1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
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Commission file number 1-8787
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AMERICAN INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2592361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Pine Street, New York, New York 10270
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-7000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $2.50 Per Share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /.
The aggregate market value of the shares of all classes of voting stock of
the registrant held by non-affiliates of the registrant on January 31, 1996 was
approximately $32,958,850,000 computed upon the basis of the closing sales price
of the Common Stock on that date.
As of January 31, 1996, there were outstanding 474,216,248 shares of Common
Stock, $2.50 par value, of the registrant.
Documents Incorporated by Reference:
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 20, 1996 is incorporated by reference in
Part III of this Form 10-K.
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2
PART I
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ITEM 1. BUSINESS
American International Group, Inc. ("AIG"), a Delaware corporation, is a holding
company which through its subsidiaries is primarily engaged in a broad range of
insurance and insurance-related activities and financial services in the United
States and abroad. AIG's primary activities include both general and life
insurance operations. The principal insurance company subsidiaries are American
Home Assurance Company ("American Home"), National Union Fire Insurance Company
of Pittsburgh, Pa. ("National Union"), New Hampshire Insurance Company ("New
Hampshire"), Lexington Insurance Company ("Lexington"), American International
Underwriters Overseas, Ltd. ("AIUO"), American Life Insurance Company ("ALICO"),
American International Assurance Company, Limited ("AIA"), Nan Shan Life
Insurance Company, Ltd. ("Nan Shan"), The Philippine American Life Insurance
Company ("PHILAM"), American International Reinsurance Company, Ltd. and United
Guaranty Residential Insurance Company. For information on AIG's business
segments, see Note 18 of Notes to Financial Statements.
All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 1996, beneficial ownership of
approximately 16.0 percent, 3.5 percent and 2.4 percent of AIG's Common Stock,
$2.50 par value ("Common Stock"), was held by Starr International Company, Inc.
("SICO"), The Starr Foundation and C. V. Starr & Co., Inc. ("Starr"),
respectively.
At December 31, 1995, AIG and its subsidiaries had approximately 34,500
employees.
The following table shows the general development of the business of AIG on
a consolidated basis, the contributions made to AIG's consolidated revenues and
operating income and the assets held, in the periods indicated by its general
insurance, life insurance, agency and service fee and financial services
operations, equity in income of minority-owned insurance companies and realized
capital gains (losses). (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 1 and 18 of Notes to
Financial Statements.)
(dollars in thousands)
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Years Ended December 31, 1995 1994 1993 1992 1991
===========================================================================================================================
General insurance operations:
Gross premiums written $ 17,895,120 $ 16,392,409 $ 14,901,255 $ 13,615,715 $ 13,336,248
Net premiums written 11,893,022 10,865,753 10,025,903 9,138,528 9,146,394
Net premiums earned 11,405,731 10,286,831 9,566,640 9,209,390 9,104,632
Adjusted underwriting profit (loss) (a) 361,583 147,517 10,391 (195,084) (4,809)
Net investment income 1,545,717 1,435,092 1,340,480 1,252,086 1,163,461
Realized capital gains 68,075 52,487 65,264 67,134 89,275
Operating income 1,975,375 1,635,096 1,416,135 1,124,136 1,247,927
Identifiable assets (b) 56,074,024 51,372,100 46,981,720 42,416,509(b) 29,278,641
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Loss ratio 75.9 77.8 79.2 81.5 78.9
Expense ratio 21.1 20.9 20.9 20.9 21.5
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Combined ratio 97.0 98.7 100.1 102.4 100.4
===========================================================================================================================
Life insurance operations:
Premium income 8,038,150 6,724,321 5,746,046 4,853,087 4,059,354
Net investment income 2,264,905 1,748,428 1,499,714 1,313,838 1,139,793
Realized capital gains 32,703 86,706 54,576 43,257 23,219
Operating income 1,090,605 952,484 781,611 667,453 561,839
Identifiable assets (b) 43,280,484 34,496,652 28,381,164 23,472,687(b) 19,986,909
Insurance in-force at end of year 376,097,107 333,378,811 257,162,102 210,605,862 193,226,288
Agency and service fee operations:
Commissions, management and other fees 260,018 236,778 237,738 225,686 211,210
Net investment income 1,855 1,162 1,903 2,611 4,754
Operating income 56,909 54,129 60,247 52,570 46,202
Identifiable assets 149,392 184,310 179,297 157,280 188,638
Financial services operations:
Commissions, transaction and other fees 2,204,090 1,783,239 1,529,079 1,404,902 1,073,553
Operating income 417,741 404,853 390,038 346,442 222,156
Identifiable assets 36,833,772 30,660,776 25,514,258 27,138,230 20,485,838
Equity in income of minority-owned
insurance operations 81,722 56,005 39,589 27,929 28,806
Other realized capital losses (28,944) (52,340) (12,742) (11,293) (14,144)
Revenues (c) 25,874,022 22,358,709 20,068,287 18,388,627 16,883,913
Total assets 134,136,398 114,346,117 101,014,848 92,722,182 69,389,468
===========================================================================================================================
(a) Adjusted underwriting profit (loss) is statutory underwriting income (loss)
adjusted primarily for changes in deferral of acquisition costs. This
adjustment is necessary to present the financial statements in accordance
with generally accepted accounting principles.
(b) The insurance assets with respect to December 31, 1992 and subsequent years
conform to the requirements of FASB 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts".
(c) Represents the sum of general net premiums earned, life premium income,
agency commissions, management and other fees, net investment income,
financial services commissions, transaction and other fees, equity in income
of minority-owned insurance operations and realized capital gains.
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The following table shows identifiable assets, revenues and income derived
from operations in the United States and Canada and from operations in other
countries for the year ended December 31, 1995. (See also Note 18 of Notes to
Financial Statements.)
(dollars in thousands)
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Percent of Total
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United States Other United States Other
Total and Canada Countries and Canada Countries
====================================================================================================================================
General insurance operations:
Net premiums earned $ 11,405,731 $ 7,322,531 $ 4,083,200 64.2% 35.8%
Adjusted underwriting profit 361,583 57,514 304,069 15.9 84.1
Net investment income 1,545,717 1,240,174 305,543 80.2 19.8
Realized capital gains (losses) 68,075 71,766 (3,691) -- --
Operating income 1,975,375 1,369,454 605,921 69.3 30.7
Identifiable assets 56,074,024 44,046,477 12,027,547 78.6 21.4
Life insurance operations:
Premium income 8,038,150 463,533 7,574,617 5.8 94.2
Net investment income 2,264,905 846,345 1,418,560 37.4 62.6
Realized capital gains 32,703 1,425 31,278 4.4 95.6
Operating income 1,090,605 60,439 1,030,166 5.5 94.5
Identifiable assets 43,280,484 12,061,000 31,219,484 27.9 72.1
Agency and service fee operations:
Commissions, management and other fees 260,018 255,700 4,318 98.3 1.7
Net investment income 1,855 1,820 35 98.1 1.9
Operating income 56,909 54,038 2,871 95.0 5.0
Identifiable assets 149,392 149,392 -- 100.0 --
Financial services operations:
Commissions, transaction and other fees 2,204,090 1,864,217 339,873 84.6 15.4
Operating income 417,741 281,197 136,544 67.3 32.7
Identifiable assets 36,833,772 30,638,950 6,194,822 83.2 16.8
Equity in income of minority-owned
insurance operations 81,722 58,407 23,315 71.5 28.5
Other realized capital losses (28,944) (28,880) (64) -- --
Income before income taxes and cumulative
effect of accounting changes 3,465,883 1,698,606 1,767,277 49.0 51.0
Revenues 25,874,022 12,097,038 13,776,984 46.8 53.2
Total Assets 134,136,398 84,456,853 49,679,545 63.0 37.0
====================================================================================================================================
GENERAL INSURANCE OPERATIONS
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance. One or more of these
companies is licensed to write substantially all of these lines in all states of
the United States and in more than 100 foreign countries.
AIG's business derived from brokers in the United States and Canada is
conducted through its domestic brokerage group, consisting of American Home,
National Union, Lexington and certain other insurance company subsidiaries of
AIG. The primary casualty/risk management division of this group provides
insurance and risk management programs for large corporate customers. The AIG
global risk division designs and implements creative risk financing alternatives
using the insurance and financial services capabilities of AIG. Also included
are the operations of New Hampshire and its subsidiaries, which focus
specifically on providing AIG products and services through brokers to middle
market companies, and regional insurance companies which service the commercial
middle market.
The domestic brokerage division accepts business mainly from insurance
brokers, enabling selection of specialized markets and retention of underwriting
control. Any licensed broker is able to submit business to these companies
without the traditional agent-company contractual relationship, but such broker
usually has no authority to commit the companies to accept a risk.
In addition to writing substantially all classes of business insurance,
including large commercial or industrial property insurance, excess liability,
inland marine, workers' compensation and excess and umbrella coverages, the
domestic brokerage division offers many specialized forms of insurance such as
directors and officers liability, difference-in-conditions, kidnap-ransom,
export credit and political risk, and various types of professional errors and
omissions coverages. Lexington writes surplus lines, those risks for which
conventional insurance companies do not readily provide insurance coverage,
either because of complexity or because the coverage does not lend itself to
conventional contracts.
Audubon Insurance Company and its subsidiaries ("Audubon") conduct agency
marketing of personal and small commercial coverages in certain Southern and
Western States.
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4
AIG engages in mass marketing of personal lines coverages, primarily
private passenger auto, through American International Insurance Company and
New Hampshire Indemnity Company, Inc. as well as through its interests in the
Robert Plan Corporation and 20th Century Industries.
The business of United Guaranty Corporation ("UGC") and its subsidiaries is
also included in the domestic operations of AIG. The principal business of the
UGC subsidiaries is the writing of residential mortgage loan insurance, which is
guaranty insurance on conventional first mortgage loans on single-family
dwellings and condominiums. Such insurance protects lenders against loss if
borrowers default. UGC subsidiaries also write commercial mortgage loan
insurance covering first mortgage loans on commercial real estate, home equity
and property improvement loan insurance on loans to finance residential property
improvements, alterations and repairs and for other purposes not necessarily
related to real estate, and rent guaranty insurance on commercial and industrial
real estate. UGC had approximately $12 billion of mortgage guarantee risk
in-force at December 31, 1995.
AIG's foreign general insurance business comprises primarily risks
underwritten through American International Underwriters ("AIU"), a marketing
unit consisting of wholly owned agencies and insurance companies. It also
includes business written by foreign-based insurance subsidiaries of AIUO for
their own accounts. In general, the same types of policies and marketing
methods, with certain refinements for local laws, customs and needs, are used in
these foreign operations as have been described above in connection with the
domestic operations.
During 1995 domestic general and foreign general insurance business
accounted for 64.7 percent and 35.3 percent, respectively, of AIG's net premiums
written.
AIG's general insurance company subsidiaries worldwide operate primarily by
underwriting and accepting any size risk for their direct account and securing
reinsurance on that portion of the risk in excess of the limit which they wish
to retain. This operating policy differs from that of many insurance companies
which will underwrite only up to their net retention limit, thereby requiring
the broker or agent to secure commitments from other underwriters for the
remainder of the gross risk amount.
The following table summarizes general insurance premiums written and
earned:
(in thousands)
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Years Ended December 31, Written Earned
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1995
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Gross premiums $17,895,120 $17,243,829
Ceded premiums (6,002,098) (5,838,098)
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Net premiums $11,893,022 $11,405,731
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1994
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Gross premiums $16,392,409 $15,665,787
Ceded premiums (5,526,656) (5,378,956)
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Net premiums $10,865,753 $10,286,831
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1993
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Gross premiums $14,901,255 $14,405,992
Ceded premiums (4,875,352) (4,839,352)
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Net premiums $10,025,903 $ 9,566,640
================================================================================
The utilization of reinsurance is closely monitored by an internal
reinsurance security committee, consisting of members of AIG's Senior
Management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 5 of Notes to Financial Statements.)
AIG is well diversified both in terms of lines of business and geographic
locations. Of the general insurance lines of business, workers' compensation was
approximately 13 percent of AIG's net premiums written. This line is well
diversified geographically and is generally written on a loss sensitive
basis which reduces its exposure to material uncertainty or risks.
Notwithstanding the above, the majority of AIG's insurance business is in
the casualty classes, which tend to involve longer periods of time for the
reporting and settling of claims. This may increase the risk and uncertainty
with respect to AIG's loss reserve development. (See also the Discussion and
Analysis of Consolidated Net Loss and Loss Expense Reserve Development and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
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The following table is a summary of the general insurance operations,
including ratios, by major operating category for the year ended December 31,
1995. (See also Note 18(b) of Notes to Financial Statements.)
(dollars in thousands)
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Ratio of Ratio of
Losses and Underwriting
Loss Expenses Expenses
Net Premiums Incurred to Incurred to
------------------------------- Net Premiums Net Premiums Combined
Written Earned Earned Written Ratio
=============================================================================================================
Foreign $ 4,202,815 $ 4,083,200 59.5 32.5 92.0
Commercial casualty (a) 5,895,757 5,645,281 82.7 13.8 96.5
Commercial property 452,323 403,037 81.4 19.0 100.4
Pools and associations (b) 400,951 394,088 152.1 15.1 167.2
Personal lines (c) 692,747 628,068 83.5 17.7 101.2
Mortgage guaranty 248,429 252,057 43.7 25.3 69.0
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Total $11,893,022 $11,405,731 75.9 21.1 97.0
=============================================================================================================
(a) Including workers' compensation and retrospectively rated risks.
(b) Including involuntary pools.
(c) Including mass marketing and specialty programs.
Loss and expense ratios of AIG's consolidated general insurance operations
are set forth in the following table. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
(dollars in thousands)
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Ratio of Ratio of
Losses and Underwriting
Loss Expenses Expenses
Net Premiums Incurred to Incurred to Industry
------------------------ Net Premiums Net Premiums Combined Underwriting Combined
Years Ended December 31, Written Earned Earned Written Ratio Margin Ratio*
=============================================================================================================================
1995 $11,893,022 $11,405,731 75.9 21.1 97.0 3.0 108.8
1994 10,865,753 10,286,831 77.8 20.9 98.7 1.3 108.9
1993 10,025,903 9,566,640 79.2 20.9 100.1 (0.1) 107.9
1992 9,138,528 9,209,390 81.5 20.9 102.4 (2.4) 119.1
1991 9,146,394 9,104,632 78.9 21.5 100.4 (0.4) 109.5
=============================================================================================================================
* Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders) and the ratio for 1995 reflects estimated results
provided by Conning & Company.
During 1995, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 7.2 percent and 8.9 percent were
written in California and New York, respectively (no other state accounted for
more than 5 percent of such premiums).
There was no significant adverse effect on AIG's results of operations from
the economic environments in any one state, country or geographic region for the
year ended December 31, 1995.
DISCUSSION AND ANALYSIS OF CONSOLIDATED NET LOSS AND LOSS EXPENSE RESERVE
DEVELOPMENT
The reserve for net losses and loss expenses is exclusive of applicable
reinsurance and represents the accumulation of estimates for reported losses
("case basis reserves") and provisions for losses incurred but not reported
("IBNR"). AIG does not discount its loss reserves other than for minor amounts
related to certain workers' compensation claims.
Loss reserves established with respect to foreign business are set and
monitored in terms of the respective local or functional currency. Therefore, no
assumption is included for changes in currency rates. (See also Note 1(t) of
Notes to Financial Statements.) Losses and loss expenses are charged to income
as incurred.
Management continually reviews the adequacy of established loss reserves
through the utilization of a number of analytical reserve development techniques
(discussed below). Through the use of these techniques, management is able to
monitor the adequacy of its established reserves, including the appropriate
assumptions for inflation. Also, through reactions to the emergence of specific
development patterns, such as case reserve redundancies or deficiencies and IBNR
emergence, management is able to currently determine any required adjustments.
(See also Management's Discussion and Analysis of Financial Condition and
Results of Operations.)
The "Analysis of Consolidated Net Loss and Loss Expense Reserve
Development", which follows, presents the development of net loss and loss
expense reserves for calendar years 1985 through 1995. The upper half of the
table shows the cumulative amounts paid during successive years related to the
opening loss reserves. For example, with respect to the net loss and loss
expense reserve of $11,086.1 million as of December 31, 1988, by the end of 1995
(seven years later) $9,737.0 million
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had actually been paid in settlement of these net loss reserves. In addition, as
reflected in the lower section of the table, the original reserve of $11,086.1
million was reestimated to be $11,301.5 million at December 31, 1995. This
increase from the original estimate would generally be a combination of a number
of factors, including reserves being settled for larger amounts than originally
estimated. The original estimates will also be increased or decreased as more
information becomes known about the individual claims and overall claim
frequency and severity patterns. The redundancy (deficiency) depicted in the
table, for any particular calendar year, shows the aggregate change in estimates
over the period of years subsequent to the calendar year reflected at the top of
the respective column heading. For example, the redundancy of $280.4 million at
December 31, 1995 related to December 31, 1994 net losses and loss expense
reserves of $18,418.9 million represents the cumulative amount by which reserves
for 1994 and prior years have developed redundantly during 1995.
ANALYSIS OF CONSOLIDATED NET LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
(in millions)
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1985 1986 1987 1988 1989
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Reserve for Net Losses and Loss
Expenses, December 31, $ 4,034.9 $6,199.3 $8,670.7 $11,086.1 $12,958.5
Paid (Cumulative) as of:
One Year Later 1,576.1 2,300.1 2,619.2 3,266.9 3,940.3
Two Years Later 2,823.2 3,676.4 4,315.9 5,451.5 6,476.6
Three Years Later 3,321.1 4,340.7 5,496.6 6,904.5 8,350.8
Four Years Later 3,589.5 4,919.1 6,207.5 7,966.2 9,721.3
Five Years Later 3,886.5 5,260.3 6,757.2 8,792.1 10,764.8
Six Years Later 4,055.3 5,593.1 7,246.1 9,449.6 11,284.8
Seven Years Later 4,267.7 5,902.7 7,616.7 9,737.0
Eight Years Later 4,464.7 6,113.2 7,771.9
Nine Years Later 4,629.6 6,183.0
Ten Years Later 4,683.9
Net Liability Reestimated as of:
End of Year 4,034.9 6,199.3 8,670.7 11,086.1 12,958.5
One Year Later 4,164.2 6,268.3 8,523.6 10,923.8 12,844.5
Two Years Later 4,404.2 6,354.3 8,492.4 10,856.9 12,843.9
Three Years Later 4,502.0 6,397.5 8,488.1 10,811.9 12,809.2
Four Years Later 4,573.4 6,491.1 8,472.3 10,774.9 12,896.4
Five Years Later 4,672.4 6,531.2 8,472.0 10,805.1 13,064.6
Six Years Later 4,728.9 6,598.0 8,470.0 10,953.6 13,426.0
Seven Years Later 4,824.5 6,681.0 8,577.4 11,301.5
Eight Years Later 4,925.6 6,770.0 8,912.3
Nine Years Later 5,052.0 7,074.5
Ten Years Later 5,365.1
Redundancy/(Deficiency) (1,330.2) (875.2) (241.6) (215.4) (467.5)
=========================================================================================
(in millions)
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1990 1991 1992 1993 1994 1995
======================================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $14,699.2 $15,839.9 $16,756.8 $17,557.0 $18,418.9 $19,692.8
Paid (Cumulative) as of:
One Year Later 4,315.2 4,747.8 4,882.7 5,146.3 4,775.0
Two Years Later 7,349.7 8,015.4 8,289.4 8,241.7
Three Years Later 9,561.0 10,436.2 10,433.1
Four Years Later 11,223.5 11,814.8
Five Years Later 12,111.6
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Liability Reestimated as of:
End of Year 14,699.2 15,839.9 16,756.8 17,557.0 18,418.9 19,692.8
One Year Later 14,596.2 15,828.1 16,807.0 17,434.3 18,138.5
Two Years Later 14,595.4 15,902.9 16,603.4 17,479.1
Three Years Later 14,723.7 15,989.7 16,778.3
Four Years Later 14,965.4 16,254.2
Five Years Later 15,361.2
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Redundancy/(Deficiency) (662.0) (414.3) (21.5) 77.9 280.4
======================================================================================================
The trend depicted in the latest development year in the reestimated
liability portion of the "Analysis of Consolidated Net Losses and Loss Expense
Reserve Development" table indicates that the overall position of AIG's 1994 and
prior reserves one year later is fairly comparable to the trends reflected in
recent years. The variations in development from original reserves in the later
years of the table are relatively insignificant both in terms of aggregate
amounts and as a percentage of the initial reserve balances.
RECONCILIATION OF NET RESERVE FOR LOSSES AND
LOSS EXPENSES
(in millions)
- --------------------------------------------------------------------------------
1995 1994 1993
================================================================================
Net reserve for losses and loss
expenses at beginning of year $18,418.9 $17,557.0 $16,756.8
- --------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 8,935.4 8,158.4 7,530.7
Prior years* (275.6) (152.8) 45.3
================================================================================
8,659.8 8,005.6 7,576.0
- --------------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 2,610.9 1,997.4 1,893.1
Prior years 4,775.0 5,146.3 4,882.7
================================================================================
7,385.9 7,143.7 6,775.8
- --------------------------------------------------------------------------------
Net reserve for losses and loss
expenses at end of year $19,692.8 $18,418.9 $17,557.0
================================================================================
* Does not include the effects of foreign exchange adjustments which are
reflected in the "Net Losses and Loss Expense Reserve Development" table.
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Approximately 50 percent of the net losses and loss expense reserves are
paid out within two years of the date incurred. The remaining net losses and
loss expense reserves, particularly those associated with the casualty lines of
business, may extend to 20 years or more.
For further discussion regarding net reserves for losses and loss expenses,
see Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The reserve for losses and loss expenses as reported in AIG's Consolidated
Balance Sheet at December 31, 1995, differs from the total reserve reported in
the Annual Statements filed with state insurance departments and, where
appropriate, with foreign regulatory authorities. The difference at December 31,
1995 is primarily because of minor discounting on certain workers' compensation
claims, estimates for unrecoverable reinsurance and additional reserves relating
to certain foreign operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
The reserve for gross losses and loss expenses is prior to reinsurance and
represents the accumulation for reported losses and IBNR. Management reviews the
adequacy of established gross loss reserves in the manner previously described
for net loss reserves.
The "Analysis of Consolidated Gross Losses and Loss Expense Reserve
Development", which follows, presents the development of gross losses and loss
expense reserves for calendar years 1992 through 1995. As with the net losses
and loss expense reserve development, the redundancies of $430.0 million, $509.7
million and $676.5 million for 1992, 1993 and 1994, respectively, are relatively
insignificant both in terms of an aggregate amount and as a percentage of the
initial reserve balance.
ANALYSIS OF CONSOLIDATED GROSS LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
(in millions)
- --------------------------------------------------------------------------------
1992 1993 1994 1995
================================================================================
Gross losses and loss
expenses, December 31, $28,156.8 $30,046.2 $31,435.4 $33,046.7
Paid (cumulative) as of:
One Year Later 7,280.9 8,807.1 7,640.0
Two Years Later 13,006.0 13,278.7
Three Years Later 16,432.3
Gross Liability Reestimated
as of:
End of Year 28,156.8 30,046.2 31,435.4 33,046.7
One Year Later 28,253.4 29,865.9 30,758.9
Two Years Later 27,824.8 29,536.5
Three Years Later 27,726.8
Redundancy 430.0 509.7 676.5
- --------------------------------------------------------------------------------
LIFE INSURANCE OPERATIONS
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group life,
annuity, and accident and health policies. Financial and investment products
consist of single premium annuity, variable annuities, guaranteed investment
contracts and universal life. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
In the United States, AIG has four domestic life subsidiaries: American
International Life Assurance Company of New York, AIG Life Insurance Company,
Delaware American Life Insurance Company, and Pacific Union Assurance Company.
These companies utilize multiple distribution channels including brokerage and
career and general agents to offer primarily financial and investment products
and specialty forms of accident and health coverage for individuals and groups,
including employee benefit plans. The domestic life business comprised 5.8
percent of total life premium income in 1995.
Life insurance operations in foreign countries comprised 94.2 percent of
life premium income and 94.5 percent of operating income in 1995. AIG operates
overseas principally through four subsidiary companies, ALICO, AIA , Nan Shan
and PHILAM. Although ALICO is incorporated in Delaware, all of its business is
written outside of the United States. ALICO has operations either directly or
through subsidiaries in approximately 50 countries located in Europe, Africa,
Latin America, the Middle East, and the Far East, with Japan being the largest
territory. AIA operates primarily in Hong Kong, Singapore, Malaysia and
Thailand. Nan Shan operates primarily in Taiwan while PHILAM operates in the
Philippines.
Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial products
are sold in Japan.
In addition to the above, AIG also has subsidiary operations in Switzerland
(Ticino Societa d'Assicurazioni Sulla Vita), Puerto Rico (AIG Life Insurance
Company of Puerto Rico) and conducts life insurance business through AIUO
subsidiary companies in certain countries in Central and South America.
The foreign life companies have approximately 105,000 career agents and
sell their products largely to indigenous persons in local currencies. In
addition to the agency outlets, these companies also distribute their products
through direct marketing channels, such as mass marketing, and through brokers
and other distribution outlets such as financial institutions.
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The following table summarizes the life insurance operating results for the
year ended December 31, 1995. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------
Average
Net Direct Termination Rate
Premium Investment Operating Insurance ----------------
Income Income Income(a) In-Force Lapse Other
====================================================================================================
Individual:
Life $5,990,812 $1,516,975 $ 671,003 $297,763,160(b) 6.7% 2.4%
Annuity 95,112 407,148 38,134 (c)
Accident and health 1,144,076 85,713 291,541 (c)
Group:
Life 367,614 24,208 30,029 78,333,947 8.8% 4.0%
Pension 51,503 216,233 18,408 (c)
Accident and health 389,033 23,103 19,923 (c)
Realized capital gains -- -- 32,703 (c)
Consolidation adjustments -- (8,475) (11,136) (c)
- ----------------------------------------------------------------------------------------------------
Total $8,038,150 $2,264,905 $1,090,605 $376,097,107
====================================================================================================
(a) Including income related to investment type products.
(b) Including $193.2 billion of whole life insurance and endowments.
(c) Not applicable.
INSURANCE INVESTMENT OPERATIONS
A significant portion of AIG's general and life operating revenues are derived
from AIG's insurance investment operations. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 1, 2, 8
and 18 of Notes to Financial Statements.)
The following table is a summary of the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at December 31, 1995:
(dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
Percent --------------------
General Life Total of Total Domestic Foreign
===================================================================================================================================
Fixed maturities:
Available for sale, at market value(a) $ 9,068,133 $22,168,672 $31,236,805 50.9% 37.5% 62.5%
Held to maturity, at amortized cost(b) 11,545,530 -- 11,545,530 18.8 100.0 --
Equity securities, at market value(c) 3,011,249 2,131,897 5,143,146 8.4 35.8 64.2
Mortgage loans on real estate, policy and collateral loans 54,852 6,887,329 6,942,181 11.3 52.8 47.2
Short-term investments, including
time deposits, and cash 636,709 1,231,817 1,868,526 3.0 25.6 74.4
Real estate 345,336 660,954 1,006,290 1.6 17.3 82.7
Investment income due and accrued 466,744 732,380 1,199,124 2.0 55.3 44.7
Other invested assets 1,421,878 1,055,991 2,477,869 4.0 50.6 49.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total $26,550,431 $34,869,040 $61,419,471 100.0% 51.0% 49.0%
===================================================================================================================================
(a) Includes $428,296 of bonds trading securities, at market value.
(b) Includes $459,505 of preferred stocks, at amortized cost.
(c) Includes $38,989 of preferred stocks, at market value.
The following table summarizes the investment results of the general
insurance operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------
Annual Average Cash and Invested Assets
-----------------------------------------
Cash Rate of Return
(including Net --------------------- Realized
short-term Invested Investment Invested Capital
Years Ended December 31, investments) Assets(a) Total Income(b) Total(c) Assets(d) Gains
- -------------------------------------------------------------------------------------------------------------------
1995 $ 795,805 $24,415,940 $25,211,745 $1,545,717 6.1% 6.3% $68,075
1994 1,387,704 21,836,228 23,223,932 1,435,092 6.2 6.6 52,487
1993 1,779,647 19,766,959 21,546,606 1,340,480 6.2 6.8 65,264
1992 1,766,031 18,285,417 20,051,448 1,252,086 6.2 6.8 67,134
1991 1,828,346 16,960,076 18,788,422 1,163,461 6.2 6.9 89,275
- -------------------------------------------------------------------------------------------------------------------
(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and excludes
realized capital gains.
(c) Net investment income divided by the annual average sum of cash and invested
assets.
(d) Net investment income divided by the annual average invested assets.
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The following table summarizes the investment results of the life insurance
operations. (See also Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Average Cash and Invested Assets
-----------------------------------------------
Cash Rate of Return
(including Net ------------------ Realized
short-term Invested Investment Invested Capital
Years Ended December 31, investments) Assets(a) Total Income(b) Total(c) Assets(d) Gains
- ------------------------------------------------------------------------------------------------------------------------------------
1995 $1,222,375 $29,557,181 $30,779,556 $2,264,905 7.4% 7.7% $32,703
1994 2,045,747 22,317,914 24,363,661 1,748,428 7.2 7.8 86,706
1993 2,697,282 17,286,171 19,983,453 1,499,714 7.5 8.7 54,576
1992 2,304,043 14,190,868 16,494,911 1,313,838 8.0 9.3 43,257
1991 1,940,738 11,785,325 13,726,063 1,139,793 8.3 9.7 23,219
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and excludes
realized capital gains.
(c) Net investment income divided by the annual average sum of cash and invested
assets.
(d) Net investment income divided by the annual average invested assets.
AIG's worldwide insurance investment policy places primary emphasis on
investments in high quality, fixed income securities in all of its portfolios
and, to a lesser extent, investments in marketable common stocks in order to
preserve policyholders' surplus and generate net investment income. The ability
to implement this policy is somewhat limited in certain territories as there may
be a lack of qualified long term investments or investment restrictions may be
imposed by the local regulatory authorities. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
AGENCY AND SERVICE FEE OPERATIONS
AIG's agency and service fee operations contribute to AIG earnings through fees
as agents and managers, the premiums they generate for AIG's insurance companies
and the revenues they produce from technical and support service activities.
Several AIG companies act as managing general agents for both AIG
subsidiaries and non-affiliated insurance companies, accepting liability on
risks and actively managing the business produced. These general agencies deal
directly with the producing agents and brokers, exercise full underwriting
control, issue policies, collect premiums, arrange reinsurance, perform
accounting, actuarial and safety and loss control services, adjust and pay
losses and claims, and settle net balances with the represented companies. In
some cases, they also maintain their own and the represented companies'
authority to do business in the jurisdictions in which they operate.
Agency and service fee operations are conducted primarily through AIG Risk
Management, Inc., which provides risk management services to independent
insurance agents, brokers and their customers on a worldwide basis and AIG
Aviation Inc., which sells aviation insurance.
FINANCIAL SERVICES OPERATIONS
AIG operations which contribute to financial services income include primarily
A.I. Credit Corp. ("AICCO"), AIG Financial Products Corp. and its subsidiary
companies ("AIGFP"), AIG Trading Group Inc. and its subsidiaries ("AIGTG"),
International Lease Finance Corporation ("ILFC") and UeberseeBank AG. AICCO's
business is principally in premium financing. AIGFP engages in financial
transactions, including long-dated interest rate and currency swaps and
structures borrowings through guaranteed investment agreements. AIGTG engages in
various commodities trading, foreign exchange trading and market making
activities. ILFC is engaged primarily in the acquisition of new and used
commercial jet aircraft and the leasing and remarketing of such aircraft to
airlines around the world. UeberseeBank AG operates as a Swiss bank. Other
financial services operations are AIG Global Investment Group, Inc. and its
subsidiaries, which manage the investment portfolios of various AIG
subsidiaries, as well as third-party assets. AIG Asset Management Services, Inc.
and AIG Capital Partners, Inc. are responsible for product design and
origination, as well as marketing and distribution of third-party asset
management products, including retail mutual funds and direct investment
products. (See also Management's Discussion and Analysis of Financial Condition
and Results of Operations and Notes 1, 9 and 11 of Notes to Financial
Statements.)
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The following table is a summary of the composition of AIG's financial
services invested assets and liabilities at December 31, 1995. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)
(in thousands)
- --------------------------------------------------------------------------------
Financial services invested assets:
Flight equipment primarily under operating leases,
net of accumulated depreciation $12,442,010
Securities available for sale, at market value 3,931,100
Trading securities, at market value 2,641,436
Spot commodities, at market value 1,079,124
Unrealized gain on interest rate and currency
swaps, options and forward transactions 7,250,954
Securities purchased under agreements to resell,
at contract value 2,022,056
Trade receivables 3,321,985
Other, including short-term investments 1,780,296
- --------------------------------------------------------------------------------
Total financial services invested assets $34,468,961
- --------------------------------------------------------------------------------
Financial services liabilities:
Borrowings under obligations of guaranteed
investment agreements $ 5,423,555
Securities sold under agreements to repurchase,
at contract value 1,379,872
Trade payables 2,810,947
Securities sold but not yet purchased, principally
obligations of the U.S. Government and 1,204,386
Government agencies, at market value
Spot commodities sold but not yet purchased,
at market value 783,302
Unrealized loss on interest rate and currency
swaps, options and forward transactions 6,405,045
Deposits due to banks and other depositors 957,441
Commercial paper 1,834,882
Notes, bonds and loans payable 8,932,743
- --------------------------------------------------------------------------------
Total financial services liabilities $29,732,173
- --------------------------------------------------------------------------------
The following table is a summary of the revenues and operating income of
AIG's financial services operations for the year ended December 31, 1995. (See
also Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)
Operating
(in thousands) Revenues Income
- --------------------------------------------------------------------------------
ILFC $1,378,353 $ 263,790
AIGFP* 289,020 140,245
AIGTG* 317,207 68,765
Other 219,510 (55,059)
- -------------------------------------------------------------------------------
Total financial service revenues $2,204,090 $ 417,741
- --------------------------------------------------------------------------------
* Represents net trading revenues.
Other financial services activities include AIG's 30 percent interest in AB
Asesores CFMB, S.L., a Spanish brokerage, investment banking and private
investment management firm, and certain investment management and venture
capital operations in various overseas financial services sectors.
OTHER OPERATIONS
Small AIG subsidiaries provide insurance-related services such as adjusting
claims and marketing specialized products. AIG has several other relatively
minor subsidiaries which carry on various businesses. Mt. Mansfield Company,
Inc. owns and operates the ski slopes, lifts, school and an inn located at
Stowe, Vermont.
ADDITIONAL INVESTMENTS
As of March 15, 1996, AIG holds a 48.3 percent interest in Transatlantic
Holdings, Inc., a reinsurance holding company, and a 19.9 percent interest in
Richmond Insurance Company, Ltd., a reinsurer. (See also Note 1(n) of Notes to
Financial Statements.) AIG holds a 23.9 percent interest in SELIC Holdings,
Ltd., an insurance holding company and a 24.4 percent interest in IPC Holding,
Ltd., a reinsurance holding company. Other significant investments include
minority positions in the Robert Plan Corporation, Kroll Holdings, Inc.,
Alexander and Alexander Services, Inc. and 20th Century Industries.
LOCATIONS OF CERTAIN ASSETS
As of December 31, 1995, approximately 37 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $1.07
billion of cash and securities on deposit with foreign regulatory authorities.
Foreign operations and assets held abroad may be adversely affected by political
developments in foreign countries, including such possibilities as tax changes,
nationalization and changes in regulatory policy, as well as by consequence of
hostilities and unrest. The risks of such occurrences and their overall effect
upon AIG vary from country to country and cannot easily be predicted. If
expropriation or nationalization does occur, AIG's policy is to take all
appropriate measures to seek recovery of such assets. Certain of the countries
in which AIG's business is conducted have currency restrictions which generally
cause a delay in a company's ability to repatriate assets and profits. (See also
Notes 1(t), 2 and 18(d) of Notes to Financial Statements.)
INSURANCE REGULATION AND COMPETITION
Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such requirements.
(See also Note 10(b) of Notes to Financial Statements.)
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11
AIG's insurance subsidiaries, in common with other insurers, are subject to
regulation and supervision by the states and by other jurisdictions in which
they do business. Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate regulatory and
supervisory powers to an insurance official. The regulation and supervision
relate primarily to approval of policy forms and rates, the standards of
solvency that must be met and maintained, including risk based capital
measurements, the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the size of risks which may be
insured under a single policy, deposits of securities for the benefit of
policyholders, methods of accounting, periodic examinations of the affairs of
insurance companies, the form and content of reports of financial condition
required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of policyholders
rather than security holders. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Risk Based Capital (RBC) is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Thus, inadequately capitalized general and life insurance companies may be
identified.
The RBC formula develops a risk adjusted target level of adjusted statutory
capital by applying certain factors to various asset, premium and reserve items.
Higher factors are applied to more risky items and lower factors are applied to
less risky items. Thus, the target level of statutory surplus varies not only as
a result of the insurer's size, but also on the risk profile of the insurer's
operations.
The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control.
The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 1995.
To the extent that any of AIG's insurance entities would fall below
prescribed levels of surplus, it would be AIG's intention to infuse necessary
capital to support that entity.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business is carried on in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification or revocation by such authorities, and AIU or other AIG
subsidiaries could be prevented from conducting business in certain of the
jurisdictions where they currently operate. In the past, AIU has been allowed to
modify its operations to conform with new licensing requirements in most
jurisdictions.
In addition to licensing requirements, AIG's foreign operations are also
regulated in various jurisdictions with respect to currency, policy language and
terms, amount and type of security deposits, amount and type of reserves, amount
and type of local investment and the share of profits to be returned to
policyholders on participating policies. Some foreign countries regulate rates
in various types of policies. Certain countries have established reinsurance
institutions, wholly or partially owned by the state, to which admitted insurers
are obligated to cede a portion of their business on terms which do not always
allow foreign insurers, including AIG, full compensation. Regulations governing
constitution of technical reserves and remittance balances in some countries may
hinder remittance of profits and repatriation of assets.
The insurance industry is highly competitive. Within the United States,
AIG's general insurance subsidiaries compete with approximately 4,300 other
stock companies, specialty insurance organizations, mutual companies and other
underwriting organizations. AIG's life insurance companies compete in the United
States with some 1,600 life insurance companies and other participants in
related financial service fields. Overseas, AIG subsidiaries compete for
business with foreign insurance operations of the larger U.S. insurers and local
companies in particular areas in which they are active.
AIG's financial services subsidiaries, particularly AIGTG and AIGFP,
operate in a highly competitive environment, both domestically and overseas.
Principal sources of competition are banks, investment banks and other non-bank
financial institutions.
ITEM 2. PROPERTIES
AIG and its subsidiaries operate from approximately 250 offices in the United
States, 5 offices in Canada and numerous offices in other foreign countries. The
offices in Manchester, New Hampshire; Springfield, Illinois; Houston, Texas;
Atlanta, Georgia; Baton Rouge, Louisiana; Wilmington, Delaware; Hato Rey, Puerto
Rico; San Diego, California; Greensboro, North Carolina; Livingston, New Jersey;
70 Pine Street and 72 Wall Street in New York City; and offices in approximately
30 foreign countries including Bermuda, Hong Kong, the Philippines, Japan,
England, Singapore, Taiwan and Thailand are located in buildings owned by AIG
and its subsidiaries. The remainder of the office space utilized by AIG
subsidiaries is leased.
ITEM 3. LEGAL PROCEEDINGS
AIG and its subsidiaries, in common with the insurance industry in general, are
subject to litigation, including claims for punitive damages, in the normal
course of their business. AIG does not believe that such litigation will have a
material adverse effect on its financial condition, future operating results or
liquidity. (See also the Discussion and Analysis of Consolidated Net Loss and
Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
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ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1995.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the directors and executive
officers of AIG. All directors are elected at the annual meeting of
shareholders. All officers serve at the pleasure of the Board of Directors, but
subject to the foregoing, are elected for terms of one year expiring in May of
each year.
- ------------------------------------------------------------------------------------------------------------------------------------
Served as
Director or
Officer
Name Title Age Since
- ------------------------------------------------------------------------------------------------------------------------------------
M. Bernard Aidinoff* Director 67 1984
Lloyd M. Bentsen Director 75 1995
Marshall A. Cohen Director 60 1992
Barber B. Conable, Jr Director 73 1991
Martin S. Feldstein Director 56 1987
Houghton Freeman Director 74 1967
Leslie L. Gonda Director 76 1990
M. R. Greenberg* Director, Chairman, and Chief Executive Officer 70 1967
Carla A. Hills Director 62 1993
Frank J. Hoenemeyer Director 76 1985
John I. Howell* Director 79 1969
Edward E. Matthews Director and Vice Chairman-Finance 64 1973
Dean P. Phypers Director 67 1979
John J. Roberts* Director and Vice Chairman-External Affairs 73 1967
Ernest E. Stempel* Director and Vice Chairman-Life Insurance 79 1967
Thomas R. Tizzio* Director and President 58 1982
Edwin E. Manton Senior Adviser 87 1967
Evan G. Greenberg Executive Vice President-Foreign General Insurance 41 1995
Robert M. Sandler Executive Vice President, Senior Casualty Actuary and Senior Claims Officer 53 1980
Howard I. Smith Executive Vice President and Comptroller 51 1984
Edmund S. W. Tse Executive Vice President-Life Insurance 58 1991
Lawrence W. English Senior Vice President-Administration 54 1985
Axel I. Freudmann Senior Vice President-Human Resources 49 1986
Win J. Neuger Senior Vice President and Chief Investment Officer 46 1995
Petros K. Sabatacakis Senior Vice President-Financial Services 49 1992
William D. Smith Senior Vice President-Domestic General Insurance 51 1995
Florence A. Davis Vice President-General Counsel 41 1995
Robert E. Lewis Vice President and Chief Credit Officer 45 1993
Frank Petralito II Vice President and Director of Taxes 59 1978
Kathleen E. Shannon Vice President and Secretary 46 1986
John T. Wooster, Jr Vice President-Communications 56 1989
William N. Dooley Treasurer 42 1992
- ------------------------------------------------------------------------------------------------------------------------------------
* Member of Executive Committee.
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Except as hereinafter noted, each of the directors who is also an executive
officer of AIG and each of the other executive officers has, for more than five
years, occupied an executive position with AIG or companies that are now its
subsidiaries, or with Starr. Evan G. Greenberg is the son of M.R. Greenberg.
There are no other arrangements or understandings between any director or
officer and any other person pursuant to which the director or officer was
elected to such position. Ms. Davis was a Principal in the legal department and
Worldwide Director of Compliance at Morgan Stanley & Co. Incorporated prior to
joining AIG in April, 1995. Mr. Lewis was Assistant General Manager for North
America, Chief Credit Officer, and senior executive responsible for risk and
exposure management of ING Bank in New York, the bank division of Internationale
Nederlanden Group, from 1988 until joining AIG in October, 1993. Mr. Sabatacakis
was Managing Director and head of the Capital Markets and Treasury Group of
Chemical Banking Corporation prior to joining AIG in February, 1992. Mr. Neuger
was Managing Director, Global Investment Management-Equity at Bankers Trust
Company prior to joining AIG in February, 1995.
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
(a) The table below shows the high and low closing sales prices per share of
AIG's common stock, as reported on the New York Stock Exchange Composite Tape,
for each quarter of 1995 and 1994, as adjusted for the common stock split in the
form of a 50 percent common stock dividend paid July 28, 1995. All prices are as
reported by the National Quotation Bureau, Incorporated.
- --------------------------------------------------------------------------------
1995 1994
---------------- ----------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter 71 7/8 64 5/8 61 3/4 55
Second Quarter 79 1/4 68 7/8 64 3/8 56
Third Quarter 86 1/2 71 5/8 63 7/8 58 3/4
Fourth Quarter 94 7/8 82 5/8 66 1/2 58 3/8
- --------------------------------------------------------------------------------
(b) In 1995, AIG paid a quarterly dividend of 7.7 cents in March and June
and 8.5 cents in September and December for a total cash payment of 32.4 cents
per share of common stock. In 1994, AIG paid a quarterly dividend of 6.7 cents
in March and June and 7.7 cents in September and December for a total cash
payment of 28.8 cents per share of common stock. These amounts reflect the
adjustment for a common stock split in the form of a 50 percent common stock
dividend paid July 28, 1995. Subject to the dividend preference of any of AIG's
serial preferred stock which may be outstanding, the holders of shares of common
stock are entitled to receive such dividends as may be declared by the Board of
Directors from funds legally available therefor.
See Note 10(b) of Notes to Financial Statements for a discussion of certain
restrictions on the payment of dividends to AIG by some of its insurance
subsidiaries.
(c) The approximate number of holders of Common Stock as of January 31,
1996, based upon the number of record holders, was 17,600.
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ITEM 6. SELECTED FINANCIAL DATA
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data is presented in accordance
with generally accepted accounting principles. This data should be read in
conjunction with the financial statements and accompanying notes included
elsewhere herein.
(in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues (a) $ 25,874,022 $ 22,358,709 $ 20,068,287 $18,388,627 $16,883,913
General insurance:
Net premiums written 11,893,022 10,865,753 10,025,903 9,138,528 9,146,394
Net premiums earned 11,405,731 10,286,831 9,566,640 9,209,390 9,104,632
Adjusted underwriting profit (loss) 361,583 147,517 10,391 (195,084) (4,809)
Net investment income 1,545,717 1,435,092 1,340,480 1,252,086 1,163,461
Realized capital gains 68,075 52,487 65,264 67,134 89,275
Operating income 1,975,375 1,635,096 1,416,135 1,124,136 1,247,927
Life insurance:
Premium income 8,038,150 6,724,321 5,746,046 4,853,087 4,059,354
Net investment income 2,264,905 1,748,428 1,499,714 1,313,838 1,139,793
Realized capital gains 32,703 86,706 54,576 43,257 23,219
Operating income 1,090,605 952,484 781,611 667,453 561,839
Agency and service fee operating income 56,909 54,129 60,247 52,570 46,202
Financial services operating income 417,741 404,853 390,038 346,442 222,156
Equity in income of minority-owned insurance
operations 81,722 56,005 39,589 27,929 28,806
Other realized capital losses (28,944) (52,340) (12,742) (11,293) (14,144)
Income before income taxes and cumulative
effect of accounting changes 3,465,883 2,951,979 2,601,081 2,137,048 2,022,575
Income taxes 955,500 776,464 683,003 512,033 469,566
Income before cumulative effect of accounting changes 2,510,383 2,175,515 1,918,078 1,625,015 1,553,009
Cumulative effect of accounting changes, net of tax:
AIG -- -- -- 31,941 --
Minority-owned insurance operations -- -- 20,695 -- --
Net income 2,510,383 2,175,515 1,938,773 1,656,956 1,553,009
Earnings per common share:
Income before cumulative effect of
accounting changes 5.30 4.58 4.03 3.40 3.24
Cumulative effect of accounting changes, net of tax:
AIG -- -- -- .07 --
Minority-owned insurance operations -- -- .04 -- --
Net income 5.30 4.58 4.07 3.47 3.24
Cash dividends per common share .32 .29 .26 .23 .21
Total assets (b) 134,136,398 114,346,117 101,014,848 92,722,182 69,389,468
Long-term debt (c) 13,938,095 12,613,907 10,955,963 9,517,595 7,591,385
Capital funds (shareholders' equity) 19,827,103 16,421,661 15,224,195 12,782,152 11,463,454
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(a) Represents the sum of general net premiums earned, life premium income,
agency commissions, management and other fees, net investment income,
financial services commissions, transaction and other fees, equity in income
of minority-owned insurance operations and realized capital gains. (See also
tables under Item 1, "Business".)
(b) The assets with respect to December 31, 1992 and subsequent years conform to
the requirements of FASB 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts."
(c) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
13
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONAL REVIEW
GENERAL INSURANCE OPERATIONS
General insurance operations for the twelve month periods ending December 31,
1995, 1994 and 1993 were as follows:
(in thousands)
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
Net premiums written:
Domestic $ 7,690,207 $ 7,132,367 $ 6,979,913
Foreign 4,202,815 3,733,386 3,045,990
- -------------------------------------------------------------------------------
Total $11,893,022 $10,865,753 $10,025,903
- -------------------------------------------------------------------------------
Net premiums earned:
Domestic $ 7,322,531 $ 6,683,656 $ 6,648,472
Foreign 4,083,200 3,603,175 2,918,168
- -------------------------------------------------------------------------------
Total $11,405,731 $10,286,831 $ 9,566,640
- -------------------------------------------------------------------------------
Adjusted underwriting
profit (loss):
Domestic $ 57,514 $ (56,190) $ (122,008)
Foreign 304,069 203,707 132,399
- -------------------------------------------------------------------------------
Total $ 361,583 $ 147,517 $ 10,391
- -------------------------------------------------------------------------------
Net investment income:
Domestic $ 1,240,174 $ 1,147,595 $ 1,085,953
Foreign 305,543 287,497 254,527
- -------------------------------------------------------------------------------
Total $ 1,545,717 $ 1,435,092 $ 1,340,480
- -------------------------------------------------------------------------------
Operating income before
realized capital gains:
Domestic $ 1,297,688 $ 1,091,405 $ 963,945
Foreign 609,612 491,204 386,926
- -------------------------------------------------------------------------------
Total 1,907,300 1,582,609 1,350,871
Realized capital gains 68,075 52,487 65,264
- -------------------------------------------------------------------------------
Operating income $ 1,975,375 $ 1,635,096 $ 1,416,135
- -------------------------------------------------------------------------------
In AIG's general insurance operations, 1995 net premiums written and net
premiums earned increased 9.5 percent and 10.9 percent, respectively, from those
of 1994. In 1994, net premiums written increased 8.4 percent and net premiums
earned increased 7.5 percent when compared to 1993.
The growth in net premiums written in 1995 and 1994 resulted from a
combination of several factors. Domestically, AIG continued to achieve some
general price increases in certain commercial property and specialty casualty
markets, as well as volume growth in personal lines. Overseas, the primary
reasons for growth were price and volume increases. Foreign general insurance
operations produced 35.3 percent of the general insurance net premiums written
in 1995, 34.4 percent in 1994 and 30.4 percent in 1993.
In comparing the foreign exchange rates used to translate AIG's foreign
general operations during 1995 to those foreign exchange rates used to translate
AIG's foreign general operations during 1994, the U.S. dollar declined in value
in relation to most major foreign currencies in which AIG transacts business.
Accordingly, when foreign net premiums written were translated into U.S. dollars
for the purposes of consolidation, total general insurance net premiums written
were approximately 2.3 percentage points greater than they would have been if
translated utilizing those exchange rates which prevailed during 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 were as follows:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Domestic:
Loss Ratio 85.11 86.83 87.19
Expense Ratio 14.88 14.59 15.05
- --------------------------------------------------------------------------------
Combined Ratio 99.99 101.42 102.24
- --------------------------------------------------------------------------------
Foreign:
Loss Ratio 59.46 61.12 60.97
Expense Ratio 32.51 33.04 34.26
- --------------------------------------------------------------------------------
Combined Ratio 91.97 94.16 95.23
- --------------------------------------------------------------------------------
Consolidated:
Loss Ratio 75.93 77.82 79.19
Expense Ratio 21.11 20.93 20.88
- --------------------------------------------------------------------------------
Combined Ratio 97.04 98.75 100.07
- --------------------------------------------------------------------------------
Adjusted underwriting profit or loss (operating income less net investment
income and realized capital gains) represents statutory underwriting profit or
loss adjusted primarily for changes in deferred acquisition costs. The adjusted
underwriting profits were $361.6 million in 1995, $147.5 million in 1994 and
$10.4 million in 1993. (See also Notes 4 and 18 of Notes to Financial
Statements.)
AIG's results reflect the net impact with respect to incurred losses of
catastrophes approximating $100 million in 1995, $55 million in 1994 and $70
million in 1993. AIG's gross incurred losses from catastrophes approximated $190
million in 1995, $174 million in 1994 and $134 million in 1993. 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 portions of
the United States and the Caribbean. The Northridge earthquake which struck the
Los Angeles area of California in January, 1994, resulted in gross and net
incurred losses of approximately $174 million and $55 million, respectively. If
these catastrophes were excluded from the losses incurred in each period, the
pro forma consolidated statutory general insurance ratios would be as follows:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Loss Ratio 75.05 77.29 78.46
Expense Ratio 21.11 20.93 20.88
- --------------------------------------------------------------------------------
Combined Ratio 96.16 98.22 99.34
- --------------------------------------------------------------------------------
14
16
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Excluding the effects of the aforementioned catastrophes, the general
insurance operation has improved significantly over the three year period. AIG's
ability to maintain the pro forma combined ratio below 100 is primarily
attributable to the profitability of AIG's foreign general insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.
General insurance net investment income in 1995 increased 7.7 percent when
compared to 1994. In 1994, net investment income increased 7.1 percent over
1993. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment. The new cash flow was
generated from net general insurance operating cash flow and included the
compounding of previously earned and reinvested net investment income. (See also
the discussion under "Liquidity" herein.)
General insurance realized capital gains were $68.1 million in 1995, $52.5
million in 1994 and $65.3 million in 1993. 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 1995 increased 20.8 percent when
compared to 1994. The 1994 results reflect an increase of 15.5 percent from
1993. The contribution of general insurance operating income to income before
income taxes and the cumulative effect of accounting changes was 57.0 percent in
1995 compared to 55.4 percent in 1994 and 54.4 percent in 1993.
A year to year comparison of operating income is significantly influenced
by the catastrophe losses in any one year as well as the volatility from one
year to the next in realized capital gains. Adjusting each year to exclude the
effects of both catastrophe losses and realized capital gains, operating income
would have increased by 22.6 percent in 1995 and 15.3 percent in 1994. The
increase in the growth rate of 1995 over 1994 and 1994 over 1993 after the
aforementioned adjustments was a result of the increased net investment income
and improvement in underwriting results.
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 100 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $16.88 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 1995 with respect to reinsurance recoverable to the extent that any
reinsurer may not be able to reimburse AIG under the terms of these reinsurance
arrangements. AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound, and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods. The application of
this collateral against balances due or any changes to the amount of collateral
are based on the development of losses recoverable on an individual reinsurer
basis. This development includes losses incurred but not reported (IBNR).
Approximately 50 percent of the general reinsurance asset is from unauthorized
reinsurers. In order to obtain statutory recognition, nearly all of these
balances are collateralized. The remaining 50 percent of the general reinsurance
asset is from authorized reinsurers and over 96 percent of such balances are
from reinsurers rated A-(excellent) or better, as rated by A.M. Best. This
rating is a measure of financial strength. The terms authorized and
unauthorized pertain to regulatory categories, not creditworthiness.
AIG maintains a provision for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 1995,
AIG had allowances for unrecoverable reinsurance approximating $125 million. At
that date, and prior to this allowance, AIG had no significant reinsurance
recoverables from any individual reinsurer which is financially troubled (e.g.,
liquidated, insolvent, in receivership or otherwise subject to formal or
informal regulatory restriction).
AIG's Reinsurance Security Department conducts ongoing detailed assessments
of the reinsurance markets and current and potential reinsurers both foreign and
domestic. Such assessments include, but are not limited to, identifying if a
reinsurer is appropriately licensed, and has sufficient financial capacity, and
the local economic environment in which a foreign reinsurer operates. This
department also reviews the nature of the risks ceded and the need for
collateral. In addition, AIG's Credit Risk Committee reviews the credit limits
for and concentrations with any one reinsurer.
AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
The consolidated general reinsurance assets of $16.88 billion include
reinsurance recoverables for (i) paid losses and loss expenses of $1.74 billion
and (ii) $13.35 billion with respect to the ceded reserve for losses and loss
expenses, including ceded IBNR (ceded reserves). The ceded reserves represent
the accumulation of estimates of ultimate ceded losses including provisions for
ceded IBNR and loss expenses. The methods used to determine such estimates and
to establish the resulting ceded reserves are continually reviewed and updated.
Any adjustments
15
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
therefrom are reflected in income currently. It is AIG's belief
that the ceded reserves at December 31, 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 December 31, 1995, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $33.05 billion, an increase of $1.61
billion or 5.1 percent over the prior year end and represent the accumulation of
estimates of ultimate losses, including IBNR, and loss expenses and minor
amounts of discounting related to certain workers' compensation claims. General
insurance net loss reserves increased $1.27 billion or 6.9 percent to $19.69
billion and represent loss reserves reduced by reinsurance recoverable, net of
an allowance for unrecoverable reinsurance. The methods used to determine such
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting therefrom are reflected in operating income
currently. It is management's belief that the general insurance net loss
reserves are adequate to cover all general insurance net losses and loss
expenses as at December 31, 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 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 nine
percent were employed. These factors are periodically reviewed and subsequently
adjusted, as appropriate, to reflect emerging trends which are based upon past
loss experience.
Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in property's exposure to fire loss can be approximated by
the amount of insurance purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive indemnity claims asserting injuries from toxic
waste, hazardous substances, and other environmental pollutants and alleged
damages to cover the cleanup costs of hazardous waste dump sites (hereinafter
collectively referred to as environmental claims) and indemnity claims asserting
injuries from asbestos. The vast majority of these asbestos and environmental
claims emanate from policies written in 1984 and prior years. Commencing in
1985, standard policies contained an absolute exclusion for pollution related
damage. However, AIG currently underwrites pollution impairment liability
insurance on a claims made basis and excluded such claims from the analyses
included herein. AIG has established a specialized claims unit which
investigates and adjusts all such asbestos and environmental claims.
Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends
which influence the development of asbestos and environmental claims are the
inconsistent court resolutions, judicial interpretations which broaden the
intent of the policies and scope of coverage and the increasing number of new
claims. The case law that has emerged can be characterized as still being in its
infancy and the likelihood of any firm direction in the near future is very
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 1996 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
16
18
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
changes in Superfund and waste dump site coverage issues. Additional liabilities
could emerge for amounts in excess of the current reserves held. Although this
emergence cannot now be reasonably estimated, it could have a material adverse
impact on AIG's future operating results. The reserves carried for these claims
at December 31, 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.
A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and environmental claims separately and combined at
December 31, 1995, 1994 and 1993 was as follows:
(in millions)
- ---------------------------------------------------------------------------------------------------------------------
1995 1994 1993
----------------- ----------------- ------------------
Gross Net Gross Net Gross Net
- ---------------------------------------------------------------------------------------------------------------------
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 686.0 $130.2 $ 656.0 $116.7 $ 558.4 $ 86.9
Losses and loss expenses incurred 197.7 20.5 149.2 45.8 242.9 65.1
Losses and loss expenses paid (138.9) (22.8) (119.2) (32.3) (145.3) (35.3)
- ---------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 744.8 $127.9 $ 686.0 $130.2 $ 656.0 $ 116.7
- ---------------------------------------------------------------------------------------------------------------------
Environmental:
Reserve for losses and loss expenses at beginning of year $ 728.1 $200.1 $ 684.8 $191.5 $ 566.4 $ 166.6
Losses and loss expenses incurred 684.9 231.7 187.5 61.8 278.6 106.5
Losses and loss expenses paid (215.1) (52.5) (144.2) (53.2) (160.2) (81.6)
- ---------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,197.9 $379.3 $ 728.1 $200.1 $ 684.8 $ 191.5
- ---------------------------------------------------------------------------------------------------------------------
Combined:
Reserve for losses and loss expenses at beginning of year $1,414.1 $330.3 $1,340.8 $308.2 $1,124.8 $ 253.5
Losses and loss expenses incurred 882.6 252.2 336.7 107.6 521.5 171.6
Losses and loss expenses paid (354.0) (75.3) (263.4) (85.5) (305.5) (116.9)
- ---------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,942.7 $507.2 $1,414.1 $330.3 $1,340.8 $ 308.2
- ---------------------------------------------------------------------------------------------------------------------
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at December 31, 1995, 1994 and 1993 were estimated as follows:
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
1995 1994 1993
----------------- ----------------- ------------------
Gross Net Gross Net Gross Net
- ---------------------------------------------------------------------------------------------------------------------
Combined $665,000 $218,000 $150,000 $30,000 $150,000 $30,000
- ---------------------------------------------------------------------------------------------------------------------
17
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
A summary of asbestos and environmental claims count activity for the years
ended December 31, 1995, 1994 and 1993 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- --------------------------------- ---------------------------------
Asbestos Environmental Combined Asbestos Environmental Combined Asbestos Environmental Combined
- ------------------------------------------------------------------------------------------------------------------------------------
Claims at beginning of 5,947 16,223 22,170 5,522 16,661 22,183 5,490 14,169 19,659
year
Claims during year:
Opened 1,026 5,045 6,071 1,626 3,178 4,804 1,381 4,875 6,256
Settled (93) (663) (756) (106) (501) (607) (144) (455) (599)
Dismissed or
otherwise
resolved (1,636) (2,747) (4,383) (1,095) (3,115) (4,210) (1,205) (1,928) (3,133)
- ------------------------------------------------------------------------------------------------------------------------------------
Claims at end of year 5,244 17,858 23,102 5,947 16,223 22,170 5,522 16,661 22,183
- ------------------------------------------------------------------------------------------------------------------------------------
The average cost per claim settled, dismissed or otherwise resolved for the
years ended December 31, 1995, 1994 and 1993 was as follows:
- --------------------------------------------------------------------------------
1995 1994 1993
---------------- ---------------- -----------------
Gross Net Gross Net Gross Net
- --------------------------------------------------------------------------------
Asbestos $80,300 $13,200 $99,300 $26,900 $107,700 $26,200
Environmental 63,100 15,400 39,900 14,700 67,200 34,200
Combined 68,900 14,700 54,700 17,700 81,900 31,300
- --------------------------------------------------------------------------------
An insurance rating agency has developed a survival ratio to measure the
number of years it would take a company to exhaust both its asbestos and
environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. The higher the
ratio, the more years the reserves for losses and loss expenses cover these
claims payments. These ratios are computed based on the respective ending
reserves for losses and loss expenses over the respective claims settlements
during the fiscal year. Such payments include indemnity payments and legal and
loss adjustment payments. It should be noted, however, that this is an extremely
simplistic approach to measuring asbestos and environmental reserve levels. Many
factors, such as aggressive settlement procedures, mix of business and level of
coverage provided, have significant impact on the amount of asbestos and
environmental losses and loss expense reserves, ultimate payments thereof and
the resultant ratio. The aforementioned insurance rating agency has recently
published the findings of its current studies with respect to the ultimate
aggregate costs for toxic waste cleanups for the insurance industry. This agency
has significantly lowered its ultimate aggregate cost projections that were
published last year. Other published studies also project lower ultimate
aggregate costs for toxic waste cleanups for the insurance industry.
The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments include court judgments, court orders,
covered claims with no coverage defenses, state mandated cleanup costs, claims
where AIG's coverage defenses are minimal, and settlements made less than six
months before the first trial setting. Also, AIG considers all legal and loss
adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
Accordingly, AIG's survival ratios for involuntary asbestos and
environmental claims, separately and combined, were estimated as follows for the
years ended December 31, 1995, 1994 and 1993:
- --------------------------------------------------------------------------------
1995 1994 1993
------------ ----------- ----------
Gross Net Gross Net Gross Net
- --------------------------------------------------------------------------------
Involuntary survival ratios:
Asbestos 5.4 5.6 5.8 4.0 4.5 3.3
Environmental 12.2 13.7 11.0 8.1 9.4 5.0
Combined 8.6 10.5 7.9 6.1 6.3 4.2
- --------------------------------------------------------------------------------
18
20
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 1995, 1994 and 1993
were $23.5 million, $28.2 million and $32.0 million, respectively.
AIG is also required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated. (See also Note 18 of Notes to Financial Statements.)
LIFE INSURANCE OPERATIONS
Life insurance operations for the twelve month periods ending December 31, 1995,
1994 and 1993 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Premium income:
Domestic $ 463,533 $ 370,112 $ 268,358
Foreign 7,574,617 6,354,209 5,477,688
- --------------------------------------------------------------------------------
Total $ 8,038,150 $ 6,724,321 $ 5,746,046
- --------------------------------------------------------------------------------
Net investment income:
Domestic $ 846,345 $ 600,616 $ 471,459
Foreign 1,418,560 1,147,812 1,028,255
- --------------------------------------------------------------------------------
Total $ 2,264,905 $ 1,748,428 $ 1,499,714
- --------------------------------------------------------------------------------
Operating income before
realized capital gains:
Domestic $ 59,014 $ 38,243 $ 19,322
Foreign 998,888 827,535 707,713
- --------------------------------------------------------------------------------
Total 1,057,902 865,778 727,035
Realized capital gains 32,703 86,706 54,576
- --------------------------------------------------------------------------------
Operating income $ 1,090,605 $ 952,484 $ 781,611
- --------------------------------------------------------------------------------
Life insurance in-force:
Domestic $ 54,272,118 $ 43,849,682 $ 17,167,306
Foreign 321,824,989 289,529,129 239,994,796
- --------------------------------------------------------------------------------
Total $376,097,107 $333,378,811 $257,162,102
- --------------------------------------------------------------------------------
AIG's life insurance operations, demonstrating the strength of its
franchise, continued to show growth primarily as a result of overseas
operations, particularly in Asia. AIG's life premium income in 1995 represented
an 19.5 percent increase from the prior year. This compares with an increase of
17.0 percent in 1994 over 1993. Foreign life operations produced 94.2 percent,
94.5 percent and 95.3 percent of the life premium income in 1995, 1994, and
1993, respectively. (See also Notes 1, 4 and 6 of Notes to Financial
Statements.)
As previously discussed, the U.S. dollar declined in value in relation to
most major foreign currencies in which AIG transacts business. Accordingly, when
foreign life premium income was translated into U.S. dollars for purposes of
consolidation, total life premium income was approximately 3.4 percentage points
greater than it would have been if translated utilizing exchange rates
prevailing in 1994.
Life insurance net investment income increased 29.5 percent in 1995
compared to an increase of 16.6 percent in 1994. The growth in net investment
income was primarily attributable to foreign new cash flow for investment and,
to a lesser degree, growth in interest income earned on policy loans related to
domestic corporate-owned life insurance products (COLI). The new cash flow was
generated from life insurance operations and included the compounding of
previously earned and reinvested net investment income. (See also the
discussion under "Liquidity" herein.)
The growth in the premium income of the domestic life segment resulted
primarily from the sales of terminal funded pension plan annuities and to a
lesser extent the renewal of risk bearing premium related to COLI.
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 $32.7 million in 1995, $86.7
million in 1994 and $54.6 million in 1993. 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 1995 increased 14.5 percent to $1.09
billion compared to an increase of 21.9 percent in 1994. Excluding realized
capital gains from life insurance operating income, the percent increases would
be 22.2 percent and 19.1 percent in 1995 and 1994, respectively. The
contribution of life insurance operating income to income before income taxes
and the cumulative effect of accounting changes amounted to 31.5 percent in 1995
compared to 32.3 percent in 1994 and 30.0 percent in 1993.
The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with the
financial and investment contract products is investment risk.
Underwriting risk represents the exposure to loss resulting from the actual
policy experience adversely emerging in comparison to the assumptions made in
the product pricing associated with mortality, morbidity, termination and
expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately one million dollars
of coverage by using yearly renewable term rein-
19
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
surance. The life insurance operations have not entered into assumption
reinsurance transactions or surplus relief transactions during the three year
period ended December 31, 1995. (See also Note 5 of Notes to Financial
Statements.)
The investment risk represents the exposure to loss resulting from the cash
flows from the invested assets, primarily long-term fixed rate investments,
being less than the cash flows required to meet the obligations of the expected
policy and contract liabilities and the necessary return on investments.
To minimize its exposure to investment risk, AIG tests the cash flows from
the invested assets and the policy and contract liabilities using various
interest rate scenarios to assess whether there is a liquidity excess or
deficit. If a rebalancing of the invested assets to the policy and contract
claims became necessary and did not occur, a demand could be placed upon
liquidity. (See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term investments or there are investment
restrictions imposed by the local regulatory authorities. For example, in Japan
and several Southeast Asia territories, the duration of the investments is often
for a shorter period than the effective maturity of such policy liabilities.
Therefore, there is a risk that the reinvestment of the proceeds at the maturity
of the investments may be at a yield below that of the interest required for the
accretion of the policy liabilities. In Japan, the average duration of the
investment portfolio is 5.5 years, while the related policy liabilities are
estimated to be 11.8 years. To maintain an adequate yield to match the interest
required over the duration of the liabilities, constant management focus is
required to reinvest the proceeds of the maturing securities without
sacrificing investment quality. To the extent permitted under local regulation,
AIG may invest in qualified longer-term securities outside Japan to achieve a
closer matching in both duration and the required yield. AIG is able to manage
any asset-liability duration difference through maintenance of sufficient global
liquidity and to support any operational shortfall through its international
financial network. Domestically, the asset-liability matching process is
appropriately functioning as there are investments available to match the
duration and the required yield. (See also the discussion under "Liquidity"
herein.)
AIG uses asset-liability matching as a management tool to determine the
composition of the invested assets and marketing strategies. As a part of these
strategies, AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest rate or other
economic changes.
AGENCY AND SERVICE FEE OPERATIONS
Agency and service fee operating income in 1995 increased 5.1 percent to $56.9
million compared to $54.1 million in 1994 which was a decrease of 10.2 percent
from 1993. The increase in operating income from 1993 resulted from the growth
of risk management services. The decline in 1994 was due to reduced commission
revenue in certain of AIG's managing general agencies. Agency and service fee
operating income contributed 1.6 percent to AIG's income before income taxes and
the cumulative effect of accounting changes in 1995 compared to 1.8 percent in
1994 and 2.3 percent in 1993.
FINANCIAL SERVICES OPERATIONS
Financial services operations for the twelve month periods ending December 31,
1995, 1994 and 1993 were as follows:
(in thousands)
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
Revenues:
International Lease Finance Corp. $1,378,353 $1,097,599 $ 879,153
AIG Financial Products Corp.* 289,020 279,058 336,086
AIG Trading Group Inc.* 317,207 246,643 227,403
Other 219,510 159,939 86,437
- -------------------------------------------------------------------------------
Total $2,204,090 $1,783,239 $1,529,079
- -------------------------------------------------------------------------------
Operating income:
International Lease Finance Corp. $ 263,790 $ 248,191 $ 220,041
AIG Financial Products Corp. 140,245 131,032 150,113
AIG Trading Group Inc. 68,765 55,249 69,803
Other, including intercompany
adjustments (55,059) (29,619) (49,919)
- -------------------------------------------------------------------------------
Total $ 417,741 $ 404,853 $ 390,038
- -------------------------------------------------------------------------------
* Represents net trading revenues.
Financial services operating income increased 3.2 percent in 1995 over
1994. This compares with an increase of 3.8 percent in 1994 over 1993.
International Lease Finance Corporation (ILFC) generates its revenues
primarily from leasing new and used commercial jet aircraft to domestic and
foreign airlines. Revenues also result from the remarketing of commercial jets
for its own account, for airlines and for financial institutions. Revenues in
1995 increased 25.6 percent from 1994 compared to a 24.8 percent increase
during 1994 from 1993. The revenue increase in each year resulted primarily from
the growth both in the size and relative cost of the fleet. During 1995,
operating income increased 6.3 percent from 1994 and 12.8 percent during 1994
from 1993. The decline in the rate of increase of ILFC's 1995 operating income
is due to the full effect of the lease margin compression resulting from the
increases in interest rates that prevailed during 1994. The average borrowing
cost during 1995 was 6.47 percent while 1994 was 6.41 percent. Further declines
in interest rates would have a positive effect on leasing margins. (See also the
discussions under "Capital Resources" and "Liquidity" herein.)
ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to lease or re-lease at
acceptable rates or sell at lease expiration and through committing to purchase
aircraft which it would be unable to lease. ILFC manages its lessee
non-performance exposure through credit reviews and security deposit
requirements. At December 31, 1995, only three of 278 aircraft owned were not
leased and these three aircraft have been committed
20
22
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
for sale. All other aircraft remain leased. Currently, 76 percent of rental
revenue is from foreign carriers. (See also the discussions under "Capital
Resources" and "Liquidity" herein.)
AIG Financial Products Corp. and its subsidiaries (AIGFP) participate in
the derivatives dealer market conducting, primarily as principal, an interest
rate, currency and equity derivative products business. AIGFP also enters into
long-dated forward foreign exchange contracts, option transactions, liquidity
facilities, investment agreements and other structured transactions and invests
in a diversified portfolio of securities. Thus, AIGFP derives substantially all
its revenues from proprietary positions entered in connection with counterparty
transactions rather than for speculative transactions. Revenues in 1995
increased 3.6 percent from 1994 compared to a 17.0 percent decline during 1994
from 1993. During 1995, operating income increased 7.0 percent from 1994 and
declined 12.7 percent during 1994 from 1993. As AIGFP is a transaction-oriented
operation, current and past revenues and operating results may not provide a
basis for predicting future performance. (See also the discussions under
"Capital Resources," "Liquidity" and "Derivatives" herein.)
AIG Trading Group Inc. and its subsidiaries (AIGTG) derive a substantial
portion of their revenues from market making and trading activities, as
principals, in foreign exchange, interest rates, precious and base metals and
natural gas and other energy products. Revenues in 1995 increased 28.6 percent
from 1994 compared to an 8.5 percent increase during 1994 from 1993. During
1995, operating income increased 24.5 percent from 1994 and declined 20.9
percent during 1994 from 1993. (See also the discussions under "Capital
Resources," "Liquidity" and "Derivatives" herein.)
Financial services operating income represented 12.1 percent of AIG's
income before income taxes and the cumulative effect of accounting changes in
1995. This compares to 13.7 percent and 15.0 percent in 1994 and 1993,
respectively.
OTHER OPERATIONS
In 1995, AIG's equity in income of minority-owned insurance operations was $81.7
million compared to $56.0 million in 1994 and $39.6 million in 1993. In 1995,
the equity interest in insurance companies, which includes two equity operations
which commenced business during 1993, represented 2.4 percent of income before
income taxes and the cumulative effect of accounting changes compared to 1.9
percent in 1994 and 1.5 percent in 1993.
Other realized capital losses amounted to $28.9 million, $52.3 million and
$12.7 million in 1995, 1994 and 1993, respectively.
Minority interest represents minority shareholders' equity in income of
certain consolidated subsidiaries. In 1995, minority interest amounted to $36.3
million. In 1994 and 1993, minority interest amounted to $29.7 million and $26.9
million, respectively.
Other income (deductions)-net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, realized
foreign exchange transaction gains and losses in substantially all currencies
and unrealized gains and losses in hyperinflationary currencies, as well as the
income and expenses of the parent holding company and other miscellaneous income
and expenses. In 1995, net deductions amounted to $91.2 million. In 1994 and
1993, net deductions amounted to $68.6 million and $46.9 million, respectively.
Income before income taxes amounted to $3.47 billion in 1995 and $2.95
billion in 1994. Income before income taxes and the cumulative effect of
accounting changes was $2.60 billion in 1993.
In 1995, AIG recorded a provision for income taxes of $955.5 million
compared to the provisions of $776.5 million and $683.0 million in 1994 and
1993, respectively. These provisions represent effective tax rates of 27.6
percent in 1995 and 26.3 percent in each of 1994 and 1993. The increase in the
effective tax rate in 1995 over prior years is primarily due to the
profitability of domestic general adjusted underwriting relative to income
before income taxes and the cumulative effect of accounting changes. (See Note 3
of Notes to Financial Statements.)
Income before the cumulative effect of accounting changes amounted to $1.92
billion in 1993. At January 1, 1993, AIG's equity in income of minority-owned
insurance operations was positively impacted by the cumulative effect of
accounting changes on such operations from the adoption of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes"(FASB 109),
which was partially offset by the adoption of Statement of Financial Accounting
Standards No. 106 "Employer's Accounting for Postretirement Benefits Other than
Pension Plans" (FASB 106). AIG's equity in the cumulative effect of such
accounting changes was a net benefit of $20.7 million.
Net income amounted to $2.51 billion in 1995, $2.18 billion in 1994 and
$1.94 billion in 1993. The increases in net income over the three year period
resulted from those factors described above.
21
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
At December 31, 1995, AIG had total capital funds of $19.83 billion and total
borrowings of $17.99 billion. At that date, $14.32 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs).
Total borrowings at December 31, 1995 and 1994 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------------------------------------
GIAs -- AIGFP $ 5,423,555 $ 5,535,318
- --------------------------------------------------------------------------------
Commercial Paper:
Funding 687,182 1,211,280
ILFC(a) 1,834,882 1,960,545
AICCO 644,571 617,734
- --------------------------------------------------------------------------------
Total 3,166,635 3,789,559
- --------------------------------------------------------------------------------
Medium Term Notes:
ILFC(a) 2,391,535 1,999,535
AIG 115,000 155,000
- --------------------------------------------------------------------------------
Total 2,506,535 2,154,535
- --------------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC(a) 3,550,000 2,950,000
AIGFP 1,868,943 1,048,061
AIG: Lire bonds 159,067 159,067
Zero coupon notes 73,348 65,831
- --------------------------------------------------------------------------------
Total 5,651,358 4,222,959
- --------------------------------------------------------------------------------
Loans and Mortgages Payable:
AIGTG -- 890,800
ILFC(a)(b) 1,122,265 678,650
AIG 120,369 247,656
- --------------------------------------------------------------------------------
Total 1,242,634 1,817,106
- --------------------------------------------------------------------------------
Total Borrowings 17,990,717 17,519,477
- --------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 8,898,682 7,588,730
Matched GIA borrowings 5,423,555 5,535,318
- --------------------------------------------------------------------------------
14,322,237 13,124,048
- --------------------------------------------------------------------------------
Remaining borrowings of AIG $ 3,668,480 $ 4,395,429
- --------------------------------------------------------------------------------
(a) AIG does not guarantee or support these borrowings.
(b) Primarily capital lease obligations.
See also Note 9 of Notes to Financial Statements.
Although financing may be obtained through other sources, GIAs 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 and Notes 1, 9 and 11
of Notes to Financial Statements.)
AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its subsidiaries. Funding
intends to continue to meet AIG's funding requirements through the issuance of
commercial paper guaranteed by AIG. This issuance of Funding's commercial paper
is subject to the approval of AIG's Board of Directors. ILFC and A.I. Credit
Corp. (AICCO) 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. From time to
time, AIGFP may issue commercial paper to fund its operations. AIG guarantees
AIGFP's commercial paper. At December 31, 1995, AIGFP had no commercial paper
outstanding. (See also the discussion under "Derivatives" herein and Note 9 of
Notes to Financial Statements.)
AIG and Funding have entered into two syndicated revolving credit
facilities (the Facilities) aggregating $1 billion. The Facilities consist of a
$500 million 364 day revolving credit facility and a $500 million five year
revolving credit facility. The Facilities can be used for general corporate
purposes and also provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under
either of the Facilities, nor were any borrowings outstanding as of December 31,
1995.
ILFC increased the aggregate principal amount outstanding of its medium
term and term notes to $5.94 billion at December 31, 1995, a net increase of
$992.0 million, and incurred a net increase in its capital lease obligations of
$783.0 million at that date. At December 31, 1995, ILFC had $1.80 billion in
aggregate principal amount of debt securities registered for issuance from time
to time. ILFC sold $200 million of Market Auction Preferred Stock in 1995. The
cash used to purchase flight equipment, including progress payments during the
construction phase, is primarily derived from the proceeds of ILFC's debt
financings. The primary sources for the repayment of this debt and the interest
expense thereon are the cash flow from operations, proceeds from the sale of
flight equipment and the rollover of prior debt. (See also the discussions under
"Operational Review" and "Liquidity" herein and Notes 1, 9 and 15 of Notes to
Financial Statements.)
During 1995, AIG did not issue any medium term notes and $40.0 million of
previously issued notes matured. At December 31, 1995, AIG had $247.0 million in
aggregate principal amount of debt securities registered for issuance from time
to time. An additional $500 million principal amount of debt securities was
registered in February, 1996. (See also the discussion under "Derivatives"
herein and Note 9 of Notes to Financial Statements.)
AIG's capital funds have increased $3.41 billion in 1995. Unrealized
appreciation of investments, net of taxes, increased $1.21 billion, primarily
resulting from the rally of the domestic equity markets and the decline in
domestic interest rates and its effect on the market values of bonds worldwide.
As a result of AIG's adoption of Financial Accounting Standards No. 115
"Accounting for Certain Investments on Debt and Equity Securities", unrealized
appreciation of investments, net of taxes, is now subject to increased
volatility resulting from the changes in the market value of bonds available for
sale. During 1995, the cumulative translation adjustment loss, net of taxes,
increased $168.0 million and retained earnings increased $2.36 billion,
resulting from net income less dividends.
22
24
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
During 1995, AIG repurchased 220,000 shares of its common stock in the open
market at a cost of $16.0 million. During 1994, AIG repurchased 3.14 million
shares of its common stock in the open market at a cost of $177.7 million. AIG
intends to continue to buy its common shares in the open market from time to
time and to satisfy its obligations under various employee benefit plans through
such purchases.
Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At December 31, 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 and Note 10 of Notes to Financial
Statements.)
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.
At December 31, 1995, the adjusted capital of each of AIG's domestic
general companies and of each of AIG's domestic life companies exceeded each of
their RBC standards by considerable margins.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business is carried on in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
To AIG's knowledge, no AIG company is on any regulatory or similar "watch
list".
LIQUIDITY
At December 31, 1995, AIG's consolidated invested assets included approximately
$2.36 billion of cash and short-term investments. Consolidated net cash provided
from operating activities in 1995 amounted to approximately $7.21 billion.
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance pretax operating cash flow is
derived from two sources, underwriting operations and investment operations. In
the aggregate, AIG's insurance operations generated approximately $9.6 billion
in pretax cash flow during 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
$3.5 billion in investment income cash flow during 1995. Investment income cash
flow is primarily derived from interest and dividends received and includes
realized capital gains.
The combined insurance pretax operating cash flow coupled with the cash and
short-term investments of $1.87 billion provided the insurance operations with a
significant amount of liquidity during 1995. 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 $13.8 billion from the maturities, sales and
redemptions of fixed income securities and from the sales of marketable equity
securities, AIG purchased approximately $19.5 billion of fixed income
securities and marketable equity securities during 1995.
During 1995, AIG received approximately $1 billion from redemptions of held
to maturity municipal bonds. Prior to redemption, the yield on these bonds
approximated eight percent. The yield on the reinvestment of the proceeds in
bonds with similar characteristics averaged nearly 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 investment income due and accrued and real estate, at
December 31, 1995 and 1994:
(dollars in thousands)
- ---------------------------------------------------------------------------------------------
December 31, 1995 December 31, 1994
---------------------------- ----------------------------
Invested Percent Invested Percent
Assets of Total Assets of Total
- ---------------------------------------------------------------------------------------------
General insurance $26,550,431 27.5% $23,873,059 30.2%
Life insurance 34,869,040 36.2 26,690,071 33.8
Financial services 34,468,961 35.8 27,920,262 35.4
Other 449,832 0.5 491,548 0.6
- ---------------------------------------------------------------------------------------------
Total $96,338,264 100.0% $78,974,940 100.0%
- ---------------------------------------------------------------------------------------------
23
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at December 31, 1995 and 1994:
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
Percent --------------------
December 31, 1995 General Life Total of Total Domestic Foreign
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Available for sale, at market value (a) $ 9,068,133 $22,168,672 $31,236,805 50.9% 37.5% 62.5%
Held to maturity, at amortized cost (b) 11,545,530 -- 11,545,530 18.8 100.0 --
Equity securities, at market value (c) 3,011,249 2,131,897 5,143,146 8.4 35.8 64.2
Mortgage loans on real estate, policy and collateral loans 54,852 6,887,329 6,942,181 11.3 52.8 47.2
Short-term investments, including
time deposits, and cash 636,709 1,231,817 1,868,526 3.0 25.6 74.4
Real estate 345,336 660,954 1,006,290 1.6 17.3 82.7
Investment income due and accrued 466,744 732,380 1,199,124 2.0 55.3 44.7
Other invested assets 1,421,878 1,055,991 2,477,869 4.0 50.6 49.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total $26,550,431 $34,869,040 $61,419,471 100.0% 51.0% 49.0%
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes $428,296 of bonds trading securities, at market value.
(b) Includes $459,505 of preferred stock, at amortized cost.
(c) Includes $38,989 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 and the
redesignation of approximately $2.8 billion of fixed maturities held to maturity
to fixed maturities available for sale. This change was permitted by the
transition provision for a one-time transfer of securities from held to
maturity, at amortized cost as included in the Financial Accounting Standards
Board's "Special Report, a Guide to the Implementation of Statement No. 115 on
Accounting for Certain Investments in Debt and Equity Securities."
At December 31, 1995, approximately 54 percent of the fixed maturity
investments were domestic securities. Approximately 40 percent of such domestic
securities were rated AAA, approximately two percent were below investment
grade.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations.
AIG annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At December 31, 1995, approximately 46
percent of the foreign fixed income investments were either rated AAA or, on the
basis of AIG's internal analysis were equivalent from a credit standpoint to
securities so rated. Less than one percent of these investments were deemed
below investment grade and approximately four percent were not rated at that
date.
Although AIG's fixed income insurance portfolios contain only minor
amounts of securities below investment grade, any fixed income security may be
subject to downgrade for a variety of reasons subsequent to any balance sheet
date. There have been no significant downgrades as at March 1, 1996.
At December 31, 1995, approximately five percent of the fixed maturities
portfolio was Collateralized Mortgage Obligations (CMOs). All of the CMOs were
investment grade and approximately 79 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
24
26
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.)
Mortgage loans on real estate, policy and collateral loans comprised 11.3
percent of AIG's insurance invested assets at December 31, 1995. AIG's insurance
holdings of real estate mortgages amounted to $2.1 billion of which 32 percent
was domestic. At December 31, 1995, no domestic mortgages and only a nominal
amount of foreign mortgages were in default. At December 31, 1995, AIG's
insurance holdings of collateral loans amounted to $845.1 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 $3.95 billion at December 31, 1995, with approximately
one billion dollars of this increase relating to the domestic corporate-owned
life insurance product.
Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash.
AIG's real estate investment properties are primarily occupied by AIG's
various operations. The current market value of these properties considerably
exceeds their carrying value.
Other invested assets were primarily comprised of both foreign and domestic
private placements, limited partnerships and outside managed funds.
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
The following table is a summary of the composition of AIG's financial
services invested assets at December 31, 1995 and 1994. (See also the
discussions under "Operational Review," "Capital Resources" and "Derivatives"
herein.)
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
1995 1994
---------------------- ----------------------
Invested Percent Invested Percent
Assets of Total Assets of Total
- ---------------------------------------------------------------------------------------------------------------------
Flight equipment primarily under operating leases, net of
accumulated depreciation $12,442,010 36.1% $10,723,527 38.4%
Unrealized gain on interest rate and currency swaps,
options and forward transactions 7,250,954 21.0 4,650,743 16.7
Securities available for sale, at market value 3,931,100 11.4 3,796,792 13.6
Trading securities, at market value 2,641,436 7.7 2,483,637 8.9
Securities purchased under agreements to resell, at contract value 2,022,056 5.9 1,209,403 4.3
Trade receivables 3,321,985 9.6 2,629,734 9.4
Spot commodities, at market value 1,079,124 3.1 916,833 3.3
Other, including short-term investments 1,780,296 5.2 1,509,593 5.4
- ---------------------------------------------------------------------------------------------------------------------
Total $34,468,961 100.0% $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 financings. The primary
sources for the repayment of this debt and the interest expense thereon are the
cash flow from operations, proceeds from the sale of flight equipment and the
rollover of prior debt. During 1995, ILFC acquired flight equipment costing
$3.28 billion.
At December 31, 1995, ILFC had committed to purchase or had secured
positions for 292 aircraft deliverable from 1996 through 2004 at an estimated
aggregate purchase price of $15.9 billion and had options to purchase an
additional 34 aircraft deliverable through 2005 at an estimated aggregate
purchase price of $2.5 billion. As at March 15, 1996, ILFC has entered into
leases, letters of intent to lease or is in various stages of negotiation for
all of the aircraft to be delivered in 1996 and 44 of 228 aircraft to be
delivered subsequent to 1996. ILFC will be required to find customers for any
aircraft presently on order and any aircraft to be ordered, and it must arrange
financing for portions of the purchase price of such equipment. In a rising
interest rate environment, ILFC negotiates higher lease rates on any new
contracts. ILFC has been successful to date both in placing its new aircraft on
lease or under sales contract and obtaining adequate financing.
AIGFP's derivative transactions are carried at market value or at estimated
fair value when market prices are not readily available. AIGFP reduces its
economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were to sell or close out the transactions prior to maturity. AIG
believes that the impact of any such limited liquidity would not be significant
to AIG's financial condition or its overall liquidity. (See also the discussion
under "Derivatives" herein.)
Securities available for sale, at market value and securities purchased
under agreements to resell are purchased with the proceeds of AIGFP's GIA
financings and other long and short term borrowings. The proceeds from the
disposal of securities available for sale and securities purchased under
agreements to
25
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
resell have been used to fund the maturing GIAs or other AIGFP financing. (See
also the discussion under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At December
31, 1995, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. AIGFP has also
entered into credit derivative transactions to hedge its credit risk associated
with $1.1 billion of these securities. There were no securities deemed below
investment grade. There have been no significant downgrades through March 1,
1996. 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 conducts, as principal, market making and trading activities in
foreign exchange, interest rates, precious and base metals and natural gas and
other energy products. AIGTG owns inventories in the commodities in which it
trades and may reduce the exposure to market risk through the use of swaps,
forwards, futures and option contracts. AIGTG uses derivatives to manage the
economic exposure of its various trading positions and transactions from adverse
movements of interest rates, exchange rates and commodity prices. AIGTG supports
its trading activities largely through trade payables, unrealized losses on
swaps, short-term borrowings and spot commodities sold but not yet purchased.
(See also the discussions under "Capital Resources" and "Derivatives" herein.)
DERIVATIVES
Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying equity, debt, commodity or
other asset, liability, or some index. Derivatives payments may be based on
interest rates and exchange rates and/or prices of certain securities, certain
commodities, or financial or commodity indices. The more significant types of
derivative arrangements in which AIG transacts are swaps, forwards, futures,
options and related instruments.
The most commonly used swaps are interest rate and currency swaps. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. A currency swap is similar but the notional
amounts are different currencies which are typically exchanged at the
commencement and termination of the swap based upon negotiated exchange rates.
A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a
commodity, security, currency, financial index or other instrument, at a
specified price. A futures contract is traded on an exchange, while a forward
contract is executed over the counter.
An option contract generally provides the option purchaser with the right
but not the obligation to buy or sell during a period of time or at a specified
date the underlying instrument at a set price. The option writer is obligated to
sell or buy the underlying item if the option purchaser chooses to exercise his
right. The option writer receives a nonrefundable fee or premium paid by the
option purchaser.
Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security exchanges and settled daily through such clearing houses.
Negotiated over the counter derivatives include forwards, swaps and options.
Over the counter derivatives are generally not traded like exchange traded
securities. However, in the normal course of business, with the agreement of the
original counterparty, these contracts may be terminated early or assigned to
another counterparty.
All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.
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 potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must manage a variety of exposures including credit, market, liquidity,
operational and legal risks.
Market risk 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).
26
28
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market risk exposure. AIGFP values its
portfolio at market value or estimated fair value when market values are not
readily available. These valuations represent an assessment of the present
values of expected future cash flows of AIGFP's transactions and may include
reserves for such risks as are deemed appropriate by AIGFP's and AIG's
management. AIGFP evaluates the portfolio's discounted cash flows with reference
to current market conditions, maturities within the portfolio and other relevant
factors. Based upon this evaluation, AIGFP determines what, if any, offsetting
transactions are necessary to reduce the market risk exposure of the portfolio.
The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.
Additionally, depending upon the 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, commodity
prices, volatility rates and other relevant factors.
A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels and the effect of time. Though not
indicative of the future, past volatile market scenarios have represented
profit opportunities for AIGTG.
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at December 31, 1995
were as follows:
(in thousands)
- --------------------------------------------------------------------------------
Gross Gross Balance
Unrealized Unrealized Sheet
Gains Losses Amount
- --------------------------------------------------------------------------------
Securities available for
sale, at market value (a) $ 209,954 $ 209,476 $3,931,100
Unrealized gain/loss on
interest rate and currency
swaps, options and forward
transactions (b) (c) 7,250,954 6,405,045 --
Trading securities, at
market value -- -- 2,641,436
Securities sold but not yet
purchased, principally
obligations of the U.S.
government and government
agencies, at market value -- -- 1,204,386
Trade receivables (c) 4,335,033 2,621,935 3,321,985
Spot commodities, at
market value (d) 163,673 164,949 1,079,124
Trade payables -- 1,901,569 2,810,947
Spot commodities sold but
not yet purchased, at
market value 176,498 179,762 783,302
- --------------------------------------------------------------------------------
(a) See also Note 8 (e) of Notes to Financial Statements.
(b) These amounts are also presented as the respective balance sheet amounts.
(c) At December 31, 1995, AIGTG's net replacement values with respect to
interest rate and currency swaps were $356.0 million and $1.71 billion with
respect to futures and forward contracts.
(d) The net replacement value with respect to purchased option contracts of
AIGTG at December 31, 1995 was $459.0 million.
27
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The interest rate risk on securities available for sale, at market, is
managed by taking offsetting positions on a security by security basis, thereby
offsetting a significant portion of the unrealized appreciation or depreciation.
At December 31, 1995, the unrealized gains and losses remaining after benefit of
the offsets were $6.6 million and $6.1 million, respectively.
AIGFP carries its derivatives at market or estimated fair value, whichever
is appropriate. Because of limited liquidity of certain 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 conducts as principal, market making and trading activities in
foreign exchange, interest rates, precious and base metals and natural gas and
other energy products. 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 other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements that provide for legally enforceable
set-off and close out netting of exposures in the event of default. Under such
agreements, in connection with the early termination of a transaction, AIGFP is
permitted to set-off its receivables from a counterparty against AIGFP's
payables to that same counterparty arising out of all included transactions.
Excluding regulated exchange transactions, AIGTG, whenever possible, enters into
netting agreements with its counterparties which are similar in effect to those
discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's derivatives portfolio at December 31, 1995. The notional amounts used to
express the extent of AIGFP's involvement in swap 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 each of the respective
contractual agreements.
The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, ISDA Master Agreements and collateral held.
28
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American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 1995:
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Remaining Life
--------------------------------------------------
One Two Through Six Through After 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 $26,726,000 $61,700,000 $31,497,000 $10,518,000 $130,441,000 $105,581,000
Currency swaps 5,942,000 14,161,000 5,305,000 3,421,000 28,829,000 18,260,000
Equity/commodity swaps 247,000 48,000 -- 25,000 320,000 817,000
Swaptions 417,000 1,246,000 1,939,000 772,000 4,374,000 9,060,000
- ----------------------------------------------------------------------------------------------------------------------------
Total $33,332,000 $77,155,000 $38,741,000 $14,736,000 $163,964,000 $133,718,000
- ----------------------------------------------------------------------------------------------------------------------------
Futures and forward contracts:
Exchange traded futures contracts
contractual amount $16,050,000 -- -- -- $ 16,050,000 $ 13,183,000
- ----------------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts
contractual amount $ 2,236,000 $ 2,000 -- -- $ 2,238,000 $ 2,049,000
- ----------------------------------------------------------------------------------------------------------------------------
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 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
----------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 1995 1994
- --------------------------------------------------------------------------------------------
Counterparty credit quality:
AAA $1,994,000 $ -- $1,994,000 $1,093,000
AA 2,129,000 17,000 2,146,000 1,987,000
A 1,433,000 10,000 1,443,000 1,012,000
BBB 1,239,000 -- 1,239,000 525,000
Below investment grade 49,000 -- 49,000 21,000
Not externally rated--exchanges* -- 23,000 23,000 13,000
- --------------------------------------------------------------------------------------------
Total $6,844,000 $50,000 $6,894,000 $4,651,000
- --------------------------------------------------------------------------------------------
* Exchange traded futures are not deemed to have significant credit exposure
as the exchanges guarantee that every contract will be properly settled on a
daily basis.
At December 31, 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
------------------------------
Swaps and Futures and Total Total
Swaptions Forward Contracts 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Non-U.S. banks $2,425,000 $18,000 $2,443,000 $2,101,000
Insured municipalities 880,000 -- 880,000 270,000
U.S. industrials 1,025,000 -- 1,025,000 494,000
Governmental 845,000 -- 845,000 726,000
Non-U.S. financial service companies 40,000 -- 40,000 31,000
Non-U.S. industrials 531,000 -- 531,000 372,000
Special purpose 113,000 -- 113,000 16,000
U.S. banks 310,000 9,000 319,000 172,000
U.S. financial service companies 424,000 -- 424,000 324,000
Supranationals 251,000 -- 251,000 132,000
Exchanges* -- 23,000 23,000 13,000
- -----------------------------------------------------------------------------------------------------------------------------
Total $6,844,000 $50,000 $6,894,000 $4,651,000
- -----------------------------------------------------------------------------------------------------------------------------
* Exchange traded futures are not deemed to have significant credit exposure
as the exchanges guarantee that every contract will be properly settled on a
daily basis.
29
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The following tables provide the notional and contractual amounts of
AIGTG's derivatives portfolio at December 31, 1995. In addition, the estimated
positive fair values associated with the derivatives portfolio are also provided
and include a maturity profile for the December 31, 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
positive fair values of all of AIGTG's derivatives contracts at December 31,
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 values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1995:
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
-------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
FUTURES AND FORWARD CONTRACTS AND INTEREST
RATE AND CURRENCY SWAPS:
Exchange traded futures contracts
contractual amount $ 22,494,000 $4,131,000 $ 180,000 $ -- $ 26,805,000 $ 21,504,000
================================================================================================================================
Over the counter forward contracts
contractual amount $174,487,000 $8,075,000 $1,142,000 $ 6,000 $183,710,000 $171,287,000
================================================================================================================================
Interest rate and currency swaps:
Notional amount:
Interest rate swaps and forward rate
agreements $ 22,064,000 $6,889,000 $ 833,000 $150,000 $ 29,936,000 $ 19,891,000
Currency swaps -- 2,734,000 1,227,000 580,000 4,541,000 --
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 22,064,000 $9,623,000 $2,060,000 $730,000 $ 34,477,000 $ 19,891,000
================================================================================================================================
FUTURES AND FORWARD CONTRACTS AND INTEREST
RATE AND CURRENCY SWAPS:
Credit exposure:
Gross replacement value $ 3,590,000 $ 838,000 $ 243,000 $ 53,000 $ 4,724,000 $ 3,531,000
Master netting arrangements (2,097,000) (318,000) (74,000) (16,000) (2,505,000) (1,577,000)
Collateral (52,000) (49,000) (48,000) -- (149,000) (83,000)
- --------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE* $ 1,441,000 $ 471,000 $ 121,000 $ 37,000 $ 2,070,000 $ 1,871,000
================================================================================================================================
* The net replacement value of $356.0 million with respect to interest rate and
currency swaps is presented as a component of unrealized gain on interest
rate and currency swaps, options and forward transactions.
30
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American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
OPTION CONTRACTS:
Contractual amounts for purchased options:
Exchange traded $ 1,112,000 $ 146,000 $ -- -- $ 1,258,000 $ 1,410,000
Over the counter 21,348,000 3,179,000 752,000 -- 25,279,000 13,827,000
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 22,460,000 $ 3,325,000 $ 752,000 -- $ 26,537,000 $ 15,237,000
============================================================================================================================
CREDIT EXPOSURE FOR PURCHASED OPTIONS:
Gross replacement value $ 478,000 $ 164,000 $ 64,000 -- $ 706,000 $ 370,000
Master netting arrangements (188,000) (41,000) (1,000) -- (230,000) (72,000)
Collateral (17,000) -- -- -- (17,000) (23,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net replacement value(a) $ 273,000 $ 123,000 $ 63,000 -- $ 459,000 $ 275,000
============================================================================================================================
Contractual amounts for sold options(b) $ 23,456,000 $ 3,656,000 $ 968,000 -- $ 28,080,000 $ 14,158,000
============================================================================================================================
(a) The net replacement value with respect to purchased options is presented as
a component of spot commodities, at market value.
(b) Options obligate AIGTG to buy or sell the underlying item if the option
purchaser chooses to exercise. The amounts do not represent credit
exposures.
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 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 OVER THE COUNTER TOTAL TOTAL
RATE AND CURRENCY SWAPS PURCHASED OPTIONS 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Counterparty credit quality:
AAA $ 154,000 $ 60,000 $ 214,000 $ 240,000
AA 717,000 189,000 906,000 782,000
A 449,000 81,000 530,000 620,000
BBB 65,000 7,000 72,000 67,000
Below investment grade 20,000 2,000 22,000 32,000
Not externally rated, including exchange
traded futures and options* 665,000 120,000 785,000 405,000
- -------------------------------------------------------------------------------------------------------------------------------
Total $2,070,000 $459,000 $2,529,000 $2,146,000
===============================================================================================================================
* Exchange traded futures and options are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly
settled on a daily basis.
At December 31, 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 OVER THE COUNTER TOTAL TOTAL
RATE AND CURRENCY SWAPS PURCHASED OPTIONS 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Non-U.S. banks $ 611,000 $223,000 $ 834,000 $ 818,000
U.S. industrials 332,000 8,000 340,000 322,000
Governmental 132,000 20,000 152,000 112,000
Non-U.S. financial service companies 222,000 36,000 258,000 54,000
Non-U.S. industrials 101,000 15,000 116,000 164,000
U.S. banks 288,000 37,000 325,000 426,000
U.S. financial service companies 132,000 99,000 231,000 110,000
Exchanges* 252,000 21,000 273,000 140,000
- -------------------------------------------------------------------------------------------------------------------------------
Total $2,070,000 $459,000 $2,529,000 $2,146,000
===============================================================================================================================
* Exchange traded futures and options are not deemed to have significant credit
exposure as the exchanges guarantee that every contract will be properly
settled on a daily basis.
31
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Generally, AIG manages and operates its businesses in the currencies of the
local operating environment. Thus, exchange gains or losses occur when AIG's
foreign currency net investment is affected by changes in the foreign exchange
rates relative to the U.S. dollar from one reporting period to the next.
As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and insurance investment operations; to
date, such activities have been minor.
AIG, through its Foreign Exchange Operating Committee, evaluates its
worldwide consolidated net asset or liability positions and manages AIG's
translation exposure to adverse movement in currency exchange rates. AIG may use
forward exchange contracts and purchases options where the cost of such is
reasonable and markets are liquid to reduce these exchange translation
exposures. The exchange gain or loss with respect to these hedging instruments
is recorded on an accrual basis as a component of the cumulative translation
adjustment account in capital funds. AIG's largest currency net investments have
had historically stable exchange rates with respect to the U.S. dollar.
Management of AIG's liquidity profile is designed to ensure that even under
adverse conditions AIG is able to raise funds at the most economical cost to
fund maturing liabilities and capital and liquidity requirements of its
subsidiaries. Sources of funds considered in meeting these objectives include
guaranteed investment agreements, issuance of long and short-term debt,
maturities and sales of securities available for sale, securities sold under
repurchase agreements, trade payables, securities and spot commodities sold, not
yet purchased, issuance of equity, and cash provided from operations. AIG's
strong capital position is integral to managing liquidity, as it enables AIG to
raise funds in diverse markets worldwide. (See also the discussions under
"Capital Resources" and "Liquidity" herein.)
Legal risk arises from the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of AIG's clients and counterparties,
including contractual provisions intended to reduce credit exposure by providing
for the netting of mutual obligations. (See also the discussion on master
netting 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.
ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) 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 believes that
the adoption of this statement in 1996 will have an immaterial impact on the
results of operations, financial condition and liquidity.
In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123 "Accounting for Awards of Stock-Based Compensation to Employees" (FASB
123). FASB 123 establishes accounting and reporting standards for stock-based
employee compensation plans. These plans include stock option and stock purchase
plans. FASB 123 provides employers a choice: Adopt FASB 123 accounting standards
for all stock compensation arrangements which requires the recognition of
compensation expense for the fair value of virtually all stock compensation
awards; or continue to account for stock options and other forms of stock
compensation under the current accounting standards (APB No. 25 "Accounting for
Stock Issued to Employees") while also providing the disclosure required under
FASB 123. AIG has adopted the disclosure requirements of FASB 123 effective for
the year ended December 31, 1995 financial statements.
In December 1995, FASB issued "Special Report, a Guide to the
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." Among other things, this guide provided for a
transition provision permitting a one-time transfer of debt securities from the
held to maturity classification to the available for sale classification.
Pursuant thereto, AIG has transferred approximately $2.8 billion of bonds held
to maturity, at amortized cost, having a market value of approximately $100
million in excess of such amortized cost.
In 1994, the American Institute of Certified Public Accountants issued a
Statement of Position (SOP) 94-6 "Disclosure of Certain Significant Risks and
Uncertainties" (SOP 94-6). Pursuant to SOP 94-6, AIG has made certain
disclosures as to risks and uncertainties and the nature of AIG's operations
and AIG's use of estimates in the preparation of its 1995 financial statements.
32
34
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 8. Financial Statements and Supplementary Data
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
- --------------------------------------------------------------------------------
Page
- --------------------------------------------------------------------------------
Report of Independent Accountants 34
Consolidated Balance Sheet at
December 31, 1995 and 1994 35
Consolidated Statement of Income for the
years ended December 31, 1995, 1994
and 1993 37
Consolidated Statement of Capital Funds
for the years ended December 31, 1995,
1994 and 1993 38
Consolidated Statement of Cash Flows for
the years ended December 31, 1995,
1994 and 1993 39
Notes to Financial Statements 41
Schedules:
I--Summary of Investments--Other Than
Investments in Related
Parties as of
December 31, 1995 S-1
II--Condensed Financial Information of
Registrant as of December 31, 1995
and 1994 and for the years ended
December 31, 1995, 1994 and 1993 S-2
III--Supplementary Insurance Information as
of December 31, 1995, 1994 and
1993 and for the years then ended S-4
IV--Reinsurance as of December 31, 1995,
1994 and 1993 and for the years
then ended S-5
VI--Supplemental Information Concerning
Property-Casualty Insurance Operations
as of December 31, 1995, 1994
and 1993 and for the years then ended S-6
33
35
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
American International Group, Inc.
We have audited the consolidated financial statements and the financial
statement schedules of American International Group, Inc. and subsidiaries
listed in the index on page 33 of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
International Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
As discussed in Note 1(w) of Notes to Financial Statements, the Company
changed its method of accounting for investments in certain fixed maturity
securities in 1993.
COOPERS & LYBRAND L.L.P.
New York, New York
February 22, 1996.
36
36
CONSOLIDATED BALANCE SHEET American International Group, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 1994
============================================================================================================================
ASSETS:
Investments and cash:
Fixed maturities:
Bonds held to maturity, at amortized cost (market value: 1995-$11,822,190;
1994-$13,109,670) $ 11,086,025 $ 13,041,807
Bonds available for sale, at market value (amortized cost: 1995-$29,417,475;
1994-$22,207,311) 30,926,771 21,812,600
Bonds trading securities, at market value (cost: 1995-$411,245;
1994-$171,993) 428,296 163,956
Preferred stocks, at amortized cost (market value: 1995-$620,217; 1994-$424,775) 459,505 412,503
Equity securities:
Common stocks (cost: 1995-$4,555,334; 1994-$4,607,786) 5,294,867 5,002,668
Non-redeemable preferred stocks (cost: 1995-$73,497; 1994-$85,901) 74,454 96,503
Mortgage loans on real estate, policy and collateral loans-net 7,860,532 5,353,074
Financial services assets:
Flight equipment primarily under operating leases, net of accumulated depreciation
(1995-$1,182,128; 1994-$959,096) 12,442,010 10,723,527
Securities available for sale, at market value (cost: 1995-$3,930,622;
1994-$3,794,076) 3,931,100 3,796,792
Trading securities, at market value 2,641,436 2,483,637
Spot commodities, at market value 1,079,124 916,833
Unrealized gain on interest rate and currency swaps, options and forward transactions 7,250,954 4,650,743
Trade receivables 3,321,985 2,629,734
Securities purchased under agreements to resell, at contract value 2,022,056 1,209,403
Other invested assets 2,808,158 1,953,015
Short-term investments, at cost which approximates market value 2,272,528 2,467,453
Cash 88,371 76,237
- ----------------------------------------------------------------------------------------------------------------------------
Total investments and cash 93,988,172 76,790,485
Investment income due and accrued 1,212,948 927,951
Premiums and insurance balances receivable-net 9,410,185 8,802,207
Reinsurance assets 16,878,155 16,289,607
Deferred policy acquisition costs 5,767,573 5,132,245
Investments in partially-owned companies 820,781 645,167
Real estate and other fixed assets, net of accumulated depreciation
(1995-$1,303,693; 1994-$1,129,514) 1,822,061 1,865,244
Separate and variable accounts 2,506,791 2,297,605
Other assets 1,729,732 1,595,606
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $134,136,398 $114,346,117
============================================================================================================================
See Accompanying Notes to Financial Statements.
35
37
CONSOLIDATED BALANCE SHEET (CONTINUED) American International Group, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 1994
============================================================================================================================
LIABILITIES:
Reserve for losses and loss expenses $ 33,046,717 $ 31,435,355
Reserve for unearned premiums 6,938,064 6,318,754
Future policy benefits for life and accident and health insurance contracts 20,864,635 17,432,222
Policyholders' contract deposits 9,580,983 6,487,426
Other policyholders' funds 2,092,165 1,951,358
Reserve for commissions, expenses and taxes 1,257,246 1,319,183
Insurance balances payable 1,886,403 1,462,545
Funds held by companies under reinsurance treaties 344,692 382,853
Income taxes payable:
Current 325,113 420,569
Deferred 552,144 33,031
Financial services liabilities:
Borrowings under obligations of guaranteed investment agreements 5,423,555 5,535,318
Securities sold under agreements to repurchase, at contract value 1,379,872 1,342,064
Trade payables 2,810,947 2,108,263
Securities sold but not yet purchased, principally obligations of the
U.S. Government and Government agencies, at market value 1,204,386 192,898
Spot commodities sold but not yet purchased, at market value 783,302 369,089
Unrealized loss on interest rate and currency swaps, options and forward transactions 6,405,045 3,659,450
Deposits due to banks and other depositors 957,441 655,973
Commercial paper 1,834,882 1,960,545
Notes, bonds and loans payable 8,932,743 7,567,046
Commercial paper 1,331,753 1,829,014
Notes, bonds, loans and mortgages payable 467,784 627,554
Separate and variable accounts 2,506,791 2,297,605
Other liabilities 2,982,632 2,336,341
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 113,909,295 97,724,456
- ----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANY 400,000 200,000
CAPITAL FUNDS:
Common stock, $2.50 par value; 1,000,000,000 shares authorized; shares issued
1995-506,084,177; 1994-337,390,984 1,265,210 843,477
Additional paid-in capital 131,828 565,410
Unrealized appreciation of investments, net of taxes 1,395,064 184,556
Cumulative translation adjustments, net of taxes (456,072) (288,074)
Retained earnings 17,697,739 15,340,928
Treasury stock; 1995-31,899,951; 1994-21,550,358 shares of common stock
(including 27,814,386 and 18,538,925 shares, respectively, held by subsidiaries) (206,666) (224,636)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS 19,827,103 16,421,661
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL FUNDS $134,136,398 $114,346,117
============================================================================================================================
See Accompanying Notes to Financial Statements.
36
38
CONSOLIDATED STATEMENT OF CAPITAL FUNDS American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993
================================================================================================================================
PREFERRED STOCK:
Series M-1 and M-2, exchangeable money market cumulative serial:
Balance at beginning of year $ - $ - $ 8
Redemption of preferred stock - - (8)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year - - -
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year 843,477 843,477 562,324
Stock split effected as dividend 421,733 - 281,153
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,265,210 843,477 843,477
- --------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 565,410 572,142 1,014,947
Excess (deficit) of proceeds over (under) cost of common
stock issued under stock option and stock purchase plans (15,097) (6,732) (10,131)
Stock split effected as dividend (421,733) - (281,153)
Redemption of preferred stock - - (149,992)
Other 3,248 - (1,529)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 131,828 565,410 572,142
- --------------------------------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS, NET OF TAXES:
Balance at beginning of year 184,556 922,646 129,816
Changes during year 1,809,365 (1,084,566) 719,824
Deferred income tax (expense) benefit on changes (598,857) 346,476 (177,971)
Cumulative effect of accounting change, net of taxes of $156,521 - - 250,977
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,395,064 184,556 922,646
- --------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS, NET OF TAXES:
Balance at beginning of year (288,074) (348,186) (333,882)
Changes during year (156,523) 37,089 8,742
Applicable income tax (expense) benefit on changes (11,475) 23,023 (23,046)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (456,072) (288,074) (348,186)
- --------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 15,340,928 13,301,529 11,486,615
Net income 2,510,383 2,175,515 1,938,773
Cash dividends to shareholders:
Preferred - - (1,043)
Common ($.32, $.29 and $.26 per share, respectively) (153,572) (136,116) (122,816)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 17,697,739 15,340,928 13,301,529
- --------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST:
Balance at beginning of year (224,636) (67,413) (77,676)
Cost of shares acquired during year (17,646) (178,676) (13,148)
Issued under stock option and stock purchase plans 35,616 21,453 23,411
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (206,666) (224,636) (67,413)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS AT END OF YEAR $19,827,103 $16,421,661 $15,224,195
================================================================================================================================
See Accompanying Notes to Financial Statements.
38
39
CONSOLIDATED STATEMENT
OF CASH FLOWS American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993
================================================================================================================================
SUMMARY:
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,208,381 $ 5,388,795 $ 6,467,451
NET CASH USED IN INVESTING ACTIVITIES (11,218,986) (9,139,291) (7,998,990)
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,022,739 3,669,252 1,552,392
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH 12,134 (81,244) 20,853
CASH AT BEGINNING OF YEAR 76,237 157,481 136,628
- --------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 88,371 $ 76,237 $ 157,481
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,510,383 $ 2,175,515 $ 1,938,773
- --------------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Non-cash revenues, expenses, gains and losses included in income:
Change in:
General and life insurance reserves 5,182,203 5,426,572 4,770,443
Premiums and insurance balances receivable and payable-net (184,120) (433,949) 204,046
Reinsurance assets (588,548) (405,819) (1,541,186)
Deferred policy acquisition costs (635,328) (882,836) (591,591)
Investment income due and accrued (284,997) (119,683) (25,877)
Funds held under reinsurance treaties (38,161) (24,049) 75,387
Other policyholders' funds 140,807 212,068 212,813
Current and deferred income taxes-net (165,730) 2,050 141,143
Reserve for commissions, expenses and taxes (61,937) 205,786 188,592
Other assets and liabilities-net 511,489 (123,796) 15,711
Trade receivables and payables -net 10,433 (881,227) 1,483,536
Trading securities, at market value (157,799) 32,529 (568,946)
Spot commodities, at market value (162,291) (152,618) (132,498)
Net unrealized gain on interest rate and currency swaps,
options and forward transactions 145,384 (351,173) 782,580
Securities purchased under agreements to resell (812,653) 1,528,104 1,579,805
Securities sold under agreements to repurchase 37,808 (957,499) (1,332,642)
Securities sold but not yet purchased 1,011,488 (503,556) 279,063
Spot commodities sold but not yet purchased, at market value 414,213 83,332 (1,250,918)
Realized capital gains (71,834) (86,853) (107,098)
Equity in income of partially-owned companies and other invested assets (119,116) (108,378) (61,934)
Depreciation expenses, principally flight equipment 734,560 581,930 472,247
Cumulative effect of accounting changes - - (20,695)
Change in cumulative translation adjustments (156,523) 37,089 8,742
Other-net (51,350) 135,256 (52,045)
- --------------------------------------------------------------------------------------------------------------------------------
Total adjustments 4,697,998 3,213,280 4,528,678
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,208,381 $ 5,388,795 $ 6,467,451
================================================================================================================================
See Accompanying Notes to Financial Statements.
39
40
CONSOLIDATED STATEMENT
OF CASH FLOWS (CONTINUED) American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of fixed maturities, at amortized cost matured or redeemed $ 1,111,864 $ 580,098 $ 2,202,289
Cost of fixed maturities, at amortized cost sold - - 1,319,187
Cost of bonds, at market sold 7,633,674 7,945,587 5,251,475
Cost of bonds, at market matured or redeemed 2,695,319 1,451,753 556,881
Cost of equity securities sold 2,517,697 2,675,545 1,885,439
Realized capital gains 71,834 86,853 107,098
Purchases of fixed maturities (16,947,508) (16,168,618) (11,965,103)
Purchases of equity securities (2,588,994) (3,518,311) (2,868,385)
Mortgage, policy and collateral loans granted (3,488,856) (2,691,600) (1,234,780)
Repayments of mortgage, policy and collateral loans 902,378 780,406 691,284
Sales or maturities of securities held for investment - - 1,902,814
Sales of securities available for sale 1,896,109 4,421,682 -
Maturities of securities available for sale 1,183,742 464,301 -
Purchases of securities held for investment - - (2,714,813)
Purchases of securities available for sale (3,210,125) (3,695,670) -
Sales of flight equipment 1,158,151 266,262 301,353
Purchases of flight equipment (3,279,356) (2,726,791) (2,410,816)
Net additions to real estate and other fixed assets (340,563) (469,759) (389,390)
Sales or distributions of other invested assets 294,855 370,047 325,077
Investments in other invested assets (970,580) (913,346) (436,660)
Change in short-term investments 194,925 2,081,866 (424,014)
Investments in partially-owned companies (53,552) (79,596) (97,926)
- --------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $(11,218,986) $ (9,139,291) $ (7,998,990)
==============================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in policyholders' contract deposits $ 3,093,557 $ 2,047,587 $ (46,863)
Change in deposits due to banks and other depositors 301,468 98,601 (444,238)
Change in commercial paper (622,924) 640,674 523,576
Proceeds from notes, bonds, loans and mortgages payable 5,600,790 4,810,073 2,479,559
Repayments on notes, bonds, loans and mortgages payable (4,290,938) (2,427,351) (822,147)
Proceeds from guaranteed investment agreements 2,940,563 3,650,957 4,244,133
Maturities of guaranteed investment agreements (3,052,326) (4,851,218) (4,206,373)
Proceeds from subsidiary company preferred stock issued 197,144 - 98,472
Proceeds from common stock issued 20,519 14,721 13,280
Cash dividends to shareholders (153,572) (136,116) (123,859)
Acquisition of treasury stock (17,646) (178,676) (13,148)
Redemption of preferred stock - - (150,000)
Other-net 6,104 - -
- --------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 4,022,739 $ 3,669,252 $ 1,552,392
==============================================================================================================
TAXES PAID $ 1,065,700 $ 741,900 $ 466,600
==============================================================================================================
INTEREST PAID $ 1,318,700 $ 1,055,500 $ 1,017,100
==============================================================================================================
See Accompanying Notes to Financial Statements
40
41
American International Group, Inc.
NOTES TO FINANCIAL STATEMENTS and Subsidiaries
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation: The consolidated financial statements include
the accounts of American International Group, Inc. and all significant
subsidiaries (AIG). All material intercompany accounts and transactions have
been eliminated.
(b) Basis of Presentation: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Certain accounts have been reclassified in the 1994 and 1993 financial
statements to conform to their 1995 presentation.
General Insurance Operations: AIG's general insurance subsidiaries are
multiple line companies writing substantially all lines of property and casualty
insurance. One or more of these companies is licensed to write substantially all
of these lines in all states of the United States and in more than 100 foreign
countries. Premiums are earned primarily on a pro rata basis over the term of
the related coverage. The reserve for unearned premiums represents the portion
of net premiums written relating to the unexpired terms of coverage.
Acquisition costs are deferred and amortized over the period in which the
related premiums are earned. Investment income is not anticipated in the
deferral of acquisition costs (see Note 4).
Losses and loss expenses are charged to income as incurred. The reserve for
losses and loss expenses represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The methods
of determining such estimates and establishing resulting reserves, including
amounts relating to reserves for estimated unrecoverable reinsurance, are
continually reviewed and updated. Adjustments resulting therefrom are reflected
in income currently. AIG does not discount its loss reserves, other than for
very minor amounts related to certain workers' compensation claims.
Life Insurance Operations: AIG's life insurance subsidiaries offer a wide
range of traditional insurance and financial and investment products. One or
more of these subsidiaries is licensed to write life insurance in all states in
the United States and in over 70 foreign countries. Traditional products consist
of individual and group life, annuity, and accident and health policies.
Financial and investment products consist of single premium annuity, variable
annuities, guaranteed investment contracts and universal life. Premiums for
traditional life insurance products are generally recognized as revenues over
the premium paying period of the related policies. Benefits and expenses are
provided against such revenues to recognize profits over the estimated life of
the policies. Revenues for universal life and investment-type products consist
of policy charges for the cost of insurance, administration, and surrenders
during the period. Expenses include interest credited to policy account balances
and benefit payments made in excess of policy account balances. Investment
income reflects certain minor amounts of realized capital gains where the gains
are deemed to be an inherent element in pricing certain life products in some
foreign countries.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Deferred policy acquisition costs and policy initiation costs related to
universal life and investment-type products are amortized in relation to
expected gross profits over the life of the policies (see Note 4).
The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.
Financial Services Operations: AIG participates in the derivatives dealer
market conducting, primarily as principal, an interest rate, currency and equity
derivative products business. AIG also enters into long-dated forward foreign
exchange contracts, option transactions, liquidity facilities, investment
agreements and other structured transactions and invests in a diversified
portfolio of securities.
AIG engages in market making and trading activities, as principal, in
foreign exchange, interest rates, precious and base metals and natural gas and
other energy products. AIG owns inventories in the commodities in which it
trades and may reduce the exposure to market risk through the use of swaps,
forwards, futures and option contracts.
AIG, as lessor, leases flight equipment principally under operating leases.
Accordingly, income is reported over the life of the lease as rentals become
receivable under the provisions of the lease or, in the case of leases with
varying payments, under the straight-line method over the noncancelable term of
the lease. In certain cases, leases provide for additional amounts contingent on
usage. AIG is also a marketer of flight equipment and marketing revenues from
such operations consist of net gains on sales of flight equipment, commissions
and net gains on disposition of leased flight equipment.
(c) Investments in Fixed Maturities and Equity Securities: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at market value. Included in
the bonds available for sale are collateralized mortgage obligations (CMOs).
Premiums and discounts arising from the purchase of CMOs are treated as yield
adjustments over their estimated life. Bond trading securities are carried at
market value, as it is AIG's intention to sell these securities in the near
term. Common and non-redeemable preferred stocks are carried at market value.
Unrealized gains and losses from investments in equity securities and fixed
maturities available for sale are reflected in capital funds, net of any related
deferred income taxes. Unrealized gains
41
42
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and losses from investments in trading securities are reflected in income
currently.
Realized capital gains and losses are determined principally by specific
identification. Where declines in values of securities below cost or amortized
cost are considered to be other than temporary, a charge is reflected in income
for the difference between amortized cost and estimated net realizable value.
(d) Mortgage Loans on Real Estate, Policy and Collateral
Loans--net: Mortgage loans on real estate, policy loans and collateral loans are
carried at unpaid principal balances. Impairment of mortgage loans on real
estate and collateral loans is generally measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate
subject to the fair value of underlying collateral. Interest income on such
loans is recognized as cash is received.
(e) Flight Equipment: Flight equipment is stated at cost. Major additions
and modifications are capitalized. Normal maintenance and repairs, airframe and
engine overhauls and compliance with return conditions of flight equipment on
lease are provided by and paid for by the lessee. Under the provisions of most
leases for certain airframe and engine overhauls, the lessee is reimbursed for
costs incurred up to but not exceeding contingent rentals paid to AIG by the
lessee. AIG provides a charge to income for such reimbursements based upon the
hours utilized during the period and the expected reimbursement during the life
of the lease. Depreciation and amortization are computed on the straight-line
basis to a residual value of approximately 15 percent over the estimated useful
lives of the related assets but not exceeding 25 years. This caption also
includes deposits for aircraft to be purchased.
At the time the assets are retired or disposed of, the cost and associated
accumulated depreciation and amortization are removed from the related accounts
and the difference, net of proceeds, is recorded as a gain or loss.
(f) Securities Available for Sale, at market value: These securities are
held to meet long term investment objectives and are accounted for as available
for sale, carried at market value and recorded on a trade date basis. Unrealized
gains and losses are reflected in capital funds, net of any related deferred
income taxes.
(g) Trading Securities, at market value: Trading securities are held to
meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and marked to market. The
unrealized gains and losses are reflected in income.
(h) Spot Commodities, at market value: Spot commodities, which include
commodities and options, are valued at market and are recorded on a trade date
basis. The unrealized gains and losses are reflected in income currently. The
exposure to market risk may be reduced through the use of forwards, futures and
option contracts. These contracts are valued at market and are recorded as
contractual commitments on a trade date basis. The unrealized gains and losses
on open contracts are reflected in income currently.
(i) Unrealized Gain and Unrealized Loss on Interest Rate and Currency
Swaps, Options and Forward Transactions: Swaps, options and forward transactions
are accounted for as contractual commitments recorded on a trade date basis and
are carried at market or estimated fair value when market values are not
available. Estimated fair values are based on the use of valuation models that
utilize, among other things, current interest, foreign exchange and volatility
rates with the resulting unrealized gains or losses reflected in income
currently. These valuations represent an assessment of the present values of
expected future cash flows of these transactions and may include reserves for
market risk as deemed appropriate. The portfolio's discounted cash flows are
evaluated with reference to current market conditions, maturities within the
portfolio and other relevant factors. Based upon this evaluation, it is
determined what, if any, offsetting transactions are necessary to reduce the
market risk of the portfolio. The recorded values of these transactions may be
different than the values that might be realized if AIG were to sell or close
out the transactions prior to maturity. AIG manages its market risk with a
variety of transactions, including swaps, trading securities, futures and
forward contracts and other transactions, as appropriate.
(j) Trade Receivables and Trade Payables: Trade receivables and trade
payables include balances due from and due to clearing brokers and exchanges and
receivables from and payables to counterparties which relate to unrealized gains
and losses on open futures and forward contracts, securities and commodities.
(k) Securities Purchased (Sold) Under Agreements to Resell (Repurchase), at
contract value: Purchases of securities under agreements to resell and sales of
securities under agreements to repurchase are accounted for as collateralized
transactions and are recorded at their contracted resale or repurchase amounts,
plus accrued interest. Generally, it is AIG's policy to take possession of
securities purchased under agreements to resell.
AIG minimizes the credit risk that counterparties to transactions might be
unable to fulfill their contractual obligations by monitoring customer credit
exposure and collateral value and generally requiring additional collateral to
be deposited with AIG when deemed necessary.
(l) Other Invested Assets: Other invested assets consist primarily of
investments in joint ventures and partnerships and other investments not
classified elsewhere herein. The joint ventures and partnerships are carried at
equity or cost depending on the nature of the invested asset and the ownership
percentage thereof. Other investments are carried at cost or market depending
upon the nature of the underlying assets. Unrealized gains and losses from the
revaluation of those investments carried at market are reflected in capital
funds, net of any related taxes.
(m) Reinsurance Assets: Reinsurance assets include the balances due from
both reinsurance and insurance com-
42
43
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
panies under the terms of AIG's reinsurance arrangements for paid and unpaid
losses and loss expenses, ceded unearned premiums and ceded future policy
benefits for life and accident and health insurance contracts and benefits paid
and unpaid. It also includes funds held under reinsurance treaties.
(n) Investments in Partially-Owned Companies: The equity method of
accounting is used for AIG's investment in companies in which AIG's ownership
interest approximates twenty but is not greater than fifty percent
(minority-owned companies). Equity in income of minority-owned insurance
operations is presented separately in the consolidated statement of income.
Equity in realized capital gains of such companies is included in other realized
capital gains (losses). Equity in net income of other unconsolidated companies
is principally included in other income (deductions)-net. At December 31, 1995,
AIG's significant investments in partially-owned companies included its 48.3
percent interest in Transatlantic Holdings, Inc. (Transatlantic), which derives
a substantial portion of its assumed reinsurance from AIG subsidiaries; its 19.9
percent interest in Richmond Insurance Company; its 23.9 percent interest in
SELIC Holdings, Ltd; and its 24.4 percent interest in IPC Holdings, Ltd. This
balance sheet caption also includes investments in less significant
partially-owned companies and in certain minor majority-owned subsidiaries. At
December 31, 1995, the market value of AIG's investment in Transatlantic
exceeded its carrying value by approximately $308.2 million.
(o) Real Estate and Other Fixed Assets: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs are
charged to income as incurred; expenditures for betterments are capitalized and
depreciated.
(p) Separate and Variable Accounts: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of each
account are legally segregated and are not subject to claims which arise out of
any other business of AIG.
(q) Securities Sold but not yet Purchased, Principally Obligations of the
U.S. Government and Government Agencies, at market value: Securities sold but
not yet purchased represent sales of securities not owned at the time of sale.
These obligations are recorded on a trade date basis and are carried at current
market values. The unrealized gains and losses are reflected in income
currently.
(r) Spot Commodities Sold but not yet Purchased, at market value: Spot
commodities sold but not yet purchased represent sales of commodities not owned
at the time of sale. These obligations are recorded on a trade date basis and
are carried at market values based upon current commodity prices. The unrealized
gains and losses are reflected in income currently.
(s) Preferred Shareholders' Equity in Subsidiary Company: Preferred
shareholders' equity in subsidiary company relates to outstanding market auction
preferred stock of International Lease Finance Corporation (ILFC), a wholly
owned subsidiary of AIG.
(t) Translation of Foreign Currencies: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FASB 52). Under FASB 52, functional currency assets and
liabilities are translated into U.S. dollars generally using current rates of
exchange and the related translation adjustments are recorded as a separate
component of capital funds net of any related taxes. Functional currencies are
generally the currencies of the local operating environment. Income statement
accounts expressed in functional currencies are translated using average
exchange rates. The adjustments resulting from translation of financial
statements of foreign entities operating in highly inflationary economies are
recorded in income. Exchange gains and losses resulting from foreign currency
transactions are also recorded in income currently. The exchange gain or loss
with respect to utilization of foreign exchange hedging instruments is recorded
as a component of capital funds.
(u) Income Taxes: Deferred federal and foreign income taxes are provided
for temporary differences for the expected future tax consequences of events
that have been recognized in AIG's financial statements or tax returns.
(v) Earnings Per Share: Earnings per common share are based on the weighted
average number of common shares outstanding, retroactively adjusted to reflect
all stock dividends and stock splits. The effect of all other common stock
equivalents is not significant for any period presented.
(w) Accounting Standards:
(i) Standards Adopted in 1995: In March 1995, the Financial Accounting
Standards Board (FASB)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 believes that
the adoption of this statement in 1996 will have an immaterial impact on the
results of operations, financial condition and liquidity.
In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123 "Accounting for Awards of Stock-Based Compensation to Employees" (FASB
123). FASB 123 establishes accounting and reporting standards for stock-based
employee compensation plans. These plans include stock option and stock purchase
plans. FASB 123 provides employers a choice: Adopt FASB 123 accounting standards
for all stock compensation arrangements which requires the recognition of
compensation
43
44
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expense for the fair value of virtually all stock compensation
awards; or continue to account for stock options and other forms of stock
compensation under the current accounting standards (APB No. 25 "Accounting for
Stock Issued to Employees") while also providing the disclosure required under
FASB 123. AIG has adopted the disclosure requirements of FASB 123 effective for
the year ended December 31, 1995 financial statements.
In December 1995, FASB issued "Special Report, a Guide to the
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." Among other things, this guide provided for a
transition provision permitting a one-time transfer of debt securities from the
held to maturity classification to the available for sale classification.
Pursuant thereto, AIG has transferred approximately $2.8 billion of bonds held
to maturity, at amortized cost, having a market value of approximately $100
million in excess of such amortized cost.
In 1994, the American Institute of Certified Public Accountants (AICPA)
issued a Statement of Position (SOP) 94-6 "Disclosure of Certain Significant
Risks and Uncertainties" (SOP 94-6). Pursuant to SOP 94-6, AIG has made certain
disclosures as to risks and uncertainties and the nature of AIG's operations and
AIG's use of estimates in the preparation of its 1995 financial statements.
(ii) Standards Adopted Prior to 1995: In November 1992, FASB issued
Statement of Financial Accounting Standards No. 112 "Employers' Accounting for
Postemployment Benefits" (FASB 112). FASB 112 establishes accounting standards
for employers who provide benefits to former or inactive employees after
employment but before retirement. FASB 112 was adopted by AIG effective January
1, 1994 and had no significant impact on AIG's results of operations, financial
condition or liquidity.
In October 1994, FASB issued Statement of Financial Accounting Standards
No. 119 "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments" (FASB 119). FASB 119 requires disclosure about derivative
financial instruments and amends FASB 105 "Disclosure of Information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk" (FASB 105) and Statement of Financial Accounting
Standards No. 107 "Disclosure about Fair Value of Financial Instruments".
FASB 119 requires disclosure about the amounts, nature and terms of
derivatives that are not subject to FASB 105. Also, FASB 119 requires disclosure
about financial instruments held or issued for trading purposes and purposes
other than trading. This statement was adopted by AIG effective December 31,
1994.
In December 1994, AICPA issued Statement of Position 94-5 "Disclosure of
Certain Matters in the Financial Statements of Insurance Enterprises"
(SOP 94-5). Pursuant to SOP 94-5, AIG has disclosed certain information with
respect to unpaid claims and claim adjustment expenses; accounting methods used
by AIG's insurance subsidiaries that are permitted by various domestic and
foreign insurance regulatory authorities rather than prescribed by such
authorities; and AIG's policies and methodologies for estimating the liability
for unpaid claim adjustment expense for difficult-to-estimate liabilities.
In May 1993, FASB issued Statement of Accounting Standards No. 115
"Accounting for Certain Investments on Debt and Equity Securities" (FASB 115)
and AIG adopted this standard at December 31, 1993. The pretax increase in
carrying value of bonds available for sale as a result of marking to market was
$919.3 million. The portion which inured to the benefit of policyholders was
$511.8 million, which has been recorded as a component of future policy benefits
for life and accident and health insurance contracts. Thus, the unrealized
appreciation of investments increased $251.0 million, net of taxes of $156.5
million.
2. FOREIGN OPERATIONS
Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds which
generally cause a delay in the outward remittance of such funds. Approximately
37 percent of consolidated assets at each of the years ended December 31, 1995
and 1994, and 53 percent, 53 percent and 51 percent of revenues for the years
ended December 31, 1995, 1994 and 1993, respectively, were located in or derived
from foreign countries (other than Canada). (See Note 18).
3. FEDERAL INCOME TAXES
(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal income
tax return. A Revenue Agent's Report assessing additional taxes for the years
1987 and 1988 has been issued and a Letter of Protest contesting the assessments
has been filed with the Internal Revenue Service. It is management's belief
that there are substantial arguments in support of the positions taken by AIG in
its Letter of Protest. Management also believes that the final result of these
examinations will be immaterial to the financial statements.
Foreign income not expected to be taxed in the United States has arisen
because AIG's foreign subsidiaries were generally not subject to U.S. income
taxes on income earned prior to January 1, 1987. Such income would become
subject to U.S. income taxes at current tax rates if remitted to the United
States or if other events occur which would make these amounts currently
taxable. The cumulative amount of undistributed earnings of AIG's foreign
subsidiaries currently not subject to U.S. income taxes was approximately $2.8
billion at December 31, 1995. Management presently has no intention of
subjecting these accumulated earnings to material U.S. income taxes and no
provision has been made in the accompanying financial statements for such taxes.
Income taxes paid in 1995, 1994 and 1993 amounted to $1,065,700,000,
$741,900,000 and $466,600,000, respectively.
44
45
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
3. FEDERAL INCOME TAXES (CONTINUED)
The Uruguay Round of the General Agreement on Tariffs and Trade Agreements
Act (GATT), which was approved in 1994, contains several revenue raising
provisions. One of GATT's funding measures requires AIG to include, in its
estimated tax payments, income taxes resulting from the Subpart F income of
foreign subsidiaries.
During 1994, the Internal Revenue Service issued Treasury Regulations that
affect the tax accounting method for companies which enter into hedging
transactions. The effect of these Regulations was to accelerate the timing of
AIG's income tax payments.
None of these changes had a material effect on AIG's results of operations
or liquidity.
(b) The U.S. Federal income tax rate is 35 percent for 1995, 1994 and 1993.
Actual tax expense on income differs from the "expected" amount computed by
applying the Federal income tax rate because of the following:
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
----------------------- ---------------------- --------------------
Percent Percent Percent
of pre-tax of pre-tax of pre-tax
Amount income Amount income Amount income
- ----------------------------------------------------------------------------------------------------------------------------
"Expected" tax expense $1,213,059 35.0% $1,033,193 35.0% $ 910,378 35.0%
Adjustments:
Tax exempt interest (274,090) (7.9) (260,146) (8.8) (248,887) (9.6)
Dividends received deduction (18,583) (0.5) (12,326) (0.4) (9,357) (0.4)
State income taxes 48,579 1.4 36,025 1.2 48,424 1.9
Foreign income not expected to be
taxed in the U.S., less foreign income taxes (5,010) (0.1) 4,708 0.2 10,481 0.4
Other (8,455) (0.3) (24,990) (0.9) (28,036) (1.0)
- ---------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 955,500 27.6% $ 776,464 26.3% $ 683,003 26.3%
- ---------------------------------------------------------------------------------------------------------------------------
Foreign and domestic components of actual tax expense:
Foreign:
Current $ 341,998 $ 244,405 $ 219,799
Deferred 45,685 38,625 17,736
Domestic*:
Current 683,776 592,359 552,233
Deferred (115,959) (98,925) (106,765)
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 955,500 $ 776,464 $ 683,003
- ---------------------------------------------------------------------------------------------------------------------------
* Including U.S. tax on foreign income.
(c) The components of the net deferred tax liability as of December 31,
1995 and December 31, 1994 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Deferred tax assets:
Loss reserve discount $1,266,292 $1,276,085
Unearned premium reserve reduction 271,119 241,695
Accruals not currently deductible 392,192 309,088
Adjustment to life policy reserves 506,896 370,835
Cumulative translation adjustment 16,509 15,608
Other 28,136 26,227
- --------------------------------------------------------------------------------
2,481,144 2,239,538
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 1,213,557 1,082,040
Financial service products
mark to market differential 175,952 226,598
Depreciation of flight equipment 669,742 522,282
Acquisition net asset basis adjustments 225,081 238,019
Unrealized appreciation of investments 656,572 57,547
Other 92,384 146,083
- --------------------------------------------------------------------------------
3,033,288 2,272,569
- --------------------------------------------------------------------------------
Net deferred tax liability $ 552,144 $ 33,031
- --------------------------------------------------------------------------------
45
46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. DEFERRED POLICY ACQUISITION COSTS
The following reflects the policy acquisition costs deferred for amortization
against future income and the related amortization charged to income for
general and life insurance operations, excluding certain amounts deferred and
amortized in the same period:
(in thousands)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------
GENERAL INSURANCE OPERATIONS:
BALANCE AT BEGINNING OF YEAR $1,179,494 $1,009,545 $ 880,257
- --------------------------------------------------------------------------------
Acquisition costs deferred
Commissions 570,180 602,014 475,511
OTHER 648,154 523,246 492,944
- --------------------------------------------------------------------------------
1,218,334 1,125,260 968,455
- --------------------------------------------------------------------------------
Amortization charged to income
Commissions 590,415 469,181 416,134
Other 517,625 486,130 423,033
- --------------------------------------------------------------------------------
1,108,040 955,311 839,167
- --------------------------------------------------------------------------------
BALANCE AT END OF YEAR $1,289,788 $1,179,494 $1,009,545
- --------------------------------------------------------------------------------
LIFE INSURANCE OPERATIONS:
BALANCE AT BEGINNING OF YEAR $3,952,751 $3,239,864 $2,777,561
- --------------------------------------------------------------------------------
Acquisition costs deferred
Commissions 819,596 741,532 604,906
Other 387,438 337,066 294,636
- --------------------------------------------------------------------------------
1,207,034 1,078,598 899,542
- --------------------------------------------------------------------------------
Amortization charged to income
Commissions 426,456 368,448 304,276
Other 194,031 168,916 165,034
- --------------------------------------------------------------------------------
620,487 537,364 469,310
- --------------------------------------------------------------------------------
(Decrease) increase due to
foreign exchange (61,513) 171,653 32,071
- --------------------------------------------------------------------------------
BALANCE AT END OF YEAR $4,477,785 $3,952,751 $3,239,864
- --------------------------------------------------------------------------------
TOTAL DEFERRED POLICY ACQUISITION COSTS $5,767,573 $5,132,245 $4,249,409
- --------------------------------------------------------------------------------
5. REINSURANCE
In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.
General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Amounts recoverable from general reinsurers are estimated in
a manner consistent with the claims liabilities associated with the reinsurance
and presented as a component of reinsurance assets.
AIG life companies limit exposure to loss on any single life. For ordinary
insurance, AIG retains a maximum of approximately one million dollars of
coverage per individual life. There are smaller retentions for other lines of
business. Life reinsurance is effected principally under yearly renewable term
treaties. Amounts recoverable from life reinsurers are estimated in a manner
consistent with the assumptions used for the underlying policy benefits and are
presented as a component of reinsurance assets.
General insurance premiums written and earned were comprised of the
following:
(in thousands)
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, WRITTEN EARNED
- -------------------------------------------------------------------------------
1995
Gross premiums $17,895,120 $17,243,829
Ceded premiums (6,002,098) (5,838,098)
- -------------------------------------------------------------------------------
Net premiums $11,893,022 $11,405,731
- -------------------------------------------------------------------------------
1994
Gross premiums $16,392,409 $15,665,787
Ceded premiums (5,526,656) (5,378,956)
- -------------------------------------------------------------------------------
Net premiums $10,865,753 $10,286,831
- -------------------------------------------------------------------------------
1993
Gross premiums $14,901,255 $14,405,992
Ceded premiums (4,875,352) (4,839,352)
- -------------------------------------------------------------------------------
Net premiums $10,025,903 $ 9,566,640
- -------------------------------------------------------------------------------
In the normal course of their operations, certain AIG subsidiaries are
provided reinsurance coverages from AIG's minority-owned reinsurance companies.
During 1995, 1994 and 1993, the premiums written which were ceded to
Transatlantic amounted to $189,000,000, $200,000,000 and $238,100,000,
respectively.
For the years ended December 31, 1995, 1994 and 1993, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $5.14
billion, $4.84 billion and $4.45 billion, respectively.
Life insurance net premium income was comprised of the following:
(in thousands)
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Gross premium income $8,245,422) $6,886,249 $5,924,557
Ceded premiums (207,272) (161,928) (178,511)
- -------------------------------------------------------------------------------
Net premium income $8,038,150 $6,724,321 $5,746,046
- -------------------------------------------------------------------------------
Life insurance recoveries, which reduced death and other benefits,
approximated $111.4 million, $96.0 million and $76.7 million, respectively, for
each of the years ended December 31, 1995, 1994 and 1993.
AIG's reinsurance arrangements do not relieve AIG from its direct
obligation to its insureds. Thus, a credit exposure exists with respect to both
general and life reinsurance ceded to the extent that any reinsurer is unable to
meet the obligations assumed under the reinsurance agreements. AIG holds
substantial collateral as security under related reinsurance agreements in the
form of funds, securities and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely
successful in prior recovery efforts.
AIG evaluates the financial condition of its reinsurers through an internal
reinsurance security committee consisting of members of AIG's Senior Management.
No single reinsurer is a material reinsurer to AIG nor is AIG's business
substantially dependent upon any reinsurance contract.
46
47
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
5. REINSURANCE (CONTINUED)
Life insurance ceded to other insurance companies was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1995 1994* 1993
- --------------------------------------------------------------------------------
Life insurance in-force $34,779,331 $30,184,126 $13,006,029
- --------------------------------------------------------------------------------
* The principal reason for the increase in 1994 relates to life insurance
in-force ceded with respect to corporate-owned life insurance.
Life insurance assumed represented 0.1 percent of gross life insurance
in-force at December 31, 1995 and 1994 and 0.5 percent for 1993, and 0.1 percent
of gross premium income for each of the periods ended December 31, 1995, 1994
and 1993.
Supplemental information for gross loss and benefit reserves net of ceded
reinsurance at December 31, 1995 and 1994 follows:
(in thousands)
- -------------------------------------------------------------------------------
AS NET OF
REPORTED REINSURANCE
- -------------------------------------------------------------------------------
DECEMBER 31, 1995
Reserve for losses and loss expenses $(33,046,717) $(19,692,817)
Future policy benefits for life and accident
and health insurance contracts (20,864,635) (20,728,035)
Premiums and insurance balances
receivable-net 9,410,185 11,150,516
Funds held under reinsurance treaties -- 89,624
Reserve for unearned premiums (6,938,064) (5,380,364)
Reinsurance assets 16,878,155 --
- -------------------------------------------------------------------------------
DECEMBER 31, 1994
Reserve for losses and loss expenses $(31,435,355) $(18,418,855)
Future policy benefits for life and accident
and health insurance contracts (17,432,222) (17,108,322)
Premiums and insurance balances
receivable-net 8,802,207 10,245,259
Funds held under reinsurance treaties -- 112,455
Reserve for unearned premiums (6,318,754) (4,925,054)
Reinsurance assets 16,289,607 --
- -------------------------------------------------------------------------------
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS
(a) The following analysis provides a reconciliation of the activity in the
reserve for losses and loss expenses:
(in thousands)
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
At beginning of year:
Reserve for losses and
loss expenses $ 31,435,400 $ 30,046,200 $ 28,156,800
Reinsurance recoverable (13,016,500) (12,489,200) (11,400,000)
- -------------------------------------------------------------------------------
18,418,900 17,557,000 16,756,800
- -------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 8,935,400 8,158,400 7,530,700
Prior year (275,600) (152,800) 45,300
- -------------------------------------------------------------------------------
8,659,800 8,005,600 7,576,000
- -------------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 2,610,900 1,997,400 1,893,100
Prior year 4,775,000 5,146,300 4,882,700
- -------------------------------------------------------------------------------
7,385,900 7,143,700 6,775,800
- -------------------------------------------------------------------------------
At end of year:
Net reserve for losses and
loss expenses 19,692,800 18,418,900 17,557,000
Reinsurance recoverable 13,353,900 13,016,500 12,489,200
- -------------------------------------------------------------------------------
$ 33,046,700 $ 31,435,400 $ 30,046,200
- -------------------------------------------------------------------------------
(b) The analysis of the future policy benefits and policyholders' contract
deposits liabilities as at December 31, 1995 and 1994 follows:
(in thousands)
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
FUTURE POLICY BENEFITS:
Long duration contracts $20,281,527 $16,916,382
Short duration contracts 583,108 515,840
- --------------------------------------------------------------------------------
Total $20,864,635 $17,432,222
- --------------------------------------------------------------------------------
Policyholders' contract deposits:
Annuities $ 3,617,579 $ 3,171,013
Guaranteed investments contracts (GICs) 1,694,030 812,737
Corporate-owned life insurance 3,204,913 1,483,882
Universal life 473,400 364,356
Other investment contracts 591,061 655,438
- --------------------------------------------------------------------------------
Total $ 9,580,983 $ 6,487,426
- --------------------------------------------------------------------------------
(c) Long duration contract liabilities included in future policy benefits,
as presented in the table above, result from traditional life products. Short
duration contract liabilities are primarily accident and health products. The
liability for future life policy benefits has been established based upon the
following assumptions:
(i) Interest rates (exclusive of immediate/terminal funding annuities),
which vary by territory, year of issuance and products, range from 2.5 percent
to 12.0 percent within the first 20 years. Interest rates on immediate/terminal
funding annuities are at a maximum of 12.2 percent and grade to not greater than
7.5 percent.
47
48
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS (Continued)
(ii) Mortality and surrender rates are based upon actual experience by
geographical area modified to allow for variations in policy form. The weighted
average lapse rate, including surrenders, for individual and group life
approximated 7.3 percent.
(iii) The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the benefit of AIG are
restricted in some cases by the insurance contracts and by the local insurance
regulations of the countries in which the policies are in-force.
(iv) Participating life business represented approximately 29 percent of
the gross insurance in-force at December 31, 1995 and 47 percent of gross
premium income in 1995. The amount of dividends to be paid is determined
annually by the Boards of Directors. Anticipated dividends are considered as a
planned contractual benefit in computing the value of future policy benefits and
are provided ratably over the premium-paying period of the contracts.
(d) The liability for policyholders' contract deposits has been established
based on the following assumptions:
(i) Interest rates credited on deferred annuities vary by year of issuance
and range from 4.0 percent to 8.3 percent. Credited interest rate guarantees are
generally for a period of one year. Withdrawal charges generally range from 6.0
percent to 10.0 percent grading to zero over a period of 6 to 10 years.
(ii) Domestically, GICs have market value withdrawal provisions for any
funds withdrawn other than benefit responsive payments. Interest rates credited
generally range from 4.7 percent to 9.1 percent and maturities range from 2 to 7
years. Overseas, primarily in the United Kingdom, GIC type contracts are
credited at rates ranging from 5.0 percent to 6.4 percent with maturities
generally being one year. Contracts in other foreign locations have interest
rates, maturities and withdrawal charges based upon local economic and
regulatory conditions.
(iii) Interest rates on corporate-owned life insurance business are
guaranteed at 4.0 percent and the weighted average rate credited in 1995 was
10.5 percent.
(iv) The universal life funds have credited interest rates of 4.5 percent
to 7.0 percent and guarantees ranging from 3.0 percent to 5.5 percent depending
on the year of issue. Additionally, universal life funds are subject to
surrender charges that amount to 8.5 percent of the fund balance grading to zero
over a period not longer than 20 years.
(e) Experience adjustments, relating to future policy benefits and
policyholders' contract deposits, vary according to the type of contract and the
territory in which the policy is in-force. In general terms, investments,
mortality and morbidity results may be passed through by experience credits or
as an adjustment to the premium mechanism, subject to local regulatory guidance.
7. STATUTORY FINANCIAL DATA
Statutory surplus and net income for general insurance and life insurance
operations as reported to regulatory authorities were as follows:
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Statutory surplus:
General insurance $11,142,956 $9,521,550 $7,164,367
Life insurance 4,788,833 3,834,269 3,275,078
Statutory net income
(including net realized
capital gains and losses):
General insurance 1,499,345 1,304,022 1,206,387
Life insurance 681,189 730,170 570,570
- --------------------------------------------------------------------------------
AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with GAAP vary between domestic and foreign jurisdictions. The principal
differences are that statutory financial statements do not reflect deferred
policy acquisition costs and deferred income taxes, all bonds are carried at
amortized cost and reinsurance assets and liabilities are presented net of
reinsurance. AIG's use of permitted statutory accounting practices does not have
a significant impact on statutory surplus.
8. Investment Information
(a) Statutory Deposits: Cash and securities with carrying values of $3.65
billion and $3.04 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 1995 and 1994,
respectively.
(b) Net Investment Income: An analysis of the net investment income from
the general and life insurance operations follows:
(in thousands)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------
General insurance:
Fixed maturities $1,323,180 $1,198,432 $1,136,120
Equity securities 53,052 90,773 96,311
Short-term investments 44,615 48,023 62,156
Other (net of interest
expense on funds held) 199,563 158,718 97,150
- --------------------------------------------------------------------------------
Total investment income 1,620,410 1,495,946 1,391,737
Investment expenses 74,693 60,854 51,257
- --------------------------------------------------------------------------------
Net investment income $1,545,717 $1,435,092 $1,340,480
- --------------------------------------------------------------------------------
Life insurance:
Fixed maturities $1,517,990 $1,194,686 $ 975,623
Equity securities 70,794 58,017 38,361
Short-term investments 67,218 92,484 220,050
Interest on mortgage, policy
and collateral loans 605,251 369,935 242,014
Other 105,119 119,769 94,146
- --------------------------------------------------------------------------------
Total investment income 2,366,372 1,834,891 1,570,194
Investment expenses 101,467 86,463 70,480
- --------------------------------------------------------------------------------
Net investment income $2,264,905 $1,748,428 $1,499,714
- --------------------------------------------------------------------------------
48
49
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
8. INVESTMENT INFORMATION (CONTINUED)
(c) Investment Gains and Losses:The realized capital gains (losses) and
increase (decrease) in unrealized appreciation of investments for 1995, 1994 and
1993 were as follows:
(in thousands)
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Realized capital gains (losses)
on investments:
Fixed maturities (a) $ 54,293 $ (116,903) $ 125,296
Equity securities 69,639 223,603 65,090
Other (52,098) (19,847) (83,288)
- -------------------------------------------------------------------------------
REALIZED CAPITAL GAINS $ 71,834 $ 86,853 $ 107,098
- -------------------------------------------------------------------------------
Increase (decrease) in unrealized
appreciation of investments:
Cumulative effect of
accounting change (b) $ -- $ -- $ 407,498
Fixed maturities 1,905,315 (1,357,521) 31,382
Equity securities 335,006 (254,518) 545,074
Other (c) (430,956) 527,473 143,368
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN UNREALIZED
APPRECIATION $1,809,365 $(1,084,566) $1,127,322
- -------------------------------------------------------------------------------
(a) In 1995 and 1994, the realized gains (losses) resulted from the sale of
available for sale fixed maturities. In 1993, a majority of the gains
(losses) realized resulted from sales of bonds carried at market value.
(b) Includes $511.8 million increase in unrealized appreciation attributable to
participating policyholders at December 31, 1993.
(c) Includes $480.9 million increase and $440.5 million decrease in unrealized
appreciation attributable to participating policyholders at December 31,
1995 and 1994, respectively.
The gross gains and gross losses realized on the disposition of available
for sale securities for 1995 and 1994 follows:
(in thousands)
- --------------------------------------------------------------------------------
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
- --------------------------------------------------------------------------------
1995
Bonds $ 60,205 $ 42,633
Common Stocks 276,036 215,162
Preferred Stocks 10,189 1,510
Financial services securities available for sale 8,244 799
- --------------------------------------------------------------------------------
Total $354,674 $260,104
- --------------------------------------------------------------------------------
1994
Bonds $ 50,416 $139,224
Common Stocks 302,318 92,257
Preferred Stocks 13,911 369
Financial services securities available for sale 41,029 8,334
- --------------------------------------------------------------------------------
Total $407,674 $240,184
- --------------------------------------------------------------------------------
During 1993 gross gains of $99,162,000 and gross losses of $43,094,000 were
realized on dispositions of fixed maturities carried at amortized cost.
(d) Market Value of Fixed Maturities and Unrealized Appreciation of
Investments: At December 31, 1995 and 1994, the balance of the unrealized
appreciation of investments in equity securities (before applicable taxes)
included gross gains of approximately $1,286,600,000 and $1,320,000,000 and
gross losses of approximately $546,100,000 and $914,500,000, respectively.
The deferred tax payable related to the net unrealized appreciation of
investments was $656,572,000 at December 31, 1995 and $57,547,000 at December
31, 1994.
The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 1995 and December 31, 1994
were as follows:
(in thousands)
- ------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------
1995
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 4,908 $ 604 $ 5 $ 5,507
States (b) 11,078,968 743,726 8,144 11,814,550
Foreign governments 124 9 -- 133
All other corporate 2,025 -- 25 2,000
- ------------------------------------------------------------------------------------
Total bonds 11,086,025 744,339 8,174 11,822,190
Preferred stocks 459,505 160,956 244 620,217
- ------------------------------------------------------------------------------------
Total fixed maturities $11,545,530 $905,295 $ 8,418 $12,442,407
- ------------------------------------------------------------------------------------
1994
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 4,627 $ 39 $ 201 $ 4,465
States (b) 13,035,025 346,979 278,845 13,103,159
Foreign governments 126 -- -- 126
All other corporate 2,029 -- 109 1,920
- ------------------------------------------------------------------------------------
Total bonds 13,041,807 347,018 279,155 13,109,670
Preferred stocks 412,503 12,484 212 424,775
- ------------------------------------------------------------------------------------
Total fixed maturities $13,454,310 $359,502 $279,367 $13,534,445
- ------------------------------------------------------------------------------------
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
49
50
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
8. INVESTMENT INFORMATION (CONTINUED)
The amortized cost and estimated market value of bonds available for sale
and carried at market value at December 31, 1995 and 1994 were as follows:
(in thousands)
- --------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
1995
Fixed maturities available for sale:
Bonds:
U.S. Government (a) $ 1,380,182 $ 121,977 $ 1,426 $ 1,500,733
States (b) 5,232,316 277,086 3,275 5,506,127
Foreign governments 7,255,915 343,931 8,642 7,591,204
All other corporate 15,549,062 852,878 73,233 16,328,707
- --------------------------------------------------------------------------------------------
Total bonds $29,417,475 $1,595,872 $ 86,576 $30,926,771
- --------------------------------------------------------------------------------------------
1994
Fixed maturities available for sale:
Bonds:
U.S. Government (a) $ 1,425,914 $ 35,565 $133,547 $ 1,327,932
States (b) 2,449,698 27,765 114,764 2,362,699
Foreign governments 5,310,211 78,319 117,465 5,271,065
All other corporate 13,021,488 215,274 385,858 12,850,904
- --------------------------------------------------------------------------------------------
Total bonds $22,207,311 $ 356,923 $751,634 $21,812,600
- --------------------------------------------------------------------------------------------
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market values of fixed maturities held to
maturity and fixed maturities available for sale at December 31, 1995, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
(in thousands)
- --------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
- --------------------------------------------------------------------------------
Fixed maturities held to maturity:
Due in one year or less $ 131,728 $ 140,124
Due after one year through five years 1,772,180 1,956,021
Due after five years through ten years 3,664,657 3,975,096
Due after ten years 5,976,965 6,371,166
- --------------------------------------------------------------------------------
Total held to maturity $11,545,530 $12,442,407
- --------------------------------------------------------------------------------
Fixed maturities available for sale:
Due in one year or less $ 2,042,094 $ 1,993,113
Due after one year through five years 10,796,502 10,628,704
Due after five years through ten years 10,549,729 11,915,726
Due after ten years 6,029,150 6,389,228
- --------------------------------------------------------------------------------
Total available for sale $29,417,475 $30,926,771
- --------------------------------------------------------------------------------
(e) Securities Available for Sale: AIGFP follows a policy of minimizing
interest rate, equity and currency risks associated with securities available
for sale by entering into swap or other transactions. In addition, to reduce its
credit risk, AIGFP has entered into credit derivative transactions with respect
to $1.10 billion of securities available for sale. At December 31, 1995, the
cumulative increase in carrying value of the securities available for sale and
related hedges as a result of marking to market such securities net of hedging
transactions was $478,000.
The amortized cost, related hedges and estimated market value of securities
available for sale and carried at market value at December 31, 1995 and 1994
were as follows:
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAINS
GROSS GROSS (LOSSES)-NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED ON HEDGING MARKET
COST GAINS LOSSES TRANSACTIONS VALUE
- --------------------------------------------------------------------------------------------------------------------------
1995
Securities available for sale:
Corporate and bank debt $1,248,881 $ 33,801 $ 1,590 $(31,410) $1,249,682
Foreign government obligations 1,152,656 33,475 75,878 43,381 1,153,634
Asset-backed and collateralized 631,574 7,007 2,156 (5,074) 631,351
Preferred stocks 453,870 3,462 3,363 16 453,985
U.S. Government obligations 443,641 48,906 773 (49,326) 442,448
- --------------------------------------------------------------------------------------------------------------------------
Total $3,930,622 $126,651 $ 83,760 $(42,413) $3,931,100
- --------------------------------------------------------------------------------------------------------------------------
1994
Securities available for sale:
Corporate and bank debt $1,228,207 $ 7,128 $ 23,475 $ 17,198 $1,229,058
Foreign government obligations 1,254,856 5,717 153,734 149,523 1,256,362
Asset-backed and collateralized 774,277 10,218 3,105 (6,538) 774,852
Preferred stocks 146,521 1,398 80 (1,333) 146,506
U.S. Government obligations 390,215 -- 39,762 39,561 390,014
- --------------------------------------------------------------------------------------------------------------------------
Total $3,794,076 $ 24,461 $220,156 $198,411 $3,796,792
- --------------------------------------------------------------------------------------------------------------------------
50
51
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
8. INVESTMENT INFORMATION (CONTINUED)
The amortized cost and estimated market values of securities available for
sale at December 31, 1995, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain borrowers have
the right to call or prepay certain obligations with or without call or
prepayment penalties.
(in thousands)
- --------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
- --------------------------------------------------------------------------------
Securities available for sale:
Due in one year or less $ 164,276 $ 164,232
Due after one year through five years 1,696,767 1,798,274
Due after five years through ten years 1,155,880 1,154,885
Due after ten years 282,125 182,358
Asset backed and collateralized 631,574 631,351
- --------------------------------------------------------------------------------
Total available for sale $3,930,622 $3,931,100
- --------------------------------------------------------------------------------
(f) CMOs: At December 31, 1995, CMOs, held by AIG's life companies, were
presented as a component of bonds available for sale, at market value. All of
the CMOs were investment grade and approximately 79 percent of the CMOs were
backed by various U.S. government agencies. The remaining 21 percent were
corporate issuances.
At December 31, 1995 and 1994, the market value of the CMO portfolio was
$2.2 billion and $1.7 billion, respectively; the amortized cost was
approximately $2.1 billion in 1995 and $1.8 billion in 1994. AIG's CMO portfolio
is readily marketable. There were no derivative (high risk) CMO securities
contained in this portfolio at December 31, 1995.
The distribution of the CMOs at December 31, 1995 and 1994 was as follows:
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
GNMA 31% 38%
FHLMC 23 23
FNMA 20 20
VA 5 5
Other 21 14
- -------------------------------------------------------------------------------
100% 100%
- -------------------------------------------------------------------------------
At December 31, 1995, the gross weighted average coupon of this portfolio
was 8.1 percent. The gross weighted average life of this portfolio was 6.7
years.
(g) Fixed Maturities Below Investment Grade: At December 31, 1995, the
fixed maturities and securities available for sale held by AIG that were below
investment grade were insignificant.
(h) During 1993, certain investments held by AIGFP experienced financial
difficulties and suffered rating downgrades. The pretax impact on AIG of the
estimated other than temporary impairment in value of these investments was $215
million. As is AIG's policy in such situations where credit ratings have
deteriorated significantly, these impairments have been appropriately recognized
by charges to income of $104 million in 1993 and $111 million prior to 1993.
(i) At December 31, 1995, non-income producing invested assets were
insignificant.
9. DEBT OUTSTANDING
At December 31, 1995, AIG's debt outstanding of $17.99 billion, shown below,
included borrowings of $14.32 billion which were either not guaranteed by AIG or
were matched borrowings under obligations of guaranteed investment agreements
(GIAs).
(in thousands)
- --------------------------------------------------------------------------------
Borrowings under Obligations of
GIAs-- AIGFP $ 5,423,555
- --------------------------------------------------------------------------------
Commercial Paper:
AIG Funding Inc. (Funding) 687,182
ILFC (a) 1,834,882
A.I. Credit Corp. (AICCO) 644,571
- --------------------------------------------------------------------------------
Total 3,166,635
- --------------------------------------------------------------------------------
Medium Term Notes:
ILFC (a) 2,391,535
AIG 115,000
- --------------------------------------------------------------------------------
Total 2,506,535
- --------------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC (a) 3,550,000
AIGFP 1,868,943
AIG: Lire bonds 159,067
Zero coupon notes 73,348
- --------------------------------------------------------------------------------
Total 5,651,358
- --------------------------------------------------------------------------------
Loans and Mortgages Payable:
ILFC (a) (b) 1,122,265
AIG 120,369
- --------------------------------------------------------------------------------
Total 1,242,634
- --------------------------------------------------------------------------------
Total Borrowings 17,990,717
- --------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 8,898,682
Matched GIA borrowings 5,423,555
- --------------------------------------------------------------------------------
14,322,237
- --------------------------------------------------------------------------------
Remaining borrowings of AIG $ 3,668,480
- --------------------------------------------------------------------------------
(a) AIG does not guarantee or support these borrowings.
(b) Primarily capital lease obligations.
(a) Commercial Paper:At December 31, 1995, the commercial paper issued and
outstanding was as follows:
(dollars in thousands)
- ----------------------------------------------------------------------------------
Weighted
Net Average Weighted
Book Unamortized Face Interest Average
Value Discount Amount Rate Maturity
- ----------------------------------------------------------------------------------
Funding $ 687,182 $ 5,943 $ 693,125 5.71% 60 days
AICCO 644,571 1,553 646,124 5.76 16 days
ILFC 1,834,882 8,748 1,843,630 5.82 89 days
- ----------------------------------------------------------------------------------
Total $3,166,635 $16,244 $3,182,879 -- --
- ----------------------------------------------------------------------------------
Commercial paper issued by Funding is guaranteed by AIG. AIG has entered
into an agreement in support of AICCO's commercial paper. AIG does not
guarantee ILFC's commercial paper.
51
52
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
9. DEBT OUTSTANDING (CONTINUED)
(b) Borrowings under Obligations of Guaranteed Investment Agreements:
Borrowings under obligations of guaranteed investment agreements, which are
guaranteed by AIG, are recorded at the amount outstanding under each contract.
Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings are primarily fixed and
range up to 10.6 percent.
Payments due under these investment agreements in each of the next five
years ending December 31, and the periods thereafter based on the earliest call
dates, were as follows:
(in thousands)
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
- --------------------------------------------------------------------------------
1996 $2,540,466
1997 290,545
1998 165,065
1999 227,530
2000 60,423
Remaining years after 2000 2,139,526
- --------------------------------------------------------------------------------
Total $5,423,555
- --------------------------------------------------------------------------------
At December 31, 1995, the market value of securities pledged as collateral
with respect to these obligations approximated $1,081,000,000.
(c) Medium Term Notes Payable:
(i) Medium Term Notes Payable Issued by AIG: AIG's Medium Term Notes are
unsecured obligations which may not be redeemed by AIG prior to maturity and
bear interest at either fixed rates set by AIG at issuance or variable rates
determined by reference to an interest rate or other formula.
An analysis of the Medium Term Notes for the year ended December 31, 1995
was as follows:
(in thousands)
- ----------------------------------------------------------------------------------
MEDIUM TERM
NOTE SERIES: B C D TOTAL
- ----------------------------------------------------------------------------------
Balance December 31, 1994 $40,000 $90,000 $25,000 $155,000
Matured during year -- 15,000 25,000 40,000
- ----------------------------------------------------------------------------------
Balance December 31, 1995 $40,000 $75,000 $ -- $115,000
- ----------------------------------------------------------------------------------
The interest rates on this debt range up to 8.45 percent. To the extent
deemed appropriate, AIG may enter into swap transactions to reduce its effective
short-term borrowing rate.
At December 31, 1995, the maturity schedule for AIG's outstanding Medium
Term Notes was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Principal
Amount
- --------------------------------------------------------------------------------
1996 $ 75,000
1997 --
1998 40,000
- --------------------------------------------------------------------------------
Total $115,000
- --------------------------------------------------------------------------------
At December 31, 1995, AIG had $247,000,000 principal amount of Series D
Medium Term Notes registered and available for issuance from time to time.
(ii) Medium Term Notes Payable Issued by ILFC:ILFC's Medium Term Notes are
unsecured obligations which may not be redeemed by ILFC prior to maturity and
bear interest at fixed rates set by ILFC at issuance.
As of December 31, 1995, notes in aggregate principal amount of
$2,391,535,000 were outstanding with maturity dates varying from 1996 to 2005 at
interest rates ranging from 4.5 percent to 9.88 percent. These notes provide for
a single principal payment at the maturity of each note.
At December 31, 1995, the maturity schedule for ILFC's outstanding Medium
Term Notes was as follows:
(in thousands)
- --------------------------------------------------------------------------------
Principal
Amount
- --------------------------------------------------------------------------------
1996 $ 456,050
1997 534,700
1998 567,535
1999 485,250
2000 156,000
Remaining years after 2000 192,000
- --------------------------------------------------------------------------------
Total $2,391,535
- --------------------------------------------------------------------------------
(d) NOTES AND BONDS PAYABLE:
(i) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of
$750,000,000. The notes were offered at 12 percent of principal amount at stated
maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG
from the issuance were $85,625,000. The notes are redeemable at any time in
whole or in part at the option of AIG at 100 percent of their principal amount
at stated maturity. The notes are also redeemable at the option of AIG or bearer
notes may be redeemed at the option of the holder in the event of certain
changes involving taxation in the United States at prices ranging from 38.28
percent currently, to 89.88 percent after August 15, 2003, of the principal
amount at stated maturity together with accrued amortization of original issue
discount from the preceding August 15. During 1995 and 1994, no notes were
repurchased. At December 31, 1995, the notes outstanding had a face value of
$189,200,000, an unamortized discount of $115,852,000 and a net book value of
$73,348,000. The amortization of the original issue discount was recorded as
interest expense.
(ii) Italian Lire Bonds:In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire. The principal amount of 200 billion Italian Lire
Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent
which is paid annually. These bonds are not redeemable prior to maturity, except
in the event of certain changes involving taxation in the United States or the
imposition of certain certification, identification or reporting requirements.
52
53
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
9. DEBT OUTSTANDING (CONTINUED)
Simultaneous with the issuance of this debt, AIG entered into a swap
transaction which effectively converted AIG's net interest expense to a U.S.
dollar liability of approximately 7.9 percent, which requires the payment of
proceeds at maturity of approximately $159 million in exchange for 200 billion
Italian Lire and interest thereon.
(iii) Term Notes Issued by ILFC:ILFC has issued unsecured obligations which
may not be redeemed prior to maturity.
As of December 31, 1995, notes in aggregate principal amount of
$3,550,000,000 were outstanding with maturity dates varying from 1996 to 2004
and interest rates ranging from 4.75 percent to 8.88 percent. $300,000,000 of
such term notes are at floating interest rates and the remainder are at fixed
rates. These notes provide for a single principal payment at maturity.
At December 31, 1995, the maturity schedule for ILFC's Term Notes was as
follows:
(in thousands)
- --------------------------------------------------------------------------------
Principal
Amount
- --------------------------------------------------------------------------------
1996 $ 600,000
1997 650,000
1998 750,000
1999 900,000
2000 400,000
Remaining years after 2000 250,000
- --------------------------------------------------------------------------------
Total $3,550,000
- --------------------------------------------------------------------------------
AIG does not guarantee any of the debt obligations of ILFC.
(iv) Notes and Bonds Payable Issued by AIGFP: During 1992, AIGFP issued 200
million principal amount Netherland guilder denominated bonds which bear
interest at a rate of 8.4 percent, payable annually, and mature on June 30,
1997. At December 31, 1995, these bonds had a carrying value of $110.1 million.
During 1995, AIGFP issued notes as follows: (a) 249 million principal
amount and 3 million principal amount Great Britain pound sterling denominated
notes due December 29, 2000, with interest rates of 5.88 percent and 3 month
sterling LIBOR, respectively, payable quarterly, and carrying values of $384.9
million and $4.6 million, respectively, at December 31, 1995; (b) 194 billion
principal amount Italian lire denominated notes, which bear interest at a rate
of 7.76 percent, payable annually, mature on December 31, 1998 and had a
carrying value of $122.5 million at December 31, 1995; and (c) 180 million
principal amount Australian dollar denominated notes, which bear interest at a
rate of 5.87 percent, payable semi-annually, mature on January 2, 2003 and had a
carrying value of $73.9 million at December 31, 1995.
AIGFP has also issued various credit linked notes maturing from 1996
through 2000. These notes, which are primarily U.S. dollar denominated, have
been issued to hedge certain credit risks in AIGFP's portfolio of securities
available for sale. AIGFP's payment obligations under these notes are reduced or
eliminated upon the occurrence of a payment default or bankruptcy event with
respect to the reference third party credit that is being hedged. The notes bear
interest at various interest rates. At December 31, 1995, these notes had a
carrying value of $1.04 billion.
AIGFP is also obligated under various notes maturing from 1996 through
2015. The majority of these notes are U.S. dollar and Japanese yen denominated
and bear interest at various interest rates. At December 31, 1995, these notes
had a carrying value of $130.7 million.
AIG guarantees all of the notes and bonds issued by AIGFP.
(e) Loans and Mortgages Payable:Loans and mortgages payable at December 31,
1995 consisted of the following:
(in thousands)
- -------------------------------------------------------------------------------------
Financial
Services AIG Total
- -------------------------------------------------------------------------------------
Uncollateralized loans payable $ 11,339 $102,301 $ 113,640
Collateralized loans and
mortgages payable* 1,110,926 18,068 1,128,994
- -------------------------------------------------------------------------------------
Total $1,122,265 $120,369 $1,242,634
- -------------------------------------------------------------------------------------
* Primary capital lease obligations
(i) Capital Lease Obligations: At December 31, 1995, ILFC's capital lease
obligations of $1.09 billion provide 10 year, fully amortizing debt with a
portion of this debt at fixed rates varying from 6.18 percent to 6.89 percent
and the remainder at a floating LIBOR base rate. The debt matures through 2005.
The flight equipment associated with the obligations had a net book value of
$1.22 billion. As of December 31, 1995, ILFC had the option to enter into an
additional facility of $747 million for aircraft to be delivered in 1996 on the
same terms as those for the existing facilities.
(f) Interest Expense for All Indebtedness:Total interest expense for all
indebtedness, net of capitalized interest, aggregated $1,361,140,000 in 1995,
$1,289,277,000 in 1994 and $1,103,955,000 in 1993. Interest expense paid
approximated $1,318,736,000 in 1995, $1,055,503,000 in 1994 and $1,017,066,000
in 1993.
10. CAPITAL FUNDS
(a) At December 31, 1995, there were 6,000,000 shares of AIG's $5 par value
serial preferred stock authorized, issuable in series.
During 1993, dividends paid on the Exchangeable Money Market Cumulative
Serial Preferred Stock then outstanding aggregated $1,043,000.
(b) AIG parent depends on its subsidiaries for cash flow in the form of
loans, advances and dividends. Some AIG subsidiaries, namely those in the
insurance business, are subject to regulatory restrictions on the amount of
dividends which can be remitted to AIG parent. These restrictions vary by state.
For example, unless permitted by the New York Superintendent of
53
54
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. CAPITAL FUNDS (CONTINUED)
Insurance, general insurance companies domiciled in New York may not pay
dividends to shareholders which in any twelve month period exceed the lesser of
10 percent of the company's statutory policyholders' surplus or 100 percent of
its "adjusted net investment income", as defined. Generally, less severe
restrictions applicable to both general and life insurance companies exist in
most of the other states in which AIG's insurance subsidiaries are domiciled.
Certain foreign jurisdictions have restrictions which generally cause only a
temporary delay in the remittance of dividends. There are also various local
restrictions limiting cash loans and advances to AIG by its subsidiaries.
Largely as a result of the restrictions, approximately 60 percent of
consolidated capital funds were restricted from immediate transfer to AIG parent
at December 31, 1995.
(c) The common stock activity for the three years ended December 31, 1995
was as follows:
- -----------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------
Shares outstanding at
beginning of year 315,840,626 317,628,067 211,629,013
Acquired during year (236,443) (2,086,113) (148,872)
Issued under stock option
and purchase plans 517,844 298,672 350,848
Stock split effected
as stock dividend 168,693,199 -- 112,461,475
Other* (10,631,000) -- (6,664,397)
- -----------------------------------------------------------------------------------
Shares outstanding at end of year 474,184,226 315,840,626 317,628,067
- -----------------------------------------------------------------------------------
* Shares issued to AIG and subsidiaries as part of stock split effected as stock
dividend.
As a result of common stock splits in the form of 50 percent stock
dividends, common stock increased and additional paid-in capital decreased
$421.7 million in 1995 and $281.2 million in 1993, respectively. Such stock
splits effected as stock dividends were paid July 28, 1995 and July 30, 1993 to
holders of record on June 30, 1995 and July 2, 1993, respectively.
11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, various commitments and contingent liabilities
are entered into by AIG and certain of its subsidiaries. In addition, AIG
guarantees various obligations of certain subsidiaries.
(a) Commitments to extend credit are agreements to lend subject to certain
conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. At December 31, 1995
and 1994, these commitments, made principally by AIG Capital Corp., approximated
$96,300,000 and $133,000,000, respectively. AIG uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. AIG evaluates each counterparty's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
AIG upon extension of credit, is based on management's credit evaluation of the
counterparty.
(b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the elements
of currency, interest rate, equity and commodity risks are reflected in the
consolidated balance sheet. In addition, these instruments involve, to varying
degrees, elements of credit risk not explicitly recognized in the consolidated
balance sheet. Collateral is required, at the discretion of AIG, on certain
transactions based on the creditworthiness of the counterparty.
(c) AIGFP becomes a party to off-balance sheet financial instruments in the
normal course of its business and to reduce its currency, interest rate and
equity exposures. Interest rate, currency and equity risks related to such
instruments are reflected in the consolidated financial statements to the extent
these instruments are carried at a market or a fair value, whichever is
appropriate. Because of limited liquidity of certain of these instruments, the
recorded estimated fair values of such instruments may be different than the
values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity.
AIGFP, as principal and for its own account, enters into interest rate,
currency and equity swaps, swaptions and forward commitments. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
AIGFP typically becomes a principal in the exchange of interest payments between
the parties and, therefore, may be exposed to loss, if counterparties default.
Currency and equity swaps are similar to interest rate swaps, but may involve
the exchange of principal amounts at the beginning and end of the transaction.
At December 31, 1995, the notional principal amount of the sum of the swap pays
and receives approximated $164.0 billion, primarily related to interest rate
swaps of approximately $130.4 billion.
The following tables provide the notional and contractual amounts of
AIGFP's derivatives portfolio at December 31, 1995. The notional amounts used to
express the extent of AIGFP's involvement in swap 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 each of the respective
contractual agreements.
54
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American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The following table presents AIGFP's swaps and swaptions portfolio by
maturity and type of derivative at December 31, 1995:
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Remaining Life
-------------------------------------------------------
One Two Through Six Through After 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 $26,726,000 $61,700,000 $31,497,000 $10,518,000 $130,441,000 $105,581,000
Currency swaps 5,942,000 14,161,000 5,305,000 3,421,000 28,829,000 18,260,000
Equity/commodity swaps 247,000 48,000 -- 25,000 320,000 817,000
Swaptions 417,000 1,246,000 1,939,000 772,000 4,374,000 9,060,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total $33,332,000 $77,155,000 $38,741,000 $14,736,000 $163,964,000 $133,718,000
- ----------------------------------------------------------------------------------------------------------------------------------
Futures and forward contracts are contracts for delivery of foreign
currencies or financial indices in which the seller/purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise as a result of movements in current market
prices from contracted prices and the potential inability of counterparties to
meet their obligations under the contracts. At December 31, 1995, the
contractual amount of AIGFP's futures and forward contracts approximated $18.3
billion.
The following table presents AIGFP's futures and forward contracts
portfolio by maturity and type of derivative at December 31, 1995:
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
--------------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Futures and forward contracts:
Exchange traded futures contracts
contractual amount $16,050,000 -- -- -- $16,050,000 $13,183,000
- ---------------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts
contractual amount $ 2,236,000 $ 2,000 -- -- $ 2,238,000 $ 2,049,000
- ---------------------------------------------------------------------------------------------------------------------------
These instruments involve, to varying degrees, elements of credit risk not
explicitly recognized in the consolidated financial statements. AIGFP utilizes
various credit enhancements, including collateral, credit triggers and credit
derivatives to reduce the credit exposure relating to these off-balance sheet
financial instruments. AIGFP requires credit enhancements in connection with
specific transactions based on, among other things, the creditworthiness of the
counterparties and the transaction's size and maturity. In addition, AIGFP's
derivative transactions are generally documented under ISDA Master Agreements.
Such agreements provide for legally enforceable set-off and close out netting of
exposures to specific counterparties. Under such agreements, in connection with
an early termination of a transaction, AIGFP is permitted to set off its
receivables from a counterparty against its payables to the same counterparty
arising out of all included transactions. As a result, the net replacement value
represents the net sum of estimated positive fair values after the application
of such strategies, agreements and collateral held. The net replacement value
most closely represents the net credit risk to AIGFP or the maximum amount
exposed to potential loss. The net replacement value of all interest rate,
currency, and equity swaps, swaptions and forward commitments at December 31,
1995, approximated $6.8 billion. The net replacement value for futures and
forward contracts at December 31, 1995, approximated $50.0 million.
AIGFP independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGFP's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The average credit rating of AIGFP's counterparties as a whole (as
measured by AIGFP) is equivalent to AA. The maximum potential loss will increase
or decrease during the life of the derivative commitments as a function of
maturity and market conditions.
55
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 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
-----------------------------
Swaps And Futures And Total Total
Swaptions Forward Contracts 1995 1994
- -------------------------------------------------------------------------------------------------------
Counterparty credit quality:
AAA $1,994,000 $ -- $1,994,000 $1,093,000
AA 2,129,000 17,000 2,146,000 1,987,000
A 1,433,000 10,000 1,443,000 1,012,000
BBB 1,239,000 -- 1,239,000 525,000
Below investment grade 49,000 -- 49,000 21,000
Not externally rated--exchanges* -- 23,000 23,000 13,000
- -------------------------------------------------------------------------------------------------------
Total $6,844,000 $50,000 $6,894,000 $4,651,000
- -------------------------------------------------------------------------------------------------------
* Exchange traded futures are not deemed to have significant credit exposure as
the exchanges guarantee that every contract will be properly settled on a daily
basis.
At December 31, 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
---------------------------------
Swaps And Futures And Total Total
Swaptions Forward Contracts 1995 1994
- ------------------------------------------------------------------------------------------------------------
Non-U.S. banks $2,425,000 $18,000 $2,443,000 $2,101,000
Insured municipalities 880,000 -- 880,000 270,000
U.S. industrials 1,025,000 -- 1,025,000 494,000
Governmental 845,000 -- 845,000 726,000
Non-U.S. financial service companies 40,000 -- 40,000 31,000
Non-U.S. industrials 531,000 -- 531,000 372,000
Special purpose 113,000 -- 113,000 16,000
U.S. banks 310,000 9,000 319,000 172,000
U.S. financial service companies 424,000 -- 424,000 324,000
Supranationals 251,000 -- 251,000 132,000
Exchanges* -- 23,000 23,000 13,000
- ------------------------------------------------------------------------------------------------------------
Total $6,844,000 $50,000 $6,894,000 $4,651,000
- ------------------------------------------------------------------------------------------------------------
* Exchange traded futures are not deemed to have significant credit exposure as
the exchanges guarantee that every contract will be properly settled on a daily
basis.
AIGFP has entered into commitments to provide liquidity for certain tax
exempt variable rate demand notes issued by municipal entities. The agreements
allow the holders, in certain circumstances, to tender the notes to the issuer
at par value. In the event a remarketing agent of an issuer is unable to resell
such tendered notes, AIGFP would be obligated to purchase the notes at par
value. With respect to certain notes that have been issued, AIGFP has fulfilled
its liquidity commitments by arranging bank liquidity facilities. These banks
agree to purchase the notes that AIGFP is otherwise obligated to purchase in
connection with a failed remarketing. It is the intention of AIGFP to arrange
similar liquidity with respect to the $1.3 billion aggregate amount of notes
that are expected to be issued through 1999. In connection with one transaction
that has a bank liquidity facility, AIGFP has committed through December 31,
1997 to purchase up to $278.6 million of notes in the event the bank is required
to purchase notes under the liquidity facility. Any notes so purchased by AIGFP
would be insured as to both principal and interest and, while held by AIGFP,
would bear interest at an above-market tax-exempt rate. It is AIGFP's intention,
as with existing obligations, to remove itself from this risk through bank
participations before the issuance of the underlying notes.
Securities sold, but not yet purchased represent obligations of AIGFP to
deliver specified securities at their contracted prices, and thereby create a
liability to repurchase the securities in the market at prevailing prices.
AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, believes that it
has in place effective procedures for evaluating and limiting the credit and
market risks to which it is subject. Management is not aware of any potential
counterparty defaults as of December 31, 1995.
56
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American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The net trading revenues for the twelve months ended December 31, 1995 from
AIGFP's operations were $289.0 million.
(d) AIG Trading Group Inc. and its subsidiaries (AIGTG) becomes a party to
off-balance sheet financial instruments in the normal course of its business and
to reduce its currency, interest rate and commodity exposures.
The following tables provide the notional and contractual amounts of
AIGTG's derivatives portfolio at December 31, 1995. In addition, the estimated
positive fair values associated with the derivatives portfolio are also provided
and include a maturity profile for the December 31, 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.
Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks arise as a result of movements
in current market prices from contracted prices and the potential inability of
counterparties to meet their obligations under the contracts. At December 31,
1995, the contractual amount of AIGTG's futures and forward contracts
approximated $210.5 billion.
The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
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 values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss. At December 31, 1995, the net replacement value of AIGTG's
futures and forward contracts and interest rate and currency swaps approximated
$2.07 billion.
The following table presents AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1995:
(in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Remaining Life
-------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Futures and forward contracts
and interest rate and
currency swaps:
Exchange traded futures contracts
contractual amount $ 22,494,000 $4,131,000 $ 180,000 $ -- $ 26,805,000 $ 21,504,000
- -------------------------------------------------------------------------------------------------------------------------------
Over the counter forward contracts
contractual amount $174,487,000 $8,075,000 $1,142,000 $ 6,000 $183,710,000 $171,287,000
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps:
Notional amount:
Interest rate swaps and forward
rate agreements $ 22,064,000 $6,889,000 $ 833,000 $150,000 $ 29,936,000 $ 19,891,000
Currency swaps -- 2,734,000 1,227,000 580,000 4,541,000 --
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 22,064,000 $9,623,000 $2,060,000 $730,000 $ 34,477,000 $ 19,891,000
- -------------------------------------------------------------------------------------------------------------------------------
Futures and forward contracts and interest rate and currency swaps:
Credit exposure:
Gross replacement value $ 3,590,000 $ 838,000 $ 243,000 $ 53,000 $ 4,724,000 $ 3,531,000
Master netting arrangements (2,097,000) (318,000) (74,000) (16,000) (2,505,000) (1,577,000)
Collateral (52,000) (49,000) (48,000) -- (149,000) (83,000)
- -------------------------------------------------------------------------------------------------------------------------------
Net replacement value * $ 1,441,000 $ 471,000 $ 121,000 $ 37,000 $ 2,070,000 $ 1,871,000
- -------------------------------------------------------------------------------------------------------------------------------
* The net replacement value of $356.0 million with respect to interest rate
and currency swaps is presented as a component of unrealized gain on
interest rate and currency swaps, options and forward transactions.
57
58
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Options are contracts that allow the holder of the option to purchase or
sell the underlying commodity, currency or index at a specified price and
within, or at, a specified period of time. Risks arise as a result of movements
in current market prices from contracted prices, and the potential inability of
the counterparties to meet their obligations under the contracts. At December
31, 1995, the contractual amount of AIGTG's purchased options approximated $26.5
billion.
As a writer of options, AIGTG generally receives an option premium and then
manages the risk of any unfavorable change in the value of the underlying
commodity, currency or index. At December 31, 1995, the contractual amount for
sold options approximated $28.1 billion.
The following table presents AIGTG's options portfolio and the associated
credit exposure, if applicable, by maturity and type of derivative at December
31, 1995:
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Remaining Life
--------------------------------------------------
One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Option contracts:
Contractual amounts for purchased options:
Exchange traded $ 1,112,000 $ 146,000 $ -- -- $ 1,258,000 $ 1,410,000
Over the counter 21,348,000 3,179,000 752,000 -- 25,279,000 13,827,000
- --------------------------------------------------------------------------------------------------------------------------------
Total $22,460,000 $ 3,325,000 $ 752,000 -- $ 26,537,000 $ 15,237,000
- --------------------------------------------------------------------------------------------------------------------------------
Credit exposure for purchased options:
Gross replacement value $ 478,000 $ 164,000 $ 64,000 -- $ 706,000 $ 370,000
Master netting arrangements (188,000) (41,000) (1,000) -- (230,000) (72,000)
Collateral (17,000) -- -- -- (17,000) (23,000)
- --------------------------------------------------------------------------------------------------------------------------------
Net replacement value (a) $ 273,000 $ 123,000 $ 63,000 -- $ 459,000 $ 275,000
- --------------------------------------------------------------------------------------------------------------------------------
Contractual amounts for sold options (b) $23,456,000 $ 3,656,000 $ 968,000 -- $ 28,080,000 $ 14,158,000
- --------------------------------------------------------------------------------------------------------------------------------
(a) The net replacement value with respect to purchased options is presented as
a component of spot commodities, at market value.
(b) Options obligate AIGTG to buy or sell the underlying item if the option
purchaser chooses to exercise. The amounts do not represent credit
exposures.
AIGTG independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGTG's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The maximum potential loss will increase or decrease during the life
of the derivative commitments as a function of maturity and market conditions.
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 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 Over The Counter Total Total
Rate And Currency Swaps Purchased Options 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Counterparty credit quality:
AAA $ 154,000 $ 60,000 $ 214,000 $ 240,000
AA 717,000 189,000 906,000 782,000
A 449,000 81,000 530,000 620,000
BBB 65,000 7,000 72,000 67,000
Below investment grade 20,000 2,000 22,000 32,000
Not externally rated, including exchange
traded futures and options* 665,000 120,000 785,000 405,000
- -----------------------------------------------------------------------------------------------------------------------
Total $2,070,000 $459,000 $2,529,000 $2,146,000
- -----------------------------------------------------------------------------------------------------------------------
* Exchange traded futures and options are not deemed to have significant
credit exposure as the exchanges guarantee that every contract will be
properly settled on a daily basis.
58
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American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
At December 31, 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 Over The Counter Total Total
Rate And Currency Swaps Purchased Options 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Non-U.S. banks $ 611,000 $223,000 $ 834,000 $ 818,000
U.S. industrials 332,000 8,000 340,000 322,000
Governmental 132,000 20,000 152,000 112,000
Non-U.S. financial service companies 222,000 36,000 258,000 54,000
Non-U.S. industrials 101,000 15,000 116,000 164,000
U.S. banks 288,000 37,000 325,000 426,000
U.S. financial service companies 132,000 99,000 231,000 110,000
Exchanges* 252,000 21,000 273,000 140,000
- ----------------------------------------------------------------------------------------------------------------------
Total $2,070,000 $459,000 $2,529,000 $2,146,000
- ----------------------------------------------------------------------------------------------------------------------
* Exchange traded futures and options are not deemed to have significant
credit exposure as the exchanges guarantee that every contract will be
properly settled on a daily basis.
AIGTG limits its risks by holding offsetting positions. In addition, AIGTG
monitors and controls its risk exposures through various monitoring systems
which evaluate AIGTG's market and credit risks, and through credit approvals and
limits. At December 31, 1995, AIGTG did not have a significant concentration of
credit risk from either an individual counterparty or group of counterparties.
The net trading revenues for the twelve months ended December 31, 1995 from
AIGTG's operations were $317.2 million.
At December 31, 1995, AIGTG had issued and outstanding $206.0 million
principal amount of letters of credit. These letters of credit were issued
primarily to various exchanges.
AIG has issued unconditional guarantees with respect to the prompt payment,
when due, of all present and future obligations and liabilities of AIGFP and
AIGTG arising from transactions entered into by AIGFP and AIGTG.
(e) At December 31, 1995, ILFC had committed to purchase or had secured
positions for 292 aircraft deliverable from 1996 through 2004 at an estimated
aggregate purchase price of $15.9 billion and had options to purchase an
additional 34 aircraft deliverable through 2005 at an estimated aggregate
purchase price of $2.5 billion. ILFC will be required to find customers for any
aircraft presently on order and any aircraft to be ordered, and it must arrange
financing for portions of the purchase price of such equipment.
AIG does not anticipate any losses in connection with the aforementioned
activities that would have a material effect on its financial condition or
results of operations.
(f) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.
AIG continues to receive indemnity claims asserting injuries from toxic
waste, hazardous substances, and other environmental pollutants and alleged
damages to cover the cleanup costs of hazardous waste dump sites (hereinafter
collectively referred to as environmental claims) and indemnity claims asserting
injuries from asbestos. Estimation of asbestos and environmental claims loss
reserves is a difficult process, as these claims, which emanate from policies
written in 1984 and prior years, cannot be estimated by conventional reserving
techniques. Asbestos and environmental claims development is affected by factors
such as inconsistent court resolutions, the broadening of the intent of policies
and scope of coverage and increasing number of new claims. AIG and other
industry members have and will continue to litigate the broadening judicial
interpretation of policy coverage and the liability issues. If the courts
continue in the future to expand the intent of the policies and the scope of the
coverage, as they have in the past, additional liabilities would emerge for
amounts in excess of reserves held. This emergence cannot now be reasonably
estimated, but could have a material impact on AIG's future operating results.
The reserves carried for these claims as at December 31, 1995 ($1.94 billion
gross; $507.2 million net) are believed to be adequate as these reserves are
based on known facts and current law.
59
60
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
A summary of reserve activity, including estimates for applicable incurred
but not reported losses and loss expenses, relating to asbestos and
environmental claims separately and combined at December 31, 1995, 1994 and 1993
was as follows:
(in millions)
- --------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
------------------ ------------------ -------------------
Gross Net Gross Net Gross Net
- --------------------------------------------------------------------------------------------------------------------------------
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 686.0 $130.2 $ 656.0 $116.7 $ 558.4 $ 86.9
Losses and loss expenses incurred 197.7 20.5 149.2 45.8 242.9 65.1
Losses and loss expenses paid (138.9) (22.8) (119.2) (32.3) (145.3) (35.3)
- --------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 744.8 $127.9 $ 686.0 $130.2 $ 656.0 $ 116.7
- --------------------------------------------------------------------------------------------------------------------------------
Environmental:
Reserve for losses and loss expenses at beginning of year $ 728.1 $200.1 $ 684.8 $191.5 $ 566.4 $ 166.6
Losses and loss expenses incurred 684.9 231.7 187.5 61.8 278.6 106.5
Losses and loss expenses paid (215.1) (52.5) (144.2) (53.2) (160.2) (81.6)
- --------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,197.9 $379.3 $ 728.1 $200.1 $ 684.8 $ 191.5
- --------------------------------------------------------------------------------------------------------------------------------
Combined:
Reserve for losses and loss expenses at beginning of year $1,414.1 $330.3 $1,340.8 $308.2 $1,124.8 $ 253.5
Losses and loss expenses incurred 882.6 252.2 336.7 107.6 521.5 171.6
Losses and loss expenses paid (354.0) (75.3) (263.4) (85.5) (305.5) (116.9)
- --------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,942.7 $507.2 $1,414.1 $330.3 $1,340.8 $ 308.2
- --------------------------------------------------------------------------------------------------------------------------------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FASB 107) requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
such fair value. These financial instruments may or may not be recognized in the
consolidated balance sheet. In the measurement of the fair value of certain of
the financial instruments, quoted market prices were not available and other
valuation techniques were utilized. These derived fair value estimates are
significantly affected by the assumptions used. FASB 107 excludes certain
financial instruments, including those related to insurance contracts.
The following methods and assumptions were used by AIG in estimating the
fair value of the financial instruments presented:
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Fixed maturity securities: Fair values for fixed maturity securities
carried at amortized cost or at market value were generally based upon quoted
market prices. For certain fixed maturity securities for which market prices
were not readily available, fair values were estimated using values obtained
from independent pricing services. No other fair valuation techniques were
applied to these bonds as AIG believes it would have to expend excessive costs
for the benefits derived.
Equity securities: Fair values for equity securities were based upon quoted
market prices.
Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.
Trade receivables and trade payables: Fair values for trade receivables and
trade payables approximate the carrying values presented in the consolidated
balance sheet.
Securities available for sale: Fair values for securities available for
sale and related hedges were based on quoted market prices. For securities and
related hedges for which market prices were not readily available, fair values
were estimated using quoted market prices of comparable investments.
Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.
Spot commodities: Fair values for spot commodities, which include options,
were based on current market prices.
Unrealized gains and losses on interest rate and currency swaps, options
and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among other
things, current interest, foreign exchange and volatility rates, as applicable.
Securities purchased (sold) under agreements to resell (repurchase), at
contract value: As these securities (obligations) are short-term in nature, the
contract values approximate fair values.
Other invested assets: For assets for which market prices were not readily
available, fair valuation techniques were not applied as AIG believes it would
have to expend excessive costs for the benefits derived.
60
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American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Policyholders' contract deposits: Fair values of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
GIAs: Fair values of AIG's obligations under investment type agreements
were estimated using discounted cash flow calculations based on interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued. Additionally, AIG follows a
policy of minimizing interest rate risks associated with GIAs by entering into
swap transactions.
Securities sold but not yet purchased, principally obligations of the U.S.
Government and Government agencies: The carrying amounts for these financial
instruments approximate fair values.
Spot commodities sold but not yet purchased: Fair values for spot
commodities sold short, which include options, were based on current market
prices.
Deposits due to banks and other depositors: To the extent certain amounts
are not demand deposits or certificates of deposit which mature in more than one
year, fair values were not calculated as AIG believes it would have to expend
excessive costs for the benefits derived.
Commercial paper: The carrying amount of AIG's commercial paper borrowings
approximates fair value.
Notes, bonds, loans and mortgages payable: Where practical, the fair values
of these obligations were estimated using discounted cash flow calculations
based upon AIG's current incremental borrowing rates for similar types of
borrowings with maturities consistent with those remaining for the debt being
valued.
The carrying values and fair values of AIG's financial instruments at
December 31, 1995 and December 31, 1994 and the average fair values with respect
to derivative positions during 1995 and 1994 were as follows:
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994
------------------------------------ ------------------------------------
Average Average
Carrying Fair Fair Carrying Fair Fair
Value Value Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed maturities $42,900,597 $43,797,474 $ -- $35,430,866 $35,511,002 $ --
Equity securities 5,369,321 5,369,321 -- 5,099,171 5,099,171 --
Mortgage loans on real estate, policy
and collateral loans 7,860,532 7,885,655 -- 5,353,074 5,381,198 --
Securities available for sale 3,931,100 3,931,100 4,089,766 3,796,792 3,796,792 4,262,469
Trading securities 2,641,436 2,641,436 3,193,973 2,483,637 2,483,637 2,268,539
Spot commodities 1,079,124 1,079,124 1,127,600 916,833 916,833 1,099,350
Unrealized gain on interest rate and currency
swaps, options and forward transactions 7,250,954 7,250,954 6,477,814 4,650,743 4,650,743 4,930,135
Trade receivables 3,321,985 3,321,985 3,250,451 2,629,734 2,629,734 2,689,014
Securities purchased under agreement to resell 2,022,056 2,022,056 -- 1,209,403 1,209,403 --
Other invested assets 2,808,158 2,808,158 -- 1,953,015 1,953,015 --
Short-term investments 2,272,528 2,272,528 -- 2,467,453 2,467,453 --
Cash 88,371 88,371 -- 76,237 76,237 --
Policyholders' contract deposits 9,580,983 9,673,374 -- 6,487,426 6,396,626 --
Borrowings under obligations of guaranteed
investment agreements 5,423,555 6,247,398 -- 5,535,318 5,623,119 --
Securities sold under agreements to repurchase 1,379,872 1,379,872 -- 1,342,064 1,342,064 --
Trade payables 2,810,947 2,810,947 3,335,512 2,108,263 2,108,263 2,762,057
Securities sold but not yet purchased,
principally obligations of the U.S. Government
and Government agencies 1,204,386 1,204,386 -- 192,898 192,898 --
Spot commodities sold but not yet purchased 783,302 783,302 662,800 369,089 369,089 394,425
Unrealized loss on interest rate and
currency swaps, options and forward
transactions 6,405,045 6,405,045 5,415,325 3,659,450 3,659,450 4,071,962
Deposits due to banks and other depositors 957,441 957,441 -- 655,973 655,973 --
Commercial paper 3,166,635 3,166,635 -- 3,789,559 3,789,559 --
Notes, bonds, loans and mortgages payable 9,400,527 9,700,189 -- 8,194,600 8,013,629 --
- ---------------------------------------------------------------------------------------------------------------------------------
Off-balance sheet financial instruments: Financial instruments which are
not currently recognized in the consolidated balance sheet of AIG are
principally commitments to extend credit and financial guarantees. The
unrecognized fair values of these instruments represent fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
current agreements and the counterparties' credit standings. No valuation was
made as AIG believes it would have to expend excessive costs for the benefits
derived.
13. STOCK COMPENSATION PLANS
At December 31, 1995, AIG had two types of stock-based compensation plans. One
was a stock option plan; the other, an employee stock purchase plan. AIG applies
APB Opinion 25 "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation costs
have been recognized for either plan.
61
62
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. STOCK COMPENSATION PLANS (CONTINUED)
(a) Stock Option Plan:On December 19, 1991, the AIG Board of Directors adopted a
1991 employee stock option plan, which provides that options to purchase a
maximum of 4,500,000 shares of common stock could be granted to officers and
other key employees at prices not less than fair market value at the date of
grant. Both the 1991 plan, and the options with respect to 112,387 shares
granted thereunder on December 19, 1991, were approved by shareholders at the
1992 Annual Meeting. At December 31, 1995, 2,099,983 shares were reserved for
future grants under the 1991 plan. As of March 18, 1992, no further options
could be granted under the 1987 plan, but outstanding options granted under the
1987 plan and the previously superceded 1982 plan continue in force until
exercise or expiration. At December 31, 1995, there were 4,130,713 shares
reserved for issuance under the 1991, 1987 and 1982 plans.
Under each plan, 25 percent of the options granted become exercisable on
the anniversary of the date of grant in each of the four years following that
grant and all options expire 10 years from the date of the grant. As of December
31, 1995, outstanding options granted with respect to 2,896,132 shares qualified
for Incentive Stock Option treatment under the Economic Recovery Tax Act of
1981.
Additional information with respect to AIG's plans at December 31, 1995,
and changes for the three years then ended, was as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------- --------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Under Option:
Outstanding at beginning of year 4,148,082 $40.31 3,933,389 $35.60 3,938,900 $30.31
Granted 557,675 90.33 593,550 64.39 521,362 59.21
Exercised (517,204) 24.84 (312,579) 25.17 (469,668) 17.83
Forfeited (57,840) 48.21 (66,278) 48.12 (57,205) 32.24
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 4,130,713 $48.89 4,148,082 $40.31 3,933,389 $35.60
- ---------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 2,749,517 $37.00 2,700,035 $31.12 2,329,323 $26.97
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per share of
options granted during 1995 $32.92
- ---------------------------------------------------------------------------------------------------------------------------------
Information about fixed stock options outstanding at December 31, 1995, is
summarized as follows:
- ----------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted Weighted Weighted
Number Average Remaining Average Number Average
Range Of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------
$18.13-26.06 975,274 2.9 years $21.79 975,274 $21.79
32.00-43.00 969,402 5.0 years 35.63 958,026 35.59
53.00-66.08 1,629,112 7.9 years 58.82 816,217 56.81
67.42-93.25 556,925 9.8 years 90.35 -- --
- ----------------------------------------------------------------------------------------------------------------
4,130,713 2,749,517
- ----------------------------------------------------------------------------------------------------------------
The fair value of stock options granted during the year ended December 31,
1995 was $18,356,000. The fair value of each option is estimated on the date of
the grant using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for grants in 1995:
dividend yield of 0.32 percent, expected volatility of 20.4 percent, risk-free
interest rate of 5.77 percent, and an expected life of 7 years.
(b) Employee Stock Purchase Plan: AIG's 1984 employee stock purchase plan was
adopted at its 1984 shareholders' meeting and became effective as of July 1,
1984. Eligible employees receive privileges to purchase up to an aggregate of
1,968,750 shares of AIG common stock, at a price equal to 85 percent of the fair
market value on the date of grant of the purchase privilege.
62
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American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
13. STOCK COMPENSATION PLANS (CONTINUED)
Purchase privileges are granted annually and are limited to the number of
whole shares that can be purchased by an amount equal to 5 percent of an
employee's annual salary or $3,750, whichever is less. Beginning with the
January 1, 1996 subscription, the maximum allowable purchase limitation
increased to $5,500.
As of December 31, 1995, there were 110,641 shares of common stock
subscribed to at a weighted average price of $65.20 per share pursuant to grants
of privileges under the 1984 plan. There were 152,406 shares, 135,992 shares and
140,171 shares issued under the 1984 plan at weighted average prices of $50.22,
$50.37 and $36.31 for the years ended December 31, 1995, 1994 and 1993,
respectively. The excess or deficit of the proceeds over the par value or cost
of the common stock issued was credited or charged to additional paid-in
capital. There were 255,104 shares available for the grant of future purchase
privileges under the 1984 plan at December 31, 1995.
The fair value of purchase privileges granted during the year ended
December 31, 1995 was $2,005,000. The weighted average fair value per share of
those purchase rights granted in 1995 was $14.90. The fair value of each
purchase right is estimated on the date of the subscription using the
Black-Scholes model.
The following were weighted average assumptions: dividend yield of 0.32
percent, an expected life of 1 year, expected volatility of 16.9 percent, and a
risk-free interest rate of 5.64 percent.
14. EMPLOYEE BENEFITS
(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation. While benefits vary, they are
usually based on the employees' years of credited service and average
compensation in the three years preceding retirement.
AIG's U.S. retirement plan is a qualified, noncontributory, defined benefit
plan. All qualified employees who have attained age 21 and completed twelve
months of continuous service are eligible to participate in this plan. An
employee with 5 or more years of service is entitled to pension benefits
beginning at normal retirement at age 65. Benefits are based upon a percentage
of average final compensation multiplied by years of credited service limited to
44 years of credited service. Prior to January 1, 1996, average final
compensation was subject to certain limitations. Annual funding requirements are
determined based on the "projected unit credit" cost method which attributes a
pro rata portion of the total projected benefit payable at normal retirement to
each year of credited service.
AIG has adopted a Supplemental Executive Retirement Program (Supplemental
Plan) to provide additional retirement benefits to designated executives and key
employees. Under the Supplemental Plan, the annual benefit, not to exceed 60
percent of average final compensation, accrues at a percentage of average final
pay multiplied for each year of credited service reduced by any benefits from
the current and any predecessor retirement plans, Social Security, if any, and
from any qualified pension plan of prior employers. The Supplemental Plan also
provides a benefit equal to the reduction in benefits payable under the AIG
retirement plan as a result of Federal limitations on benefits payable
thereunder. Currently, the Supplemental Plan is unfunded.
Eligibility for participation in the various non-U.S. retirement plans is
either based on completion of a specified period of continuous service or date
of hire, subject to age limitation. While benefits vary, they are generally
based on the employees' years of credited service and average compensation in
the years preceding retirement.
Assumptions associated with the projected benefit obligation and expected
long-term rate of return on plan assets at December 31, 1995 were as follows:
- -------------------------------------------------------------------------------
Range Of
Non-U.S. Plans* U.S. Plans
- -------------------------------------------------------------------------------
Discount rate 4.5-10.0% 7.3%
Salary increase rate 3.5-10.0 5.0
Expected long-term rate
of return on plan assets 5.0-10.0 9.0
- -------------------------------------------------------------------------------
* The ranges for the non-U.S. plans reflect the local socioeconomic environments
in which AIG operates.
63
64
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
14. EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the funded status of the various pension
plans and the amounts recognized in the accompanying consolidated balance sheet
as of December 31, 1995 and 1994:
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994
------------------------------------ ---------------------------------
Non-U.S. U.S. Non-U.S. U.S.
Plans Plans Total Plans Plans Total
- -----------------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value* $161,112 $193,511 $ 354,623 $158,695 $146,065 $304,760
- -----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefits earned prior to valuation date:
Vested 209,936 142,250 352,186 164,802 99,694 264,496
Nonvested 33,640 20,245 53,885 24,887 14,713 39,600
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 243,576 162,495 406,071 189,689 114,407 304,096
Additional benefits based on estimated
future salary levels 67,478 90,636 158,114 68,908 53,033 121,941
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 311,054 253,131 564,185 258,597 167,440 426,037
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 149,942 59,620 209,562 99,902 21,375 121,277
- -----------------------------------------------------------------------------------------------------------------------------------
Unrecognized prior service cost (10,920) (18,457) (29,377) (9,593) (3,035) (12,628)
Unrecognized net gain (loss) (49,831) 5,529 (44,302) (3,849) 26,582 22,733
Unamortized balance of the initial transition amounts (19,925) (10,639) (30,564) (24,259) (12,141) (36,400)
- -----------------------------------------------------------------------------------------------------------------------------------
Net amounts to be applied to future periods (80,676) (23,567) (104,243) (37,701) 11,406 (26,295)
Adjustment to reflect minimum liability 40,166 3,401 43,567 19,014 488 19,502
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued pension liability $109,432 $ 39,454 $ 148,886 $ 81,215 $ 33,269 $114,484
- -----------------------------------------------------------------------------------------------------------------------------------
* Plan assets are invested primarily in fixed-income securities and listed
stocks.
Net pension cost for the years ended December 31, 1995, 1994 and 1993
included the following components:
(in thousands)
- ---------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------
Cost of benefits earned during the period $ 40,015 $ 41,986 $ 33,258
Interest cost on the projected benefit
obligation 27,320 24,795 23,243
Actual return on all retirement plan assets (53,904) (8,789) (29,613)
Net amortization and deferral of
actuarial gains and losses 30,114 (15,466) 7,542
Amortization of the initial
transition amount 3,720 3,749 3,389
- ---------------------------------------------------------------------------------
Net pension expense* $ 47,265 $ 46,275 $ 37,819
- ---------------------------------------------------------------------------------
* Net pension expense included $30,978, $26,727 and $20,999 related to
non-U.S. plans for 1995, 1994 and 1993, respectively.
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k)
plan), which, during the two years ended December 31, 1994, provided for salary
reduction contributions by employees and matching contributions by AIG of up to
2 percent of annual salary. Commencing January 1, 1995, the 401(k) plan provided
for matching contributions by AIG of up to 6 percent of annual salary depending
on the employees' years of service.
(c) In addition to AIG's defined benefit pension plan, AIG and its
subsidiaries provide a postretirement benefit program for medical care and life
insurance, domestically and in certain foreign countries. Eligibility in the
various plans is generally based upon completion of a specified period of
eligible service and reaching a specified age. Benefits vary by geographic
location.
AIG's U.S. postretirement medical and life insurance benefits are based
upon the employee reaching age 55 with 10 years of service to be eligible for an
immediate benefit from the U.S. retirement plan. Retirees and their dependents
who were age 65 by May 1, 1989 participate in the medical plan at no cost. All
other retirees and dependents over age 65 pay 50 percent of the premium that is
paid by current active employees. Retirees under age 65 pay the full active
premium and covered dependents pay twice the active employee amounts.
Contributions are subject to adjustment annually. Other cost sharing features of
the medical plan include deductibles, coinsurance and Medicare coordination and
a lifetime maximum benefit of $1,000,000. The maximum life insurance benefit
prior to age 70 is $32,500, with a maximum of $25,000 thereafter.
Effective January 1, 1993, both plans' provisions were amended. Employees
who retire on or after January 1, 1993 are required to pay the actual cost of
the medical benefits reduced by a credit which is based upon age and years of
serv ice at retirement. The life insurance benefit varies by age at retirement
from $5,000 for retirement at ages 55 through 59 to $15,000 for retirement at
ages 65 and over.
64
65
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
14. EMPLOYEE BENEFITS (CONTINUED)
Assumptions associated with the accrued postretirement benefit liability at
December 31, 1995 were as follows:
- -------------------------------------------------------------------------------
Non-U.S. U.S.
Plans Plans
- -------------------------------------------------------------------------------
Discount rate 6.5-10.0% 7.3%
Salary increase rate 5.0-10.0 --
Medical trend rate year 1* 14.0 10.5
Medical trend rate year 6 and 9 6.0 5.5
- -------------------------------------------------------------------------------
* The Medical trend rate grades downward from years 1 through 6 domestically
and years 1 through 9 for the foreign benefits. The trend rates remain
level thereafter.
The following table sets forth the liability for the accrued postretirement
benefits of the various plans, and amounts recognized in the accompanying
consolidated balance sheet as of December 31, 1995 and 1994. These plans are
not funded currently.
(in thousands)
- -------------------------------------------------------------------------------
Non-U.S. U.S.
Plans Plans Total
- -------------------------------------------------------------------------------
1995
Accumulated postretirement
benefit obligation:
Retirees $ 2,128 $ 42,771 $44,899
Fully eligible active employees 5,790 1,715 7,505
Other active employees 7,898 11,204 19,102
- -------------------------------------------------------------------------------
15,816 55,690 71,506
- -------------------------------------------------------------------------------
Unrecognized net loss -- (3,355) (3,355)
Unrecognized prior service cost -- 28,802 28,802
- -------------------------------------------------------------------------------
Accrued postretirement benefit
liabilities $15,816 $ 81,137 $96,953
- -------------------------------------------------------------------------------
1994
Accumulated postretirement
benefit obligation:
Retirees $ 1,896 $ 44,521 $46,417
Fully eligible active employees 4,301 845 5,146
Other active employees 5,932 9,059 14,991
- -------------------------------------------------------------------------------
12,129 54,425 66,554
- -------------------------------------------------------------------------------
Unrecognized net loss -- (2,931) (2,931)
Unrecognized prior service cost -- 30,319 30,319
- -------------------------------------------------------------------------------
Accrued postretirement benefit
liabilities $12,129 $ 81,813 $93,942
- -------------------------------------------------------------------------------
The net periodic postretirement costs for the years ended December 31,
1995, 1994 and 1993 included the following components:
(in thousands)
- --------------------------------------------------------------------------------
Life
Medical Insurance
Plans Plans Total
- --------------------------------------------------------------------------------
1995
Cost of benefits earned during
the period $ 1,011 $ 448 $ 1,459
Interest cost on accumulated
postretirement benefit obligations 3,744 1,246 4,990
Amortization of prior service cost (1,344) (172) (1,516)
- -------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $ 3,411 $1,522 $ 4,933
- -------------------------------------------------------------------------------
1994
Cost of benefits earned during
the period $ 1,160 $ 499 $ 1,659
Interest cost on accumulated
postretirement benefit obligations 4,055 1,032 5,087
Amortization of prior service cost (1,344) (172) (1,516)
Amortization of net actuarial losses 318 -- 318
- -------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $ 4,189 $1,359 $ 5,548
- -------------------------------------------------------------------------------
1993
Cost of benefits earned during
the period $ 876 $ 384 $ 1,260
Interest cost on accumulated
postretirement benefit obligations 3,693 1,110 4,803
Amortization of prior service cost (1,344) (172) (1,516)
- -------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $ 3,225 $1,322 $ 4,547
- -------------------------------------------------------------------------------
The medical trend rate assumptions have a significant effect on the amounts
reported. Increasing each trend rate by 1 percent in each year would increase
the accumulated postretirement benefit obligations as of December 31, 1995 by
$5.6 million and the aggregate service and interest cost components of the
periodic postretirement benefit costs for 1995 by $502,000.
(d) AIG has certain postemployment benefits provided to former or inactive
employees who are not retirees. Certain of these benefits are insured and
expensed currently; other expenses are provided for currently. Such uninsured
expenses include long and short-term disability medical and life insurance
continuation, short-term disability income continuation and COBRA medical
subsidies. The provision for these benefits at December 31, 1995 was $6.4
million. The incremental expense was insignificant.
65
66
15. LEASES
(a) AIG and its subsidiaries occupy leased space in many locations under various
long-term leases and have entered into various leases covering the long-term use
of data processing equipment. At December 31, 1995, the future minimum lease
payments under operating leases were as follows:
(in thousands)
- --------------------------------------------------------------------------------
1996 $183,813
1997 136,160
1998 100,525
1999 74,961
2000 65,155
Remaining years after 2000 228,412
- --------------------------------------------------------------------------------
Total $789,026
- --------------------------------------------------------------------------------
Rent expense approximated $215,600,000, $208,000,000, and $200,500,000 for
the years ended December 31, 1995, 1994 and 1993, respectively.
(b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 1995 was as follows:
(in thousands)
- --------------------------------------------------------------------------------
1996 $1,112,237
1997 889,205
1998 700,100
1999 551,181
2000 404,996
Remaining years after 2000 743,435
- --------------------------------------------------------------------------------
Total $4,401,154
- --------------------------------------------------------------------------------
Flight equipment is leased, under operating leases, for periods ranging
from one to ten years.
16. OWNERSHIP AND TRANSACTIONS WITH RELATED PARTIES
(a) Ownership: The directors and officers of AIG, the directors and holders of
common stock of C. V. Starr & Co., Inc. (Starr), a private holding company, The
Starr Foundation, Starr International Company, Inc. (SICO), a private holding
company, and Starr own or otherwise control approximately 28 percent of the
voting stock of AIG. Six directors of AIG also serve as directors of Starr and
SICO.
(b) Transactions with Related Parties: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries
for the production and management of insurance business. Net commission payments
to Starr aggregated approximately $42,600,000 in 1995, $31,200,000 in 1994 and
$25,800,000 in 1993, from which Starr is required to pay commissions due
originating brokers and its operating expenses. AIG also received approximately
$14,100,000 in 1995, $12,900,000 in 1994 and $11,800,000 in 1993 from Starr and
paid approximately $34,000 in 1995, $42,000 in 1994 and $60,000 in 1993 to Starr
as reimbursement for services provided at cost. AIG also received approximately
$1,500,000 in 1995, $900,000 in 1994 and $600,000 in 1993 from SICO and paid
approximately $1,200,000 in 1995, $1,200,000 in 1994 and $1,100,000 in 1993 to
SICO as reimbursement for services rendered at cost. AIG also paid to SICO
$5,000,000 in 1995, $3,000,000 in 1994 and $3,400,000 in 1993 in rental fees.
17. SUMMARY OF QUARTERLY FINANCIAL INFORMATION--
UNAUDITED
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1995 and 1994 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.
Three Months Ended
----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------------- ---------------------- ---------------------- ----------------------
(in thousands, except per
share amounts) 1995 1994 1995 1994 1995 1994 1995 1994
----------------------------------------------------------------------------------------------
Revenues $6,006,709 $5,210,830 $6,457,734 $5,605,759 $6,546,990 $5,652,465 $6,862,589 $5,889,655
----------------------------------------------------------------------------------------------
Net income $ 572,156 $ 505,618 $ 633,785 $ 549,694 $ 630,686 $ 542,527 $ 673,756 $ 577,676
----------------------------------------------------------------------------------------------
Net income per common share $ 1.20 $ 1.06 $ 1.34 $ 1.16 $ 1.33 $ 1.14 $ 1.43 $ 1.22
Average shares outstanding 473,848 476,184 474,016 474,846 474,130 474,552 474,130 473,798
----------------------------------------------------------------------------------------------
18. Segment Information
(a) AIG's operations are conducted principally through five business segments.
These segments and their respective operations are as follows:
Parent - AIG parent is a holding company owning directly or indirectly all
of the capital stock of certain insurance, insurance related and financial
services companies in both the United States and abroad.
General Insurance - AIG's general insurance operations are multiple line
property and casualty companies writing substantially all lines of insurance
other than title insurance. The general insurance operations also include
mortgage guaranty insurance operations.
Life Insurance - AIG's life insurance operations offer a broad line of
individual and group life, annuity and accident and health policies.
Agency and Service Fee - AIG's agency operations are engaged in the
production and management of various types of insurance for affiliated and
non-affiliated companies.
66
67
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
18. SEGMENT INFORMATION (CONTINUED)
Financial Services - AIG's financial services operations engage in
diversified financial services for affiliated and non-affiliated companies. Such
operations include, but are not limited to, asset management, short-term cash
management and financing, premium financing, interest rate, currency, equity and
commodity derivative products business, various commodities trading and market
making activities, banking services and operations and leasing and remarketing
of flight equipment.
The following table is a summary of the operations by major operating
segments for the years ended December 31, 1995, 1994 and 1993:
Industry Segments-1995
------------------------------------------------------------------------------------------------------
Adjustments
General Life Agency And Financial And
(In Thousands) Parent Insurance Insurance Service Fee Services Eliminations(a) Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $ 730,057(b) $13,019,523 $10,335,758 $261,873 $ 2,204,090 $ (677,279) $ 25,874,022
- -------------------------------------------------------------------------------------------------------------------------------
Income before income
taxes and cumulative
effect of accounting
changes $ 730,057(b) $ 1,975,375 $ 1,090,605 $ 56,909 $ 417,741 $ (804,804) $ 3,465,883
- -------------------------------------------------------------------------------------------------------------------------------
Equity in net income
of partially-owned
companies $ 38,308 $ 43,204 $ 3,150 $ -- $ -- $ 358 $ 85,020
- -------------------------------------------------------------------------------------------------------------------------------
Depreciation expense $ -- $ 88,773 $ 49,786 $ 2,339 $ 522,141 $ 71,521 $ 734,560
- -------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 141 $ 126,096 $ 53,936 $ 1,731 $ 3,359,468(c) $ 95,745 $ 3,637,117(c)
- -------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $20,445,762 $56,074,024 $43,280,484 $149,392 $36,833,772 $(22,647,036) $134,136,398
- -------------------------------------------------------------------------------------------------------------------------------
Industry Segments-1994
----------------------------------------------------------------------------------------------------
Adjustments
General Life Agency And Financial And
(In Thousands) Parent Insurance Insurance Service Fee Services Eliminations(a) Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $ 899,698(b) $11,774,410 $ 8,559,455 $237,940 $ 1,783,239 $ (896,033) $ 22,358,709
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes
and cumulative effect of
accounting changes $ 899,698(b) $ 1,635,096 $ 952,484 $ 54,129 $ 404,853 $ (994,281) $ 2,951,979
- ---------------------------------------------------------------------------------------------------------------------------------
Equity in net income (loss)
of partially-owned
companies $ 25,476 $ 32,687 $ 829 $ (61) $ -- $ 182 $ 59,113
- ---------------------------------------------------------------------------------------------------------------------------------
Depreciation expense $ -- $ 66,514 $ 43,317 $ 3,514 $ 402,741 $ 65,844 $ 581,930
- ---------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 545 $ 131,721 $ 106,957 $ 2,822 $ 2,841,317(c) $ 87,882 $ 3,171,244(c)
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $17,295,644 $51,372,100 $34,496,652 $184,310 $30,660,776 $(19,663,365) $114,346,117
- ---------------------------------------------------------------------------------------------------------------------------------
Industry Segments-1993
--------------------------------------------------------------------------------------------------------
Adjustments
General Life Agency And Financial And
(In Thousands) Parent Insurance Insurance Service Fee Services Eliminations)(a) Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 908,176(b) $10,972,384 $ 7,300,336 $ 239,641 $ 1,529,079 $ (881,329) $ 20,068,287
- --------------------------------------------------------------------------------------------------------------------------------
Income before income
taxes and
cumulative effect
of accounting
changes $ 908,176(b) $ 1,416,135 $ 781,611 $ 60,247 $ 390,038 $ (955,126) $ 2,601,081
- --------------------------------------------------------------------------------------------------------------------------------
Equity in net
income (loss) of
partially-owned
companies $ 11,183 $ 36,618 $ 1,260 $ (202) $ -- $ 236 $ 49,095
- --------------------------------------------------------------------------------------------------------------------------------
Depreciation expense $ -- $ 40,535 $ 39,258 $ 3,787 $ 326,028 $ 62,639 $ 472,247
- --------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ -- $ 103,686 $ 119,157 $ 4,801 $ 2,575,652(c) $ 109,737 $ 2,913,033(c)
- --------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $16,210,208 $46,981,720 $28,381,164 $ 179,297 $25,514,258 $(16,251,799) $101,014,848
- --------------------------------------------------------------------------------------------------------------------------------
(a) Including other operations and other income (deductions)-net, which are not
deemed to be reportable segments.
(b) Substantially dividend income from subsidiaries.
(c) Relating primarily to ILFC.
67
68
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
18. Segment Information (continued)
(b) The following table is a summary of AIG's general insurance operations
by major operating category for the years ended December 31, 1995, 1994 and
1993:
Net Premiums
--------------------------------------------------------------------------------
Written Earned
--------------------------------------- --------------------------------------
(in thousands) 1995 1994 1993 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Underwriting:
Foreign $ 4,202,815 $ 3,733,386 $ 3,045,990 $ 4,083,200 $ 3,603,175 $2,918,168
Commercial casualty (a) 5,895,757 5,684,895 5,416,060 5,645,281 5,296,272 5,232,266
Commercial property 452,323 306,631 237,090 403,037 290,195 176,620
Pools and associations (b) 400,951 444,526 746,390 394,088 427,272 723,077
Personal lines (c) 692,747 492,122 401,611 628,068 464,120 362,191
Mortgage guaranty 248,429 204,193 178,762 252,057 205,797 154,318
- ---------------------------------------------------------------------------------------------------------------------
Total underwriting $11,893,022 $10,865,753 $10,025,903 $11,405,731 $10,286,831 $9,566,640
- ---------------------------------------------------------------------------------------------------------------------
Operating Income
------------------------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------
Underwriting:
Foreign $ 304,069 $ 203,707 $ 132,399
Commercial casualty (a) 252,673 253,677 251,886
Commercial property (9,238) (77,933) (48,900)
Pools and associations (b) (263,291) (293,907) (368,045)
Personal lines (c) (6,558) (17,147) (24,324)
Mortgage guaranty 83,928 79,120 67,375
- --------------------------------------------------------------------------
Total underwriting 361,583 147,517 10,391
- --------------------------------------------------------------------------
Net investment income 1,545,717 1,435,092 1,340,480
Realized capital gains 68,075 52,487 65,264
- --------------------------------------------------------------------------
General insurance operating income $1,975,375 $1,635,096 $1,416,135
- --------------------------------------------------------------------------
(a) Including workers' compensation and retrospectively rated risks.
(b) Including involuntary pools.
(c) Including mass marketing and specialty programs.
(c) AIG's individual life insurance and group life insurance portfolio
accounted for 66 percent, 62 percent and 64 percent of AIG's consolidated life
insurance operating income before realized capital gains or losses for the years
ended December 31, 1995, 1994 and 1993, respectively. For those years, 94
percent, 96 percent and 97 percent, respectively, of consolidated life operating
income before realized capital gains or losses was derived from foreign
operations.
(d) A substantial portion of AIG's business is conducted in countries other
than the United States and Canada. The following table is a summary of AIG's
business by geographic segments. Allocations have been made on the basis of
location of operations and assets.
Geographic Segments-1995
------------------------------------------------------
Other
(In Thousands) Domestic(a) Far East Foreign Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Revenues (b) $12,097,038 $ 9,859,833 $ 3,917,151 $ 25,874,022
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting changes $ 1,698,606 $ 1,375,307 $ 391,970 $ 3,465,883
- -------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $84,456,853 $27,580,921 $22,098,624 $134,136,398
- -------------------------------------------------------------------------------------------------------------------------------
Geographic Segments-1994
------------------------------------------------------
Other
(In Thousands) Domestic(a) Far East Foreign Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Revenues (b) $10,591,559 $ 8,374,195 $ 3,392,955 $ 22,358,709
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting changes $ 1,455,733 $ 1,192,969 $ 303,277 $ 2,951,979
- -------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $71,838,459 $24,199,044 $18,308,614 $114,346,117
- -------------------------------------------------------------------------------------------------------------------------------
Geographic Segments-1993
------------------------------------------------------
Other
(In Thousands) Domestic (A) Far East Foreign Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Revenues (b) $ 9,920,548 $ 6,910,722 $ 3,237,017 $ 20,068,287
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting changes $ 1,338,175 $ 900,439 $ 362,467 $ 2,601,081
- -------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $64,482,527 $18,667,545 $17,864,776 $101,014,848
- -------------------------------------------------------------------------------------------------------------------------------
(a) Including general insurance operations in Canada.
(b) Revenues are derived from revenues of the general, life, agency and service
fee and financial services operations, equity in income of minority-owned
insurance operations and realized capital gains attributable to the
segments.
68
69
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting
and financial disclosure within the twenty four months ending December 31, 1995.
- --------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Except for the information provided in Part I under the heading "Directors and
Executive Officers of the Registrant", this item is omitted because a definitive
proxy statement which involves the election of directors will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the fiscal year pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
- --------------------------------------------------------------------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits.
1. Financial Statements and Schedules. See accom-
panying Index to Financial Statements.
2. Exhibits.
3--Articles of Incorporation and By-Laws.
10--Material Contracts.
11--Computation of Earnings Per Share for the Years Ended December 31,
1995, 1994, 1993, 1992 and 1991.
12--Computation of Ratios of Earnings to Fixed Charges for the Years
Ended December 31, 1995, 1994, 1993, 1992 and 1991.
21--Subsidiaries of Registrant.
23--Consent of Coopers & Lybrand L.L.P.
24--Power of Attorney.
27--Financial Data Schedule.
28--Information from Statutory Schedule P.
99--Undertakings.
(b) Reports on Form 8-K.
There have been no reports on Form 8-K filed during the quarter ended
December 31, 1995.
69
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the issuer has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York, on the 29th day of March, 1996.
AMERICAN INTERNATIONAL GROUP, INC.
By s/s M.R. GREENBERG
------------------------------------
(M. R. Greenberg, Chairman)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report on Form 10-K has been signed below by the following persons
in the capacities indicated on the 29th day of March, 1996 and each of the
undersigned persons, in any capacity, hereby severally constitutes M.R.
Greenberg, Edward E. Matthews and Howard I. Smith and each of them, singularly,
his true and lawful attorney with full power to them and each of them to sign
for him, and in his name and in the capacities indicated below, this Annual
Report on Form 10-K and any and all amendments thereto.
Signature Title
--------- -----
s/s M.R. GREENBERG Chairman and Director
-------------------------- (Principal Executive Officer)
(M. R. Greenberg)
s/s EDWARD E. MATTHEWS Vice Chairman and Director
-------------------------- (Principal Financial Officer)
(Edward E. Matthews)
s/s HOWARD I. SMITH Executive Vice President
-------------------------- and Comptroller
(Howard I. Smith) (Principal Accounting Officer)
s/s M. BERNARD AIDINOFF Director
--------------------------
(M. Bernard Aidinoff)
s/s LLOYD M. BENTSEN Director
--------------------------
(Lloyd M. Bentsen)
s/s MARSHALL A. COHEN Director
--------------------------
(Marshall A. Cohen)
s/s BARBER B. CONABLE, JR. Director
--------------------------
(Barber B. Conable, Jr.)
s/s MARTIN S. FELDSTEIN Director
--------------------------
(Martin S. Feldstein)
s/s HOUGHTON FREEMAN Director
--------------------------
(Houghton Freeman)
II-1
71
SIGNATURES- (CONTINUED)
Signature Title
--------- -----
s/s LESLIE L. GONDA Director
--------------------------
(Leslie L. Gonda)
s/s CARLA A. HILLS Director
--------------------------
(Carla A. Hills)
s/s FRANK J. HOENEMEYER Director
--------------------------
(Frank J. Hoenemeyer)
s/s JOHN I. HOWELL Director
--------------------------
(John I. Howell)
s/s DEAN P. PHYPERS Director
--------------------------
(Dean P. Phypers)
s/s JOHN J. ROBERTS Director
--------------------------
(John J. Roberts)
s/s ERNEST E. STEMPEL Director
--------------------------
(Ernest E. Stempel)
s/s THOMAS R. TIZZIO Director
--------------------------
(Thomas R. Tizzio)
II-2
72
Schedule I
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1995
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
Amount at
which shown
in the
Balance
Type of Investment Cost* Value Sheet
====================================================================================================================
Fixed maturities:
Bonds:
United States Government and government agencies
and authorities $ 1,388,615 $ 1,509,771 $ 1,509,172
States, municipalities and political subdivisions 16,493,252 17,513,809 16,778,227
Foreign governments 7,475,635 7,816,661 7,816,652
Public utilities 2,607,553 2,837,736 2,837,736
All other corporate 12,949,690 13,499,280 13,499,305
- --------------------------------------------------------------------------------------------------------------------
Total bonds 40,914,745 43,177,257 42,441,092
Preferred stocks 459,505 620,217 459,505
- --------------------------------------------------------------------------------------------------------------------
Total fixed maturities 41,374,250 43,797,474 42,900,597
- --------------------------------------------------------------------------------------------------------------------
Equity securities:
Common stocks:
Public utilities 101,578 113,109 113,109
Banks, trust and insurance companies 686,499 916,475 916,475
Industrial, miscellaneous and all other 3,767,257 4,265,283 4,265,283
- --------------------------------------------------------------------------------------------------------------------
Total common stocks 4,555,334 5,294,867 5,294,867
Non-redeemable preferred stocks 73,497 74,454 74,454
- --------------------------------------------------------------------------------------------------------------------
Total equity securities 4,628,831 5,369,321 5,369,321
- --------------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate, policy and collateral loans 7,860,532 7,885,655 7,860,532
Financial services assets:
Flight equipment primarily under operating leases, net of
accumulated depreciation 12,442,010 -- 12,442,010
Securities available for sale, at market value 3,930,622 3,931,100 3,931,100
Trading securities, at market value -- 2,641,436 2,641,436
Spot commodities, at market value -- 1,079,124 1,079,124
Unrealized gain on interest rate and currency swaps,
options and forward transactions -- 7,250,954 7,250,954
Trade receivables 3,321,985 -- 3,321,985
Securities purchased under agreements to resell, at contract value 2,022,056 -- 2,022,056
Other invested assets 2,808,158 -- 2,808,158
Short-term investments, at cost which approximates market value 2,272,528 -- 2,272,528
- --------------------------------------------------------------------------------------------------------------------
Total investments $80,660,972 -- $93,899,801
====================================================================================================================
* Original cost of equity securities and, as to fixed maturities, original cost
reduced by repayments and adjusted for amortization of premiums or accrual of
discounts.
S-1
73
Schedule II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET -- PARENT COMPANY ONLY
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
=======================================================================================================================
Assets:
Cash $ 142 $ 57
Short-term investments 10,159 1,069
Invested assets 342,585 314,404
Carrying value of subsidiaries and partially-owned companies, at equity 20,106,697 17,135,389
Premiums and insurance balances receivable-net 47,757 49,415
Other assets 290,546 288,154
- -----------------------------------------------------------------------------------------------------------------------
Total assets $20,797,886 $17,788,488
=======================================================================================================================
Liabilities:
Insurance balances payable $ 136,044 $ 117,560
Due to affiliates-net 298,904 483,890
Medium term notes payable 115,000 155,000
Zero coupon notes 73,348 65,831
Italian Lire bonds 159,067 159,067
Other liabilities 188,420 385,479
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities $ 970,783 $ 1,366,827
=======================================================================================================================
Capital funds:
Common stock $ 1,265,210 $ 843,477
Additional paid-in capital 131,828 565,410
Unrealized appreciation of investments, net of taxes 1,395,064 184,556
Cumulative translation adjustments, net of taxes (456,072) (288,074)
Retained earnings 17,697,739 15,340,928
Treasury stock (206,666) (224,636)
- -----------------------------------------------------------------------------------------------------------------------
Total capital funds 19,827,103 16,421,661
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and capital funds $20,797,886 $17,788,488
=======================================================================================================================
STATEMENT OF INCOME--PARENT COMPANY ONLY
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
=======================================================================================================================
Agency income $ 1,561 $ 1,207 $ 2,027
Dividend income from consolidated subsidiaries:
Cash 728,825 898,659 907,432
Dividend income from partially-owned companies 1,232 1,039 744
Equity in undistributed net income of consolidated subsidiaries
and partially-owned companies 1,901,252 1,499,330 1,201,155
Other income (deductions)-net 43,004 (59,922) (50,683)
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,675,874 2,340,313 2,060,675
Income taxes 165,491 164,798 121,902
- -----------------------------------------------------------------------------------------------------------------------
Net income $2,510,383 $2,175,515 $1,938,773
=======================================================================================================================
S-2
74
Schedule II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
STATEMENT OF CASH FLOWS--PARENT COMPANY ONLY
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 2,510,383 $ 2,175,515 $ 1,938,773
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-cash revenues, expenses, gains and losses included in income:
Equity in undistributed net income of consolidated subsidiaries and
partially-owned companies (1,901,252) (1,499,330) (1,201,155)
Change in premiums and insurance balances receivable and payable-net 20,142 (666) 16,939
Change in cumulative translation adjustments 18,196 (138,528) (7,088)
Other-net (402,841) 84,185 13,657
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (2,265,755) (1,554,339) (1,177,647)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 244,628 621,176 761,126
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investments (15,005) (101,553) (35,226)
Change in short-term investments (9,090) 1,693 111,447
Change in collateral and guaranteed loans 15,000 -- (2,500)
Contributions to subsidiaries and investments in partially-owned companies (68,398) (462,056) (237,899)
Other-net (135) (2,874) (3,796)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (77,628) (564,790) (167,974)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in medium term notes (40,000) (140,000) 58,000
Proceeds from common stock issued 20,519 14,721 13,280
Change in loans payable 17,680 383,135 (377,581)
Cash dividends to shareholders (153,572) (136,116) (123,859)
Acquisition of treasury stock (17,646) (178,676) (13,148)
Redemption of preferred stock -- -- (150,000)
Other-net 6,104 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (166,915) (56,936) (593,308)
- ----------------------------------------------------------------------------------------------------------------------------------
Change in cash 85 (550) (156)
Cash at beginning of year 57 607 763
- ----------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 142 $ 57 $ 607
- ----------------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--PARENT COMPANY ONLY
(1) Agency operations conducted in New York through the North American Division
of AIU are included in the financial statements of the parent company.
(2) Certain accounts have been reclassified in the 1994 and 1993 financial
statements to conform to their 1995 presentation.
(3) Other income (deductions)-net includes fees received from consolidated
financial services subsidiaries.
(4) "Equity in undistributed net income of consolidated subsidiaries and
partially-owned companies" in the accompanying Statement of Income--Parent
Company Only--includes equity in the cumulative effect of accounting
changes, net of tax of the minority-owned insurance operations.
(5) See also Notes to Consolidated Financial Statements.
S-3
75
Schedule III
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
As of December 31, 1995, 1994 and 1993 and for the years then ended
(in thousands)
- -----------------------------------------------------------------------------------------------------
Reserves for
Losses and
Deferred Loss Reserve Policy
Policy Expenses, for and
Acquisition Future Policy Unearned Contract Premium
Segment Costs Benefits Premiums Claims(a) Revenue
- -----------------------------------------------------------------------------------------------------
1995
General insurance $ 1,289,788 $33,046,717 $6,938,064 $ -- $11,405,731
Life insurance 4,477,785 20,864,635 -- 708,878 8,038,150
- -----------------------------------------------------------------------------------------------------
$ 5,767,573 $53,911,352 $6,938,064 $ 708,878 $19,443,881
- -----------------------------------------------------------------------------------------------------
1994
General insurance $ 1,179,494 $31,435,355 $6,318,754 $ -- $10,286,831
Life insurance 3,952,751 17,432,222 -- 548,243 6,724,321
- -----------------------------------------------------------------------------------------------------
$ 5,132,245 $48,867,577 $6,318,754 $ 548,243 $17,011,152
- -----------------------------------------------------------------------------------------------------
1993
General insurance $ 1,009,545 $30,046,172 $5,515,670 $ -- $ 9,566,640
Life insurance 3,239,864 14,638,382 -- 406,516 5,746,046
- -----------------------------------------------------------------------------------------------------
$ 4,249,409 $44,684,554 $5,515,670 $ 406,516 $15,312,686
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Losses and Amortization
Loss of Deferred
Net Expenses Policy Other Net
Investment Incurred, Acquisition Operating Premiums
Segment Income Benefits Costs(b) Expenses Written
- -----------------------------------------------------------------------------------------------------
1995
General insurance $ 1,545,717 $ 8,659,835 $1,108,040 $ 1,276,273 $11,893,022
Life insurance 2,264,905 7,088,034 620,487 1,536,632 --
- -----------------------------------------------------------------------------------------------------
$ 3,810,622 $15,747,869 $1,728,527 $ 2,812,905 $11,893,022
- -----------------------------------------------------------------------------------------------------
1994
General insurance $ 1,435,092 $ 8,005,601 $ 955,311 $ 1,178,402 $10,865,753
Life insurance 1,748,428 5,782,561 537,364 1,287,046 --
- -----------------------------------------------------------------------------------------------------
$ 3,183,520 $13,788,162 $1,492,675 $ 2,465,448 $10,865,753
- -----------------------------------------------------------------------------------------------------
1993
General insurance $ 1,340,480 $ 7,576,016 $ 839,167 $ 1,141,066 $10,025,903
Life insurance 1,499,714 4,891,357 469,310 1,158,058 --
- -----------------------------------------------------------------------------------------------------
$ 2,840,194 $12,467,373 $1,308,477 $ 2,299,124 $10,025,903
- -----------------------------------------------------------------------------------------------------
(a) Reflected in insurance balances payable on the accompanying balance sheet.
(b) Amounts shown for general insurance segment exclude amounts deferred and
amortized in the same period.
S-4
76
Schedule IV
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
As of December 31, 1995, 1994 and 1993 and for the years then ended
(dollars in thousands)
- -----------------------------------------------------------------------------------------------------
Percent of
Ceded Assumed Amount
to Other from Other Net Assumed
Gross Amount Companies Companies Amount to Net
- -----------------------------------------------------------------------------------------------------
1995
Life insurance in-force $376,097,107 $34,779,331 $ 239,787 $341,557,563 0.1%
- -----------------------------------------------------------------------------------------------------
Premiums:
General insurance $ 16,357,919 $ 6,002,098 $1,537,201 $ 11,893,022 12.9%
Life insurance 8,234,425 207,272 10,997 8,038,150 0.1
- -----------------------------------------------------------------------------------------------------
Total premiums $ 24,592,344 $ 6,209,370 $1,548,198 $ 19,931,172 7.8%
- -----------------------------------------------------------------------------------------------------
1994
Life insurance in-force $333,378,811 $30,184,126 $ 235,278 $303,429,963 0.1%
- -----------------------------------------------------------------------------------------------------
Premiums:
General insurance $ 15,368,001 $ 5,526,656 $1,024,408 $ 10,865,753 9.4%
Life insurance 6,877,256 161,928 8,993 6,724,321 0.1
- -----------------------------------------------------------------------------------------------------
Total premiums $ 22,245,257 $ 5,688,584 $1,033,401 $ 17,590,074 5.9%
- -----------------------------------------------------------------------------------------------------
1993
Life insurance in-force $257,162,102 $13,006,029 $1,287,379 $245,443,452 0.5%
- -----------------------------------------------------------------------------------------------------
Premiums:
General insurance $ 13,633,638 $ 4,875,352 $1,267,617 $ 10,025,903 12.6%
Life insurance 5,914,007 178,511 10,550 5,746,046 0.2
- -----------------------------------------------------------------------------------------------------
Total premiums $ 19,547,645 $ 5,053,863 $1,278,167 $ 15,771,949 8.1%
- -----------------------------------------------------------------------------------------------------
S-5
77
Schedule VI
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
As of December 31, 1995, 1994, 1993 and for the years then ended
(in thousands)
- ---------------------------------------------------------------------------------------------------------------
Discount Losses and Loss
If Any, Expenses Incurred
Deducted from Related to Paid
Reserves for -------------------------- Losses
Losses and Current Prior and Loss
Affiliation With Registrant Loss Expenses Year Years Expenses
- ---------------------------------------------------------------------------------------------------------------
1995
AIG and consolidated subsidiaries $21,000 $8,935,400 $(275,600) $7,385,900
1994
AIG and consolidated subsidiaries $21,000 $8,158,400 $(152,800) $7,143,700
1993
AIG and consolidated subsidiaries $21,000 $7,530,700 $ 45,300 $6,775,800
- ---------------------------------------------------------------------------------------------------------------
Note: The ending reserves of 50% or less owned equity investees (minority-owned
companies) are less than 5% of the total reserves.
S-6
78
EXHIBIT INDEX
Exhibit
Number Description Location
- ------- ----------- --------
2 Plan of acquisition, reorganization, arrangement, liquidation
or succession..................................................... None.
3(i) Restated Certificate of Incorporation of AIG, at November
30, 1994.......................................................... Incorporated by reference from Exhibit 3(i) to AIG's
Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-8787).
3(ii) By-laws of AIG.................................................... Incorporated by reference from Exhibit 3(ii) to AIG's
Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-8787).
4 Instruments defining the rights of security holders, including
indentures
(a) Fiscal Agency Agreement dated as of October 1,
1984 between AIG and Citibank, N.A....................... Not required to be filed. The Registrant hereby agrees
to file with the Commission a copy of any
instrument defining the rights of holders of the
Registrant's long-term debt upon request of the
Commission.
(b) Indenture dated as of July 15, 1989 between AIG
and The Bank of New York................................. Not required to be filed. The Registrant hereby agrees
to file with the Commission a copy of any
instrument defining the rights of holders of the
Registrant's long-term debt upon request of the
Commission.
II-3
79
Exhibit
Number Description Location
- ------- ----------- --------
9 Voting Trust Agreement............................................ None.
10 Material contracts
(a) AIG 1969 Employee Stock Option Plan and
Agreement Form.......................................... Filed as exhibit to AIG's Registration Statement
(File No. 2-44043) and incorporated herein by
reference.
(b) AIG 1972 Employee Stock Option Plan..................... Filed as exhibit to AIG's Registration Statement
(File No. 2-44702) and incorporated herein by
reference.
(c) AIG 1972 Employee Stock Purchase Plan................... Filed as exhibit to AIG's Registration Statement
(File No. 2-44043) and incorporated herein by
reference.
(d) AIG 1984 Employee Stock Purchase Plan................... Filed as exhibit to AIG's Registration Statement
(File No. 2-91945) and incorporated herein by
reference.
(e) AIG 1977 Stock Option and Stock Appreciation
Rights Plan............................................. Filed as exhibit to AIG's Registration Statement
(File No. 2-59317) and incorporated herein by
reference.
(f) AIG 1982 Employee Stock Option Plan..................... Filed as exhibit to AIG's Registration Statement
(File No. 2-78291) and incorporated herein by
reference.
(g) AIG 1987 Employee Stock Option Plan..................... Filed as exhibit to AIG's Definitive Proxy Statement
dated as of April 6, 1987 (File No. 0-4652) and
incorporated herein by reference.
(h) AIG 1991 Employee Stock Option Plan..................... Filed as exhibit to AIG's Definitive Proxy Statement
dated as of March 30, 1992 (File No. 0-4652) and
incorporated herein by reference.
(i) AIRCO 1972 Employee Stock Option Plan................... Incorporated by reference to AIG's Joint Proxy
Statement and Prospectus (File No. 2-61994).
(j) AIRCO 1977 Stock Option and Stock
Appreciation Rights Plan................................ Incorporated by reference to AIG's Joint Proxy
Statement and Prospectus (File No.2-61994).
11 Statement re computation of per share earnings.................... Filed herewith.
12 Statements re computation of ratios............................... Filed herewith.
13 Annual report to security holders................................. Not required to be filed.
18 Letter re change in accounting principles......................... None.
21 Subsidiaries of the Registrant.................................... Filed herewith.
22 Published report regarding matters submitted to vote of
security holders.................................................. None.
II-4
80
Exhibit
Number Description Location
- ------- ---------- --------
23 Consent of Coopers & Lybrand L.L.P.................................... Filed herewith.
24 Power of attorney..................................................... Included on the signature page hereof.
27 Financial Data Schedule............................................... Provided herewith.
28P Information from reports furnished to state insurance
regulatory authorities................................................ To be filed under hardship exemption.
99 Undertakings by the Registrant required by Item 17 of
Form S-3 and Item 21 of Form S-8, deemed to be incorporated by
reference into AIG's Registration Statements on Forms S-3 and S-8 (No.
2-38768, No.2-44043, No. 2-45346, No. 2-51498, No. 2-59317, No.
2-61858, No. 2-62760, No. 2-64336, No. 2-67600, No. 2-72058, No.
2-75874, No. 2-75875, No. 2-78291, No. 2-87005, No. 2-82989, No.
2-90756, No. 2-91945, No. 2-95589, No. 2- 97439, No. 33-8495, No.
33-13874, No. 33-18073, No. 33-25291, No. 33-41643, No. 33-48996, No.
33-57250, No. 33-60327, No. 33-60827 and No. 33-62821)................ Filed herewith.
II-5
1
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
American International Group, Inc. and Subsidiaries
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993 1992 1991
===================================================================================================================================
Average outstanding shares used in the computation of
per share earnings:
Common stock issued (a) 506,085 506,086 506,089 506,093 506,088
Common stock in treasury (a) (32,063) (31,207) (29,897) (29,637) (28,530)
- -----------------------------------------------------------------------------------------------------------------------------------
Average outstanding shares 474,022 474,879 476,192 476,456 477,558
===================================================================================================================================
Income before cumulative effect of accounting changes $ 2,510,383 $ 2,175,515 $ 1,917,035 $ 1,620,544 $ 1,545,747
Cumulative effect of accounting changes, net of tax
AIG -- -- -- 31,941 --
Minority-owned insurance operations -- -- 20,695 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (applicable to common stock) (b) $ 2,510,383 $ 2,175,515 $ 1,937,730 $ 1,652,485 $ 1,545,747
===================================================================================================================================
Earnings per common share: (c)
Income before cumulative effect of accounting changes $ 5.30 $ 4.58 $ 4.03 $ 3.40 $ 3.24
Cumulative effect of accounting changes, net of tax
AIG -- -- -- 0.07 --
Minority-owned insurance operations -- -- 0.04 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 5.30 $ 4.58 $ 4.07 $ 3.47 $ 3.24
===================================================================================================================================
(a) Adjusted for a common stock split in the form of a 50 percent common stock
dividend paid July 28, 1995.
(b) After deductions in 1993, 1992 and 1991 of preferred stock dividends of
$1,043, $4,471 and $7,262, respectively.
(c) The effect of all other common stock equivalents is not significant;
therefore, this information is not presented.
II-6
1
COMPUTATION OF RATIOS OF Exhibit 12
EARNINGS TO FIXED CHARGES
American International Group, Inc. and Subsidiaries
(in thousands, except ratios)
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993 1992 1991
====================================================================================================================
Income before income taxes and cumulative effect of
accounting changes $3,465,883 $2,951,979 $2,601,081 $2,137,048 $2,022,575
Less-Equity income of less than 50% owned persons 91,444 54,091 43,966 40,148 35,534
Add-Dividends from less than 50% owned persons 6,515 4,660 4,349 5,147 4,444
- --------------------------------------------------------------------------------------------------------------------
3,380,954 2,902,548 2,561,464 2,102,047 1,991,485
Add-Fixed charges 1,483,752 1,404,633 1,213,487 1,233,132 977,816
Less-Capitalized interest 50,746 46,023 42,699 38,725 40,313
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes, cumulative effect of
accounting changes and fixed charges $4,813,960 $4,261,158 $3,732,252 $3,296,454 $2,928,988
====================================================================================================================
Fixed charges:
Interest costs $1,411,886 $1,335,300 $1,146,654 $1,166,732 $ 911,349
Rental expense* 71,866 69,333 66,833 66,400 66,467
- --------------------------------------------------------------------------------------------------------------------
Total fixed charges $1,483,752 $1,404,633 $1,213,487 $1,233,132 $ 977,816
====================================================================================================================
Ratio of earnings to fixed charges 3.24 3.03 3.08 2.67 3.00
====================================================================================================================
* The proportion deemed representative of the interest factor.
The ratios shown are significantly affected as a result of the inclusion of the
fixed charges and operating results of AIG Financial Products Corp. and its
subsidiaries (AIGFP). AIGFP structures borrowings through guaranteed investment
agreements and engages in other complex financial transactions, including
interest rate and currency swaps. In the course of its business, AIGFP enters
into borrowings that are primarily used to purchase assets that yield rates
greater than the rates on the borrowings with the intent of earning a profit on
the spread and to finance the acquisition of securities utilized to hedge
certain transactions. The pro forma ratios of earnings to fixed charges,
excluding the effects of the operating results of AIGFP, are 4.77, 5.25, 5.66,
5.15 and 5.40 for 1995, 1994, 1993, 1992 and 1991, respectively. As AIGFP will
continue to be a subsidiary, AIG expects that these ratios will continue to be
lower than they would be if the fixed charges and operating results of AIGFP
were not included therein.
II-7
1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
% of Voting
Securities
Owned by its
Jurisdiction of Immediate
Name of Corporation Incorporation Parent(1)
- ---------------------------------------------------------------------------------------------------------------
Starr Delaware (2)
SICO Panama (2)
AIG (Registrant)(3) Delaware (4)
AICCO New Hampshire 100%
AIG Asset Management Group, Inc. Delaware 100%
AIG Aviation, Inc. Georgia 100%
AIG Capital Corp. Delaware 100%
AIG Capital Management Corp. Delaware 100%
AIG Capital Partners, Inc. Delaware 100%
AIG Claim Services, Inc. Delaware 100%
AIG Consumer Finance, Inc. Delaware 100%
AIG Financial Products Corp. Delaware 100%
AIG Funding, Inc. Delaware 100%
AIG Global Investment Group, Inc. Delaware 100%
AIG Life Insurance Company Delaware 78.9%(5)
AIG Life Insurance Company of Puerto Rico Puerto Rico 100%
AIG Marketing, Inc. Delaware 100%
AIG Realty, Inc. New Hampshire (6)
American International Realty Corp. Delaware 100%
AIG Risk Management, Inc. New York 100%
AIG Trading Group Inc. Delaware 80%
AIU Insurance Company New York 52%(7)
AIU North America, Inc. New York 100%
American International Underwriters Corporation New York 100%
American Home New York 100%
AIG Hawaii Insurance Company, Inc. Hawaii 100%
American International Insurance Company New York 100%
American International Insurance Company of California California 100%
Minnesota Insurance Company Minnesota 100%
Transatlantic Holdings, Inc. Delaware 34.12%(8)
American International Group Data Center, Inc. New Hampshire 100%
American International Life Assurance Company of New York New York 77.52%(9)
American International Reinsurance Company Limited Bermuda 100%
AIA Hong Kong 100%
Australian American Assurance Company Limited Australia 100%
American International Assurance Company (Bermuda) Limited Bermuda 100%
Nan Shan Life Insurance Company, Ltd. Taiwan 94.12%
AIUO Bermuda 100%
AIG Europe (Ireland) Ltd. Ireland 100%
Universal Insurance Co., Ltd. Thailand 100%
Interamericana Compania de Seguros Gerais (Brazil) Brazil 100%
La Seguridad de Centroamerica, Compania de Seguros, Sociedad Anonima Guatemala 100%
American International Insurance Company of Puerto Rico Puerto Rico 100%
La Interamerica Compania de Seguros Generales S.A. Colombia 100%
American International Underwriters G.m.b.H. Germany 100%
Underwriters Adjustment Company, Inc. Panama 100%
American Life Insurance Company Delaware 100%
Kenya American Insurance Company Limited Kenya 100%
ALICO France 89%
II-8
2
SUBSIDIARIES OF REGISTRANT--(CONTINUED)
% of Voting
Securities
Owned by its
Jurisdiction of Immediate
Name of Corporation Incorporation Parent(1)
- ---------------------------------------------------------------------------------------------------------------
Birmingham Fire Insurance Company of Pennsylvania Pennsylvania 100%
China America Insurance Company, Ltd. Delaware 50%
Commerce and Industry Insurance Company New York 100%
Commerce and Industry Insurance Company of Canada Ontario 100%
Delaware American Life Insurance Company Delaware 100%
Hawaii Insurance Consultants, Ltd. Hawaii 100%
The Insurance Company of the State of Pennsylvania Pennsylvania 100%
Landmark Insurance Company California 100%
Le Metropolitana de Seguros, C. por A. Dominican Republic 100%
Mt. Mansfield Company, Inc. Vermont 100%
National Union Pennsylvania 100%
American International Specialty Lines Insurance Company Alaska 70%(10)
International Lease Finance Corporation California 100%
Lexington Delaware 70%(10)
JI Accident & Fire Insurance Co. Ltd. Japan 50%
National Union Fire Insurance Company of Louisiana Louisiana 100%
NHIG Holding Corp. Delaware 100%
Audubon Insurance Company Louisiana 100%
Audubon Indemnity Company Mississippi 100%
Agency Management Corporation Louisiana 100%
The Gulf Agency, Inc. Alabama 100%
New Hampshire Pennsylvania 100%
AIG Europe, S.A. France (11)
A.I. Network Corporation New Hampshire 100%
Marketpac International, Inc. Delaware 100%
American International Pacific Insurance Company Colorado 100%
American International South Insurance Company Pennsylvania 100%
Granite State Insurance Company Pennsylvania 100%
New Hampshire Indemnity Company, Inc. Pennsylvania 100%
Illinois National Insurance Co. Illinois 100%
New Hampshire Insurance Services, Inc. New Hampshire 100%
PHILAM Philippines 99%
Pacific Union Assurance Company California 100%
The Philippine American General Insurance Company, Inc. Philippines 100%
Philam Insurance Company, Inc. Philippines 100%
The Philippine American Assurance Company, Inc. Philippines 25%
II-9
3
SUBSIDIARIES OF REGISTRANT--(CONTINUED)
% of Voting
Securities
Owned by its
Jurisdiction of Immediate
Name of Corporation Incorporation Parent(1)
- ---------------------------------------------------------------------------------------------------------------
Risk Specialist Companies, Inc. Delaware 100%
Ticino Societa d' Assicurazioni Sulla Vita Switzerland 99.8%
20th Century Insurance Company of Arizona Arizona 51%
UeberseeBank, AG Switzerland 100%
UGC North Carolina 36.31%(12)
United Guaranty Residential Insurance Company of North Carolina North Carolina 100%
United Guaranty Residential Insurance Company North Carolina 75%(13)
United Guaranty Commercial Insurance Company of North Carolina North Carolina 100%
United Guaranty Commercial Insurance Company North Carolina 100%
United Guaranty Credit Insurance Company North Carolina 100%
United Guaranty Services, Inc. North Carolina 100%
- ---------------------------------------------------------------------------------------------------------------
(1) Percentages include directors' qualifying shares.
(2) The directors and officers of AIG as a group own 88.17 percent of the
voting common stock of Starr and 81.82 percent of the voting stock of
SICO. Six of the directors of AIG also serve as directors of Starr and
SICO.
(3) All subsidiaries listed except for minority-owned Transatlantic Holdings,
Inc., which is included under the equity method, are consolidated in the
accompanying financial statements. Certain subsidiaries have been omitted
from the tabulation. The omitted subsidiaries, when considered in the
aggregate as a single subsidiary, do not constitute a significant
subsidiary.
(4) The common stock is owned 16.0 percent by SICO, 2.4 percent by Starr and
3.5 percent by The Starr Foundation.
(5) Also owned 21.1 percent by Commerce & Industry Insurance Company.
(6) Owned by 13 AIG subsidiaries.
(7) Also owned 8 percent by The Insurance Company of the State of Pennsylvania,
32 percent by National Union, and 8 percent by Birmingham.
(8) Also owned 14.16 percent by American International Group, Inc.
(9) Also owned 22.48% by American Home.
(10) Also owned 20 percent by The Insurance Company of the State of Pennsylvania
and 10 percent by Birmingham.
(11) 100 percent to be held with other AIG companies.
(12) Also owned 45.88 percent by National Union, 16.95 percent by New Hampshire
and 0.86 percent by The Insurance Company of the State of Pennsylvania.
(13) Also owned 25 percent by United Guaranty Residential Insurance Company of
North Carolina.
II-10
1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
American International Group, Inc. on Forms S-3 and S-8 (No. 2-38768, No.
2-44043, No. 2-45346, No. 2-51498, No. 2-59317, No. 2-61858, No. 2-62760, No.
2-64336, No. 2-67600, No. 2-72058, No. 2-75874, No. 2-75875, No. 2-78291, No.
2-87005, No. 2-82989, No. 2-90756, No. 2-91945, No. 2-95589, No. 2-97439, No.
33-8495, No. 33-13874, No. 33-18073, No. 33-25291, No. 33-41643, No. 33-48996,
No. 33-57250, No. 33-60327, No. 33-60827 and No. 33-62821) of our report dated
February 22, 1996, on our audits of the consolidated financial statements and
financial statement schedules of American International Group, Inc. and
subsidiaries as of December 31, 1995 and 1994 and for each of the three years in
the period ended December 31, 1995, which report is included in the Annual
Report on Form 10-K of American International Group, Inc. for the year 1995, and
to the reference to our firm under the heading "Financial Statements" included
in the Prospectuses.
COOPERS & LYBRAND L.L.P.
New York, New York
March 29, 1996.
II-11
7
1
U.S. DOLLARS
12-MOS
DEC-31-1995
JAN-01-1995
DEC-31-1995
1
30,926,771
11,086,025
11,822,190
5,369,321
2,194,641
1,137,144
93,899,801
88,371
16,878,155
5,767,573
134,136,398
53,911,352
6,938,064
0
11,673,148
12,567,162
0
0
1,265,210
18,561,893
134,136,398
19,443,881
3,810,622
71,834
(91,208)
15,747,869
1,728,527
2,812,905
3,465,883
955,500
2,510,383
0
0
0
2,510,383
5.30
5.30
18,418,900
8,935,400
(275,600)
2,610,900
4,775,000
19,692,800
280,400
1
Exhibit 99
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933 unless the information required to be included in
such post-effective amendment is contained in a periodic report filed by
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 and incorporated herein by reference,
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement unless the information required to be included in
such post-effective amendment is contained in a periodic report filed by
the registrant pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 and incorporated herein by reference, and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
(2) that, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering; and
(4) that, for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given, a copy of the registrant's annual report to shareholders for its last
fiscal year, unless such employee otherwise has received a copy of such report
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120-day period the
annual report for the last fiscal year will be furnished to each such employee.
(c) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan, who do not otherwise
receive such material as shareholders of the registrant, at the time and in the
manner such material is sent to its shareholders, copies of all reports, proxy
statements and other communications distributed to its shareholders generally.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-12
