<PAGE>   1
================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                      
                                -------------
                                      
                                  Form 10-K
(Mark One)

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/x/              SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                  For the fiscal year ended December 31, 1994

                                       OR

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/ /              SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

             For the Transition period from________to_____________

                         Commission file number 1-8787

                                -------------

                       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:


<TABLE>
<CAPTION>
                                                                Name of each exchange on
                 Title of each class                                which registered
                 -------------------                                ----------------
       <S>                                                    <C>
       Common Stock, Par Value $2.50 Per Share                New York Stock Exchange, Inc.
</TABLE>


Securities registered pursuant to Section 12(g) of the Act:

                 Title of each class
                 -------------------
                         None
                                -------------

         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,
1995 was approximately $23,460,599,000 computed upon the basis of the closing 
sales price of the Common Stock on that date.

         As of January 31, 1995, there were outstanding 315,892,792 shares of
Common Stock, $2.50 par value, of the registrant.

                      Documents Incorporated by Reference:

         The registrant's definitive proxy statement filed or to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 24, 1995 is incorporated by reference in

Part III of this Form 10-K.
                                                                                
================================================================================

<PAGE>   2

PART I


ITEM 1. BUSINESS

American International Group, Inc. ("AIG"), a Delaware corporation, is a
holding company which through its subsidiaries is primarily engaged in a broad
range of insurance and insurance-related activities in the United States and
abroad. AIG's primary activities include both general and life insurance
operations. The principal insurance company subsidiaries are American Home
Assurance Company ("American Home"), National Union Fire Insurance Company of
Pittsburgh, Pa. ("National Union"), New Hampshire Insurance Company ("New
Hampshire"), Lexington Insurance Company ("Lexington"), American International
Underwriters Overseas, Ltd. ("AIUO"), American Life Insurance Company
("ALICO"), American International Assurance Company, Limited ("AIA"), Nan Shan
Life Insurance Company, Ltd.  ("Nan Shan"), The Philippine American Life
Insurance Company ("PHILAM"), American International Reinsurance Company, Ltd.
and United Guaranty Residential Insurance Company. Other significant activities
are financial services and agency and service fee operations.  For information
on AIG's business segments, see Note 19 of Notes to Financial Statements.

         All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 1995, beneficial ownership of
approximately 16.0 percent, 3.6 percent and 2.4 percent of AIG's Common Stock,
$2.50 par value ("Common Stock"), was held by Starr International Company, Inc.
("SICO"), The Starr Foundation and C. V. Starr & Co., Inc. ("Starr"),
respectively.

         At December 31, 1994, AIG and its subsidiaries had approximately 32,000
employees.

         The following table shows the general development of the business of
AIG on a consolidated basis, the contributions made to AIG's consolidated
revenues and operating income and the assets held, in the periods indicated by
its general insurance, life insurance, agency and service fee and financial
services operations, equity in income of minority-owned insurance companies and
realized capital gains. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 1 and 19 of Notes to
Financial Statements.)


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                   
-------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                1994           1993            1992           1991           1990
=========================================================================================================================
<S>                                             <C>           <C>              <C>            <C>            <C>
General insurance operations:
  Gross premiums written                        $ 16,392,409  $  14,901,255    $ 13,615,715   $ 13,336,248   $ 11,926,850
  Net premiums written                            10,865,753     10,025,903       9,138,528      9,146,394      9,267,201
  Net premiums earned                             10,286,831      9,566,640       9,209,390      9,104,632      9,149,414
  Adjusted underwriting profit (loss)(a)             147,517         10,391        (195,084)        (4,809)        75,184
  Net investment income                            1,435,092      1,340,480       1,252,086      1,163,461      1,059,161
  Realized capital gains                              52,487         65,264          67,134         89,275        120,000
  Operating income                                 1,635,096      1,416,135       1,124,136      1,247,927      1,254,345
  Identifiable assets(b)                          51,372,100     46,981,720      42,416,509(b)  29,278,641     27,993,993
-------------------------------------------------------------------------------------------------------------------------
  Loss ratio                                            77.8           79.2            81.5           78.9           78.2
  Expense ratio                                         20.9           20.9            20.9           21.5           21.4
-------------------------------------------------------------------------------------------------------------------------
  Combined ratio                                        98.7          100.1           102.4          100.4           99.6
=========================================================================================================================
Life insurance operations:
  Premium income                                   6,724,321      5,746,046       4,853,087      4,059,354      3,477,598
  Net investment income                            1,748,428      1,499,714       1,313,838      1,139,793        977,343
  Realized capital gains (losses)                     86,706         54,576          43,257         23,219         (6,347)
  Operating income                                   952,484        781,611         667,453        561,839        462,862
  Identifiable assets(b)                          34,496,652     28,381,164      23,472,687(b)  19,986,909     16,319,156
  Insurance in-force at end of year              333,378,811    257,162,102     210,605,862    193,226,288    160,373,296
Agency and service fee operations:
  Commissions, management and other fees             236,778        237,738         225,686        211,210        205,679
  Net investment income                                1,162          1,903           2,611          4,754          5,226
  Operating income                                    54,129         60,247          52,570         46,202         36,663
  Identifiable assets                                184,310        179,297         157,280        188,638        168,846
Financial services operations:
  Commissions, transaction and other fees          1,866,253      1,595,449       1,404,902      1,073,553        704,201
  Operating income                                   404,853        390,038         346,442        222,156        132,505
  Identifiable assets                             30,660,776     25,514,258      27,138,230     20,485,838     14,472,483
Equity in income of minority-owned
  insurance operations                                56,005         39,589          27,929         28,806         24,050
Other realized capital losses                        (52,340)       (12,742)        (11,293)       (14,144)       (14,258)
Revenues(c)                                       22,441,723     20,134,657      18,388,627     16,883,913     15,702,067
Total assets                                     114,346,117    101,014,848      92,722,182     69,389,468     58,201,835
=========================================================================================================================
</TABLE>


(a)   Adjusted underwriting profit (loss) is statutory underwriting income
      (loss) adjusted primarily for changes in deferral of acquisition costs.
      This adjustment is necessary to present the financial statements in
      accordance with generally accepted accounting principles.

(b)   The insurance assets with respect to December 31, 1992 and subsequent
      years conform to the requirements of FASB 113, "Accounting and Reporting
      for Reinsurance of Short-Duration and Long-Duration Contracts".

(c)   Represents the sum of general net premiums earned, life premium income,
      agency commissions, management and other fees, net investment income,
      financial services commissions, transaction and other fees, equity in
      income of minority-owned insurance operations and realized capital gains.





                                                                               1

<PAGE>   3
         The following table shows identifiable assets, revenues and income
derived from operations in the United States and Canada and from operations in
other countries for the year ended December 31, 1994. (See also Note 19 of
Notes to Financial Statements.)


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                   
-------------------------------------------------------------------------------------------------------------------------
                                                                                                   PERCENT OF TOTAL      
                                                                                             ----------------------------
                                                              UNITED STATES           OTHER  UNITED STATES          OTHER
                                                       TOTAL     AND CANADA       COUNTRIES     AND CANADA      COUNTRIES
=========================================================================================================================
<S>                                             <C>             <C>             <C>                   <C>            <C>
General insurance operations:
  Net premiums earned                           $ 10,286,831    $ 6,827,708     $ 3,459,123           66.4%          33.6%
  Adjusted underwriting profit (loss)                147,517        (91,524)        239,041             --             --
  Net investment income                            1,435,092      1,147,595         287,497           80.0           20.0
  Realized capital gains (losses)                     52,487         62,676         (10,189)            --             --
  Operating income                                 1,635,096      1,118,747         516,349           68.4           31.6
  Identifiable assets                             51,372,100     40,799,419      10,572,681           79.4           20.6
Life insurance operations:
  Premium income                                   6,724,321        370,112       6,354,209            5.5           94.5
  Net investment income                            1,748,428        600,616       1,147,812           34.4           65.6
  Realized capital gains                              86,706          4,028          82,678            4.6           95.4
  Operating income                                   952,484         42,271         910,213            4.4           95.6
  Identifiable assets                             34,496,652      8,563,247      25,933,405           24.8           75.2
Agency and service fee operations:
  Commissions, management and other fees             236,778        234,479           2,299           99.0            1.0
  Net investment income                                1,162          1,149              13           98.9            1.1
  Operating income                                    54,129         52,764           1,365           97.5            2.5
  Identifiable assets                                184,310        162,566          21,744           88.2           11.8
Financial services operations:
  Commissions, transaction and other fees          1,866,253      1,554,701         311,552           83.3           16.7
  Operating income                                   404,853        277,992         126,861           68.7           31.3
  Identifiable assets                             30,660,776     24,757,029       5,903,747           80.7           19.3
Equity in income of minority-owned
  insurance operations                                56,005         42,719          13,286           76.3           23.7
Other realized capital losses                        (52,340)       (39,878)        (12,462)            --             --
Income before income taxes and cumulative
  effect of accounting changes                     2,951,979      1,420,399       1,531,580           48.1           51.9
Revenues                                          22,441,723     10,805,905      11,635,818           48.2           51.8
Total Assets                                     114,346,117     71,838,459      42,507,658           62.8           37.2
=========================================================================================================================
</TABLE>


GENERAL INSURANCE OPERATIONS

AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance.  One or more of
these companies is licensed to write substantially all of these lines in all
states of the United States and in more than 100 foreign countries.

         AIG's business derived from brokers in the United States and Canada is
conducted through its domestic brokerage division, consisting of American Home,
National Union, Lexington and certain other insurance company subsidiaries of
AIG. Also included are the operations of New Hampshire and its subsidiaries,
which were restructured in 1992, thus completing the withdrawal of these
companies from an agency production system. New Hampshire is now integrated
into this division as the AIG company focusing specifically on providing AIG
products and services through brokers to middle market companies.

         The domestic brokerage division accepts business mainly from insurance
brokers, enabling selection of specialized markets and retention of
underwriting control. Any licensed broker is able to submit business to these
companies without the traditional agent-company contractual relationship, but
such broker usually has no authority to commit the companies to accept a risk.

         In addition to writing substantially all classes of business
insurance, including large commercial or industrial property insurance, excess
liability, inland marine, workers' compensation and excess and umbrella
coverages, the domestic brokerage division offers many specialized forms of
insurance such as directors and officers liability, difference-in-conditions,
kidnap-ransom, export credit and political risk, and various types of
professional errors and omissions coverages. Lexington writes surplus lines,
those risks for which conventional insurance companies do not readily provide
insurance coverage, either because of complexity or because the coverage does
not lend itself to conventional contracts.

         Audubon Insurance Company and its subsidiaries ("Audubon") conduct
agency marketing of personal and small commercial coverages in certain Southern
and Western States.

         American International Insurance Company ("AIIC") engages in mass
marketing of personal lines coverages. Since 1992, AIIC increased its
participation in non-standard auto business in urban markets.

         The business of United Guaranty Corporation ("UGC") and its
subsidiaries is also included in the domestic operations





2

<PAGE>   4
of AIG. The principal business of the UGC subsidiaries is the writing of
residential mortgage loan insurance, which is guaranty insurance on
conventional first mortgage loans on single-family dwellings and condominiums.
Such insurance protects lenders against loss if borrowers default. UGC
subsidiaries also write commercial mortgage loan insurance covering first
mortgage loans on commercial real estate, home equity and property improvement
loan insurance on loans to finance residential property improvements,
alterations and repairs and for other purposes not necessarily related to real
estate, and rent guaranty insurance on commercial and industrial real estate.
UGC had approximately $10 billion of mortgage guarantee risk in-force at
December 31, 1994.

         AIG's foreign general insurance business comprises primarily risks
underwritten through American International Underwriters ("AIU"), a marketing
unit consisting of wholly owned agencies and insurance companies. It also
includes business written by foreign-based insurance subsidiaries of AIUO for
their own accounts. In general, the same types of policies and marketing
methods, with certain refinements for local laws, customs and needs, are used
in these foreign operations as have been described above in connection with the
domestic operations.

         During 1994 domestic general and foreign general insurance business
accounted for 67.0 percent and 33.0 percent, respectively, of AIG's net
premiums written.

         AIG's general insurance company subsidiaries worldwide operate
primarily by underwriting and accepting any size risk for their direct account
and securing reinsurance on that portion of the risk in excess of the limit
which they wish to retain. This operating policy differs from that of many
insurance companies which will underwrite only up to their net retention limit,
thereby requiring the broker or agent to secure commitments from other
underwriters for the remainder of the gross risk amount.

         The following table summarizes general insurance premiums written and
earned:


<TABLE>
<CAPTION>
(in thousands)                                                             
---------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                             WRITTEN         EARNED
===========================================================================
<S>                                              <C>            <C>
1994                                                                       
---------------------------------------------------------------------------
Gross premiums                                   $16,392,409    $15,665,787
Ceded premiums                                    (5,526,656)    (5,378,956)
--------------------------------------------------------------------------- 
Net premiums                                     $10,865,753    $10,286,831
===========================================================================
1993                                                                       
---------------------------------------------------------------------------
Gross premiums                                   $14,901,255    $14,405,992
Ceded premiums                                    (4,875,352)    (4,839,352)
--------------------------------------------------------------------------- 
Net premiums                                     $10,025,903    $ 9,566,640
===========================================================================
1992                                                                       
---------------------------------------------------------------------------
Gross premiums                                   $13,615,715    $13,616,700
Ceded premiums                                    (4,477,187)    (4,407,310)
--------------------------------------------------------------------------- 
Net premiums                                     $ 9,138,528    $ 9,209,390
===========================================================================
</TABLE>


         The utilization of reinsurance is closely monitored by an internal
reinsurance security committee, consisting of members of AIG's Senior
Management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 5 of Notes to Financial Statements.)

         AIG is well diversified both in terms of lines of business and
geographic locations. Of the general insurance lines of business, workers'
compensation was approximately 16 percent of AIG's net premiums written. This
line is well diversified geographically and is generally written on a
retrospectively rated basis which reduces its exposure to material uncertainty
or risks.

         Notwithstanding the above, the majority of AIG's insurance business is
in the casualty classes, which tend to involve longer periods of time for the
reporting and settling of claims. This may increase the risk and uncertainty
with respect to AIG's loss reserve development. (See also the Discussion and
Analysis of Consolidated Net Loss and Loss Expense Reserve Development and

Management's Discussion and Analysis of Financial Condition and Results of
Operations.)





                                                                               3

<PAGE>   5
         The following table is a summary of the general insurance operations,
including ratios, by major operating category for the year ended December 31, 
1994. (See also Note 19(b) of Notes to Financial Statements.)


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                   
-------------------------------------------------------------------------------------------------------------------------
                                                                                   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
=========================================================================================================================
<S>                                              <C>            <C>                   <C>             <C>           <C>
Foreign                                          $ 3,588,608    $ 3,459,123            59.7           33.2           92.9
Commercial casualty(a)                             5,718,053      5,329,215            82.6           13.1           95.7
Commercial property                                  309,802        294,944           102.0           23.9          125.9
Pools and associations(b)                            552,975        533,632           145.9           17.3          163.2
Personal lines(c)                                    492,122        464,120            82.7           21.8          104.5
Mortgage guaranty                                    204,193        205,797            37.2           26.6           63.8
-------------------------------------------------------------------------------------------------------------------------
Total                                            $10,865,753    $10,286,831            77.8           20.9           98.7
=========================================================================================================================
</TABLE>


(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.)


<TABLE>
<CAPTION>
(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*
==============================================================================================================================
<S>                        <C>            <C>                  <C>             <C>        <C>              <C>           <C>
1994                       $10,865,753    $10,286,831          77.8            20.9        98.7             1.3          109.7
1993                        10,025,903      9,566,640          79.2            20.9       100.1            (0.1)         107.9
1992                         9,138,528      9,209,390          81.5            20.9       102.4            (2.4)         119.1
1991                         9,146,394      9,104,632          78.9            21.5       100.4            (0.4)         109.5
1990                         9,267,201      9,149,414          78.2            21.4        99.6             0.4          109.4
==============================================================================================================================
</TABLE>


* Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders).

The ratio for 1994 reflects estimated results provided by Conning & Company.

         During 1994, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 9.7 percent and 10.2 percent were
written in California and New York, respectively (no other state accounted for
more than 5 percent of such premiums).

         There was no significant adverse effect on AIG's results of operations
from the economic environments in any one state, country or geographic region
for the year ended December 31, 1994.

DISCUSSION AND ANALYSIS OF CONSOLIDATED NET LOSS AND
LOSS EXPENSE RESERVE DEVELOPMENT

The reserve for net losses and loss expenses is exclusive of applicable
reinsurance and represents the accumulation of estimates for reported losses
("case basis reserves") and provisions for losses incurred but not reported
("IBNR"). AIG does not discount its loss reserves other than for minor amounts
related to certain workers' compensation claims.

         Loss reserves established with respect to foreign business are set and
monitored in terms of the respective local or functional currency. Therefore,
no assumption is included for changes in currency rates. (See also Note 1(t) of
Notes to Financial Statements.) Losses and loss expenses are charged to income
as incurred.

         Management continually reviews the adequacy of established loss
reserves through the utilization of a number of analytical reserve development
techniques (discussed below). Through the use of these techniques, management
is able to monitor the adequacy of its established reserves, including the
appropriate assumptions for inflation. Also, through reactions to the emergence
of specific development patterns, such as case reserve redundancies or
deficiencies and IBNR emergence, management is able to currently determine any
required adjustments. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)

         The "Analysis of Consolidated Net Loss and Loss Expense Reserve
Development", which follows, presents the development of net loss and loss
expense reserves for calendar years 1984 through 1994. The upper half of the
table shows the cumulative amounts paid during successive years related to the
opening loss reserves. For example, with respect to the net loss and loss
expense reserve of $3,132.7 million as of December 31, 1984, by the end of 1994
(ten years later) $3,772.9 million





4

<PAGE>   6
had actually been paid in settlement of these net loss reserves. In addition,
as reflected in the lower section of the table, the original reserve of
$3,132.7 million was reestimated to be $4,119.7 million at December 31, 1994.
This increase from the original estimate would generally be a combination of a
number of factors, including reserves being settled for larger amounts than
originally estimated. The original estimates will also be increased or
decreased as more information becomes known about the individual claims and
overall claim frequency and severity patterns. The redundancy (deficiency)
depicted in the table, for any particular calendar year, shows the aggregate
change in estimates over the period of years subsequent to the calendar year
reflected at the top of the respective column heading. For example, the
redundancy of $122.7 million at December 31, 1994 related to December 31, 1993
net losses and loss expense reserves of $17,557.0 million represents the
cumulative amount by which reserves for 1993 and prior years have developed
redundantly during 1994.

ANALYSIS OF CONSOLIDATED NET LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT


<TABLE>
<CAPTION>
(in millions)                                                                                             
----------------------------------------------------------------------------------------------------------
                                         1984        1985        1986        1987         1988        1989
==========================================================================================================
<S>                                  <C>         <C>         <C>         <C>         <C>         <C>
Reserve for Net Losses and Loss
  Expenses, December 31,             $3,132.7    $4,034.9    $6,199.3    $8,670.7    $11,086.1   $12,958.5
Paid (Cumulative) as of:
  One Year Later                      1,288.8     1,576.1     2,300.1     2,619.2      3,266.9     3,940.3
  Two Years Later                     2,183.9     2,823.2     3,676.4     4,315.9      5,451.5     6,476.6
  Three Years Later                   2,723.9     3,321.1     4,340.7     5,496.6      6,904.5     8,350.8
  Four Years Later                    2,934.6     3,589.5     4,919.1     6,207.5      7,966.2     9,721.3
  Five Years Later                    3,072.9     3,886.5     5,260.3     6,757.2      8,792.1    10,764.8
  Six Years Later                     3,235.6     4,055.3     5,593.1     7,246.1      9,449.6
  Seven Years Later                   3,329.8     4,267.7     5,902.7     7,616.7
  Eight Years Later                   3,496.2     4,464.7     6,113.2
  Nine Years Later                    3,640.0     4,629.6
  Ten Years Later                     3,772.9
Net Liability Reestimated as of:
  End of Year                         3,132.7     4,034.9     6,199.3     8,670.7     11,086.1    12,958.5
  One Year Later                      3,269.9     4,164.2     6,268.3     8,523.6     10,923.8    12,844.5
  Two Years Later                     3,447.0     4,404.2     6,354.3     8,492.4     10,856.9    12,843.9
  Three Years Later                   3,638.8     4,502.0     6,397.5     8,488.1     10,811.9    12,809.2
  Four Years Later                    3,669.6     4,573.4     6,491.1     8,472.3     10,774.9    12,896.4
  Five Years Later                    3,744.2     4,672.4     6,531.2     8,472.0     10,805.1    13,064.6
  Six Years Later                     3,819.0     4,728.9     6,598.0     8,470.0     10,953.6
  Seven Years Later                   3,861.2     4,824.5     6,681.0     8,577.4
  Eight Years Later                   3,953.3     4,925.6     6,770.0
  Nine Years Later                    3,970.4     5,052.0
  Ten Years Later                     4,119.7
  Redundancy/(Deficiency)              (987.0)   (1,017.1)     (570.7)       93.3        132.5      (106.1)
========================================================================================================== 
</TABLE>



<TABLE>
<CAPTION>
(in millions)                                                                                 
----------------------------------------------------------------------------------------------
                                         1990        1991        1992        1993         1994
==============================================================================================
<S>                                 <C>         <C>         <C>         <C>          <C>
Reserve for Net Losses and Loss
  Expenses, December 31,            $14,699.2   $15,839.9   $16,756.8   $17,557.0    $18,418.9
Paid (Cumulative) as of:
  One Year Later                      4,315.2     4,747.8     4,882.7     5,146.3
  Two Years Later                     7,349.7     8,015.4     8,289.4
  Three Years Later                   9,561.0    10,436.2
  Four Years Later                   10,223.5
  Five Years Later
  Six Years Later
  Seven Years Later
  Eight Years Later
  Nine Years Later
  Ten Years Later
Net Liability Reestimated as of:
  End of Year                        14,699.2    15,839.9    16,756.8    17,557.0     18,418.9
  One Year Later                     14,596.2    15,828.1    16,807.0    17,434.3
  Two Years Later                    14,595.4    15,902.9    16,603.4
  Three Years Later                  14,723.7    15,989.7
  Four Years Later                   14,965.4
  Five Years Later
  Six Years Later
  Seven Years Later
  Eight Years Later
  Nine Years Later
  Ten Years Later
  Redundancy/(Deficiency)              (266.2)     (149.8)      153.4       122.7             
==============================================================================================
</TABLE>


         The trend depicted in the latest development year in the reestimated
liability portion of the "Analysis of Consolidated Net Losses and Loss Expense
Reserve Development" table indicates that the overall position of AIG's 1993
and prior reserves one year later is fairly comparable to the trends reflected
in recent years. The variations in development from original reserves in the
later years of the table are relatively insignificant both in terms of
aggregate amounts and as a percentage of the initial reserve balances.

RECONCILIATION OF NET RESERVE FOR LOSSES AND
LOSS EXPENSES


<TABLE>
<CAPTION>
(in millions)                                                              
---------------------------------------------------------------------------
                                         1994           1993           1992
===========================================================================
<S>                                 <C>            <C>            <C>
Net reserve for losses and loss
  expenses at beginning of year     $17,557.0      $16,756.8      $15,839.9
---------------------------------------------------------------------------
Losses and loss expenses incurred:
  Current year                        8,158.4        7,530.7        7,497.1
  Prior years*                         (152.8)          45.3            6.4
---------------------------------------------------------------------------
                                      8,005.6        7,576.0        7,503.5
---------------------------------------------------------------------------
Losses and loss expenses paid:
  Current year                        1,997.4        1,893.1        1,838.8
  Prior years                         5,146.3        4,882.7        4,747.8
---------------------------------------------------------------------------
                                      7,143.7        6,775.8        6,586.6
---------------------------------------------------------------------------
Net reserve for losses and loss
  expenses at end of year           $18,418.9      $17,557.0      $16,756.8
===========================================================================
</TABLE>


* Does not include the effects of foreign exchange adjustments as described
  above, which are reflected in the above table.





                                                                               5

<PAGE>   7
         Approximately 50 percent of the net losses and loss expense reserves
are paid out within two years of the date incurred.  The remaining net losses
and loss expense reserves, particularly those associated with the casualty
lines of business, may extend to 20 years or more.

         For further discussion regarding net reserves for losses and loss
expenses, see Management's Discussion and Analysis of Financial Condition and
Results of Operations.

         The reserve for losses and loss expenses as reported in AIG's
Consolidated Balance Sheet at December 31, 1994, differs from the total reserve
reported in the Annual Statements filed with state insurance departments and,
where appropriate, with foreign regulatory authorities. The difference at
December 31, 1994 is primarily because of minor discounting on certain workers'
compensation claims, estimates for unrecoverable reinsurance and additional
reserves relating to certain foreign operations. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)

         The reserve for gross losses and loss expenses is prior to reinsurance
and represents the accumulation for reported losses and IBNR. Management
reviews the adequacy of established gross losses reserves in the manner
previously described for net losses reserves.

         The "Analysis of Consolidated Gross Losses and Loss Expense Reserve
Development", which follows, presents the development of gross losses and loss
expense reserves for calendar years 1994, 1993 and 1992. As with the net losses
and loss expense reserve development, the redundancies of $180.3 million and
$332.0 million for 1993 and 1992, respectively, are relatively insignificant
both in terms of an aggregate amount and as a percentage of the initial reserve
balance.

ANALYSIS OF CONSOLIDATED GROSS LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT


<TABLE>
<CAPTION>
(in millions)                                                              
---------------------------------------------------------------------------
                                         1992           1993           1994
===========================================================================
<S>                                 <C>            <C>            <C>
Gross losses and loss
  expenses, December 31,            $28,156.8      $30,046.2      $31,435.4
Paid (cumulative) as of:                   
  One Year Later                      7,280.9        8,807.1
  Two Years Later                    13,006.0
Gross Liability Reestimated as of:
  End of Year                        28,156.8       30,046.2       31,435.4
  One Year Later                     28,253.4       29,865.9
  Two Years Later                    27,824.8       
Redundancy                              332.0          180.3               
===========================================================================
</TABLE>


LIFE INSURANCE OPERATIONS

AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries.  Traditional products consist of individual and group
life, annuity, and accident and health policies. Financial and investment
products consist of single premium annuity, variable annuities, guaranteed
investment contracts and universal life. (See also Management's Discussion 
and Analysis of Financial Condition and Results of Operations.)

         In the United States, AIG has four domestic life subsidiaries:
American International Life Assurance Company of New York, AIG Life Insurance
Company, Delaware American Life Insurance Company, and Pacific Union Assurance
Company. These companies utilize multiple distribution channels including
brokerage and career and general agents to offer primarily financial
and investment products and specialty forms of accident and health coverage for
individuals and groups, including employee benefit plans. The domestic life
business comprised 5.5 percent of total life premium income in 1994.

         Life insurance operations in foreign countries comprised 94.5 percent
of life premium income and 95.6 percent of operating income in 1994. AIG
operates overseas through four main subsidiary companies, ALICO, AIA , Nan Shan
and PHILAM. Although ALICO is incorporated in Delaware, all of its business is
written outside of the United States. ALICO has operations either directly or
through subsidiaries in approximately 50 countries located in Europe, Africa,
Latin America, the Middle East, and the Far East, with Japan being the largest
territory. AIA operates primarily in Hong Kong, Singapore, Malaysia and
Thailand. Nan Shan operates primarily in Taiwan while PHILAM in the
Philippines.

         Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial
products are sold in Japan.

         In addition to the above, AIG also has subsidiary operations in
Switzerland (Ticino Societa d'Assicurazioni Sulla Vita), Puerto Rico (AIG Life
Insurance Company of Puerto Rico) and conducts life insurance business through
AIUO subsidiary companies in certain countries in Central and South America.

         The foreign life companies have approximately 100,000 career agents
and sell their products largely to indigenous persons in local currencies. In
addition to the agency outlets, these companies also distribute their products
through direct marketing channels, such as mass marketing, and through brokers
and other distribution outlets such as financial institutions.

         The following table summarizes the life insurance operating results
for the year ended December 31, 1994. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)





6

<PAGE>   8

<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                            
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    AVERAGE
                                                                NET                                DIRECT       TERMINATION RATE  
                                              PREMIUM    INVESTMENT       OPERATING             INSURANCE      -------------------
                                               INCOME        INCOME          INCOME(a)           IN-FORCE        LAPSE       OTHER
==================================================================================================================================
<S>                                        <C>           <C>               <C>               <C>                   <C>         <C>
Individual:
  Life                                     $5,037,032    $1,126,290        $517,235          $260,187,171(b)       7.1%        1.9%
  Annuity                                      60,981       344,087          22,788                      (c)
  Accident and health                         931,620        62,822         268,627                      (c)
Group:
  Life                                        331,140        20,413          27,158            73,191,640          8.3%        7.2%
  Pension                                       8,905       181,078          15,107                      (c)
  Accident and health                         354,643        18,932          22,344                      (c)
Realized capital gains                             --            --          86,706                      (c)
Consolidation adjustments                          --        (5,194)         (7,481)                     (c)                      
----------------------------------------------------------------------------------------------------------------------------------
TOTAL                                      $6,724,321    $1,748,428        $952,484          $333,378,811                         
==================================================================================================================================
</TABLE>


(a)   Including income related to investment type products.

(b)   Including $160.13 billion of whole life insurance and endowments.

(c)   Not applicable.

INSURANCE INVESTMENT OPERATIONS

A significant portion of AIG's general and life operating revenues are derived
from AIG's insurance investment operations. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 1, 2, 8
and 19 of Notes to Financial Statements.)

      The following table is a summary of the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at December 31, 1994:


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                            
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                             PERCENT DISTRIBUTION
                                                                                                  PERCENT   ----------------------
                                                  GENERAL             LIFE            TOTAL      OF TOTAL    DOMESTIC      FOREIGN
==================================================================================================================================
<S>                                           <C>              <C>              <C>                 <C>         <C>           <C>
Fixed maturities:
  Available for sale, at market value(a)      $ 4,995,778      $16,890,709      $21,886,487          43.3%       32.2%        67.8%
  Held to maturity, at amortized cost(b)       13,454,310               --       13,454,310          26.6       100.0           --
Equity securities, at market value(c)           2,799,728        2,090,421        4,890,149           9.7        30.4         69.6
Mortgage loans on real estate, policy
  and collateral loans                             27,725        4,534,604        4,562,329           9.0        43.1         56.9
Short-term investments, including
  time deposits, and cash                         954,901        1,212,933        2,167,834           4.3        27.6         72.4
Real estate                                       364,115          648,938        1,013,053           2.0        18.0         82.0
Investment income due and accrued                 446,745          471,281          918,026           1.8        57.5         42.5
Other invested assets                             829,757          841,185        1,670,942           3.3        50.9         49.1
----------------------------------------------------------------------------------------------------------------------------------
Total                                         $23,873,059      $26,690,071      $50,563,130         100.0%       51.7%        48.3%
================================================================================================================================== 
</TABLE>


(a)   Includes $163,956 of bonds trading securities, at market value.

(b)   Includes $412,503 of preferred stocks, at amortized cost.

(c)   Includes $61,937 of preferred stocks, at market value.

         The following table summarizes the investment results of the general
insurance operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                        
------------------------------------------------------------------------------------------------------------------------------
                          ANNUAL AVERAGE CASH AND INVESTED ASSETS   
                         ------------------------------------------
                                  CASH                                                       RATE OF RETURN                   
                            (INCLUDING                                          NET       ---------------------       REALIZED
                            SHORT-TERM       INVESTED                    INVESTMENT                    INVESTED        CAPITAL
YEARS ENDED DECEMBER 31,  INVESTMENTS)         ASSETS(a)      TOTAL          INCOME(b)    TOTAL(c)       ASSETS(d)       GAINS
==============================================================================================================================
<S>                         <C>           <C>           <C>              <C>                <C>             <C>        <C>
1994                        $1,387,704    $21,836,228   $23,223,932      $1,435,092         6.2%            6.6%       $52,487
1993                         1,779,647     19,766,959    21,546,606       1,340,480         6.2             6.8         65,264
1992                         1,766,031     18,285,417    20,051,448       1,252,086         6.2             6.8         67,134
1991                         1,828,346     16,960,076    18,788,422       1,163,461         6.2             6.9         89,275
1990                         1,842,262     15,139,966    16,982,228       1,059,161         6.2             7.0        120,000
==============================================================================================================================
</TABLE>


(a)   Including investment income due and accrued and real estate.

(b)   Net investment income is after deduction of investment expenses and
      excludes realized capital gains (losses).

(c)   Net investment income divided by the annual average sum of cash and
      invested assets.

(d)   Net investment income divided by the annual average invested assets.





                                                                               7

<PAGE>   9
         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.)


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                            
----------------------------------------------------------------------------------------------------------------------------------
                                                          ASSETS AT END OF PERIOD          
                                             ----------------------------------------------
                                                     CASH                                                                 REALIZED
                                               (INCLUDING                                             NET   NET YIELD      CAPITAL
                                               SHORT-TERM         INVESTED                     INVESTMENT     ON MEAN        GAINS
YEARS ENDED DECEMBER 31,                     INVESTMENTS)           ASSETS(a)         TOTAL        INCOME(b)   ASSETS(c)   (LOSSES)
================================================================================================================================== 
<S>                                            <C>             <C>              <C>            <C>                <C>      <C>
1994                                           $1,212,932      $25,477,139      $26,690,071    $1,748,428         7.4%     $86,706
1993                                            2,878,563       19,158,688       22,037,251     1,499,714         7.8       54,576
1992                                            2,516,001       15,413,653       17,929,654     1,313,838         8.3       43,257
1991                                            2,092,084       12,968,083       15,060,167     1,139,793         8.7       23,219
1990                                            1,789,392       10,602,567       12,391,959       977,343         9.1       (6,347)
================================================================================================================================== 
</TABLE>


(a)   Including investment income due and accrued and real estate.

(b)   Net investment income is after deduction of investment expenses and
      excludes realized capital gains (losses).

(c)   Calculated on the basis of the formula prescribed by the National
      Association of Insurance Commissioners.

AIG's worldwide insurance investment policy places primary emphasis on
investments in high quality, fixed income securities in all of its portfolios
and, to a lesser extent, investments in marketable common stocks in order to
preserve policyholders' surplus and generate net investment income. The ability
to implement this policy is somewhat limited in certain territories as there
may be a lack of qualified long term investments or investment restrictions may
be imposed by the local regulatory authorities. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)

AGENCY AND SERVICE FEE OPERATIONS

AIG's agency and service fee operations contribute to AIG earnings through fees
as agents and managers, the premiums they generate for AIG's insurance
companies and the revenues they produce from technical and support service
activities.

         Several AIG companies act as managing general agents for both AIG
subsidiaries and non-affiliated insurance companies, accepting liability on
risks and actively managing the business produced. These general agencies deal
directly with the producing agents and brokers, exercise full underwriting
control, issue policies, collect premiums, arrange reinsurance, perform
accounting, actuarial and safety and loss control services, adjust and pay
losses and claims, and settle net balances with the represented companies. In
some cases, they also maintain their own and the represented companies'
authority to do business in the jurisdictions in which they operate.

         Agency and service fee operations are conducted primarily through AIG
Risk Management, Inc., which provides risk management services to independent
insurance agents, brokers and their customers on a worldwide basis and AIG
Aviation Inc., which sells aviation insurance.

FINANCIAL SERVICES OPERATIONS

AIG operations which contribute to financial services income include primarily
A.I. Credit Corp. ("AICCO"), AIG Financial Products Corp. and its subsidiary
companies ("AIGFP"), AIG Trading Group Inc. and its subsidiaries ("AIGTG"),
International Lease Finance Corporation ("ILFC") and UeberseeBank AG. AICCO's
business is principally in premium financing. AIGFP engages in financial 
transactions, including long-dated interest rate and currency swaps and
structures borrowings through guaranteed investment agreements. AIGTG engages in
various commodities trading, foreign exchange trading and market making
activities. ILFC is engaged primarily in the acquisition of new and used
commercial jet aircraft and the leasing and remarketing of such aircraft to
airlines around the world. UeberseeBank AG operates as a Swiss bank. Other
financial services operations are AIG Global Investors, Inc. and AIG 
Investment Corporation and their subsidiaries, which manage the investment 
portfolios of various AIG subsidiaries. (See also Management's Discussion and 
Analysis of Financial Condition and Results of Operations and Notes 1, 9 and 
11 of Notes to Financial Statements.)

         The following table is a summary of the composition of AIG's financial
services invested assets and liabilities at December 31, 1994. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)





8

<PAGE>   10

<TABLE>
<CAPTION>
(in thousands)                                                             
===========================================================================
<S>                                                             <C>
Financial services invested assets:
  Flight equipment primarily under operating leases,
    net of accumulated depreciation                             $10,723,527
  Securities available for sale, at market value                  3,796,792
  Trading securities, at market value                             2,483,637
  Spot commodities, at market value                                 916,833
  Unrealized gain on interest rate and currency
    swaps, options and forward transactions                       4,650,743
  Securities purchased under agreements to resell,
    at contract value                                             1,209,403
  Trade receivables                                               2,629,734
  Other, including short-term investments                         1,509,593
---------------------------------------------------------------------------
Total financial services invested assets                        $27,920,262
===========================================================================
Financial services liabilities:
  Borrowings under obligations of guaranteed
    investment agreements                                       $ 5,535,318
  Securities sold under agreements to repurchase,
    at contract value                                             1,342,064
  Trade payables                                                  2,108,263
  Securities sold but not yet purchased, principally
    obligations of the U.S. Government and
    Government agencies, at market value                            192,898
  Spot commodities sold but not yet purchased,
    at market value                                                 369,089
  Unrealized loss on interest rate and currency
    swaps, options and forward transactions                       3,659,450
  Deposits due to banks and other depositors                        655,973
  Commercial paper                                                1,960,545
  Notes, bonds and loans payable                                  7,567,046
---------------------------------------------------------------------------
Total financial services liabilities                            $23,390,646
===========================================================================
</TABLE>


         The following table is a summary of the revenues of AIG's financial
services operations for the year ended December 31, 1994. (See also 
Management's Discussion and Analysis of Financial Condition and Results of 
Operations and Note 1 of Notes to Financial Statements.)


<TABLE>
<CAPTION>
(in thousands)                                                             
===========================================================================
<S>                                                              <C>
Financial services revenues:
  ILFC                                                           $1,097,599
  AIGFP*                                                            279,058
  AIGTG*                                                            246,643
  Other                                                             242,953
---------------------------------------------------------------------------
Total financial service revenues                                 $1,866,253
===========================================================================
</TABLE>


* Represents net trading revenues.

         Other financial services activities include AIG's 30 percent interest
in AB Asesores CFMB, S.L., a Spanish brokerage, investment banking and private
investment management firm, and certain investment management and venture
capital operations in various overseas financial services sectors.

OTHER OPERATIONS

Small AIG subsidiaries provide insurance-related services such as
adjusting claims and marketing specialized products. AIG has several other
relatively small subsidiaries which carry on various businesses. Mt. Mansfield
Company, Inc. owns and operates the ski slopes, lifts, school and an inn located
at Stowe, Vermont.

ADDITIONAL INVESTMENTS

As of March 15, 1995, AIG holds a 46.4 percent interest in Transatlantic
Holdings, Inc., a reinsurance holding company, and a 19.9 percent interest in
Richmond Insurance Company, Ltd., a reinsurer. (See also Note 1(n) of Notes to
Financial Statements.) During 1992, AIG acquired convertible preferred stock 
in The Robert Plan Corporation, a leading servicer and underwriter of
private passenger and commercial automobile insurance in urban markets. During
1993, AIG acquired a 23.1 percent interest in Kroll Associates, an international
investigation and consulting firm. AIG holds a 23.9 percent interest in SELIC
Holdings, Ltd., an insurance holding company and a 24.4 percent interest in IPC
Holding, Ltd., a reinsurance holding company. During 1994, AIG invested $200
million in non-voting convertible preferred stock of Alexander and Alexander
Services, Inc., an independent insurance brokerage operation. As of March 24,
1995, AIG had invested $236 million in convertible  preferred stock and warrants
of 20th Century Industries, a low-cost provider of mass marketed auto insurance
in California.

LOCATIONS OF CERTAIN ASSETS

As of December 31, 1994, approximately 37 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $925.2
million of cash and securities on deposit with foreign regulatory
authorities. Foreign operations and assets held abroad may be adversely affected
by political developments in foreign countries, including such possibilities as
tax changes, nationalization and changes in regulatory policy, as well as by
consequence of hostilities and unrest. The risks of such occurrences and their
overall effect upon AIG vary from country to country and cannot easily be
predicted. If expropriation or nationalization does occur, AIG's policy is to
take all appropriate measures to seek recovery of such assets. Certain of the
countries in which AIG's business is conducted have currency restrictions which
generally cause a delay in a company's ability to repatriate assets and profits.
(See also Notes 1(t), 2 and 19(d) of Notes to Financial Statements.)

INSURANCE REGULATION AND COMPETITION

Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such requirements.
(See also Note 10(b) of Notes to Financial Statements.)

         AIG's insurance subsidiaries, in common with other insurers, are
subject to regulation and supervision by the states and by other jurisdictions
in which they do business. Within the United States, the method of such
regulation varies but generally has its source in statutes that delegate
regulatory and





                                                                               9

<PAGE>   11
supervisory powers to an insurance official. The regulation and supervision
relate primarily to approval of policy forms and rates, the standards of
solvency that must be met and maintained, including risk based capital
measurements, the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the size of risks which may be
insured under a single policy, deposits of securities for the benefit of
policyholders, methods of accounting, periodic examinations of the affairs of
insurance companies, the form and content of reports of financial condition
required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of policyholders
rather than security holders. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)

         Risk Based Capital (RBC) is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Thus, inadequately capitalized general and life insurance companies may be
identified.

         The RBC formula develops a risk adjusted target level of statutory
surplus by applying certain factors to various asset, premium and reserve
items. Higher factors are applied to more risky items and lower factors are
applied to less risky items. Thus, the target level of statutory surplus varies
not only as a result of the insurer's size, but also on the risk profile of the
insurer's operations.

         The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control.

         To the extent that any of AIG's insurance entities would fall below
prescribed levels of surplus, it would be AIG's intention to infuse necessary
capital to support that entity.

         These statutory surplus of each of AIG's domestic general and life 
insurance company subsidiaries exceeded its RBC standards by considerable
margins as of December 31, 1994.

         A substantial portion of AIG's general insurance business and a
majority of its life insurance business is carried on in foreign countries. The
degree of regulation and supervision in foreign jurisdictions varies from
minimal in some to stringent in others. Generally, AIG, as well as the
underwriting companies operating in such jurisdictions, must satisfy local
regulatory requirements. Licenses issued by foreign authorities to AIG
subsidiaries are subject to modification or revocation by such authorities, and
AIU or other AIG subsidiaries could be prevented from conducting business in
certain of the jurisdictions where they currently operate. In the past, AIU has
been allowed to modify its operations to conform with new licensing
requirements in most jurisdictions.

         In addition to licensing requirements, AIG's foreign operations are
also regulated in various jurisdictions with respect to currency, policy
language and terms, amount and type of security deposits, amount and type of
reserves, amount and type of local investment and the share of profits to be
returned to policyholders on participating policies. Some foreign countries
regulate rates in various types of policies. Certain countries have established
reinsurance institutions, wholly or partially owned by the state, to which
admitted insurers are obligated to cede a portion of their business on terms
which do not always allow foreign insurers, including AIG, full compensation.
Regulations governing constitution of technical reserves and remittance
balances in some countries may hinder remittance of profits and repatriation of
assets.

         The insurance industry is highly competitive. Within the United
States, AIG's general insurance subsidiaries compete with approximately 4,300
other stock companies, specialty insurance organizations, mutual companies and
other underwriting organizations.  AIG's life insurance companies compete in
the United States with some 1,600 life insurance companies and other
participants in related financial service fields. Overseas, AIG subsidiaries 
compete for business with foreign insurance operations of the larger U.S. 
insurers and local companies in particular areas in which they are active.

         AIG's financial services subsidiaries, particularly AIGTG and AIGFP,
operate in a highly competitive environment both domestically and overseas.
Principal sources of competition are banks, investment banks and other non-bank
financial institutions.


I
TEM 2. PROPERTIES

AIG and its subsidiaries operate from approximately 250 offices in the United
States, 5 offices in Canada and numerous offices in other foreign countries.
The offices in Manchester, New Hampshire; Springfield, Illinois; Houston,
Texas; Atlanta, Georgia; Baton Rouge, Louisiana; Wilmington, Delaware; Hato
Rey, Puerto Rico; San Diego, California; Greensboro, North Carolina; 
Livingston, New Jersey; 70 Pine Street and 72 Wall Street in New York City; 
and offices in approximately 30 foreign countries including Bermuda, Hong
Kong, the Philippines, Japan, England, Singapore, Taiwan and Thailand are
located in buildings owned by AIG and its subsidiaries. The remainder of the
office space utilized by AIG subsidiaries is leased.


ITEM 3. LEGAL PROCEEDINGS

AIG and its subsidiaries, in common with the insurance industry in general, are
subject to litigation, including claims for punitive damages, in the normal
course of their business. AIG does not believe that such litigation will have a
material adverse effect on its financial condition, future operating results or
liquidity. (See also the Discussion and Analysis of Consolidated Net Loss and
Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)


ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth
quarter of 1994.





10

<PAGE>   12
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.


<TABLE>
<CAPTION>
                                                                                                                                
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       SERVED AS
                                                                                                                     DIRECTOR OR
                                                                                                                         OFFICER
NAME                              TITLE                                                                      AGE           SINCE
================================================================================================================================
<S>                               <C>                                                                        <C>            <C>
M. Bernard Aidinoff*              Director                                                                   66             1984
Lloyd Bentsen                     Director                                                                   74             1995
Marshall A. Cohen                 Director                                                                   59             1992
Barber B. Conable, Jr.            Director                                                                   72             1991
Martin S. Feldstein               Director                                                                   55             1987
Houghton Freeman                  Director                                                                   73             1967
Leslie L. Gonda                   Director                                                                   75             1990
M. R. Greenberg*                  Director, Chairman, and Chief Executive Officer                            69             1967
Carla A. Hills                    Director                                                                   61             1993
Frank J. Hoenemeyer               Director                                                                   75             1985
John I. Howell*                   Director                                                                   78             1969
Edward E. Matthews                Director and Vice Chairman-Finance                                         63             1973
Dean P. Phypers                   Director                                                                   66             1979
John J. Roberts*                  Director and Vice Chairman-External Affairs                                72             1967
Ernest E. Stempel*                Director and Vice Chairman-Life Insurance                                  78             1967
Thomas R. Tizzio*                 Director and President                                                     57             1982
Jeffrey W. Greenberg              Executive Vice President-Domestic General Insurance-Brokerage              43             1987
Edmund S. W. Tse                  Executive Vice President-Life Insurance                                    57             1991
Lawrence W. English               Senior Vice President-Administration                                       53             1985
Axel I. Freudmann                 Senior Vice President-Human Resources                                      48             1986
John G. Hughes                    Senior Vice President-Worldwide Claims                                     64             1978
Kevin H. Kelley                   Senior Vice President-Domestic General Insurance-Brokerage                 44             1991
Win J. Neuger                     Senior Vice President and Chief Investment Officer                         45             1995
R. Kendall Nottingham             Senior Vice President-Life Insurance                                       56             1991
Petros K. Sabatacakis             Senior Vice President-Financial Services                                   48             1992
Robert M. Sandler                 Senior Vice President, Senior Casualty Actuary and Senior Claims Officer   52             1980
Howard I. Smith                   Senior Vice President and Comptroller                                      50             1984
Stephen Y. N. Tse                 Senior Vice President                                                      64             1974
Wayland M. Mead                   Acting General Counsel                                                     63             1975
Robert K. Conry                   Vice President and Director of Internal Audit                              42             1992
Patrick J. Foley                  Vice President                                                             64             1982
Robert E. Lewis                   Vice President and Chief Credit Officer                                    44             1993
Christian M. Milton               Vice President-Reinsurance                                                 47             1985
Nicholas A. O'Kulich              Vice President-Life Insurance                                              51             1991
Douglas A. Paul                   Vice President-Strategic Planning                                          46             1983
Frank Petralito II                Vice President and Director of Taxes                                       58             1978
Kathleen E. Shannon               Vice President and Secretary                                               45             1986
Joseph H. Umansky                 Vice President and Deputy Comptroller                                      47             1992
John T. Wooster, Jr.              Vice President-Communications                                              55             1989
William N. Dooley                 Treasurer                                                                  41             1992
================================================================================================================================
</TABLE>


* Member of Executive Committee.





                                                                              11

<PAGE>   13
         Except as hereinafter noted, each of the directors who is also an
executive officer of AIG and each of the other executive officers has, for more
than five years, occupied an executive position with AIG or companies that are
now its subsidiaries, or with Starr. Jeffrey W. Greenberg is the son of M.R.
Greenberg. There are no other arrangements or understandings between any
director or officer and any other person pursuant to which the director or
officer was elected to such position. Mr. Lewis was Assistant General Manager
for North America, Chief Credit Officer, and senior executive responsible for
risk and exposure management of ING Bank in New York, the bank division of
Internationale Nederlanden Group, from 1988 until joining AIG in October, 1993.
Mr. O'Kulich was president of Maccabees Life & Annuity Company from 1982 to
July 31, 1989 and was self employed from August, 1989 until joining AIG in May,
1990. Mr. Sabatacakis was Managing Director and head of the Capital Markets and
Treasury Group of Chemical Banking Corporation prior to joining AIG in
February, 1992. Mr. Neuger was Managing Director, Global Investment
Management-Equity at Bankers Trust Company prior to joining AIG in February,
1995.


PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS

(a) The table below shows the high and low closing sales prices per share of
AIG's common stock, as reported on the New York Stock Exchange Composite Tape,
for each quarter of 1994 and 1993, as adjusted for the 50 percent common stock
split in the form of a common stock dividend paid July 30, 1993. All prices are
as reported by the National Quotation Bureau, Incorporated.


<TABLE>
<CAPTION>
---------------------------------------------------------------------
                                        1994              1993    
                                  ---------------    ----------------
                                   High      Low     High      Low  
---------------------------------------------------------------------
<S>                               <C>      <C>      <C>        <C>
First Quarter                     92 5/8   82 1/2    85 1/8    75
Second Quarter                    96 1/2   84        88        79 1/8
Third Quarter                     95 7/8   88 1/8   100        85 1/2
Fourth Quarter                    99 3/4   87 5/8    97 7/8    83 5/8
=====================================================================
</TABLE>


         (b) In 1994, AIG paid a quarterly dividend of 10.0 cents in March and
June and 11.5 cents in September and December for a total cash payment of 43
cents per share of common stock. In 1993, AIG paid a quarterly dividend of 9.3
cents in March and June and 10.0 cents in September and December for a total
cash payment of 38.6 cents per share of common stock. These amounts reflect the
adjustment for a 50 percent common stock split in the form of a common stock
dividend paid July 30, 1993. Subject to the dividend preference of any of AIG's
serial preferred stock which may be outstanding, the holders of shares of
common stock are entitled to receive such dividends as may be declared by the
Board of Directors from funds legally available therefor. AIG redeemed the 750
shares of Series M-1 Preferred Stock on April 2, 1993 and the 750 shares of
Series M-2 Preferred Stock on March 5, 1993 at a price of $100,000 per share
plus accrued dividends.

         See Note 10(b) of Notes to Financial Statements for a discussion of
certain restrictions on the payment of dividends to AIG by some of its
insurance subsidiaries.

         (c) The approximate number of holders of Common Stock as of January
31, 1995, based upon the number of record holders, was 15,900.





12

<PAGE>   14

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.


<TABLE>
<CAPTION>
(in thousands, except per share amounts)                                                                                         
---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                        1994           1993            1992           1991           1990
=================================================================================================================================
<S>                                                     <C>            <C>              <C>            <C>            <C>
Revenues(a)                                             $ 22,441,723   $ 20,134,657     $18,388,627    $16,883,913    $15,702,067
General insurance:
  Net premiums written                                    10,865,753     10,025,903       9,138,528      9,146,394      9,267,201
  Net premiums earned                                     10,286,831      9,566,640       9,209,390      9,104,632      9,149,414
  Adjusted underwriting profit (loss)                        147,517         10,391        (195,084)        (4,809)        75,184
  Net investment income                                    1,435,092      1,340,480       1,252,086      1,163,461      1,059,161
  Realized capital gains                                      52,487         65,264          67,134         89,275        120,000
  Operating income                                         1,635,096      1,416,135       1,124,136      1,247,927      1,254,345
Life insurance:
  Premium income                                           6,724,321      5,746,046       4,853,087      4,059,354      3,477,598
  Net investment income                                    1,748,428      1,499,714       1,313,838      1,139,793        977,343
  Realized capital gains (losses)                             86,706         54,576          43,257         23,219         (6,347)
  Operating income                                           952,484        781,611         667,453        561,839        462,862
Agency and service fee operating income                       54,129         60,247          52,570         46,202         36,663
Financial services operating income                          404,853        390,038         346,442        222,156        132,505
Equity in income of minority-owned insurance
  operations                                                  56,005         39,589          27,929         28,806         24,050
Other realized capital losses                                (52,340)       (12,742)        (11,293)       (14,144)       (14,258)
Income before income taxes and cumulative
  effect of accounting changes                             2,951,979      2,601,081       2,137,048      2,022,575      1,811,534
Income taxes                                                 776,464        683,003         512,033        469,566        369,240
Income before cumulative effect of accounting changes      2,175,515      1,918,078       1,625,015      1,553,009      1,442,294
Cumulative effect of accounting changes, net of tax:
  AIG                                                             --             --          31,941             --             --
  Minority-owned insurance operations                             --         20,695              --             --             --
Net income                                                 2,175,515      1,938,773       1,656,956      1,553,009      1,442,294
Earnings per common share:
  Income before cumulative effect of
    accounting changes                                          6.87           6.04            5.10           4.86           4.61
  Cumulative effect of accounting changes, net of tax:
    AIG                                                           --             --             .10             --             --
    Minority-owned insurance operations                           --            .07              --             --             --
  Net income                                                    6.87           6.11            5.20           4.86           4.61
Cash dividends per common share                                  .43            .39             .35            .31            .27
Total assets(b)                                          114,346,117    101,014,848      92,722,182     69,389,468     58,201,835
Long-term debt(c)                                         12,613,907     10,955,963       9,517,595      7,591,385      6,780,211
Capital funds (shareholders' equity)                      16,421,661     15,224,195      12,782,152     11,463,454      9,904,442
=================================================================================================================================
</TABLE>


(a)   Represents the sum of general net premiums earned, life premium income,
      agency commissions, management and other fees, net investment income,
      financial services commissions, transaction and other fees, equity in
      income of minority-owned insurance operations and realized capital gains.
      (See also tables under Item 1, "Business".)

(b)   The assets with respect to December 31, 1992 and subsequent years conform
      to the requirements of FASB 113, "Accounting and Reporting for
      Reinsurance of Short-Duration and Long-Duration Contracts."

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





                                                                              13

<PAGE>   15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OPERATIONAL REVIEW

GENERAL INSURANCE OPERATIONS

General insurance operations for the twelve month periods ending December 31,
1994, 1993 and 1992 were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                     
---------------------------------------------------------------------------------------------------
                                                                1994           1993            1992
===================================================================================================
<S>                                                      <C>            <C>              <C>
Net premiums written:
  Domestic                                               $ 7,277,200    $ 7,006,600      $6,564,600
  Foreign                                                  3,588,600      3,019,300       2,573,900
---------------------------------------------------------------------------------------------------
  Total                                                  $10,865,800    $10,025,900      $9,138,500
===================================================================================================
Net premiums earned:
  Domestic                                               $ 6,827,700    $ 6,664,800      $6,712,800
  Foreign                                                  3,459,100      2,901,800       2,496,600
---------------------------------------------------------------------------------------------------
Total                                                    $10,286,800    $ 9,566,600      $9,209,400
===================================================================================================
Adjusted underwriting
  profit (loss):
  Domestic                                               $   (91,500)   $  (130,300)     $ (290,100)
  Foreign                                                    239,000        140,700          95,000
---------------------------------------------------------------------------------------------------
Total                                                    $   147,500    $    10,400      $ (195,100)
=================================================================================================== 
Net investment income:
  Domestic                                               $ 1,147,600    $ 1,086,000      $1,014,600
  Foreign                                                    287,500        254,500         237,500
---------------------------------------------------------------------------------------------------
Total                                                    $ 1,435,100    $ 1,340,500      $1,252,100
===================================================================================================
Operating income before
  realized capital gains:
  Domestic                                               $ 1,056,100    $   955,700      $  724,500
  Foreign                                                    526,500        395,200         332,500
---------------------------------------------------------------------------------------------------
Total                                                      1,582,600      1,350,900       1,057,000
Realized capital gains                                        52,500         65,200          67,100
---------------------------------------------------------------------------------------------------
Operating income                                         $ 1,635,100    $ 1,416,100      $1,124,100
===================================================================================================
</TABLE>


         In AIG's general insurance operations, 1994 net premiums written and
net premiums earned increased 8.4 percent and 7.5 percent, respectively, from
those of 1993. In 1993, net premiums written increased 9.7 percent and net
premiums earned increased 3.9 percent when compared to 1992.

         The growth in net premiums written in 1994 and 1993 resulted from a
combination of several factors. Although AIG continued to achieve some general
price increases in domestic commercial property and some specialty casualty
markets, the primary reasons for this growth were price and volume increases
overseas. Foreign general insurance operations produced 33.0 percent of the
general insurance net premiums written in 1994, 30.1 percent in 1993 and 28.2
percent in 1992.

         During 1994, the U.S. dollar declined in value in relation to most
major foreign currencies in which AIG transacts business. Accordingly, the
translation of foreign net premiums written into U.S. dollars for the purposes
of consolidation caused the increase in total net premiums written to be
approximately one and one-half percentage points greater than it would have
been if translated utilizing exchange rates prevailing in 1993.

         If the net premiums written with respect to the domestic risk
management operations were excluded from both 1994 and 1993, the domestic net
premiums written would have increased approximately 12 percent. The decline in
the volume of the risk management net premiums written was generally a result
of higher deductibles. This decline had no impact on the operating income
produced by the risk management business.

         Net premiums written are initially deferred and earned based upon the
terms of the underlying policies. The net unearned premium reserve constitutes
the deferred revenues which are generally earned ratably over the policy
period. Thus, the net unearned premium reserve is not fully recognized as net
premiums earned until the end of the policy period.

         The statutory general insurance ratios were as follows:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                                1994           1993            1992
===================================================================================================
<S>                                                           <C>            <C>             <C>
Domestic:
Loss Ratio                                                     87.03          87.27           89.12
  Expense Ratio                                                14.87          15.12           15.42
---------------------------------------------------------------------------------------------------
  Combined Ratio                                              101.90         102.39          104.54
===================================================================================================
Foreign:
  Loss Ratio                                                   59.64          60.64           60.93
  Expense Ratio                                                33.22          34.26           34.81
---------------------------------------------------------------------------------------------------
Combined Ratio                                                 92.86          94.90           95.74
===================================================================================================
Consolidated:
  Loss Ratio                                                   77.82          79.19           81.48
  Expense Ratio                                                20.93          20.88           20.88
---------------------------------------------------------------------------------------------------
Combined Ratio                                                 98.75         100.07          102.36
===================================================================================================
</TABLE>


         The Northridge earthquake which struck the Los Angeles area of
California in January, 1994, resulted in gross and net incurred losses of
approximately $174 million and $55 million, respectively. Although there were
severe winter storms during the first quarter of 1994, AIG considered these as
losses incurred in the ordinary course of business, not as catastrophes. The
gross and net losses recorded in 1993 for catastrophes were approximately $134
million and $70 million, respectively. The catastrophes incurred in both 1994
and 1993 were significantly below the gross and net catastrophe losses of
approximately $567 million and $192 million, respectively, recorded in 1992.
Three major storms, Andrew, Iniki and Omar, occurred in 1992. If the
catastrophes were excluded from the losses incurred in each period, the pro
forma consolidated statutory general insurance ratios would be as follows:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                                1994           1993            1992
===================================================================================================
<S>                                                            <C>            <C>            <C>
Loss Ratio                                                     77.29          78.46           79.40
Expense Ratio                                                  20.93          20.88           20.88
---------------------------------------------------------------------------------------------------
Combined Ratio                                                 98.22          99.34          100.28
===================================================================================================
</TABLE>


         The maintenance of the pro forma statutory combined ratio in all three
years at a level approximating 100 is a result of AIG's emphasis on maintaining
its underwriting discipline within the continued overall competitiveness of the
domestic market environment as well as AIG's expense control.





14

<PAGE>   16
                             American International Group, Inc. and Subsidiaries


         Adjusted underwriting profit or loss (operating income less net
investment income and realized capital gains) represents statutory underwriting
profit or loss adjusted primarily for changes in deferred acquisition costs.
(See also Note 4 of Notes to Financial Statements.) The adjusted underwriting
profit in 1994 was $147.5 million compared to an adjusted underwriting profit
of $10.4 million recorded in 1993 and an adjusted underwriting loss of $195.1
million in 1992. (See also Note 19 of Notes to Financial Statements.)

         The domestic adjusted underwriting loss has been impacted
significantly by catastrophes in all three years. Excluding the effects of
these catastrophes, the domestic general insurance operation has significantly
improved over the three year period. This improvement is a result of a strategy
implemented several years ago. That is, AIG withdrew from certain classes of
business, primarily agency lines and certain segments of workers' compensation
business. At that time, AIG had determined that the returns on capital or
equity allocated to such classes were deemed unacceptable. AIG's objective
continues to be disciplined underwriting, especially in the domestic primary
casualty market, and AIG does not seek net premium growth where rates do not
adequately reflect its assessment of exposures.

         General insurance net investment income in 1994 increased 7.1 percent
when compared to 1993. In 1993, net investment income increased 7.1 percent
over 1992. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment. The new cash flow was
generated from net general insurance operating cash flow and included the
compounding of previously earned and reinvested net investment income. (See
also the discussion under "Liquidity" herein.)

         General insurance realized capital gains were $52.5 million in 1994,
$65.3 million in 1993 and $67.1 million in 1992. These realized gains resulted
from the ongoing management of the general insurance investment portfolios
within the overall objectives of the general insurance operations and arose
primarily from the disposition of equity securities and available for sale and
trading fixed maturities as well as redemptions of fixed maturities.

         General insurance operating income in 1994 increased 15.5 percent when
compared to 1993. The 1993 results reflect an increase of 26.0 percent from
1992. The contribution of general insurance operating income to income before
income taxes and the cumulative effect of accounting changes was 55.4 percent
in 1994 compared to 54.4 percent in 1993 and 52.6 percent in 1992.

         A year to year comparison of operating income is significantly
influenced by the catastrophe losses in any one year as well as the volatility
from one year to the next in realized capital gains. Adjusting each year to
exclude the effects of both catastrophe losses and realized capital gains,
operating income would have increased by 15.3 percent in 1994 and 13.9 percent
in 1993. The increase in the growth rate of 1994 over 1993 and 1993 over 1992
after the aforementioned adjustments was a result of the increased net
investment income and improvement in underwriting results.

         AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 100 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection which AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.

         AIG's general reinsurance assets amounted to $16.29 billion and
resulted from its reinsurance arrangements. Thus, a credit exposure existed at
December 31, 1994 with respect to reinsurance recoverable to the extent that
any reinsurer may not be able to reimburse AIG under the terms of these
reinsurance arrangements. AIG manages its credit risk in its reinsurance
relationships by transacting with reinsurers that it considers financially
sound, and when necessary AIG holds substantial collateral in the form of
funds, securities and/or irrevocable letters of credit. This collateral can be
drawn on for amounts that remain unpaid beyond specified time periods. The
application of this collateral against balances due or any changes to the
amount of collateral are based on the development of losses recoverable on an
individual reinsurer basis. This development includes losses incurred but not
reported (IBNR). Approximately 59 percent of reinsurance recoverable is from
unauthorized reinsurers. In order to obtain statutory recognition, nearly all
of these balances are collateralized. The remaining 41 percent of the
reinsurance recoverable is from authorized reinsurers and over 90 percent of
such balances are from reinsurers rated A- (excellent) or better, as rated by
A.M.  Best. This rating is a measure of financial strength. The terms
authorized and unauthorized pertain to regulatory categories, not
creditworthiness.

         AIG maintains a provision for estimated unrecoverable reinsurance and
has been largely successful in its prior recovery efforts. At December 31,
1994, AIG had allowances for unrecoverable reinsurance approximating $110
million. At that date, and prior to this allowance, AIG had no significant
reinsurance recoverables from any individual reinsurer which is financially
troubled (e.g., liquidated, insolvent, in receivership or otherwise subject to
formal or informal regulatory restriction).

         AIG's Reinsurance Security Department conducts ongoing detailed
assessments of the reinsurance markets and current and potential reinsurers
both foreign and domestic. Such assessments include, but are not limited to,
identifying if a reinsurer is appropriately licensed, and whether a reinsurer
has sufficient financial capacity. Also considered are such things as the local
economic environment and exchange rates of foreign reinsurers. This department
also reviews the nature of the risks ceded and the need for collateral. In
addition, AIG's Credit Risk Committee reviews the credit limits for and
concentrations with any one reinsurer.

         AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk





                                                                              15

<PAGE>   17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

among various legal entities. These reinsurance agreements have been approved
by the appropriate regulatory authorities. All material intercompany
transactions have been eliminated in consolidation.

         The consolidated general reinsurance assets of $16.29 billion include
reinsurance recoverables for (i) paid losses and loss expenses of $1.44 billion
and (ii) the ceded reserve for losses and loss expenses, including losses and
loss expenses incurred but not reported (ceded reserves) of $13.02 billion. The
ceded reserves represent the accumulation of estimates of ultimate ceded losses
including provisions for ceded IBNR and loss expenses. The methods used to
determine such estimates and to establish the resulting ceded reserves are
continually reviewed and updated. Any adjustments therefrom are reflected in
income currently. It is AIG's belief that the ceded reserves at December 31,
1994 were representative of the ultimate losses recoverable. In the future, as
the ceded reserves continue to develop to ultimate amounts, the ultimate loss
recoverable may be greater or less than the reserves currently ceded.

         At December 31, 1994, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $31.44 billion, an increase of $1.39
billion or 4.6 percent over the prior year end. General insurance net loss
reserves represent the accumulation of estimates of ultimate losses, including
IBNR, and loss expenses, reduced by reinsurance recoverable net of an allowance
for unrecoverable reinsurance and minor amounts of discounting related to
certain workers' compensation claims. The net loss reserves increased $861.9
million or 4.9 percent to $18.42 billion. The methods used to determine such
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting therefrom are reflected in operating income
currently. It is management's belief that the general insurance net loss
reserves are adequate to cover all general insurance net losses and loss
expenses as at December 31, 1994. In the future, if the general insurance net
loss reserves develop deficiently, such deficiency would have an adverse impact
on such future results of operations.

         In a very broad sense, the general loss reserves can be categorized
into two distinct groups: one group being long tail casualty lines of business;
the other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.

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

         A variety of actuarial methods and assumptions are normally employed
to estimate net losses for long tail casualty lines.  These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. Loss trend factors
reflect many items including changes in claims handling, exposure and policy
forms and current and future estimates of monetary inflation and social
inflation. Thus, many factors are implicitly considered in estimating the year
to year growth in loss costs. Therefore, AIG's carried net long tail loss
reserves are judgmentally set as well as tested for reasonableness using the
most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. For the
majority of long tail casualty lines, net loss trend factors approximating 10
percent were employed. These factors are periodically reviewed and subsequently
adjusted, as appropriate, to reflect emerging trends which are based upon past
loss experience.

         Estimation of net losses for short tail business is less complex than
for long tail casualty lines. Loss cost trends for many property lines can
generally be assumed to be similar to the growth in exposure of such lines. For
example, if the fire insurance coverage remained proportional to the actual
value of the property, the growth in property's exposure to fire loss can be
approximated by the amount of insurance purchased.

         For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.

         AIG continues to receive indemnity claims asserting injuries from
toxic waste, hazardous substances, and other environmental pollutants and
alleged damages to cover the cleanup costs of hazardous waste dump sites
(hereinafter collectively referred to as environmental claims) and indemnity
claims asserting injuries from asbestos. The vast majority of these asbestos
and environmental claims emanate from policies written in 1984 and prior years.
Commencing in 1985, standard policies contained an absolute exclusion for
pollution related damage. However, AIG currently underwrites pollution
impairment liability insurance on a claims made basis and excluded such claims
from the analyses included herein. AIG has established a specialized claims
unit which investigates and adjusts all such asbestos and environmental claims.

         Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends
which influence the development of asbestos and environmental claims are the
inconsistent court resolutions, judicial interpretations which broaden the
intent of the policies and scope of coverage and the increasing number of new
claims. The case law that has emerged can be characterized as still being in
its infancy and the likelihood of any firm direction in the near future is very





16

<PAGE>   18
                             American International Group, Inc. and Subsidiaries


small. Additionally, the exposure for cleanup costs of hazardous waste dump
sites involves issues such as allocation of responsibility among potentially
responsible parties and the government's refusal to release parties. The
cleanup cost exposure may significantly change if the Congressional
reauthorization of Superfund expected in 1995 dramatically changes, thereby
reducing or increasing litigation and cleanup costs.

         In the interim, AIG and other industry members have and will continue
to litigate the broadening judicial interpretation of the policy coverage and
the liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims. Such development will
be affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
changes in Superfund and waste dump site coverage issues. Additional
liabilities could emerge for amounts in excess of the current reserves held.
Although this emergence cannot now be reasonably estimated, it could have a
material adverse impact on AIG's future operating results. The reserves carried
for these claims at December 31, 1994 are believed to be adequate as these
reserves are based on the known facts and current law.  Furthermore, as AIG's
net exposure retained relative to the gross exposure written was lower in 1984
and prior years, the potential impact of these claims is much smaller on the
net loss reserves than on the gross loss reserves. (See the previous discussion
on reinsurance collectibility herein.)

         The majority of AIG's exposures for asbestos and environmental claims
are excess casualty coverages, not primary coverages.  Thus, the litigation
costs are treated in the same manner as indemnity reserves. That is, litigation
expenses are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.

         A summary of reserve activity, including estimates for applicable
IBNR, relating to asbestos and environmental claims separately and combined at
December 31, 1994 and 1993 was as follows:


<TABLE>
<CAPTION>
(in millions)                                                                                     
--------------------------------------------------------------------------------------------------
                                                      1994                           1993         
                                            ------------------------        ----------------------
                                               Gross             Net           Gross           Net
==================================================================================================
<S>                                         <C>               <C>          <C>              <C>
Asbestos:
Reserve for losses and loss
  expenses at beginning of year             $  656.0          $116.7       $  558.4         $  86.9
Losses and loss expenses incurred              149.2            45.8          242.9            65.1
Losses and loss expenses paid                 (119.2)          (32.3)        (145.3)          (35.3)
--------------------------------------------------------------------------------------------------- 
Reserve for losses and loss
  expenses at end of year                   $  686.0          $130.2       $  656.0         $ 116.7
===================================================================================================
Environmental:
Reserve for losses and loss
  expenses at beginning of year             $  684.8          $191.5       $  566.4         $ 166.6
Losses and loss expenses incurred              187.5            61.8          278.6           106.5
Losses and loss expenses paid                 (144.2)          (53.2)        (160.2)          (81.6)
--------------------------------------------------------------------------------------------------- 
Reserve for losses and loss
  expenses at end of year                   $  728.1          $200.1       $  684.8         $ 191.5
===================================================================================================
Combined:
Reserve for losses and loss
  expenses at beginning of year             $1,340.8          $308.2       $1,124.8         $ 253.5
Losses and loss expenses incurred              336.7           107.6          521.5           171.6
Losses and loss expenses paid                 (263.4)          (85.5)        (305.5)         (116.9)
--------------------------------------------------------------------------------------------------- 
Reserve for losses and loss
  expenses at end of year                   $1,414.1          $330.3       $1,340.8         $ 308.2
===================================================================================================
</TABLE>


         The gross and net IBNR included in the aforementioned reserve for
losses and loss expenses at December 31, 1994 and 1993 were estimated as
follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                    
--------------------------------------------------------------------------------------------------
                                                      1994                           1993         
                                            ------------------------        ----------------------
                                               Gross             Net           Gross           Net
==================================================================================================
<S>                                         <C>              <C>           <C>              <C>
Combined                                    $150,000         $30,000       $150,000         $30,000
===================================================================================================
</TABLE>






                                                                              17

<PAGE>   19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

         A summary of asbestos and environmental claims count activity for the
years ended December 31, 1994 and 1993 were as follows:


<TABLE>
<CAPTION>
                                                                                                                     
---------------------------------------------------------------------------------------------------------------------
                                                     1994                                      1993                  
                                      ------------------------------------      -------------------------------------
                                      ASBESTOS ENVIRONMENTAL      COMBINED      ASBESTOS   ENVIRONMENTAL     COMBINED
=====================================================================================================================
<S>                                     <C>           <C>           <C>           <C>             <C>          <C>
Claims at beginning of year              5,522        16,661        22,183         5,490          14,169       19,659
Claims during year:
  Opened                                 1,626         3,178         4,804         1,381           4,875        6,256
  Settled                                 (106)         (501)         (607)         (144)           (455)        (599)
Dismissed or otherwise resolved         (1,095)       (3,115)       (4,210)       (1,205)         (1,928)      (3,133)
--------------------------------------------------------------------------------------------------------------------- 
Claims at end of year                    5,947        16,223        22,170         5,522          16,661       22,183
=====================================================================================================================
</TABLE>


         The average cost per claim settled, dismissed or otherwise resolved
for the years ended December 31, 1994 and 1993 was as follows:


<TABLE>
<CAPTION>
                                                                                       
----------------------------------------------------------------------------------------
                                                1994                      1993         
                                        --------------------      ----------------------
                                         Gross          Net        Gross            Net
========================================================================================
<S>                                    <C>           <C>          <C>            <C>
Asbestos                               $99,300       $26,900      $107,700       $26,200
Environmental                           39,900        14,700        67,200        34,200
Combined                                54,700        17,700        81,900        31,300
========================================================================================
</TABLE>


         Recently, an insurance rating agency has developed a survival ratio to
measure the number of years it would take a company to exhaust both its
asbestos and environmental reserves for losses and loss expenses based on that
company's current level of asbestos and environmental claims payments. The
higher the ratio, the more years the reserves for losses and loss expenses
cover these claims payments. These ratios are computed based on the respective
ending reserves for losses and loss expenses over the respective claims
settlements during the fiscal year. Such payments include indemnity payments
and legal and loss adjustment payments. It should be noted, however, that this
is an extremely simplistic approach to measuring asbestos and environmental
reserve levels. Many factors, such as aggressive settlement procedures, mix of
business and level of coverage provided, do have significant impact on the
amount of asbestos and environmental losses and loss expense reserves, ultimate
payments thereof and the resultant ratio. In addition to the study published by
that insurance rating agency, another published study projected significantly
lower ultimate costs for toxic waste cleanups for the insurance industry.

         The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments include court judgments; court orders;
covered claims with no coverage defenses; state mandated cleanup costs; claims
where AIG's coverage defenses are minimal; and settlements made less than six
months before the first trial setting. Also, AIG considers all legal and loss
adjustment payments as involuntary.

         AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a
result, AIG reduces its exposure to future environmental loss contingencies.

         Accordingly, AIG's survival ratios for involuntary asbestos and
environmental claims, separately and combined, were estimated as follows for
the years ended December 31, 1994 and 1993:


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                                1994                       1993         
                                        --------------------       ---------------------
                                          Gross          Net          Gross          Net
========================================================================================
<S>                                       <C>            <C>           <C>           <C>
Involuntary survival ratios:
  Asbestos                                 5.8           4.0           4.5           3.3
  Environmental                           11.0           8.1           9.4           5.0
  Combined                                 7.9           6.1           6.3           4.2
========================================================================================
</TABLE>


         AIG's operations are negatively impacted under guarantee fund
assessment laws which exist in most states. As a result of operating in a state
which has guarantee fund assessment laws, a solvent insurance company may be
assessed for certain obligations arising from the insolvencies of other
insurance companies which operated in that state. AIG generally records these
assessments upon notice. Additionally, certain states permit at least a portion
of the assessed amount to be used as a credit against a company's future
premium tax liabilities. Therefore, the ultimate net assessment cannot
reasonably be estimated. The guarantee fund assessments net of credits for
1994, 1993 and 1992 were $48.2 million, $69.1 million and $27.7 million,
respectively. Also, AIG is required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated. (See also Note 19 of Notes to Financial Statements.)





18

<PAGE>   20
                             American International Group, Inc. and Subsidiaries


LIFE INSURANCE OPERATIONS

Life insurance operations for the twelve month periods ending December 31,
1994, 1993 and 1992 were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                     
-----------------------------------------------------------------------------------
                                                1994            1993           1992
===================================================================================
<S>                                     <C>             <C>            <C>
Premium income:
  Domestic                              $    370,100    $    268,300   $    269,400
  Foreign                                  6,354,200       5,477,700      4,583,700
-----------------------------------------------------------------------------------
Total                                   $  6,724,300    $  5,746,000   $  4,853,100
===================================================================================
Net investment income:
  Domestic                              $    600,600    $    471,500   $    409,300
  Foreign                                  1,147,800       1,028,200        904,500
-----------------------------------------------------------------------------------
Total                                   $  1,748,400    $  1,499,700   $  1,313,800
===================================================================================
Operating income before
  realized capital gains:
  Domestic                              $     38,300    $     19,300   $     10,800
  Foreign                                    827,500         707,700        613,400
-----------------------------------------------------------------------------------
Total                                        865,800         727,000        624,200
Realized capital gains                        86,700          54,600         43,300
-----------------------------------------------------------------------------------
Operating income                        $    952,500    $    781,600   $    667,500
===================================================================================
Life insurance in-force:
  Domestic                              $ 43,849,700    $ 17,167,300   $ 15,745,400
  Foreign                                289,529,100     239,994,800    194,860,500
-----------------------------------------------------------------------------------
Total                                   $333,378,800    $257,162,100   $210,605,900
===================================================================================
</TABLE>


         AIG's life insurance operations continued to show growth as a result
of overseas operations, particularly in Asia. AIG's life premium income in 1994
represented an 17.0 percent increase from the prior year. This compares with an
increase of 18.4 percent in 1993 over 1992. Foreign life operations produced
94.5 percent, 95.3 percent and 94.4 percent of the life premium income in 1994,
1993 and 1992, respectively. (See also Notes 1, 4 and 6 of Notes to Financial
Statements.)

         As previously discussed, the U.S. dollar declined in value in relation
to most major foreign currencies in which AIG transacts business. Accordingly,
the translation of foreign life premium income into U.S. dollars for purposes
of consolidation caused the increase in total premium income to be
approximately two percentage points greater than it would have been if
translated utilizing exchange rates prevailing in 1993.

         Life insurance net investment income increased 16.6 percent in 1994
compared to an increase of 14.1 percent in 1993. The growth in net investment
income was primarily attributable to new cash flow for investment.

         The new cash flow was generated from net life insurance operating cash
flow and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein.)

         The growth in the premium income of the domestic life segment resulted
primarily from the risk bearing premium related to corporate-owned life
insurance products. Additionally, the interest income earned on the policy
loans associated with these products has significantly increased domestic
investment income.

         The traditional life products, such as whole and term life and
endowments, were the major contributors to the growth in foreign premium income
and investment income, particularly in Asia, and continue to be the primary
source of growth in the life segment. A mixture of traditional, accident and
health and financial products are being sold in Japan.

         Life insurance realized capital gains were $86.7 million in 1994,
$54.6 million in 1993 and $43.3 million in 1992. These realized gains resulted
from the ongoing management of the life insurance investment portfolios within
the overall objectives of the life insurance operations and arose primarily
from the disposition of equity securities and available for sale fixed
maturities and redemptions of fixed maturities.

         Life insurance operating income in 1994 increased 21.9 percent to
$952.5 million compared to an increase of 17.1 percent in 1993. Excluding
realized capital gains from life insurance operating income, the percent
increases would be 19.1 percent and 16.5 percent in 1994 and 1993,
respectively. The contribution of life insurance operating income to income
before income taxes and the cumulative effect of accounting changes amounted to
32.3 percent in 1994 compared to 30.0 percent in 1993 and 31.2 percent in 1992.

         The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk.  The risk associated with
the financial and investment contract products is investment risk.

         Underwriting risk represents the exposure to loss resulting from the
actual policy experience adversely emerging in comparison to the assumptions
made in the product pricing associated with mortality, morbidity, termination
and expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately $1.3 million of
coverage by using yearly renewable term reinsurance. The life insurance
operations have not entered into assumption reinsurance transactions or surplus
relief transactions during the three year period ended December 31, 1994. (See
also Note 5 of Notes to Financial Statements.)

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

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

         The asset-liability relationship is appropriately managed in AIG's
foreign operations, even though certain territories lack qualified long-term
investments or there are investment restrictions imposed by the local
regulatory authorities. For example,





                                                                              19

<PAGE>   21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

in Japan and several Southeast Asia territories, the duration of the
investments is often for a shorter period than the effective maturity of such
policy liabilities. Therefore, there is a risk that the reinvestment of the
proceeds at the maturity of the investments may be at a yield below that of the
interest required for the accretion of the policy liabilities. In Japan, the
average duration of the investment portfolio is 5.0 years, while the related
policy liabilities are estimated to be 11.5 years. To maintain an adequate
yield to match the interest required over the duration of the liabilities,
constant management focus is required to reinvest the proceeds of the maturing
securities without sacrificing investment quality. To the extent permitted
under local regulation, AIG may invest in qualified longer-term securities
outside Japan to achieve a closer matching in both duration and the required
yield. AIG is able to manage any asset-liability duration difference through
maintenance of sufficient global liquidity and to support any operational
shortfall through its international financial network. Domestically, the
asset-liability matching process is appropriately functioning as there are
investments available to match the duration and the required yield. (See also
the discussion under "Liquidity" herein.)

         AIG uses asset-liability matching as a management tool to determine
the composition of the invested assets and marketing strategies. As a part of
these strategies, AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest rate or other
economic changes.

AGENCY AND SERVICE FEE OPERATIONS

Agency and service fee operating income in 1994 decreased 10.2 percent to $54.1
million compared to $60.2 million which was an increase of 14.6 percent in
1993. The decline in 1994 was due to reduced commission revenue in certain of
AIG's managing general agencies. The increase in operating income in 1993
resulted from the growth of risk management services. Agency and service fee
operating income contributed 1.8 percent to AIG's income before income taxes
and the cumulative effect of accounting changes in 1994 compared to 2.3 percent
in 1993 and 2.5 percent in 1992.

FINANCIAL SERVICES OPERATIONS

Financial services operations for the twelve month periods ending December 31,
1994, 1993 and 1992 were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                     
-----------------------------------------------------------------------------------
                                                1994            1993           1992
===================================================================================
<S>                                       <C>             <C>            <C>
REVENUES:
International Lease Finance Corp.         $1,097,600      $  879,100     $  690,900
AIG Financial Products Corp.*                279,100         336,100        421,000
AIG Trading Group Inc.*                      246,600         227,400        175,800
Other                                        243,000         152,800        117,200
-----------------------------------------------------------------------------------
Total                                     $1,866,300      $1,595,400     $1,404,900
===================================================================================
Operating income:
International Lease Finance Corp.         $  248,200      $  220,000     $  186,200
AIG Financial Products Corp.                 131,000         150,100        171,500
AIG Trading Group Inc.                        55,200          69,800         56,000
Other, including intercompany
  adjustments                                (29,500)        (49,900)       (67,300)
----------------------------------------------------------------------------------- 
Total                                     $  404,900      $  390,000     $  346,400
===================================================================================
</TABLE>


* Represents net trading revenues.

         Financial services operating income increased 3.8 percent in 1994 over
1993. This compares with an increase of 12.6 percent in 1993 over 1992. The
financial services operating income in both 1994 and 1993 increased primarily
as a result of the increase in the operating income of International Lease
Finance Corporation (ILFC).

         ILFC primarily engages in the acquisition of new and used commercial
jet aircraft and the leasing and sale of such aircraft to airlines around the
world. ILFC derives a substantial portion of its revenues from its leasing
operations and is also engaged in the remarketing of commercial jets to and for
airlines and financial institutions. As a result of the rising interest rate
environment during 1994, ILFC's new borrowings were at higher rates relative to
prior years. In such an environment, ILFC negotiates higher lease rates on any
new contract. The increase in interest rates had a minor impact on ILFC's
current lease margins. It is not anticipated that this rise in interest rates
will have any significant impact on future operating income. (See also the
discussions under "Capital Resources" and "Liquidity" herein.)

         ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to lease or re-lease at
acceptable rates or sell at lease expiration and through committing to purchase
aircraft which it would be unable to lease. ILFC manages its lessee
non-performance exposure through credit reviews and security deposit
requirements. At December 31, 1994, only three of 270 aircraft owned were not
leased. At March 1, 1995, these three aircraft have been committed for either
lease or sale and all other aircraft remain leased. Currently, 77 percent of
the fleet is leased to foreign carriers producing 76.8 percent of ILFC's rental
revenues. (See also the discussions under "Capital Resources" and "Liquidity"
herein.)

         AIG Trading Group Inc. and its subsidiaries (AIGTG), derive a
substantial portion of their revenues from market making and trading
activities, as principals, in foreign exchange, interest rates, precious and
base metals, petroleum and natural





20

<PAGE>   22
                             American International Group, Inc. and Subsidiaries


gas. AIGTG's operating income declined as a result of reduced volatility in
1994 relative to 1993 in the markets in which AIGTG participates. (See also the
discussions under "Capital Resources," "Liquidity" and "Derivatives" herein.)

         AIG Financial Products Corp. and its subsidiaries (AIGFP) participate
in the derivatives dealer market conducting, as principals, an interest rate,
currency and equity derivative products business which includes long-dated
transactions. AIGFP also enters into guaranteed investment agreements. In 1994,
AIGFP's revenues and operating income were less than those of 1993 as a result
of fewer transactions. Current and past performance may not provide a basis for
predicting future performance. AIGFP derives substantially all its revenues
from proprietary positions entered in connection with counterparty transactions
rather than for speculative purposes. (See also the discussions under "Capital
Resources," "Liquidity" and "Derivatives" herein.)

         Financial services operating income represented 13.7 percent of AIG's
income before income taxes and the cumulative effect of accounting changes in
1994. This compares to 15.0 percent and 16.2 percent in 1993 and 1992,
respectively.

OTHER OPERATIONS

In 1994, AIG's equity in income of minority-owned insurance operations was
$56.0 million compared to $39.6 million in 1993 and $27.9 million in 1992. The
equity interest in insurance companies, which includes two equity operations
which commenced business during 1993, represented 1.9 percent of income before
income taxes and the cumulative effect of accounting changes in 1994, compared
to 1.5 percent in 1993 and 1.3 percent in 1992.

         Other realized capital losses amounted to $52.3 million, $12.7 million
and $11.3 million in 1994, 1993 and 1992, respectively.

         Minority interest represents minority shareholders' equity in income
of certain consolidated subsidiaries. In 1994, minority interest amounted to
$29.7 million. In 1993 and 1992, minority interest amounted to $26.9 million
and $11.2 million, respectively.

         Other income (deductions)-net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, realized
foreign exchange transaction gains and losses in substantially all currencies
and unrealized gains and losses in hyperinflationary currencies, as well as the
income and expenses of the parent holding company and other miscellaneous
income and expenses. In 1994, net deductions amounted to $68.6 million. In 1993
and 1992, net deductions amounted to $46.9 million and $59.0 million,
respectively.

         Income before income taxes and the cumulative effect of accounting
changes amounted to $2.95 billion in 1994 and $2.60 billion in 1993. Income
before income taxes was $2.14 billion in 1992.

         In 1994, AIG recorded a provision for income taxes of $776.5 million
compared to the provisions of $683.0 million and $512.0 million in 1993 and
1992, respectively. These provisions represent effective tax rates of 26.3
percent in 1994 and 1993 and 24.0 percent in 1992. The most significant cause
for the increase in the effective tax rate for 1993 was the Omnibus Budget
Reconciliation Act of 1993 (the Act). Among other things, the Act increased the
corporate tax rate to 35 percent from 34 percent, effective January 1, 1993.
Additionally, the 1993 effective tax rate was influenced by higher state and
local income taxes. (See Note 3 of Notes to Financial Statements.)

         Income before the cumulative effect of accounting changes amounted to
$2.18 billion in 1994, $1.92 billion in 1993 and $1.63 billion in 1992. The
increases in net income over the three year period resulted from those factors
described above.

         At January 1, 1993, AIG's equity in income of minority-owned insurance
operations was positively impacted by the cumulative effect of accounting
changes on such operations from the adoption of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes"(FASB 109), which was
partially offset by the adoption of Statement of Financial Accounting Standards
No. 106 "Employer's Accounting for Postretirement Benefits Other than Pension
Plans" (FASB 106). AIG's equity in the cumulative effect of such accounting
changes was a net benefit of $20.7 million.

         AIG had adopted FASB 106 and FASB 109 effective as at January 1, 1992,
recording a cumulative effect net benefit of $31.9 million. The pretax
cumulative charge of adopting FASB 106 was $83.1 million and the net of tax
cumulative charge was $54.8 million.  The cumulative effect of adopting FASB
109 was a benefit of $86.7 million.

         Net income amounted to $2.18 billion in 1994, $1.94 billion in 1993
and $1.66 billion in 1992. The increases in net income over the three year
period resulted from those factors described above.





                                                                              21

<PAGE>   23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CAPITAL RESOURCES

At December 31, 1994, AIG had total capital funds of $16.42 billion and total
borrowings of $17.52 billion.

         Total borrowings at December 31, 1994 and 1993 were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                     
-----------------------------------------------------------------------------------
December 31,                                                    1994           1993
===================================================================================
<S>                                                      <C>            <C>
Borrowings under Obligations of
  Guaranteed Investment Agreements
  (GIA) -- AIGFP                                         $ 5,535,300    $ 6,735,600
-----------------------------------------------------------------------------------
Commercial Paper:
  Funding                                                  1,211,300        891,700
  ILFC                                                     1,960,600*     1,442,400*
  AICCO                                                      617,700        638,200
  AIGFP                                                           --        176,600
-----------------------------------------------------------------------------------
  Total                                                    3,789,600      3,148,900
-----------------------------------------------------------------------------------
Medium Term Notes:
  ILFC                                                     1,999,500*     1,753,700*
  AIG                                                        155,000        295,000
-----------------------------------------------------------------------------------
  Total                                                    2,154,500      2,048,700
-----------------------------------------------------------------------------------
Notes and Bonds Payable:
  ILFC                                                     2,950,000*     2,550,000*
  AIGFP                                                    1,048,100        521,400
  AIG: Lire bonds                                            159,100        159,100
      Zero coupon notes                                       65,800         59,100
-----------------------------------------------------------------------------------
  Total                                                    4,223,000      3,289,600
-----------------------------------------------------------------------------------
Loans and Mortgages Payable:
  AIGTG                                                      890,800        117,900
  ILFC                                                       678,600*        79,000*
  AIG                                                        247,700        269,400
-----------------------------------------------------------------------------------
  Total                                                    1,817,100        466,300
-----------------------------------------------------------------------------------
Total Borrowings                                          17,519,500     15,689,100
-----------------------------------------------------------------------------------
Borrowings not guaranteed by AIG                           7,588,700      5,825,100
Matched GIA borrowings                                     5,535,300      6,735,600
-----------------------------------------------------------------------------------
                                                          13,124,000     12,560,700
-----------------------------------------------------------------------------------
Remaining borrowings of AIG                              $ 4,395,500    $ 3,128,400
===================================================================================
</TABLE>


* AIG does not guarantee or support these borrowings.

See also Note 9 of Notes to Financial Statements.

         GIAs serve as the primary source of proceeds for AIGFP's investments
in a diversified portfolio of securities and derivative transactions. During
1994, the GIA balance declined $1.2 billion. As a result, AIGFP increased its
term notes payable $526.7 million to $1.05 billion as an additional source of
funding for its operating activities. (See also the discussions under
"Operational Review", "Liquidity" and "Derivatives" herein and Notes 1, 9 and
11 of Notes to Financial Statements.)

         AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its subsidiaries. Funding
intends to continue to meet AIG's funding requirements through the issuance of
commercial paper guaranteed by AIG. This issuance of commercial paper is
subject to the approval of AIG's Board of Directors. ILFC, A.I. Credit Corp.
(AICCO) and AIGFP issue commercial paper for the funding of their own
operations. AIG does not guarantee AICCO's or ILFC's commercial paper.
However, AIG has entered into an agreement in support of AICCO's commercial
paper. AIG guarantees AIGFP's commercial paper. (See also the discussion under
"Derivatives" herein and Note 9 of Notes to Financial Statements.)

         On December 15, 1994, AIG and Funding entered into two syndicated
revolving credit facilities (the Facilities) aggregating $1 billion. The
Facilities consist of a $500 million 364 day revolving credit facility and a
$500 million five year revolving credit facility. The Facilities represent a
consolidation of domestic and international bilateral lines of credit and can
be used for general corporate purposes. The Facilities also provide backup for
AIG's commercial paper programs administered by Funding. There are currently no
borrowings outstanding under either of the Facilities, nor were any borrowings
outstanding as of December 31, 1994.

         During 1994, ILFC increased the aggregate principal amount outstanding
of its medium term and term notes to $4.95 billion at December 31, 1994, a net
increase of $645.8 million. At December 31, 1994, ILFC had $1.6 billion in
aggregate principal amount of debt securities registered for issuance from time
to time. The cash used to purchase flight equipment is derived primarily from
the proceeds of ILFC's debt financing. The primary sources for the repayment of
this debt and the interest expense thereon are the lease receipts received and
proceeds from the sale of flight equipment. During 1994, ILFC obtained net
financing of $1.76 billion for the acquisition of flight equipment costing
$2.73 billion. Additional funds were provided by operating cash flow and the
sale of flight equipment. ILFC sold $100 million of Market Auction Preferred
Stock in 1993. Additionally, $100 million of Market Auction Preferred Stock was
sold in February, 1995. The proceeds from the sale of these securities were
used to reduce ILFC's maturing debt. (See also the discussions under
"Operational Review" and "Liquidity" herein and Notes 1, 9 and 16 of Notes to
Financial Statements.)

         During 1994, AIG did not issue any medium term notes and $140.0
million of previously issued notes matured. At December 31, 1994, AIG had
$247.0 million in aggregate principal amount of debt securities registered for
issuance from time to time. (See also the discussion under "Derivatives" herein
and Note 9 of Notes to Financial Statements.)

         AIGTG increased its short-term borrowings by $772.9 million to finance
its commodities inventory, futures exchange margin requirements and timing
differences in operating cash flows. (See also the discussion under
"Operational Review," "Liquidity" and "Derivatives" herein and Notes 1, 9 and
11 of Notes to Financial Statements.)

         AIG's capital funds have increased $1.20 billion in 1994. Unrealized
appreciation of investments, net of taxes, decreased $738.1 million, primarily
resulting from the rise in domestic interest rates and its effect on the market
values of bonds worldwide.  As a result of adopting Financial Accounting
Standards No. 115 "Accounting for Certain Investments on Debt and Equity
Securities", unrealized appreciation of investments, net of taxes, is now
subject to increased volatility resulting from the





22

<PAGE>   24
                             American International Group, Inc. and Subsidiaries


changes in the market value of bonds available for sale. The cumulative
translation adjustment loss, net of taxes, decreased $60.1 million as a result
of the general weakness of the U.S. dollar against most major currencies.
Retained earnings increased $2.04 billion, resulting from net income less
dividends.

         In December 1994, the Mexican peso was devalued significantly against
the U.S. dollar, as well as other currencies. AIG's Mexican operations
constitute only a minor part of AIG's consolidated general and life operations
and therefore the devaluation had little effect on AIG's results of operations
or financial condition. It is also anticipated that there will be little impact
going forward.

         During 1994, AIG repurchased 2.09 million shares of its common stock
in the open market at a cost of $177.7 million.

         During 1993, preferred stock issued and outstanding decreased $7,500
and additional paid-in capital declined approximately $150 million due to the
redemption of Series M-1 and M-2 Exchangeable Money Market Cumulative Serial
Preferred Stock. Common stock increased by $281.2 million and additional
paid-in capital decreased by that amount as a result of a common stock split in
the form of a 50 percent stock dividend paid July 30, 1993. (See also Note 10
of Notes to Financial Statements.)

         Payments of dividends to AIG by its insurance subsidiaries are subject
to certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes
such continued reinvestment in the future will be adequate to meet any
foreseeable capital needs. However, AIG may choose from time to time to raise
additional funds through the issuance of additional securities. At December 31,
1994, there were no significant statutory or regulatory issues which would
impair AIG's financial condition, results of operations or liquidity. (See also
the discussion under "Liquidity" herein and Note 10 of Notes to Financial
Statements.)

LIQUIDITY

At December 31, 1994, AIG's consolidated invested assets included approximately
$2.54 billion of cash and short-term investments.  Consolidated net cash
provided from operating activities in 1994 amounted to approximately $5.39
billion.

         Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.

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

         The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance pretax operating cash flow is
derived from two sources, underwriting operations and investment operations. In
the aggregate, AIG's insurance operations generated approximately $7.9 billion
in pretax cash flow during 1994. Cash flow includes periodic premium
collections, including policyholders' contract deposits, paid loss recoveries
less reinsurance premiums, losses, benefits, acquisition and operating expenses
paid and investment income. Generally, there is a time lag from when premiums
are collected and, when as a result of the occurrence of events specified in
the policy, the losses and benefits are paid. AIG's insurance investment
operations generated approximately $3.1 billion in investment income cash flow
during 1994. Investment income cash flow is primarily derived from interest and
dividends received and includes realized capital gains.

         The combined insurance pretax operating cash flow coupled with the
cash and short-term investments of $2.17 billion provided the insurance
operations with a significant amount of liquidity. This liquidity is available
to purchase high quality and diversified fixed income securities and to a
lesser extent marketable equity securities and to provide mortgage loans on
real estate, policy and collateral and guaranteed loans. With this liquidity
coupled with proceeds of approximately $12.7 billion from the maturities, sales
and redemptions of fixed income securities and from the sales of marketable
equity securities, AIG purchased approximately $19.4 billion of fixed income
securities and marketable equity securities during 1994.





                                                                              23

<PAGE>   25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

         During 1995, AIG expects to have approximately $1 billion of held to
maturity municipal bonds redeemed for approximately $1 billion. Prior to
redemption, the yield on these bonds approximates 8 percent. If these bonds
were redeemed at March 1, 1995, the estimated yield on the reinvestment of the
proceeds in bonds with similar characteristics would approximate 6.5 percent.
AIG does not anticipate that these redemptions will have a significant effect
on AIG's general investment income, operations, financial condition or
liquidity.

         The following table is a summary of AIG's invested assets by
significant segment, including investment income due and accrued and real
estate, at December 31, 1994 and 1993:


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                            
----------------------------------------------------------------------------------------------------------------------------------
                                                                   DECEMBER 31, 1994                        DECEMBER 31, 1993     
                                                              -------------------------                ---------------------------
                                                                INVESTED        PERCENT                   INVESTED         PERCENT
                                                                  ASSETS       OF TOTAL                     ASSETS        OF TOTAL
==================================================================================================================================
<S>                                                          <C>                  <C>                  <C>                   <C>
General insurance                                            $23,873,000           30.2%               $22,573,800            33.2%
Life insurance                                                26,690,100           33.8                 22,037,300            32.4
Financial services*                                           27,920,300           35.4                 22,957,300            33.7
Other                                                            491,500            0.6                    464,100             0.7
----------------------------------------------------------------------------------------------------------------------------------
Total                                                        $78,974,900          100.0%               $68,032,500           100.0%
================================================================================================================================== 
</TABLE>


* See also the discussion under "Accounting Standards: Standards Adopted in
  1994" herein.

         The following tables summarize the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at December 31, 1994 and 1993:


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                            
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                             PERCENT DISTRIBUTION
                                                                                               PERCENT      ----------------------
DECEMBER 31, 1994                                      GENERAL           LIFE         TOTAL   OF TOTAL      DOMESTIC       FOREIGN
==================================================================================================================================
<S>                                                <C>            <C>           <C>              <C>           <C>            <C>
Fixed Maturities:
  Available for sale, at market value(a)           $ 4,995,800    $16,890,700   $21,886,500       43.3%         32.2%         67.8%
  Held to maturity, at amortized cost(b)            13,454,300             --    13,454,300       26.6         100.0            --
Equity securities, at market value(c)                2,799,700      2,090,400     4,890,100        9.7          30.4          69.6
Mortgage loans on real estate, policy and
  collateral loans                                      27,700      4,534,600     4,562,300        9.0          43.1          56.9
Short-term investments, including
  time deposits, and cash                              954,900      1,213,000     2,167,900        4.3          27.6          72.4
Real estate                                            364,100        648,900     1,013,000        2.0          18.0          82.0
Investment income due and accrued                      446,700        471,300       918,000        1.8          57.5          42.5
Other invested assets                                  829,800        841,200     1,671,000        3.3          50.9          49.1
----------------------------------------------------------------------------------------------------------------------------------
Total                                              $23,873,000    $26,690,100   $50,563,100      100.0%         51.7%         48.3%
================================================================================================================================== 
</TABLE>


(a)   Includes $164,000 of bonds trading securities, at market value.

(b)   Includes $412,500 of preferred stock, at amortized cost.

(c)   Includes $61,900 of preferred stock, at market value.


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                            
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                             PERCENT DISTRIBUTION
                                                                                               PERCENT      ----------------------
DECEMBER 31, 1993                                      GENERAL           LIFE         TOTAL   OF TOTAL      DOMESTIC       FOREIGN
==================================================================================================================================
<S>                                                <C>            <C>           <C>              <C>           <C>            <C>
Fixed Maturities:
  Available for sale, at market value(a)           $ 4,387,800    $13,387,800   $17,775,600       39.8%         39.0%         61.0%
  Held to maturity, at amortized cost(b)            12,211,100             --    12,211,100       27.4         100.0            --
Equity securities, at market value(c)                2,816,100      1,562,700     4,378,800        9.8          36.7          63.3
Mortgage loans on real estate, policy and
  collateral loans                                      96,300      2,678,200     2,774,500        6.2          24.6          75.4
Short-term investments, including
  time deposits, and cash                            1,820,500      2,878,600     4,699,100       10.6          23.1          76.9
Real estate                                            284,300        572,000       856,300        1.9          16.2          83.8
Investment income due and accrued                      429,700        363,900       793,600        1.8          54.0          46.0
Other invested assets                                  528,000        594,100     1,122,100        2.5          51.4          48.6
----------------------------------------------------------------------------------------------------------------------------------
Total                                              $22,573,800    $22,037,300   $44,611,100      100.0%         53.0%         47.0%
================================================================================================================================== 
</TABLE>


(a)   Includes $310,800 of bonds trading securities, at market value.

(b)   Includes $17,400 of preferred stock, at amortized cost.

(c)   Includes $89,800 of preferred stock, at market value.





24

<PAGE>   26
                             American International Group, Inc. and Subsidiaries


         With respect to fixed maturities, AIG's strategy is to invest in high
quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations.

         At December 31, 1994, approximately 60 percent of the fixed maturity
investments were domestic securities. Approximately 42 percent of such domestic
securities were rated AAA, approximately 2 percent were below investment grade
and less than 1 percent were not rated.

         A significant portion of the foreign insurance fixed income portfolio
is rated by Moody's, Standard & Poor's (S&P) or similar foreign services.
However, similar credit quality rating services are not available in all
overseas locations. Thus, AIG annually reviews the credit quality of the
nonrated fixed income investments, including mortgages, in its foreign
portfolio. AIG applies a scale similar to that of Moody's and S&P to the rating
of these securities. Coupling the ratings of this internal review with those of
the independent agencies indicates that approximately 42 percent of the foreign
fixed income investments were rated AAA, less than one percent were deemed
below investment grade and approximately 4 percent were not rated at December
31, 1994.

         Although AIG's fixed income insurance portfolios contain only minor
amounts of securities below investment grade, potentially any fixed income
security is subject to downgrade for a variety of reasons subsequent to any
balance sheet date. There have been no significant downgrades as at March 1,
1995.

         At December 31, 1994, approximately 5 percent of the fixed maturities
portfolio was Collateralized Mortgage Obligations (CMOs). All of the CMOs were
investment grade and approximately 86 percent of the CMOs were backed by
various U.S. government agencies. Thus, credit risk was minimal. CMOs are
exposed to interest rate risk as the duration and ultimate realized yield would
be affected by the accelerated prepayments of the underlying mortgages. There
were no interest only or principal only CMOs.

         When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from currency risk and
interest rate risk, AIG and its insurance subsidiaries enter into derivative
transactions as end users. To date, such activities have been minor. (See also
the discussion under "Derivatives" herein.)

         Short-term investments represent amounts invested in various internal
and external money market funds, time deposits and cash. The $2.53 billion
reduction in short-term investments and cash during 1994 resulted from the
redeployment of funds to purchase fixed maturities both domestically and
overseas, particularly for foreign life operations.

         Mortgage loans on real estate, policy, collateral and guaranteed loans
comprised 9.0 percent of AIG's insurance invested assets at December 31, 1994.
AIG's insurance holdings of real estate mortgages amounted to $1.71 billion of
which 33.8 percent was domestic. At December 31, 1994, no domestic mortgages
and only a nominal amount of foreign mortgages were in default. At December 31,
1994, AIG's insurance holdings of collateral loans amounted to $625.7 million,
all of which were foreign. It is AIG's practice to maintain a maximum loan to
value ratio of 75 percent at loan origination. AIG's policy loans increased
from $984.9 million at December 31, 1993 to $2.23 billion at December 31, 1994,
with $1.25 billion of this increase relating to the domestic corporate-owned
life insurance product.

         AIG's real estate investment properties are primarily occupied by
AIG's various operations. The current market value of these properties
considerably exceeds their carrying value.

         In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.

         The following table is a summary of the composition of AIG's financial
services invested assets at December 31, 1994 and 1993. (See also the
discussions under "Operational Review," "Capital Resources" and "Derivatives"
herein.)


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                            
----------------------------------------------------------------------------------------------------------------------------------
                                                                         1994                                      1993           
                                                              -------------------------                ---------------------------
                                                              INVESTED          PERCENT                INVESTED            PERCENT
                                                              ASSETS           OF TOTAL                ASSETS             OF TOTAL
==================================================================================================================================
<S>                                                          <C>                  <C>                  <C>                   <C>
Flight equipment primarily under operating leases, net of
  accumulated depreciation                                   $10,723,500           38.4%               $ 8,555,400            37.3%
Unrealized gain on interest rate and currency swaps,
  options and forward transactions*                            4,650,700           16.7                         --              --
Securities available for sale, at market value                 3,796,800           13.6                  4,991,100            21.7
Trading securities, at market value                            2,483,600            8.9                  2,516,200            11.0
Securities purchased under agreements to resell, at
  contract value                                               1,209,400            4.3                  2,737,500            11.9
Trade receivables                                              2,629,700            9.4                  1,328,400             5.8
Spot commodities, at market value                                916,800            3.3                    764,200             3.3
Net unrealized gain on interest rate and currency swaps,
  options and forward transactions                                    --             --                    640,100             2.8
Other, including short-term investments                        1,509,800            5.4                  1,424,400             6.2
----------------------------------------------------------------------------------------------------------------------------------
Total                                                        $27,920,300          100.0%               $22,957,300           100.0%
================================================================================================================================== 
</TABLE>


* See also the discussion under "Accounting Standards: Standards Adopted in
  1994" herein.





                                                                              25

<PAGE>   27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

         As previously discussed, the cash used for the purchase of flight
equipment is derived primarily from the proceeds of ILFC's debt financing. The
primary sources for the repayment of this debt and the interest expense thereon
are the lease receipts received and proceeds from the sale of flight equipment.
During 1994, ILFC obtained net financing of $1.76 billion for the acquisition
of flight equipment costing $2.73 billion. Additional funds were provided by
operating cash flow and the sale of flight equipment.

         At December 31, 1994, ILFC had committed to purchase 236 aircraft
deliverable from 1995 through 2000 at an estimated aggregate purchase price of
$13.4 billion and had options to purchase an additional 51 aircraft deliverable
through 2001 at an estimated aggregate exercisable price of $2.8 billion. As at
March 15, 1995, ILFC has entered into leases, letters of intent to lease or is
in various stages of negotiation for 63 of 68 aircraft to be delivered in 1995
and 54 of 168 aircraft to be delivered subsequent to 1995. ILFC will be
required to find customers for any aircraft presently on order and any new
aircraft to be ordered, and it must arrange financing for portions of the
purchase price of such equipment. In a rising interest rate environment, ILFC
negotiates higher lease rates on any new contracts. ILFC has been successful to
date both in placing its new aircraft on lease or under sales contract and
obtaining adequate financing.

         AIGFP's positions are carried at market value or at estimated fair
value when market prices are not readily available.  These values represent
assessments of the present value of expected future cash flows. The recorded
values of these transactions may be less than the values that might be
realized, if AIGFP were to sell or close out the transactions prior to
maturity. AIGFP reduces its economic risk exposure through similarly valued
offsetting transactions including swaps, trading securities, forwards and
futures. AIG believes that the impact of such limited liquidity would not be
significant to AIG's financial condition or its overall liquidity. (See also
the discussion under "Derivatives" herein.)

         Securities available for sale, at market value and securities
purchased under agreements to resell are primarily purchased with the proceeds
of AIGFP's GIA financings and term borrowings. As the GIA and term borrowings
combined net balances have declined since December 31, 1993, the proceeds from
the disposal of securities available for sale and securities purchased under
agreements to resell have been used to fund the maturing GIAs. (See also the
discussion under "Capital Resources" herein.)

         Securities available for sale is mainly a portfolio of debt
securities, where the individual securities have varying degrees of credit
risk. At December 31, 1994, the average credit rating to this portfolio was AA
as determined through rating agencies or internal review. There were no
securities deemed below investment grade. There have been no significant
downgrades through March 1, 1995. Securities purchased under agreements to
resell are treated as collateralized transactions. AIGFP generally takes
possession of securities purchased under agreements to resell. AIGFP further
minimizes its credit risk by monitoring counterparty credit exposure and, when
AIGFP deems necessary, it requires additional collateral to be deposited.
Trading securities, at market value are marked to market daily and are held to
meet the short-term risk management objectives of AIGFP.

         AIGTG acts as principal in certain foreign exchange, interest rate,
precious and base metals, petroleum and natural gas trading activities. AIGTG
owns inventories in the commodities in which it trades and may reduce the
exposure to market risk through the use of forwards, futures and option
contracts. AIGTG uses derivatives to manage the economic exposure of its
various trading positions and transactions from adverse movement in interest
rates, exchange rates and commodity prices. AIGTG supports its trading
activities largely through trade payables, short-term borrowings and spot
commodities sold but not yet purchased. (See also the discussions under
"Capital Resources" and "Derivatives" herein.)

DERIVATIVES

Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying stock, bond, commodity or other
asset, or some index. Derivatives payments may be based on interest rates and
exchange rates and/or prices of certain securities, certain commodities, or
financial or commodity indices. The more significant types of derivative
arrangements in which AIG transacts are swaps, forwards, futures, options and
related instruments.

         The most commonly used swaps are interest rate and currency swaps. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. A currency swap is similar but the notional
amounts are different currencies which are typically exchanged at the
commencement and termination of the swap based upon negotiated exchange rates.

         A futures or forward contract is a legal contract between two parties
to purchase or sell at a specified future date a specified quantity of a
commodity, security, currency, financial index or other instrument, at a
specified price. A futures contract is traded on an exchange, while a forward
contract is executed over the counter.

         An option contract generally provides the option purchaser with the
right but not the obligation to buy or sell during a period of time or at a
specified date the underlying instrument at a set price. The option writer is
obligated to sell or buy the underlying item if the option purchaser chooses to
exercise his right. The option writer receives a nonrefundable fee or premium
paid by the option purchaser.

         Derivatives are generally either negotiated over the counter contracts
or standardized contracts executed on an exchange.  Standardized exchange
traded derivatives include futures and options which can be readily bought or
sold over





26

<PAGE>   28
                             American International Group, Inc. and Subsidiaries


recognized security exchanges and settled through such clearing houses.
Negotiated over the counter derivatives include forwards, swaps and options.
Over the counter derivatives are generally not traded like exchange traded
securities. However, in the normal course of business, with the agreement of
the original counterparty, these contracts may be terminated or assigned to
another counterparty.

         Through AIGFP and AIGTG, AIG participates in the derivatives dealer
market acting primarily as principal. In these derivative operations AIG
structures transactions which generally permit its counterparties to enter into
transactions with respect to interest and exchange rate changes, to prices of
securities and to certain commodities and financial or commodity indices. All
significant derivatives activities are conducted through AIGFP and AIGTG.

         Generally, derivatives are used by AIG's customers such as
corporations, financial institutions, multinational organizations, sovereign
entities, government agencies and municipalities. For example, a futures,
forward or option contract can be used to protect the customers' assets or
liabilities against price fluctuations.

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

         AIG actively manages the exposures to limit the potential to loss,
while maximizing the rewards afforded by these business opportunities. In doing
so, AIG must manage a variety of exposures to risk including credit risk,
market risk, liquidity risk and legal risk.

         Market risk principally arises from the uncertainty that future
earnings are exposed to potential changes in volatility, interest rates,
foreign exchange rates, and equity and commodity prices. AIG generally controls
its exposure to market risk by taking offsetting positions. AIG's philosophy
with respect to its financial services operations is to minimize or set limits
for open or uncovered positions that are to be carried. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk
below).

         AIGFP does not seek to manage the market risk of each of its
individual transactions through an individual offsetting transaction. Rather,
AIGFP takes a portfolio approach to the management of its market risk exposure.
AIGFP values its portfolio at market value or estimated fair value when market
values are not readily available. These valuations represent an assessment of
the present values of expected future cash flows of AIGFP's transactions and
may include reserves for market risk as deemed appropriate by AIGFP management.
AIGFP evaluates the portfolio's discounted cash flows with reference to current
market conditions, maturities within the portfolio and other relevant factors.
Based upon this evaluation, AIGFP determines what, if any, offsetting
transactions are necessary to reduce the market risk exposure of the portfolio.

         The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.

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

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

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

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

         AIGTG attempts to secure reliable current market prices, such as
published prices or third party quotes, to value its derivatives. Where such
prices are not available, AIGTG uses an internal methodology which includes
interpolation or





                                                                              27

<PAGE>   29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

extrapolation from verifiable prices nearest to the dates of the transactions.
The methodology may reflect interest and exchange rates, volatility rates and
other relevant factors.

         A significant portion of AIGTG's business is transacted in liquid
markets. Certain of AIGTG's derivative product exposures are evaluated using
simulation techniques which consider such factors as changes in currency and
commodity prices, interest rates, volatility levels and the effect of time.
Though not indicative of the future, past volatile market scenarios have
represented profit opportunities for AIGTG.

         The gross unrealized gains and gross unrealized losses of AIGFP and
AIGTG included in the financial services assets and liabilities at December 31,
1994 were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                     
-----------------------------------------------------------------------------------
                                               GROSS           GROSS        BALANCE
                                          UNREALIZED      UNREALIZED          SHEET
                                               GAINS          LOSSES         AMOUNT
===================================================================================
<S>                                       <C>             <C>            <C>
Securities available for
  sale, at market value                   $  243,200      $  240,400     $3,796,800
Unrealized gain/loss on
  interest rate and currency
  swaps, options and forward
  transactions(a)                          4,650,700       3,659,400             --
Trading securities, at
  market value                                    --              --      2,483,600
Securities sold but not yet
  purchased, principally
  obligations of the U.S.
  government and government
  agencies, at market value                       --              --        192,900
Trade receivables(b)                       3,530,300       1,659,500      2,629,700
Spot commodities, at
  market value(c)                            179,100          96,400        916,800
Trade payables                                    --       1,097,400      2,108,300
Spot commodities sold but
  not yet purchased, at
  market value                                83,800          33,400        369,100
===================================================================================
</TABLE>


(a)   See also the discussion under "Accounting Standards: Standards Adopted in
      1994" herein.

(b)   The net replacement value with respect to futures and forward contracts
      of AIGTG at December 31, 1994 was $1.87 billion.

(c)   The net replacement value with respect to purchased option contracts of
      AIGTG at December 31, 1994 was $275.1 million.

         The interest rate risk on securities available for sale, at market, is
managed by taking offsetting positions on a security by security basis, thereby
offsetting a significant portion of the unrealized appreciation or
depreciation. At December 31, 1994, the unrealized gains and losses remaining
after benefit of the offsets were $8.3 million and $5.6 million, respectively.

         AIGFP carries its derivatives at market or estimated fair value,
whichever is appropriate. Because of limited liquidity of these instruments,
the recorded estimated fair values of these derivatives may be different than
the values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity. (See also the discussions under "Operational
Review: Financial Services", "Liquidity" and "Accounting Standards: Standards
Adopted in 1994" herein.)

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

         AIGTG acts as principal in certain foreign exchange, interest rate,
precious and base metals, petroleum and natural gas trading activities. AIGTG
owns inventories in the commodities in which it trades. These inventories are
carried at market and may be substantially hedged. AIGTG uses derivatives to
manage the economic exposure of its various trading positions and transactions
from adverse movements in interest rates, exchange rates and commodity prices.
(See also the discussions under "Operational Review: Financial Services" and
"Liquidity" herein.)

         A counterparty may default on any obligation to AIG, including a
derivative contract. Credit risk is a consequence of extending credit and/or
carrying trading and investment positions. Credit risk exists for a derivative
contract when that contract has an estimated positive fair value. To help
manage this risk, the credit departments of AIGFP and AIGTG operate within the
guidelines of the AIG Credit Risk Committee, which sets credit policy and
limits for counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account the industry and country of the counterparty.
Transactions which fall outside these pre-established guidelines require the
approval of the AIG Credit Risk Committee. It is also AIG's policy to establish
reserves for potential credit impairment when necessary.

         AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral and margin agreements.

         The significant majority of AIGFP's transactions are contracted and
documented under master netting agreements that provide for set-off and close
out netting in the event of default. Excluding regulated exchange transactions,
AIGTG, whenever possible, enters into netting agreements with its
counter-parties which are similar in effect to those discussed above.

         The following tables provide the notional and contractual amounts of
AIGFP's derivatives portfolio at December 31, 1994.  The notional amounts used
to express the extent of AIGFP's involvement in derivatives transactions
represent a standard of measurement of the volume of AIGFP's swaps business.
Notional amount is not a quantification of market risk or credit risk and it
may not necessarily be recorded on the balance sheet. Notional amounts
represent those amounts used to calculate contractual





28

<PAGE>   30
                             American International Group, Inc. and Subsidiaries


cash flows to be exchanged and are not paid or received, except for certain
contracts such as currency swaps. The timing and the amount of cash flows
relating to foreign exchange forwards and exchange traded futures and options
contracts are determined by the contractual agreements.

         AIGFP extensively uses legally enforceable master closeout netting
agreements. Thus, contracts subject to such arrangements permit AIGFP to offset
its receivables from and payables to the same counterparty. As a result, the
net replacement value represents the net sum of estimated positive fair values
after the application of such agreements and collateral held. The net
replacement value most closely represents the net credit risk to AIGFP or the
maximum amount exposed to potential loss. (See also the discussion under
"Accounting Standards: Standards Adopted in 1994" herein.)

         The following table presents AIGFP's derivatives portfolio by maturity
and type of derivative at December 31, 1994:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                    
----------------------------------------------------------------------------------------------------------------------------------
                                                                      REMAINING LIFE    
                                                   ---------------------------------------------------
                                                                   AFTER ONE    AFTER FIVE
                                                        WITHIN      YEAR BUT     YEARS BUT       AFTER
                                                           ONE        WITHIN        WITHIN         TEN         TOTAL         TOTAL
                                                          YEAR    FIVE YEARS     TEN YEARS       YEARS          1994          1993
==================================================================================================================================
<S>                                                <C>           <C>           <C>         <C>          <C>           <C>
Interest rate, currency and equity/commodity
swaps and swaptions:
Notional amount:
  Interest rate swaps                              $ 7,395,000   $57,086,000   $32,063,000 $ 9,037,000  $105,581,000  $ 77,462,500
  Currency swaps                                        50,100    10,817,200     5,902,000   1,491,000    18,260,300    16,123,000
  Equity/commodity swaps                               341,000       411,000        40,000      25,000       817,000     1,227,000
  Swaptions                                            246,000     4,997,000     2,672,000   1,145,000     9,060,000     8,265,800
----------------------------------------------------------------------------------------------------------------------------------
Total                                              $ 8,032,100   $73,311,200   $40,677,000 $11,698,000  $133,718,300  $103,078,300
==================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts
  contractual amount*                              $13,182,900            --            --          --  $ 13,182,900  $ 27,132,300
==================================================================================================================================
Over the counter forward contracts
  contractual amount                               $ 1,983,900       $64,800            --          --  $  2,048,700  $    945,100
==================================================================================================================================
</TABLE>


* Exchange traded futures are not deemed to have significant credit exposure
  as the exchanges guarantee that every contract will be properly settled.

         At December 31, 1994, the counterparty credit quality by derivative
product with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                    
----------------------------------------------------------------------------------------------------------------------------------
                                                                                       NET REPLACEMENT VALUE       
                                                                                 ---------------------------------
                                                                                  SWAPS AND            FUTURES AND
                                                                                  SWAPTIONS      FORWARD CONTRACTS           TOTAL
==================================================================================================================================
<S>                                                                              <C>                       <C>          <C>
Counterparty credit quality:
  AAA                                                                            $1,087,800                $ 4,500      $1,092,300
  AA                                                                              1,977,600                  9,100       1,986,700
  A                                                                               1,007,900                  4,500       1,012,400
  BBB                                                                               525,000                     --         525,000
  Below investment grade                                                             21,000                     --          21,000
  Not externally rated--exchanges                                                        --                 13,300          13,300
----------------------------------------------------------------------------------------------------------------------------------
Total                                                                            $4,619,300                $31,400      $4,650,700
==================================================================================================================================
</TABLE>






                                                                              29

<PAGE>   31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

         At December 31, 1994, the counterparty breakdown by industry with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                    
----------------------------------------------------------------------------------------------------------------------------------
                                                                                       NET REPLACEMENT VALUE       
                                                                                 ---------------------------------
                                                                                  SWAPS AND            FUTURES AND
                                                                                  SWAPTIONS      FORWARD CONTRACTS           TOTAL
==================================================================================================================================
<S>                                                                              <C>                       <C>          <C>
Non-U.S. banks                                                                   $2,085,500                $15,200      $2,100,700
Insured municipalities                                                              270,000                     --         270,000
U.S. industrials                                                                    493,600                     --         493,600
Governmental                                                                        726,100                     --         726,100
Non-U.S. financial service companies                                                 31,000                     --          31,000
Non-U.S. industrials                                                                372,300                     --         372,300
Special purpose                                                                      16,400                     --          16,400
U.S. banks                                                                          169,000                  2,900         171,900
U.S. financial service companies                                                    323,600                     --         323,600
Supranationals                                                                      131,800                     --         131,800
Exchanges                                                                                --                 13,300          13,300
----------------------------------------------------------------------------------------------------------------------------------
Total                                                                            $4,619,300                $31,400      $4,650,700
==================================================================================================================================
</TABLE>


         The following tables provide the notional and contractual amounts of
AIGTG's derivatives portfolio at December 31, 1994. In addition, the estimated
positive fair values associated with the derivatives portfolio are also
provided and include a maturity profile for the December 31, 1994 balances
based upon the expected timing of the future cash flows.

         The notional amounts used to express the extent of AIGTG's involvement
in derivatives transactions represent a standard of measurement of the volume
of AIGTG's swaps business. Notional amount is not a quantification of the
market or credit risks of the positions and is not necessarily recorded on the
balance sheet. Notional amounts represent those amounts used to calculate
contractual cash flows to be exchanged and are not paid or received, except for
certain contracts such as currency swaps. The timing and the amount of cash
flows relating to foreign exchange forwards and exchange traded futures and
options contracts are determined by the contractual agreements.

         The gross replacement values presented represent the sum of the
estimated fair values of all of AIGTG's derivatives contracts at December 31,
1994. These values do not represent the credit risk to AIGTG.

         Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values
most closely represent the net credit risk to AIGTG or the maximum amount
exposed to potential loss. (See also the discussion under "Accounting
Standards: Standards Adopted in 1994" herein.)





30

<PAGE>   32
                             American International Group, Inc. and Subsidiaries


         The following tables present AIGTG's derivatives portfolio and
associated credit exposure, if applicable, by maturity and type of derivative
at December 31, 1994:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                    
----------------------------------------------------------------------------------------------------------------------------------
                                                                       REMAINING LIFE                 
                                                  ----------------------------------------------------
                                                                   AFTER ONE     AFTER FIVE
                                                        WITHIN      YEAR BUT      YEARS BUT      AFTER
                                                           ONE        WITHIN         WITHIN        TEN         TOTAL         TOTAL
                                                          YEAR    FIVE YEARS      TEN YEARS      YEARS          1994          1993
==================================================================================================================================
<S>                                              <C>              <C>              <C>          <C>     <C>           <C>
Futures and forward contracts and interest swaps:
Exchange traded futures contracts
  contractual amount(a)                           $ 17,778,200    $3,683,000       $ 42,900         --  $ 21,504,100  $ 11,582,600
==================================================================================================================================
Over the counter forward contracts
  contractual amount(b)                           $182,254,500    $8,825,800       $ 93,000     $4,700  $191,178,000  $104,333,300
==================================================================================================================================
Credit exposure for over the counter forwards:
  Gross replacement value                         $  2,934,700    $  509,600       $ 79,500     $7,200  $  3,531,000  $  2,180,700
  Master netting arrangements                       (1,284,000)     (238,700)       (54,000)      (800)   (1,577,500)     (700,800)
  Collateral                                           (82,700)            --            --         --       (82,700)           --
----------------------------------------------------------------------------------------------------------------------------------
Net replacement value(c)                          $  1,568,000    $  270,900       $ 25,500     $6,400  $  1,870,800  $  1,479,900
==================================================================================================================================
</TABLE>


(a)   Exchange traded futures are not deemed to have significant credit
      exposure as the exchanges guarantee that every contract will be properly
      settled.

(b)   Includes interest rate swaps with notional amounts of approximately
      $549.0 million and $203.4 million at December 31, 1994 and 1993,
      respectively.

(c)   The net replacement values with respect to futures and forward contracts
      are presented as a component of trade receivables in the accompanying
      balance sheet.


<TABLE>
<CAPTION>
(in thousands)                                                                                                                    
----------------------------------------------------------------------------------------------------------------------------------
                                                                       REMAINING LIFE                 
                                                  ----------------------------------------------------
                                                                   AFTER ONE     AFTER FIVE
                                                        WITHIN      YEAR BUT      YEARS BUT      AFTER
                                                           ONE        WITHIN         WITHIN        TEN         TOTAL         TOTAL
                                                          YEAR    FIVE YEARS      TEN YEARS      YEARS          1994          1993
==================================================================================================================================
<S>                                                <C>            <C>                    <C>        <C>  <C>           <C>
Option contracts:
Contractual amounts for purchased options:
  Exchange traded(a)                               $ 1,363,100    $   47,500             --         --   $ 1,410,600   $ 4,399,900
  Over the counter                                  12,127,400     1,699,200             --         --    13,826,600    15,047,400
----------------------------------------------------------------------------------------------------------------------------------
Total                                              $13,490,500    $1,746,700             --         --   $15,237,200   $19,447,300
==================================================================================================================================
Credit exposure for over the counter 
 purchased options:
  Gross replacement value                          $   309,500    $   60,000             --         --   $   369,500   $   313,600
  Master netting arrangements                          (59,100)      (12,700)            --         --       (71,800)           --
  Collateral                                           (22,600)           --             --         --       (22,600)           --
----------------------------------------------------------------------------------------------------------------------------------
Net replacement value(b)                           $   227,800    $   47,300             --         --   $   275,100   $   313,600
==================================================================================================================================
Contractual amounts for sold options(c)            $12,300,000    $1,857,900             --         --   $14,157,900   $17,495,400
==================================================================================================================================
</TABLE>


(a)   Exchange traded options are not deemed to have significant credit
      exposure as the exchanges guarantee that every option will be properly
      settled.

(b)   The net replacement value with respect to purchased options is presented
      as a component of spot commodities, at market value in the accompanying
      balance sheet.

(c)   Options obligate AIGTG to buy or sell the underlying item if the option
      purchaser chooses to exercise. The amounts do not represent credit
      exposures.





                                                                              31

<PAGE>   33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

         At December 31, 1994, the counterparty credit quality by derivative
product with respect to the net replacement value  of AIGTG's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                    
----------------------------------------------------------------------------------------------------------------------------------
                                                                                NET REPLACEMENT VALUE               
                                                                    ----------------------------------------------
                                                                                FUTURES AND
                                                                          FORWARD CONTRACTS       OVER THE COUNTER
                                                                    AND INTEREST RATE SWAPS      PURCHASED OPTIONS           TOTAL
==================================================================================================================================
<S>                                                                              <C>                      <C>           <C>
Counterparty credit quality:
  AAA                                                                            $  213,800               $ 25,700      $  239,500
  AA                                                                                611,300                171,000         782,300
  A                                                                                 581,900                 38,000         619,900
  BBB                                                                                60,700                  6,700          67,400
  Below investment grade                                                             26,300                  6,000          32,300
  Not externally rated*                                                             376,800                 27,700         404,500
----------------------------------------------------------------------------------------------------------------------------------
Total                                                                            $1,870,800               $275,100      $2,145,900
==================================================================================================================================
</TABLE>


* Includes $140.0 million due from exchanges.

         At December 31, 1994, the counterparty breakdown by industry with
respect to the net replacement value of AIGTG's derivatives portfolio was as
follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                    
----------------------------------------------------------------------------------------------------------------------------------
                                                                                 NET REPLACEMENT VALUE              
                                                                    ----------------------------------------------
                                                                                FUTURES AND
                                                                          FORWARD CONTRACTS       OVER THE COUNTER
                                                                    AND INTEREST RATE SWAPS      PURCHASED OPTIONS           TOTAL
==================================================================================================================================
<S>                                                                              <C>                      <C>           <C>
Non-U.S. banks                                                                   $  637,400               $180,400      $  817,800
U.S. industrials                                                                    307,600                 14,500         322,100
Governmental                                                                         94,600                 16,800         111,400
Non-U.S. financial service companies                                                 52,500                  1,800          54,300
Non-U.S. industrials                                                                137,800                 26,300         164,100
U.S. banks                                                                          398,100                 28,000         426,100
U.S. financial service companies                                                    102,800                  7,300         110,100
Exchanges                                                                           140,000                     --         140,000
----------------------------------------------------------------------------------------------------------------------------------
Total                                                                            $1,870,800               $275,100      $2,145,900
==================================================================================================================================
</TABLE>


         Generally, AIG manages and operates its businesses in the currencies
of the local operating environment. Thus, exchange gains or losses occur when
AIG's foreign currency net investment is affected by changes in the foreign
exchange rates relative to the U.S. dollar from one reporting period to the
next.

         As an end-user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain
exposures with respect to AIG's debt financing and insurance investment
operations; to date, such activities have been minor.

         AIG, through its Foreign Exchange Operating Committee, evaluates its
worldwide consolidated net asset or liability positions and manages AIG's
translation exposure to adverse movement in currency exchange rates. AIG may
use forward exchange contracts and purchases options where the cost of such is
reasonable and markets are liquid to reduce these exchange translation
exposures. The exchange gain or loss with respect to these hedging instruments
is recorded on an accrual basis as a component of the cumulative translation
adjustment account in capital funds. AIG's largest currency net investments
have had historically stable exchange rates with respect to the U.S. dollar.

         Management of AIG's liquidity profile is designed to ensure that even
under adverse conditions AIG is able to raise funds at the most economical cost
to fund maturing liabilities and capital and liquidity requirements of its
subsidiaries. Sources of funds considered in meeting these objectives include
guaranteed investment agreements, issuance of long and short-term debt,
maturities and sales of securities available for sale, securities sold under
repurchase agreements, trade payables, securities and spot commodities sold,
not yet purchased, issuance of equity, and cash provided from operations. AIG's
strong capital position is integral to managing liquidity, as it enables AIG to
raise funds in diverse markets worldwide. (See also the discussions under
"Capital Resources" and "Liquidity" herein.)

         Legal risk arises from the uncertainty of the enforceability, through
legal or judicial processes, of the obligations of AIG's clients and
counterparties, including contractual provisions intended to reduce credit
exposure by providing for the netting of mutual obligations. (See also the
discussion on master netting





32

<PAGE>   34
                             American International Group, Inc. and Subsidiaries


agreements above.) AIG seeks to eliminate or minimize such uncertainty through
continuous consultation with internal and external legal advisors, both
domestically and abroad, in order to understand the nature of legal risk, to
improve documentation and to strengthen transaction structure.

         Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and
options.

         Over the counter derivatives dealers have drafted a code of conduct to
provide standards for their industry. The alternative to self-regulation is
federal regulation. AIG supports self-regulation and expects to adhere to
promulgated standards.

RECENT DEVELOPMENTS

In 1989, the National Association of Insurance Commissioners (NAIC) adopted the
"NAIC Solvency Policing Agenda for 1990". Included in this agenda was the
development of Risk-Based Capital (RBC) requirements. RBC relates an individual
insurance company's statutory surplus to the risk inherent in its overall
operations. AIG believes that the development of RBC standards is a positive
step for the insurance industry but further believes the standards in their
present form may lead to an inefficient deployment of industry capital. As
experience is gained with the application of RBC standards, it is likely that
adjustments to the formula will be made.

         Standards for the life RBC formula and a model act have been approved
by regulators and were effective with the 1993 statutory financial statements.
At December 31, 1994, the adjusted capital of each of AIG's four domestic life
companies exceeded each of their RBC standards by considerable margins.

         RBC standards for property and casualty insurers were finalized in
principle in December 1993 and were effective with the 1994 statutory financial
statements. At December 31, 1994, the adjusted capital of each of AIG's
domestic general companies exceeded each of their RBC standards by considerable
margins. Additionally, no AIG company is on any regulatory or similar "watch
list".

         In 1992, domestic life insurance companies were required for
regulatory purposes to fully adopt two investment reserves, the Asset Valuation
Reserve (AVR) and the Interest Maintenance Reserve (IMR). The AVR is formula
based and applies to all invested assets which are subject to either credit or
market risk. The IMR defers realized capital gains and losses on the sale of
fixed maturities and mortgage loans. The realized gains and losses are
subsequently amortized into investment income over the original term of the
disposed assets. The impact of these reserves on the separately reported
statutory income of certain domestic life companies was significant in 1994.
However, there was no impact on AIG's 1994 GAAP consolidated life insurance
operating income presented herein.

         In July 1994, AIG acquired $200 million of 8 percent convertible
preferred stock of Alexander & Alexander Services Inc.  (A&A), an independent
insurance brokerage operation. The preferred stock is convertible into common
stock of A&A at $17 per share.  Both the convertible preferred stock and the
common stock are non-voting in the hands of AIG. AIG may elect in the future to
exchange its non-voting common stock for up to 9.9 percent of A&A's voting
common stock. The dividend will be paid in-kind for the first two years; and,
at A&A's option, for an additional three years.

         In December 1994, AIG acquired $200 million in a new issue of 9
percent cumulative convertible preferred stock of 20th Century Industries (20th
Century), a low-cost provider of mass marketed auto insurance in California.
Dividends on the preferred stock will be paid in cash or in kind for the first
three years at 20th Century's option, and in cash thereafter. Additionally, AIG
invested $16 million in warrants for 16 million common shares of 20th Century
at a per share exercise price of $13.50. AIG expects to enter a strategic
alliance with 20th Century to extend the direct marketing of personal
automobile insurance to certain western states. Pursuant to its agreement with
20th Century, by March 31, 1995, AIG will invest an additional $20 million in
the preferred stock of 20th Century.

         In January 1995, the Kobe region of Japan suffered severe damage as a
result of an earthquake. The impact of the insured losses on AIG's 1995 results
of operations before taxes is currently estimated to be $50 million net of
reinsurance.

ACCOUNTING STANDARDS

STANDARDS ADOPTED IN 1994:

In March 1992, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts"
(Interpretation), which is effective for fiscal years beginning after December
15, 1993. The Interpretation requires that unrealized gains and losses on
swaps, forwards, options and similar contracts be recognized as assets and
liabilities.  Previously, AIG's policy was to record such unrealized gains and
losses on a net basis in the consolidated balance sheet. The Interpretation
allows the netting of such unrealized gains and losses with the same
counterparty when they are included under a master netting arrangement with the
counterparty and the contracts are reported at market or fair value.

         Although there was no effect on AIG's operating income upon the
adoption of the Interpretation, AIG adopted this Interpretation effective
January 1, 1994, and now presents certain of its financial services assets and
liabilities, primarily unrealized gain (loss) on interest rate and currency
swaps, options and forward transactions, on a gross basis. Thus, both
consolidated assets and liabilities have increased. The effect of presenting
these assets and liabilities on a gross basis on AIG's consolidated balance
sheet was not significant. The prior year's balance sheet was not reclassified.

         In November 1992, FASB issued Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Post-employment Benefits" (FASB
112). FASB 112 established accounting standards for employers who provide
benefits to former or inactive employees after employment but before





                                                                              33

<PAGE>   35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

retirement. FASB 112 was adopted by AIG effective January 1, 1994, and had no
significant effect on AIG's results of operations, financial condition or
liquidity.

         In May 1993, FASB issued Statement of Financial Accounting Standards
No. 114 "Accounting by Creditors for Impairment of a Loan" (FASB 114). FASB 114
addresses the accounting by all creditors for impairment of certain loans. The
impaired loans are to be measured at the present value of all expected future
cash flows. The present value may be determined by discounting the expected
future cash flows at the loan's effective rate or valued at the loan's
observable market price or valued at the fair value of the collateral if the
loan is collateral dependent. AIG adopted FASB 114 effective December 31, 1994.

         In October 1994, FASB issued Statement of Financial Accounting
Standards No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures" (FASB 118). FASB 118 amends FASB 114 to allow a
creditor to use existing methods to recognize interest income on an impaired
loan. FASB 118 also amends certain disclosure requirements of FASB 114. This
statement is effective at the same time as FASB 114. AIG adopted FASB 118
effective December 31, 1994. The adoption of these statements did not cause any
significant impact on AIG's results of operations, financial condition or
liquidity.

         In October 1994, FASB issued Statement of Financial Accounting
Standards No. 119 "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" (FASB 119). FASB 119 requires disclosure about
derivative financial instruments and amends FASB Statement No. 105 "Disclosure
of Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk" (FASB 105) and FASB
Statement No. 107 "Disclosure about Fair Value of Financial Instruments".

         FASB 119 requires disclosure about the amounts, nature and terms of
derivatives that are not subject to FASB 105. Also, FASB 119 requires
disclosure about financial instruments held or issued for trading purposes and
purposes other than trading. This statement was adopted by AIG effective
December 31, 1994.





34

<PAGE>   36
                             American International Group, Inc. and Subsidiaries



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


<TABLE>
<CAPTION>
                                                              
--------------------------------------------------------------
                                                          PAGE
--------------------------------------------------------------
<S>                                                        <C>
  Report of Independent Accountants                         36
  Consolidated Balance Sheet at
    December 31, 1994 and 1993                              37
  Consolidated Statement of Income for the
    years ended December 31, 1994, 1993
    and 1992                                                39
  Consolidated Statement of Capital Funds
    for the years ended December 31, 1994,
    1993 and 1992                                           40
  Consolidated Statement of Cash Flows for
    the years ended December 31, 1994,
    1993 and 1992                                           41
  Notes to Financial Statements                             43

Schedules:
    I--Summary of Investments--Other Than
         Investments in Related
         Parties as of
         December 31, 1994                                 S-1
    II--Condensed Financial Information of
         Registrant as of December 31, 1994
         and 1993 and for the years ended
         December 31, 1994, 1993 and 1992                  S-2
    III--Supplementary Insurance Information as
         of December 31, 1994, 1993 and
         1992 and for the years then ended                 S-4
    IV--Reinsurance as of December 31, 1994,
         1993 and 1992 and for the years
         then ended                                        S-5
    VI--Supplemental Information Concerning
         Property-Casualty Insurance Operations
         as of December 31, 1994, 1993
         and 1992 and for the years then ended             S-6
</TABLE>






                                                                              35

<PAGE>   37

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders
American International Group, Inc.

         We have audited the consolidated financial statements of American
International Group, Inc. and subsidiaries listed in the index on page 35 of
this Form 10-K. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American International Group, Inc. and subsidiaries as of December 31, 1994 and
1993, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.

         As discussed in Note 1(w) of Notes to Financial Statements, the
Company changed its method of accounting for investments in certain fixed
maturity securities in 1993, and in 1992 for income taxes and postretirement
benefits other than pensions.

                                                        COOPERS & LYBRAND L.L.P.

New York, New York
February 23, 1995.






36

<PAGE>   38
                             American International Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>
(in thousands)                                                                                                                  
------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,                                                                                            1994              1993
==============================================================================================================================
<S>                                                                                             <C>               <C>
ASSETS:
  Investments and cash:
    Fixed maturities:
      Bonds held to maturity, at amortized cost (market value: 1994-$13,109,700;
        1993-$13,278,300)                                                                       $ 13,041,807      $ 12,193,701
      Bonds available for sale, at market value (amortized cost: 1994-$22,207,300;
        1993-$16,599,600)                                                                         21,812,600        17,562,411
      Bonds trading securities, at market value (cost: 1994-$172,000;
        1993-$307,900)                                                                               163,956           310,834
      Preferred stocks, at amortized cost (market value: 1994-$424,800; 1993-$18,000)                412,503            17,428
    Equity securities:
      Common stocks (cost: 1994-$4,607,800; 1993-$3,720,000)                                       5,002,668         4,364,410
      Non-redeemable preferred stocks (cost: 1994-$85,900; 1993-$108,200)                             96,503           123,837
    Mortgage loans on real estate, policy and collateral loans-net                                 5,353,074         3,576,516
    Financial services assets:
    Flight equipment primarily under operating leases, net of accumulated depreciation
      (1994-$959,100; 1993-$599,800)                                                              10,723,527         8,555,356
    Securities available for sale, at market value (cost: 1994-$3,794,100;
      1993-$4,971,800)                                                                             3,796,792         4,991,105
    Trading securities, at market value                                                            2,483,637         2,516,166
    Spot commodities, at market value                                                                916,833           764,215
    Net unrealized gain on interest rate and currency swaps, options and forward transactions             --           640,120
    Unrealized gain on interest rate and currency swaps, options and forward transactions          4,650,743                --
    Trade receivables                                                                              2,629,734         1,328,391
    Securities purchased under agreements to resell, at contract value                             1,209,403         2,737,507
  Other invested assets                                                                            1,953,015         1,265,056
  Short-term investments, at cost which approximates market value                                  2,467,453         5,072,893
  Cash                                                                                                76,237           157,481
------------------------------------------------------------------------------------------------------------------------------
    Total investments and cash                                                                    76,790,485        66,177,427



  Investment income due and accrued                                                                  927,951           808,268
  Premiums and insurance balances receivable-net                                                   8,802,207         8,364,096
  Reinsurance assets                                                                              16,289,607        15,883,788
  Deferred policy acquisition costs                                                                5,132,245         4,249,409
  Investments in partially-owned companies                                                           645,167           571,680
  Real estate and other fixed assets, net of accumulated depreciation                   
    (1994-$1,129,500; 1993-$950,000)                                                               1,865,244         1,615,742
  Separate and variable accounts                                                                   2,297,605         1,914,815
  Other assets                                                                                     1,595,606         1,429,623
                                                                                        
                                                                                        
                                                                                                                              
------------------------------------------------------------------------------------------------------------------------------
    TOTAL ASSETS                                                                                $114,346,117      $101,014,848
==============================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.


37


<PAGE>   39
                             American International Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET (CONTINUED)


<TABLE>
<CAPTION>
(in thousands, except share amounts)                                                                                              
----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,                                                                                                  1994            1993
==================================================================================================================================
<S>                                                                                                   <C>             <C>
LIABILITIES:
  Reserve for losses and loss expenses                                                                $ 31,435,355    $ 30,046,172
  Reserve for unearned premiums                                                                          6,318,754       5,515,670
  Future policy benefits for life and accident and health insurance contracts                           17,432,222      14,638,382
  Policyholders' contract deposits                                                                       6,487,426       4,439,839
  Other policyholders' funds                                                                             1,951,358       1,739,290
  Reserve for commissions, expenses and taxes                                                            1,319,183       1,113,397
  Insurance balances payable                                                                             1,462,545       1,458,383
  Funds held by companies under reinsurance treaties                                                       382,853         406,902
  Income taxes payable:
    Current                                                                                                420,569         358,219
    Deferred                                                                                                33,031         447,790
  Financial services liabilities:
    Borrowings under obligations of guaranteed investment agreements                                     5,535,318       6,735,579
    Securities sold under agreements to repurchase, at contract value                                    1,342,064       2,299,563
    Trade payables                                                                                       2,108,263       1,688,147
    Securities sold but not yet purchased, principally obligations of the
      U.S. Government and Government agencies, at market value                                             192,898         696,454
    Spot commodities sold but not yet purchased, at market value                                           369,089         285,757
    Unrealized loss on interest rate and currency swaps, options and forward transactions                3,659,450              --
    Deposits due to banks and other depositors                                                             655,973         557,372
  Commercial paper                                                                                       1,960,545       1,618,979
  Notes, bonds and loans payable                                                                         7,567,046       5,021,941
  Commercial paper                                                                                       1,829,014       1,529,906
  Notes, bonds, loans and mortgages payable                                                                627,554         782,660
  Separate and variable accounts                                                                         2,297,605       1,914,815
  Other liabilities                                                                                      2,336,341       2,295,436
----------------------------------------------------------------------------------------------------------------------------------
    TOTAL LIABILITIES                                                                                   97,724,456      85,590,653
==================================================================================================================================

    COMMITMENTS AND CONTINGENT LIABILITIES

  PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANY                                                     200,000         200,000

CAPITAL FUNDS:
  Common stock, $2.50 par value; 500,000,000 shares authorized; shares issued
    1994-337,390,984; 1993-337,390,986                                                                     843,477         843,477
  Additional paid-in capital                                                                               565,410         572,142
  Unrealized appreciation of investments, net of taxes                                                     184,556         922,646
  Cumulative translation adjustments, net of taxes                                                        (288,074)       (348,186)
  Retained earnings                                                                                     15,340,928      13,301,529
  Treasury stock; 1994-21,550,358; 1993-19,762,919 shares of common stock
    (including 18,538,925 and 18,747,224 shares, respectively held by subsidiaries)                       (224,636)        (67,413)
---------------------------------------------------------------------------------------------------------------------------------- 
    TOTAL CAPITAL FUNDS                                                                                 16,421,661      15,224,195
----------------------------------------------------------------------------------------------------------------------------------
    TOTAL LIABILITIES AND CAPITAL FUNDS                                                               $114,346,117    $101,014,848
==================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.





38

<PAGE>   40
                             American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME 


<TABLE>
<CAPTION>
(in thousands, except per share amounts)                                                                                          
----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                                                       1994           1993            1992
==================================================================================================================================
<S>                                                                                     <C>           <C>              <C>
GENERAL INSURANCE OPERATIONS:
  Net premiums written                                                                  $10,865,753    $10,025,903     $ 9,138,528
  Change in unearned premium reserve                                                       (578,922)      (459,263)         70,862
----------------------------------------------------------------------------------------------------------------------------------
  Net premiums earned                                                                    10,286,831      9,566,640       9,209,390
  Net investment income                                                                   1,435,092      1,340,480       1,252,086
  Realized capital gains                                                                     52,487         65,264          67,134
----------------------------------------------------------------------------------------------------------------------------------
                                                                                         11,774,410     10,972,384      10,528,610
----------------------------------------------------------------------------------------------------------------------------------
  Losses incurred                                                                         6,645,223      6,310,099       6,172,111
  Loss expenses incurred                                                                  1,360,378      1,265,917       1,331,393
  Underwriting expenses (principally policy acquisition costs)                            2,133,713      1,980,233       1,900,970
----------------------------------------------------------------------------------------------------------------------------------
                                                                                         10,139,314      9,556,249       9,404,474
----------------------------------------------------------------------------------------------------------------------------------
  OPERATING INCOME                                                                        1,635,096      1,416,135       1,124,136
----------------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE OPERATIONS:
  Premium income                                                                          6,724,321      5,746,046       4,853,087
  Net investment income                                                                   1,748,428      1,499,714       1,313,838
  Realized capital gains                                                                     86,706         54,576          43,257
----------------------------------------------------------------------------------------------------------------------------------
                                                                                          8,559,455      7,300,336       6,210,182
----------------------------------------------------------------------------------------------------------------------------------
  Death and other benefits                                                                2,716,093      2,374,112       1,849,238
  Increase in future policy benefits                                                      3,066,468      2,517,245       2,274,638
  Acquisition and insurance expenses                                                      1,824,410      1,627,368       1,418,853
----------------------------------------------------------------------------------------------------------------------------------
                                                                                          7,606,971      6,518,725       5,542,729
----------------------------------------------------------------------------------------------------------------------------------
  OPERATING INCOME                                                                          952,484        781,611         667,453
----------------------------------------------------------------------------------------------------------------------------------
Agency and service fee operating income                                                      54,129         60,247          52,570
----------------------------------------------------------------------------------------------------------------------------------
Financial services operating income                                                         404,853        390,038         346,442
----------------------------------------------------------------------------------------------------------------------------------
Equity in income of minority-owned insurance operations                                      56,005         39,589          27,929
----------------------------------------------------------------------------------------------------------------------------------
Other realized capital losses                                                               (52,340)       (12,742)        (11,293)
---------------------------------------------------------------------------------------------------------------------------------- 
Minority interest                                                                           (29,657)       (26,938)        (11,201)
---------------------------------------------------------------------------------------------------------------------------------- 
Other income (deductions)-net                                                               (68,591)       (46,859)        (58,988)
---------------------------------------------------------------------------------------------------------------------------------- 
Income before income taxes and cumulative effect of
  accounting changes                                                                      2,951,979      2,601,081       2,137,048
----------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefits):
  Current                                                                                   836,764        772,032         556,332
  Deferred                                                                                  (60,300)       (89,029)        (44,299)
---------------------------------------------------------------------------------------------------------------------------------- 
                                                                                            776,464        683,003         512,033
----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes                                     2,175,515      1,918,078       1,625,015
Cumulative effect of accounting changes, net of tax
  AIG                                                                                            --             --          31,941
  Minority-owned insurance operations                                                            --         20,695              --
----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                              $ 2,175,515    $ 1,938,773     $ 1,656,956
==================================================================================================================================
Earnings per common share:
Income before cumulative effect of accounting changes                                         $6.87          $6.04          $ 5.10
Cumulative effect of accounting changes, net of tax
  AIG                                                                                            --             --             .10
  Minority-owned insurance operations                                                            --            .07              --
----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                                    $6.87          $6.11          $ 5.20
==================================================================================================================================
Average shares outstanding                                                                  316,586        317,461         317,637
==================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.





                                                                              39

<PAGE>   41
                             American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CAPITAL FUNDS


<TABLE>
<CAPTION>
(in thousands, except per share amounts)                                                                                          
----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                                                       1994           1993            1992
==================================================================================================================================
<S>                                                                                     <C>            <C>             <C>
PREFERRED STOCK:
  Series M-1 and M-2, exchangeable money market cumulative serial:
  Balance at beginning of year                                                          $        --    $         8     $         8
    Redemption of preferred stock                                                                --             (8)             --
----------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                                         --             --               8
----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
  Balance at beginning of year                                                              843,477        562,324         562,324
    Stock split effected as dividend                                                             --        281,153              --
----------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                                    843,477        843,477         562,324
----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
  Balance at beginning of year                                                              572,142      1,014,947       1,029,733
    Excess (deficit) of proceeds over (under) par value of common stock
      or cost of treasury common stock issued under stock
      option and stock purchase plans                                                        (6,732)       (10,131)        (13,353)
    Stock split effected as dividend                                                             --       (281,153)             --
    Redemption of preferred stock                                                                --       (149,992)             --
    Other                                                                                        --         (1,529)         (1,433)
---------------------------------------------------------------------------------------------------------------------------------- 
  Balance at end of year                                                                    565,410        572,142       1,014,947
----------------------------------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS, NET OF TAXES:
  Balance at beginning of year                                                              922,646        129,816         114,826
    Changes during year                                                                  (1,084,566)       719,824          26,812
    Deferred income tax (expense) benefit on changes                                        346,476       (177,971)        (11,822)
    Cumulative effect of accounting change, net of taxes of $156,521                             --        250,977              --
----------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                                    184,556        922,646         129,816
----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS, NET OF TAXES:
  Balance at beginning of year                                                             (348,186)      (333,882)       (167,567)
    Changes during year                                                                      37,089          8,742        (212,541)
    Applicable income tax (expense) benefit on changes                                       23,023        (23,046)         46,226
----------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                                   (288,074)      (348,186)       (333,882)
---------------------------------------------------------------------------------------------------------------------------------- 
RETAINED EARNINGS:
  Balance at beginning of year                                                           13,301,529     11,486,615       9,946,335
    Net income                                                                            2,175,515      1,938,773       1,656,956
    Cash dividends to shareholders:
      Preferred                                                                                  --         (1,043)         (4,471)
      Common ($.43, $.39 and $.35 per share, respectively)                                 (136,116)      (122,816)       (112,205)
---------------------------------------------------------------------------------------------------------------------------------- 
  Balance at end of year                                                                 15,340,928     13,301,529      11,486,615
----------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST:
  Balance at beginning of year                                                              (67,413)       (77,676)        (22,205)
    Cost of shares acquired during year                                                    (178,676)       (13,148)        (82,096)
    Issued under stock option and stock purchase plans                                       21,453         23,411          26,625
----------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                                   (224,636)       (67,413)        (77,676)
---------------------------------------------------------------------------------------------------------------------------------- 
Total capital funds at end of year                                                      $16,421,661    $15,224,195     $12,782,152
==================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.





40

<PAGE>   42
                             American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
(in thousands)                                                                                                                    
----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                                                       1994           1993            1992
==================================================================================================================================
<S>                                                                                     <C>            <C>             <C>
SUMMARY:
  Net cash provided by operating activities                                             $ 5,388,795    $ 6,467,451     $ 2,983,661
  Net cash used in investing activities                                                  (9,139,291)    (7,998,990)     (5,944,009)
  Net cash provided by financing activities                                               3,669,252      1,552,392       2,948,448
----------------------------------------------------------------------------------------------------------------------------------
  Change in cash                                                                            (81,244)        20,853         (11,900)
  Cash at beginning of year                                                                 157,481        136,628         148,528
----------------------------------------------------------------------------------------------------------------------------------
  Cash at end of year                                                                   $    76,237    $   157,481     $   136,628
==================================================================================================================================

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                            $ 2,175,515    $ 1,938,773     $ 1,656,956
----------------------------------------------------------------------------------------------------------------------------------
  Adjustments to reconcile net income to net cash provided by
    operating activities:
      Non-cash revenues, expenses, gains and losses included in income:
      Change in:
        General and life insurance reserves                                               5,426,572      4,770,443       3,755,753
        Premiums and insurance balances receivable and payable-net                         (433,949)       204,046        (119,083)
        Reinsurance assets                                                                 (405,819)    (1,541,186)       (980,757)
        Deferred policy acquisition costs                                                  (882,836)      (591,591)       (415,142)
        Investment income due and accrued                                                  (119,683)       (25,877)        (72,442)
        Funds held under reinsurance treaties                                               (24,049)        75,387          14,332
        Other policyholders' funds                                                          212,068        212,813        (163,971)
        Current and deferred income taxes-net                                                 2,050        141,143         (46,695)
        Reserve for commissions, expenses and taxes                                         205,786        188,592          82,052
        Other assets and liabilities-net                                                   (123,796)        15,711         366,672
        Trade receivables and payables-net                                                 (881,227)     1,483,536      (1,537,589)
        Trading securities, at market value                                                  32,529       (568,946)       (322,323)
        Spot commodities, at market value                                                  (152,618)      (132,498)        313,274
        Net unrealized gain on interest rate and currency swaps,
          options and forward transactions                                                 (351,173)       782,580        (880,117)
        Securities purchased under agreements to resell                                   1,528,104      1,579,805      (1,132,296)
        Securities sold under agreements to repurchase                                     (957,499)    (1,332,642)      1,881,101
        Securities sold but not yet purchased                                              (503,556)       279,063        (594,152)
        Spot commodities sold but not yet purchased, at market value                         83,332     (1,250,918)      1,290,089
      Realized capital gains                                                                (86,853)      (107,098)        (99,098)
      Equity in income of partially-owned companies and other invested assets              (108,378)       (61,934)        (19,041)
      Depreciation expenses, principally flight equipment                                   581,930        472,247         391,865
      Cumulative effect of accounting changes                                                    --        (20,695)        (31,941)
      Change in cumulative translation adjustments                                           37,089          8,742        (212,541)
      Other-net                                                                             135,256        (52,045)       (141,245)
---------------------------------------------------------------------------------------------------------------------------------- 
      Total adjustments                                                                   3,213,280      4,528,678       1,326,705
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                               $ 5,388,795    $ 6,467,451     $ 2,983,661
==================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.





                                                                              41

<PAGE>   43
                             American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT
OF CASH FLOWS (CONTINUED)


<TABLE>
<CAPTION>
(in thousands)                                                                                                                    
----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                                                       1994           1993            1992
==================================================================================================================================
<S>                                                                                    <C>            <C>             <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
    Cost of fixed maturities, at amortized cost sold                                   $         --   $  1,319,187    $  1,189,167
    Cost of fixed maturities, at amortized cost matured or redeemed                         580,098      2,202,289       1,544,986
    Cost of bonds, at market sold                                                         7,945,587      5,251,475       5,301,328
    Cost of bonds, at market matured or redeemed                                          1,451,753        556,881         769,043
    Cost of equity securities sold                                                        2,675,545      1,885,439       1,699,855
    Realized capital gains                                                                   86,853        107,098          99,098
    Purchases of fixed maturities                                                       (16,168,618)   (11,965,103)    (11,656,635)
    Purchases of equity securities                                                       (3,518,311)    (2,868,385)     (2,043,295)
    Mortgage, policy and collateral loans granted                                        (2,691,600)    (1,234,780)       (869,290)
    Repayments of mortgage, policy and collateral loans                                     780,406        691,284         789,158
    Sales or maturities of securities held for investment                                        --      1,902,814       2,385,465
    Sales of securities available for sale                                                4,421,682             --              --
    Maturities of securities available for sale                                             464,301             --              --
    Purchases of securities held for investment                                                  --     (2,714,813)     (2,751,823)
    Purchases of securities available for sale                                           (3,695,670)            --              --
    Sales of flight equipment                                                               266,262        301,353         210,927
    Purchases of flight equipment                                                        (2,726,791)    (2,410,816)     (1,746,762)
    Net additions to real estate and other fixed assets                                    (469,759)      (389,390)       (249,705)
    Sales or distributions of other invested assets                                         370,047        325,077         255,497
    Investments in other invested assets                                                   (913,346)      (436,660)       (232,317)
    Change in short-term investments                                                      2,081,866       (424,014)       (547,229)
    Investments in partially-owned companies                                                (79,596)       (97,926)        (91,477)
---------------------------------------------------------------------------------------------------------------------------------- 
NET CASH USED IN INVESTING ACTIVITIES                                                  $ (9,139,291)  $ (7,998,990)   $ (5,944,009)
================================================================================================================================== 
CASH FLOWS FROM FINANCING ACTIVITIES:
    Change in policyholders' contract deposits                                         $  2,047,587   $    (46,863)   $    709,298
    Change in deposits due to banks and other depositors                                     98,601       (444,238)        789,579
    Change in commercial paper                                                              640,674        523,576         856,092
    Proceeds from notes, bonds, loans and mortgages payable                               4,810,073      2,479,559       2,388,701
    Repayments on notes, bonds, loans and mortgages payable                              (2,427,351)      (822,147)     (1,639,780)
    Liquidation of zero coupon notes payable                                                     --             --          (4,647)
    Proceeds from guaranteed investment agreements                                        3,650,957      4,244,133       3,024,305
    Maturities of guaranteed investment agreements                                       (4,851,218)    (4,206,373)     (3,088,167)
    Proceeds from subsidiary company preferred stock issued                                      --         98,472          98,567
    Proceeds from common stock issued                                                        14,721         13,280          13,272
    Cash dividends to shareholders                                                         (136,116)      (123,859)       (116,676)
    Acquisition of treasury stock                                                          (178,676)       (13,148)        (82,096)
    Redemption of preferred stock                                                                --       (150,000)             --
----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                              $  3,669,252   $  1,552,392    $  2,948,448
==================================================================================================================================
TAXES PAID                                                                             $    741,900   $    466,600    $    328,900
==================================================================================================================================
INTEREST PAID                                                                          $  1,055,500   $  1,017,100    $  1,052,000
==================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.





42

<PAGE>   44
                             American International Group, Inc. and Subsidiaries

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION:The consolidated financial statements include
the accounts of American International Group, Inc. and all significant
subsidiaries (AIG). All material intercompany accounts and transactions have
been eliminated.

         (b) BASIS OF PRESENTATION: The accompanying financial statements have
been prepared on the basis of generally accepted accounting principles. Certain
accounts have been reclassified in the 1993 and 1992 financial statements to
conform to their 1994 presentation.

         General Insurance Operations:Premiums are earned primarily on a pro
rata basis over the term of the related coverage. The reserve for unearned
premiums represents the portion of net premiums written relating to the
unexpired terms of coverage.

         Acquisition costs are deferred and amortized over the period in which
the related premiums are earned. Investment income is not anticipated in the
deferral of acquisition costs (see Note 4).

         Losses and loss expenses are charged to income as incurred. The
reserve for losses and loss expenses represents the accumulation of estimates
for reported losses and includes provisions for losses incurred but not
reported. AIG does not discount its loss reserves, other than for very minor
amounts related to certain workers' compensation claims. The methods of
determining such estimates and establishing resulting reserves, including
amounts relating to reserves for estimated unrecoverable reinsurance, are
continually reviewed and updated. Adjustments resulting therefrom are reflected
in income currently.

         LIFE INSURANCE OPERATIONS: Premiums for traditional life insurance
products are generally recognized as revenues over the premium paying period of
the related policies. Benefits and expenses are provided against such revenues
to recognize profits over the estimated life of the policies. Revenues for
universal life and investment-type products consist of policy charges for the
cost of insurance, administration, and surrenders during the period. Expenses
include interest credited to policy account balances and benefit payments made
in excess of policy account balances. Investment income reflects certain minor
amounts of realized capital gains where the gains are deemed to be an inherent
element in pricing certain life products in some foreign countries.

         Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Deferred policy acquisition costs and policy initiation costs related to
universal life and investment-type products are amortized in relation to
expected gross profits over the life of the policies (see Note 4).

         The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.

         FINANCIAL SERVICES OPERATIONS: AIG conducts, primarily as principal,
an interest rate, currency, and equity derivative products business which
includes long-dated transactions. AIG also enters into guaranteed investment
agreement transactions. In the course of conducting this business, AIG also
engages in a variety of other related financial transactions, including
offsetting transactions.

         AIG, as principal, engages in certain foreign exchange, interest
rates, precious and base metals, petroleum and natural gas trading activities.
AIG owns inventories in the commodities in which it trades and may reduce the
exposure to market risk through the use of forwards, futures and option
contracts.

         AIG, as lessor, leases flight equipment principally under operating
leases. Accordingly, income is reported over the life of the lease as rentals
become receivable under the provisions of the lease or, in the case of leases
with varying payments, under the straight-line method over the noncancelable
term of the lease. In certain cases, leases provide for additional amounts
contingent on usage. AIG also is a marketer of flight equipment and marketing
revenues from such operations consisting of net gains on sales of flight
equipment, commissions and net gains on dispositions of leased flight
equipment.

         (c) INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at market value. Included
in the bonds available for sale are collateralized mortgage obligations (CMOs).
Premiums and discounts arising from the purchase of CMOs are treated as yield
adjustments over the estimated life. Bond trading securities are carried at
market value, as it is AIG's intention to sell these securities in the near
term. Common and non-redeemable preferred stocks are carried at market value.

         Unrealized gains and losses from investments in equity securities and
fixed maturities available for sale are reflected in capital funds, net of any
related deferred income taxes. Unrealized gains and losses from investments in
trading securities are reflected in income currently.

         Realized capital gains and losses are determined principally by
specific identification. Where declines in values of securities below cost or
amortized cost are considered to be other than temporary, a charge would be
reflected in income for the difference between amortized cost and estimated net
realizable value.

         (d) MORTGAGE LOANS ON REAL ESTATE, POLICY AND COLLATERAL LOANS--NET:
Mortgage loans on real estate, policy loans and collateral loans are carried at
unpaid principal balances. Impairment of mortgage loans on real estate and
collateral loans is generally measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate subject to
the fair value of underlying collateral. Interest income on such loans is
recognized as cash is received.

         (e) FLIGHT EQUIPMENT: Flight equipment is stated at cost. Major
additions and modifications are capitalized. Normal maintenance and repairs,
airframe and engine overhauls and compliance





                                                                              43

<PAGE>   45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

with return conditions of flight equipment on lease are provided by and paid
for by the lessee. Under the provisions of most leases for certain airframe and
engine overhauls, the lessee is reimbursed for costs incurred up to but not
exceeding contingent rentals paid to AIG by the lessee. AIG provides a charge
to income for such reimbursements based upon the hours utilized during the
period and the expected reimbursement during the life of the lease.
Depreciation and amortization are computed on the straight-line basis to a
residual value of approximately 15 percent over the estimated useful lives of
the related assets but not exceeding 25 years.  This caption also includes
deposits for aircraft to be purchased.

         At the time the assets are retired or disposed of, the cost and
associated accumulated depreciation and amortization are removed from the
related accounts and the difference, net of proceeds, is recorded as a gain or
loss.

         (f) SECURITIES AVAILABLE FOR SALE, AT MARKET VALUE:
These securities are held to meet long term investment objectives and are
accounted for as available for sale, carried at market value and are recorded
on a trade date basis. Unrealized gains and losses are reflected in capital
funds, net of any related deferred income taxes.

         (g) TRADING SECURITIES, AT MARKET VALUE: Trading securities are held
to meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and marked to market daily. The
unrealized gains and losses are reflected in income daily.

         (h) SPOT COMMODITIES, AT MARKET VALUE: Spot commodities, which include
commodities and options, are valued at market and are recorded on a trade date
basis. The unrealized gains and losses are reflected in income currently. The
exposure to market risk may be reduced through the use of forwards, futures and
option contracts. These contracts are valued at market and are recorded as
contractual commitments on a trade date basis. The unrealized gains and losses
on open contracts are reflected in income currently.

         (i) UNREALIZED GAIN AND UNREALIZED LOSS ON INTEREST RATE AND CURRENCY
SWAPS, OPTIONS AND FORWARD TRANSACTIONS: Swaps, options and forward
transactions are accounted for as contractual commitments recorded on a trade
date basis and are carried at market or estimated fair value when market values
are not available. Estimated fair values are based on the use of valuation
models that utilize, among other things, current interest, foreign exchange and
volatility rates with the resulting unrealized gains or losses reflected in
income currently. These valuations represent an assessment of the present
values of expected future cash flows of these transactions and may include
reserves for market risk as deemed appropriate. The portfolio's discounted cash
flows are evaluated with reference to current market conditions, maturities
within the portfolio and other relevant factors. Based upon this evaluation, it
is determined what, if any, offsetting transactions are necessary to reduce the
market risk of the portfolio. The recorded values of these transactions may be
different than the values that might be realized if AIG were to sell or close
out the transactions prior to maturity. AIG manages its market risk with a
variety of transactions, including swaps, trading securities, futures and
forward contracts and other transactions as appropriate.

         (j) TRADE RECEIVABLES AND TRADE PAYABLES: Trade receivables and trade
payables include balances due from and due to clearing brokers and exchanges
and receivables from and payables to counterparties which relate to unrealized
gains and losses on open futures and forward contracts, securities, commodities
and swaps.

         (k) SECURITIES PURCHASED (SOLD) UNDER AGREEMENTS TO RESELL
(REPURCHASE), AT CONTRACT VALUE: Purchases of securities under agreements to
resell and sales of securities under agreements to repurchase are accounted for
as collateralized transactions and are recorded at their contracted resale or
repurchase amounts, plus accrued interest. Generally, it is AIG's policy to
take possession of securities purchased under agreements to resell.

         AIG minimizes the credit risk that counterparties to transactions
might be unable to fulfill their contractual obligations by monitoring customer
credit exposure and collateral value and generally requiring additional
collateral to be deposited with AIG when deemed necessary.

         (l) OTHER INVESTED ASSETS: Other invested assets consist primarily of
investments in joint ventures and partnerships and other investments not
classified elsewhere herein. The joint ventures and partnerships are carried at
equity or cost depending on the nature of the invested asset and the ownership
percentage thereof. Other investments are carried at cost or market depending
upon the nature of the underlying assets. Unrealized gains and losses from the
revaluation of those investments carried at market are reflected in capital
funds, net of any related taxes.

         (m) REINSURANCE ASSETS: Reinsurance assets include the balances due
from both reinsurance and insurance companies under the terms of AIG's
reinsurance arrangements for paid and unpaid losses and loss expenses, ceded
unearned premiums and ceded future policy benefits for life and accident and
health insurance contracts and benefits paid and unpaid. It also includes funds
held under reinsurance treaties.

         (n) INVESTMENTS IN PARTIALLY-OWNED COMPANIES:
The equity method of accounting is used for AIG's investment in companies in
which AIG's ownership interest approximates twenty but is not greater than
fifty percent (minority-owned companies). Equity in income of minority-owned
insurance operations is presented separately in the consolidated statement of
income. Equity in realized capital gains of such companies is included in other
realized capital gains (losses). Equity in net income of other unconsolidated
companies is principally included in other income (deductions)-net. At
December 31, 1994, AIG's significant investments in partially-owned companies
included its 46.4 percent interest in Transatlantic Holdings, Inc.
(Transatlantic), which derives a substantial portion of its assumed reinsurance
from AIG subsidiaries; its 19.9 percent





44

<PAGE>   46
                             American International Group, Inc. and Subsidiaries


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

interest in Richmond Insurance Company; its 23.9 percent interest in SELIC
Holdings, Ltd; and its 24.4 percent interest in IPC Holdings, Ltd. This balance
sheet caption also includes investments in less significant partially-owned
companies and in certain minor majority-owned subsidiaries. At December 31,
1994, the market value of AIG's investment in Transatlantic exceeded its
carrying value by approximately $239.3 million.

         (o) REAL ESTATE AND OTHER FIXED ASSETS: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment).  Expenditures for maintenance and repairs
are charged to income as incurred; expenditures for betterments are capitalized
and depreciated.

         (p) SEPARATE AND VARIABLE ACCOUNTS: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of each
account are legally segregated and are not subject to claims which arise out of
any other business of AIG.

         (q) SECURITIES SOLD BUT NOT YET PURCHASED, PRINCIPALLY OBLIGATIONS OF
THE U.S. GOVERNMENT AND GOVERNMENT AGENCIES, AT MARKET VALUE: Securities sold
but not yet purchased represent sales of securities not owned at the time of
sale. These obligations are recorded on a trade date basis and are carried at
current market values. The unrealized gains and losses are reflected in income
currently.

         (r) SPOT COMMODITIES SOLD BUT NOT YET PURCHASED, AT MARKET VALUE: Spot
commodities sold but not yet purchased represent sales of commodities not owned
at the time of sale. These obligations are recorded on a trade date basis and
are carried at market values based upon current commodity prices. The
unrealized gains and losses are reflected in income currently.

         (s) PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANY: Preferred
shareholders' equity in subsidiary company relates to outstanding market
auction preferred stock of International Lease Finance Corporation (ILFC), a
wholly owned subsidiary of AIG.

         (t) TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FASB 52). Under FASB 52, functional currency assets and
liabilities are translated into U.S. dollars generally using current rates of
exchange and the related translation adjustments are recorded as a separate
component of capital funds net of any related taxes. Functional currencies are
generally the currencies of the local operating environment. Income statement
accounts expressed in functional currencies are translated using average
exchange rates. The adjustments resulting from translation of financial
statements of foreign entities operating in highly inflationary economies are
recorded in income. Exchange gains and losses resulting from foreign currency
transactions are also recorded in income currently. The exchange gain or loss
with respect to utilization of foreign exchange hedging instruments is recorded
as a component of capital funds.

         (u) INCOME TAXES: Deferred federal and foreign income taxes are
provided for temporary differences for the expected future tax consequences of
events that have been recognized in AIG's financial statements or tax returns.

         (v) EARNINGS PER SHARE: Earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. The effect of all other common
stock equivalents is not significant for any period presented.

         (w) ACCOUNTING STANDARDS:

         (i) STANDARDS ADOPTED IN 1994: In March 1992, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 39 "Offsetting of Amounts
Related to Certain Contracts" (Interpretation), which is effective for fiscal
years beginning after December 15, 1993. The Interpretation requires that
unrealized gains and losses on swaps, forwards, options and similar contracts
be recognized as assets and liabilities. Previously, AIG's policy was to record
such unrealized gains and losses on a net basis in the consolidated balance
sheet. The Interpretation allows the netting of such unrealized gains and
losses with the same counterparty when they are included under a master netting
arrangement with the counterparty and the contracts are reported at market
value.

         Although there was no effect on AIG's operating income upon the
adoption of the Interpretation, AIG now presents certain of its financial
services assets and liabilities, primarily unrealized gain or loss on interest
rate and currency swaps, options and forward transactions, on a gross basis.
Thus, both consolidated assets and liabilities have increased. The effect of
presenting these assets and liabilities on a gross basis on AIG's consolidated
balance sheet was not significant. Prior years' balance sheets are not required
to be restated. AIG adopted this interpretation effective January 1, 1994.

         In November 1992, FASB issued Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Postemployment Benefits" (FASB
112). FASB 112 establishes accounting standards for employers who provide
benefits to former or inactive employees after employment but before
retirement. FASB 112 was adopted by AIG effective January 1, 1994 and had no
significant impact on AIG's results of operations, financial condition or
liquidity.

         In May 1993, FASB issued Statement of Financial Accounting Standards
No. 114 "Accounting by Creditors for Impairment of a Loan" (FASB 114). FASB 114
addresses the accounting by all creditors for impairment of certain loans. The
impaired loans are to be measured at the present value of all expected future
cash flows. The present value may be determined by discounting the expected
future cash flows at the loan's effective rate or valued at the loan's
observable market price or valued at the fair value of the collateral if the
loan is collateral dependent.





                                                                              45

<PAGE>   47
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

         In October 1994, FASB issued Statement of Financial Accounting
Standards No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures" (FASB 118). FASB 118 amends FASB 114 to allow a
creditor to use existing methods to recognize interest income on an impaired
loan. FASB 118 also amends certain disclosure requirements of FASB 114. AIG has
adopted FASB 114 and FASB 118 effective December 31, 1994. The adoption of
these statements did not have any significant impact on AIG's results of
operations, financial condition or liquidity.

         In October 1994, FASB issued Statement of Financial Accounting
Standards No. 119 "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" (FASB 119). FASB 119 requires disclosure about
derivative financial instruments and amends FASB 105 "Disclosure of Information
about Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk" (FASB 105) and FASB 107
"Disclosure about Fair Value of Financial Instruments".

         FASB 119 requires disclosure about the amounts, nature and terms of
derivatives that are not subject to FASB 105. Also, FASB 119 requires
disclosure about financial instruments held or issued for trading purposes and
purposes other than trading. This statement was adopted by AIG effective
December 31, 1994.

         In December 1994, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 94-5 "Disclosure of Certain
Matters in the Financial Statements of Insurance Enterprises" (SOP 94-5).
Pursuant to SOP 94-5, AIG has disclosed certain information with respect to
unpaid claims and claim adjustment expenses; accounting methods used by AIG's
insurance subsidiaries that are permitted by various domestic and foreign
insurance regulatory authorities rather than prescribed by such authorities;
and AIG's policies and methodologies for estimating the liability for unpaid
claim adjustment expense for difficult-to-estimate liabilities.

         (ii) STANDARDS ADOPTED PRIOR TO 1994: In 1990, FASB issued Statement
of Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (FASB 106). FASB 106 establishes
accounting for postretirement benefits, principally postretirement health care
and life insurance benefits. It requires accrual accounting for postretirement
benefits during the years that an employee renders services. FASB 106 has been
adopted effective January 1, 1992. The consolidated transition liability was
approximately $83.1 million, including minor amounts for certain foreign plans.
The transition liability was recognized immediately at adoption as a change in
accounting principle. The cumulative effect of the adoption of FASB 106 was a
charge of $54.8 million, net of a tax benefit of $28.3 million.

         In 1992, FASB issued Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" (FASB 109). FASB 109's objectives are to
recognize (a) the amount of taxes payable or refundable for the current year
and (b) deferred tax liabilities and assets for expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. The measurement of a deferred tax asset is subject to the
expectation of future realization. AIG adopted FASB 109, effective January 1,
1992. The cumulative effect of adopting FASB 109 was a benefit of $86.7
million.

         At January 1, 1993, AIG adopted Statement of Accounting Standards No.
113 "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" (FASB 113). This statement specifies the accounting
for the reinsuring (ceding) of insurance contracts and, effective in the first
quarter of 1993, eliminates the reporting of assets and liabilities net of the
effects of reinsurance. As required by FASB 113, the reserve for losses and
loss expenses, reserve for unearned premiums and future policy benefits for
life and accident and health insurance contracts have been presented gross of
ceded reinsurance. A reinsurance asset was established to include the
aforementioned ceded reinsurance balances. FASB 113 also establishes the
conditions required for a contract with a reinsurer to be accounted for as
reinsurance ceded and prescribes accounting and reporting standards for the
contract. There has been no material effect on AIG's general or life insurance
operating income as a result of the adoption of FASB 113.

         In May 1993, FASB issued Statement of Accounting Standards No. 115
"Accounting for Certain Investments on Debt and Equity Securities" (FASB 115)
and AIG adopted this standard at December 31, 1993. The pretax increase in
carrying value of bonds available for sale as a result of marking to market was
$919.3 million. The portion which inured to the benefit of policyholders was
$511.8 million, which has been recorded as a component of future policy
benefits for life and accident and health insurance contracts.  Thus, the
unrealized appreciation of investments increased $251.0 million, net of taxes
of $156.5 million.

         FASB 115 addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Those investments are to be classified in three
categories and accounted for as follows:

         * Where an enterprise has the positive intent and ability to hold debt
securities to maturity, those securities are deemed to be held to maturity
securities and reported at amortized cost.

         * Where an enterprise purchases debt and equity securities principally
for the purpose of selling them in the near term, those securities are deemed
to be trading securities and are reported at fair value, with the unrealized
gains and losses included in operating income.

         * Where debt and equity securities are not reported either as held to
maturity securities or trading securities, those securities are deemed to be
available for sale securities and reported at fair value, with unrealized gains
and losses excluded from operating income and reported in a separate component
of shareholders' equity.





46

<PAGE>   48
                             American International Group, Inc. and Subsidiaries


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

         This statement has significantly changed and narrowed the meaning of
the held to maturity category from previous generally accepted accounting
principles.

         During 1993, the Emerging Issues Task Force (EITF) of the FASB adopted
an accounting rule "Accounting for Multiple-Year Retrospectively Rated Contract
by Ceding and Assuming Enterprises" (EITF Issue No. 93-6). This rule encompasses
any multiyear retrospectively rated contract requiring that insurers recognize
as assets the reinsurer's obligations, and that ceding insurers accrue
liabilities for the contract obligations. AIG has analyzed the aspects of this
accounting rule and determined that its implementation had no significant
impact on AIG's results of operations or financial condition.

2. FOREIGN OPERATIONS

Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds
which generally cause a delay in the outward remittance of such funds.
Approximately 37 percent and 36 percent of consolidated assets at December 31,
1994 and 1993, respectively, and 52 percent, 50 percent and 47 percent of
revenues for the years ended December 31, 1994, 1993 and 1992, respectively,
were located in or derived from foreign countries (other than Canada). (See
Note 19.)

3. FEDERAL INCOME TAXES

(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal income
tax return. Revenue Agent's Reports assessing additional taxes for the years
1985 through 1988 have been issued and Letters of Protest contesting the
assessments have been filed with the Internal Revenue Service. It is
management's belief that there are substantial arguments in support of the
positions taken by AIG in its Letters of Protest. Management also believes that
the final result of these examinations will be immaterial to the financial
statements.

         Foreign income not expected to be taxed in the United States has
arisen because AIG's foreign subsidiaries were generally not subject to U.S.
income taxes on income earned prior to January 1, 1987. Such income would
become subject to U.S. income taxes at current tax rates if remitted to the
United States or if other events occur which would make these amounts currently
taxable. The cumulative amount of undistributed earnings of AIG's foreign
subsidiaries currently not subject to U.S. income taxes was approximately $2.6
billion at December 31, 1994. Management presently has no intention of
subjecting these accumulated earnings to material U.S. income taxes and no
provision has been made in the accompanying financial statements for such
taxes.

         Income taxes paid in 1994, 1993 and 1992 amounted to $741,900,000,
$466,600,000 and $328,900,000, respectively.

         The Omnibus Budget Reconciliation Act of 1993 (the 1993 Act) increased
the highest tax rate on corporations to 35 percent for 1993 and subsequent
years. The 1993 Act requires securities dealers to recognize for tax purposes
the mark-to-market gain or loss on certain securities. The adjustment from this
change in accounting method must be phased into taxable income over five years
beginning in 1993. The 1993 Act also disallows several items as expenses
beginning in 1994. None of these items will have a significant effect on AIG's
net income or financial condition. However, it is expected that income taxes
paid will increase as a result of such changes.

         The Uruguay Round of the General Agreement on Tariffs and Trade
Agreements Act (GATT) contains several revenue raising provisions. One of
GATT's funding measures requires AIG to include Subpart F income from foreign
subsidiaries in estimated tax payments. It is anticipated that the timing of
income taxes paid will accelerate as a result of this change.

         During 1994, the Internal Revenue Service issued Treasury Regulations
that affect the tax accounting method for companies which enter into hedging
transactions. The expected effect of these Regulations is to accelerate the
timing of AIG's income tax payments. None of these 1994 changes will have a
material effect on AIG's net income.





                                                                              47

<PAGE>   49
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3. FEDERAL INCOME TAXES (continued)

         (b) The U.S. Federal income tax rate is 35 percent for 1994 and 1993
and 34 percent for 1992. Actual tax expense on income differs from the
"expected" amount computed by applying the Federal income tax rate because of
the following:


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                   
-------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                   1994                     1993                    1992         
                                                  ----------------------   ----------------------   ---------------------

                                                                 PERCENT                  PERCENT                 PERCENT
                                                              OF PRE-TAX               OF PRE-TAX              OF PRE-TAX
                                                      AMOUNT      INCOME      AMOUNT       INCOME      AMOUNT      INCOME
=========================================================================================================================
<S>                                               <C>               <C>    <C>               <C>    <C>             <C>
"Expected" tax expense                            $1,033,193        35.0%  $ 910,378         35.0%  $ 726,596        34.0%
Adjustments:
  Tax exempt interest                               (260,146)       (8.8)   (248,887)        (9.6)   (228,883)      (10.7)
  Dividends received deduction                       (12,326)       (0.4)     (9,357)        (0.4)     (8,726)       (0.4)
  State income taxes                                  36,025         1.2      48,424          1.9      22,307         1.0
Foreign income not expected to be
  taxed in the U.S., less foreign income taxes         4,708         0.2      10,481          0.4      18,780         0.9
  Other                                              (24,990)       (0.9)    (28,036)        (1.0)    (18,041)       (0.8)
------------------------------------------------------------------------------------------------------------------------- 
Actual tax expense                                $  776,464        26.3%  $ 683,003         26.3%  $ 512,033        24.0%
========================================================================================================================= 
FOREIGN AND DOMESTIC COMPONENTS
  OF ACTUAL TAX EXPENSE:
  FOREIGN:
    Current                                       $  244,405               $ 219,799                $ 159,113
    Deferred                                          38,625                  17,736                   21,998
  DOMESTIC*:
    Current                                          592,359                 552,233                  397,219
    Deferred                                         (98,925)               (106,765)                 (66,297)           
-------------------------------------------------------------------------------------------------------------------------
Total                                             $  776,464               $ 683,003                $ 512,033            
=========================================================================================================================
</TABLE>


* Including U.S. tax on foreign income.

         (c) The components of the net deferred tax liability as of December
31, 1994 and December 31, 1993 were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
                                                                    1994        1993
====================================================================================
<S>                                                           <C>         <C>
DEFERRED TAX ASSETS:
  Loss reserve discount                                       $1,276,085  $1,266,010
  Unearned premium reserve reduction                             241,695     212,588
  Accruals not currently deductible                              309,088     294,630
  Adjustment to life policy reserves                             370,835     272,236
  Cumulative translation adjustment                               15,608       1,847
  Other                                                           26,227      70,173
------------------------------------------------------------------------------------
                                                               2,239,538   2,117,484
------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
  Deferred policy acquisition costs                            1,082,040     937,046
  Financial service products
    mark to market differential                                  226,598     346,262
  Depreciation of flight equipment                               522,282     350,779
  Acquisition net asset basis adjustments                        238,019     275,765
  Unrealized appreciation of investments                          57,547     404,264
  Other                                                          146,083     251,158
------------------------------------------------------------------------------------
                                                               2,272,569   2,565,274
------------------------------------------------------------------------------------
Net deferred tax liability                                    $   33,031  $  447,790
====================================================================================
</TABLE>


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:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                1994        1993        1992
====================================================================================
<S>                                               <C>         <C>         <C>
GENERAL INSURANCE OPERATIONS:
  Balance at beginning of year                    $1,009,545  $  880,257  $  872,012
------------------------------------------------------------------------------------
  Acquisition costs deferred
  Commissions                                        602,014     475,511     418,527
  Other                                              523,246     492,944     428,694
------------------------------------------------------------------------------------
                                                   1,125,260     968,455     847,221
------------------------------------------------------------------------------------
  Amortization charged to income
  Commissions                                        469,181     416,134     453,328
  Other                                              486,130     423,033     385,648
------------------------------------------------------------------------------------
                                                     955,311     839,167     838,976
------------------------------------------------------------------------------------
Balance at end of year                            $1,179,494  $1,009,545  $  880,257
====================================================================================
LIFE INSURANCE OPERATIONS:
  Balance at beginning of year                    $3,239,864  $2,777,561  $2,370,664
------------------------------------------------------------------------------------
  Acquisition costs deferred
    Commissions                                      741,532     604,906     551,121
    Other                                            337,066     294,636     246,839
------------------------------------------------------------------------------------
                                                   1,078,598     899,542     797,960
------------------------------------------------------------------------------------
  Amortization charged to income
    Commissions                                      368,448     304,276     265,600
    Other                                            168,916     165,034     129,275
------------------------------------------------------------------------------------
                                                     537,364     469,310     394,875
------------------------------------------------------------------------------------
Increase due to foreign exchange                     171,653      32,071       3,812
------------------------------------------------------------------------------------
Balance at end of year                            $3,952,751  $3,239,864  $2,777,561
------------------------------------------------------------------------------------
Total deferred policy acquisition costs           $5,132,245  $4,249,409  $3,657,818
====================================================================================
</TABLE>






48

<PAGE>   50
                             American International Group, Inc. and Subsidiaries


5. REINSURANCE

In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.

         General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Amounts recoverable from general reinsurers are estimated
in a manner consistent with the claims liabilities associated with the
reinsurance and presented as a component of reinsurance assets.

         AIG life companies limit exposure to loss on any single life. For
ordinary insurance, AIG retains a maximum of approximately $1,300,000 of
coverage per individual life. There are smaller retentions for other lines of
business. Life reinsurance is effected principally under yearly renewable term
treaties. Amounts recoverable from life reinsurers are estimated in a manner
consistent with the assumptions used for the underlying policy benefits and are
presented as a component of reinsurance assets.

         General insurance premiums written and earned were comprised of the
following:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                      WRITTEN         EARNED
====================================================================================
<S>                                                       <C>            <C>
1994
Gross premiums                                            $16,392,409    $15,665,787
Ceded premiums                                             (5,526,656)    (5,378,956)
------------------------------------------------------------------------------------ 
Net premiums                                              $10,865,753    $10,286,831
====================================================================================
1993
Gross premiums                                            $14,901,255    $14,405,992
Ceded premiums                                             (4,875,352)    (4,839,352)
------------------------------------------------------------------------------------ 
Net premiums                                              $10,025,903    $ 9,566,640
====================================================================================
1992
Gross premiums                                            $13,615,715    $13,616,700
Ceded premiums                                             (4,477,187)    (4,407,310)
------------------------------------------------------------------------------------ 
Net premiums                                              $ 9,138,528    $ 9,209,390
====================================================================================
</TABLE>


         In the normal course of their operations, certain AIG subsidiaries are
provided reinsurance coverages from AIG's minority-owned reinsurance
companies. During 1994, 1993 and 1992, the premiums written which were ceded to
Transatlantic amounted to $200,000,000, $238,100,000 and $210,700,000,
respectively.

         For the years ended December 31, 1994, 1993 and 1992, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $4.84
billion, $4.45 billion and $4.19 billion, respectively.

         Life insurance net premium income was comprised of the following:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                             1994         1993          1992
====================================================================================
<S>                                            <C>          <C>           <C>
Gross premium income                           $6,886,249   $5,924,557    $5,023,534
Ceded premiums                                   (161,928)    (178,511)     (170,447)
------------------------------------------------------------------------------------ 
Net premium income                             $6,724,321   $5,746,046    $4,853,087
====================================================================================
</TABLE>


         Life insurance recoveries, which reduced death and other benefits,
approximated $96.0 million, $76.7 million and $64.8 million, respectively, for
each of the years ended December 31, 1994, 1993 and 1992.

         AIG's reinsurance arrangements do not relieve AIG from its direct
obligation to its insureds. Thus, a credit exposure exists with respect to both
general and life reinsurance ceded to the extent that any reinsurer is unable
to meet the obligations assumed under the reinsurance agreements. AIG holds
substantial collateral as security under related reinsurance agreements in the
form of funds, securities and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely
successful in prior recovery efforts.

         AIG evaluates the financial condition of its reinsurers through an
internal reinsurance security committee consisting of members of AIG's Senior
Management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract.

         Life insurance ceded to other insurance companies was as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                             1994         1993          1992
====================================================================================
<S>                                           <C>          <C>           <C>
Life insurance in-force                       $30,184,126  $13,006,029   $11,344,069
====================================================================================
</TABLE>


* The principal reason for the increase in 1994 relates to life insurance
  in-force ceded with respect to corporate-owned life insurance.

         Life insurance assumed represented 0.1 percent of gross life insurance
in-force at December 31, 1994, and 0.5 percent for 1993 and 1.7 percent for
1992, and 0.1 percent, 0.1 percent and 0.2 percent of gross premium income for
each of the periods ended December 31, 1994, 1993 and 1992, respectively.

         Supplemental information for gross loss and benefit reserves net of
ceded reinsurance at December 31, 1994 and 1993 follows:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
                                                                   AS         NET OF
                                                             REPORTED    REINSURANCE
====================================================================================
<S>                                                      <C>            <C>
December 31, 1994
Reserve for losses and loss expenses                     $(31,435,355)  $(18,418,855)
Future policy benefits for life and accident
  and health insurance contracts                          (17,432,222)   (17,108,322)
Premium and insurance balances
  receivable-net                                            8,802,207     10,245,259
Funds held under reinsurance treaties                              --        112,455
Reserve for unearned premiums                              (6,318,754)    (4,925,054)
Reinsurance assets                                         16,289,607             --
====================================================================================
December 31, 1993
Reserve for losses and loss expenses                     $(30,046,172)  $(17,556,972)
Future policy benefits for life and accident
  and health insurance contracts                          (14,638,382)   (14,344,882)
Premium and insurance balances
  receivable-net                                            8,364,096     10,122,694
Funds held under reinsurance treaties                              --         96,490
Reserve for unearned premiums                              (5,515,670)    (4,269,670)
Reinsurance assets                                         15,883,788             --
====================================================================================
</TABLE>






                                                                              49

<PAGE>   51
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE
   POLICY BENEFITS AND POLICYHOLDERS' CONTRACT DEPOSITS

(a) The following analysis provides a reconciliation of the activity in the
reserve for losses and loss expenses:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                         1994           1993            1992
====================================================================================
<S>                                      <C>            <C>             <C>
At beginning of year:
  Reserve for losses and
    loss expenses                        $ 30,046,200   $ 28,156,800    $ 26,239,900
  Reinsurance recoverable                 (12,489,200)   (11,400,000)    (10,400,000)
------------------------------------------------------------------------------------ 
                                           17,557,000     16,756,800      15,839,900
------------------------------------------------------------------------------------
Losses and loss expenses incurred:
  Current year                              8,158,400      7,530,700       7,497,100
  Prior year                                 (152,800)        45,300           6,400
------------------------------------------------------------------------------------
                                            8,005,600      7,576,000       7,503,500
------------------------------------------------------------------------------------
Losses and loss expenses paid:
  Current year                              1,997,400      1,893,100       1,838,800
  Prior year                                5,146,300      4,882,700       4,747,800
------------------------------------------------------------------------------------
                                            7,143,700      6,775,800       6,586,600
------------------------------------------------------------------------------------
At end of year:
  Net reserve for losses and
    loss expenses                          18,418,900     17,557,000      16,756,800
  Reinsurance recoverable                  13,016,500     12,489,200      11,400,000
------------------------------------------------------------------------------------
                                         $ 31,435,400   $ 30,046,200    $ 28,156,800
====================================================================================
</TABLE>


         (b) The analysis of the future policy benefits and policyholders'
contract deposits liabilities as at December 31, 1994 and 1993 follows:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
                                                                1994            1993
====================================================================================
<S>                                                      <C>             <C>
Future policy benefits:
  Long duration contracts                                $16,916,382     $14,223,502
  Short duration contracts                                   515,840         414,880
------------------------------------------------------------------------------------
Total                                                    $17,432,222     $14,638,382
====================================================================================
Policyholders' contract deposits:
  Annuities                                              $ 3,171,013     $ 2,686,439
  Guaranteed investments contracts (GICs)                    812,737         729,679
  Corporate-owned life insurance                           1,483,882         195,610
  Universal life                                             364,356         312,312
  Other investment contracts                                 655,438         515,799
------------------------------------------------------------------------------------
Total                                                    $ 6,487,426     $ 4,439,839
====================================================================================
</TABLE>


         (c) Long duration contract liabilities included in future policy
benefits, as presented in the table above, result from traditional life
products. Short duration contract liabilities are primarily accident and health
products. These long duration products generally have fixed cash values and
there are no surrender charges. The liability for future life policy benefits
has been established based upon the following assumptions:

         (i) Interest rates (exclusive of immediate/terminal funding
annuities), which vary by territory, year of issuance and products, range from
3.0 percent to 12.0 percent within the first 20 years. Interest rates on
immediate/terminal funding annuities are at a maximum of 12.2 percent and grade
to not greater than 7.5 percent.

         (ii) Mortality and surrender rates are based upon actual experience by
geographical area modified to allow for variations in policy form. The weighted
average lapse rate, including surrenders, for individual and group life
approximated 7.5 percent.

         (iii) The portion of net income and unrealized appreciation of
investments that can inure to the benefit of AIG is limited in some cases by
the insurance contracts and by the local insurance regulations of the countries
in which the policies are in force.  All net income and unrealized appreciation
of investments in excess of these limits have been included in the reserve for
future policy benefits in the consolidated balance sheet.

         (iv) Participating life business represented approximately  27 percent
of the gross insurance in-force at December 31, 1994 and 48 percent of gross
premium income in 1994. The amount of dividends to be paid is determined
annually by the Boards of Directors. Anticipated dividends are considered as a
planned contractual benefit in computing the value of future policy benefits
and are provided ratably over the premium-paying period of the contracts.

         (d) The liability for policyholders' contract deposits has been
established based on the following assumptions:

         (i) Interest rates credited on deferred annuities vary by year of
issuance and range from 8.2 percent to 4.0 percent.  Credited interest rate
guarantees are generally for a period of one year. Withdrawal charges generally
range from 6.0 percent to 10.0 percent grading to 0 percent over a period of 7
to 10 years.

         (ii) Domestically, GICs have market value withdrawal provisions for
any funds withdrawn other than benefit responsive payments. Interest rates
credited generally range from 4.7 percent to 9.1 percent and maturities range
from 2 to 7 years. Overseas, primarily in the United Kingdom, GIC type
contracts are credited at rates ranging from 4.5 percent to 7.0 percent with
maturities generally being one year. Contracts in other foreign locations have
interest rates, maturities and withdrawal charges based upon local economic and
regulatory conditions.

         (iii) Interest rates on corporate-owned life insurance business are
guaranteed at 4 percent and credited on average 9.7 percent on funds supported
by policy loans.

         (iv) The universal life funds have credited interest rates of 6
percent to 7 percent and guarantees ranging from 4 percent to 5.5 percent
depending on the year of issue. Additionally, universal life funds are subject
to surrender charges that amount to 7.5 percent of the fund balance and grade
off over no more than 15 years from issue.

         (e) Experience adjustments, relating to future policy benefits and
policyholders' contract deposits, vary according to the type of contract and
the territory in which the policy is in force. In general terms, investments,
mortality and morbidity results may be passed through by experience credits or
as an adjustment to the premium mechanism, subject to local regulatory
guidance.





50

<PAGE>   52
                             American International Group, Inc. and Subsidiaries


7. STATUTORY FINANCIAL DATA

Statutory surplus and net income for general insurance and life insurance
operations as reported to regulatory authorities were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                         1994           1993            1992
====================================================================================
<S>                                        <C>            <C>             <C>
Statutory surplus:
  General insurance                        $9,521,550     $7,164,367      $6,552,960
  Life insurance                            3,834,269      3,275,078       2,141,637
Statutory net income
  (including net realized
  capital gains and losses):
  General insurance                         1,304,022      1,206,387         875,231
  Life insurance                              730,170        570,570         378,704
====================================================================================
</TABLE>


         AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with generally accepted accounting principles (GAAP) vary between domestic and
foreign jurisdictions. The principal differences are that statutory financial
statements do not reflect deferred policy acquisition costs and deferred income
taxes, all bonds are carried at amortized cost and reinsurance assets and
liabilities are presented net of reinsurance. AIG's use of permitted statutory
accounting practices does not have a significant impact on statutory surplus.

8. INVESTMENT INFORMATION

(a) STATUTORY DEPOSITS: Cash and securities with carrying values of $3.04
billion and $2.95 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 1994 and 1993,
respectively.

         (b) NET INVESTMENT INCOME: An analysis of the net investment income
from the general and life insurance operations follows:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                         1994           1993            1992
====================================================================================
<S>                                        <C>            <C>             <C>
General insurance:
  Fixed maturities                         $1,198,432     $1,136,120      $1,108,643
  Equity securities                            90,773         96,311          34,964
  Short-term investments                       48,023         62,156          72,334
  Other (net of interest
    expense on funds held)                    158,718         97,150          83,410
------------------------------------------------------------------------------------
  Total investment income                   1,495,946      1,391,737       1,299,351
  Investment expenses                          60,854         51,257          47,265
------------------------------------------------------------------------------------
Net investment income                      $1,435,092     $1,340,480      $1,252,086
====================================================================================
Life insurance:
  Fixed maturities                         $1,194,686     $  975,623      $  904,733
  Equity securities                            58,017         38,361          18,692
  Short-term investments                       92,484        220,050         157,976
  Interest on mortgage, policy
    and collateral loans                      369,935        242,014         232,472
  Other                                       119,769         94,146          63,851
------------------------------------------------------------------------------------
  Total investment income                   1,834,891      1,570,194       1,377,724
  Investment expenses                          86,463         70,480          63,886
------------------------------------------------------------------------------------
Net investment income                      $1,748,428     $1,499,714      $1,313,838
====================================================================================
</TABLE>


         (c) INVESTMENT GAINS AND LOSSES: The realized capital gains and
increase or decrease in unrealized appreciation of investments for 1994, 1993
and 1992 were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                         1994           1993            1992
====================================================================================
<S>                                       <C>            <C>                <C>
Realized capital gains (losses)
  on investments:
    Fixed maturities (a)                  $  (116,903)    $  125,296        $130,698
    Equity securities                         223,603         65,090          57,616
    Other                                     (19,847)       (83,288)        (89,216)
------------------------------------------------------------------------------------ 
Realized capital gains                    $    86,853     $  107,098        $ 99,098
====================================================================================
Increase (decrease) in unrealized
  appreciation of investments:
    Cumulative effect of
      accounting change (b)               $        --     $  407,498        $     --
    Fixed maturities                       (1,357,521)        31,382          38,592
    Equity securities                        (254,518)       545,074         (75,771)
    Other                                     527,473)(c)    143,368          63,991
------------------------------------------------------------------------------------
Increase (decrease) in unrealized
  appreciation                            $(1,084,566)    $1,127,322        $ 26,812
====================================================================================
</TABLE>


(a) In 1994, the realized gains (losses) resulted from the sale of available
    for sale fixed maturities. Prior to 1994, a majority of the gains (losses)
    realized resulted from sales of bonds carried at market value.

(b) Includes $511.8 million increase in unrealized appreciation attributable
    to participating policyholders at December 31, 1993.

(c) Includes $440.5 million decrease in unrealized appreciation attributable
    to participating policyholders at December 31, 1994.

         The gross gains and gross losses realized on the disposition of
available for sale securities for 1994 follows:


<TABLE>
<CAPTION>
(in thousands)                                                                      
------------------------------------------------------------------------------------
                                                               GROSS           GROSS
                                                            REALIZED        REALIZED
                                                               GAINS          LOSSES
====================================================================================
<S>                                                         <C>             <C>
1994
Bonds                                                       $ 50,416        $139,224
Common Stocks                                                302,318          92,257
Preferred Stocks                                              13,911             369
Financial services securities available for sale              41,029           8,334
------------------------------------------------------------------------------------
Total                                                       $407,674        $240,184
====================================================================================
</TABLE>


         During 1993 and 1992, gross gains of $99,162,000 and $87,776,000,
respectively, and gross losses of $43,094,000 and $35,635,000, respectively,
were realized on dispositions of fixed maturities carried at amortized cost.

         (d) MARKET VALUE OF FIXED MATURITIES AND UNREALIZED APPRECIATION OF
INVESTMENTS: At December 31, 1994, the balance of the unrealized appreciation
of investments in equity securities (before applicable taxes) included gross
gains of approximately $1,320,000,000 and gross losses of approximately
$914,500,000.

         At December 31, 1993, the balance of the unrealized appreciation of
investments in equity securities (before applicable taxes) included gross gains
of approximately $906,400,000 and gross losses of approximately $246,400,000.

         The deferred tax payable related to the net unrealized appreciation of
investments was $57,547,000 at December 31, 1994 and $404,264,000 at December
31, 1993.





                                                                              51

<PAGE>   53
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. INVESTMENT INFORMATION (continued)

         The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 1994 and December 31, 1993
were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                    GROSS         GROSS        ESTIMATED
                                  AMORTIZED    UNREALIZED    UNREALIZED           MARKET
                                       COST         GAINS        LOSSES            VALUE
========================================================================================
<S>                             <C>            <C>             <C>           <C>
1994
Fixed maturities held to
  maturity:
  Bonds:
    U.S. Government (a)         $     4,627    $       39      $    201      $     4,465
    States (b)                   13,035,025       346,979       278,845       13,103,159
    Foreign Governments                 126            --            --              126
    All other corporate               2,029            --           109            1,920
----------------------------------------------------------------------------------------
Total bonds                      13,041,807       347,018       279,155       13,109,670
Preferred stocks                    412,503        12,484           212          424,775
----------------------------------------------------------------------------------------
Total fixed maturities          $13,454,310    $  359,502      $279,367      $13,534,445
========================================================================================
1993
Fixed maturities held to
  maturity:
  Bonds:
    U.S. Government (a)         $    14,330    $      745      $     27      $    15,048
    States (b)                   12,176,138     1,087,519         3,850       13,259,807
    All other corporate               3,233           242            --            3,475
----------------------------------------------------------------------------------------
Total bonds                      12,193,701     1,088,506         3,877       13,278,330
Preferred stocks                     17,428         6,084         5,519           17,993
----------------------------------------------------------------------------------------
Total fixed maturities          $12,211,129    $1,094,590      $  9,396      $13,296,323
========================================================================================
</TABLE>


(a) Including U.S. Government agencies and authorities.

(b) Including municipalities and political subdivisions.

         The amortized cost and estimated market value of bonds available for
sale and carried at market value at December 31, 1994 and 1993 were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                    GROSS         GROSS        ESTIMATED
                                  AMORTIZED    UNREALIZED    UNREALIZED           MARKET
                                       COST         GAINS        LOSSES            VALUE
========================================================================================
<S>                             <C>            <C>             <C>           <C>
1994
Fixed maturities available
  for sale:
  Bonds:
    U.S. Government (a)         $ 1,425,914    $   35,565      $133,547      $ 1,327,932
    States (b)                    2,449,698        27,765       114,764        2,362,699
    Foreign governments           5,310,211        78,319       117,465        5,271,065
    All other corporate          13,021,488       215,274       385,858       12,850,904
----------------------------------------------------------------------------------------
Total bonds                     $22,207,311    $  356,923      $751,634      $21,812,600
========================================================================================
1993
Fixed maturities available
  for sale:
  Bonds:
     U.S. Government (a)        $ 1,211,016    $   84,342      $ 14,823      $ 1,280,535
     States (b)                   1,876,795       123,697         4,404        1,996,088
     Foreign governments          4,422,548       237,961         5,928        4,654,581
     All other corporate          9,089,243       610,802        68,838        9,631,207
----------------------------------------------------------------------------------------
Total bonds                     $16,599,602    $1,056,802      $ 93,993      $17,562,411
========================================================================================
</TABLE>


(a) Including U.S. Government agencies and authorities.

(b) Including municipalities and political subdivisions.

         The amortized cost and estimated market value of securities available
for sale and carried at market value at December 31, 1994 and 1993 were as
follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                    GROSS         GROSS        ESTIMATED
                                  AMORTIZED    UNREALIZED    UNREALIZED           MARKET
                                       COST         GAINS        LOSSES            VALUE
========================================================================================
<S>                              <C>             <C>           <C>            <C>
1994
Securities available for sale:
    Corporate and bank
      debt                       $1,228,207      $ 29,622      $ 28,771       $1,229,058
    Foreign government
      obligations                 1,254,856       159,775       158,269        1,256,362
    Asset-backed and
      collateralized                774,277        12,803        12,228          774,852
    Preferred stocks                146,521         1,402         1,416          146,507
    U.S. Government
      obligations                   390,215        39,560        39,762          390,013
----------------------------------------------------------------------------------------
Total                            $3,794,076      $243,162      $240,446       $3,796,792
========================================================================================
1993
Securities available for sale:
    Corporate and bank
      debt                       $1,549,993      $158,532      $148,320       $1,560,205
    Foreign government
      obligations                 1,943,953       179,016       176,199        1,946,770
    Asset-backed and
      collateralized                850,783        32,547        30,027          853,303
    Preferred stocks                272,477         1,501           567          273,411
    U.S. Government
      obligations                   354,609        12,595         9,788          357,416
----------------------------------------------------------------------------------------
Total                            $4,971,815      $384,191      $364,901       $4,991,105
========================================================================================
</TABLE>


         The amortized cost and estimated market values of fixed maturities
held to maturity and fixed maturities available for sale at December 31, 1994,
by contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties.


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                                               ESTIMATED
                                                              AMORTIZED           MARKET
                                                                   COST            VALUE
========================================================================================
<S>                                                         <C>              <C>
Fixed maturities held to maturity:
Due in one year or less                                     $    98,894      $    99,896
Due after one year through five years                         1,565,915        1,598,466
Due after five years through ten years                        4,826,173        4,865,742
Due after ten years                                           6,963,328        6,970,341
----------------------------------------------------------------------------------------
Total held to maturity                                      $13,454,310      $13,534,445
========================================================================================
Fixed maturities available for sale:
Due in one year or less                                     $ 1,149,688      $ 1,145,356
Due after one year through five years                         8,639,832        8,546,882
Due after five years through ten years                        9,099,515        8,926,127
Due after ten years                                           3,318,276        3,194,235
----------------------------------------------------------------------------------------
Total available for sale                                    $22,207,311      $21,812,600
========================================================================================
</TABLE>


        The amortized cost and estimated market values of securities available
for sale at December 31, 1994, by contractual maturity, are shown below.
Actual maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay certain obligations with or without
call or prepayment penalties.





                                                                              52

<PAGE>   54
                             American International Group, Inc. and Subsidiaries


8. INVESTMENT INFORMATION (continued)


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                                               ESTIMATED
                                                              AMORTIZED           MARKET
                                                                   COST            VALUE
========================================================================================
<S>                                                          <C>              <C>
Securities available for sale:
Due in one year or less                                      $  288,434       $  288,224
Due after one year through five years                         1,313,647        1,314,795
Due after five years through ten years                        1,278,481        1,279,054
Due after ten years                                             139,237          139,867
Asset backed and collateralized                                 774,277          774,852
----------------------------------------------------------------------------------------
Total available for sale                                     $3,794,076       $3,796,792
========================================================================================
</TABLE>


         (e) CMOs: CMOs, held by AIG's life companies, are presented as a
component of bonds available for sale, at market. The CMOs are principally U.S.
government and government agency backed and AAA rated securities. These
represent 86 percent of the CMOs held.  Whole loans represent 14 percent of the
CMOs held and are investment grade.

         At December 31, 1994 and 1993, the market value of the CMO portfolio
was $1.7 billion and $1.8 billion, respectively; the amortized cost was
approximately $1.8 billion in 1994 and $1.7 billion in 1993. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 1994.

         The distribution of the CMOs at December 31, 1994 and 1993 was as
follows:


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                                                   1994             1993
========================================================================================
<S>                                                                 <C>              <C>
GNMA                                                                 38%              48%
FNMA                                                                 23               22
FHLMC                                                                20               21
VA                                                                    5                4
Other                                                                14                5
----------------------------------------------------------------------------------------
                                                                    100%             100%
======================================================================================== 
</TABLE>


         At December 31, 1994, the gross weighted average coupon of this
portfolio was 7.6 percent. The gross weighted average life of this portfolio
was 7.8 years.

         (f) FIXED MATURITIES BELOW INVESTMENT GRADE: At December 31, 1994, the
fixed maturities and securities available for sale held by AIG that were below
investment grade were insignificant.

         (g) During 1993, certain investments held by AIGFP experienced
financial difficulties and suffered rating downgrades. The pretax impact on AIG
of the estimated other than temporary impairment in value of these investments
was $215 million. As is AIG's policy in such situations where credit ratings
have deteriorated significantly, these impairments have been appropriately
recognized by charges to income of $104 million in 1993 and $111 million prior
to 1993.

         (h) At December 31, 1994, non-income producing invested assets were
insignificant.

9. DEBT OUTSTANDING

At December 31, 1994, AIG had the following debt outstanding:


<TABLE>
<CAPTION>
(in thousands)                                                                          
========================================================================================
<S>                                                                          <C>
Borrowings under Obligations of
  Guaranteed Investment Agreements
  (GIA) -- AIGFP                                                             $ 5,535,318
----------------------------------------------------------------------------------------
Commercial Paper:
  AIG Funding Inc. (Funding)                                                   1,211,280
  ILFC                                                                         1,960,545*
  A.I. Credit Corp. (AICCO)                                                      617,734
----------------------------------------------------------------------------------------
  Total                                                                        3,789,559
========================================================================================
Medium Term Notes:
  ILFC                                                                         1,999,535*
  AIG                                                                            155,000
----------------------------------------------------------------------------------------
  Total                                                                        2,154,535
========================================================================================
Notes and Bonds Payable:
  ILFC                                                                         2,950,000*
  AIGFP                                                                        1,048,061
  AIG: Lire bonds                                                                159,067
      Zero coupon notes                                                           65,831
----------------------------------------------------------------------------------------
  Total                                                                        4,222,959
========================================================================================
Loans and Mortgages Payable
  AIGTG                                                                          890,800
  ILFC                                                                           678,650*
  AIG                                                                            247,656
----------------------------------------------------------------------------------------
  Total                                                                        1,817,106
========================================================================================
Total Borrowings                                                              17,519,477
========================================================================================
Borrowings not guaranteed by AIG                                               7,588,730
Matched GIA borrowings                                                         5,535,318
----------------------------------------------------------------------------------------
                                                                              13,124,048
----------------------------------------------------------------------------------------
Remaining borrowings of AIG                                                  $ 4,395,429
========================================================================================
</TABLE>


* AIG does not guarantee or support these borrowings.

         (a) COMMERCIAL PAPER: At December 31, 1994, the commercial paper issued
and outstanding was as follows:


<TABLE>
<CAPTION>
(dollars in thousands)                                                                  
----------------------------------------------------------------------------------------
                                                                WEIGHTED
                        NET                                      AVERAGE        WEIGHTED
                       BOOK    UNAMORTIZED            FACE      INTEREST         AVERAGE
                      VALUE       DISCOUNT          AMOUNT          RATE        MATURITY
========================================================================================
<S>              <C>               <C>          <C>                 <C>         <C>
Funding          $1,211,280        $10,540      $1,221,820          6.47%        49 days
AICCO               617,734          2,891         620,625          5.83         30 days
ILFC              1,960,545         11,816       1,972,361          5.73        100 days
----------------------------------------------------------------------------------------
Total            $3,789,559        $25,247      $3,814,806            --              --
========================================================================================
</TABLE>


         Commercial paper issued by Funding is guaranteed by AIG. AIG has
entered into an agreement in support of AICCO's commercial paper. AIG does not
guarantee ILFC's commercial paper.

         (b) BORROWINGS UNDER OBLIGATIONS OF GUARANTEED INVESTMENT
AGREEMENTS: Borrowings under obligations of guaranteed investment agreements,
which are guaranteed by AIG, are recorded on the basis of proceeds received.
Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings range from 3.3 percent to
10.6 percent.





                                                                              53

<PAGE>   55
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. DEBT OUTSTANDING (continued)

         Payments due under these investment agreements in each of the next
five years ending December 31, and the periods thereafter based on the earliest
call dates, were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                                               PRINCIPAL
                                                                                  AMOUNT
========================================================================================
<S>                                                                           <C>
1995                                                                          $2,444,707
1996                                                                             715,338
1997                                                                              68,826
1998                                                                              28,631
1999                                                                             237,362
Remaining years after 1999                                                     2,040,454
----------------------------------------------------------------------------------------
Total                                                                         $5,535,318
========================================================================================
</TABLE>


         At December 31, 1994, the market value of securities pledged as
collateral with respect to these obligations approximated $1,057,319,000.

         (c) MEDIUM TERM NOTES PAYABLE:

         (i) MEDIUM TERM NOTES PAYABLE ISSUED BY AIG: AIG's Medium Term Notes
are unsecured obligations which may not be redeemed by AIG prior to maturity
and bear interest at either fixed rates set by AIG at issuance or variable
rates determined by reference to an interest rate or other formula.

         An analysis of the Medium Term Notes for the year ended December 31,
1994 was as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
MEDIUM TERM
NOTE SERIES:                             B               C             D           TOTAL
========================================================================================
<S>                                <C>            <C>           <C>             <C>
Balance December 31, 1993          $40,000        $105,000      $150,000        $295,000
Matured during year                     --          15,000       125,000         140,000
----------------------------------------------------------------------------------------
Balance December 31, 1994          $40,000        $ 90,000      $ 25,000        $155,000
========================================================================================
</TABLE>


         The interest rates on this debt range up to 8.45 percent. To the
extent deemed appropriate, AIG may enter into swap transactions to reduce its
effective short-term borrowing rate.

         At December 31, 1994, the maturity schedule for AIG's outstanding
Medium Term Notes was as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                                               PRINCIPAL
                                                                                  AMOUNT
========================================================================================
<S>                                                                             <C>
1995                                                                            $ 40,000
1996                                                                              75,000
1997                                                                                  --
1998                                                                              40,000
----------------------------------------------------------------------------------------
Total                                                                           $155,000
========================================================================================
</TABLE>


         At December 31, 1994, AIG had $247,000,000 principal amount of Series
D Medium Term Notes registered and available for issuance from time to time.

         (ii) MEDIUM TERM NOTES PAYABLE ISSUED BY ILFC: ILFC's Medium Term
Notes are unsecured obligations which may not be redeemed by ILFC prior to
maturity and bear interest at fixed rates set by ILFC at issuance.

         As of December 31, 1994, notes in aggregate principal amount of
$1,999,535,000 were outstanding with maturity dates varying from 1995 to 2004
at interest rates ranging from 3.75 percent to 9.88 percent. These notes
provide for a single principal payment at the maturity of each note.

         At December 31, 1994, the maturity schedule for ILFC's outstanding
Medium Term Notes was as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                                               PRINCIPAL
                                                                                  AMOUNT
========================================================================================
<S>                                                                           <C>
1995                                                                          $  319,900
1996                                                                             442,550
1997                                                                             412,600
1998                                                                             433,235
1999                                                                             273,250
Remaining years after 1999                                                       118,000
----------------------------------------------------------------------------------------
Total                                                                         $1,999,535
========================================================================================
</TABLE>


         (d) NOTES AND BONDS PAYABLE:

         (i) ZERO COUPON NOTES: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of
$750,000,000. The notes were offered at 12 percent of principal amount at
stated maturity, bear no interest and are due August 15, 2004. The net proceeds
to AIG from the issuance were $85,625,000. The notes are redeemable at any time
in whole or in part at the option of AIG at 100 percent of their principal
amount at stated maturity. The notes are also redeemable at the option of AIG
or bearer notes may be redeemed at the option of the holder in the event of
certain changes involving taxation in the United States at prices ranging from
34.41 percent currently, to 89.88 percent after August 15, 2003, of the
principal amount at stated maturity together with accrued amortization of
original issue discount from the preceding August 15. During 1994 and 1993, no
notes were repurchased. At December 31, 1994, the notes outstanding have a face
value of $189,200,000, an unamortized discount of $123,369,000 and a net book
value of $65,831,000. The amortization of the original issue discount is
recorded as interest expense.

         (ii) ITALIAN LIRE BONDS: In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire. The principal amount of 200 billion Italian Lire
Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent
which is paid annually. These bonds are not redeemable prior to maturity,
except in the event of certain changes involving taxation in the United States
or the imposition of certain certification, identification or reporting
requirements.

         Simultaneous with the issuance of this debt, AIG entered into a swap
transaction which effectively converted AIG's net interest expense to a U.S.
dollar liability of approximately 7.9 percent, which requires the payment of
proceeds at maturity of approximately $159 million in exchange for 200 billion
Italian Lire and interest thereon.





54

<PAGE>   56
                             American International Group, Inc. and Subsidiaries

9. DEBT OUTSTANDING (continued)

         (iii) TERM NOTES ISSUED BY ILFC: ILFC has issued unsecured obligations
which may not be redeemed prior to maturity.  $100,000,000 of such term notes
are at floating interest rates and the remainder are at fixed rates.

         As of December 31, 1994, notes in aggregate principal amount of
$2,950,000,000 were outstanding with maturity dates varying from 1995 to 2004
and interest rates ranging from 4.75 percent to 8.88 percent. These notes
provide for a single principal payment at maturity.

         At December 31, 1994, the maturity schedule for ILFC's Term Notes was
as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                                               PRINCIPAL
                                                                                  AMOUNT
========================================================================================
<S>                                                                           <C>
1995                                                                          $  500,000
1996                                                                             600,000
1997                                                                             650,000
1998                                                                             500,000
1999                                                                             350,000
Remaining years after 1999                                                       350,000
----------------------------------------------------------------------------------------
Total                                                                         $2,950,000
========================================================================================
</TABLE>


         AIG does not guarantee any of the debt obligations of ILFC.

         (iv) Notes and Bonds Payable Issued by AIGFP:During 1992, AIGFP's
foreign banking subsidiary issued Netherland guilder denominated bonds. The
bonds mature on June 30, 1997 and have a Netherland guilder interest rate of
8.4 percent. Interest is payable annually. At December 31, 1994, these bonds
had a U.S. dollar carrying value of $110.1 million.

         During 1994, AIGFP issued Swiss franc denominated notes, maturing on
May 15, 1998 and June 1, 1999 in the amount of Swiss franc 130 million and 61
million, respectively. These notes have an interest rate that is six month
Swiss franc LIBOR plus 22 basis points. Interest is payable semi-annually. At
December 31, 1994, these notes had a U.S. dollar carrying value of $148.6
million.

         AIGFP is also obligated under various notes maturing in 1995 through
2005. The majority of these notes are U.S. dollar denominated and accrue
interest at various interest rates. At December 31, 1994, these notes amounted
to $789.4 million.

         (e) LOANS AND MORTGAGES PAYABLE: Loans and mortgages payable at
December 31, 1994 consisted of the following:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                 FINANCIAL
                                                  SERVICES           AIG           TOTAL
========================================================================================
<S>                                             <C>             <C>           <C>
Uncollateralized loans payable                  $1,240,547      $116,466      $1,357,013
Collateralized loans and
  mortgages payable                                328,903       131,190         460,093
----------------------------------------------------------------------------------------
Total                                           $1,569,450      $247,656      $1,817,106
========================================================================================
</TABLE>


         (f) INTEREST EXPENSE FOR ALL INDEBTEDNESS: Total interest expense for
all indebtedness, net of capitalized interest, aggregated $1,289,277,000 in
1994, $1,103,955,000 in 1993 and $1,128,007,000 in 1992. Interest expense paid
approximated $1,055,503,000 in 1994, $1,017,066,000 in 1993 and $1,051,976,000
in 1992.

10. CAPITAL FUNDS

(a) At December 31, 1994, there were 6,000,000 shares of AIG's $5 par value
serial preferred stock authorized, issuable in series.  AIG redeemed the
Exchangeable Money Market Cumulative Serial Preferred(TM) Stock, Series M-1 on
April 2, 1993 and the Exchangeable Money Market Cumulative Serial Preferred
Stock, Series M-2 (Series M-1 and M-2 together, MMP(TM)), on March 5, 1993 at a
price of $100,000 per share plus accrued dividends.

         During 1993 and 1992, dividends paid on the MMP aggregated $1,043,000
and $4,471,000, respectively.

         (b) AIG parent depends on its subsidiaries for cash flow in the form
of loans, advances and dividends. Some AIG subsidiaries, namely those in the
insurance business, are subject to regulatory restrictions on the amount of
dividends which can be remitted to AIG parent. These restrictions vary by
state. For example, unless permitted by the New York Superintendent of
Insurance, general insurance companies domiciled in New York may not pay
dividends to shareholders which in any twelve month period exceed the lesser of
10 percent of the company's statutory policyholders' surplus or 100 percent of
its "adjusted net investment income", as defined. Generally, less severe
restrictions applicable to both general and life insurance companies exist in
most of the other states in which AIG's insurance subsidiaries are domiciled.
Certain foreign jurisdictions have restrictions which generally cause only a
temporary delay in the remittance of dividends. There are also various local
restrictions limiting cash loans and advances to AIG by its subsidiaries.
Largely as a result of the restrictions, approximately 64 percent of
consolidated capital funds were restricted from immediate transfer to AIG
parent at December 31, 1994.

         (c) The common stock activity for the three years ended December 31,
1994 was as follows:


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                                      1994          1993            1992
========================================================================================
<S>                                            <C>           <C>             <C>
Shares outstanding at
  beginning of year                            317,628,067   211,629,013     212,269,558
Acquired during year                            (2,086,113)     (148,872)       (963,062)
Issued under stock option
  and purchase plans                               298,672       350,848         322,517
Stock split effected
  as dividend                                           --   112,461,475              --
Other*                                                  --    (6,664,397)             --
----------------------------------------------------------------------------------------
Shares outstanding at end of year              315,840,626   317,628,067     211,629,013
========================================================================================
</TABLE>


* Shares issued to AIG and subsidiaries as part of stock split effected as
  dividend.

         Common stock increased and additional paid-in capital decreased $281.2
million as a result of a common stock split in the form of a 50 percent stock
dividend paid July 30, 1993 to holders of record July 2, 1993.





                                                                              55

<PAGE>   57
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


11. COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, various commitments and contingent
liabilities are entered into by AIG and certain of its subsidiaries. In
addition, AIG guarantees various obligations of certain subsidiaries.

         (a) Commitments to extend credit are agreements to lend subject to
certain conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. At December 31,
1994 and 1993, these commitments, made principally by AIG Capital Corp.,
approximated $133,000,000 and $140,700,000 respectively. AIG uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance sheet instruments. AIG evaluates each counterparty's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by AIG upon extension of credit, is based on management's
credit evaluation of the counterparty.

         (b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the
elements of currency, interest rate, equity and commodity risks are reflected
in the consolidated balance sheet. In addition, these instruments involve, to
varying degrees, elements of credit risk not explicitly recognized in the
consolidated balance sheet. Collateral is required, at the discretion of AIG,
on certain transactions based on the creditworthiness of the counterparty.

         (c) AIGFP becomes party to off-balance sheet financial instruments in
the normal course of its business and to reduce its currency, interest rate,
equity and commodity exposures.

         AIGFP, as principal and for its own account, enters into interest
rate, currency, equity and commodity swaps and swaptions.  Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
AIGFP typically becomes a principal in the exchange of interest payments
between the parties and, therefore, may be exposed to loss, if counterparties
default. Currency, equity and commodity swaps are similar to interest rate
swaps, but may involve the exchange of principal amounts at the beginning and
end of the transaction. At December 31, 1994, the notional principal amount of
the sum of the swap pays and receives approximated $133.7 billion, primarily
related to interest rate swaps of approximately $105.6 billion.

         The following tables provide the notional and contractual amounts of
AIGFP's derivatives portfolio at December 31, 1994.  The notional amounts used
to express the extent of AIGFP's involvement in derivatives transactions
represent a standard of measurement of the volume of AIGFP's swaps business.
Notional amount is not a quantification of market risk or credit risk and it
may not necessarily be recorded on the balance sheet. Notional amounts
represent those amounts used to calculate contractual cash flows to be
exchanged and are not paid or received, except for certain contracts such as
currency swaps. The timing and the amount of cash flows relating to foreign
exchange forwards and exchange traded futures and options contracts are
determined by the contractual agreements.

         The following table presents AIGFP's swaps and swaptions portfolio by
maturity and type of derivative at December 31, 1994:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                     
-----------------------------------------------------------------------------------------------------------------------------------
                                                                 REMAINING LIFE                     
                                              ------------------------------------------------------
                                                              AFTER ONE    AFTER FIVE
                                                  WITHIN       YEAR BUT     YEARS BUT          AFTER
                                                     ONE         WITHIN        WITHIN            TEN          TOTAL           TOTAL
                                                    YEAR     FIVE YEARS     TEN YEARS          YEARS           1994            1993
===================================================================================================================================
<S>                                           <C>           <C>           <C>            <C>           <C>             <C>
INTEREST RATE, CURRENCY AND EQUITY/COMMODITY
SWAPS AND SWAPTIONS:
Notional amount:
  Interest rate swaps                         $7,395,000    $57,086,000   $32,063,000    $ 9,037,000   $105,581,000    $ 77,462,500
  Currency swaps                                  50,100     10,817,200     5,902,000      1,491,000     18,260,300      16,123,000
  Equity/commodity swaps                         341,000        411,000        40,000         25,000        817,000       1,227,000
  Swaptions                                      246,000      4,997,000     2,672,000      1,145,000      9,060,000       8,265,800
-----------------------------------------------------------------------------------------------------------------------------------
Total                                         $8,032,100    $73,311,200   $40,677,000    $11,698,000   $133,718,300    $103,078,300
===================================================================================================================================
</TABLE>






56

<PAGE>   58
                             American International Group, Inc. and Subsidiaries

11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)

         Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks arise as a result of movements
in current market prices from contracted prices and the potential inability of
counterparties to meet their obligations under the contracts. At December 31,
1994, the contractual amount of AIGFP's futures and forward contracts
approximated $15.2 billion.

         The following table presents AIGFP's futures and forward contracts
portfolio, by maturity and type of derivative at December 31, 1994:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                     
-----------------------------------------------------------------------------------------------------------------------------------
                                                                 REMAINING LIFE                     
                                             -------------------------------------------------------
                                                              AFTER ONE    AFTER FIVE
                                                  WITHIN       YEAR BUT     YEARS BUT          AFTER
                                                     ONE         WITHIN        WITHIN            TEN          TOTAL           TOTAL
                                                    YEAR     FIVE YEARS     TEN YEARS          YEARS           1994            1993
===================================================================================================================================
<S>                                          <C>                <C>                <C>            <C>   <C>             <C>
Futures and forward contracts:
Exchange traded futures contracts
  contractual amount*                        $13,182,900             --            --             --    $13,182,900     $27,132,300
===================================================================================================================================
Over the counter forward contracts
  contractual amount                         $ 1,983,900        $64,800            --             --    $ 2,048,700     $   945,100
===================================================================================================================================
</TABLE>


* Exchange traded futures are not deemed to have significant credit exposure
  as the exchanges guarantee that every contract will be properly settled.

         AIGFP extensively uses legally enforceable master closeout netting
agreements. Thus, contracts subject to such arrangements permit AIGFP to offset
its receivables from and payables to the same counterparty. As a result, the
net replacement value represents the net sum of estimated positive fair values
after the application of such agreements and collateral held. The net
replacement value most closely represents the net credit risk to AIGFP or the
maximum amount exposed to potential loss. The net replacement value of all
interest rate, currency, and equity/commodity swaps and swaptions at December
31, 1994, approximated $4.6 billion. The net replacement value for futures and
forward contracts at December 31, 1994, approximated $31.4 million.

         AIGFP independently evaluates the creditworthiness of its
counterparties, taking into account credit ratings assigned by recognized
statistical rating organizations. In addition, AIGFP's credit approval process
involves pre-set counterparty, country and industry credit exposure limits and,
for particularly credit intensive transactions, obtaining approval from AIG's
Credit Risk Committee. The average credit rating of AIGFP's counterparties as a
whole (as measured by AIGFP) is equivalent to AA. The maximum potential loss
will increase or decrease during the life of the derivative commitments as a
function of maturity and market conditions.

         At December 31, 1994, the counterparty credit quality by derivative
product with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                     
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   NET REPLACEMENT VALUE       
                                                                           ------------------------------------
                                                                            SWAPS AND               FUTURES AND
                                                                            SWAPTIONS         FORWARD CONTRACTS               TOTAL
===================================================================================================================================
<S>                                                                        <C>                          <C>              <C>
Counterparty credit quality:
  AAA                                                                      $1,087,800                   $ 4,500          $1,092,300
  AA                                                                        1,977,600                     9,100           1,986,700
  A                                                                         1,007,900                     4,500           1,012,400
  BBB                                                                         525,000                        --             525,000
  Below investment grade                                                       21,000                        --              21,000
  Not externally rated--exchanges                                                  --                    13,300              13,300
-----------------------------------------------------------------------------------------------------------------------------------
Total                                                                      $4,619,300                   $31,400          $4,650,700
===================================================================================================================================
</TABLE>






                                                                              57

<PAGE>   59
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)

         At December 31, 1994, the counterparty breakdown by industry with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                     
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   NET REPLACEMENT VALUE        
                                                                           -------------------------------------
                                                                            SWAPS AND               FUTURES AND
                                                                            SWAPTIONS         FORWARD CONTRACTS               TOTAL
===================================================================================================================================
<S>                                                                        <C>                          <C>              <C>
Non-U.S. banks                                                             $2,085,500                   $15,200          $2,100,700
Insured municipalities                                                        270,000                        --             270,000
U.S. industrials                                                              493,600                        --             493,600
Governmental                                                                  726,100                        --             726,100
Non-U.S. financial service companies                                           31,000                        --              31,000
Non-U.S. industrials                                                          372,300                        --             372,300
Special purpose                                                                16,400                        --              16,400
U.S. banks                                                                    169,000                     2,900             171,900
U.S. financial service companies                                              323,600                        --             323,600
Supranationals                                                                131,800                        --             131,800
Exchanges                                                                          --                    13,300              13,300
-----------------------------------------------------------------------------------------------------------------------------------
Total                                                                      $4,619,300                   $31,400          $4,650,700
===================================================================================================================================
</TABLE>


         AIGFP has entered into commitments to provide liquidity for certain
insured variable rate bonds issued by municipal entities. The bond agreements
allow the holders, in certain circumstances, to tender the bonds to the issuer
at par value. In the event a remarketing agent of an issuer is unable to resell
such bonds, AIGFP would be obligated to purchase the bonds at par value.  AIGFP
would receive interest on any bonds purchased at rates above the then
prevailing market rates. These liquidity facilities aggregate $436 million and
extend through December 31, 1997. Additional commitments to provide liquidity
for bonds not yet issued by municipal entities aggregated $1.3 billion at
December 31, 1994. It is management's intention, as with existing obligations,
to remove itself from this risk through bank participations before the issuance
of the underlying bonds. Therefore, in management's opinion, it is unlikely
that AIGFP will become obligated to purchase any bonds pursuant to the
liquidity facilities.

         Securities sold, but not yet purchased represent obligations of AIGFP
to deliver specified securities at their contracted prices, and thereby create
a liability to repurchase the securities in the market at prevailing prices.

         AIGFP monitors and controls its risk exposure on a daily basis through
financial and credit reporting systems and, accordingly, believes that it has
in place effective procedures for evaluating and limiting the credit and market
risks to which it is subject. Management is not aware of any potential
counterparty defaults as of December 31, 1994.

         The net trading revenues for the twelve months ended December 31, 1994
from AIGFP's operations were $279.1 million.

         (d) AIG Trading Group Inc. and its subsidiaries (AIGTG) becomes party
to off-balance sheet financial instruments in the normal course of its business
and to reduce its currency, interest rate and commodity exposures.

         The following table provides the notional and contractual amounts of
AIGTG's derivatives portfolio at December 31, 1994. In addition, the estimated
positive fair values associated with the derivatives portfolio are also
provided and include a maturity profile for the December 31, 1994 balances
based upon the expected timing of the future cash flows.

         The notional amounts used to express the extent of AIGTG's involvement
in derivatives transactions represent a standard of measurement of the volume
of AIGTG's swaps business. Notional amount is not a quantification of the
market or credit risks of the positions and is not necessarily recorded on the
balance sheet. Notional amounts represent those amounts used to calculate
contractual cash flows to be exchanged and are not paid or received, except for
certain contracts such as currency swaps. The timing and the amount of cash
flows relating to foreign exchange forwards and exchange traded futures and
options contracts are determined by the contractual agreements.

         The gross replacement values presented represent the sum of the
estimated fair values of all of AIGTG's derivatives contracts at December 31,
1994. These values do not represent the credit risk to AIGTG.

         Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement value most
closely represents the net credit risk to AIGTG or the maximum exposure to
potential loss.





58

<PAGE>   60
                             American International Group, Inc. and Subsidiaries

11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)

         Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument at a specified price or yield. Risks arise as a result of movements
in current market prices from contracted prices and the potential inability of
counterparties to meet their obligations under the contracts. At December 31,
1994, the contractual amount of AIGTG's futures and forward contracts
approximated $212.7 billion.

         The gross replacement values presented represent the sum of the
estimated fair values of all of AIGTG's derivatives contracts at December 31,
1994. These values do not represent the credit risk to AIGTG.

         Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values
most closely represent the net credit risk to AIGTG or the maximum amount
exposed to potential loss. At December 31, 1994, the net replacement value of
AIGTG's futures and forwards contracts approximated $1.87 billion.

         The following table presents AIGTG's derivatives portfolio and the
associated credit exposure by maturity and type of derivative at December 31,
1994:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                     
-----------------------------------------------------------------------------------------------------------------------------------
                                                                REMAINING LIFE                      
                                           ---------------------------------------------------------
                                                              AFTER ONE    AFTER FIVE
                                                  WITHIN       YEAR BUT     YEARS BUT          AFTER
                                                     ONE         WITHIN        WITHIN            TEN          TOTAL           TOTAL
                                                    YEAR     FIVE YEARS     TEN YEARS          YEARS           1994            1993
===================================================================================================================================
<S>                                         <C>              <C>              <C>             <C>     <C>              <C>
Futures and forward contracts and
 interest rate swaps:
Exchange traded futures contracts
  contractual amount (a)                    $ 17,778,200     $3,683,000       $42,900             --   $ 21,504,100    $ 11,582,600
===================================================================================================================================
Over the counter forward contracts
  contractual amount (b)                    $182,254,500     $8,825,800       $93,000         $4,700   $191,178,000    $104,333,300
===================================================================================================================================
Credit exposure for over the counter
 forwards:
  Gross replacement value                   $  2,934,700     $  509,600       $79,500         $7,200   $  3,531,000    $  2,180,700
  Master netting arrangements                 (1,284,000)      (238,700)      (54,000)          (800)    (1,577,500)       (700,800)
  Collateral                                     (82,700)            --            --             --        (82,700)             --
-----------------------------------------------------------------------------------------------------------------------------------
Net replacement value (c)                   $  1,568,000     $  270,900       $25,500         $6,400   $  1,870,800    $  1,479,900
===================================================================================================================================
</TABLE>


(a) Exchange traded futures are not deemed to have significant credit exposure
    as the exchanges guarantee that every contract will be properly settled.

(b) Includes interest rate swaps with notional amounts of approximately
    $549.0 million and $203.4 million at December 31, 1994 and 1993,
    respectively.

(c) The net replacement values with respect to futures and forward contracts
    are presented as a component of trade receivables in the accompanying
    balance sheet.

         Options are contracts that allow the holder of the option to purchase
or sell the underlying commodity, currency or index at a specified price and
within, or at, a specified period of time. Risks arise as a result of movements
in current market prices from contracted prices, and the potential inability of
the counterparties to meet their obligations under the contracts. At December
31, 1994, the contractual amounts of AIGTG's purchased options approximated
$15.2 billion.

         As a writer of options, AIGTG generally receives an option premium and
then manages the risk of any unfavorable change in the value of the underlying
commodity, currency or index. At December 31, 1994, the contractual amounts for
sold options approximated $14.2 billion.





                                                                              59

<PAGE>   61

NOTES TO FINANCIAL STATEMENTS (CONTINUED)


11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)

         The following table presents AIGTG's options portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative
at December 31, 1994:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                     
-----------------------------------------------------------------------------------------------------------------------------------
                                                                   REMAINING LIFE                   
                                            --------------------------------------------------------
                                                              AFTER ONE    AFTER FIVE
                                                  WITHIN       YEAR BUT     YEARS BUT          AFTER
                                                     ONE         WITHIN        WITHIN            TEN          TOTAL           TOTAL
                                                    YEAR     FIVE YEARS     TEN YEARS          YEARS           1994            1993
===================================================================================================================================
<S>                                          <C>             <C>                   <C>            <C>   <C>             <C>
Option contracts:
Contractual amounts for purchased options:
  Exchange traded (a)                        $ 1,363,100     $   47,500            --             --    $ 1,410,600     $ 4,399,900
  Over the counter                            12,127,400      1,699,200            --             --     13,826,600      15,047,400
-----------------------------------------------------------------------------------------------------------------------------------
Total                                        $13,490,500     $1,746,700            --             --    $15,237,200     $19,447,300
===================================================================================================================================
Credit exposure for over the counter
 purchased options:
  Gross replacement value                    $   309,500     $   60,000            --             --    $   369,500     $   313,600
  Master netting arrangements                    (59,100)       (12,700)           --             --        (71,800)             --
  Collateral                                     (22,600)            --            --             --        (22,600)             --
-----------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b)                    $   227,800     $   47,300            --             --    $   275,100     $   313,600
-----------------------------------------------------------------------------------------------------------------------------------
Contractual amounts for sold options (c)     $12,300,000     $1,857,900            --             --    $14,157,900     $17,495,400
===================================================================================================================================
</TABLE>


(a) Exchange traded options are not deemed to have significant credit
    exposure as the exchanges guarantee that every option will be
    properly settled.

(b) The net replacement value with respect to purchased options is
    presented as a component of spot commodities, at market value
    in the accompanying balance sheet.

(c) Options obligate AIGTG to buy or sell the underlying item if the option
    purchaser chooses to exercise. The amounts do not represent credit
    exposures.

         AIGTG independently evaluates the creditworthiness of its
counterparties, taking into account credit ratings assigned by recognized
statistical rating organizations. In addition, AIGTG's credit approval process
involves pre-set counterparty, country and industry credit exposure limits and,
for particularly credit intensive transactions, obtaining approval from AIG's
Credit Risk Committee. The maximum potential loss will increase or decrease
during the life of the derivative commitments as a function of maturity and
market conditions.

         At December 31, 1994, the counterparty credit quality by derivative
product with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                                   
-----------------------------------------------------------------------------------------------------------------
                                                           NET REPLACEMENT VALUE           
                                              ---------------------------------------------
                                                          FUTURES AND
                                                    FORWARD CONTRACTS      OVER THE COUNTER
                                              AND INTEREST RATE SWAPS     PURCHASED OPTIONS                 TOTAL
=================================================================================================================
<S>                                                        <C>                     <C>                 <C>
Counterparty credit quality:
  AAA                                                      $  213,800              $ 25,700            $  239,500
  AA                                                          611,300               171,000               782,300
  A                                                           581,900                38,000               619,900
  BBB                                                          60,700                 6,700                67,400
  Below investment grade                                       26,300                 6,000                32,300
  Not externally rated*                                       376,800                27,700               404,500
-----------------------------------------------------------------------------------------------------------------
Total                                                      $1,870,800              $275,100            $2,145,900
=================================================================================================================
</TABLE>


* Includes $140.0 million due from exchanges.





60

<PAGE>   62
                             American International Group, Inc. and Subsidiaries

11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)

         At December 31, 1994 the counterparty breakdown by industry with
respect to the net replacement value of AIGTG's derivatives portfolio was as
follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                                   
-----------------------------------------------------------------------------------------------------------------
                                                          NET REPLACEMENT VALUE            
                                              ---------------------------------------------
                                                          FUTURES AND
                                                    FORWARD CONTRACTS      OVER THE COUNTER
                                              AND INTEREST RATE SWAPS     PURCHASED OPTIONS                 TOTAL
=================================================================================================================
<S>                                                        <C>                     <C>                 <C>
Non-U.S. banks                                             $  637,400              $180,400            $  817,800
U.S. industrials                                              307,600                14,500               322,100
Governmental                                                   94,600                16,800               111,400
Non-U.S. financial service companies                           52,500                 1,800                54,300
Non-U.S. industrials                                          137,800                26,300               164,100
U.S. banks                                                    398,100                28,000               426,100
U.S. financial service companies                              102,800                 7,300               110,100
Exchanges                                                     140,000                    --               140,000
-----------------------------------------------------------------------------------------------------------------
Total                                                      $1,870,800              $275,100            $2,145,900
=================================================================================================================
</TABLE>


         AIGTG limits its risks by holding offsetting positions. In addition,
AIGTG monitors and controls its risk exposures through various monitoring
systems which evaluate AIGTG's market and credit risks, and through credit
approvals and limits. At December 31, 1994, AIGTG did not have a significant
concentration of credit risk from either an individual counterparty or group of
counterparties.

         The net trading revenues for the twelve months ended December 31, 1994
from AIGTG's operations were $246.6 million.

         At December 31, 1994, AIGTG had issued and outstanding $142 million
principal amount of letters of credit. These letters of credit were issued
primarily to various exchanges.

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

         (e) At December 31, 1994, ILFC had committed to purchase 236 aircraft
deliverable from 1995 through 2000 at an estimated aggregate purchase price of
$13.4 billion. Concurrently, at December 31, 1994, ILFC had options to purchase
51 aircraft deliverable through 2001 at an estimated aggregate purchase price
of $2.8 billion. ILFC will be required to find customers for any new aircraft
ordered and arrange financing for portions of the purchase price of such
equipment.

         AIG does not anticipate any losses in connection with the
aforementioned activities that would have a material effect on its financial
condition or results of operations.

         (f) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.

         AIG continues to receive indemnity claims asserting injuries from
toxic waste, hazardous substances, and other environmental pollutants and
alleged damages to cover the cleanup costs of hazardous waste dump sites
(hereinafter collectively referred to as environmental claims) and indemnity
claims asserting injuries from asbestos. Estimation of asbestos and
environmental claims loss reserves is a difficult process, as these claims,
which emanate from policies written in 1984 and prior years, cannot be
estimated by conventional reserving techniques. Asbestos and environmental
claims development is affected by factors such as inconsistent court
resolutions, the broadening of the intent of policies and scope of coverage and
increasing number of new claims. AIG and other industry members have and will
continue to litigate the broadening judicial interpretation of policy coverage
and the liability issues. If the courts continue in the future to expand the
intent of the policies and the scope of the coverage, as they have in the past,
additional liabilities would emerge for amounts in excess of reserves held.
This emergence cannot now be reasonably estimated, but could have a material
impact on AIG's future operating results. The reserves carried for these claims
as at December 31, 1994 ($1.41 billion gross; $330.3 million net) are believed
to be adequate as these reserves are based on known facts and current law.
Furthermore, as AIG's net exposure retained relative to the gross exposure
written was lower in those years, the potential impact of these claims is much
smaller on the net loss reserves than on the gross loss reserves.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FASB 107) requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
such fair value. These financial instruments may or may not be recognized in
the consolidated balance sheet. In the measurement of the fair value of certain
of the financial instruments, quoted market prices were not available and other
valuation techniques were utilized. These derived fair value estimates are
significantly affected by the assumptions used. FASB 107 excludes certain
financial instruments, including those related to insurance contracts.





                                                                              61

<PAGE>   63
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

         The following methods and assumptions were used by AIG in estimating
the fair value of the financial instruments presented:

         Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.

         Fixed maturity securities: Fair values for fixed maturity securities
carried at amortized cost or at market value were generally based upon quoted
market prices. For certain fixed maturity securities for which market prices
were not readily available, fair values were estimated using values obtained
from independent pricing services. No other fair valuation techniques were
applied to these bonds as AIG believes it would have to expend excessive costs
for the benefits derived.

         Equity securities: Fair values for equity securities were based upon
quoted market prices.

         Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.

         Securities held for investment: Fair values for securities held for
investment carried at amortized cost were based upon quoted market prices. For
securities for which market prices were not readily available, fair values were
estimated using quoted market prices of comparable investments.

         Trade receivables and trade payables: Fair values for trade
receivables and trade payables approximate the carrying values presented in the
consolidated balance sheet.

         Securities available for sale: Fair values for securities available
for sale and related hedges were based on quoted market prices. For securities
and related hedges for which market prices were not readily available, fair
values were estimated using quoted market prices of comparable investments.

         Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.

         Spot commodities: Fair values for spot commodities, which include
options, were based on current market prices.

         Unrealized gains and losses on interest rate and currency swaps,
options and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among
other things, current interest, foreign exchange and volatility rates, as
applicable.

         Securities purchased (sold) under agreements to resell (repurchase),
at contract value: As these securities (obligations) are short-term in nature,
the contract values approximate fair values.

         Other invested assets: For assets for which market prices were not
readily available, fair valuation techniques were not applied as AIG believes
it would have to expend excessive costs for the benefits derived.

         Policyholders' contract deposits: Fair values of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.

         GIAs: Fair values of AIG's obligations under investment type
agreements were estimated using discounted cash flow calculations based on
interest rates currently being offered for similar agreements with maturities
consistent with those remaining for the agreements being valued. Additionally,
AIG follows a policy of minimizing interest rate risks associated with GIAs by
entering into swap transactions.

         Securities sold but not yet purchased, principally obligations of the
U.S. Government and Government agencies: The carrying amounts for these
financial instruments approximate fair values.

         Spot commodities sold but not yet purchased: Fair values for spot
commodities sold short, which include options, were based on current market
prices.

         Deposits due to banks and other depositors: To the extent certain
amounts are not demand deposits or certificates of deposit which mature in more
than one year, fair values were not calculated as AIG believes it would have to
expend excessive costs for the benefits derived.

         Commercial paper: The carrying amount of AIG's commercial paper
borrowings approximates fair value.

         Notes, bonds, loans and mortgages payable: Where practical, the fair
values of these obligations were estimated using discounted cash flow
calculations based upon AIG's current incremental borrowing rates for similar
types of borrowings with maturities consistent with those remaining for the
debt being valued.





62

<PAGE>   64
                             American International Group, Inc. and Subsidiaries

12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

         The carrying values and fair values of AIG's financial instruments at
December 31, 1994 and December 31, 1993 and the average fair values with
respect to derivative positions during 1994 were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                     
-----------------------------------------------------------------------------------------------------------------------------------
                                                                               1994                                 1993          
                                                            ----------------------------------------    ---------------------------
                                                                                             AVERAGE
                                                               CARRYING          FAIR           FAIR       CARRYING            FAIR
                                                                  VALUE         VALUE          VALUE          VALUE           VALUE
===================================================================================================================================
<S>                                                         <C>           <C>             <C>           <C>             <C>
Fixed maturities                                            $35,430,866   $35,511,002     $       --    $30,084,374     $31,169,569
Equity securities                                             5,099,171     5,099,171             --      4,488,247       4,488,247
Mortgage loans on real estate, policy and collateral
  loans                                                       5,353,074     5,381,198             --      3,576,516       3,662,300
Securities available for sale                                 3,796,792     3,796,792      4,262,469      4,991,105       4,991,105
Trading securities                                            2,483,637     2,483,637      2,268,539      2,516,166       2,516,166
Spot commodities                                                916,833       916,833      1,099,350        764,215         764,215
Net unrealized gain on interest rate and currency swaps,
  options and forward transactions                                   --            --             --        640,120         640,120
Unrealized gain on interest rate and currency swaps,
  options and forward transactions                            4,650,743     4,650,743      4,930,135             --              --
Trade receivables                                             2,629,734     2,629,734      2,689,014      1,328,391       1,328,391
Securities purchased under agreement to resell                1,209,403     1,209,403             --      2,737,507       2,737,507
Other invested assets                                         1,953,015     1,953,015             --      1,265,056       1,265,056
Short-term investments                                        2,467,453     2,467,453             --      5,072,893       5,072,893
Cash                                                             76,237        76,237             --        157,481         157,481
Policyholders' contract deposits                              6,487,426     6,396,626             --      4,439,839       4,566,204
Borrowings under obligations of guaranteed
  investment agreements                                       5,535,318     5,623,119             --      6,735,579       7,261,330
Securities sold under agreements to repurchase                1,342,064     1,342,064             --      2,299,563       2,299,563
Trade payables                                                2,108,263     2,108,263      2,762,057      1,688,147       1,688,147
Securities sold but not yet purchased, principally
  obligations of the U.S. Government and Government
  agencies                                                      192,898       192,898             --        696,454         696,454
Spot commodities sold but not yet purchased                     369,089       369,089        394,425        285,757         285,757
Unrealized loss on interest rate and currency swaps,
  options and forward transactions                            3,659,450     3,659,450      4,071,962             --              --
Deposits due to banks and other depositors                      655,973       655,973             --        557,372         557,372
Commercial paper                                              3,789,559     3,789,559             --      3,148,885       3,148,885
Notes, bonds, loans and mortgages payable                     8,194,600     8,013,629             --      5,804,601       5,965,912
===================================================================================================================================
</TABLE>


         Off-balance sheet financial instruments: Financial instruments which
are not currently recognized in the consolidated balance sheet of AIG are
principally commitments to extend credit and financial guarantees. The
unrecognized fair values of these instruments represent fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the current agreements and the counterparties' credit standings. No valuation
was made as AIG believes it would have to expend excessive costs for the
benefits derived.

13. STOCK PURCHASE PLAN

AIG's 1984 employee stock purchase plan was adopted at the 1984 shareholders'
meeting and became effective as of July 1, 1984.  Eligible employees receive
privileges to purchase up to an aggregate of 1,312,500 shares of AIG common
stock, at a price equal to 85 percent of the fair market value on the date of
grant of the purchase privilege.

         Purchase privileges are granted annually and are limited to the number
of whole shares that can be purchased by an amount equal to 5 percent of an
employee's annual salary or $3,750, whichever is less.

         As of December 31, 1994, there were 91,906 shares of common stock
subscribed to at a weighted average price of $73.77 per share pursuant to
grants of privileges under the 1984 plan. There were 90,661 shares, 93,447
shares and 92,220 shares issued under the 1984 plan at weighted average prices
of $75.55, $54.46 and $49.66 for the years ended December 31, 1994, 1993 and
1992, respectively. The excess of the proceeds over the par value or cost of
the common stock issued was credited to additional paid-in capital. There were
253,528 shares available for the grant of future purchase privileges under the
1984 plan at December 31, 1994.

14. STOCK OPTIONS

On December 19, 1991, the AIG Board of Directors adopted a 1991 employee stock
option plan, which provides that options to purchase a maximum of 3,000,000
shares of common stock could be granted to officers and other key employees at
prices not less than fair market value at the date of grant. Both the 1991
plan, and the options with respect to 74,925 shares granted thereunder on
December 19, 1991, were approved by shareholders at the 1992 Annual Meeting. At
December 31, 1994, 1,744,874 shares were reserved for future grants under the
1991 plan. As of March 18, 1992, no further options could be granted under the
1987 plan, but outstanding options granted under the 1987 plan and the
previously superceded 1982 plan continue in force until exercise or expiration.
At December 31, 1994, there were 2,765,388 shares reserved for issuance under
the 1991, 1987 and 1982 plans.





                                                                              63

<PAGE>   65
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

14. STOCK OPTIONS (continued)

         Under each plan, 25 percent of the options granted become exercisable
on the anniversary of the date of grant in each of the four years following
that grant and all options expire 10 years from the date of the grant. As of
December 31, 1994, outstanding options granted with respect to 2,001,274 shares
qualified for Incentive Stock Option treatment under the Economic Recovery Tax
Act of 1981.

         Additional information with respect to the AIG plans at December 31,
1994 was as follows:


<TABLE>
<CAPTION>
(dollars in thousands, except per share amounts)                                        
----------------------------------------------------------------------------------------
                                                    NUMBER   PRICE RANGE       AGGREGATE
                                                        OF          PER           OPTION
                                                    SHARES         SHARE           PRICE
========================================================================================
<S>                                              <C>        <C>                 <C>
Shares under option at
  December 31, 1994                              2,765,388  $17.33-99.13        $167,201
Shares under option
  exercisable at
  December 31, 1994                              1,800,023   17.33-99.13          84,031
Shares under option exercised
  during year ended:
  December 31, 1994                                208,011   14.87-88.75           7,858
  December 31, 1993                                314,938   15.63-79.50           8,456
  December 31, 1992                                391,566   11.87-60.92           8,658
Shares under option granted
  during year ended:
  December 31, 1994                                395,700   88.88-96.88          38,221
  December 31, 1993                                347,575   84.33-99.13          30,869
  December 31, 1992                                486,300   54.67-79.50          37,967
Shares under option
  forfeited during
  year ended:
  December 31, 1994                                 44,186   17.95-96.88           3,189
  December 31, 1993                                 38,137   16.37-88.75           1,844
  December 31, 1992                                 55,208   11.87-60.92           2,306
========================================================================================
</TABLE>


15. EMPLOYEE BENEFITS

(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation. While benefits vary, they are
usually based on the employees' years of credited service and average
compensation in the three years preceding retirement.

         AIG's U.S. retirement plan is a qualified, noncontributory, defined
benefit plan. All qualified employees who have attained age 21 and completed
six months of continuous service are eligible to participate in this plan. An
employee with 5 or more years of service is entitled to pension benefits
beginning at normal retirement at age 65. Benefits are based upon a percentage
of average final compensation multiplied by years of credited service
commencing April 1, 1985 and limited to 44 years of credited service. The
average final compensation is subject to certain limitations. Annual funding
requirements are determined based on the "projected unit credit" cost method
which attributes a pro rata portion of the total projected benefit payable at
normal retirement to each year of credited service.

         AIG has adopted a Supplemental Executive Retirement Program
(Supplemental Plan) to provide additional retirement benefits to designated
executives and key employees. Under the Supplemental Plan, the annual benefit,
not to exceed 60 percent of average final compensation, accrues at a percentage
of average final pay multiplied for each year of credited service reduced by
any benefits from the current and any predecessor retirement plans, Social
Security, if any, and from any qualified pension plan of prior employers. The
Supplemental Plan also provides a benefit equal to the reduction in benefits
payable under the AIG retirement plan as a result of Federal limitations on
benefits payable thereunder. Currently, the Supplemental Plan is unfunded.

         Eligibility for participation in the various non-U.S. retirement plans
is either based on completion of a specified period of continuous service or
date of hire, subject to age limitation. While benefits vary, they are
generally based on the employees' years of credited service and average
compensation in the years preceding retirement.

         Assumptions associated with the projected benefit obligation and
expected long-term rate of return on plan assets at December 31, 1994 were as
follows:


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                                                RANGE OF
                                                          NON-U.S. PLANS*     U.S. PLANS
========================================================================================
<S>                                                             <C>                  <C>
Discount rate                                                   4.5-10.0%            8.5%
Salary increase rate                                            3.0-10.0             5.0
Expected long-term rate
  of return on plan assets                                      5.0-8.5              9.0
========================================================================================
</TABLE>


* The ranges for the non-U.S. plans reflect the local socioeconomic
  environments in which AIG operates.





64

<PAGE>   66
                             American International Group, Inc. and Subsidiaries

15. EMPLOYEE BENEFITS (continued)

         The following table sets forth the funded status of the various
pension plans and the amounts recognized in the accompanying consolidated
balance sheet as of December 31, 1994 and 1993:


<TABLE>
<CAPTION>
(in thousands)                                                                                                                      
-----------------------------------------------------------------------------------------------------------------------------------
                                                                   1994                                        1993                
                                                 --------------------------------------      --------------------------------------
                                                 NON-U.S.           U.S.                     NON-U.S.           U.S.   
                                                    PLANS          PLANS          TOTAL         PLANS          PLANS          TOTAL
===================================================================================================================================
<S>                                              <C>            <C>            <C>           <C>            <C>            <C>
Plan assets at fair value*                       $158,695       $146,065       $304,760      $131,391       $139,129       $270,520
-----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:                                                                        
  Accumulated benefits earned prior to                                                                                 
    valuation date:                                                                                                    
    Vested                                        164,802         99,694        264,496       143,614         94,717        238,331
    Nonvested                                      24,887         14,713         39,600        21,038         15,747         36,785
-----------------------------------------------------------------------------------------------------------------------------------
  Accumulated benefit obligation                  189,689        114,407        304,096       164,652        110,464        275,116
  Additional benefits based on estimated                                                                               
    future salary levels                           68,908         53,033        121,941        48,973         66,652        115,625
-----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation                      258,597        167,440        426,037       213,625        177,116        390,741
-----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of                                                                              
  plan assets                                      99,902         21,375        121,277        82,234         37,987        120,221
-----------------------------------------------------------------------------------------------------------------------------------
  Unrecognized prior service cost                  (9,593)        (3,035)       (12,628)       (9,486)        (2,786)       (12,272)
  Unrecognized net gain (loss)                     (3,849)        26,582         22,733        (6,344)         1,321         (5,023)
  Unamortized balance of the initial transition                                                                        
    amounts                                       (24,259)       (12,141)       (36,400)      (23,266)       (13,692)       (36,958)
----------------------------------------------------------------------------------------------------------------------------------- 
Net amounts to be applied to future periods       (37,701)        11,406        (26,295)      (39,096)       (15,157)       (54,253)
Adjustment to reflect minimum liability            19,014            488         19,502        23,268          1,896         25,164
-----------------------------------------------------------------------------------------------------------------------------------
Accrued pension liability                        $ 81,215       $ 33,269       $114,484      $ 66,406       $ 24,726       $ 91,132
===================================================================================================================================
</TABLE>


* Plan assets are invested primarily in fixed-income securities and listed
  stocks.

         Net pension cost for the years ended December 31, 1994, 1993 and 1992
included the following components:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                      1994          1993            1992
========================================================================================
<S>                                               <C>           <C>             <C>
Cost of benefits earned during the period         $ 41,986      $ 33,258        $ 25,175
Interest cost on the projected benefit
  obligation                                        24,795        23,243          18,135
Actual return on all retirement plan assets         (8,789)      (29,613)        (13,574)
Net amortization and deferral of
  actuarial gains and losses                       (15,466)        7,542          (4,856)
Amortization of the initial
  transition amount                                  3,749         3,389           2,014
----------------------------------------------------------------------------------------
Net pension expense*                              $ 46,275      $ 37,819        $ 26,894
========================================================================================
</TABLE>


* Net pension expense included $26,727, $20,999 and $13,478 related to
  non-U.S. plans for 1994, 1993 and 1992, respectively.

         (b) AIG sponsors a voluntary savings plan for domestic employees (a
401(k) plan), which, during the three years ended December 31, 1994, provided
for salary reduction contributions by employees and matching contributions by
AIG of up to 2 percent of annual salary.

         (c) In addition to AIG's defined benefit pension plan, AIG and its
subsidiaries provide a postretirement benefit program for medical care and life
insurance, domestically and in certain foreign countries. Eligibility in the
various plans is generally based upon completion of a specified period of
eligible service and reaching a specified age. Benefits vary by geographic
location.

         AIG's U.S. postretirement medical and life insurance benefits are
based upon the employee reaching age 55 with 10 years of service to be eligible
for an immediate benefit from the U.S. retirement plan. Retirees and their
dependents who were age 65 by May 1, 1989 participate in the medical plan at no
cost. All other retirees and dependents over age 65 pay 50 percent of the
premium that is paid by current active employees. Retirees under age 65 pay the
full active premium and covered dependents pay twice the active employee
amounts. Contributions are subject to adjustment annually. Other cost sharing
features of the medical plan include deductibles, coinsurance and Medicare
coordination and a lifetime maximum benefit of $1,000,000. The maximum life
insurance benefit prior to age 70 is $32,500, with a maximum of $25,000
thereafter.

         Effective January 1, 1993, both plans' provisions were amended.
Employees who retire on or after January 1, 1993 will be required to pay the
actual cost of the medical benefits reduced by a credit which is based upon age
and years of service at retirement. The life insurance benefit will vary by age
at retirement from $5,000 for retirement at ages 55 through 59 to $15,000 for
retirement at ages 65 and over.

         Assumptions associated with the accrued postretirement benefit
liability at December 31, 1994 were as follows:


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                                                NON-U.S.            U.S.
                                                                   PLANS           PLANS
========================================================================================
<S>                                                             <C>                 <C>
Discount rate                                                   8.0-10.5%            8.5%
Salary increase rate                                             7.0-8.0              --
Medical trend rate year 1*                                          14.0            11.5
Medical trend rate year 7 and 9                                      6.0             5.5
========================================================================================
</TABLE>


* The Medical trend rate grades downward from years 1 through 7 domestically
  and years 1 through 9 for the foreign benefits. The trend rates remain
  level thereafter.





                                                                              65

<PAGE>   67
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. EMPLOYEE BENEFITS (continued)

         The following table sets forth the liability for the accrued
postretirement benefits of the various plans, and amounts recognized in the
accompanying consolidated balance sheet as of December 31, 1994 and 1993. These
plans are not funded currently.


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                  NON-U.S.          U.S.
                                                     PLANS         PLANS           TOTAL
========================================================================================
<S>                                                <C>           <C>             <C>
1994
Accumulated postretirement
  benefit obligation:
Retirees                                           $ 1,896       $44,521         $46,417
Fully eligible active employees                      4,301           845           5,146
Other active employees                               5,932         9,059          14,991
----------------------------------------------------------------------------------------
                                                    12,129        54,425          66,554
----------------------------------------------------------------------------------------
Unrecognized net loss                                   --        (2,931)         (2,931)
Unrecognized prior service cost                         --        30,319          30,319
----------------------------------------------------------------------------------------
Accrued postretirement benefit
  liabilities                                      $12,129       $81,813         $93,942
========================================================================================
1993
Accumulated postretirement
  benefit obligation:
Retirees                                           $ 1,911       $45,749         $47,660
Fully eligible active employees                      3,969         1,633           5,602
Other active employees                               4,993         9,602          14,595
----------------------------------------------------------------------------------------
                                                    10,873        56,984          67,857
----------------------------------------------------------------------------------------
Unrecognized net loss                                   --        (7,812)         (7,812)
Unrecognized prior service cost                         --        31,835          31,835
----------------------------------------------------------------------------------------
Accrued postretirement benefit
  liabilities                                      $10,873       $81,007         $91,880
========================================================================================
</TABLE>


         The net periodic postretirement costs for the years ended December 31,
1994, 1993 and 1992 included the following components:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
                                                                    LIFE
                                                   MEDICAL     INSURANCE
                                                     PLANS         PLANS           TOTAL
========================================================================================
<S>                                                <C>            <C>            <C>
1994
Cost of benefits earned during
  the period                                       $ 1,160        $  499         $ 1,659
Interest cost on accumulated
  postretirement benefit obligations                 4,055         1,032           5,087
Amortization of prior service cost                  (1,344)         (172)         (1,516)
Amortization of net actuarial losses                   318            --             318
----------------------------------------------------------------------------------------
Net periodic postretirement
  benefit costs                                    $ 4,189        $1,359         $ 5,548
========================================================================================
1993
Cost of benefits earned during
  the period                                       $   876        $  384         $ 1,260
Interest cost on accumulated
  postretirement benefit obligations                 3,693         1,110           4,803
Amortization of prior service cost                  (1,344)         (172)         (1,516)
---------------------------------------------------------------------------------------- 
Net periodic postretirement
  benefit costs                                    $ 3,225        $1,322         $ 4,547
========================================================================================
1992
Cost of benefits earned during
  the period                                       $ 4,439        $  696         $ 5,135
Interest cost on accumulated
  postretirement benefit obligations                 5,668         1,283           6,951
----------------------------------------------------------------------------------------
Net periodic postretirement
  benefit costs                                    $10,107        $1,979         $12,086
========================================================================================
</TABLE>


         The medical trend rate assumptions have a significant effect on the
amounts reported. Increasing each trend rate by 1 percent in each year would
increase the accumulated postretirement benefit obligations as of December 31,
1994 by $4.9 million and the aggregate service and interest cost components of
the periodic postretirement benefit costs for 1994 by $493,000.

         (d) AIG has certain postemployment benefits provided to former or
inactive employees who are not retirees. Certain of these benefits are insured
and expensed currently; other expenses are provided for currently. Such
uninsured expenses include long and short-term disability medical and life
insurance continuation, short-term disability income continuation and COBRA
medical subsidies. The provision for these benefits at December 31, 1994 was
$5.3 million. The incremental expense was insignificant.





66

<PAGE>   68
                             American International Group, Inc. and Subsidiaries

16. LEASES

(a) AIG and its subsidiaries occupy leased space in many locations under
various long-term leases and have entered into various leases covering the
long-term use of data processing equipment. At December 31, 1994, the future
minimum lease payments under operating leases were as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
<S>                                                                             <C>
1995                                                                            $183,210
1996                                                                             127,399
1997                                                                              86,781
1998                                                                              69,111
1999                                                                              58,324
Remaining years after 1999                                                       227,173
----------------------------------------------------------------------------------------
Total                                                                           $751,998
========================================================================================
</TABLE>


         Rent expense approximated $218,900,000, $200,500,000, and $199,200,000
for the years ended December 31, 1994, 1993 and 1992, respectively.

         (b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 1994 was as follows:


<TABLE>
<CAPTION>
(in thousands)                                                                          
----------------------------------------------------------------------------------------
<S>                                                                           <C>
1995                                                                          $  944,295
1996                                                                             816,793
1997                                                                             626,652
1998                                                                             476,441
1999                                                                             339,036
Remaining years after 1999                                                       657,035
----------------------------------------------------------------------------------------
Total                                                                         $3,860,252
========================================================================================
</TABLE>


         Flight equipment is leased, under operating leases, for periods
ranging from one to twelve years.

17. OWNERSHIP AND TRANSACTIONS WITH RELATED PARTIES

(a) OWNERSHIP: The directors and officers of AIG, the directors and holders of
common stock of C. V. Starr & Co., Inc. (Starr), a private holding company, The
Starr Foundation, Starr International Company, Inc. (SICO), a private holding
company, and Starr own or otherwise control approximately 29 percent of the
voting stock of AIG. Six directors of AIG also serve as directors of Starr and
SICO.

         (b) TRANSACTIONS WITH RELATED PARTIES: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its
subsidiaries for the production and management of insurance business. Net
commission payments to Starr aggregated approximately $31,200,000 in 1994,
$25,800,000 in 1993 and $21,200,000 in 1992, from which Starr is required to
pay commissions due originating brokers and its operating expenses. AIG also
received approximately $12,900,000 in 1994, $11,800,000 in 1993 and $11,500,000
in 1992 from Starr and paid approximately $42,000 in 1994, $60,000 in 1993 and
$50,000 in 1992 to Starr as reimbursement for services provided at cost. AIG
also received approximately $900,000 in 1994, $600,000 in 1993 and $800,000 in
1992 from SICO and paid approximately $1,200,000 in 1994, $1,100,000 in 1993
and $900,000 in 1992 to SICO as reimbursement for services rendered at cost.
AIG also paid to SICO $3,000,000 in 1994, $3,400,000 in 1993 and $3,800,000 in
1992 in rental fees.

18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION--
    UNAUDITED

The following quarterly financial information for each of the three months
ended March 31, June 30, September 30 and December 31, 1994 and 1993 is
unaudited. However, in the opinion of management, all adjustments (consisting
of normal recurring adjustments) necessary to present fairly the results of
operations for such periods, have been made for a fair presentation of the
results shown.


<TABLE>
<CAPTION>
                                                                              THREE MONTHS ENDED                         
                                                  -----------------------------------------------------------------------
                                                              MARCH 31,                               JUNE 30,           
                                                  ------------------------------           ------------------------------
(in thousands, except per share amounts)                1994                1993                 1994                1993
=========================================================================================================================
<S>                                               <C>                 <C>                  <C>                 <C>
Revenues                                          $5,225,830          $4,643,240           $5,625,759          $5,015,236
=========================================================================================================================
Income before cumulative effect of
  accounting changes                              $  505,618          $  475,226           $  549,694          $  481,634
=========================================================================================================================
Cumulative effect of accounting changes (a)       $       --          $   20,695           $       --          $       --
=========================================================================================================================
Net income                                        $  505,618          $  495,921           $  549,694          $  481,634
=========================================================================================================================
Income before cumulative effect of
  accounting changes per common share                  $1.59               $1.49                $1.74               $1.52
Net income per common share                            $1.59               $1.56                $1.74               $1.52
Average shares outstanding                           317,456             317,484              316,564             317,360
=========================================================================================================================
</TABLE>



<TABLE>
<CAPTION>
                                                                              THREE MONTHS ENDED                         
                                                  -----------------------------------------------------------------------
                                                            SEPTEMBER 30,                           DECEMBER 31,         
                                                  ------------------------------           ------------------------------
(in thousands, except per share amounts)                1994                1993                 1994                1993
=========================================================================================================================
<S>                                               <C>                 <C>                  <C>                 <C>
Revenues                                          $5,675,296          $5,119,228           $5,914,838          $5,356,953
Income before cumulative effect of
  accounting changes                              $  542,527          $  451,061           $  577,676          $  510,157
=========================================================================================================================
Cumulative effect of accounting changes (a)       $       --          $       --           $       --          $       --
=========================================================================================================================
Net income                                        $  542,527          $  451,061           $  577,676          $  510,157
=========================================================================================================================
Income before cumulative effect of
  accounting changes per common share                  $1.71               $1.42                $1.83               $1.61
Net income per common share                            $1.71               $1.42                $1.83               $1.61
Average shares outstanding                           316,368             317,438              315,866             317,577
=========================================================================================================================
</TABLE>


(a) Represents a net benefit for the cumulative effect of the adoption of
    accounting pronouncements related to postretirement benefits (FASB 106)
    and income taxes (FASB 109) by minority-owned insurance operations in
    1993.





                                                                              67

<PAGE>   69
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


19. SEGMENT INFORMATION

(a) AIG's operations are conducted principally through five business segments.
These segments and their respective operations are as follows:

         Parent - AIG parent is a holding company owning directly or indirectly
all of the capital stock of certain insurance, insurance related and financial
services companies in both the United States and abroad.

         General Insurance - AIG's general insurance operations are multiple
line property and casualty companies writing substantially all lines of
insurance other than title insurance. The general insurance operations also
include mortgage guaranty insurance operations.

         Life Insurance - AIG's life insurance operations offer a broad line of
individual and group life, annuity and accident and health policies.

         Agency and Service Fee - AIG's agency operations are engaged in the
production and management of various types of insurance for affiliated and
non-affiliated companies.

         Financial Services - AIG's financial services operations engage in
diversified financial services for affiliated and non-affiliated companies.
Such operations include, but are not limited to, short-term cash management and
financing, premium financing, interest rate, currency, equity and commodity
derivative products business, various commodities trading and market making
activities, banking services and operations and leasing and remarketing of
flight equipment.





68

<PAGE>   70
                             American International Group, Inc. and Subsidiaries

19. SEGMENT INFORMATION (continued)

         The following table is a summary of the operations by major operating
segments for the years ended December 31, 1994, 1993 and 1992:


<TABLE>
<CAPTION>
                                                                    INDUSTRY SEGMENTS-1994                            
                                  ------------------------------------------------------------------------------------

                                                        GENERAL              LIFE         AGENCY AND         FINANCIAL
(in thousands)                         PARENT         INSURANCE         INSURANCE        SERVICE FEE          SERVICES
======================================================================================================================
<S>                               <C>               <C>               <C>                   <C>            <C>
Revenues (b)                      $   899,698(c)    $11,774,410       $ 8,559,455           $237,940       $ 1,866,253
======================================================================================================================
Income before income taxes
  and cumulative effect of
  accounting changes              $   899,698(c)    $ 1,635,096       $   952,484           $ 54,129       $   404,853
======================================================================================================================
Equity in net income (loss) of
  partially-owned companies       $    25,476       $    32,687       $       829           $    (61)      $        --
======================================================================================================================
Depreciation expense              $        --       $    66,514       $    43,317           $  3,514       $   402,741
======================================================================================================================
Capital expenditures              $       545       $   131,721       $   106,957           $  2,822       $ 2,841,317(d)
======================================================================================================================   
Identifiable assets               $17,295,644       $51,372,100       $34,496,652           $184,310       $30,660,776
======================================================================================================================
</TABLE>



<TABLE>
<CAPTION>
                                     INDUSTRY SEGMENTS-1994    
                                 ------------------------------
                                  ADJUSTMENTS
                                          AND
(in thousands)                   ELIMINATIONS(a)   CONSOLIDATED
===============================================================
<S>                              <C>               <C>
Revenues (b)                     $   (896,033)     $ 22,441,723
===============================================================
Income before income taxes
  and cumulative effect of
  accounting changes             $   (994,281)     $  2,951,979
===============================================================
Equity in net income (loss) of
  partially-owned companies      $        182      $     59,113
===============================================================
Depreciation expense             $     65,844      $    581,930
===============================================================
Capital expenditures             $     87,882      $  3,171,244(d)
===============================================================   
Identifiable assets              $(19,663,365)     $114,346,117
===============================================================
</TABLE>




<TABLE>
<CAPTION>
                                                                    INDUSTRY SEGMENTS-1993                            
                                  ------------------------------------------------------------------------------------

                                                        GENERAL              LIFE         AGENCY AND         FINANCIAL
(in thousands)                         PARENT         INSURANCE         INSURANCE        SERVICE FEE          SERVICES
======================================================================================================================
<S>                               <C>               <C>               <C>                   <C>            <C>
Revenues (b)                      $   908,176(c)    $10,972,384       $ 7,300,336           $239,641       $ 1,595,449
======================================================================================================================
Income before income taxes
  and cumulative effect of
  accounting changes              $   908,176(c)    $ 1,416,135       $   781,611           $ 60,247       $   390,038
======================================================================================================================
Equity in net income (loss) of
  partially-owned companies       $    11,183       $    36,618       $     1,260           $   (202)      $        --
======================================================================================================================
Depreciation expense              $        --       $    40,535       $    39,258           $  3,787       $   326,028
======================================================================================================================
Capital expenditures              $        --       $   103,686       $   119,157           $  4,801       $ 2,575,652(d)
======================================================================================================================   
Identifiable assets (e)           $16,210,208       $46,981,720       $28,381,164           $179,297       $25,514,258
======================================================================================================================
</TABLE>



<TABLE>
<CAPTION>
                                     INDUSTRY SEGMENTS-1993    
                                 ------------------------------
                                  ADJUSTMENTS
                                          AND
(in thousands)                   ELIMINATIONS(a)   CONSOLIDATED
===============================================================
<S>                              <C>               <C>
Revenues (b)                     $   (881,329)     $ 20,134,657
===============================================================
Income before income taxes
  and cumulative effect of
  accounting changes             $   (955,126)     $  2,601,081
===============================================================
Equity in net income (loss) of
  partially-owned companies      $        236      $     49,095
===============================================================
Depreciation expense             $     62,639      $    472,247
===============================================================
Capital expenditures             $    109,737      $  2,913,033(d)
===============================================================   
Identifiable assets (e)          $(16,251,799)     $101,014,848
===============================================================
</TABLE>




<TABLE>
<CAPTION>
                                                                    INDUSTRY SEGMENTS-1992                            
                                  ------------------------------------------------------------------------------------

                                                        GENERAL              LIFE         AGENCY AND         FINANCIAL
(in thousands)                         PARENT         INSURANCE         INSURANCE        SERVICE FEE          SERVICES
======================================================================================================================
<S>                               <C>               <C>               <C>                   <C>            <C>
Revenues (b)                      $   637,339(c)    $10,528,610       $ 6,210,182           $228,297       $ 1,404,902
======================================================================================================================
Income before income taxes
  and cumulative effect of
  accounting changes              $   637,339(c)    $ 1,124,136       $   667,453           $ 52,570       $   346,442
======================================================================================================================
Equity in net income (loss) of
  partially-owned companies       $     6,258       $    19,610       $     7,382           $     46       $        --
======================================================================================================================
Depreciation expense              $     1,057       $    38,963       $    41,613           $  3,796       $   249,548
======================================================================================================================
Capital expenditures              $     2,733       $    66,899       $   156,583           $ 16,355       $ 1,793,372(d)
======================================================================================================================   
Identifiable assets (e)           $13,747,118       $42,416,509       $23,472,687           $157,280       $27,138,230
======================================================================================================================
</TABLE>



<TABLE>
<CAPTION>
                                     INDUSTRY SEGMENTS-1992    
                                 ------------------------------
                                  ADJUSTMENTS
                                          AND
(in thousands)                   ELIMINATIONS(a)   CONSOLIDATED
===============================================================
<S>                              <C>               <C>
Revenues (b)                     $   (620,703)     $ 18,388,627
===============================================================
Income before income taxes
  and cumulative effect of
  accounting changes             $   (690,892)     $  2,137,048
===============================================================
Equity in net income (loss) of
  partially-owned companies      $         --      $     33,296
===============================================================
Depreciation expense             $     56,888      $    391,865
===============================================================
Capital expenditures             $     34,378      $  2,070,320(d)
===============================================================   
Identifiable assets (e)          $(14,209,642)     $ 92,722,182
===============================================================
</TABLE>


(a) Including other operations and other income (deductions)-net, which are
    not deemed to be reportable segments.

(b) Including realized capital gains attributable to the segments.

(c) Substantially dividend income from subsidiaries.

(d) Relating primarily to ILFC.

(e) Assets as at December 31, 1993 and 1992 have been adjusted to conform to
    the requirements of FASB 113.





                                                                              69

<PAGE>   71
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


19. SEGMENT INFORMATION (continued)

         (b) The following table is a summary of AIG's general insurance
operations by major operating category for the years ended December 31, 1994,
1993 and 1992:


<TABLE>
<CAPTION>
                                                                   NET PREMIUMS                                     
                              --------------------------------------------------------------------------------------
                                               WRITTEN                                       EARNED                 
                              -----------------------------------------    -----------------------------------------
(in thousands)                      1994           1993           1992           1994            1993           1992
====================================================================================================================
<S>                          <C>            <C>             <C>           <C>              <C>            <C>
UNDERWRITING:
Foreign                      $ 3,588,608    $ 3,019,328     $2,573,922    $ 3,459,123      $2,901,848     $2,496,596
Commercial casualty (a)        5,718,053      5,438,420      5,209,295      5,329,215       5,244,479      5,350,017
Commercial property              309,802        241,387        166,696        294,944         180,722        210,288
Pools and associations (b)       552,975        746,395        753,361        533,632         723,082        760,159
Personal lines (c)               492,122        401,611        295,876        464,120         362,191        266,024
Mortgage guaranty                204,193        178,762        139,378        205,797         154,318        126,306
--------------------------------------------------------------------------------------------------------------------
Total underwriting           $10,865,753    $10,025,903     $9,138,528    $10,286,831      $9,566,640     $9,209,390
====================================================================================================================
Net investment income
Realized capital gains
General insurance operating
  income                                                                                                            
====================================================================================================================
</TABLE>




<TABLE>
<CAPTION>
                                          OPERATING INCOME            
                              ----------------------------------------
(in thousands)                      1994           1993           1992
======================================================================
<S>                           <C>            <C>            <C>
UNDERWRITING:
Foreign                       $  239,041     $  140,666     $   95,024
Commercial casualty (a)          256,883        255,893        169,554
Commercial property              (75,738)       (51,688)       (23,411)
Pools and associations (b)      (334,642)      (377,531)      (389,507)
Personal lines (c)               (17,147)       (24,324)       (77,234)
Mortgage guaranty                 79,120         67,375         30,490
----------------------------------------------------------------------
Total underwriting               147,517         10,391       (195,084)
Net investment income          1,435,092      1,340,480      1,252,086
Realized capital gains            52,487         65,264         67,134
                              ----------------------------------------
General insurance operating
  income                      $1,635,096     $1,416,135     $1,124,136
======================================================================
</TABLE>


(a) Including workers' compensation and retrospectively rated risks.

(b) Including involuntary pools.

(c) Including mass marketing and specialty programs.

         (c) AIG's individual life insurance and group life insurance portfolio
accounted for 62 percent, 64 percent and 67 percent of AIG's consolidated life
insurance operating income before realized capital gains or losses for the
years ended December 31, 1994, 1993 and 1992, respectively. For those years, 96
percent, 97 percent and 98 percent, respectively, of consolidated life
operating income before realized capital gains or losses was derived from
foreign operations.

         (d) A substantial portion of AIG's business is conducted in countries
other than the United States and Canada. The following table is a summary of
AIG's business by geographic segments. Allocations have been made on the basis
of location of operations and assets.


<TABLE>
<CAPTION>
                                                                             GEOGRAPHIC SEGMENTS-1994               
                                                           ---------------------------------------------------------
                                                                                                OTHER
(in thousands)                                               DOMESTIC (a)    FAR EAST         FOREIGN   CONSOLIDATED
====================================================================================================================
<S>                                                        <C>            <C>             <C>           <C>
Revenues (b)                                               $10,805,905    $ 8,374,188     $ 3,261,630   $ 22,441,723
====================================================================================================================
Income before income taxes and cumulative effect of
  accounting changes                                       $ 1,420,399    $ 1,192,643     $   338,937   $  2,951,979
====================================================================================================================
Identifiable assets                                        $71,838,459    $24,199,044     $18,308,614   $114,346,117
====================================================================================================================
</TABLE>




<TABLE>
<CAPTION>
                                                                             GEOGRAPHIC SEGMENTS-1993               
                                                           ---------------------------------------------------------
                                                                                                OTHER
(in thousands)                                               DOMESTIC (a)    FAR EAST         FOREIGN   CONSOLIDATED
====================================================================================================================
<S>                                                        <C>            <C>             <C>           <C>
Revenues (b)                                               $ 9,986,731    $ 6,911,684     $ 3,236,242   $ 20,134,657
====================================================================================================================
Income before income taxes and cumulative effect of
  accounting changes                                       $ 1,329,908    $   900,669     $   370,504   $  2,601,081
====================================================================================================================
Identifiable assets (c)                                    $64,482,527    $18,667,545     $17,864,776   $101,014,848
====================================================================================================================
</TABLE>




<TABLE>
<CAPTION>
                                                                             GEOGRAPHIC SEGMENTS-1992               
                                                           ---------------------------------------------------------
                                                                                                OTHER
(in thousands)                                               DOMESTIC (a)    FAR EAST         FOREIGN   CONSOLIDATED
====================================================================================================================
<S>                                                        <C>            <C>             <C>           <C>
Revenues (b)                                               $ 9,767,716    $ 5,876,894     $ 2,744,017   $ 18,388,627
====================================================================================================================
Income before income taxes and cumulative effect of
  accounting changes                                       $ 1,035,235    $   799,503     $   302,310   $  2,137,048
====================================================================================================================
Identifiable assets (c)                                    $59,443,456    $14,720,118     $18,558,608   $ 92,722,182
====================================================================================================================
</TABLE>


(a) Including general insurance operations in Canada.

(b) Revenues are derived from revenues of the general, life, agency and
    service fee and financial services operations, equity in income of
    minority-owned insurance operations and realized capital gains
    attributable to the segments.

(c) Assets as at December 31, 1993 and 1992 have been adjusted to conform to
    the requirements of FASB 113.





70

<PAGE>   72
                             American International Group, Inc. and Subsidiaries



I
TEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in or disagreements with accountants on accounting
and financial disclosure within the twenty-four months ending December 31,
1994.


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT

Except for the information provided in Part I under the heading "Directors and
Executive Officers of the Registrant", this item is omitted because a
definitive proxy statement which involves the election of directors will be
filed with the Securities and Exchange Commission not later than 120 days after
the close of the fiscal year pursuant to Regulation 14A.


ITEM 11. EXECUTIVE COMPENSATION

This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 
OWNERS AND MANAGEMENT

This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.


ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.


PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K

       (a) FINANCIAL STATEMENTS AND EXHIBITS.
         1. Financial Statements and Schedules. See accom-
            panying Index to Financial Statements.

         2. EXHIBITS.
             3--Articles of Incorporation and By-Laws.
            10--Material Contracts.
            11--Computation of Earnings Per Share for the
                 Years Ended December 31, 1994, 1993,
                 1992, 1991 and 1990.
            12--Computation of Ratios of Earnings to Fixed
                 Charges for the Years Ended December 31,
                 1994, 1993, 1992, 1991 and 1990.
            21--Subsidiaries of Registrant.
            23--Consent of Coopers & Lybrand L.L.P.
            24--Power of Attorney.
            27--Financial Data Schedule.
            28--Information from Statutory Schedule P.
            99--Undertakings.


       (b) REPORTS ON FORM 8-K.

       There have been no reports on Form 8-K filed during the quarter ended
December 31, 1994.





                                                                              71

<PAGE>   73






                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the issuer has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York, on the 29th day of March, 1995.

                                 AMERICAN INTERNATIONAL GROUP, INC.
                                 By   s/s M.R. GREENBERG, CHAIRMAN   
                                   ------------------------------------
                                         (M. R. Greenberg, Chairman)

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons in the capacities indicated on the 29th day of March, 1995 and each of
the undersigned persons, in any capacity, hereby severally constitutes M.R.
Greenberg, Edward E. Matthews and Howard I. Smith and each of them, singularly,
his true and lawful attorney with full power to them and each of them to sign
for him, and in his name and in the capacities indicated below, this Annual
Report on Form 10-K and any and all amendments thereto.


<TABLE>
<CAPTION>
                  SIGNATURE                                                     TITLE
                  ---------                                                     -----
                                                            
    <S>                                                     <C>
             s/s M.R. Greenberg                             Chairman and Director
    ------------------------------------                      (Principal Executive Officer)
              (M. R. Greenberg)                             
                                                            
           s/s Edward E. Matthews                           Vice Chairman and Director
    ------------------------------------                      (Principal Financial Officer)
            (Edward E. Matthews)                            
                                                            
             s/s Howard I. Smith                            Senior Vice President
    ------------------------------------                      and Comptroller
              (Howard I. Smith)                               (Principal Accounting Officer)
                                                            
                                                            
           s/s M. Bernard Aidinoff                          Director
    ------------------------------------                            
            (M. Bernard Aidinoff)                           
                                                            
              s/s Lloyd Bentsen                             Director
    ------------------------------------                            
               (Lloyd Bentsen)                              
                                                            
            s/s Marshall A. Cohen                           Director
    ------------------------------------                            
             (Marshall A. Cohen)                            
                                                            
         s/s Barber B. Conable, Jr.                         Director
    ------------------------------------                            
          (Barber B. Conable, Jr.)                          
                                                            
           s/s Martin S. Feldstein                          Director
    ------------------------------------                            
            (Martin S. Feldstein)                           
                                                            
            s/s Houghton Freeman                            Director
    ------------------------------------                                        
             (Houghton Freeman)
</TABLE>




                                     II-1

<PAGE>   74
                            SIGNATURES--(Continued)


<TABLE>
<CAPTION>
                  SIGNATURE                                  TITLE
                  ---------                                  -----
                                                            
           <S>                                              <C>
             s/s Leslie L. Gonda                            Director
    ------------------------------------                            
              (Leslie L. Gonda)                             
                                                            
             s/s Carla A. Hills                             Director
    ------------------------------------                            
              (Carla A. Hills)                              
                                                            
           s/s Frank J. Hoenemeyer                          Director
    ------------------------------------                            
            (Frank J. Hoenemeyer)                           
                                                            
             s/s John I. Howell                             Director
    ------------------------------------                            
              (John I. Howell)                              
                                                            
             s/s Dean P. Phypers                            Director
    ------------------------------------                            
              (Dean P. Phypers)                             
                                                            
             s/s John J. Roberts                            Director
    ------------------------------------                            
              (John J. Roberts)                             
                                                            
            s/s Ernest E. Stempel                           Director
    ------------------------------------                            
             (Ernest E. Stempel)                            
                                                            
            s/s Thomas R. Tizzio                            Director
    ------------------------------------                                        
             (Thomas R. Tizzio)
</TABLE>






                                      II-2

<PAGE>   75
                                                                      Schedule I

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1994


<TABLE>
<CAPTION>
(in thousands)                                                                                                                
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     AMOUNT AT
                                                                                                                   WHICH SHOWN
                                                                                                                        IN THE
                                                                                                                       BALANCE
TYPE OF INVESTMENT                                                             COST(*)              VALUE                SHEET
==============================================================================================================================
<S>                                                                        <C>                 <C>                 <C>
Fixed maturities:
  Bonds:
    United States Government and government agencies
      and authorities                                                      $ 1,430,541         $ 1,332,397         $ 1,332,559
    States, municipalities and political subdivisions                       15,656,717          15,629,814          15,561,680
    Foreign governments                                                      5,310,336           5,271,191           5,271,191
    Public utilities                                                         2,660,304           2,701,629           2,701,629
    All other corporate                                                     10,363,213          10,151,195          10,151,304
------------------------------------------------------------------------------------------------------------------------------
  Total bonds                                                               35,421,111          35,086,226          35,018,363
  Preferred stocks                                                             412,503             424,775             412,503
------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities                                                      35,833,614          35,511,001          35,430,866
------------------------------------------------------------------------------------------------------------------------------
Equity securities:
  Common stocks:
    Public utilities                                                            93,886              96,739              96,739
    Banks, trust and insurance companies                                       558,445             662,662             662,662
    Industrial, miscellaneous and all other                                  3,955,455           4,243,267           4,243,267
------------------------------------------------------------------------------------------------------------------------------
  Total common stocks                                                        4,607,786           5,002,668           5,002,668
  Non-redeemable preferred stocks                                               85,901              96,503              96,503
------------------------------------------------------------------------------------------------------------------------------
Total equity securities                                                      4,693,687           5,099,171           5,099,171
------------------------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate, policy and collateral loans                   5,353,074                  --           5,353,074
Financial services assets:
  Flight equipment primarily under operating leases, net of
    accumulated depreciation                                                10,723,527                              10,723,527
  Securities available for sale, at market value                             3,794,076           3,796,792           3,796,792
  Trading securities, at market value                                               --           2,483,637           2,483,637
  Spot commodities, at market value                                                 --             916,833             916,833
  Unrealized gain on interest rate and currency swaps,
    options and forward transactions                                                --           4,650,743           4,650,743
  Trade receivables                                                          2,629,734                  --           2,629,734
  Securities purchased under agreements to resell, at contract value         1,209,403                  --           1,209,403
Other invested assets                                                        1,953,015                  --           1,953,015
Short-term investments, at cost which approximates market value              2,467,453                  --           2,467,453
------------------------------------------------------------------------------------------------------------------------------
Total investments                                                          $68,657,583                  --         $76,714,248
==============================================================================================================================
</TABLE>


(*)      Original cost of equity securities and, as to fixed maturities,
         original cost reduced by repayments and adjusted for amortization of
         premiums or accrual of discounts.





                                      S-1

<PAGE>   76
                                                                     Schedule II

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET -- PARENT COMPANY ONLY


<TABLE>
<CAPTION>
(in thousands)                                                                                                                
------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,                                                                                          1994                1993
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                 <C>
ASSETS:
  Cash                                                                                         $        57         $       607
  Short-term investments                                                                             1,069               2,762
  Invested assets                                                                                  314,404             220,819
  Carrying value of subsidiaries and partially-owned companies, at equity                       17,135,389          15,754,002
  Due from affiliates-net                                                                               --              25,898
  Premiums and insurance balances receivable-net                                                    49,415              60,340
  Other assets                                                                                     288,154             228,473
------------------------------------------------------------------------------------------------------------------------------
      Total assets                                                                             $17,788,488         $16,292,901
==============================================================================================================================
LIABILITIES:
  Insurance balances payable                                                                   $   117,560         $   129,151
  Due to affiliates-net                                                                            483,890                  --
  Medium term notes payable                                                                        155,000             295,000
  Zero coupon notes                                                                                 65,831              59,116
  Italian Lire bonds                                                                               159,067             159,067
  Other liabilities                                                                                385,479             426,372
------------------------------------------------------------------------------------------------------------------------------
      Total liabilities                                                                          1,366,827           1,068,706
==============================================================================================================================
CAPITAL FUNDS:
  Common stock                                                                                     843,477             843,477
  Additional paid-in capital                                                                       565,410             572,142
  Unrealized appreciation of investments, net of taxes                                             184,556             922,646
  Cumulative translation adjustments, net of taxes                                                (288,074)           (348,186)
  Retained earnings                                                                             15,340,928          13,301,529
  Treasury stock                                                                                  (224,636)            (67,413)
------------------------------------------------------------------------------------------------------------------------------ 
      Total Capital Funds                                                                       16,421,661          15,224,195
------------------------------------------------------------------------------------------------------------------------------
      Total liabilities and capital funds                                                      $17,788,488         $16,292,901
==============================================================================================================================
</TABLE>



STATEMENT OF INCOME--PARENT COMPANY ONLY


<TABLE>
<CAPTION>
(in thousands)                                                                                                                
------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                                          1994                1993                1992
==============================================================================================================================
<S>                                                                         <C>                <C>                 <C>
Agency income                                                               $    1,207         $     2,027           $   5,716
Dividend income from consolidated subsidiaries:
  Cash                                                                         898,659             907,432             528,807
  Other                                                                             --                  --             107,941
Dividend income from partially-owned companies                                   1,039                 744                 591
Equity in undistributed net income of consolidated subsidiaries
  and partially-owned companies                                              1,499,330           1,201,155           1,036,038
Other income (deductions)-net                                                  (59,922)            (50,683)            148,445
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting changes       2,340,313           2,060,675           1,827,538
Income taxes                                                                   164,798             121,902             168,374
------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes                        2,175,515           1,938,773           1,659,164
Cumulative effect of accounting changes, net of tax                                 --                  --              (2,208)
------------------------------------------------------------------------------------------------------------------------------ 
Net income                                                                  $2,175,515         $ 1,938,773         $ 1,656,956
==============================================================================================================================
</TABLE>




                                      S-2

<PAGE>   77
                                                                     Schedule II

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
STATEMENT OF CASH FLOWS--PARENT COMPANY ONLY


<TABLE>
<CAPTION>
(in thousands)                                                                                                                
------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                                          1994                1993                1992
==============================================================================================================================
<S>                                                                        <C>                 <C>                 <C>
Cash flows from operating activities
  Net income                                                               $ 2,175,515         $ 1,938,773         $ 1,656,956
------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided
  by operating activities:
  Non-cash revenues, expenses, gains and losses included in income:
    Equity in undistributed net income of consolidated subsidiaries
      and partially-owned companies                                         (1,499,330)         (1,201,155)         (1,036,038)
    Cumulative effect of accounting changes                                         --                  --               2,208
    Non-cash dividends from subsidiaries                                            --                  --            (107,941)
    Change in premiums and insurance balances receivable and
      payable-net                                                                 (666)             16,939              23,905
    Change in cumulative translation adjustments                              (138,528)             (7,088)             (2,319)
    Other-net                                                                   84,185              13,657             208,449
------------------------------------------------------------------------------------------------------------------------------
    Total adjustments                                                       (1,554,339)         (1,177,647)           (911,736)
------------------------------------------------------------------------------------------------------------------------------ 
Net cash provided by operating activities                                      621,176             761,126             745,220
------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Cost of investments sold or matured                                               --                  --              11,035
  Purchase of investments                                                     (101,553)            (35,226)            (27,220)
  Change in short-term investments                                               1,693             111,447             (42,322)
  Change in collateral and guaranteed loans                                         --              (2,500)            (14,500)
  Contributions to subsidiaries and investments in partially-owned
    companies                                                                 (462,056)           (237,899)           (183,949)
  Other-net                                                                     (2,874)             (3,796)             (4,539)
------------------------------------------------------------------------------------------------------------------------------ 
Net cash used in investing activities                                         (564,790)           (167,974)           (261,495)
------------------------------------------------------------------------------------------------------------------------------ 
Cash flows from financing activities:
  Change in medium term notes                                                 (140,000)             58,000            (169,500)
  Proceeds from common stock issued                                             14,721              13,280              13,272
  Change in loans payable                                                      383,135            (377,581)           (128,782)
  Liquidation of zero coupon notes payable                                          --                  --              (4,647)
  Cash dividends to shareholders                                              (136,116)           (123,859)           (116,676)
  Acquisition of treasury stock                                               (178,676)            (13,148)            (82,096)
  Redemption of preferred stock                                                     --            (150,000)                 --
------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                          (56,936)           (593,308)           (488,429)
------------------------------------------------------------------------------------------------------------------------------ 
Change in cash                                                                    (550)               (156)             (4,704)
Cash at beginning of year                                                          607                 763               5,467
------------------------------------------------------------------------------------------------------------------------------
Cash at end of year                                                        $        57         $       607         $       763
==============================================================================================================================
</TABLE>


NOTES TO FINANCIAL STATEMENTS--PARENT COMPANY ONLY

(1)      Agency operations conducted in New York through the North American
         Division of AIU are included in the financial statements of the parent
         company.

(2)      Certain accounts have been reclassified in the 1993 and 1992 financial
         statements to conform to their 1994 presentation.

(3)      Other income (deductions)-net includes fees received from consolidated
         financial services subsidiaries.

(4)      "Equity in undistributed net income of consolidated subsidiaries and
         partially-owned companies" in the accompanying Statement of
         Income--Parent Company Only--includes equity in the cumulative effect
         of accounting changes, net of tax of the minority-owned insurance
         operations.

(5)      See also Notes to Consolidated Financial Statements.





                                      S-3

<PAGE>   78
                                                                    Schedule III
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
As of December 31, 1994, 1993 and 1992 and for the years then ended


<TABLE>
<CAPTION>
(in thousands)
-------------------------------------------------------------------------------------------------------------------------
                                                 RESERVES FOR
                                                   LOSSES AND
                                 DEFERRED                LOSS             RESERVE              POLICY
                                   POLICY           EXPENSES,                 FOR                 AND
                              ACQUISITION       FUTURE POLICY            UNEARNED            CONTRACT             PREMIUM
SEGMENT                             COSTS            BENEFITS            PREMIUMS            CLAIMS(a)            REVENUE
=========================================================================================================================
<S>                            <C>                <C>                  <C>                   <C>              <C>
1994
  General insurance            $1,179,494         $31,435,355          $6,318,754              $   --         $10,286,831
  Life insurance                3,952,751          17,432,222                  --             548,243           6,724,321
-------------------------------------------------------------------------------------------------------------------------
                               $5,132,245         $48,867,577          $6,318,754            $548,243         $17,011,152
=========================================================================================================================
1993
  General insurance            $1,009,545         $30,046,172          $5,515,670              $   --         $ 9,566,640
  Life insurance                3,239,864          14,638,382                  --             406,516           5,746,046
-------------------------------------------------------------------------------------------------------------------------
                               $4,249,409         $44,684,554          $5,515,670            $406,516         $15,312,686
=========================================================================================================================
1992
  General insurance            $  880,257         $28,156,767          $4,956,727              $   --         $ 9,209,390
  Life insurance                2,777,561          11,804,484                  --             321,077           4,853,087
-------------------------------------------------------------------------------------------------------------------------
                               $3,657,818         $39,961,251          $4,956,727            $321,077         $14,062,477
=========================================================================================================================
</TABLE>



<TABLE>
<CAPTION>
(in thousands)
-------------------------------------------------------------------------------------------------------------------------
                              
                                                  LOSSES AND         AMORTIZATION
                                                        LOSS          OF DEFERRED
                                     NET            EXPENSES               POLICY               OTHER                 NET
                              INVESTMENT           INCURRED,          ACQUISITION           OPERATING            PREMIUMS
SEGMENT                           INCOME            BENEFITS              COSTS(b)           EXPENSES             WRITTEN
=========================================================================================================================
<S>                           <C>               <C>                    <C>                 <C>                <C>
1994                          
  General insurance           $1,435,092         $ 8,005,601           $  955,311          $1,178,402         $10,865,753
  Life insurance               1,748,428           5,782,561              537,364           1,287,046                  --
-------------------------------------------------------------------------------------------------------------------------
                              $3,183,520         $13,788,162           $1,492,675          $2,465,448         $10,865,753
=========================================================================================================================
1993                          
  General insurance           $1,340,480         $ 7,576,016           $  839,167          $1,141,066         $10,025,903
  Life insurance               1,499,714           4,891,357              469,310           1,158,058                  --
-------------------------------------------------------------------------------------------------------------------------
                              $2,840,194         $12,467,373           $1,308,477          $2,299,124         $10,025,903
=========================================================================================================================
1992                          
  General insurance           $1,252,086        $  7,503,504           $  838,976          $1,061,994         $ 9,138,528
  Life insurance               1,313,838           4,123,876              394,875           1,023,978                  --
-------------------------------------------------------------------------------------------------------------------------
                              $2,565,924         $11,627,380           $1,233,851          $2,085,972         $ 9,138,528
=========================================================================================================================
</TABLE>
                      


(a) Reflected in insurance balances payable on the accompanying balance sheet.

(b) Amounts shown for general insurance segment exclude amounts deferred and
    amortized in the same period.





                                      S-4

<PAGE>   79
                                                                     Schedule IV
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
As of December  31, 1994, 1993 and 1992 and for the years then ended


<TABLE>
<CAPTION>
(dollars in thousands)                                                                                                   
-------------------------------------------------------------------------------------------------------------------------
                                                                                                               PERCENT OF
                                                       CEDED              ASSUMED                                  AMOUNT
                                                    TO OTHER           FROM OTHER                 NET             ASSUMED
                            GROSS AMOUNT           COMPANIES            COMPANIES              AMOUNT              TO NET
=========================================================================================================================
<S>                         <C>                  <C>                   <C>               <C>                         <C>
1994
Life insurance in-force     $333,378,811         $30,184,126           $  235,278        $303,429,963                 0.1%
========================================================================================================================= 
Premiums:
  General insurance         $ 15,368,001         $ 5,526,656           $1,024,408        $ 10,865,753                 9.4%
  Life insurance               6,877,256             161,928                8,993           6,724,321                 0.1
-------------------------------------------------------------------------------------------------------------------------
Total premiums              $ 22,245,257         $ 5,688,584           $1,033,401        $ 17,590,074                 5.9%
========================================================================================================================= 
1993
Life insurance in-force     $257,162,102         $13,006,029           $1,287,379        $245,443,452                 0.5%
========================================================================================================================= 
Premiums:
  General insurance         $ 13,633,638         $ 4,875,352           $1,267,617        $ 10,025,903                12.6%
  Life insurance               5,914,007             178,511               10,550           5,746,046                 0.2
-------------------------------------------------------------------------------------------------------------------------
Total premiums              $ 19,547,645         $ 5,053,863           $1,278,167        $ 15,771,949                 8.1%
========================================================================================================================= 
1992
Life insurance in-force     $210,605,862         $11,344,069           $3,670,939        $202,932,732                 1.8%
========================================================================================================================= 
Premiums:
  General insurance         $ 12,797,504         $ 4,477,187           $  818,211        $  9,138,528                 9.0%
  Life insurance               5,013,447             170,447               10,087           4,853,087                 0.2
-------------------------------------------------------------------------------------------------------------------------
Total premiums              $ 17,810,951         $ 4,647,634           $  828,298        $ 13,991,615                 5.9%
========================================================================================================================= 
</TABLE>






                                      S-5

<PAGE>   80
                                                                     Schedule VI
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
As of December 31, 1994, 1993, 1992 and for the years then ended


<TABLE>
<CAPTION>
(in thousands)                                                                                                          
------------------------------------------------------------------------------------------------------------------------
                                                    DISCOUNT                   LOSSES AND LOSS    
                                                     IF ANY,                  EXPENSES INCURRED   
                                               DEDUCTED FROM                      RELATED TO                        PAID
                                                RESERVES FOR             -------------------------                LOSSES
                                                  LOSSES AND             CURRENT             PRIOR              AND LOSS
AFFILIATION WITH REGISTRANT                    LOSS EXPENSES              YEAR               YEARS              EXPENSES
========================================================================================================================
<S>                                                  <C>               <C>                 <C>                <C>
1994
  AIG and consolidated subsidiaries                  $21,000           $8,158,400          $(152,800)         $7,143,700
1993
  AIG and consolidated subsidiaries                  $21,000           $7,530,700          $  45,300          $6,775,800
1992
  AIG and consolidated subsidiaries                  $21,000           $7,497,100          $   6,400          $6,586,600
========================================================================================================================
</TABLE>


Note: The ending reserves of 50% or less owned equity investees (minority-owned
      companies) are less than 5% of the total reserves.




                                      S-6

<PAGE>   81

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                DESCRIPTION                                              LOCATION
       ------                                -----------                                              --------

         <S>         <C>                                                                    <C>
         2           Plan of acquisition, reorganization, arrangement, liquidation
                     or succession  . . . . . . . . . . . . . . . . . . . . . . . .         None

         3(i)        Restated Certificate of Incorporation of AIG,
                     at November 30, 1994 . . . . . . . . . . . . . . . . . . . . .         Filed herewith.

         3(ii)       By-laws of AIG   . . . . . . . . . . . . . . . . . . . . . . .         Filed herewith.

         4           Instruments defining the rights of security holders, including
                     indentures
                          (a)  Fiscal Agency Agreement dated as of October 1,
                               1984 between AIG and Citibank, N.A.  . . . . . . . .         Not required to be filed. The Registrant
                                                                                                 hereby agrees to file with the
                                                                                                 Commission a copy of any instrument
                                                                                                 defining the rights of holders of
                                                                                                 the Registrant's long-term debt
                                                                                                 upon request of the Commission.

                          (b)  Indenture dated as of July 15, 1989 between AIG
                               and The Bank of New York   . . . . . . . . . . . . .         Not required to be filed. The Registrant
                                                                                                 hereby agrees to file with the
                                                                                                 Commission a copy of any instrument
                                                                                                 defining the rights of holders of
                                                                                                 the Registrant's long-term debt
                                                                                                 upon request of the Commission.
</TABLE>






                                      II-3

<PAGE>   82

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                DESCRIPTION                                              LOCATION
       ------                                -----------                                              --------

        <S>          <C>                                                                    <C>
         9           Voting Trust Agreement   . . . . . . . . . . . . . . . . . . .         None.
        10           Material contracts
                          (a)  AIG 1969 Employee Stock Option Plan and
                               Agreement Form   . . . . . . . . . . . . . . . . . .         Filed as exhibit to AIG's Registration
                                                                                                 Statement (File No. 2-44043) and
                                                                                                 incorporated herein by reference.
                          (b)  AIG 1972 Employee Stock Option Plan  . . . . . . . .         Filed as exhibit to AIG's Registration
                                                                                                 Statement (File No. 2-44702) and
                                                                                                 incorporated herein by reference.
                          (c)  AIG 1972 Employee Stock Purchase Plan  . . . . . . .         Filed as exhibit to AIG's Registration
                                                                                                 Statement (File No. 2-44043) and
                                                                                                 incorporated herein by reference.
                          (d)  AIG 1984 Employee Stock Purchase Plan  . . . . . . .         Filed as exhibit to AIG's Registration
                                                                                                 Statement (File No. 2-91945) and
                                                                                                 incorporated herein by reference.
                          (e)  AIG 1977 Stock Option and Stock Appreciation
                               Rights Plan  . . . . . . . . . . . . . . . . . . . .         Filed as exhibit to AIG's Registration
                                                                                                 Statement (File No. 2-59317) and
                                                                                                 incorporated herein by reference.
                          (f)  AIG 1982 Employee Stock Option Plan  . . . . . . . .         Filed as exhibit to AIG's Registration
                                                                                                 Statement (File No. 2-78291) and
                                                                                                 incorporated herein by reference.
                          (g)  AIG 1987 Employee Stock Option Plan  . . . . . . . .         Filed as exhibit to AIG's Definitive
                                                                                                 Proxy Statement dated as of April
                                                                                                  6, 1987 (File No. 0-4652) and
                                                                                                 incorporated herein by reference.
                          (h)  AIG 1991 Employee Stock Option Plan  . . . . . . . .         Filed as exhibit to AIG's Definitive
                                                                                                 Proxy Statement dated as of March
                                                                                                 30, 1992 (File No. 0-4652) and
                                                                                                 incorporated herein by reference.
                          (i)  AIRCO 1972 Employee Stock Option Plan  . . . . . . .         Incorporated by reference to AIG's Joint
                                                                                                 Proxy Statement and Prospectus
                                                                                                 (File No.2-61994).
                          (j)  AIRCO 1977 Stock Option and Stock
                               Appreciation Rights Plan   . . . . . . . . . . . . .         Incorporated by reference to AIG's Joint
                                                                                                 Proxy Statement and Prospectus
                                                                                                 (File No.2-61994).

        11           Statement re computation of per share earnings   . . . . . . .         Filed herewith.
        12           Statements re computation of ratios  . . . . . . . . . . . . .         Filed herewith.
        13           Annual report to security holders  . . . . . . . . . . . . . .         Not required to be filed.
        18           Letter re change in accounting principles  . . . . . . . . . .         None.
        21           Subsidiaries of the Registrant   . . . . . . . . . . . . . . .         Filed herewith.
        22           Published report regarding matters submitted to vote of
                     security holders   . . . . . . . . . . . . . . . . . . . . . .         None.
</TABLE>






                                      II-4

<PAGE>   83

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                DESCRIPTION                                              LOCATION
       ------                                -----------                                              --------

       <S>           <C>                                                                    <C>
        23           Consent of Coopers & Lybrand L.L.P.  . . . . . . . . . . . . .         Filed herewith.
        24           Power of attorney  . . . . . . . . . . . . . . . . . . . . . .         Included on the signature page hereof.
        27           Financial Data Schedule  . . . . . . . . . . . . . . . . . . .         Provided herewith.
        28P          Information from reports furnished to state insurance regula-
                     tory authorities   . . . . . . . . . . . . . . . . . . . . . .         To be filed under hardship exemption.
        99           Undertakings by the Registrant required by Item 17 of                              
                     Form S-3 and Item 21 of Form S-8, deemed to be incorpo-
                     rated by reference into AIG's Registration Statements on
                     Forms S-3 and S-8 (No. 2-38768, No.2-44043, No. 2-
                     45346, No. 2-51498, No. 2-59317, No. 2-61858, No. 2-
                     62760, No. 2-64336, No. 2-67600, No. 2-72058, No.
                     2-75874, No. 2-75875, No. 2-78291, No. 2-87005, No. 2-
                     82989, No. 2-90756, No. 2-91945, No. 2-95589, No. 2-
                     97439, No. 33-8495, No. 33-13874, No. 33-18073, No.
                     33-25291, No. 33-41643, No. 33-48996 and
                     No. 33-57250)  . . . . . . . . . . . . . . . . . . . . . . . .         Filed herewith.
</TABLE>






                                      II-5





<PAGE>   1
                                                                    Exhibit 3(i)




                     RESTATED CERTIFICATE OF INCORPORATION

                                       of

                       AMERICAN INTERNATIONAL GROUP, INC.

         American International Group, Inc. (the "Company"), a corporation
which is organized and existing under and by virtue of the General Corporation
Law of the State of Delaware and which was originally incorporated under such
law as "American International Enterprise, Inc." on June 9, 1967, DOES HEREBY
CERTIFY:

         FIRST: That at a meeting of the Board of Directors of the Company
resolutions were duly adopted setting forth a Restated Certificate of
Incorporation of said Company. The resolution setting forth the restatement is
as follows:

                                R E S O L V E D

         That the Certificate of Incorporation of AMERICAN INTERNATIONAL
GROUP, INC. (the "Company") restated so that as restated it will read in its
entirety as follows:

                                 "ARTICLE ONE.

                                     Name.

        The name of the Company is AMERICAN INTERNATIONAL GROUP, INC.

                                  ARTICLE TWO.

                     Registered Office and Registered Agent

         Its principal office is to be located in the City of Dover, in the
County of Kent, in the state of Delaware. The name of its resident agent is
the UNITED STATES CORPORATION COMPANY, whose address is 32 Loockerman Square,
Suite L-100 in said City.


<PAGE>   2




                                 ARTICLE THREE.

                         Corporate Purposes and Powers.


         The nature of the business or purpose to be conducted or promoted by
the Company is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware, including, but
not limited to, the business of insurance agent, broker or adjuster.

                                 ARTICLE FOUR.

                                 Capital Stock.

         The total number of shares of all classes of stock which the Company
shall have authority to issue is 506,000,000, of which 6,000,000 shares are to
be Serial Preferred Stock, par value $5.00 per share (hereinafter called the
"Serial Preferred Stock") and 500,000,000 shares are to be Common Stock, par
value $2.50 per share (hereinafter called the "Common Stock").

         The voting powers, designations, preferences and relative,
participating, optional and other special rights and the qualifications,
limitations and restrictions thereof, of the Serial Preferred Stock and the
Common Stock, in addition those set forth elsewhere herein, are as follows:

         (1) The Serial preferred Stock may be issued from time to time by the
Board of Directors, as shares of one or more series of Serial Preferred Stock,
and, subject to subdivisions (2) through (6) of this Article Four, the Board
of Directors or a duly authorized committee thereof is expressly authorized,
prior to issuance, in the resolution or resolutions providing for the issue of
shares of each particular series, to fix the relative rights, preferences or
limitations of the shares of the series, including but not limited to the
following:

               (a) The distinctive serial designation of such series which
         shall distinguish it from other series;

               (b) The number of shares included in such series, which number
         may be increased or decreased from time to time unless otherwise
         provided in the resolutions creating the series:

               (c) The dividend rate or rates (or method of determining such
         rate or rates) for shares of such series and the date or dates (or
         the method of determining such date or dates) upon which such
         dividends shall be payable;

                                          2

<PAGE>   3


               (d) Whether dividends on the shares of such series shall be
         cumulative, and, in the case of shares of any series having
         cumulative dividend rights, the date or dates or method of
         determining the date or dates from which dividends on the shares of
         such series shall be cumulative;

               (e) The amount or amounts which shall be paid out of the assets
         of the Company to the holders of the shares of such series upon
         voluntary or involuntary liquidation, dissolution or winding up of
         the Company;

               (f) The price or prices at which, the period or periods within
         which and the terms and conditions upon which the shares of such
         series may be redeemed or exchanged, in whole or in part;

               (g) The obligation, is any, of the Company to purchase or
         redeem shares of such series pursuant to a sinking fund or otherwise
         and the price or prices at which, the period or periods within which
         and the terms and conditions upon which the shares of such series
         shall be redeemed, in whole or in part, pursuant to such obligation;

               (h) The period or periods within which and the terms and
         conditions if any, including the price or prices or the rate or rates
         of conversion and the terms and conditions of any adjustments
         thereof, upon which the shares of such series shall be convertible at
         the option of the holder into shares of any other class of stock of
         into shares of any other series of Serial Preferred Stock, except
         into shares of a class having rights or preferences as to dividends
         or distribution of assets upon liquidation which are prior or
         superior in rank to those of the shares being converted;

               (i) The voting rights, if any, of the shares of such series in
         addition to those required by law, including the number of votes per
         share and any requirement for the approval by the holders of up to 66
         2/3% of all Serial Preferred Stock, or of the shares of one or more
         series, or of both, as a condition to specified corporate action or
         amendments to the Restated Certificate of Incorporation; and

               (j) Any other relative rights, preferences or limitations of
         the shares of the series not inconsistent herewith or with applicable
         law.

         (2) All Serial preferred Stock (a) shall rank senior to the Common
Stock in respect of the right to receive dividends and the right to receive
payments out of the assets of the Company upon voluntary or involuntary
liquidation, dissolution or winding up of the Company and (b) shall be of
equal rank with all other shares the Serial Preferred Stock as to the right to
receive dividends and

                                       3

<PAGE>   4

the right to receive payments out of the assets of the Company upon
voluntary or involuntary liquidation, dissolution or winding up of the
Company.

         (3) No dividend shall be paid upon, or declared or set apart for, any
share of Serial Preferred Stock or any other share of preferred stock ranking
on a parity with the Serial Preferred Stock as to dividends unless at the same
time a like proportionate dividend, ratably in proportion to the respective
dividend rates fixed therefor, shall be paid upon, or declared and set apart
for, all shares of Serial Preferred Stock and preferred stock of all series
ranking on a parity as to dividends then issued and outstanding and on which
dividends are accrued and payable for all dividend periods terminating on or
prior to the dividend payment date.

         4) In no event, so long as any shares of Serial Preferred Stock shall
be outstanding, shall any dividend, whether in cash or property, be paid or
declared, nor shall any distribution be made, on any junior stock, nor shall
any shares of any junior stock be purchased, redeemed or otherwise acquired
for value by the Company, unless all dividends on the Serial Preferred Stock
of all series and any series of preferred stock ranking on a parity with the
Serial Preferred Stock as to dividends for all past dividend periods and for
the then current period shall have been paid or declared and a sum sufficient
for the payment thereof set apart, unless the Company shall note in default
with respect to any of its obligation with respect to any past period with
respect to any sinking fund for any series of Serial Preferred Stock and
preferred stock ranking on a parity with the Serial Preferred Stock as to
dividends. The foregoing provisions of this sub-division (4) shall not,
however, apply to a dividend payable on any junior stock, or to the
acquisition of shares of any junior stock in exchange for, or through
application of the proceeds of the sale of, shares of any other junior stock.

         (5) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, then, before any
distribution or payment shall be made to the holders of any junior stock, the
holders of the Serial Preferred Stock and any shares of preferred stock
ranking on a parity therewith as to liquidation shall be entitled to be paid
in full the respective amounts of the liquidation preferences thereof, which
in the case of Serial Preferred Stock shall be the amounts fixed in accordance
with the provisions of subdivision (1) of this Article Four, together with
accrued dividends to such distribution or payment date whether or not earned
or declared. If such payment shall have been made in full to the holders of
the Serial Preferred Stock and any series of preferred stock ranking on a
parity therewith as to liquidation, the remaining assets and funds of the
Company shall be distributed among the holders of the junior stock, according
to their respective rights and preferences and in each case according

                                       4

<PAGE>   5


to their respective shares. If, upon any liquidation, dissolution or
winding up of the affairs of the Company, the amounts so payable are not paid
in full to the holders of all outstanding shares of Serial Preferred Stock and
any series of preferred stock ranking on a parity therewith as to liquidation,
the holders of all series of Serial Preferred Stock and any series of
preferred stock ranking on a parity therewith as to liquidation shall share
ratably in any distribution of assets in proportion to the full amounts to
which they would otherwise be respectively entitled. Neither the consolidation
or merger of the Company, nor the sale, lease or conveyance of all or a part
of its assets, shall be deemed a liquidation, dissolution or winding up of the
affairs of the Company within the meaning of the foregoing provisions of this
subdivision (5).

         (6) No holder of Serial Preferred Stock shall be entitled as a matter
of right to subscribe for or purchase, or have any preemptive right with
respect to, any part of any new or additional issue of stock of any class
whatsoever, or of securities convertible into any stock of any class
whatsoever, whether now or hereafter authorized and whether issued for cash or
other consideration or by way of dividend.

         (7) As issued herein with respect to the Serial Preferred Stock or in
any resolution adopted by the Board of Directors providing for the issue of
any particular series of the Serial Preferred Stock as authorized by
subdivision (1) of this Article Four, the following terms shall have the
following meanings:

               (a) The term "junior stock" shall mean the Common Stock and any
         other class of stock of the Company hereafter authorized over which
         the Serial Preferred Stock has preference or priority in the payment
         of dividends or in the distribution of assets on any liquidation,
         dissolution or winding up of the Company.

               (b) The term "sinking fund" shall mean any fund or requirement
         for the periodic retirement of shares.

               (c) The term "accrued dividends", with respect to any share of
         any series, shall mean an amount computed at the annual dividend rate
         for the series of which the particular share is a part, from the date
         on which dividends on such share became cumulate to and including the
         date to which such dividends are to be accrued, less the aggregate
         amount of all dividends theretofore paid thereon.

         (8) No holder of any share or shares of stock of the Company shall be
entitled as of right to subscribe for, purchase or receive any shares of stock
of any class or any other securities which the Company may issue, whether now
or hereafter authorized, and whether such stock or securities be issued for
money or for a consideration

                                       5

<PAGE>   6


other than money or by way of a dividend and all such shares of stock
or other securities may be issued or disposed of by the Board of Directors to
such persons, firms, corporations, and associations and on such terms as it,
in its absolute discretion, may deem advisable, without offering to
stockholders then of record or any class of stockholders any thereof upon the
same terms or upon any terms.

         (9) The holders of the shares of Common Stock will be entitled to one
vote per share of such stock on a matters except as herein or by statute
otherwise provided.

                                 ARTICLE FIVE.

                                Minimum Capital.

         The minimum amount of capital with which the company will commence
business is $1,000.

                                  ARTICLE SIX.

                              Corporate Existence.

         The Company is to have perpetual existence.

                                 ARTICLE SEVEN.

           Liability of Holders of Capital Stock for Corporate Debts.

         The private property of the stockholders shall not be subject to the
payment of corporate debts to any extent whatever.

                                 ARTICLE EIGHT.

                    Powers of Board of Directors; Meetings;
                             Corporate Books; Etc.

         The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Company, and for further
definition, limitation and regulation of the powers of the Company and of the
directors and stockholders:

         (1) Subject to the provisions of subdivision (6) of Article Four
hereof, the number of directors of the Company shall be such as from time to
time shall be fixed by, or in the manner provided in the By-Laws. Election of
directors need not be by ballot unless the By-Laws so provide.

                                       6

<PAGE>   7


         (2) The Board of Directors shall have power:

               (a) Without the assent or vote of the stockholders, to make,
         alter, change, add to, or repeal the By-Laws of the Company; to fix
         and vary the amount to be reserved for any proper purpose and to
         abolish any such reserve in the manner in which it was created; to
         authorize and cause to be executed mortgages and liens upon any part
         of the property of the Company provided it be less than substantially
         all; to determine the use and disposition of any surplus or net
         profits and to fix the times for the declaration and payment of
         dividends.

               (b) To determine from time to time whether, and to what extent,
         and at what times and places, and under what conditions and
         regulations, the accounts and books of the Company (other than the
         stock ledger) or any of them, shall be open to the inspection of the
         stockholders.

               (c) By resolution passed by a majority of the whole Board, to
         designate one or more committees, each committee to consist of two or
         more of the directors of the Company, which, to the extent provided
         in the resolution or in the By-Laws of the Company, shall have and
         may exercise the powers of the Board of Directors in the management
         of the business and affairs of the Company, and may authorize the
         seal of the Company to be affixed to all papers which may require it.
         Such committee or committees shall have such name or names as may be
         stated in the By-Laws of the Company or as may be determined from
         time to time by resolution adopted by the Board of Directors.

               (d) When and as authorized by the affirmative vote of the
         holders of a majority of the stock is issued and outstanding having
         voting power given at a stockholders# meeting duly called for that
         purpose, or when authorized by the written consent of the holders of
         a majority of the voting stock issued and outstanding, to sell, lease
         or exchange all of the property and assets of the Company, including
         its good will and its corporate franchises, upon such terms and
         conditions and for such consideration, which may be in whole or in
         part shares of stock in, and/or other securities of, any other
         corporation or corporations, as its Board of Directors shall deem
         expedient and for the best interests of the Company.

         (3) The directors in their discretion may submit any contract or act
for approval or ratification at any annual meeting of the stockholders or at
any meeting of the stockholders called for this purpose of considering any
such act or contract, and any contract or act that shall be approved or be
ratified by the vote of the holders of a majority of the stock of the Company
which is represented in person or by proxy at such meeting and entitled to

                                       7

<PAGE>   8


vote thereat (provided that a lawful quorum of stockholders be there
represented in person or by proxy) shall be as valid and as binding upon the
Company and upon all the stockholders, as though it had been approved or
ratified by every stockholder of the Company, whether or not the contract or
act would otherwise be open to legal attack because of directors# interest, or
for any other reason.

         (4) The stockholders and directors shall have power to hold their
meetings if the By-Laws so provide and (except as the laws of the State of
Delaware shall otherwise provide) keep the books, documents and papers of the
Company, outside of the State of Delaware, and to have one or more offices
within or without the State of Delaware, at such places as may be from time to
time designated by the By-Laws or by resolution of the stockholders or
directors, except as otherwise required by the laws of Delaware.


         (5) In addition to the powers and authorities hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised
or done by the Company; subject, nevertheless, to the provisions of the
statutes of Delaware, of this certificate, and to any By-Laws from time to
time made by the stockholders; provided, however, that no By-Laws so made
shall invalidate any prior act of the directors which would have been valid if
such By-Laws had not been made.

                                 ARTICLE NINE.

                          Transactions with Directors.

         No contract or other transaction between the Company and any other
corporation, whether or not a majority of the shares of the capital stock of
such other corporation is owned by the Company, and no act of the Company
shall in any way be affected or invalidated by the fact that any of the
directors of the Company are financially or otherwise interested in, or are
directors or officers of, such other corporation; any director individually,
or any firm of which such director may be a member, may be a party to, or may
be financially or otherwise interested in, any contract or transaction of the
Company, provided that the fact that he or such firm is so interested shall be
disclosed or shall have been known to the Board of Directors or a majority
thereof; and any director of the Company who is also a director or officer of
such other corporation, or who is so interested, may be counted in determining
the existence of a quorum at any meeting of the Board of Directors of the
Company which shall authorize such contract or transaction and may vote
thereat to authorize such contract or transaction, with like force and effect
as if he were not such director or officer of such other corporation or not so
interested.

                                       8

<PAGE>   9


                                  ARTICLE TEN.

                   Indemnification of Directors and Officers.

         The Company shall indemnify to the full extent permitted by law any
person made, or threatened to be made, a party to an action, suit or
proceeding (whether civil, criminal, administrative or investigative) by
reason of the fact that he, his testator or intestate is or was a director,
officer or employee of the company or serves or served any other enterprise at
the request of the Company.

                                ARTICLE ELEVEN.

         Reservation of Right to Amend Certificate of Incorporation.

         The Company reserves the right to amend, alter, change or repeal any
provision contained in the Certificate of Incorporation in the manner now or
hereafter prescribed by law, and all rights and powers conferred herein on
stockholders, directors and officers are subject to this reserved power.

                                ARTICLE TWELVE.

         No director of the Company shall be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such an exemption from liability or limitation thereof is
not permitted under the Delaware General Corporation law as presently in
effect or as the same may hereafter be amended. No amendment to or repeal of
these provisions shall apply to or have any effect on the liability or alleged
liability of any director of the Company for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal."

         SECOND: That said restatement only restates and integrates and does
not further amend the provision of the Company#s certificate of incorporation
as heretofore amended or supplemented, and there is no discrepancy between
those provisions and the provisions of said restatement.

         THIRD: That said restatement as duly adopted in accordance it the
provisions of Section 245 of the General Corporation Law of the State of
Delaware.

                                       9

<PAGE>   10


         FOURTH: That the capital of said company will not be reduced under or
by reason of said restatement.

         IN WITNESS WHEREOF, said AMERICAN INTERNATIONAL GROUP, INC.  has
caused its corporate seal to be hereunto affixed and this Certificate to be
signed by Maurice R. Greenberg, its Chairman, and Kathleen E. Shannon, its
Secretary this 30th day of November, 1994.

                                   AMERICAN INTERNATIONAL GROUP, INC.


                                   By  /s/ MAURICE R. GREENBERG
                                      ------------------------------
                                                Chairman


                                   By  /s/ KATHLEEN E. SHANNON
                                      ------------------------------
                                                Secretary


                                       10


<PAGE>   11
STATE OF NEW YORK  )
                   )  S.S.:
COUNTY OF NEW YORK )

         BE IT REMEMBERED that on this 30th day of November, 1994, personally
came before me, a Notary Public in and for the County and State aforesaid,
Maurice R. Greenberg, Chairman of American International Group, Inc., (the
"Company"), a corporation of the State of Delaware, the Company described in
and which executed the forgoing certificate, known to me personally to be
such, and he, the said Maurie R. Greenberg as such Chairman, duly executed
said certificate before me and acknowledged the said certificate to be his act
and deed and the act and deed of said Company; that the signature of the said
Chairman and of the Secretary of said Company to said certificate are in the
handwriting of the said Chairman and Secretary of said Company, respectively,
and that the seal affixed to said certificate is the common or corporate seal
of said Company, and that the facts said therein are true.

         IN WITNESS WHEREOF, I have hereunto set my hand and seal of office
the day and year aforesaid.

                                                 /s/ PATRICIA R. MCAULFFE
                                                 ------------------------
                                                        Notary Public

                                                                   [SEAL]

                                       11








<PAGE>   1


                                                                   Exhibit 3(ii)



                                                       AMENDED November 14, 1994

                      AMERICAN INTERNATIONAL GROUP, INC .

                                    BY-LAWS

                                   ARTICLE I

                                  Stockholders

         Section 1.1. Annual Meetings. An annual meeting of stockholders shall
be held for the election of directors at such date, time and place either
within or without the State of Delaware as may be designated by the Board of
Directors from time to time. Any other proper business may be transacted at
the annual meeting.

         Section 1.2. Special Meetings. Special meetings of stockholders for
any purpose or purposes may be called at any time by the Chairman, a Vice
Chairman, if any, the President, if any, the Secretary or the Board of
Directors, to be held at such date, time and place either within or without
the State of Delaware as may be stated in the notice of the meeting. A special
meeting of stockholders shall be called by the Secretary upon the written
request, stating the purpose of the meeting, of stockholders who together own
of record twenty-five percent of the outstanding shares of each class of stock
entitled to vote at such meeting.

         Section 1.3. Notice of Meetings. Whenever stockholders are required
or permitted to take any action at a meeting, a written notice of the meeting
shall be given which shall state
 the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the
meeting is called.  Unless otherwise provided by law, the written notice of
any meeting shall be given not less than ten nor more than sixty days before
the date of such meeting to each stockholder entitled to vote at such meeting.
If mailed, such notice shall be deemed to be given when deposited in the
United States mail, postage prepaid, directed to the stockholder at such
stockholder#s address as it appears on the records of the Corporation. No
business other than that stated in the notice shall be transacted at any
special meeting without the unanimous consent of all the stockholders entitled
to vote thereat.

         Section 1.4. Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced


<PAGE>   2

at the meeting at which the adjournment is taken; provided, that if
the adjournment is for more than thirty days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting. At the adjourned meeting the Corporation may transact any business
which might have been transacted at the original meeting.

         Section 1.5. Quorum. At each meeting of stockholders, except where
otherwise provided by law or the certificate of incorporation or these
by-laws, the holders of a majority of the outstanding shares of each class of
stock entitled to vote at the meeting, present in person or represented by
proxy, shall constitute a quorum. In the absence of a quorum, the stockholders
so present may, by majority vote, adjourn the meeting from time to time in the
manner provided by Section 1.4 of these by-laws until a quorum shall attend.
Shares of its own capital stock belonging on the record date for the meeting
to the Corporation or to another corporation, if a majority of the shares
entitled to vote in the election of directors of such other corporation is
held, directly or indirectly, by the Corporation, shall neither be entitled to
vote nor be counted for quorum purposes; provided, however, that the foregoing
shall not limit the right of the Corporation to vote stock, including but not
limited to its own stock, held by it in a fiduciary capacity.

         Section 1.6. Organization. Meetings of stockholders shall be presided
over by the Chairman, or in the absence of the Chairman by a Vice Chairman, if
any, or in the absence of a Vice Chairman by the President, if any, or in the
absence of the President by a Vice President, or in the absence of the
foregoing persons by a chairman designated by the Board of Directors, or in
the absence of such designation by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, or in the absence of the
Secretary an Assistant Secretary shall so act, or in their absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.

         Section 1.7. Classes or Series of Stock; Voting Proxies.  For
purposes of this Article I, two or more classes or series of stock shall be
considered a single class if and to the extent that the holders thereof are
entitled to vote together as a single class at the meeting. Unless otherwise
provided in the certificate of incorporation, each stockholder entitled to
vote at any meeting of stockholders shall be entitled to one vote for each
share of stock held by such stockholder which has voting power upon the matter
in question. Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for such stockholder by proxy,
but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. A duly executed


                                      2

<PAGE>   3


proxy shall be irrevocable if it states that it is irrevocable and if
and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy
bearing a later date with the Secretary of the Corporation. Voting at meetings
of stockholders need not be by written ballot and need not be conducted by
inspectors unless the holders of a majority of the outstanding shares of all
classes of stock entitled to vote thereon present in person or by proxy at
such meeting shall so determine. At all meetings of stockholders for the
election of directors a plurality of the votes cast shall be sufficient to
elect. With respect to other matters, unless otherwise provided by law or by
the certificate of incorporation or these by-laws, the affirmative vote of the
holders of a majority of the shares of all classes of stock present in person
or represented by proxy at the meeting and entitled to vote on the subject
matter shall be the act of the stockholders, provided that (except as
otherwise required by law or by the certificate of incorporation) the Board of
Directors may require a larger vote upon any such matter. Where a separate
vote by class is required, the affirmative vote of the holders of a majority
of the shares of each class present in person or represented by proxy at the
meeting shall be the act of such class, except as otherwise provided by law or
by the certificate of incorporation or these by-laws.

         Section 1.8. Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution
or allotment of any rights, or entitled to exercise any rights in respect of
any change, conversion or exchange of stock or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
any meeting, nor more than sixty days prior to any other action. If no record
date is fixed: (1) the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; (2) the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the board is necessary, shall be the day on which the
first written consent is expressed; and (3) the record date for determining
stockholders for any other purpose shall be at the close of business on the
day on which the Board adopts the resolution relating thereto. A determination
of stockholders of record entitled to notice of or to vote at a meeting of

                                       3

<PAGE>   4


stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
adjourned meeting.

         Section 1.9. List of Stockholders Entitled to Vote. The Secretary
shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof and may be inspected by any
stockholder who is present.

         Section 1.10. Consent of Stockholders in Lieu of Meeting. Unless
otherwise provided in the certificate of incorporation, any action required by
law to be taken at any annual or special meeting of stockholders of the
Corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.  Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.

                                   ARTICLE II

                               Board of Directors

         Section 2.1. Powers; Number; Qualifications. The business and affairs
of the Corporation shall be managed by or under the direction of the Board of
Directors, except as may be otherwise provided by law or in the certificate of
incorporation. The Board shall consist of not less than seven nor more than 21
members, the number thereof to be determined from time to time by the Board;
provided, however, that in determining the number of directors no account
shall be taken of any non-voting director, including any advisory or honorary
director, that may be elected from time to time by a majority of the Board of
Directors. The number of directors may be increased by amendment of these
by-laws by the affirmative vote of a majority of the directors then in

                                       4

<PAGE>   5


office, although less than a quorum, or by the affirmative vote of
the holders of a majority of the outstanding shares of all classes of stock
entitled to vote thereon, and by like vote the additional directors may be
elected to hold office until the next succeeding annual meeting of
stockholders and until their respective successors are elected and qualified
or until their respective earlier resignations or removals. Directors need not
be stockholders.

         Section 2.2. Election; Term of Office; Resignation; Removal;
Vacancies. Each director shall hold office until the annual meeting of
stockholders next succeeding his or her election and until his or her
successor is elected and qualified or until his or her earlier resignation or
removal. Any director may resign at any time upon written notice to the Board
of Directors or to the Chairman or the Secretary of the Corporation. Such
resignation shall take effect at the time specified therein, and no acceptance
of such resignation shall be necessary to make it effective.  Any director or
the entire Board of Directors may be removed, with or without cause, by the
holders of a majority of the shares then entitled to vote at an election of
directors; and any vacancy so created may be filled by the holders of a
majority of the shares then entitled to vote at an election of directors.
Whenever the holders of any class or series of stock are entitled to elect one
or more directors by the provisions of the certificate of incorporation, the
provisions of the preceding sentence shall apply, in respect to the removal
without cause of a director or directors so elected, to the vote of the
holders of the outstanding shares of that class or series and not to the vote
of the outstanding shares as a whole. Unless otherwise provided in the
certificate of incorporation or these by-laws, vacancies (other than any
vacancy created by removal of a director by shareholder vote) and newly
created directorships resulting from any increase in the authorized number of
directors elected by all of the stockholders having the right to vote as a
single class or from any other cause may be filled by a majority of the
directors then in office, although less than a quorum, or by the sole
remaining director. Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may, unless otherwise provided in the
certificate of incorporation, be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by the sole
remaining director so elected.

         Section 2.3. Regular Meetings. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware
and at such times as the Board may from time to time determine, and if so
determined notice thereof need not be given.

                                       5

<PAGE>   6


         Section 2.4. Special Meetings. Special meetings of the Board of
Directors may be held at any time or place within or without the State of
Delaware whenever called by the Chairman or by the Secretary on the written
request of any two directors.  Reasonable notice thereof shall be given by the
person calling the meeting.

         Section 2.5. Participation in Meetings by Conference Telephone
Permitted. Unless otherwise restricted by the certificate of incorporation or
these by-laws, members of the Board of Directors, or any committee designated
by the Board, may participate in a meeting of the Board or of such committee,
as the case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this by-law shall
constitute presence in person at such meeting.

         Section 2.6. Quorum; Vote Required for Action. At all meetings of the
Board of Directors a majority of the entire Board shall constitute a quorum
for the transaction of business. The vote of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the
Board unless the certificate of incorporation or these by-laws shall require a
vote of a greater number. In case at any meeting of the Board a quorum shall
not be present, a majority of the members of the Board present may adjourn the
meeting from time to time until a quorum shall attend, and notice need not be
given of any such adjourned meeting if the time and place thereof are
announced at the meeting at which adjournment is taken.

         Section 2.7. Organization. Meetings of the Board of Directors shall
be presided over by the Chairman, or in the absence of the Chairman by a Vice
Chairman, if any, or in the absence of a Vice Chairman by the President, if
any, or in their absence by a chairman chosen at the meeting. The Secretary,
or in the absence of the Secretary an Assistant Secretary, shall act as
secretary of the meeting, but in the absence of the Secretary and any
Assistant Secretary the chairman of the meeting may appoint any person to act
as secretary of the meeting.

         Section 2.8. Action by Directors Without a Meeting.  Unless otherwise
restricted by the certificate of incorporation or these by-laws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board or committee.

                                       6


<PAGE>   7

         Section 2.9. Compensation of Directors. The Board of Directors shall
have the authority to fix the compensation of directors.

                                  ARTICLE III

                                   Committees

         Section 3.1. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees,
each committee to consist of two or more of the directors of the corporation.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.  In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in place
of any such absent or disqualified member. Any such committee, to the extent
permitted by applicable law and provided in the resolution of the Board or in
these by-laws, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which
may require it.  Such committee or committees shall have such name or names as
may be stated in these by-laws or as may be determined from time to time by
resolution adopted by the Board of Directors. The committees shall keep
regular minutes of their proceedings and report the same to the Board of
Directors when required. If the committee is for the purpose of managing the
business of a division of the Corporation, at the option of the Board of
Directors and provided that two directors serve on such committee, one or more
of the members of the committee may be an officer or officers or employee or
employees of the Corporation or a subsidiary thereof who are not directors,
provided further that neither the quorum nor any action of the committee shall
be determined by the presence or vote of any such member who is not a
director.

         The Executive Committee, if one shall be designated, to the extent
permitted by applicable law shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it. Except as otherwise provided
from time to time in resolutions passed by a majority of the whole Board of
Directors, the powers and authority of the Executive Committee shall include
the power and authority to declare a dividend on stock, to authorize the
issuance of stock and to adopt a certificate of ownership and merger pursuant
to Section 253 of the Delaware General Corporation Law.

                                       7

<PAGE>   8


         The Audit Committee, if one shall be designated, shall be composed of
at least three directors, all of whom shall be persons who are not officers or
employees of the Corporation or any of its parents or affiliates. Such
Committee shall have the duty to advise the Board of Directors and the
officers generally in matters relating to audits of the records of account of
the Corporation and its subsidiaries. Such Committee shall recommend to the
Board of Directors the nomination of the independent public accountants for
the ensuing fiscal year, shall meet from time to time with the independent
public accountants to review the scope of any proposed audit and to review the
financial statements of the corporation and its subsidiaries and the public
accountants# certificate relating thereto, and may also meet with such
internal auditors as may be employed by the Corporation or its subsidiaries.

         The Finance Committee, if one shall be designated, shall direct the
financial and investment policy of the Corporation.  Subject to the control of
the Board of Directors, it shall have power to invest and reinvest the assets
of the Corporation in such securities or other property as it may elect and to
change such investments at such time or times as it may deem proper, all
subject to the requirements of law, and to assist, counsel and advise the
Finance and Investment Committees of the Corporation#s subsidiaries. All
action taken by the Finance Committee shall be reported to the Board at its
meeting next succeeding such action.

         Section 3.2. Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board may adopt, amend and repeal
rules for the conduct of its business. In the absence of a provision by the
Board or a provision in the rules of such committee to the contrary, a
majority of the members of such committee shall constitute a quorum for the
transaction of business, the vote of a majority of the members present at a
meeting at the time of such vote if a quorum is then present shall be the act
of such committee, and in other respects each committee shall conduct its
business in the same manner as the Board conducts its business pursuant to
Article II of these by-laws.

                                   ARTICLE IV

                                    Officers

         Section 4.1. Officers; Election. As soon as practicable after the
annual meeting of stockholders in each year, the Board of Directors shall
elect a Chairman and a Secretary, and it may, if it so determines, elect one
or more Vice Chairman and a President.  The Board may also elect one or more
Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers and such other
officers as the Board may deem desirable or appropriate and may

                                       8

<PAGE>   9


give any of them such further designations or alternate titles as it
considers desirable. Any number of offices may be held by the same person.

         Section 4.2. Term of Office; Resignation; Removal Vacancies. Except
as otherwise provided in the resolution of the Board of Directors electing any
officer each officer shall hold office until the first meeting of the Board
after the annual meeting of stockholders next succeeding his or her election,
and until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Any officer may resign at any time upon
written notice to the Board or to the Chairman or the Secretary of the
Corporation. Such resignation shall take effect at the time specified therein,
and no acceptance of such resignation shall be necessary to make it effective.
The Board may remove any officer with or without cause at any time. Any such
removal shall be without prejudice to the contractual rights of such officer,
if any, with the Corporation, but the election of an officer shall not of
itself create contractual rights. Any vacancy occurring in any office of the
Corporation by death, resignation, removal or otherwise may be filled for the
unexpired portion of the term by the Board at any regular or special meeting.

         Section 4.3. Chairman. The Chairman shall preside at all meetings of
the Board of Directors and of the stockholders at which he or she shall be
present. The Chairman shall be the chief executive officer and shall have
general charge and supervision of the business of the Corporation and, in
general, shall perform all duties incident to the office of chairman of a
corporation and such other duties as may, from time to time, be assigned to
him or her by the Board or as may be provided by law.

         Section 4.4. Vice Chairman. In the absence of the Chairman, a Vice
Chairman, if any, shall preside at all meetings of the Board of Directors and
of the stockholders at which he or she shall be present and shall have and may
exercise such powers as may, from time to time, be assigned to him or her by
the Board or as may be provided by law.

         Section 4.5. President. In the absence of the Chairman and a Vice
Chairman, the President, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he or she shall be present and
shall have and may exercise such powers as may, from time to time, be assigned
to him or her by the Board or as may be provided by law.

         Section 4.6. Vice Presidents. The Vice President or Vice Presidents,
at the request or in the absence of the President or during the President#s
inability to act, shall perform the duties of the President, and when so
acting shall have the powers of the President. Vice Presidents include all
Executive Vice Presidents and Senior Vice Presidents. If there be more than
one

                                       9

<PAGE>   10


Vice President, the Board of Directors may determine which one or
more of the Vice Presidents shall perform any of such duties; or if such
determination is not made by the Board, the Chairman may make such
determination; otherwise any of the Vice Presidents may perform any of such
duties. The Vice President or Vice Presidents shall have such other powers and
shall perform such other duties as may, from time to time, be assigned to him
or her or them by the Board or the Chairman or as may be provided by law.

         Section 4.7. Secretary. The Secretary shall have the duty to record
the proceedings of the meetings of the stockholders, the Board of Directors
and any committees in a book to be kept for that purpose, shall see that all
notices are duly given in accordance with the provisions of these by-laws or
as required by law, shall be custodian of the records of the Corporation, may
affix the corporate seal to any document the execution of which, on behalf of
the Corporation, is duly authorized, and when so affixed may attest the same,
and, in general, shall perform all duties incident to the office of secretary
of a corporation and such other duties as may, from time to time, be assigned
to him or her by the Board or the Chairman or as may be provided by law.

         Section 4.8. Treasurer. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation and shall deposit or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust
companies or other depositories as shall, from time to time, be selected by or
under authority of the Board of Directors. If required by the Board, the
Treasurer shall give a bond for the faithful discharge of his or her duties,
with such surety or sureties as the Board may detain. The Treasurer shall keep
or cause to be kept full and accurate records of all receipts and
disbursements in books of the Corporation, shall render to the Chairman and to
the Board, whenever requested, an account of the financial condition of the
Corporation, and, in general, shall perform all the duties incident to the
office of treasurer of a corporation and such other duties as may, from time
to time, be assigned to him or her by the Board or the Chairman or as may be
provided by law.

         Section 4.9. Other Officers. The other officers, if any, of the
Corporation, including any Assistant Vice Presidents, shall have such powers
and duties in the management of the Corporation as shall be stated in a
resolution of the Board of Directors which is not inconsistent with these
by-laws and, to the extent not so stated, as generally pertain to their
respective offices, subject to the control of the Board. The Board may require
any officer, agent or employee to give security for the faithful performance
of his or her duties.

                                       10

<PAGE>   11


                                   ARTICLE V

                                     Stock

         Section 5.1. Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by or in the name of the
Corporation by the Chairman or a Vice Chairman, if any, or the President, if
any, or a Vice President and by the Treasurer or an Assistant Treasurer, or
the Secretary or an Assistant Secretary, of the Corporation, certifying the
number of shares owned by such holder in the Corporation. If such certificate
is manually signed by one officer or manually countersigned by a transfer
agent or by a registrar, any other signature on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.

         Section 5.2. Lost, Stolen or Destroyed Stock Certificates: Issuance
of New Certificates. The Corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen-or destroyed, and the Corporation may require the owner of the
lost, stolen or destroyed certificate, or such owner#s legal representative,
to give the Corporation a bond sufficient to indemnify it against any claim
that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.

                                   ARTICLE VI

                                 Miscellaneous

         Section 6.1. Fiscal Year. The fiscal year of the Corporation shall be
the calendar year.

         Section 6.2. Seal. The Corporation may have a corporate seal which
shall have the name of the Corporation inscribed thereon and shall be in such
form as may be approved from time to time by the Board of Directors. The
corporate seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.

         Section 6.3. Waiver of Notice of Meetings of Stockholders, Directors
and Committees. Whenever notice is required to be given by law or under any
provision of the certificate of incorporation or these by-laws, a written
waiver



                                       11

<PAGE>   12


thereof, signed by the person entitled to notice, whether before or
after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of
such meeting, except when the person attends a meeting for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special
meeting of the stockholders, directors or members of a committee of directors
need be specified in any written waiver of notice unless so required by the
certificate of incorporation or these by-laws.

         Section 6.4. Indemnification of Directors, Officers and Employees.
The Corporation shall indemnify to the full extent authorized by law any
person made or threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether criminal, civil, administrative
or investigative, by reason of the fact that such person or such person#s
testator or intestate is or was a director, officer or employee of the
Corporation or serves or served at the request of the Corporation any other
enterprise as a director, officer, employee or agent. For purposes of this
by-law, the term "Corporation" shall include any predecessor of the
Corporation and any constituent corporation (including any constituent of a
constituent) absorbed by the Corporation in a consolidation or merger: the
term "other enterprise" shall include any corporation, partnership, joint
venture, trust or employee benefit plan; service "at the request of the
Corporation" shall include service as a director, officer or employee of the
Corporation which imposes duties on, or involves services by, such director,
officer or employee with respect to an employee benefit plan, its participants
or beneficiary; any excise taxes assessed on a person with respect to an
employee benefit plan shall be deemed to be indemnifiable expenses; and action
by a person with respect to an employee benefit plan which such person
reasonably believes to be in the interest of the participants and
beneficiaries of such plan shall be deemed to be action not opposed to the
best interests of the Corporation.

         Section 6.5. Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or
between the Corporation and any other corporation, partnership, association or
other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the director or officer is present
at or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because his or
her or their votes are counted for such purpose, if: (1) the material facts as
to his or her relationship or interest and as to the contract or transaction
are disclosed or are known to the Board or the committee, and the Board or
committee in good faith authorizes the contract or

                                       12

<PAGE>   13


transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than
a quorum; or (2) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (3) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board, a committee thereof or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board or of a committee which
authorizes the contract or transaction.

         Section 6.6. Form of Records. Any records maintained by the
Corporation in the regular course of its business, including its stock ledger,
books of account and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs or any other information
storage device, provided that the records so kept can be converted into
clearly legible for within a reasonable time. The Corporation shall so convert
any records so kept upon the request of any person entitled to inspect the
same.

         Section 6.7. Dividends. Subject to the provisions of the certificate
of incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the Corporation as and when they deem expedient. Before declaring any
dividend, the Board may cause to be set apart out of any funds of the
Corporation available for dividends, such sum or sums as the directors from
time to time in their discretion deem proper forworking capital or as a
reserve fund to meet contingencies or for equalizing dividends or for such
other purposes as the directors shall deem conducive to the interests of the
Corporation.

         Section 6.8. Checks. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name
of the Corporation shall be signed by such officer or officers, agent or
agents of the Corporation, and in such manner as shall be determined from time
to time by resolution of the Board of Directors.

         Section 6.9. Amendment of By-Laws. These by-laws may be amended or
repealed, and new by-laws adopted, by the affirmative vote of a majority of
the Board of Directors, but the holders of a majority of the shares then
entitled to vote may adopt additional by-laws and may amend or repeal any
by-law whether or not adopted by them.




                                       13

<PAGE>   14
                               State of Delaware

                                                                PAGE 1
                        Office of the Secretary of State


         I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED
CERTIFICATE OF "AMERICAN INTERNATIONAL GROUP. INC.", FILED IN THIS OFFICE ON
THE THIRTIETH DAY OF NOVEMBER, A.D. 1994, AT 9 O'CLOCK A.M.  

         A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT 
COUNTY RECORDER OF DEEDS FOR RECORDING.








0658607 8100
                            [SEAL]    /s/ EDWARD J. FREEL
944231025                             ------------------------------------
                                      Edward J. Freel, Secretary of State

                                      AUTHENTICATION: 7320247

                                                DATE: 12-01-94




<PAGE>   1
                                                                      Exhibit 11
Computation of Earnings Per Share

                             American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands, except per share amounts)                                                                                      
------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                              1994         1993         1992         1991         1990
==============================================================================================================================
<S>                                                             <C>          <C>          <C>          <C>          <C>
Average outstanding shares used in the computation of
  per share earnings:
    Common shares issued (a)                                       337,391      337,392      337,395      337,392      329,351
    Common stock in treasury (a)                                   (20,805)     (19,931)     (19,758)     (19,020)     (18,883)
------------------------------------------------------------------------------------------------------------------------------ 
    Average outstanding shares                                     316,586      317,461      317,637      318,372      310,468
==============================================================================================================================
    Income before cumulative effect of accounting changes       $2,175,515   $1,917,035   $1,620,544   $1,545,747   $1,432,606
      Cumulative effect of accounting changes, net of tax
        AIG                                                             --           --       31,941           --           --
        Minority-owned insurance operations                             --       20,695           --           --           --
------------------------------------------------------------------------------------------------------------------------------
    Net income (applicable to common stock) (b)                 $2,175,515   $1,937,730   $1,652,485   $1,545,747   $1,432,606
==============================================================================================================================
    Earnings per common share: (c)
      Income before cumulative effect of accounting changes          $6.87        $6.04        $5.10        $4.86        $4.61
      Cumulative effect of accounting changes, net of tax
        AIG                                                             --           --         0.10           --           --
        Minority-owned insurance operations                             --         0.07           --           --           --
------------------------------------------------------------------------------------------------------------------------------
      Net income                                                     $6.87        $6.11        $5.20        $4.86        $4.61
==============================================================================================================================
</TABLE>


(a) Adjusted for a 50 percent common stock split in the form of a common stock
    dividend paid July 30, 1993.

(b) After deductions in 1993, 1992, 1991 and 1990 of preferred stock dividends
    of $1,043, $4,471, $7,262 and $9,688, respectively.


(c) The effect of all other common stock equivalents is not significant;
    therefore, this information is not presented.



                                      II-6



<PAGE>   1
                                                                      Exhibit 12
Computation of Ratios of
Earnings to Fixed Charges    American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands, except ratios)                                                                                                 
------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                              1994         1993         1992         1991         1990
==============================================================================================================================
<S>                                                             <C>          <C>          <C>          <C>          <C>
Income before income taxes and cumulative effect of
  accounting changes                                            $2,951,979   $2,601,081   $2,137,048   $2,022,575   $1,811,534
Less-Equity income of less than 50% owned persons                   54,091       43,966       40,148       35,534       31,774
Add-Dividends from less than 50% owned persons                       4,660        4,349        5,147        4,444        3,525
------------------------------------------------------------------------------------------------------------------------------
                                                                 2,902,548    2,561,464    2,102,047    1,991,485    1,783,285
Add-Fixed charges                                                1,408,266    1,213,487    1,233,132      977,816      672,500
Less-Capitalized interest                                           46,023       42,699       38,725       40,313       13,772
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, cumulative effect of
  accounting changes and fixed charges                          $4,264,791   $3,732,252   $3,296,454   $2,928,988   $2,442,013
==============================================================================================================================
Fixed charges:
  Interest costs                                                $1,335,300   $1,146,654   $1,166,732   $  911,349   $  616,333
  Rental expense*                                                   72,966       66,833       66,400       66,467       56,167
------------------------------------------------------------------------------------------------------------------------------
Total fixed charges                                             $1,408,266   $1,213,487   $1,233,132   $  977,816   $  672,500
==============================================================================================================================
Ratio of earnings to fixed charges                                    3.03         3.08         2.67         3.00         3.63
==============================================================================================================================
</TABLE>


* The proportion deemed representative of the interest factor.

The ratios shown are significantly affected as a result of the inclusion of the
fixed charges and operating results of AIG Financial Products
 Corp. and its
subsidiaries (AIGFP). AIGFP structures borrowings through guaranteed investment
agreements and engages in other complex financial transactions, including
interest rate and currency swaps. In the course of its business, AIGFP enters
into borrowings that are primarily used to purchase assets that yield rates
greater than the rates on the borrowings with the intent of earning a profit on
the spread and to finance the acquisition of securities utilized to hedge
certain transactions. The pro forma ratios of earnings to fixed charges,
excluding the effects of the operating results of AIGFP, are 5.23, 5.66, 5.15,
5.40 and 7.27 for 1994, 1993, 1992, 1991 and 1990, respectively. As AIGFP will
continue to be a subsidiary, AIG expects that these ratios will continue to be
lower than they would be if the fixed charges and operating results of AIGFP
were not included therein.





                                      II-7



<PAGE>   1
                                                                      Exhibit 21
Subsidiaries of Registrant

<TABLE>
<CAPTION>
                                                                                                                   % OF VOTING
                                                                                                                    SECURITIES
                                                                                                                  OWNED BY ITS
                                                                                      JURISDICTION OF                IMMEDIATE
NAME OF CORPORATION                                                                     INCORPORATION                   PARENT(1)
------------------------------------------------------------------------------------------------------------------------------   
<S>                                                                                     <C>                              <C>
Starr                                                                                        Delaware                         (2)
SICO                                                                                           Panama                         (2)
  AIG (Registrant)(3)                                                                        Delaware                         (4)
    AICCO                                                                               New Hampshire                      100%
    AIG Aviation, Inc.                                                                        Georgia                      100%
    AIG Capital Corp.                                                                        Delaware                      100%
    AIG Capital Management                                                                   Delaware                      100%
    AIG Claim Services, Inc.                                                                 Delaware                      100%
    AIG Financial Products Corp.                                                             Delaware                      100%
    AIG Funding, Inc.                                                                        Delaware                      100%
    AIG Global Investors, Inc.                                                             New Jersey                      100%
    AIG Life Insurance Company                                                               Delaware                     78.9%(5)
    AIG Life Insurance Company of Puerto Rico                                             Puerto Rico                      100%
    AIG Marketing, Inc.                                                                      Delaware                      100%
    AIG Investment Corporation                                                               Delaware                      100%
    AIG Realty, Inc.                                                                    New Hampshire                          (6)
      American International Realty Corp.                                                    Delaware                      100%
    AIG Risk Management, Inc.                                                                New York                      100%
    AIG Trading Group Inc.                                                                   Delaware                       80%
    AIU Insurance Company                                                                    New York                       52%(7)
    AIU North America, Inc.                                                                  New York                      100%
    American International Underwriters Corporation                                          New York                      100%
    American Home                                                                            New York                      100%
      AIG Hawaii Insurance Company, Inc.                                                       Hawaii                      100%
      American International Insurance Company                                               New York                      100%
         American International Insurance Company of California                            California                      100%
         Minnesota Insurance Company                                                        Minnesota                      100%
      Transatlantic
 Holdings, Inc.                                                           Delaware                    34.15%(8)
    American International Group Data Center, Inc.                                      New Hampshire                      100%
    American International Life Assurance Company of New York                                New York                    77.52%(9)
    American International Reinsurance Company Limited                                        Bermuda                      100%
      AIA                                                                                   Hong Kong                      100%
        Australian American Assurance Company Limited                                       Australia                      100%
      American International Assurance Company (Bermuda) Limited                              Bermuda                      100%
      Nan Shan Life Insurance Company, Ltd.                                                    Taiwan                    94.12%
    AIUO                                                                                      Bermuda                      100%
      AIG Europe (Ireland) Ltd.                                                               Ireland                      100%
      Universal Insurance Co., Ltd.                                                          Thailand                      100%
      Interamericana Compania de Seguros Gerais (Brazil)                                       Brazil                      100%
      La Seguridad de Centroamerica, Compania de Seguros, Sociedad Anonima                  Guatemala                      100%
      American International Insurance Company of Puerto Rico                             Puerto Rico                      100%
      La Interamerica Compania de Seguros Generales S.A.                                     Colombia                      100%
      American International Underwriters G.m.b.H.                                            Germany                      100%
      Underwriters Adjustment Company, Inc.                                                    Panama                      100%
    American Life Insurance Company                                                          Delaware                      100%
      Kenya American Insurance Company Limited                                                  Kenya                      100%
      ALICO                                                                                    France                       89%
</TABLE>





                                      II-8

<PAGE>   2
Subsidiaries of Registrant--(continued)

<TABLE>
<CAPTION>
                                                                                                                   % OF VOTING
                                                                                                                    SECURITIES
                                                                                                                  OWNED BY ITS
                                                                                      JURISDICTION OF                IMMEDIATE
NAME OF CORPORATION                                                                     INCORPORATION                   PARENT(1)
------------------------------------------------------------------------------------------------------------------------------   
    <S>                                                                            <C>                                     <C>
    Birmingham Fire Insurance Company of Pennsylvania                                    Pennsylvania                      100%
    China America Insurance Company, Ltd.                                                    Delaware                       50%
    Commerce and Industry Insurance Company                                                  New York                      100%
    Commerce and Industry Insurance Company of Canada                                         Ontario                      100%
    Delaware American Life Insurance Company                                                 Delaware                      100%
    Hawaii Insurance Consultants, Ltd.                                                         Hawaii                      100%
    The Insurance Company of the State of Pennsylvania                                   Pennsylvania                      100%
    Landmark Insurance Company                                                             California                      100%
    Le Metropolitana de Seguros, C. por A.                                         Dominican Republic                      100%
    Mt. Mansfield Company, Inc.                                                               Vermont                      100%
    National Union                                                                       Pennsylvania                      100%
      American International Specialty Lines Insurance Company                                 Alaska                       70%(10)
      International Lease Finance Corporation                                              California                      100%
      Lexington                                                                              Delaware                       70%(10)
        JI Accident & Fire Insurance Co. Ltd.                                                   Japan                       50%
      National Union Fire Insurance Company of Louisiana                                    Louisiana                      100%
    NHIG Holding Corp.                                                                       Delaware                      100%
      Audubon Insurance Company                                                             Louisiana                      100%
        Audubon Indemnity Company                                                         Mississippi                      100%
        Agency Management Corporation                                                       Louisiana                      100%
          The Gulf Agency, Inc.                                                               Alabama                      100%
      New Hampshire                                                                      Pennsylvania                      100%
        AIG Europe, S.A.                                                                       France                          (11)
        A.I. Network Corporation                                                        New Hampshire                      100%
          Marketpac International, Inc.                                                      Delaware                      100%
        American International Pacific Insurance Company                                     Colorado                      100%
        American Global Insurance Company                                                Pennsylvania                      100%
        Granite State Insurance Company                                                  Pennsylvania                      100%
        New Hampshire Indemnity Company, Inc.                                            Pennsylvania                      100%
        Illinois National Insurance Co.                                                      Illinois                      100%
        New Hampshire Insurance Services, Inc.                                          New Hampshire                      100%
    PHILAM                                                                                Philippines                       99%
      Pacific Union Assurance Company                                                      California                      100%
      The Philippine American General Insurance Company, Inc.                             Philippines                      100%
        Philam Insurance Company, Inc.                                                    Philippines                      100%
        The Philippine American Assurance Company, Inc.                                   Philippines                       25%
</TABLE>





                                      II-9

<PAGE>   3
Subsidiaries of Registrant--(continued)

<TABLE>
<CAPTION>
                                                                                                                   % OF VOTING
                                                                                                                    SECURITIES
                                                                                                                  OWNED BY ITS
                                                                                      JURISDICTION OF                IMMEDIATE
NAME OF CORPORATION                                                                     INCORPORATION                   PARENT(1)
------------------------------------------------------------------------------------------------------------------------------   
<S>                                                                                    <C>                                <C>
Risk Specialist Companies, Inc.                                                              Delaware                      100%
Ticino Societa d' Assicurazioni Sulla Vita                                                Switzerland                     99.8%
UeberseeBank, AG                                                                          Switzerland                      100%
UGC                                                                                    North Carolina                    36.31%(12)
  United Guaranty Residential Insurance Company of North Carolina                      North Carolina                      100%
  United Guaranty Residential Insurance Company                                        North Carolina                       75%(13)
      United Guaranty Commercial Insurance Company of North Carolina                   North Carolina                      100%
      United Guaranty Commercial Insurance Company                                     North Carolina                      100%
      United Guaranty Credit Insurance Company                                         North Carolina                      100%
United Guaranty Services, Inc.                                                         North Carolina                      100%
============================================================================================================================== 
</TABLE>



 (1)     Percentages include directors' qualifying shares.

 (2)     The directors and officers of AIG as a group own 88.17 percent of the
         voting common stock of Starr and 81.82 percent of the voting stock of
         SICO. Six of the directors of AIG also serve as directors of Starr and
         SICO.

 (3)     All subsidiaries listed except for minority-owned Transatlantic
         Holdings, Inc., which is included under the equity method, are
         consolidated in the accompanying financial statements. Certain
         subsidiaries have been omitted from the tabulation. The omitted
         subsidiaries, when considered in the aggregate as a single subsidiary,
         do not constitute a significant subsidiary.

 (4)     The common stock is owned 16.0 percent by SICO, 2.4 percent by Starr
         and 3.6 percent by The Starr Foundation.

 (5)     Also owned 21.1 percent by Commerce & Industry Insurance Company.

 (6)     Owned by 13 AIG subsidiaries.

 (7)     Also owned 8 percent by The Insurance Company of the State of
         Pennsylvania, 32 percent by National Union, and 8 percent by
         Birmingham.

 (8)     Also owned 12.25 percent by American International Group, Inc.

 (9)     Also owned 22.48% by American Home.

(10)     Also owned 20 percent by The Insurance Company of the State of
         Pennsylvania and 10 percent by Birmingham.

(11)     Under reorganization plan, 100 percent to be held with other AIG
         companies.

(12)     Also owned 45.88 percent by National Union, 16.95 percent by New
         Hampshire and 0.86 percent by The Insurance Company of the State of
         Pennsylvania.

(13)     Also owned 25 percent by United Guaranty Residential Insurance Company
         of North Carolina.





                                     II-10



<PAGE>   1
                                                                      Exhibit 23
Consent of Independent Accountants


We consent to the incorporation by reference in the Registration Statements of
American International Group, Inc. on Forms S-3 and S-8 (No. 2-38768, No.
2-44043, No. 2-45346, No. 2-51498, No. 2-59317, No. 2-61858, No. 2-62760, No.
2-64336, No. 2-67600, No. 2-72058, No. 2-75874, No. 2-75875, No. 2-78291, No.
2-87005, No. 2-82989, No. 2-90756, No. 2-91945, No. 2-95589, No. 2-97439, No.
33-8495, No. 33-13874, No. 33-18073, No. 33-25291 No. 33-41643, No. 33-48996
and No. 33-57250) of our report dated February 23, 1995, on our audits of the
consolidated financial statements and financial statement schedules of American
International Group, Inc. and subsidiaries as of December 31, 1994 and 1993 and
for each of the three years in the period ended December 31, 1994, which report
is included in the Annual Report on Form 10-K of American International Group,
Inc. for the year 1994, and to the reference to our firm under the heading
"Financial Statements" included in the Prospectuses.



                                                   COOPERS & LYBRAND L.L.P.


New York, New York
March 29, 1995.





                                     II-11





<TABLE> <S> <C>

<ARTICLE> 7
<LEGEND>
                                            Exhibit 27
      AMERICAN INTERNATIONAL GROUP, INC.
           Financial Data Schedule
For the twelve months ended December 31, 1994
    (In thousands, except per share amounts)
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1994
<PERIOD-START>                             JAN-01-1994
<PERIOD-END>                               DEC-31-1994
<DEBT-HELD-FOR-SALE>                        21,812,600
<DEBT-CARRYING-VALUE>                       13,041,807
<DEBT-MARKET-VALUE>                         13,109,700
<EQUITIES>                                   5,099,171
<MORTGAGE>                                   1,741,643
<REAL-ESTATE>                                1,256,504
<TOTAL-INVEST>                              76,714,248
<CASH>                                          76,237
<RECOVER-REINSURE>                          16,289,607
<DEFERRED-ACQUISITION>                       5,132,245
<TOTAL-ASSETS>                             114,346,117
<POLICY-LOSSES>                             48,867,577
<UNEARNED-PREMIUMS>                          6,318,754
<POLICY-OTHER>                                       0
<POLICY-HOLDER-FUNDS>                        8,438,784
<NOTES-PAYABLE>                             11,984,159
<COMMON>                                       843,477
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<OTHER-SE>                                  15,578,184
<TOTAL-LIABILITY-AND-EQUITY>               114,346,117
<PREMIUMS>                                  17,011,152
<INVESTMENT-INCOME>                          3,183,520
<INVESTMENT-GAINS>                              86,853
<OTHER-INCOME>                                (68,591)
<BENEFITS>                                  13,788,162
<UNDERWRITING-AMORTIZATION>                  1,492,675
<UNDERWRITING-OTHER>                         2,465,448
<INCOME-PRETAX>                              2,951,979
<INCOME-TAX>                                   776,464
<INCOME-CONTINUING>                          2,175,515
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 2,175,515
<EPS-PRIMARY>                                     6.87
<EPS-DILUTED>                                     6.87
<RESERVE-OPEN>                              17,557,000
<PROVISION-CURRENT>                          8,158,400
<PROVISION-PRIOR>                            (152,800)
<PAYMENTS-CURRENT>                           1,997,400
<PAYMENTS-PRIOR>
                             5,146,300
<RESERVE-CLOSE>                             18,418,900
<CUMULATIVE-DEFICIENCY>                      (122,700)  
        

</TABLE>




<PAGE>   1
                                                                      Exhibit 99
Undertakings

(a)      The undersigned registrant hereby undertakes:

(1)      to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

                   (i)    to include any prospectus required by Section 10(a)
         (3) of the Securities Act of 1933 unless the information required to
         be included in such post-effective amendment is contained in a
         periodic report filed by registrant pursuant to Section 13 or 15(d) of
         the Securities Exchange Act of 1934 and incorporated herein by
         reference,

                  (ii)    to reflect in the prospectus any facts or events
         arising after the effective date of this Registration Statement (or
         the most recent post-effective amendment thereof) which, individually
         or in the aggregate, represent a fundamental change in the information
         set forth in this Registration Statement unless the information
         required to be included in such post-effective amendment is contained
         in a periodic report filed by the registrant pursuant to Section 13 or
         15(d) of the Securities Exchange Act of 1934 and incorporated herein
         by reference, and

                 (iii)    to include any material information with respect to
         the plan of distribution not previously disclosed in this Registration

         Statement or any material change to such information in this
         Registration Statement;

(2)      that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;

(3)      to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering; and

(4)      that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(b)      The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent
or given, a copy of the registrant's annual report to shareholders for its last
fiscal year, unless such employee otherwise has received a copy of such report
in which case the registrant shall state in the prospectus that it will
promptly furnish, without charge, a copy of such report on written request of
the employee. If the last fiscal year of the registrant has ended within 120
days prior to the use of the prospectus, the annual report of the registrant
for the preceding fiscal year may be so delivered, but within such 120-day
period the annual report for the last fiscal year will be furnished to each
such employee.

(c)      The undersigned registrant hereby undertakes to transmit or cause to
be transmitted to all employees participating in the plan, who do not otherwise
receive such material as shareholders of the registrant, at the time and in the
manner such material is sent to its shareholders, copies of all reports, proxy
statements and other communications distributed to its shareholders generally.

         Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.





                                     II-12