FORM 10-Q
Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

[ X ]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                     to                     

For Quarter Ended June 30, 2003 Commission File Number 1-8787


AMERICAN INTERNATIONAL GROUP, INC.

(Exact name of registrant as specified in its charter)
     
 
Delaware
(State or other jurisdiction of incorporation or organization)
  13-2592361
(I.R.S. Employer Identification Number)
 
70 Pine Street, New York, New York
(Address of principal executive offices)
  10270
(Zip Code)
Registrant’s telephone number, including area code (212) 770-7000
NONE
Former name, former address and former fiscal year, if changed since last report.


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

 
YES  [ X ] NO  [     ]

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

 
YES  [ X ] NO  [     ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of June 30, 2003: 2,608,877,973.




TABLE OF CONTENTS

CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
NOTES TO FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF SEGMENT OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations
SIGNATURE
EXHIBIT INDEX
STATEMENT RE COMPUTATION OF RATIOS
302 CERTIFICATION
906 CERTIFICATION


Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED BALANCE SHEET
(in millions)
(unaudited)
                         
June 30, December 31,
2003 2002


ASSETS:
               
 
Investments, financial services assets and cash:
               
   
Fixed maturities:
               
     
Bonds available for sale, at market value (amortized cost: 2003 — $248,669; 2002 — $232,121)
  $ 268,385     $ 242,385  
     
Bonds held to maturity, at amortized cost (market value: 2003 — $4,252; 2002 — $0)
    4,181        
     
Bond trading securities, at market value (cost: 2003 — $0; 2002 — $963)
          981  
   
Equity securities:
               
     
Common stocks (cost: 2003 — $5,664; 2002 — $6,152)
    5,733       5,482  
     
Non-redeemable preferred stocks (cost: 2003 — $1,731; 2002 — $1,678)
    1,816       1,584  
   
Mortgage loans on real estate, net of allowance (2003 — $104; 2002 — $110)
    11,804       11,541  
   
Policy loans
    6,097       6,046  
   
Collateral and guaranteed loans, net of allowance (2003 — $17; 2002 — $54)
    2,240       2,341  
   
Financial services assets:
               
     
Flight equipment primarily under operating leases, net of accumulated depreciation (2003 — $4,975; 2002 — $4,426)
    29,628       26,867  
     
Securities available for sale, at market value (cost: 2003 — $17,284; 2002 — $16,715)
    17,256       16,687  
     
Trading securities, at market value
    6,991       4,146  
     
Spot commodities, at market value
    613       489  
     
Unrealized gain on interest rate and currency swaps, options and forward transactions
    15,274       15,376  
     
Trading assets
    4,799       4,786  
     
Securities purchased under agreements to resell, at contract value
    27,270       25,661  
     
Finance receivables, net of allowance (2003 — $441; 2002 — $477)
    15,950       15,857  
   
Securities lending collateral
    25,305       23,694  
   
Other invested assets
    14,380       12,680  
   
Short-term investments, at cost (approximates market value)
    13,198       6,993  
   
Cash
    835       1,165  
     
     
 
       
Total investments, financial services assets and cash
    471,755       424,761  
 
Investment income due and accrued
    4,543       4,297  
 
Premiums and insurance balances receivable, net of allowance (2003 — $190; 2002 — $150)
    15,780       13,088  
 
Reinsurance assets
    31,699       29,882  
 
Deferred policy acquisition costs
    22,270       22,256  
 
Investments in partially-owned companies
    1,407       1,575  
 
Real estate and other fixed assets, net of accumulated depreciation (2003 — $3,927; 2002 — $3,727)
    5,578       5,382  
 
Separate and variable accounts
    52,107       46,248  
 
Goodwill
    6,139       6,079  
 
Other assets
    9,334       7,661  
     
     
 
       
Total assets
  $ 620,612     $ 561,229  
     
     
 

See Accompanying Notes to Financial Statements.

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Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEET — (continued)

(in millions, except share amounts)
(unaudited)
                       
June 30, December 31,
2003 2002


LIABILITIES:
               
 
Reserve for losses and loss expenses
  $ 55,628     $ 51,539  
 
Reserve for unearned premiums
    19,162       16,336  
 
Future policy benefits for life and accident and health insurance contracts
    78,267       72,547  
 
Policyholders’ contract deposits
    150,052       142,160  
 
Other policyholders’ funds
    7,771       7,582  
 
Reserve for commissions, expenses and taxes
    3,510       3,429  
 
Insurance balances payable
    3,748       3,273  
 
Funds held by companies under reinsurance treaties
    4,036       3,425  
 
Income taxes payable:
               
   
Current
    1,013       793  
   
Deferred
    7,463       4,289  
 
Financial services liabilities:
               
   
Borrowings under obligations of guaranteed investment agreements
    14,636       14,850  
   
Securities sold under agreements to repurchase, at contract value
    10,507       9,162  
   
Trading liabilities
    4,687       3,825  
   
Securities and spot commodities sold but not yet purchased, at market value
    13,009       11,765  
   
Unrealized loss on interest rate and currency swaps, options and forward transactions
    11,062       11,265  
   
Trust deposits and deposits due to banks and other depositors
    3,297       2,987  
   
Commercial paper
    6,957       7,467  
   
Notes, bonds, loans and mortgages payable
    47,352       43,233  
 
Commercial paper
    2,383       1,645  
 
Notes, bonds, loans and mortgages payable
    5,540       4,690  
 
Separate and variable accounts
    52,107       46,248  
 
Minority interest
    1,823       1,580  
 
Securities lending payable
    25,305       23,694  
 
Other liabilities
    21,160       12,189  
     
     
 
     
Total liabilities
    550,475       499,973  
     
     
 
 
Preferred shareholders’ equity in subsidiary companies
    1,782       2,153  
     
     
 
CAPITAL FUNDS:
               
 
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2003 — 2,751,327,476; 2002 — 2,751,327,476
    6,878       6,878  
 
Additional paid-in capital
    592       607  
 
Retained earnings
    56,255       52,270  
 
Accumulated other comprehensive income (loss)
    5,997       691  
 
Treasury stock, at cost; 2003 — 142,449,503; 2002 — 141,726,645 shares of common stock
    (1,367 )     (1,343 )
     
     
 
     
Total capital funds
    68,355       59,103  
     
     
 
     
Total liabilities, preferred shareholders’ equity in subsidiary companies and capital funds
  $ 620,612     $ 561,229  
     
     
 

See Accompanying Notes to Financial Statements.

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AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
(unaudited)
                                   
Six Months Three Months
Ended June 30, Ended June 30,
2003 2002 2003 2002




Revenues:
                               
 
Premiums and other considerations
  $ 26,174     $ 21,309     $ 13,228     $ 11,019  
 
Net investment income
    8,210       7,374       4,186       3,726  
 
Realized capital gains (losses)
    (988 )     (861 )     (356 )     (629 )
 
Other revenues
    5,422       4,977       2,833       2,546  
     
     
     
     
 
 
Total revenues
    38,818       32,799       19,891       16,662  
     
     
     
     
 
Benefits and expenses:
                               
 
Incurred policy losses and benefits
    22,745       18,785       11,453       9,618  
 
Insurance acquisition & other operating expenses
    9,719       8,288       5,008       4,277  
     
     
     
     
 
 
Total benefits and expenses
    32,464       27,073       16,461       13,895  
     
     
     
     
 
Income before income taxes and minority interest
    6,354       5,726       3,430       2,767  
     
     
     
     
 
Income taxes:
                               
 
Current
    1,511       1,056       822       428  
 
Deferred
    425       708       238       444  
     
     
     
     
 
      1,936       1,764       1,060       872  
     
     
     
     
 
Income before minority interest
    4,418       3,962       2,370       1,895  
     
     
     
     
 
Minority interest
    (188 )     (181 )     (94 )     (94 )
     
     
     
     
 
Net income
  $ 4,230     $ 3,781     $ 2,276     $ 1,801  
     
     
     
     
 
Earnings per common share:
                               
 
Basic
  $ 1.62     $ 1.45     $ 0.87     $ 0.69  
     
     
     
     
 
 
Diluted
  $ 1.61     $ 1.43     $ 0.87     $ 0.68  
     
     
     
     
 
Cash dividends per common share
  $ 0.094     $ 0.084     $ 0.047     $ 0.042  
     
     
     
     
 
Average shares outstanding:
                               
 
Basic
    2,610       2,614       2,610       2,613  
     
     
     
     
 
 
Diluted
    2,628       2,639       2,627       2,640  
     
     
     
     
 

See Accompanying Notes to Financial Statements.

3


Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
                   
Six Months
Ended June 30,

2003 2002


Cash Flows From Operating Activities:
               
Net Income
  $ 4,230     $ 3,781  
     
     
 
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
    11,503       6,797  
 
Premiums and insurance balances receivable and payable — net
    (2,217 )     (1,131 )
 
Reinsurance assets
    (1,817 )     (1,149 )
 
Deferred policy acquisition costs
    (1,398 )     (1,706 )
 
Investment income due and accrued
    (246 )     (276 )
 
Funds held under reinsurance treaties
    611       338  
 
Other policyholders’ funds
    189       (396 )
 
Current and deferred income taxes — net
    645       585  
 
Reserve for commissions, expenses and taxes
    81       92  
 
Other assets and liabilities — net
    666       182  
 
Trading assets and liabilities — net
    849       1,035  
 
Trading securities, at market value
    (2,845 )     (910 )
 
Spot commodities, at market value
    (124 )     (56 )
 
Net unrealized (gain) loss on interest rate and currency swaps, options and forward transactions
    (101 )     290  
 
Securities purchased under agreements to resell
    (1,609 )     (368 )
 
Securities sold under agreements to repurchase
    1,345       (1,044 )
 
Securities and spot commodities sold but not yet purchased, at market value
    1,244       (623 )
Realized capital (gains) losses
    988       861  
Equity in income of partially-owned companies and other invested assets
    (236 )     (230 )
Amortization of premium and discount on securities
    (4 )     (95 )
Depreciation expenses, principally flight equipment
    908       799  
Change in cumulative translation adjustments
    459       (340 )
Provision for finance receivable losses
    183       180  
Other — net
    (193 )     (243 )
     
     
 
Total Adjustments
    8,881       2,592  
     
     
 
Net cash provided by operating activities
  $ 13,111     $ 6,373  
     
     
 

See Accompanying Notes to Financial Statements.

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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS — (Continued)

(in millions)
(unaudited)
                   
Six Months
Ended June 30,

2003 2002


Cash Flows From Investing Activities:
               
 
Cost of bonds, at market sold
  $ 54,747     $ 41,249  
 
Cost of bonds, at market matured or redeemed
    7,655       6,503  
 
Cost of equity securities sold
    4,057       3,003  
 
Realized capital gains (losses)
    (988 )     (861 )
 
Purchases of fixed maturities
    (82,232 )     (65,182 )
 
Purchases of equity securities
    (3,610 )     (3,343 )
 
Mortgage, policy and collateral loans granted
    (1,110 )     (1,327 )
 
Repayments of mortgage, policy and collateral loans
    872       686  
 
Sales of securities available for sale
    1,554       1,972  
 
Maturities of securities available for sale
    1,439       2,187  
 
Purchases of securities available for sale
    (3,526 )     (2,364 )
 
Sales of flight equipment
    14       40  
 
Purchases of flight equipment
    (3,478 )     (3,379 )
 
Net additions to real estate and other fixed assets
    (562 )     (406 )
 
Sales or distributions of other invested assets
    2,712       3,949  
 
Investments in other invested assets
    (4,238 )     (4,865 )
 
Change in short-term investments
    769       110  
 
Investments in partially-owned companies
    220       2  
 
Finance receivable originations and purchases
    (5,358 )     (4,769 )
 
Finance receivable principal payments received
    5,084       4,589  
     
     
 
Net cash used in investing activities
    (25,979 )     (22,206 )
     
     
 
Cash Flows From Financing Activities:
               
 
Change in policyholders’ contract deposits
    7,892       13,320  
 
Change in trust deposits and deposits due to banks and other depositors
    310       119  
 
Change in commercial paper
    228       (390 )
 
Proceeds from notes, bonds, loans and mortgages payable
    12,883       11,430  
 
Repayments on notes, bonds, loans and mortgages payable
    (7,893 )     (7,107 )
 
Proceeds from guaranteed investment agreements
    2,672       4,541  
 
Maturities of guaranteed investment agreements
    (2,886 )     (5,356 )
 
Redemption of subsidiary company preferred stock
    (371 )     (50 )
 
Proceeds from common stock issued
    23       129  
 
Cash dividends to shareholders
    (245 )     (221 )
 
Acquisition of treasury stock
    (76 )     (556 )
 
Other — net
    1       6  
     
     
 
Net cash provided by financing activities
    12,538       15,865  
     
     
 
Change in cash
    (330 )     32  
Cash at beginning of period
    1,165       698  
     
     
 
Cash at end of period
  $ 835     $ 730  
     
     
 

See Accompanying Notes to Financial Statements.

5


Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
                                     
Six Months Three Months
Ended June 30, Ended June 30,


2003 2002 2003 2002




Net income
  $ 4,230     $ 3,781     $ 2,276     $ 1,801  
Other comprehensive income:
                               
 
Unrealized appreciation (depreciation) of investments — net of reclassification adjustments
    7,589       (71 )     5,650       1,334  
   
Deferred income tax (expense) benefit on changes
    (2,688 )     73       (2,000 )     (448 )
 
Foreign currency translation adjustments(a)
    456       (347 )     418       (71 )
   
Applicable income tax (expense) benefit on changes
    (79 )     52       (74 )     23  
 
Net derivative gains (losses) arising from cash flow hedging activities
    122       (42 )     (71 )     (138 )
   
Deferred income tax (expense) benefit on changes
    (28 )     26       27       64  
 
Retirement plan liabilities adjustment, net of tax
    (66 )     (30 )     (26 )      
     
     
     
     
 
Other comprehensive income
    5,306       (339 )     3,924       764  
     
     
     
     
 
Comprehensive income
  $ 9,536     $ 3,442     $ 6,200     $ 2,565  
     
     
     
     
 

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

See Accompanying Notes to Financial Statements.

6


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AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

 
NOTES TO FINANCIAL STATEMENTS

June 30, 2003

(unaudited)

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

      2)     Segment Information:

      The following table summarizes the operations by major operating segment for the six months and quarter ended June 30, 2003 and 2002 (in millions):

                                   
Operating Segments

Six Months Three Months
Ended June 30, Ended June 30,


2003 2002 2003 2002




Revenues(a):
                               
 
General Insurance
  $ 16,300     $ 12,509     $ 8,402     $ 6,379  
 
Life Insurance
    17,312       15,553       8,758       7,896  
 
Financial Services
    3,610       3,241       1,917       1,675  
 
Retirement Savings & Asset Management
    1,812       1,736       916       871  
 
Other
    (216 )     (240 )     (102 )     (159 )
     
     
     
     
 
Consolidated
  $ 38,818     $ 32,799     $ 19,891     $ 16,662  
     
     
     
     
 
Operating income(b):
                               
 
General Insurance
  $ 2,356     $ 1,869     $ 1,212     $ 936  
 
Life Insurance
    2,756       2,544       1,561       1,217  
 
Financial Services
    1,153       1,016       623       542  
 
Retirement Savings & Asset Management
    584       580       301       280  
 
Other
    (495 )     (283 )     (267 )     (208 )
     
     
     
     
 
Consolidated
  $ 6,354     $ 5,726     $ 3,430     $ 2,767  
     
     
     
     
 

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

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     The following is AIG’s Consolidated Statement of Segment Operations for the six months and quarter ended June 30, 2003 and 2002:

 
CONSOLIDATED STATEMENT OF SEGMENT OPERATIONS
(in millions)
(unaudited)
                                   
Six Months Three Months
Ended June 30, Ended June 30,


2003 2002 2003 2002




General insurance operations:
                               
 
Net premiums written
  $ 17,087     $ 13,117     $ 8,844     $ 6,783  
 
Change in unearned premium reserve
    (2,046 )     (1,751 )     (1,090 )     (924 )
     
     
     
     
 
 
Net premiums earned
    15,041       11,366       7,754       5,859  
 
Net investment income
    1,515       1,425       731       680  
 
Realized capital gains (losses)
    (256 )     (282 )     (83 )     (160 )
     
     
     
     
 
 
General insurance revenues
    16,300       12,509       8,402       6,379  
     
     
     
     
 
 
Losses and loss expenses incurred
    11,128       8,483       5,725       4,340  
 
Underwriting expenses
    2,816       2,157       1,465       1,103  
     
     
     
     
 
 
General insurance benefits and expenses
    13,944       10,640       7,190       5,443  
     
     
     
     
 
 
General insurance operating income
    2,356       1,869       1,212       936  
     
     
     
     
 
Life insurance operations:
                               
 
GAAP premiums
    11,133       9,943       5,474       5,160  
 
Net investment income
    6,695       5,949       3,455       3,046  
 
Realized capital gains (losses)
    (516 )     (339 )     (171 )     (310 )
     
     
     
     
 
 
Life insurance revenues
    17,312       15,553       8,758       7,896  
     
     
     
     
 
 
Death and other benefits
    5,369       5,184       2,765       2,659  
 
Increase in future policy benefits
    6,248       5,118       2,963       2,619  
 
Acquisition and insurance expenses
    2,939       2,707       1,469       1,401  
     
     
     
     
 
 
Life insurance benefits and expenses
    14,556       13,009       7,197       6,679  
     
     
     
     
 
 
Life insurance operating income
    2,756       2,544       1,561       1,217  
     
     
     
     
 
Financial services operating income
    1,153       1,016       623       542  
Retirement savings & asset management operating income
    584       580       301       280  
Other realized capital gains (losses)
    (216 )     (240 )     (102 )     (159 )
Other income (deductions) — net
    (279 )     (43 )     (165 )     (49 )
     
     
     
     
 
Income before income taxes and minority interest
  $ 6,354     $ 5,726     $ 3,430     $ 2,767  
     
     
     
     
 

      The following table summarizes AIG’s general insurance operations by major operating unit for the six months and quarter ended June 30, 2003 and 2002 (in millions):

                                   
General Insurance

Six Months Three Months
Ended June 30, Ended June 30,


2003 2002 2003 2002




Revenues:
                               
 
Domestic Brokerage Group
  $ 9,011     $ 6,724     $ 4,689     $ 3,379  
 
Transatlantic
    1,589       1,233       831       633  
 
Personal Lines
    1,802       1,430       914       742  
 
Mortgage Guaranty
    334       328       156       163  
 
Foreign General
    3,601       2,797       1,839       1,471  
 
Reclassifications and Eliminations
    (37 )     (3 )     (27 )     (9 )
     
     
     
     
 
Total General Insurance
  $ 16,300     $ 12,509     $ 8,402     $ 6,379  
     
     
     
     
 

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General Insurance

Six Months Three Months
Ended June 30, Ended June 30,


2003 2002 2003 2002




Operating income:
                               
 
Domestic Brokerage Group
  $ 1,388     $ 1,043     $ 679     $ 512  
 
Transatlantic
    176       146       96       74  
 
Personal Lines
    98       86       29       63  
 
Mortgage Guaranty
    219       236       109       124  
 
Foreign General
    728       629       381       318  
 
Reclassifications and Eliminations
    3       11       1       5  
 
Realized capital gains (losses)
    (256 )     (282 )     (83 )     (160 )
     
     
     
     
 
Total General Insurance
  $ 2,356     $ 1,869     $ 1,212     $ 936  
     
     
     
     
 

      The following table summarizes AIG’s life insurance operations by major operating unit for the six months and quarter ended June 30, 2003 and 2002 (in millions):

                                   
Life Insurance

Six Months Three Months
Ended June 30, Ended June 30,


2003 2002 2003 2002




Revenues:
                               
 
American International Assurance and Nan Shan Life
  $ 6,317     $ 5,779     $ 3,275     $ 3,017  
 
ALICO and AIG Star Life
    4,052       3,601       2,108       1,824  
 
Domestic Life
    6,710       5,935       3,303       2,920  
 
Other
    233       238       72       135  
     
     
     
     
 
Total Life Insurance
  $ 17,312     $ 15,553     $ 8,758     $ 7,896  
     
     
     
     
 
Operating income:
                               
 
American International Assurance and Nan Shan Life
  $ 902     $ 807     $ 494     $ 415  
 
ALICO and AIG Star Life
    858       699       460       388  
 
Domestic Life
    1,419       1,308       755       676  
 
Other
    93       69       23       48  
 
Realized capital gains (losses)
    (516 )     (339 )     (171 )     (310 )
     
     
     
     
 
Total Life Insurance
  $ 2,756     $ 2,544     $ 1,561     $ 1,217  
     
     
     
     
 

      The following table summarizes AIG’s financial services operations by major operating unit for the six months and quarter ended June 30, 2003 and 2002 (in millions):

                                   
Financial Services

Six Months Three Months
Ended June 30, Ended June 30,


2003 2002 2003 2002




Revenues:
                               
 
International Lease Finance Corporation 
  $ 1,487     $ 1,367     $ 765     $ 726  
 
AIG Financial Products Corp. 
    676       538       404       266  
 
Consumer Finance 
    1,293       1,227       654       614  
 
Other*
    154       109       94       69  
     
     
     
     
 
Total Financial Services
  $ 3,610     $ 3,241     $ 1,917     $ 1,675  
     
     
     
     
 
Operating income:
                               
 
International Lease Finance Corporation 
  $ 358     $ 381     $ 184     $ 208  
 
AIG Financial Products Corp. 
    450       356       254       180  
 
Consumer Finance 
    315       265       167       141  
 
Other*
    30       14       18       13  
     
     
     
     
 
Total Financial Services
  $ 1,153     $ 1,016     $ 623     $ 542  
     
     
     
     
 

Including AIG Trading Group Inc.

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

      The quarterly dividend rate per common share, commencing with the dividend payable September 19, 2003 is $0.065.

      4)     Cash flow information for the six month periods ended June 30, 2003 and 2002 is as follows:

                 
2003 2002


(in millions)
Income taxes paid
  $ 1,181     $ 940  
Interest paid
  $ 1,901     $ 1,799  

      5)     Computation of Earnings Per Share:

                                   
Six Months Three Months
Ended June 30, Ended June 30,


2003 2002 2003 2002




(in millions, except per share amounts)
Numerator:
                               
Net income (applicable to common stock)
  $ 4,230     $ 3,781     $ 2,276     $ 1,801  
     
     
     
     
 
Denominator:
                               
Basic:
                               
Average outstanding shares used in the computation of per share earnings:
                               
 
Common stock
    2,752       2,752       2,752       2,752  
 
Common stock in treasury
    (142 )     (138 )     (142 )     (139 )
     
     
     
     
 
Average outstanding shares — basic
    2,610       2,614       2,610       2,613  
     
     
     
     
 
Diluted:
                               
Average outstanding shares used in the computation of per share earnings:
                               
 
Common stock
    2,752       2,752       2,752       2,752  
 
Common stock in treasury
    (142 )     (138 )     (142 )     (139 )
Stock options and stock purchase plan (treasury stock method)
    18       25       17       27  
     
     
     
     
 
Average outstanding shares — diluted
    2,628       2,639       2,627       2,640  
     
     
     
     
 
Net income per share:
                               
 
Basic
  $ 1.62     $ 1.45     $ 0.87     $ 0.69  
     
     
     
     
 
 
Diluted
  $ 1.61     $ 1.43     $ 0.87     $ 0.68  
     
     
     
     
 

      AIG does not have any anti-dilutive shares.

      6)     Acquisition, Restructuring and Related Charges

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

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

      Of the total direct costs of $512 million, $430 million have been paid as of June 30, 2003, including approximately $14 million, $111 million and $305 million paid during the first six months of 2003, and the

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twelve months of 2002 and 2001, respectively. In addition, during 2002, $32 million of liabilities were utilized to absorb other insignificant merger-related expenses. The balance, $50 million, is recorded as a component of “Other Liabilities” as of June 30, 2003.

      With respect to the elimination of positions, 2,287 terminations were included in AIG’s original post-business combination plans. As of June 30, 2003, terminations totaled 1,932; including 218, 1,105 and 609 made during 2003, 2002 and 2001, respectively. The majority of the remaining 355 terminations are scheduled to occur in 2003, in accordance with AGC’s employee termination program.

      The indirect costs of $851 million represented charges resulting from post-business combination plans, recognizing that certain assets will have no future economic benefit or ability to generate future revenues. Such charges include asset impairment charges related to software, leasehold improvements and certain goodwill. Also included were certain adjustments associated with conforming AGC’s balances to AIG’s existing accounting policies and methodologies. Of the $851 million, $790 million had been applied as at June 30, 2003, including $8 million, $113 million and $669 million in the first six months of 2003, and the twelve months of 2002 and 2001, respectively. The balance, $61 million, is reflected as a component of “Other Liabilities” as of June 30, 2003.

      7)     Starr International Company, Inc. Plan

      Starr International Company, Inc. (SICO) provides a Deferred Compensation Profit Participation Plan (SICO Plan) to certain AIG employees. The SICO Plan came into being in 1975 when the voting shareholders and Board of Directors of SICO, a private holding company whose principal asset consists of AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including AIG. Participation in the SICO Plan by any person, and the amount of such participation, is at the sole discretion of SICO’s Board of Directors, and none of the costs of the various benefits provided under such plan is paid by or charged to AIG. The SICO Plan provides that shares currently owned by SICO may be set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors may permit an early pay-out under certain circumstances. Prior to pay-out, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant’s voluntary termination of employment with AIG prior to normal retirement age. In addition, SICO’s Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock. If the expenses of the SICO Plan had been reflected by AIG, the pre-tax amounts accrued would have been $64.2 million for the first six months of 2003 and $25.1 million for the same period of 2002 and $32.1 million and $12.5 million for the second quarter 2003 and 2002, respectively.

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

      b)     AIG and certain of its subsidiaries become parties to financial instruments with market risk resulting from both dealer and end user activities and to reduce currency, interest rate, equity and commodity exposures. To the extent those instruments are carried at their estimated fair value, the elements of currency, interest rate, equity and commodity risks are reflected in the consolidated balance sheet. Collateral is required, at the discretion of AIG, on certain transactions based on the creditworthiness of the counterparty.

      c)     AIGFP and AIGTG each become parties to derivative financial instruments in the normal course of their business and to reduce currency, interest rate, commodity and equity exposures. Interest rate, currency, commodity and equity risks related to such instruments are reflected in the consolidated financial statements

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to the extent these instruments are carried at a market or a fair value, whichever is appropriate. The recorded estimated fair values of such instruments may be different than the values that might be realized if AIGFP and AIGTG were required to sell or close out the transactions prior to maturity.

      AIGFP and AIGTG, in the ordinary course of their operations and as principal, structure derivative transactions to meet the needs of investors who may be seeking to hedge certain aspects of such investors’ operations. AIGFP and AIGTG may also enter into derivative transactions for their own account. Such derivative transactions include interest rate, currency, commodity and equity swaps, swaptions, forward and option 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 and AIGTG typically become a principal in the exchange of interest payments between the parties and, therefore, may be exposed to loss, if counterparties default. Currency, commodity and equity swaps are similar to interest rate swaps, but involve the exchange of specific currencies or the cashflows based on the underlying commodity, and equity securities or indices. Also, they may involve the exchange of principal amounts at the beginning and end of the transaction. Swaptions are options where the holder has the right but not the obligation to enter into a swap transaction or cancel an existing swap transaction. At June 30, 2003, the notional principal amount of the sum of the swap pays and receives approximated $1,076.8 billion, primarily related to interest rate swaps of approximately $677.4 billion. The following tables provide the contractual and notional amounts of derivatives transactions, by maturity and type, of AIGFP and AIGTG at June 30, 2003 and December 31, 2002.

      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 the contractual and notional amounts by maturity and type of derivative of AIGFP’s and AIGTG’s derivatives portfolio at June 30, 2003 and December 31, 2002:

(in millions)


                                                   
Remaining Life of Notional Amount*

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

AIGFP and AIGTG interest rate, currency and equity swaps and swaptions:
                                               
Notional amount:
                                               
 
Interest rate swaps
  $ 171,685     $ 350,198     $ 141,587     $ 13,893     $ 677,363     $ 631,464  
 
Currency swaps
    52,377       97,981       49,603       6,617       206,578       185,531  
 
Swaptions and equity swaps
    106,494       49,265       29,728       7,416       192,903       186,014  

Total
  $ 330,556     $ 497,444     $ 220,918     $ 27,926     $ 1,076,844     $ 1,003,009  

Notional amount is not representative of either market risk or credit risk

     Futures and forward contracts are contracts for delivery of foreign currencies, commodities or financial indices in which the seller/purchaser agrees to make/take delivery at a specified future date of a specified instrument, at a specified price or yield. Options are contracts that allow the holder of the option to purchase or sell the underlying commodity, currency or index at a specified price and within, or at, a specified period of time. As a writer of options, AIGFP and AIGTG generally receive an option premium and then manage the risk of any unfavorable change in the value of the underlying commodity, currency or index. Risks arise as a result of movements in current market prices from contracted prices, and the potential inability of the counterparties to meet their obligations under the contracts. At June 30, 2003, the contractual amount of AIGFP’s and AIGTG’s futures, forward and option contracts approximated $295.5 billion.

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      The following table presents AIGFP’s and AIGTG’s futures, forward and option contracts portfolio by maturity and type of derivative at June 30, 2003 and December 31, 2002:

(in millions)


                                                 
Remaining Life

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

Futures, forward and option contracts:
                                               
Exchange traded futures and options contracts contractual amount
  $ 15,527     $ 1,135     $ 103     $     $ 16,765     $ 23,859  

Over the counter forward contracts contractual amount
  $ 261,305     $ 13,551     $ 3,843     $ 36     $ 278,735     $ 219,099  

Sold options obligate AIGFP and AIGTG to buy or sell the underlying item if the option purchaser chooses to exercise. The amounts do not represent credit exposure.

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

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

      AIGFP continually monitors the underlying portfolios to determine whether the credit loss experience for any particular portfolio has caused the likelihood of AIGFP having a payment obligation under the transaction to be greater than super senior risk. AIGFP maintains the ability opportunistically to hedge specific securities in a portfolio thereby further limiting its exposure to loss and has hedged outstanding transactions in this manner on occasion. AIGFP has never had a payment obligation under these credit derivatives transactions. Furthermore, based on portfolio credit losses experienced to date under all outstanding transactions, no transaction has experienced credit losses in an amount that has made the likelihood of AIGFP having to make a payment, in AIGFP’s view, to be greater than remote, even in severe recessionary market scenarios. At June 30, 2003, the notional amount with respect to AIGFP’s credit derivative portfolio was $160.36 billion.

      AIGFP and AIGTG utilize various credit enhancements, including letters of credit, guarantees, collateral, credit triggers, credit derivatives and margin agreements to reduce the credit exposure relating to these off-balance sheet financial instruments. AIGFP and AIGTG require 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 and AIGTG’s derivative transactions are generally documented under ISDA Master Agreements. Management believes that such agreements provide for legally

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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 and AIGTG are permitted to set-off their receivables from a counterparty against their payables to the same counterparty arising out of all included transactions. As a result, the net replacement value represents the net sum of estimated positive fair values after the application of such strategies, agreements and collateral held. Subsequent to the application of such credit enhancements, the net exposure to credit risk or the net replacement value of all interest rate, currency, commodity and equity swaps, options, swaptions, forward commitments, futures and forward contracts approximated $17.15 billion at June 30, 2003 and $17.38 billion at December 31, 2002. The net replacement value most closely represents the net credit risk to AIGFP and AIGTG or the maximum amount exposed to potential loss.

      AIGFP and AIGTG independently evaluate the creditworthiness of their counterparties, taking into account credit ratings assigned by recognized statistical rating organizations. In addition, AIGFP’s and AIGTG’s credit approval processes involve 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 and AIGTG’s counterparties as a whole (as measured by AIGFP and AIGTG) 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 and AIGTG determine counterparty credit quality by reference to ratings from independent rating agencies or, where such ratings are not available, by internal analysis. At June 30, 2003 and December 31, 2002, the counterparty credit quality with respect to the net replacement value of AIGFP’s and AIGTG’s derivatives portfolios were as follows:

(in millions)


                   
Net Replacement Value

2003 2002

Counterparty credit quality:
               
 
AAA
  $ 6,781     $ 7,524  
 
AA
    4,301       4,493  
 
A
    4,823       3,626  
 
BBB
    564       1,313  
 
Below investment grade
    79       98  
 
Exchange traded futures and options(a)
    597       328  

Total(b)
  $ 17,145     $ 17,382  

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

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     At June 30, 2003 and December 31, 2002, the counterparty breakdown by industry with respect to the net replacement value of AIGFP’s and AIGTG’s derivatives portfolio was as follows:

(in millions)


                 
Net Replacement Value

2003 2002

Non-U.S. banks
  $ 4,864     $ 4,237  
Insured municipalities
    703       925  
U.S. industrials
    1,326       3,142  
Governmental
    593       557  
Non-U.S. financial service companies
    670       579  
Non-U.S. industrials
    1,062       1,596  
Special purpose
    3,680       3,252  
U.S. banks
    627       588  
U.S. financial service companies
    3,015       2,166  
Supranationals
    8       12  
Exchanges*
    597       328  

Total
  $ 17,145     $ 17,382  

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

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

      AIGFP and AIGTG monitor and control their risk exposure on a daily basis through financial, credit, legal reporting systems, credit approvals and limits and, accordingly, believes that it has in place effective procedures for evaluating and limiting the credit and market risks to which it is subject. Management is not aware of any potentially significant counterparty defaults. At June 30, 2003, AIGFP and AIGTG did not have a significant concentration of credit risk from either an individual counterparty or group of counterparties.

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

      Revenues for the six months ended June 30, 2003 and 2002 from AIGFP’s operations were $676 million and $538 million, respectively.

      d)     At June 30, 2003, ILFC had committed to purchase 459 aircraft deliverable from 2003 through 2010 at an estimated aggregate purchase price of $26.2 billion and had options to purchase 18 aircraft deliverable from 2003 through 2008 at an estimated aggregate purchase price of $1.3 billion. ILFC will be required to find customers for any aircraft acquired, and it must arrange financing for portions of the purchase price of such equipment.

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

      In late 2002, a shareholder derivative action was filed in Delaware Chancery Court alleging breaches of fiduciary duty of loyalty and care against AIG’s directors. AIG management believes the allegations of the complaint are without merit. AIG’s Board of Directors has appointed a special committee of independent directors to review the complaint and respond to the lawsuit.

      AIG continues to receive claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter collectively referred to as environmental claims) and indemnity claims asserting injuries from asbestos. Estimation of asbestos and environmental claims loss reserves is a difficult process, as these claims, which emanate from policies written in 1984 and prior years, cannot be estimated by conventional reserving techniques. Asbestos and environmental claims development is affected by factors such as inconsistent court

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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 June 30, 2003 ($2.09 billion gross; $676 million net) are believed to be adequate as these reserves are based on known facts and current law.

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

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

      A summary of reserve activity for the six months ended June 30, 2003 and 2002, including estimates for applicable incurred but not reported losses and loss expenses, relating to asbestos and environmental claims separately and combined, is as follows:

                                 
(in millions)

2003 2002


Gross Net Gross Net

Asbestos:
                               
Reserve for losses and loss expenses at beginning of year
  $ 1,304     $ 400     $ 1,114     $ 312  
Losses and loss expenses incurred*
    107       41       118       72  
Losses and loss expenses paid*
    (172 )     (46 )     (82 )     (40 )

Reserve for losses and loss expenses at end of period
  $ 1,239     $ 395     $ 1,150     $ 344  

Environmental:
                               
Reserve for losses and loss expenses at beginning of year
  $ 832     $ 296     $ 1,115     $ 407  
Losses and loss expenses incurred*
    54       10       (49 )     (11 )
Losses and loss expenses paid*
    (40 )     (25 )     (79 )     (39 )

Reserve for losses and loss expenses at end of period
  $ 846     $ 281     $ 987     $ 357  

Combined:
                               
Reserve for losses and loss expenses at beginning of year
  $ 2,136     $ 696     $ 2,229     $ 719  
Losses and loss expenses incurred*
    161       51       69       61  
Losses and loss expenses paid*
    (212 )     (71 )     (161 )     (79 )

Reserve for losses and loss expenses at end of period
  $ 2,085     $ 676     $ 2,137     $ 701  

All amounts pertain to policies underwritten in prior years.

     f)     SAI Deferred Compensation Holdings, Inc., a wholly-owned subsidiary of AIG, has established a deferred compensation plan for registered representatives of certain AIG subsidiaries, pursuant to which participants have the opportunity to invest deferred commissions and fees on a notional basis. The value of the deferred compensation fluctuates with the value of the deferred investment alternatives chosen. AIG has provided a full and unconditional guarantee of the obligations of SAI Deferred Compensation Holdings, Inc. to pay the deferred compensation under the plan.

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      9)     Debt Outstanding:

      At June 30, 2003, AIG’s debt outstanding of $76.87 billion, shown below, included borrowings of $67.93 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. Borrowings at June 30, 2003 and December 31, 2002 were as follows:

                   
(in millions)

2003 2002

Borrowings under obligations of GIAs — AIGFP
  $ 14,636     $ 14,850  

Commercial Paper:
               
 
ILFC(a)
    3,324       4,213  
 
AGF(a)
    3,384       2,956  
 
AIG Funding, Inc.
    2,383       1,645  
 
AIG Credit Card Company (Taiwan)(a)
    234       234  
 
AIG Finance (Taiwan) Limited(a)
    15       64  

 
Total
    9,340       9,112  

Medium Term Notes:
               
 
AGF(a)
    7,959       7,719  
 
ILFC(a)
    5,957       4,970  
 
AIG
    824       998  

 
Total
    14,740       13,687  

Notes and Bonds Payable:
               
 
AIGFP
    17,463       16,940  
 
ILFC(a)(b)
    12,582       9,825  
 
AGF(a)
    2,084       2,266  
 
AIG
    3,124       1,608  
 
AGC
    1,243       1,542  

 
Total
    36,496       32,181  

Loans and Mortgages Payable:
               
 
AIG
    514       697  
 
AIGCFG(a)
    613       735  
 
ILFC(a)(c)
    206       261  
 
AIG Finance (Hong Kong) Limited(a)
    195       229  
 
Other subsidiaries(a)
    128       133  

 
Total
    1,656       2,055  

 
Total Borrowings
    76,868       71,885  

Borrowings not guaranteed by AIG
    36,681       33,605  
Matched GIA borrowings — AIGFP
    14,636       14,850  
Matched notes and bonds payable — AIGFP
    16,617       16,526  

      67,934       64,981  

Remaining borrowings of AIG
  $ 8,934     $ 6,904  

(a) AIG does not guarantee these borrowings.
(b) Includes borrowings under Export Credit Facility of $1.9 billion.
(c) Capital lease obligations.

     At June 30, 2003, the commercial paper issued and outstanding was as follows:

                                     
(dollars in millions)

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

ILFC
  $ 3,324     $ 3     $ 3,327       1.12 %   29
AGF
    3,384       3       3,387       1.09     32
Funding
    2,383       1       2,384       1.07     22
AIGCCC — Taiwan*
    234             234       2.06     29
AIGF — Taiwan*
    15             15       1.39     50

Total
  $ 9,340     $ 7     $ 9,347          

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

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     The maturity distributions of total borrowings at June 30, 2003 and December 31, 2002 were as follows:

(in millions)


                 
2003 2002

Short-term borrowings
  $ 21,404     $ 22,468  
Long-term borrowings*
    55,464       49,417  

Total borrowings
  $ 76,868     $ 71,885  

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

     During the first six months of 2003, AIGFP increased the aggregate principal amount outstanding of its notes and bonds payable to $17.46 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.

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

      ILFC and American General Finance, Inc. and its subsidiaries (AGF) as well as AIG Credit Card Company (Taiwan) — (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited — (AIGF-Taiwan), both consumer finance subsidiaries in Taiwan, have issued commercial paper for the funding of their own operations. At June 30, 2003, AIG did not guarantee the commercial paper of any of its subsidiaries other than Funding. On July 8, 2002, AGC ceased issuing commercial paper under its program. AGC’s funding requirements are now being met through Funding’s commercial paper program.

      AIG and Funding are parties to unsecured syndicated revolving credit facilities (collectively, the Facility) aggregating $2.75 billion. The Facility consists of $1.375 billion in a short-term revolving credit facility and $1.375 billion in a five year revolving credit facility. The Facility can be used for general corporate purposes and also to provide backup for Funding’s commercial paper programs. There are currently no borrowings outstanding under the Facility, nor were any borrowings outstanding as of June 30, 2003.

      AGF is a party to unsecured syndicated revolving credit facilities aggregating $3.0 billion. The facilities consist of $1.5 billion in a short-term revolving credit facility and $1.5 billion in a five year revolving credit facility, which support AGF’s commercial paper borrowings. There are currently no borrowings under these facilities, nor were any borrowings outstanding as of June 30, 2003. AGF had $3.4 billion in aggregate principal amount of debt securities registered and available for issuance at June 30, 2003. AGF uses the proceeds from the issuance of notes and bonds for the funding of its finance receivables.

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

      ILFC is a party to unsecured syndicated revolving credit facilities aggregating $3.15 billion to support its commercial paper program. The facilities consist of $2.15 billion in a short-term revolving credit facility and $1.0 billion in a three year revolving credit facility. There are currently no borrowings outstanding under these facilities, nor were any borrowings outstanding as of June 30, 2003.

      At June 30, 2003, ILFC had increased the aggregate amount outstanding of its medium term and long term notes to $18.54 billion, a net increase of $3.74 billion from December 31, 2002 (of which $170 million results from foreign exchange translation), and recorded a net decline in its capital lease obligations of $55 million and a net decrease in its commercial paper of $889 million. At June 30, 2003, ILFC had $11.08 billion of debt securities registered for public sale. During the six months ended June 30, 2003, $4.38 billion of debt securities were issued. During the second quarter of 2003, ILFC expanded its Euro Medium Term Note Program to $5.0 billion, under which $2.81 billion in notes were sold through June 30, 2003. ILFC has substantially eliminated the currency exposure arising from foreign currency denominated notes by either hedging the notes through swaps or through the offset provided by operating lease payments. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

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      ILFC had a $4.3 billion Export Credit Facility for use in connection with the purchase of approximately 75 aircraft delivered through 2001. This facility was guaranteed by various European Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90 percent on these borrowings depending on the delivery date of the aircraft. At June 30, 2003, ILFC had $1.9 billion outstanding under this facility. The debt is collateralized by a pledge of the shares of a subsidiary of ILFC, which holds title to the aircraft financed under the facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the preceding table of borrowings.

      The proceeds of ILFC’s debt financing are primarily used to purchase flight equipment, including progress payments during the construction phase. The primary sources for the repayment of this debt and the interest expense thereon are the cash flow from operations, proceeds from the sale of flight equipment and the rollover and refinancing of the prior debt.

      AIGFP has established a Euro Medium Term Note Program under which an aggregate principal amount of up to $4.0 billion of notes may be outstanding. As of June 30, 2003, $3.18 billion of notes had been issued under the program, $2.07 billion of which are outstanding. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

      During the first six months of 2003, AIG did not issue any medium term notes and $174 million of previously issued notes matured. At June 30, 2003, AIG had $140 million in aggregate principal amount of debt securities registered for issuance from time to time. AIG has filed a universal shelf registration statement to sell up to $5.1 billion of debt securities, preferred and common stock and other securities. AIG has no current plans to issue the equity, equity-linked or capital securities included in the registration statement, but intends to continue its customary practice of issuing securities from time to time for general corporate purposes.

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

      On May 15, 2003, AIG sold $1.5 billion principal amount of notes in a Rule 144A/Regulation S offering. $500 million of the notes bear interest at a rate of 2.875 percent per annum and mature in 2008 and $1.0 billion of the notes bear interest at a rate of 4.250 percent per annum and mature in 2013. The notes are senior unsecured obligations of AIG and rank equally with all of AIG’s other senior debt outstanding.

      10)     Accounting Standards:

      In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN45). FIN45 requires that, for guarantees within its scope that are issued or amended after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be established and recognized through earnings. To date, the impact on earnings for AIG has not been and is not expected to be material.

      AIG guarantees the indebtedness of third parties principally in connection with AIG SunAmerica Inc.’s (AIG SunAmerica) investments in affordable housing properties. The guarantees are issued primarily to facilitate financing for the construction of the underlying properties, and range in duration of up to ten years. Since the inception of this investment program over ten years ago, payments under these guarantees have been insignificant. This is due to the fact that the loans are first backed by the creditworthiness of the third party general partner; and secondly, are secured by the underlying properties. The maximum exposure before consideration of the applicable security under these guarantees as of June 30, 2003 is approximately $3.4 billion.

      In addition, AIG’s real estate investment operations will occasionally extend similar guarantees to real estate partnerships in which they are an investor. The guarantees facilitate financing for the construction,

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and/or purchase of land. There have been no payments to date under these guarantees. This is due to the fact that the loans are first backed by the creditworthiness of the third party general partner; and secondly, are secured by the underlying properties. The maximum exposure before consideration of the applicable security under these guarantees as of June 30, 2003 is approximately $183 million.

      Through its ILFC subsidiary, AIG has also provided other types of guarantees. From time to time, ILFC participates with airlines, banks and other financial institutions to assist in financing aircraft by providing asset guarantees, put options or loan guarantees. Historically, losses arising from these guarantees have been immaterial, as ILFC has recourse to the value of the underlying aircraft, which offsets ILFC’s exposure, should ILFC be called upon to fulfill its obligations under these guarantees. The maximum exposure before consideration of the applicable security of these guarantees as of June 30, 2003 is approximately $1.0 billion.

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

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

      Beginning July 1, 2003, AIG is required to consolidate approximately $2.9 billion of assets and liabilities, and record a one-time cumulative accounting charge upon adoption of FIN46 which will not have a material effect on AIG’s results of operations. Of the $2.9 billion, $1.2 billion relates to third party debt most of which arises from sale-leaseback transactions involving AIG’s ILFC subsidiary. The remaining $1.7 billion relates to other liabilities arising from affordable housing transactions involving AIG SunAmerica subsidiaries. In addition, AIG may be required to consolidate certain other VIEs based on future guidance from FASB.

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

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

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

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

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      With respect to net income for the six months and quarter ended June 30, 2003 and 2002, the following table provides a pro forma reconciliation as if AIG had adopted the recognition provisions of FAS 123 at its inception:

                                     
Six Months Three Months
Ended June 30, Ended June 30,


2003 2002 2003 2002
(in millions, except per share amounts)



Net income, as reported
  $ 4,230     $ 3,781     $ 2,276     $ 1,801  
Actual stock-based compensation recognized, net of tax*
    6             4        
     
     
     
     
 
      4,236       3,781       2,280       1,801  
Pro forma stock-based compensation, net of tax
    29       28       15       14  
Actual stock-based compensation recognized, net of tax
    6             4        
     
     
     
     
 
Net income, pro forma
  $ 4,201     $ 3,753     $ 2,261     $ 1,787  
     
     
     
     
 
Earnings per common share:
                               
 
Basic:
                               
   
Net income, as reported
  $ 1.62     $ 1.45     $ 0.87     $ 0.69  
   
Stock-based compensation, net of tax
    (0.01 )     (0.01 )            
     
     
     
     
 
   
Net income, pro forma
  $ 1.61     $ 1.44     $ 0.87     $ 0.69  
     
     
     
     
 
 
Diluted:
                               
   
Net income, as reported
  $ 1.61     $ 1.43     $ 0.87     $ 0.68  
   
Stock-based compensation, net of tax
    (0.01 )     (0.01 )            
     
     
     
     
 
   
Net income, pro forma
  $ 1.60     $ 1.42     $ 0.87     $ 0.68  
     
     
     
     
 
Average shares outstanding:
                               
Basic
    2,610       2,614       2,610       2,613  
Diluted
    2,628       2,639       2,627       2,640  


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

      In May 2003, FASB issued Financial Accounting Standard No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (FAS 150). FAS 150 requires certain financial instruments previously classified as either entirely equity or between the liabilities section and the equity section of the balance sheet be classified as liabilities.

      FAS 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: mandatory redeemable financial instruments; obligations to repurchase the issuer’s equity shares by transferring assets; and certain obligations to issue a variable number of shares.

      FAS 150 is effective for the quarter ending September 30, 2003. The impact of FAS 150 on AIG’s results of operations and financial condition will be insignificant.

      In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1). FASB did not object to the issuance of SOP 03-1. This statement is effective as of January 1, 2004, and will require AIG to recognize a liability for guaranteed minimum death benefits and other living benefits related to its variable annuity and variable life contracts and modify certain disclosures for these products. AIG is evaluating the provisions of SOP 03-1 and does not currently have an estimate of the liability. Management believes with regard to its possible impact that the one-time cumulative accounting charge upon adoption may have a material effect on AIG’s results of operations in the first quarter of 2004 but will not be material to AIG’s financial condition or liquidity.

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      11)     Information Provided in Connection with Outstanding Debt of AGC

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

Condensed Consolidating Balance Sheets

                                           
June 30, 2003 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Assets:
                                       
 
Invested assets
  $ 2,214     $     $ 476,779     $ (8,073 )   $ 470,920  
 
Cash
    9             826             835  
 
Carrying value of subsidiaries and partially owned companies, at equity
    68,278       20,728       6,731       (94,330 )     1,407  
 
Other assets
    2,702       2,675       144,152       (2,079 )     147,450  
     
     
     
     
     
 
Total Assets
  $ 73,203     $ 23,403     $ 628,488     $ (104,482 )   $ 620,612  
     
     
     
     
     
 
Liabilities:
                                       
 
Insurance liabilities
  $ 354     $     $ 317,778     $ 6     $ 318,138  
 
Debt
    3,948       2,823       77,263       (7,166 )     76,868  
 
Other liabilities
    546       3,656       154,325       (3,058 )     155,469  
     
     
     
     
     
 
Total Liabilities
    4,848       6,479       549,366       (10,218 )     550,475  
     
     
     
     
     
 
Preferred shareholders’ equity in subsidiary companies
                1,782             1,782  
Total Capital Funds
    68,355       16,924       77,340       (94,264 )     68,355  
     
     
     
     
     
 
Total Liabilities, Preferred Shareholders’ Equity in Subsidiary Companies and Capital Funds
  $ 73,203     $ 23,403     $ 628,488     $ (104,482 )   $ 620,612  
     
     
     
     
     
 
                                           
December 31, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Assets:
                                       
 
Invested assets
  $ 1,208     $     $ 428,496     $ (6,108 )   $ 423,596  
 
Cash
    18       1       1,146             1,165  
 
Carrying value of subsidiaries and partially owned companies, at equity
    59,003       17,981       12,607       (88,016 )     1,575  
 
Other assets
    2,450       2,714       130,049       (320 )     134,893  
     
     
     
     
     
 
Total Assets
  $ 62,679     $ 20,696     $ 572,298     $ (94,444 )   $ 561,229  
     
     
     
     
     
 
Liabilities:
                                       
 
Insurance liabilities
  $ 422     $     $ 296,474     $ (30 )   $ 296,866  
 
Debt
    2,606       3,200       72,356       (6,277 )     71,885  
 
Other liabilities
    548       3,197       127,716       (239 )     131,222  
     
     
     
     
     
 
Total liabilities
    3,576       6,397       496,546       (6,546 )     499,973  
     
     
     
     
     
 
Preferred shareholders’ equity in subsidiary companies
                2,153             2,153  
Total Capital Funds
    59,103       14,299       73,599       (87,898 )     59,103  
     
     
     
     
     
 
Total Liabilities, Preferred Shareholders’ Equity in Subsidiary Companies and Capital Funds
  $ 62,679     $ 20,696     $ 572,298     $ (94,444 )   $ 561,229  
     
     
     
     
     
 

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Condensed Consolidating Statements of Income

                                         
Six months ended June 30, 2003 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Operating income
  $ 249     $     $ 6,600     $     $ 6,849  
Equity in undistributed net income of consolidated subsidiaries
    3,670       807             (4,477 )      
Dividend income from consolidated subsidiaries
    545       108             (653 )      
Other
    (194 )     (40 )     (261 )           (495 )
Income taxes (benefits)
    40       (3 )     1,899             1,936  
Minority interest
                (188 )           (188 )
     
     
     
     
     
 
Net income (loss)
  $ 4,230     $ 878     $ 4,252     $ (5,130 )   $ 4,230  
     
     
     
     
     
 
                                         
Six months ended June 30, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Operating income
  $ 287     $     $ 5,722     $     $ 6,009  
Equity in undistributed net income of consolidated subsidiaries
    3,205       365             (3,570 )      
Dividend income from consolidated subsidiaries
    438       478             (916 )      
Other
    (141 )     (67 )     (75 )           (283 )
Income taxes (benefits)
    8             1,756             1,764  
Minority interest
                (181 )           (181 )
     
     
     
     
     
 
Net income (loss)
  $ 3,781     $ 776     $ 3,710     $ (4,486 )   $ 3,781  
     
     
     
     
     
 
                                         
Three months ended June 30, 2003 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Operating income
  $ 133     $     $ 3,564     $     $ 3,697  
Equity in undistributed net income of consolidated subsidiaries
    1,870       341             (2,211 )      
Dividend income from consolidated subsidiaries
    336       103             (439 )      
Other
    (108 )     (40 )     (119 )           (267 )
Income taxes (benefits)
    (45 )     (14 )     1,119             1,060  
Minority interest
                (94 )           (94 )
     
     
     
     
     
 
Net income (loss)
  $ 2,276     $ 418     $ 2,232     $ (2,650 )   $ 2,276  
     
     
     
     
     
 
                                         
Three months ended June 30, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Operating income
  $ 133     $     $ 2,842     $     $ 2,975  
Equity in undistributed net income of consolidated subsidiaries
    1,592       151             (1,743 )      
Dividend income from consolidated subsidiaries
    197       229             (426 )      
Other
    (112 )     (34 )     (62 )           (208 )
Income taxes (benefits)
    9       (15 )     878             872  
Minority interest
                (94 )           (94 )
     
     
     
     
     
 
Net income (loss)
  $ 1,801     $ 361     $ 1,808     $ (2,169 )   $ 1,801  
     
     
     
     
     
 

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Table of Contents

Condensed Consolidating Statements of Cash Flows

                                   
Six months ended June 30, 2003 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries AIG
(in millions)



Net cash provided by operating activities
  $ 325     $ 609     $ 12,177     $ 13,111  
Cash flows from investing:
                               
 
Invested assets disposed
    (1,342 )           79,477       78,135  
 
Invested assets acquired
    4             (103,556 )     (103,552 )
Other
    (31 )     (195 )     (336 )     (562 )
     
     
     
     
 
Net cash provided by (used in) investing activities
    (1,369 )     (195 )     (24,415 )     (25,979 )
     
     
     
     
 
Cash flows from financing activities:
                               
 
Change in debts
    1,324       (377 )     4,057       5,004  
 
Other
    (289 )     (38 )     7,861       7,534  
     
     
     
     
 
Net cash provided by (used in) financing activities
    1,035       (415 )     11,918       12,538  
     
     
     
     
 
Change in cash
    (9 )     (1 )     (320 )     (330 )
Cash at beginning of period
    18       1       1,146       1,165  
     
     
     
     
 
Cash at end of period
  $ 9     $     $ 826     $ 835  
     
     
     
     
 
                                   
Six months ended June 30, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries AIG
(in millions)



Net cash provided by operating activities
  $ 155     $ 485     $ 5,733     $ 6,373  
Cash flows from investing:
                               
 
Invested assets disposed
    (215 )           63,644       63,429  
 
Invested assets acquired
    (66 )           (85,163 )     (85,229 )
Other
    (19 )     (220 )     (167 )     (406 )
     
     
     
     
 
Net cash used in investing activities
    (300 )     (220 )     (21,686 )     (22,206 )
     
     
     
     
 
Cash flows from financing activities:
                               
 
Change in debts
    792       (222 )     2,548       3,118  
 
Other
    (646 )     (43 )     13,436       12,747  
     
     
     
     
 
Net cash provided by (used in) financing activities
    146       (265 )     15,984       15,865  
     
     
     
     
 
Change in cash
    1             31       32  
Cash at beginning of period
    1       1       696       698  
     
     
     
     
 
Cash at end of period
  $ 2     $ 1     $ 727     $ 730  
     
     
     
     
 

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Table of Contents

Cautionary Statement Regarding Forward-Looking Information

      This Quarterly Report on Form 10-Q and other publicly available documents may include, and AIG’s officers and representatives may from time to time make, statements which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only AIG’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside of AIG’s control. These statements may address, among other things, AIG’s strategy for growth, product development, regulatory approvals, market position, financial results and reserves. It is possible that AIG’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause AIG’s actual results to differ, possibly materially, from those in the specific forward-looking statements are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations. AIG is not under any obligation to (and expressly disclaims any such obligations to) update or alter any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.

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Table of Contents

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

Index

             
Page

Executive Summary
    26  
 
Consolidated Results
    26  
 
Critical Accounting Estimates
    28  
 
Operational Review
    29  
 
General Insurance Operations
    29  
   
General Insurance Results
    30  
   
Reinsurance
    32  
   
Reserve for Losses and Loss Expenses
    32  
   
Asbestos and Environmental Claims
    34  
 
Life Insurance Operations
    37  
   
Life Insurance Results
    38  
   
Underwriting and Investment Risk
    38  
 
Financial Services Operations
    40  
   
Financial Services Results
    40  
 
Retirement Savings & Asset Management Operations
    42  
    Retirement Savings & Asset Management Results     43  
 
Other Operations
    43  
Capital Resources
    43  
 
Borrowings
    44  
 
Capital Funds
    46  
 
Stock Repurchase
    46  
 
Dividends from Insurance Subsidiaries
    46  
 
Regulation and Supervision
    46  
  Contractual Obligations and Other        
   
Commercial Commitments
    47  
 
Special Purpose Vehicles
    47  
Liquidity
    48  
Invested Assets
    49  
 
Insurance Invested Assets
    50  
   
Fixed Maturity Investments
    50  
   
Credit Quality
    50  
   
Equity Investments
    51  
   
Valuation of Invested Assets
    51  
   
Mortgage Investments
    54  
   
Short-term Investments
    54  
   
Real Estate Investments
    54  
   
Other Investments
    54  
   
Managing Market Risk
    54  
 
Financial Services Invested Assets
    56  
   
Managing Market Risk
    58  
Derivatives
    59  
 
Counterparty Credit Quality
    60  
 
Fair Value Source
    61  
 
Notional Amounts
    61  
Accounting Standards
    63  
Recent Developments
    65  
Controls and Procedures
    65  

Executive Summary

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

FLOW CHART

      Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, AIG presents its operations in the way it believes will be most meaningful, as well as most transparent. Gross premiums written, statutory underwriting profit (loss) and combined ratios are presented in accordance with accounting principles prescribed by insurance regulatory authorities because these are standard measures of performance used in the insurance industry and thus allow more meaningful comparisons with AIG’s insurance competitors.

Consolidated Results

      AIG’s revenues in the first six months of 2003 increased 18.4 percent to $38.8 billion when compared to $32.8 billion in the same period of 2002. Growth in revenues was primarily attributable to the

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growth in net premiums earned from the global insurance operations. This growth was negatively impacted by realized capital losses incurred of $988 million in 2003 compared to $861 million in 2002.

      AIG’s income before income taxes and minority interest increased 11.0 percent in the first six months of 2003 when compared to the same period of 2002. General insurance operating income was the primary reason for this growth.

      AIG’s effective income tax rates were 30.47 percent for net income and 33.41 percent for realized capital gains (losses) in 2003 compared to 30.80 percent and 34.98 percent, respectively, in 2002.

      AIG’s net income in the first six months of 2003 increased 11.9 percent to $4.23 billion when compared to $3.78 billion in the same period of 2002.

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

                   
(in millions)

2003 2002

Revenues:
               
 
General insurance(a)
  $ 16,300     $ 12,509  
 
Life insurance(b)
    17,312       15,553  
 
Financial services(c)
    3,610       3,241  
 
Retirement savings & asset management(d)
    1,812       1,736  
 
Other
    (216 )     (240 )

Total
  $ 38,818     $ 32,799  

Operating income:
               
 
General insurance
  $ 2,356     $ 1,869  
 
Life insurance
    2,756       2,544  
 
Financial services
    1,153       1,016  
 
Retirement savings & asset management
    584       580  
 
Other
    (495 )     (283 )

Total
  $ 6,354     $ 5,726  

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

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

(c) Represents financial services commissions, transactions and other fees.

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

     General Insurance: General insurance operating income increased 26.0 percent in the first six months of 2003 compared to the same period in 2002. This increase was primarily attributable to strong growth in operating income with respect to Domestic Brokerage Group’s and Foreign General’s operations. Realized capital losses with respect to general insurance operations amounted to $256 million and $282 million for the first six months of 2003 and 2002, respectively.

      Life Insurance: Life insurance operating income increased 8.3 percent in the first six months of 2003 compared to the same period in 2002. This increase resulted from growth in each of AIG’s principal life insurance businesses, partially offset by realized capital losses of $516 million and $339 million for the first six months of 2003 and 2002, respectively.

      Financial Services: Financial services operating income increased 13.5 percent in the first six months of 2003 compared to the same period in 2002, reflecting profits derived from a diversified range of businesses and products.

      Retirement Savings & Asset Management: Retirement savings & asset management operating income increased 0.8 percent in the first six months of 2003 when compared to the same period in 2002. Equity markets have improved in recent months, although they remain below June 30, 2002 levels.

      Realized Capital Losses: During the first six months of 2003, AIG’s realized capital losses aggregated $988 million. These realized capital losses reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings. Upon the ultimate disposition of these holdings, a portion of these losses may be recovered depending on future market conditions.

      Capital Resources: At June 30, 2003, AIG had total capital funds of $68.36 billion and total borrowings of $76.87 billion. At that date, $67.93 billion of such borrowings were either not guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable.

      During the period from January 1, 2003 through June 30, 2003, AIG repurchased in the open market 1,625,000 shares of its common stock.

      Liquidity: At June 30, 2003, consolidated invested assets were $479.8 billion including $14.03 billion in cash and short-term investments. Consolidated net cash provided from operating activities in the first six months of 2003 amounted to $13.11 billion.

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Table of Contents

Outlook

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

      In the Life Insurance segment, AIG expects continued growth overall, focused in its major product lines such as Life Insurance, Personal Accident, Pension & Investment Products, and Group Life/Health. AIG continues to expand its operations in China, becoming the first foreign insurance organization to have wholly owned life insurance operations in Beijing, Suzhou, Dongguan and Jiangmen as well as previously established operations in Shanghai, Foshan, Guangzhou and Shenzhen. AIG also expects India, Korea and Vietnam to offer additional opportunities for growth.

      Asia, the largest region of Foreign Life, had good operating income and premium growth in the first six months of 2003. The outbreak of SARS in Asia, which has since abated, had a short term impact on first year life insurance policy sales earlier in 2003. The SARS epidemic has, however, heightened the awareness of the importance of protection policies, and AIG has introduced a series of new products to serve this need.

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

Critical Accounting Estimates

      AIG considers its most critical accounting estimates those with respect to reserves for losses and loss expenses, future policy benefits for life and accident and health contracts, deferred policy acquisition costs, and fair value determinations with respect to certain assets and liabilities of certain of the subsidiaries of AIG’s financial services operations. These accounting estimates require the use of assumptions about matters some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, AIG’s results of operations would be directly impacted.

      Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, AIG’s critical accounting estimates are discussed in significant detail. The major categories for which assumptions are developed and used to establish each critical accounting estimate are highlighted below.

Reserves for Losses and Loss Expenses (General Insurance):

  •  Loss trend factors: used to establish expected loss ratios for subsequent accident years based on the projected loss ratio for prior accident years.
 
  •  Expected loss ratios for the latest accident year: i.e. accident year 2002 for the year end 2002 loss reserve analysis. For low frequency, high severity classes such as Excess Casualty and Directors and Officers Liability, expected loss ratios generally are utilized for at least the three most recent accident years.
 
  •  Loss development factors: used to project the reported losses for each accident year to an ultimate amount.

Future Policy Benefits for Life and Accident and Health Contracts (Life Insurance):

  •  Interest rates, which vary by territory, year of issuance and products.
 
  •  Mortality, morbidity and surrender rates based upon actual experience by geographical region modified to allow for variation in policy form.
 
  •  Restrictions exist with respect to the amount of current and prior operating income and current unrealized appreciation of investments which can inure to the benefit of AIG. Such restrictions have been imposed by local insurance regulations in certain countries in which AIG transacts business.

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Table of Contents

Deferred Policy Acquisition Costs (General Insurance, Life Insurance and Retirement Savings and Asset Management):

  •  Estimated future profitability of current business.
 
  •  Estimated gross profits to be realized over the estimated duration of the contracts (non-traditional life).
 
  •  Estimated gross profits, as described above, include investment income and gains and losses on investments less required interest, actual mortality and other expenses.

Fair Value Determinations of Certain Assets and Liabilities (Financial Services):

  •  Valuation models utilizing factors, such as market liquidity and current interest, foreign exchange and volatility rates.
 
  •  AIG attempts to secure reliable and independent current market price data, such as published exchange rates from external subscription services such as Bloomberg or Reuters or third party broker quotes for use in this model. When such prices are not available, AIG uses an internal methodology, which includes interpolation or extrapolation from verifiable prices from trades occurring on dates nearest to the dates of the transactions.

Operational Review

General Insurance Operations

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

      Domestic general insurance operations are comprised of the Domestic Brokerage Group (DBG), which includes The Hartford Steam Boiler Inspection and Insurance Company (HSB); Transatlantic Holdings, Inc. (Transatlantic); Personal Lines, including 21st Century Insurance Group (21st Century); and Mortgage Guaranty.

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

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

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

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

      AIG’s Foreign General insurance group accepts risks primarily underwritten through American International Underwriters (AIU), a marketing unit consisting of wholly-owned agencies and insurance entities. The Foreign General insurance group also includes business written by AIG’s foreign-based insurance subsidiaries for their own accounts. The Foreign General insurance group uses various marketing methods to write both business and personal lines insurance with certain refinements for local laws, customs and needs. AIU operates in over 70 countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin America. (See also Note 2 of Notes to Financial Statements.)

      General insurance operations for the six month periods ending June 30, 2003 and 2002 were as follows:

                   
(in millions)

2003 2002

Net premiums written:
               
 
DBG
  $ 9,603     $ 7,131  
 
Transatlantic
    1,571       1,156  
 
Personal Lines
    1,785       1,533  
 
Mortgage Guaranty
    241       248  
 
Foreign General
    3,887       3,049  

Total
  $ 17,087     $ 13,117  

Net premiums earned:
               
 
DBG
  $ 8,237     $ 6,127  
 
Transatlantic
    1,455       1,108  
 
Personal Lines
    1,720       1,377  
 
Mortgage Guaranty
    240       247  
 
Foreign General
    3,389       2,507  

Total
  $ 15,041     $ 11,366  

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Table of Contents

                   
(in millions)

2003 2002

Underwriting profit:
               
 
DBG
  $ 488     $ 219  
 
Transatlantic
    43       20  
 
Personal Lines
    33       25  
 
Mortgage Guaranty
    138       157  
 
Foreign General
    395       305  

Total
  $ 1,097     $ 726  

Net investment income:
               
 
DBG
  $ 900     $ 824  
 
Transatlantic
    133       126  
 
Personal Lines
    65       61  
 
Mortgage Guaranty
    81       79  
 
Intercompany adjustments and eliminations — net
    3       11  
 
Foreign General
    333       324  

Total
  $ 1,515     $ 1,425  

Realized capital gains (losses)
    (256 )     (282 )

Operating income
  $ 2,356     $ 1,869  

General Insurance Results

      During the first six months of 2003, net premiums written and net premiums earned increased 30.3 percent and 32.3 percent, respectively, from those of 2002.

      Commencing in the latter part of 1999 and continuing through and into the current quarter, the commercial property-casualty market place has experienced rate increases. Virtually all areas of DBG have experienced rate increases, as well as maintaining an excellent retention rate for desired renewal business. The vast majority of the increase in the first six months of 2003 resulted from rate increases with respect to renewed business. Overall, DBG’s net premiums written increased $2.47 billion or 34.7 percent in the first six months of 2003 over 2002. Adjusting this growth for cancelled or non-renewed business, such growth would have approximated 40 percent.

      Personal Lines’ net premiums written increased 16.4 percent or $251 million in the first six months of 2003 from 2002, reflecting auto insurance rate increases in many states.

      Foreign General insurance net premiums written increased 27.5 percent and net premiums earned increased 35.2 percent in the first six months of 2003 when compared to the same period of 2002.

      Net premiums written growth was most significant in Continental Europe and the United Kingdom. The product lines that had significant growth were excess casualty and financial lines.

      In comparing the average foreign currency exchange rates used to translate the results of AIG’s foreign general operations during the first six months of 2003 to those average foreign currency exchange rates used to translate AIG’s Foreign General results during the same period of 2002, the U.S. dollar weakened slightly in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, when foreign net premiums written were translated into U.S. dollars for the purposes of the preparation of the consolidated financial statements, total general insurance net premiums written were approximately 2.0 percentage points more than they would have been if translated utilizing those average foreign currency exchange rates which prevailed during that same period of 2002.

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

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

      The statutory general insurance ratios for the six months ending June 30, 2003 and 2002 were as follows:

                   
2003 2002

Domestic General:
               
 
Loss Ratio
    77.63       78.19  
 
Expense Ratio
    16.51       17.93  

Combined Ratio
    94.14       96.12  

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2003 2002

Foreign General:
               
 
Loss Ratio
    61.48       62.08  
 
Expense Ratio
    26.15       27.98  

Combined Ratio
    87.63       90.06  

Consolidated:
               
 
Loss Ratio
    73.99       74.63  
 
Expense Ratio
    18.70       20.27  

Combined Ratio
    92.69       94.90  

      The domestic and foreign combined ratios improved over last year’s primarily due to the growth in net premiums exceeding the growth in expenses, as well as heightened expense control.

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

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

      Statutory underwriting profit is arrived at by reducing net premiums earned by net losses and loss expenses incurred and net expenses incurred. Statutory accounting differs from GAAP, as statutory accounting, in general, requires immediate expense recognition and ignores the matching of revenues and expenses as required by GAAP. That is, for statutory purposes, expenses are recognized immediately, not over the same period that the revenues are earned.

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

      A major part of the discipline of a successful general insurance company is to produce an underwriting profit, exclusive of investment income. When underwriting is not profitable, premiums are inadequate to pay for losses and expenses. Therefore, investment income must be used to cover underwriting losses. If assets and the income therefrom are insufficient to pay claims and expenses over extended periods, an insurance company cannot survive. For these reasons, AIG views its underwriting operations separately from its investment operations. (See also the discussion under “Liquidity” herein.)

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

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

      General insurance net investment income in the first six months of 2003 increased 6.3 percent when compared to the same period of 2002. The invested cash flow resulting from the growth in net premiums written in this and prior periods had a positive impact on net investment income. (See also the discussion under “Liquidity” herein.)

      General insurance realized capital losses were $256 million and $282 million in the first six months of 2003 and 2002, respectively. These realized capital losses resulted from the ongoing management of the general insurance investment portfolios within the overall objectives of the general insurance operations and reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings. (See the discussion on “Valuation of Invested Assets” herein.)

      General insurance operating income for the first six months of 2003 increased 26.0 percent to

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$2.36 billion. The contribution of general insurance operating income to AIG’s consolidated income before income taxes and minority interest was 37.1 percent during the first six months of 2003 compared to 32.6 percent in the same period of 2002.

Reinsurance

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

      AIG’s general reinsurance assets amounted to $30.35 billion at June 30, 2003 and resulted from AIG’s reinsurance arrangements. Thus, a credit exposure existed at June 30, 2003 with respect to reinsurance recoverable to the extent that any reinsurer may not be able to reimburse AIG under the terms of these reinsurance arrangements. AIG manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound, and when necessary AIG holds substantial collateral in the form of funds, securities and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. At December 31, 2002, approximately 40 percent of the general reinsurance assets were from unauthorized reinsurers. In order to obtain statutory recognition, the majority of these balances were collateralized. The remaining 60 percent of the general reinsurance assets were from authorized reinsurers and over 90 percent of such balances are from reinsurers rated A-(excellent) or better, as rated by A.M. Best. Through June 30, 2003, these distribution percentages have not changed significantly. This rating is a measure of financial strength. The terms authorized and unauthorized pertain to regulatory categories, not creditworthiness.

      AIG’s allowance for estimated unrecoverable reinsurance has not changed significantly from December 31, 2002 when AIG had allowances for unrecoverable reinsurance approximating $120 million. At June 30, 2003, AIG had no significant reinsurance recoverables from any individual reinsurer which is financially troubled (e.g., liquidated, insolvent, in receivership or otherwise subject to formal or informal regulatory restriction).

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

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

      At June 30, 2003, the general reinsurance assets of $30.35 billion include reinsurance recoverables for paid losses and loss expenses of $3.84 billion and $22.54 billion with respect to the ceded reserve for losses and loss expenses, including ceded losses incurred but not reported (IBNR) (ceded reserves). The ceded reserves represent the accumulation of estimates of ultimate ceded losses including provisions for ceded IBNR and loss expenses. The methods used to determine such estimates and to establish the resulting ceded reserves are continually reviewed and updated. Any adjustments thereto are reflected in income currently. It is AIG’s belief that the ceded reserves at June 30, 2003 were representative of the ultimate losses recoverable. In the future, as the ceded reserves continue to develop to ultimate amounts, the ultimate loss recoverable may be greater or less than the reserves currently ceded.

Reserve for Losses and Loss Expenses

      The table below classifies as of June 30, 2003 the components of the general insurance reserve for

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losses and loss expenses (loss reserves) with respect to major lines of business on a statutory basis*:
         
(in millions)

Other Liability Occurrence
  $ 15,183  
Other Liability Claims Made
    9,785  
Workers Compensation
    6,655  
Auto Liability
    4,662  
International
    3,107  
Property
    3,034  
Reinsurance
    2,020  
Medical Malpractice
    1,688  
Aircraft
    1,523  
Products Liability
    1,281  
Accident & Health
    1,104  
Fidelity/Surety
    991  
Other
    4,595  

Total
  $ 55,628  

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

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

      At June 30, 2003, general insurance net loss reserves increased $2.74 billion from prior year end to $33.09 billion. The net loss reserves represent loss reserves reduced by reinsurance recoverables, net of an allowance for unrecoverable reinsurance. The methods used to determine such estimates and to establish the resulting reserves are continually reviewed and updated. Any adjustments resulting therefrom are reflected in operating income currently. It is management’s belief that the general insurance net loss reserves are adequate to cover all general insurance net losses and loss expenses as at June 30, 2003. There can be no assurance that AIG’s ultimate loss reserves will not adversely develop and materially exceed AIG’s loss reserves as of June 30, 2003. In the future, if the general insurance net loss reserves develop deficiently, such deficiency would have an adverse impact on future results of operations.

      In a very broad sense, the general loss reserves can be categorized into two distinct groups, one group being long tail casualty lines of business. Such lines include excess and umbrella liability, directors and officers’ liability, professional liability, medical malpractice, general liability, products’ liability, and related classes. The other group is short tail lines of business consisting principally of property lines, personal lines and certain classes of casualty lines.

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

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

      AIG annually reviews the adequacy of established loss reserves. This review does not calculate a range of loss reserve estimates as developing a range of loss reserve estimates would not be meaningful. This is because AIG’s general insurance business is primarily in long tail casualty lines driven almost entirely by severity rather than frequency of claims. Rather an estimate is calculated which AIG’s actuaries believe provides a reasonable estimate of the required reserve. This amount is evaluated against actual carried reserves. If there is a significant disparity, an adjustment is made to the carried reserves.

      A number of actuarial assumptions are made in the review of reserves for each individual segment. For segments in longer tail lines of business, actua-

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rial assumptions generally are made with respect to the following:

  1. Loss trend factors which are used to establish expected loss ratios for subsequent accident years based on the projected loss ratio for prior accident years.
 
  2. Expected loss ratios for the latest accident year (i.e. accident year 2002 for the year end 2002 loss reserve analysis) and in some cases, for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend (See 1 above) and the impact of rate changes and other quantifiable factors. For low frequency, high severity classes such as Excess Casualty and Directors and Officers Liability, expected loss ratios generally are utilized for at least the three most recent accident years.
 
  3. Loss development factors which are used to project the reported losses for each accident year to an ultimate basis.

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

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

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

Asbestos and Environmental Claims

      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 over a decade ago specialized toxic tort and environmental claim units, which investigate and adjust all such asbestos

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and environmental claims. These units utilize a comprehensive ground up approach to claim adjusting by thoroughly evaluating each exposure on a claim by claim basis. Commencing in 1985, standard policies contained an absolute exclusion for pollution related damage and an absolute asbestos exclusion was also implemented. However, AIG currently underwrites environmental impairment liability insurance on a claims made basis and excluded such claims from the analyses included herein.

      Estimation of asbestos and environmental claims loss reserves is a difficult process. These asbestos and environmental claims cannot be estimated by conventional reserving techniques as previously described. Quantitative techniques frequently have to be supplemented by subjective considerations including managerial judgment. Significant factors which affect the trends which influence the development of asbestos and environmental claims are the inconsistent court resolutions and judicial interpretations which broaden the intent of the policies and scope of coverage. The current case law can be characterized as still evolving and there is little likelihood that any firm direction will develop in the near future. Additionally, the exposure for cleanup costs of hazardous waste dump sites involves issues such as allocation of responsibility among potentially responsible parties and the government’s refusal to release parties.

      In the interim, AIG and other industry members have and will continue to litigate the broadening judicial interpretation of the policy coverage and the liability issues. At the current time, it is not possible to determine the future development of asbestos and environmental claims with the same degree of reliability as is the case for other types of claims. Such development will be affected by the extent to which courts continue to expand the intent of the policies and the scope of the coverage, as they have in the past, as well as by the changes in Superfund and waste dump site coverage issues. Although the estimated liabilities for these claims are subject to a significantly greater margin of error than for other claims, the reserves carried for these claims at June 30, 2003 are believed to be adequate as these reserves are based on the known facts and current law. Furthermore, as AIG’s net exposure retained relative to the gross exposure written was lower in 1984 and prior years, the potential impact of these claims is much smaller on the net loss reserves than on the gross loss reserves. In the future, if the environmental claims develop deficiently, such deficiency would have an adverse impact on future results of operations. (See the previous discussion on reinsurance collectibility herein.)

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

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

      A summary of reserve activity for the six months ended June 30, 2003 and 2002, including estimates for applicable IBNR, relating to asbestos and environmental claims separately and combined, is as follows:

                                 
(in millions)

2003 2002


Gross Net Gross Net

Asbestos:
                               
Reserve for losses and loss expenses at beginning of year
  $ 1,304     $ 400     $ 1,114     $ 312  
Losses and loss expenses incurred*
    107       41       118       72  
Losses and loss expenses paid*
    (172 )     (46 )     (82 )     (40 )

Reserve for losses and loss expenses at end of period
  $ 1,239     $ 395     $ 1,150     $ 344  

Environmental:
                               
Reserve for losses and loss expenses at beginning of year
  $ 832     $ 296     $ 1,115     $ 407  
Losses and loss expenses incurred*
    54       10       (49 )     (11 )
Losses and loss expenses paid*
    (40 )     (25 )     (79 )     (39 )

Reserve for losses and loss expenses at end of period
  $ 846     $ 281     $ 987     $ 357  

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(in millions)

2003 2002


Gross Net Gross Net

Combined:
                               
Reserve for losses and loss expenses at beginning of year
  $ 2,136     $ 696     $ 2,229     $ 719  
Losses and loss expenses incurred*
    161       51       69       61  
Losses and loss expenses paid*
    (212 )     (71 )     (161 )     (79 )

Reserve for losses and loss expenses at end of period
  $ 2,085     $ 676     $ 2,137     $ 701  

All amounts pertain to policies underwritten in prior years.

     The gross and net IBNR included in the aforementioned reserve for losses and loss expenses at June 30, 2003 and December 31, 2002 were estimated as follows:

(in millions)


                                 
2003 2002


Gross Net Gross Net

Combined
  $ 1,033     $ 289     $ 1,022     $ 283  

      A summary of asbestos and environmental claims count activity for the six month periods ended June 30, 2003 and 2002 was as follows:

                                                   

2003 2002


Asbestos Environmental Combined Asbestos Environmental Combined

Claims at beginning of year
    7,085       8,995       16,080       6,670       9,364       16,034  
Claims during year:
                                               
 
Opened
    305       939       1,244       535       989       1,524  
 
Settled
    (60 )     (116 )     (176 )     (72 )     (284 )     (356 )
 
Dismissed or otherwise resolved
    (119 )     (1,146 )     (1,265 )     (274 )     (648 )     (922 )

Claims at end of period
    7,211       8,672       15,883       6,859       9,421       16,280  

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

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

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

      AIG’s survival ratios for involuntary asbestos and environmental claims, separately and combined, were based upon a three year average payment. These ratios at June 30, 2003 and 2002 were as follows:


                                   
2003 2002


Gross Net Gross Net

Involuntary survival ratios:
                               
 
Asbestos
    4.2       4.1       3.7       3.4  
 
Environmental
    16.1       10.9       17.3       13.5  
 
Combined
    7.3       6.6       7.1       6.7  

      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

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insurance company may be assessed for certain obligations arising from the insolvencies of other insurance companies which operated in that state. AIG generally records these assessments upon notice. Additionally, certain states permit at least a portion of the assessed amount to be used as a credit against a company’s future premium tax liabilities. Therefore, the ultimate net assessment cannot reasonably be estimated. The guarantee fund assessments net of credits for 2002 were $76 million. Based upon current information, AIG does not anticipate that its net assessment will be significantly different in 2003.

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

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 fixed and variable annuities, guaranteed investment contracts and pensions.

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

      Life insurance operations presented on a major product basis for the six month periods ending June 30, 2003 and 2002 were as follows:

(in millions)


                     
2003 2002

GAAP premiums:
               
 
Domestic:
               
   
Life Insurance
  $ 845     $ 818  
   
Individual Fixed Annuities
    25       23  
   
Guaranteed Investment Contracts
    3       16  
   
Home Service
    418       431  
   
Group Life/Health
    512       478  
   
Pension and Investment Products
    745       493  

 
Total Domestic:
    2,548       2,259  

 
Foreign:
               
   
Life Insurance
    6,459       5,879  
   
Personal Accident
    1,439       1,168  
   
Group Products
    633       589  
   
Guaranteed Investment Contracts
    54       48  

 
Total Foreign:
    8,585       7,684  

 
Total GAAP premiums
  $ 11,133     $ 9,943  

Net investment income:
               
 
Domestic:
               
   
Life Insurance
  $ 681     $ 704  
   
Individual Fixed Annuities
    1,798       1,565  
   
Guaranteed Investment Contracts
    1,020       984  
   
Home Service
    339       336  
   
Group Life/Health
    57       53  
   
Pension and Investment Products
    453       383  

 
Total Domestic
    4,348       4,025  

 
Foreign:
               
   
Life Insurance
    1,910       1,577  
   
Personal Accident
    77       67  
   
Group Products
    169       122  
   
Guaranteed Investment Contracts
    197       164  
   
Intercompany Adjustments
    (6 )     (6 )

 
Total Foreign
    2,347       1,924  

Total net investment income
  $ 6,695     $ 5,949  

Realized capital gains (losses)
    (516 )     (339 )

Total operating income
  $ 2,756     $ 2,544  

Life insurance in-force*:
               
   
Domestic
  $ 597,958     $ 577,686  
   
Foreign
    777,328       746,765  

Total
  $ 1,375,286     $ 1,324,451  

* Amounts presented were as at June 30, 2003 and December 31, 2002.

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Life Insurance Results

      Life insurance operating income increased 8.3 percent to $2.76 billion during the first six months of 2003 when compared to the same period last year.

      The contribution of life insurance operating income to AIG’s consolidated income before income taxes and minority interest amounted to 43.4 percent during the first six months of 2003 compared to 44.4 percent in the same period of 2002. Contributing to the group’s performance were improved profit margins resulting from expense reductions, redeployment of invested assets achieving increased yields, monitoring of crediting rates to maintain margins and increased production of protection policies in Asia.

      AIG’s GAAP life premiums during the first six months of 2003 increased by $1.2 billion, representing a 12.0 percent increase from the same period in 2002. Domestically, the growth is predominantly attributable to the Pension & Investment Products (which include structured settlements), Life Insurance and Group Life/Health. With respect to the Foreign Life segment, the majority of the growth was attributable to the Life Insurance and Personal Accident lines of business. This growth was most significant in Southeast Asia where AIG maintains significant market share established by its strong agency force and in Japan where AIG is benefiting from a flight to quality. Foreign life operations produced 77.1 percent and 77.3 percent of AIG’s consolidated GAAP life premiums in 2003 and 2002, respectively.

      The traditional life products, particularly individual life products as well as personal accident, were major contributors to the growth in foreign premiums. These traditional life products, coupled with the increased distribution of financial and investment products contributed to the growth in foreign investment income. A mixture of traditional, accident and health and financial products are being sold in Japan through ALICO and AIG Star Life.

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

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

      Life insurance net investment income increased 12.5 percent during the first six months of 2003. The growth in net investment income was attributable to both foreign and domestic invested new cash flow for investment as well as returns on nontraditional investments. This cash flow was generated from life insurance operations and included the compounding of previously earned and reinvested net investment income. (See also the discussion under “Liquidity” herein.)

      Life insurance realized capital losses for the first six months were $516 million in 2003 and $339 million in 2002. These realized capital losses resulted from the ongoing management of the life insurance investment portfolios within the overall objectives of the life insurance operations and reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings. (See the discussion on “Valuation of Invested Assets” herein.)

Underwriting and Investment Risk

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

      Underwriting risk represents the exposure to loss resulting from the actual policy experience adversely emerging in comparison to the assumptions made in the product pricing associated with mortality, morbidity, termination and expenses. AIG’s foreign life companies limit their maximum underwriting exposure on traditional life insurance of a single life to approximately $1.5 million of coverage and AIG’s domestic life companies limit their maximum underwriting exposure on traditional life insurance of a single life to $2.5 million of coverage by using yearly renewable term reinsurance.

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

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

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

      To maintain an adequate yield to match the interest necessary to support future policy liabilities, constant management focus is required to reinvest the proceeds of the maturing securities and to invest the future premium receipts while continuing to maintain satisfactory investment quality.

      To the extent permitted under local regulation, AIG may invest in qualified longer-term securities outside Japan to achieve a closer matching in both duration and the required yield. AIG is able to manage any asset-liability duration difference through maintenance of sufficient global liquidity and to support any operational shortfall through its international financial network. (See also the discussion under “Liquidity” herein.)

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

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

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

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

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

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Financial Services Operations

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

      International Lease Finance Corporation (ILFC) engages primarily in the acquisition of commercial jet aircraft and the leasing and remarketing of such aircraft to airlines around the world. Also, ILFC provides, for a fee, fleet management services to certain third-party operators. (See also Note 2 of Notes to Financial Statements.)

      AIG Financial Products Corp. and its subsidiaries (AIGFP) structure financial transactions, including long-dated interest rate and currency swaps and structured borrowings through notes, bonds and guaranteed investment agreements. AIGFP does not engage in trading activities with respect to commodity contracts. AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various commodity and foreign exchange trading and market making activities. (See also Note 2 of Notes to Financial Statements.)

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

      Financial services operations for the six month periods ending June 30, 2003, and 2002 were as follows:

(in millions)

                 

2003 2002

Revenues:
               
ILFC(a)
  $ 1,487     $ 1,367  
AIGFP(b)
    676       538  
Consumer Finance(c)
    1,293       1,227  
Other
    154       109  

Total
  $ 3,610     $ 3,241  

Operating income:
               
ILFC
  $ 358     $ 381  
AIGFP
    450       356  
Consumer Finance
    315       265  
Other, including intercompany adjustments
    30       14  

Total
  $ 1,153     $ 1,016  

(a) Revenues were primarily from aircraft lease rentals.
(b) Revenues were primarily fees from proprietary positions entered into in connection with counterparty transactions.
(c) Revenues were primarily finance charges.

Financial Services Results

      Financial services operating income increased 13.5 percent in the first six months of 2003 over the same period of 2002. Financial services operating income represented 18.2 percent of AIG’s consolidated income before income taxes and minority interest in the first six months of 2003. This compares to 17.7 percent in the same period of 2002.

      ILFC generates its revenues primarily from leasing new and used commercial jet aircraft to domestic and foreign airlines. Revenues also result from the remarketing of commercial jets for its own account, for airlines and for financial institutions. Revenues in the first six months of 2003 increased 8.8 percent from the same period of 2002. The revenue growth resulted primarily from the increase in flight equipment under operating lease and the increase in the relative cost of the leased fleet. ILFC has historically derived over 80 percent of its lease revenues with respect to flight equipment from airlines based outside the United States and is not significantly exposed to current domestic airline difficulties. Passenger miles in Asia, a major market for ILFC, have increased substantially as the risk of SARS has abated.

      ILFC typically contracts to re-lease aircraft before the end of the existing lease term. For aircraft returned before the end of the lease term, ILFC has generally been able to re-lease such aircraft within two to six months of its return. While some of the lease rates for aircraft that have been redeployed are lower, this is partially offset by low interest rates, which reduce ILFC’s financing costs. As a lessor, ILFC considers an aircraft “idle” or “off lease” when the aircraft is not subject to a signed lease agreement or signed letter of intent. ILFC had two aircraft off lease at June 30, 2003 which had been off lease for less than three months. As of July 23, 2003, one of the two unleased aircraft was placed. All new and used aircraft deliveries in 2003 have been placed, and 78 percent of 2004 new aircraft deliveries have been leased.

      ILFC management is very active in the airline industry. Management formally reviews regularly, and no less frequently than quarterly, issues affecting ILFC’s fleet, including events and circum-

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stances that may cause impairment of aircraft values. Management evaluates aircraft in the fleet as necessary, based on these events and circumstances in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144). ILFC has not recognized any impairment related to its fleet, as the existing service potential of the aircraft in ILFC’s portfolio has not been diminished. Further, ILFC has been able to re-lease the aircraft without diminution in lease rates to an extent that would require an impairment write-down. (See also the discussions under “Liquidity” herein.)

      During the first six months of 2003, ILFC’s operating income decreased 6.0 percent from the same period of 2002 principally due to the impact of certain bankruptcy and other settlements received in 2002.

      ILFC finances its purchases of aircraft primarily through the issuance of a variety of debt instruments. The composite borrowing rates at the end of the first six months of 2003 and 2002 were 4.50 percent and 5.03 percent, respectively. (See also the discussions under “Capital Resources” and “Liquidity” herein and Note 2 of Notes to Financial Statements.)

      ILFC is exposed to operating loss and liquidity strain through non-performance of aircraft lessees, through owning aircraft which it would be unable to sell or re-lease at acceptable rates at lease expiration and through committing to purchase aircraft which it would be unable to lease. ILFC manages its lessee non-performance exposure through credit reviews and security deposit requirements. As a result of these measures and its own contingency planning, ILFC did not suffer any material losses from airline shutdowns in the aftermath of the September 11 terrorist attacks, but there can be no assurance that ILFC will successfully manage the risks relating to the impact of possible future deterioration in the airline industry. Approximately 88 percent of ILFC’s fleet is leased to non-U.S. carriers, and this fleet, the most efficient in the airline industry, continues to be in high demand from carriers. (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.

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

      AIGFP’s revenues in the first six months of 2003 increased 25.6 percent from the same period of 2002. During the first six months of 2003, operating income increased 26.3 percent from the same period of 2002. Such revenues and operating income resulted from AIGFP’s interest rate and credit segments. As AIGFP is a transaction-oriented operation, current and past revenues and operating results may not provide a basis for predicting future performance. The breakdown by percentage contribution of revenues and operating income for AIGFP in the first six months of 2003 and 2002 is set forth below. The percentages for operating income are the same as those for revenues because expenses are allocated across all products in proportion to the revenues generated by that product. Material changes in the distribution of revenues and operating income are not meaningful because of the transactional nature of AIGFP’s business.

                 

2003 2002

Spread Income on Investments and Borrowings
    42 %     54 %
Interest Rate Products
    29       22  
Equity Linked Products
    2       6  
Credit Linked Products
    26       17  
Other revenue
    1       1  

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

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

      The most significant component of AIGFP’s operating expenses is compensation, which approximated 31 percent and 34 percent of revenues in the first six months of 2003 and 2002, respectively. This decrease in percentage resulted from a change in the mix of the transactions attributable to each period.

      Domestically, AIG’s consumer finance operations derive a substantial portion of their revenues from finance charges assessed on outstanding mortgages and finance receivables from the sub-prime market, while overseas operations are engaged in developing a multi-product consumer finance business with an emphasis on emerging markets. Revenues increased 5.4 percent in the first six months of 2003 from the same period in 2002; operating income increased 18.7 percent compared to the 2002 period. The increase in revenues was the result of growth in average finance receivables and credit quality continues to be strong. Further reductions of the cost to borrow led to an improvement in the operating income over the previous period.

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

Retirement Savings & Asset Management Operations

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

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

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

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“reversion to the mean” is used to maintain this long-term net growth rate assumption, while giving consideration to short-term variations in equity markets.

      A number of guaranteed minimum death benefits (GMDB) and other similar benefits are offered on variable annuities. GMDB-related contract benefits incurred, net of reinsurance were $42 million and $20 million for the six months ended June 30, 2003 and 2002, respectively. In accordance with GAAP, AIG expenses these benefits in the period paid.

      Retirement savings & asset management operations for the six month periods ending June 30, 2003 and 2002 were as follows:

(in millions)


                 
2003 2002

Revenues:
               
AIG VALIC
  $ 1,112     $ 1,067  
AIG SunAmerica
    250       306  
Other*
    450       363  

Total
  $ 1,812     $ 1,736  

Operating income:
               
AIG VALIC
  $ 445     $ 411  
AIG SunAmerica
    5       50  
Other*
    134       119  

Total
  $ 584     $ 580  

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

Retirement Savings & Asset Management Results

      Retirement savings & asset management operating income in the first six months of 2003 increased 0.8 percent when compared to the same period of 2002. Equity markets have improved in recent months, although they remain below June 30, 2002 levels.

      Retirement savings & asset management operating income represented 9.2 percent of AIG’s consolidated income before income taxes and minority interest in the first six months of 2003. This compares to 10.1 percent in the same period of 2002.

      At June 30, 2003, AIG’s third party assets under management, including both retail mutual funds and institutional accounts, approximated $43 billion.

Other Operations

      Other realized capital losses amounted to $216 million and $240 million in the first six months of 2003 and 2002, respectively.

      Other income (deductions)-net includes income generated by the investment of capital held by AIG SunAmerica outside of its life insurance subsidiaries, AIG’s equity in certain minor majority-owned subsidiaries and certain partially-owned companies, realized foreign exchange transaction gains and losses in substantially all currencies and unrealized gains and losses in hyperinflationary currencies, as well as the income and expenses of the parent holding company and other miscellaneous income and expenses. In the first six months of 2003, other income (deductions) — net amounted to $(279) million. In the same period of 2002, other income (deductions) — net amounted to $(43) million. This decline was primarily the result of increases in pension, interest and administrative expenses.

      Income before income taxes and minority interest amounted to $6.35 billion in the first six months of 2003 compared to $5.73 billion in the same period of 2002.

      In the first six months of 2003, AIG recorded a provision for income taxes of $1.94 billion compared to the provision of $1.76 billion in the same period of 2002. These provisions represent effective tax rates of 30.5 percent in the first six months of 2003 and 30.8 percent in the same period of 2002.

      Minority interest represents minority shareholders’ equity in income of certain majority-owned consolidated subsidiaries. Minority interest amounted to $188 million and $181 million in the first six months of 2003 and 2002, respectively.

      Net income amounted to $4.23 billion in the first six months of 2003 and $3.78 billion in the same period of 2002. The increases in net income over the periods resulted from those factors described above.

Capital Resources

      At June 30, 2003, AIG had total capital funds of $68.36 billion and total borrowings of $76.87 billion. At that date, $67.93 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.

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Borrowings

      Total borrowings and borrowings not guaranteed or matched at June 30, 2003 and December 31, 2002 were as follows:

                   
(in millions)

2003 2002

GIAs — AIGFP
  $ 14,636     $ 14,850  

Commercial Paper:
               
 
ILFC(a)
    3,324       4,213  
 
AGF(a)
    3,384       2,956  
 
AIG Funding, Inc. (Funding)
    2,383       1,645  
 
AIG Credit Card Company (Taiwan)(a)
    234       234  
 
AIG Finance (Taiwan) Limited(a)
    15       64  

 
Total
    9,340       9,112  

Medium Term Notes:
               
 
AGF(a)
    7,959       7,719  
 
ILFC(a)
    5,957       4,970  
 
AIG
    824       998  

 
Total
    14,740       13,687  

Notes and Bonds Payable:
               
 
AIGFP
    17,463       16,940  
 
ILFC(a)(b)
    12,582       9,825  
 
AGF(a)
    2,084       2,266  
 
AIG
    3,124       1,608  
 
AGC
    1,243       1,542  

 
Total
    36,496       32,181  

Loans and Mortgages Payable:
               
 
AIG
    514       697  
 
AIGCFG(a)
    613       735  
 
ILFC(a)(c)
    206       261  
 
AIG Finance (Hong Kong) Limited(a)
    195       229  
 
Other subsidiaries(a)
    128       133  

 
Total
    1,656       2,055  

 
Total Borrowings
    76,868       71,885  

Borrowings not guaranteed by AIG
    36,681       33,605  
Matched GIA borrowings — AIGFP
    14,636       14,850  
Matched notes and bonds payable — AIGFP
    16,617       16,526  

      67,934       64,981  

Remaining borrowings of AIG
  $ 8,934     $ 6,904  

(a) AIG does not guarantee these borrowings.
(b) Includes borrowings under Export Credit Facility of $1.9 billion.
(c) Capital lease obligations.

     At June 30, 2003, the commercial paper issued and outstanding was as follows:

                                         
(dollars in millions)

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

ILFC
  $ 3,324     $ 3     $ 3,327       1.12 %     29  
AGF
    3,384       3       3,387       1.09       32  
Funding
    2,383       1       2,384       1.07       22  
AIGCCC — Taiwan*
    234             234       2.06       29  
AIGF — Taiwan*
    15             15       1.39       50  

Total
  $ 9,340     $ 7     $ 9,347              

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

     The maturity distributions of total borrowings at June 30, 2003 and December 31, 2002 were as follows:

(in millions)


                 
2003 2002

Short-term borrowings
  $ 21,404     $ 22,468  
Long-term borrowings*
    55,464       49,417  

Total borrowings
  $ 76,868     $ 71,885  

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

     During the first six months of 2003, AIGFP increased the aggregate principal amount outstanding of its notes and bonds payable to $17.46 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.)

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

      ILFC and AGF as well as AIG Credit Card Company (Taiwan) — (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited — (AIGF-Taiwan), both consumer finance subsidiaries in Taiwan, have issued commercial paper for the funding of their own operations. At June 30, 2003, AIG did not guarantee the commercial paper of any of its subsidiaries other than Funding. On July 8, 2002, AGC ceased issuing commercial paper under its program. AGC’s funding

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requirements are now being met through Funding’s commercial paper program. (See also the discussion under “Derivatives” herein.)

      AIG and Funding are parties to unsecured syndicated revolving credit facilities (collectively, the Facility) aggregating $2.75 billion. The Facility consists of $1.375 billion in a short-term revolving credit facility and $1.375 billion in a five year revolving credit facility. The Facility can be used for general corporate purposes and also to provide backup for Funding’s commercial paper programs. There are currently no borrowings outstanding under the Facility, nor were any borrowings outstanding as of June 30, 2003.

      AGF is a party to unsecured syndicated revolving credit facilities aggregating $3.0 billion. The facilities consist of $1.5 billion in a short-term revolving credit facility and $1.5 billion in a five year revolving credit facility, which support AGF’s commercial paper borrowings. There are currently no borrowings under these facilities, nor were any borrowings outstanding as of June 30, 2003. AGF had $3.4 billion in aggregate principal amount of debt securities registered and available for issuance at June 30, 2003. AGF uses the proceeds from the issuance of notes and bonds for the funding of its finance receivables.

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

      ILFC is a party to unsecured syndicated revolving credit facilities aggregating $3.15 billion to support its commercial paper program. The facilities consist of $2.15 billion in a short-term revolving credit facility and $1.0 billion in a three year revolving credit facility. There are currently no borrowings outstanding under these facilities, nor were any borrowings outstanding as of June 30, 2003.

      At June 30, 2003, ILFC had increased the aggregate amount outstanding of its medium term and long term notes to $18.54 billion, a net increase of $3.74 billion from December 31, 2002 (of which $170 million results from foreign exchange translation), and recorded a net decline in its capital lease obligations of $55 million and a net decrease in its commercial paper of $889 million. At June 30, 2003, ILFC had $11.08 billion of debt securities registered for public sale. During the six months ended June 30, 2003, $4.38 billion of debt securities were issued. During the second quarter of 2003, ILFC expanded its Euro Medium Term Note Program to $5.0 billion, under which $2.81 billion in notes were sold through June 30, 2003. ILFC has substantially eliminated the currency exposure arising from foreign currency denominated notes by either hedging the notes through swaps or through the offset provided by operating lease payments. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

      ILFC had a $4.3 billion Export Credit Facility for use in connection with the purchase of approximately 75 aircraft delivered through 2001. This facility was guaranteed by various European Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90 percent on these borrowings depending on the delivery date of the aircraft. At June 30, 2003, ILFC had $1.9 billion outstanding under this facility. The debt is collateralized by a pledge of the shares of a subsidiary of ILFC, which holds title to the aircraft financed under the facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the preceding table of borrowings.

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

      AIGFP has established a Euro Medium Term Note Program under which an aggregate principal amount of up to $4.0 billion of notes may be outstanding. As of June 30, 2003, $3.18 billion of notes had been issued under the program, $2.07 billion of which are outstanding. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

      During the first six months of 2003, AIG did not issue any medium term notes and $174 million of previously issued notes matured. At June 30, 2003, AIG had $140 million in aggregate principal amount of debt securities registered for issuance from time to time. AIG has filed a universal shelf registration statement to sell up to $5.1 billion of debt securities, preferred and common stock and other securities. AIG has no current plans to issue the equity, equity-linked or capital securities in-

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cluded in the registration statement, but intends to continue its customary practice of issuing securities from time to time for general corporate purposes.

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

      On May 15, 2003, AIG sold $1.5 billion principal amount of notes in a Rule 144A/ Regulation S offering. $500 million of the notes bear interest at a rate of 2.875 percent per annum and mature in 2008 and $1.0 billion of the notes bear interest at a rate of 4.250 percent per annum and mature in 2013. The notes are senior unsecured obligations of AIG and rank equally with all of AIG’s other senior debt outstanding.

Capital Funds

      AIG’s capital funds increased $9.25 billion during the first six months of 2003. Unrealized appreciation of investments, net of taxes increased $4.90 billion. During the first six months of 2003, the cumulative translation adjustment loss, net of taxes, decreased $377 million. The change from period to period with respect to the unrealized appreciation of investments, net of taxes was primarily impacted by the decrease in domestic interest rates. During the first six months of 2003, there was a gain of $94 million, net of taxes, relating to derivative contracts designated as cash flow hedging instruments. (See also the discussion under Notes to Financial Statements and the Consolidated Statement of Comprehensive Income.) During the first six months of 2003, retained earnings increased $3.99 billion, resulting from net income less dividends.

Stock Repurchase

      Although AIG did not repurchase any shares of its common stock during the quarter ended June 30, 2003, AIG intends to continue to buy its common stock for general corporate purposes, including to satisfy its obligations under various employee benefit plans.

Dividends from Insurance Subsidiaries

      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 June 30, 2003, there were no significant statutory or regulatory issues which would impair AIG’s financial condition, results of operations or liquidity. To AIG’s knowledge, no AIG company is on any regulatory or similar “watch list”. (See also the discussion under “Liquidity” herein.)

Regulation and Supervision

      AIG’s insurance subsidiaries, in common with other insurers, are subject to regulation and supervision by the states and jurisdictions in which they do business. The National Association of Insurance Commissioners (NAIC) has developed Risk-Based Capital (RBC) requirements. RBC relates an individual insurance company’s statutory surplus to the risk inherent in its overall operations. At June 30, 2003, the adjusted capital of each of AIG’s domestic general companies and of each of AIG’s domestic life companies exceeded each of their RBC standards. Federal, state or local legislation may affect AIG’s ability to operate and expand its various financial services businesses and changes in the current laws, regulations or interpretations thereof may have a material adverse effect on these businesses.

      A substantial portion of AIG’s general insurance business and a majority of its life insurance business are conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies from minimal in some to stringent in others. Generally, AIG, as well as the underwriting companies operating in such jurisdictions, must satisfy local regulatory requirements. Licenses issued by foreign authorities to AIG subsidiaries are subject to modification and revocation. Thus, AIG’s insurance subsidiaries could be prevented from conducting future business in certain of the jurisdic-

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tions where they currently operate. AIG’s international operations include operations in various developing nations. Both current and future foreign operations could be adversely affected by unfavorable political developments up to and including nationalization of AIG’s operations without compensation. Adverse effects resulting from any one country may impact AIG’s results of operations, liquidity and financial condition depending on the magnitude of the event and AIG’s net financial exposure at that time in that country.

Contractual Obligations and Other Commercial Commitments

      The maturity schedule of AIG’s most significant contractual obligations at June 30, 2003 is presented in the following table:

(in millions)


                                           
Payments due by Period

2004 2006 Remaining
through through years after
June 30, 2003 Total 2003 2005 2007 2007

Borrowings*
  $ 67,528     $ 21,404     $ 14,737     $ 10,328     $ 21,059  
Aircraft Purchase Commitments
    26,170       1,148       9,354       9,385       6,283  
Other Long-Term Obligations:
                                       
 
ILFC
    830       367       463              

Total
  $ 94,528     $ 22,919     $ 24,554     $ 19,713     $ 27,342  

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

     The maturity schedule of AIG’s most significant Other Commercial Commitments at June 30, 2003 is presented in the following table:

(in millions)


                                           
Amount of Commitment Expiration

Total Less
Amounts than 1 1-3 4-5 After 5
June 30, 2003 Committed year years years years

Letters of Credit:
                                       
 
AIGFP
  $ 798     $ 12     $ 5     $ 4     $ 777  
Guarantees:
                                       
 
AIG SunAmerica(a)
    4,942       618       1,560             2,764  
Other Commercial Commitments:
                                       
 
AIGFP(b)
    4,220       5       12       340       3,863  
 
ILFC(c)
    2,069       232       656       815       366  
 
AIG SunAmerica
    1,091       107       663       321        

Total
  $ 13,120     $ 974     $ 2,896     $ 1,480     $ 7,770  

(a) Primarily in connection with investment operations.
(b) Primarily liquidity facilities provided in connection with certain municipal swap transactions.
(c) Primarily in connection with options to acquire aircraft.

Special Purpose Vehicles

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

      In the GIC Programs, AIG’s life insurance subsidiaries (principally SunAmerica Life Insurance Company) provide guaranteed investment contracts (GICs) to SPVs which are not controlled by AIG. The SPVs issue notes or bonds which are sold to third party institutional investors. Neither AIG nor the insurance company issuing the GICs has any obligation to the investors in the notes or bonds. The proceeds from the securities issued by the SPV are invested by the SPV in the GICs. The insurance company subsidiaries use their proceeds to invest in a diversified portfolio of securities, primarily investment grade bonds (see also the discussion under “Liquidity” and “Insurance Invested Assets” herein). Both the assets and the liabilities of the insurance companies arising from these GIC Programs are presented in AIG’s consolidated balance sheet. Thus, at June 30, 2003, approximately $31 billion of policyholders’ contract deposits represented liabilities from issuances of

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GICs included in these GIC Programs, offset by the proceeds from the issuances, which are included as insurance invested assets.

      AIGFP uses SPVs as an integral part of its ongoing operations with respect to specific structured transactions with independent third parties. In most instances, AIGFP controls and manages the assets and liabilities with respect to these SPVs, subject to certain transaction specific limitations. These SPVs are fully consolidated by AIG (see the discussions of AIGFP under “Operations Review: Financial Services Operations”). AIGFP also sponsors an SPV that issues commercial paper and secured liquidity notes to third-party institutional investors. This SPV uses the proceeds of these offerings to obtain beneficial interests in certain financial assets (total assets of approximately $816 million), which serve as collateral for the securities issued by the SPV. AIGFP provides credit and liquidity support to this SPV, which is not consolidated by AIG.

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

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

      To facilitate and expand certain retirement savings & asset management activities, AIG establishes SPVs. AIG receives fees for management of the assets held in the SPV which support the issuance of securities such as collateralized bond obligations sold by the SPV to independent third party investors. These SPVs serve a variety of business purposes, including financing, liquidity, or to facilitate independent third party management participation.

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

Liquidity

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

      At June 30, 2003, AIG’s consolidated invested assets included $14.03 billion of cash and short-term investments. Consolidated net cash provided from operating activities in the first six months of 2003 amounted to $13.11 billion.

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

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

      The liquidity of the combined insurance operations is derived both domestically and abroad. The combined insurance operating cash flow is derived from two sources, underwriting operations and investment operations. In the aggregate, AIG’s insurance operations generated approximately $20.5 billion in pre-tax cash flow during the first six months of 2003. Cash flow includes periodic premium collections, including policyholders’ contract deposits, cash flows from investment operations and paid loss recoveries less reinsurance premiums, losses, benefits and acquisition and operating expenses. Generally, there is a time lag from when premiums are collected and, when as a result of the occurrence of events specified in the policy, the losses and benefits are paid. AIG’s insurance investment operations generated approximately $8.2 billion in investment income cash flow during the first six months of 2003. Investment income cash flow is primarily derived from interest and dividends received and includes realized capital gains net of realized capital losses.

      With respect to general insurance operations, if paid losses accelerated beyond AIG’s ability to fund

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

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

      In addition to the combined insurance pre-tax operating cash flow, AIG’s insurance operations held $12.70 billion in cash and short-term investments at June 30, 2003. Operating cash flow and the cash and short-term balances held provided AIG’s insurance operations with a significant amount of liquidity.

      This liquidity is available, among other things, to purchase predominantly high quality and diversified fixed income securities and, to a lesser extent, marketable equity securities, and to provide mortgage loans on real estate, policy loans and collateral loans. This cash flow coupled with proceeds of approximately $66 billion from the maturities, sales and redemptions of fixed income securities and from the sale of equity securities was used to purchase approximately $86 billion of fixed income securities and marketable equity securities during the first six months of 2003.

Invested Assets

      The following table is a summary of AIG’s invested assets by significant segment, including investment income due and accrued of $4.54 billion and $4.30 billion and real estate of $3.52 billion and $3.30 billion, respectively, at June 30, 2003 and December 31, 2002:

(dollars in millions)


                                 
June 30, 2003 December 31, 2002


Invested Percent Invested Percent
Assets of Total Assets of Total

General insurance
  $ 64,341       13.4 %   $ 55,478       12.8 %
Life insurance
    288,413       60.1       259,138       59.9  
Financial services
    123,496       25.7       114,878       26.6  
Other
    3,565       0.8       2,868       0.7  

Total
  $ 479,815       100.0 %   $ 432,362       100.0 %

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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 June 30, 2003 and December 31, 2002:

(dollars in millions)


                                                   
Percent Distribution
General Life Percent
June 30, 2003 Insurance Insurance Total of Total Domestic Foreign

Fixed maturities:
                                               
 
Available for sale, at market value
  $ 38,145     $ 228,794     $ 266,939       75.7 %     68.1 %     31.9 %
 
Held to maturity, at amortized cost
    4,181             4,181       1.2       100.0        
Equity securities, at market value(a)
    3,898       3,430       7,328       2.1       52.9       47.1  
Mortgage loans on real estate, policy and collateral loans
    36       19,102       19,138       5.4       69.6       30.4  
Short-term investments, including time deposits, and cash
    1,953       10,744       12,697       3.6       70.9       29.1  
Real estate
    552       2,559       3,111       0.9       24.5       75.5  
Investment income due and accrued
    761       3,688       4,449       1.2       64.5       35.5  
Securities lending collateral
&