SEC Filing | American International Group, Inc.

1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1995 COMMISSION FILE NUMBER 1-8787 --------------------- AMERICAN INTERNATIONAL GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-2592361 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 70 PINE STREET, NEW YORK, NEW YORK 10270 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 770-7000 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 the number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 1995 316,129,242. (Adjusting on a pro forma basis, common shares outstanding would have been 474,193,863 after reflecting a common stock split in the form of a 50 percent common stock dividend paid July 28, 1995.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 AMERICAN INTERNATIONAL GROUP, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1995 1994 ------------ ------------ (UNAUDITED) ASSETS: Investments and cash: Fixed maturities: Bonds held to maturity, at amortized cost (market value: 1995 -- $14,509,700; 1994 -- $13,109,700)............. $ 13,925,300 $ 13,041,807 Bonds available for sale, at market value (amortized cost: 1995 -- $25,014,400; 1994 -- $22,207,300)....... 25,922,891 21,812,600 Bonds trading securities, at market value (cost: 1995 -- $365,700; 1994 -- $172,000)................... 369,261 163,956 Preferred stocks, at amortized cost (market value: 1995 -- $550,800; 1994 -- $424,800)................... 443,708 412,503 Equity securities: Common stocks (cost: 1995 -- $4,815,600; 1994 -- $4,607,800)................................... 5,200,609 5,002,668 Non-redeemable preferred stocks (cost: 1995 -- $85,300; 1994 -- $85,900)...................................... 86,065 96,503 Mortgage loans on real estate, policy and collateral loans -- net............................................. 7,031,943 5,353,074 Financial services assets: Flight equipment primarily under operating leases, net of accumulated depreciation (1995 -- $1,082,400; 1994 -- $959,100)..................................... 12,699,360 10,723,527 Securities available for sale, at market value (cost: 1995 -- $4,091,300; 1994 -- $3,794,100)............... 4,087,537 3,796,792 Trading securities, at market value...................... 3,322,257 2,483,637 Spot commodities, at market value........................ 1,191,821 916,833 Unrealized gain on interest rate and currency swaps, options and forward transactions...................... 7,115,557 4,650,743 Trade receivables........................................ 2,851,780 2,629,734 Securities purchased under agreements to resell, at contract value........................................ 1,232,616 1,209,403 Other invested assets...................................... 2,166,426 1,953,015 Short-term investments, at cost which approximates market value.................................................... 2,286,470 2,467,453 Cash....................................................... 66,007 76,237 ------------ ------------ Total investments and cash.......................... 89,999,608 76,790,485 Investment income due and accrued............................. 1,062,338 927,951 Premiums and insurance balances receivable -- net............. 9,930,490 8,802,207 Reinsurance assets............................................ 16,812,539 16,289,607 Deferred policy acquisition costs............................. 5,760,760 5,132,245 Investments in partially-owned companies...................... 740,136 645,167 Real estate and other fixed assets, net of accumulated depreciation (1995 -- $1,245,500; 1994 -- $1,129,500)...... 1,930,793 1,865,244 Separate and variable accounts................................ 2,399,071 2,297,605 Other assets.................................................. 1,897,958 1,595,606 ------------ ------------ Total assets........................................ $130,533,693 $114,346,117 =========== ===========
See Accompanying Notes to Financial Statements. 1 3 AMERICAN INTERNATIONAL GROUP, INC. CONSOLIDATED BALANCE SHEET -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1995 1994 ------------ ------------ (UNAUDITED) LIABILITIES: Reserve for losses and loss expenses.......................... $ 32,762,970 $ 31,435,355 Reserve for unearned premiums................................. 7,011,422 6,318,754 Future policy benefits for life and accident and health insurance contracts........................................ 20,437,106 17,432,222 Policyholders' contract deposits.............................. 8,477,093 6,487,426 Other policyholders' funds.................................... 2,172,454 1,951,358 Reserve for commissions, expenses and taxes................... 1,390,524 1,319,183 Insurance balances payable.................................... 2,075,938 1,462,545 Funds held by companies under reinsurance treaties............ 384,800 382,853 Income taxes payable: Current.................................................... 281,376 420,569 Deferred................................................... 369,537 33,031 Financial services liabilities: Borrowings under obligations of guaranteed investment agreements............................................... 4,767,575 5,535,318 Securities sold under agreements to repurchase, at contract value.................................................... 2,327,872 1,342,064 Trade payables............................................. 2,845,739 2,108,263 Securities sold but not yet purchased, principally obligations of the U.S. Government and Government agencies, at market value................................ 730,755 192,898 Spot commodities sold but not yet purchased, at market value.................................................... 541,831 369,089 Unrealized loss on interest rate and currency swaps, options and forward transactions......................... 6,298,787 3,659,450 Deposits due to banks and other depositors................. 621,065 655,973 Commercial paper........................................... 2,432,337 1,960,545 Notes, bonds and loans payable............................. 8,357,934 7,567,046 Commercial paper.............................................. 2,070,651 1,829,014 Notes, bonds, loans and mortgages payable..................... 601,547 627,554 Separate and variable accounts................................ 2,399,071 2,297,605 Other liabilities............................................. 2,747,641 2,336,341 ------------ ------------ Total liabilities................................... 112,106,025 97,724,456 ------------ ------------ Preferred shareholders' equity in subsidiary company.......... 300,000 200,000 CAPITAL FUNDS: Common stock, $2.50 par value: 1,000,000,000 shares authorized; shares issued 1995 -- 337,390,977; 1994 -- 337,390,984........................................ 843,477 843,477 Additional paid-in capital.................................... 551,987 565,410 Unrealized appreciation of investments, net of taxes.......... 751,744 184,556 Cumulative translation adjustments, net of taxes.............. (291,723) (288,074) Retained earnings............................................. 16,474,201 15,340,928 Treasury stock, at cost; 1995 -- 21,261,735; 1994 -- 21,550,358 shares of common stock.................. (202,018) (224,636) ------------ ------------ Total capital funds................................. 18,127,668 16,421,661 ------------ ------------ Total liabilities and capital funds................. $130,533,693 $114,346,117 =========== ===========
See Accompanying Notes to Financial Statements. 2 4 AMERICAN INTERNATIONAL GROUP, INC. CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SIX MONTHS THREE MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- 1995 1994 1995 1994 --------- --------- --------- --------- General insurance operations: Net premiums written...................... $6,024,227 $5,500,895 $3,145,232 $2,879,590 Change in unearned premium reserve........ (421,585) (467,491) (306,438) (302,539) --------- --------- --------- --------- Net premiums earned....................... 5,602,642 5,033,404 2,838,794 2,577,051 Net investment income..................... 757,808 705,894 378,143 351,765 Realized capital gains.................... 47,556 48,488 23,146 28,394 --------- --------- --------- --------- 6,408,006 5,787,786 3,240,083 2,957,210 --------- --------- --------- --------- Losses and loss expenses incurred......... 4,308,515 4,000,258 2,138,305 2,022,791 Underwriting expenses..................... 1,128,399 1,010,420 600,580 526,866 --------- --------- --------- --------- 5,436,914 5,010,678 2,738,885 2,549,657 --------- --------- --------- --------- Operating income.......................... 971,092 777,108 501,198 407,553 --------- --------- --------- --------- Life insurance operations: Premium income............................ 3,837,151 3,171,655 2,047,402 1,676,556 Net investment income..................... 1,059,569 835,255 557,129 427,259 Realized capital gains (losses)........... 1,748 32,719 (1,183) 3,979 --------- --------- --------- --------- 4,898,468 4,039,629 2,603,348 2,107,794 --------- --------- --------- --------- Death and other benefits.................. 1,573,237 1,243,068 855,500 666,267 Increase in future policy benefits........ 1,753,386 1,478,014 909,446 765,561 Acquisition and insurance expenses........ 1,074,170 878,162 577,196 458,702 --------- --------- --------- --------- 4,400,793 3,599,244 2,342,142 1,890,530 --------- --------- --------- --------- Operating income.......................... 497,675 440,385 261,206 217,264 --------- --------- --------- --------- Agency and service fee operating income... 31,966 29,170 15,406 13,595 Financial services operating income....... 193,485 214,143 117,948 117,045 Equity in income of minority-owned insurance operations.................... 39,119 22,021 21,430 14,749 Other realized capital gains (losses)..... (14,304) (19,687) (6,570) (9,482) Minority interest......................... (17,508) (10,813) (8,136) (5,267) Other income (deductions) -- net (36,436) (33,224) (23,187) (14,764) --------- --------- --------- --------- Income before income taxes................ 1,665,089 1,419,103 879,295 740,693 --------- --------- --------- --------- Income taxes (benefits) -- Current........ 475,956 426,362 298,060 207,393 -- Deferred....... (16,808) (62,571) (52,550) (16,394) --------- --------- --------- --------- 459,148 363,791 245,510 190,999 --------- --------- --------- --------- Net income............................... $1,205,941 $1,055,312 $ 633,785 $ 549,694 ========= ========= ========= ========= Earnings per common share (a): Net income................................ $ 2.54 $ 2.22 $ 1.34 $ 1.16 ========= ========= ========= ========= Cash dividends per common share........... $ 0.153 $ 0.133 $ 0.077 $ 0.067 ========= ========= ========= ========= Average shares outstanding (a)............ 473,933 475,544 474,016 474,846 --------- --------- --------- ---------
(a) Share information reflects a common stock split in the form of a 50 percent common stock dividend paid July 28, 1995. See Accompanying Notes to Financial Statements. 3 5 AMERICAN INTERNATIONAL GROUP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------- 1995 1994 ----------- ---------- Cash Flows From Operating Activities: Net income..................................................... $ 1,205,941 $1,055,312 ----------- ---------- 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....................... 4,535,030 3,073,203 Premiums and insurance balances receivable and payable -- net..................................................... (514,890) (566,047) Reinsurance assets........................................ (522,932) (336,898) Deferred policy acquisition costs......................... (628,515) (478,609) Investment income due and accrued......................... (134,387) (60,197) Funds held under reinsurance treaties..................... 1,947 (36,474) Other policyholders' funds................................ 221,096 103,967 Current and deferred income taxes -- net.................. (156,001) (84,929) Reserve for commissions, expenses and taxes............... 71,341 220,258 Other assets and liabilities -- net....................... 108,948 (10,383) Trade receivables and payables -- net..................... 515,430 408,611 Trading securities, at market value....................... (838,620) 508,118 Spot commodities, at market value......................... (274,988) (420,544) Net unrealized gain on interest rate and currency swaps, options and forward transactions........................ 174,523 (290,045) Securities purchased under agreements to resell........... (23,213) (14,398) Securities sold under agreements to repurchase............ 985,808 (595,303) Securities sold but not yet purchased..................... 537,857 150,510 Spot commodities sold but not yet purchased, at market value................................................... 172,742 136,630 Realized capital gains....................................... (35,000) (61,520) Equity in income of partially-owned companies and other invested assets........................................... (53,296) (31,350) Depreciation expenses, principally flight equipment.......... 350,844 263,063 Change in cumulative translation adjustments................. 45,451 52,625 Other -- net................................................. (46,474) 18,126 ----------- ---------- Total Adjustments............................................ 4,492,701 1,948,414 ----------- ---------- Net cash provided by operating activities...................... 5,698,642 3,003,726 ----------- ----------
See Accompanying Notes to Financial Statements. 4 6 AMERICAN INTERNATIONAL GROUP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------- 1995 1994 ----------- ---------- Cash Flows From Investing Activities: Cost of fixed maturities, at amortized cost matured or redeemed.................................................. 387,974 307,992 Cost of bonds, at market sold................................ 4,829,308 4,304,361 Cost of bonds, at market matured or redeemed................. 1,302,178 641,095 Cost of equity securities sold............................... 1,363,587 1,304,979 Realized capital gains....................................... 35,000 61,520 Purchases of fixed maturities................................ (10,401,337) (7,690,165) Purchases of equity securities............................... (1,578,128) (1,843,779) Mortgage, policy and collateral loans granted................ (2,135,487) (1,464,294) Repayments of mortgage, policy and collateral loans.......... 388,030 359,786 Sales of securities available for sale....................... 1,519,889 3,058,704 Maturities of securities available for sale.................. 131,595 391,970 Purchases of securities available for sale................... (1,949,525) (2,494,442) Sales of flight equipment.................................... 268,405 141,370 Purchases of flight equipment................................ (2,398,067) (1,706,412) Net additions to real estate and other fixed assets.......... (197,988) (177,459) Sales or distributions of other invested assets.............. 166,667 69,837 Investments in other invested assets......................... (299,113) (250,345) Change in short-term investments............................. 180,983 464,227 Investments in partially-owned companies..................... (20,752) (35,454) ----------- ---------- Net cash used in investing activities.......................... (8,406,781) (4,556,509) ----------- ---------- Cash Flows From Financing Activities: Change in policyholders' contract deposits................... 1,989,667 1,263,678 Change in deposits due to banks and other depositors......... (34,908) 130,952 Change in commercial paper................................... 713,429 598,948 Proceeds from notes, bonds, loans and mortgages payable...... 2,738,973 1,964,549 Repayments on notes, bonds, loans and mortgages payable...... (1,978,036) (976,507) Proceeds from guaranteed investment agreements............... 1,210,364 910,524 Maturities of guaranteed investment agreements............... (1,978,107) (2,232,543) Proceeds from subsidiary company preferred stock issued...... 98,476 -- Proceeds from common stock issued............................ 11,886 6,974 Cash dividends to shareholders............................... (72,668) (63,407) Acquisition of treasury stock................................ (1,167) (109,335) ----------- ---------- Net cash provided by financing activities...................... 2,697,909 1,493,833 ----------- ---------- Change in cash................................................. (10,230) (58,950) Cash at beginning of period.................................... 76,237 157,481 ----------- ---------- Cash at end of period.......................................... $ 66,007 $ 98,531 =========== ==========
See Accompanying Notes to Financial Statements. 5 7 AMERICAN INTERNATIONAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 a) These statements are unaudited. In the opinion of management, all adjustments consisting of normal recurring accruals have been made for a fair presentation of the results shown. b) Earnings per share of American International Group, Inc. (AIG) are based on the weighted average number of common shares outstanding during the period, retroactively adjusted to reflect a common stock split in the form of a 50 percent common stock dividend paid July 28, 1995. The effect of potentially dilutive securities is not significant. Following are the net income per share figures, before and after adjustment for the stock split:
SIX MONTHS SECOND QUARTER ----------------- ----------------- 1995 1994 1995 1994 ------ ------ ------ ------ ~~Pre-split....................... $ 3.82 $ 3.33 $ 2.01 $ 1.74 Post-split...................... $ 2.54 $ 2.22 $ 1.34 $ 1.16~~
Cash dividends per common share reflect the adjustment for a common stock split in the form of a 50 percent common stock dividend paid July 28, 1995. Following are the dividend per share figures, before and after adjustment for the stock split:
SIX MONTHS SECOND QUARTER ----------------- ----------------- 1995 1994 1995 1994 ------ ------ ------ ------ ~~Pre-split....................... $0.230 $0.200 $0.115 $0.100 Post-split...................... $0.153 $0.133 $0.077 $0.067~~
c) Supplemental cash flow information for the six month periods ended June 30, 1995 and 1994 is as follows:
1995 1994 -------- -------- (IN THOUSANDS) ~~Income taxes paid.............................. $616,500 $442,600 Interest paid.................................. $651,000 $496,000~~
d) For further information, refer to the Form 10-K filing of AIG for the year ended December 31, 1994. 6 8 AMERICAN INTERNATIONAL GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATIONAL REVIEW General Insurance Operations General insurance operations for the six month periods ending June 30, 1995 and 1994 were as follows: (in thousands) - ---------------------------------------------------------
1995 1994 - --------------------------------------------------------- Net premiums written: Domestic $3,949,886 $3,743,207 Foreign 2,074,341 1,757,688 - --------------------------------------------------------- Total $6,024,227 $5,500,895 - --------------------------------------------------------- Net premiums earned: Domestic $3,632,375 $3,408,428 Foreign 1,970,267 1,624,976 - --------------------------------------------------------- Total $5,602,642 $5,033,404 - --------------------------------------------------------- Adjusted underwriting profit (loss): Domestic $ (11,996) $ (80,256) Foreign 177,724 102,982 - --------------------------------------------------------- Total $ 165,728 $ 22,726 - --------------------------------------------------------- Net investment income: Domestic $ 611,132 $ 569,370 Foreign 146,676 136,524 - --------------------------------------------------------- Total $ 757,808 $ 705,894 - --------------------------------------------------------- Operating income before realized capital gains: Domestic $ 599,136 $ 489,114 Foreign 324,400 239,506 - --------------------------------------------------------- Total $ 923,536 $ 728,620 Realized capital gains 47,556 48,488 - --------------------------------------------------------- Operating income $ 971,092 $ 777,108 - ---------------------------------------------------------
During the first six months of 1995, the net premiums written and the net premiums earned in AIG's general insura nce operations increased 9.5 percent and 11.3 percent, respectively, from those of 1994. The growth in net premiums written in the first six months of 1995 over the same period of 1994 resulted from a combination of several factors. Domestically, AIG continued to achieve general price increases in certain domestic commercial property and specialty casualty markets, as well as growth in personal lines. Overseas, growth was achieved through price and volume increases. Foreign general insurance operations produced 34.4 percent of the general insurance net premiums written in this period of 1995 and 32.0 percent in the same period of 1994. During the first six months of 1995, the U.S. dollar declined in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, the translation of foreign net premiums written into U.S. dollars for the purposes of consolidation caused the increase in total net premiums written to be approximately three percentage points greater than it would have been if translated utilizing exchange rates prevailing in the first six months of 1994. Net premiums written are initially deferred and earned based upon the terms of the underlying policies. The net unearned premium reserve constitutes the deferred revenues which are generally earned ratably over the policy period. Thus, the net unearned premium reserve is not fully recognized as net premiums earned until the end of the policy period. The statutory general insurance ratios for the six month periods ended June 30, 1995 and 1994 were as follows:
1995 1994 - -------------------------------------------------------- Domestic: Loss Ratio 86.67 88.51 Expense Ratio 14.32 14.40 - -------------------------------------------------------- Combined Ratio 100.99 102.91 - -------------------------------------------------------- Foreign: Loss Ratio 58.90 60.51 Expense Ratio 31.91 32.46 - -------------------------------------------------------- Combined Ratio 90.81 92.97 - -------------------------------------------------------- Consolidated: Loss Ratio 76.90 79.47 Expense Ratio 20.38 20.17 - -------------------------------------------------------- Combined Ratio 97.28 99.64 - --------------------------------------------------------
AIG's results reflect the net impact with respect to incurred losses of catastrophes approximating $55 million in each of 1995 and 1994. During the first six months of 1995, AIG's gross incurred losses from catastrophes approximated $115 million. The Kobe Japan earthquake which struck in early 1995 resulted in gross and net incurred losses to AIG of approximately $73 million and $30 million, respectively. A substantial portion of the remaining balances resulted from storms which struck the midwestern and southern states. 7 9 The Northridge earthquake which struck the Los Angeles area of California in January 1994, resulted in gross and net incurred losses to AIG of approximately $174 million and $55 million, respectively. AIG did not record any catastrophe losses in the second quarter of 1994. If these catastrophes were excluded from each six months period's losses incurred, the pro forma consolidated statutory general insurance ratios would be as follows:
- ------------------------------------------------------ 1995 1994 - ------------------------------------------------------ Loss Ratio 75.92 78.38 Expense Ratio 20.38 20.17 - ------------------------------------------------------ Combined Ratio 96.30 98.55 - ------------------------------------------------------
The maintenance of the pro forma statutory combined ratio in each period at a level below 100 is a result of the profitability of AIG's foreign general insurance operations and AIG's emphasis on maintaining its disciplined underwriting within the continued overall competitiveness of the domestic market environment as well as AIG's expense control. Adjusted underwriting profit or loss (operating income less net investment income and realized capital gains) represents statutory underwriting profit or loss adjusted primarily for changes in deferred acquisition costs. The adjusted underwriting profit in the first six months of 1995 was $165.7 million compared to an adjusted underwriting profit of $22.7 million recorded in the same period of 1994. This improvement is a result of growth in AIG's foreign general insurance operations and a domestic strategy implemented several years ago. That is, AIG withdrew from certain classes of domestic business, primarily agency lines and certain segments of workers' compensation business. At that time, AIG had determined that the returns on capital or equity allocated to such classes were deemed unacceptable. AIG's objective continues to be disciplined underwriting, especially in the domestic primary casualty market, and AIG does not seek net premium growth where rates do not adequately reflect its assessment of exposures. General insurance net investment income in the first six months of 1995 increased 7.4 percent when compared to the same period of 1994. The growth in net investment income was primarily attributable to new cash flow for investment. The new cash flow was generated from general insurance operating net cash flow and included the compounding of previously earned and reinvested net investment income. (See also the discussion under "Liquidity" herein.) General insurance realized capital gains were $47.6 million in the first six months of 1995, and $48.5 million in the same period of 1994. These realized gains resulted from the ongoing management of the general insurance investment portfolios within the overall objectives of the general insurance operations and arose primarily from the disposition of equity securities and available for sale and trading fixed maturities as well as redemptions of fixed maturities. General insurance operating income in the first six months of 1995 increased 25.0 percent when compared to the same period of 1994. The contribution of general insurance operating income to income before income taxes was 58.3 percent in the first six months of 1995 compared to 54.8 percent in the same period of 1994. The growth rate and increase in the percentage contribution in the first six months of 1995 resulted from the increased adjusted underwriting profit and the growth of net investment income. A period to period comparison of operating income may be significantly influenced by the catastrophe losses in any one year as well as the volatility from one year to the next in realized capital gains. Adjusting each year to exclude the effects of both catastrophe losses and realized capital gains, operating income would have increased by 24.9 percent in 1995. AIG is a major purchaser of reinsurance for its general insurance operations. AIG is cognizant of the need to exercise good judgment in the selection and approval of both domestic and foreign companies participating in its reinsurance programs. AIG insures risks in over 100 countries and its reinsurance programs must be coordinated in order to provide AIG the level of reinsurance protection which AIG desires. These reinsurance arrangements do not relieve AIG from its direct obligations to its insureds. AIG's general reinsurance assets resulting from its reinsurance arrangements amounted to $16.81 billion at June 30, 1995. A credit exposure exists with respect to reinsurance recoverable when under the terms of the reinsurance arrangements any reinsurer may not be able to reimburse AIG. With respect to its reinsurance relationships, AIG manages its credit 8 10 risk by transacting with reinsurers that it considers financially sound; and, when necessary, AIG holds substantial collateral in the form of funds, securities and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods. The application of this collateral against balances due or any changes to the amount of collateral are based on the development of losses recoverable on an individual reinsurer basis. This development includes losses incurred but not reported (IBNR). At December 31, 1994, approximately 59 percent of reinsurance recoverable was from unauthorized reinsurers. In order to obtain statutory recognition, nearly all of these balances are collateralized. The remaining 41 percent of the reinsurance recoverable was from authorized reinsurers and over 90 percent of such balances were from reinsurers rated A- (excellent) or better, as rated by A.M. Best. Through June 30, 1995, these distribution percentages have not significantly changed. The A.M. Best rating is a measure of financial strength. The terms authorized and unauthorized pertain to regulatory categories, not creditworthiness. AIG's provision for estimated unrecoverable reinsurance has not significantly changed from December 31, 1994. AIG has been largely successful in its prior recovery efforts and has 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, whether a reinsurer 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, 1995, the consolidated general reinsurance assets of $16.81 billion include reinsurance recoverables for (i) paid losses and loss expenses of $1.44 billion and (ii) the ceded reserve for losses and loss expenses, including losses and loss expenses incurred but not reported (ceded reserves) of $13.57 billion. The ceded reserves represent the accumulation of estimates of ultimate ceded losses including provisions for ceded IBNR and loss expenses. The methods used to determine such estimates and to establish the resulting ceded reserves are continually reviewed and updated. Any adjustments therefrom are reflected in income currently. It is AIG's belief that the ceded reserves at June 30, 1995 were representative of the ultimate losses recoverable. In the future, as the ceded reserves continue to develop to ultimate amounts, the ultimate loss recoverable may be greater or less than the reserves currently ceded. At June 30, 1995, general insurance reserves for losses and loss expenses (loss reserves) amounted to $32.76 billion, an increase of $1.33 billion or 4.2 percent over the prior year end. General insurance net loss reserves represent the accumulation of estimates of ultimate losses, including IBNR, and loss expenses, reduced by reinsurance recoverable net of an allowance for unrecoverable reinsurance and minor amounts of discounting related to certain workers' compensation claims. The net loss reserves increased $777.9 million to $19.20 billion or 4.2 percent over the prior year end. 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, 1995. In the future, if the general insurance net loss reserves develop deficiently, such deficiency would have an adverse impact on such future results of operations. In a very broad sense, the general loss reserves can be categorized into two distinct groups: one group being long tail casualty lines of business; the other being short tail lines of business consisting principally of property lines and including certain classes of casualty lines. Estimation of ultimate net losses and loss expenses (net losses) for long tail casualty lines of 9 11 business is a complex process and depends on a number of factors, including the line and volume of the business involved. In the more recent accident years of long tail casualty lines there is limited statistical credibility in reported net losses. That is, a relatively low proportion of net losses would be reported claims and expenses and an even smaller proportion would be net losses paid. A relatively high proportion of net losses would therefore be IBNR. A variety of actuarial methods and assumptions are normally employed to estimate net losses for long tail casualty lines. These methods ordinarily involve the use of loss trend factors intended to reflect the estimated annual growth in loss costs from one accident year to the next. Loss trend factors reflect many items including changes in claims handling, exposure and policy forms and current and future estimates of monetary inflation and social inflation. Thus, many factors are implicitly considered in estimating the year to year growth in loss costs. Therefore, AIG's carried net long tail loss reserves are judgmentally set as well as tested for reasonableness using the most appropriate loss trend factors for each class of business. In the evaluation of AIG's net loss reserves, loss trend factors vary slightly, depending on the particular class and nature of the business involved. For the majority of long tail casualty lines, net loss trend factors approximating 10 percent were employed. These factors are periodically reviewed and subsequently adjusted, as appropriate, to reflect emerging trends which are based upon past loss experience. Estimation of net losses for short tail business is less complex than for long tail casualty lines. Loss cost trends for many property lines can generally be assumed to be similar to the growth in exposure of such lines. For example, if the fire insurance coverage remained proportional to the actual value of the property, the growth in the property's exposure to fire loss can be approximated by the amount of insurance purchased. For other property and short tail casualty lines, the loss trend is implicitly assumed to grow at the rate that reported net losses grow from one year to the next. The concerns noted above for longer tail casualty lines with respect to the limited statistical credibility of reported net losses generally do not apply to shorter tail lines. AIG continues to receive indemnity claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter collectively referred to as environmental claims) and indemnity claims asserting injuries from asbestos. The vast majority of these asbestos and environmental claims emanate from policies written in 1984 and prior years. Commencing in 1985, standard policies contained an absolute exclusion for pollution related damage. However, AIG currently underwrites pollution impairment liability insurance on a claims made basis and excluded such claims from the analyses included herein. AIG has established a specialized claims unit which investigates and adjusts all such asbestos and environmental claims. Estimation of asbestos and environmental claims loss reserves is a difficult process. These asbestos and environmental claims cannot be estimated by conventional reserving techniques as previously described. Quantitative techniques frequently have to be supplemented by subjective considerations including managerial judgment. Significant factors which affect the trends which influence the development of asbestos and environmental claims are the inconsistent court resolutions, judicial interpretations which broaden the intent of the policies and scope of coverage and the increasing number of new claims. The case law that has emerged can be characterized as still being in its infancy and the likelihood of any firm direction in the near future is very small. Additionally, the exposure for cleanup costs of hazardous waste dump sites involves issues such as allocation of responsibility among potentially responsible parties and the government's refusal to release parties. The cleanup cost exposure may significantly change if the Congressional reauthorization of Superfund expected in 1995 dramatically changes, thereby reducing or increasing litigation and cleanup costs. In the interim, AIG and other industry members have and will continue to litigate the broadening judicial interpretation of the policy coverage and the liability issues. At the current time, it is not possible to determine the future development of asbestos and environmental claims. Such development will be affected by the extent to which courts continue to expand the intent of the policies and the scope of the coverage, as they have in the past, as well as by changes in Superfund and waste dump site coverage issues. Additional liabilities could emerge for amounts in excess of the current reserves held. Although this emergence cannot now be rea- 10 12 sonably estimated, it could have a material adverse impact on AIG's future operating results. The reserves carried for these claims at June 30, 1995 are believed to be adequate as these reserves are based on the known facts and current law. Furthermore, as AIG's net exposure retained relative to the gross exposure written was lower in 1984 and prior years, the potential impact of these claims is much smaller on the net loss reserves than on the gross loss reserves. (See the previous discussion on reinsurance collectibility herein.) The majority of AIG's exposures for asbestos and environmental claims are excess casualty coverages, not primary coverages. Thus, the litigation costs are treated in the same manner as indemnity reserves. That is, litigation expenses are included within the limits of the liability AIG incurs. Individual significant claim liabilities, where future litigation costs are reasonably determinable, are established on a case basis. AIG's estimated gross and net IBNR with respect to asbestos and environmental claims were $190 million and $50 million at June 30, 1995 and $150 million and $30 million at December 31, 1994. A summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims separately and combined at June 30, 1995 and 1994 was as follows: (in millions) - ------------------------------------------------------
1995 1994 ------------- ------------- GROSS NET Gross Net - ------------------------------------------------------ Asbestos: Reserve for losses and loss expenses at beginning of period $ 686.0 $130.2 $ 656.0 $116.7 Losses and loss expenses incurred 15.9 7.9 20.7 11.7 Losses and loss expenses paid (62.1) (15.1) (51.0) (14.9) - ------------------------------------------------------ Reserve for losses and loss expenses at end of period $ 639.8 $123.0 $ 625.7 $113.5 - ------------------------------------------------------ Environmental: Reserve for losses and loss expenses at beginning of period $ 728.1 $200.1 $ 684.8 $191.5 Losses and loss expenses incurred 190.0 57.6 53.6 40.6 Losses and loss expenses paid (79.6) (30.2) (83.8) (33.0) - ------------------------------------------------------ Reserve for losses and loss expenses at end of period $ 838.5 $227.5 $ 654.6 $199.1 - ------------------------------------------------------ Combined: Reserve for losses and loss expenses at beginning of period $1,414.1 $330.3 $1,340.8 $308.2 Losses and loss expenses incurred 205.9 59.0 74.3 52.3 Losses and loss expenses paid (141.7) (38.8) (134.8) (47.9) - ------------------------------------------------------ Reserve for losses and loss expenses at end of period $1,478.3 $350.5 $1,280.3 $312.6 - ------------------------------------------------------
A summary of asbestos and environmental claims count activity for the six month periods ended June 30, 1995 and 1994 was as follows:
------------------------------------------------------------------------------------------------------------------ 1995 1994 ---------------------------------- ---------------------------------- ASBESTOS ENVIRONMENTAL COMBINED Asbestos Environmental Combined - ------------------------------------------------------------------------------------------------------------------ Claims at beginning of period 5,947 16,223 22,170 5,522 16,661 22,183 Claims during period: Opened 781 2,157 2,938 722 1,743 2,465 Settled (80) (304) (384) (48) (266) (314) Dismissed or otherwise resolved (373) (1,067) (1,440) (638) (1,912) (2,550) - ------------------------------------------------------------------------------------------------------------------ Claims at end of period 6,275 17,009 23,284 5,558 16,226 21,784 - ------------------------------------------------------------------------------------------------------------------
11 13 The average cost per claim settled, dismissed or otherwise resolved for the six month periods ended June 30, 1995 and 1994 was as follows: - ------------------------------------------------------
1995 1994 --------------- ---------------- GROSS NET Gross Net - ----------------------------------------------------------- Asbestos $137,100 $19,000 $74,300 $21,700 Environmental 58,100 22,000 38,500 15,200 Combined 77,700 21,300 47,100 16,700 - -----------------------------------------------------------
Recently, an insurance rating agency developed a survival ratio to measure the number of years it would take a company to exhaust both its asbestos and environmental reserves for losses and loss expenses based on that company's current level of asbestos and environmental claims payments. The higher the ratio, the more years the reserves for losses and loss expenses cover these claims payments. These ratios are computed based on the respective ending reserves for losses and loss expenses over the respective claims settlements during the fiscal year. Such payments include indemnity payments and legal and loss adjustment payments. It should be noted, however, that this is an extremely simplistic approach to measuring asbestos and environmental reserve levels. Many factors, such as aggressive settlement procedures, mix of business and level of coverage provided have significant impact on the amount of asbestos and environmental losses and loss expense reserves, ultimate payments thereof and the resultant ratio. In addition to the study published by that insurance rating agency, another published study projected significantly lower ultimate costs for toxic waste cleanups for the insurance industry. The developed survival ratios include both involuntary and voluntary indemnity payments. Involuntary payments include court judgments; court orders; covered claims with no coverage defenses; state mandated cleanup costs; claims where AIG's coverage defenses are minimal; and settlements made less than six months before the first trial setting. Also, AIG considers all legal and loss adjustment payments as involuntary. AIG believes voluntary indemnity payments should be excluded from the survival ratio. The special asbestos and environmental claims unit actively manages AIG's asbestos and environmental claims and proactively pursues early settlement of environmental claims for all known and unknown sites. As a result, AIG reduces its exposure to future environmental loss contingencies. Accordingly, AIG's annualized survival ratios for involuntary asbestos and environmental claims, separately and combined, were estimated as follows for the six month periods ended June 30, 1995 and 1994: - ------------------------------------------------------
1995 1994 ------------- ---------------- GROSS NET Gross Net - ----------------------------------------------------------- Involuntary survival ratios: Asbestos 5.2 4.1 6.1 3.8 Environmental 12.8 8.8 9.8 6.4 Combined 8.2 8.2 7.8 5.3 - -----------------------------------------------------------
AIG's operations are negatively impacted under guarantee fund assessment laws which exist in most states. As a result of operating in a state which has guarantee fund assessment laws, a solvent insurance company may be assessed for certain obligations arising from the insolvencies of other insurance companies which operated in that state. AIG generally records these assessments upon notice. Additionally, certain states permit at least a portion of the assessed amount to be used as a credit against a company's future premium tax liabilities. Therefore, the ultimate net assessment cannot reasonably be estimated. The guarantee fund assessments, net of credits for 1994 were $48.2 million. Based upon current information, AIG does not anticipate that its net assessment will be significantly different in 1995. Also, AIG is required to participate in various involuntary pools (principally workers' compensation business) which provide insurance coverage for those not able to obtain such coverage in the voluntary markets. This participation is also recorded upon notification, as these amounts cannot reasonably be estimated. 12 14 Life Insurance Operations Life insurance operations for the six months ended June 30, 1995 and 1994 were as follows: (in thousands) - ------------------------------------------------------
1995 1994 - ------------------------------------------------------ Premium income: Domestic $ 245,653 $ 187,189 Foreign 3,591,498 2,984,466 - ------------------------------------------------------ Total $ 3,837,151 $ 3,171,655 - ------------------------------------------------------ Net investment income: Domestic $ 394,157 $ 284,056 Foreign 665,412 551,199 - ------------------------------------------------------ Total $ 1,059,569 $ 835,255 - ------------------------------------------------------ Operating income before realized capital gains: Domestic $ 26,070 $ 17,383 Foreign 469,857 390,283 - ------------------------------------------------------ Total $ 495,927 $ 407,666 Realized capital gains 1,748 32,719 - ------------------------------------------------------ Operating income $ 497,675 $ 440,385 - ------------------------------------------------------ Life insurance in-force: Domestic $ 51,210,304 $ 35,734,985 Foreign 363,054,434 262,534,038 - ------------------------------------------------------ Total $414,264,738 $298,269,023 - ------------------------------------------------------
AIG's life insurance operations continued to show growth as a result of overseas operations, particularly in Asia. AIG's life premium income in the first six months of 1995 increased 21.0 percent over the same period in 1994. Foreign life operations produced 93.6 percent and 94.1 percent of the life premium income in 1995 and 1994, respectively. As previously discussed, the U.S. dollar declined in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, the translation of foreign life premium income into U.S. dollars for purposes of consolidation caused the increase in total premium income to be approximately five percentage points greater than it would have been if translated utilizing exchange rates prevailing in the first six months of 1994. Life insurance net investment income increased 26.9 percent in the first six months of 1995 over the same period in 1994. The growth in net investment income was primarily attributable to new cash flow for investment. The new cash flow was generated from life insurance operating net cash flow and included the compounding of previously earned and reinvested net investment income. (See also the discussion under "Liquidity" herein.) The growth in the premium income of the domestic life segment primarily resulted from the sale of a terminal funded pension plan annuity and to a lesser extent the renewal of risk bearing premium related to corporate-owned life insurance products. Additionally, the interest income earned on the policy loans associated with the life products caused domestic investment income to increase significantly. The traditional life products, such as whole and term life and endowments, were the major contributors to the growth in foreign premium income and investment income, particularly in Asia, and continue to be the primary source of growth in the life segment. A mixture of traditional, accident and health and financial products are being sold in Japan. Life insurance realized capital gains were $1.7 million in the first six months of 1995 and $32.7 million in the same period of 1994. These realized gains resulted from the ongoing management of the life insurance investment portfolios within the overall objectives of the life insurance operations and arose primarily from the disposition of equity securities and available for sale fixed maturities and redemptions of fixed maturities. Life insurance operating income in the first six months of 1995 increased 13.0 percent to $497.7 million from $440.4 million in the same period of 1994. Excluding realized capital gains from life insurance operating income, the percent increase would be 21.7 percent in 1995. The contribution of life insurance operating income to income before income taxes amounted to 29.9 percent in 1995 compared to 31.0 percent in 1994. The risks associated with the traditional life and accident and health products are underwriting risk and investment risk. The risk associated with the financial and investment contract products is investment risk. Underwriting risk represents the exposure to loss resulting from the actual policy experience adversely emerging in comparison to the assumptions made in the product pricing associated with mortality, morbidity, termination and expenses. AIG's life companies limit their maximum underwriting exposure on traditional life insurance of a single life to approximately $1.5 million of coverage by using yearly renewable term reinsurance. The life insurance operations have not entered into assumption reinsurance transactions or surplus relief transactions during the twelve month and six month 13 15 periods ended December 31, 1994 and June 30, 1995, respectively. The investment risk represents the exposure to loss resulting from the cash flows from the invested assets, primarily long-term fixed rate investments, being less than the cash flows required to meet the obligations of the expected policy and contract liabilities and the necessary return on investments. To minimize its exposure to investment risk, AIG tests the cash flows from the invested assets and the policy and contract liabilities using various interest rate scenarios to assess whether there is a liquidity excess or deficit. If a rebalancing of the invested assets to the policy and contract claims became necessary and did not occur, a demand could be placed upon liquidity. (See also the discussion under "Liquidity" herein.) The asset-liability relationship is appropriately managed in AIG's foreign operations, even though certain territories lack qualified long-term investments or there are investment restrictions imposed by the local regulatory authorities. For example, in Japan and several Southeast Asia territories, the duration of the investments is often for a shorter period than the effective maturity of such policy liabilities. Therefore, there is a risk that the reinvestment of the proceeds at the maturity of the investments may be at a yield below that of the interest required for the accretion of the policy liabilities. At December 31, 1994, the average duration of the Japanese investment portfolio was 5.0 years, while the related Japanese policy liabilities were estimated to be 11.5 years. These durations have not significantly changed during 1995. To maintain an adequate yield to manage the interest required over the duration of the liabilities, constant management focus is required to reinvest the proceeds of the maturing securities without sacrificing investment quality. To the extent permitted under local regulation and to manage more closely both duration and the required yield, AIG may invest in qualified longer-term securities outside Japan. AIG is able to manage any asset-liability duration difference through maintenance of sufficient global liquidity and to support any operational shortfall through its international financial network. Domestically, the asset-liability management process is appropriately functioning as there are investments available to match the duration and the required yield. (See also the discussion under "Liquidity" herein.) AIG uses asset-liability management as a tool to determine the composition of the invested assets and marketing strategies. As a part of these strategies, AIG may determine that it is economically advantageous to be temporarily in an unmatched position due to an anticipated interest rate change or other economic changes. Agency and Service Fee Operations Agency and service fee operating income in the six months ended June 30, 1995 and 1994 was $32.0 million and $29.2 million, respectively. This was an increase of 9.6 percent. The increase in 1995 was due to increased commission revenue in certain of AIG's managing general agencies. Agency and service fee operating income contributed 1.9 percent to AIG's income before income taxes in 1995 compared to 2.1 percent in 1994. Financial Services Operations Financial services operations for the six months ended June 30, 1995 and 1994 were as follows:
(in thousands) - --------------------------------------------------------- 1995 1994 - --------------------------------------------------------- Revenues: International Lease Finance Corp. $ 656,091 $525,939 AIG Financial Products Corp. 110,359* 150,180* AIG Trading Group Inc. 122,388* 108,563* Other 114,419 80,598 - --------------------------------------------------------- Total $1,003,257 $865,280 - --------------------------------------------------------- Operating income: International Lease Finance Corp. $ 135,561 $124,960 AIG Financial Products Corp. 53,768 69,974 AIG Trading Group Inc. 29,916 26,979 Other, including intercompany adjustments (25,760) (7,770) - --------------------------------------------------------- Total $ 193,485 $214,143 - ---------------------------------------------------------
* Represents net trading revenues. Financial services operating income decreased 9.6 percent in the first six months of 1995 over the same period in 1994. The financial services operating income in 1995 decreased as a result of the declines in the operating income of AIG Financial Products Corp. and its subsidiaries (AIGFP) and other minor AIG financial services operations. AIGFP participates in the derivatives dealer market conducting, as principal, an interest rate, currency and equity derivative products business which includes long-dated transactions. AIGFP also enters into guaranteed investment agreements. AIGFP's revenues and operating income in the first six months of 1995 were less than those for the same period of 1994. These declines resulted from 14 16 reduced activity in the market place. Current and past performance may not provide a basis for predicting future performance. AIGFP derives substantially all its revenues from proprietary positions entered in connection with counterparty transactions rather than from speculative transactions. (See also the discussions under "Capital Resources," "Liquidity" and "Derivatives" herein.) International Lease Finance Corporation (ILFC) primarily engages in the acquisition of new and used commercial jet aircraft and the leasing and sale of such aircraft to airlines around the world. ILFC derives a substantial portion of its revenues from its leasing operations and is also engaged in the remarketing of commercial jets to and for airlines and financial institutions. As a result of the rising interest rate environment during 1994, ILFC's weighted average interest with respect to its borrowings increased during the first six months of 1995 when compared to the same period in 1994. Although the increase in interest expense had some impact on ILFC's current lease margins, it is not anticipated that the aforementioned rise in interest rates will have any significant impact on future operating income as lease margins generally lag rising interest rates. Accordingly, ILFC has negotiated appropriate lease rates on any new contracts. (See also the discussions under "Capital Resources" and "Liquidity" herein.) ILFC is exposed to loss through non-performance of aircraft lessees, through owning aircraft which it would be unable to lease or re-lease at acceptable rates or sell at lease expiration and through committing to purchase aircraft which it would be unable to lease. ILFC manages its lessee non-performance exposure through credit reviews and security deposit requirements. At June 30, 1995, only one of 296 aircraft owned was not leased. At August 1, 1995, this one aircraft has been contracted for sale. All other aircraft remain leased. Currently, 76 percent of the fleet is leased to foreign carriers which produces approximately the same percent of ILFC's rental revenues. (See also the discussions under "Capital Resources" and "Liquidity" herein.) AIG Trading Group Inc. and its subsidiaries (AIGTG), derive a substantial portion of their revenues from market making and trading activities, as principals, in foreign exchange, interest rates, precious and base metals, petroleum and natural gas. AIGTG's operating income increased in 1995 as a result of increased activity and presence in the natural gas sector. (See also the discussions under "Liquidity" and "Derivatives" herein.) Financial services operating income represented 11.6 percent of AIG's income before income taxes in the first six months of 1995. This compares to 15.1 percent in 1994. Other Operations In the first six months of 1995, AIG's equity in income of minority-owned insurance operations was $39.1 million compared to $22.0 million in the same period of 1994. The equity interest in insurance companies represented 2.3 percent of income before income taxes in 1995, compared to 1.6 percent in 1994. Other realized capital losses amounted to $14.3 million and $19.7 million in the first six months of 1995 and 1994, respectively. Minority interest represents minority shareholders' equity in income of certain consolidated subsidiaries. In the first six months of 1995, minority interest amounted to $17.5 million compared to $10.8 million for the same period of 1994. Other income (deductions) -- net includes AIG's equity in certain minor majority-owned subsidiaries and certain partially-owned companies, realized foreign exchange transaction gains and losses in substantially all currencies and unrealized gains and losses in hyperinflationary currencies, as well as the income and expenses of the parent holding company and other miscellaneous income and expenses. In the first six months of 1995 and 1994, net deductions amounted to $36.4 million and $33.2 million, respectively. Income before income taxes amounted to $1.67 billion during the first six months of 1995 and $1.42 billion in 1994. In the first six months of 1995, AIG recorded a provision for income taxes of $459.1 million compared to the provision of $363.8 million in the same period of 1994. These provisions represent effective tax rates of 27.6 percent in 1995 and 25.6 percent in 1994. The increase in the effective tax rate is in part due to the smaller domestic general adjusted underwriting loss relative to income before income taxes and in part to foreign capital losses which do not provide a current benefit. 15 17 Net income amounted to $1.21 billion in the first six months of 1995 and $1.06 billion in the same period of 1994. CAPITAL RESOURCES At June 30, 1995 and December 31, 1994, AIG had total capital funds of $18.13 billion and $16.42 billion, respectively, and total borrowings of $18.23 billion and $17.52 billion, respectively. Total borrowings at June 30, 1995 and December 31, 1994 were as follows: (in thousands) - ---------------------------------------------------------
1995 1994 - --------------------------------------------------------- Borrowings under Obligations of Guaranteed Investment Agreements (GIA) -- AIGFP $ 4,767,575 $ 5,535,318 - --------------------------------------------------------- Commercial Paper: Funding 1,444,187 1,211,280 ILFC 2,432,337* 1,960,545* AICCO 626,464 617,734 - --------------------------------------------------------- Total 4,502,988 3,789,559 - --------------------------------------------------------- Medium Term Notes: ILFC 2,306,435* 1,999,535* AIG 115,000 155,000 - --------------------------------------------------------- Total 2,421,435 2,154,535 - --------------------------------------------------------- Notes and Bonds Payable: ILFC 3,300,000* 2,950,000* AIGFP 1,121,258 1,048,061 AIG: Lire bonds 159,067 159,067 Zero coupon notes 69,483 65,831 - --------------------------------------------------------- Total 4,649,808 4,222,959 - --------------------------------------------------------- Loans and Mortgages Payable: AIGTG 287,000 890,800 ILFC 1,343,241* 678,650* AIG 257,997 247,656 - --------------------------------------------------------- Total 1,888,238 1,817,106 - --------------------------------------------------------- Total Borrowings 18,230,044 17,519,477 - --------------------------------------------------------- Borrowings not guaranteed by AIG 9,382,013 7,588,730 Matched GIA borrowings 4,767,575 5,535,318 - --------------------------------------------------------- 14,149,588 13,124,048 - --------------------------------------------------------- Remaining borrowings of AIG $ 4,080,456 $ 4,395,429 - ---------------------------------------------------------
*AIG does not guarantee or support these borrowings. GIAs usually serve as the primary source of proceeds for AIGFP's investments in a diversified portfolio of securities and derivative transactions. (See also the discussions under "Operational Review", "Liquidity" and "Derivatives" herein.) AIG Funding, Inc. (Funding), through the issuance of commercial paper, fulfills the short-term cash requirements of AIG and its subsidiaries. Funding intends to continue to meet AIG's funding requirements through the issuance of commercial paper guaranteed by AIG. This issuance of commercial paper is subject to the approval of AIG's Board of Directors. ILFC, A.I. Credit Corp. (AICCO) and AIGFP issue commercial paper for the funding of their own operations. AIG does not guarantee AICCO's or ILFC's commercial paper. However, AIG has entered into an agreement in support of AICCO's commercial paper. (See also the discussion under "Derivatives" herein.) During 1994, AIG and Funding entered into two syndicated revolving credit facilities (the Facilities) aggregating $1 billion. The Facilities consist of a $500 million 364 day revolving credit facility and a $500 million five year revolving credit facility. The Facilities represent a consolidation of domestic and international bilateral lines of credit and can be used for general corporate purposes. The Facilities also provide backup for AIG's commercial paper programs administered by Funding. At June 30, 1995, there were no borrowings outstanding under either of the Facilities, nor were any borrowings outstanding through August 1, 1995. At June 30, 1995, ILFC increased the aggregate principal amount outstanding of its medium term and term notes to $5.61 billion, a net increase of $656.9 million. At June 30, 1995, ILFC had approximately $587 million in aggregate principal amount of debt securities registered for issuance from time to time. The funds used to purchase flight equipment are derived primarily from the proceeds of ILFC's debt financing. The primary sources for the repayment of this debt and the interest expense thereon are the lease receipts received and proceeds from the sale of flight equipment. During the first six months of 1995, ILFC obtained net financing of approximately $1.79 billion and sold $100 million of Market Auction Preferred Stock (MAPS) in February, 1995. These proceeds were used for the acquisition of flight equipment costing $2.40 billion. Additional funds were provided by operating cash flow and the sale of flight equipment. (See also the discussions under "Operational Review" and "Liquidity" herein.) During the first six months of 1995, AIG did not issue any medium term notes and $40.0 million of previously issued notes matured. At June 30, 1995, AIG had $247.0 million in aggregate principal amount of debt securities registered for issuance from time to time. (See also the discussion under "Derivatives" herein.) 16 18 AIG's capital funds have increased $1.71 billion in the first six months of 1995. Unrealized appreciation of investments, net of taxes, increased $567.2 million, primarily resulting from the decline of domestic interest rates during the period. As a result of adopting Financial Accounting Standards No. 115 "Accounting for Certain Investments on Debt and Equity Securities" at December 31, 1993, unrealized appreciation of investments, net of taxes, is now subject to increased volatility resulting from the changes in the market value of bonds available for sale. The cumulative translation adjustment loss, net of taxes, increased $3.6 million. Retained earnings increased $1.13 billion, resulting from net income less dividends. 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, 1995, there were no significant statutory or regulatory issues which would impair AIG's financial condition, results of operations or liquidity. (See also the discussion under "Liquidity" herein.) LIQUIDITY At June 30, 1995, AIG's consolidated invested assets included approximately $2.35 billion of cash and short-term investments. Consolidated net cash provided from operating activities in the first six months of 1995 amounted to approximately $5.70 billion. Management believes that AIG's liquid assets, its net cash provided by operations, and access to the capital markets will enable it to meet any foreseeable cash requirements. AIG's liquidity is primarily derived from the cash flows of its general and life insurance operations. The liquidity of the combined insurance operations is derived both domestically and abroad. The combined insurance pretax cash flow is derived from two sources, underwriting operations and investment operations. In the aggregate, AIG's insurance operations generated approximately $5.6 billion in pretax cash flow during the first six months of 1995. Cash flow includes periodic premium collections, including policyholders' contract deposits, paid loss recoveries less reinsurance premiums, losses, benefits, acquisition and operating expenses paid. 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 $1.7 billion in investment income cash flow during the first six months of 1995. Investment income cash flow is primarily derived from interest and dividends received and includes realized capital gains. At June 30, 1995, the combined insurance pretax cash flow coupled with the cash and short-term investments of $2.09 billion provided the insurance operations with a significant amount of liquidity. This liquidity is available to purchase high quality and diversified fixed income securities and to a lesser extent marketable equity securities and to provide mortgage loans on real estate, policy and collateral and guaranteed loans. With this liquidity coupled with proceeds of approximately $8 billion from the maturities, sales and redemptions of fixed income securities and from the sales of marketable equity securities, AIG purchased approximately $12 billion of fixed income securities and marketable equity securities and granted $1.7 billion of mortgage loans on real estate, policy and collateral loans during the first six months of 1995. During 1995, AIG expects to receive approximately $1 billion for the redemption of held to maturity municipal bonds. During the first six months of 1995, approximately $400 million of these securities were redeemed. Through August 1, 1995 the redemptions of these bonds approximated $800 million. Prior to redemption, the yield on these bonds approximated eight percent. The current estimate of the yield on the reinvestment of the proceeds in bonds with similar characteristics is slightly less than six percent. AIG does not anticipate that these redemptions will have a significant effect on AIG's general investment income, operations, financial condition or liquidity. The following table is a summary of AIG's invested assets by significant segment, including 17 19 investment income due and accrued and real estate, at June 30, 1995 and December 31, 1994: (dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1995 December 31, 1994 ----------------------- ------------------------- INVESTED PERCENT Invested Percent ASSETS OF TOTAL Assets of Total --------------------------------------------------------------------------------------------------------------------- General insurance $25,448,716 27.5% $23,873,059 30.2% Life insurance 32,462,475 35.2 26,690,071 33.8 Financial services 33,945,749 36.8 27,920,262 35.4 Other 479,302 0.5 491,548 0.6 - ------------------------------------------------------------------------------------------------------------------------ Total $92,336,242 100.0% $78,974,940 100.0% - ------------------------------------------------------------------------------------------------------------------------
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, 1995 and December 31, 1994: (dollars in thousands) - ---------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION PERCENT -------------------- JUNE 30, 1995 GENERAL LIFE TOTAL OF TOTAL DOMESTIC FOREIGN - --------------------------------------------------------------------------------------------------------------------------- FIXED MATURITIES: AVAILABLE FOR SALE, AT MARKET VALUE(a) $ 5,669,537 $20,516,839 $26,186,376 45.2% 31.1% 68.9% HELD TO MATURITY, AT AMORTIZED COST(b) 14,369,008 -- 14,369,008 24.8 100.0 -- EQUITY SECURITIES, AT MARKET VALUE(c) 2,772,626 2,303,596 5,076,222 8.8 28.4 71.6 MORTGAGE LOANS ON REAL ESTATE, POLICY AND COLLATERAL LOANS 39,214 6,176,956 6,216,170 10.7 49.1 50.9 SHORT-TERM INVESTMENTS, INCLUDING TIME DEPOSITS, AND CASH 845,978 1,244,687 2,090,665 3.6 15.4 84.6 REAL ESTATE 347,948 680,789 1,028,737 1.8 16.4 83.6 INVESTMENT INCOME DUE AND ACCRUED 485,052 565,923 1,050,975 1.8 55.3 44.7 OTHER INVESTED ASSETS 919,353 973,685 1,893,038 3.3 47.7 52.3 - --------------------------------------------------------------------------------------------------------------------------- TOTAL $25,448,716 $32,462,475 $57,911,191 100.0% 50.0% 50.0% - ---------------------------------------------------------------------------------------------------------------------------
(a)Includes $369,261 of bonds trading securities, at market value. (b)Includes $443,708 of preferred stock, at amortized cost. (c)Includes $50,799 of preferred stock, at market value. (dollars in thousands) - ---------------------------------------------------------------------------------------------------------------------------
Percent Distribution Percent -------------------- December 31, 1994 General Life Total of Total Domestic Foreign - --------------------------------------------------------------------------------------------------------------------------- Fixed Maturities: Available for sale, at market value(a) $ 4,995,778 $16,890,709 $21,886,487 43.3% 32.2% 67.8% Held to maturity, at amortized cost(b) 13,454,310 -- 13,454,310 26.6 100.0 -- Equity securities, at market value(c) 2,799,728 2,090,421 4,890,149 9.7 30.4 69.6 Mortgage loans on real estate, policy and collateral loans 27,725 4,534,604 4,562,329 9.0 43.1 56.9 Short-term investments, including time deposits, and cash 954,901 1,212,933 2,167,834 4.3 27.6 72.4 Real estate 364,115 648,938 1,013,053 2.0 18.0 82.0 Investment income due and accrued 446,745 471,281 918,026 1.8 57.5 42.5 Other invested assets 829,757 841,185 1,670,942 3.3 50.9 49.1 - --------------------------------------------------------------------------------------------------------------------------- Total $23,873,059 $26,690,071 $50,563,130 100.0% 51.7% 48.3% - ---------------------------------------------------------------------------------------------------------------------------
(a)Includes $163,956 of bonds trading securities, at market value. (b)Includes $412,503 of preferred stock, at amortized cost. (c)Includes $61,937 of preferred stock, at market value. With respect to fixed maturities, AIG's strategy is to invest in high quality securities while maintaining diversification to avoid significant exposure to issuer, industry and/or country concentrations. The growth in the percentage distribution of fixed maturities available for sale, at market value is primarily attributable to the decline in domestic interest rates. At June 30, 1995, approximately 56 percent of the fixed maturity investments were domestic securities. Approximately 40 percent of such domestic securities were rated AAA, less than two percent 18 20 were below investment grade and less than two percent were not rated. A significant portion of the foreign insurance fixed income portfolio is rated by Moody's, Standard & Poor's (S&P) or similar foreign services. However, similar credit quality rating services are not available in all overseas locations. Thus, AIG annually reviews the credit quality of the nonrated fixed income investments, including mortgages, in its foreign portfolio. AIG applies a scale similar to that of Moody's and S&P to the rating of these securities. Coupling the ratings of this internal review with those of the independent agencies indicates that approximately 42 percent of the foreign fixed income investments were rated AAA, less than one percent were deemed below investment grade and approximately 4 percent were not rated at December 31, 1994. These percent distributions have not significantly changed at June 30, 1995. Although AIG's fixed income insurance portfolios contain only minor amounts of securities below investment grade, potentially any fixed income security is subject to downgrade for a variety of reasons subsequent to any balance sheet date. There have been no significant downgrades as at August 1, 1995. At June 30, 1995, approximately 5 percent of the fixed maturities portfolio were Collateralized Mortgage Obligations (CMOs). All of the CMOs were investment grade and approximately 83 percent of the CMOs were backed by various U.S. government agencies. Thus, credit risk was minimal. CMOs are exposed to interest rate risk as the duration and ultimate realized yield would be affected by the accelerated prepayments of the underlying mortgages. There were no interest only or principal only CMOs. When permitted by regulatory authorities and when deemed necessary to protect insurance assets, including invested assets, from currency risk and interest rate risk, AIG and its insurance subsidiaries enter into derivative transactions as end users. To date, such activities have been minor. (See also the discussion under "Derivatives" herein.) Short-term investments represent amounts invested in various internal and external money market funds, time deposits and cash. Mortgage loans on real estate, policy, collateral and guaranteed loans comprised 10.7 percent of AIG's insurance invested assets at June 30, 1995. AIG's insurance holdings of real estate mortgages amounted to $1.99 billion of which 30.8 percent was domestic. At June 30, 1995, no domestic mortgages and only a nominal amount of foreign mortgages were in default. At June 30, 1995, AIG's insurance holdings of collateral loans amounted to $834.6 million, all of which were foreign. It is AIG's practice to maintain a maximum loan to value ratio of 75 percent at loan origination. AIG's policy loans increased from $2.23 billion at December 31, 1994 to $3.39 billion at June 30, 1995, with approximately one billion dollars of this increase relating to the domestic corporate-owned life insurance product. AIG's real estate investment properties are primarily occupied by AIG's various operations. The current market value of these properties considerably exceeds their carrying value. In certain jurisdictions, significant regulatory and/or foreign governmental barriers exist which may not permit the immediate free flow of funds between insurance subsidiaries or from the insurance subsidiaries to AIG parent. These barriers generally cause only minor delays in the outward remittance of the funds. The following table is a summary of the composition of AIG's financial services invested assets at June 30, 1995 and December 31, 1994. (See also the discussions under "Operational Review," "Capital Resources" and "Derivatives" herein.) 19 21 (dollars in thousands) - -----------------------------------------------------------------------------------------------------------------------
JUNE 30, 1995 December 31, 1994 ----------------------- ------------------------- INVESTED PERCENT Invested Percent ASSETS OF TOTAL Asset of Total - ----------------------------------------------------------------------------------------------------------------------- Flight equipment primarily under operating leases, net of accumulated depreciation $12,699,360 37.4% $10,723,527 38.4% Unrealized gain on interest rate and currency swaps, options and forward transactions 7,115,557 21.0 4,650,743 16.7 Securities available for sale, at market value 4,087,537 12.0 3,796,792 13.6 Trading securities, at market value 3,322,257 9.8 2,483,637 8.9 Securities purchased under agreements to resell, at contract value 1,232,616 3.6 1,209,403 4.3 Trade receivables 2,851,780 8.4 2,629,734 9.4 Spot commodities, at market value 1,191,821 3.5 916,833 3.3 Other, including short-term investments 1,444,821 4.3 1,509,593 5.4 - ----------------------------------------------------------------------------------------------------------------------- Total $33,945,749 100.0% $27,920,262 100.0% - -----------------------------------------------------------------------------------------------------------------------
As previously discussed, the cash used for the purchase of flight equipment is derived primarily from the proceeds of ILFC's debt financing. The primary sources for the repayment of this debt and the interest expense thereon are the lease receipts received and proceeds from the sale of flight equipment. During the first six months of 1995, ILFC obtained net financing of approximately $1.79 billion and proceeds of $100 million from the sale of MAPS for the acquisition of flight equipment costing $2.40 billion. Additional funds were provided by operating cash flow and the sale of flight equipment. AIGFP's derivative transactions are carried at market value or at estimated fair value when market prices are not readily available. These values represent assessments of the present value of expected future cash flows. The recorded values of these transactions may be less than the values that might be realized, if AIGFP were to sell or close out the transactions prior to maturity. AIGFP reduces its economic risk exposure through similarly valued offsetting transactions including swaps, trading securities, forwards and futures. AIG believes that the impact of such limited liquidity would not be significant to AIG's financial condition or its overall liquidity. The significant increase in unrealized gain on interest rate and currency swaps, options and forward transactions resulted from the decline in the U.S. dollar relative to most major foreign currencies during the first six months of 1995. (See also the discussion under "Derivatives" herein.) Securities available for sale, at market value and securities purchased under agreements to resell are purchased with the proceeds of AIGFP's GIA financings and other long and short term borrowings. The decline in GIA borrowings since December 31, 1994, has been offset by the increase in certain other financial services liabilities such as securities sold under agreements to repurchase. (See also the discussion under "Capital Resources" herein.) Securities available for sale is mainly a portfolio of debt securities, where the individual securities have varying degrees of credit risk. At June 30, 1995, the average credit rating to this portfolio was AA as determined through rating agencies or internal review. There were no securities deemed below investment grade. There have been no significant downgrades through August 1, 1995. Securities purchased under agreements to resell are treated as collateralized transactions. AIGFP generally takes possession of securities purchased under agreements to resell. AIGFP further minimizes its credit risk by monitoring counterparty credit exposure and, when AIGFP deems necessary, it requires additional collateral to be deposited. Trading securities, at market value are marked to market daily and are held to meet the short-term risk management objectives of AIGFP. AIGTG acts as principal in certain foreign exchange, interest rate, precious and base metals, petroleum and natural gas trading activities. AIGTG owns inventories in the commodities in which it trades and may reduce the exposure to market risk through the use of forwards, futures and option contracts. AIGTG uses derivatives to manage the economic exposure of its various trading positions and transactions from adverse movement in interest rates, exchange rates and commodity prices. AIGTG supports its trading activities largely through trade payables, short-term borrowings and 20 22 spot commodities sold but not yet purchased. (See also the discussions under "Capital Resources" and "Derivatives" herein.) DERIVATIVES Derivatives are financial arrangements among two or more parties whose returns are linked to or "derived" from some underlying stock, bond, commodity or other asset, or some index. Derivatives payments may be based on interest rates and exchange rates and/or prices of certain securities, certain commodities, or financial or commodity indices. The types of derivative arrangements in which AIG transacts are swaps, forwards, futures, options and related instruments. The most commonly used swaps are interest rate and currency swaps. An interest rate swap is a contract between two parties to exchange interest rate payments (typically a fixed interest rate versus a variable interest rate) calculated on a notional principal amount for a specified period of time. The notional amount is not exchanged. A currency swap is similar but the notional amounts are different currencies which are typically exchanged at the commencement and termination of the swap based upon negotiated exchange rates. A futures or forward contract is a legal contract between two parties to purchase or sell at a specified future date a specified quantity of a commodity, security, currency, financial index or other instrument, at a specified price. A futures contract is traded on an exchange, while a forward contract is executed over the counter. An option contract generally provides the option purchaser with the right but not the obligation to buy or sell during a period of time or at a specified date the underlying instrument at a set price. The option writer is obligated to sell or buy the underlying item if the option purchaser chooses to exercise his right. The option writer receives a nonrefundable fee or premium paid by the option purchaser. Derivatives are generally either negotiated over the counter contracts or standardized contracts executed on an exchange. Standardized exchange traded derivatives include futures and options which can be readily bought or sold over recognized security exchanges and settled through such clearing houses. Negotiated over the counter derivatives include forwards, swaps and options. Over the counter derivatives are generally not traded like exchange traded securities. However, in the normal course of business, with the agreement of the original counterparty, these contracts may be terminated or assigned to another counterparty. Through AIGFP and AIGTG, AIG participates in the derivatives dealer market acting primarily as principal. In these derivative operations AIG structures transactions which generally permit its counterparties to enter into transactions with respect to interest and exchange rate changes, to prices of securities and to certain commodities and financial or commodity indices. All significant derivatives activities are conducted through AIGFP and AIGTG. Generally, derivatives are used by AIG's customers such as corporations, financial institutions, multinational organizations, sovereign entities, government agencies and municipalities. For example, a futures, forward or option contract can be used to protect the customers' assets or liabilities against price fluctuations. The senior management of AIG, with review by the Board of Directors, defines the policies and establishes general operating parameters for AIGFP and AIGTG. AIG's senior management has established various oversight committees to review the various financial market, operational and credit issues of AIGFP and AIGTG. The senior managements of AIGFP and AIGTG report the results of their respective operations to and review future strategies with AIG's senior management. AIG actively manages the exposures to limit the potential to loss, while maximizing the rewards afforded by these business opportunities. In doing so, AIG must manage a variety of exposures to risk including credit risk, market risk, liquidity risk and legal risk. Market risk principally arises from the uncertainty that future earnings are exposed to potential changes in volatility, interest rates, foreign exchange rates, and equity and commodity prices. AIG generally controls its exposure to market risk by taking offsetting positions. AIG's philosophy with respect to its financial services operations is to minimize or set limits for open or uncovered positions that are to be carried. Credit risk exposure is separately managed. (See the discussion on the management of credit risk below). 21 23 AIGFP does not seek to manage the market risk of each of its individual transactions through an individual offsetting transaction. Rather, AIGFP takes a portfolio approach to the management of its market risk exposure. AIGFP values its portfolio at market value or estimated fair value when market values are not readily available. These valuations represent an assessment of the present values of expected future cash flows of AIGFP's transactions and may include reserves for market risk as deemed appropriate by AIGFP's management. AIGFP evaluates the portfolio's discounted cash flows with reference to current market conditions, maturities within the portfolio and other relevant factors. Based upon this evaluation, AIGFP determines what, if any, offsetting transactions are necessary to reduce the market risk exposure of the portfolio. The aforementioned estimated fair values are based upon the use of valuation models. These models utilize, among other things, current interest, foreign exchange and volatility rates. These valuation models are integrated into the evaluation of the portfolio, as described above, in order to provide timely information for the market risk management of the portfolio. Additionally, depending upon the nature of interest rates and market movements during the day, the system will produce reports for management's consideration for intra-day offsetting positions. Overnight, the system generates reports which recommend the types of offsets management should consider for the following day. Additionally, AIGFP operates in major business centers overseas and is essentially open for business 24 hours a day. Thus, the market exposure and offset strategies are monitored, reviewed and coordinated around the clock. Therefore, offsetting adjustments can be made as and when necessary from any AIGFP office in the world. As part of its monitoring and controlling of its exposure to market risk, AIGFP applies various testing techniques which reflect potential market movements. These techniques vary by currency and are regularly changed to reflect factors affecting the derivatives portfolio. In addition to the daily monitoring, AIGFP's senior management and local risk managers conduct a weekly review of the derivatives portfolio and existing hedges. This review includes an examination of the portfolio's risk measures, such as aggregate option sensitivity to movements in market variables. AIGFP's management may change these measures to reflect their judgment and evaluation of the dynamics of the markets. This management group will also determine whether additional or alternative action is required in order to manage the portfolio. AIG utilizes an outside consultant to provide the managements of AIG and AIGFP with comfort that the system produces representative values. AIGTG's approach to managing market risk is to establish an appropriate offsetting position to a particular transaction or group of transactions depending upon the extent of market risk AIGTG wishes to reduce. AIGTG senior management has established positions and stop-loss limits for each line of business. AIGTG's traders are required to maintain positions within these limits. These positions are monitored during the day either manually or through on-line computer systems. In addition, these positions are reviewed by AIGTG management. Reports which present each trading book's position and the prior day's profit and loss are reviewed by traders, head traders and AIGTG's senior management. Based upon these and other reports, AIGTG's senior management may determine to adjust AIGTG's risk profile. AIGTG attempts to secure reliable current market prices, such as published prices or third party quotes, to value its derivatives. Where such prices are not available, AIGTG uses an internal methodology which includes interpolation or extrapolation from verifiable prices nearest to the dates of the transactions. The methodology may reflect interest and exchange rates, volatility rates and other relevant factors. A significant portion of AIGTG's business is transacted in liquid markets. Certain of AIGTG's derivative product exposures are evaluated using simulation techniques which consider such factors as changes in currency and commodity prices, interest rates, volatility levels and the effect of time. Though not indicative of the future, past volatile market scenarios have represented profit opportunities for AIGTG. 22 24 The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG included in the financial services assets and liabilities at June 30, 1995 were as follows:
(in thousands) - ----------------------------------------------------------- GROSS GROSS BALANCE UNREALIZED UNREALIZED SHEET GAINS LOSSES AMOUNT - ----------------------------------------------------------- Securities available for sale, at market value $ 205,100 $ 208,900 $4,087,537 Unrealized gain/loss on interest rate and currency swaps, options and forward transactions 7,115,557 6,298,787 -- Trading securities, at market value -- -- 3,322,257 Securities sold but not yet purchased, principally obligations of the U.S. government and government agencies, at market value -- -- 730,755 Trade receivables(a) 5,173,907 2,721,231 2,851,780 Spot commodities, at market value(b) 171,868 138,165 1,191,821 Trade payables -- 2,115,341 2,845,739 Spot commodities sold but not yet purchased, at market value 125,236 28,526 541,831 - -----------------------------------------------------------
(a)The net replacement value with respect to futures and forward contracts of AIGTG at June 30, 1995 was $2.51 billion. (b)The net replacement value with respect to purchased option contracts of AIGTG at June 30, 1995 was $391.8 million. The interest rate risk on securities available for sale, at market, is managed by taking offsetting positions on a security by security basis, thereby offsetting a significant portion of the unrealized appreciation or depreciation. At June 30, 1995, the unrealized gains and losses remaining after benefit of the offsets were $7.4 million and $11.2 million, respectively. AIGFP carries its derivatives at market or estimated fair value, whichever is appropriate. Because of limited liquidity of these instruments, the recorded estimated fair values of these derivatives may be different than the values that might be realized if AIGFP were to sell or close out the transactions prior to maturity. (See also the discussions under "Operational Review: Financial Services" and "Liquidity" herein.) Trading securities, at market value, and securities sold but not yet purchased are marked to market daily with the unrealized gain or loss being recognized in income at that time. These securities are held to meet the short-term risk management objectives of AIGFP. AIGTG acts as principal in certain foreign exchange, interest rate, precious and base metals, petroleum and natural gas trading activities. AIGTG owns inventories in the commodities in which it trades. These inventories are carried at market and may be substantially hedged. AIGTG uses derivatives to manage the economic exposure of its various trading positions and transactions from adverse movements in interest rates, exchange rates and commodity prices. (See also the discussions under "Operational Review: Financial Services" and "Liquidity" herein.) A counterparty may default on any obligation to AIG, including a derivative contract. Credit risk is a consequence of extending credit and/or carrying trading and investment positions. Credit risk exists for a derivative contract when that contract has an estimated positive fair value. To help manage this risk, the credit departments of AIGFP and AIGTG operate within the guidelines of the AIG Credit Risk Committee, which sets credit policy and limits for counterparties and provides limits for derivative transactions with counterparties having different credit ratings. In addition to credit ratings, this committee takes into account the industry and country of the counterparty. Transactions which fall outside these pre-established guidelines require the approval of the AIG Credit Risk Committee. It is also AIG's policy to establish reserves for potential credit impairment when necessary. AIGFP and AIGTG determine the credit quality of each of their counterparties taking into account credit ratings assigned by recognized statistical rating organizations. If it is determined that a counterparty requires credit enhancement, then one or more enhancement techniques will be used. Examples of such enhancement techniques include letters of credit, guarantees, collateral and margin agreements. The significant majority of AIGFP's transactions are contracted and documented under master netting agreements that provide for set-off and close out netting in the event of default. Excluding regu- 23 25 lated exchange transactions, AIGTG, whenever possible, enters into netting agreements with its counterparties which are similar in effect to those discussed above. The following tables provide the notional and contractual amounts of AIGFP's derivatives portfolio at June 30, 1995. The notional amounts used to express the extent of AIGFP's involvement in derivatives transactions represent a standard of measurement of the volume of AIGFP's swaps business. Notional amount is not a quantification of market risk or credit risk and it may not necessarily be recorded on the balance sheet. Notional amounts represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps. The timing and the amount of cash flows relating to foreign exchange forwards and exchange traded futures and options contracts are determined by the contractual agreements. AIGFP extensively uses legally enforceable master closeout netting agreements. Thus, contracts subject to such arrangements permit AIGFP to offset its receivables from and payables to the same counterparty. As a result, the net replacement value represents the net sum of estimated positive fair values after the application of such agreements and collateral held. The net replacement value most closely represents the net credit risk to AIGFP or the maximum amount exposed to potential loss. The following table presents AIGFP's derivatives portfolio by maturity and type of derivative at June 30, 1995 and December 31, 1994:
(in thousands) - ----------------------------------------------------------------------------------------------------------------------------- REMAINING LIFE ---------------------------------------------- AFTER ONE AFTER FIVE WITHIN YEAR BUT YEARS BUT AFTER ONE WITHIN WITHIN TEN TOTAL Total YEAR FIVE YEARS TEN YEARS YEARS 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Interest rate, currency and equity/commodity swaps and swaptions: Notional amount: Interest rate swaps $11,548,000 $62,764,000 $34,447,000 $ 9,621,000 $118,380,000 $105,581,000 Currency swaps 2,198,000 13,319,000 6,619,000 1,863,000 23,999,000 18,260,300 Equity/commodity swaps 1,689,000 529,000 702,000 1,611,000 4,531,000 817,000 Swaptions 1,122,000 5,917,000 4,148,000 1,790,000 12,977,000 9,060,000 - ----------------------------------------------------------------------------------------------------------------------------- Total $16,557,000 $82,529,000 $45,916,000 $14,885,000 $159,887,000 $133,718,300 - ----------------------------------------------------------------------------------------------------------------------------- Futures, options and forward contracts: Exchange traded futures and options contracts contractual amount* $22,120,277 -- -- -- $ 22,120,277 $ 13,182,900 - ----------------------------------------------------------------------------------------------------------------------------- Over the counter forward contracts contractual amount $ 2,759,000 $ 78,000 -- -- $ 2,837,000 $ 2,048,700 - -----------------------------------------------------------------------------------------------------------------------------
*Exchange traded futures and options are not deemed to have significant credit exposure as the exchanges guarantee that every contract will be properly settled. 24 26 At June 30, 1995, the counterparty credit quality by derivative product with respect to the net replacement value of AIGFP's derivatives portfolio was as follows: (in thousands) - ----------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE -------------------------------- FUTURES, OPTIONS SWAPS AND AND SWAPTIONS FORWARD CONTRACTS TOTAL - ---------------------------------------------------------------------------------------------------------------------- Counterparty credit quality: AAA $1,645,526 $ 43,870 $1,689,396 AA 2,240,975 45,811 2,286,786 A 1,652,720 712 1,653,432 BBB 1,421,841 -- 1,421,841 Below investment grade 30,754 -- 30,754 Not externally rated -- exchanges -- 33,348 33,348 - ---------------------------------------------------------------------------------------------------------------------- Total $6,991,816 $123,741 $7,115,557 - ----------------------------------------------------------------------------------------------------------------------
At June 30, 1995, the counterparty breakdown by industry with respect to the net replacement value of AIGFP's derivatives portfolio was as follows: (in thousands) - ----------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE -------------------------------- FUTURES, OPTIONS SWAPS AND AND SWAPTIONS FORWARD CONTRACTS TOTAL - ---------------------------------------------------------------------------------------------------------------------- Non-U.S. banks $3,091,811 $ 16,472 $3,108,283 Insured municipalities 637,381 -- 637,381 U.S. industrials 601,800 -- 601,800 Governmental 836,160 -- 836,160 Non-U.S. financial service companies 92,939 -- 92,939 Non-U.S. industrials 655,466 133 655,599 Special purpose 67,589 -- 67,589 U.S. banks 229,532 33,097 262,629 U.S. financial service companies 520,108 40,691 560,799 Supranationals 259,030 -- 259,030 Exchanges -- 33,348 33,348 - ---------------------------------------------------------------------------------------------------------------------- Total $6,991,816 $123,741 $7,115,557 - ----------------------------------------------------------------------------------------------------------------------
The following tables provide the notional and contractual amounts of AIGTG's derivatives portfolio at June 30, 1995. In addition, the estimated positive fair values associated with the derivatives portfolio are also provided and include a maturity profile for the June 30, 1995 balances based upon the expected timing of the future cash flows. The notional amounts used to express the extent of AIGTG's involvement in derivatives transactions represent a standard of measurement of the volume of AIGTG's swaps business. Notional amount is not a quantification of the market or credit risks of the positions and is not necessarily recorded on the balance sheet. Notional amounts represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps. The timing and the amount of cash flows relating to foreign exchange forwards and exchange traded futures and options contracts are determined by the contractual agreements. The gross replacement values presented represent the sum of the estimated fair values of all of AIGTG's derivatives contracts at June 30, 1995. These values do not represent the credit risk to AIGTG. Net replacement values presented represent the net sum of estimated positive fair values after the application of legally enforceable master closeout netting agreements and collateral held. The net replacement value most closely represents the net credit risk to AIGTG or the maximum amount exposed to potential loss. 25 27 The following tables present AIGTG's derivatives portfolio and associated credit exposure, if applicable, by maturity and type of derivative at June 30, 1995 and December 31, 1994:
(in thousands) - ----------------------------------------------------------------------------------------------------------------------------- REMAINING LIFE ------------------------------------------- AFTER ONE AFTER FIVE WITHIN YEAR BUT YEARS BUT AFTER ONE WITHIN WITHIN TEN TOTAL Total YEAR FIVE YEARS TEN YEARS YEARS 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Futures and forward contracts and interest swaps: Exchange traded futures contracts contractual amount(a) $ 30,836,839 $ 3,697,885 $ 90,063 $ -- $ 34,624,787 $ 21,504,155 - ----------------------------------------------------------------------------------------------------------------------------- Over the counter forward contracts contractual amount(b) $222,765,049 $13,550,864 $2,205,869 $509,400 $239,031,182 $191,178,023 - ----------------------------------------------------------------------------------------------------------------------------- Futures and forward contracts and interest swaps: Credit exposure: Gross replacement value $ 4,440,968 $ 614,565 $ 99,676 $ 18,698 $ 5,173,907 $ 3,531,000 Master netting arrangements (2,149,060) (357,370) (69,685) (10,190) (2,586,305) (1,577,407) Collateral (77,445) -- -- -- (77,445) (82,747) - ----------------------------------------------------------------------------------------------------------------------------- Net replacement value(c) $ 2,214,463 $ 257,195 $ 29,991 $ 8,508 $ 2,510,157 $ 1,870,846 - -----------------------------------------------------------------------------------------------------------------------------
(a)Exchange traded futures are not deemed to have significant credit exposure as the exchanges guarantee that every contract will be properly settled. (b)Includes interest rate swaps with notional amounts of approximately $4.27 billion and $549.0 million at June 30, 1995 and December 31, 1994, respectively. (c)The net replacement values with respect to futures and forward contracts are presented as a component of trade receivables in the accompanying balance sheet.
(in thousands) - ----------------------------------------------------------------------------------------------------------------------------- REMAINING LIFE ------------------------------------------- AFTER ONE AFTER FIVE WITHIN YEAR BUT YEARS BUT AFTER ONE WITHIN WITHIN TEN TOTAL Total YEAR FIVE YEARS TEN YEARS YEARS 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Option contracts: Contractual amounts for purchased options: Exchange traded(a) $ 1,779,911 $ 174,529 -- -- $ 1,954,440 $ 1,410,501 Over the counter 20,553,404 2,491,913 -- -- 23,045,317 13,826,578 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 22,333,315 $ 2,666,442 -- -- $ 24,999,757 $ 15,237,079 - ----------------------------------------------------------------------------------------------------------------------------- Credit exposure for purchased options: Gross replacement value $ 475,207 $ 122,874 $ 3,050 -- $ 601,131 $ 369,499 Master netting arrangements (152,376) (56,559) -- -- (208,935) (71,773) Collateral (425) -- -- -- (425) (22,594) - ----------------------------------------------------------------------------------------------------------------------------- Net replacement value(b) $ 322,406 $ 66,315 $ 3,050 -- $ 391,771 $ 275,132 - ----------------------------------------------------------------------------------------------------------------------------- Contractual amounts for sold options(c) $ 22,491,913 $ 2,709,999 -- -- $ 25,201,912 $ 14,157,868 - -----------------------------------------------------------------------------------------------------------------------------
(a)Exchange traded options are not deemed to have significant credit exposure as the exchanges guarantee that every option will be properly settled. (b)The net replacement value with respect to purchased options is presented as a component of spot commodities, at market value in the accompanying balance sheet. (c)Options obligate AIGTG to buy or sell the underlying item if the option purchaser chooses to exercise. The amounts do not represent credit exposures. 26 28 At June 30, 1995, the counterparty credit quality by derivative product with respect to the net replacement value of AIGTG's derivatives portfolio was as follows:
(in thousands) - ------------------------------------------------------------------------------------------------------------------------ NET REPLACEMENT VALUE ------------------------------------------------- FUTURES AND FORWARD CONTRACTS AND INTEREST RATE SWAPS PURCHASED OPTIONS TOTAL - ------------------------------------------------------------------------------------------------------------------------ Counterparty credit quality: AAA $ 242,138 $ 52,262 $ 294,400 AA 961,136 159,558 1,120,694 A 581,557 81,442 662,999 BBB 76,109 4,626 80,735 Below investment grade 28,654 5,384 34,038 Not externally rated, including exchange traded futures and options 620,563 88,499 709,062 - ------------------------------------------------------------------------------------------------------------------------ Total $ 2,510,157 $ 391,771 $2,901,928 - ------------------------------------------------------------------------------------------------------------------------
At June 30, 1995, the counterparty breakdown by industry with respect to the net replacement value of AIGTG's derivatives portfolio was as follows:
(in thousands) - ------------------------------------------------------------------------------------------------------------------------ NET REPLACEMENT VALUE ------------------------------------------------- FUTURES AND FORWARD CONTRACTS AND INTEREST RATE SWAPS PURCHASED OPTIONS TOTAL - ------------------------------------------------------------------------------------------------------------------------ Non-U.S. banks $ 876,311 $ 175,477 $1,051,788 U.S. industrials 331,879 12,492 344,371 Governmental 187,768 23,861 211,629 Non-U.S. financial service companies 49,200 16,677 65,877 Non-U.S. industrials 164,002 58,819 222,821 U.S. banks 391,164 40,083 431,247 U.S. financial service companies 210,233 38,197 248,430 Exchanges 299,600 26,165 325,765 - ------------------------------------------------------------------------------------------------------------------------ Total $ 2,510,157 $ 391,771 $2,901,928 - ------------------------------------------------------------------------------------------------------------------------
Generally, AIG manages and operates its businesses in the currencies of the local operating environment. Thus, exchange gains or losses occur when AIG's foreign currency net investment is affected by changes in the foreign exchange rates relative to the U.S. dollar from one reporting period to the next. As an end-user, AIG and its subsidiaries, including its insurance subsidiaries, use derivatives to aid in managing AIG's foreign exchange translation exposure. Derivatives may also be used to minimize certain exposures with respect to AIG's debt financing and insurance investment operations; to date, such activities have been minor. AIG, through its Foreign Exchange Operating Committee, evaluates its worldwide consolidated net asset or liability positions and manages AIG's translation exposure to adverse movement in currency exchange rates. AIG may use forward exchange contracts and purchased options where the cost of such is reasonable and markets are liquid to reduce these exchange translation exposures. The exchange gain or loss with respect to these hedging instruments is recorded on an accrual basis as a component of the cumulative translation adjustment account in capital funds. AIG's largest currency net investments have had historically stable exchange rates with respect to the U.S. dollar. Management of AIG's liquidity profile is designed to ensure that even under adverse conditions AIG is able to raise funds at the most economical cost to fund maturing liabilities and capital and liquidity requirements of its subsidiaries. Sources of funds considered in meeting these objectives include guaranteed investment agreements, issuance of long and short-term debt, maturities and sales of securities available for sale, securities sold under repurchase agreements, trade payables, securities and spot commodities sold, not yet purchased, issu- 27 29 ance of equity, and cash provided from operations. AIG's strong capital position is integral to managing liquidity, as it enables AIG to raise funds in diverse markets worldwide. (See also the discussions under "Capital Resources" and "Liquidity" herein.) Legal risk arises from the uncertainty of the enforceability, through legal or judicial processes, of the obligations of AIG's clients and counterparties, including contractual provisions intended to reduce credit exposure by providing for the netting of mutual obligations. (See also the discussion on master netting agreements above.) AIG seeks to eliminate or minimize such uncertainty through continuous consultation with internal and external legal advisors, both domestically and abroad, in order to understand the nature of legal risk, to improve documentation and to strengthen transaction structure. Over the counter derivatives are not transacted in an exchange traded environment. The futures exchanges maintain considerable financial requirements and surveillance to ensure the integrity of exchange traded futures and options. Over the counter derivatives dealers have drafted a code of conduct to provide standards for their industry. The alternative to self-regulation is federal regulation. AIG supports self-regulation and expects to adhere to promulgated standards. RECENT DEVELOPMENTS In May 1995, the Board of Directors of AIG declared a common stock split in the form of a 50 percent common stock dividend which was paid July 28, 1995 to shareholders of record on June 30, 1995. A quarterly dividend of 8.5 cents per share was declared on the common stock, payable September 22, 1995 to shareholders of record on September 8, 1995. For the six month periods ended June 30, 1995 and 1994, the earnings per common share on net income prior to the common stock split in the form of a 50 percent common stock dividend were $3.82 and $3.33, respectively. Earnings per common share on net income after providing for the effect of the common stock split in the form of a 50 percent common stock dividend were $2.54 and $2.22, respectively. In 1989, the National Association of Insurance Commissioners (NAIC) adopted the "NAIC Solvency Policing Agenda for 1990". Included in this agenda was the development of Risk-Based Capital (RBC) requirements. RBC relates an individual insurance company's statutory surplus to the risk inherent in its overall operations. AIG believes that the development of RBC standards is a positive step for the insurance industry but further believes the standards in their present form may lead to an inefficient deployment of industry capital. As experience is gained with the application of RBC standards, it is likely that adjustments to the formula will be made. At December 31, 1994, the adjusted capital of each of AIG's four domestic life companies exceeded each of their RBC standards by considerable margins. There has been no significant change during the first six months of 1995. RBC standards for property and casualty insurers were finalized in principle in December 1993 and were effective with the 1994 statutory financial statements. At December 31, 1994, the adjusted capital of each of AIG's domestic general companies exceeded each of their RBC standards by considerable margins. Additionally, no AIG company is on any regulatory or similar "watch list". There has been no significant change during the first six months of 1995. ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of" (FASB 121). This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and an impairment loss must be recognized. FASB 121 is effective for AIG commencing January 1, 1996. AIG does not anticipate adopting FASB 121 before that date. AIG believes that the adoption of this statement will have an immaterial impact on the results of operations, financial condition and liquidity. 28 30 PART II -- OTHER INFORMATION ITEM #4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders held on May 24, 1995, the shareholders: (a) elected sixteen directors as follows:
NOMINEE SHARES FOR SHARES WITHHELD ------------------------------------------------------------ ---------- --------------- M. Bernard Aidinoff......................................... 281,731,089 3,208,433 Lloyd M. Bentsen............................................ 283,853,293 1,086,229 Marshall A. Cohen........................................... 284,025,162 914,360 Barber B. Conable, Jr....................................... 284,014,711 924,811 Martin Feldstein............................................ 284,031,225 908,297 Houghton Freeman............................................ 283,625,429 1,314,093 Leslie L. Gonda............................................. 284,005,609 933,913 Maurice R. Greenberg........................................ 283,602,546 1,336,976 Carla A. Hills.............................................. 281,753,470 3,186,052 Frank J. Hoenemeyer......................................... 284,013,384 926,138 John J. Howell.............................................. 284,005,863 933,659 Edward E. Matthews.......................................... 284,016,473 923,049 Dean P. Phypers............................................. 284,045,568 893,954 John J. Roberts............................................. 283,591,163 1,348,359 Ernest E. Stempel........................................... 283,585,078 1,354,444 Thomas R. Tizzio............................................ 283,620,633 1,318,889
(b) approved, by a vote of 268,573,834 shares to 15,034,426 shares, with 1,331,262 abstentions, a proposal to amend the Restated Certificate of Incorporation to increase the authorized number of shares of Common Stock from 500,000,000 shares to 1,000,000,000 shares; (c) approved, by a vote of 284,234,340 shares to 260,772 shares with 444,410 abstentions, a proposal to select Coopers & Lybrand L.L.P. as independent accountants for 1995; (d) rejected, by a vote of 43,224,942 shares for and 221,519,449 shares against, with 6,105,035 shares abstaining and 14,090,096 shares not voting, a shareholder proposal requesting AIG to change the composition of the Nominating Committee; and (e) rejected, by a vote of 14,602,410 shares for and 245,331,905 shares against, with 10,915,111 shares abstaining and 14,090,096 shares not voting, a shareholder proposal requesting AIG to initiate a study relating to investment in tobacco companies. 29 31 PART II -- OTHER INFORMATION ITEM #6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See accompanying Exhibit Index. (b) There have been no reports on Form 8-K filed during the quarter ended June 30, 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN INTERNATIONAL GROUP, INC. -------------------------------------- (Registrant) s/s HOWARD I. SMITH -------------------------------------- Howard I. Smith Executive Vice President and Comptroller (Chief Accounting Officer) Dated: August 11, 1995 30 32 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION LOCATION - ------- ----------------------------------------------------------------- ------------------ 2 Plan of acquisition, reorganization, arrangement, liquidation or succession....................................................... None 4 Instruments defining the rights of security holders, including indentures....................................................... Not required to be filed. 10 Material contracts............................................... None 11 Statement re computation of per share earnings................... Filed herewith. 12 Statement re computation of ratios............................... Filed herewith. 15 Letter re unaudited interim financial information................ None 18 Letter re change in accounting principles........................ None 19 Report furnished to security holders............................. None 22 Published report regarding matters submitted to vote of security holders.......................................................... None 23 Consents of experts and counsel.................................. None 24 Power of attorney................................................ None 27 Financial Data Schedule.......................................... Provided herewith. 99 Additional exhibits.............................................. None
31

1 EXHIBIT 11 AMERICAN INTERNATIONAL GROUP, INC. COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30, ------------------------- --------------------- 1995 1994 1995 1994 ---------- ---------- -------- -------- Average outstanding shares used in the computation of per share earnings: Common stock(a)............................ 506,086 506,086 506,086 506,086 Common stock in treasury(a)................ (32,153) (30,542) (32,070) (31,240) ---------- ---------- -------- -------- 473,933 475,544 474,016 474,846 ========= ========= ======== ======== Net income (applicable to common stock)...... $1,205,941 $1,055,312 $633,785 $549,694 ========= ========= ======== ======== Net income per share......................... $ 2.54 $ 2.22 $ 1.34 $ 1.16 ========= ========= ======== ========
- --------------- (a) Adjusted for a common stock split in the form of a 50 percent common stock dividend paid July 28, 1995. The effects of all other common stock equivalents are not significant. 32

1 EXHIBIT 12 AMERICAN INTERNATIONAL GROUP, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS, EXCEPT RATIOS)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30, ------------------------- ------------------------- 1995 1994 1995 1994 ---------- ---------- ---------- ---------- Income before income taxes................ $1,665,089 $1,419,103 $ 879,295 $ 740,693 Less -- Equity income of less than 50% owned persons........................... 41,042 20,730 22,741 12,322 Add -- Dividends from less than 50% owned persons................................. 2,940 2,743 1,791 1,772 ---------- ---------- ---------- ---------- 1,626,987 1,401,116 858,345 730,143 Add -- Fixed charges........................... 780,720 704,956 411,357 346,265 Less -- Capitalized interest.................... 27,490 22,272 13,578 10,927 ---------- ---------- ---------- ---------- Income before income taxes and fixed charges................................. $2,380,217 $2,083,800 $1,256,124 $1,065,481 ========= ========= ========= ========= Fixed charges: Interest costs.......................... $ 740,880 $ 671,540 $ 391,437 $ 329,557 Rent expense *.......................... 39,840 33,416 19,920 16,708 ---------- ---------- ---------- ---------- Total fixed charges.................. $ 780,720 $ 704,956 $ 411,357 $ 346,265 ========= ========= ========= ========= Ratio of earnings to fixed charges........ 3.05 2.96 3.05 3.08
- --------------- * The proportion deemed representative of the interest factor. The ratio shown is significantly affected as a result of the inclusion of the fixed charges and operating results of AIG Financial Products Corp. and its subsidiaries (AIGFP). AIGFP structures borrowings through guaranteed investment agreements and engages in other complex financial transactions, including interest rate and currency swaps. In the course of its business, AIGFP enters into borrowings that are primarily used to purchase assets that yield rates greater than the rates on the borrowings with the intent of earning a profit on the spread and to finance the acquisition of securities utilized to hedge certain transactions. The pro forma ratios of earnings to fixed charges, which exclude the effects of the operating results of AIGFP, are 4.74 and 5.59 for the second quarter and 4.66 and 5.61 for the first six months of 1995 and 1994, respectively. As AIGFP will continue to be a subsidiary, AIG expects that these ratios will continue to be lower than they would be if the fixed charges and operating results of AIGFP were not included therein. 33

7 1 US DOLLARS 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 1 25,922,891 13,925,300 14,509,700 5,286,674 2,022,044 1,274,296 89,933,601 66,007 16,812,539 5,760,760 130,533,693 53,200,076 7,011,422 0 10,649,547 13,462,469 843,477 0 0 17,284,191 130,533,693 9,439,793 1,817,377 35,000 (36,436) 7,635,138 830,369 1,372,200 1,665,089 459,148 1,205,941 0 0 0 1,205,941 2.54 2.54 18,418,900 4,308,500 0 987,200 2,543,400 19,196,800 0