AMERICAN INTERNATIONAL GROUP, INC.
Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                     to                     

For Quarter Ended September 30, 2002 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of September 30, 2002: 2,608,594,952.




TABLE OF CONTENTS

CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
NOTES TO FINANCIAL STATEMENTS
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II -- OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX
EX-12: STATEMENT RE COMPUTATION OF RATIOS


Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED BALANCE SHEET
(in millions)
(unaudited)
                         
September 30, December 31,
2002 2001


ASSETS:
               
 
Investments, financial services assets and cash:
               
   
Fixed maturities:
               
     
Bonds available for sale, at market value (amortized cost: 2002 — $218,935; 2001 — $196,111)
  $ 228,566     $ 199,774  
     
Bond trading securities, at market value (cost: 2002 — $836; 2001 — $844)
    850       842  
   
Equity securities:
               
     
Common stocks (cost: 2002 — $7,422; 2001 — $6,963)
    6,263       6,188  
     
Non-redeemable preferred stocks (cost: 2002 — $1,734; 2001 — $1,840)
    1,630       1,749  
   
Mortgage loans on real estate, net of allowance (2002 — $103; 2001 — $114)
    11,395       10,774  
   
Policy loans
    6,018       5,786  
   
Collateral and guaranteed loans, net of allowance (2002 — $27; 2001 — $23)
    2,449       2,407  
   
Financial services assets:
               
     
Flight equipment primarily under operating leases, net of accumulated depreciation (2002 — $4,184; 2001 — $3,492)
    25,971       22,710  
     
Securities available for sale, at market value (cost: 2002 — $16,570; 2001 — $17,793)
    16,552       17,801  
     
Trading securities, at market value
    4,729       5,733  
     
Spot commodities, at market value
    483       352  
     
Unrealized gain on interest rate and currency swaps, options and forward transactions
    15,106       11,493  
     
Trading assets
    4,645       6,234  
     
Securities purchased under agreements to resell, at contract value
    22,844       21,681  
     
Finance receivables, net of allowance (2002 — $478; 2001 — $532)
    15,101       13,955  
   
Other invested assets
    34,833       22,704  
   
Short-term investments, at cost (approximates market value)
    16,324       7,392  
   
Cash
    893       698  
     
     
 
       
Total investments, financial services assets and cash
    414,652       358,273  
 
Investment income due and accrued
    4,316       3,681  
 
Premiums and insurance balances receivable, net of allowance (2002 — $162; 2001 — $208)
    11,441       10,853  
 
Reinsurance assets, net of allowance
    31,117       28,758  
 
Deferred policy acquisition costs
    19,225       17,443  
 
Investments in partially-owned companies
    1,155       902  
 
Real estate and other fixed assets, net of accumulated depreciation (2002 — $3,698; 2001 — $3,532)
    4,797       4,833  
 
Separate and variable accounts
    43,865       51,954  
 
Goodwill
    6,009       6,102  
 
Other assets
    10,718       10,262  
     
     
 
       
Total assets
  $ 547,295     $ 493,061  
     
     
 

See Accompanying Notes to Financial Statements.

1


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AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEET — (continued)

(in millions, except share amounts)
(unaudited)
                       
September 30, December 31,
2002 2001


LIABILITIES:
               
 
Reserve for losses and loss expenses
  $ 46,817     $ 44,792  
 
Reserve for unearned premiums
    16,742       13,148  
 
Future policy benefits for life and accident and health insurance contracts
    70,702       64,998  
 
Policyholders’ contract deposits
    138,255       119,402  
 
Other policyholders’ funds
    7,315       7,611  
 
Reserve for commissions, expenses and taxes
    3,500       3,381  
 
Insurance balances payable
    3,449       3,207  
 
Funds held by companies under reinsurance treaties
    3,345       2,685  
 
Income taxes payable:
               
   
Current
    306       405  
   
Deferred
    5,015       2,881  
 
Financial services liabilities:
               
   
Borrowings under obligations of guaranteed investment agreements
    14,986       16,392  
   
Securities sold under agreements to repurchase, at contract value
    9,325       11,818  
   
Trading liabilities
    3,618       4,372  
   
Securities and spot commodities sold but not yet purchased, at market value
    8,748       8,331  
   
Unrealized loss on interest rate and currency swaps, options and forward transactions
    11,838       8,813  
   
Trust deposits and deposits due to banks and other depositors
    2,982       2,290  
   
Commercial paper
    7,770       8,416  
   
Notes, bonds and loans payable
    39,648       33,643  
 
Commercial paper
    2,743       3,476  
 
Notes, bonds, loans and mortgages payable
    4,230       3,804  
 
Separate and variable accounts
    43,865       51,954  
 
Minority interest
    1,582       1,509  
 
Other liabilities
    39,587       21,381  
     
     
 
     
Total liabilities
    486,368       438,709  
     
     
 
 
Preferred shareholders’ equity in subsidiary companies
    2,144       2,202  
     
     
 
CAPITAL FUNDS:
               
 
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2002 — 2,751,327,476; 2001 — 2,750,237,554
    6,878       6,876  
 
Additional paid-in capital
    639       669  
 
Retained earnings
    52,497       47,218  
 
Accumulated other comprehensive income (loss)
    176       (1,725 )
 
Treasury stock, at cost; 2002 — 142,732,524; 2001 — 134,805,555 shares of common stock
    (1,407 )     (888 )
     
     
 
     
Total capital funds
    58,783       52,150  
     
     
 
     
Total liabilities, preferred shareholders’ equity in subsidiary companies and capital funds
  $ 547,295     $ 493,061  
     
     
 

See Accompanying Notes to Financial Statements.

2


Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF INCOME

(in millions, except per share amounts)
(unaudited)
                                     
Nine Months Three Months
Ended September 30, Ended September 30,


2002 2001 2002 2001




Revenues:
                               
 
Premiums and other considerations
  $ 32,593     $ 28,280     $ 11,284     $ 9,652  
 
Net investment income
    11,214       10,354       3,840       3,501  
 
Realized capital gains (losses)
    (1,456 )     (549 )     (595 )     (114 )
 
Other revenues
    7,598       7,443       2,621       2,543  
     
     
     
     
 
 
Total revenues
    49,949       45,528       17,150       15,582  
     
     
     
     
 
Benefits and expenses:
                               
 
Incurred policy losses and benefits
    28,730       25,828       9,945       9,286  
 
Insurance acquisition and other operating expenses
    12,764       12,261       4,476       4,316  
 
Acquisition, restructuring and related charges
          2,017             1,363  
     
     
     
     
 
 
Total benefits and expenses
    41,494       40,106       14,421       14,965  
     
     
     
     
 
Income before income taxes, minority interest and cumulative effect of accounting changes
    8,455       5,422       2,729       617  
     
     
     
     
 
Income taxes:
                               
 
Current
    1,380       932       324       157  
 
Deferred
    1,201       603       493       7  
     
     
     
     
 
      2,581       1,535       817       164  
     
     
     
     
 
Income before minority interest and cumulative effect of accounting changes
    5,874       3,887       1,912       453  
     
     
     
     
 
Minority interest
    (251 )     (254 )     (70 )     (45 )
     
     
     
     
 
Income before cumulative effect of accounting changes
    5,623       3,633       1,842       408  
     
     
     
     
 
Cumulative effect of accounting changes, net of tax
          (136 )           (81 )
     
     
     
     
 
Net income
  $ 5,623     $ 3,497     $ 1,842     $ 327  
     
     
     
     
 
Earnings per common share:
                               
 
Basic
                               
   
Income before cumulative effect of accounting changes
  $ 2.15     $ 1.38     $ 0.70     $ 0.15  
   
Cumulative effect of accounting changes
          (0.05 )           (0.03 )
     
     
     
     
 
   
Net income
  $ 2.15     $ 1.33     $ 0.70     $ 0.12  
     
     
     
     
 
 
Diluted
                               
   
Income before cumulative effect of accounting changes
  $ 2.13     $ 1.37     $ 0.70     $ 0.15  
   
Cumulative effect of accounting changes
          (0.05 )           (0.03 )
     
     
     
     
 
   
Net income
  $ 2.13     $ 1.32     $ 0.70     $ 0.12  
     
     
     
     
 
Cash dividends per common share
  $ 0.131     $ 0.116     $ 0.047     $ 0.042  
     
     
     
     
 
Average shares outstanding:
                               
 
Basic
    2,613       2,622       2,610       2,620  
     
     
     
     
 
 
Diluted
    2,635       2,653       2,634       2,651  
     
     
     
     
 

See Accompanying Notes to Financial Statements.

3


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AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
                   
Nine Months
Ended September 30,

2002 2001


Cash Flows From Operating Activities:
               
Net Income
  $ 5,623     $ 3,497  
     
     
 
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
    10,782       6,617  
 
Premiums and insurance balances receivable and payable — net
    (346 )     826  
 
Reinsurance assets
    (2,359 )     (2,624 )
 
Deferred policy acquisition costs
    (2,520 )     (871 )
 
Investment income due and accrued
    (635 )     (271 )
 
Funds held under reinsurance treaties
    660       903  
 
Other policyholders’ funds
    (296 )     581  
 
Current and deferred income taxes — net
    1,101       256  
 
Reserve for commissions, expenses and taxes
    119       462  
 
Other assets and liabilities — net
    (737 )     3,744  
 
Trading assets and liabilities — net
    835       (193 )
 
Trading securities, at market value
    1,004       716  
 
Spot commodities, at market value
    (131 )     (134 )
 
Net unrealized (gain) loss on interest rate and currency swaps, options and forward transactions
    (588 )     (662 )
 
Securities purchased under agreements to resell
    (1,163 )     (4,580 )
 
Securities sold under agreements to repurchase
    (2,493 )     9  
 
Securities and spot commodities sold but not yet purchased, at market value
    417       (824 )
 
Realized capital (gains) losses
    1,457       549  
 
Equity in income of partially-owned companies and other invested assets
    (129 )     (344 )
 
Depreciation expenses, principally flight equipment
    1,212       1,076  
 
Amortization of premium and discount on securities
    (118 )     (290 )
 
Change in cumulative translation adjustments
    (275 )     (407 )
 
Provision for finance receivable losses
    279       269  
 
Other — net
    (221 )     (175 )
     
     
 
 
Total Adjustments
    5,855       4,633  
     
     
 
Net cash provided by operating activities
  $ 11,478     $ 8,130  
     
     
 

See Accompanying Notes to Financial Statements.

4


Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS — (Continued)

(in millions)
(unaudited)
                   
Nine Months
Ended September 30,

2002 2001


Cash Flows From Investing Activities:
               
 
Cost of bonds, at market sold
  $ 64,222     $ 59,526  
 
Cost of bonds, at market matured or redeemed
    13,339       6,563  
 
Cost of equity securities sold
    4,315       4,559  
 
Realized capital gains (losses)
    (1,457 )     (549 )
 
Purchases of fixed maturities
    (100,315 )     (82,789 )
 
Purchases of equity securities
    (4,653 )     (4,706 )
 
Mortgage, policy and collateral loans granted
    (2,214 )     (2,230 )
 
Repayments of mortgage, policy and collateral loans
    1,307       2,196  
 
Sales of securities available for sale
    2,899       2,901  
 
Maturities of securities available for sale
    2,629       1,372  
 
Purchases of securities available for sale
    (4,270 )     (6,721 )
 
Sales of flight equipment
    92       218  
 
Purchases of flight equipment
    (4,060 )     (3,514 )
 
Net additions to real estate and other fixed assets
    (447 )     (566 )
 
Sales or distributions of other invested assets
    5,601       2,753  
 
Investments in other invested assets
    (8,033 )     (4,832 )
 
Change in short-term investments
    (860 )     (3,137 )
 
Investments in partially-owned companies
    (160 )     (162 )
 
Finance receivables originations and purchases
    (7,227 )     (7,252 )
 
Finance receivables principal payments received
    5,803       6,788  
     
     
 
Net cash used in investing activities
    (33,489 )     (29,582 )
     
     
 
Cash Flows From Financing Activities:
               
 
Change in policyholders’ contract deposits
    18,853       10,730  
 
Change in trust deposits and deposits due to banks and other depositors
    692       486  
 
Change in commercial paper
    (1,379 )     1,696  
 
Proceeds from notes, bonds, loans and mortgages payable
    14,330       18,719  
 
Repayments on notes, bonds, loans and mortgages payable
    (7,922 )     (10,835 )
 
Proceeds from guaranteed investment agreements
    5,640       8,043  
 
Maturities of guaranteed investment agreements
    (7,046 )     (5,330 )
 
Redemption of subsidiary company preferred stock
    (50 )     (688 )
 
Proceeds from common stock issued
    145       163  
 
Cash dividends to shareholders
    (344 )     (632 )
 
Acquisition of treasury stock
    (732 )     (1,039 )
 
Other — net
    19       102  
     
     
 
Net cash provided by financing activities
    22,206       21,415  
     
     
 
Change in cash
    195       (37 )
Cash at beginning of period
    698       522  
     
     
 
Cash at end of period
  $ 893     $ 485  
     
     
 

See Accompanying Notes to Financial Statements.

5


Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.

 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
                                     
Nine Months Three Months
Ended September 30, Ended September 30,


2002 2001 2002 2001




Net income
  $ 5,623     $ 3,497     $ 1,842     $ 327  
Other comprehensive income:
                               
 
Unrealized appreciation of investments — net of reclassification adjustments
    3,915       2,460       3,986       1,672  
   
Deferred income tax expense on changes
    (1,315 )     (826 )     (1,388 )     (595 )
 
Foreign currency translation adjustments(a)
    (283 )     (418 )     64       (105 )
   
Applicable income tax (expense) benefit on changes
    (20 )     72       (72 )     4  
 
Net derivative losses arising from cash flow hedging activities
    (566 )     (669 )     (524 )     (534 )
   
Deferred income tax benefit on changes
    205       138       179       152  
 
Retirement plan liabilities adjustment, net of tax
    (35 )           (5 )      
 
Cumulative effect of accounting change, net of tax(b)
          150              
 
Cumulative effect of accounting change, net of tax(c)
          339              
     
     
     
     
 
Other comprehensive income
    1,901       1,246       2,240       594  
     
     
     
     
 
Comprehensive income
  $ 7,524     $ 4,743     $ 4,082     $ 921  
     
     
     
     
 

(a)  Includes insignificant derivative gains and losses arising from hedges of net investments in foreign operations.
 
(b)  Consists of derivative gains and losses qualifying for cash flow hedging arising from the adoption of Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (FAS 133).

(c)  Represents the unrealized appreciation arising from the transfer of the bonds held to maturity portfolio to the bonds available for sale portfolio in connection with the implementation of FAS 133.

See Accompanying Notes to Financial Statements.

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AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

 
NOTES TO FINANCIAL STATEMENTS

September 30, 2002

(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 2001 financial statements to conform to their 2002 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, 2001.

      2)     The following is AIG’s Consolidated Statement of Segment Operations for the nine months and quarter ended September 30, 2002 and 2001:

CONSOLIDATED STATEMENT OF SEGMENT OPERATIONS

(in millions)
(unaudited)
                                   
Nine Months Three Months
Ended September 30, Ended September 30,


2002 2001 2002 2001




General insurance operations:
                               
 
Net premiums written
  $ 20,202     $ 14,903     $ 7,085     $ 4,983  
 
Change in unearned premium reserve
    (2,640 )     (594 )     (889 )     (138 )
     
     
     
     
 
 
Net premiums earned
    17,562       14,309       6,196       4,845  
 
Net investment income
    2,086       2,147       661       724  
 
Realized capital gains (losses)
    (492 )     (147 )     (210 )     (89 )
     
     
     
     
 
      19,156       16,309       6,647       5,480  
     
     
     
     
 
 
Losses and loss expenses incurred(a)
    13,091       10,652       4,608       3,561  
 
Losses and loss expenses incurred: World Trade Center and related losses (WTC)
          769             769  
 
Underwriting expenses
    3,354       2,915       1,197       1,038  
     
     
     
     
 
      16,445       14,336       5,805       5,368  
     
     
     
     
 
 
Operating income
    2,711       1,973       842       112  
     
     
     
     
 
Life insurance operations:
                               
 
Premium income
    15,031       13,971       5,088       4,807  
 
Net investment income
    9,128       8,207       3,179       2,777  
 
Realized capital gains (losses)
    (601 )     (4 )     (262 )     17  
     
     
     
     
 
      23,558       22,174       8,005       7,601  
     
     
     
     
 
 
Death and other benefits
    7,814       7,450       2,630       2,761  
 
Death and other benefits: WTC
          131             131  
 
Increase in future policy benefits
    7,825       6,826       2,707       2,064  
 
Acquisition and insurance expenses
    4,120       4,164       1,413       1,463  
     
     
     
     
 
      19,759       18,571       6,750       6,419  
     
     
     
     
 
 
Operating income
    3,799       3,603       1,255       1,182  
     
     
     
     
 
Financial services operating income
    1,568       1,404       552       488  
Retirement savings & asset management operating income
    808       801       228       248  
Other realized capital gains (losses)
    (363 )     (398 )     (123 )     (42 )
Other income (deductions) — net(b)
    (68 )     56       (25 )     (8 )
Acquisition, restructuring and related charges
          (2,017 )           (1,363 )
     
     
     
     
 
Income before income taxes, minority interest and cumulative effect of accounting changes
    8,455       5,422       2,729       617  
     
     
     
     
 

(a)  Includes 21st Century’s third quarter 2002 loss adjustment expense pre-tax provision of $43 million for SB1899 Northridge earthquake claims.
 
(b)  Includes 21st Century’s third quarter 2002 pre-tax charge of $37 million to write off capitalized costs associated with a software development project.

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     3)     On August 29, 2001, American General Corporation (AGC) was acquired by AIG. In connection with the acquisition, AIG issued approximately 290 million shares of its common stock in exchange for all the outstanding common stock of AGC based on an exchange ratio of 0.5790 of a share of AIG common stock for each share of AGC common stock. The acquisition was accounted for as a pooling of interests and all prior historical financial information presented herein has been restated to include AGC.

      4)     Earnings per share of AIG are based on the weighted average number of common shares outstanding during the period, retroactively adjusted to reflect all stock splits.

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

      5)     Cash flow information for the nine month periods ended September 30, 2002 and 2001 is as follows:

                 
2002 2001


(in millions)
Income taxes paid
  $ 1,173     $ 1,140  
Interest paid
  $ 2,538     $ 3,042  

      6)     Segment Information:

      The following table summarizes the operations by major operating segment for the nine months and quarter ended September 30, 2002 and 2001 (in millions):

                                   
Operating Segments

Nine Months Three Months
Ended September 30, Ended September 30,


2002 2001 2002 2001




Revenues(a):
                               
 
General Insurance
  $ 19,156     $ 16,309     $ 6,647     $ 5,480  
 
Life Insurance
    23,558       22,174       8,005       7,601  
 
Financial Services
    4,961       4,728       1,720       1,633  
 
Retirement Savings & Asset Management
    2,637       2,715       901       910  
 
Other
    (363 )     (398 )     (123 )     (42 )
     
     
     
     
 
Total
  $ 49,949     $ 45,528     $ 17,150     $ 15,582  
     
     
     
     
 
Operating income:
                               
 
General Insurance
  $ 2,711     $ 1,973     $ 842     $ 112  
 
Life Insurance
    3,799       3,603       1,255       1,182  
 
Financial Services
    1,568       1,404       552       488  
 
Retirement Savings & Asset Management
    808       801       228       248  
 
Other
    (431 )     (2,359 )(b)     (148 )     (1,413 )(b)
     
     
     
     
 
Total
  $ 8,455     $ 5,422     $ 2,729     $ 617  
     
     
     
     
 

(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)  Includes pre-tax charges of $654 million for a termination fee ($600 million) and other related costs in connection with AGC’s termination of its merger agreement with Prudential plc in the second quarter of 2001, and $1.36 billion in acquisition, restructuring and related charges in connection with the acquisition of AGC in the third quarter of 2001. See also Note 7 of Notes to Financial Statements.

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     The following table summarizes AIG’s general insurance operations by major reporting group for the nine months and quarter ended September 30, 2002 and 2001 (in millions):

                                   
General Insurance

Nine Months Three Months
Ended September 30, Ended September 30,


2002 2001 2002 2001




Revenues:
                               
 
Domestic Brokerage Group
  $ 10,220     $ 8,386     $ 3,496     $ 2,811  
 
Transatlantic
    1,935       1,535       702       543  
 
Personal Lines
    2,176       1,960       746       633  
 
Mortgage Guaranty
    494       475       166       170  
 
Foreign General
    4,329       3,936       1,532       1,318  
 
Intercompany adjustments and eliminations — net
    2       17       5       5  
     
     
     
     
 
Total
  $ 19,156     $ 16,309     $ 6,647     $ 5,480  
     
     
     
     
 
Operating income (loss) before realized capital gains (losses)*:
                               
 
Domestic Brokerage Group
  $ 1,587     $ 978     $ 544     $ (13 )
 
Transatlantic
    221       (33 )     75       (139 )
 
Personal Lines
    101       48       15       29  
 
Mortgage Guaranty
    331       321       95       108  
 
Foreign General
    946       789       317       211  
 
Intercompany adjustments and eliminations — net
    17       17       6       5  
     
     
     
     
 
Total
  $ 3,203     $ 2,120     $ 1,052     $ 201  
     
     
     
     
 

Realized capital gains (losses) are not deemed to be an integral part of AIG’s general insurance operations’ internal reporting groups.

     The following table summarizes AIG’s life insurance operations by major reporting group for the nine months and quarter ended September 30, 2002 and 2001 (in millions):

                                   
Life Insurance

Nine Months Three Months
Ended September 30, Ended September 30,


2002 2001 2002 2001




Revenues:
                               
 
American International Assurance and Nan Shan Life 
  $ 8,559     $ 7,668     $ 2,780     $ 2,583  
 
ALICO and AIG Star Life
    5,495       4,738       1,931       1,817  
 
Domestic Life
    9,098       9,315       3,163       3,035  
 
Other
    406       453       131       166  
     
     
     
     
 
Total
  $ 23,558     $ 22,174     $ 8,005     $ 7,601  
     
     
     
     
 
Operating income before realized capital gains (losses):
                               
 
American International Assurance and Nan Shan Life
  $ 1,205     $ 1,162     $ 398     $ 383  
 
ALICO and AIG Star Life
    1,104       707       400       252  
 
Domestic Life
    2,000       1,662       692       501  
 
Other
    91       76       27       29  
     
     
     
     
 
Total
  $ 4,400     $ 3,607     $ 1,517     $ 1,165  
     
     
     
     
 

      The following table summarizes AIG’s financial services operations by major reporting group for the nine months and quarter ended September 30, 2002 and 2001 (in millions):

                                   
Financial Services

Nine Months Three Months
Ended September 30, Ended September 30,


2002 2001 2002 2001




Revenues:
                               
 
International Lease Finance Corporation 
  $ 2,096     $ 1,937     $ 729     $ 659  
 
AIG Financial Products Corp. 
    857       802       319       283  
 
Consumer Finance 
    1,838       1,903       611       653  
 
Other*
    170       86       61       38  
     
     
     
     
 
Total
  $ 4,961     $ 4,728     $ 1,720     $ 1,633  
     
     
     
     
 

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Financial Services

Nine Months Three Months
Ended September 30, Ended September 30,


2002 2001 2002 2001




Operating income:
                               
 
International Lease Finance Corporation 
  $ 588     $ 531     $ 207     $ 187  
 
AIG Financial Products Corp. 
    541       524       185       170  
 
Consumer Finance 
    409       379       144       146  
 
Other*
    30       (30 )     16       (15 )
     
     
     
     
 
Total
  $ 1,568     $ 1,404     $ 552     $ 488  
     
     
     
     
 

Including AIG Trading Group Inc.

     7)     Computation of Earnings Per Share:

                                     
Nine Months Three Months
Ended September 30, Ended September 30,


2002 2001 2002 2001




(in millions, except per share amounts)
Numerator:
                               
Income before cumulative effect of accounting changes
  $ 5,623     $ 3,633     $ 1,842     $ 408  
Cumulative effect of accounting changes, net of tax
          (136 )           (81 )
     
     
     
     
 
Net income (applicable to common stock)
  $ 5,623     $ 3,497     $ 1,842     $ 327  
     
     
     
     
 
Denominator:
                               
Basic:
                               
Average outstanding shares used in the computation of per share earnings:
                               
 
Common stock
    2,752       2,766       2,752       2,763  
 
Common stock in treasury
    (139 )     (144 )     (142 )     (143 )
     
     
     
     
 
Average outstanding shares — basic
    2,613       2,622       2,610       2,620  
     
     
     
     
 
Diluted:
                               
Average outstanding shares used in the computation of per share earnings:
                               
 
Common stock
    2,752       2,766       2,752       2,763  
 
Common stock in treasury
    (139 )     (144 )     (142 )     (143 )
Stock options and stock purchase plan (treasury stock method)
    22       31       24       31  
     
     
     
     
 
Average outstanding shares — diluted
    2,635       2,653       2,634       2,651  
     
     
     
     
 
Net income per share:
                               
 
Basic
                               
   
Income before cumulative effect of accounting changes
  $ 2.15     $ 1.38     $ 0.70     $ 0.15  
   
Cumulative effect of accounting changes
          (0.05 )           (0.03 )
     
     
     
     
 
   
Net income
  $ 2.15     $ 1.33     $ 0.70     $ 0.12  
     
     
     
     
 
 
Diluted
                               
   
Income before cumulative effect of accounting changes
  $ 2.13     $ 1.37     $ 0.70     $ 0.15  
   
Cumulative effect of accounting changes
          (0.05 )           (0.03 )
     
     
     
     
 
   
Net income
  $ 2.13     $ 1.32     $ 0.70     $ 0.12  
     
     
     
     
 

      8)     Acquisition, Restructuring and Related Charges

      During the third quarter of 2001, AGC was consolidated into AIG and charges in connection with this acquisition totaled $1.36 billion for that quarter, including approximately $512 million of direct costs. Of the $512 million, approximately $305 million had been paid as of December 31, 2001 and an additional $97 million has been paid for the nine months ended September 30, 2002. The balance is included in Other liabilities.

      Less significant, ongoing costs with respect to the integration of operations will continue to be expensed in future periods as incurred. AIG expects that these ongoing costs will include costs for the integration of computer systems, the training and relocation of certain employees and the consolidation of facilities.

      9)     Starr International Company, Inc. Plan

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      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 $37.0 million for the first nine months of 2002 and $41.8 million for the same period of 2001 and $11.9 million and $13.2 million for the third quarter 2002 and 2001, respectively.

      10)     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, 2001 at which time they approximated $300 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 September 30, 2002, the

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notional principal amount of the sum of the swap pays and receives approximated $778.37 billion, primarily related to interest rate swaps of approximately $545.37 billion.

      The following tables provide the contractual and notional amounts of derivatives transactions of AIGFP at September 30, 2002.

      The notional amounts used to express the extent of involvement in swap transactions represent a standard of measurement of the volume of swaps business of AIGFP. 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.

      The following table presents AIGFP’s derivatives portfolio by maturity and type of derivative at September 30, 2002 and December 31, 2001:

(in millions)


                                                   
Remaining Life of Notional Amount*

One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 2002 2001

AIGFP interest rate, currency and equity swaps and swaptions:
                                               
Notional amount:
                                               
 
Interest rate swaps
  $ 145,656     $ 267,977     $ 120,949     $ 10,783     $ 545,365     $ 436,669  
 
Currency swaps
    40,508       79,843       43,125       5,289       168,765       139,174  
 
Swaptions and equity swaps
    21,359       26,405       11,543       4,932       64,239       58,491  

Total
  $ 207,523     $ 374,225     $ 175,617     $ 21,004     $ 778,369     $ 634,334  

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 September 30, 2002 the contractual amount of AIGFP’s futures and forward contracts approximated $63.89 billion.

      The following table presents AIGFP’s futures and forward contracts portfolio by maturity and type of derivative at September 30, 2002 and December 31, 2001:

(in millions)


                                                 
Remaining Life

One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 2002 2001

Futures and forward contracts:
                                               
Exchange traded futures contracts contractual amount
  $ 7,417     $     $     $     $ 7,417     $ 10,036  

Over the counter forward contracts contractual amount
  $ 55,804     $ 443     $ 230     $     $ 56,477     $ 58,003  

      AIGFP utilizes various credit enhancements, including collateral, credit triggers and credit derivatives to reduce the credit exposure relating to these off-balance sheet financial instruments. AIGFP requires credit enhancements in connection with specific transactions based on, among other things, the creditworthiness of the counterparties and the transaction’s size and maturity. In addition, AIGFP’s derivative transactions are generally documented under ISDA Master Agreements. 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

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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 $14.44 billion at September 30, 2002 and $10.84 billion at December 31, 2001. The net replacement value for futures and forward contracts approximated $25 million at September 30, 2002 and $64 million at December 31, 2001. 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 September 30, 2002 and December 31, 2001, 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 2002 2001

Counterparty credit quality:
                               
 
AAA
  $ 7,106     $     $ 7,106     $ 4,388  
 
AA
    3,965       22       3,987       3,214  
 
A
    1,929       3       1,932       2,498  
 
BBB
    1,387             1,387       784  
 
Below investment grade
    48             48       23  

Total
  $ 14,435     $ 25     $ 14,460     $ 10,907  

      At September 30, 2002 and December 31, 2001, 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 2002 2001

Non-U.S. banks
  $ 2,755     $ 10     $ 2,765     $ 2,464  
Insured municipalities
    927             927       638  
U.S. industrials
    3,534             3,534       2,113  
Governmental
    728             728       563  
Non-U.S. financial service companies
    452             452       428  
Non-U.S. industrials
    1,338             1,338       1,289  
Special purpose
    3,092             3,092       1,851  
U.S. banks
    156       15       171       72  
U.S. financial service companies
    1,369             1,369       1,211  
Supranationals
    84             84       278  

Total
  $ 14,435     $ 25     $ 14,460     $ 10,907  

      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

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the credit and market risks to which it is subject. Management is not aware of any potentially significant counterparty defaults.

      Commissions, transaction and other fees for the six months ended September 30, 2002 and 2001 from AIGFP’s operations were $857 million and $802 million, respectively.

      d)     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 September 30, 2002, the contractual amount of AIGTG’s futures, forward and option contracts approximated $483.51 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 September 30, 2002 and December 31, 2001. The gross replacement values presented represent the sum of the estimated positive fair values of all of AIGTG’s derivatives contracts at September 30, 2002 and December 31, 2001. 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 September 30, 2002, the net replacement value of AIGTG’s futures, forward and option contracts and interest rate and currency swaps approximated $2.11 billion.

(in millions)


                                                     
Remaining Life

One Two Through Six Through After Ten Total Total
Year Five Years Ten Years Years 2002 2001

Contractual amount of futures, forwards and options:
                                               
 
Exchange traded futures and options
  $ 14,483     $ 1,985     $ 49     $     $ 16,517     $ 14,977  

 
Forwards
  $ 214,333     $ 14,034     $ 1,794     $ 36     $ 230,197     $ 184,102  

 
Over the counter purchased options
  $ 85,347     $ 13,531     $ 22,135     $ 137     $ 121,150     $ 138,655  

 
Over the counter sold options(a)
  $ 80,306     $ 12,703     $ 22,383     $ 253     $ 115,645     $ 137,661  

Notional amount(c):
                                               
 
Interest rate swaps and forward rate agreements
  $ 15,762     $ 37,809     $ 6,688     $ 149     $ 60,408     $ 59,683  
 
Currency swaps
    2,407       5,463       644             8,514       11,092  
 
Swaptions
    3,154       9,369       1,474             13,997       7,280  

Total
  $ 21,323     $ 52,641     $ 8,806     $ 149     $ 82,919     $ 78,055  

Credit exposure:
                                               
 
Futures, forwards, swaptions and purchased options contracts and interest rate and currency swaps:
                                               
   
Gross replacement value
  $ 5,330     $ 2,945     $ 2,200     $ 21     $ 10,496     $ 10,074  
   
Master netting arrangements
    (3,546 )     (2,544 )     (1,940 )     (2 )     (8,032 )     (6,691 )
   
Collateral
    (163 )     (99 )     (73 )     (18 )     (353 )     (330 )

Net replacement value(b)
  $ 1,621     $ 302     $ 187     $ 1     $ 2,111     $ 3,053  

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(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.

      AIGTG determines counterparty credit quality by reference to ratings from independent rating agencies or internal analysis. At September 30, 2002 and December 31, 2001, 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

2002 2001

Counterparty credit quality:
               
 
AAA
  $ 268     $ 391  
 
AA
    603       1,117  
 
A
    603       863  
 
BBB
    212       330  
 
Below investment grade
    43       130  
 
Not externally rated, including exchange traded futures and options*
    382       222  

Total
  $ 2,111     $ 3,053  

Counterparty breakdown by industry:
               
 
Non-U.S. banks
  $ 803     $ 1,151  
 
U.S. industrials
    270       503  
 
Governmental
    26       71  
 
Non-U.S. financial service companies
    43       187  
 
Non-U.S. industrials
    178       190  
 
U.S. banks
    129       353  
 
U.S. financial service companies
    280       376  
 
Exchanges*
    382       222  

Total
  $ 2,111     $ 3,053  

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 September 30, 2002, 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 obligations and liabilities of AIGFP and AIGTG arising from transactions entered into by AIGFP and AIGTG.

      e)     As a component of its asset and liability management strategy, AIG SunAmerica utilizes swap agreements to match more closely the cash flows of its assets to the cash flows of its liabilities. AIG SunAmerica uses these swap agreements to hedge against the risk of interest rate changes and currency fluctuations. At September 30, 2002 and December 31, 2001, AIG SunAmerica’s swap agreements had an

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aggregate notional principal amount of $21.66 billion and $17.90 billion, respectively. These agreements mature in various years through 2031.

      f)     AGC and certain of its subsidiaries have entered into various interest rate and currency swap agreements, treasury rate lock agreements and options to enter into interest rate swap agreements (“swaptions”). AGC uses these agreements to hedge its exposure to interest rate changes and currency rate fluctuations that are associated with investment operations and/or anticipated debt issuances. At September 30, 2002, AGC’s swap agreements with respect to debt had an aggregate notional amount of $800 million, of which $400 million was with AIGFP. There were no treasury rate lock agreements or swaptions outstanding at September 30, 2002. The impact of AGC’s derivatives on AIG’s results of operations, financial condition and liquidity was insignificant.

      g)     At September 30, 2002, ILFC had committed to purchase 493 aircraft deliverable from 2002 through 2010 at an estimated aggregate purchase price of $29.4 billion and had options to purchase 38 aircraft deliverable from 2002 through 2008 at an estimated aggregate purchase price of $2.4 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. As of September 30, 2002, ILFC has entered into leases for all aircraft to be delivered in 2002 and 2003.

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

      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 September 30, 2002 ($2.09 billion gross; $687 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 (up to the year 2011 with respect to the year ended December 31, 2001), 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 frequency/ severity analysis is also performed for asbestos.

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      A summary of reserves and activity for the nine months then ended September 30, 2002 and 2001, including estimates for applicable incurred but not reported losses and loss expenses, relating to asbestos and environmental claims separately, is as follows.

                                 
(in millions)

2002 2001


Gross Net Gross Net

Asbestos:
                               
Reserve for losses and loss expenses at beginning of year
  $ 1,114     $ 312     $ 1,100     $ 338  
Losses and loss expenses incurred*
    187       100       242       56  
Losses and loss expenses paid*
    (143 )     (53 )     (251 )     (90 )

Reserve for losses and loss expenses at end of period
  $ 1,158     $ 359     $ 1,091     $ 304  

Environmental:
                               
Reserve for losses and loss expenses at beginning of year
  $ 1,115     $ 407     $ 1,345     $ 517  
Losses and loss expenses incurred*
    (62 )     (29 )     (38 )     (54 )
Losses and loss expenses paid*
    (121 )     (50 )     (153 )     (58 )

Reserve for losses and loss expenses at end of period
  $ 932     $ 328     $ 1,154     $ 405  

Combined:
                               
Reserve for losses and loss expenses at beginning of year
  $ 2,229     $ 719     $ 2,445     $ 855  
Losses and loss expenses incurred*
    125       71       204       2  
Losses and loss expenses paid*
    (264 )     (103 )     (404 )     (148 )

Reserve for losses and loss expenses at end of period
  $ 2,090     $ 687     $ 2,245     $ 709  

All amounts pertain to policies underwritten in prior years.

     i)     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.

      11)     Capital Resources:

      At September 30, 2002, AIG had total capital funds of $58.78 billion and total borrowings of $69.38 billion. At that date, $61.31 billion of such borrowings were either not guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable.

      Total borrowings and borrowings not guaranteed or matched at September 30, 2002 and December 31, 2001 were as follows:

                   
(in millions)

2002 2001

GIAs — AIGFP
  $ 14,986     $ 16,392  

Commercial Paper:
               
 
AGC
          2,468  
 
AGF(a)
    3,984       4,853  
 
AIG Funding, Inc. (Funding)
    2,669       902  
 
ILFC(a)
    3,720       3,494  
 
AIG Finance (Taiwan) Limited(a)
    74       107  
 
AIG Credit Card Company (Taiwan)(a)
    66       68  

 
Total
    10,513       11,892  

Medium Term Notes:
               
 
AGF(a)
    6,339       4,100  
 
ILFC(a)
    4,908       4,809  
 
AIG
    498       542  

 
Total
    11,745       9,451  

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(in millions)

2002 2001

Notes and Bonds Payable:
               
 
ILFC(a)
    9,667       7,073  
 
AIGFP
    15,254       13,920  
 
AIG
    1,600       1,577  
 
AGC
    1,541       1,340  
 
AGF(a)
    1,907       2,201  

 
Total
    29,969       26,111  

Loans and Mortgages Payable:
               
 
ILFC(a)(b)
    296       365  
 
AIG Finance (Hong Kong) Limited(a)
    276       290  
 
CFG(a)
    836       885  
 
AIG
    756       345  

 
Total
    2,164       1,885  

 
Total Borrowings
    69,377       65,731  

Borrowings not guaranteed by AIG
    32,073       28,245  
Matched GIA borrowings
    14,986       16,392  
Matched notes and bonds payable — AIGFP
    14,251       12,185  

      61,310       56,822  

Remaining borrowings of AIG
  $ 8,067     $ 8,909  

(a)  AIG does not guarantee these borrowings.
(b)  Capital lease obligations.

     At September 30, 2002, 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

Funding
  $ 2,669       $ 3     $ 2,672       1.78 %   27
ILFC
    3,720       10       3,730       1.80     54
AGF
    3,984        8       3,992       1.80     42
AIGF — Taiwan*
    74        1       75       4.41     64
AIGCCC — Taiwan*
    66             66       2.81     70

Total
  $ 10,513       $22     $ 10,535          

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

     The maturity distributions of total borrowings at September 30, 2002 and December 31, 2001 were as follows:

(in millions)


                 
2002 2001

Short-term borrowings
  $ 17,116     $ 19,336  
Long-term borrowings*
    52,261       46,395  

Total borrowings
  $ 69,377     $ 65,731  

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

     During the first nine months of 2002, AIGFP increased the aggregate principal amount outstanding of its notes and bonds payable to $15.25 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, fulfills the short-term cash requirements of AIG and its non-insurance subsidiaries. Funding intends to continue to meet AIG’s funding requirements through the issuance of commercial paper guaranteed by AIG. This issuance of Funding’s commercial paper is subject to the approval of AIG’s Board of Directors. ILFC and A.I. Credit Corp. (AICCO) as well as AIG Credit Card Company (Taiwan) — (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited — (AIGF-Taiwan), both consumer finance subsidiaries in Taiwan, AGC and AGF have

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issued commercial paper for the funding of their own operations. At September 30, 2002, 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. In early 2001, AICCO ceased issuing commercial paper under its program and the agreement which AIG had provided supporting the commercial paper was terminated; AICCO’s funding requirements are now met through Funding’s program. (See also the discussion under “Derivatives” in Management’s Discussion and Analysis.)

      AIG and Funding are parties to 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 AIG’s commercial paper programs administered by Funding. There were no borrowings outstanding under the Facility as of September 30, 2002.

      AGF is a party to unsecured syndicated revolving credit facilities aggregating $3.0 billion. The facilities consists 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 were no borrowings outstanding under this facility as of September 30, 2002. AGF had $258 million in aggregate principal amount of debt securities registered and available for issuance at September 30, 2002. 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 the first nine months of 2002, AGC issued $200 million in notes which will mature in March 2003. These notes are included in Notes and Bonds Payable in the accompanying table of borrowings.

      ILFC has entered into committed revolving loans and lines of credit with commercial banks aggregating $2.85 billion to support its commercial paper program. At September 30, 2002, there were no borrowings under these facilities. During October 2002, the amount of these facilities was increased to $3.15 billion.

      At September 30, 2002, ILFC had increased the aggregate principal amount outstanding of its medium term and term notes to $14.58 billion, a net increase of $2.69 billion, and recorded a net decline in its capital lease obligations of $69 million and a net increase in its commercial paper of $226 million. On January 28, 2002, ILFC registered $4.0 billion principal amount of debt securities for issuance from time to time. At September 30, 2002, $2.78 billion had been 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 September 30, 2002. Notes issued under this program are included in Notes and Bonds Payable in the accompanying 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 varied from 5.75 percent to 5.90 percent on these aircraft depending on the delivery date of the aircraft. At September 30, 2002, ILFC had $2.17 billion outstanding under this facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the accompanying table of borrowings.

      The proceeds of ILFC’s debt financing are primarily used to purchase flight equipment, including progress payments during the construction phase. The primary sources for the repayment of this debt and the interest expense thereon are the cash flow from operations, proceeds from the sale of flight equipment and the rollover and refinancing of the prior debt. (See also the discussions under “Operational Review” and “Liquidity” 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 September 30, 2002, $1.72 billion of notes had been issued under the program, all of which are currently outstanding. Notes issued under this program are included in Notes and Bonds Payable in the accompanying table of borrowings.

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      During the first nine months of 2002, AIG issued $4 million principal amount of medium term notes and $48 million of previously issued notes matured. At September 30, 2002, AIG had $640 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.

      12)     Accounting Standards:

      In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (FAS 142). As of January 1, 2002, AIG adopted FAS 142. FAS 142 requires AIG to discontinue the amortization of goodwill in its consolidated income statement. Amortization expense recorded in AIG’s consolidated statement of income amounted to $117 million pre-tax for the first nine months of 2001 and $41 million pre-tax for the third quarter of 2001.

      FAS 142 requires goodwill to be subject to an assessment of impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two-step process prescribed in FAS 142, whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of impairment, if any. FAS 142 also requires the completion of a transitional impairment test in the year of adoption, with any identified impairments recognized as a cumulative effect of a change in accounting principles. During the second quarter, AIG completed its transitional impairment test for 2002, resulting in no impairment.

      Changes in the carrying amount of goodwill are primarily caused as a result of foreign currency translation adjustments.

      13)     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 (the “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.

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Table of Contents

Condensed Consolidating Balance Sheets

                                           
September 30, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Assets:
                                       
 
Invested assets
  $ 1,489     $     $ 417,544     $ (5,274 )   $ 413,759  
 
Cash
    3       2       888             893  
 
Carrying value of subsidiaries and partially owned companies, at equity
    58,655       13,956       3,498       (74,954 )     1,155  
 
Other assets
    2,639       2,676       138,710       (12,537 )     131,488  
     
     
     
     
     
 
Total Assets
  $ 62,786     $ 16,634     $ 560,640     $ (92,765 )   $ 547,295  
     
     
     
     
     
 
Liabilities:
                                       
 
Insurance liabilities
  $ 383     $     $ 286,411     $ (14 )   $ 286,780  
 
Debt
    2,098       3,234       68,862       (4,817 )     69,377  
 
Other liabilities
    1,522       3,214       137,959       (12,484 )     130,211  
     
     
     
     
     
 
Total Liabilities
    4,003       6,448       493,232       (17,315 )     486,368  
     
     
     
     
     
 
Preferred shareholders’ equity in subsidiary companies
                2,144               2,144  
Total Capital Funds
    58,783       10,186       65,264       (75,450 )     58,783  
     
     
     
     
     
 
Total Liabilities, Preferred Shareholders’ Equity in Subsidiary Companies and Capital Funds
  $ 62,786     $ 16,634     $ 560,640     $ (92,765 )   $ 547,295  
     
     
     
     
     
 
                                           
December 31, 2001 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




Assets:
                                       
 
Invested assets
  $ 1,405     $     $ 359,541     $ (3,371 )   $ 357,575  
 
Cash
    1       1       696             698  
 
Carrying value of subsidiaries and partially owned companies, at equity
    52,117       12,022       3,509       (66,746 )     902  
 
Other assets
    2,395       2,799       129,626       (934 )     133,886  
     
     
     
     
     
 
Total Assets
  $ 55,918     $ 14,822     $ 493,372     $ (71,051 )   $ 493,061  
     
     
     
     
     
 
Liabilities:
                                       
 
Insurance liabilities
  $ 320     $     $ 256,219     $     $ 256,539  
 
Debt
    2,119       5,500       61,048       (2,936 )     65,731  
 
Other liabilities
    1,329       1,267       114,735       (892 )     116,439  
     
     
     
     
     
 
Total liabilities
    3,768       6,767       432,002       (3,828 )     438,709  
     
     
     
     
     
 
Preferred shareholders’ equity in subsidiary companies
                2,602       (400 )     2,202  
Total Capital Funds
    52,150       8,055       58,768       (66,823 )     52,150  
     
     
     
     
     
 
Total Liabilities, Preferred Shareholders’ Equity in Subsidiary Companies and Capital Funds
  $ 55,918     $ 14,822     $ 493,372     $ (71,051 )   $ 493,061  
     
     
     
     
     
 

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Condensed Consolidating Statements of Income

                                         
Nine months ended September 30, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




General insurance operating income
  $ 140     $     $ 2,571     $     $ 2,711  
Life insurance operating income
    16             3,783             3,799  
Financial services operating income
    300             1,268             1,568  
Retirement savings & asset management operating income
    (8 )           816             808  
Equity in undistributed net income of consolidated subsidiaries
    4,574       826             (5,400 )      
Other
    861       388       (100 )     (1,580 )     (431 )
Income taxes (benefits)
    260       (37 )     2,358             2,581  
Minority interest
                (251 )           (251 )
     
     
     
     
     
 
Net income
  $ 5,623     $ 1,251     $ 5,729     $ (6,980 )   $ 5,623  
     
     
     
     
     
 
                                         
Nine months ended September 30, 2001 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




General insurance operating income
  $ 146     $     $ 1,827     $     $ 1,973  
Life insurance operating income
    (42 )           3,645             3,603  
Financial services operating income
    276             1,128             1,404  
Retirement savings & asset management operating income
    13             788             801  
Equity in undistributed net income of consolidated subsidiaries
    2,725       153             (2,878 )      
Other
    509       (843 )     (523 )     (1,502 )     (2,359 )
Income taxes (benefits)
    114       (375 )     1,796             1,535  
Minority interest
                (254 )           (254 )
Cumulative effect of accounting changes
    (16 )     (49 )     (71 )           (136 )
     
     
     
     
     
 
Net income
  $ 3,497     $ (364 )   $ 4,744     $ (4,380 )   $ 3,497  
     
     
     
     
     
 
                                         
Three months ended September 30, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




General insurance operating income
  $ 44     $     $ 798     $     $ 842  
Life insurance operating income
                1,255             1,255  
Financial services operating income
    123             429             552  
Retirement savings & asset management operating income
    (6 )           234             228  
Equity in undistributed net income of consolidated subsidiaries
    1,369       461             (1,830 )      
Other
    564       (23 )     (25 )     (664 )     (148 )
Income taxes (benefits)
    252       (37 )     602             817  
Minority interest
                (70 )           (70 )
     
     
     
     
     
 
Net income
  $ 1,842     $ 475     $ 2,019     $ (2,494 )   $ 1,842  
     
     
     
     
     
 

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Condensed Consolidating Statements of Income (continued)
                                         
Three months ended September 30, 2001 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries Eliminations AIG
(in millions)




General insurance operating income
  $ 33     $     $ 79     $     $ 112  
Life insurance operating income
    (17 )           1,199             1,182  
Financial services operating income
    91             397             488  
Retirement savings & asset management operating income
    4             244             248  
Equity in undistributed net income of consolidated subsidiaries
    405       (190 )           (215 )      
Other
    (208 )     (279 )     (484 )     (442 )     (1,413 )
Income taxes (benefits)
    (19 )     (94 )     277             164  
Minority interest
                (45 )           (45 )
Cumulative effect of accounting changes
                (81 )           (81 )
     
     
     
     
     
 
Net income
  $ 327     $ (375 )   $ 1,032     $ (657 )   $ 327  
     
     
     
     
     
 

Condensed Consolidating Statements of Cash Flows

                                   
Nine months ended September 30, 2002 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries AIG
(in millions)



Net cash provided by operating activities
  $ 1,002     $ 2,602     $ 7,874     $ 11,478  
Cash flows from investing:
                               
 
Invested assets disposed
    (160 )           97,890       97,730  
 
Invested assets acquired
    (79 )           (130,693 )     (130,772 )
Other
    (29 )     (279 )     (139 )     (447 )
     
     
     
     
 
Net cash used in investing activities
    (268 )     (279 )     (32,942 )     (33,489 )
     
     
     
     
 
Cash flows from financing activities:
                               
 
Change in debts
    183       (2,266 )     5,706       3,623  
 
Other
    (915 )     (56 )     19,554       18,583  
     
     
     
     
 
Net cash provided by (used in) financing activities
    (732 )     (2,322 )     25,260       22,206  
     
     
     
     
 
Change in cash
    2       1       192       195  
Cash at beginning of period
    1       1       696       698  
     
     
     
     
 
Cash at end of period
  $ 3     $ 2     $ 888     $ 893  
     
     
     
     
 
                                   
Nine months ended September 30, 2001 American
International
Group, Inc. AGC Other Consolidated
Guarantor Issuer Subsidiaries AIG
(in millions)



Net cash provided by (used in) operating activities
  $ 834     $ (237 )   $ 7,533     $ 8,130  
Cash flows from investing:
                               
 
Invested assets disposed
    (380 )           83,408       83,028  
 
Invested assets acquired
    (426 )           (111,618 )     (112,044 )
 
Other
    (67 )     17       (516 )     (566 )
     
     
     
     
 
Net cash provided by (used in) investing activities
    (873 )     17       (28,726 )     (29,582 )
     
     
     
     
 
Cash flows from financing activities:
                               
 
Change in debts
    882       667       7,573       9,122  
 
Other
    (843 )     (447 )     13,583       12,293  
     
     
     
     
 
Net cash provided by financing activities
    39       220       21,156       21,415  
     
     
     
     
 
Change in cash
                (37 )     (37 )
Cash at beginning of period
    1       3       518       522  
     
     
     
     
 
Cash at end of period
  $ 1     $ 3     $ 481     $ 485  
     
     
     
     
 

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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 with a narrative with respect to AIG’s operations, financial condition and liquidity and certain other significant matters.

Index

             
Page

Operational Review
    25  
 
Consolidated Results
    25  
 
General Insurance Operations
    26  
   
General Insurance Results
    27  
   
Reinsurance
    30  
   
Reserves for Losses and Loss Expenses
    30  
   
Environmental Claims
    31  
 
Life Insurance Operations
    34  
   
Life Insurance Results
    35  
   
Underwriting and Investment Risk
    36  
 
Financial Services Operations
    36  
   
Financial Services Results
    37  
 
Retirement Savings & Asset
       
 
Management Operations
    38  
    Retirement Savings & Asset Management Results     39  
 
Other Operations
    39  
Capital Resources
    40  
 
Borrowings
    40  
 
Capital Funds
    42  
 
Stock Repurchase
    42  
 
Dividends from Insurance Subsidiaries
    42  
 
Regulation and Supervision
    42  
  Contractual Obligations and Other Commercial Commitments     43  
 
Special Purpose Vehicles
    43  
Liquidity
    44  
Invested Assets
    45  
 
Insurance Invested Assets
    46  
   
Fixed Maturity Investments
    46  
   
Credit Quality
    46  
   
Equity Investments
    47  
   
Valuation of Invested Assets
    47  
   
Mortgage Investments
    49  
   
Short-term Investments
    49  
   
Real Estate Investments
    49  
   
Other Investments
    49  
   
Managing Market Risk
    49  
 
Financial Services Invested Assets
    51  
   
Managing Market Risk
    53  
Derivatives
    56  
 
Counterparty Credit Quality
    57  
 
Fair Value Source
    59  
 
Notional Amounts
    59  
Important Accounting Policies
    61  
Accounting Standards
    61  
Controls and Procedures
    61  

Operational Review

Consolidated Results

      AIG’s net income in the first nine months of 2002 increased 60.8 percent to $5.62 billion when compared to $3.50 billion in the same period of 2001. Excluding $1.38 billion of acquisition, restructuring and related charges, and $533 million in World Trade Center and related losses (WTC), net of tax incurred in 2001, AIG’s net income in the first nine months of 2002 increased 3.8 percent. The primary reason for the reduced growth rate in net income in the first nine months of 2002 relative to historical AIG growth rates was the realized capital losses, net of tax of $955 million and $361 million in 2002 and 2001, respectively.

      AIG’s operations are conducted principally through four business segments: general insurance, life insurance, financial services and retirement savings & asset management. The following table summarizes

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the operations of each principal segment for the nine month periods ending September 30, 2002 and 2001:

(in millions)


                   
2002 2001

Revenues:
               
 
General insurance(a)
  $ 19,156     $ 16,309  
 
Life insurance(b)
    23,558       22,174  
 
Financial services(c)
    4,961       4,728  
 
Retirement savings & asset management(d)
    2,637       2,715  
 
Other
    (363 )     (398 )

Total
  $ 49,949     $ 45,528  

Operating income:
               
 
General insurance
  $ 2,711     $ 1,973  
 
Life insurance
    3,799       3,603  
 
Financial services
    1,568       1,404  
 
Retirement savings & asset management
    808       801  
 
Other
    (431 )     (2,359 )

Total
  $ 8,455     $ 5,422  

(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 37.4 percent in the first nine months of 2002 compared to the same period in 2001. Excluding realized capital gains (losses) and WTC losses of $769 million, including $200 million from Transatlantic in 2001, general insurance operating income increased 10.9 percent, reflecting strong growth in adjusted underwriting profit. The growth in investment income slowed primarily as a result of lower earnings from the private equity portfolio.

      Life Insurance: Life insurance operating income increased 5.4 percent in the first nine months of 2002 compared to the same period in 2001. Excluding realized capital gains (losses) and WTC losses of $131 million in 2001, life insurance operating income increased 17.7 percent, reflecting operating income growth in each of AIG’s principal life insurance businesses.

      Financial Services: Financial services operating income increased 11.7 percent in the first nine months of 2002 compared to the same period in 2001, reflecting the continued growth of each of its principal operations.

      Retirement Savings & Asset Management: Retirement savings & asset management operating income increased 1.0 percent in the first nine months of 2002 when compared to the same period in 2001. This growth was principally a result of the operations of The Variable Annuity Life Insurance Company (VALIC).

      Realized Capital Losses: During the first nine months of 2002, AIG incurred net realized capital losses of $1.46 billion, including $356 million from WorldCom securities.

      Capital Resources: At September 30, 2002, AIG had total capital funds of $58.78 billion and total borrowings of $69.38 billion. At that date, $61.31 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, 2002 through November 1, 2002, AIG repurchased in the open market 10,858,000 shares of its common stock.

      Liquidity: At September 30, 2002, consolidated invested assets were $421.71 billion including $17.22 billion in cash and short-term investments. Consolidated net cash provided from operating activities in the first nine months of 2002 amounted to $11.48 billion.

      Outlook for the Remainder of 2002: Premium rates in the General Insurance business are continuing to strengthen both domestically and in key international markets, along with policy restrictions and exclusions. In the Life Insurance segment, the integration of AGC and its operations is proceeding well.

General Insurance Operations

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

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

      DBG is AIG’s primary domestic general division. DBG writes substantially all classes of business insurance, accepting such business mainly from insurance

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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 reinsurance capacity, both domestically and overseas, on treaty and facultative bases. Transatlantic structures traditional and non-traditional programs for a full range of property and casualty products with an emphasis on specialty risk.

      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 6 of Notes to Financial Statements.)

      General insurance operations for the nine month periods ending September 30, 2002 and 2001 were as follows:

                   
(in millions)

2002 2001

Net premiums written:
               
 
DBG(a)
  $ 11,030     $ 7,430  
 
Transatlantic
    1,843       1,427  
 
Personal Lines
    2,369       1,858  
 
Mortgage Guaranty
    381       364  
 
Foreign General
    4,579       3,824  

Total
  $ 20,202     $ 14,903  

Net premiums earned:
               
 
DBG(a)
  $ 9,379     $ 7,114  
 
Transatlantic
    1,745       1,347  
 
Personal Lines
    2,107       1,878  
 
Mortgage Guaranty
    376       361  
 
Foreign General
    3,955       3,609  

Total
  $ 17,562     $ 14,309  

Adjusted underwriting profit (loss)(b):
               
 
DBG(a)
  $ 402     $ (388 )
 
Transatlantic
    31       (213 )
 
Personal Lines(c)
    10       (38 )
 
Mortgage Guaranty
    222       241  
 
Foreign General
    452       371  

Total
  $ 1,117     $ (27 )

Net investment income
               
 
DBG
  $ 1,185     $ 1,366  
 
Transatlantic
    190       180  
 
Personal Lines
    91       86  
 
Mortgage Guaranty
    109       80  
 
Intercompany adjustments and eliminations — net
    17       17  
 
Foreign General
    494       418  

Total
  $ 2,086     $ 2,147  

Operating income before realized capital gains (losses) (b):
               
 
DBG(a)
  $ 1,587     $ 978  
 
Transatlantic
    221       (33 )
 
Personal Lines(c)
    101       48  
 
Mortgage Guaranty
    331       321  
 
Intercompany adjustments and eliminations — net
    17       17  
 
Foreign General
    946       789  

Total
    3,203       2,120  
Realized capital gains (losses)
    (492 )     (147 )

Operating income
  $ 2,711     $ 1,973  

(a)  Reflects the realignment of certain internal divisions in each year.
(b)  2001 general insurance operations includes $769 million with respect to the WTC losses.
(c)  Includes 21st Century’s third quarter 2002 loss adjustment expense pre-tax provision of $43 million for SB1899 Northridge earthquake claims.

General Insurance Results

      During the first nine months of 2002, net premiums written and net premiums earned increased 35.6 percent and 22.7 percent, respectively, from those of 2001.

      Commencing in the latter part of 1999 and continuing through 2002, the commercial property-casualty market place has experienced rate increases. Virtually all areas of DBG have experienced rate increases. Overall, DBG’s net premiums written increased $3.60 billion or 48.4 percent in the first nine months of 2002 over 2001.

      Personal Lines’ net premiums written increased 27.5 percent or $511 million in the first nine months of 2002 from 2001, reflecting auto insurance rate increases in many states.

      Foreign General insurance net premiums written increased 19.8 percent and net premiums earned increased 9.6 percent in the first nine months of 2002 when compared to the same period of 2001.

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Foreign General insurance operations produced 22.7 percent of the general insurance net premiums written in the first nine months of 2002 and 25.7 percent in 2001.

      In comparing the average foreign currency exchange rates used to translate the results of AIG’s foreign general operations during the first nine months of 2002 to those average foreign currency exchange rates used to translate AIG’s foreign general results during the same period of 2001, the U.S. dollar strengthened 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 1.4 percentage points less than they would have been if translated utilizing those average foreign currency exchange rates which prevailed during that same period of 2001.

      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 nine months ending September 30, 2002 and 2001 were as follows:

                   
2002 2001

Domestic General:
               
 
Loss Ratio
    78.41       86.44  
 
Expense Ratio
    17.86       17.66  

Combined Ratio
    96.27       104.10  

Foreign General:
               
 
Loss Ratio
    61.25       60.18  
 
Expense Ratio
    28.30       31.64  

Combined Ratio
    89.55       91.82  

Consolidated:
               
 
Loss Ratio
    74.54       79.82  
 
Expense Ratio
    20.23       21.24  

Combined Ratio
    94.77       101.06  

      The adjusted underwriting profit (loss) was $1.12 billion for the first nine months of 2002 and $(27) million for the same period of 2001. Excluding WTC losses from losses incurred in 2001, adjusted underwriting profit increased $375 million or 50.5 percent in 2002 over the same period of 2001. This increase resulted principally from premium rate increases and policy form changes and exclusions.

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

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

      Statutory underwriting profit is arrived at by reducing net premiums earned by net losses and loss expenses incurred and net expenses incurred. Statutory accounting differs from GAAP, as statutory accounting requires immediate expense recognition and ignores the matching of revenues and expenses as required by GAAP. That is, for statutory purposes, all expenses, most specifically acquisition expenses, are recognized immediately, not 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 and recognized over the period the related premiums written are earned. Accordingly, the statutory underwriting profit has been adjusted as a result of acquisition expenses being deferred as required by GAAP. Thus, “ad-

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justed underwriting profit” is a GAAP measurement which can be viewed as gross margin or an intermediate subtotal in calculating operating income and net income.

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

      AIG’s results reflect the impact of incurred losses from catastrophes approximating $40 million and $817 million (which includes $769 million with respect to WTC losses) in the first nine months of 2002 and 2001, respectively. AIG’s gross incurred losses from catastrophes approximated $102 million and $2.1 billion (which includes approximately $2.0 billion with respect to WTC losses) in the first nine months of 2002 and 2001, respectively. While 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 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. The pro forma table below excludes catastrophe losses in order to present comparable results of AIG’s recurring core underwriting operations. The pro forma consolidated statutory general insurance ratios for the nine months ending September 30, 2002 and 2001 would be as follows:

                 
2002 2001

Loss Ratio
    74.32       74.11  
Expense Ratio
    20.23       21.24  

Combined Ratio
    94.55       95.35  

      AIG’s historic ability to maintain its combined ratio below 100 is primarily attributable to the profitability of AIG’s foreign general insurance operations and AIG’s emphasis on maintaining its disciplined underwriting, especially in the domestic specialty markets. In addition, AIG does not seek net premium growth where rates do not adequately reflect its assessment of exposures.

      General insurance net investment income in the first nine months of 2002 decreased 2.8 percent when compared to the same period of 2001. The growth in net investment income in 2002 has slowed significantly primarily as a result of lower earnings from the general insurance private equity portfolio. Also, interest income earned from the general insurance bond portfolio was impacted by lower yields as the proceeds from maturing fixed income securities are reinvested. However, the cash flow resulting from the growth in net premiums written should have positive impact on net investment income in future quarters. (See also the discussion under “Liquidity” herein.)

      General insurance realized capital losses were $492 million and $147 million in the first nine months of 2002 and 2001, 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 arose primarily from the disposition of equity securities and available for sale fixed maturities as well as redemptions of fixed maturities. (See the discussion on “Insurance Invested Assets” herein.)

      General insurance operating income for the first nine months of 2002 increased 37.4 percent to $2.71 billion. Excluding realized capital gains (losses) and WTC losses of $769 million from losses incurred in 2001, general insurance operating income increased 10.9 percent over the same period of 2001. The contribution of general insurance operating income to income before income taxes, minority interest and cumulative effect of accounting changes was 32.1 percent during the first nine

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months of 2002 compared to 36.4 percent in the same period of 2001. Excluding acquisition, restructuring and related charges from income before income taxes, minority interest and cumulative effect of accounting changes during the first nine months of 2001, the contribution of general insurance operating income was 26.5 percent.

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 held general reinsurance assets of $29.98 billion at September 30, 2002 as a result of its reinsurance arrangements. Thus, a credit exposure existed at September 30, 2002 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, 2001, approximately 43 percent of the general reinsurance assets were from unauthorized reinsurers. In order to obtain statutory recognition, nearly all of these balances were collateralized. The remaining 57 percent of the general reinsurance assets were from authorized reinsurers and over 97 percent of such balances are from reinsurers rated A-(excellent) or better, as rated by A.M. Best. This rating is a measure of financial strength. The terms authorized and unauthorized pertain to regulatory categories, not creditworthiness. Through September 30, 2002, these distribution percentages have not changed significantly.

      AIG’s allowance for estimated unrecoverable reinsurance has not changed significantly from December 31, 2001 when AIG had allowances for unrecoverable reinsurance approximating $75 million. At September 30, 2002, AIG had no significant reinsurance recoverables from any individual reinsurer which is financially troubled (e.g., liquidated, insolvent, in receivership or otherwise subject to formal or informal regulatory restriction).

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

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

      At September 30, 2002, the consolidated general reinsurance assets of $29.98 billion include reinsurance recoverables for paid losses and loss expenses of $4.20 billion and $19.78 billion with respect to the ceded reserve for losses and loss expenses, including ceded losses incurred but not reported (IBNR) (ceded reserves). The ceded reserves represent the accumulation of estimates of ultimate ceded losses including provisions for ceded IBNR and loss expenses. The methods used to determine such estimates and to establish the resulting ceded reserves are continually reviewed and updated. Any adjustments therefrom are reflected in income currently. It is AIG’s belief that the ceded reserves at September 30, 2002 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.

Reserves for Losses and Loss Expenses

      At September 30, 2002, general insurance reserves for losses and loss expenses (loss reserves) amounted to $46.82 billion. These loss reserves represent the accumulation of estimates of ultimate losses, including IBNR, and loss expenses and amounts of discounting related to certain workers’

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compensation claims. At September 30, 2002, general insurance net loss reserves increased $1.15 billion from prior year end to $27.04 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 at September 30, 2002. In the future, if the general insurance net loss reserves develop deficiently, as a result of a variety of factors which are increasingly difficult to quantify, such as the litigious nature of our society, the increasing size of jury awards and settlements, and the failure to make progress in tort reform, 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. These lines account for approximately one-half of net losses and loss expenses. The other group is short tail lines of business consisting principally of property lines, 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 four percent. Loss trend factors reflect many items including changes in claims handling, exposure and policy forms and current and future estimates of monetary inflation and social inflation. Thus, many factors are implicitly considered in estimating the year to year growth in loss costs. Therefore, AIG’s carried net long tail loss reserves are judgmentally set as well as tested for reasonableness using the most appropriate loss trend factors for each class of business. In the evaluation of AIG’s net loss reserves, loss trend factors vary slightly, depending on the particular class and nature of the business involved. These factors are periodically reviewed and subsequently adjusted, as appropriate, to reflect emerging trends which are based upon past loss experience.

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

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

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 continues to maintain specialized toxic tort and environmental claim units, established over a decade ago, which investigate and adjust all such asbestos and environmental claims. Highly rated with respect to claim file handling and case reserving by independent sources, these units utilize a comprehensive ground up, bottom up approach to claim adjusting by thoroughly evaluating

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each exposure on a claim by claim basis. Commencing in 1985, standard policies contained an absolute exclusion for pollution related damage. However, AIG currently underwrites environmental impairment liability insurance on a claims made basis and excluded such claims from the analyses included herein.

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

      In the interim, AIG and other industry members have and will continue to litigate the broadening judicial interpretation of the policy coverage and the liability issues. At the current time, it is not possible to determine the future development of asbestos and environmental claims with the same degree of reliability as is the case for other types of claims. Such development will be affected by the extent to which courts continue to expand the intent of the policies and the scope of the coverage, as they have in the past, as well as by the changes in Superfund and waste dump site coverage issues. Although the estimated liabilities for these claims are subject to a significantly greater margin of error than for other claims, the reserves carried for these claims at September 30, 2002 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.

      A summary of reserves and activity for the nine months then ended September 30, 2002 and 2001, including estimates for applicable IBNR, relating to asbestos and environmental claims separately, is as follows:

                                 
(in millions)

2002 2001


Gross Net Gross Net

Asbestos:
                               
Reserve for losses and loss expenses at beginning of year
  $ 1,114     $ 312     $ 1,100     $ 338  
Losses and loss expenses incurred*
    187       100       242       56  
Losses and loss expenses paid*
    (143 )     (53 )     (251 )     (90 )

Reserve for losses and loss expenses at end of period
  $ 1,158     $ 359     $ 1,091     $ 304  

Environmental:
                               
Reserve for losses and loss expenses at beginning of year
  $ 1,115     $ 407     $ 1,345     $ 517  
Losses and loss expenses incurred*
    (62 )     (29 )     (38 )     (54 )
Losses and loss expenses paid*
    (121 )     (50 )     (153 )     (58 )

Reserve for losses and loss expenses at end of period
  $ 932     $ 328     $ 1,154     $ 405  

Combined:
                               
Reserve for losses and loss expenses at beginning of year
  $ 2,229     $ 719     $ 2,445     $ 855  
Losses and loss expenses incurred*
    125       71       204       2  
Losses and loss expenses paid*
    (264 )     (103 )     (404 )     (148 )

Reserve for losses and loss expenses at end of period
  $ 2,090     $ 687     $ 2,245     $ 709  

All amounts pertain to policies underwritten in prior years.

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     The average cost per claim settled, dismissed or otherwise resolved for the nine month periods ended September 30, 2002 and 2001 was as follows:


                                 
2002 2001


Gross Net Gross Net

Asbestos
  $ 389,600     $ 144,400     $ 342,400     $ 122,800  
Environmental
    78,400       32,400       47,100       17,800  
Combined
    138,200       53,900       101,400       37,100  

      The gross and net IBNR included in the aforementioned reserve for losses and loss expenses at September 30, 2002 and December 31, 2001 were estimated as follows:

(in millions)


                                 
2002 2001


Gross Net Gross Net

Combined
  $ 1,023     $ 283     $ 1,038     $ 278  

      A summary of asbestos and environmental claims count activity for the nine month periods ended September 30, 2002 and 2001 was as follows:  
                                                   

2002 2001


Asbestos Environmental Combined Asbestos Environmental Combined

Claims at beginning of year
    6,670       9,364       16,034       6,796       11,323       18,119  
Claims during year:
                                               
 
Opened
    752       1,283       2,035       587       1,517       2,104  
 
Settled
    (80 )     (456 )     (536 )     (95 )     (897 )     (992 )
 
Dismissed or otherwise resolved
    (287 )     (1,087 )     (1,374 )     (638 )     (2,354 )     (2,992 )

Claims at end of period
    7,055       9,104       16,159       6,650       9,589       16,239  

      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 September 30, 2002 and 2001 were as follows:


                                   
2002 2001


Gross Net Gross Net

Involuntary survival ratios:
                               
 
Asbestos
    3.7       4.2       3.2       3.8  
 
Environmental
    17.9       13.9       17.5       16.0  
 
Combined
    7.1       7.5       6.6       8.0  

      AIG’s operations are negatively impacted under guarantee fund assessment laws which exist

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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 2001 were $24 million. Based upon current information, AIG does not anticipate that its net assessment will be significantly different in 2002.

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

Life Insurance Operations

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

      AIG’s three principal overseas life operations are American Life Insurance Company (ALICO), American International Assurance Company, Limited together with American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and all of its business is written outside of the United States. ALICO has operations either directly or through subsidiaries in approximately 50 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 Hong Kong, Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. AIG’s principal domestic life insurance subsidiaries include American General Life, AIG Annuity and SunAmerica Life. 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 6 of Notes to Financial Statements.)

      Life insurance premium income presented in accordance with GAAP for the nine month periods ending September 30, 2002 and 2001 was as follows:

(in millions)


                   
2002 2001

Premium income:
               
 
Domestic
  $ 3,518     $ 3,763  
 
Foreign
    11,513       10,208  

Total
  $ 15,031     $ 13,971  

      Life insurance operations presented on a major product basis for the nine month periods ending September 30, 2002 and 2001 were as follows:

(in millions)


                     
2002 2001

Premium income, deposits and other considerations(a) (b):
               
 
Domestic:
               
   
Life
  $ 3,198     $ 3,309  
   
Fixed Annuities, Pension and Investment Products
    17,299       15,225  
   
Other
          157  

 
Total Domestic
    20,497       18,691  

 
Foreign:
               
   
Life
    14,278       11,925  
   
Personal Accident
    1,828       1,547  
   
Group Life/Medical
    778       713  
   
Fixed Annuity/Pension
    662       584  

 
Total Foreign
    17,546       14,769  

Total premium income, deposits and other considerations
  $ 38,043     $ 33,460  

Net investment income:
               
 
Domestic:
               
   
Life
  $ 1,611     $ 1,558  
   
Fixed Annuities, Pension and Investment Products
    4,540       4,038  
   
Other
          4  

 
Total Domestic
    6,151       5,600  

 
Foreign:
               
   
Life
    2,639       2,289  
   
Personal Accident
    104       97  
   
Group Life/Medical
    35       34  
   
Fixed Annuity/Pension
    208       195  
   
Intercompany Adjustments
    (9 )     (8 )

 
Total Foreign
    2,977       2,607  

Total net investment income
  $ 9,128     $ 8,207  

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2002 2001

Operating income before realized capital gains (losses):
               
 
Domestic:
               
   
Life
  $ 916     $ 708  
   
Fixed Annuities, Pension and Investment Products
    1,084       950  
   
Other
          4  

 
Total Domestic
    2,000       1,662  

 
Foreign:
               
   
Life
    1,804       1,434  
   
Personal Accident
    482       418  
   
Group Life/Medical
    92       76  
   
Fixed Annuity/Pension
    31       25  
   
Intercompany Adjustments
    (9 )     (8 )

 
Total Foreign
    2,400       1,945  

Total operating income before realized capital gains (losses)
    4,400       3,607  
Realized capital gains (losses)
    (601 )     (4 )

Total operating income
  $ 3,799     $ 3,603  

Life insurance in-force(a)(c):
               
   
Domestic
  $ 550,609     $ 517,067  
   
Foreign
    727,008       711,434  

Total
  $ 1,277,617     $ 1,228,501  

(a)  Represents a non-GAAP measurement used by AIG to help manage its life insurance operation, and may not be comparable to similarly- captioned measurements used by other life insurance companies.
 
(b)  Premium income, deposits and other considerations represent aggregate business activity during the respective periods.
 
(c)  Amounts presented were as at September 30, 2002 and December 31, 2001.

Life Insurance Results

      Life insurance operating income increased 5.4 percent to $3.80 billion during the first nine months of 2002 when compared to the same period last year. Excluding realized capital gains (losses) and WTC losses of $131 million in 2001, life insurance operating income increased 17.7 percent in 2002 over the same period of 2001. The contribution of life insurance operating income to income before income taxes, minority interest and cumulative effect of accounting changes amounted to 44.9 percent during the first nine months of 2002 compared to 66.5 percent in the same period of 2001. The increase in contribution percentage in 2001 was influenced by the impact of the WTC losses on general insurance operating income and its reduced contribution to income before income taxes, minority interest and cumulative effect of accounting changes. Excluding acquisition, restructuring and related charges from income before income taxes, minority interest and cumulative effect of accounting changes during the first nine months of 2001, the contribution of life insurance operating income was 48.4 percent.

      AIG’s GAAP life premium income during the first nine months of 2002 represented a 7.6 percent increase from the same period in 2001. Foreign life operations produced 76.6 percent and 73.1 percent of the GAAP life premium income in 2002 and 2001, 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 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 strengthened in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, for the first nine months of 2002, 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 2.1 percentage points less than it would have been if translated utilizing average exchange rates prevailing in 2001.

      Life insurance net investment income increased 11.2 percent during the first nine months of 2002. 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 nine months were $601 million in 2002 and $4 million in 2001. These realized capital losses

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resulted from the ongoing management of the life insurance investment portfolios within the overall objectives of the life insurance operations and arose primarily from the disposition of equity securities and available for sale fixed maturities and redemptions of fixed maturities. (See the discussion on “Insurance 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 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 dollars of coverage and AIG’s domestic life companies, including those of AGC, 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 without sacrificing investment quality. To the extent permitted under local regulation, AIG may invest in qualified longer-term securities outside Japan to achieve a closer matching in both duration and the required yield. AIG is able to manage any asset-liability duration difference through maintenance of sufficient global liquidity and to support any operational shortfall through its international financial network. (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.

Financial Services Operations

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

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      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 6 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 trading, foreign exchange trading, interest rate swaps and market making activities. (See also Note 6 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 6 of Notes to Financial Statements.)

      Financial services operations for the nine month periods ending September 30, 2002, and 2001 were as follows:

(in millions)

                 

2002 2001

Revenues:
               
ILFC(a)
  $ 2,096     $ 1,937  
AIGFP(b)
    857       802  
Consumer Finance(c)
    1,838       1,903  
Other
    170       86  

Total
  $ 4,961     $ 4,728  

Operating income:
               
ILFC
  $ 588     $ 531  
AIGFP
    541       524  
Consumer Finance
    409       379  
Other, including intercompany adjustments
    30       (30 )

Total
  $ 1,568     $ 1,404  

(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 11.7 percent in the first nine months of 2002 over the same period of 2001. Financial services operating income represented 18.6 percent of AIG’s income before income taxes and minority interest in the first nine months of 2002. This compares to 25.9 percent in the same period of 2001. The increase in contribution percentage in 2001 was influenced by the impact of the WTC losses on general insurance operating income and its reduced contribution to income before income taxes, minority interest and cumulative effect of accounting changes. Excluding acquisition, restructuring, and related charges from income before income taxes, minority interest and cumulative effect of accounting changes during the first nine months of 2001, the contribution of financial services operating income was 18.9 percent.

      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 nine months of 2002 increased 8.2 percent from the same period of 2001. 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. Approximately 20 percent of ILFC’s operating lease revenues are derived from U.S. and Canadian airlines. During the first nine months of 2002, operating income increased 10.7 percent from the same period of 2001. 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 nine months of 2002 and 2001 were 4.95 percent and 5.21 percent, respectively. (See also the discussions under “Capital Resources” and “Liquidity” herein and Note 6 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

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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 80 percent of ILFC’s fleet is leased to non-U.S. and Canadian 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. Revenues in the first nine months of 2002 increased 6.9 percent from the same period of 2001. During the first nine months of 2002, operating income increased 3.2 percent from the same period of 2001. As AIGFP is a transaction-oriented operation, current and past revenues and operating results may not provide a basis for predicting future performance. 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 most significant component of operating expenses is compensation, which approximated 30 percent of revenue in the nine months ended September 30, 2002 and 2001. (See also the discussions under “Capital Resources,” “Liquidity” and “Derivatives” herein and Note 6 of Notes to Financial Statements.)

      Consumer Finance operations are comprised of AGF, which derives a substantial portion of its revenues from finance charges assessed on outstanding mortgages and finance receivables from the sub-prime market, and CFG, which is engaged in developing a multi-product consumer finance business with an emphasis on emerging markets. Although Consumer Finance revenues decreased 3.4 percent in the first nine months of 2002 from the same period in 2001, operating income increased 8.0 percent compared to the 2001 period. The decline in revenues was the result of lower yields on the finance receivables, but borrowing costs also declined significantly and spreads, and therefore profits, increased as a result.

      AGF is exposed to loss when contractual payments are not received. AGF manages its collection exposure through the mix of types of loans and security thereon. (See also the discussions under “Capital Resources” and “Liquidity” herein and Note 6 of Notes to Financial Statements.)

Retirement Savings & Asset Management Operations

      AIG’s retirement savings & asset management operations offer a wide variety of investment products, including variable annuities and mutual funds, as well as investment services, including 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. (SunAmerica), VALIC, AIG Global Investment Group, Inc. and its subsidiaries (Global Investment) and AIG Capital Partners, Inc. (Cap Partners). SunAmerica develops and sells variable annuities and other investment products, sells and manages mutual funds and provides financial services. 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, and provides custodial services. Cap Partners organizes, and manages the invested assets of institutional private equity investment funds and may also invest in such 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 by SunAmerica and VALIC (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

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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 $54 million and $13 million for the nine months ended September 30, 2002 and 2001, respectively. In accordance with GAAP, AIG expenses these benefits in the period paid. With respect to the other benefits, substantially all of AIG’s policy obligations are reinsured.

      Retirement savings & asset management operations for the nine month periods ending September 30, 2002 and 2001 were as follows:

(in millions)


                 
2002 2001

Revenues:
               
VALIC
  $ 1,606     $ 1,589  
SunAmerica
    454       497  
Other*
    577       629  

Total
  $ 2,637     $ 2,715  

Operating Income:
               
VALIC
  $ 572     $ 491  
SunAmerica
    57       160  
Other*
    179       150  

Total
  $ 808     $ 801  

Includes Global Investment, Cap Partners, John McStay Investment Counsel and certain overseas variable annuity operations.

Retirement Savings & Asset Management Results

      Retirement savings & asset management operating income in the first nine months of 2002 increased 1.0 percent when compared to the same period of 2001.

      Retirement savings & asset management operating income represented 9.6 percent of AIG’s income before income taxes and minority interest in the first nine months of 2002. This compares to 14.8 percent in the same period of 2001. Excluding acquisition, restructuring, and related charges from income before income taxes, minority interest and cumulative effect of accounting changes during the first nine months of 2001, the contribution of retirement savings & asset management operating income to income was 10.8 percent.

      At September 30, 2002, AIG’s third party assets under management, including both retail mutual funds and institutional accounts, approximated $40 billion.

Other Operations

      Other realized capital losses amounted to $363 million, and $398 million in the first nine months of 2002 and 2001, respectively.

      Other income (deductions)-net includes income generated by the investment of capital held by 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 nine months of 2002, other income (deductions) — net amounted to $(68) million. In the same period of 2001, other income (deductions) — net amounted to $56 million. This decline was primarily the result of weaker performance of SunAmerica investments in partnerships and private equities and 21st Century’s third quarter 2002 pre-tax charge of $37 million to write off capitalized costs associated with a software development project.

      Acquisition, restructuring and related charges of $2.02 billion for the first nine months of 2001 were incurred in connection with the acquisition of AGC, including $654 million paid by AGC in connection with the termination of AGC’s merger with Prudential plc.

      Income before income taxes, minority interest and cumulative effect of accounting changes amounted to $8.46 billion in the first nine months of 2002 compared to $5.42 billion in the same period of 2001.

      In the first nine months of 2002, AIG recorded a provision for income taxes of $2.58 billion compared to the provision of $1.54 billion in the same period of 2001. These provisions represent effective tax rates of 30.5 percent in the first nine months of 2002, and 28.3 percent in the same period of 2001.

      Minority interest represents minority shareholders’ equity in income of certain majority-owned consolidated subsidiaries. Minority interest amounted to $251 million and $254 million in the first nine months of 2002 and 2001, respectively.

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      Income before the cumulative effect of accounting changes amounted to $5.62 billion in the first nine months of 2002 and $3.63 billion in the same period of 2001.

      Net income amounted to $5.62 billion in the first nine months of 2002 and $3.50 billion in the same period of 2001. The increases in net income over the periods resulted from those factors described above.

Capital Resources

      At September 30, 2002, AIG had total capital funds of $58.78 billion and total borrowings of $69.38 billion. At that date, $61.31 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 September 30, 2002 and December 31, 2001 were as follows:

                   
(in millions)

2002 2001

GIAs — AIGFP
  $ 14,986     $ 16,392  

Commercial Paper:
               
 
AGC
          2,468  
 
AGF(a)
    3,984       4,853  
 
AIG Funding, Inc. (Funding)
    2,669       902  
 
ILFC(a)
    3,720       3,494  
 
AIG Finance (Taiwan) Limited(a)
    74       107  
 
AIG Credit Card Company (Taiwan)(a)
    66       68  

 
Total
    10,513       11,892  

Medium Term Notes:
               
 
AGF(a)
    6,339       4,100  
 
ILFC(a)
    4,908       4,809  
 
AIG
    498       542  

 
Total
    11,745       9,451  

Notes and Bonds Payable:
               
 
ILFC(a)
    9,667       7,073  
 
AIGFP
    15,254       13,920  
 
AIG
    1,600       1,577  
 
AGC
    1,541       1,340  
 
AGF(a)
    1,907       2,201  

 
Total
    29,969       26,111  

Loans and Mortgages Payable:
               
 
ILFC(a)(b)
    296       365  
 
AIG Finance (Hong Kong) Limited(a)
    276       290  
 
CFG(a)
    836       885  
 
AIG
    756       345  

 
Total
    2,164       1,885  

 
Total Borrowings
    69,377       65,731  

Borrowings not guaranteed by AIG
    32,073       28,245  
Matched GIA borrowings
    14,986       16,392  
Matched notes and bonds payable — AIGFP
    14,251       12,185  

      61,310       56,822  

Remaining borrowings of AIG
  $ 8,067     $ 8,909  

(a)  AIG does not guarantee these borrowings.
(b)  Capital lease obligations.

     At September 30, 2002, 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

Funding
  $ 2,669     $ 3     $ 2,672       1.78 %     27  
ILFC
    3,720       10       3,730       1.80       54  
AGF
    3,984       8       3,992       1.80       42  
AIGF — Taiwan*
    74       1       75       4.41       64  
AIGCCC — Taiwan*
    66             66       2.81       70  

Total
  $ 10,513     $ 22     $ 10,535              

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

     The maturity distributions of total borrowings at September 30, 2002 and December 31, 2001 were as follows:

(in millions)


                 
2002 2001

Short-term borrowings
  $ 17,116     $ 19,336  
Long-term borrowings*
    52,261       46,395  

Total borrowings
  $ 69,377     $ 65,731  

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

     During the first nine months of 2002, AIGFP increased the aggregate principal amount outstanding of its notes and bonds payable to $15.25 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, fulfills the short-term cash requirements of AIG and its non-insurance subsidiaries. Funding intends to continue to meet AIG’s funding requirements through the issuance of commercial paper guaranteed by AIG. This issuance of Funding’s commercial paper is subject to the approval of AIG’s Board of Directors. ILFC and

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A.I. Credit Corp. (AICCO) as well as AIG Credit Card Company (Taiwan) — (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited — (AIGF-Taiwan), both consumer finance subsidiaries in Taiwan, AGC and AGF have issued commercial paper for the funding of their own operations. At September 30, 2002, 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. In early 2001, AICCO ceased issuing commercial paper under its program and the agreement which AIG had provided supporting the commercial paper was terminated; AICCO’s funding requirements are now met through Funding’s program. (See also the discussion under “Derivatives” herein.)

      AIG and Funding are parties to 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 AIG’s commercial paper programs administered by Funding. There were no borrowings outstanding under the Facility as of September 30, 2002.

      AGF is a party to unsecured syndicated revolving credit facilities aggregating $3.0 billion. The facilities consists 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 were no borrowings under this facility as of September 30, 2002. AGF had $258 million in aggregate principal amount of debt securities registered and available for issuance at September 30, 2002. 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 the first nine months of 2002, AGC issued $200 million in notes which will mature in March 2003. These notes are included in Notes and Bonds Payable in the accompanying table of borrowings.

      ILFC has entered into committed revolving loans and lines of credit with commercial banks aggregating $2.85 billion to support its commercial paper program. At September 30, 2002, there were no borrowings under these facilities. During October 2002, the amount of these facilities was increased to $3.15 billion.

      At September 30, 2002, ILFC had increased the aggregate principal amount outstanding of its medium term and term notes to $14.58 billion, a net increase of $2.69 billion, and recorded a net decline in its capital lease obligations of $69 million and a net increase in its commercial paper of $226 million. On January 28, 2002, ILFC registered $4.0 billion principal amount of debt securities for issuance from time to time. At September 30, 2002, $2.78 billion had been 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 September 30, 2002. Notes issued under this program are included in Notes and Bonds Payable in the accompanying 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 varied from 5.75 percent to 5.90 percent on these aircraft depending on the delivery date of the aircraft. At September 30, 2002, ILFC had $2.17 billion outstanding under this facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the accompanying table of borrowings.

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

      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 September 30, 2002, $1.72 billion of notes had been issued under the program, all of which are currently outstanding. Notes issued under this program are included in Notes and Bonds Payable in the accompanying table of borrowings.

      During the first nine months of 2002, AIG issued $4 million principal amount of medium term notes and $48 million of previously issued notes matured. At September 30, 2002, AIG had

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$640 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.

Capital Funds

      AIG’s capital funds increased $6.63 billion during the first nine months of 2002. Unrealized appreciation of investments, net of taxes increased $2.60 billion. During the first nine months of 2002, the cumulative translation adjustment loss, net of taxes, increased $303 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. The 2001 transfer of bonds in the held to maturity, at amortized cost category to the bonds available for sale, at market value category in accordance with the transition provisions of FAS 133 resulted in a gain of $339 million recorded in the statement of comprehensive income as a cumulative effect of an accounting change adjustment. (See also the discussion under “Operational Review” and “Liquidity” herein.) The 2001 capital funds included a cumulative effect of an accounting change adjustment gain of $150 million. During the first nine months of 2002, there was a loss of $361 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 nine months of 2002, retained earnings increased $5.28 billion, resulting from net income less dividends.

Stock Repurchase

      During the period from January 2002 through November 1, 2002, AIG repurchased in the open market 10,858,000 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 September 30, 2002, there were no significant statutory or regulatory issues which would impair AIG’s financial condition, results of operations or liquidity. To AIG’s knowledge, no AIG company is on any regulatory or similar “watch list”. (See also the discussion under “Liquidity” herein.)

Regulation and Supervision

      AIG’s insurance subsidiaries, in common with other insurers, are subject to regulation and supervision by the states and jurisdictions in which they do business. The National Association of Insurance Commissioners (NAIC) has developed Risk-Based Capital (RBC) requirements. RBC relates an individual insurance company’s statutory surplus to the risk inherent in its overall operations. At September 30, 2002, the adjusted capital of each of AIG’s domestic general companies and of each of AIG’s domestic life companies exceeded each of their RBC standards by considerable margins. Federal, state or local legislation may affect AIG’s ability to operate and expand its various financial services businesses and changes in the current laws, regulations or interpretations thereof may have a material adverse effect on these businesses.

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

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

Contractual Obligations and Other Commercial Commitments

      The maturity schedule of AIG’s most significant contractual obligations at September 30, 2002 is presented in the following table:

(in millions)


                                           
Payments due by Period

2003 2005 Remaining
through through years after
September 30, 2002 Total 2002 2004 2006 2006

Borrowings*
  $ 58,864     $ 17,116     $ 15,354     $ 7,061       $19,333  
Unconditional Obligations to Purchase Aircraft
    29,414       1,142       8,946       9,401       9,925  
Other Long-Term Obligations:
                                       
 
ILFC
    1,120       267       853              

Total
  $ 89,398     $ 18,525     $ 25,153     $ 16,462       $29,258  

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

     The maturity schedule of AIG’s most significant Other Commercial Commitments at September 30, 2002 is presented in the following table:

(in millions)


                                           
Amount of Commitment Expiration

Total Less
Amounts than 1 1-3 4-5 After 5
September 30, 2002 Committed year years years years