholders' contract deposits 9,803,409 9,888,685 --
Borrowings under obligations of guaranteed
investment agreements 5,723,228 6,195,954 --
Securities sold under agreements to repurchase 3,039,423 3,039,423 --
Trading liabilities 3,313,508 3,313,508 3,227,531
Securities and spot commodities sold but not yet purchased 1,568,542 1,568,542 263,722
Unrealized loss on interest rate and currency swaps, options
and forward transactions 5,414,433 5,414,433 4,976,258
Deposits due to banks and other depositors 1,206,374 1,206,374 --
Commercial paper 4,497,976 4,497,976 --
Notes, bonds, loans and mortgages payable 13,299,310 13,596,511 --
======================================================================================================
Off-balance sheet financial instruments: Financial instruments which are
not currently recognized in the consolidated balance sheet of AIG are
principally commitments to extend credit and financial guarantees. The
unrecognized fair values of these instruments represent fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
current agreements and the counterparties' credit standings. No valuation was
made as AIG believes it would have to expend excessive costs for the benefits
derived.
13. Stock Compensation Plans
At December 31, 1997, AIG had two types of stock-based compensation plans. One
was a stock option plan; the other, an employee stock purchase plan. AIG applies
APB Opinion 25 "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation costs
have been recognized for either plan.
Had compensation costs for these plans been determined consistent with the
method of Statement of Financial Accounting Standards No. 123 "Accounting for
Awards of Stock Based Compensation to Employees," AIG's net income and earnings
per share for the years ended December 31, 1997, 1996 and 1995 would have been
reduced to the pro forma amounts as follows:
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Net income:
As reported $ 3,332,335 $ 2,897,257 $ 2,510,383
Pro forma 3,323,289 2,892,422 2,509,261
Earnings per share-
diluted:
As reported $4.73 $4.08 $3.52
Pro forma 4.71 4.08 3.52
================================================================================
The fair value of stock grants included in the pro forma amounts is not
necessarily indicative of future effects on net income and earnings per share.
(a) Stock Option Plan: On December 19, 1991, the AIG Board of Directors
adopted a 1991 employee stock option plan (the 1991 Plan), which provided that
options to purchase a maximum of 6,750,000 shares of common stock could be
granted to officers and other key employees at prices not less than fair market
value at the date of grant. Both the 1991 Plan, and the options with respect to
168,580 shares granted
65
67
Notes to Financial Statements (CONTINUED)
13. Stock Compensation Plans (continued)
thereunder on December 19, 1991, were approved by shareholders at the 1992
Annual Meeting. An amendment to the 1991 Plan, approved by shareholders at the
1997 Annual Meeting, increased the aggregate number of shares available for
grant to 11,812,500 shares to assure that adequate shares are available for
grant during the remaining term of the 1991 Plan. A second amendment to the 1991
Plan limits the maximum number of shares as to which stock options may be
granted to any employee in any one year to 135,000 shares. At December 31, 1997,
6,648,316 shares were reserved for future grants under the amended 1991 Plan. As
of March 18, 1992, no further options could be granted under the 1987 employee
stock option plan (the 1987 Plan), but outstanding options granted under the
1987 Plan continue in force until exercise or expiration. At December 31, 1997,
there were 6,206,676 shares reserved for issuance under these plans.
Under each plan, 25 percent of the options granted become exercisable on
the anniversary of the date of grant in each of the four years following that
grant and all options expire 10 years from the date of the grant. As of December
31, 1997, outstanding options granted with respect to 4,075,338 shares qualified
for Incentive Stock Option treatment under the Economic Recovery Tax Act of
1981.
Additional information with respect to AIG's plans at December 31, 1997,
and changes for the three years then ended, was as follows:
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
==========================================================================================================================
Shares Under Option:
Outstanding at beginning of year 6,470,656 $ 39.18 6,196,069 $ 32.59 6,222,123 $ 26.87
Granted 743,550 105.78 935,100 72.37 836,512 60.22
Exercised (935,321) 26.11 (591,827) 22.25 (775,806) 16.56
Forfeited (72,209) 52.10 (68,686) 42.33 (86,760) 32.14
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 6,206,676 $ 48.98 6,470,656 $ 39.18 6,196,069 $ 32.59
- --------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 4,228,252 $ 34.51 4,354,324 $ 28.76 4,124,275 $ 24.67
- --------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per
share of options granted $ 39.31 $ 27.34 $ 21.95
==========================================================================================================================
Information about stock options outstanding at December 31, 1997, is
summarized as follows:
- --------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted Weighted Weighted
Number Average Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
==============================================================================================================
$12.09- 17.37 741,294 1.7 years $ 15.08 741,294 $15.08
21.33- 28.67 1,089,691 3.0 years 23.70 1,089,691 23.70
35.33- 40.67 1,275,951 5.4 years 37.27 1,269,299 37.26
42.89- 53.33 804,951 7.0 years 43.65 578,522 43.47
57.58- 62.92 694,702 8.0 years 62.09 335,162 62.12
65.83- 73.75 857,137 8.9 years 73.02 214,284 73.02
82.83-106.50 742,950 9.9 years 105.78 -- --
- --------------------------------------------------------------------------------------------------------------
6,206,676 4,228,252
==============================================================================================================
The fair values of stock options granted during the years ended December
31, 1997, 1996 and 1995 were $29,226,000, $25,566,000 and $18,356,000,
respectively. The fair value of each option is estimated on the date of the
grant using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for grants in 1997,
1996 and 1995, respectively: dividend yields of 0.30 percent, 0.33 percent and
0.32 percent; expected volatilities of 20.0 percent, 20.0 percent and 20.4
percent; risk-free interest rates of 6.03 percent, 6.29 percent and 5.77 percent
and expected terms of 7 years.
(b) Employee Stock Purchase Plan: AIG's 1984 employee stock purchase plan
was adopted at its 1984 shareholders' meeting and became effective as of July 1,
1984. Eligible employees could receive privileges to purchase up to an aggregate
of 2,953,125 shares of AIG common stock, at a price equal to 85 percent of the
fair market value on the date of grant of the purchase privilege. Purchase
privileges were granted annually and were limited to the number of whole shares
that could be purchased by an amount equal to 5 percent of an employee's annual
salary or $5,500, whichever was less.
66
68
American International Group, Inc. and Subsidiaries
13. Stock Compensation Plans (continued)
AIG's 1996 employee stock purchase plan was adopted at its 1996
shareholders' meeting and became effective as of July 1, 1996, replacing the
1984 plan. Eligible employees may receive privileges to purchase up to an
aggregate of 1,500,000 shares of AIG common stock, at a price equal to 85
percent of the fair market value on the date of the grant of the purchase
privilege. Purchase privileges are granted annually and are limited to the
number of whole shares that can be purchased by an amount equal to 5 percent of
an employee's annual salary or $5,500, whichever is less. Beginning with the
January 1, 1998 subscription, the maximum allowable purchase limitation
increased to 10 percent of an employee's annual salary or $10,000, whichever is
less and the eligibility requirement was reduced to one year. In all other
respects, the 1996 plan is identical to the 1984 plan.
There were 69,339 shares, 219,326 shares and 228,609 shares issued under
the 1984 plan at weighted average prices of $52.76, $44.59 and $33.48 for the
years ended December 31, 1997, 1996 and 1995, respectively. The excess or
deficit of the proceeds over the par value or cost of the common stock issued
was credited or charged to additional paid-in capital.
There were 147,085 shares issued under the 1996 plan at a weighted average
price of $57.76 for the year ended December 31, 1997. The excess or deficit of
the proceeds over the par value or cost of the common stock issued was credited
or charged to additional paid-in capital.
As of December 31, 1997, there were 181,049 shares of common stock
subscribed to at a weighted average price of $77.37 per share pursuant to grants
of privileges under the 1996 plan. There were 1,171,866 shares available for the
grant of future purchase privileges under the 1996 plan at December 31, 1997.
The fair values of purchase privileges granted during the years ended
December 31, 1997, 1996 and 1995 were $3,625,000, $3,039,000 and $2,005,000,
respectively. The weighted average fair values per share of those purchase
rights granted in 1997, 1996 and 1995 were $20.02, $13.14 and $9.93,
respectively. The fair value of each purchase right is estimated on the date of
the subscription using the Black-Scholes model.
The following weighted average assumptions were used for grants in 1997,
1996 and 1995, respectively: dividend yields of 0.30 percent, 0.37 percent and
0.32 percent; expected volatilities of 26.0 percent, 21.9 percent and 16.9
percent; risk-free interest rates of 5.81 percent, 5.54 percent and 5.64
percent; and expected terms of 1 year.
14. Employee Benefits
(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation.
AIG's U.S. retirement plan is a qualified, noncontributory, defined
benefit plan. All qualified employees who have attained age 21 and completed
twelve months of continuous service are eligible to participate in this plan. An
employee with 5 or more years of service is entitled to pension benefits
beginning at normal retirement at age 65. Benefits are based upon a percentage
of average final compensation multiplied by years of credited service limited to
44 years of credited service. The average final compensation is subject to
certain limitations. Annual funding requirements are determined based on the
"projected unit credit" cost method which attributes a pro rata portion of the
total projected benefit payable at normal retirement to each year of credited
service.
AIG has adopted a Supplemental Executive Retirement Program (Supplemental
Plan) to provide additional retirement benefits to designated executives and key
employees. Under the Supplemental Plan, the annual benefit, not to exceed 60
percent of average final compensation, accrues at a percentage of average final
pay multiplied for each year of credited service reduced by any benefits from
the current and any predecessor retirement plans, Social Security, if any, and
from any qualified pension plan of prior employers. The Supplemental Plan also
provides a benefit equal to the reduction in benefits payable under the AIG
retirement plan as a result of Federal limitations on benefits payable
thereunder. Currently, the Supplemental Plan is unfunded.
Eligibility for participation in the various non-U.S. retirement plans is
either based on completion of a specified period of continuous service or date
of hire, subject to age limitation. Where non-U.S. retirement plans are defined
benefit plans, they are generally based on the employees' years of credited
service and average compensation in the years preceding retirement.
Assumptions associated with the projected benefit obligation and expected
long-term rate of return on plan assets at December 31, 1997 were as follows:
- --------------------------------------------------------------------------------
Range of
Non-U.S. Plans* U.S. Plans
================================================================================
Discount rate 3.5-10.0% 7.0%
Salary increase rate 2.5-10.0 5.0
Expected long-term rate of return on plan assets 4.0- 9.2 9.0
================================================================================
* The ranges for the non-U.S. plans reflect the local socioeconomic environments
in which AIG operates.
67
69
Notes to Financial Statements (CONTINUED)
14. Employee Benefits (continued)
The following table sets forth the funded status of the various pension
plans and the amounts recognized in the accompanying consolidated balance sheet
as of December 31, 1997 and 1996:
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
----------------------------------- ----------------------------------
Non-U.S. U.S. Non-U.S. U.S.
Plans Plans Total Plans Plans Total
===================================================================================================================================
Plan assets at fair value* $ 159,734 $ 297,433 $ 457,167 $ 171,037 $ 230,767 $ 401,804
- -----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefits earned prior to valuation date:
Vested 234,264 206,242 440,506 240,023 155,738 395,761
Nonvested 29,414 30,833 60,247 30,222 22,222 52,444
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 263,678 237,075 500,753 270,245 177,960 448,205
Additional benefits based on estimated
future salary levels 66,307 126,282 192,589 69,981 94,956 164,937
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 329,985 363,357 693,342 340,226 272,916 613,142
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets 170,251 65,924 236,175 169,189 42,149 211,338
- -----------------------------------------------------------------------------------------------------------------------------------
Unrecognized prior service cost (14,322) (20,827) (35,149) (19,288) (17,102) (36,390)
Unrecognized net gain (loss) (64,770) 16,356 (48,414) (59,897) 29,550 (30,347)
Unamortized balance of the initial transition amounts (11,583) (7,635) (19,218) (15,241) (9,137) (24,378)
- -----------------------------------------------------------------------------------------------------------------------------------
Net amounts to be applied to future periods (90,675) (12,106) (102,781) (94,426) 3,311 (91,115)
Adjustment to reflect minimum liability 47,965 4,031 51,996 61,024 3,217 64,241
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued pension liability $ 127,541 $ 57,849 $ 185,390 $ 135,787 $ 48,677 $ 184,464
===================================================================================================================================
* Plan assets are invested primarily in fixed-income securities and listed
stocks.
Net pension cost for the years ended December 31, 1997, 1996 and 1995
included the following components:
(in thousands)
- --------------------------------------------------------------------------------
1997 1996 1995
================================================================================
Cost of benefits earned during the period $ 48,648 $ 47,783 $ 40,015
Interest cost on the projected benefit
obligation 34,383 31,603 27,320
Actual return on all retirement plan assets (66,769) (41,387) (53,904)
Net amortization and deferral of
actuarial gains and losses 39,743 17,918 30,114
Amortization of the initial
transition amount 3,093 3,323 3,720
- --------------------------------------------------------------------------------
Net pension expense* $ 59,098 $ 59,240 $ 47,265
================================================================================
* Net pension expense included $31,323, $34,584 and $30,978 related to non-U.S.
plans for 1997, 1996 and 1995, respectively.
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k)
plan), which, during the three years ended December 31, 1997, provided for
salary reduction contributions by employees and matching contributions by AIG of
up to 6 percent of annual salary depending on the employees' years of service.
(c) In addition to AIG's defined benefit pension plan, AIG and its
subsidiaries provide a postretirement benefit program for medical care and life
insurance, domestically and in certain foreign countries. Eligibility in the
various plans is generally based upon completion of a specified period of
eligible service and reaching a specified age. Benefits vary by geographic
location.
AIG's U.S. postretirement medical and life insurance benefits are based
upon the employee electing immediate retirement and having a minimum of ten
years of service. Retirees and their dependents who were age 65 by May 1, 1989
participate in the medical plan at no cost. Employees who retired after May 1,
1989 and on or prior to January 1, 1993 pay the active employee premium if under
age 65 and 50 percent of the active employee premium if over age 65. Retiree
contributions are subject to adjustment annually. Other cost sharing features of
the medical plan include deductibles, coinsurance and Medicare coordination and
a lifetime maximum benefit of $1,000,000. The maximum life insurance benefit
prior to age 70 is $32,500, with a maximum of $25,000 thereafter.
Effective January 1, 1993, both plans' provisions were amended. Employees
who retire after January 1, 1993 are required to pay the actual cost of the
medical benefits reduced by a credit which is based upon age and years of
service at retirement. The life insurance benefit varies by age at retirement
from $5,000 for retirement at ages 55 through 59 to $15,000 for retirement at
ages 65 and over.
Assumptions associated with the accrued postretirement benefit liability
at December 31, 1997 were as follows:
- --------------------------------------------------------------------------------
Non-U.S. U.S.
Plans Plans
================================================================================
Discount rate 7.0-10.0% 7.0%
Medical trend rate year 1* 12.0 7.5
Medical trend rate year 3 and 9 6.0 5.5
================================================================================
* The Medical trend rate grades downward from years 1 through 3 domestically and
years 1 through 9 for the foreign benefits. The trend rates remain level
thereafter.
68
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American International Group, Inc. and Subsidiaries
14. Employee Benefits (continued)
The following table sets forth the liability for the accrued
postretirement benefits of the various plans, and amounts recognized in the
accompanying consolidated balance sheet as of December 31, 1997 and 1996. These
plans are not funded currently.
(in thousands)
- -------------------------------------------------------------------------------
Non-U.S. U.S.
Plans Plans Total
===============================================================================
1997
Accumulated postretirement benefit obligation:
Retirees $ 1,923 $ 49,030 $ 50,953
Fully eligible active employees 6,539 2,436 8,975
Other active employees 10,048 18,529 28,577
- -------------------------------------------------------------------------------
18,510 69,995 88,505
- -------------------------------------------------------------------------------
Unrecognized net loss -- (11,277) (11,277)
Unrecognized prior service cost -- 22,132 22,132
- -------------------------------------------------------------------------------
Accrued postretirement benefit
liabilities $ 18,510 $ 80,850 $ 99,360
===============================================================================
1996
Accumulated postretirement benefit obligation:
Retirees $ 2,025 $ 44,568 $ 46,593
Fully eligible active employees 6,127 2,127 8,254
Other active employees 8,757 11,926 20,683
- -------------------------------------------------------------------------------
16,909 58,621 75,530
- -------------------------------------------------------------------------------
Unrecognized net loss -- (5,299) (5,299)
Unrecognized prior service cost -- 27,287 27,287
- -------------------------------------------------------------------------------
Accrued postretirement benefit
liabilities $ 16,909 $ 80,609 $ 97,518
===============================================================================
The net periodic postretirement costs for the years ended December 31,
1997, 1996 and 1995 included the following components:
(in thousands)
- --------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
================================================================================
1997
Cost of benefits earned during
the period $ 1,617 $ 606 $ 2,223
Interest cost on accumulated
postretirement benefit obligations 4,225 1,431 5,656
Amortization of prior service cost (1,344) (172) (1,516)
Amortization of net actuarial losses 80 31 111
- --------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $ 4,578 $ 1,896 $ 6,474
================================================================================
1996
Cost of benefits earned during
the period $ 1,315 $ 574 $ 1,889
Interest cost on accumulated
postretirement benefit obligations 3,992 1,307 5,299
Amortization of prior service cost (1,344) (172) (1,516)
Amortization of net actuarial losses 59 22 81
- --------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $ 4,022 $ 1,731 $ 5,753
================================================================================
1995
Cost of benefits earned during
the period $ 1,011 $ 448 $ 1,459
Interest cost on accumulated
postretirement benefit obligations 3,744 1,246 4,990
Amortization of prior service cost (1,344) (172) (1,516)
- --------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $ 3,411 $ 1,522 $ 4,933
================================================================================
69
71
Notes to Financial Statements (CONTINUED)
14. Employee Benefits (continued)
The medical trend rate assumptions have a significant effect on the
amounts reported. Increasing each trend rate by 1 percent in each year would
increase the accumulated postretirement benefit obligations as of December 31,
1997 by $6.0 million and the aggregate service and interest cost components of
the periodic postretirement benefit costs for 1997 by $557,000.
(d) AIG has certain benefits provided to former or inactive employees who
are not retirees. Certain of these benefits are insured and expensed currently;
other expenses are provided for currently. Such uninsured expenses include long
and short-term disability medical and life insurance continuation, short-term
disability income continuation and COBRA medical subsidies. The provision for
these benefits at December 31, 1997 was $5.6 million. The incremental expense
was insignificant.
15. Leases
(a) AIG and its subsidiaries occupy leased space in many locations under various
long-term leases and have entered into various leases covering the long-term use
of data processing equipment.
At December 31, 1997, the future minimum lease payments under operating
leases were as follows:
(in thousands)
================================================================================
1998 $218,319
1999 152,004
2000 112,630
2001 96,075
2002 75,747
Remaining years after 2002 225,693
- --------------------------------------------------------------------------------
Total $880,468
================================================================================
Rent expense approximated $240,600,000, $219,100,000 and $215,600,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 1997 was as follows:
(in thousands)
================================================================================
1998 $1,460,145
1999 1,248,816
2000 962,415
2001 722,347
2002 552,554
Remaining years after 2002 792,066
- --------------------------------------------------------------------------------
Total $5,738,343
================================================================================
Flight equipment is leased, under operating leases, for periods ranging
from one to ten years.
16. Ownership and Transactions with Related Parties
(a) Ownership: The directors and officers of AIG, the directors and holders of
common stock of C. V. Starr & Co., Inc. (Starr), a private holding company, The
Starr Foundation, Starr International Company, Inc. (SICO), a private holding
company, and Starr own or otherwise control approximately 29 percent of the
voting stock of AIG. Six directors of AIG also serve as directors of Starr and
SICO.
(b) Transactions with Related Parties: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries
for the production and management of insurance business. There are no
significant receivables from/payables to related parties at December 31, 1997.
Net commission payments to Starr aggregated approximately $46,200,000 in 1997,
$48,400,000 in 1996 and $42,600,000 in 1995, from which Starr is required to pay
commissions due originating brokers and its operating expenses. AIG also
received approximately $13,900,000 in 1997, $15,300,000 in 1996 and $14,100,000
in 1995 from Starr and paid approximately $35,000 in 1997 and $34,000 in both
1996 and 1995 to Starr in rental fees. AIG also received approximately $900,000
in 1997, $1,000,000 in 1996 and $1,500,000 in 1995 from SICO and paid
approximately $1,200,000 in each of the years 1997, 1996 and 1995 to SICO as
reimbursement for services rendered at cost. AIG also paid to SICO $3,900,000 in
1997, $4,400,000 in 1996 and $5,000,000 in 1995 in rental fees.
17. Segment Information
(a) AIG's operations are conducted principally through four business segments.
These segments and their respective operations are as follows:
Parent - AIG parent is a holding company owning directly or indirectly all
of the capital stock of certain insurance, insurance related and financial
services companies in both the United States and abroad.
General Insurance - AIG's general insurance operations are multiple line
property and casualty companies writing substantially all lines of insurance
other than title insurance. The general insurance operations also include
mortgage guaranty insurance operations.
Life Insurance - AIG's life insurance operations offer a broad line of
individual and group life, annuity and accident and health policies.
Financial Services - AIG's financial services operations engage in
diversified financial services for affiliated and non-affiliated companies. Such
operations include, but are not limited to, asset management, short-term cash
management and financing, premium financing, interest rate, currency, equity and
commodity derivative products business, various commodities trading and market
making activities, banking services and operations and leasing and remarketing
of flight equipment.
70
72
American International Group, Inc. and Subsidiaries
17. Segment Information (continued)
The following table is a summary of the operations by major operating
segments for the years ended December 31, 1997, 1996 and 1995:
Industry Segments-1997
----------------------------------------------------------------------------------------
Adjustments
General Life Financial and
(in thousands) Parent Insurance Insurance Services Eliminations(a) Consolidated
=============================================================================================================================
Revenues $ 1,480,649(b) $14,402,738 $12,843,294 $ 3,273,478 $ (1,397,859) $ 30,602,300
=============================================================================================================================
Income before income taxes $ 1,480,649(b) $ 2,471,866 $ 1,571,483 $ 701,337 $ (1,526,437) $ 4,698,898
=============================================================================================================================
Equity in net income of
partially-owned companies $ 55,698 $ 56,183 $ 899 $ -- $ -- $ 112,780
=============================================================================================================================
Depreciation expense $ 84 $ 88,543 $ 56,356 $ 653,599 $ 74,323 $ 872,905
=============================================================================================================================
Capital expenditures $ 3,545 $ 166,286 $ 345,618 $ 3,519,261(c) $ 169,817 $ 4,204,527(c)
=============================================================================================================================
Identifiable assets $25,288,425 $62,386,262 $52,103,905 $51,756,123 $(27,564,028) $163,970,687
=============================================================================================================================
Industry Segments-1996
---------------------------------------------------------------------------------------
Adjustments
General Life Financial and
(in thousands) Parent Insurance Insurance Services Eliminations(a) Consolidated
============================================================================================================================
Revenues $ 1,148,627(b) $13,610,598 $11,688,925 $ 2,555,477 $ (1,061,060) $ 27,942,567
============================================================================================================================
Income before income taxes $ 1,148,627(b) $ 2,205,567 $ 1,323,758 $ 523,906 $ (1,188,636) $ 4,013,222
============================================================================================================================
Equity in net income of
partially-owned companies $ 50,488 $ 49,799 $ 73 $ 1,240 $ 157 $ 101,757
============================================================================================================================
Depreciation expense $ 42 $ 84,933 $ 54,102 $ 592,841 $ 73,663 $ 805,581
============================================================================================================================
Capital expenditures $ 342 $ 132,955 $ 236,945 $ 3,357,506(c)$ 167,355 $ 3,895,103(c)
============================================================================================================================
Identifiable assets $22,608,843 $58,791,735 $48,376,033 $43,861,592 $(25,207,201) $148,431,002
============================================================================================================================
Industry Segments-1995
---------------------------------------------------------------------------------------
Adjustments
General Life Financial and
(in thousands) Parent Insurance Insurance Services Eliminations(a) Consolidated
============================================================================================================================
Revenues $ 730,057(b) $13,021,380 $10,335,758 $ 2,204,090 $ (677,281) $ 25,614,004
============================================================================================================================
Income before income taxes $ 730,057(b) $ 2,032,286 $ 1,090,605 $ 417,741 $ (804,806) $ 3,465,883
============================================================================================================================
Equity in net income of
partially-owned companies $ 38,308 $ 43,204 $ 3,150 $ -- $ 358 $ 85,020
============================================================================================================================
Depreciation expense $ -- $ 91,112 $ 49,786 $ 522,141 $ 71,521 $ 734,560
============================================================================================================================
Capital expenditures $ 141 $ 127,827 $ 53,936 $ 3,359,468(c)$ 95,745 $ 3,637,117(c)
============================================================================================================================
Identifiable assets $20,445,762 $56,223,416 $43,280,484 $36,833,772 $(22,647,036) $134,136,398
============================================================================================================================
(a) Including other operations and other income (deductions)-net, which are not
deemed to be reportable segments.
(b) Substantially dividend income from subsidiaries.
(c) Relating primarily to ILFC.
71
73
Notes to Financial Statements (CONTINUED)
17. Segment Information (continued)
(b) The following table is a summary of AIG's general insurance operations
by major operating category for the years ended December 31, 1997, 1996 and
1995:
Net Premiums
---------------------------------------------------------------------------------
Written Earned
--------------------------------------- ---------------------------------------
(in thousands) 1997 1996 1995 1997 1996 1995
=======================================================================================================================
Underwriting:
Foreign $ 4,369,989 $ 4,324,847 $ 4,202,815 $ 4,068,809 $ 4,033,210 $ 4,083,200
Commercial casualty(a) 7,041,086 6,398,039 5,895,757 6,428,763 5,853,271 5,645,281
Commercial property 485,621 490,644 452,323 408,437 480,388 403,037
Pools and associations(b) 358,275 435,127 400,951 369,294 429,565 394,088
Personal lines(c) 811,742 725,295 692,747 790,448 734,042 628,068
Mortgage guaranty 340,816 317,727 248,429 355,289 324,339 252,057
- -----------------------------------------------------------------------------------------------------------------------
Total underwriting $13,407,529 $12,691,679 $11,893,022 $12,421,040 $11,854,815 $11,405,731
======================================================================================================================
Net investment income
Realized capital gains
General insurance operating income
=======================================================================================================================
Operating Income
------------------------------------
(in thousands) 1997 1996 1995
=========================================================================
Underwriting:
Foreign $ 497,356 $ 397,965 $ 305,031
Commercial casualty(a) 148,263 338,482 306,168
Commercial property (64,142) (136,638) (9,238)
Pools and associations(b) (225,497) (240,932) (263,291)
Personal lines(c) 18,633 (680) (5,961)
Mortgage guaranty 115,555 91,587 83,928
- -------------------------------------------------------------------------
Total underwriting 490,168 449,784 416,637
=====================================
Net investment income 1,853,523 1,690,798 1,547,572
Realized capital gains 128,175 64,985 68,077
------------------------------------
General insurance operating income $2,471,866 $2,205,567 $2,032,286
=========================================================================
(a) Including workers' compensation and retrospectively rated risks.
(b) Including involuntary pools.
(c) Including mass marketing and specialty programs.
(c) AIG's individual life insurance and group life insurance portfolio
accounted for 69 percent, 68 percent and 66 percent of AIG's consolidated life
insurance operating income before realized capital gains or losses for the years
ended December 31, 1997, 1996 and 1995, respectively. For those years, 92
percent, 92 percent and 94 percent, respectively, of consolidated life operating
income before realized capital gains or losses was derived from foreign
operations.
(d) A substantial portion of AIG's business is conducted in countries
other than the United States and Canada. The following table is a summary of
AIG's business by geographic segments. Allocations have been made on the basis
of location of operations and assets.
Geographic Segments-1997
-------------------------------------------------------
Other
(in thousands) Domestic(a) Far East Foreign Consolidated
====================================================================================
Revenues (b) $ 14,141,330 $11,670,811 $ 4,790,159 $ 30,602,300
====================================================================================
Income before income taxes $ 2,015,556 $ 1,668,703 $ 1,014,639 $ 4,698,898
====================================================================================
Identifiable assets $105,757,551 $32,291,980 $25,921,156 $163,970,687
====================================================================================
Geographic Segments-1996
-------------------------------------------------------
Other
(in thousands) Domestic(a) Far East Foreign Consolidated
====================================================================================
Revenues (b) $ 12,954,888 $10,690,814 $ 4,296,865 $ 27,942,567
====================================================================================
Income before income taxes $ 1,877,203 $ 1,521,650 $ 614,369 $ 4,013,222
====================================================================================
Identifiable assets $ 92,088,305 $32,222,889 $24,119,808 $148,431,002
====================================================================================
Geographic Segments-1995
-------------------------------------------------------
Other
(in thousands) Domestic(a) Far East Foreign Consolidated
====================================================================================
Revenues (b) $ 11,841,338 $ 9,859,833 $ 3,912,833 $ 25,614,004
====================================================================================
Income before income taxes $ 1,698,606 $ 1,375,307 $ 391,970 $ 3,465,883
====================================================================================
Identifiable assets $ 84,456,853 $27,580,921 $22,098,624 $134,136,398
====================================================================================
(a) Including general insurance operations in Canada.
(b) Revenues are derived from revenues of the general, life and financial
services operations, equity in income of minority-owned insurance operations
and realized capital gains attributable to the segments.
72
74
American International Group, Inc. and Subsidiaries
18. Summary of Quarterly Financial Information--
Unaudited
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1997 and 1996 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.
Three Months Ended
-----------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
(in thousands, except ----------------------- ----------------------- ----------------------- -----------------------
per share amounts) 1997 1996 1997 1996 1997 1996 1997 1996
====================================================================================================================================
Revenues $7,188,998 $6,576,960 $7,758,359 $6,891,748 $7,704,343 $7,116,105 $7,950,600 $7,357,754
====================================================================================================================================
Net income $ 780,935 $ 671,218 $ 826,495 $ 724,368 $ 840,318 $ 731,437 $ 884,587 $ 770,234
====================================================================================================================================
Net income per common share:
Basic $ 1.11 $ 0.94 $ 1.18 $ 1.03 $ 1.19 $ 1.04 $ 1.27 $ 1.09
Diluted 1.10 0.94 1.18 1.02 1.19 1.04 1.26 1.08
Average shares outstanding:
Basic 704,259 710,954 702,185 706,631 701,385 704,155 700,213 704,202
Diluted 707,211 713,855 705,266 709,521 704,597 707,018 703,348 707,001
====================================================================================================================================
73
75
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with accountants on accounting
and financial disclosure within the twenty-four months ending December 31, 1997.
- --------------------------------------------------------------------------------
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Except for the information provided in Part I under the heading "Directors and
Executive Officers of the Registrant", this item is omitted because a definitive
proxy statement which involves the election of directors will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the fiscal year pursuant to Regulation 14A.
ITEM 11. Executive Compensation
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
- --------------------------------------------------------------------------------
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 13. Certain Relationships and Related Transactions
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
- --------------------------------------------------------------------------------
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Exhibits.
1. Financial Statements and Schedules. See accompanying Index to Financial
Statements.
2. Exhibits.
3--Articles of Incorporation and By-Laws.
10--Material Contracts.
11--Computation of Earnings Per Share for the Years Ended December 31,
1997, 1996, 1995, 1994 and 1993.
12--Computation of Ratios of Earnings to Fixed Charges for the Years
Ended December 31, 1997, 1996, 1995, 1994 and 1993.
21--Subsidiaries of Registrant.
23--Consent of Coopers & Lybrand L.L.P.
24--Power of Attorney.
27--Financial Data Schedule.
99--Undertakings.
(b) Reports on Form 8-K.
There have been no reports on Form 8-K filed during the quarter ended
December 31, 1997.
74
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the issuer has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York, on the 30th day of March, 1998.
AMERICAN INTERNATIONAL GROUP, INC.
By s/s M.R. Greenberg
--------------------------------------
(M. R. Greenberg, Chairman)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report on Form 10-K has been signed below by the following persons
in the capacities indicated on the 30th day of March, 1998 and each of the
undersigned persons, in any capacity, hereby severally constitutes M.R.
Greenberg, Edward E. Matthews and Howard I. Smith and each of them, singularly,
his true and lawful attorney with full power to them and each of them to sign
for him, and in his name and in the capacities indicated below, this Annual
Report on Form 10-K and any and all amendments thereto.
Signature Title
--------- -----
s/s M.R. Greenberg Chairman and Director
- --------------------------------- (Principal Executive Officer)
(M. R. Greenberg)
s/s Howard I. Smith Executive Vice President,
- --------------------------------- Chief Financial Officer,
(Howard I. Smith) Comptroller and Director
(Principal Financial
and Accounting Officer)
s/s M. Bernard Aidinoff Director
- ---------------------------------
(M. Bernard Aidinoff)
- ---------------------------------
(Lloyd M. Bentsen) Director
s/s Pei-yuan Chia Director
- ---------------------------------
(Pei-yuan Chia)
s/s Marshall A. Cohen Director
- ---------------------------------
(Marshall A. Cohen)
s/s Barber B. Conable, Jr. Director
- ---------------------------------
(Barber B. Conable, Jr.)
s/s Martin S. Feldstein Director
- ---------------------------------
(Martin S. Feldstein)
II-1
77
SIGNATURES- (Continued)
Signature Title
--------- -----
s/s Leslie L. Gonda Director
- ---------------------------------
(Leslie L. Gonda)
s/s Evan G. Greenberg Director
- ---------------------------------
(Evan G. Greenberg)
s/s Carla A. Hills Director
- ---------------------------------
(Carla A. Hills)
s/s Frank J. Hoenemeyer Director
- ---------------------------------
(Frank J. Hoenemeyer)
s/s Edward E. Matthews Director
- ---------------------------------
(Edward E. Matthews)
s/s Dean P. Phypers Director
- ---------------------------------
(Dean P. Phypers)
s/s Thomas R. Tizzio
- --------------------------------- Director
(Thomas R. Tizzio)
s/s Edmund S.W. Tse Director
- ---------------------------------
(Edmund S.W. Tse)
Director
- ---------------------------------
(Frank G. Wisner)
II-2
78
EXHIBIT INDEX
Exhibit
Number Description Location
- ------ ----------- --------
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession .............. None.
3(i) Restated Certificate of Incorporation of AIG ........ Incorporated by reference from Exhibit 3(i)
to AIG's Annual Report on Form 10-K
for the year ended December 31, 1996.
3(ii) By-laws of AIG ...................................... Incorporated by reference from Exhibit 3(ii) to AIG's
Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-8787).
4 Instruments defining the rights of security
holders, including indentures
(a) Fiscal Agency Agreement dated as Not required to be filed. The Registrant hereby
of October 1, 1984 between AIG and agrees to file with the Commission a copy of
Citibank, N.A. .............................. any instrument defining the rights of holders
of the Registrant's long-term debt upon request
of the Commission.
(b) Indenture dated as of July 15, 1989 Not required to be filed. The Registrant hereby
between AIG and The Bank of New York ........ agrees to file with the Commission a copy of
any instrument defining the rights of holders
of the Registrant's long-term debt upon request
of the Commission.
II-3
79
Exhibit
Number Description Location
- ------ ----------- --------
9 Voting Trust Agreement............................... None.
10 Material contracts*
(a) AIG 1969 Employee Stock Option Plan and Filed as exhibit to AIG's Registration Statement
Agreement Form (File No. 2-44043) and incorporated herein by
reference.
(b) AIG 1972 Employee Stock Option Plan......... Filed as exhibit to AIG's Registration Statement
(File No. 2-44702) and incorporated herein by
reference.
(c) AIG 1972 Employee Stock Purchase Plan....... Filed as exhibit to AIG's Registration Statement
(File No. 2-44043) and incorporated herein by
reference.
(d) AIG 1984 Employee Stock Purchase Plan....... Filed as exhibit to AIG's Registration Statement
(File No. 2-91945) and incorporated herein by
reference.
(e) AIG 1996 Employee Stock Purchase Plan....... Filed as exhibit to AIG's Definitive Proxy Statement
dated April 2, 1996 (File No. 1-8787) and
incorporated herein by reference.
(f) AIG 1977 Stock Option and Stock Appreciation
Rights Plan................................. Filed as exhibit to AIG's Registration Statement
(File No. 2-59317) and incorporated herein by
reference.
(g) AIG 1982 Employee Stock Option Plan......... Filed as exhibit to AIG's Registration Statement
(File No. 2-78291) and incorporated herein by
reference.
(h) AIG 1987 Employee Stock Option Plan......... Filed as exhibit to AIG's Definitive Proxy Statement
dated as of April 6, 1987 (File No. 0-4652) and
incorporated herein by reference.
(i) AIG 1991 Employee Stock Option Plan......... Filed as exhibit to AIG's Definitive Proxy Statement
dated as of April 4, 1997 (File No. 1-8787) and
incorporated herein by reference.
(j) AIRCO 1972 Employee Stock Option Plan....... Incorporated by reference to AIG's Joint
Proxy Statement and Prospectus (File No.
2-61994).
(k) AIRCO 1977 Stock Option and Stock
Appreciation Rights Plan.................... Incorporated by reference to AIG's Joint Proxy
Statement and Prospectus (File No.2-61994).
(l) Purchase Agreement between AIA and
Mr. E.S.W. Tse.............................. Filed herewith.
11 Statement re computation of per share earnings....... Filed herewith.
12 Statements re computation of ratios.................. Filed herewith.
13 Annual report to security holders.................... Not required to be filed.
18 Letter re change in accounting principles............ None.
21 Subsidiaries of the Registrant....................... Filed herewith.
22 Published report regarding matters submitted to
vote of security holders ............................ None.
----------
* All material contracts are management contracts or compensatory plans or arrangements.
II-4
80
Exhibit
Number Description Location
- ------ ----------- --------
23 Consent of Coopers & Lybrand L.L.P................... Filed herewith.
24 Power of attorney.................................... Included on the signature page hereof.
27 Financial Data Schedule.............................. Provided herewith.
99 Undertakings by the Registrant required by Item 17
of Form S-3 and Item 21 of Form S-8, deemed to be
incorporated by reference into AIG's Registration
Statements on Forms S-3 and S-8 (No. 2-38768,
No.2-44043, No. 2-45346, No. 2-51498, No. 2-59317,
No. 2-61858, No. 2-62760, No. 2-64336, No. 2-67600,
No. 2-72058, No. 2-75874, No. 2-75875, No. 2-78291,
No. 2-87005, No. 2-82989, No. 2-90756, No. 2-91945,
No. 2-95589, No. 2- 97439, No. 33-8495, No. 33-13874,
No. 33-18073, No. 33-25291, No. 33-41643, No.
33-48996, No. 33-57250, No. 33-60327, No. 33-60827,
No. 33-62821, No. 333-21365 and No. 333-48639) ...... Filed herewith.
II-5