<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
                   For the fiscal year ended December 31, 1999
                                       OR
            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   |_|                   SECURITIES EXCHANGE ACT OF 1934

                For the Transition period from________to________

                          Commission file number 1-8787

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

                       American International Group, Inc.
             (Exact name of registrant as specified in its charter)

                      Delaware                     13-2592361
           (State or other jurisdiction of      (I.R.S. Employer
           incorporation or organization)      Identification No.)

         70 Pine Street, New York, New York           10270
      (Address of principal executive offices)     (Zip Code)
        Registrant's telephone number, including area code (212) 770-7000

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

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

                                              Name of each exchange on
              Title of each class                 which registered
              -------------------                 ----------------
   Common Stock, Par Value $2.50 Per Share     New York Stock Exchange, Inc.

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

                 Title of each class
                 -------------------
                        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, 2000 was
approximately $161,757,642,000 computed upon the basis of the closing sales
price of the Common Stock on that date.

      As of January 31, 2000, there were outstanding 1,549,773,813 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 17, 2000 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 engaged in a broad range of insurance
and insurance-related activities and financial services in the United States and
abroad. AIG's primary activities include both general and life insurance
operations. Other significant activities include financial services and asset
management. The principal insurance company subsidiaries are American Home
Assurance Company ("American Home"), National Union Fire Insurance Company of
Pittsburgh, Pa. ("National Union"), New Hampshire Insurance Company ("New
Hampshire"), Lexington Insurance Company ("Lexington"), Transatlantic
Reinsurance Company, American International Underwriters Overseas, Ltd.
("AIUO"), American Life Insurance Company ("ALICO"), American International
Assurance Company, Limited together with American International Assurance
Company (Bermuda) Limited ("AIA"), Nan Shan Life Insurance Company, Ltd. ("Nan
Shan"), American International Reinsurance Company, Ltd. and United Guaranty
Residential Insurance Company. The merger of SunAmerica Inc., a leading company
in the retirement savings and asset accumulation business, with and into AIG
became effective January 1, 1999. The transaction was treated as a pooling of
interests for accounting purposes. AIG issued 0.855 shares of common stock in
exchange for each share of SunAmerica Inc. stock outstanding at the effective
time of the merger for an aggregate issuance of approximately 187.5 million
shares. For information on AIG's business segments, see Note 18 of Notes to
Financial Statements.

      All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 2000, beneficial ownership of
approximately 13.7 percent, 2.8 percent and 2.0 percent of AIG's Common Stock,
$2.50 par value ("Common Stock"), was held by Starr International Company, Inc.
("SICO"), The Starr Foundation and C.V. Starr & Co., Inc. ("Starr"),
respectively.

      At December 31, 1999, AIG and its subsidiaries had approximately 55,000
employees.

      The following table shows the general development of the business of AIG
on a consolidated basis, the contributions made to AIG's consolidated revenues
and operating income and the assets held, in the periods indicated by its
general insurance, life insurance, financial services operations, asset
management operations, equity in income of minority-owned insurance companies
and other realized capital losses. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes 1 and 18 of
Notes to Financial Statements.)


<TABLE>
<CAPTION>
(dollars in millions)
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                            1999           1998          1997           1996           1995
====================================================================================================================================
<S>                                                              <C>            <C>           <C>            <C>            <C>    
General insurance operations:
   Gross premiums written                                        $22,569        $20,684       $18,742        $18,319        $17,895
   Net premiums written                                           16,224         14,586        13,408         12,692         11,893
   Net premiums earned                                            15,544         14,098        12,421         11,855         11,406
   Adjusted underwriting profit (a)                                  669            531           490            450            417
   Net investment income                                           2,517          2,192         1,854          1,691          1,547
   Realized capital gains                                            295            205           128             65             68
   Operating income                                                3,481          2,928         2,472          2,206          2,032
   Identifiable assets                                            76,725         73,226        62,386         58,792         56,223
------------------------------------------------------------------------------------------------------------------------------------
   Loss ratio                                                       75.5           75.6          75.3           75.9           75.9
   Expense ratio                                                    20.8           20.8          20.9           20.6           20.7
------------------------------------------------------------------------------------------------------------------------------------
   Combined ratio                                                   96.3           96.4          96.2           96.5           96.6
====================================================================================================================================
Life insurance operations:
   Premium income                                                 11,942         10,293         9,956          8,995          8,044
   Net investment income                                           6,206          5,201         4,521          3,805          3,059
   Realized capital gains (losses)                                  (148)           (74)           (9)             4              1
   Operating income                                                2,858          2,373         2,048          1,657          1,331
   Identifiable assets                                           128,697        103,611        87,747         72,275         60,125
   Insurance in-force at end of year                             584,959        503,649       443,323        429,992        378,005
Financial services operations:
   Commissions, transaction and other fees                         3,340          3,044         3,042          2,379          2,043
   Operating income                                                1,081            869           671            501            424
   Identifiable assets                                            66,567         59,198        51,110         43,074         36,039
Asset management operations:
   Commissions and other fees                                        985            707           555            444            390
   Operating income                                                  314            191           127            101             35
   Identifiable assets                                             1,132            915           646            787            795
Equity in income of minority-owned
   insurance operations                                               --             57           114             99             82
Other realized capital losses                                        (25)            (7)          (29)           (12)           (30)
Revenues (b)                                                      40,656         35,716        32,553         29,325         26,610
Total assets                                                     268,238        233,676       199,614        172,330        150,981
====================================================================================================================================
</TABLE>


(a)   Adjusted underwriting profit is statutory underwriting income adjusted
      primarily for changes in deferral of acquisition costs. This adjustment is
      necessary to present the financial statements in accordance with generally
      accepted accounting principles.
(b)   Represents the sum of general net premiums earned, life premium income,
      net investment income, financial services commissions, transaction and
      other fees, asset management commissions and other fees, equity in income
      of minority-owned insurance operations, and realized capital gains
      (losses). Commencing in 1997, agency operations were presented as a
      component of general insurance and for years prior to 1997 agency results
      have been reclassified to conform to this presentation.


                                                                               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, 1999. (See also Note 18 of Notes to
Financial Statements.)


<TABLE>
<CAPTION>
(dollars in millions)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              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                                        $ 15,544        $10,083       $ 5,461             64.9%          35.1%
   Adjusted underwriting profit                                    669            359           310             53.6           46.4
   Net investment income                                         2,517          1,995           522             79.3           20.7
   Realized capital gains (losses)                                 295            321           (26)              --             --
   Operating income                                              3,481          2,675           806             76.8           23.2
   Identifiable assets                                          76,725         58,137        18,588             75.8           24.2
Life insurance operations:
   Premium income                                               11,942            947        10,995              7.9           92.1
   Net investment income                                         6,206          3,497         2,709             56.3           43.7
   Realized capital losses                                        (148)           (91)          (57)              --             --
   Operating income                                              2,858            971         1,887             34.0           66.0
   Identifiable assets                                         128,697         72,358        56,339             56.2           43.8
Financial services operations:
   Commissions, transaction and other fees                       3,340          2,797           543             83.7           16.3
   Operating income                                              1,081            846           235             78.2           21.8
   Identifiable assets                                          66,567         55,473        11,094             83.3           16.7
Asset management operations:
   Commissions and other fees                                      985            821           164             83.3           16.7
   Operating income                                                314            288            26             91.8            8.2
   Identifiable assets                                           1,132            573           559             50.6           49.4
Other realized capital losses                                      (25)           (25)           --               --             --
Income before income taxes and minority interest                 7,512          4,590         2,922             61.1           38.9
Revenues                                                        40,656         20,345        20,311             50.0           50.0
Total Assets                                                   268,238        181,517        86,721             67.7           32.3
====================================================================================================================================
</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 approximately 70 foreign countries.

      Domestic general insurance operations are comprised of the Domestic
Brokerage Group, which includes the domestic operations of Transatlantic
Holdings, Inc. ("Transatlantic"), Personal Lines, including 21st Century
Insurance Group (21st Century), and Mortgage Guaranty.

      Commencing with the third quarter of 1998, Transatlantic and 21st Century
were consolidated into AIG's financial statements, as a result of AIG obtaining
majority ownership.

      AIG's primary domestic division is the Domestic Brokerage Group (DBG).
DBG's business is derived from brokers in the United States and Canada and is
conducted through its general insurance subsidiaries including American Home,
National Union, Lexington, Transatlantic and certain other insurance company
subsidiaries of AIG. The risk management division of DBG provides insurance and
risk management programs for large corporate customers. The AIG Risk Finance
division designs and implements creative risk financing alternatives using the
insurance and financial services capabilities of AIG. Also included are the
operations of DBG's environmental unit which focuses specifically on providing
specialty products to clients with environmental exposures.

      DBG writes substantially all classes of business insurance accepting such
business mainly from insurance brokers. This provides DBG the opportunity to
select specialized markets and retain underwriting control. Any licensed broker
is able to submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no authority to commit DBG
to accept a risk.

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

      AIG engages in mass marketing of personal lines coverages, primarily
private passenger auto and includes homeowners and personal umbrella coverages,
principally through American International Insurance Company and 21st Century.


2

<PAGE>   4

      The business of United Guaranty Corporation ("UGC") and its subsidiaries
is also included in the domestic operations of AIG. The principal business of
the UGC subsidiaries is the writing of residential mortgage loan insurance,
which is guaranty insurance on conventional first mortgage loans on
single-family dwellings and condominiums. Such insurance protects lenders
against loss if borrowers default. UGC subsidiaries also write home equity and
property improvement loan insurance on loans to finance residential property
improvements, alterations and repairs and for other purposes not necessarily
related to real estate. UGC had approximately $19 billion of mortgage guarantee
risk in-force at December 31, 1999.

      AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters ("AIU"), a marketing unit consisting
of wholly owned agencies and insurance companies. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General group uses various
marketing methods to write both business and personal lines insurance with
certain refinements for local laws, customs and needs. AIU operates in over 70
countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America. Transatlantic's foreign operations are included in this group.

      During 1999, DBG and the Foreign General insurance group accounted for
50.0 percent and 34.2 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 millions)
--------------------------------------------------------------------------------
Years Ended December 31,                                   Written       Earned
================================================================================
1999
--------------------------------------------------------------------------------
<S>                                                        <C>          <C>     
Gross premiums                                             $22,569      $21,187 
Ceded premiums                                              (6,345)      (5,643)
--------------------------------------------------------------------------------
Net premiums                                               $16,224      $15,544
================================================================================
1998                                               
--------------------------------------------------------------------------------
Gross premiums                                             $20,684      $20,092
Ceded premiums                                              (6,098)      (5,994)
--------------------------------------------------------------------------------
Net premiums                                               $14,586      $14,098
================================================================================
1997                                               
--------------------------------------------------------------------------------
Gross premiums                                             $18,742      $17,566
Ceded premiums                                              (5,334)      (5,145)
--------------------------------------------------------------------------------
Net premiums                                               $13,408      $12,421
================================================================================
</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 7 percent of AIG's net premiums written. This line is well
diversified geographically.

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


                                                                               3

<PAGE>   5

      Loss and expense ratios of AIG's consolidated general insurance operations
are set forth in the following table. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)


<TABLE>
<CAPTION>
(dollars in millions)
------------------------------------------------------------------------------------------------------------------------------------
                                                                 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>  
1999                               $16,224     $15,544               75.5           20.8          96.3            3.7          107.3
1998                                14,586      14,098               75.6           20.8          96.4            3.6          104.9
1997                                13,408      12,421               75.3           20.9          96.2            3.8          101.5
1996                                12,692      11,855               75.9           20.6          96.5            3.5          106.3
1995                                11,893      11,406               75.9           20.7          96.6            3.4          106.7
====================================================================================================================================
</TABLE>


*     Source: Best's Aggregates & Averages (Stock insurance companies, after
      dividends to policyholders); the ratio for 1999 reflects estimated results
      provided by Conning & Company.

      During 1999, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 10.8 percent, 5.8 percent and 5.1
percent were written in California, New York and Illinois, respectively. No
other state accounted for more than 5 percent of such premiums.

      There was no significant adverse effect on AIG's general insurance results
of operations from the economic environments in any one state, country or
geographic region for the year ended December 31, 1999. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)

Discussion and Analysis of Consolidated Net Losses and Loss Expense Reserve
Development

The reserve for net losses and loss expenses represents the accumulation of
estimates for reported losses ("case basis reserves") and provisions for losses
incurred but not reported ("IBNR"), both reduced by applicable reinsurance
recoverable. Losses and loss expenses are charged to income as incurred. AIG
discounts certain of its loss reserves principally related to workers'
compensation lines of business.

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

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

      The "Analysis of Consolidated Net Losses and Loss Expense Reserve
Development", which follows, presents the development of net losses and loss
expense reserves for calendar years 1989 through 1999. The upper half of the
table shows the cumulative amounts paid during successive years related to the
opening loss reserves. For example, with respect to the net losses and loss
expense reserve of $16.76 billion as of December 31, 1992, by the end of 1999
(seven years later) $14.50 billion had actually been paid in settlement of these
net loss reserves. In addition, as reflected in the lower section of the table,
the original reserve of $16.76 billion was reestimated to be $18.15 billion at
December 31, 1999. 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 $382 million at December 31, 1999 related to December 31, 1998 net
losses and loss expense reserves of $24.62 billion represents the cumulative
amount by which reserves for 1998 and prior years have developed redundantly
during 1999. The reserve for net losses and loss expenses with respect to
Transatlantic and 21st Century are included only in the consolidated net losses
and loss expenses commencing with the year ended December 31, 1998. Reserve
development for these operations is included only for 1998 and subsequent
periods.

      Over the past several years, AIG has significantly strengthened its net
loss and loss expense reserves with respect to asbestos and environmental
losses. This strengthening is the primary cause of the adverse development
reflected in certain calendar years in the net loss and loss expense reserves
shown in the following table.


4

<PAGE>   6

Analysis of Consolidated Net Losses and
Loss Expense Reserve Development


<TABLE>
<CAPTION>
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
                                        1989     1990    1991     1992     1993     1994     1995    1996     1997     1998     1999
====================================================================================================================================
<S>                                  <C>      <C>     <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>      <C>    
Reserve for Net Losses and Loss
   Expenses, December 31,            $12,958  $14,699 $15,840  $16,757  $17,557  $18,419  $19,693 $20,407  $21,171  $24,619  $24,600
Paid (Cumulative) as of:
   One Year Later                      3,940    4,315   4,748    4,883    5,146    4,775    5,281   5,616    5,716    6,779
   Two Years Later                     6,477    7,350   8,015    8,289    8,242    8,073    8,726   9,081    9,559
   Three Years Later                   8,351    9,561  10,436   10,433   10,404   10,333   11,024  11,456
   Four Years Later                    9,721   11,224  11,815   11,718   12,095   12,107   12,591
   Five Years Later                   10,765   12,112  12,611   12,931   13,378   13,270
   Six Years Later                    11,285   12,615  13,472   13,894   14,179
   Seven Years Later                  11,517   13,235  14,193   14,502
   Eight Years Later                  11,953   13,804  14,654
   Nine Years Later                   12,402   14,147
   Ten Years Later                    12,627
Net Liability Reestimated as of:
   End of Year                        12,958   14,699  15,840   16,757   17,557   18,419   19,693  20,407   21,171   24,619   24,600
   One Year Later                     12,845   14,596  15,828   16,807   17,434   18,139   19,413  20,009   20,890   24,237
   Two Years Later                    12,844   14,595  15,903   16,603   17,479   18,269   19,330  19,999   20,886
   Three Years Later                  12,809   14,724  15,990   16,778   17,782   18,344   19,327  20,151
   Four Years Later                   12,896   14,965  16,254   17,182   18,090   18,344   19,604
   Five Years Later                   13,065   15,361  16,712   17,600   18,300   18,535
   Six Years Later                    13,426   15,845  17,095   17,844   18,537
   Seven Years Later                  13,931   16,161  17,356   18,148
   Eight Years Later                  14,180   16,385  17,679
   Nine Years Later                   14,457   16,687
   Ten Years Later                    14,738
   Redundancy/(Deficiency)            (1,780)  (1,988) (1,839)  (1,391)    (980)    (116)      89     256      285      382
====================================================================================================================================
</TABLE>



                                                                               5

<PAGE>   7

      The following table excludes for each calendar year the net loss and loss
expense reserves and the development thereof with respect to asbestos and
environmental claims. Thus, AIG's loss and loss expense reserves excluding
asbestos and environmental claims are developing adequately. (See also

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

Analysis of Consolidated Net Losses and Loss Expense
Reserve Development Excluding Asbestos and
Environmental Net Losses and Loss Expense Reserve
Development


<TABLE>
<CAPTION>
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
                                        1989     1990    1991     1992     1993     1994     1995    1996     1997     1998     1999
====================================================================================================================================
<S>                                  <C>      <C>     <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>      <C>    
Reserve for Net Losses and
   Loss Expenses, Excluding
   Asbestos and Environmental
   Losses and Loss Expenses,
   December 31,                      $12,838  $14,539 $15,639  $16,503  $17,249  $18,089  $19,186 $19,664  $20,384  $23,754  $23,709
Paid (Cumulative) as of:
   One Year Later                      3,940    4,260   4,691    4,766    5,061    4,700    5,174   5,507    5,576    6,657
   Two Years Later                     6,422    7,237   7,842    8,088    8,082    7,891    8,515   8,832    9,305
   Three Years Later                   8,240    9,333  10,178   10,157   10,137   10,048   10,673  11,094
   Four Years Later                    9,496   10,912  11,483   11,337   11,726   11,683   12,128
   Five Years Later                   10,456   11,727  12,175   12,448   12,871   12,734
   Six Years Later                    10,904   12,126  12,935   13,274   13,560
   Seven Years Later                  11,034   12,646  13,519   13,771
   Eight Years Later                  11,370   13,079  13,870
   Nine Years Later                   11,684   13,312
   Ten Years Later                    11,801
Net Liability Reestimated as of:
   End of Year                        12,838   14,539  15,639   16,503   17,249   18,089   19,186  19,664   20,384   23,754   23,709
   One Year Later                     12,684   14,341  15,518   16,382   17,019   17,556   18,568  19,118   19,903   23,229
   Two Years Later                    12,591   14,232  15,422   16,073   16,813   17,355   18,347  18,910   19,771
   Three Years Later                  12,449   14,190  15,403   15,997   16,790   17,293   18,141  18,934
   Four Years Later                   12,368   14,327  15,417   16,081   16,960   17,090   18,292
   Five Years Later                   12,431   14,472  15,562   16,362   16,969   17,155
   Six Years Later                    12,544   14,648  15,808   16,404   17,080
   Seven Years Later                  12,748   14,828  15,869   16,582
   Eight Years Later                  12,861   14,854  16,067
   Nine Years Later                   12,941   15,032
   Ten Years Later                    13,097
   Redundancy/(Deficiency)              (259)    (493)   (428)     (79)     169      934      894     730      613      525
====================================================================================================================================
</TABLE>


Reconciliation of Net Reserve for Losses and
Loss Expenses


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                 1999         1998         1997
================================================================================
<S>                                          <C>          <C>          <C>     
Net reserve for losses and loss
   expenses at beginning of year             $ 24,619     $ 21,171     $ 20,407
Acquisitions (a)                                   --        2,896           --
--------------------------------------------------------------------------------
Losses and loss expenses incurred:
   Current year                                12,122       10,938        9,732
   Prior years (b)                               (384)        (281)        (376)
--------------------------------------------------------------------------------
                                               11,738       10,657        9,356
--------------------------------------------------------------------------------
Losses and loss expenses paid:
   Current year                                 4,978        4,389        2,976
   Prior years                                  6,779        5,716        5,616
--------------------------------------------------------------------------------
                                               11,757       10,105        8,592
--------------------------------------------------------------------------------
Net reserve for losses and loss
   expenses at end of year (c)                $24,600      $24,619      $21,171
================================================================================
</TABLE>

(a)   Acquisitions include the opening balances with respect to Transatlantic
      and 21st Century.
(b)   Does not include the effects of foreign exchange adjustments which are
      reflected in the "Net Losses and Loss Expense Reserve Development" table.
(c)   See also Note 6(a) of Notes to Financial Statements.

      Approximately 45 percent of the net losses and loss expense reserves are
paid out within two years of the date incurred. The remaining net losses and
loss expense reserves, particularly those associated with the casualty lines of
business, may extend to 20 years or more.

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

      The reserve for losses and loss expenses as reported in AIG's Consolidated
Balance Sheet at December 31, 1999, differs from the total reserve reported in
the Annual Statements filed with state insurance departments and, where
appropriate, with foreign regulatory authorities. The differences at December
31, 1999 relate primarily to reserves for certain foreign operations. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)

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

      The "Analysis of Consolidated Gross Losses and Loss 


6

<PAGE>   8
Expense Reserve Development", which follows, presents the development of gross
losses and loss expense reserves for calendar years 1992 through 1999. As with
the net losses and loss expense reserve development, the deficiencies of $1.77
billion and $923 million for 1992 and 1993, and redundancies of $1.02 billion,
$1.44 billion, $2.02 billion, $1.15 billion and $1.15 billion for 1994, 1995,
1996, 1997 and 1998, 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         1995         1996        1997         1998         1999
====================================================================================================================================
<S>                                <C>          <C>         <C>          <C>          <C>         <C>          <C>          <C>    
Gross Losses and
  Loss Expenses,
  December 31,                     $28,157      $30,046     $31,435      $33,047      $33,430     $33,400      $38,310      $38,252
Paid (Cumulative)
  as of:
  One Year Later                     7,281        8,807       7,640        8,392        9,199       9,185       10,344
  Two Years Later                   13,006       13,279      13,036       15,496       15,043      14,696
  Three Years Later                 16,432       17,311      17,540       18,837       18,721
  Four Years Later                  18,550       20,803      20,653       21,811
  Five Years Later                  21,322       22,895      22,634
  Six Years Later                   22,807       23,779
  Seven Years Later                 23,684
Gross Liability Reestimated
  as of:
  End of Year                       28,157       30,046      31,435       33,047       33,430      33,400       38,310       38,252
  One Year Later                    28,253       29,866      30,759       32,372       32,777      32,337       37,161
  Two Years Later                   27,825       29,537      30,960       32,398       31,719      32,251
  Three Years Later                 27,727       30,362      30,825       31,759       31,407
  Four Years Later                  28,625       31,020      30,508       31,604
  Five Years Later                  29,701       30,881      30,417
  Six Years Later                   29,605       30,969
  Seven Years Later                 29,929
  Redundancy/(Deficiency)           (1,772)        (923)      1,018        1,443        2,023       1,149        1,149
====================================================================================================================================
</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, endowment and accident and health policies. Financial and investment
products consist of single premium annuity, variable annuities, guaranteed
investment contracts, universal life and pensions. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)

      Life insurance operations in foreign countries comprised 92.1 percent of
life premium income and 66.0 percent of operating income in 1999. AIG operates
overseas principally through American Life Insurance Company (ALICO), American
International Assurance Company, Limited together with American International
Assurance Company (Bermuda) Limited (AIA) and Nan Shan Life Insurance Company,
Ltd. (Nan Shan). ALICO is incorporated in Delaware and all of its business is
written outside of the United States. ALICO has operations either directly or
through subsidiaries in approximately 50 countries located in Europe, Africa,
Latin America, the Caribbean, the Middle East, and the Far East, with Japan
being the largest territory. AIA operates primarily in Hong Kong, Singapore,
Malaysia and Thailand. Nan Shan operates in Taiwan. These operations comprised
89.8 percent of AIG's consolidated life premium income. (See also Note 18 of
Notes to Financial Statements.)

      AIG's domestic life operations are comprised of two separate operations,
AIG's domestic life companies and the life insurance subsidiaries of SunAmerica.
AIG's predominant domestic life subsidiaries are American International Life
Assurance Company of New York and AIG Life Insurance Company. These companies
utilize multiple distribution channels including brokerage and career and
general agents to offer primarily life insurance, financial and investment
products and specialty forms of accident and health coverage for individuals and
groups, including employee benefit plans. SunAmerica sells primarily financial
and investment type products. The domestic life operations comprised 7.9 percent
of total life premium income in 1999.

      There was no significant adverse effect on AIG's life insurance results of
operations from economic environments in any one state, country or geographic
region for the year ended December 31, 1999. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)

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

      In addition to the above, AIG also has subsidiary operations in the
Philippines, Canada, Mexico, Poland, Switzerland, Puerto Rico, and conducts life
insurance business through AIUO subsidiary companies in Russia, Israel and in
certain countries in Central and South America.


                                                                               7

<PAGE>   9

      The foreign life companies have approximately 125,000 career agents and
sell their products largely to indigenous persons in local currencies. In
addition to the agency outlets, these companies also distribute their products
through direct marketing channels, such as mass marketing, and through brokers
and other distribution outlets such as financial institutions.

      The following tables summarize the life insurance operating results for
the years ended December 31, 1999 and 1998. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)


<TABLE>
<CAPTION>
(dollars in millions)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Average
                                                            Net                                                   Termination Rate
                                       Premium       Investment        Operating        Insurance            ----------------------
December 31, 1999                       Income           Income       Income (a)         In-Force            Lapse            Other
===================================================================================================================================
<S>                                    <C>               <C>              <C>            <C>                  <C>              <C> 
Individual:
    Life                               $ 8,491           $2,630           $1,487         $431,507 (b)         7.0%             1.6%
    Annuity                                334            1,600              244                  (c)
    Accident and health                  1,643              115              432                  (c)
Group:                                                                                       
    Life                                   619               37               66          153,452             8.5%             2.7%
    Pension                                252            1,805              765                  (c)
    Accident and health                    603               27               20                  (c)
Realized capital losses                     --               --             (148)                 (c)
Consolidation adjustments                   --               (8)              (8)                 (c)
-----------------------------------------------------------------------------------------------------------------------------------
Total                                  $11,942           $6,206           $2,858         $584,959
===================================================================================================================================
</TABLE>

(a)   Including income related to investment type products.
(b)   Including $304.7 billion of whole life insurance and endowments.
(c)   Not applicable.


<TABLE>
<CAPTION>
(dollars in millions)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Average
                                                            Net                                                   Termination Rate
                                       Premium       Investment        Operating        Insurance            -----------------------
December 31, 1998                       Income           Income       Income (a)         In-Force            Lapse            Other
====================================================================================================================================
<S>                                    <C>               <C>              <C>            <C>                  <C>              <C> 
Individual:
    Life                               $ 7,391           $2,260           $1,244         $381,181 (b)         6.8%             1.4%
    Annuity                                284            1,598              292                  (c)
    Accident and health                  1,297               95              361                  (c)
Group:                                                                                  
    Life                                   513               32               55          122,468            10.6%             5.1%
    Pension                                229            1,197              480                  (c)
    Accident and health                    579               27               23                  (c)
Realized capital losses                     --               --              (74)                 (c)
Consolidation adjustments                   --               (8)              (8)                 (c)
------------------------------------------------------------------------------------------------------------------------------------
Total                                  $10,293           $5,201           $2,373         $503,649
====================================================================================================================================
</TABLE>

(a)   Including income related to investment type products.
(b)   Including $280.1 billion of whole life insurance and endowments. 
(c)   Not applicable.


8

<PAGE>   10

      AIG's individual life insurance and group life insurance portfolio
accounted for 52 percent, 53 percent and 52 percent of AIG's consolidated life
insurance operating income before realized capital losses for the years ended
December 31, 1999, 1998 and 1997, respectively. For the years ended December 31,
1999, 1998 and 1997, 64.7 percent, 68.0 percent and 69.3 percent, respectively,
of consolidated life operating income before realized capital losses was derived
from foreign operations.

Insurance Investment Operations

A significant portion of AIG's general and life operating revenues are derived
from AIG's insurance investment operations. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 1, 2, 8
and 18 of Notes to Financial Statements.)

      The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at December 31, 1999 and 1998:


<TABLE>
<CAPTION>
(dollars in millions)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Percent Distribution    
                                                    General          Life                     Percent     ------------------------- 
December 31, 1999                                 Insurance     Insurance          Total     of Total     Domestic          Foreign
===================================================================================================================================
<S>                                                 <C>           <C>           <C>            <C>          <C>              <C>  
Fixed maturities:
    Available for sale, at market value (a)         $16,903       $61,022       $ 77,925       61.6%        53.5%            46.5%
    Held to maturity, at amortized cost              12,078            --         12,078        9.5        100.0             --
Equity securities, at market value (b)                4,000         2,503          6,503        5.1         50.2             49.8
Mortgage loans on real estate, policy and                                                                
    collateral loans                                     70        10,420         10,490        8.3         57.0             43.0
Short-term investments, including                                                                        
    time deposits, and cash                             977         5,710          6,687        5.3         45.1             54.9
Real estate                                             381         1,141          1,522        1.2         18.5             81.5
Investment income due and accrued                       576         1,421          1,997        1.6         48.0             52.0
Other invested assets                                 4,150         5,138          9,288        7.4         85.1             14.9
----------------------------------------------------------------------------------------------------------------------------------
Total                                               $39,135       $87,355       $126,490      100.0%        59.5%            40.5%
==================================================================================================================================
</TABLE>

(a)   Includes $1.04 billion of bonds trading securities, at market value.
(b)   Includes $697 million of non-redeemable preferred stocks, at market value.


<TABLE>
<CAPTION>
(dollars in millions)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Percent Distribution
                                                              General        Life                 Percent   ------------------------
December 31, 1998                                           Insurance   Insurance       Total    of Total   Domestic         Foreign
====================================================================================================================================
<S>                                                           <C>         <C>        <C>           <C>        <C>              <C>  
Fixed maturities:

    Available for sale, at market value (a)                   $15,939     $51,237    $ 67,176      59.0%      56.4%            43.6%
    Held to maturity, at amortized cost                        12,658          --      12,658      11.1      100.0               --
Equity securities, at market value (b)                          3,923       2,092       6,015       5.3       54.1             45.9
Mortgage loans on real estate, policy and collateral loans         70       9,894       9,964       8.7       55.5             44.5
Short-term investments, including                                                                         
    time deposits, and cash                                       873       5,835       6,708       5.9       42.6             57.4
Real estate                                                       393       1,124       1,517       1.3       18.2             81.8
Investment income due and accrued                                 568       1,197       1,765       1.5       51.2             48.8
Other invested assets                                           4,459       3,699       8,158       7.2       85.9             14.1
------------------------------------------------------------------------------------------------------------------------------------
Total                                                         $38,883     $75,078    $113,961     100.0%      61.7%            38.3%
====================================================================================================================================
</TABLE>

(a)   Includes $1.01 billion of bonds trading securities, at market value.
(b)   Includes $593 million of non-redeemable preferred stocks, at market value.


                                                                               9

<PAGE>   11

      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 millions)
----------------------------------------------------------------------------------------------------------------------------------
                           Annual Average Cash and Invested Assets
                           ---------------------------------------
                                   Cash
                             (including                                           Net                                     Realized
                             short-term      Invested                      Investment                Rate of Return on     Capital
Years Ended December 31,   investments)     Assets(a)        Total          Income(b)                  Invested Assets       Gains
==================================================================================================================================
<S>                                <C>        <C>          <C>                 <C>                    <C>          <C>        <C> 
1999                               $925       $38,084      $39,009             $2,517                 6.5%(c)      6.6%(d)    $295
1998                                745        34,619       35,364              2,192                 6.2%(c)      6.3%(d)     205
1997                                611        29,704       30,315              1,854                 6.1%(c)      6.2%(d)     128
1996                                630        27,048       27,678              1,691                 6.1%(c)      6.3%(d)      65
1995                                825        24,417       25,242              1,547                 6.1%(c)      6.3%(d)      68
==================================================================================================================================
</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. 
(c)   Net investment income divided by the annual average sum of cash and
      invested assets.
(d)   Net investment income divided by the annual average invested assets.

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


<TABLE>
<CAPTION>
(dollars in millions)
----------------------------------------------------------------------------------------------------------------------------------
                           Annual Average Cash and Invested Assets
                           ---------------------------------------
                                   Cash                                                                                   Realized
                             (including                                           Net                                      Capital
                             short-term      Invested                      Investment            Rate of Return on           Gains
Years Ended December 31,   investments)     Assets(a)         Total         Income(b)             Invested Assets         (Losses)
==================================================================================================================================
<S>                           <C>            <C>             <C>             <C>                <C>          <C>           <C>    
1999                          $5,772         $75,444         $81,216         $6,206             7.6%(c)      8.2%(d)       $(148) 
1998                           4,619          65,796          70,415          5,201             7.4%(c)      7.9%(d)         (74) 
1997                           2,467          57,849          60,316          4,521             7.5%(c)      7.8%(d)          (9) 
1996                           1,809          48,158          49,967          3,805             7.6%(c)      7.9%(d)           4
1995                           1,934          38,990          40,924          3,059             7.5%(C)      7.8%(d)           1
==================================================================================================================================
</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.
(c)   Net investment income divided by the annual average sum of cash and
      invested assets.
(d)   Net investment income divided by the annual average invested assets.

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

Financial Services Operations

AIG's financial services subsidiaries engage in diversified financial products
and services including aircraft, consumer and premium financing, and banking
services.

      International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. (See also Note 18 of
Notes to Financial Statements.)

      AIG Financial Products Corp. and its subsidiaries (AIGFP) structure
financial transactions, including long-dated interest rate and currency swaps
and structures borrowing through notes, bonds and guaranteed investment
agreements. (See also Note 18 of Notes to Financial Statements.)

      AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various
commodities trading, foreign exchange trading, interest rate swaps and market
making activities. (See also Note 18 of Notes to Financial Statements.)

      Together these three operations comprise 94.5 percent of the commissions,
transaction and other fees of AIG's consolidated financial services operations.


10

<PAGE>   12

      The following table is a summary of the composition of AIG's financial
services and asset management invested assets and liabilities at December 31,
1999 and 1998. (See also Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 1 of Notes to Financial
Statements.)


<TABLE>
<CAPTION>
(in millions)                                           1999            1998
============================================================================
<S>                                                  <C>             <C>    
Financial services and asset management
    invested assets:
    Flight equipment primarily under operating
       leases, net of accumulated depreciation       $17,334         $16,330
    Securities available for sale, at market value    12,954          10,674
    Trading securities, at market value                4,391           5,668
    Spot commodities, at market value                    683             476
    Unrealized gain on interest rate and currency
       swaps, options and forward transactions         7,931           9,881
    Trading assets                                     5,793           6,229
    Securities purchased under agreements to
       resell, at contract value                      10,897           4,838
    Other, including short-term investments            2,565           2,523
----------------------------------------------------------------------------
Total                                                $62,548         $56,619
============================================================================
Financial services and asset management liabilities:
    Borrowings under obligations of guaranteed
       investment agreements                        $  9,430        $  9,188
    Securities sold under agreements to
       repurchase, at contract value                   6,116           4,473
    Trading liabilities                                3,821           4,664
    Securities and spot commodities sold but not
       yet purchased, at market value                  6,413           4,457
    Unrealized loss on interest rate and currency
       swaps, options and forward transactions         8,624           7,055
    Trust deposits and deposits due to banks and
       other depositors                                2,175           1,682
    Commercial paper                                   2,958           3,204
    Notes, bonds and loans payable                    16,806          15,249
----------------------------------------------------------------------------
Total                                                $56,343         $49,972
============================================================================
</TABLE>


      The following table is a summary of the revenues and operating income of
AIG's principal financial services operations for the year ended December 31,
1999, 1998 and 1997. (See also Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 1 of Notes to Financial
Statements.)


<TABLE>
<CAPTION>
                                                                   Operating
(in millions)                                       Revenues          Income
============================================================================
<S>                                                   <C>               <C>    
1999
ILFC                                                  $2,194            $590
AIGFP*                                                   737             482
AIGTG*                                                   227             109
============================================================================
1998
ILFC                                                  $2,002            $496
AIGFP*                                                   550             323
AIGTG*                                                   374             123
============================================================================
1997
ILFC                                                  $1,857            $382
AIGFP*                                                   452             241
AIGTG*                                                   562             127
============================================================================
</TABLE>

* Revenues represent commissions, transaction and other fees.

      A.I. Credit Corp. and Imperial Premium Finance, Inc. also contribute to
financial services income. These operations engage principally in premium
financing. (See also Management's Discussion and Analysis of Financial Condition
and Results of Operations and Notes 1, 9 and 12 of Notes to Financial
Statements.)

      AIG Consumer Finance Group, Inc., through its subsidiaries, is engaged in
developing a multi-product consumer finance business with an emphasis on
emerging markets.

Asset Management Operations

AIG's asset management operations offer a wide variety of investment vehicles
and services, including variable annuities, mutual funds, and investment asset
management. Such products and services are offered to individuals and
institutions both domestically and internationally.

      AIG's three principal asset management operations are SunAmerica's asset
management operations (SAAMCo), AIG Global Investment Group, Inc. and its
subsidiaries (Global Investment) and AIG Capital Partners, Inc. (Cap Partners).
SAAMCo develops and sells variable annuities and other investment products,
sells and manages mutual funds and provides financial services. Global
Investment manages invested assets of institutions, including insurance
companies and pension funds, and provides custodial services. Cap Partners
organizes, and manages the invested assets of institutional investment funds and
may also invest in such funds. Each of these subsidiary operations receives fees
for investment products and services provided.

Other Operations

Small AIG subsidiaries provide insurance-related services such as adjusting
claims and marketing specialized products. AIG has several other relatively
minor subsidiaries which carry on various businesses. American International
Technology Enterprises, Inc. provides information technology and processing
services to businesses worldwide. Mt. Mansfield Company, Inc. owns and operates
the ski slopes, lifts, school and an inn located at Stowe, Vermont.

Additional Investments

AIG holds a 24.4 percent interest in IPC Holdings, Ltd., a reinsurance holding
company and a 19.9 percent interest in Richmond Insurance Company, Ltd., a
reinsurer. (See also Note 1(o) of Notes to Financial Statements.)

Locations of Certain Assets

As of December 31, 1999, approximately 32 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $894
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 


                                                                              11

<PAGE>   13

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, 2 and 18 of Notes to Financial
Statements.)

Insurance Regulation and Competition

Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such
requirements.(See also Note 11 of Notes to Financial Statements.)

      AIG's insurance subsidiaries, in common with other insurers, are subject
to regulation and supervision by the states and by other jurisdictions in which
they do business. Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate regulatory and
supervisory powers to an insurance official. The regulation and supervision
relate primarily to approval of policy forms and rates, the standards of
solvency that must be met and maintained, including risk based capital
measurements, the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the size of risks which may be
insured under a single policy, deposits of securities for the benefit of
policyholders, methods of accounting, periodic examinations of the affairs of
insurance companies, the form and content of reports of financial condition
required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of policyholders
rather than security holders. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)

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

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

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

      The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 1999.

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

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

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

      The insurance industry is highly competitive. Within the United States,
AIG's general insurance subsidiaries compete with approximately 3,000 other
stock companies, specialty insurance organizations, mutual companies and other
underwriting organizations. AIG's life insurance companies compete in the United
States with some 1,700 life insurance companies and other participants in
related financial service fields. Overseas, AIG subsidiaries compete for
business with foreign insurance operations of the larger U.S. insurers and local
companies in particular areas in which they are active.

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


12

<PAGE>   14


I
TEM 2. Properties

AIG and its subsidiaries operate from approximately 360 offices in the United
States, 5 offices in Canada and numerous offices in approximately 100 foreign
countries. The offices in Springfield, Illinois; Houston, Texas; Atlanta,
Georgia; Baton Rouge, Louisiana; Wilmington, Delaware; Hato Rey, Puerto Rico;
San Diego, California; Greensboro, North Carolina; Livingston, New Jersey; 70
Pine Street, 72 Wall Street and 175 Water Street in New York City; and offices
in approximately 30 foreign countries including Bermuda, Chile, Hong Kong, the
Philippines, Japan, England, Singapore, Switzerland, Taiwan and Thailand are
located in buildings owned by AIG and its subsidiaries. The remainder of the
office space utilized by AIG subsidiaries is leased.


ITEM 3. Legal Proceedings

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


ITEM 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth
quarter of 1999.

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                                                                        71                 1984
Eli Broad                Director                                                                        66                 1999
Pei-yuan Chia            Director                                                                        61                 1996
Marshall A. Cohen        Director                                                                        64                 1992
Barber B. Conable, Jr.   Director                                                                        77                 1991
Martin S. Feldstein      Director                                                                        60                 1987
Ellen V. Futter          Director                                                                        50                 1999
Leslie L. Gonda          Director                                                                        80                 1990
Evan G. Greenberg*       Director, President and Chief Operating Officer                                 45                 1995
M. R. Greenberg*         Director, Chairman and Chief Executive Officer                                  74                 1967
Carla A. Hills           Director                                                                        66                 1993
Frank J. Hoenemeyer*     Director                                                                        80                 1985
Edward E. Matthews*      Director and Vice Chairman - Investments and Financial Services                 68                 1973
Dean P. Phypers          Director                                                                        71                 1979
Howard I. Smith          Director, Executive Vice President, Chief Financial Officer and Comptroller     55                 1984
Thomas R. Tizzio*        Director and Senior Vice Chairman - General Insurance                           62                 1982
Edmund S. W. Tse         Director and Vice Chairman - Life Insurance                                     62                 1991
Jay S. Wintrob           Director                                                                        43                 1999
Frank G. Wisner          Director and Vice Chairman - External Affairs                                   61                 1997
Edwin E. Manton          Senior Advisor                                                                  91                 1967
John J. Roberts          Senior Advisor                                                                  77                 1967
Ernest E. Stempel        Senior Advisor                                                                  83                 1967
Kristian P. Moor         Executive Vice President - Domestic General Insurance                           40                 1998
R. Kendall Nottingham    Executive Vice President - Life Insurance                                       61                 1998
Robert M. Sandler        Executive Vice President, Senior Casualty Actuary and Senior Claims Officer     57                 1980
Martin J. Sullivan       Executive Vice President - Foreign General Insurance                            45                 1997
William N. Dooley        Senior Vice President - Financial Services                                      47                 1992
Lawrence W. English      Senior Vice President - Administration                                          58                 1985
Axel I. Freudmann        Senior Vice President - Human Resources                                         53                 1986
Win J. Neuger            Senior Vice President and Chief Investment Officer                              50                 1995
Ernest T. Patrikis       Senior Vice President and General Counsel                                       56                 1998
Robert E. Lewis          Vice President and Chief Credit Officer                                         49                 1993
Charles M. Lucas         Vice President and Director of Market Risk Management                           61                 1996
Frank Petralito II       Vice President and Director of Taxes                                            63                 1978
Kathleen E. Shannon      Vice President and Secretary                                                    50                 1986
John T. Wooster, Jr.     Vice President - Communications                                                 60                 1989
Carol A. McFate          Treasurer                                                                       47                 1998
================================================================================================================================
</TABLE>

* Member of Executive Committee.


                                                                              13

<PAGE>   15

      Except as hereinafter noted, each of the directors who is also an
executive officer of AIG and each of the other executive officers has, for more
than five years, occupied an executive position with AIG or companies that are
now its subsidiaries, or with Starr. Evan G. Greenberg is the son of M.R.
Greenberg. There are no other arrangements or understandings between any
director or officer and any other person pursuant to which the director or
officer was elected to such position. Prior to joining AIG in 1998, Mr. Patrikis
was First Vice President at the Federal Reserve Bank of New York, previously
having served as Executive Vice President and General Counsel. Mr. Lucas was
Senior Vice President at Republic National Bank of New York prior to joining AIG
in 1996. Ms. McFate was Assistant Treasurer of AIG and Director of Financial
Analysis of AIG prior to being elected Treasurer of AIG in 1998 and was Senior
Vice President - Investment Management at Prudential Insurance Company prior to
joining AIG in 1994. Mr. Wisner served as a career foreign service officer with
the United States Department of State from 1961 through July, 1997, with his
last position being Ambassador to India.


PART II
================================================================================

ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters

(a) The table below shows the high and low closing sales prices per share of
AIG's common stock, as reported on the New York Stock Exchange Composite Tape,
for each quarter of 1999 and 1998, as adjusted for the common stock split in the
form of a 25 percent common stock dividend paid July 30, 1999 and the common
stock split in the form of a 50 percent common stock dividend paid July 31,
1998. All prices are as reported by the National Quotation Bureau, Incorporated.


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                          1999                      1998
                                  ---------------------       ------------------
                                     High       Low           High       Low
================================================================================
<S>                               <C>           <C>           <C>        <C>
First Quarter                      98 1/8       78            69         53 5/8
Second Quarter                    106 3/8       89 3/16       77 7/8     65 7/16
Third Quarter                      99 3/4       84 1/2        81 9/16    61
Fourth Quarter                    111 11/16     82            80 11/16   53 1/4
================================================================================
</TABLE>


      (b) In 1999, AIG paid a quarterly dividend of 4.5 cents in March and June
and 5.0 cents in September and December for a total cash payment of 19 cents per
share of common stock. In 1998, AIG paid a quarterly dividend of 4.0 cents in
March and June and 4.5 cents in September and December for a total cash payment
of 17 cents per share of common stock. These amounts reflect the adjustment for
common stock splits described above. Subject to the dividend preference of any
of AIG's serial preferred stock which may be outstanding, the holders of shares
of common stock are entitled to receive such dividends as may be declared by the
Board of Directors from funds legally available therefor.

       See Note 11(a) of Notes to Financial Statements for a discussion of
certain restrictions on the payment of dividends to AIG by some of its insurance
subsidiaries.

      (c) The approximate number of holders of Common Stock as of January 31,
2000, based upon the number of record holders, was 26,000.

================================================================================


14

<PAGE>   16


ITEM 6. Selected Financial Data
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

The following Selected Consolidated Financial Data, which has been restated to
include the operations of SunAmerica Inc., the Maryland corporation which was
merged into AIG on January 1, 1999, on a pooling of interest basis, is presented
in accordance with generally accepted accounting principles. This data should be
read in conjunction with the financial statements and accompanying notes
included elsewhere herein.


<TABLE>
<CAPTION>
(in millions, except per share amounts) 
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                               1999          1998          1997          1996          1995
===================================================================================================================================
<S>                                                               <C>           <C>           <C>           <C>           <C>      
Revenues (a)                                                      $  40,656     $  35,716     $  32,553     $  29,325     $  26,610
General insurance:
    Net premiums written                                             16,224        14,586        13,408        12,692        11,893
    Net premiums earned                                              15,544        14,098        12,421        11,855        11,406
    Adjusted underwriting profit                                        669           531           490           450           417
    Net investment income                                             2,517         2,192         1,854         1,691         1,547
    Realized capital gains                                              295           205           128            65            68
    Operating income                                                  3,481         2,928         2,472         2,206         2,032
Life insurance:
    Premium income                                                   11,942        10,293         9,956         8,995         8,044
    Net investment income                                             6,206         5,201         4,521         3,805         3,059
    Realized capital gains (losses)                                    (148)          (74)           (9)            4             1
    Operating income                                                  2,858         2,373         2,048         1,657         1,331
Financial services operating income                                   1,081           869           671           501           424
Asset management operating income                                       314           191           127           101            35
Equity in income of minority-owned insurance operations                  --            57           114            99            82
Other realized capital losses                                           (25)           (7)          (29)          (12)          (30)
Other income (deductions)--net                                         (197)         (134)          (93)          (84)          (91)
Income before income taxes and minority interest                      7,512         6,277         5,310         4,468         3,783
Income taxes                                                          2,219         1,785         1,525         1,234         1,041
Income before minority interest                                       5,293         4,492         3,785         3,234         2,742
Minority interest                                                      (238)         (210)          (74)          (63)          (38)
Net income                                                            5,055         4,282         3,711         3,171         2,704
Earnings per common share (b) :
    Basic                                                              3.27          2.81          2.45          2.08          1.78
    Diluted                                                            3.23          2.75          2.40          2.05          1.75
Cash dividends per common share (c)                                     .19           .17           .15           .13           .11
Total assets                                                        268,238       233,676       199,614       172,330       150,981
Long-term debt (d)                                                   22,896        22,720        18,950        18,079        14,977
Capital funds (shareholders' equity)                                 33,306        30,123        26,585        23,705        21,040
===================================================================================================================================
</TABLE>

(a)   Represents the sum of general net premiums earned, life premium income,
      net investment income, financial services commissions, transaction and
      other fees, asset management commissions and other fees, equity in income
      of minority-owned insurance operations, and realized capital gains
      (losses). Commencing in 1997, agency operations were presented as a
      component of general insurance and for years prior to 1997 agency results
      have been reclassified to conform to this presentation.
(b)   Per share amounts for all periods presented have been retroactively
      adjusted to reflect all stock dividends and splits and reflect the
      adoption of the Statement of Financial Accounting Standards No. 128
      "Earnings per Share."
(c)   Cash dividends have not been restated to reflect dividends paid by
      SunAmerica Inc.
(d)   Including commercial paper and excluding that portion of long-term debt
      maturing in less than one year.


                                                                              15

<PAGE>   17

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

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


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Operational Review

General Insurance Operations

AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance.

      Domestic general insurance operations are comprised of the Domestic
Brokerage Group (DBG), which includes the domestic operations of Transatlantic
Holdings, Inc. (Transatlantic), Personal Lines, including 21st Century Insurance
Group (21st Century), and Mortgage Guaranty.

      Commencing with the third quarter of 1998, Transatlantic and 21st Century
were consolidated into AIG's financial statements, as a result of AIG obtaining
majority ownership.

      DBG is AIG's primary domestic division. DBG writes substantially all
classes of business insurance, accepting such business mainly from insurance
brokers. This provides DBG the opportunity to select specialized markets and
retain underwriting control. Any licensed broker is able to submit business to
DBG without the traditional agent-company contractual relationship, but such
broker usually has no authority to commit DBG to accept a risk.

      Personal Lines engages in the mass marketing of personal lines insurance,
primarily private passenger auto and includes homeowners and personal umbrella
coverages.

      Mortgage Guaranty provides guaranty insurance on conventional first
mortgage loans on single family dwellings and condominiums.

      AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters (AIU), a marketing unit consisting
of wholly owned agencies and insurance entities. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General insurance group uses
various marketing methods to write both business and personal lines insurance
with certain refinements for local laws, customs and needs. AIU operates in over
70 countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America. Transatlantic's foreign operations are included in this group. (See
also Note 18 of Notes to Financial Statements.)

      General insurance operations for the twelve month periods ending December
31, 1999, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                      1999       1998       1997
================================================================================
<S>                                               <C>        <C>        <C>     
Net premiums written:
   Domestic                                       $ 10,678   $  9,787   $  9,038
   Foreign                                           5,546      4,799      4,370
--------------------------------------------------------------------------------
Total                                             $ 16,224   $ 14,586   $ 13,408
================================================================================
Net premiums earned:
   Domestic                                       $ 10,083   $  9,471   $  8,352
   Foreign                                           5,461      4,627      4,069
--------------------------------------------------------------------------------
Total                                             $ 15,544   $ 14,098   $ 12,421
================================================================================
Adjusted underwriting profit (loss):
   Domestic                                       $    359   $      9   $     (7)
   Foreign                                             310        522        497
--------------------------------------------------------------------------------
Total                                             $    669   $    531   $    490
================================================================================
Net investment income:
   Domestic                                       $  1,995   $  1,754   $  1,485
   Foreign                                             522        438        369
--------------------------------------------------------------------------------
Total                                             $  2,517   $  2,192   $  1,854
================================================================================
Operating income before realized capital gains:
   Domestic                                       $  2,354   $  1,763   $  1,478
   Foreign                                             832        960        866
--------------------------------------------------------------------------------
Total                                                3,186      2,723      2,344
Realized capital gains                                 295        205        128
--------------------------------------------------------------------------------
Operating income                                  $  3,481   $  2,928   $  2,472
================================================================================
</TABLE>


      In AIG's general insurance operations, 1999 net premiums written and net
premiums earned increased 11.2 percent and 10.3 percent, respectively, from
those of 1998. In 1998, net premiums written increased 8.8 percent and net
premiums earned increased 13.5 percent when compared to 1997.


16

<PAGE>   18

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

      General insurance domestic net premiums written and net premiums earned
were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                      1999       1998       1997
================================================================================
<S>                                               <C>        <C>        <C>     
Net premiums written:
   DBG                                            $  8,119   $  8,002   $  7,885
   Personal Lines                                    2,162      1,422        812
   Mortgage Guaranty                                   397        363        341
--------------------------------------------------------------------------------
Total                                             $ 10,678   $  9,787   $  9,038
================================================================================
Net premiums earned:
   DBG                                            $  7,608   $  7,814   $  7,207
   Personal Lines                                    2,079      1,280        790
   Mortgage Guaranty                                   396        377        355
--------------------------------------------------------------------------------
Total                                             $ 10,083   $  9,471   $  8,352
================================================================================
</TABLE>


      During the latter part of 1999, the commercial insurance market began to
experience some rate increases. However, this market remains competitive and
excessively capitalized. DBG has been able to sustain some growth in various
specialty markets, such as pollution, excess liability and risk management,
where AIG provides cost effective coverages for large complex risks,
underwriting flexibility, and creative risk financing solutions; however, in
1999 DBG declined to renew $450 million of domestic business where underwriting
and pricing standards could not be achieved. Non-renewed policies were
principally in the workers' compensation, traditional casualty and property
lines of business.

      As reflected in the preceding table showing the distribution of net
premiums written and net premiums earned, domestic growth was primarily achieved
through the growth in the personal auto insurance segment of Personal Lines.
Personal Lines net premiums written increased $740 million in 1999 over 1998,
compared to an increase of $610 million in 1998 over 1997. The consolidation of
21st Century for twelve months in 1999 compared to six months in 1998 accounted
for approximately 50 percent of the increase. The balance of the increase was
related to the significant growth in the number of policies issued with respect
to preferred, standard and non-standard auto risks.

      Growth of 15.6 percent and 18.0 percent for foreign general insurance net
premiums written and net premiums earned, respectively, in 1999 over 1998
reflect growth of operations in the United Kingdom, the Far East, and the
consolidation of Transatlantic's foreign operations for the twelve months in
1999 compared to six months in 1998. Foreign general insurance operations
produced 34.2 percent of the general insurance net premiums written in 1999,
32.9 percent in 1998 and 32.6 percent in 1997.

      Differences in foreign exchange rates during 1999 relative to 1998 had a
negligible effect on foreign general insurance net premiums written when
translated from original currencies into U.S. dollars. (See also the discussion
under "Capital Resources" herein.)

      Because of the nature and diversity of AIG's operations and the continuing
rapid changes in the insurance industry worldwide, together with the factors
discussed above, it is difficult to assess further or project future growth in
AIG's net premiums written and reserve for losses and loss expenses.

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

      AIG, along with most general insurance entities, uses the loss ratio, the
expense ratio and the combined ratio as measures of performance. The loss ratio
is derived as the sum of losses and loss expenses incurred divided by net
premiums earned. The expense ratio is derived as statutory underwriting expenses
divided by net premiums written. The combined ratio is the sum of the loss ratio
and the expense ratio. These ratios are relative measurements that describe for
every $100 of net premiums earned or written, the cost of losses and statutory
expenses, respectively. The combined ratio presents the total cost per $100 of
premium production. A combined ratio below 100 demonstrates underwriting profit;
a combined ratio above 100 demonstrates underwriting loss. The statutory general
insurance ratios were as follows:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                      1999       1998       1997
================================================================================
<S>                                                  <C>        <C>        <C>  
Domestic:
   Loss Ratio                                        81.51      84.25      84.44
   Expense Ratio                                     16.19      15.87      15.90
--------------------------------------------------------------------------------
Combined Ratio                                       97.70     100.12     100.34
================================================================================
Foreign:
   Loss Ratio                                        64.44      57.87      56.61
   Expense Ratio                                     29.80      30.76      31.16
--------------------------------------------------------------------------------
Combined Ratio                                       94.24      88.63      87.77
================================================================================
Consolidated:
   Loss Ratio                                        75.51      75.59      75.33
   Expense Ratio                                     20.84      20.77      20.87
--------------------------------------------------------------------------------
Combined Ratio                                       96.35      96.36      96.20
================================================================================
</TABLE>


      AIG believes that underwriting profit is the true measure of the
performance of the core business of a general insurance company.

      Underwriting profit is measured in two ways: statutory underwriting profit
and Generally Accepted Accounting Principles (GAAP) underwriting profit.

      Statutory underwriting profit is arrived at by reducing net premiums
earned by net losses and loss expenses incurred and net expenses incurred.
Statutory accounting differs from GAAP, as statutory accounting requires
immediate expense recognition and ignores the matching of revenues and expenses
as required by GAAP. That is, for statutory purposes, all expenses, most
specifically acquisition expenses, are recognized immediately, not consistent
with the revenues earned.


                                                                              17

<PAGE>   19

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

      A basic premise of GAAP accounting is the recognition of expenses at the
same time revenues are earned, the principle of matching. Therefore, to convert
underwriting results to a GAAP basis, acquisition expenses are deferred and
recognized together with the related revenues. Accordingly, the statutory
underwriting profit has been adjusted as a result of acquisition expenses being
deferred as required by GAAP. Thus, "adjusted underwriting profit" is a GAAP
measurement which can be viewed as gross margin or an intermediate subtotal in
calculating operating income and net income.

      A major part of the discipline of a successful general insurance company
is to produce an underwriting profit, exclusive of investment income. If
underwriting is not profitable, losses incurred are a major factor. The result
is that the premiums are inadequate to pay for losses and expenses and produce a
profit; therefore, investment income must be used to cover underwriting losses.
If assets and the income therefrom are insufficient to pay claims and expenses
over extended periods, an insurance company cannot survive. For these reasons,
AIG views and manages its underwriting operations separately from its investment
operations.

      The adjusted underwriting profits were $669 million in 1999, $531 million
in 1998 and $490 million in 1997. Domestic adjusted underwriting profit
increased primarily as a result of the disciplined underwriting of DBG. Foreign
underwriting profit declined primarily as a result of catastrophe losses from
European storms. The regulatory, product type and competitive environment as
well as the degree of litigation activity in any one country varies
significantly. These factors have a direct impact on pricing and consequently
profitability as reflected by adjusted underwriting profit and statutory general
insurance ratios. (See also Notes 4 and 18 of Notes to Financial Statements.)

      AIG's results reflect the net impact of incurred losses from catastrophes
approximating $156 million in 1999, $110 million in 1998 and $16 million in
1997. AIG's gross incurred losses from catastrophes approximated $472 million in
1999, $625 million in 1998 and $22 million in 1997. In 1999, the catastrophe
losses resulted primarily from European storms. The impact of losses caused by
catastrophes can fluctuate widely from year to year, making comparisons of
recurring type business more difficult. The pro forma table below excludes
catastrophe losses in order to present comparable results of AIG's recurring
core underwriting operations. The pro forma consolidated statutory general
insurance ratios would be as follows:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                      1999       1998       1997
================================================================================
<S>                                                  <C>        <C>        <C>  
Loss Ratio                                           74.51      74.81      75.20
Expense Ratio                                        20.84      20.77      20.87
--------------------------------------------------------------------------------
Combined Ratio                                       95.35      95.58      96.07
================================================================================
</TABLE>


      AIG's historic ability to maintain its combined ratio below 100 is
primarily attributable to the profitability of AIG's foreign general insurance
operations and AIG's emphasis on maintaining its disciplined underwriting,
especially in the domestic specialty markets. In 1999, the discipline in
domestic underwriting was critical in maintaining underwriting profit as the
foreign general combined ratio rose because of the impact of catastrophe losses.
In addition, AIG does not seek net premium growth where rates do not adequately
reflect its assessment of exposures.

      General insurance net investment income in 1999 increased 14.8 percent
when compared to 1998. In 1998, net investment income increased 18.3 percent
over 1997. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment and the consolidation of
Transatlantic and 21st Century for twelve months in 1999 compared to six months
in 1998. The new cash flow was generated from net general insurance operating
cash flow and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein and Note 8
of Notes to Financial Statements.)

      General insurance realized capital gains were $295 million in 1999, $205
million in 1998 and $128 million in 1997. These realized gains resulted from the
ongoing management of the general insurance investment portfolios within the
overall objectives of the general insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.

      General insurance operating income in 1999 increased 18.9 percent when
compared to 1998. The 1998 results reflect an increase of 18.4 percent from
1997. The contribution of general insurance operating income to income before
income taxes and minority interest was 46.3 percent in 1999 compared to 46.6
percent in 1998 and 1997.

      AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 70 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.

      AIG's general reinsurance assets amounted to $19.13 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 1999 with respect to reinsurance recoverable to the extent that any
reinsurer may not be able to reimburse AIG under the terms of these reinsurance
arrangements. AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound, and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods on an individual
reinsurer basis. At December 31, 1999, approximately 50 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recogni-


18

<PAGE>   20

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

tion, nearly all of these balances were collateralized. The remaining 50 percent
of the general reinsurance assets were from authorized reinsurers and over 95
percent of such balances are from reinsurers rated A-(excellent) or better, as
rated by A.M. Best. This rating is a measure of financial strength. The terms
authorized and unauthorized pertain to regulatory categories, not
creditworthiness.

      AIG maintains an allowance for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 1999,
AIG had allowances for unrecoverable reinsurance approximating $78 million. At
that date, and prior to this allowance, AIG had no significant reinsurance
recoverables from any individual reinsurer which is financially troubled (e.g.,
liquidated, insolvent, in receivership or otherwise subject to formal or
informal regulatory restriction).

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

      AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.

      At December 31, 1999, the consolidated general reinsurance assets of
$19.13 billion include reinsurance recoverables for paid losses and loss
expenses of $2.54 billion and $13.65 billion with respect to the ceded reserve
for losses and loss expenses, including ceded losses incurred but not reported
(IBNR) (ceded reserves). The ceded reserves represent the accumulation of
estimates of ultimate ceded losses including provisions for ceded IBNR and loss
expenses. The methods used to determine such estimates and to establish the
resulting ceded reserves are continually reviewed and updated. Any adjustments
therefrom are reflected in income currently. It is AIG's belief that the ceded
reserves at December 31, 1999 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, 1999, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $38.25 billion. These loss reserves
represent the accumulation of estimates of ultimate losses, including IBNR, and
loss expenses and amounts of discounting related to certain workers'
compensation claims. At December 31, 1999, general insurance net loss reserves
decreased $19 million from prior year end to $24.60 billion. The decrease was
primarily attributable to the change in the mix of business. That is, claims
with respect to personal lines increased relative to commercial lines. Thus, the
subsequent payment of these personal lines claims is significantly faster as
these claims are deemed short tail lines, as described below. The net loss
reserves represent loss reserves reduced by reinsurance recoverables, net of an
allowance for unrecoverable reinsurance. The methods used to determine such
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting therefrom are reflected in operating income
currently. It is management's belief that the general insurance net loss
reserves are adequate to cover all general insurance net losses and loss
expenses as at December 31, 1999. In the future, if the general insurance net
loss reserves develop deficiently, such deficiency would have an adverse impact
on such future results of operations.

      In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business. Such
lines include excess and umbrella liability, directors and officers' liability,
professional liability, medical malpractice, general liability, products'
liability, and related classes. These lines account for approximately one-half
of net losses and loss expenses. The other group is short tail lines of business
consisting principally of property lines, certain classes of casualty lines and
includes personal lines.

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

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


                                                                              19

<PAGE>   21

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

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

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

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

      Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends which
influence the development of asbestos and environmental claims are the
inconsistent court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current case law can be
characterized as still evolving and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves issues such as allocation
of responsibility among potentially responsible parties and the government's
refusal to release parties. The cleanup cost exposure may significantly change
if the Congressional reauthorization of Superfund dramatically changes, thereby
reducing or increasing litigation and cleanup costs. Additionally, proposed
legislation, if passed in current form, would be expected to reduce ultimate
asbestos exposure.

      In the interim, AIG and other industry members have and will continue to
litigate the broadening judicial interpretation of the policy coverage and the
liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims with the same degree of
reliability as is the case for other types of claims. Such development will be
affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
changes in Superfund and waste dump site coverage issues. Although the estimated
liabilities for these claims are subject to a significantly greater margin of
error than for other claims, the reserves carried for these claims at December
31, 1999 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, 1999, 1998 and 1997 follows. The 1999 and 1998 reserve activity
includes Transatlantic.


20

<PAGE>   22

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------------------------------------------
                                                                   1999                  1998                  1997
                                                             ----------------      ----------------      ----------------
                                                             Gross        Net      Gross        Net      Gross        Net
==========================================================================================================================
<S>                                                         <C>        <C>        <C>        <C>        <C>        <C>    
Asbestos:
Reserve for losses and loss expenses at beginning of year   $   964    $   259    $   842    $   195    $   876    $   172
Losses and loss expenses incurred                               404        101        375        111        238         69
Losses and loss expenses paid                                  (275)       (54)      (253)       (47)      (272)       (46)
--------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year         $ 1,093    $   306    $   964    $   259    $   842    $   195
==========================================================================================================================
Environmental:
Reserve for losses and loss expenses at beginning of year   $ 1,535    $   605    $ 1,467    $   592    $ 1,427    $   571
Losses and loss expenses incurred                               127         47        284        107        223         84
Losses and loss expenses paid                                  (143)       (67)      (216)       (94)      (183)       (63)
--------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year         $ 1,519    $   585    $ 1,535    $   605    $ 1,467    $   592
==========================================================================================================================
Combined:
Reserve for losses and loss expenses at beginning of year   $ 2,499    $   864    $ 2,309    $   787    $ 2,303    $   743
Losses and loss expenses incurred                               531        148        659        218        461        153
Losses and loss expenses paid                                  (418)      (121)      (469)      (141)      (455)      (109)
--------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year         $ 2,612    $   891    $ 2,499    $   864    $ 2,309    $   787
==========================================================================================================================
</TABLE>


      The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at December 31, 1999, 1998 and 1997 were estimated as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------------------------------------------
                                                                   1999                  1998                  1997
                                                             ----------------      ----------------      ----------------
                                                             Gross        Net      Gross        Net      Gross        Net
==========================================================================================================================
<S>                                                         <C>        <C>        <C>        <C>        <C>        <C>    
Combined                                                    $   930    $   352    $   979    $   359    $ 1,004    $   394
==========================================================================================================================
</TABLE>


      A summary of asbestos and environmental claims count activity for the
years ended December 31, 1999, 1998 and 1997 was as follows:


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                1999                                     1998              
                                -----------------------------------      ----------------------------------
                                Asbestos  Environmental    Combined      Asbestos  Environmental   Combined
===========================================================================================================
<S>                                <C>           <C>         <C>           <C>            <C>        <C>   
Claims at beginning of year        6,388         16,560      22,948        6,150          17,422     23,572
Claims during year:   
  Opened                             946          2,040       2,986          887           3,502      4,389 
  Settled                           (225)          (876)     (1,101)         (81)           (677)      (758)
  Dismissed or
    otherwise resolved              (363)        (4,292)     (4,655)        (568)         (3,687)    (4,255)
-----------------------------------------------------------------------------------------------------------
Claims at end of year              6,746         13,432      20,178        6,388          16,560     22,948 
===========================================================================================================

<CAPTION>
--------------------------------------------------------------------
                                                  1997
                                ------------------------------------
                                Asbestos    Environmental   Combined
====================================================================
<S>                                <C>             <C>        <C>   
Claims at beginning of year        5,668           17,395     23,063
Claims during year:   
  Opened                           1,073            3,624      4,697
  Settled                           (169)            (644)      (813)
  Dismissed or
    otherwise resolved              (422)          (2,953)    (3,375)
--------------------------------------------------------------------
Claims at end of year              6,150           17,422     23,572
====================================================================
</TABLE>



                                                                              21

<PAGE>   23

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

      The average cost per claim settled, dismissed or otherwise resolved for
the years ended December 31, 1999, 1998 and 1997 was as follows:


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                                          Gross           Net
=============================================================================
<S>                                                    <C>           <C>     
1999
Asbestos                                               $467,700      $ 91,800
Environmental                                            27,700        13,000
Combined                                                 72,600        21,000
=============================================================================
1998
Asbestos                                               $389,800      $ 72,400
Environmental                                            49,500        21,500
Combined                                                 93,600        28,100
=============================================================================
1997
Asbestos                                               $460,200      $ 77,800
Environmental                                            50,900        17,500
Combined                                                108,600        26,000
=============================================================================
</TABLE>


      A.M. Best, an insurance rating agency, has developed a survival ratio to
measure the number of years it would take a company to exhaust both its asbestos
and environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. This is a ratio
derived by taking the current ending losses and loss expense reserves and
dividing by the average annual payments for the prior three years. Therefore,
the ratio derived is a simplistic measure of an estimate of the number of years
it would be before the current ending losses and loss expense reserves would be
paid off using recent average payments. The higher the ratio, the more years the
reserves for losses and loss expenses cover these claims payments. These ratios
are computed based on the ending reserves for losses and loss expenses over the
respective claims settlements during the fiscal year. Such payments include
indemnity payments and legal and loss adjustment payments. It should be noted,
however, that this is an extremely simplistic approach to measuring asbestos and
environmental reserve levels. Many factors, such as aggressive settlement
procedures, mix of business and level of coverage provided, have significant
impact on the amount of asbestos and environmental losses and loss expense
reserves, ultimate payments thereof and the resultant ratio.

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

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

      AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios for the years ended December 31, 1999, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------
                                                       Gross           Net
==========================================================================
<S>                                                    <C>           <C>     
1999
Involuntary survival ratios:
  Asbestos                                               4.1           6.3
  Environmental                                         17.3          17.5
  Combined                                               8.2          11.7
==========================================================================
1998
Involuntary survival ratios:
  Asbestos                                               3.7           5.2
  Environmental                                         17.0          17.2
  Combined                                               7.8          10.8
==========================================================================
1997
Involuntary survival ratios:
  Asbestos                                               3.8           4.6
  Environmental                                         14.6          18.0
  Combined                                               7.7          11.2
==========================================================================
</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 1999, 1998 and 1997
were $15 million, $16 million and $15 million, respectively.

      AIG is also required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated.

Life Insurance Operations

AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. Traditional products consist of
individual and group life, annuity, endowment and accident and health policies.
Financial and investment products consist of single premium annuity, variable
annuities, guaranteed investment contracts, universal life and pensions.

      AIG's three principal overseas life operations are American Life Insurance
Company (ALICO), American International Assurance Company, Limited together with
American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan
Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and
all of its business is written outside of the United States. ALICO has
operations either directly or through subsidiaries in approximately 50


22

<PAGE>   24

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

countries located in Europe, Africa, Latin America, the Caribbean, the Middle
East, and the Far East, with Japan being the largest territory. AIA operates
primarily in Hong Kong, Singapore, Malaysia and Thailand. Nan Shan operates in
Taiwan. AIG's domestic life operations are comprised of two separate operations,
AIG's domestic life companies and the life insurance subsidiaries of SunAmerica
Inc. (SunAmerica), a Delaware corporation which owns substantially all of the
subsidiaries which were owned by SunAmerica Inc., the Maryland corporation which
was merged into AIG in January 1999. Both of these operations sell primarily
financial and investment type products. (See also Note 18 of Notes to Financial
Statements.)

      Life insurance operations for the twelve month periods ending December 31,
1999, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                      1999       1998       1997
================================================================================
<S>                                               <C>        <C>        <C>     
Premium income:
   Domestic                                       $    947   $    784   $    583
   Foreign                                          10,995      9,509      9,373
--------------------------------------------------------------------------------
Total                                             $ 11,942   $ 10,293   $  9,956
================================================================================
Net investment income:
   Domestic                                       $  3,497   $  2,889   $  2,464
   Foreign                                           2,709      2,312      2,057
--------------------------------------------------------------------------------
Total                                             $  6,206   $  5,201   $  4,521
================================================================================
Operating income before realized capital losses:
   Domestic                                       $  1,062   $    782   $    632
   Foreign                                           1,944      1,665      1,425
--------------------------------------------------------------------------------
Total                                                3,006      2,447      2,057
Realized capital losses                               (148)       (74)        (9)
--------------------------------------------------------------------------------
Operating income                                  $  2,858   $  2,373   $  2,048
================================================================================
Life insurance in-force:
   Domestic                                       $103,049   $ 65,705   $ 66,267
   Foreign                                         481,910    437,944    377,056
--------------------------------------------------------------------------------
Total                                             $584,959   $503,649   $443,323
================================================================================
</TABLE>


      AIG's life premium income in 1999 represented a 16.0 percent increase from
the prior year. This compares with an increase of 3.4 percent in 1998 over 1997.
Foreign life operations produced 92.1 percent, 92.4 percent and 94.1 percent of
the life premium income in 1999, 1998 and 1997, respectively. (See also Notes 1,
4 and 6 of Notes to Financial Statements.)

      The traditional life products, particularly individual life products, were
major contributors to the growth in foreign premium income and resulting
investment income, particularly in those countries in which AIA and Nan Shan
operate. A mixture of traditional, accident and health and financial products
are being sold in Japan through ALICO.

      Differences in foreign exchange rates during 1999 relative to 1998 had a
negligible effect on foreign life premium income when translated from original
currencies into U.S. dollars.

      Life insurance net investment income increased 19.3 percent in 1999
compared to an increase of 15.0 percent in 1998. The growth in net investment
income in 1999 and 1998 was attributable to both foreign and domestic new cash
flow for investment. The new cash flow was generated from life insurance
operations and included the compounding of previously earned and reinvested net
investment income. (See also the discussion under "Liquidity" herein.)

      Life insurance realized capital losses were $148 million in 1999, $74
million in 1998 and $9 million in 1997. These realized capital losses resulted
from the ongoing management of the life insurance investment portfolios within
the overall objectives of the life insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.

      Life insurance operating income in 1999 increased 20.5 percent to $2.86
billion compared to an increase of 15.9 percent in 1998. Excluding realized
capital gains and losses from life insurance operating income, the percent
increases would be 22.8 percent and 19.0 percent in 1999 and 1998, respectively.
The contribution of life insurance operating income to income before income
taxes and minority interest amounted to 38.0 percent in 1999 compared to 37.8
percent in 1998 and 38.6 percent in 1997.

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

      Underwriting risk represents the exposure to loss resulting from the
actual policy experience adversely emerging in comparison to the assumptions
made in the product pricing associated with mortality, morbidity, termination
and expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately one million dollars
of coverage by using yearly renewable term reinsurance. (See also Note 5 of
Notes to Financial Statements.)

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

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

      The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term 


                                                                              23

<PAGE>   25

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

investments or there are investment restrictions imposed by the local regulatory
authorities. For example, in Japan and several Southeast Asia territories, the
duration of the investments is often for a shorter period than the effective
maturity of the related policy liabilities. Therefore, there is a risk that the
reinvestment of the proceeds at the maturity of the initial investments may be
at a yield below that of the interest required for the accretion of the policy
liabilities. At December 31, 1999, the average duration of the investment
portfolio in Japan was 5.6 years.

      Additionally, there exists a future investment risk associated with
certain policies currently in force which will have premium receipts in the
future. That is, the investment of these future premium receipts may be at a
yield below that required to meet future policy liabilities. With respect to the
investment of these future premium receipts, the average maturity is estimated
to be 6.0 years. These durations compare with an estimated average duration of
9.4 years for the corresponding policy liabilities. To maintain an adequate
yield to match the interest necessary to support future policy liabilities,
constant management focus is required to reinvest the proceeds of the maturing
securities and to invest the future premium receipts without sacrificing
investment quality. To the extent permitted under local regulation, AIG may
invest in qualified longer-term securities outside Japan to achieve a closer
matching in both duration and the required yield. AIG is able to manage any
asset-liability duration difference through maintenance of sufficient global
liquidity and to support any operational shortfall through its international
financial network. Domestically, active monitoring assures appropriate
asset-liability matching as there are investments available to match the
duration and the required yield. (See also the discussion under "Liquidity"
herein.)

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

Financial Services Operations

AIG's financial services subsidiaries engage in diversified financial products
and services including premium financing, banking services and consumer finance
services.

      International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. (See also Note 18 of
Notes to Financial Statements.)

      AIG Financial Products Corp. and its subsidiaries (AIGFP) structure
financial transactions, including long-dated interest rate and currency swaps
and structured borrowings through notes, bonds and guaranteed investment
agreements. (See also Note 18 of Notes to Financial Statements.)

      AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various
commodities trading, foreign exchange trading, interest rate swaps and market
making activities. (See also Note 18 of Notes to Financial Statements.)

      Financial services operations for the twelve month periods ending December
31, 1999, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                      1999       1998       1997
================================================================================
<S>                                               <C>        <C>        <C>     
Revenues:
International Lease Finance
   Corporation                                    $  2,194   $  2,002   $  1,857
AIG Financial Products Corp.*                          737        550        452
AIG Trading Group Inc.*                                227        374        562
Other                                                  182        118        171
--------------------------------------------------------------------------------
Total                                             $  3,340   $  3,044   $  3,042
================================================================================
Operating income:
International Lease Finance
   Corporation                                    $    590   $    496   $    382
AIG Financial Products Corp.                           482        323        241
AIG Trading Group Inc.                                 109        123        127
Other, including intercompany
   adjustments                                        (100)       (73)       (79)
--------------------------------------------------------------------------------
Total                                             $  1,081   $    869   $    671
================================================================================
</TABLE>

* Represents commissions, transaction and other fees.

      Financial services operating income increased 24.4 percent in 1999 over
1998. This compares with an increase of 29.5 percent in 1998 over 1997.

      Financial services operating income represented 14.4 percent of AIG's
income before income taxes and minority interest in 1999. This compares to 13.8
percent and 12.6 percent in 1998 and 1997, respectively.

      ILFC generates its revenues primarily from leasing new and used commercial
jet aircraft to domestic and foreign airlines. Revenues also result from the
remarketing of commercial jets for its own account, for airlines and for
financial institutions. Revenues in 1999 increased 9.6 percent from 1998
compared to a 7.8 percent increase during 1998 from 1997. The revenue growth in
each year resulted primarily from the increase in flight equipment available for
operating lease, the increase in the relative cost of the leased fleet and the
increase in the relative composition of the fleet with wide bodies which
typically receive higher lease payments. Approximately 20 percent of ILFC's
operating lease revenues are derived from U.S. and Canadian airlines. During
1999, operating income increased 19.0 percent from 1998 and 29.6 percent during
1998 from 1997. ILFC finances its purchases of aircraft primarily through the
issuance of a variety of debt instruments. The composite borrowing rates at
December 31, 1999, 1998 and 1997 were 6.14 percent, 6.03 percent and 6.44
percent, respectively. (See also the discussions under "Capital Resources" and
"Liquidity" herein and Note 18 of Notes to Financial Statements.)


24

<PAGE>   26

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

      ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to sell or re-lease at
acceptable rates at lease expiration and through committing to purchase aircraft
which it would be unable to lease. ILFC manages its lessee non-performance
exposure through credit reviews and security deposit requirements. At December
31, 1999, there were 336 aircraft subject to operating leases and there were two
aircraft off lease. Both aircraft were re-leased in early 2000. (See also the
discussions under "Capital Resources" and "Liquidity" herein.)

      AIGFP participates in the derivatives dealer market conducting, primarily
as principal, an interest rate, currency, equity and credit derivative products
business. AIGFP also enters into structured transactions including long-dated
forward foreign exchange contracts, option transactions, liquidity facilities
and investment agreements and invests in a diversified portfolio of securities.
AIGFP derives substantially all its revenues from proprietary positions entered
in connection with counterparty transactions rather than from speculative
transactions. Revenues in 1999 increased 33.9 percent from 1998 compared to a
21.7 percent increase during 1998 from 1997. During 1999, operating income
increased 49.4 percent from 1998 and increased 34.0 percent during 1998 from
1997. As AIGFP is a transaction-oriented operation, current and past revenues
and operating results may not provide a basis for predicting future performance.
(See also the discussions under "Capital Resources," "Liquidity" and
"Derivatives" herein and Note 18 of Notes to Financial Statements.)

      AIGTG derives a substantial portion of their revenues from market making
and trading activities, as principals, in foreign exchange, interest rates and
precious and base metals. Revenues in 1999 decreased 39.2 percent from 1998
compared to a 33.5 percent decrease during 1998 from 1997. During 1999,
operating income decreased 11.4 percent from 1998 compared to a 2.4 percent
decrease during 1998 from 1997. The declines in 1999 and 1998 relative to 1997
resulted primarily from the decline in trading volume during those years,
particularly as a result of less volatile foreign exchange markets. As AIGTG is
a transaction-oriented operation, current and past revenues and operating
results may not provide a basis for predicting future performance or for
comparing revenues to operating income. (See also the discussions under "Capital
Resources," "Liquidity" and "Derivatives" herein and Note 18 of Notes to
Financial Statements.)

      In December 1997, AIGTG sold its energy operations. The sale of these
operations did not have a significant impact on AIG's results of operations.

      AIG Consumer Finance Group, Inc., through its subsidiaries, is engaged in
developing a multi-product consumer finance business with an emphasis on
emerging markets.

Asset Management Operations

AIG's asset management operations offer a wide variety of investment vehicles
and services, including variable annuities, mutual funds, and investment asset
management. Such products and services are offered to individuals and
institutions both domestically and internationally.

      AIG's three principal asset management operations are SunAmerica's asset
management operations (SAAMCo), AIG Global Investment Group, Inc. and its
subsidiaries (Global Investment) and AIG Capital Partners, Inc. (Cap Partners).
SAAMCo develops and sells variable annuities and other investment products,
sells and manages mutual funds and provides financial services. Global
Investment manages invested assets of institutions, including insurance
companies and pension funds, and provides custodial services. Cap Partners
organizes, and manages the invested assets of institutional investment funds and
may also invest in such funds. Each of these subsidiary operations receives fees
for investment products and services provided.

      Asset management operations for the twelve month periods ending December
31, 1999, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                      1999       1998       1997
================================================================================
<S>                                               <C>        <C>        <C>     
Revenues                                          $    985   $    707   $    555
Operating income                                       314        191        127
================================================================================
</TABLE>


      These increases were primarily attributable to increased fees from the
management of the variable annuity business and mutual fund assets by SAAMCo.

      Asset management operating income increased 64.3 percent in 1999 over
1998. This compares with an increase of 50.4 percent in 1998 over 1997.

      Asset management operating income represented 4.2 percent of AIG's income
before income taxes and minority interest in 1999. This compares to 3.0 percent
and 2.4 percent in 1998 and 1997, respectively.

Other Operations

In 1998, AIG's equity in income of minority-owned insurance operations was $57
million compared to $114 million in 1997. In 1998, the equity interest in
insurance companies represented 0.9 percent of income before income taxes and
minority interest compared to 2.1 percent in 1997. In 1999, AIG did not report
equity in income of minority-owned insurance operations as a result of the
consolidation of Transatlantic's and SELIC Holdings, Ltd. operations into
general insurance operating results. IPC Holdings, Ltd., the remaining operation
included in equity in income of minority-owned insurance operations in previous
periods is now reported as a component of other income (deductions)--net.

      Other realized capital losses amounted to $25 million, $7 million and $29
million in 1999, 1998 and 1997, respectively.


                                                                              25

<PAGE>   27

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

      Other income (deductions)--net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, realized
foreign exchange transaction gains and losses in substantially all currencies
and unrealized gains and losses in hyperinflationary currencies, costs
associated with the Year 2000 computer issues, as well as the income and
expenses of the parent holding company and other miscellaneous income and
expenses. In 1999, net deductions amounted to $197 million. In 1998 and 1997,
net deductions amounted to $134 million and $93 million, respectively. (See also
the discussion under "Recent Developments" herein.)

      Income before income taxes and minority interest amounted to $7.51 billion
in 1999, $6.28 billion in 1998 and $5.31 billion in 1997.

      In 1999, AIG recorded a provision for income taxes of $2.22 billion
compared to the provisions of $1.79 billion and $1.53 billion in 1998 and 1997,
respectively. These provisions represent effective tax rates of 29.5 percent in
1999, 28.4 percent in 1998 and 28.7 percent in 1997. (See Note 3 of Notes to
Financial Statements.)

      Minority interest represents minority shareholders' equity in income of
certain majority-owned consolidated subsidiaries. Minority interest amounted to
$238 million, $210 million and $74 million in 1999, 1998 and 1997, respectively.
The increase in 1998 from 1997 was primarily related to the minority
shareholders' equity resulting when Transatlantic and 21st Century were
consolidated during 1998.

      Net income amounted to $5.06 billion in 1999, $4.28 billion in 1998 and
$3.71 billion in 1997. The increases in net income over the three year period
resulted from those factors described above.

Capital Resources

At December 31, 1999, AIG had total capital funds of $33.31 billion and total
borrowings of $32.98 billion. At that date, $29.65 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.

      Total borrowings and borrowings not guaranteed or matched at December 31,
1999 and 1998 were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
December 31,                                                  1999          1998
================================================================================
<S>                                                        <C>           <C>    
GIAs -- AIGFP                                              $ 9,430       $ 9,188
--------------------------------------------------------------------------------
Commercial Paper:
   AIG Funding                                                 888           637
   ILFC (a)                                                  2,958         3,204
   A.I. Credit Corp.                                           475           727
   AIG Finance (Taiwan) Limited (a)                             83            68
--------------------------------------------------------------------------------
   Total                                                     4,404         4,636
--------------------------------------------------------------------------------
Medium Term Notes:
   ILFC (a)                                                  3,226         3,348
   AIG (b)                                                     481           467
--------------------------------------------------------------------------------
   Total                                                     3,707         3,815
--------------------------------------------------------------------------------
Notes and Bonds Payable:
   ILFC (a) (e)                                            $ 5,016       $ 3,825
   AIGFP                                                     7,895         7,265
   AIG (d)                                                     705         1,250
--------------------------------------------------------------------------------
   Total                                                    13,616        12,340
--------------------------------------------------------------------------------
Loans and Mortgages Payable:
   ILFC (a) (c)                                                670           811
   AIG Finance (Hong Kong) Limited (a)                         566           532
   AIG Consumer Finance Group, Inc. (a)                        334           254
   AIG                                                         257           334
--------------------------------------------------------------------------------
   Total                                                     1,827         1,931
--------------------------------------------------------------------------------
Total Borrowings                                            32,984        31,910
--------------------------------------------------------------------------------
Borrowings not guaranteed by AIG                            12,853        12,042
Matched GIA borrowings                                       9,430         9,188
Matched notes and
   bonds payable -- AIGFP                                    7,370         6,565
--------------------------------------------------------------------------------
                                                            29,653        27,795
--------------------------------------------------------------------------------
Remaining borrowings of AIG                                $ 3,331       $ 4,115
================================================================================
</TABLE>

(a)   AIG does not guarantee or support these borrowings.
(b)   Includes $198 million and $228 million issued by SunAmerica Inc. and
      assumed by AIG as a result of the merger at December 31, 1999 and 1998,
      respectively.
(c)   Capital lease obligations.
(d)   Includes $432 million and $989 million issued by SunAmerica Inc. and
      assumed by AIG as a result of the merger at December 31, 1999 and 1998,
      respectively.
(e)   Includes borrowings under Export Credit Facility of $1.30 billion.

See also Note 9 of Notes to Financial Statements.

      During 1999, AIGFP increased the aggregate principal amount outstanding of
its notes and bonds payable to $7.90 billion. AIGFP uses the proceeds from the
issuance of notes and bonds and GIA borrowings to invest in a diversified
portfolio of securities and derivative transactions. The funds may also be
temporarily invested in securities purchased under agreements to resell. (See
also the discussions under "Operational Review", "Liquidity" and "Derivatives"
herein and Notes 1, 8, 9, 12 and 18 of Notes to Financial Statements.)

      AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its non-insurance
subsidiaries. Funding intends to continue to meet AIG's funding requirements
through the issuance of commercial paper guaranteed by AIG. This issuance of
Funding's commercial paper is subject to the approval of AIG's Board of
Directors. ILFC, A.I. Credit Corp. 


26

<PAGE>   28

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

(AICCO) and AIG Finance (Taiwan) Limited (AIGF - Taiwan), a consumer finance
subsidiary, issue commercial paper for the funding of their own operations. AIG
does not guarantee AICCO's, ILFC's or AIGF - Taiwan's commercial paper. However,
AIG has entered into an agreement in support of AICCO's commercial paper. From
time to time, AIGFP may issue commercial paper, which AIG guarantees, to fund
its operations. At December 31, 1999, AIGFP had no commercial paper outstanding.
(See also the discussion under "Derivatives" herein and Note 9 of Notes to
Financial Statements.)

      AIG and Funding have entered into two syndicated revolving credit
facilities (the Facilities) aggregating $1 billion. The Facilities consist of a
$500 million 364 day revolving credit facility and a $500 million five year
revolving credit facility. The Facilities can be used for general corporate
purposes and also provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under
either of the Facilities, nor were any borrowings outstanding as of December 31,
1999.

      During 1999, AIG issued $152 million principal amount of Medium Term Notes
and $108 million of previously issued notes matured.

      At December 31, 1999, AIG had $356 million in aggregate principal amount
of debt securities registered for issuance from time to time. An additional $658
million principal amount of debt securities was registered as of March 3, 2000.

      At December 31, 1999, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $8.24 billion, a net increase
of $1.07 billion, and recorded a net decline in its capital lease obligations of
$141 million and a net decrease in its commercial paper of $246 million. At
December 31, 1999, ILFC had $1.68 billion in aggregate principal amount of debt
securities registered for issuance from time to time. In addition, ILFC
established a Euro Medium Term Note Program for $2.0 billion, under which $771
million in notes were sold through December 31, 1999.

      ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for
approximately 75 aircraft to be delivered from 1999 through 2001. ILFC has the
right, but is not required, to use the facility to fund 85 percent of each
aircraft's purchase price. This facility is guaranteed by various European
Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90
percent on the first 75 aircraft depending on the delivery date of the aircraft.
Through March 8, 2000, ILFC borrowed $1.50 billion under this facility.
Borrowings with respect to this facility are included in Notes and Bonds Payable
in the accompanying table of borrowings.

      The proceeds of ILFC's debt financing are primarily used to purchase
flight equipment, including progress payments during the construction phase. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. (See also the discussions
under "Operational Review" and "Liquidity" herein.)

      AIG's capital funds increased $3.18 billion during 1999. Unrealized
appreciation of investments, net of taxes decreased $1.65 billion. During 1999,
the cumulative translation adjustment loss, net of taxes, increased $447
million. The change from year to year with respect to the unrealized
appreciation of investments, net of taxes was primarily impacted by the rise in
domestic interest rates. The cumulative translation adjustment loss, net of
taxes was primarily impacted by the general strength in the U.S. dollar relative
to certain currencies in Southeast Asia and South America. (See also the
discussion under "Operational Review" and "Liquidity" herein.) Retained earnings
increased $3.93 billion, resulting from net income less dividends.

      During 1999 and prior to the five for four split in the form of a 25
percent common stock dividend, AIG repurchased in the open market 931,000 shares
of its common stock. Subsequent to the common stock dividend, AIG repurchased
11,633,200 shares of its common stock. AIG intends to continue to buy its common
shares in the open market for general corporate purposes, including to satisfy
its obligations under various employee benefit plans.

      Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At December 31, 1999, there
were no significant statutory or regulatory issues which would impair AIG's
financial condition, results of operations or liquidity. To AIG's knowledge, no
AIG company is on any regulatory or similar "watch list". (See also the
discussion under "Liquidity" herein and Note 11 of Notes to Financial
Statements.)

      The National Association of Insurance Commissioners (NAIC) has developed
Risk-Based Capital (RBC) requirements. RBC relates an individual insurance
company's statutory surplus to the risk inherent in its overall operations. At
December 31, 1999, the adjusted capital of each of AIG's domestic general
companies and of each of AIG's domestic life companies exceeded each of their
RBC standards by considerable margins.

       A substantial portion of AIG's general insurance business and a majority
of its life insurance business are conducted in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.


                                                                              27

<PAGE>   29

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

Liquidity

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

      At December 31, 1999, AIG's consolidated invested assets included $7.14
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in 1999 amounted to $10.32 billion.

      Sources of funds considered in meeting the objectives of AIG's financial
services operations include guaranteed investment agreements, issuance of long
and short-term debt, maturities and sales of securities available for sale,
securities sold under repurchase agreements, trading liabilities, securities and
spot commodities sold but not yet purchased, issuance of equity, and cash
provided from such operations. AIG's strong capital position is integral to
managing this liquidity, as it enables AIG to raise funds in diverse markets
worldwide. (See also the discussions under "Capital Resources" herein.)

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

      The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated approximately $18 billion in
pre-tax cash flow during 1999. Cash flow includes periodic premium collections,
including policyholders' contract deposits, paid loss recoveries less
reinsurance premiums, losses, benefits, acquisition and operating expenses.
Generally, there is a time lag from when premiums are collected and, when as a
result of the occurrence of events specified in the policy, the losses and
benefits are paid. AIG's insurance investment operations generated approximately
$8.6 billion in investment income cash flow during 1999. Investment income cash
flow is primarily derived from interest and dividends received and includes
realized capital gains net of realized capital losses.

      In addition to the combined insurance pre-tax operating cash flow, AIG's
insurance operations held $6.69 billion in cash and short-term investments at
December 31, 1999. The aforementioned operating cash flow and the cash and
short-term balances held provided AIG's insurance operations with a significant
amount of liquidity.

      This liquidity is available, among other things, to purchase high quality
and diversified fixed income securities and to a lesser extent equity securities
and to provide mortgage loans on real estate, policy loans and collateral loans.
This cash flow coupled with proceeds of approximately $40 billion from the
maturities, sales and redemptions of fixed income securities and from the sale
of equity securities was used to purchase approximately $54 billion of fixed
income securities and equity securities during 1999.

      The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued of $2.05 billion and $1.87
billion and real estate of $1.62 billion and $1.61 billion, at December 31, 1999
and 1998, respectively:


<TABLE>
<CAPTION>
(dollars in millions)
------------------------------------------------------------------------------
                                                    Invested           Percent
                                                      Assets          of Total
==============================================================================
<S>                                                <C>                    <C>  
1999
General insurance                                  $  39,135              20.6%
Life insurance                                        87,355              46.1
Financial services and asset management               62,548              33.0
Other                                                    651               0.3
------------------------------------------------------------------------------
Total                                              $ 189,689             100.0%
==============================================================================
1998
General insurance                                  $  38,883              22.7%
Life insurance                                        75,078              43.8
Financial services and asset management               56,619              33.1
Other                                                    714               0.4
------------------------------------------------------------------------------
Total                                              $ 171,294             100.0%
==============================================================================
</TABLE>



28

<PAGE>   30

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

Insurance Invested Assets

The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at December 31, 1999 and 1998:


<TABLE>
<CAPTION>
(dollars in millions)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Percent Distribution
                                                                    General       Life              Percent    --------------------
December 31, 1999                                                 Insurance  Insurance     Total   of Total    Domestic     Foreign
===================================================================================================================================
<S>                                                               <C>        <C>        <C>           <C>          <C>         <C>  
Fixed maturities:
  Available for sale, at market value (a)                         $ 16,903   $ 61,022   $ 77,925       61.6%       53.5%       46.5%
  Held to maturity, at amortized cost                               12,078         --     12,078        9.5       100.0          --
Equity securities, at market value (b)                               4,000      2,503      6,503        5.1        50.2        49.8
Mortgage loans on real estate, policy and collateral loans              70     10,420     10,490        8.3        57.0        43.0
Short-term investments, including time deposits, and cash              977      5,710      6,687        5.3        45.1        54.9
Real estate                                                            381      1,141      1,522        1.2        18.5        81.5
Investment income due and accrued                                      576      1,421      1,997        1.6        48.0        52.0
Other invested assets                                                4,150      5,138      9,288        7.4        85.1        14.9
-----------------------------------------------------------------------------------------------------------------------------------
Total                                                             $ 39,135   $ 87,355   $126,490      100.0%       59.5%       40.5%
===================================================================================================================================
</TABLE>

(a)   Includes $1.04 billion of bonds trading securities, at market value.
(b)   Includes $697 million of non-redeemable preferred stocks, at market value.


<TABLE>
<CAPTION>
(dollars in millions)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Percent Distribution
                                                                    General       Life              Percent    --------------------
December 31, 1998                                                 Insurance  Insurance     Total   of Total    Domestic     Foreign
===================================================================================================================================
<S>                                                               <C>        <C>        <C>           <C>          <C>         <C>  
Fixed maturities:
  Available for sale, at market value (a)                         $ 15,939   $ 51,237   $ 67,176       59.0%       56.4%       43.6%
  Held to maturity, at amortized cost                               12,658         --     12,658       11.1       100.0          --
Equity securities, at market value (b)                               3,923      2,092      6,015        5.3        54.1        45.9
Mortgage loans on real estate, policy and collateral loans              70      9,894      9,964        8.7        55.5        44.5
Short-term investments, including time deposits, and cash              873      5,835      6,708        5.9        42.6        57.4
Real estate                                                            393      1,124      1,517        1.3        18.2        81.8
Investment income due and accrued                                      568      1,197      1,765        1.5        51.2        48.8
Other invested assets                                                4,459      3,699      8,158        7.2        85.9        14.1
-----------------------------------------------------------------------------------------------------------------------------------
Total                                                             $ 38,883   $ 75,078   $113,961      100.0%       61.7%       38.3%
===================================================================================================================================
</TABLE>

(a)   Includes $1.01 billion of bonds trading securities, at market value.
(b)   Includes $593 million of non-redeemable preferred stocks, at market value.

      Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.

      With respect to fixed maturities, AIG's general strategy is to invest in
high quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)

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

      The fixed maturities held to maturity portfolio is exposed to adverse
interest rate fluctuations. However, AIG has the ability and intent to hold such
securities to maturity.

      Therefore, there would be no detrimental impact to AIG's results of
operations or financial condition as a result of such fluctuations.

      At December 31, 1999, approximately 59.8 percent of the fixed maturities
investments were domestic securities. Approximately 36 percent of such domestic
securities were rated AAA. Approximately 12 percent were below investment grade
or not rated.

      A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations. AIG
annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At December 31, 1999, approximately 15
percent of the foreign fixed income investments were either rated AAA or, on the
basis of AIG's internal analysis, were equivalent from a credit standpoint to
securities so rated. Approximately 13 percent were below investment grade or not
rated at that date. A large portion of these fixed maturity securities are
sovereign fixed maturity securities supporting the policy liabilities in the
country of issuance.


                                                                              29

<PAGE>   31

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

      At December 31, 1999, approximately 17 percent of the fixed maturities
portfolio was collateralized mortgage obligations (CMOs), including minor
amounts with respect to commercial mortgage backed securities. Substantially all
of the CMOs were investment grade and approximately 18 percent of the CMOs were
backed by various U.S. government agencies. CMOs are exposed to interest rate
risk as the duration and ultimate realized yield would be affected by the
accelerated prepayments of the underlying mortgages.

      Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date.

      AIG invests in equities for reasons including diversifying its overall
exposure to interest rate risk. Equity securities are subject to declines in
fair value. Such declines in fair value are presented in unrealized appreciation
of investments, net of taxes as components of comprehensive income.

      Mortgage loans on real estate, policy and collateral loans comprised 8.3
percent of AIG's insurance invested assets at December 31, 1999. AIG's insurance
operations' holdings of real estate mortgages amounted to $6.64 billion of which
74.6 percent was domestic. At December 31, 1999, only a nominal amount were in
default. It is AIG's practice to maintain a maximum loan to value ratio of 75
percent at loan origination. At December 31, 1999, AIG's insurance holdings of
collateral loans amounted to $1.03 billion, all of which were foreign. It is
AIG's strategy to enter into mortgage and collateral loans as an adjunct
primarily to life insurance fixed maturity investments. AIG's policy loans
increased from $2.63 billion at December 31, 1998 to $2.82 billion at December
31, 1999.

      Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash held.

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

      Other invested assets were primarily comprised of both foreign and
domestic private placements, limited partnerships and outside managed funds.

      When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as end users. To
date, such activities have not been significant. (See also the discussion under
"Derivatives" herein.)

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

      AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.

      Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.

      AIG believes that statistical models alone do not provide a reliable
method of monitoring and controlling market risk. While VaR models are
relatively sophisticated, the quantitative market risk information generated is
limited by the assumptions and parameters established in creating the related
models. Therefore, such models are tools and do not substitute for the
experience or judgment of senior management.

      AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.

      Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.

      AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of December 31, 1999 and December 31, 1998. These
calculations used the variance-covariance (delta-normal) methodology. These
calculations also used daily historical interest and foreign currency exchange
rates and equity prices in the two years ending December 31, 1999 and 1998, as
applicable. The VaR model estimated the volatility of each of these rates,
equity prices and the correlations among them. For interest rates, each
country's yield curve was constructed using eleven separate points on this curve
to model possible curve movements. Inter-country correlations were also used.
The redemption experience of municipal and corporate fixed maturities and
mortgage securities was taken into account as well as the use of financial
modeling. Thus, the 


30

<PAGE>   32

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

VaR measured the sensitivity of the asset and the liability portfolios of each
of the aforementioned market exposures. Each sensitivity was estimated
separately to capture the market exposures within each insurance segment. These
sensitivities were then applied to a database, which contained both historical
ranges of movements in all market factors and the correlations among them. The
results were aggregated to provide a single amount that depicts the maximum
potential loss in fair value at a confidence level of 95 percent for a time
period of one month. At December 31, 1999 and December 31, 1998 the VaR of AIG's
insurance segments was approximately $863 million and $760 million for general
insurance, respectively and $1.19 billion and $981 million for life insurance,
respectively. The average VaR for 1999 for each of AIG's insurance segments was
approximately $831 million for general insurance and $1.10 billion for life
insurance. The high and low VaRs for general insurance during 1999 were
approximately $891 million and $776 million, respectively. The high and low VaRs
for life insurance during 1999 were approximately $1.19 billion and $1.05
billion, respectively.

      The following table presents the VaR of each component of market risk for
each of AIG's insurance segments as of December 31, 1999 and December 31, 1998.
VaR with respect to combined operations cannot be derived by aggregating the
individual risk or segment amounts presented herein.

(in millions)
--------------------------------------------------------------------------------
                                            General                   Life
                                           Insurance               Insurance
                                        ----------------        ----------------
Market Risk                             1999        1998        1999        1998
================================================================================
Interest rate                           $338        $232        $950        $809
Currency                                  29          26         566         457
Equity                                   798         716         396         254
================================================================================

Financial Services and Asset Management Invested Assets

The following table is a summary of the composition of AIG's financial services
and asset management invested assets at December 31, 1999 and 1998. (See also
the discussions under "Operational Review: Financial Services Operations",
"Operational Review: Asset Management Operations", "Capital Resources" and
"Derivatives" herein.)


<TABLE>
<CAPTION>
(dollars in millions)
------------------------------------------------------------------------------------------------------------------
                                                                               1999                   1998
                                                                      ---------------------  ---------------------
                                                                      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                                      $17,334        27.7%   $16,330        28.8%
Unrealized gain on interest rate and currency swaps,
  options and forward transactions                                       7,931        12.7      9,881        17.5
Securities available for sale, at market value                          12,954        20.7     10,674        18.9
Trading securities, at market value                                      4,391         7.0      5,668        10.0
Securities purchased under agreements to resell, at contract value      10,897        17.4      4,838         8.5
Trading assets                                                           5,793         9.3      6,229        11.0
Spot commodities, at market value                                          683         1.1        476         0.8
Other, including short-term investments                                  2,565         4.1      2,523         4.5
------------------------------------------------------------------------------------------------------------------
Total                                                                  $62,548       100.0%   $56,619       100.0%
==================================================================================================================
</TABLE>


      As previously discussed, the cash used for the purchase of flight
equipment is derived primarily from the proceeds of ILFC's debt financings. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. During 1999, ILFC acquired
flight equipment costing $3.37 billion.

      At December 31, 1999, ILFC had committed to purchase 331 aircraft
deliverable from 2000 through 2007 at an estimated aggregate purchase price of
$16.4 billion and had options to purchase 83 aircraft deliverable from 2000
through 2007 at an estimated aggregate purchase price of $3.9 billion. As of
March 8, 2000, ILFC has entered into leases for all of the aircraft to be
delivered in 2000 and 100 of 280 aircraft to be delivered subsequent to 2000.
ILFC will be required to find customers for any aircraft presently on order and
any aircraft to be ordered, and it must arrange financing for portions of the
purchase price of such equipment. In a rising interest rate environment, ILFC
negotiates higher lease rates on any new contracts. ILFC has been successful to
date both in placing its new aircraft on lease or under sales contract and
obtaining adequate financing.

      ILFC is exposed to market risk and the risk of loss of fair value
resulting from adverse fluctuations in interest rates. As of December 31, 1999
and December 31, 1998, AIG statistically measured the aforementioned loss of
fair value through the application of a VaR model. In this analysis, the net
fair value of ILFC was determined using the financial instrument assets which
included the tax adjusted future flight equipment lease revenue and the
financial instrument liabilities which included the future servicing of the
current debt. The estimated impact of the current derivative positions was also
taken into account.

      AIG calculated the VaR with respect to the net fair value of ILFC using
the variance-covariance (delta-normal) methodology. This calculation also used
daily historical interest rates for the two years ending December 31, 1999 and
December 31, 1998. The VaR model estimated the volatility of each of these
interest rates and the correlation among them. The yield curve was constructed
using eleven key points on the curve to model possible curve movements. Thus,
the VaR measured the sensitivity of the assets and liabilities to the calculated
interest rate exposures. These sensitivities were then applied to a database,
which contained the historical ranges of movements in 


                                                                              31

<PAGE>   33

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

interest rates and the correlation among them. The results were aggregated to
provide a single amount that depicts the maximum potential loss in fair value of
a confidence level of 95 percent for a time period of one month. As of December
31, 1999 and December 31, 1998, the VaR with respect to the aforementioned net
fair value of ILFC was approximately $50 million and $9 million, respectively.

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

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

      Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At December
31, 1999, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. AIGFP has also
entered into credit derivative transactions to hedge its credit risk associated
with $182 million of these securities. There were no securities deemed below
investment grade at December 31, 1999. There have been no significant downgrades
through March 1, 2000. Securities purchased under agreements to resell are
treated as collateralized transactions. AIGFP takes possession of or obtains a
security interest in securities purchased under agreements to resell. AIGFP
further minimizes its credit risk by monitoring counterparty credit exposure
and, when AIGFP deems necessary, it requires additional collateral to be
deposited. Trading securities, at market value are marked to market daily and
are held to meet the short-term risk management objectives of AIGFP.

      AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates and precious and base metals. AIGTG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements of interest rates, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities largely through trading liabilities, unrealized losses on swaps,
short-term borrowings, securities sold under agreements to repurchase and
securities and commodities sold but not yet purchased. (See also the discussions
under "Capital Resources" and "Derivatives" herein.)

      The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at December 31, 1999
were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                             Gross         Gross
                                                        Unrealized    Unrealized
                                                             Gains        Losses
================================================================================
<S>                                                         <C>           <C>   
Securities available for sale, at market value (a)          $  921        $  887
Unrealized gain/loss on interest rate
  and currency swaps, options
  and forward transactions (b) (c)                           7,931         8,624
Trading assets                                               4,659         2,648
Spot commodities, at market value                               50            --
Trading liabilities                                             --         2,361
Securities and spot commodities sold but
  not yet purchased, at market value                           313            --
================================================================================
</TABLE>

(a)   See also Note 8(e) of Notes to Financial Statements.
(b)   These amounts are also presented as the respective balance sheet amounts.
(c)   At December 31, 1999, AIGTG's replacement values with respect to interest
      rate and currency swaps were $315 million.

      AIGFP's interest rate and currency risks on securities available for sale,
at market, are managed by taking offsetting positions on a security by security
basis, thereby offsetting a significant portion of the unrealized appreciation
or depreciation. At December 31, 1999, the unrealized gains and losses remaining
after the benefit of the offsets were $39 million and $5 million, respectively.

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

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

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


32

<PAGE>   34

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

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

      AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This department determines whether AIG's market risks, as well as
those market risks of individual subsidiaries, are within the parameters
established by AIG's senior management. Well established market risk management
techniques such as sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain subsidiaries are managed
and hedged by that subsidiary.

      AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.

      AIGFP is exposed to market risk due to changes in and volatility of
foreign currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.

      AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.

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

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

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

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

      All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.

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

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

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


                                                                              33

<PAGE>   35

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

an internal methodology which includes interpolation or extrapolation from
verifiable prices nearest to the dates of the transactions. The methodology may
reflect interest and exchange rates, commodity prices, volatility rates and
other relevant factors.

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

      AIGFP and AIGTG are both exposed to the risk of loss of fair value from
adverse fluctuations in interest rate and foreign currency exchange rates and
equity and commodity prices. AIG statistically measured the losses of fair value
through the application of a VaR model. AIG separately calculated the VaR with
respect to AIGFP and AIGTG, as AIG manages these operations separately.

      AIGFP's and AIGTG's asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange traded
investments, derivative instruments and commodities. Since the market risk with
respect to securities available for sale, at market is substantially hedged,
segregation of market sensitive instruments into trading and other than trading
was not deemed necessary.

      AIG calculated the VaR with respect to AIGFP and AIGTG as of December 31,
1999 and December 31, 1998. These calculations used the variance-covariance
(delta-normal) methodology. These calculations also used, where appropriate for
each entity, daily historical interest and foreign currency exchange rates and
equity/commodity prices in the two years ending December 31, 1999 and December
31, 1998, as applicable. The VaR model estimated the volatility of each of these
rates, prices and the correlations among them. For interest rates, the yield
curves of the United States and certain foreign countries were constructed using
eleven separate points on each country's yield curve to model possible curve
movements. Inter-country correlations were also used. The redemption experience
of corporate fixed maturities was taken into account. Thus, the VaR measured the
sensitivity of the asset and the liability portfolios of each of the market
exposures. Each sensitivity was estimated separately to capture the market
exposures within each entity. These sensitivities were then applied to a
database, which contained both historical ranges of movements in all market
factors and the correlations among them. The results depict the maximum
potential loss in fair value at a confidence level of 95 percent.

      Given the distinct business strategies at AIGFP and AIGTG, the VaR
calculations used different time periods to measure market exposures. Many of
AIGFP's customized, longer-term contracts may require several days to transact
and hedge. AIG therefore used a one month holding period to measure market
exposures for AIGFP. The large majority of AIGTG's contracts can be arranged and
hedged within one day. AIG therefore used a one day holding period to measure
market exposures at AIGTG.

      The following table presents the VaR on a combined basis and of each
component of AIGFP's and AIGTG's market risk as of December 31, 1999 and
December 31, 1998. VaR with respect to combined operations cannot be derived by
aggregating the individual risk presented herein.


<TABLE>
<CAPTION>
(in millions)
----------------------------------------------------------------------------
                                    AIGFP (a)                  AIGTG (b)
Market Risks                   1999         1998          1999          1998
============================================================================
<S>                            <C>          <C>           <C>           <C>
Combined                       $24          $42           $ 5           $ 3
Interest rate                   23           42             3             3
Currency                        --           --             4             2
Equity/Commodity                 1            2            --            --
============================================================================
</TABLE>

(a)   A one month holding period was used to measure the market exposures of
      AIGFP.
(b)   A one day holding period was used to measure the market exposures of
      AIGTG.

      The average combined VaRs for 1999 were approximately $25 million and $5
million for AIGFP and AIGTG, respectively. The high and low VaRs for AIGFP
during 1999 were approximately $29 million and $23 million, respectively. The
high and low VaRs for AIGTG during 1999 were $5 million and $4 million,
respectively.

Derivatives

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

      The most commonly used swaps are interest rate swaps, currency swaps,
equity swaps and swaptions. Such derivatives are traded over the counter. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. Currency and equity swaps are similar to
interest rate swaps but may involve the exchange of principal amounts at the
commencement and termination of the swap. Swaptions are options where the holder
has the right but not the obligation to enter into a swap transaction or cancel
an existing swap transaction.

      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.


34

<PAGE>   36

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

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

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

      Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange
traded securities and the terms of over the counter derivatives are non-standard
and unique to each contract. However, in the normal course of business, with the
agreement of the original counterparty, these contracts may be terminated early
or assigned to another counterparty.

      All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.

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

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

      A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements that provide for legally enforceable
set-off in the event of default. Also, under such agreements, in connection with
a counterparty desiring to terminate a contract prior to maturity, AIGFP may be
permitted to set-off its receivables from that counterparty against AIGFP's
payables to that same counterparty arising out of all included transactions.
Excluding regulated exchange transactions, AIGTG, whenever possible, enters into
netting agreements with its counterparties which are similar in effect to those
discussed above.

      The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivatives transactions at December 31, 1999 and December
31, 1998.

      The notional amounts used to express the extent of AIGFP's and AIGTG's
involvement in swap transactions represent a standard of measurement of the
volume of AIGFP's and AIGTG's swaps business. Notional amount is not a
quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.

      The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.

      The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, set-off and netting under ISDA Master Agreements
and collateral held. Prior to the application of these credit enhancements, the
gross credit risk with respect to these derivative instruments was $16.90
billion at December 31, 1999. Subsequent to the application of such credit
enhancements, the net exposure to credit risk or the net replacement value of
all interest rate, currency and equity swaps, swaptions and forward commitments
at December 31, 1999, approximated $7.53 billion. The net replacement value for
futures and forward contracts at December 31, 1999, approximated $5 million. The
net replacement value most closely represents the net credit risk to AIGFP or
the maximum amount exposed to potential loss.


                                       35

<PAGE>   37

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

      The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 1999 and December 31, 1998:


<TABLE>
<CAPTION>
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
                                                                            Remaining Life
                                                               -------------------------------------------              
                                                                One  Two Through  Six Through    After Ten        Total        Total
                                                               Year   Five Years    Ten Years        Years         1999         1998
====================================================================================================================================
<S>                                                        <C>          <C>          <C>          <C>          <C>          <C>     
Interest rate, currency and equity/commodity
  swaps and swaptions:
Notional amount:
  Interest rate swaps                                      $ 83,568     $121,534     $ 69,459     $  7,121     $281,682     $255,917
  Currency swaps                                             29,163       28,396       22,038        4,076       83,673       73,894
  Swaptions and equity swaps                                 11,829       23,192       10,026        2,955       48,002       15,685
------------------------------------------------------------------------------------------------------------------------------------
Total                                                      $124,560     $173,122     $101,523     $ 14,152     $413,357     $345,496
====================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts contractual amount       $  6,587           --           --           --     $  6,587     $  8,290
====================================================================================================================================
Over the counter forward contracts contractual amount      $ 21,426     $    447     $     --     $     --     $ 21,873     $ 42,898
====================================================================================================================================
</TABLE>


      AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1999 and
December 31, 1998, 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 millions)
----------------------------------------------------------------------------------------------
                                         Net Replacement Value
                                    ------------------------------                              
                                    Swaps and          Futures and         Total         Total
                                    Swaptions    Forward Contracts          1999          1998
==============================================================================================
<S>                                    <C>                  <C>           <C>           <C>   
Counterparty credit quality:                    
  AAA                                  $2,067               $   --        $2,067        $2,360
  AA                                    2,837                    2         2,839         3,688
  A                                     1,573                    3         1,576         1,883
  BBB                                     997                   --           997         1,085
  Below investment grade                   55                   --            55           210
----------------------------------------------------------------------------------------------
Total                                  $7,529               $    5        $7,534        $9,226
==============================================================================================
</TABLE>



36

<PAGE>   38

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

      At December 31, 1999 and December 31, 1998, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in millions)
----------------------------------------------------------------------------------------------
                                         Net Replacement Value
                                    ------------------------------                              
                                    Swaps and          Futures and         Total         Total
                                    Swaptions    Forward Contracts          1999          1998
==============================================================================================
<S>                                    <C>                   <C>          <C>           <C>   
Non-U.S. banks                         $2,512                $   3        $2,515        $2,877
Insured municipalities                    352                   --           352           784
U.S. industrials                          778                    2           780         1,125
Governmental                              180                   --           180           603
Non-U.S. financial service companies      158                   --           158           272
Non-U.S. industrials                    1,117                   --         1,117         1,145
Special purpose                           716                   --           716           423
U.S. banks                                510                   --           510           911
U.S. financial service companies        1,112                   --         1,112           932
Supranationals                             94                   --            94           154
----------------------------------------------------------------------------------------------
Total                                  $7,529                $   5        $7,534        $9,226
==============================================================================================
</TABLE>


      The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 1999 and December 31, 1998. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the December 31,
1999 balances based upon the expected timing of the future cash flows.

      The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
1999 and December 31, 1998. These values do not represent the credit risk to
AIGTG.

      The net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
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.


                                                                              37

<PAGE>   39

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

      The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1999 and December 31, 1998:


<TABLE>
<CAPTION>
(in millions)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                          Remaining Life
                                                              -------------------------------------------
                                                               One   Two Through Six Through    After Ten        Total        Total
                                                              Year    Five Years   Ten Years        Years         1999         1998
===================================================================================================================================
<S>                                                      <C>          <C>          <C>          <C>          <C>          <C>      
Contractual amount of futures, forwards and options:
  Exchange traded futures and options                    $  13,873    $   4,990    $      45    $      --    $  18,908    $  11,836
===================================================================================================================================
  Forwards                                               $ 199,533    $  18,198    $   2,697    $      --    $ 220,428    $ 282,157
===================================================================================================================================
  Over the counter purchased options                     $  51,050    $  18,327    $  13,703    $     791    $  83,871    $  58,860
===================================================================================================================================
  Over the counter sold options (a)                      $  51,737    $  18,703    $  15,157    $   1,129    $  86,726    $  58,861
===================================================================================================================================
Notional amount:
  Interest rate swaps and forward rate agreements        $  43,541    $  31,322    $   5,510    $      63    $  80,436    $ 110,791
  Currency swaps                                             2,948        4,716          695           --        8,359        7,512
  Swaptions                                                    802        6,745        2,293          156        9,996        5,766
-----------------------------------------------------------------------------------------------------------------------------------
Total                                                    $  47,291    $  42,783    $   8,498    $     219    $  98,791    $ 124,069
===================================================================================================================================
Credit exposure:
  Futures, forwards, swaptions and purchased options
    contracts and interest rate and currency swaps:
      Gross replacement value                            $   6,404    $   1,253    $     211    $      21    $   7,889    $   9,791
      Master netting arrangements                           (4,003)        (455)        (120)          (2)      (4,580)      (5,610)
      Collateral                                              (167)         (39)          (3)          --         (209)        (359)
-----------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b)                                $   2,234    $     759    $      88    $      19    $   3,100    $   3,822
===================================================================================================================================
</TABLE>


(a)   Sold options obligate AIGTG to buy or sell the underlying item if the
      option purchaser chooses to exercise. The amounts do not represent credit
      exposure.
(b)   The net replacement values with respect to exchange traded futures and
      options, forward contracts and purchased over the counter options are
      presented as a component of trading assets in the accompanying balance
      sheet. The net replacement values with respect to interest rate and
      currency swaps are presented as a component of unrealized gain on interest
      rate and currency swaps, options and forward transactions in the
      accompanying balance sheet.

      AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1999 and
December 31, 1998, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                           Net Replacement Value
                                                           ---------------------
                                                               1999         1998
================================================================================
<S>                                                          <C>          <C>   
Counterparty credit quality:
  AAA                                                        $  276       $  462
  AA                                                          1,241        1,821
  A                                                           1,010        1,066
  BBB                                                           256          221
  Below investment grade                                         49           26
  Not externally rated, including
    exchange traded futures and options*                        268          226
--------------------------------------------------------------------------------
Total                                                        $3,100       $3,822
================================================================================
Counterparty breakdown by industry:
  Non-U.S. banks                                             $  926       $1,253
  U.S. industrials                                               70          381
  Governmental                                                  178          184
  Non-U.S. financial service companies                          698          406
  Non-U.S. industrials                                          176          150
  U.S. banks                                                    401          593
  U.S. financial service companies                              383          629
  Exchanges*                                                    268          226
--------------------------------------------------------------------------------
Total                                                        $3,100       $3,822
================================================================================
</TABLE>

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

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


38

<PAGE>   40

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

      AIG, through its Foreign Exchange Operating Committee, evaluates each of
its worldwide consolidated foreign currency net asset or liability positions and
manages AIG's translation exposure to adverse movement in currency exchange
rates. AIG may use forward exchange contracts and purchase options where the
cost of such is reasonable and markets are liquid to reduce these exchange
translation exposures. The exchange gain or loss with respect to these hedging
instruments is recorded on an accrual basis as a component of comprehensive
income in capital funds.

      As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and its insurance operations; to date, such
activities have not been significant.

      AIG has formed a Derivatives Review Committee. This committee, with
certain exceptions, provides an independent review of any proposed derivative
transaction. The committee examines, among other things, the nature and purpose
of the derivative transaction, its potential credit exposure, if any, and the
estimated benefits. This committee does not review those derivative transactions
entered into by AIGFP and AIGTG for their own accounts.

      Legal risk arises from the uncertainty of the enforceability, through
legal or judicial processes, of the obligations of AIG's clients and
counterparties, including contractual provisions intended to reduce credit
exposure by providing for the netting of mutual obligations. (See also the
discussion on master netting agreements above.) AIG seeks to eliminate or
minimize such uncertainty through continuous consultation with internal and
external legal advisors, both domestically and abroad, in order to understand
the nature of legal risk, to improve documentation and to strengthen transaction
structure.

Accounting Standards

In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FASB
130) and Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" (FASB 131).

      FASB 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. FASB 130 was
effective for AIG as of January 1, 1998.

      FASB 131 establishes standards for the way AIG is required to disclose
certain information about its operating segments in its annual financial
statements and certain selected information in its interim financial statements.
FASB 131 establishes, where practicable, standards with respect to geographic
areas, among other things. Certain descriptive information is also required.
FASB 131 was effective for the year ended December 31, 1998.

      In February 1998, FASB issued Statement of Financial Accounting Standards
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits" (FASB 132). This statement requires AIG to revise its disclosures
about pension and other postretirement benefit plans and does not change the
measurement or recognition of these plans. Also, FASB 132 requires additional
information on changes in the benefit obligations and fair values of plan
assets. FASB 132 was effective for the year ended December 31, 1998.

      In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FASB 133).
This statement requires AIG to recognize all derivatives in the consolidated
balance sheet measuring these derivatives at fair value. The recognition of the
change in the fair value of a derivative depends on a number of factors,
including the intended use of the derivative. Currently, AIGTG and AIGFP
present, in all material respects, the changes in fair value of their derivative
transactions as a component of AIG's operating income. AIG is evaluating the
impact of FASB 133 with respect to derivative transactions entered into by other
AIG operations. AIG believes that the impact of FASB 133 on its results of
operations, financial condition or liquidity will not be significant. FASB 133
is effective for the year commencing January 1, 2001.

      In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." This statement provides guidance for the
recording of a liability for insurance-related assessments. The statement
requires that a liability be recognized in certain defined circumstances. This
statement was effective for the year commencing January 1, 1999 and has been
adopted herein. SOP 97-3 did not have a material impact on AIG's results of
operations, financial condition or liquidity.

      In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
This statement identifies several methods of deposit accounting and provides
guidance on the application of each method. This statement classifies insurance
and reinsurance contracts for which the deposit method is appropriate as
contracts that (i) transfer only significant timing risk, (ii) transfer only
significant underwriting risk, (iii) transfer neither significant timing nor
underwriting risk, and (iv) have an indeterminate risk. AIG believes that the
impact of this statement on its results of operations, financial condition or
liquidity will not be significant. This statement is effective for the year
commencing January 1, 2000. Restatement of previously issued financial
statements is not permitted.


                                                                              39

<PAGE>   41

--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)

Year 2000 Issues

Any statements contained herein that are not historical facts, or that might be
considered an opinion or projection, whether expressed or implied, are meant as,
and should be considered, forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are based on assumptions and opinions concerning a variety of known and unknown
risks, including those risks related to the Year 2000 issue. If any assumptions
or opinions prove incorrect, any forward-looking statements made on that basis
may also prove materially incorrect.

      The Year 2000 issue arises from computer programs being written using two
digits rather than four digits to define the applicable year. This could result
in a failure of the information technology systems (IT systems) and other
equipment containing imbedded technology (non-IT systems) in the year 2000,
causing disruption of operations of AIG, its lessees, vendors, or business
partners.

      AIG developed and implemented a plan to address the Year 2000 issue as it
affected AIG's internal IT and non-IT systems, and assessed Year 2000 issues
relating to third parties with whom AIG has critical relationships. AIG has not
experienced any business disruption from the Year 2000 issue. Its IT and non-IT
systems were compliant on January 1, 2000, and there have been no problems
related to any third party compliance.


40

<PAGE>   42

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

--------------------------------------------------------------------------------
                                                                            Page
--------------------------------------------------------------------------------
    Report of Independent Accountants                                        42
    Consolidated Balance Sheet at
       December 31, 1999 and 1998                                            43
    Consolidated Statement of Income for the
       years ended December 31, 1999, 1998
       and 1997                                                              45
    Consolidated Statement of Capital Funds
       for the years ended December 31, 1999,
       1998 and 1997                                                         46
    Consolidated Statement of Cash Flows for
       the years ended December 31, 1999,
       1998 and 1997                                                         47
    Consolidated Statement of Comprehensive Income
       for the years ended December 31, 1999, 1998
       and 1997                                                              49
    Notes to Financial Statements                                            50

Schedules:

     I--Summary of Investments--Other Than
            Investments in Related
            Parties as of
            December 31, 1999                                               S-1
     II--Condensed Financial Information of
            Registrant as of December 31, 1999
            and 1998 and for the years ended
            December 31, 1999, 1998 and 1997                                S-2
     III--Supplementary Insurance Information as
            of December 31, 1999, 1998 and
            1997 and for the years then ended                               S-4
     IV--Reinsurance as of December 31, 1999,
            1998 and 1997 and for the years
            then ended                                                      S-5


                                                                              41

<PAGE>   43

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

Report of Independent Accountants

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

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the consolidated financial
position of American International Group, Inc. and its subsidiaries (the
"Company") at December 31, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedules listed in the accompanying index present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.


                                  PricewaterhouseCoopers LLP

New York, New York
February 9, 2000



42


<PAGE>   44

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

Consolidated Balance Sheet


<TABLE>
<CAPTION>
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
December 31,                                                                                                       1999         1998
====================================================================================================================================
<S>                                                                                                            <C>          <C>     
Assets:
    Investments and cash:
       Fixed maturities:
           Bonds available for sale, at market value (amortized cost: 1999-$78,218; 1998-$63,873)              $ 77,028     $ 66,317
           Bonds held to maturity, at amortized cost (market value: 1999-$12,202; 1998-$13,633)                  12,076       12,658
           Bonds trading securities, at market value (cost: 1999-$1,057; 1998-$990)                               1,038        1,005
           Preferred stocks, at amortized cost (market value: 1999-$0; 1998-$0)                                       2           --
       Equity securities:
           Common stocks (cost: 1999-$5,496; 1998-$5,465)                                                         6,002        5,648
           Non-redeemable preferred stocks (cost: 1999-$718; 1998-$628)                                             712          620
       Mortgage loans on real estate, net of allowance (1999-$78; 1998-$67)                                       7,139        6,702
       Policy loans                                                                                               2,822        2,626
       Collateral and guaranteed loans, net of allowance (1999-$74; 1998-$74)                                     2,173        2,413
       Financial services and asset management assets:
           Flight equipment primarily under operating leases, net of accumulated depreciation
              (1999-$2,200; 1998-$2,048)                                                                         17,334       16,330
           Securities available for sale, at market value (amortized cost: 1999-$12,920; 1998-$10,667)           12,954       10,674
           Trading securities, at market value                                                                    4,391        5,668
           Spot commodities, at market value                                                                        683          476
           Unrealized gain on interest rate and currency swaps, options and forward transactions                  7,931        9,881
           Trading assets                                                                                         5,793        6,229
           Securities purchased under agreements to resell, at contract value                                    10,897        4,838
       Other invested assets                                                                                      9,900        8,692
       Short-term investments, at cost (approximates market value)                                                7,007        6,739
       Cash                                                                                                         132          303
------------------------------------------------------------------------------------------------------------------------------------
           Total investments and cash                                                                           186,014      167,819
------------------------------------------------------------------------------------------------------------------------------------
    Investment income due and accrued                                                                             2,054        1,869
    Premiums and insurance balances receivable-net of allowance (1999-$133; 1998-$105)                           12,737       11,679
    Reinsurance assets                                                                                           19,368       17,744
    Deferred policy acquisition costs                                                                             9,624        8,081
    Investments in partially-owned companies                                                                        346          418
    Real estate and other fixed assets, net of accumulated depreciation (1999-$1,892; 1998-$1,774)                2,933        2,738
    Separate and variable accounts                                                                               29,666       18,662
    Other assets                                                                                                  5,496        4,666
------------------------------------------------------------------------------------------------------------------------------------
Total assets                                                                                                   $268,238     $233,676
====================================================================================================================================
</TABLE>

See Accompanying Notes to Financial Statements.


                                                                              43

<PAGE>   45

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

Consolidated Balance Sheet (CONTINUED)


<TABLE>
<CAPTION>
(in millions, except share amounts)
-----------------------------------------------------------------------------------------------------------------------------------
December 31,                                                                                                      1999         1998
===================================================================================================================================
<S>                                                                                                           <C>          <C>     
Liabilities:
    Reserve for losses and loss expenses                                                                      $ 38,252     $ 38,310
    Reserve for unearned premiums                                                                               11,450       10,009
    Future policy benefits for life and accident and health insurance contracts                                 34,608       29,571
    Policyholders' contract deposits                                                                            42,549       33,924
    Other policyholders' funds                                                                                   3,236        2,720
    Reserve for commissions, expenses and taxes                                                                  2,598        2,225
    Insurance balances payable                                                                                   2,254        2,283
    Funds held by companies under reinsurance treaties                                                             861          837
    Income taxes payable:
       Current                                                                                                     138          224
       Deferred                                                                                                    751        1,247
    Financial services and asset management liabilities:
       Borrowings under obligations of guaranteed investment agreements                                          9,430        9,188
       Securities sold under agreements to repurchase, at contract value                                         6,116        4,473
       Trading liabilities                                                                                       3,821        4,664
       Securities and spot commodities sold but not yet purchased, at market value                               6,413        4,457
       Unrealized loss on interest rate and currency swaps, options and forward transactions                     8,624        7,055
       Trust deposits and deposits due to banks and other depositors                                             2,175        1,682
       Commercial paper                                                                                          2,958        3,204
       Notes, bonds and loans payable                                                                           16,806       15,249
    Commercial paper                                                                                             1,446        1,432
    Notes, bonds, loans and mortgages payable                                                                    2,344        2,837
    Separate and variable accounts                                                                              29,666       18,662
    Minority interest                                                                                            1,350        1,590
    Other liabilities                                                                                            6,191        6,815
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                                              234,037      202,658
-----------------------------------------------------------------------------------------------------------------------------------

Preferred shareholders' equity in subsidiary companies                                                             895          895
-----------------------------------------------------------------------------------------------------------------------------------
Capital funds:
    Preferred stock                                                                                                 --          248
    Common stock, $2.50 par value; 2,000,000,000 shares authorized; shares issued
       1999-1,660,707,090; 1998-1,313,510,800                                                                    4,152        3,284
    Additional paid-in capital                                                                                   2,080        1,319
    Retained earnings                                                                                           31,040       27,110
    Accumulated other comprehensive income                                                                      (2,103)         (10)
    Treasury stock, at cost; 1999-111,579,044; 1998-96,373,983 shares of common stock
       (including 87,540,027 and 70,034,573 shares, respectively, held by subsidiaries)                         (1,863)      (1,828)
-----------------------------------------------------------------------------------------------------------------------------------
Total capital funds                                                                                             33,306       30,123
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and capital funds                                                                           $268,238     $233,676
===================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.


44

<PAGE>   46

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

Consolidated Statement of Income


<TABLE>
<CAPTION>
(in millions, except per share amounts)
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                   1999              1998              1997
===================================================================================================================================
<S>                                                                                    <C>                <C>              <C>     
General insurance operations:
    Net premiums written                                                               $ 16,224           $14,586          $ 13,408
    Change in unearned premium reserve                                                     (680)             (488)             (987)
-----------------------------------------------------------------------------------------------------------------------------------
    Net premiums earned                                                                  15,544            14,098            12,421
    Net investment income                                                                 2,517             2,192             1,854
    Realized capital gains                                                                  295               205               128
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                         18,356            16,495            14,403
-----------------------------------------------------------------------------------------------------------------------------------
    Losses incurred                                                                       9,819             9,164             7,801
    Loss expenses incurred                                                                1,919             1,493             1,555
    Underwriting expenses (principally policy acquisition costs)                          3,137             2,910             2,575
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                         14,875            13,567            11,931
-----------------------------------------------------------------------------------------------------------------------------------
    Operating income                                                                      3,481             2,928             2,472
-----------------------------------------------------------------------------------------------------------------------------------
Life insurance operations:
    Premium income                                                                       11,942            10,293             9,956
    Net investment income                                                                 6,206             5,201             4,521
    Realized capital losses                                                                (148)              (74)               (9)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                         18,000            15,420            14,468
-----------------------------------------------------------------------------------------------------------------------------------
    Death and other benefits                                                              5,000             4,543             4,052
    Increase in future policy benefits                                                    6,870             5,699             5,718
    Acquisition and insurance expenses                                                    3,272             2,805             2,650
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                         15,142            13,047            12,420
-----------------------------------------------------------------------------------------------------------------------------------
    Operating income                                                                      2,858             2,373             2,048
-----------------------------------------------------------------------------------------------------------------------------------
Financial services operating income                                                       1,081               869               671
-----------------------------------------------------------------------------------------------------------------------------------
Asset management operating income                                                           314               191               127
-----------------------------------------------------------------------------------------------------------------------------------
Equity in income of minority-owned insurance operations                                      --                57               114
-----------------------------------------------------------------------------------------------------------------------------------
Other realized capital losses                                                               (25)               (7)              (29)
-----------------------------------------------------------------------------------------------------------------------------------
Other income (deductions)--net                                                             (197)             (134)              (93)
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest                                          7,512             6,277             5,310
-----------------------------------------------------------------------------------------------------------------------------------
Income taxes:
    Current                                                                               1,813             1,100             1,304
    Deferred                                                                                406               685               221
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                          2,219             1,785             1,525
-----------------------------------------------------------------------------------------------------------------------------------
Income before minority interest                                                           5,293             4,492             3,785
-----------------------------------------------------------------------------------------------------------------------------------
Minority interest                                                                          (238)             (210)              (74)
-----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                             $  5,055          $  4,282          $  3,711
===================================================================================================================================
Earnings per common share:
    Basic                                                                              $   3.27          $   2.81          $   2.45
    Diluted                                                                                3.23              2.75              2.40
===================================================================================================================================
Average shares outstanding:
    Basic                                                                                 1,548             1,518             1,508
    Diluted                                                                               1,567             1,554             1,542
===================================================================================================================================
</TABLE>

See Accompanying Notes to Financial Statements.


                                                                              45

<PAGE>   47

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

Consolidated Statement of Capital Funds


<TABLE>
<CAPTION>
(in millions, except per share amounts)
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                       1999            1998            1997
===================================================================================================================================
<S>                                                                                        <C>             <C>             <C>     
Preferred stock:
    Balance at beginning of year                                                           $    248        $    248        $    385
       Conversion to common stock                                                              (248)             --              --
       Redemption of preferred stock                                                             --              --            (137)
-----------------------------------------------------------------------------------------------------------------------------------
    Balance at end of year                                                                       --             248             248
-----------------------------------------------------------------------------------------------------------------------------------
Common stock:
    Balance at beginning of year                                                              3,284           2,334           1,539
       Issuance of common stock                                                                  --               1             162
       Stock split effected as dividend                                                         818             949             633
       Issued in conversion of Series E preferred stock to common stock                          24              --              --
       Issued in connection with redemption of Premium Equity
           Redemption Cumulative Security Units (PERCS Units)                                    21              --              --
       Issued under stock option and stock purchase plans                                         5              --              --
-----------------------------------------------------------------------------------------------------------------------------------
    Balance at end of year                                                                    4,152           3,284           2,334
-----------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
    Balance at beginning of year                                                              1,319           1,335             996
       Issuance of common stock                                                                  --              (1)            480
       Excess of cost over proceeds of common stock issued under
           stock option and stock purchase plans                                                (84)            (22)            (29)
       Cost of issuances of preferred securities                                                 --              --             (55)
       Stock splits-SunAmerica                                                                   --              --             (65)
       Excess of redemption value of Series E preferred stock over
           par value of common stock issued                                                     224              --              --
       Excess of proceeds over par value of common stock issued
           in connection with redemption of PERCS Units                                         410              --              --
       Excess of proceeds over par value of common stock issued
           under stock option and stock purchase plans                                           83              --              --
       Other                                                                                    128               7               8
-----------------------------------------------------------------------------------------------------------------------------------
    Balance at end of year                                                                    2,080           1,319           1,335
-----------------------------------------------------------------------------------------------------------------------------------
Retained earnings:
    Balance at beginning of year                                                             27,110          24,101          21,290
       Net income                                                                             5,055           4,282           3,711
       Stock dividends to shareholders                                                         (818)           (949)           (633)
       Cash dividends to shareholders:
           Preferred                                                                             --             (12)            (19)
           Common ($.19, $.20 and $.16 per share, respectively)                                (303)           (312)           (248)
           Other                                                                                 (4)             --              --
-----------------------------------------------------------------------------------------------------------------------------------
    Balance at end of year                                                                   31,040          27,110          24,101
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income:
    Balance at beginning of year                                                                (10)            382             868
       Unrealized appreciation (depreciation) of investments-net
           of reclassification adjustments                                                   (2,541)           (387)            232
           Deferred income tax benefit (expense) on changes                                     895              95             (33)
       Foreign currency translation adjustments                                                (432)           (137)           (754)
           Applicable income tax benefit on changes                                             (15)             37              69
-----------------------------------------------------------------------------------------------------------------------------------
    Other comprehensive income                                                               (2,093)           (392)           (486)
-----------------------------------------------------------------------------------------------------------------------------------
    Balance at end of year                                                                   (2,103)            (10)            382
-----------------------------------------------------------------------------------------------------------------------------------
Treasury stock, at cost:
    Balance at beginning of year                                                             (1,828)         (1,815)         (1,373)
       Cost of shares acquired during year                                                     (275)            (81)           (508)
       Issued under stock option and stock purchase plans                                       216              68              66
       Issued pursuant to Restricted Stock Unit Obligations                                      24              --              --
-----------------------------------------------------------------------------------------------------------------------------------
    Balance at end of year                                                                   (1,863)         (1,828)         (1,815)
-----------------------------------------------------------------------------------------------------------------------------------
Total capital funds at end of year                                                          $33,306         $30,123         $26,585
====================================================================================================================================
</TABLE>

See Accompanying Notes to Financial Statements.


46

<PAGE>   48

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

Consolidated Statement of Cash Flows


<TABLE>
<CAPTION>
(in millions)
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                           1999          1998          1997
===================================================================================================================================
<S>                                                                                            <C>           <C>           <C>     
Summary:
    Net cash provided by operating activities                                                  $ 10,321      $  7,439      $  3,433
    Net cash used in investing activities                                                       (20,758)      (16,207)       (7,402)
    Net cash provided by financing activities                                                    10,266         8,984         3,997
-----------------------------------------------------------------------------------------------------------------------------------
    Change in cash                                                                                 (171)          216            28
    Cash at beginning of year                                                                       303            87            59
-----------------------------------------------------------------------------------------------------------------------------------
    Cash at end of year                                                                        $    132      $    303      $     87
===================================================================================================================================
Cash flows from operating activities:
    Net income                                                                                 $  5,055      $  4,282      $  3,711
-----------------------------------------------------------------------------------------------------------------------------------
    Adjustments to reconcile net income to net cash provided by operating
       activities:
           Non-cash revenues, expenses, gains and losses included in income:
           Change in:
              General and life insurance reserves                                                 6,684         6,990         1,767
              Premiums and insurance balances receivable and payable-net                         (1,087)         (733)         (796)
              Reinsurance assets                                                                 (1,624)         (972)          416
              Deferred policy acquisition costs                                                  (1,543)       (1,025)         (200)
              Investment income due and accrued                                                    (185)         (111)         (229)
              Funds held under reinsurance treaties                                                  24           370           (47)
              Other policyholders' funds                                                            516           368           133
              Current and deferred income taxes-net                                                 319           225           520
              Reserve for commissions, expenses and taxes                                           373           455           229
              Other assets and liabilities-net                                                     (813)         (411)          593
              Trading assets and liabilities-net                                                   (407)         (216)         (869)
              Trading securities, at market value                                                 1,277        (1,693)       (1,617)
              Spot commodities, at market value                                                    (207)          (16)         (255)
              Net unrealized gain on interest rate and currency swaps,
                  options and forward transactions                                                3,519        (1,382)           49
              Securities purchased under agreements to resell                                    (6,059)         (287)       (2,909)
              Securities sold under agreements to repurchase                                      1,643         1,767          (333)
              Securities and spot commodities sold but not yet
                  purchased, at market value                                                      1,956          (715)        3,603
           Realized capital gains                                                                  (122)         (124)          (90)
           Equity in income of partially-owned companies and other invested assets                 (186)         (176)         (157)
           Depreciation expenses, principally flight equipment                                    1,071           952           885
           Change in cumulative translation adjustments                                            (432)         (137)         (754)
           Other-net                                                                                549            28          (217)
-----------------------------------------------------------------------------------------------------------------------------------
           Total adjustments                                                                      5,266         3,157          (278)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                                      $ 10,321      $  7,439      $  3,433
===================================================================================================================================
</TABLE>

See Accompanying Notes to Financial Statements.


                                                                              47

<PAGE>   49

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

Consolidated Statement of Cash Flows (CONTINUED)


<TABLE>
<CAPTION>
(in millions)
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                             1999         1998         1997
===================================================================================================================================
<S>                                                                                              <C>          <C>          <C>     
Cash flows from investing activities:
       Cost of fixed maturities, at amortized cost matured or redeemed                           $  1,062     $  1,578     $  1,226
       Cost of bonds, at market sold                                                               27,375       28,110       22,446
       Cost of bonds, at market matured or redeemed                                                 8,178        8,315        8,200
       Cost of equity securities sold                                                               3,703        2,784        2,262
       Realized capital gains                                                                         122          124           90
       Purchases of fixed maturities                                                              (50,365)     (43,659)     (36,428)
       Purchases of equity securities                                                              (3,821)      (3,277)      (1,916)
       Acquisitions, net of cash acquired                                                              --         (515)          --
       Mortgage, policy and collateral loans granted                                               (3,498)      (2,942)      (3,233)
       Repayments of mortgage, policy and collateral loans                                          3,105        2,341        2,962
       Sales of securities available for sale                                                       4,787        2,618        4,310
       Maturities of securities available for sale                                                    787        1,848        3,232
       Purchases of securities available for sale                                                  (7,869)      (5,967)      (6,916)
       Sales of flight equipment                                                                    1,699          687        2,231
       Purchases of flight equipment                                                               (3,365)      (3,160)      (3,435)
       Net additions to real estate and other fixed assets                                           (602)        (624)        (517)
       Sales or distributions of other invested assets                                              2,995        2,869        2,549
       Investments in other invested assets                                                        (4,827)      (5,109)      (2,637)
       Change in short-term investments                                                              (268)      (2,227)      (1,788)
       Investments in partially-owned companies                                                        44           (1)         (40)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                                            $(20,758)    $(16,207)    $ (7,402)
===================================================================================================================================
Cash flows from financing activities:
       Change in policyholders' contract deposits                                                $  8,625     $  4,474     $  2,816
       Change in trust deposits and deposits due to banks and other depositors                        493         (595)      (1,030)
       Change in commercial paper                                                                    (232)       1,261       (1,123)
       Proceeds from notes, bonds, loans and mortgages payable                                      8,539        7,909        8,164
       Repayments on notes, bonds, loans and mortgages payable                                     (7,486)      (4,973)      (7,016)
       Liquidation of zero coupon notes payable                                                        --           --          (12)
       Proceeds from guaranteed investment agreements                                               7,927        6,540        4,930
       Maturities of guaranteed investment agreements                                              (7,685)      (5,353)      (2,653)
       Proceeds from common stock issued                                                              220           40          614
       Net proceeds from issuance of preferred securities of subsidiary grantor trusts                 --           --          300
       Payment for redemption of preferred securities of subsidiary grantor trusts                     --           --          (55)
       Payment for redemption of preferred stock                                                       --           --         (137)
       Cash dividends to shareholders                                                                (303)        (324)        (267)
       Acquisition of treasury stock                                                                 (275)         (81)        (508)
       Proceeds from redemption of Premium Equity Redemption
           Cumulative Security Units                                                                  431           --           --
       Other-net                                                                                       12           86          (26)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                                        $ 10,266     $  8,984     $  3,997
===================================================================================================================================
Supplementary information:
Taxes paid                                                                                       $  1,625     $  1,334     $    922
===================================================================================================================================
Interest paid                                                                                    $  1,993     $  2,076     $  1,864
===================================================================================================================================
</TABLE>

See Accompanying Notes to Financial Statements.


48

<PAGE>   50

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

Consolidated Statement of Comprehensive Income


<TABLE>
<CAPTION>
(in millions)
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                     1999             1998             1997
===================================================================================================================================
<S>                                                                                       <C>              <C>              <C>    
Comprehensive income:
Net income                                                                                $ 5,055          $ 4,282          $ 3,711
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income:
    Unrealized appreciation (depreciation) of investments-net
       of reclassification adjustments                                                     (2,541)            (387)             232
       Deferred income tax benefit (expense) on changes                                       895               95              (33)
    Foreign currency translation adjustments                                                 (432)            (137)            (754)
       Applicable income tax (expense) benefit on changes                                     (15)              37               69
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income                                                                 (2,093)            (392)            (486)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income                                                                      $ 2,962          $ 3,890          $ 3,225
===================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.


                                                                              49

<PAGE>   51

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

Notes to Financial Statements

1. Summary of Significant Accounting Policies

(a) Principles of Consolidation: On January 1, 1999 (the merger date),
SunAmerica Inc., a Maryland corporation, merged with and into AIG. AIG issued
187.5 million shares of its common stock in exchange for all the outstanding
common stock and Class B stock of SunAmerica Inc., based on an exchange ratio of
0.855 shares of AIG common stock for each share of SunAmerica Inc. stock. A
newly formed Delaware company, SunAmerica Inc. (SunAmerica) holds substantially
all of the assets previously held by the Maryland corporation. The merger was
accounted for as a pooling of interests and the accompanying financial
statements for 1998 and prior years have been restated to combine SunAmerica
Inc.'s financial statements for its fiscal years ended September 30 with AIG's
December 31 financial statements.

      The following is a reconciliation of the individual company results to the
combined results for the twelve month periods during 1998 and 1997:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------
                                               AIG           SunAmerica
                                       December 31,        September 30,         Total
======================================================================================
<S>                                     <C>                  <C>            <C>       
1998
  Revenues                              $   33,296           $    2,420     $   35,716
  Net income                                 3,766                  516          4,282
1997
  Revenues                                  30,602                1,951         32,553
  Net income                                 3,332                  379          3,711
======================================================================================
</TABLE>


      The financial statements for the quarter ended March 31, 1999, included in
the AIG Quarterly Report on Form 10-Q reflected the operations of SunAmerica on
a pooling of interests basis and the change of its fiscal year from September 30
to December 31. For the period October 1, 1998 through December 31, 1998,
SunAmerica Inc.'s revenues were $318 million, operating income was $52 million
and net income was $29 million; dividends distributed were $33 million. Thus,
capital funds at December 31, 1999 reflect the net decrease in SunAmerica Inc.'s
retained earnings of $4 million and the decline of $94 million in accumulated
other comprehensive income.

      AIG subsidiaries write property, casualty, marine, life and financial
lines insurance in approximately 130 countries and jurisdictions. Certain of
AIG's foreign subsidiaries included in the consolidated financial statements
report on a fiscal year ending November 30. All material intercompany accounts
and transactions have been eliminated.

      Commencing with the third quarter 1998, Transatlantic and 21st Century
were consolidated into AIG's financial statements as AIG became the majority
shareholder of these entities.

      (b) Basis of Presentation: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Certain accounts have been reclassified in the 1998 and 1997 financial
statements to conform to their 1999 presentation.

      General Insurance Operations: AIG's general insurance subsidiaries are
multiple line companies writing substantially all lines of property and casualty
insurance. Premiums are earned primarily on a pro rata basis over the term of
the related coverage. The reserve for unearned premiums represents the portion
of premiums written relating to the unexpired terms of coverage.

      Acquisition costs represent those costs, including commissions, that vary
with and are primarily related to the acquisition of new business. These costs
are deferred and amortized over the period in which the related premiums written
are earned. Investment income is not anticipated in the deferral of acquisition
costs. (See Note 4.)

      Losses and loss expenses are charged to income as incurred. The reserve
for losses and loss expenses represents the accumulation of estimates for
reported losses and includes provisions for losses incurred but not reported.
The methods of determining such estimates and establishing resulting reserves,
including amounts relating to reserves for estimated unrecoverable reinsurance,
are continually reviewed and updated. Adjustments resulting therefrom are
reflected in income currently. AIG discounts certain of its loss reserves which
are primarily related to certain workers' compensation claims. (See Note 6.)

      Life Insurance Operations: AIG's life insurance subsidiaries offer a wide
range of traditional insurance and financial and investment products.
Traditional products consist of individual and group life, annuity, endowment
and accident and health policies. Financial and investment products consist of
single premium annuity, variable annuities, guaranteed investment contracts,
universal life and pensions. Premiums for traditional life insurance products
and life contingent annuities, excluding accident and health products, are
recognized as revenues when due. Estimates for premiums due but not yet
collected are accrued. Benefits and expenses are provided against such revenues
to recognize profits over the estimated life of the policies. Revenues for
universal life and investment-type products consist of policy charges for the
cost of insurance, administration and surrenders during the period. Expenses
include interest credited to policy account balances and benefit payments made
in excess of policy account balances. Accident and health products are accounted
for in a manner similar to general insurance products described above.
Investment income reflects certain amounts of realized capital gains where the
gains are deemed to be an inherent element in pricing certain life products in
some foreign countries.

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


50

<PAGE>   52

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

1. Summary of Significant Accounting Policies (continued)

life and investment-type products are deferred and amortized, with interest, in
relation to the incidence of estimated gross profits to be realized over the
estimated lives of the contracts. Estimated gross profits are composed of net
interest income, net realized investment gains and losses, variable annuity
fees, surrender charges and direct administrative expenses.

      As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to deferred policy acquisition costs equal to
the change in amortization that would have been recorded if such securities had
been sold at their stated aggregate fair value and the proceeds reinvested at
current yields. The change in this adjustment, net of tax, is included with the
change in net unrealized gains/losses on debt and equity securities available
for sale that is credited or charged directly to comprehensive income. Deferred
policy acquisition costs have been increased by $130 million at December 31,
1999 and reduced by $145 million at December 31, 1998 for this adjustment. (See
Note 4.)

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

      Financial Services Operations: AIG participates in the derivatives dealer
market conducting, primarily as principal, an interest rate, currency, equity
and credit derivative products business. AIG also enters into structured
transactions including long-dated forward foreign exchange contracts, option
transactions, liquidity facilities and investment agreements and invests in a
diversified portfolio of securities.

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

      AIG, as lessor, leases flight equipment principally under operating
leases. Accordingly, income is reported over the life of the lease as rentals
become receivable under the provisions of the lease or, in the case of leases
with varying payments, under the straight-line method over the noncancelable
term of the lease. In certain cases, leases provide for additional amounts
contingent on usage. AIG is also a remarketer of flight equipment for its own
account and for airlines and financial institutions. AIG's revenues from such
operations consist of net gains on sales of flight equipment and commissions.

      Asset Management Operations: AIG's asset management operations offer a
wide variety of investment vehicles and services, including variable annuities,
mutual funds and investment asset management. Such products and services are
offered to individuals and institutions both domestically and internationally.
The fees generated with respect to asset management operations are recognized as
revenues when earned. Costs incurred in the sale of variable annuities and
mutual funds are deferred and subsequently amortized. With respect to variable
annuities, acquisition costs are amortized in relation to the incidence of
estimated gross profits to be realized over the estimated lives of the variable
annuity contracts. With respect to the sale of mutual funds, acquisition costs
are amortized over the estimated lives of the funds obtained.

      (c) Non-cash Transaction: In July 1998, 224,950 shares of 21st Century's
Series A preferred stock were converted into 19,584,368 shares of 21st Century's
common stock.

      (d) Investments in Fixed Maturities and Equity Securities: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at current market values.
Interest income with respect to fixed maturity securities is accrued currently.

      Included in the bonds available for sale are collateralized mortgage
obligations (CMOs). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments over their estimated lives.

      Bond trading securities are carried at current market values, as it is
AIG's intention to sell these securities in the near term.

      Common and non-redeemable preferred stocks are carried at current market
values. Dividend income is generally recognized when receivable.

      Unrealized gains and losses from investments in equity securities and
fixed maturities available for sale are reflected as a separate component of
comprehensive income, net of deferred income taxes in capital funds currently.
Unrealized gains and losses from investments in trading securities are reflected
in income currently.

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

      (e) Mortgage Loans on Real Estate, Policy and Collateral Loans-net:
Mortgage loans on real estate, policy loans and collateral loans are carried at
unpaid principal balances. Interest income on such loans is accrued currently.

      Impairment of mortgage loans on real estate and collateral loans is
generally measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate subject to the fair value of
underlying collateral. Interest income on such loans is recognized as cash is
received.

      There is no allowance for policy loans, as these loans serve to reduce the
death benefit paid when the death claim is made and the balances are effectively
collateralized by the cash surrender value of the policy.


                                                                              51

<PAGE>   53

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

1. Summary of Significant Accounting Policies (continued)

      (f) Flight Equipment: Flight equipment is stated at cost. Major additions
and modifications are capitalized. Normal maintenance and repairs, airframe and
engine overhauls and compliance with return conditions of flight equipment on
lease are provided by and paid for by the lessee. Under the provisions of most
leases for certain airframe and engine overhauls, the lessee is reimbursed for
costs incurred up to but not exceeding contingent rentals paid to AIG by the
lessee. AIG provides a charge to income for such reimbursements based upon the
expected reimbursements during the life of the lease. Depreciation and
amortization are computed on the straight-line basis to a residual value of
approximately 15 percent over the estimated useful lives of the related assets
but not exceeding 25 years. AIG monitors the global aircraft market and the
values of various types and models of aircraft within that market relative to
the values of its own fleet. If events or circumstances were such that the
carrying amount of AIG's aircraft might be impaired, AIG would determine if such
impairment existed and recognize such impairment. This caption also includes
deposits for aircraft to be purchased.

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

      (g) Securities Available for Sale, at market value: These securities are
held to meet long term investment objectives and are accounted for as available
for sale, carried at current market values and recorded on a trade date basis.
Unrealized gains and losses from valuing these securities and any related hedges
are reflected in capital funds currently, net of any related deferred income
taxes. When the underlying security is sold, the realized gain or loss resulting
from the hedging derivative transaction is recognized in income in that same
period as the realized gain or loss of the hedged security.

      (h) Trading Securities, at market value: Trading securities are held to
meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and carried at current market
values. Unrealized gains and losses are reflected in income currently.

      (i) Spot Commodities, at market value: Spot commodities are carried at
current market values and are recorded on a settlement date basis. The exposure
to market risk may be reduced through the use of forwards, futures and option
contracts. Unrealized gains and losses of both commodities and any derivative
transactions are reflected in income currently.

      (j) Unrealized Gain and Unrealized Loss on Interest Rate and Currency
Swaps, Options and Forward Transactions: Interest rate swaps, currency swaps,
equity swaps, swaptions, options and forward transactions are accounted for as
contractual commitments recorded on a trade date basis and are carried at
current market values or estimated fair values when market values are not
available. Unrealized gains and losses are reflected in income currently.
Estimated fair values are based on the use of valuation models that utilize,
among other things, current interest, foreign exchange and volatility rates.
These valuations represent an assessment of the present values of expected
future cash flows of these transactions and may include reserves for market risk
as deemed appropriate. The portfolio's discounted cash flows are evaluated with
reference to current market conditions, maturities within the portfolio and
other relevant factors. Based upon this evaluation, it is determined what
offsetting transactions, if any, are necessary to reduce the market risk of the
portfolio. AIG manages its market risk with a variety of transactions,
including swaps, trading securities, futures and forward contracts and other
transactions as appropriate. Because of the limited liquidity of some of these
instruments, the recorded values of these transactions may be different than the
values that might be realized if AIG were to sell or close out the transactions
prior to maturity. AIG believes that such differences are not significant to the
results of operations, financial condition or liquidity. Such differences would
be immediately recognized when the transactions are sold or closed out prior to
maturity.

      (k) Trading Assets and Trading Liabilities: Trading assets and trading
liabilities include option premiums paid and received and receivables from and
payables to counterparties which relate to unrealized gains and losses on
futures, forwards and options and balances due from and due to clearing brokers
and exchanges.

      Futures, forwards and options purchased and written are accounted for as
contractual commitments on a trade date basis and are carried at fair values.
Unrealized gains and losses are reflected in income currently. The fair values
of futures contracts are based on closing exchange quotations. Commodity forward
transactions are carried at fair values derived from dealer quotations and
underlying commodity exchange quotations. For long dated forward transactions,
where there are no dealer or exchange quotations, fair values are derived using
internally developed valuation methodologies based on available market
information. Options are carried at fair values based on the use of valuation
models that utilize, among other things, current interest or commodity rates and
foreign exchange and volatility rates, as applicable.

      (l) Securities Purchased (Sold) Under Agreements to Resell (Repurchase),
at contract value: Purchases of securities under agreements to resell and sales
of securities under agreements to repurchase are accounted for as collateralized
lending transactions and are recorded at their contracted resale or repurchase
amounts, plus accrued interest. Generally, it is AIG's policy to take possession
of or obtain a security interest in securities purchased under agreements to
resell.

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


52

<PAGE>   54

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

1. Summary of Significant Accounting Policies (continued)

      (m) Other Invested Assets: Other invested assets consist primarily of
investments by AIG's insurance operations in joint ventures and partnerships and
other investments not classified elsewhere herein. The joint ventures and
partnerships are carried at equity or cost depending on the nature of the
invested asset and the ownership percentage thereof. Other investments are
carried at cost or market values depending upon the nature of the underlying
assets. Unrealized gains and losses from the revaluation of those investments
carried at market values are reflected in comprehensive income, net of any
related deferred income taxes.

      (n) Reinsurance Assets: Reinsurance assets include the balances due from
both reinsurance and insurance companies under the terms of AIG's reinsurance
agreements for paid and unpaid losses and loss expenses, ceded unearned premiums
and ceded future policy benefits for life and accident and health insurance
contracts and benefits paid and unpaid. It also includes funds held under
reinsurance treaties. Amounts related to paid and unpaid losses and loss
expenses with respect to these reinsurance agreements are substantially
collateralized.

      (o) Investments in Partially-Owned Companies: The equity method of
accounting is used for AIG's investment in companies in which AIG's ownership
interest approximates twenty but is not greater than fifty percent
(minority-owned companies). Equity in income of minority-owned insurance
operations is presented separately in the consolidated statement of income.
Equity in net income of other unconsolidated companies is principally included
in other income (deductions)--net. At December 31, 1999, AIG's significant
investments in partially-owned companies included its 24.4 percent interest in
IPC Holdings, Ltd. This balance sheet caption also includes investments in less
significant partially-owned companies and in certain minor majority-owned
subsidiaries. The amounts of dividends received from unconsolidated subsidiaries
owned less than 50 percent were $13 million, $24 million and $30 million in
1999, 1998 and 1997 respectively. The undistributed earnings of unconsolidated
subsidiaries owned less than 50 percent was $82 million as of December 31, 1999.

      In 1999, AIG did not report equity in income of minority-owned insurance
operations as a result of the consolidation of Transatlantic's and SELIC
Holdings, Ltd. operations into general insurance operating results. IPC
Holdings, Ltd., the remaining operation included in equity in income of
minority-owned insurance operations in previous periods is now reported as a
component of other income (deductions) -- net.

      (p) Real Estate and Other Fixed Assets: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs are
charged to income as incurred; expenditures for betterments are capitalized and
depreciated.

      From time to time, AIG assesses the carrying value of its real estate
relative to the market values of real estate within the specific local area. At
December 31, 1999, there were no impairments.

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

      (r) Securities and Spot Commodities Sold but not yet Purchased, at market
value: Securities and spot commodities sold but not yet purchased represent
sales of securities and spot commodities not owned at the time of sale. The
obligations arising from such transactions are recorded on a trade date basis
and carried at the respective current market values or current commodity prices.

      (s) Preferred Shareholders' Equity in Subsidiary Companies: Preferred
shareholders' equity in subsidiary companies relates to outstanding preferred
stock of ILFC and certain subsidiaries of SunAmerica, both wholly owned
subsidiaries of AIG. Dividends on such preferred stock are accounted for as
interest expense and included as minority interest in the consolidated statement
of income.

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

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

      (v) Earnings Per Share: Basic earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. Diluted earnings per share are
based on those shares used in basic earnings per share plus shares that would


                                                                              53

<PAGE>   55

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

1. Summary of Significant Accounting Policies (continued)

have been outstanding assuming issuance of common shares for all dilutive
potential common shares outstanding, retroactively adjusted to reflect all stock
dividends and stock splits.

      The computation of earnings per share for December 31, 1999, 1998 and 1997
was as follows:


<TABLE>
<CAPTION>
(in millions, except per share amounts)
-------------------------------------------------------------------------------
Years Ended December 31,                         1999         1998         1997
===============================================================================
<S>                                           <C>          <C>          <C>    
Numerator for basic earnings
  per share:
Net income                                    $ 5,055      $ 4,282      $ 3,711
Less:
  Dividends on non-convertible
    preferred stock                                --           --           (6)
  Dividends on convertible
    preferred stock                                --          (12)         (12)
-------------------------------------------------------------------------------
Net income applicable to
  common stock                                $ 5,055      $ 4,270      $ 3,693
===============================================================================
Denominator for basic earnings
  per share:
Average shares outstanding used in the
  computation of per share earnings:
  Common stock issued                           1,664        1,632        1,618
  Common stock in treasury                       (116)        (111)        (107)
  Common stock contingently issuable               --           (3)          (3)
-------------------------------------------------------------------------------
Average shares outstanding--basic               1,548        1,518        1,508
===============================================================================
Numerator for diluted earnings
  per share:
Net income                                    $ 5,055      $ 4,282      $ 3,711
Less:
  Dividends on non-convertible
    preferred stock                                --           --           (6)
-------------------------------------------------------------------------------
Net income applicable to
  common stock                                $ 5,055      $ 4,282      $ 3,705
===============================================================================
Denominator for diluted earnings
  per share:
Average shares outstanding                      1,548        1,521        1,511
Incremental shares from potential
  common stock:
  Average number of shares arising
    from outstanding employee stock
    plans (treasury stock method)                  19           15           11
  Average number of shares issuable
    upon conversion of convertible
    securities and preferred stock                 --           18           20
-------------------------------------------------------------------------------
Average shares outstanding--
  diluted                                       1,567        1,554        1,542
===============================================================================
Earnings per share:
Basic                                         $  3.27      $  2.81      $  2.45
Diluted                                          3.23         2.75         2.40
===============================================================================
</TABLE>


      (w) Accounting Standards: In June 1997, FASB issued Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (FASB 130) and
Statement of Financial Accounting Standards No. 131 "Disclosure about Segments
of an Enterprise and Related Information" (FASB 131).

      FASB 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. FASB 130 was
effective for AIG as of January 1, 1998.

      FASB 131 establishes standards for the way AIG is required to disclose
information about its operating segments in its annual financial statements and
selected information in its interim financial statements. FASB 131 establishes,
where practicable, standards with respect to geographic areas, among other
things. Certain descriptive information is also required. FASB 131 was effective
for the year ended December 31, 1998.

      In February 1998, FASB issued Statement of Financial Accounting Standards
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits" (FASB 132). This statement requires AIG to revise its disclosures
about pension and other postretirement benefit plans and does not change the
measurement or recognition of these plans. Also, FASB 132 requires additional
information on changes in the benefit obligations and fair values of plan
assets. FASB 132 was effective for the year ended December 31, 1998.

      In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FASB 133).
This statement requires AIG to recognize all derivatives in the consolidated
balance sheet measuring these derivatives at fair value. The recognition of the
change in the fair value of a derivative depends on a number of factors,
including the intended use of the derivative. Currently, AIG Financial Products
Corp. and its subsidiaries (AIGFP) and AIG Trading Group Inc. and its
subsidiaries (AIGTG) present, in all material respects, the changes in fair
value of their derivative transactions as a component of AIG's operating income.
AIG is evaluating the impact of FASB 133 with respect to derivative transactions
entered into by other AIG operations. AIG believes that the impact of FASB 133
on its results of operations, financial condition or liquidity will not be
significant. FASB 133 is effective for the year commencing January 1, 2001.

      In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." This statement provides guidance for the
recording of a liability for insurance-related assessments. The statement
requires that a liability be recognized in certain defined circumstances. This
statement was effective for the year commencing January 1, 1999 and has been
adopted herein. SOP 97-3 did not have a material impact on AIG's results of
operations, financial condition or liquidity.

       In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
This statement identifies several methods of deposit accounting and provides
guidance on the application of each method. This statement classifies insurance
and reinsurance contracts for which the deposit 


54

<PAGE>   56

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

method is appropriate as contracts that (i) transfer only significant timing
risk, (ii) transfer only significant underwriting risk, (iii) transfer neither
significant timing nor underwriting risk, and (iv) have an indeterminate risk.
AIG believes that the impact of this statement on its results of operations,
financial condition or liquidity will not be significant. This statement is
effective for the year commencing January 1, 2000. Restatement of previously
issued financial statements is not permitted.

2. Foreign Operations

Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds which
generally cause a delay in the outward remittance of such funds. Approximately
32 percent of consolidated assets at December 31, 1999 and 1998 and 50 percent,
49 percent and 51 percent of revenues for the years ended December 31, 1999,
1998 and 1997, respectively, were located in or derived from foreign countries
(other than Canada). (See Note 18.)

3. Federal Income Taxes

(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal income
tax return. Revenue Agent's Reports assessing additional taxes for the years
1987, 1988, 1989 and 1990 have been issued and Letters of Protest contesting the
assessments have been filed with the Internal Revenue Service. In addition,
Revenue Agent's Reports assessing additional taxes for the years ended November
30, 1988 and September 30, 1990, 1991, 1992, 1993 and 1994 have been issued to
SunAmerica. Such assessments relate to years prior to the acquisition of
SunAmerica by AIG. Letters of Protest contesting the assessments have been filed
with the Internal Revenue Service. It is management's belief that there are
substantial arguments in support of the positions taken by AIG and SunAmerica in
their Letters of Protest. AIG also believes that the impact of the results of
these examinations will not be significant to AIG's financial condition, results
of operations or liquidity.

      Foreign income not expected to be taxed in the United States has arisen
because AIG's foreign subsidiaries were generally not subject to U.S. income
taxes on income earned prior to January 1, 1987. Such income would become
subject to U.S. income taxes at current tax rates if remitted to the United
States or if other events occur which would make these amounts currently
taxable. The cumulative amount of translated undistributed earnings of AIG's
foreign subsidiaries currently not subject to U.S. income taxes was
approximately $3.1 billion at December 31, 1999. Management presently has not
subjected and has no intention of subjecting these accumulated earnings to
material U.S. income taxes and no provision has been made in the accompanying
financial statements for such taxes.

      (b) The U.S. Federal income tax rate is 35 percent for 1999, 1998 and
1997. 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 millions)
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                           1999                      1998                      1997
                                                           --------------------      --------------------      --------------------
                                                                        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                                     $ 2,629         35.0%     $ 2,197         35.0%     $ 1,859         35.0%
Adjustments:
  Tax exempt interest                                         (280)        (3.7)        (284)        (4.5)        (287)        (5.4)
  Dividends received deduction                                 (38)        (0.5)         (30)        (0.5)         (28)        (0.5)
  State income taxes                                            55          0.7           34          0.5           33          0.6
  Foreign income not expected to be taxed in the
    U.S., less foreign income taxes                            (81)        (1.1)         (85)        (1.4)         (33)        (0.6)
  Affordable housing tax credits                               (55)        (0.7)         (39)        (0.6)         (24)        (0.5)
  Other                                                        (11)        (0.2)          (8)        (0.1)           5          0.1
-----------------------------------------------------------------------------------------------------------------------------------
Actual tax expense                                         $ 2,219         29.5%     $ 1,785         28.4%     $ 1,525         28.7%
===================================================================================================================================
Foreign and domestic components of actual tax expense:
  Foreign:
    Current                                                $   403                   $   386                   $   317              
    Deferred                                                   123                        31                        75              
  Domestic*
    Current                                                  1,410                       714                       987              
    Deferred                                                   283                       654                       146             
-----------------------------------------------------------------------------------------------------------------------------------
Total                                                      $ 2,219                   $ 1,785                   $ 1,525             
===================================================================================================================================
</TABLE>

* Including U.S. tax on foreign income.


                                                                              55

<PAGE>   57

--------------------------------------------------------------------------------
Notes to Financial Statements  (continued)

3. Federal Income Taxes (continued)

      (c) The components of the net deferred tax liability as of December 31,
1999 and December 31, 1998 were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                              1999          1998
================================================================================
<S>                                                         <C>           <C>   
Deferred tax assets:
  Loss reserve discount                                     $1,357        $1,275
  Unearned premium reserve reduction                           380           390
  Accruals not currently deductible                            466           555
  Adjustment to life policy reserves                         1,126           935
  Cumulative translation adjustment                            137           151
  Unrealized depreciation of investments                       191            --
  Other                                                         68            62
--------------------------------------------------------------------------------
                                                             3,725         3,368
--------------------------------------------------------------------------------
Deferred tax liabilities:
  Deferred policy acquisition costs                          2,305         2,002
  Financial service products mark to market
  differential                                                 454           330
  Depreciation of flight equipment                           1,210         1,137
  Acquisition net asset basis adjustments                       63            93
  Unrealized appreciation of investments                        --           707
  Other                                                        444           346
--------------------------------------------------------------------------------
                                                             4,476         4,615
--------------------------------------------------------------------------------
Net deferred tax liability                                  $  751        $1,247
================================================================================
</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 millions)
-------------------------------------------------------------------------------
Years Ended December 31,                            1999       1998        1997
===============================================================================
<S>                                               <C>        <C>        <C>    
General insurance operations:
  Balance at beginning of year                    $1,852     $1,637     $ 1,416
-------------------------------------------------------------------------------
  Acquisition costs deferred
    Commissions                                      799        664         592
    Other                                          1,009        909         845
-------------------------------------------------------------------------------
                                                   1,808      1,573       1,437
-------------------------------------------------------------------------------
  Amortization charged to income
    Commissions                                      642        568         552
    Other                                            886        790         664
-------------------------------------------------------------------------------
                                                   1,528      1,358       1,216
-------------------------------------------------------------------------------
  Balance at end of year                          $2,132     $1,852     $ 1,637
===============================================================================
Life insurance operations:
  Balance at beginning of year                    $6,229     $5,515     $ 5,403
-------------------------------------------------------------------------------
  Acquisition costs deferred
    Commissions                                    1,068        892         963
    Other                                            951        421         825
-------------------------------------------------------------------------------
                                                   2,019      1,313       1,788
-------------------------------------------------------------------------------
  Amortization charged to income
    Commissions                                      502        450         489
    Other                                            389        309         385
-------------------------------------------------------------------------------
                                                     891        759         874
-------------------------------------------------------------------------------
  Increase (decrease) due to foreign
    exchange                                         135        160        (802)
-------------------------------------------------------------------------------
  Balance at end of year                          $7,492     $6,229     $ 5,515
-------------------------------------------------------------------------------
Total deferred policy acquisition costs           $9,624     $8,081     $ 7,152
===============================================================================
</TABLE>


5. Reinsurance

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

      General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Ceded premiums are considered prepaid reinsurance premiums
and are amortized into income over the contract period in proportion to the
protection received. Amounts recoverable from general reinsurers are estimated
in a manner consistent with the claims liabilities associated with the
reinsurance and presented as a component of reinsurance assets.


56

<PAGE>   58

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

5. Reinsurance (continued)

      AIG life companies limit exposure to loss on any single life. For ordinary
insurance, AIG retains a maximum of approximately one million dollars of
coverage per individual life. There are smaller retentions for other lines of
business. Life reinsurance is effected principally under yearly renewable term
treaties. The premiums with respect to these treaties are considered prepaid
reinsurance premiums and are amortized into income over the contract period in
proportion to the protection provided. Amounts recoverable from life reinsurers
are estimated in a manner consistent with the assumptions used for the
underlying policy benefits and are presented as a component of reinsurance
assets.

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


<TABLE>
<CAPTION>
(in millions)
-------------------------------------------------------------------------------
Years Ended December 31,                            Written              Earned
===============================================================================
<S>                                                <C>                 <C>     
1999
Gross premiums                                     $ 22,569            $ 21,187
Ceded premiums                                       (6,345)             (5,643)
-------------------------------------------------------------------------------
Net premiums                                       $ 16,224            $ 15,544
===============================================================================
1998
Gross premiums                                     $ 20,684            $ 20,092
Ceded premiums                                       (6,098)             (5,994)
-------------------------------------------------------------------------------
Net premiums                                       $ 14,586            $ 14,098
===============================================================================
1997
Gross premiums                                     $ 18,742            $ 17,566
Ceded premiums                                       (5,334)             (5,145)
-------------------------------------------------------------------------------
Net premiums                                       $ 13,408            $ 12,421
===============================================================================
</TABLE>


       For the years ended December 31, 1999, 1998 and 1997, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $5.13
billion, $5.36 billion and $4.59 billion, respectively.

      Life insurance net premium income was comprised of the following:


<TABLE>
<CAPTION>
(in millions)
-------------------------------------------------------------------------------
Years Ended December 31,                   1999            1998            1997
===============================================================================
<S>                                    <C>             <C>             <C>     
Gross premium income                   $ 12,252        $ 10,578        $ 10,242
Ceded premiums                             (310)           (285)           (286)
-------------------------------------------------------------------------------
Net premium income                     $ 11,942        $ 10,293        $  9,956
===============================================================================
</TABLE>


      Life insurance recoveries, which reduced death and other benefits,
approximated $168 million, $176 million and $190 million, respectively, for the
years ended December 31, 1999, 1998 and 1997.

      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 millions)
--------------------------------------------------------------------------------
Years Ended December 31,                      1999           1998           1997
================================================================================
<S>                                        <C>            <C>            <C>    
Life insurance in-force                    $69,535        $62,768        $56,971
================================================================================
</TABLE>


      Life insurance assumed represented 0.2 percent of gross life insurance
in-force at December 31, 1999 and 0.3 percent at December 31, 1998 and 1997,
respectively, and life insurance premium income assumed represented 0.3 percent,
0.3 percent and 0.2 percent of gross premium income for the periods ended
December 31, 1999, 1998 and 1997, respectively.

      Supplemental information for gross loss and benefit reserves net of ceded
reinsurance at December 31, 1999 and 1998 follows:


<TABLE>
<CAPTION>
(in millions)
-------------------------------------------------------------------------------
                                                             As          Net of
                                                       Reported     Reinsurance
===============================================================================
<S>                                                    <C>             <C>      
1999
Reserve for losses and loss expenses                   $(38,252)       $(24,600)
Future policy benefits for life and
  accident and health insurance contracts               (34,608)        (34,372)
Premiums and insurance balances
  receivable-net                                         12,737          15,277
Funds held under reinsurance treaties                        --             484
Reserve for unearned premiums                           (11,450)         (8,994)
Reinsurance assets                                       19,368              --
===============================================================================
1998
Reserve for losses and loss expenses                   $(38,310)       $(24,619)
Future policy benefits for life and
  accident and health insurance contracts               (29,571)        (29,433)
Premiums and insurance balances
  receivable-net                                         11,679          13,394
Funds held under reinsurance treaties                        --             446
Reserve for unearned premiums                           (10,009)         (8,255)
Reinsurance assets                                       17,744              --
===============================================================================
</TABLE>



                                                                              57

<PAGE>   59

--------------------------------------------------------------------------------
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 millions)
-------------------------------------------------------------------------------
Years Ended December 31,                       1999          1998          1997
===============================================================================
<S>                                        <C>           <C>           <C>     
At beginning of year:
  Reserve for losses and
    loss expenses                          $ 38,310      $ 33,400      $ 33,430
  Reinsurance recoverable                   (13,691)      (12,229)      (13,023)
-------------------------------------------------------------------------------
                                             24,619        21,171        20,407
-------------------------------------------------------------------------------
Acquisitions                                     --         2,896            --
Losses and loss expenses incurred:
  Current year                               12,122        10,938         9,732
  Prior years                                  (384)         (281)         (376)
-------------------------------------------------------------------------------
Total                                        11,738        10,657         9,356
===============================================================================
Losses and loss expenses paid:
  Current year                                4,978         4,389         2,976
  Prior years                                 6,779         5,716         5,616
-------------------------------------------------------------------------------
Total                                        11,757        10,105         8,592
===============================================================================
At end of year:
  Net reserve for losses and
    loss expenses                            24,600        24,619        21,171
  Reinsurance recoverable                    13,652        13,691        12,229
-------------------------------------------------------------------------------

Total                                      $ 38,252      $ 38,310      $ 33,400
===============================================================================
</TABLE>


       (b) The analysis of the future policy benefits and policyholders'
contract deposits liabilities as at December 31, 1999 and 1998 follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                             1999           1998
================================================================================
<S>                                                       <C>            <C>    
Future policy benefits:
  Long duration contracts                                 $33,670        $28,535
  Short duration contracts                                    938          1,036
--------------------------------------------------------------------------------
Total                                                     $34,608        $29,571
================================================================================
Policyholders' contract deposits:
  Annuities                                               $18,027        $18,129
  Guaranteed investment contracts (GICs)                   18,905         12,007
  Corporate life products                                   1,891          2,266
  Universal life                                            2,962            639
  Other investment contracts                                  764            883
--------------------------------------------------------------------------------
Total                                                     $42,549        $33,924
================================================================================
</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. The
liability for future life policy benefits has been established based upon the
following assumptions:

      (i) Interest rates (exclusive of immediate/terminal funding annuities),
which vary by territory, year of issuance and products, range from 1.5 percent
to 12.0 percent within the first 20 years. Interest rates on immediate/terminal
funding annuities are at a maximum of 12.2 percent and grade to not greater than
7.5 percent.

      (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 7.4 percent.

      (iii) The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the benefit of AIG are
restricted in some cases by the insurance contracts and by the local insurance
regulations of the countries in which the policies are in force.

      (iv) Participating life business represented approximately 30 percent of
the gross insurance in-force at December 31, 1999 and 46 percent of gross
premium income in 1999. 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, which vary by territory
and year of issuance, range from 2.0 percent to 12.0 percent. Credited interest
rate guarantees are generally for a period of one year. Withdrawal charges
generally range from zero percent to 10.0 percent grading to zero over a period
of zero to 10 years.

      (ii) Domestically, GICs have market value withdrawal provisions for any
funds withdrawn other than benefit responsive payments. Interest rates credited
generally range from 3.9 percent to 9.4 percent and maturities range from 1 to
30 years. Overseas, primarily in the United Kingdom, GIC type contracts are
credited at rates ranging from 3.6 percent to 5.8 percent with guarantees
generally being one year. Contracts in other foreign locations have interest
rates, maturities and withdrawal charges based upon local economic and
regulatory conditions.

      (iii) Interest rates on corporate life insurance products are guaranteed
at 4.0 percent and the weighted average rate credited in 1999 was 6.7 percent.

      (iv) The universal life funds have credited interest rates of 4.5 percent
to 7.0 percent and guarantees ranging from 3.5 percent to 5.5 percent depending
on the year of issue. Additionally, universal life funds are subject to
surrender charges that amount to 11.0 percent of the fund balance grading to
zero over a period not longer than 20 years.

      (e) Certain products, which are short duration contracts, are subject to
experience adjustments. These include group life and group medical products,
credit life contracts, accident & health insurance contracts/riders attached to
life policies and, to a limited extent, reinsurance agreements with other direct
insurers. Ultimate premiums from these contracts are estimated and recognized as
revenue and the unearned portions of the premiums are held as reserves.
Experience adjustments vary according to the type of contract and the territory
in which the policy is in force and are subject to local regulatory guidance.


58

<PAGE>   60

--------------------------------------------------------------------------------
                             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 millions)
--------------------------------------------------------------------------------
Years Ended December 31,                      1999           1998           1997
================================================================================
<S>                                        <C>            <C>            <C>    
Statutory surplus:
  General insurance                        $16,225        $15,523        $14,071
  Life insurance                            10,230          8,177          6,966
Statutory net income*:
  General insurance                          2,458          2,252          2,041
  Life insurance                             1,575            925          1,357
================================================================================
</TABLE>


* Includes net realized capital gains and losses.

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

8. Investment Information

(a) Statutory Deposits: Cash and securities with carrying values of $4.34
billion and $4.12 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 1999 and 1998,
respectively.

      (b) Net Investment Income: An analysis of the net investment income from
the general and life insurance operations follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
Years Ended December 31,                          1999         1998         1997
================================================================================
<S>                                             <C>          <C>          <C>   
General insurance:
  Fixed maturities                              $1,852       $1,663       $1,490
  Equity securities                                101           80           55
  Short-term investments                            52           73           40
  Other invested assets                            399          202          196
  Miscellaneous (net of interest
    expense on funds held)                         256          279          141
--------------------------------------------------------------------------------
  Total investment income                        2,660        2,297        1,922
  Investment expenses                              143          105           68
--------------------------------------------------------------------------------
Net investment income                           $2,517       $2,192       $1,854
================================================================================
Life insurance:
  Fixed maturities                              $4,427       $3,683       $3,154
  Equity securities                                 91           72           79
  Short-term investments                           338          308          148
  Interest on mortgage, policy
    and collateral loans                           824          820          766
  Other                                            769          627          624
--------------------------------------------------------------------------------
  Total investment income                        6,449        5,510        4,771
  Investment expenses                              243          309          250
--------------------------------------------------------------------------------
Net investment income                           $6,206       $5,201       $4,521
================================================================================
</TABLE>


      (c) Investment Gains and Losses: The realized capital gains (losses) and
increase (decrease) in unrealized appreciation of investments for 1999, 1998 and
1997 were as follows:


<TABLE>
<CAPTION>
(in millions)
-------------------------------------------------------------------------------
Years Ended December 31,                         1999         1998         1997
===============================================================================
<S>                                           <C>            <C>          <C>  
Realized capital gains (losses)
  on investments:
  Fixed maturities (a)                        $  (191)       $ 121        $  64
  Equity securities                               410          105          134
  Other                                           (97)        (102)        (108)
-------------------------------------------------------------------------------
Realized capital gains                        $   122        $ 124        $  90
===============================================================================
Increase (decrease) in unrealized
  appreciation of investments:
  Fixed maturities                            $(3,634)       $ 555        $ 712
  Equity securities                               327         (484)        (405)
  Other (b)                                       766         (458)         (75)
-------------------------------------------------------------------------------
Increase (decrease) in unrealized
  appreciation                                $(2,541)       $(387)       $ 232
===============================================================================
</TABLE>

(a)   The realized gains (losses) resulted from the sale of available for sale
      fixed maturities.
(b)   Includes $264 million decrease, $301 million increase and $158 million
      decrease in unrealized appreciation attributable to participating
      policyholders at December 31, 1999, 1998 and 1997, respectively.

      The gross gains and gross losses realized on the disposition of available
for sale securities for 1999, 1998 and 1997 follow:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                               Gross       Gross
                                                            Realized    Realized
                                                               Gains      Losses
================================================================================
<S>                                                           <C>           <C> 
1999                                                                
Bonds                                                         $  197        $401
Common stocks                                                    806         336
Preferred stocks                                                  35          11
Financial services securities available for sale                  26          --
--------------------------------------------------------------------------------
Total                                                         $1,064        $748
================================================================================
1998                                                                
Bonds                                                         $  502        $363
Common stocks                                                    542         454
Preferred stocks                                                  12          11
Financial services securities available for sale                   4           2
--------------------------------------------------------------------------------
Total                                                         $1,060        $830
================================================================================
1997                                                                
Bonds                                                         $  229        $247
Common stocks                                                    559         419
Preferred stocks                                                   6          11
Financial services securities available for sale                   6           3
--------------------------------------------------------------------------------
Total                                                         $  800        $680
================================================================================
</TABLE>

                                                            
      (d) Market Value of Fixed Maturities and Unrealized Appreciation of
Investments: At December 31, 1999 and 1998, the balance of the unrealized
appreciation of investments


                                                                              59

<PAGE>   61

--------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)

8. Investment Information (continued)

in equity securities (before applicable taxes)
included gross gains of approximately $1.2 billion and $1.3 billion and gross
losses of approximately $706 million and $1.2 billion, respectively.

       The deferred tax asset related to the net unrealized depreciation of
investments was $191 million at December 31, 1999 and the deferred tax payable
related to the net unrealized appreciation of investments was $707 million at
December 31, 1998.

       The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 1999 and 1998 were as
follows:


<TABLE>
<CAPTION>
(in millions)
------------------------------------------------------------------------------------
                                                      Gross       Gross    Estimated
                                      Amortized  Unrealized  Unrealized       Market
                                           Cost       Gains      Losses        Value
====================================================================================
<S>                                     <C>            <C>         <C>       <C>    
1999
Fixed maturities held to                                                            
  maturity:                                                                         
  Bonds:                                                                            
    U.S. Government (a)                 $    30        $ --        $ --      $    30
    States (b)                           12,042         275         149       12,168
    Foreign governments                       1          --          --            1
    All other corporate                       3          --          --            3
------------------------------------------------------------------------------------
Total bonds                              12,076         275         149       12,202
Preferred stocks                              2          --           2           --
------------------------------------------------------------------------------------
Total fixed maturities                  $12,078        $275        $151      $12,202
====================================================================================
1998
Fixed maturities held to                                                            
  maturity:                                                                         
    Bonds:                                                                          
    U.S. Government (a)                 $     9        $  1        $ --      $    10
    States (b)                           12,648         975           2       13,621
    All other corporate                       1           1          --            2
------------------------------------------------------------------------------------
Total fixed maturities                  $12,658        $977        $  2      $13,633
====================================================================================
</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, 1999 and 1998 were as follows:


<TABLE>
<CAPTION>
(in millions)
-------------------------------------------------------------------------------------
                                                     Gross        Gross     Estimated
                                     Amortized  Unrealized   Unrealized        Market
                                          Cost       Gains       Losses         Value
=====================================================================================
<S>                                    <C>          <C>          <C>          <C>    
1999
Fixed maturities available
  for sale:
  Bonds:
    U.S. Government (a)                $ 2,470      $   62       $   77       $ 2,455
    States (b)                           9,470         145          384         9,231
    Foreign governments                 14,780         461           84        15,157
    All other corporate                 51,498         782        2,095        50,185
-------------------------------------------------------------------------------------
Total bonds                            $78,218      $1,450       $2,640       $77,028
=====================================================================================
1998                                                                                 
Fixed maturities available                                                           
  for sale:                                                                          
  Bonds:                                                                             
    U.S. Government (a)                $ 2,827      $  216       $    2       $ 3,041
    States (b)                           6,514         427           65         6,876
    Foreign governments                 10,523         671           42        11,152
    All other corporate                 44,009       1,861          622        45,248
-------------------------------------------------------------------------------------
Total bonds                            $63,873      $3,175       $  731       $66,317
=====================================================================================
</TABLE>

(a)   Including U.S. Government agencies and authorities.
(b)   Including municipalities and political subdivisions.

      The amortized cost and estimated market values of fixed maturities held to
maturity and fixed maturities available for sale at December 31, 1999, 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 millions)
--------------------------------------------------------------------------------
                                                                       Estimated
                                                           Amortized      Market
                                                                Cost       Value
================================================================================
<S>                                                          <C>         <C>    
Fixed maturities held to maturity:
Due in one year or less                                      $   485     $   491
Due after one year through five years                          1,816       1,842
Due after five years through ten years                         3,740       3,781
Due after ten years                                            6,037       6,088
--------------------------------------------------------------------------------
Total held to maturity                                       $12,078     $12,202
================================================================================
Fixed maturities available for sale:
Due in one year or less                                      $ 5,248     $ 5,246
Due after one year through five years                         24,157      24,382
Due after five years through ten years                        25,889      25,125
Due after ten years                                           22,924      22,275
--------------------------------------------------------------------------------
Total available for sale                                     $78,218     $77,028
================================================================================
</TABLE>



60

<PAGE>   62

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

8. Investment Information (continued)

      (e) Securities Available for Sale: AIGFP follows a policy of minimizing
interest rate, equity and currency risks associated with securities available
for sale by entering into swap or other transactions. In addition, to reduce its
credit risk, AIGFP has entered into credit derivative transactions with respect
to $182 million of securities available for sale. At December 31, 1999, the
cumulative increase in carrying value of the securities available for sale and
related hedges as a result of marking to market such securities net of hedging
transactions was $34 million.

      The amortized cost, related hedges and estimated market value of
securities available for sale and carried at market value at December 31, 1999
and 1998 were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------------------------------------
                                                                                         Unrealized
                                                                                              Gains
                                                            Gross            Gross   (Losses) - net        Estimated
                                       Amortized       Unrealized       Unrealized       on Hedging           Market
                                            Cost            Gains           Losses     Transactions            Value
====================================================================================================================
<S>                                     <C>                 <C>              <C>             <C>            <C>     
1999
Securities available for sale:
  Corporate and bank debt               $  7,477            $  54            $ 199           $  167         $  7,499
  Foreign government obligations             354              311                1             (311)             353
  Asset-backed and collateralized          3,985                6              165              163            3,989
  Preferred stocks                           957               13               --               (4)             966
  U.S. Government obligations                147                4                7                3              147
--------------------------------------------------------------------------------------------------------------------
Total                                   $ 12,920            $ 388            $ 372           $   18         $ 12,954
====================================================================================================================
1998
Securities available for sale:
  Corporate and bank debt               $  5,440            $ 149            $  13           $ (131)        $  5,445
  Foreign government obligations             405               16                1              (15)             405
  Asset-backed and collateralized          3,037               91                8              (95)           3,025
  Preferred stocks                           970               10               --                3              983
  U.S. Government obligations                815               15               --              (14)             816
--------------------------------------------------------------------------------------------------------------------
Total                                   $ 10,667            $ 281            $  22           $ (252)        $ 10,674
====================================================================================================================
</TABLE>


      The amortized cost and estimated market values of securities available for
sale at December 31, 1999, 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 millions)
--------------------------------------------------------------------------------
                                                                       Estimated
                                                       Amortized          Market
                                                            Cost           Value
================================================================================
<S>                                                      <C>             <C>    
Securities available for sale:
Due in one year or less                                  $ 1,487         $ 1,487
Due after one year through five years                      5,397           5,428
Due after five years through ten years                     1,465           1,466
Due after ten years                                          586             584
Asset-backed and collateralized                            3,985           3,989
--------------------------------------------------------------------------------
Total available for sale                                 $12,920         $12,954
================================================================================
</TABLE>


      No securities available for sale were below investment grade at December
31, 1999.

      (f) CMOs: At December 31, 1999, CMOs, held by AIG's life companies, were
presented as a component of bonds available for sale, at market value.
Substantially all of the CMOs were investment grade and approximately 18 percent
of the CMOs were backed by various U.S. government agencies. The remaining 82
percent were corporate issuances.

      At December 31, 1999 and 1998, the market value of the CMO portfolio was
$14.94 billion and $7.29 billion, respectively; the amortized cost was
approximately $15.63 billion in 1999 and $7.07 billion in 1998. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 1999 and 1998.

      The distribution of the CMOs at December 31, 1999 and 1998 was as follows:


<TABLE>
<CAPTION>
                                                        1999               1998
===============================================================================
<S>                                                      <C>                <C> 
GNMA                                                       1%                 6%
FHLMC                                                     10                 15
FNMA                                                       6                 10
VA                                                         1                  1
Non-governmental                                          82                 68
-------------------------------------------------------------------------------
                                                         100%               100%
===============================================================================
</TABLE>


      AIG is not exposed to any significant credit concentration risk of a
single or group non-governmental issuer.

      At December 31, 1999, the gross weighted average coupon of this portfolio
was 6.8 percent. The gross weighted average life of this portfolio was
approximately 6.38 years.


                                                                              61

<PAGE>   63

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

8. Investment Information (continued)

      (g) Fixed Maturities Below Investment Grade: At December 31, 1999, fixed
maturities held by AIG that were below investment grade or not rated totaled
$10.93 billion.

      (h) At December 31, 1999, non-income producing invested assets were
insignificant.

9. Debt Outstanding

At December 31, 1999, AIG's debt outstanding of $32.98 billion, shown below,
included borrowings of $29.65 billion which were either not guaranteed by AIG or
were matched borrowings under obligations of guaranteed investment agreements
(GIAs) or matched notes and bonds payable.


<TABLE>
<CAPTION>
(in millions)
================================================================================
<S>                                                                      <C>    
Borrowings under obligations of GIAs -- AIGFP                            $ 9,430
--------------------------------------------------------------------------------
Commercial Paper:
   AIG Funding, Inc. (Funding)                                               888
   ILFC (a)                                                                2,958
   AICCO                                                                     475
   AIGF - Taiwan (a)                                                          83
--------------------------------------------------------------------------------
   Total                                                                   4,404
--------------------------------------------------------------------------------
Medium Term Notes:
   ILFC (a)                                                                3,226
   AIG(b)                                                                    481
--------------------------------------------------------------------------------
   Total                                                                   3,707
--------------------------------------------------------------------------------
Notes and Bonds Payable:
   ILFC  (a)(e)                                                            5,016
   AIGFP                                                                   7,895
   AIG (d)                                                                   705
--------------------------------------------------------------------------------
   Total                                                                  13,616
--------------------------------------------------------------------------------
Loans and Mortgages Payable:
   ILFC (a)(c)                                                               670
   AIG Finance (Hong Kong) Limited (AIGF - Hong Kong)(a)                     566
   AIG Consumer Finance Group, Inc.(a)                                       334
   AIG                                                                       257
--------------------------------------------------------------------------------
   Total                                                                   1,827
--------------------------------------------------------------------------------
Total Borrowings                                                          32,984
--------------------------------------------------------------------------------
Borrowings not guaranteed by AIG                                          12,853
Matched GIA borrowings                                                     9,430
Matched notes and bonds payable -- AIGFP                                   7,370
--------------------------------------------------------------------------------
                                                                          29,653
--------------------------------------------------------------------------------
Remaining borrowings of AIG                                              $ 3,331
================================================================================
</TABLE>


(a)   AIG does not guarantee or support these borrowings.
(b)   Includes $198 million issued by SunAmerica Inc. and assumed by AIG as a
      result of the merger.
(c)   Capital lease obligations.
(d)   Includes $432 million issued by SunAmerica Inc. and assumed by AIG as a
      result of the merger, Italian Lire bonds of $159 million and zero coupon
      notes of $114 million.
(e)   Includes borrowings under Export Credit Facility of $1.30 billion.

      The amount of long-term borrowings is $22.90 billion and the amount of
short-term borrowings is $10.08 billion. Long-term borrowings include commercial
paper; short-term borrowings represent borrowings that mature in less than one
year.

      (a) Commercial Paper: At December 31, 1999, the commercial paper issued
and outstanding was as follows: 


<TABLE>
<CAPTION>
(dollars in millions)
--------------------------------------------------------------------------------
                                                         Weighted
                         Net                              Average     Weighted
                        Book   Unamortized    Face        Interest    Average
                        Value    Discount    Amount         Rate      Maturity
================================================================================
<S>                    <C>        <C>        <C>            <C>        <C>    
Funding                $  888     $    2     $  890         5.59%      18 days
ILFC                    2,958         20      2,978         5.86      108 days
AICCO                     475          2        477         5.85       23 days
AIGF - Taiwan*             83          2         85         6.38      186 days
--------------------------------------------------------------------------------
Total                  $4,404     $   26     $4,430           --            --
================================================================================
</TABLE>

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

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

      (b) Borrowings under Obligations of Guaranteed Investment Agreements:
Borrowings under obligations of guaranteed investment agreements, which are
guaranteed by AIG, are recorded at the amount outstanding under each contract.
Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings are primarily fixed and
range up to 9.8 percent.

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


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                       <C>   
2000                                                                      $4,228
2001                                                                         717
2002                                                                         155
2003                                                                          88
2004                                                                          59
Remaining years after 2004                                                 4,183
--------------------------------------------------------------------------------
Total                                                                     $9,430
================================================================================
</TABLE>


      At December 31, 1999, the market value of securities pledged as collateral
with respect to these obligations approximated $2.4 billion.

      Funds received from GIA borrowings are invested in a diversified portfolio
of securities and derivative transactions.


62

<PAGE>   64

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

9. Debt Outstanding (continued)

      (c) Medium Term Notes Payable:

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

      An analysis of AIG's Medium Term Notes for the year ended December 31,
1999 was as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
Medium Term Note Series E:                                                Total
================================================================================
<S>                                                                       <C>  
Balance December 31, 1998                                                 $ 239
Issued during year                                                          152
Matured during year                                                        (108)
--------------------------------------------------------------------------------
Balance December 31, 1999                                                 $ 283
================================================================================
</TABLE>


      The interest rates on this debt range from 2.25 percent to 6.38 percent.
To the extent deemed appropriate, AIG may enter into swap transactions to reduce
its effective borrowing rates with respect to these notes.

      At December 31, 1999, AIG's Medium Term Notes also included notes in
aggregate principal amount of $198 million issued by SunAmerica Inc. with
maturity dates from 2000 to 2026 at interest rates ranging from 6.03 percent to
7.34 percent. AIG does not intend to have SunAmerica issue its own debt.

      During 1997, AIG issued $100 million principal amount of equity-linked
Medium Term Notes due July 30, 2004. These notes accrue interest at the rate of
2.25 percent and the total return on these notes is linked to the appreciation
in market value of AIG's common stock. The notes may be redeemed, at the option
of AIG, as a whole but not in part, at any time on or after July 30, 2000. In
conjunction with the issuance of these notes, AIG entered into a series of swap
transactions which effectively converted its interest expense to a fixed rate of
5.87 percent and transferred the equity appreciation exposure to a third party.
AIG is exposed to credit risk with respect to the counterparties to these swap
transactions.

      At December 31, 1999, the maturity schedule for AIG's outstanding Medium
Term Notes, including those issued by SunAmerica Inc., was as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                        <C>  
2000                                                                       $  33
2001                                                                         176
2002                                                                          24
2003                                                                          25
2004                                                                         120
Remaining years after 2004                                                   103
--------------------------------------------------------------------------------
Total                                                                       $481
================================================================================
</TABLE>


      At December 31, 1999, AIG had $356 million principal amount of debt
securities registered and available for issuance from time to time. An
additional $658 million principal amount of debt securities was registered as of
March 3, 2000.

      (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, 1999, notes in aggregate principal amount of $3.23
billion were outstanding with maturity dates from 2000 to 2005 at interest rates
ranging from 5.15 percent to 8.55 percent. These notes provide for a single
principal payment at the maturity of each note.

      At December 31, 1999, the maturity schedule for ILFC's outstanding Medium
Term Notes was as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                        <C>  
2000                                                                      $1,056
2001                                                                         912
2002                                                                         729
2003                                                                         404
2004                                                                         120
Remaining years after 2004                                                     5
--------------------------------------------------------------------------------
Total                                                                     $3,226
================================================================================
</TABLE>


      (d) Notes and Bonds Payable:

      (i) Notes, Bonds and Debentures Issued by AIG.

      (A) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of $750
million. The notes were offered at 12 percent of princi pal amount at stated
maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG
from the issuance were $86 million. The notes are redeemable at any time in
whole or in part at the option of AIG at 100 percent of their principal amount
at stated maturity. The notes are also redeemable at the option of AIG or bearer
notes may be redeemed at the option of the holder in the event of certain
changes involving taxation in the United States at prices ranging from 58.66
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 1999 and 1998, no notes were
repurchased. At December 31, 1999, the notes outstanding after prior purchases
had a face value of $189 million, an unamortized discount of $75 million and a
net book value of $114 million. The amortization of the original issue discount
was recorded as interest expense.

      (B) Italian Lire Bonds: In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire. The principal amount of 200 billion Italian Lire
Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent
which is paid annually. These bonds are not redeemable prior to matu-


                                                                              63

<PAGE>   65

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

9. Debt Outstanding (continued)

rity, except in the event of certain changes involving taxation in the United
States or the imposition of certain certification, identification or reporting
requirements.

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

      (C) Notes and Debentures Issued by SunAmerica Inc.: As of December 31,
1999, Notes and Debentures issued by SunAmerica Inc. in aggregate principal
amount of $432 million (net of amortized discount of $43 million) were
outstanding with maturity dates from 2007 to 2097 at interest rates ranging from
5.60 percent to 9.95 percent.

      (ii) Term Notes Issued by ILFC: ILFC has issued unsecured obligations
which may not be redeemed prior to maturity.

      As of December 31, 1999, notes in aggregate principal amount of $3.72
billion were outstanding with maturity dates from 2000 to 2004 and interest
rates ranging from 5.50 percent to 8.88 percent. Term notes in the aggregate
principal amount of $100 million are at floating interest rates and the
remainder are at fixed rates. These notes provide for a single principal payment
at maturity.

      At December 31, 1999, the maturity schedule for ILFC's Term Notes was as
follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                      <C>    
2000                                                                     $   900
2001                                                                       1,075
2002                                                                         883
2003                                                                         200
2004                                                                         663
--------------------------------------------------------------------------------
Total                                                                     $3,721
================================================================================
</TABLE>


      At December 31, 1999, ILFC had $1.68 billion in aggregate principal amount
of debt securities registered for issuance from time to time. In addition, ILFC
established a Euro Medium Term Note program for $2.0 billion, under which $771
million in notes were sold through December 31, 1999.

      Also included in term notes are ILFC's borrowings under an Export Credit
Facility.

      ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for
approximately 75 aircraft to be delivered from 1999 through 2001. ILFC has the
right, but is not required, to use the facility to fund 85 percent of each
aircraft's purchase price. This facility is guaranteed by various European
Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90
percent on the first 75 aircraft depending on the delivery date of the aircraft.
Through December 31, 1999, ILFC borrowed $1.30 billion under this facility.
Borrowings with respect to this facility are included in Notes and Bonds Payable
in the accompanying table of borrowings.At December 31, 1999, the future minimum
payments for ILFC's borrowings under the Export Credit Facility was as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                      <C>    
2000                                                                     $   135
2001                                                                         135
2002                                                                         135
2003                                                                         135
2004                                                                         135
Remaining years after 2004                                                   620
--------------------------------------------------------------------------------
Total                                                                     $1,295
================================================================================
</TABLE>


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

      (iii) Notes and Bonds Payable Issued by AIGFP: At December 31, 1999,
AIGFP's bonds outstanding, the proceeds of which are invested in a segregated
portfolio of securities available for sale, were as follows:


<TABLE>
<CAPTION>
(dollars in millions)
--------------------------------------------------------------------------------
Range of                                     Range of                U.S. Dollar
Maturities       Currency                    Interest Rates       Carrying Value
================================================================================
<S>              <C>                          <C>                         <C>   
2000-2001        Euro                         4.60% - 7.76%               $1,722
2002             Japanese yen                 4.50                           190
2001-2002        New Zealand dollar           8.51 - 9.43                    596
2002             United Kingdom pound         7.46                            79
2000-2029        U.S. dollar                  4.79 - 7.72                  3,970
--------------------------------------------------------------------------------
Total                                                                     $6,557
================================================================================
</TABLE>


      AIGFP is also obligated under various notes maturing from 2000 through
2026. The majority of these notes are denominated in U.S. dollars and Euros and
bear interest at various interest rates. At December 31, 1999, these notes had a
U.S. dollar carrying value of $1.3 billion.

      AIG guarantees all of AIGFP's debt.


64

<PAGE>   66

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

9. Debt Outstanding (continued)

      (e) Loans and Mortgages Payable: Loans and mortgages payable at December
31, 1999, consisted of the following:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                       AIG
                                           AIGF-  Consumer
                               ILFC    Hong Kong   Finance       AIG      Total
================================================================================
<S>                           <C>        <C>        <C>        <C>        <C>   
Uncollateralized
  loans payable               $   --     $  566     $  334     $   84     $  984
Collateralized loans and
  mortgages payable              670         --         --        173        843
--------------------------------------------------------------------------------
Total                         $  670     $  566     $  334     $  257     $1,827
================================================================================
</TABLE>


      At December 31, 1999, ILFC's capital lease obligations were $670 million.
Fixed interest rates with respect to these obligations range from 6.18 percent
to 6.89 percent; variable rates are referenced to LIBOR. These obligations
mature through 2005. The flight equipment associated with the capital lease
obligations had a net book value of $1.05 billion.

      At December 31, 1999, the maturity schedule for ILFC's capital lease
obligations, were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                         <C> 
2000                                                                        $134
2001                                                                         128
2002                                                                         123
2003                                                                         117
2004                                                                         162
Remaining years after 2004                                                   199
--------------------------------------------------------------------------------
Total minimum lease obligations                                              863
--------------------------------------------------------------------------------
Less amount representing interest                                            193
--------------------------------------------------------------------------------
Present value of net minimum capital lease obligations                      $670
================================================================================
</TABLE>


      (f) CMOs: Combined principal payments due of all significant debt,
excluding commercial paper, in each of the next five years ending December 31,
1999, and periods thereafter were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                      <C>    
2000                                                                     $10,088
2001                                                                       5,412
2002                                                                       2,972
2003                                                                       2,218
2004                                                                       1,721
Remaining years after 2004                                                 6,169
--------------------------------------------------------------------------------
Total                                                                    $28,580
================================================================================
</TABLE>


      (g) Revolving Credit Facilities: AIG and Funding have entered into two
syndicated revolving credit facilities (the Facilities) aggregating $1 billion.
The Facilities consist of a $500 million 364 day revolving credit facility and a
$500 million five year revolving credit facility. The Facilities can be used for
general corporate purposes and also provide backup for AIG's commercial paper
programs administered by Funding. There are currently no borrowings outstanding
under either of the Facilities, nor were any borrowings outstanding as of
December 31, 1999.

      (h) Interest Expense for All Indebtedness: Total interest expense for all
indebtedness, net of capitalized interest, aggregated $2.19 billion in 1999,
$1.99 billion in 1998 and $1.81 billion in 1997. Dividends on the preferred
shareholders' equity in subsidiary companies of ILFC and certain SunAmerica
subsidiaries are accounted for as interest expense and included as minority
interest in the consolidated statement of income. The dividends for ILFC for
December 31, 1999, 1998 and 1997 were approximately $17 million in each of the
three years. The dividends for the SunAmerica subsidiaries were approximately
$40 million in each of the years ended December 31, 1999 and 1998 and 1997.

10. Preferred Shareholders' Equity in Subsidiary Companies

Preferred shareholders' equity in subsidiary companies represents preferred
stocks issued by ILFC and certain SunAmerica subsidiaries, wholly owned
subsidiaries of AIG.

      (a) ILFC: The preferred stock consists of 4,000 shares of market auction
preferred stock ("MAPS") in eight series of 500 shares each. Each of these
shares has a liquidation value of $100,000 per share and is not convertible. The
dividend rate, other than the initial rate, for each dividend period for each
series is reset approximately every seven weeks (49 days) on the basis of orders
placed in an auction. At December 31, 1999, the dividend rate ranged from 4.70
percent to 5.18 percent.

      (b) SunAmerica: The preferred stock consists of $185 million liquidation
amount of 8.35% Trust Originated Preferred Securities issued by SunAmerica
Capital Trust II in October 1995 and $310 million liquidation amount of 8.30%
Trust Originated Preferred Securities issued by SunAmerica Capital Trust III in
November 1996.

      In connection with the issuance of the 8.35% Trust Originated Preferred
Securities and the related purchase by SunAmerica Inc. of the grantor trust's
common securities, SunAmerica Inc. issued to the grantor trust $191 million
principal amount of 8.35% junior subordinated debentures, due 2044, which are
redeemable at the option of AIG on or after September 30, 2000 at a redemption
price of $25 per debenture plus accrued and unpaid interest.

      In connection with the issuance of the 8.30% Trust Originated Preferred
Securities and the related purchase by SunAmerica Inc. of the grantor trust's
common securities, SunAmerica Inc. issued to the grantor trust $321 million
principal amount of 8.30% junior subordinated debentures, due 2045, which are
redeemable at the option of AIG on or after November 13, 2001 at a redemption
price of $25 per debenture plus accrued and unpaid interest.


                                                                              65

<PAGE>   67

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

10. Preferred Shareholders' Equity in Subsidiary Companies (continued)

      The interest and other payment dates on the debentures correspond to the
distribution and other payment dates on the preferred and common securities. The
preferred and common securities will be redeemed on a pro rata basis, to the
same extent as the debentures are repaid. Under certain circumstances involving
a change in law or legal interpretation, the debentures may be distributed to
holders of the preferred and common securities in liquidation of the grantor
trust(s). AIG's obligations under the debentures and related agreements, taken
together, provide a full and unconditional guarantee of payments due on the
preferred securities.

      The grantor trusts are wholly owned subsidiaries of AIG. The debentures
issued to the grantor trusts and the common securities purchased by SunAmerica
Inc. from the grantor trusts are eliminated in the consolidated balance sheet.

11. Capital Funds

(a) AIG parent depends on its subsidiaries for cash flow in the form of loans,
advances and dividends. AIG's insurance subsidiaries are subject to regulatory
restrictions on the amount of dividends which can be remitted to AIG parent.
These restrictions vary by state. For example, unless permitted by the New York
Superintendent of Insurance, general insurance companies domiciled in New York
may not pay dividends to shareholders which in any twelve month period exceed
the lesser of 10 percent of the company's statutory policyholders' surplus or
100 percent of its "adjusted net investment income", as defined. Generally, less
severe restrictions applicable to both general and life insurance companies
exist in most of the other states in which AIG's insurance subsidiaries are
domiciled. Certain foreign jurisdictions have restrictions which generally cause
only a temporary delay in the remittance of dividends. There are also various
local restrictions limiting cash loans and advances to AIG by its subsidiaries.
Largely as a result of the restrictions, approximately 65 percent of
consolidated capital funds were restricted from immediate transfer to AIG parent
at December 31, 1999.

      (b) At December 31, 1999, there were 6,000,000 shares of AIG's $5 par
value serial preferred stock authorized, issuable in series.

      (c) The activity for preferred stock issued by SunAmerica Inc. prior to
the merger with AIG for the year ended December 31, 1999 and the two years ended
September 30, 1998 was as follows:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                            1999            1998           1997
================================================================================
<S>                                    <C>             <C>            <C>      
Shares outstanding at
  beginning of year                    4,000,000       4,000,000      8,001,565
Redemption of Series E
  Depositary Shares                   (4,000,000)             --             --
Redemption of Series B
  Preferred Shares                            --              --     (3,514,765)
Redemption of Series C
  Preferred Shares                            --              --       (486,800)
--------------------------------------------------------------------------------
Shares outstanding at end of year             --       4,000,000      4,000,000
================================================================================
</TABLE>


      On November 1, 1995, SunAmerica Inc. issued 4,000,000 $3.10 Depositary
Shares (the "Series E Depositary Shares"), each representing one-fiftieth of a
share of Series E Mandatory Conversion Premium Dividend Preferred Stock, with a
liquidation preference of $62 per share. On September 22, 1998, SunAmerica Inc.
announced that it would redeem all of its Series E Depositary Shares. The
redemption was completed on October 30, 1998 and resulted in the issuance of
11,250,709 shares of SunAmerica Inc. common stock and cash payment of all
accrued and unpaid dividends through the redemption date.

      At September 30, 1996, SunAmerica Inc. had outstanding 486,800 shares of
Adjustable Rate Cumulative Preferred Stock, Series C (the "Series C Preferred
Shares"), with a liquidation preference of $100 per share. On October 4, 1996,
SunAmerica Inc. redeemed all of the Series C Preferred Shares for a cash payment
equal to the total liquidation amount of $49 million plus accrued and unpaid
dividends to the redemption date.

      In 1992, SunAmerica Inc. issued 5,620,000 shares of 9 1/4% Preferred
Stock, Series B (the "Series B Preferred Shares"), with a liquidation preference
of $25 per share. On June 13, 1995, SunAmerica Inc. exchanged 2,105,235 Series B
Preferred Shares with a liquidation preference of $53 million for $53 million
liquidation amount of 9.95% Trust Originated Preferred Securities of SunAmerica
Capital Trust I. On June 16, 1997, SunAmerica Inc. redeemed all of the remaining
Series B Preferred Shares for a cash payment equal to the total liquidation
amount of approximately $88 million plus accrued and unpaid dividends to the
redemption date.


66

<PAGE>   68

11. Capital Funds (continued)

      (d) The common stock activity for the three years ended December 31, 1999
was as follows:


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
                                        1999                   1998(a)                1997(a)
==========================================================================================
<S>                            <C>                   <C>                 <C>        
Shares outstanding at
  beginning of year            1,217,136,817         866,541,676         571,572,606
Acquired during the year          (2,797,287)           (974,815)         (4,657,254)
Common shares issued                      --                  --           9,122,850
Conversion of Series E
  Preferred Stock                  9,619,356                  --                  --
Conversion of PERCS
  Units                            8,642,535                  --                  --
Issued pursuant to
  Restricted Stock
  Unit Obligations                   538,649                  --                  --
Issued under stock option
  and purchase plans               6,427,942           1,556,136           1,082,647
Issued in connection with
  acquisition                             --                  --               4,391
Issued under contractual
  obligations                          7,094              37,123               1,967
Stock split effected as
  stock dividend                 327,061,951         379,536,828         308,708,094
Other (b)                        (17,509,011)        (29,560,131)        (19,293,625)
------------------------------------------------------------------------------------------
Shares outstanding at
  end of year                  1,549,128,046       1,217,136,817         866,541,676
==========================================================================================
</TABLE>


(a)   Outstanding shares have been adjusted to reflect the conversion of all
      outstanding SunAmerica Inc. shares by converting each outstanding share of
      SunAmerica Inc. to 0.855 shares of AIG.
(b)   Shares issued to AIG and subsidiaries as part of stock split effected as
      stock dividend and conversion of SunAmerica Inc. non-transferrable Class B
      stock to common stock.

      Common stock increased and retained earnings decreased $818 million in
1999, $949 million in 1998 and $633 million in 1997 as a result of common stock
splits in the form of 25 percent, 50 percent and 50 percent common stock
dividends paid July 30, 1999, July 31, 1998 and July 25, 1997, respectively.

      (e) On November 6, 1996, SunAmerica Inc. issued 11,500,000 8 1/2% Premium
Equity Redemption Cumulative Security Units (the "Units") with a stated amount
of $37.50 per Unit. Each Unit consisted of a stock purchase contract (the
"Contract") and a United States Treasury Note (the "Treasury Note") having a
principal amount equal to the stated amount and maturing on October 31, 1999.
The holders of the Units received interest on the Treasury Notes payable by the
United States Government at a rate of 7 1/2% per annum and Contract fees payable
at a rate of 1% per annum (both, the "Unit Payments") based upon the stated
amount. The Contract obligated SunAmerica Inc. to deliver on October 31, 1999 to
the holder of each Unit one and one-half shares of common stock of SunAmerica
Inc., subject to adjustment under certain defined circumstances, and obligated
the holder of the Unit to pay to SunAmerica Inc. $37.50 per Unit. The Treasury
Notes were held by a collateral agent to secure payment to SunAmerica Inc. as
required under the Contract, but could be redeemed by the holders of the Units
under certain defined circumstances. SunAmerica Inc. redeemed all of its Units
on December 6, 1998. In connection with this redemption, SunAmerica Inc. issued
10,108,229 shares of SunAmerica Inc. common stock and made a cash payment for
all accrued and unpaid Contract fees.

      (f) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB
130) was adopted by AIG effective January 1, 1998. FASB 130 establishes
standards for reporting comprehensive income and its components as part of
capital funds. The reclassification adjustments with respect to available for
sale securities were $122 million, $124 million and $90 million for December 31,
1999, 1998 and 1997, respectively.

12. Commitments and Contingent Liabilities

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

      (a) Commitments to extend credit are agreements to lend subject to certain
conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. These commitments
approximated $150 million and $92 million for December 31, 1999 and 1998,
respectively. AIG uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. AIG
evaluates each counterparty's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by AIG upon extension of
credit, is based on management's credit evaluation of the counterparty.

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

      (c) AIGFP becomes a party to off-balance sheet financial instruments in
the normal course of its business and to reduce its currency, interest rate and
equity exposures. Interest rate, currency and equity risks related to such
instruments are reflected in the consolidated financial statements to the extent
these instruments are carried at a market or a fair value, whichever is
appropriate. Because of limited liquidity of certain of these instruments, the
recorded estimated fair values of such instruments may be different than the
values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity.

      AIGFP, in the ordinary course of its operations and as principal,
structures derivative transactions to meet the needs of investors who may be
seeking to hedge certain aspects of such investors' operations. AIGFP may also
enter into derivative transactions for its own account. Such derivative


                                                                              67

<PAGE>   69

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

12. Commitments and Contingent Liabilities (continued)

transactions include interest rate, currency and equity swaps, swaptions and
forward commitments. Interest rate swap transactions generally involve the
exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. AIGFP typically becomes a
principal in the exchange of interest payments between the parties and,
therefore, may be exposed to loss, if counterparties default. Currency and
equity swaps are similar to interest rate swaps, but may involve the exchange of
principal amounts at the beginning and end of the transaction. Swaptions are
options where the holder has the right but not the obligation to enter into a
swap transaction or cancel an existing swap transaction. At December 31, 1999,
the notional principal amount of the sum of the swap pays and receives
approximated $413.4 billion, primarily related to interest rate swaps of
approximately $281.7 billion.

      The following tables provide the contractual and notional amounts of
derivatives transactions of AIGFP and AIGTG at December 31, 1999.

      The notional amounts used to express the extent of involvement in swap
transactions represent a standard of measurement of the volume of swaps business
of AIGFP and AIGTG. Notional amount is not a quantification of market risk or
credit risk and it may not necessarily be recorded on the balance sheet.
Notional amounts represent those amounts used to calculate contractual cash
flows to be exchanged and are not paid or received, except for certain contracts
such as currency swaps.

      The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.

      The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 1999 and December 31, 1998:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------------------------------------------
                                                                  Remaining Life
                                                --------------------------------------------------
                                                     One     Two Through   Six Through   After Ten       Total       Total
                                                    Year      Five Years     Ten Years       Years        1999        1998
==========================================================================================================================
<S>                                             <C>             <C>           <C>         <C>         <C>         <C>     
Interest rate, currency and equity/commodity
  swaps and swaptions:
Notional amount:
  Interest rate swaps                           $ 83,568        $121,534      $ 69,459    $  7,121    $281,682    $255,917
  Currency swaps                                  29,163          28,396        22,038       4,076      83,673      73,894
  Swaptions and equity swaps                      11,829          23,192        10,026       2,955      48,002      15,685
--------------------------------------------------------------------------------------------------------------------------
Total                                           $124,560        $173,122      $101,523    $ 14,152    $413,357    $345,496
==========================================================================================================================
</TABLE>


      Futures and forward contracts are contracts for delivery of foreign
currencies or financial indices in which the seller/purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise as a result of movements in current market
prices from contracted prices and the potential inability of counterparties to
meet their obligations under the contracts. At December 31, 1999, the
contractual amount of AIGFP's futures and forward contracts approximated $28.5
billion.

      The following table presents AIGFP's futures and forward contracts
portfolio by maturity and type of derivative at December 31, 1999 and December
31, 1998:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------------------------------------------
                                                                  Remaining Life
                                                --------------------------------------------------
                                                     One     Two Through   Six Through   After Ten       Total       Total
                                                    Year      Five Years     Ten Years       Years        1999        1998
==========================================================================================================================
<S>                                             <C>             <C>           <C>         <C>         <C>         <C>     
Futures and forward contracts:
Exchange traded futures contracts
  contractual amount                            $  6,587              --            --          --    $  6,587    $  8,290
==========================================================================================================================
Over the counter forward contracts
  contractual amount                            $ 21,426        $    447            --          --    $ 21,873    $ 42,898
==========================================================================================================================
</TABLE>


      These instruments involve, to varying degrees, elements of credit risk not
explicitly recognized in the consolidated financial statements.

      AIGFP utilizes various credit enhancements, including collateral, credit
triggers and credit derivatives to reduce the credit exposure relating to these
off-balance sheet financial instruments. AIGFP requires credit enhancements in
connection with specific transactions based on, among other things, the
creditworthiness of the counterparties and the transaction's size and maturity.
In addition, AIGFP's derivative transactions are generally documented under ISDA
Master Agreements. Such agreements provide for legally enforceable set-off and
close out netting of exposures to specific counterparties. Under such
agreements, in connection with an early termination of a transaction, AIGFP is
permitted to set off its receivables from a counterparty against its payables to
the same counterparty arising out of all included transactions. As a result, the
net replacement value represents the net sum of estimated positive fair values
after the application of such strategies, agreements and collateral held. Prior
to the application of the aforementioned credit enhancements, the gross exposure
to credit risk with respect to these derivative instruments was $16.90 billion
at December 31, 1999. Subsequent to the application of such 


68

<PAGE>   70

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

12. Commitments and Contingent Liabilities (continued)

credit enhancements, the net exposure to credit risk or the net replacement
value of all interest rate, currency, and equity swaps, swaptions and forward
commitments at December 31, 1999, approximated $7.53 billion. The net
replacement value for futures and forward contracts at December 31, 1999,
approximated $5 million. The net replacement value most closely represents the
net credit risk to AIGFP or the maximum amount exposed to potential loss.

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

      AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1999 and
December 31, 1998, 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 millions)
---------------------------------------------------------------------------------------------------------
                                            Net Replacement Value
                                     ---------------------------------
                                     Swaps and             Futures and             Total            Total
                                     Swaptions       Forward Contracts              1999             1998
=========================================================================================================
<S>                                     <C>                       <C>             <C>              <C>   
Counterparty credit quality:
  AAA                                   $2,067                    $ --            $2,067           $2,360
  AA                                     2,837                       2             2,839            3,688
  A                                      1,573                       3             1,576            1,883
  BBB                                      997                      --               997            1,085
  Below investment grade                    55                      --                55              210
---------------------------------------------------------------------------------------------------------
Total                                   $7,529                    $  5            $7,534           $9,226
=========================================================================================================
</TABLE>


      At December 31, 1999 and December 31, 1998, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in millions)
---------------------------------------------------------------------------------------------------------
                                            Net Replacement Value
                                     ---------------------------------
                                     Swaps and             Futures and             Total            Total
                                     Swaptions       Forward Contracts              1999             1998
=========================================================================================================
<S>                                     <C>                       <C>             <C>              <C>   
Non-U.S. banks                          $2,512                    $  3            $2,515           $2,877
Insured municipalities                     352                      --               352              784
U.S. industrials                           778                       2               780            1,125
Governmental                               180                      --               180              603
Non-U.S. financial service companies       158                      --               158              272
Non-U.S. industrials                     1,117                      --             1,117            1,145
Special purpose                            716                      --               716              423
U.S. banks                                 510                      --               510              911
U.S. financial service companies         1,112                      --             1,112              932
Supranationals                              94                      --                94              154
---------------------------------------------------------------------------------------------------------
Total                                   $7,529                    $  5            $7,534           $9,226
=========================================================================================================
</TABLE>


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

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

      Commissions, transaction and other fees for the twelve months ended
December 31, 1999, 1998 and 1997 from AIGFP's operations were $737 million, $550
million and $452 million, respectively.

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

      The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 1999 and December 31, 1998. In
addition, the estimated positive fair 


                                                                              69

<PAGE>   71

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

12. Commitments and Contingent Liabilities (continued)

values associated with the derivatives portfolio are also provided and include a
maturity profile for the December 31, 1999 balances based upon the expected
timing of the future cash flows.

      Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks arise as a result of movements
in current market prices from contracted prices and the potential inability of
counterparties to meet their obligations under the contracts. Options are
contracts that allow the holder of the option to purchase or sell the underlying
commodity, currency or index at a specified price and within, or at, a specified
period of time. Risks arise as a result of movements in current market prices
from contracted prices, and the potential inability of the counterparties to
meet their obligations under the contracts. As a writer of options, AIGTG
generally receives an option premium and then manages the risk of any
unfavorable change in the value of the underlying commodity, currency or index.
At December 31, 1999, the contractual amount of AIGTG's futures, forward and
option contracts approximated $409.9 billion.

      The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
1999 and December 31, 1998. These values do not represent the credit risk to
AIGTG.

      Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss within a product category. At December 31, 1999, the net
replacement value of AIGTG's futures, forward and option contracts and interest
rate and currency swaps approximated $3.1 billion.

      The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1999 and December 31, 1998:


<TABLE>
<CAPTION>
(in millions)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                       Remaining Life
                                                       --------------------------------------------------
                                                             One   Two Through   Six Through    After Ten        Total        Total
                                                            Year    Five Years     Ten Years        Years         1999         1998
===================================================================================================================================
<S>                                                    <C>           <C>           <C>          <C>          <C>          <C>      
Contractual amount of futures, forwards and options:
  Exchange traded futures and options                  $  13,873     $   4,990     $      45    $      --    $  18,908    $  11,836
===================================================================================================================================
  Forwards                                             $ 199,533     $  18,198     $   2,697    $      --    $ 220,428    $ 282,157
===================================================================================================================================
  Over the counter purchased options                   $  51,050     $  18,327     $  13,703    $     791    $  83,871    $  58,860
===================================================================================================================================
  Over the counter sold options (a)                    $  51,737     $  18,703     $  15,157    $   1,129    $  86,726    $  58,861
===================================================================================================================================
Notional amount:
  Interest rate swaps and forward rate agreements      $  43,541     $  31,322     $   5,510    $      63    $  80,436    $ 110,791
  Currency swaps                                           2,948         4,716           695           --        8,359        7,512
  Swaptions                                                  802         6,745         2,293          156        9,996        5,766
-----------------------------------------------------------------------------------------------------------------------------------
Total                                                  $  47,291     $  42,783     $   8,498    $     219    $  98,791    $ 124,069
===================================================================================================================================
Credit exposure:
  Futures, forwards swaptions and purchased options
   contracts and interest rate and currency swaps:
     Gross replacement value                           $   6,404     $   1,253     $     211    $      21    $   7,889    $   9,791
     Master netting arrangements                          (4,003)         (455)         (120)          (2)      (4,580)      (5,610)
     Collateral                                             (167)          (39)           (3)          --         (209)        (359)
-----------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b)                              $   2,234     $     759     $      88    $      19    $   3,100    $   3,822
===================================================================================================================================
</TABLE>

(a)   Sold options obligate AIGTG to buy or sell the underlying item if the
      option purchaser chooses to exercise. The amounts do not represent credit
      exposure.
(b)   The net replacement values with respect to exchange traded futures and
      options, forward contracts and purchased over the counter options are
      presented as a component of trading assets in the accompanying balance
      sheet. The net replacement values with respect to interest rate and
      currency swaps are presented as a component of unrealized gain on interest
      rate and currency swaps, options and forward transactions in the
      accompanying balance sheet.


70

<PAGE>   72

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

12. Commitments and Contingent Liabilities (continued)

      AIGTG independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGTG's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The maximum potential loss will increase or decrease during the life
of the derivative commitments as a function of maturity and market conditions.
 
      AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1999 and
December 31, 1998, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio were as follows:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                                           Net Replacement Value
                                                           ---------------------
                                                              1999          1998
================================================================================
<S>                                                         <C>           <C>   
Counterparty credit quality:
  AAA                                                       $  276        $  462
  AA                                                         1,241         1,821
  A                                                          1,010         1,066
  BBB                                                          256           221
  Below investment grade                                        49            26
  Not externally rated, including
   exchange traded futures and options*                        268           226
--------------------------------------------------------------------------------
Total                                                       $3,100        $3,822
================================================================================
Counterparty breakdown by industry:
  Non-U.S. banks                                            $  926        $1,253
  U.S. industrials                                              70           381
  Governmental                                                 178           184
  Non-U.S. financial service companies                         698           406
  Non-U.S. industrials                                         176           150
  U.S. banks                                                   401           593
  U.S. financial service companies                             383           629
  Exchanges*                                                   268           226
--------------------------------------------------------------------------------
Total                                                       $3,100        $3,822
================================================================================
</TABLE>


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

      Spot commodities sold but not yet purchased represent obligations of AIGTG
to deliver spot commodities at their contracted prices and thereby create a
liability to repurchase the spot commodities in the market at prevailing prices.

      AIGTG limits its risks by holding offsetting positions. In addition, AIGTG
monitors and controls its risk exposures through various monitoring systems
which evaluate AIGTG's market and credit risks, and through credit approvals and
limits. At December 31, 1998, AIGTG did not have a significant concentration of
credit risk from either an individual counterparty or group of counterparties.

      Commissions, transaction and other fees for the twelve months ended
December 31, 1999, 1998 and 1997 from AIGTG's operations were $227 million, $374
million and $562 million, respectively.

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

      (e) As a component of its asset and liability management strategy,
SunAmerica utilizes swap agreements to match more closely the cash flows of its
assets to the cash flows of its liabilities. SunAmerica uses these swap
agreements to hedge against the risk of interest rate changes. At December 31,
1999, SunAmerica's swap agreements had an aggregate notional principal amount of
$2.01 billion. These agreements mature in various years through 2010.

      For investment purposes, SunAmerica has entered into various total return
agreements with an aggregate notional amount of $576 million (the "notional
amount") at December 31, 1999. The total return agreements effectively exchange
a fixed rate of interest (the "payment amount") on the notional amount for the
coupon income plus or minus the increase or decrease in the fair value of
specified non-investment grade bonds (the "bonds"). SunAmerica is exposed to
potential loss with respect to credit risk on the underlying non-investment
grade bonds and fair value risk resulting from the payment amount and any
depreciation in the aggregate fair value of the bonds below the notional amount.
SunAmerica is also exposed to potential credit loss in the event of
nonperformance by the investment grade rated counterparty with respect to any
increase in the aggregate market value of the bonds above the notional amount.
However, nonperformance is not anticipated and, therefore, no collateral is held
or pledged. The agreements are marked to market and the change in market value
is recognized currently in life investment income. Net amounts received (paid)
are included in operating income and totaled ($12 million) for the year ended
December 31, 1999 and ($34 million) and $35 million for the years ended
September 30, 1998 and 1997, respectively. AIG guarantees the payment
obligations of SunAmerica under such agreements.

      (f) At December 31, 1999, ILFC had committed to purchase 331 aircraft
deliverable from 2000 through 2007 at an estimated aggregate purchase price of
$16.4 billion and had options to purchase 83 aircraft deliverable from 2000
through 2007 at an estimated aggregate purchase price of $3.9 billion. ILFC will
be required to find customers for any aircraft presently on order and any
aircraft to be ordered, and it must arrange financing for portions of the
purchase price of such equipment.

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


                                                                              71

<PAGE>   73

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

12. Commitments and Contingent Liabilities (continued)

      AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter collectively
referred to as environmental claims) and indemnity claims asserting injuries
from asbestos. Estimation of asbestos and environmental claims loss reserves is
a difficult process, as these claims, which emanate from policies written in
1984 and prior years, cannot be estimated by conventional reserving techniques.
Asbestos and environmental claims development is affected by factors such as
inconsistent court resolutions, the broadening of the intent of policies and
scope of coverage and increasing number of new claims. AIG and other industry
members have and will continue to litigate the broadening judicial
interpretation of policy coverage and the liability issues. If the courts
continue in the future to expand the intent of the policies and the scope of the
coverage, as they have in the past, additional liabilities would emerge for
amounts in excess of reserves held. This emergence cannot now be reasonably
estimated, but could have a material impact on AIG's future operating results.
The reserves carried for these claims as at December 31, 1999 ($2.61 billion
gross; $891 million net) are believed to be adequate as these reserves are based
on known facts and current law.

      A summary of reserve activity, including estimates for applicable incurred
but not reported losses and loss expenses, relating to asbestos and
environmental claims separately and combined at December 31, 1999, 1998 and 1997
follows. The 1999 and 1998 reserve activity includes Transatlantic.

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


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------------------------------------------------
                                                                      1999                   1998                     1997
                                                             -------------------     -------------------     -------------------
                                                               Gross         Net       Gross         Net       Gross         Net
================================================================================================================================
<S>                                                          <C>         <C>         <C>         <C>         <C>         <C>    
Asbestos:
Reserve for losses and loss expenses at beginning of year    $   964     $   259     $   842     $   195     $   876     $   172
Losses and loss expenses incurred                                404         101         375         111         238          69
Losses and loss expenses paid                                   (275)        (54)       (253)        (47)       (272)        (46)
--------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year          $ 1,093     $   306     $   964     $   259     $   842     $   195
================================================================================================================================
Environmental:
Reserve for losses and loss expenses at beginning of year    $ 1,535     $   605     $ 1,467     $   592     $ 1,427     $   571
Losses and loss expenses incurred                                127          47         284         107         223          84
Losses and loss expenses paid                                   (143)        (67)       (216)        (94)       (183)        (63)
--------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year          $ 1,519     $   585     $ 1,535     $   605     $ 1,467     $   592
================================================================================================================================
Combined:
Reserve for losses and loss expenses at beginning of year    $ 2,499     $   864     $ 2,309     $   787     $ 2,303     $   743
Losses and loss expenses incurred                                531         148         659         218         461         153
Losses and loss expenses paid                                   (418)       (121)       (469)       (141)       (455)       (109)
--------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year          $ 2,612     $   891     $ 2,499     $   864     $ 2,309     $   787
================================================================================================================================
</TABLE>


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

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

      The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 1999.

      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.

13. Fair Value of Financial Instruments

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

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


72

<PAGE>   74

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

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

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

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

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

      Trading assets and trading liabilities: Fair values for trading assets and
trading liabilities approximate the carrying values presented in the
consolidated balance sheet.

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

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

      Spot commodities: Fair values for spot commodities were based on current
market prices.

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

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

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

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

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

      Securities and spot commodities sold but not yet purchased: The carrying
amounts for the financial instruments approximate fair values. Fair values for
spot commodities sold short were based on current market prices.

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

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

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


                                                                              73

<PAGE>   75

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

13. Fair Value of Financial Instruments (continued)

      The carrying values and fair values of AIG's financial instruments at
December 31, 1999 and December 31, 1998 and the average fair values with respect
to derivative positions during 1999 and 1998 were as follows:


<TABLE>
<CAPTION>
(in millions)
-------------------------------------------------------------------------------------------------------------------------------
                                                                               1999                            1998
                                                                ------------------------------   ------------------------------
                                                                                       Average                          Average
                                                                Carrying       Fair       Fair   Carrying       Fair       Fair
                                                                   Value      Value      Value      Value      Value      Value
===============================================================================================================================
<S>                                                              <C>        <C>        <C>        <C>        <C>        <C>    
Assets:
Fixed maturities                                                 $90,144    $90,268    $    --    $79,980    $80,955    $    --
Equity securities                                                  6,714      6,714         --      6,268      6,268         --
Mortgage loans on real estate, policy and collateral loans        12,134     12,086         --     11,741     11,871         --
Securities available for sale                                     12,954     12,954     11,992     10,674     10,674      8,855
Trading securities                                                 4,391      4,391      5,438      5,668      5,668      5,682
Spot commodities                                                     683        683        536        476        476        442
Unrealized gain on interest rate and currency swaps, options
  and forward transactions                                         7,931      7,931      8,045      9,881      9,881      9,997
Trading assets                                                     5,793      5,793      5,297      6,229      6,229      6,048
Securities purchased under agreements to resell                   10,897     10,897         --      4,838      4,838         --
Other invested assets                                              9,900      9,900         --      8,692      8,692         --
Short-term investments                                             7,007      7,007         --      6,739      6,739         --
Cash                                                                 132        132         --        303        303         --
Liabilities:
Policyholders' contract deposits                                  42,549     41,266         --     33,924     33,906         --
Borrowings under obligations of guaranteed
  investment agreements                                            9,430      9,308         --      9,188     10,146         --
Securities sold under agreements to repurchase                     6,116      6,116         --      4,473      4,473         --
Trading liabilities                                                3,821      3,821      4,177      4,664      4,664      4,824
Securities and spot commodities sold but not yet purchased         6,413      6,413      6,314      4,457      4,457      5,614
Unrealized loss on interest rate and currency swaps, options
  and forward transactions                                         8,624      8,624      8,630      7,055      7,055      6,805
Trust deposits and deposits due to banks and other depositors      2,175      2,163         --      1,682      1,759         --
Commercial paper                                                   4,404      4,404         --      4,636      4,636         --
Notes, bonds, loans and mortgages payable                         19,150     18,702         --     18,086     18,527         --
===============================================================================================================================
</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.

14. Stock Compensation Plans

At December 31, 1999, AIG had two types of stock-based compensation plans. One
was a stock option plan; the other, an employee stock purchase plan. AIG applies
APB Opinion 25 "Accounting for Stock Issued to Employees" and related
Interpretations (APB 25) in accounting for its plans. Accordingly, no
compensation costs have been recognized for either plan.

      Had compensation costs for these plans been determined consistent with the
method of Statement of Financial Accounting Standards No. 123 "Accounting for
Awards of Stock Based Compensation to Employees" (FASB 123), AIG's net income
and earnings per share for the years ended December 31, 1999, 1998 and 1997
would have been reduced to the pro forma amounts as follows:


<TABLE>
<CAPTION>
(in millions, except per share amounts)
--------------------------------------------------------------------------------
                                            1999         1998            1997
================================================================================
<S>                                    <C>          <C>             <C>         
Net income:
  As reported                          $   5,055    $   4,282(a)    $   3,711(a)
  Pro forma                                5,028        4,235           3,690
Earnings per share--diluted(b):
  As reported                          $    3.23    $    2.75       $    2.40
  Pro forma                                 3.21         2.73            2.39
================================================================================
</TABLE>


(a)   Post merger amounts.
(b)   Includes SunAmerica Inc. shares which were exchanged for AIG shares at an
      exchange ratio of 0.855 shares of AIG common stock for each share of
      SunAmerica Inc. common stock for 1998 and 1997.


74

<PAGE>   76

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

14. Stock Compensation Plans (continued)

(i) Stock Option Plan: On December 19, 1991, the AIG Board of Directors adopted
a 1991 employee stock option plan (the 1991 Plan), which provided that options
to purchase a maximum of 12,656,250 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 316,087
shares granted thereunder on December 19, 1991, were approved by shareholders at
the 1992 Annual Meeting. An amendment to the 1991 Plan, approved by shareholders
at the 1997 Annual Meeting, increased the aggregate number of shares available
for grant to 22,148,437 shares to assure that adequate shares are available for
grant during the remaining term of the 1991 Plan. A second amendment to the 1991
Plan limits the maximum number of shares as to which stock options may be
granted to any employee in any one year to 253,125 shares. At December 31, 1999,
9,499,167 shares were reserved for future grants under the amended 1991 Plan. As
of March 18, 1992, no further options could be granted under the 1987 employee
stock option plan (the 1987 Plan), but outstanding options granted under the
1987 Plan continue in force until exercise or expiration. At December 31, 1999,
there were 11,654,856 shares reserved for issuance under these plans.

      During 1999, AIG granted options with respect to 383,000 shares which
become exercisable on the fifth anniversary of the date of grant and expire 10
years from the date of grant. These options do not qualify for Incentive Stock
Option Treatment under the Economic Recovery Tax Act of 1981 (ISO Treatment).
The agreements with respect to all other options granted under these plans
provide that 25 percent of the options granted become exercisable on the
anniversary of the date of grant in each of the four years following that grant
and expire 10 years from the date of the grant. As of December 31, 1999,
outstanding options granted with respect to 6,694,496 shares qualified for ISO
Treatment.

      As of the merger date, SunAmerica Inc. had five stock-based compensation
plans pursuant to which options, restricted stock and deferred share and share
unit obligations had been issued and remained outstanding. Options granted under
these plans had an exercise price equal to the market price on the date of
grant, had a maximum term of ten years and generally became exercisable ratably
over a five-year period. Substantially all of the SunAmerica Inc. options
outstanding at the merger date became fully vested on that date and were
converted into options to purchase AIG common stock at the exchange ratio of
0.855 shares of AIG common stock for each share of SunAmerica Inc. common stock.
No further options can be granted under the SunAmerica Inc. plans, but
outstanding options so converted continue in force until exercise or expiration.
At December 31, 1999, there were 16,262,634 shares of AIG common stock reserved
for issuance under these plans. None of these options qualified for ISO
Treatment as of December 31, 1999.

      As a result of the merger, all unvested restricted stock then outstanding
and deferred share and share unit obligations with respect to 673,312 shares of
AIG common stock vested. During 1999, deferred share and share unit obligations
with respect to an additional 662,021 shares of AIG common stock vested and
1,335,333 shares were issued pursuant to deferred share and share unit
obligations. No deferred share or share unit obligations were granted in 1999.
As of December 31, 1999, deferred share and share unit obligations relating to
SunAmerica Inc. representing 931,886 shares were outstanding but not yet vested.

      On September 15, 1999, the AIG Board of Directors adopted a 1999 stock
option plan (the 1999 Plan), which provided that options to purchase a maximum
of 10,000,000 shares of common stock could be granted to certain key employees
and members of the Board of Directors at prices not less than fair market value
at the date of grant. The 1999 Plan limits the maximum number of shares as to
which stock options may be granted to any employee in any one year to 250,000
shares. Options granted under this Plan expire not more than 10 years from the
date of the grant. Options with respect to 9,000 shares were granted to members
of the Board of Directors on September 15, 1999. These options become
exercisable on the first anniversary of the date of grant, expire 10 years from
the date of grant and do not qualify for ISO Treatment. The Plan, and the
options granted thereunder, are subject to approval by the shareholders at the
2000 Annual Meeting of Shareholders.

      In 1999, the AIG Board of Directors amended the AIG stock option plans to
allow deferral of delivery of AIG shares otherwise deliverable upon the exercise
of an option to a date or dates specified by the optionee upon the request of an
optionee. At December 31, 1999, optionees had made valid elections to defer
delivery of 506,716 shares and 389,079 shares of AIG common stock, respectively,
upon exercise of options expiring during 2000 and 2001.


                                                                              75

<PAGE>   77

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

14. Stock Compensation Plans (continued)

      Additional information with respect to AIG's plans at December 31, 1999,
and changes for the three years then ended, were as follows:


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                    1999(a)                      1998                              1997
                                       ---------------------------   ---------------------------       ---------------------------
                                                          Weighted                      Weighted                          Weighted
                                                           Average                       Average                           Average
                                           Shares   Exercise Price       Shares   Exercise Price           Shares   Exercise Price
==================================================================================================================================
<S>                                    <C>                  <C>      <C>                  <C>          <C>                  <C>   
Shares Under Option:
Outstanding at beginning of year       29,722,330           $29.80   11,637,518           $26.12       12,132,480           $20.90
Granted                                 1,832,371            93.64    1,144,148            69.94        1,394,156            56.42
Exercised                              (3,782,244)           22.46   (1,491,089)           14.66       (1,753,727)           13.93
Forfeited                                (162,373)           47.96     (187,381)           37.49         (135,391)           27.78
----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year             27,610,084           $34.93   11,103,196           $31.99       11,637,518           $26.12
----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end        23,982,312           $28.65    7,852,838           $22.70        7,927,972           $18.41
----------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per                                                                                          
  share of options granted                                  $39.00                        $24.54                            $20.97
==================================================================================================================================
</TABLE>


(a)   Includes those options that vested January 1, 1999 as a result of the
      merger of SunAmerica Inc. with and into AIG.

      In addition, at December 31, 1999, options to purchase 316,406 shares at a
weighted average exercise price of $29.47 had been previously granted to AIG
directors and remained outstanding.

      Information about stock options outstanding at December 31, 1999, is
summarized as follows:


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                 Options Outstanding                           Options Exercisable
                                 ---------------------------------------------------    --------------------------------
                                                          Weighted          Weighted                            Weighted
                                      Number     Average Remaining           Average         Number              Average
Range of Exercise Prices         Outstanding      Contractual Life    Exercise Price    Exercisable       Exercise Price
========================================================================================================================
<S>                                <C>                   <C>                  <C>         <C>                     <C>   
$  0.81 -  9.37                    5,573,124             3.2 years            $ 6.54      5,573,124               $ 6.54
  11.38 - 19.99                    4,594,562             3.9 years             15.27      4,594,562                15.27
  21.04 - 28.44                    3,850,823             5.7 years             23.34      3,850,823                23.34
  30.71 - 39.88                    5,071,438             7.1 years             36.71      4,711,633                36.56
  44.18 - 56.80                    4,432,785             8.5 years             55.22      3,815,149                55.01
  62.27 - 78.77                    2,265,219             8.9 years             73.45      1,437,021                75.42
  90.19 - 110.31                   1,822,133             9.7 years             93.70             --                --
------------------------------------------------------------------------------------------------------------------------
                                  27,610,084                                  $34.93     23,982,312               $28.65
========================================================================================================================
</TABLE>


      The fair values of stock options granted during the years ended December
31, 1999, 1998 and 1997 were $71 million, $28 million and $29 million,
respectively. The fair value of each option is estimated on the date of the
grant using the Black-Scholes option-pricing model.

      The following weighted average assumptions were used for grants in 1999,
1998 and 1997, respectively: dividend yields of 0.20 percent, 0.24 percent and
0.30 percent; expected volatilities of 25.0 percent, 22.0 percent and 20.0
percent; risk-free interest rates of 5.33 percent, 4.73 percent and 6.03 percent
and expected terms of 7 years.

      Using the Black-Scholes option-pricing model applicable to SunAmerica Inc.
for 1998 and 1997, the fair values of stock options granted by SunAmerica Inc.
for such years were $49 million and $32 million, respectively.

      (ii) Employee Stock Purchase Plan: AIG's 1984 employee stock purchase plan
was adopted at its 1984 shareholders' meeting and became effective as of July 1,
1984. Eligible employees could receive privileges to purchase up to an aggregate
of 5,537,108 shares of AIG common stock, at a price equal to 85 percent of the
fair market value on the date of grant of the purchase privilege. Purchase
privileges were granted annually and were limited to the number of whole shares
that could be purchased by an amount equal to 5 percent of an employee's annual
salary or $5,500, whichever was less.

      AIG's 1996 employee stock purchase plan was adopted at its 1996
shareholders' meeting and became effective as of July 1, 1996, replacing the
1984 plan. Eligible employees may receive privileges to purchase up to an
aggregate of 2,812,500 shares of AIG common stock, at a price equal to 85
percent of the fair market value on the date of the grant of the purchase
privilege. Purchase privileges are granted annually and are limited to the
number of whole shares that can be purchased by an 


76

<PAGE>   78

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

amount equal to 5 percent of an employee's annual salary or $5,500, whichever is
less. Beginning with the January 1, 1998 subscription, the maximum allowable
purchase limitation increased to 10 percent of an employee's annual salary or
$10,000 per year, whichever is less, and the eligibility requirement was reduced
from two years to one year. In all other respects, the 1996 plan is identical to
the 1984 plan.

      There were 130,010 shares issued under the 1984 plan at a weighted average
price of $28.14 for the year ended December 31, 1997. There were 595,286 shares,
425,523 shares and 275,783 shares issued under the 1996 plan at weighted average
prices of $57.36, $43.11 and $30.81 for the years ended December 31, 1999, 1998
and 1997, respectively. The excess or deficit of the proceeds over the par value
or cost of the common stock issued under these plans was credited or charged to
additional paid-in capital.

      As of December 31, 1999, there were 495,827 shares of common stock
subscribed to at a weighted average price of $77.49 per share pursuant to grants
of privileges under the 1996 plan. There were 1,020,078 shares available for the
grant of future purchase privileges under the 1996 plan at December 31, 1999.

      The fair values of purchase privileges granted during the years ended
December 31, 1999, 1998 and 1997 were $13 million, $10 million and $4 million,
respectively. The weighted average fair values per share of those purchase
rights granted in 1999, 1998 and 1997 were $21.06, $15.46 and $10.68,
respectively. The fair value of each purchase right is estimated on the date of
the subscription using the Black-Scholes model.

      The following weighted average assumptions were used for grants in 1999,
1998 and 1997, respectively: dividend yields of 0.20 percent, 0.24 percent and
0.30 percent; expected volatilities of 34.0 percent, 33.0 percent and 26.0
percent; risk-free interest rates of 5.33 percent, 5.26 percent and 5.81
percent; and expected terms of 1 year.

      During 1999, there were 28,385 shares of AIG common stock issued under the
SunAmerica Inc. employee stock purchase plan at a weighted average price of
$48.90. There are no further shares available for grant under this plan.

15. Employee Benefits

(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation.

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

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

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

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

      AIG's U.S. postretirement medical and life insurance benefits are based
upon the employee electing immediate retirement and having a minimum of ten
years of service. Retirees and their dependents who were age 65 by May 1, 1989
participate in the medical plan at no cost. Employees who retired after May 1,
1989 and on or prior to January 1, 1993 pay the active employee premium if under
age 65 and 50 percent of the active employee premium if over age 65. Retiree
contributions are subject to adjustment annually. Other cost sharing features of
the medical plan include deductibles, coinsurance and Medicare coordination and
a lifetime maximum benefit of $1.5 million. The lifetime maximum benefit of the
medical plan was increased to $2.0 million effective January 1, 2000. The
maximum life insurance benefit prior to age 70 is $32,500, with a maximum of
$25,000 thereafter.

      Effective January 1, 1993, both plans' provisions were amended. Employees
who retire after January 1, 1993 are required to pay the actual cost of the
medical benefits premium reduced by a credit which is based upon age and years
of service at retirement. The life insurance benefit varies by age at retirement
from $5,000 for retirement at ages 55 through 59; $10,000 for retirement at ages
60 through 64 and $15,000 for retirement at ages 65 and over.


                                                                              77

<PAGE>   79

Notes to Financial Statements  (CONTINUED)

15. Employee Benefits (continued)

      (b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k)
plan), which, during the three years ended December 31, 1999, provided for
salary reduction contributions by employees and matching contributions by AIG of
up to 6 percent of annual salary depending on the employees' years of service.

      (c) SunAmerica sponsors a voluntary savings plan for its employees (the
"SunAmerica 401(k) plan"), which, during the three years ended December 31,
1999, provided for salary reduction contributions by qualifying employees and
matching contributions by SunAmerica of up to 4 percent of qualifying employees'
annual salaries. Under an Executive Savings Plan, designated SunAmerica
executives also could defer up to 90 percent of cash compensation during the
three years ended December 31, 1999, and SunAmerica matched 4 percent of the
participants' base salaries deferred.

      (d) AIG has certain benefits provided to former or inactive employees who
are not retirees. Certain of these benefits are insured and expensed currently;
other expenses are provided for currently. Such uninsured expenses include long
and short-term disability medical and life insurance continuation, short-term
disability income continuation and COBRA medical subsidies. The provision for
these benefits at December 31, 1999 was $6 million. The incremental expense was
insignificant.

      The following table sets forth the change in benefit obligation, change in
plan assets and weighted average assumptions associated with various pension
plan and postretirement benefits. The amounts are recognized in the accompanying
consolidated balance sheet as of December 31, 1999 and 1998:


<TABLE>
<CAPTION>
(in millions)
-------------------------------------------------------------------------------------------------------------------------
                                                             Pension Benefits                     Other Benefits
                                                    --------------------------------    ---------------------------------
                                                    Non-U.S.       U.S.                 Non-U.S.         U.S.
1999                                                  Plans       Plans        Total       Plans        Plans       Total
=========================================================================================================================
<S>                                                   <C>         <C>          <C>         <C>          <C>         <C>  
Change in benefit obligation:
Benefit obligation at beginning of year               $ 427       $ 499        $ 926       $   7        $  78       $  85
  Service cost                                           36          40           76           1            3           4
  Interest cost                                          17          35           52          --            5           5
  Participant contributions                               5          --            5          --           --          --
  Prior service costs                                    (3)         --           (3)         --           --          --
  Actuarial gain                                        (22)        (92)        (114)         --          (16)        (16)
  Benefits paid                                         (22)        (10)         (32)         --           (4)         (4)
  Effect of foreign currency fluctuation                 37          --           37          --           --          --
-------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year                     $ 475       $ 472        $ 947       $   8        $  66       $  74
=========================================================================================================================

Change in plan assets:
  Fair value of plan assets at beginning of year      $ 208       $ 399        $ 607         $--          $--         $--
  Asset adjustment                                       --          (1)          (1)         --           --          --
  Actual return on plan assets net of expenses           66          38          104          --           --          --
  Employer contributions                                 28          10           38          --            4           4
  Participant contributions                               5          --            5          --           --          --
  Benefits paid                                         (22)        (10)         (32)         --           (4)         (4)
  Effect of foreign currency fluctuation                 15          --           15          --           --          --
-------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year*             $ 300       $ 436        $ 736         $--          $--         $--
=========================================================================================================================

Reconciliation of funded status:
  Funded status                                       $(176)      $ (36)       $(212)      $  (8)       $ (66)      $ (74)
  Unrecognized actuarial (gain)/loss                      7        (100)         (93)         --            1           1
  Unrecognized transition obligation                     12           6           18          --           --          --
  Unrecognized prior service cost                         9          19           28          --          (20)        (20)
-------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end                     $(148)      $(111)       $(259)      $  (8)       $ (85)      $ (93)
=========================================================================================================================
Amounts recognized in the statement of
  financial position consist of:
  Prepaid benefit cost                                $   3       $  --        $   3         $--          $--         $--
  Accrued benefit liability                            (184)       (114)        (298)         (8)         (85)        (93)
  Intangible asset                                       33           3           36          --           --          --
-------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end                     $(148)      $(111)       $(259)      $  (8)       $ (85)      $ (93)
=========================================================================================================================
Weighted-average assumptions as of December 31,
Discount rate                                      3.0-10.0%        8.0%                7.0-7.75%         8.0%
Expected return on plan assets                     3.5-13.0         9.0                      N/A          N/A
Rate of compensation increase                       2.0-8.0         5.6                      N/A          N/A
=========================================================================================================================
</TABLE>


For measurement purposes, a 9.0 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1999. The rate was
assumed to decrease to 5.0 percent for 2007 and remain at that level thereafter.
*     Plan assets are invested primarily in fixed-income securities and listed
      stocks.


78

<PAGE>   80

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

15. Employee Benefits (continued)


<TABLE>
<CAPTION>
(in millions)
-------------------------------------------------------------------------------------------------------------------------
                                                             Pension Benefits                     Other Benefits
                                                    --------------------------------    ---------------------------------
                                                    Non-U.S.       U.S.                 Non-U.S.         U.S.
1998                                                  Plans       Plans        Total       Plans        Plans       Total
=========================================================================================================================
<S>                                                   <C>         <C>          <C>         <C>          <C>         <C>  
Change in benefit obligation:
  Benefit obligation at beginning of year             $ 330       $ 363        $ 693       $  19        $  70       $  89
  Acquisitions(a)                                        --          49           49          --            1           1
  Service cost                                           32          33           65           1            2           3
  Interest cost                                          16          29           45          --            5           5
  Participant contributions                               4          --            4          --           --          --
  Actuarial (gain)/loss                                  21          33           54         (13)           5          (8)
  Benefits paid                                         (18)         (8)         (26)         --           (5)         (5)
  Effect of foreign currency fluctuation                 42          --           42          --           --          --
-------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year                     $ 427       $ 499        $ 926       $   7        $  78       $  85
=========================================================================================================================
Change in plan assets:
  Fair value of plan assets at beginning of year      $ 160       $ 297        $ 457         $--          $--         $--
  Acquisitions(a)                                        --          37           37          --           --          --
  Actual return on plan assets net of expenses           20          55           75          --           --          --
  Employer contributions                                 24          18           42          --            5           5
  Participant contributions                               4          --            4          --           --          --
  Benefits paid                                         (18)         (8)         (26)         --           (5)         (5)
  Effect of foreign currency fluctuation                 18          --           18          --           --          --
-------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year(b)           $ 208       $ 399        $ 607         $--          $--         $--
=========================================================================================================================
Reconciliation of funded status:
Funded status                                         $(219)      $(100)       $(319)      $  (7)       $ (78)      $ (85)
Unrecognized actuarial (gain)/loss                       80          (4)          76          --           16          16
Unrecognized transition (asset)/obligation               13           7           20          --           --          --
Unrecognized prior service cost                          13          21           34          --          (21)        (21)
-------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end                     $(113)      $ (76)       $(189)      $  (7)       $ (83)      $ (90)
=========================================================================================================================
Amounts recognized in the statement of
  financial position consist of:
  Prepaid benefit cost                                $   4       $  --        $   4         $--          $--         $--
  Accrued benefit liability                            (175)        (83)        (258)         (7)         (83)        (90)
  Intangible asset                                       58           7           65          --           --          --
-------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end                     $(113)      $ (76)       $(189)      $  (7)       $ (83)      $ (90)
=========================================================================================================================
Weighted-average assumptions as of December 31
Discount rate                                      3.0-10.0%       6.75%                6.25-7.0%        6.75%
Expected return on plan assets                     3.5-13.0         8.5                      N/A          N/A
Rate of compensation increase                      2.0-10.0         5.0                      N/A          N/A
=========================================================================================================================
</TABLE>


For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1998. The rate was
assumed to decrease gradually to 5.5 percent for 2000 and remain at that level
thereafter.
(a)   Acquisitions include the opening balances with respect to Transatlantic
      and 21st Century. Transatlantic's domestic employees are and have been
      covered by AIG's plans.
(b)   Plan assets are invested primarily in fixed-income securities and listed
      stocks.


                                                                              79

<PAGE>   81

--------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)

15. Employee Benefits (continued)

      The net benefit cost for the years ended December 31, 1999, 1998, and 1997
included the following components:


<TABLE>
<CAPTION>
(in millions)
-----------------------------------------------------------------------------------------------------------------
                                                           Pension Benefits                 Other Benefits
                                                   -----------------------------   ------------------------------
                                                   Non-U.S.       U.S.             Non-U.S.       U.S.
1999                                                 Plans      Plans      Total      Plans      Plans      Total
=================================================================================================================
<S>                                                   <C>        <C>        <C>        <C>        <C>        <C> 
1999
Components of net period benefit cost:
  Service cost                                        $ 36       $ 40       $ 76       $  1       $  3       $  4
  Interest cost                                         17         35         52         --          5          5
  Expected return on assets                            (10)       (35)       (45)        --         --         --
  Amortization of prior service cost                     3          2          5         --         (1)        (1)
  Amortization of transitional liability                 2          2          4         --         --         --
  Recognized actuarial loss                              3          1          4         --         --         --
-----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost                             $ 51       $ 45       $ 96       $  1       $  7       $  8
=================================================================================================================
1998
Components of net period benefit cost:
  Service cost                                        $ 32       $ 33       $ 65       $  1       $  2       $  3
  Interest cost                                         16         29         45          1          5          6
  Expected return on assets                             (9)       (29)       (38)        --         --         --
  Amortization of prior service cost                     2          2          4         --         (1)        (1)
  Amortization of transitional (asset)/liability         2          1          3         (1)        --         (1)
  Recognized actuarial loss                              3          1          4         --         --         --
-----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost                             $ 46       $ 37       $ 83       $  1       $  6       $  7
=================================================================================================================
1997
Components of net period benefit cost:
  Service cost                                        $ 21       $ 23       $ 44       $  1       $  2       $  3
  Interest cost                                         13         21         34          1          4          5
  Expected return on assets                             (9)       (20)       (29)        --         --         --
  Amortization of prior service cost                     2          2          4         --         (1)        (1)
  Amortization of transitional liability                 2          2          4         --         --         --
  Recognized actuarial loss                              2         --          2         --         --         --
-----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost                             $ 31       $ 28       $ 59       $  2       $  5       $  7
=================================================================================================================
</TABLE>


      The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $291 million, $251 million and $54 million,
respectively, as of December 31, 1999 and $460 million, $394 million and $196
million as of December 31, 1998.

      On December 31, 1998, AIG amended its retirement and postretirement
healthcare plan to provide increased benefits to certain employees who retire
prior to age 65. Assumed healthcare cost trend rates have a significant effect
on the amounts reported for the healthcare plan. A one-percentage-point change
in assumed healthcare cost trend rates would have the following effects:


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------
                                              1-Percentage         1-Percentage
                                            Point Increase       Point Decrease
================================================================================
<S>                                                     <C>                 <C> 
Effect on total of service and interest
  cost components                                       $1                  $-- 
Effect on postretirement benefit                                       
  obligation                                             2                   (2)
================================================================================
</TABLE>



80

<PAGE>   82

--------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)

                             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, 1999, the future minimum lease payments under operating
leases were as follows:


<TABLE>
<CAPTION>
(in millions)
================================================================================
<S>                                                                       <C>   
2000                                                                      $  303
2001                                                                         236
2002                                                                         175
2003                                                                         157
2004                                                                         141
Remaining years after 2004                                                   500
--------------------------------------------------------------------------------
Total                                                                     $1,512
================================================================================
</TABLE>


      Rent expense approximated $318 million, $287 million and $252 million for
the years ended December 31, 1999, 1998 and 1997 respectively.

      (b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 1999 was as follows:


<TABLE>
<CAPTION>
(in millions)
================================================================================
<S>                                                                       <C>   
2000                                                                      $1,663
2001                                                                       1,554
2002                                                                       1,385
2003                                                                       1,162
2004                                                                         940
Remaining years after 2004                                                 1,700
--------------------------------------------------------------------------------
Total                                                                     $8,404
================================================================================
</TABLE>


      Flight equipment is leased, under operating leases, with remaining terms
ranging from one to 12 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 25 percent of the
voting stock of AIG. Six directors of AIG also serve as directors of Starr and
SICO.

      (b) Transactions with Related Parties: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries
for the production and management of insurance business. There are no
significant receivables from/payables to related parties at December 31, 1999.
Net commission payments to Starr aggregated approximately $45 million in 1999
and $46 million in 1998 and 1997, from which Starr is required to pay
commissions due originating brokers and its operating expenses. AIG also
received approximately $11 million in 1999, $13 million in 1998 and $14 million
in 1997 from Starr and paid approximately $42,000 in 1999, $37,000 in 1998 and
$35,000 in 1997 to Starr in rental fees. AIG also received approximately $1
million in 1999, 1998 and 1997 from SICO and paid approximately $1 million in
each of the years 1999, 1998 and 1997 to SICO as reimbursement for services
rendered at cost. AIG also paid to SICO $4 million in 1999, 1998 and 1997 in
rental fees.

18. Segment Information

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

      General Insurance - AIG's general insurance subsidiaries are multiple line
companies writing substantially all lines of property and casualty insurance.

      DBG writes substantially all classes of business insurance accepting such
business mainly from insurance brokers. This provides DBG the opportunity to
select specialized markets and retain underwriting control. Any licensed broker
is able to submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no authority to commit DBG
to accept a risk. Transatlantic's domestic operations are included in this
group.

      AIG's Foreign General insurance group accepts risks primarily underwritten
through AIU, a marketing unit consisting of wholly owned agencies and insurance
entities. The Foreign General insurance group also includes business written by
AIG's foreign-based insurance subsidiaries for their own accounts. The Foreign
General group uses various marketing methods to write both business and personal
lines insurance with certain refinements for local laws, customs and needs. AIU
operates in over 70 countries in Asia, the Pacific Rim, Europe, Africa, Middle
East and Latin America. Transatlantic's foreign operations are included in this
group.

      Life Insurance - AIG's life insurance subsidiaries offer a wide range of
traditional insurance and financial and investment products. Traditional
products consist of individual and group life, annuity, endowment and accident
and health policies. Financial and investment products consist of single premium
annuity, variable annuities, guaranteed investment contracts, universal life and
pensions.

      AIG's three principal overseas life operations are ALICO, AIA and Nan
Shan. ALICO is incorporated in Delaware and all of its business is written
outside of the United States. ALICO has operations either directly or through
subsidiaries in approximately 50 countries located in Europe, Africa, Latin
America, the Caribbean, the Middle East, and the Far East, with Japan being the
largest territory. AIA operates primarily in Hong Kong, Singapore, Malaysia and
Thailand. Nan Shan operates in Taiwan. AIG's domestic life operations are
comprised of two separate operations, AIG's domestic life companies and the life
insurance subsidiaries of SunAmerica.


                                                                              81

<PAGE>   83

--------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)

18. Segment Information (continued)

Both of these operations sell primarily financial and investment type products.

      Financial Services - AIG's financial services subsidiaries engage in
diversified financial products and services including premium financing, banking
services and consumer finance services.

      ILFC engages primarily in the acquisition of new and used commercial jet
aircraft and the leasing and remarketing of such aircraft to airlines around the
world.

      AIGFP structures financial transactions, including long-dated interest
rate and currency swaps and structured borrowings through notes, bonds and
guaranteed investment agreements.

      AIGTG engages in various commodities trading, foreign exchange trading,
interest rate swaps and market making activities.

      Asset Management - AIG's asset management operations offer a wide variety
of investment vehicles and services, including variable annuities, mutual funds
and investment asset management. Such products and services are offered to
individuals and institutions both domestically and internationally.

      AIG's three principal asset management operations are SAAMCo, Global
Investment and Cap Partners. SAAMCo develops and sells variable annuities and
other investment products, sells and manages mutual funds and provides financial
services. Global Investment manages invested assets of institutions, including
insurance companies and pension funds, and provides custodial services. Cap
Partners organizes, and manages the invested assets of institutional investment
funds and may also invest in such funds. Each of these subsidiary operations
receives fees for investment products and services provided.


82

<PAGE>   84

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

18. Segment Information (continued)

      (b) The following table summarizes the operations by major operating
segment for the years ended December 31, 1999, 1998 and 1997:


<TABLE>
<CAPTION>
                                                                    Operating Segments-1999
                                     --------------------------------------------------------------------------------------
                                       General           Life       Financial         Asset
(in millions)                        Insurance      Insurance        Services     Management          Other(a) Consolidated
===========================================================================================================================
<S>                                  <C>            <C>             <C>            <C>            <C>             <C>      
Revenues (b)                         $  18,356      $  18,000       $   3,340      $     985      $     (25)      $  40,656
Interest revenue                            --             --           1,381             84             --           1,465
Interest expense                             8            159           2,042              5             37           2,251
Realized capital gains (losses)            295           (148)             --             --            (25)            122
Operating income (loss) before
  minority interest                      3,481          2,858           1,081            314           (222)          7,512
Income taxes (benefit)                     831            961             388            103            (64)          2,219
Depreciation expense                       134             92             743              5             97           1,071
Capital expenditures                       215            212           3,453             35            117           4,032
Identifiable assets                     76,725        128,697          66,567          1,132         (4,883)        268,238
===========================================================================================================================

<CAPTION>
                                                                    Operating Segments-1998
                                     --------------------------------------------------------------------------------------
                                       General           Life       Financial         Asset
(in millions)                        Insurance      Insurance        Services     Management          Other(a) Consolidated
===========================================================================================================================
<S>                                  <C>            <C>             <C>            <C>            <C>             <C>      
Revenues (b)                         $  16,495      $  15,420       $   3,044      $     707      $      50       $  35,716
Interest revenue                            --             --           1,203             63             --           1,266
Interest expense                             7            184           1,835             14             36           2,076
Realized capital gains (losses)            205            (74)             --             --             (7)            124
Operating income (loss) before
  minority interest                      2,928          2,373             869            191            (84)          6,277
Income taxes                               646            728             297             45             69           1,785
Equity in income of minority-owned
  insurance operations                      57             --              --             --             --              57
Depreciation expense                       109             82             662              4             95             952
Capital expenditures                       220            277           3,233             33            142           3,905
Identifiable assets                     73,226        103,611          59,198            915         (3,274)        233,676
===========================================================================================================================

<CAPTION>
                                                                    Operating Segments-1997
                                     --------------------------------------------------------------------------------------
                                       General           Life       Financial         Asset
(in millions)                        Insurance      Insurance        Services     Management          Other(a) Consolidated
===========================================================================================================================
<S>                                  <C>            <C>             <C>            <C>            <C>             <C>      
Revenues (b)                         $  14,403      $  14,468       $   3,042      $     555      $      85       $  32,553
Interest revenue                            --             --             992             55             --           1,047
Interest expense                             2            135           1,682             17             34           1,870
Realized capital gains (losses)            128             (9)             --             --            (29)             90
Operating income (loss) before
  minority interest                      2,472          2,048             671            127             (8)          5,310
Income taxes                               514            625             244             48             94           1,525
Equity in income of minority-owned
  insurance operations                     114             --              --             --             --             114
Depreciation expense                        89             67             650              5             74             885
Capital expenditures                       166            346           3,515              4            174           4,205
Identifiable assets                     62,386         87,747          51,110            646         (2,275)        199,614
===========================================================================================================================
</TABLE>


(a)   Includes AIG Parent and other operations which are not required to be
      reported separately, other income (deductions)-net and adjustments and
      eliminations.

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


                                                                              83

<PAGE>   85

--------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)

18. Segment Information (continued)

      (c) The following table summarizes AIG's general insurance operations by
major internal reporting group for the years ended December 31, 1999, 1998 and
1997:


<TABLE>
<CAPTION>
                                                                      General Insurance-1999
                                                      ------------------------------------------------
                                                       Domestic                                  Total
                                                      Brokerage      Foreign                   General
(in millions)                                             Group      General       Other(a)  Insurance
======================================================================================================
<S>                                                     <C>          <C>          <C>          <C>    
Net premiums written                                    $ 8,119      $ 5,546      $ 2,559      $16,224
Net premiums earned                                       7,608        5,461        2,475       15,544
Losses & loss expenses incurred                           6,490        3,519        1,729       11,738
Underwriting expenses                                     1,060        1,632          445        3,137
Adjusted underwriting profit (b)                             58          310          301          669
Net investment income                                     1,738          522          257        2,517
Operating income before realized capital gains (c)        1,796          832          558        3,186
Depreciation expense                                         39           73           22          134
Capital expenditures                                         79           80           56          215
Identifiable assets                                      54,007       18,588        4,130       76,725
======================================================================================================

<CAPTION>
                                                                     General Insurance-1998
                                                      ------------------------------------------------
                                                       Domestic                                  Total
                                                      Brokerage      Foreign                   General
(in millions)                                             Group      General       Other(a)  Insurance
======================================================================================================
<S>                                                     <C>          <C>          <C>          <C>    
Net premiums written                                    $ 8,002      $ 4,799      $ 1,785      $14,586
Net premiums earned                                       7,814        4,627        1,657       14,098
Losses & loss expenses incurred                           6,862        2,678        1,117       10,657
Underwriting expenses                                     1,169        1,427          314        2,910
Adjusted underwriting profit (loss) (b)                    (217)         522          226          531
Net investment income                                     1,570          438          184        2,192
Operating income before realized capital gains (c)        1,353          960          410        2,723
Equity in income of minority-owned insurance operations      57           --           --           57
Depreciation expense                                         34           63           12          109
Capital expenditures                                         66          110           44          220
Identifiable assets                                      53,844       16,060        3,322       73,226
======================================================================================================

<CAPTION>
                                                                    General Insurance-1997
                                                      ------------------------------------------------
                                                       Domestic                                  Total
                                                      Brokerage      Foreign                   General
(in millions)                                             Group      General       Other(a)  Insurance
======================================================================================================
<S>                                                     <C>          <C>          <C>          <C>    
Net premiums written                                    $ 7,885      $ 4,370      $ 1,153      $13,408
Net premiums earned                                       7,207        4,069        1,145       12,421
Losses & loss expenses incurred                           6,268        2,304          784        9,356
Underwriting expenses                                     1,080        1,268          227        2,575
Adjusted underwriting profit (loss) (b)                    (141)         497          134          490
Net investment income                                     1,356          369          129        1,854
Operating income before realized capital gains (c)        1,215          866          263        2,344
Equity in income of minority-owned insurance operations     114           --           --          114
Depreciation expense                                         27           57            5           89
Capital expenditures                                         61           94           11          166
Identifiable assets                                      46,548       13,405        2,433       62,386
======================================================================================================
</TABLE>


(a)   Includes other operations which are not required to be reported separately
      and adjustments and eliminations.
(b)   Adjusted underwriting profit (loss) represents statutory underwriting
      profit or loss adjusted primarily for changes in deferred acquisition
      costs.
(c)   Realized capital gains are not deemed to be an integral part of AIG's
      general insurance operations' internal reporting groups.


84

<PAGE>   86

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

18. Segment Information (continued)

      (d) The following table summarizes AIG's life insurance operations by
major reporting group for the years ended December 31, 1999, 1998 and 1997:


<TABLE>
<CAPTION>
                                                                                 Life Insurance-1999
                                                        ----------------------------------------------------------------
                                                                           AIA                                     Total
                                                                           and      Domestic                        Life
(in millions)                                              ALICO      Nan Shan          Life         Other(a)  Insurance
========================================================================================================================
<S>                                                     <C>           <C>           <C>           <C>           <C>     
Premium income                                          $  3,714      $  7,014      $    947      $    267      $ 11,942
Net investment income                                      1,222         1,357         3,497           130         6,206
Operating income before realized capital gains (b)           680         1,200         1,062            64         3,006
Depreciation expense                                          41            30            15             6            92
Capital expenditures                                          62            92            39            19           212
Identifiable assets                                       26,294        28,310        72,358         1,735       128,697
========================================================================================================================

<CAPTION>
                                                                               Life Insurance-1998
                                                        ----------------------------------------------------------------
                                                                           AIA                                     Total
                                                                           and      Domestic                        Life
(in millions)                                              ALICO      Nan Shan          Life         Other(a)  Insurance
========================================================================================================================
<S>                                                     <C>           <C>           <C>           <C>           <C>     
Premium income                                          $  3,212      $  6,052      $    784      $    245      $ 10,293
Net investment income                                      1,019         1,189         2,889           104         5,201
Operating income before realized capital gains (b)           576         1,040           782            49         2,447
Depreciation expense                                          31            25            21             5            82
Capital expenditures                                         201            64             1            11           277
Identifiable assets                                       23,495        23,860        54,869         1,387       103,611
========================================================================================================================

<CAPTION>
                                                                               Life Insurance-1997
                                                        ----------------------------------------------------------------
                                                                           AIA                                     Total
                                                                           and      Domestic                        Life
(in millions)                                              ALICO      Nan Shan          Life         Other(a)  Insurance
========================================================================================================================
<S>                                                     <C>           <C>           <C>           <C>           <C>     
Premium income                                          $  2,811      $  6,278      $    583      $    284      $  9,956
Net investment income                                        754         1,188         2,464           115         4,521
Operating income before realized capital gains (b)           461           895           632            69         2,057
Depreciation expense                                          24            25            13             5            67
Capital expenditures                                         197           132             1            16           346
Identifiable assets                                       16,745        20,003        49,729         1,270        87,747
========================================================================================================================
</TABLE>


(a)   Includes other operations which are not required to be reported separately
      and adjustments and eliminations.
(b)   Realized capital gains are not deemed to be an integral part of AIG's life
      insurance operations' internal reporting groups.


                                                                              85

<PAGE>   87

--------------------------------------------------------------------------------
Notes to Financial Statements (CONTINUED)

18.  Segment Information (continued)

      (e) The following table summarizes AIG's financial services operations by
major reporting group for the years ended December 31, 1999, 1998 and 1997:


<TABLE>
<CAPTION>
                                                                             Financial Services-1999
                                                        ----------------------------------------------------------------
                                                                                                                   Total
                                                                                                               Financial
(in millions)                                               ILFC         AIGFP(a)      AIGTG         Other(b)   Services
========================================================================================================================
<S>                                                     <C>           <C>           <C>           <C>           <C>     
Commissions, transaction and other fees (c)             $  2,194      $    737      $    227      $    182      $  3,340
Interest revenue                                              30         1,066            50           235         1,381
Interest expense                                             732         1,189            27            94         2,042
Operating income (loss)                                      590           482           109          (100)        1,081
Depreciation expense                                         664             6            10            63           743
Capital expenditures                                       3,366            11            11            65         3,453
Identifiable assets                                       17,854        33,965         9,960         4,788        66,567
========================================================================================================================

<CAPTION>
                                                                            Financial Services-1998
                                                        ----------------------------------------------------------------
                                                                                                                   Total
                                                                                                               Financial
(in millions)                                               ILFC         AIGFP(a)      AIGTG         Other(b)   Services
========================================================================================================================
<S>                                                     <C>           <C>           <C>           <C>           <C>     
Commissions, transaction and other fees (c)             $  2,002      $    550      $    374      $    118      $  3,044
Interest revenue                                              49           941            74           139         1,203
Interest expense                                             694           997            59            85         1,835
Operating income (loss)                                      496           323           123           (73)          869
Depreciation expense                                         581             6             8            67           662
Capital expenditures                                       3,160             3            13            57         3,233
Identifiable assets                                       16,846        28,080        10,526         3,746        59,198
========================================================================================================================

<CAPTION>
                                                                             Financial Services-1997
                                                        ----------------------------------------------------------------
                                                                                                                   Total
                                                                                                               Financial
(in millions)                                               ILFC         AIGFP(a)      AIGTG         Other(b)   Services
========================================================================================================================
<S>                                                     <C>           <C>           <C>           <C>           <C>     
Commissions, transaction and other fees (c)             $  1,857      $    452      $    562      $    171      $  3,042
Interest revenue                                              41           768            88            95           992
Interest expense                                             691           857            42            92         1,682
Operating income (loss)                                      382           241           127           (79)          671
Depreciation expense                                         576             7             6            61           650
Capital expenditures                                       3,436             5             9            65         3,515
Identifiable assets                                       15,028        22,941        10,017         3,124        51,110
========================================================================================================================
</TABLE>


(a)   AIGFP's interest revenue and interest expense are reported as net
      revenues.
(b)   Includes other operations which are not required to be reported separately
      and adjustments and eliminations. 
(c)   Commissions, transaction and other fees are the sum of the net gain or
      loss of trading activities, the net change in unrealized gain or loss, the
      net interest revenues from forward rate agreements and interest rate
      swaps, and where applicable, management and incentive fees from asset
      management activities.


86

<PAGE>   88

--------------------------------------------------------------------------------
                             American International Group, Inc. and Subsidiaries

18. Segment Information (CONTINUED)

      (f) A substantial portion of AIG's operations is conducted in countries
other than the United States and Canada. The following table summarizes AIG's
operations by major geographic segment. Allocations have been made on the basis
of the location of operations and assets.


<TABLE>
<CAPTION>
                                                                                                Geographic Segments-1999
                                                                                    -----------------------------------------------
                                                                                                                Other
(in millions)                                                                       Domestic(a)  Far East     Foreign  Consolidated
===================================================================================================================================
<S>                                                                                   <C>         <C>         <C>           <C>    
Revenues (b)                                                                          $20,345     $13,242     $ 7,069       $40,656
Real estate and other fixed assets, net of accumulated depreciation                     1,172       1,006         755         2,933
Flight equipment primarily under operating leases, net of accumulated depreciation     17,334          --          --        17,334
===================================================================================================================================

<CAPTION>
                                                                                                  Geographic Segments-1998
                                                                                    -----------------------------------------------
                                                                                                                Other
(in millions)                                                                       Domestic(a)  Far East     Foreign  Consolidated
===================================================================================================================================
<S>                                                                                   <C>         <C>         <C>           <C>    
Revenues (b)                                                                          $18,238     $10,571     $ 6,907       $35,716
Real estate and other fixed assets, net of accumulated depreciation                     1,062         895         781         2,738
Flight equipment primarily under operating leases, net of accumulated depreciation     16,330          --          --        16,330
===================================================================================================================================
                                                                                                                         
<CAPTION>
                                                                                                 Geographic Segments-1997
                                                                                    -----------------------------------------------
                                                                                                                Other
(in millions)                                                                       Domestic(a)  Far East     Foreign  Consolidated
===================================================================================================================================
<S>                                                                                   <C>         <C>         <C>           <C>    
Revenues (b)                                                                          $16,092     $11,671     $ 4,790       $32,553
Real estate and other fixed assets, net of accumulated depreciation                       949         779         696         2,424
Flight equipment primarily under operating leases, net of accumulated depreciation     14,438          --          --        14,438
===================================================================================================================================
</TABLE>


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


                                                                              87

<PAGE>   89

--------------------------------------------------------------------------------
Notes to Financial Statements  (CONTINUED)

19. Summary of Quarterly Financial Information - Unaudited

The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1999 and 1998 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,           September 30,          December 31,
                                          -----------------   -----------------   -----------------      -----------------
(in millions, except per share amounts)      1999      1998      1999      1998      1999      1998(a)      1999      1998(a)
==========================================================================================================================
<S>                                       <C>       <C>       <C>       <C>       <C>       <C>          <C>       <C>    
Revenues                                  $ 9,825   $ 8,277   $10,195   $ 8,740   $ 9,638   $ 9,039      $10,998   $ 9,660
Net income                                  1,199     1,010     1,277     1,076     1,267     1,076        1,312     1,120
==========================================================================================================================
Net income per common share:
  Basic                                   $  0.77   $  0.66   $  0.83   $  0.71   $  0.82   $  0.71      $  0.85   $  0.73
  Diluted                                    0.77      0.65      0.81      0.69      0.81      0.69         0.84      0.72
Average shares outstanding:
  Basic                                     1,548     1,517     1,549     1,518     1,548     1,519        1,549     1,519
  Diluted                                   1,568     1,556     1,569     1,557     1,568     1,553        1,568     1,552
==========================================================================================================================
</TABLE>


(a)   Including the operations of Transatlantic and 21st Century.


88

<PAGE>   90

--------------------------------------------------------------------------------
                             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, 1999.


PART III
================================================================================


ITEM 10. Directors and Executive Officers of the Registrant

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


ITEM 11. Executive Compensation

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


ITEM 12. Security Ownership of Certain Beneficial Owners and Management

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


ITEM 13. Certain Relationships and Related Transactions

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


PART IV
================================================================================


ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

      (a)   Financial Statements and Exhibits.

            1.    Financial Statements and Schedules. See accompanying Index to
                  Financial Statements.

            2.    Exhibits.

                  2--Plan of Acquisition, Reorganization, Arrangement,
                     Liquidation or Succession.

                  3--Articles of Incorporation and By-Laws.

                  4--Instruments Defining the Rights of Security Holders.

                  10--Material Contracts.

                  11--Computation of Earnings Per Share for the Years Ended
                     December 31, 1999, 1998, 1997, 1996 and 1995.

                  12--Computation of Ratios of Earnings to Fixed Charges for the
                     Years Ended December 31, 1999, 1998, 1997, 1996 and 1995.

                  21--Subsidiaries of Registrant.

                  23--Consent of PricewaterhouseCoopers LLP.

                  24--Power of Attorney.

                  27--Financial Data Schedule.

                  99--Undertakings.

      (b)   Reports on Form 8-K.

      There have been no reports on Form 8-K filed during the quarter ended
      December 31, 1999.


                                                                              89

<PAGE>   91


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the issuer has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York, on the 30th day of March, 2000.

                                              AMERICAN INTERNATIONAL GROUP, INC.

                                              By        /s/ M.R. GREENBERG
                                                 -------------------------------
                                                    (M.R. Greenberg, Chairman)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report on Form 10-K has been signed below by the following persons
in the capacities indicated on the 30th day of March, 2000 and each of the
undersigned persons, in any capacity, hereby severally constitutes M.R.
Greenberg, Edward E. Matthews and Howard I. Smith and each of them, singularly,
his true and lawful attorney with full power to them and each of them to sign
for him, and in his name and in the capacities indicated below, this Annual
Report on Form 10-K and any and all amendments thereto.

         Signature                                           Title             
         ---------                                           -----             

    /s/ M.R. GREENBERG                                Chairman and Director    
-----------------------------------               (Principal Executive Officer)
     (M.R. Greenberg)                                          


    /s/ HOWARD I. SMITH                              Executive Vice President, 
-----------------------------------                  Chief Financial Officer,  
     (Howard I. Smith)                               Comptroller and Director  
                                                       (Principal Financial    
                                                      and Accounting Officer)  


  /s/ M. BERNARD AIDINOFF                                    Director 
-----------------------------------                                   
   (M. Bernard Aidinoff)                                     


       /s/ ELI BROAD                                         Director 
-----------------------------------                          
        (Eli Broad)                                                   


     /s/ PEI-YUAN CHIA                                       Director 
-----------------------------------                                   
      (Pei-yuan Chia)                                        


   /s/ MARSHALL A. COHEN                                     Director 
-----------------------------------
    (Marshall A. Cohen)


/s/ BARBER B. CONABLE, JR.                                   Director 
-----------------------------------
 (Barber B. Conable, Jr.)


  /s/ MARTIN S. FELDSTEIN                                    Director 
-----------------------------------
   (Martin S. Feldstein)


    /s/ ELLEN V. FUTTER                                      Director 
-----------------------------------
     (Ellen V. Futter)


                                      II-1

<PAGE>   92

                            SIGNATURES - (Continued)

         Signature                                          Title
         ---------                                          -----


  /s/ LESLIE L. GONDA                                      Director  
-----------------------------                             
   (Leslie L. Gonda)                                                 


 /s/ EVAN G. GREENBERG                                     Director  
-----------------------------                              
  (Evan G. Greenberg)                                                

                                                           
  /s/ CARLA A. HILLS                                       Director            
-----------------------------                              
   (Carla A. Hills)                                                  

                                                           
/s/ FRANK J. HOENEMEYER                                    Director            
-----------------------------                              
 (Frank J. Hoenemeyer)                                               

                                                           
/s/ EDWARD E. MATTHEWS                                     Director            
-----------------------------                              
 (Edward E. Matthews)                                                

                                                           
  /s/ DEAN P. PHYPERS                                      Director  
-----------------------------
   (Dean P. Phypers)


 /s/ THOMAS R. TIZZIO                                      Director  
-----------------------------
  (Thomas R. Tizzio)


  /s/ EDMUND S.W. TSE                                      Director  
-----------------------------
   (Edmund S.W. Tse)


  /s/ JAY S. WINTROB                                       Director  
-----------------------------
   (Jay S. Wintrob)


  /s/ FRANK G. WISNER                                      Director  
-----------------------------
   (Frank G. Wisner)


                                       II-2

<PAGE>   93


                                  EXHIBIT INDEX

Exhibit
 Number           Description                                Location
 ------           -----------                                --------

  2         Plan of acquisition,                   Agreement and Plan of Merger,
            reorganization, arrangement,           dated as of August 19, 1998, 
            liquidation or succession              between SunAmerica Inc. and  
                                                   AIG, incorporated herein by  
                                                   reference to Exhibit 2 to    
                                                   AIG's Registration Statement 
                                                   on Form S-4 (File No.        
                                                   333-65441).                  

  3(i)(a)   Restated Certificate of                Incorporated by reference to 
            Incorporation of AIG                   Exhibit 3(i) to AIG's Annual 
                                                   Report on Form 10-K for the  
                                                   year ended December 31, 1996 
                                                   (File No. 1-8787).           

  3(i)(b)   Certificate of Amendment of            Incorporated by reference to 
            Certificate of Incorporation of        Exhibit 3(i) to AIG's        
            AIG, filed June 3, 1998                Quarterly Report on Form 10-Q
                                                   for the quarter ended June 30
                                                   1998 (File No. 1-8787).      

  3(i)(c)   Certificate of Merger of SunAmerica    Incorporated by reference to 
            Inc. with and into AIG, filed          Exhibit 3(i) to AIG's Annual 
            December 30, 1998 and effective        Report on Form 10-K for the  
            January 1, 1999                        year ended December 31, 1998 
                                                   (File No. 1-8787).           

  3(ii)     By-laws of AIG                         Incorporated by reference to 
                                                   Exhibit 3(ii) to AIG's Annual
                                                   Report on Form 10-K for the  
                                                   year ended December 31, 1998 
                                                   (File No. 1-8787).           

  4         Instruments defining the rights of     
            security holders, including            
            indentures
               (a) Fiscal Agency Agreement         Not required to be filed.*  
                   dated as of October 1,                                      
                   1984 between AIG and                                        
                   Citibank, N.A.                  
               (b) Indenture dated as of July      Not required to be filed.*  
                   15, 1989 between AIG and                                    
                   The Bank of New York                                        
               (c) Subordinated Indenture,         Not required to be filed.*  
                   dated as of October 28,                                     
                   1996, between SunAmerica                                    
                   Inc. and The First              
                   National Bank of Chicago,       
                   as Trustee                      
               (d) Senior Indenture, dated as      Not required to be filed.*  
                   of April 15, 1993, between                                  
                   SunAmerica Inc. and The                                     
                   First National Bank of                                      
                   Chicago, as Trustee                                         
               (e) Supplemental Indenture,         Not required to be filed.*  
                   dated as of June 28, 1993,                                  
                   between SunAmerica Inc.                                     
                   and The First National                                      
                   Bank of Chicago, as                                         
                   Trustee, supplementing the      
                   Senior Indenture, dated as      
                   of April 15, 1993               
               (f) Supplemental Indenture,         Not required to be filed.*  
                   dated as of October 28,    
                   1996, between SunAmerica   
                   Inc. and The First         
                   National Bank of Chicago,  
                   as Trustee, supplementing  
                   the Senior Indenture,      
                   dated as of April 15, 1993 


                                      II-3

<PAGE>   94


<TABLE>
<CAPTION>
Exhibit
 Number                                   Description                                            Location
 ------                                   -----------                                            --------
<S>            <C>                                                                     <C>
               (g) Third Supplemental Indenture, dated as of January 1, 1999,          Not required to be filed.*  
                   among SunAmerica Inc., AIG and The First National Bank of
                   Chicago, as Trustee, supplementing the Senior Indenture,
                   dated as of April 15, 1993
               (h) Junior Subordinated Indenture, dated as of March 15, 1995,          Not required to be filed.*  
                   between SunAmerica Inc. and The First National Bank of
                   Chicago, as Trustee
               (i) First Supplemental Indenture, dated as of March 15, 1995,           Not required to be filed.*  
                   between SunAmerica Inc. and The First National Bank of
                   Chicago, as Trustee, supplementing the Junior Subordinated
                   Indenture, dated as of March 15, 1995
               (j) Second Supplemental Indenture, dated as of October 11, 1995,        Not required to be filed.*  
                   between SunAmerica Inc. and The First National Bank of
                   Chicago, as Trustee, supplementing the Junior Subordinated
                   Indenture dated as of March 15, 1995
               (k) Supplemental Indenture, dated as of October 28, 1996, between       Not required to be filed.*  
                   SunAmerica Inc. and The First National Bank of Chicago, as
                   Trustee, supplementing the Junior Subordinated Indenture,
                   dated as of March 15, 1995
               (l) Fourth Supplemental Indenture, dated as of November 13, 1996,       Not required to be filed.*  
                   between SunAmerica Inc. and The First National Bank of
                   Chicago, as Trustee, supplementing the Junior Subordinated
                   Indenture, dated as of March 15, 1995
               (m) Fifth Supplemental Indenture, dated as of January 1, 1999,          Not required to be filed.*  
                   among SunAmerica Inc., AIG and The First National Bank of
                   Chicago, as Trustee, supplementing the Junior Subordinated
                   Indenture, dated as of March 15, 1995
               (n) Senior Indenture, dated as of November 15, 1991, between            Not required to be filed.*  
                   SunAmerica Inc. (as successor in interest to Broad Inc.) and
                   Security Pacific National Bank, as Trustee
               (o) Tri-Party Agreement, dated as of July 1, 1993, among The            Not required to be filed.*  
                   First National Bank of Chicago, Bank of America, NT & SA and
                   SunAmerica Inc., appointing The first National Bank of Chicago
                   as Successor Trustee to Bank of America NT & SA (as successor
                   in interest to Security Pacific National Bank), amending the
                   Senior Indenture, dated as of November 15, 1991
               (p) First Supplemental Indenture, dated as of January 1, 1999,          Not required to be filed.*  
                   among SunAmerica Inc., AIG and The First National Bank of
                   Chicago, as Trustee, supplementing Senior Indenture, dated
                   November 15, 1991
</TABLE>



                                      II-4

<PAGE>   95


<TABLE>
<CAPTION>
Exhibit
 Number                                   Description                                            Location
 ------                                   -----------                                            --------
<S>            <C>                                                                     <C>
               (q) Amended and Restated Declaration of Trust of SunAmerica             Not required to be filed.*
                   Capital Trust I, dated as of June 6, 1995, among SunAmerica
                   Inc. and the Trustees of the Trust
               (r) Amended and Restated Declaration of Trust of SunAmerica             Not required to be filed.*
                   Capital Trust II, dated as of October 11, 1995, among
                   SunAmerica Inc. and the Trustees of the Trust
               (s) Amended and Restated Declaration of Trust of SunAmerica             Not required to be filed.*
                   Capital Trust III, dated as of November 13, 1996, among
                   SunAmerica Inc. and the Trustees of the Trust
               (t) Guarantee Agreement, dated as of October 11, 1995, between          Not required to be filed.*
                   SunAmerica Inc. and The Bank of New York, as Guaranty
                   Trustee, relating to the Preferred Securities of SunAmerica
                   Capital Trust II
               (u) Amendment to Guarantee, dated as of January 1, 1999, among          Not required to be filed.*
                   SunAmerica Inc., AIG and The Bank of New York, as Guaranty
                   Trustee, amending Guarantee Agreement, dated as of October
                   11, 1995, between SunAmerica Inc. and The Bank of New York,
                   as Guaranty Trustee
               (v) Guarantee Agreement, dated as of November 13, 1996, between         Not required to be filed.*
                   SunAmerica Inc. and The Bank of New York, as Guaranty
                   Trustee, relating to the Preferred Securities of SunAmerica
                   Capital Trust III
               (w) Amendment to Guarantee, dated as of January 1, 1999, among          Not required to be filed.*
                   SunAmerica Inc., AIG and The Bank of New York, as Guaranty
                   Trustee, amending Guarantee Agreement, dated November 13,
                   1996, between SunAmerica Inc. and The Bank of New York, as
                   Guaranty Trustee
</TABLE>



                                      II-5

<PAGE>   96


<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 1996 Employee Stock Purchase Plan                          Filed as exhibit to AIG's Definitive Proxy        
                                                                                  Statement dated April 2, 1996 (File No. 1-8787)   
                                                                                  and incorporated herein by reference.             

               (f) AIG 1977 Stock Option and Stock Appreciation Rights Plan       Filed as exhibit to AIG's Registration Statement
                                                                                  (File No. 2-59317) and incorporated herein by   
                                                                                  reference.                                      

               (g) AIG 1982 Employee Stock Option Plan                            Filed as exhibit to AIG's Registration Statement
                                                                                  (File No. 2-78291) and incorporated herein by   
                                                                                  reference.                                      

               (h) AIG 1987 Employee Stock Option Plan                            Filed as exhibit to AIG's Definitive Proxy   
                                                                                  Statement dated as of April 6, 1987 (File No.   
                                                                                  0-4652) and incorporated herein by reference.
                                                                                  

               (i) AIG 1991 Employee Stock Option Plan                            Filed as exhibit to AIG's Definitive Proxy    
                                                                                  Statement dated as of April 4, 1997 (File No. 
                                                                                  1-8787) and incorporated herein by reference. 
                                                                                                                                
               (j) AIRCO 1972 Employee Stock Option Plan                          Incorporated by reference to AIG's Joint Proxy
                                                                                  Statement and Prospectus (File No. 2-61994).  

               (k) AIRCO 1977 Stock Option and Stock Appreciation Rights Plan     Incorporated by reference to AIG's Joint Proxy
                                                                                  Statement and Prospectus (File No. 2-61994).  

               (l) Purchase Agreement between AIA and Mr. E.S.W. Tse.             Incorporated by reference to Exhibit 10(l) to 
                                                                                  AIG's Annual Report on Form 10-K for the year 
                                                                                  ended December 31, 1997 (File No. 1-8787).    

               (m) Retention and Employment Agreement between AIG and Jay S.      Incorporated by reference to Exhibit 10(m) to 
                   Wintrob                                                        AIG's Annual Report on Form 10-K for the year 
                                                                                  ended December 31, 1998 (File No. 1-8787).    

               (n) SunAmerica Inc. 1988 Employee Stock Plan                       Incorporated by reference to Exhibit 4(a) to AIG's
                                                                                  Registration Statement on Form S-8 (File No.      
                                                                                  333-70069).                                       

               (o) SunAmerica 1997 Employee Incentive Stock Plan                  Incorporated by reference to Exhibit 4(b) to AIG's
                                                                                  Registration Statement on Form S-8 (File No.      
                                                                                  333-70069).                                       
</TABLE>



                                      II-6

<PAGE>   97


<TABLE>
<CAPTION>
Exhibit
 Number                                   Description                                            Location
 ------                                   -----------                                            --------
<S>         <C>                                                                   <C>
                (p) SunAmerica Non-employee Directors' Stock Option Plan          Incorporated by reference to Exhibit 4(c) to AIG's
                                                                                  Registration Statement on Form S-8 (File No.      
                                                                                  333-70069).                                       

                (q) SunAmerica 1995 Performance Stock Plan                        Incorporated by reference to Exhibit 4(d) to AIG's
                                                                                  Registration Statement on Form S-8 (File No.      
                                                                                  333-70069).                                       

                (r) SunAmerica Inc. 1998 Long-Term Performance-Based Incentive    Incorporated by reference to Exhibit 4(e) to AIG's
                    Plan For the Chief Executive Officer                          Registration Statement on Form S-8 (File No.      
                                                                                  333-70069).                                       

                (s) SunAmerica Inc. Long-Term Performance-Based Incentive Plan    Incorporated by reference to Exhibit 4(f) to AIG's
                    Amended and Restated 1997                                     Registration Statement on Form S-8 (File No.      
                                                                                  333-70069). 

                (t) SunAmerica Five Year Deferred Cash Plan                       Incorporated by reference to Exhibit 4(a) to AIG's
                                                                                  Registration Statement on Form S-8 (File No.      
                                                                                  333-31346).                                       

                (u) SunAmerica Executive Savings Plan                             Incorporated by reference to Exhibit 4(b) to AIG's
                                                                                  Registration Statement on Form S-8 (File No. 333- 
                                                                                  31346).                                           

 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      None.                                  
            holders                                                                                                      
 23         Consent of PricewaterhouseCoopers LLP                                 Filed herewith.                        
 24         Power of attorney                                                     Included on the signature page hereof. 
 27         Financial Data Schedule                                               Provided herewith.                     
 99         Undertakings by the Registrant required by Item 17 of Form S-3 and    Filed herewith.                        
            Item 21 of Form S-8, deemed to be incorporated by reference into      
            AIG's Registration Statements on Forms S-3 and S-8 (No. 2-38768, No.
            2-44043, No. 2-45346, No. 2-51498, No. 2-59317, No. 2-61858, No.
            2-62760, No. 2-64336, No. 2-67600, No. 2-72058, No. 2-75874, No.
            2-75875, No. 2-78291, No. 2-87005, No. 2-82989, No. 2-90756, No.
            2-91945, No. 2-95589, No. 2- 97439, No. 33-8495, No. 33-13874, No.
            33-18073, No. 33-25291, No. 33-41643, No. 33-48996, No. 33-57250,
            No. 33-60327, No. 33-60827, No. 33-62821, No. 333-21365, No.
            333-48639, No. 333-58095, No. 333-70069 No. 333-74187, No. 
            333-83813, No. 333-31024 and No. 333-31346)
</TABLE>


----------
* The Registrant hereby agrees to file with the Commission a copy of any
instrument defining the rights of holders of the Registrant's long-term debt
upon request of the Commission.

** All material contracts are management contracts or compensatory plans or
arrangements.


                                      II-7











<PAGE>   1
                                                                      Exhibit 11

Computation of Earnings Per Share  

                             American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in millions, except per share amounts)
--------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                              1999(a)       1998(b)       1997(b)      1996(b)      1995(b)
================================================================================================================================
<S>                                                                <C>           <C>           <C>          <C>          <C>    
Numerator:

Basic:
Net income                                                         $ 5,055       $ 4,282       $ 3,711      $ 3,171      $ 2,704
Dividends on preferred stocks                                           --           (12)          (18)         (27)         (29)
================================================================================================================================
Net income applicable to common stock                                5,055         4,270         3,693        3,144        2,675
================================================================================================================================
Diluted:
Net income                                                           5,055         4,282         3,711        3,171        2,704
Dividends on non-convertible preferred stock                            --            --            (6)         (12)         (15)
--------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock                                5,055         4,282         3,705        3,159        2,689
================================================================================================================================
Denominator:

Basic:
Average shares outstanding used in the computation of
  per share earnings:
  Common stock issued                                                1,664         1,632         1,618        1,610        1,596
  Common stock in treasury                                            (116)         (111)         (107)         (99)         (90)
  Common stock issued and outstanding but not vested to
   participants under various employee stock plans                      --            (3)           (3)          (3)          (3)
--------------------------------------------------------------------------------------------------------------------------------
  Average shares outstanding-basic                                   1,548         1,518         1,508        1,508        1,503
================================================================================================================================

Diluted:
Average shares outstanding used in the computation of
  per share earnings:
  Common stock issued                                                1,664         1,632         1,618        1,610        1,596
  Common stock in treasury                                            (116)         (111)         (107)         (99)         (90)
  Stock options and stock purchase plan (treasury stock method)         19            15            11           10            9
  Average number of shares issuable upon conversion of
   Series D Mandatory Conversion
 Premium Dividend
   Preferred Stock                                                      --            --            --            4           22
  Average number of shares issuable upon conversion of
   Series E Mandatory Conversion Premium Dividend
   Preferred Stock                                                      --            14            16           18           --
  Average number of shares issuable upon conversion of
   Premium Equity Redemption Cumulative Security Units                  --             4             4           --           --
--------------------------------------------------------------------------------------------------------------------------------
  Average shares outstanding-diluted                                 1,567         1,554         1,542        1,543        1,537
================================================================================================================================
Earnings per share:
Basic                                                              $  3.27       $  2.81       $  2.45      $  2.08      $  1.78
--------------------------------------------------------------------------------------------------------------------------------
Diluted                                                            $  3.23       $  2.75       $  2.40      $  2.05      $  1.75
================================================================================================================================
</TABLE>


(a)   The number of common shares outstanding as of December 31, 1999 was 1,549.
      The number of common shares that would have been outstanding as of
      December 31, 1999 assuming the exercise or issuance of all dilutive
      potential common shares outstanding was 1,569.

(b)   Share information reflects a common stock split in the form of a 25
      percent common stock dividend paid July 30, 1999 and common stock splits
      in the form of 50 percent common stock dividends paid July 31, 1998, July
      25, 1997 and July 28, 1995.


                                      II-8




<PAGE>   1
                                                                      Exhibit 12
Computation of Ratios of                                              
Earnings to Fixed Charges    American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in millions, except ratios)
----------------------------------------------------------------------------------------------------------
Years Ended December 31,                                      1999      1998      1997      1996      1995
==========================================================================================================
<S>                                                         <C>       <C>       <C>       <C>       <C>   
Income before income taxes, minority interest and
   cumulative effect of accounting change                   $7,512    $6,277    $5,310    $4,468    $3,783
Less-Equity income of less than 50% owned persons               22        98       120       121        91
Add-Dividends from less than 50% owned persons                  13        24        30        13         6
----------------------------------------------------------------------------------------------------------
                                                             7,503     6,203     5,220     4,360     3,698
Add-Fixed charges                                            2,357     2,172     1,954     1,697     1,550
Less-Capitalized interest                                       60        86        60        61        51
----------------------------------------------------------------------------------------------------------
Income before income taxes, minority interest cumulative
   effect of accounting change and fixed charges            $9,800    $8,289    $7,114    $5,996    $5,197
==========================================================================================================
Fixed charges:
   Interest costs                                           $2,251    $2,076    $1,870    $1,621    $1,478
   Rental expense *                                            106        96        84        76        72
----------------------------------------------------------------------------------------------------------
Total fixed charges                                         $2,357    $2,172    $1,954    $1,697    $1,550
==========================================================================================================
Ratio of earnings to fixed charges                            4.16      3.82      3.64      3.53      3.35
==========================================================================================================
</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 6.96, 5.93, 5.48,
5.29 and 4.85 for 1999, 1998, 1997, 1996 and 1995, 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-9



<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)
    AIG Asset Management Group, Inc.                                              Delaware                      100%
    AIG Capital Partners, Inc.                                                    Delaware                      100%
    AIG Aviation, Inc.                                                             Georgia                      100%
    AIG Capital Corp.                                                             Delaware                      100%
    AIG Capital Management Corp.                                                  Delaware                      100%
    AIG Claim Services, Inc.                                                      Delaware                      100%
    AIG Consumer Finance, Inc.                                                    Delaware                      100%
    AIG Credit Corp.                                                              Delaware                      100%
      AICCO                                                                  New Hampshire                      100%
      Imperial Premium Finance, Inc.                                            California                      100%
      Imperial Premium Finance, Inc.                                              Delaware                      100%
    AIG Finance Holdings, Inc.                                                    New York                      100%
      AIG Finance (Hong Kong) Limited                                            Hong Kong                      100%
    AIG Financial Products Corp.                                                  Delaware                      100%
    AIG Funding, Inc.                                                             Delaware                      100%
    AIG Global Investment Group, Inc.                                             Delaware                      100%
    AIG Global Trade & Political Risk Insurance Company                         New Jersey                      100%
    AIG Life Insurance Company                                                    Delaware                     78.9%(5)
    AIG Life Insurance Company of Canada                                            Canada                      100%
    AIG Life Insurance Company of Puerto Rico                                  Puerto Rico                      100%
    AIG Marketing, Inc.                                                           Delaware                      100%
    AIG Private Bank Ltd.                                                      Switzerland                      100%
    AIG Risk Management, Inc.                                                     New York                      100%
    AIG Trading Group Inc.                                                        Delaware                       80%
    AIU Insurance Company                                                         New
 York                       52%(6)
    AIU North America, Inc.                                                       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, Inc.           California                      100%
         American International Insurance Company of New Jersey                 New Jersey                      100%
         Minnesota Insurance Company                                             Minnesota                      100%
      Transatlantic Holdings, Inc.                                                Delaware                     33.8%(7)
         Transatlantic Reinsurance Company                                        New York                      100%
            Putnam Reinsurance Company                                            New York                      100%
            Trans Re Zurich                                                    Switzerland                      100%
    American International Group Data Center, Inc.                           New Hampshire                      100%
    American International Life Assurance Company of New York                     New York                     77.52%(8)
    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%
      American International Underwriters Corporation                             New York                      100%
</TABLE>



                                      II-10

<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> 
   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%
     AIG Brasil Holding Ltd.                                                                      Brazil                73.6%(9)
     Kenya American Insurance Company Limited                                                      Kenya                 100%
     ALICO                                                                                        France                  89%
   American Security Life Insurance Company, Ltd.                                            Switzerland                99.8%
   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%
     21st Century Insurance Group                                                             California                31.7%(11)
       21st Century Insurance Company                                                         California                 100%
       21st Century Casualty Company                                                          California                 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                     (12)
       A.I. Network Corporation                                                            New Hampshire                 100%
        Marketpac International, Inc.                                                           Delaware                 100%
       American International Pacific Insurance Company                                         Colorado                 100%
       American International South Insurance Company                                       Pennsylvania                 100%
       Granite State Insurance Company                                                      Pennsylvania                 100%
       New Hampshire Indemnity Company, Inc.                                                Pennsylvania                 100%
       AIG National Insurance Company, Inc.                                                     New York                 100%
       Illinois National Insurance Co.                                                          Illinois                 100%
       New Hampshire Insurance Services, Inc.                                              New Hampshire                 100%
</TABLE>



                                      II-11

<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>
       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%
          Pine Street Real Estate Holdings Corp.                                            New Hampshire                    (13)
          American International Realty Corp.                                                    Delaware                100%
  Risk Specialist Companies, Inc.                                                                Delaware                100%
  SunAmerica Inc.                                                                                Delaware                100%
   SunAmerica Investments, Inc.                                                                   Georgia                100%
    SunAmerica Financial Network, Inc.                                                           Maryland                100%
          Advantage Capital Corp.                                                                New York                100%
          FSC Securities, Inc.                                                                   Delaware                100%
          Sentra Securities Corp.                                                              California                100%
          Spelman & Co., Inc.                                                                  California                100%
          SunAmerica Securities, Inc.                                                            Delaware                100%
   Resources Trust Company                                                                       Colorado                100%
   SunAmerica Life Insurance Company                                                              Arizona                100%
    First SunAmerica Life Insurance Company                                                      New York                100%
    Anchor National Life Insurance Company                                                        Arizona                100%
          Royal Alliance Associates, Inc.                                                        Delaware                100%
          SunAmerica Asset Management Corp.                                                      Delaware                100%
          SunAmerica Capital Services, Inc.                                                      Delaware                100%
  21st Century Insurance Company of Arizona                                                       Arizona                 51%(14)
  UGC                                                                                      North Carolina              36.31%(15)
   United Guaranty Insurance Company                                                       North Carolina                100%
   United Guaranty Mortgage Insurance Company                                              North Carolina                100%
   United Guaranty Mortgage Insurance Company of North Carolina                            North Carolina                100%
   United Guaranty Residential Insurance Company of North Carolina                         North Carolina                100%
   United Guaranty Residential Insurance Company                                           North Carolina                 75%(16)
          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 executive officers of AIG as a group own 85.54 percent
      of the voting common stock of Starr and 75 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 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 13.7 percent by SICO, 2.0 percent by Starr and
      2.8 percent by The Starr Foundation.
(5)   Also owned 21.1 percent by Commerce & Industry Insurance Company.
(6)   Also owned 8 percent by The Insurance Company of the State of
      Pennsylvania, 32 percent by National Union, and 8 percent by Birmingham.
(7)   Also owned 25.6 percent by American International Group, Inc.
(8)   Also owned 22.48 percent by American Home.
(9)   Also owned 26.4 percent by American International Group, Inc.
(10)  Also owned 20 percent by The Insurance Company of the State of
      Pennsylvania and 10 percent by Birmingham.
(11)  Also owned 16.4 percent by American Home, 6.2 percent by Commerce &
      Industry Insurance Company and 6.2 percent by New Hampshire.
(12)  100 percent to be held with other AIG companies.
(13)  Owned by 13 AIG subsidiaries.
(14)  Also owned 49 percent by 21st Century Insurance Group.
(15)  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.
(16)  Also owned 25 percent by United Guaranty Residential Insurance Company of
      North Carolina.


                                      II-12








<PAGE>   1

                                                                      Exhibit 23

Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-3 and S-8 (No. 2-38768, No. 2-44043, No. 2-45346, No.
2-51498, No. 2-59317, No. 2-61858, No. 2-62760, No. 2-64336, No. 2-67600, No.
2-72058, No. 2-75874, No. 2-75875, No. 2-78291, No. 2-87005, No. 2-82989, No.
2-90756, No. 2-91945, No. 2-95589, No. 2-97439, No. 33-8495, No. 33-13874, No.
33-18073, No. 33-25291, No. 33-41643, No. 33-48996, No. 33-57250, No. 33-60327,
No. 33-60827, No. 33-62821, No. 333-21365, No. 333-48639, No. 333- 58095, No.
333-70069, No. 333-74187, No. 333-83813, No. 333-31024 and No. 333-31346) of
American International Group, Inc. of our report dated February 9, 2000,
relating to the consolidated financial statements and financial statement
schedules, which appears in this Form 10-K. We also consent to the reference to
our firm under the headings "Financial Statements" or "Experts" included in the
Prospectuses.


                                                      PricewaterhouseCoopers LLP

New York, New York
March 30, 2000.


                                      II-13





<TABLE> <S> <C>

<ARTICLE> 7
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               DEC-31-1999
<EXCHANGE-RATE>                                      1
<DEBT-HELD-FOR-SALE>                            77,028
<DEBT-CARRYING-VALUE>                           12,078
<DEBT-MARKET-VALUE>                             12,202
<EQUITIES>                                       6,714
<MORTGAGE>                                       7,139
<REAL-ESTATE>                                    1,620
<TOTAL-INVEST>                                 185,882
<CASH>                                             132
<RECOVER-REINSURE>                              19,368
<DEFERRED-ACQUISITION>                           9,624
<TOTAL-ASSETS>                                 268,238
<POLICY-LOSSES>                                 72,860
<UNEARNED-PREMIUMS>                             11,450
<POLICY-OTHER>                                       0
<POLICY-HOLDER-FUNDS>                           45,785
<NOTES-PAYABLE>                                 23,554
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                         4,152
<OTHER-SE>                                      29,154
<TOTAL-LIABILITY-AND-EQUITY>                   268,238
<PREMIUMS>                                      27,486
<INVESTMENT-INCOME>                              8,723
<INVESTMENT-GAINS>                                 122
<OTHER-INCOME>                                   (197)
<BENEFITS>                                      23,608
<UNDERWRITING-AMORTIZATION>                      2,419
<UNDERWRITING-OTHER>                             3,990
<INCOME-PRETAX>                                  7,512<F1>
<INCOME-TAX>                                     2,219
<INCOME-CONTINUING>                              5,055
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     5,055
<EPS-BASIC>                                       3.27<F2>
<EPS-DILUTED>                                     3.23<F2>
<RESERVE-OPEN>                                  24,619
<PROVISION-CURRENT>                             12,122
<PROVISION-PRIOR>                                (384)
<PAYMENTS-CURRENT>                               4,978
<PAYMENTS-PRIOR>                                 6,779
<RESERVE-CLOSE>                                 24,600
<CUMULATIVE-DEFICIENCY>                            382
<FN>
<F1>Amount represents Income before income taxes and minority interest.
<F2>Earnings per share information reflects a common stock split in the form
 of a
25 percent common stock dividend paid July 30, 1999. Prior period financial
data schedules have not been restated for this stock split
</FN>
        

</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-14

<PAGE>   2

                                                                      Schedule I

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1999


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------------------------------
                                                                                                     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                                                     $  2,501      $  2,485      $  2,486
    States, municipalities and political subdivisions                       21,799        21,673        21,546
    Foreign governments                                                     15,527        15,901        15,901
    Public utilities                                                         4,921         5,129         5,129
    All other corporate                                                     46,603        45,080        45,080
--------------------------------------------------------------------------------------------------------------
  Total bonds                                                               91,351        90,268        90,142
  Preferred stocks                                                               2            --             2
--------------------------------------------------------------------------------------------------------------
Total fixed maturities                                                      91,353        90,268        90,144
--------------------------------------------------------------------------------------------------------------
Equity securities:
  Common stocks:
    Public utilities                                                           217           245           245
    Banks, trust and insurance companies                                       604           655           655
    Industrial, miscellaneous and all other                                  4,675         5,102         5,102
--------------------------------------------------------------------------------------------------------------
  Total common stocks                                                        5,496         6,002         6,002
  Non-redeemable preferred stocks                                              718           712           712
--------------------------------------------------------------------------------------------------------------
Total equity securities                                                      6,214         6,714         6,714
--------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate, policy and collateral loans                  12,134        12,134        12,134
Financial services assets:
  Flight equipment primarily under operating leases, net of
    accumulated depreciation                                                17,334            --        17,334
  Securities available for sale, at market value                            12,920        12,954        12,954
  Trading securities, at market value                                           --         4,391         4,391
  Spot commodities, at market value                                             --           683           683
  Unrealized gain on interest rate and currency swaps,
   options and forward transactions                                             --         7,931         7,931
  Trading assets                                                             5,793            --         5,793
  Securities purchased under agreements to resell, at contract value        10,897            --        10,897
Other invested assets                                                        9,900            --         9,900
Short-term investments, at cost (approximates market value)                  7,007            --         7,007
--------------------------------------------------------------------------------------------------------------
Total investments                                                         $173,552      $     --      $185,882
==============================================================================================================
</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>   3

                                                                     Schedule II

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


<TABLE>
<CAPTION>
(in millions)
------------------------------------------------------------------------------------------------------
December 31,                                                                       1999           1998
======================================================================================================
<S>                                                                            <C>            <C>     
Assets:
  Cash                                                                         $      3       $      2
  Short-term investments                                                              1             10
  Invested assets                                                                   760            815
  Carrying value of subsidiaries and partially-owned companies, at equity        34,603         31,982
  Premiums and insurance balances receivable-net                                    113             56
  Other assets                                                                      377            440
------------------------------------------------------------------------------------------------------
Total assets                                                                     35,857         33,305
------------------------------------------------------------------------------------------------------
Liabilities:
  Insurance balances payable                                                        285            229
  Due to affiliates-net                                                             861            748
  Medium term notes payable                                                         481            467
  Term notes payable                                                                432            988
  Zero coupon notes                                                                 114            102
  Italian Lire bonds                                                                159            159
  Other liabilities                                                                 219            489
------------------------------------------------------------------------------------------------------
Total liabilities                                                                 2,551          3,182
------------------------------------------------------------------------------------------------------
Capital funds:
  Preferred stock                                                                    --            248
  Common stock                                                                    4,152          3,284
  Additional paid-in capital                                                      2,080          1,319
  Retained earnings                                                              31,040         27,110
  Accumulated other comprehensive income                                         (2,103)           (10)
  Treasury stock                                                                 (1,863)        (1,828)
------------------------------------------------------------------------------------------------------
Total capital funds                                                              33,306         30,123
------------------------------------------------------------------------------------------------------
Total liabilities and capital funds                                            $ 35,857       $ 33,305
======================================================================================================
</TABLE>


STATEMENT OF INCOME--PARENT COMPANY ONLY


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                1999          1998          1997
========================================================================================================
<S>                                                                  <C>           <C>           <C>    
Agency loss                                                          $   (13)      $    (6)      $    --
Financial services income                                                246           263           106
Asset management income                                                    5            --            --
Dividend income from consolidated subsidiaries:
  Cash                                                                 1,049           856         1,458
  Other                                                                   30            --            --
Dividend income from partially-owned companies                             7            14            22
Equity in undistributed net income of consolidated subsidiaries
  and partially-owned companies                                        4,180         3,737         2,793
Other income (deductions)-net                                           (162)         (210)         (375)
--------------------------------------------------------------------------------------------------------
Income before income taxes                                             5,342         4,654         4,004
Income taxes                                                             287           372           293
--------------------------------------------------------------------------------------------------------
Net income                                                           $ 5,055       $ 4,282       $ 3,711
========================================================================================================
</TABLE>



                                       S-2

<PAGE>   4

                                                                     Schedule II

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


<TABLE>
<CAPTION>
(in millions)
--------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                          1999      1998          1997
==============================================================================================================
<S>                                                                            <C>       <C>           <C>     
Cash flows from operating activities:
  Net income                                                                   $5,055    $ 4,282       $ 3,711 
--------------------------------------------------------------------------------------------------------------
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                                                 (4,180)   (3,737)       (2,793)
    Change in premiums and insurance balances receivable and payable-net            (1)       30            32
    Change in cumulative translation adjustments                                   (99)      (18)           41
    Other-net                                                                     (144)      178           414
--------------------------------------------------------------------------------------------------------------
    Total adjustments                                                           (4,424)   (3,547)       (2,306)
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                          631       735        1,405
--------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:                                                    
  Purchase of investments                                                          (44)     (154)          (12)
  Sale of investments                                                               62        __             2
  Change in short-term investments                                                   9        (9)           (1)
  Change in collateral and guaranteed loans                                         18       (25)         (237)
  Contributions to subsidiaries and investments in partially-owned companies      (415)     (444)       (1,823)
  Other-net                                                                        (39)      (36)           (3)
--------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                             (409)     (668)       (2,074)
--------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:                                                    
  Change in medium term notes                                                       14       (29)          108
  Change in term notes                                                            (556)      100           563
  Proceeds from common stock issued                                                220        40           614
  Change in loans payable                                                          217       218            44
  Net proceeds from issuance of preferred
    securities of subsidiary grantor trusts                                         __        __           300
  Payment for redemption of preferred securities
    of subsidiary grantor trusts                                                    __        __           (55)
  Payment for redemption of preferred stock                                         __        __          (137)
  Cash dividends to shareholders                                                  (303)     (324)         (267)
  Acquisition of treasury stock                                                   (275)      (81)         (508)
  Proceeds from redemption of Premium Equity Redemption
    Cumulative security Units                                                       431       --            --
  Other-net                                                                          31        7            10
--------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                               (221)      (69)         (672)
--------------------------------------------------------------------------------------------------------------
Change in cash                                                                       1        (2)            3
Cash at beginning of year                                                            2         4             1
--------------------------------------------------------------------------------------------------------------
Cash at end of year                                                            $     3   $     2       $     4
==============================================================================================================
</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 1998 and 1997 financial
      statements to conform to their 1999 presentation.
(3)   "Equity in undistributed net income of consolidated subsidiaries and
      partially-owned companies" in the accompanying Statement of Income--Parent
      Company Only--includes equity in income of the minority-owned insurance
      operations.
(4)   See also Notes to Consolidated Financial Statements.


                                      S-3

<PAGE>   5

                                                                    Schedule III

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
As of December 31, 1999, 1998 and 1997 and for the years then ended


<TABLE>
<CAPTION>
(in millions)
-------------------------------------------------------------------------------------------------
                                     Reserves for
                                       Losses and                                                
                         Deferred            Loss         Reserve          Policy                
                           Policy       Expenses,             for             and                
                      Acquisition   Future Policy        Unearned        Contract         Premium
Segment                     Costs        Benefits(a)     Premiums          Claims(b)      Revenue
=================================================================================================
<S>                       <C>             <C>             <C>             <C>             <C>    
1999
  General insurance       $ 2,132         $38,252         $11,450         $    --         $15,544
  Life insurance            7,492          34,608              --             942          11,942
-------------------------------------------------------------------------------------------------
                          $ 9,624         $72,860         $11,450         $   942         $27,486
=================================================================================================
1998
  General insurance       $ 1,852         $38,310         $10,009         $    --         $14,098
  Life insurance            6,229          29,571              --           1,135          10,293
-------------------------------------------------------------------------------------------------
                          $ 8,081         $67,881         $10,009         $ 1,135         $24,391
=================================================================================================
1997
  General insurance       $ 1,637         $33,400         $ 8,739         $    --         $12,421
  Life insurance            5,515          24,502              --             795           9,956
-------------------------------------------------------------------------------------------------
                          $ 7,152         $57,902         $ 8,739         $   795         $22,377
=================================================================================================

<CAPTION>
(in millions)
------------------------------------------------------------------------------------------------------

                                            Losses and    Amortization
                                                  Loss     of Deferred
                                   Net        Expenses          Policy           Other             Net
                            Investment       Incurred,     Acquisition       Operating        Premiums
Segment                         Income        Benefits           Costs(c)     Expenses         Written
======================================================================================================
<S>                            <C>             <C>             <C>             <C>             <C>    
1999
  General insurance            $ 2,517         $11,738         $ 1,528         $ 1,609         $16,224
  Life insurance                 6,206          11,870             891           2,381              --
------------------------------------------------------------------------------------------------------
                               $ 8,723         $23,608         $ 2,419         $ 3,990         $16,224
======================================================================================================
1998
  General insurance            $ 2,192         $10,657         $ 1,358         $ 1,552         $14,586
  Life insurance                 5,201          10,242             759           2,046              --
------------------------------------------------------------------------------------------------------
                               $ 7,393         $20,899         $ 2,117         $ 3,598         $14,586
======================================================================================================
1997
  General insurance            $ 1,854         $ 9,356         $ 1,216         $ 1,359         $13,408
  Life insurance                 4,521           9,770             874           1,776              -- 
------------------------------------------------------------------------------------------------------
                               $ 6,375         $19,126         $ 2,090         $ 3,135         $13,408
======================================================================================================
</TABLE>


(a)   Reserves for losses and loss expenses with respect to the general
      insurance operations are net of discounts of $1.08 billion, $551 million
      and $249 million for 1999, 1998 and 1997, respectively.
(b)   Reflected in insurance balances payable on the accompanying balance sheet.
(c)   Amounts shown for general insurance segment exclude amounts deferred and
      amortized in the same period.


                                      S-4

<PAGE>   6

                                                                     Schedule IV

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
As of December  31, 1999, 1998 and 1997 and for the years then ended


<TABLE>
<CAPTION>
(dollars in millions)
-----------------------------------------------------------------------------------------------------------
                                                                                                 Percent of
                                                  Ceded         Assumed                              Amount
                                               to Other      from Other                Net          Assumed
                           Gross Amount       Companies       Companies             Amount           to Net
===========================================================================================================
<S>                            <C>             <C>             <C>                <C>                  <C> 
1999
Life insurance in-force        $583,670        $ 69,535        $  1,289           $515,424              0.3%
===========================================================================================================
Premiums:
  General insurance            $ 18,660        $  6,345        $  3,909(a)        $ 16,224             24.1%
  Life insurance                 12,220             310              32             11,942(b)           0.3
-----------------------------------------------------------------------------------------------------------
Total premiums                 $ 30,880        $  6,655        $  3,941           $ 28,166             14.0%
===========================================================================================================
1998
Life insurance in-force        $502,241        $ 62,768        $  1,408           $440,881              0.3%
===========================================================================================================
Premiums:
  General insurance            $ 17,931        $  6,098        $  2,753(a)        $ 14,586             18.9%
  Life insurance                 10,550             285              28             10,293(b)           0.3
-----------------------------------------------------------------------------------------------------------
Total premiums                 $ 28,481        $  6,383        $  2,781           $ 24,879             11.2%
===========================================================================================================
1997
Life insurance in-force        $442,080        $ 56,971        $  1,243           $386,352              0.3%
===========================================================================================================
Premiums:
  General insurance            $ 17,097        $  5,334        $  1,645           $ 13,408             12.3%
  Life insurance                 10,221             286              21              9,956(b)           0.2
-----------------------------------------------------------------------------------------------------------
Total premiums                 $ 27,318        $  5,620        $  1,666           $ 23,364              7.1%
===========================================================================================================
</TABLE>


(a)   The increase results from the consolidation of Transatlantic, which is a
      reinsurance company.
(b)   Includes accident and health premiums of $2.25 billion, $1.88 billion and
      $1.71 billion in 1999, 1998 and 1997, respectively.


                                      S-5