AMERICAN INTERNATIONAL GROUP, INC.
Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q/A

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

OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                     to                     

For Quarter Ended March 31, 2003 Commission File Number 1-8787


AMERICAN INTERNATIONAL GROUP, INC.

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


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

 
YES  [ X ] NO  [     ]

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

 
YES  [ X ] NO  [     ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 31, 2003: 2,608,397,880.




Table of Contents

EXPLANATORY NOTE

      This Quarterly Report on Form 10-Q/A amends the registrant’s Form 10-Q for the quarterly period ended March 31, 2003. This Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2003 is being filed solely to eliminate non-GAAP measures which excluded realized capital gains (losses) and references to non-GAAP measures of “Life Premium Income” throughout the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003.


TABLE OF CONTENTS

CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
NOTES TO FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF SEGMENT OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II -- OTHER INFORMATION
SIGNATURE
EXHIBIT INDEX
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS


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AMERICAN INTERNATIONAL GROUP, INC.

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


ASSETS:
               
 
Investments, financial services assets and cash:
               
   
Fixed maturities:
               
     
Bonds available for sale, at market value (amortized cost: 2003 — $241,014; 2002 — $232,121)
  $ 254,263     $ 242,385  
     
Bonds held to maturity, at amortized cost (market value: 2003 — $1,706; 2002 — $0)
    1,700        
     
Bond trading securities, at market value (cost: 2003 — $990; 2002 — $963)
    991       981  
   
Equity securities:
               
     
Common stocks (cost: 2003 — $5,827; 2002 — $6,152)
    5,365       5,482  
     
Non-redeemable preferred stocks (cost: 2003 — $1,698; 2002 — $1,678)
    1,771       1,584  
   
Mortgage loans on real estate, net of allowance (2003 — $103; 2002 — $110)
    11,660       11,541  
   
Policy loans
    6,064       6,046  
   
Collateral and guaranteed loans, net of allowance (2003 — $55; 2002 — $54)
    2,301       2,341  
   
Financial services assets:
               
     
Flight equipment primarily under operating leases, net of accumulated depreciation (2003 — $4,693; 2002 — $4,426)
    28,206       26,867  
     
Securities available for sale, at market value (cost: 2003 — $17,704; 2002 — $16,715)
    17,659       16,687  
     
Trading securities, at market value
    6,173       4,146  
     
Spot commodities, at market value
    606       489  
     
Unrealized gain on interest rate and currency swaps, options and forward transactions
    15,618       15,376  
     
Trading assets
    3,320       4,786  
     
Securities purchased under agreements to resell, at contract value
    24,200       25,661  
     
Finance receivables, net of allowance (2003 — $454; 2002 — $477)
    15,756       15,857  
   
Securities lending collateral
    25,924       23,694  
   
Other invested assets
    15,532       12,680  
   
Short-term investments, at cost (approximates market value)
    14,258       6,993  
   
Cash
    660       1,165  
     
     
 
       
Total investments, financial services assets and cash
    452,027       424,761  
 
Investment income due and accrued
    4,526       4,297  
 
Premiums and insurance balances receivable, net of allowance (2003 — $170; 2002 — $150)
    14,471       13,088  
 
Reinsurance assets, net of allowance
    31,269       29,882  
 
Deferred policy acquisition costs
    22,805       22,256  
 
Investments in partially-owned companies
    1,329       1,575  
 
Real estate and other fixed assets, net of accumulated depreciation (2003 — $3,856; 2002 — $3,727)
    5,433       5,382  
 
Separate and variable accounts
    45,954       46,248  
 
Goodwill
    6,185       6,079  
 
Other assets
    7,810       7,661  
     
     
 
       
Total assets
  $ 591,809     $ 561,229  
     
     
 

See Accompanying Notes to Financial Statements.

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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEET — (continued)

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


LIABILITIES:
               
 
Reserve for losses and loss expenses
  $ 53,526     $ 51,539  
 
Reserve for unearned premiums
    17,664       16,336  
 
Future policy benefits for life and accident and health insurance contracts
    76,162       72,547  
 
Policyholders’ contract deposits
    146,893       142,160  
 
Other policyholders’ funds
    7,867       7,582  
 
Reserve for commissions, expenses and taxes
    3,364       3,429  
 
Insurance balances payable
    3,598       3,273  
 
Funds held by companies under reinsurance treaties
    3,879       3,425  
 
Income taxes payable:
               
   
Current
    967       793  
   
Deferred
    5,184       4,289  
 
Financial services liabilities:
               
   
Borrowings under obligations of guaranteed investment agreements
    15,029       14,850  
   
Securities sold under agreements to repurchase, at contract value
    11,564       9,162  
   
Trading liabilities
    2,768       3,825  
   
Securities and spot commodities sold but not yet purchased, at market value
    9,906       11,765  
   
Unrealized loss on interest rate and currency swaps, options and forward transactions
    11,864       11,265  
   
Trust deposits and deposits due to banks and other depositors
    2,973       2,987  
   
Commercial paper
    7,812       7,467  
   
Notes, bonds, loans and mortgages payable
    43,889       43,233  
 
Commercial paper
    3,229       1,645  
 
Notes, bonds, loans and mortgages payable
    4,412       4,690  
 
Separate and variable accounts
    45,954       46,248  
 
Minority interest
    1,679       1,580  
 
Securities lending payable
    25,924       23,694  
 
Other liabilities
    21,663       12,189  
     
     
 
     
Total liabilities
    527,770       499,973  
     
     
 
 
Preferred shareholders’ equity in subsidiary companies
    1,782       2,153  
     
     
 
CAPITAL FUNDS:
               
 
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2003 — 2,751,327,476; 2002 — 2,751,327,476
    6,878       6,878  
 
Additional paid-in capital
    599       607  
 
Retained earnings
    54,101       52,270  
 
Accumulated other comprehensive income (loss)
    2,073       691  
 
Treasury stock, at cost; 2003 — 142,929,596; 2002 — 141,726,645 shares of common stock
    (1,394 )     (1,343 )
     
     
 
     
Total capital funds
    62,257       59,103  
     
     
 
     
Total liabilities, preferred shareholders’ equity in subsidiary companies and capital funds
  $ 591,809     $ 561,229  
     
     
 

See Accompanying Notes to Financial Statements.

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AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
(unaudited)
                   
Three Months
Ended March 31,

2003 2002


Revenues:
               
 
Premiums and other considerations
  $ 12,946     $ 10,290  
 
Net investment income
    4,024       3,648  
 
Realized capital gains (losses)
    (632 )     (232 )
 
Other revenues
    2,589       2,431  
     
     
 
 
Total revenues
    18,927       16,137  
     
     
 
Benefits and expenses:
               
 
Incurred policy losses and benefits
    11,292       9,167  
 
Insurance acquisition & other operating expenses
    4,711       4,011  
     
     
 
 
Total benefits and expenses
    16,003       13,178  
     
     
 
Income before income taxes and minority interest
    2,924       2,959  
     
     
 
Income taxes:
               
 
Current
    689       628  
 
Deferred
    187       264  
     
     
 
      876       892  
     
     
 
Income before minority interest
    2,048       2,067  
     
     
 
Minority interest
    (94 )     (87 )
     
     
 
Net income
  $ 1,954     $ 1,980  
     
     
 
Earnings per common share:
               
 
Basic
  $ 0.75     $ 0.76  
     
     
 
 
Diluted
  $ 0.74     $ 0.75  
     
     
 
Cash dividends per common share
  $ 0.047     $ 0.042  
     
     
 
Average shares outstanding:
               
 
Basic
    2,610       2,615  
     
     
 
 
Diluted
    2,628       2,641  
     
     
 

See Accompanying Notes to Financial Statements.

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AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
                   
Three Months
Ended March 31,

2003 2002


Cash Flows From Operating Activities:
               
Net Income
  $ 1,954     $ 1,980  
     
     
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
 
Non-cash revenues, expenses, gains and losses included in income:
               
 
Change in:
               
 
General and life insurance reserves
    6,017       843  
 
Premiums and insurance balances receivable and payable — net
    (1,058 )     (683 )
 
Reinsurance assets
    (1,387 )     (380 )
 
Deferred policy acquisition costs
    (771 )     (597 )
 
Investment income due and accrued
    (229 )     (172 )
 
Funds held under reinsurance treaties
    454       129  
 
Other policyholders’ funds
    285       (833 )
 
Current and deferred income taxes — net
    361       611  
 
Reserve for commissions, expenses and taxes
    (65 )     (132 )
 
Other assets and liabilities — net
    1,373       2,823  
 
Trading assets and liabilities — net
    409       1,024  
 
Trading securities, at market value
    (2,027 )     966  
 
Spot commodities, at market value
    (117 )     6  
 
Net unrealized (gain) loss on interest rate and currency swaps, options and forward transactions
    357       (628 )
 
Securities purchased under agreements to resell
    1,461       34  
 
Securities sold under agreements to repurchase
    2,402       (231 )
 
Securities and spot commodities sold but not yet purchased, at market value
    (1,859 )     (142 )
 
Realized capital (gains) losses
    632       232  
 
Equity in income of partially-owned companies and other invested assets
    (44 )     (26 )
 
Amortization of premium and discount on securities
    (2 )     (32 )
 
Depreciation expenses, principally flight equipment
    447       388  
 
Change in cumulative translation adjustments
    59       (270 )
 
Provision for finance receivable losses
    102       85  
 
Other — net
    136       (65 )
     
     
 
 
Total Adjustments
    6,936       2,950  
     
     
 
Net cash provided by operating activities
  $ 8,890     $ 4,930  
     
     
 

See Accompanying Notes to Financial Statements.

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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS — (Continued)

(in millions)
(unaudited)
                   
Three Months
Ended March 31,

2003 2002


Cash Flows From Investing Activities:
               
 
Cost of bonds, at market sold
  $ 32,933     $ 22,356  
 
Cost of bonds, at market matured or redeemed
    3,661       2,921  
 
Cost of equity securities sold
    1,479       1,454  
 
Realized capital gains (losses)
    (632 )     (232 )
 
Purchases of fixed maturities
    (47,224 )     (32,538 )
 
Purchases of equity securities
    (1,483 )     (1,766 )
 
Mortgage, policy and collateral loans granted
    (516 )     (445 )
 
Repayments of mortgage, policy and collateral loans
    418       450  
 
Sales of securities available for sale
    915       830  
 
Maturities of securities available for sale
    1,378       299  
 
Purchases of securities available for sale
    (3,245 )     (1,435 )
 
Sales of flight equipment
          37  
 
Purchases of flight equipment
    (1,757 )     (1,741 )
 
Net additions to real estate and other fixed assets
    (244 )     (74 )
 
Sales or distributions of other invested assets
    2,168       1,243  
 
Investments in other invested assets
    (5,031 )     (1,746 )
 
Change in short-term investments
    857       (1,655 )
 
Investments in partially-owned companies
    285       20  
 
Finance receivable originations and purchases
    (2,460 )     (2,216 )
 
Finance receivable principal payments received
    2,461       2,402  
     
     
 
Net cash used in investing activities
    (16,037 )     (11,836 )
     
     
 
Cash Flows From Financing Activities:
               
 
Change in policyholders’ contract deposits
    4,733       7,019  
 
Change in trust deposits and deposits due to banks and other depositors
    (14 )     (40 )
 
Change in commercial paper
    1,929       (49 )
 
Proceeds from notes, bonds, loans and mortgages payable
    5,012       4,673  
 
Repayments on notes, bonds, loans and mortgages payable
    (4,640 )     (2,775 )
 
Proceeds from guaranteed investment agreements
    1,393       1,338  
 
Maturities of guaranteed investment agreements
    (1,214 )     (2,421 )
 
Redemption of subsidiary company preferred stock
    (371 )     (34 )
 
Proceeds from common stock issued
    12       65  
 
Cash dividends to shareholders
    (123 )     (110 )
 
Acquisition of treasury stock
    (76 )     (314 )
 
Other — net
    1       4  
     
     
 
Net cash provided by financing activities
    6,642       7,356  
     
     
 
Change in cash
    (505 )     450  
Cash at beginning of period
    1,165       698  
     
     
 
Cash at end of period
  $ 660     $ 1,148  
     
     
 

See Accompanying Notes to Financial Statements.

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AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
                     
Three Months
Ended March 31,

2003 2002


Net income
  $ 1,954     $ 1,980  
Other comprehensive income:
               
 
Unrealized appreciation (depreciation) of investments — net of reclassification adjustments
    1,939       (1,405 )
   
Deferred income tax (expense) benefit on changes
    (688 )     521  
 
Foreign currency translation adjustments(a)
    38       (276 )
   
Applicable income tax (expense) benefit on changes
    (5 )     29  
 
Net derivative gains arising from cash flow hedging activities
    193       96  
   
Deferred income tax expense on changes
    (55 )     (38 )
 
Retirement plan liabilities adjustment, net of tax
    (40 )     (30 )
     
     
 
Other comprehensive income
    1,382       (1,103 )
     
     
 
Comprehensive income
  $ 3,336     $ 877  
     
     
 

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

See Accompanying Notes to Financial Statements.

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AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

 
NOTES TO FINANCIAL STATEMENTS

March 31, 2003

(unaudited)

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

      2)     Segment Information:

      The following table summarizes the operations by major operating segment for the three months ended March 31, 2003 and 2002 (in millions):

                   
Operating Segments

Three Months
Ended March 31,

2003 2002


Revenues(a):
               
 
General Insurance
  $ 7,898     $ 6,130  
 
Life Insurance
    8,554       7,657  
 
Financial Services
    1,693       1,566  
 
Retirement Savings & Asset Management
    896       865  
 
Other
    (114 )     (81 )
     
     
 
Total Reportable Segments
    18,927       16,137  
 
Reclassifications and Eliminations
           
     
     
 
Consolidated
  $ 18,927     $ 16,137  
     
     
 
Operating income(b):
               
 
General Insurance
  $ 1,144     $ 933  
 
Life Insurance
    1,195       1,327  
 
Financial Services
    530       474  
 
Retirement Savings & Asset Management
    283       300  
 
Other
    (228 )     (75 )
     
     
 
Total Reportable Segments
    2,924       2,959  
 
Reclassifications and Eliminations
           
     
     
 
Consolidated
  $ 2,924     $ 2,959  
     
     
 

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

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     The following is AIG’s Consolidated Statement of Segment Operations for the three months ended March 31, 2003 and 2002:

 
CONSOLIDATED STATEMENT OF SEGMENT OPERATIONS
(in millions)
(unaudited)
                   
Three Months
Ended March 31,

2003 2002


General insurance operations:
               
 
Net premiums written
  $ 8,243     $ 6,334  
 
Change in unearned premium reserve
    (956 )     (827 )
     
     
 
 
Net premiums earned
    7,287       5,507  
 
Net investment income
    784       745  
 
Realized capital gains (losses)
    (173 )     (122 )
     
     
 
 
General insurance revenues
    7,898       6,130  
     
     
 
 
Losses and loss expenses incurred
    5,403       4,143  
 
Underwriting expenses
    1,351       1,054  
     
     
 
 
General insurance benefits and expenses
    6,754       5,197  
     
     
 
 
General insurance operating income
    1,144       933  
     
     
 
Life insurance operations:
               
 
Premium income
    5,659       4,783  
 
Net investment income
    3,240       2,903  
 
Realized capital gains (losses)
    (345 )     (29 )
     
     
 
 
Life insurance revenues
    8,554       7,657  
     
     
 
 
Death and other benefits
    2,604       2,525  
 
Increase in future policy benefits
    3,285       2,499  
 
Acquisition and insurance expenses
    1,470       1,306  
     
     
 
 
Life insurance benefits and expenses
    7,359       6,330  
     
     
 
 
Life insurance operating income
    1,195       1,327  
     
     
 
Financial services operating income
    530       474  
Retirement savings & asset management operating income
    283       300  
Other realized capital gains (losses)
    (114 )     (81 )
Other income (deductions) — net
    (114 )     6  
     
     
 
Income before income taxes and minority interest
  $ 2,924     $ 2,959  
     
     
 

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      The following table summarizes AIG’s general insurance operations by major operating unit for the three months ended March 31, 2003 and 2002 (in millions):

                   
General Insurance

Three Months
Ended March 31,

2003 2002


Revenues:
               
 
Domestic Brokerage Group
  $ 4,322     $ 3,345  
 
Transatlantic
    758       600  
 
Personal Lines
    888       688  
 
Mortgage Guaranty
    178       165  
 
Foreign General
    1,762       1,326  
 
Reclassifications and Eliminations
    (10 )     6  
     
     
 
Total General Insurance
  $ 7,898     $ 6,130  
     
     
 
Operating income:
               
 
Domestic Brokerage Group
  $ 709     $ 531  
 
Transatlantic
    80       72  
 
Personal Lines
    69       23  
 
Mortgage Guaranty
    110       112  
 
Foreign General
    347       311  
 
Reclassifications and Eliminations
    2       6  
Realized capital gains (losses)
    (173 )     (122 )
     
     
 
Total General Insurance
  $ 1,144     $ 933  
     
     
 

      The following table summarizes AIG’s life insurance operations by major operating unit for the three months ended March 31, 2003 and 2002 (in millions):

                   
Life Insurance

Three Months
Ended March 31,

2003 2002


Revenues:
               
 
American International Assurance and Nan Shan Life 
  $ 3,042     $ 2,762  
 
ALICO and AIG Star Life
    1,944       1,777  
 
Domestic Life
    3,407       3,015  
 
Other
    161       103  
 
Reclassifications and Eliminations
           
     
     
 
Total Life Insurance
  $ 8,554     $ 7,657  
     
     
 
Operating income:
               
 
American International Assurance and Nan Shan Life
  $ 408     $ 392  
 
ALICO and AIG Star Life
    398       311  
 
Domestic Life
    664       632  
 
Other
    70       21  
 
Reclassifications and Eliminations
           
Realized capital gains (losses)
    (345 )     (29 )
     
     
 
Total Life Insurance
  $ 1,195     $ 1,327  
     
     
 

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      The following table summarizes AIG’s financial services operations by major operating unit for the three months ended March 31, 2003 and 2002 (in millions):

                   
Financial Services

Three Months
Ended March 31,

2003 2002


Revenues:
               
 
International Lease Finance Corporation 
  $ 722     $ 641  
 
AIG Financial Products Corp. 
    272       272  
 
Consumer Finance 
    639       613  
 
Other*
    128       112  
 
Reclassifications and Eliminations
    (68 )     (72 )
     
     
 
Total Financial Services
  $ 1,693     $ 1,566  
     
     
 
Operating income:
               
 
International Lease Finance Corporation 
  $ 174     $ 173  
 
AIG Financial Products Corp. 
    196       176  
 
Consumer Finance 
    148       124  
 
Other*
    32       26  
 
Reclassifications and Eliminations
    (20 )     (25 )
     
     
 
Total Financial Services
  $ 530     $ 474  
     
     
 

Including AIG Trading Group Inc.

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

      The quarterly dividend rate per common share, commencing with the dividend paid September 20, 2002 is $0.047.

      4)     Cash flow information for the three month periods ended March 31, 2003 and 2002 is as follows:

                 
2003 2002


(in millions)
Income taxes paid
  $ 413     $ 199  
Interest paid
  $ 829     $ 845  

      5)     Computation of Earnings Per Share:

                   
Three Months
Ended March 31,

2003 2002


(in millions, except
per share amounts)
Numerator:
               
Net income (applicable to common stock)
  $ 1,954     $ 1,980  
     
     
 
Denominator:
               
Basic:
               
Average outstanding shares used in the computation of per share earnings:
               
 
Common stock
    2,752       2,752  
 
Common stock in treasury
    (142 )     (137 )
     
     
 
Average outstanding shares — basic
    2,610       2,615  
     
     
 
Diluted:
               
Average outstanding shares used in the computation of per share earnings:
               
 
Common stock
    2,752       2,752  
 
Common stock in treasury
    (142 )     (137 )
Stock options and stock purchase plan (treasury stock method)
    18       26  
     
     
 
Average outstanding shares — diluted
    2,628       2,641  
     
     
 
Net income per share:
               
 
Basic
  $ 0.75     $ 0.76  
     
     
 
 
Diluted
  $ 0.74     $ 0.75  
     
     
 

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      6)     Acquisition, Restructuring and Related Charges

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

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

      Of the total direct costs of $512 million, $423 million or 83 percent have been paid as of March 31, 2003, including approximately $7 million, $111 million and $305 million paid during the first three months of 2003, and the twelve months of 2002 and 2001, respectively. In addition, during 2002, $32 million of liabilities were utilized to absorb other insignificant merger-related expenses. The balance, $57 million, is recorded as a component of “Other Liabilities” as of March 31, 2003.

      With respect to the elimination of positions, 2,287 terminations were included in AIG’s original post-business combination plans. As of March 31, 2003, terminations totaled 1,848; including 134, 1,105 and 609 made during 2003, 2002 and 2001, respectively. The remaining 439 terminations are scheduled to occur in 2003, in accordance with AGC’s employee termination program.

      The indirect costs of $851 million represented charges resulting from post-business combination plans, recognizing that certain assets will have no future economic benefit or ability to generate future revenues. Such charges include asset impairment charges related to software, leasehold improvements and certain goodwill. Also included were certain adjustments associated with conforming AGC’s balances to AIG’s existing accounting policies and methodologies. Of the $851 million, $784 million had been applied as at March 31, 2003, including $2 million, $113 million and $669 million in the first three months of 2003, and the twelve months of 2002 and 2001, respectively. The balance, $67 million, remains outstanding and is reflected as a component of “Other Liabilities” as at March 31, 2003.

      7)     Starr International Company, Inc. Plan

      Starr International Company, Inc. (SICO) provides a Deferred Compensation Profit Participation Plan (SICO Plan) to certain AIG employees. The SICO Plan came into being in 1975 when the voting shareholders and Board of Directors of SICO, a private holding company whose principal asset consists of AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including AIG. Participation in the SICO Plan by any person, and the amount of such participation, is at the sole discretion of SICO’s Board of Directors, and none of the costs of the various benefits provided under such plan is paid by or charged to AIG. The SICO Plan provides that shares currently owned by SICO may be set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors may permit an early pay-out under certain circumstances. Prior to pay-out, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant’s voluntary termination of employment with AIG prior to normal retirement age. In addition, SICO’s Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock. If the expenses of the SICO Plan had been reflected by AIG, the pre-tax amounts accrued would have been $32.1 million for the first three months of 2003 and $12.3 million for the same period of 2002.

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      8)     Commitments and Contingent Liabilities

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

      a)     Commitments to extend credit are agreements to lend subject to certain conditions. These commitments generally have fixed expiration dates or termination clauses and typically require payment of a fee. These commitments have not deviated materially from December 31, 2002 at which time they approximated $400 million. AIG uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. AIG evaluates each counterparty’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by AIG upon extension of credit, is based on management’s credit evaluation of the counterparty.

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

      c)     AIGFP becomes a party to derivative 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. The recorded estimated fair values of such instruments may be different than the values that might be realized if AIGFP were required to sell or close out the transactions prior to maturity.

      AIGFP, in the ordinary course of its operations and as principal, structures derivative transactions to meet the needs of investors who may be seeking to hedge certain aspects of such investors’ operations. AIGFP may also enter into derivative transactions for its own account. Such derivative transactions include interest rate, currency and equity swaps, swaptions and forward commitments. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. AIGFP typically becomes a principal in the exchange of interest payments between the parties and, therefore, may be exposed to loss, if counterparties default. Currency and equity swaps are similar to interest rate swaps, but involve the exchange of specific currencies or the cashflows based on the underlying equity securities or indices. Also, they may involve the exchange of principal amounts at the beginning and end of the transaction. Swaptions are options where the holder has the right but not the obligation to enter into a swap transaction or cancel an existing swap transaction. At March 31, 2003, the notional principal amount of the sum of the swap pays and receives approximated $848.83 billion, primarily related to interest rate swaps of approximately $603.17 billion.

      The following tables provide the contractual and notional amounts of derivatives transactions of AIGFP at March 31, 2003.

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

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

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      The following table presents AIGFP’s derivatives portfolio by maturity and type of derivative at March 31, 2003 and December 31, 2002:

(in millions)


                                                   
Remaining Life of Notional Amount*

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

AIGFP interest rate, currency and equity swaps and swaptions:
                                               
Notional amount:
                                               
 
Interest rate swaps
  $ 152,383     $ 302,043     $ 134,473     $ 14,273     $ 603,172     $ 579,994  
 
Currency swaps
    47,252       84,748       44,599       6,375       182,974       176,987  
 
Swaptions and equity swaps
    21,948       24,176       9,863       6,698       62,685       60,436  

Total
  $ 221,583     $ 410,967     $ 188,935     $ 27,346     $ 848,831     $ 817,417  

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

     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 March 31, 2003 the contractual amount of AIGFP’s futures and forward contracts approximated $51.86 billion.

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

(in millions)


                                                 
Remaining Life

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

Futures and forward contracts:
                                               
Exchange traded futures contracts contractual amount
  $ 6,726     $     $     $     $ 6,726     $ 10,524  

Over the counter forward contracts contractual amount
  $ 44,727     $ 214     $ 188     $     $ 45,129     $ 43,627  

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

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

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the portfolio that exceeded an 11 percent first loss threshold amount, and thereby bear risk that is senior to the 8 to 11 percent AAA rated risk layer.

      AIGFP continually monitors the underlying portfolios to determine whether the credit loss experience for any particular portfolio has caused the likelihood of AIGFP having a payment obligation under the transaction to be greater than super senior risk. AIGFP maintains the ability opportunistically to hedge specific securities in a portfolio thereby further limiting its exposure to loss and has hedged outstanding transactions in this manner on occasion. AIGFP has never had a payment obligation under these credit derivatives transactions. Furthermore, based on portfolio credit losses experienced to date under all outstanding transactions, no transaction has experienced credit losses in an amount that has made the likelihood of AIGFP having to make a payment, in AIGFP’s view, to be greater than remote, even in severe recessionary market scenarios. At March 31, 2003, the notional amount with respect to AIGFP’s credit derivative portfolio was $151.1 billion.

      AIGFP utilizes various credit enhancements, including letters of credit, guarantees, collateral, credit triggers, credit derivatives and margin agreements to reduce the credit exposure relating to these off-balance sheet financial instruments. AIGFP 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. Management believes that 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. Subsequent to the application of such credit enhancements, the net exposure to credit risk or the net replacement value of all interest rate, currency, and equity swaps, swaptions and forward commitments approximated $14.95 billion at March 31, 2003 and $14.98 billion at December 31, 2002. The net replacement value for futures and forward contracts approximated $22 million at March 31, 2003 and $110 million at December 31, 2002. The net replacement value most closely represents the net credit risk to AIGFP or the maximum amount exposed to potential loss.

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

      AIGFP determines counterparty credit quality by reference to ratings from independent rating agencies or internal analysis. At March 31, 2003 and December 31, 2002, the counterparty credit quality by derivative product with respect to the net replacement value of AIGFP’s derivatives portfolio was as follows:

(in millions)


                                   
Net Replacement Value

Swaps and Futures and Total Total
Swaptions Forward Contracts 2003 2002

Counterparty credit quality:
                               
 
AAA
  $ 6,252     $ 5     $ 6,257     $ 7,177  
 
AA
    3,647       17       3,664       3,871  
 
A
    3,882             3,882       2,887  
 
BBB
    1,133             1,133       1,120  
 
Below investment grade
    31             31       35  

Total
  $ 14,945     $ 22     $ 14,967     $ 15,090  

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

(in millions)


                                 
Net Replacement Value

Swaps and Futures and Total Total
Swaptions Forward Contracts 2003 2002

Non-U.S. banks
  $ 3,546     $ 17     $ 3,563     $ 3,310  
Insured municipalities
    907             907       925  
U.S. industrials
    2,200             2,200       2,773  
Governmental
    671             671       520  
Non-U.S. financial service companies
    416             416       474  
Non-U.S. industrials
    1,463             1,463       1,452  
Special purpose
    2,945             2,945       3,252  
U.S. banks
    761             761       431  
U.S. financial service companies
    2,029       5       2,034       1,941  
Supranationals
    7             7       12  

Total
  $ 14,945     $ 22     $ 14,967     $ 15,090  

      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 potentially significant counterparty defaults.

      Revenues for both the three months ended March 31, 2003 and 2002 from AIGFP’s operations were $272 million.

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

      Futures and forward contracts are contracts for delivery of foreign currencies, commodities or financial indices in which the seller/purchaser agrees to make/take delivery at a specified future date of a specified instrument, at a specified price or yield. Options are contracts that allow the holder of the option to purchase or sell the underlying commodity, currency or index at a specified price and within, or at, a specified period of time. As a writer of options, 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. 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 March 31, 2003, the contractual amount of AIGTG’s futures, forward and option contracts approximated $467.6 billion.

      The following table provides the contractual and notional amounts and credit exposure, if applicable, by maturity and type of derivative of AIGTG’s derivatives portfolio at March 31, 2003 and December 31, 2002. The gross replacement values presented represent the sum of the estimated positive fair values of all of AIGTG’s derivatives contracts at March 31, 2003 and December 31, 2002. These values do not represent the credit risk to AIGTG.

      Net replacement values presented represent the net sum of estimated positive fair values after the application of legally enforceable master closeout netting agreements and collateral held. The net replacement values most closely represent the net credit risk to AIGTG or the maximum amount exposed to potential loss within a product category. At March 31, 2003, the net replacement value of AIGTG’s futures, forward and option contracts and interest rate and currency swaps approximated $2.09 billion.

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(in millions)


                                                     
Remaining Life

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

Contractual amount of futures, forwards and options:
                                               
 
Exchange traded futures and options
  $ 12,915     $ 949     $ 59     $     $ 13,923     $ 13,335  

 
Forwards
  $ 207,473     $ 12,679     $ 1,817     $ 36     $ 222,005     $ 184,147  

 
Over the counter purchased options
  $ 72,464     $ 20,460     $ 23,512     $ 237     $ 116,673     $ 115,762  

 
Over the counter sold options(a)
  $ 70,080     $ 20,227     $ 24,315     $ 389     $ 115,011     $ 111,674  

Notional amount(c):
                                               
 
Interest rate swaps and forward rate agreements
  $ 15,150     $ 32,583     $ 5,746     $ 115     $ 53,594     $ 55,059  
 
Currency swaps
    2,957       5,106       328             8,391       8,544  
 
Swaptions
    4,521       4,685       1,251             10,457       10,515  

Total
  $ 22,628     $ 42,374     $ 7,325     $ 115     $ 72,442     $ 74,118  

Credit exposure:
                                               
 
Futures, forwards, swaptions and purchased options contracts and interest rate and currency swaps:
                                               
   
Gross replacement value
  $ 4,951     $ 3,378     $ 3,127     $ 39     $ 11,495     $ 11,320  
   
Master netting arrangements
    (3,498 )     (2,753 )     (2,926 )     (25 )     (9,202 )     (8,776 )
   
Collateral
    (70 )     (106 )     (20 )     (7 )     (203 )     (252 )

Net replacement value(b)
  $ 1,383     $ 519     $ 181     $ 7     $ 2,090     $ 2,292  

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

(b)  The net replacement values with respect to exchange traded futures and options, forward contracts and purchased over the counter options are presented as a component of trading assets in the accompanying balance sheet. The net replacement values with respect to interest rate and currency swaps are presented as a component of unrealized gain on interest rate and currency swaps, options and forward transactions in the accompanying balance sheet.
(c)  Notional amount is not representative of either market risk or credit risk.

     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.

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      AIGTG determines counterparty credit quality by reference to ratings from independent rating agencies or internal analysis. At March 31, 2003 and December 31, 2002, the counterparty credit quality and counterparty breakdown by industry with respect to the net replacement value of AIGTG’s derivatives portfolio were as follows:

(in millions)


                   
Net Replacement Value

2003 2002

Counterparty credit quality:
               
 
AAA
  $ 336     $ 347  
 
AA
    508       622  
 
A
    482       739  
 
BBB
    186       193  
 
Below investment grade
    59       63  
 
Exchange traded futures and options*
    519       328  

Total
  $ 2,090     $ 2,292  

Counterparty breakdown by industry:
               
 
Non-U.S. banks
  $ 712     $ 927  
 
U.S. industrials
    169       369  
 
Governmental
    35       37  
 
Non-U.S. financial service companies
    65       105  
 
Non-U.S. industrials
    167       144  
 
U.S. banks
    68       157  
 
U.S. financial service companies
    355       225  
 
Exchanges*
    519       328  

Total
  $ 2,090     $ 2,292  

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

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

      AIGTG limits its risks by holding offsetting positions. In addition, AIGTG monitors and controls its risk exposures through various monitoring systems which evaluate AIGTG’s market and credit risks, and through credit approvals and limits. At March 31, 2003, AIGTG did not have a significant concentration of credit risk from either an individual counterparty or group of counterparties.

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

      e)     At March 31, 2003, ILFC had committed to purchase 487 aircraft deliverable from 2003 through 2010 at an estimated aggregate purchase price of $27.9 billion and had options to purchase 18 aircraft deliverable from 2003 through 2008 at an estimated aggregate purchase price of $1.3 billion. ILFC will be required to find customers for any aircraft acquired, and it must arrange financing for portions of the purchase price of such equipment.

      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 adverse effect on its financial condition, future operating results or liquidity. However, the recent trend of increasing jury awards and settlements makes it somewhat more difficult to assess the ultimate outcome of such litigation. (See also Management’s Discussion and Analysis of Financial Condition and Results of Operations.)

      In late 2002, a shareholder derivative action was filed in Delaware Chancery Court alleging breaches of fiduciary duty of loyalty and care against AIG’s directors. AIG management believes the allegations of the

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complaint are without merit. AIG’s Board of Directors has appointed a special committee of independent directors to review the complaint and respond to the lawsuit.

      AIG continues to receive claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter collectively referred to as environmental claims) and indemnity claims asserting injuries from asbestos. Estimation of asbestos and environmental claims loss reserves is a difficult process, as these claims, which emanate from policies written in 1984 and prior years, cannot be estimated by conventional reserving techniques. Asbestos and environmental claims development is affected by factors such as inconsistent court 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 March 31, 2003 ($2.01 billion gross; $651 million net) are believed to be adequate as these reserves are based on known facts and current law.

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

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

      A summary of reserve activity for the three months ended March 31, 2003 and 2002, including estimates for applicable incurred but not reported losses and loss expenses, relating to asbestos and environmental claims separately and combined, is as follows:

                                 
(in millions)

2003 2002


Gross Net Gross Net

Asbestos:
                               
Reserve for losses and loss expenses at beginning of year
  $ 1,304     $ 400     $ 1,114     $ 312  
Losses and loss expenses incurred*
    39       15       44       27  
Losses and loss expenses paid*
    (110 )     (32 )     (33 )     (15 )

Reserve for losses and loss expenses at end of period
  $ 1,233     $ 383     $ 1,125     $ 324  

Environmental:
                               
Reserve for losses and loss expenses at beginning of year
  $ 832     $ 296     $ 1,115     $ 407  
Losses and loss expenses incurred*
    (18 )     (7 )     (19 )      
Losses and loss expenses paid*
    (38 )     (21 )     (35 )     (21 )

Reserve for losses and loss expenses at end of period
  $ 776     $ 268     $ 1,061     $ 386  

Combined:
                               
Reserve for losses and loss expenses at beginning of year
  $ 2,136     $ 696     $ 2,229     $ 719  
Losses and loss expenses incurred*
    21       8       25       27  
Losses and loss expenses paid*
    (148 )     (53 )     (68 )     (36 )

Reserve for losses and loss expenses at end of period
  $ 2,009     $ 651     $ 2,186     $ 710  

All amounts pertain to policies underwritten in prior years.

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

      9)     Debt Outstanding:

      At March 31, 2003, AIG’s debt outstanding of $74.37 billion, shown below, included borrowings of $65.63 billion which were either not guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable.

                   
(in millions)

2003 2002

Borrowings under obligations of GIAs — AIGFP
  $ 15,029     $ 14,850  

Commercial Paper:
               
 
ILFC(a)
    4,001       4,213  
 
AGF(a)
    3,519       2,956  
 
AIG Funding, Inc.
    3,229       1,645  
 
AIG Credit Card Company (Taiwan)(a)
    232       234  
 
AIG Finance (Taiwan) Limited(a)
    60       64  

 
Total
    11,041       9,112  

Medium Term Notes:
               
 
AGF(a)
    7,933       7,719  
 
ILFC(a)
    5,561       4,970  
 
AIG
    998       998  

 
Total
    14,492       13,687  

Notes and Bonds Payable:
               
 
AIGFP
    16,483       16,940  
 
ILFC(a)(b)
    10,887       9,825  
 
AGF(a)
    1,661       2,266  
 
AIG
    1,615       1,608  
 
AGC
    1,243       1,542  

 
Total
    31,889       32,181  

Loans and Mortgages Payable:
               
 
AIG
    705       697  
 
AIGCFG(a)
    621       735  
 
ILFC(a)(c)
    242       261  
 
AIG Finance (Hong Kong) Limited(a)
    217       229  
 
Other subsidiaries(a)
    135       133  

 
Total
    1,920       2,055  

 
Total Borrowings
    74,371       71,885  

Borrowings not guaranteed by AIG
    35,069       33,605  
Matched GIA borrowings — AIGFP
    15,029       14,850  
Matched notes and bonds payable — AIGFP
    15,533       16,526  

      65,631       64,981  

Remaining borrowings of AIG
  $ 8,740     $ 6,904  

(a) AIG does not guarantee these borrowings.
(b) Includes borrowings under Export Credit Facility of $2.03 billion.
(c) Capital lease obligations.

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     At March 31, 2003, the commercial paper issued and outstanding was as follows:

                                     
(dollars in millions)

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

ILFC
  $ 4,001     $ 4     $ 4,005       1.26 %   25
AGF
    3,519       3       3,522       1.25     28
Funding
    3,229       2       3,231       1.20     23
AIGCCC — Taiwan*
    232       1       233       2.21     76
AIGF — Taiwan*
    60             60       4.35     61

Total
  $ 11,041     $ 10     $ 11,051          

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

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

(in millions)


                 
2003 2002

Short-term borrowings
  $ 20,443     $ 22,468  
Long-term borrowings*
    53,928       49,417  

Total borrowings
  $ 74,371     $ 71,885  

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

     During the first three months of 2003, AIGFP decreased the aggregate principal amount outstanding of its notes and bonds payable to $16.48 billion. AIGFP uses the proceeds from the issuance of notes and bonds and GIA borrowings to invest in a diversified portfolio of securities and derivative transactions. The funds may also be temporarily invested in securities purchased under agreements to resell. (See also the discussions under “Operational Review”, “Liquidity” and “Derivatives” in Management’s Discussion and Analysis.)

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

      ILFC and American General Finance, Inc. and its subsidiaries (AGF) as well as AIG Credit Card Company (Taiwan) — (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited — (AIGF-Taiwan), both consumer finance subsidiaries in Taiwan, have issued commercial paper for the funding of their own operations. At March 31, 2003, AIG did not guarantee the commercial paper of any of its subsidiaries other than Funding. On July 8, 2002, AGC ceased issuing commercial paper under its program. AGC’s funding requirements are now being met through Funding’s commercial paper program. (See also the discussion under “Derivatives” in Management’s Discussion and Analysis.)

      AIG and Funding are parties to unsecured syndicated revolving credit facilities (collectively, the Facility) aggregating $2.75 billion. The Facility consists of $1.375 billion in a short-term revolving credit facility and $1.375 billion in a five year revolving credit facility. The Facility can be used for general corporate purposes and also to provide backup for Funding’s commercial paper programs. There are currently no borrowings outstanding under the Facility, nor were any borrowings outstanding as of March 31, 2003.

      AGF is a party to unsecured syndicated revolving credit facilities aggregating $3.0 billion. The facilities consist of $1.5 billion in a short-term revolving credit facility and $1.5 billion in a five year revolving credit facility, which support AGF’s commercial paper borrowings. There are currently no borrowings under these facilities, nor were any borrowings outstanding as of March 31, 2003. AGF had $4.0 billion in aggregate principal amount of debt securities registered and available for issuance at March 31, 2003. AGF uses the proceeds from the issuance of notes and bonds for the funding of its finance receivables.

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

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      ILFC is a party to unsecured syndicated revolving credit facilities aggregating $3.15 billion to support its commercial paper program. The facilities consist of $2.15 billion in a short-term revolving credit facility and $1.0 billion in a three year revolving credit facility. There are currently no borrowings outstanding under these facilities, nor were any borrowings outstanding as of March 31, 2003.

      At March 31, 2003, ILFC had increased the aggregate principal amount outstanding of its medium term and long term notes to $16.45 billion, a net increase of $1.65 billion from December 31, 2002, and recorded a net decline in its capital lease obligations of $19 million and a net decrease in its commercial paper of $212 million. At March 31, 2003, ILFC had $6.08 billion of debt securities registered for public sale. During the quarter ended March 31, 2003, $2.35 billion of debt securities were issued. During the second quarter of 2002, ILFC expanded its Euro Medium Term Note Program to $4.0 billion, under which $2.31 billion in notes were sold through March 31, 2003. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

      ILFC had a $4.3 billion Export Credit Facility for use in connection with the purchase of approximately 75 aircraft delivered through 2001. This facility was guaranteed by various European Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90 percent on these borrowings depending on the delivery date of the aircraft. At March 31, 2003, ILFC had $2.03 billion outstanding under this facility. The debt is collateralized by a pledge of the shares of a subsidiary of ILFC, which holds title to the aircraft financed under the facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the preceding table of borrowings.

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

      AIGFP has established a Euro Medium Term Note Program under which an aggregate principal amount of up to $4.0 billion of notes may be issued. As of March 31, 2003, $2.53 billion of notes had been issued under the program, $2.32 billion of which are outstanding. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

      During the first three months of 2003, AIG did not issue any medium term notes and no previously issued notes matured. At March 31, 2003, AIG had $140 million in aggregate principal amount of debt securities registered for issuance from time to time.

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

      10)     Accounting Standards:

      In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN45). FIN45 requires that, for guarantees within its scope that are issued or amended after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be established and recognized through earnings.

      AIG guarantees the indebtedness of third parties principally in connection with AIG SunAmerica Inc.’s (AIG SunAmerica) investments in affordable housing properties. The guarantees are issued primarily to facilitate financing for the construction of the underlying properties, and range in duration of up to ten years. The loans are secured by the underlying real estate. Since the inception of this investment program over ten

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years ago, payments under these guarantees have been insignificant. This is due to the fact that the loans are first backed by the creditworthiness of the third party general partner, and secondly, are secured by the underlying properties. The maximum exposure under these guarantees as of March 31, 2003 is approximately $3.4 billion.

      In addition, AIG’s real estate investment operations will occasionally extend similar guarantees to real estate partnerships in which they are an investor. The guarantees facilitate financing for the construction, and/or purchase of land. There have been no payments to date under these guarantees. This is due to the fact that the loans are first backed by the creditworthiness of the third party general partner, and secondly, are secured by the underlying properties. The maximum exposure under these guarantees as of March 31, 2003 is approximately $70 million.

      Through its ILFC subsidiary, AIG has also provided other types of guarantees. From time to time, ILFC participates with airlines, banks and other financial institutions to assist in financing aircraft by providing asset guarantees, put options or loan guarantees. Historically, losses arising from these guarantees have been immaterial, as ILFC has recourse to the value of the underlying aircraft, which offsets ILFC’s exposure, should ILFC be called upon to fulfill its obligations under these guarantees. The maximum exposure of these guarantees as of March 31, 2003 is approximately $1.0 billion.

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

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

      AIG is currently evaluating the impact of applying FIN46 to existing VIEs in which it has a variable interest, and believes that the impact on its results of operations and financial condition will not be significant.

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

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

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

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

      With respect to net income for the three month periods ended March 31, 2003 and 2002, the following table provides a pro forma reconciliation as if AIG had adopted the recognition provisions of FAS 123 at its inception:

                     
2003 2002
(in millions, except per share amounts)

Net income, as reported
  $ 1,954     $ 1,980  
Actual stock-based compensation recognized, net of tax*
    2        
     
     
 
      1,956       1,980  
Pro forma stock-based compensation, net of tax
    14       14  
Actual stock-based compensation recognized, net of tax
    2        
     
     
 
Net income, pro forma
  $ 1,940     $ 1,966  
     
     
 
Earnings per common share:
               
 
Basic:
               
   
Net income, as reported
  $ 0.75     $ 0.76  
   
Stock-based compensation, net of tax
    (0.01 )     (0.01 )
     
     
 
   
Net income, pro forma
  $ 0.74     $ 0.75  
     
     
 
 
Diluted:
               
   
Net income, as reported
  $ 0.74     $ 0.75  
   
Stock-based compensation, net of tax
    (0.01 )     (0.01 )
     
     
 
   
Net income, pro forma
  $ 0.73     $ 0.74  
     
     
 
Average shares outstanding:
               
Basic
    2,610       2,615  
Diluted
    2,628       2,641  


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

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      11)     Information Provided in Connection with Outstanding Debt of AGC

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

Condensed Consolidating Balance Sheets

                                           
March 31, 2003 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Assets:
                                       
 
Invested assets
  $ 1,077     $     $ 457,084     $ (6,794 )   $ 451,367  
 
Cash
    4       2       654             660  
 
Carrying value of subsidiaries and partially owned companies, at equity
    62,244       18,931       9,166       (89,012 )     1,329  
 
Other assets
    2,666       2,693       136,722       (3,628 )     138,453  
     
     
     
     
     
 
Total Assets
  $ 65,991     $ 21,626     $ 603,626     $ (99,434 )   $ 591,809  
     
     
     
     
     
 
Liabilities:
                                       
 
Insurance liabilities
  $ 361     $     $ 308,681     $ 32     $ 309,074  
 
Debt
    2,614       2,822       76,066       (7,131 )     74,371  
 
Other liabilities
    759       3,606       143,383       (3,423 )     144,325  
     
     
     
     
     
 
Total Liabilities
    3,734       6,428       528,130       (10,522 )     527,770  
     
     
     
     
     
 
Preferred shareholders’ equity in subsidiary companies
                1,782             1,782  
Total Capital Funds
    62,257       15,198       73,714       (88,912 )     62,257  
     
     
     
     
     
 
Total Liabilities, Preferred Shareholders’ Equity in Subsidiary Companies and Capital Funds
  $ 65,991     $ 21,626     $ 603,626     $ (99,434 )   $ 591,809  
     
     
     
     
     
 
                                           
December 31, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




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

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Condensed Consolidating Statements of Income

                                         
Three months ended March 31, 2003 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Operating income
  $ 116     $     $ 3,036     $     $ 3,152  
Equity in undistributed net income of consolidated subsidiaries
    1,800       466             (2,266 )      
Dividend income from consolidated subsidiaries
    209       5             (214 )      
Other
    (86 )           (142 )           (228 )
Income taxes (benefits)
    85       11       780             876  
Minority interest
                (94 )           (94 )
     
     
     
     
     
 
Net income (loss)
  $ 1,954     $ 460     $ 2,020     $ (2,480 )   $ 1,954  
     
     
     
     
     
 
                                         
Three months ended March 31, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Operating income
  $ 154     $     $ 2,880     $     $ 3,034  
Equity in undistributed net income of consolidated subsidiaries
    1,613       214             (1,827 )      
Dividend income from consolidated subsidiaries
    241       249             (490 )      
Other
    (29 )     (33 )     (13 )             (75 )
Income taxes (benefits)
    (1 )     15       878             892  
Minority interest
                (87 )           (87 )
     
     
     
     
     
 
Net income (loss)
  $ 1,980     $ 415     $ 1,902     $ (2,317 )   $ 1,980  
     
     
     
     
     
 

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Condensed Consolidating Statements of Cash Flows

                                   
Three months ended March 31, 2003 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries AIG
(in millions)



Net cash provided by operating activities
  $ 72     $ 473     $ 8,345     $ 8,890  
Cash flows from investing:
                               
 
Invested assets disposed
    50             45,873       45,923  
 
Invested assets acquired
    4             (61,720 )     (61,716 )
Other
    (14 )     (80 )     (150 )     (244 )
     
     
     
     
 
Net cash provided by (used in) investing activities
    40       (80 )     (15,997 )     (16,037 )
     
     
     
     
 
Cash flows from financing activities:
                               
 
Change in debts
    56       (378 )     2,802       2,480  
 
Other
    (182 )     (14 )     4,358       4,162  
     
     
     
     
 
Net cash provided by (used in) financing activities
    (126 )     (392 )     7,160       6,642  
     
     
     
     
 
Change in cash
    (14 )     1       (492 )     (505 )
Cash at beginning of period
    18       1       1,146       1,165  
     
     
     
     
 
Cash at end of period
  $ 4     $ 2     $ 654     $ 660  
     
     
     
     
 
                                   
Three months ended March 31, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries AIG
(in millions)



Net cash provided by (used in) operating activities
  $ (230 )   $ 281     $ 4,879     $ 4,930  
Cash flows from investing:
                               
 
Invested assets disposed
    (118 )           30,243       30,125  
 
Invested assets acquired
                (41,887 )     (41,887 )
 
Other
    (8 )     (146 )     80       (74 )
     
     
     
     
 
Net cash provided by (used in) investing activities
    (126 )     (146 )     (11,564 )     (11,836 )
     
     
     
     
 
Cash flows from financing activities:
                               
 
Change in debts
    714       (105 )     157       766  
 
Other
    (358 )     (30 )     6,978       6,590  
     
     
     
     
 
Net cash provided by (used in) financing activities
    356       (135 )     7,135       7,356  
     
     
     
     
 
Change in cash
                450       450  
Cash at beginning of period
    1       1       696       698  
     
     
     
     
 
Cash at end of period
  $ 1     $ 1     $ 1,146     $ 1,148  
     
     
     
     
 

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Cautionary Statement Regarding Forward-Looking Information

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

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

Index

             
Page

Executive Summary
    28  
 
Consolidated Results
    29  
 
Critical Accounting Estimates
    30  
 
Operational Review
    30  
 
General Insurance Operations
    30  
   
General Insurance Results
    31  
   
Reinsurance
    33  
   
Reserve for Losses and Loss Expenses
    34  
   
Asbestos and Environmental Claims
    36  
 
Life Insurance Operations
    38  
   
Life Insurance Results
    39  
   
Underwriting and Investment Risk
    40  
 
Financial Services Operations
    41  
   
Financial Services Results
    42  
 
Retirement Savings & Asset Management Operations
    44  
    Retirement Savings & Asset Management Results     44  
 
Other Operations
    44  
Capital Resources
    45  
 
Borrowings
    45  
 
Capital Funds
    47  
 
Stock Repurchase
    47  
 
Dividends from Insurance Subsidiaries
    47  
 
Regulation and Supervision
    48  
  Contractual Obligations and Other Commercial Commitments     48  
 
Special Purpose Vehicles
    49  
Liquidity
    49  
Invested Assets
    50  
 
Insurance Invested Assets
    51  
   
Fixed Maturity Investments
    51  
   
Credit Quality
    51  
   
Equity Investments
    52  
   
Valuation of Invested Assets
    52  
   
Mortgage Investments
    54  
   
Short-term Investments
    54  
   
Real Estate Investments
    54  
   
Other Investments
    54  
   
Managing Market Risk
    54  
 
Financial Services Invested Assets
    56  
   
Managing Market Risk
    58  
Derivatives
    60  
 
Counterparty Credit Quality
    61  
 
Fair Value Source
    63  
 
Notional Amounts
    64  
Accounting Standards
    66  
Controls and Procedures
    67  

Executive Summary

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

FLOW CHART

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

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Consolidated Results

      AIG’s revenues in the first three months of 2003 increased 17.3 percent to $18.9 billion when compared to $16.1 billion in the same period of 2002. Growth in revenues was primarily attributable to the growth in net premiums earned from the global insurance operations. This growth was negatively impacted by realized capital losses incurred of $632 million in 2003 compared to $232 million in 2002.

      AIG’s income before income taxes and minority interest decreased 1.2 percent in the first three months of 2003 when compared to the same period of 2002. The factor causing the decrease was the increase in realized capital losses noted above. AIG’s effective income tax rates were 29.97 percent for net income and 34.95 percent for realized capital gains (losses) in 2003 compared to 30.14 percent and 34.94 percent, respectively, in 2002

      AIG’s net income in the first three months of 2003 decreased 1.4 percent to $1.95 billion when compared to $1.98 billion in the same period of 2002.

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

(in millions)


                   
2003 2002

Revenues:
               
 
General insurance(a)
  $ 7,898     $ 6,130  
 
Life insurance(b)
    8,554       7,657  
 
Financial services(c)
    1,693       1,566  
 
Retirement savings & asset management(d)
    896       865  
 
Other
    (114 )     (81 )

Total
  $ 18,927     $ 16,137  

Operating income:
               
 
General insurance
  $ 1,144     $ 933  
 
Life insurance
    1,195       1,327  
 
Financial services
    530       474  
 
Retirement savings & asset management
    283       300  
 
Other
    (228 )     (75 )

Total
  $ 2,924     $ 2,959  

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

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

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

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

     General Insurance: General insurance operating income increased 22.6 percent in the first three months of 2003 compared to the same period in 2002. This increase was primarily attributable to strong growth in underwriting profit, as realized capital losses attributable to general insurance operations totaled $173 million for 2003 compared to $122 million for 2002.

      Life Insurance: Life insurance operating income decreased 9.9 percent in the first three months of 2003 compared to the same period in 2002. This decrease resulted from the impact of the $345 million of realized capital losses for 2003, which offset growth in each of AIG’s principal life insurance businesses, compared to $29 million of realized capital losses in 2002.

      Financial Services: Financial services operating income increased 11.9 percent in the first three months of 2003 compared to the same period in 2002, reflecting the continued growth of each of its principal operations.

      Retirement Savings & Asset Management: Retirement savings & asset management operating income decreased 5.6 percent in the first three months of 2003 when compared to the same period in 2002. Results in the individual variable annuity and mutual fund businesses continue to be impacted by weak equity markets in the United States and around the world.

      Realized Capital Losses: During the first three months of 2003, AIG’s realized capital losses aggregated $632 million. These realized capital losses reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings.

      Capital Resources: At March 31, 2003, AIG had total capital funds of $62.26 billion and total borrowings of $74.37 billion. At that date, $65.63 billion of such borrowings were either not guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable.

      During the period from January 1, 2003 through March 31, 2003, AIG repurchased in the open market 1,625,000 shares of its common stock.

      Liquidity: At March 31, 2003, consolidated invested assets were $459.94 billion including $14.92 billion in cash and short-term investments. Consolidated net cash provided from operating ac-

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tivities in the first three months of 2003 amounted to $8.89 billion.

Outlook

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

      In the Life Insurance segment, AIG expects continued growth with respect to its domestic individual fixed annuity operation, while in overseas markets, AIG’s life insurance operations are expected to continue double digit growth. AIG continues to expand its operations in China, becoming the first foreign insurance organization to have wholly owned life insurance operations in Beijing, Suzhou, Dongguan and Jiangmen as well as previously established operations in Shanghai, Foshan, Guangzhou and Shenzhen. AIG also expects India and Vietnam to offer additional opportunities for growth.

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

      The outbreak of Severe Acute Respiratory Syndrome (SARS) did not impact AIG’s operations during the first quarter of 2003. However, SARS may impede agents from freely visiting prospects and will have some impact on new sales in certain Asian markets during the second quarter of 2003. As a result, AIG has increased its direct marketing efforts, including telephone marketing. There is growing demand for some of AIG’s traditional policyholder protection and critical illness products. AIG expects SARS to have only a slight impact on operating income.

Critical Accounting Estimates

      AIG considers its most critical accounting estimates those with respect to reserves for losses and loss expenses, future policy benefits for life and accident and health contracts, deferred policy acquisition costs, and fair value determinations with respect to certain assets and liabilities of certain of the subsidiaries of AIG’s financial services operations. These accounting estimates require the use of assumptions about matters that are highly uncertain at the time of estimation. Reserves for losses and loss expenses are estimated using data where the more recent accident years of long tail casualty lines have limited statistical credibility in reported net losses. (See also the discussions “Reserve for Losses and Loss Expenses”, and “Asbestos and Environmental Claims” herein.) The liability for future policy benefits for life and accident and health contracts include estimates for interest rates, mortality and surrender rates and invested asset performance. (See also the discussion “Life Insurance Operations”.) Recoverability of deferred policy acquisition costs are contingent upon the underlying insurance operations being profitable. (See also the discussions “General Insurance Operations”, “Life Insurance Operations” and “Retirement Savings and Asset Management Operations” herein.) Fair value determinations with respect to certain assets and liabilities of certain subsidiaries of AIG’s financial services operations are arrived at through the use of valuation models. (See also the discussion “Managing Market Risk” herein.)

Operational Review

General Insurance Operations

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

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

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

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

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

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

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

      General insurance operations for the three month periods ending March 31, 2003 and 2002 were as follows:

                   
(in millions)

2003 2002

Net premiums written:
               
 
DBG
  $ 4,540     $ 3,446  
 
Transatlantic
    768       564  
 
Personal Lines
    884       726  
 
Mortgage Guaranty
    121       122  
 
Foreign General
    1,930       1,476  

Total
  $ 8,243     $ 6,334  

Net premiums earned:
               
 
DBG
  $ 4,013     $ 3,001  
 
Transatlantic
    692       556  
 
Personal Lines
    846       665  
 
Mortgage Guaranty
    124       122  
 
Foreign General
    1,612       1,163  

Total
  $ 7,287     $ 5,507  

Underwriting profit (loss):
               
 
DBG
  $ 243     $ 113  
 
Transatlantic
    15       10  
 
Personal Lines
    37       (6 )
 
Mortgage Guaranty
    67       70  
 
Foreign General
    171       123  

Total
  $ 533     $ 310  

Net investment income:
               
 
DBG
  $ 466     $ 418  
 
Transatlantic
    65       62  
 
Personal Lines
    32       29  
 
Mortgage Guaranty
    43       42  
 
Intercompany adjustments and eliminations — net
    2       6  
 
Foreign General
    176       188  

Total
  $ 784     $ 745  

Realized capital gains (losses)
    (173 )     (122 )

Operating Income
  $ 1,144     $ 933  

General Insurance Results

      During the first three months of 2003, net premiums written and net premiums earned increased 30.1 percent and 32.3 percent, respectively, from those of 2002.

      Commencing in the latter part of 1999 and continuing through and into the current quarter, the commercial property-casualty market place has experienced rate increases. Virtually all areas of DBG have experienced rate increases, as well as maintaining an excellent retention rate for desired renewal business. The vast majority of the increase in the first three months of 2003 resulted from rate increases with respect to renewed business. Overall, DBG’s net premiums written increased $1.09 billion or 31.7 percent in the first three months of 2003 over 2002. Adjusting this growth for cancelled or non-renewed business, such growth would have approximated 37 percent.

      Personal Lines’ net premiums written increased 21.8 percent or $158 million in the first three months of 2003 from 2002, reflecting auto insurance rate increases in many states.

      Foreign General insurance net premiums written increased 30.7 percent and net premiums earned

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increased 38.6 percent in the first three months of 2003 when compared to the same period of 2002.

      In comparing the average foreign currency exchange rates used to translate the results of AIG’s foreign general operations during the first three months of 2003 to those average foreign currency exchange rates used to translate AIG’s Foreign General results during the same period of 2002, the U.S. dollar weakened slightly in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, when foreign net premiums written were translated into U.S. dollars for the purposes of the preparation of the consolidated financial statements, total general insurance net premiums written were approximately 1.7 percentage points more than they would have been if translated utilizing those average foreign currency exchange rates which prevailed during that same period of 2002.

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

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

      The statutory general insurance ratios for the three months ending March 31, 2003 and 2002 were as follows:

                   
2003 2002

Domestic General:
               
 
Loss Ratio
    77.20       78.42  
 
Expense Ratio
    17.00       18.07  

Combined Ratio
    94.20       96.49  

Foreign General:
               
 
Loss Ratio
    63.42       63.36  
 
Expense Ratio
    25.48       28.59  

Combined Ratio
    88.90       91.95  

Consolidated:
               
 
Loss Ratio
    74.15       75.24  
 
Expense Ratio
    18.98       20.52  

Combined Ratio
    93.13       95.76  

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

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

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

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

      A major part of the discipline of a successful general insurance company is to produce an underwriting profit, exclusive of investment income. When underwriting is not profitable, premiums are inadequate to pay for losses and expenses. Therefore, investment income must be used to cover

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underwriting losses. If assets and the income therefrom are insufficient to pay claims and expenses over extended periods, an insurance company cannot survive. For these reasons, AIG views its underwriting operations separately from its investment operations. (See also the discussion under “Liquidity” herein.)

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

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

      General insurance net investment income in the first three months of 2003 increased 5.2 percent when compared to the same period of 2002. The cash flow resulting from the growth in net premiums written had a positive impact on net investment income. (See also the discussion under “Liquidity” herein.)

      General insurance realized capital losses were $173 million and $122 million in the first three months of 2003 and 2002, respectively. These realized capital losses resulted from the ongoing management of the general insurance investment portfolios within the overall objectives of the general insurance operations and reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings. (See the discussion on “Valuation of Invested Assets” herein.)

      General insurance operating income for the first three months of 2003 increased 22.6 percent to $1.14 billion. The contribution of general insurance operating income to income before income taxes and minority interest was 39.1 percent during the first three months of 2003 compared to 31.5 percent in the same period of 2002.

Reinsurance

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

      AIG’s general reinsurance assets amounted to $29.85 billion at March 31, 2003 and resulted from AIG’s reinsurance arrangements. Thus, a credit exposure existed at March 31, 2003 with respect to reinsurance recoverable to the extent that any reinsurer may not be able to reimburse AIG under the terms of these reinsurance arrangements. AIG manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound, and when necessary AIG holds substantial collateral in the form of funds, securities and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. At December 31, 2002, approximately 40 percent of the general reinsurance assets were from unauthorized reinsurers. In order to obtain statutory recognition, the majority of these balances were collateralized. The remaining 60 percent of the general reinsurance assets were from authorized reinsurers and over 90 percent of such balances are from reinsurers rated A-(excellent) or better, as rated by A.M. Best. Through March 31, 2003, these distribution percentages have not changed significantly. This rating is a measure of financial strength. The terms authorized and unauthorized pertain to regulatory categories, not creditworthiness.

      AIG’s allowance for estimated unrecoverable reinsurance has not changed significantly from December 31, 2002 when AIG had allowances for unrecoverable reinsurance approximating $120 million. At March 31, 2003, AIG had no significant reinsurance recoverables from any individual rein-

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surer which is financially troubled (e.g., liquidated, insolvent, in receivership or otherwise subject to formal or informal regulatory restriction).

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

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

      At March 31, 2003, the consolidated general reinsurance assets of $29.85 billion include reinsurance recoverables for paid losses and loss expenses of $4.18 billion and $22.01 billion with respect to the ceded reserve for losses and loss expenses, including ceded losses incurred but not reported (IBNR) (ceded reserves). The ceded reserves represent the accumulation of estimates of ultimate ceded losses including provisions for ceded IBNR and loss expenses. The methods used to determine such estimates and to establish the resulting ceded reserves are continually reviewed and updated. Any adjustments thereto are reflected in income currently. It is AIG’s belief that the ceded reserves at March 31, 2003 were representative of the ultimate losses recoverable. In the future, as the ceded reserves continue to develop to ultimate amounts, the ultimate loss recoverable may be greater or less than the reserves currently ceded.

Reserve for Losses and Loss Expenses

      The table below classifies as of March 31, 2003 the components of the general insurance reserve for losses and loss expenses (loss reserves) with respect to major lines of business on a statutory basis*:

         
(in millions)

Other Liability Occurrence
  $ 14,813  
Other Liability Claims Made
    9,189  
Workers Compensation
    6,384  
Auto Liability
    4,468  
International
    2,963  
Property
    2,871  
Reinsurance
    1,767  
Medical Malpractice
    1,592  
Aircraft
    1,490  
Products Liability
    1,275  
Accident & Health
    1,072  
Fidelity/Surety
    919  
Other
    4,723  

Total
  $ 53,526  

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

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

      At March 31, 2003, general insurance net loss reserves increased $1.17 billion from prior year end to $31.52 billion. The net loss reserves represent loss reserves reduced by reinsurance recoverables, net of an allowance for unrecoverable reinsurance. The methods used to determine such estimates and to establish the resulting reserves are continually reviewed and updated. Any adjustments resulting therefrom are reflected in operating income currently. It is management’s belief that the general insurance net loss reserves are adequate to cover all general insurance net losses and loss expenses as at March 31, 2003. While AIG annually reviews the adequacy of established loss reserves, there can be no assurance that AIG’s ultimate loss reserves will not adversely develop and materially exceed AIG’s loss reserves as of March 31, 2003. In the future, if the general insurance net loss reserves develop deficiently, such deficiency would have an adverse impact on future results of operations.

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

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erty lines, personal lines and certain classes of casualty lines.

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

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

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

      AIG’s annual reserve review does not calculate a range of loss reserve estimates. Because AIG’s general insurance business is primarily in volatile long tail casualty lines driven almost entirely by severity rather than frequency of claims, developing a range around loss reserve estimates would not be meaningful. An estimate is calculated which AIG’s actuaries believe provides a reasonable estimate of the required reserve. This amount is evaluated against actual carried reserves.

      It should also be noted that the overall AIG property/casualty reserves are the combined total of dozens of insurance company subsidiaries of AIG. Each subsidiary’s reserves are generally reviewed individually, except in some cases where the business is written on a pooled basis and the subsidiaries therefore pool their reserves as well.

      A number of actuarial assumptions are made in the review of reserves for each individual segment. For segments in longer tail lines of business, actuarial assumptions generally are made with respect to the following:

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

      To the extent the actual loss development factors, loss trend factors, or other factors used to establish expected loss ratios differ from those assumed in AIG’s loss reserve studies, AIG’s loss reserve position would be directly impacted. While it may be possible to assume loss reserve “ranges” for high frequency, shorter tail classes of business, it is AIG’s judgment that the concept of a meaningful loss reserve range does not apply to low frequency, high severity, long tail classes such as Excess Casualty and Directors and Officers Liability (D & O).

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The past decade has shown that actual loss trends from year to year, and the resulting adequacy of expected loss ratios and of the resulting carried loss reserves, cannot reasonably be expected to fall within any particular range. For example, loss costs nearly doubled during just a three accident year period for AIG’s Excess Casualty and D & O segments, while loss costs for these same two classes actually declined for several years in the early 1990s. The causes of the spike in loss costs include irrational jury awards and liability inflation that could not have been anticipated in pricing (tort system out of control), an explosion in medical costs and related liabilities, and the dot.com bubble and corporate governance related issues that have affected D & O.

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

      For other property and short tail casualty lines, the loss trend is implicitly assumed to develop at the rate that reported net losses develop 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.

Asbestos and Environmental Claims

      AIG continues to receive claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter referred to collectively as environmental claims) and indemnity claims asserting injuries from asbestos.

      The vast majority of these asbestos and environmental claims emanate from policies written in 1984 and prior years. AIG established over a decade ago specialized toxic tort and environmental claim units, which investigate and adjust all such asbestos and environmental claims. These units utilize a comprehensive ground up approach to claim adjusting by thoroughly evaluating each exposure on a claim by claim basis. Commencing in 1985, standard policies contained an absolute exclusion for pollution related damage and an absolute asbestos exclusion was also implemented. However, AIG currently underwrites environmental impairment liability insurance on a claims made basis and excluded such claims from the analyses included herein.

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

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

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than for other claims, the reserves carried for these claims at March 31, 2003 are believed to be adequate as these reserves are based on the known facts and current law. Furthermore, as AIG’s net exposure retained relative to the gross exposure written was lower in 1984 and prior years, the potential impact of these claims is much smaller on the net loss reserves than on the gross loss reserves. In the future, if the environmental claims develop deficiently, such deficiency would have an adverse impact on future results of operations. (See the previous discussion on reinsurance collectibility herein.)

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

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

      A summary of reserve activity for the three months ended March 31, 2003 and 2002, including estimates for applicable IBNR, relating to asbestos and environmental claims separately and combined, is as follows:

                                 
(in millions)

2003 2002


Gross Net Gross Net

Asbestos:
                               
Reserve for losses and loss expenses at beginning of year
  $ 1,304     $ 400     $ 1,114     $ 312  
Losses and loss expenses incurred*
    39       15       44       27  
Losses and loss expenses paid*
    (110 )     (32 )     (33 )     (15 )

Reserve for losses and loss expenses at end of period
  $ 1,233     $ 383     $ 1,125     $ 324  

Environmental:
                               
Reserve for losses and loss expenses at beginning of year
  $ 832     $ 296     $ 1,115     $ 407  
Losses and loss expenses incurred*
    (18 )     (7 )     (19 )      
Losses and loss expenses paid*
    (38 )     (21 )     (35 )     (21 )

Reserve for losses and loss expenses at end of period
  $ 776     $ 268     $ 1,061     $ 386  

Combined:
                               
Reserve for losses and loss expenses at beginning of year
  $ 2,136     $ 696     $ 2,229     $ 719  
Losses and loss expenses incurred*
    21       8       25       27  
Losses and loss expenses paid*
    (148 )     (53 )     (68 )     (36 )

Reserve for losses and loss expenses at end of period
  $ 2,009     $ 651     $ 2,186     $ 710  

All amounts pertain to policies underwritten in prior years.

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

(in millions)


                                 
2003 2002


Gross Net Gross Net

Combined
  $ 995     $ 275     $ 1,022     $ 283  

      A summary of asbestos and environmental claims count activity for the three month periods ended March 31, 2003 and 2002 was as follows:

                                                   

2003 2002


Asbestos Environmental Combined Asbestos Environmental Combined

Claims at beginning of year
    7,085       8,995       16,080       6,670       9,364       16,034  
Claims during year:
                                               
 
Opened
    99       387       486       202       484       686  
 
Settled
    (30 )     (54 )     (84 )     (49 )     (206 )     (255 )
 
Dismissed or otherwise resolved
    (23 )     (787 )     (810 )     (134 )     (313 )     (447 )

Claims at end of period
    7,131       8,541       15,672       6,689       9,329       16,018  

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

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

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

      AIG’s survival ratios for involuntary asbestos and environmental claims, separately and combined, were based upon a three year average payment. These ratios at March 31, 2003 and 2002 were as follows:


                                   
2003 2002


Gross Net Gross Net

Involuntary survival ratios:
                               
 
Asbestos
    3.7       3.5       3.1       2.9  
 
Environmental
    15.7       11.8       18.0       13.9  
 
Combined
    6.6       6.2       6.4       6.2  

      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 2002 were $76 million. Based upon current information, AIG does not anticipate that its net assessment will be significantly different in 2003.

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

Life Insurance Operations

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

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

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

      Life insurance operations presented on a major product basis for the three month periods ending March 31, 2003 and 2002 were as follows:

(in millions)


                     
2003 2002

GAAP premium income:
               
 
Domestic:
               
   
Life Insurance
  $ 431     $ 396  
   
Individual Fixed Annuities
    12       11  
   
Guaranteed Investment Contracts
    4       1  
   
Home Service
    209       216  
   
Group Life/Health
    232       238  
   
Pension and Investment Products
    434       219  

 
Total Domestic:
    1,322       1,081  

 
Foreign:
               
   
Life Insurance
    3,268       2,793  
   
Personal Accident
    691       566  
   
Group Products
    350       316  
   
Guaranteed Investment Contracts
    28       27  

 
Total Foreign:
    4,337       3,702  

 
Total GAAP premium income
  $ 5,659     $ 4,783  

Net investment income:
               
 
Domestic:
               
   
Life Insurance
  $ 316     $ 343  
   
Individual Fixed Annuities
    855       732  
   
Guaranteed Investment Contracts
    508       481  
   
Home Service
    168       169  
   
Group Life/Health
    28       26  
   
Pension and Investment Products
    235       201  

 
Total Domestic
    2,110       1,952  

(in millions)

                     
2003 2002

 
Foreign:
               
   
Life Insurance
    909       776  
   
Personal Accident
    37       33  
   
Group Products
    82       60  
   
Guaranteed Investment Contracts
    105       85  
   
Intercompany Adjustments
    (3 )     (3 )

 
Total Foreign
    1,130       951  

Total net investment income
  $ 3,240     $ 2,903  

Realized capital losses
    (345 )     (29 )

Total operating income
  $ 1,195     $ 1,327  

Life insurance in-force*:
               
   
Domestic
  $ 589,610     $ 577,686  
   
Foreign
    748,945       746,765  

Total
  $ 1,338,555     $ 1,324,451  

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

Life Insurance Results

      Life insurance operating income decreased 9.9 percent to $1.20 billion during the first three months of 2003 when compared to the same period last year.

      The contribution of life insurance operating income to income before income taxes and minority interest amounted to 40.9 percent during the first three months of 2003 compared to 44.8 percent in the same period of 2002.

      AIG’s GAAP life premium income during the first three months of 2003 represented an 18.3 percent increase from the same period in 2002. Foreign life operations produced 76.6 percent and 77.4 percent of the GAAP life premium income in 2003 and 2002, respectively.

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

      Since AIG purchased AIG Star Life, a part of income earned by AIG Star Life has resulted from surrender charges earned on policies that were either surrendered or lapsed. This favorable impact on operating income was anticipated when AIG took control. As these surrenders diminish in subsequent periods, operating income from that source will also

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be impacted. The majority of AIG Star Life’s future income is expected to be related to continuing premiums paid on renewal business, and new business to be generated from a growing agency force.

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

      Life insurance net investment income increased 11.6 percent during the first three months of 2003. The growth in net investment income was primarily attributable to both foreign and domestic new cash flow for investment. The new cash flow was generated from life insurance operations and included the compounding of previously earned and reinvested net investment income. (See also the discussion under “Liquidity” herein.)

      Life insurance realized capital losses for the first three months were $345 million in 2003 and $29 million in 2002. These realized capital losses resulted from the ongoing management of the life insurance investment portfolios within the overall objectives of the life insurance operations and reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings. (See the discussion on “Valuation of Invested Assets” herein.)

Underwriting and Investment Risk

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

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

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

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

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

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

      To the extent permitted under local regulation, AIG may invest in qualified longer-term securities outside Japan to achieve a closer matching in both duration and the required yield. AIG is able to manage any asset-liability duration difference through maintenance of sufficient global liquidity and to support any operational shortfall through its

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international financial network. (See also the discussion under “Liquidity” herein.)

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

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

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

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

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

Financial Services Operations

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

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

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

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

      Financial services operations for the three month periods ending March 31, 2003, and 2002 were as follows:

(in millions)

                 

2003 2002

Revenues:
               
ILFC(a)
  $ 722     $ 641  
AIGFP(b)
    272       272  
Consumer Finance(c)
    639       613  
Other
    60       40  

Total
  $ 1,693     $ 1,566  

Operating income:
               
ILFC
  $ 174     $ 173  
AIGFP
    196       176  
Consumer Finance
    148       124  
Other, including intercompany adjustments
    12       1  

Total
  $ 530     $ 474  

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

Financial Services Results

      Financial services operating income increased 11.9 percent in the first three months of 2003 over the same period of 2002. Financial services operating income represented 18.1 percent of AIG’s income before income taxes and minority interest in the first three months of 2003. This compares to 16.0 percent in the same period of 2002.

      ILFC generates its revenues primarily from leasing new and used commercial jet aircraft to domestic and foreign airlines. Revenues also result from the remarketing of commercial jets for its own account, for airlines and for financial institutions. Revenues in the first three months of 2003 increased 12.7 percent from the same period of 2002. The revenue growth resulted primarily from the increase in flight equipment under operating lease and the increase in the relative cost of the leased fleet. ILFC has historically derived over 80 percent of its lease revenues with respect to flight equipment from airlines based outside the United States and is not significantly exposed to current domestic airline difficulties.

      ILFC has historically re-leased aircraft returning at lease termination prior to aircraft being returned to ILFC. For aircraft returning due to early lease termination, ILFC has generally been able to re-lease such aircraft within two to three months of its return. As a lessor, ILFC considers an aircraft “idle” or “off lease” when the aircraft is not subject to a signed lease agreement or signed letter of intent. ILFC had one aircraft off lease at March 31, 2003 which had been off lease for less than three months. No impairments have been recognized related to these aircraft as ILFC believes that the existing service potential of the aircraft in ILFC’s portfolio has not been diminished and ILFC has been able to re-lease the aircraft without diminution in lease rates from those previously obtained that would require an impairment write-down.

      ILFC management is very active in the airline industry. Management formally reviews regularly, and no less frequently than quarterly, issues affecting ILFC’s fleet, including events and circumstances that may cause impairment of aircraft values. Management evaluates aircraft in the fleet as necessary, based on these events and circumstances in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144). No impairments have been recognized related to these aircraft. (See also the discussions under “Liquidity” herein.)

      During the first three months of 2003, operating income increased 0.7 percent from the same period of 2002. ILFC finances its purchases of aircraft primarily through the issuance of a variety of debt instruments. The composite borrowing rates at the end of the first three months of 2003 and 2002 were 4.57 percent and 4.93 percent, respectively. (See also the discussions under “Capital Resources” and “Liquidity” herein and Note 2 of Notes to Financial Statements.)

      ILFC is exposed to operating loss and liquidity strain through non-performance of aircraft lessees, through owning aircraft which it would be unable to sell or re-lease at acceptable rates at lease expiration and through committing to purchase aircraft which it would be unable to lease. ILFC manages its lessee non-performance exposure through credit reviews and security deposit requirements. As a result of these measures and its own contingency planning, ILFC did not suffer any material losses from airline shutdowns in the aftermath of the September 11 terrorist attacks, but there can be no assurance that ILFC will successfully manage the risks relating to the impact of possible future deterioration in the airline industry. Approximately 86 percent of ILFC’s fleet is leased to non-U.S. carriers, and this fleet, the most efficient in the airline industry, continues to be in high demand from such carriers. (See also the discussions under “Capital Resources” and “Liquidity” herein.)

      AIGFP participates in the derivatives dealer market conducting, primarily as principal, an interest rate, currency, equity and credit derivative products business. AIGFP also enters into structured transactions including long-dated forward foreign exchange contracts, option transactions, liquidity facilities and investment agreements and invests in a diversified portfolio of securities. AIGFP derives substantially all its revenues from proprietary positions entered in connection with counterparty transactions rather than from speculative transactions.

      As a dealer, AIGFP marks its transactions daily to fair value. Thus, a gain or loss on each transaction is recognized daily. AIGFP hedges the

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

      Revenues in the first three months of 2003 decreased 0.1 percent from the same period of 2002. During the first three months of 2003, operating income increased 11.2 percent from the same period of 2002. As AIGFP is a transaction-oriented operation, current and past revenues and operating results may not provide a basis for predicting future performance. The breakdown by percentage contribution of revenues and operating income for AIGFP in the first three months of 2003 and 2002 is set forth below. The percentages for operating income are the same as those for revenues because expenses are allocated across all products in proportion to the revenues generated by that product. Material changes in the distribution of revenues and operating income are not meaningful because of the transactional nature of AIGFP’s business.

                 

2003 2002

Spread Income on Investments and Borrowings
    53 %     46 %
Interest Rate Products
    34       24  
Equity Linked Products
    1       3  
Credit Linked Products
    11       26  
Other revenue
    1       1  

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

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

      The most significant component of AIGFP’s operating expenses is compensation, which approximated 29 percent and 32 percent of revenues in the first three months of 2003 and 2002, respectively.

      Domestically, AIG’s consumer finance operations derive a substantial portion of their revenues from finance charges assessed on outstanding mortgages and finance receivables from the sub-prime market, while overseas operations are engaged in developing a multi-product consumer finance business with an emphasis on emerging markets. Revenues increased 4.2 percent in the first three months of 2003 from the same period in 2002; operating income increased 19.1 percent compared to the 2002 period. The increase in revenues was the result of growth in average finance receivables.

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

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Retirement Savings & Asset Management Operations

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

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

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

      A number of guaranteed minimum death benefits (GMDB) and other similar benefits are offered on variable annuities. GMDB-related contract benefits incurred, net of reinsurance were $25 million and $9 million for the three months ended March 31, 2003 and 2002, respectively. In accordance with GAAP, AIG expenses these benefits in the period paid.

      Retirement savings & asset management operations for the three month periods ending March 31, 2003 and 2002 were as follows:

(in millions)


                 
2003 2002

Revenues:
               
AIG VALIC
  $ 544     $ 534  
AIG SunAmerica
    121       154  
Other*
    231       177  

Total
  $ 896     $ 865  

Operating income (loss):
               
AIG VALIC
  $ 219     $ 192  
AIG SunAmerica
    (1 )     39  
Other*
    65       69  

Total
  $ 283     $ 300  

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

Retirement Savings & Asset Management Results

      Retirement savings & asset management operating income in the first three months of 2003 decreased 5.6 percent when compared to the same period of 2002 reflecting the continued volatility in worldwide equity markets.

      Retirement savings & asset management operating income represented 9.7 percent of AIG’s income before income taxes and minority interest in the first three months of 2003. This compares to 10.1 percent in the same period of 2002.

      At March 31, 2003, AIG’s third party assets under management, including both retail mutual funds and institutional accounts, approximated $41 billion.

Other Operations

      Other realized capital losses amounted to $114 million, and $81 million in the first three months of 2003 and 2002, respectively.

      Other income (deductions)-net includes income generated by the investment of capital held by AIG SunAmerica outside of its life insurance subsidiaries, AIG’s equity in certain minor majority-owned subsidiaries and certain partially-owned companies, realized foreign exchange transaction gains and losses in substantially all currencies and unrealized gains and losses in hyperinflationary currencies, as well as the income and expenses of the parent holding company and other miscellaneous income and expenses. In the first three months of 2003, other income (deductions) — net amounted to $(114) million. In the same period of 2002, other income (deductions) — net amounted to

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$6 million. This decline was primarily the result of weaker performance of AIG SunAmerica investments in partnerships.

      Income before income taxes and minority interest amounted to $2.92 billion in the first three months of 2003 compared to $2.96 billion in the same period of 2002.

      In the first three months of 2003, AIG recorded a provision for income taxes of $876 million compared to the provision of $892 million in the same period of 2002. These provisions represent effective tax rates of 30.0 percent in the first three months of 2003 and 30.1 percent in the same period of 2002.

      Minority interest represents minority shareholders’ equity in income of certain majority-owned consolidated subsidiaries. Minority interest amounted to $94 million and $87 million in the first three months of 2003 and 2002, respectively.

      Net income amounted to $1.95 billion in the first three months of 2003 and $1.98 billion in the same period of 2002. The decreases in net income over the periods resulted from those factors described above.

Capital Resources

      At March 31, 2003, AIG had total capital funds of $62.26 billion and total borrowings of $74.37 billion. At that date, $65.63 billion of such borrowings were either not guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable.

Borrowings

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

                   
(in millions)

2003 2002

GIAs — AIGFP
  $ 15,029     $ 14,850  

Commercial Paper:
               
 
ILFC(a)
    4,001       4,213  
 
AGF(a)
    3,519       2,956  
 
AIG Funding, Inc. (Funding)
    3,229       1,645  
 
AIG Credit Card Company (Taiwan)(a)
    232       234  
 
AIG Finance (Taiwan) Limited(a)
    60       64  

 
Total
    11,041       9,112  

Medium Term Notes:
               
 
AGF(a)
    7,933       7,719  
 
ILFC(a)
    5,561       4,970  
 
AIG
    998       998  

 
Total
    14,492       13,687  

Notes and Bonds Payable:
               
 
AIGFP
    16,483       16,940  
 
ILFC(a)(b)
    10,887       9,825  
 
AGF(a)
    1,661       2,266  
 
AIG
    1,615       1,608  
 
AGC
    1,243       1,542  

 
Total
    31,889       32,181  

Loans and Mortgages Payable:
               
 
AIG
    705       697  
 
AIGCFG(a)
    621       735  
 
ILFC(a)(c)
    242       261  
 
AIG Finance (Hong Kong) Limited(a)
    217       229  
 
Other subsidiaries(a)
    135       133  

 
Total
    1,920       2,055  

 
Total Borrowings
    74,371       71,885  

Borrowings not guaranteed by AIG
    35,069       33,605  
Matched GIA borrowings — AIGFP
    15,029       14,850  
Matched notes and bonds payable — AIGFP
    15,533       16,526  

      65,631       64,981  

Remaining borrowings of AIG
  $ 8,740     $ 6,904  

(a) AIG does not guarantee these borrowings.
(b) Includes borrowings under Export Credit Facility of $2.03 billion.
(c) Capital lease obligations.

     At March 31, 2003, the commercial paper issued and outstanding was as follows:

                                         
(dollars in millions)

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

ILFC
  $ 4,001     $ 4     $ 4,005       1.26 %     25  
AGF
    3,519       3       3,522       1.25       28  
Funding
    3,229       2       3,231       1.20       23  
AIGCCC — Taiwan*
    232       1       233       2.21       76  
AIGF — Taiwan*
    60             60       4.35       61  

Total
  $ 11,041     $ 10     $ 11,051              

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

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

(in millions)


                 
2003 2002

Short-term borrowings
  $ 20,443     $ 22,468  
Long-term borrowings*
    53,928       49,417  

Total borrowings
  $ 74,371     $ 71,885  

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

     During the first three months of 2003, AIGFP decreased the aggregate principal amount outstanding of its notes and bonds payable to $16.48 billion. AIGFP uses the proceeds from the issuance of notes and bonds and GIA borrowings to invest in a diversified portfolio of securities and derivative transactions. The funds may also be temporarily invested in securities purchased under agreements to resell. (See also the discussions under “Operational Review”, “Liquidity” and “Derivatives” herein.)

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

      ILFC and AGF as well as AIG Credit Card Company (Taiwan) — (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited — (AIGF-Taiwan), both consumer finance subsidiaries in Taiwan, have issued commercial paper for the funding of their own operations. At March 31, 2003, AIG did not guarantee the commercial paper of any of its subsidiaries other than Funding. On July 8, 2002, AGC ceased issuing commercial paper under its program. AGC’s funding requirements are now being met through Funding’s commercial paper program. (See also the discussion under “Derivatives” herein.)

      AIG and Funding are parties to unsecured syndicated revolving credit facilities (collectively, the Facility) aggregating $2.75 billion. The Facility consists of $1.375 billion in a short-term revolving credit facility and $1.375 billion in a five year revolving credit facility. The Facility can be used for general corporate purposes and also to provide backup for Funding’s commercial paper programs. There are currently no borrowings outstanding under the Facility, nor were any borrowings outstanding as of March 31, 2003.

      AGF is a party to unsecured syndicated revolving credit facilities aggregating $3.0 billion. The facilities consist of $1.5 billion in a short-term revolving credit facility and $1.5 billion in a five year revolving credit facility, which support AGF’s commercial paper borrowings. There are currently no borrowings under these facilities, nor were any borrowings outstanding as of March 31, 2003. AGF had $4.0 billion in aggregate principal amount of debt securities registered and available for issuance at March 31, 2003. AGF uses the proceeds from the issuance of notes and bonds for the funding of its finance receivables.

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

      ILFC is a party to unsecured syndicated revolving credit facilities aggregating $3.15 billion to support its commercial paper program. The facilities consist of $2.15 billion in a short-term revolving credit facility and $1.0 billion in a three year revolving credit facility. There are currently no borrowings outstanding under these facilities, nor were any borrowings outstanding as of March 31, 2003.

      At March 31, 2003, ILFC had increased the aggregate principal amount outstanding of its medium term and long term notes to $16.45 billion, a net increase of $1.65 billion from December 31, 2002, and recorded a net decline in its capital lease obligations of $19 million and a net decrease in its commercial paper of $212 million. At March 31, 2003, ILFC had $6.08 billion of debt securities registered for public sale. During the quarter ended March 31, 2003, $2.35 billion of debt securities were issued. During the second quarter of 2002, ILFC expanded its Euro Medium Term Note Program to $4.0 billion, under which $2.31 billion in notes were sold through March 31, 2003. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

      ILFC had a $4.3 billion Export Credit Facility for use in connection with the purchase of approximately 75 aircraft delivered through 2001. This facility was guaranteed by various European Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90 percent on these borrowings depending on the delivery date of the aircraft. At

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March 31, 2003, ILFC had $2.03 billion outstanding under this facility. The debt is collateralized by a pledge of the shares of a subsidiary of ILFC, which holds title to the aircraft financed under the facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the preceding table of borrowings.

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

      AIGFP has established a Euro Medium Term Note Program under which an aggregate principal amount of up to $4.0 billion of notes may be issued. As of March 31, 2003, $2.53 billion of notes had been issued under the program, $2.32 billion of which are outstanding. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

      During the first three months of 2003, AIG did not issue any medium term notes and no previously issued notes matured. At March 31, 2003, AIG had $140 million in aggregate principal amount of debt securities registered for issuance from time to time.

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

      On May 8, 2003, AIG entered into a purchase agreement with a syndicate of investment bankers to sell $1,500,000,000 principal amount of notes in a Rule 144A/ Regulation S offering. $500,000,000 of the notes will bear interest at a rate of 2.875 percent per annum and mature in 2008 and $1,000,000,000 of the notes will bear interest at a rate of 4.250 percent per annum and mature in 2013. The notes will be unsecured senior obligations of AIG and will rank equally with all of AIG’s other senior debt outstanding. AIG expects the sale of the notes to close on May 15, 2003.

Capital Funds

      AIG’s capital funds increased $3.15 billion during the first three months of 2003. Unrealized appreciation of investments, net of taxes increased $1.25 billion. During the first three months of 2003, the cumulative translation adjustment loss, net of taxes, decreased $33 million. The change from period to period with respect to the unrealized appreciation of investments, net of taxes was primarily impacted by the decrease in domestic interest rates. During the first three months of 2003, there was a gain of $138 million, net of taxes, relating to derivative contracts designated as cash flow hedging instruments. (See also the discussion under Notes to Financial Statements and the Consolidated Statement of Comprehensive Income.) During the first three months of 2003, retained earnings increased $1.83 billion, resulting from net income less dividends.

Stock Repurchase

      During the quarter ended March 31, 2003, AIG repurchased in the open market 1,625,000 shares of its common stock. AIG intends to continue to buy its common shares in the open market for general corporate purposes, including to satisfy its obligations under various employee benefit plans.

Dividends from Insurance Subsidiaries

      Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by statutory authorities. AIG has in the past reinvested most of its unrestricted earnings in its operations and believes such continued reinvestment in the future will be adequate to meet any foreseeable capital needs. However, AIG may choose from time to time to raise additional funds through the issuance of additional securities. At March 31, 2003, there were no significant statutory or regulatory issues which would impair AIG’s financial condition, results of operations or liquidity. To AIG’s knowledge, no AIG company is on any regulatory or similar “watch list”. (See also the discussion under “Liquidity” herein.)

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Regulation and Supervision

      AIG’s insurance subsidiaries, in common with other insurers, are subject to regulation and supervision by the states and jurisdictions in which they do business. The National Association of Insurance Commissioners (NAIC) has developed Risk-Based Capital (RBC) requirements. RBC relates an individual insurance company’s statutory surplus to the risk inherent in its overall operations. At March 31, 2003, the adjusted capital of each of AIG’s domestic general companies and of each of AIG’s domestic life companies exceeded each of their RBC standards. Federal, state or local legislation may affect AIG’s ability to operate and expand its various financial services businesses and changes in the current laws, regulations or interpretations thereof may have a material adverse effect on these businesses.

      A substantial portion of AIG’s general insurance business and a majority of its life insurance business are conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies from minimal in some to stringent in others. Generally, AIG, as well as the underwriting companies operating in such jurisdictions, must satisfy local regulatory requirements. Licenses issued by foreign authorities to AIG subsidiaries are subject to modification and revocation. Thus, AIG’s insurance subsidiaries could be prevented from conducting future business in certain of the jurisdictions where they currently operate. AIG’s international operations include operations in various developing nations. Both current and future foreign operations could be adversely affected by unfavorable political developments up to and including nationalization of AIG’s operations without compensation. Adverse effects resulting from any one country may impact AIG’s results of operations, liquidity and financial condition depending on the magnitude of the event and AIG’s net financial exposure at that time in that country.

Contractual Obligations and Other Commercial Commitments

      The maturity schedule of AIG’s most significant contractual obligations at March 31, 2003 is presented in the following table:

(in millions)


                                           
Payments due by Period

2004 2006 Remaining
through through years after
March 31, 2003 Total 2003 2005 2007 2007

Borrowings*
  $ 63,330     $ 20,443     $ 14,979     $ 10,412     $ 17,496  
Aircraft Purchase Commitments
    27,874       2,907       9,338       9,346       6,283  
Other Long-Term Obligations:
                                       
 
ILFC
    843       381       462              

Total
  $ 92,047     $ 23,731     $ 24,779     $ 19,758     $ 23,779  

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

     The maturity schedule of AIG’s most significant Other Commercial Commitments at March 31, 2003 is presented in the following table:

(in millions)


                                           
Amount of Commitment Expiration

Total Less
Amounts than 1 1-3 4-5 After 5
March 31, 2003 Committed year years years years

Letters of Credit:
                                       
 
AIGFP
  $ 803     $ 14     $ 12     $ 3     $ 774  
Guarantees:
                                       
 
AIG SunAmerica(a)
    4,344       317       1,748             2,279  
Other Commercial Commitments:
                                       
 
AIGFP(b)
    4,088       4       15       338       3,731  
 
ILFC(c)
    2,057       232       656       815       354  
 
AIG SunAmerica
    1,115       218       462       435        

Total
  $ 12,407     $ 785     $ 2,893     $ 1,591     $ 7,138  

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

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Special Purpose Vehicles

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

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

      AIGFP uses SPVs as an integral part of its ongoing operations with respect to specific structured transactions with independent third parties. In most instances, AIGFP controls and manages the assets and liabilities with respect to these SPVs, subject to certain transaction specific limitations. These SPVs are fully consolidated by AIG (see the discussions of AIGFP under “Operations Review: Financial Services Operations”). AIGFP also sponsors an SPV that issues commercial paper and secured liquidity notes to third-party institutional investors. This SPV uses the proceeds of these offerings to obtain beneficial interests in certain financial assets (total assets of approximately $994 million), which serve as collateral for the securities issued by the SPV. AIGFP provides credit and liquidity support to this SPV, which is not consolidated by AIG.

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

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

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

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

Liquidity

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

      At March 31, 2003, AIG’s consolidated invested assets included $14.92 billion of cash and short-term investments. Consolidated net cash provided from operating activities in the first three months of 2003 amounted to $8.89 billion.

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

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

      The liquidity of the combined insurance operations is derived both domestically and abroad. The combined insurance operating cash flow is derived from two sources, underwriting operations and investment operations. In the aggregate, AIG’s insurance operations generated approximately $10.8 billion in pre-tax cash flow during the first three months of 2003. Cash flow includes periodic premium collections, including policyholders’ contract deposits, cash flows from investment operations and paid loss recoveries less reinsurance premiums, losses, benefits and acquisition and operating expenses. Generally, there is a time lag from when premiums are collected and, when as a result of the occurrence of events specified in the policy, the losses and benefits are paid. AIG’s insurance investment operations generated approximately $4.1 billion in investment income cash flow during the first three months of 2003. Investment income cash flow is primarily derived from interest and dividends received and includes realized capital gains net of realized capital losses.

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

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

      In addition to the combined insurance pre-tax operating cash flow, AIG’s insurance operations held $13.54 billion in cash and short-term investments at March 31, 2003. Operating cash flow and the cash and short-term balances held provided AIG’s insurance operations with a significant amount of liquidity.

      This liquidity is available, among other things, to purchase predominantly high quality and diversified fixed income securities and, to a lesser extent, marketable equity securities, and to provide mortgage loans on real estate, policy loans and collateral loans. This cash flow coupled with proceeds of approximately $38 billion from the maturities, sales and redemptions of fixed income securities and from the sale of equity securities was used to purchase approximately $49 billion of fixed income securities and marketable equity securities during the first three months of 2003.

Invested Assets

      The following table is a summary of AIG’s invested assets by significant segment, including investment income due and accrued of $4.53 billion and $4.30 billion and real estate of $3.39 billion and $3.30 billion, respectively, at March 31, 2003 and December 31, 2002:

(dollars in millions)


                                 
March 31, 2003 December 31, 2002


Invested Percent Invested Percent
Assets of Total Assets of Total

General insurance
  $ 59,873       13.0 %   $ 55,478       12.8 %
Life insurance
    279,856       60.8       259,138       59.9  
Financial services
    117,143       25.5       114,878       26.6  
Other
    3,072       0.7       2,868       0.7  

Total
  $ 459,944       100.0 %   $ 432,362       100.0 %

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Insurance Invested Assets

      The following tables summarize the composition of AIG’s insurance invested assets by insurance segment, including investment income due and accrued and real estate, at March 31, 2003 and December 31, 2002:

(dollars in millions)


                                                   
Percent Distribution
General Life Percent
March 31, 2003 Insurance Insurance Total of Total Domestic Foreign

Fixed maturities:
                                               
 
Available for sale, at market value(a)
  $ 35,996     $ 217,846     $ 253,842       74.7 %     68.6 %     31.4 %
 
Held to maturity, at amortized cost
    1,700             1,700       0.5       100.0        
Equity securities, at market value(b)
    3,789       3,137       6,926       2.0       53.0       47.0  
Mortgage loans on real estate, policy and collateral loans
    35       18,997       19,032       5.6       69.2       30.8  
Short-term investments, including time deposits, and cash
    1,856       11,688       13,544       4.0       73.7       26.3  
Real estate
    494       2,447       2,941       0.9       25.1       74.9  
Investment income due and accrued
    715       3,682       4,397       1.3       65.9       34.1  
Securities lending collateral
    7,647       18,277       25,924       7.6       73.8       26.2  
Other invested assets
    7,641       3,782       11,423       3.4       86.5       13.5  

Total
  $ 59,873     $ 279,856     $ 339,729       100.0 %     69.2 %     30.8 %

(a) Includes $991 million of bond trading securities, at market value.
(b) Includes $1.77 billion of non-redeemable preferred stocks, at market value.

(dollars in millions)


                                                 
Percent Distribution
General Life Percent
December 31, 2002 Insurance Insurance Total of Total Domestic Foreign

Fixed maturities at market value(a)
  $ 35,990     $ 206,003     $ 241,993       76.9 %     69.1 %     30.9 %
Equity securities, at market value(b)
    3,928       2,931       6,859       2.2       53.4       46.6  
Mortgage loans on real estate, policy and collateral loans
    35       18,901       18,936       6.0       68.8       31.2  
Short-term investments, including time deposits, and cash
    1,833       5,048       6,881       2.2       42.5       57.5  
Real estate
    488       2,367       2,855       0.9       24.8       75.2  
Investment income due and accrued
    729       3,489       4,218       1.4       64.2       35.8  
Securities lending collateral
    7,249       16,445       23,694       7.5       75.8       24.2  
Other invested assets
    5,226       3,954       9,180       2.9       82.1       17.9  

Total
  $ 55,478     $ 259,138     $ 314,616       100.0 %     68.6 %     31.4 %

(a) Includes $981 million of bond trading securities, at market value.
(b) Includes $1.58 billion of non-redeemable preferred stocks, at market value.

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

Fixed Maturity Investments

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

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

Credit Quality

      At March 31, 2003, approximately 69 percent of the fixed maturities investments were domestic securities. Approximately 32 percent of such domestic securities were rated AAA by one or more of the principal rating agencies. Approximately 10 percent were below investment grade or not rated.

      A significant portion of the foreign insurance fixed income portfolio is rated by Moody’s, Standard & Poor’s (S&P) or similar foreign services. Similar credit quality rating services are not available in all overseas locations. AIG annually reviews the credit quality of the foreign portfolio nonrated

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fixed income investments, including mortgages. At March 31, 2003, approximately 17 percent of the foreign fixed income investments were either rated AAA or, on the basis of AIG’s internal analysis, were equivalent from a credit standpoint to securities so rated. Approximately 11 percent were below investment grade or not rated at that date. A large portion of the foreign insurance fixed income portfolio are sovereign fixed maturity securities supporting the policy liabilities in the country of issuance.

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

Equity Investments

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

Valuation of Invested Assets

      The valuation of invested assets involves obtaining a market value for each security. The source for the market value is generally from market exchanges or dealer quotations, with the exception of non-traded securities.

      Another aspect of valuation is an assessment of impairment. As a matter of policy, the determination that a security has incurred an other-than-temporary decline in value and the amount of any loss recognition requires the judgment of AIG’s management and a continual review of its investments.

      In general, a security is considered a candidate for impairment if it meets any of the following criteria:

  •  Trading at a significant discount to par, amortized cost (if lower) or cost for an extended period of time;
 
  •  The occurrence of a discrete credit event resulting in (i) the issuer defaulting on a material outstanding obligation; or (ii) the issuer seeking protection from creditors under the bankruptcy laws or any similar laws intended for the court supervised reorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value of their claims; or,
 
  •  In the opinion of AIG’s management, it is unlikely that AIG will realize a full recovery on its investment, irrespective of the occurrence of one of the foregoing events.

      Once a security has been identified as potentially impaired, the amount of such impairment is determined by reference to that security’s contemporaneous market price. However, the market price following a significant credit event of any issuer may be volatile after such an event. Factors such as market liquidity, hedge fund activity, sensitivity to “headline” risk, and the widening of bid/ask spreads contribute to price volatility. Because of such volatility, the market price may not be indicative of the fair value of such an investment; and consequently, not indicative of a reasonable estimate of realizable value.

      AIG has the ability to hold any security to its stated maturity. Therefore, the decision to sell reflects the judgment of AIG’s management that the security sold is unlikely to provide, on a relative value basis, as attractive a return in the future as alternative securities entailing comparable risks. With respect to distressed securities, the sale decision reflects management’s judgment that the risk-discounted anticipated ultimate recovery is less than the value achievable on sale.

      As a result of these policies, AIG recorded in the first three months of 2003 impairment losses net of taxes of approximately $479 million.

      No impairment charge with respect to any one single credit was significant to AIG’s consolidated financial condition or results of operations and no individual impairment loss exceeded 1.6 percent of consolidated net income for the first three months of 2003.

      Excluding the impairments noted above, the changes in market value for AIG’s available for sale portfolio, which constitutes the vast majority of AIG’s investments, were recorded in equity as unrealized gains or losses.

      At March 31, 2003, the unrealized losses after taxes of the fixed maturity securities were approximately $2.5 billion. At March 31, 2003, the unreal-

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ized losses after taxes of the equity securities portfolio were approximately $426 million.

      At March 31, 2003, aggregate unrealized gains after taxes were $11.2 billion and aggregate unrealized losses after taxes were $2.9 billion. No single issuer accounted for more than three percent of the unrealized losses.

      At March 31, 2003, the fair value of AIG’s fixed maturities and equity securities aggregated to $264.1 billion. Of this aggregate fair value, 1.0 percent represented securities trading at or below 75 percent of amortized cost or cost.

      The impact on net income of unrealized losses after taxes will be further mitigated upon realization, because certain realized losses will be charged to participating policyholders accounts, or realization will result in current decreases in the amortization of certain deferred acquisition costs.

      At March 31, 2003, the unrealized losses after taxes for fixed maturity securities and equity securities included the following industry concentrations:

         
(in millions)

Unrealized Losses
Concentration After Taxes

Investment Grade:
       
Airline related
  $ 269  
Cable and Media
  $ 2  
Energy
  $ 62  
Telecommunications
  $ 21  
Not Rated and Below Investment Grade:
       
Airline related
  $ 171  
Cable and Media
  $ 64  
Energy
  $ 288  
Telecommunications
  $ 58  

      The amortized cost of fixed maturities available for sale in an unrealized loss position at March 31, 2003, by contractual maturity, is shown below.

         
(in millions)

Amortized
Cost

Due in one year or less
  $ 1,156  
Due after one year through five years
    5,579  
Due after five years through ten years
    10,936  
Due after ten years
    12,612  

Total
  $ 30,283  

      In the three months ended March 31, 2003, the pre-tax realized losses incurred with respect to the sale of fixed maturities and equity securities were $2.5 billion. The aggregate fair value of securities sold was $35.0 billion, which was approximately 93 percent of amortized cost. The average period of time that securities sold at a loss during the quarter ended March 31, 2003 were trading continuously at a price below book value was approximately seven months.

      The “aging” of pre-tax unrealized loss positions at March 31, 2003, is shown below:

                         
(dollars in millions)

Number Book Unrealized Number
of Months Value Losses* of items

Investment Grade Bonds
0-6
  $ 12,878     $ 543       1,547  
7-12
    3,565       475       454  
>12
    5,389       915       652  

Below Investment Grade Bonds
0-6
  $ 1,855     $ 276       490  
7-12
    1,812       364       435  
>12
    4,784       1,200       931  

Total Bonds
0-6
  $ 14,733     $ 819       2,037  
7-12
    5,377       839       889  
>12
    10,173       2,115       1,583  

Equities
0-6
  $ 1,692     $ 439       1,328  
7-12
    782       162       439  
>12
    597       55       526  

As more fully described above, upon realization, certain realized losses will be charged to participating policyholder accounts, or realization will result in a current decrease in the amortization of certain deferred acquisition costs.

Note: At March 31, 2003, aggregate pre-tax unrealized gains were $17.3 billion.

     As stated previously, the valuation for AIG’s investment portfolio comes from market exchanges or dealer quotations, with the exception of non-traded securities. AIG considers non-traded securities to mean certain fixed income investments, certain structured securities, direct private equities, limited partnerships and hedge funds. The aggregate carrying value of these securities at March 31, 2003 was approximately $34.0 billion.

      The methodology used to estimate fair value of non-traded fixed income investments is by reference to traded securities with similar attributes and using a matrix pricing methodology. This technique takes into account such factors as the industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer, and other relevant

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factors. The change in fair value is recognized as a component of unrealized appreciation.

      For certain structured securities, the carrying value is based on an estimate of the security’s future cash flows pursuant to the requirements of Emerging Issues Task Force Issue No. 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” The change in carrying value is recognized in income.

      Direct private equities, hedge funds and limited partnerships in which AIG holds in the aggregate less than a five percent interest, are carried at fair value. The change in fair value is recognized as a component of Other comprehensive income.

      With respect to hedge funds and limited partnerships in which AIG holds in the aggregate a five percent or greater interest, AIG’s carrying value is the net asset value. The changes in such net asset values are recorded in income.

      AIG obtains the fair value of its investments in limited partnerships and hedge funds from information provided by the sponsors of each of these investments, the accounts of which are generally audited on an annual basis.

      Each of these investment categories is regularly tested to determine if impairment in value exists. Various valuation techniques are used with respect to each category in this determination.

Mortgage Investments

      Mortgage loans on real estate, policy and collateral loans comprised 5.6 percent of AIG’s insurance invested assets at March 31, 2003. AIG’s insurance operations’ holdings of real estate mortgages amounted to $11.57 billion of which 87.6 percent was domestic. At March 31, 2003, only a nominal amount was in default. It is AIG’s practice to maintain a maximum loan to value ratio of 75 percent at loan origination. At March 31, 2003, AIG’s insurance holdings of collateral loans amounted to $1.40 billion, all of which were foreign. It is AIG’s strategy to enter into mortgage and collateral loans as an adjunct primarily to life insurance fixed maturity investments. AIG’s policy loans increased from $6.05 billion at December 31, 2002 to $6.06 billion at March 31, 2003.

Short-Term Investments

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

Real Estate Investments

      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 Investments

      Other invested assets were primarily comprised of limited partnerships and hedge funds.

      When permitted by regulatory authorities and when deemed necessary to protect insurance assets, including invested assets, from adverse movements in foreign currency exchange rates, interest rates and equity prices, AIG and its insurance subsidiaries may enter into derivative transactions as end users. (See also the discussion under “Derivatives” herein.)

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

Managing Market Risk

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

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

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

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

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

      AIG calculated the VaR with respect to the net fair value of each of AIG’s insurance segments as of March 31, 2003 and December 31, 2002. AIG uses the historical simulation methodology which entails re-pricing all assets and liabilities under explicit changes in market rates within a specific historical time period. In this case, the most recent three years of historical market information for interest rates, foreign exchange rates, and equity index prices were used to construct the historical scenarios. For each scenario, each transaction was re-priced. Portfolio, business unit and finally AIG-wide scenario values were then calculated by netting the values of all the underlying assets and liabilities. The final VaR number represents the maximum potential loss incurred by these scenarios with 95 percent confidence (i.e., only 5 percent of historical scenarios show losses greater than the VaR figure). A one month holding period was assumed in computing the VaR figure.

      The following table presents the VaR on a combined basis and of each component of market risk for each of AIG’s insurance segments as of March 31, 2003 and December 31, 2002. VaR with respect to combined operations cannot be derived by aggregating the individual risk or segment amounts presented herein.

(in millions)


                                 
General Insurance Life Insurance


Market Risk 2003 2002 2003 2002

Combined
  $ 658     $ 809     $ 1,717     $ 1,798  
Interest rate
    411       413       1,376       1,507  
Currency
    66       66       175       166  
Equity
    631       798       631       975  

      The following table presents the average, high and low VaRs on a combined basis and of each component of market risk for each of AIG’s insurance segments as of March 31, 2003 and December 31, 2002.

(in millions)


                                                   
2003 2002


Average High Low Average High Low

General Insurance
                                               
Market Risk
                                               
 
Combined
  $ 734     $ 809     $ 658     $ 778     $ 863     $ 643  
 
Interest rate
    412       413       411       410       425       399  
 
Currency