SEC Filing | American International Group, Inc.

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FORM 10-Q

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

[ ] 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, 2003 Commission File Number 1-8787

AMERICAN INTERNATIONAL GROUP, INC.

(Exact name of registrant as specified in its charter)



Delaware (State or other jurisdiction of incorporation or organization)		13-2592361 (I.R.S. Employer Identification Number)

70 Pine Street, New York, New York (Address of principal executive offices)		10270 (Zip Code)
Registrant’s telephone number, including area code (212) 770-7000
NONE Former name, former address and former fiscal year, if changed since last report.

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


	YES [ X ]	NO [ ]

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


	YES [ X ]	NO [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of September 30, 2003: 2,607,945,672.

AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEET

(in millions)

(unaudited)

September 30,

December 31,

2003

2002

ASSETS:

Investments, financial services assets and cash:

Fixed maturities:

Bonds available for sale, at market value (amortized cost: 2003 — $271,105; 2002 — $232,121)

285,304

242,385

Bonds held to maturity, at amortized cost (market value: 2003 — $6,831; 2002 — $0)

6,784

—

Bond trading securities, at market value (cost: 2003 — $0; 2002 — $963)

—

981

Equity securities:

Common stocks (cost: 2003 — $6,602; 2002 — $6,152)

6,785

5,482

Non-redeemable preferred stocks (cost: 2003 — $1,738; 2002 — $1,678)

1,838

1,584

Mortgage loans on real estate, net of allowance (2003 — $106; 2002 — $110)

12,141

11,541

Policy loans

6,526

6,046

Collateral and guaranteed loans, net of allowance (2003 — $17; 2002 — $54)

2,523

2,341

Financial services assets:

Flight equipment primarily under operating leases, net of accumulated depreciation (2003 — $5,075; 2002 — $4,426)

29,370

26,867

Securities available for sale, at market value (cost: 2003 — $16,324; 2002 — $16,715)

16,294

16,687

Trading securities, at market value

3,269

4,146

Spot commodities, at market value

324

489

Unrealized gain on interest rate and currency swaps, options and forward transactions

17,341

15,376

Trading assets

4,221

4,786

Securities purchased under agreements to resell, at contract value

23,351

25,661

Finance receivables, net of allowance (2003 — $436; 2002 — $477)

16,757

15,857

Securities lending collateral

27,128

23,694

Other invested assets

15,713

12,680

Short-term investments, at cost (approximates market value)

14,478

6,993

Cash

949

1,165

Total investments, financial services assets and cash

491,096

424,761

Investment income due and accrued

5,046

4,297

Premiums and insurance balances receivable, net of allowance (2003 — $195; 2002 — $150)

15,147

13,088

Reinsurance assets

32,844

29,882

Deferred policy acquisition costs

24,577

22,256

Investments in partially-owned companies

1,409

1,575

Real estate and other fixed assets, net of accumulated depreciation (2003 — $4,043; 2002 — $3,727)

5,843

5,382

Separate and variable accounts

54,147

46,248

Goodwill

7,855

6,079

Other assets

9,692

7,661

Total assets

647,656

561,229

See Accompanying Notes to Financial Statements.

AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEET — (continued)

(in millions, except share amounts)

(unaudited)


				September 30,			December 31,
				2003			2002

LIABILITIES:
	Reserve for losses and loss expenses			$	58,448		$	51,539
	Reserve for unearned premiums				20,343			16,336
	Future policy benefits for life and accident and health insurance contracts				86,810			72,547
	Policyholders’ contract deposits				166,579			142,160
	Other policyholders’ funds				8,728			7,582
	Reserve for commissions, expenses and taxes				3,627			3,429
	Insurance balances payable				3,425			3,273
	Funds held by companies under reinsurance treaties				4,217			3,425
	Income taxes payable:
		Current			1,069			793
		Deferred			5,816			4,289
	Financial services liabilities:
		Borrowings under obligations of guaranteed investment agreements			14,093			14,850
		Securities sold under agreements to repurchase, at contract value			11,212			9,162
		Trading liabilities			4,219			3,825
		Securities and spot commodities sold but not yet purchased, at market value			5,241			11,765
		Unrealized loss on interest rate and currency swaps, options and forward transactions			13,083			11,265
		Trust deposits and deposits due to banks and other depositors			3,467			2,987
		Commercial paper			4,777			7,467
		Notes, bonds, loans and mortgages payable			49,411			43,233
	Commercial paper				2,846			1,645
	Notes, bonds, loans and mortgages payable				5,617			4,690
	Preferred shareholders’ equity in subsidiary companies subject to mandatory redemption				1,682			—
	Separate and variable accounts				54,147			46,248
	Minority interest				1,799			1,580
	Securities lending payable				27,128			23,694
	Other liabilities				21,516			12,189

			Total liabilities		579,300			499,973

	Preferred shareholders’ equity in subsidiary companies				186			2,153

CAPITAL FUNDS:
	Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued 2003 — 2,751,327,476; 2002 — 2,751,327,476				6,878			6,878
	Additional paid-in capital				583			607
	Retained earnings				58,422			52,270
	Accumulated other comprehensive income (loss)				3,711			691
	Treasury stock, at cost; 2003 — 143,381,804; 2002 — 141,726,645 shares of common stock				(1,424	)		(1,343	)

			Total capital funds		68,170			59,103

			Total liabilities, preferred shareholders’ equity in subsidiary companies and capital funds	$	647,656		$	561,229

See Accompanying Notes to Financial Statements.

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,
		2003			2002			2003			2002

Revenues:
	Premiums and other considerations	$	39,895		$	32,593		$	13,721		$	11,284
	Net investment income		12,314			11,214			4,104			3,840
	Realized capital gains (losses)		(1,348	)		(1,456	)		(360	)		(595	)
	Other revenues		8,263			7,598			2,841			2,621

	Total revenues		59,124			49,949			20,306			17,150

Benefits and expenses:
	Incurred policy losses and benefits		34,405			28,730			11,660			9,945
	Insurance acquisition & other operating expenses		14,861			12,764			5,142			4,476

	Total benefits and expenses		49,266			41,494			16,802			14,421

Income before income taxes and minority interest			9,858			8,455			3,504			2,729

Income taxes:
	Current		2,384			1,380			873			324
	Deferred		621			1,201			196			493

			3,005			2,581			1,069			817

Income before minority interest			6,853			5,874			2,435			1,912

Minority interest			(286	)		(251	)		(98	)		(70	)

Net income		$	6,567		$	5,623		$	2,337		$	1,842

Earnings per common share:
	Basic	$	2.52		$	2.15		$	0.90		$	0.70

	Diluted	$	2.50		$	2.13		$	0.89		$	0.70

Cash dividends per common share		$	0.159		$	0.131		$	0.065		$	0.047

Average shares outstanding:
	Basic		2,610			2,613			2,610			2,610

	Diluted		2,628			2,635			2,628			2,634

See Accompanying Notes to Financial Statements.

AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(unaudited)



		Nine Months
		Ended September 30.

		2003			2002

Cash Flows From Operating Activities:
Net Income		$	6,567		$	5,623

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		16,843			10,782
	Premiums and insurance balances receivable and payable — net		(1,795	)		(604	)
	Reinsurance assets		(2,962	)		(2,211	)
	Deferred policy acquisition costs		(2,128	)		(2,842	)
	Investment income due and accrued		(546	)		(635	)
	Funds held under reinsurance treaties		792			660
	Other policyholders’ funds		380			(296	)
	Current and deferred income taxes — net		1,513			1,101
	Reserve for commissions, expenses and taxes		132			119
	Other assets and liabilities — net		(472	)		(819	)
	Trading assets and liabilities — net		959			835
	Trading securities, at market value		877			1,004
	Spot commodities, at market value		165			(131	)
	Net unrealized (gain) loss on interest rate and currency swaps, options and forward transactions		(147	)		(588	)
	Securities purchased under agreements to resell		2,310			(1,163	)
	Securities sold under agreements to repurchase		2,050			(2,493	)
	Securities and spot commodities sold but not yet purchased, at market value		(6,524	)		417
Realized capital (gains) losses			1,348			1,456
Equity in income of partially-owned companies and other invested assets			(389	)		(129	)
Amortization of premium and discount on securities			(59	)		(118	)
Depreciation expenses, principally flight equipment			1,386			1,212
Change in cumulative translation adjustments			24			(275	)
Provision for finance receivable losses			312			279
Other — net			(55	)		(221	)

Total Adjustments			14,014			5,340

Net cash provided by operating activities		$	20,581		$	10,963

See Accompanying Notes to Financial Statements.

AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS — (Continued)

(in millions)

(unaudited)



		Nine Months
		Ended September 30,

		2003			2002

Cash Flows From Investing Activities:
	Cost of bonds, at market sold	$	73,483		$	64,222
	Cost of bonds, at market matured or redeemed		10,668			13,339
	Cost of equity securities sold		6,277			4,315
	Realized capital gains (losses)		(1,348	)		(1,456	)
	Purchases of fixed maturities		(112,221	)		(100,315	)
	Purchases of equity securities		(6,542	)		(4,653	)
	Mortgage, policy and collateral loans granted		(1,835	)		(2,214	)
	Repayments of mortgage, policy and collateral loans		1,282			1,417
	Sales of securities available for sale		4,410			2,899
	Maturities of securities available for sale		4,143			2,629
	Purchases of securities available for sale		(8,037	)		(4,270	)
	Sales of flight equipment		808			92
	Purchases of flight equipment		(4,313	)		(4,060	)
	Net additions to real estate and other fixed assets		(776	)		(447	)
	Sales or distributions of other invested assets		5,055			5,601
	Acquisitions, net of cash acquired		(2,091	)		—
	Investments in other invested assets		(7,737	)		(8,033	)
	Change in short-term investments		(319	)		(456	)
	Investments in partially-owned companies		219			(160	)
	Finance receivables originations and purchases		(9,466	)		(7,227	)
	Finance receivables principal payments received		8,254			5,803

Net cash used in investing activities			(40,086	)		(32,974	)

Cash Flows From Financing Activities:
	Change in policyholders’ contract deposits		15,035			18,853
	Change in trust deposits and deposits due to banks and other depositors		480			692
	Change in commercial paper		(1,488	)		(1,379	)
	Proceeds from notes, bonds, loans and mortgages payable		17,827			14,330
	Repayments on notes, bonds, loans and mortgages payable		(10,891	)		(7,922	)
	Proceeds from guaranteed investment agreements		3,957			5,640
	Maturities of guaranteed investment agreements		(4,714	)		(7,046	)
	Redemption of subsidiary company preferred stock		(371	)		(50	)
	Proceeds from common stock issued		44			145
	Cash dividends to shareholders		(415	)		(344	)
	Acquisition of treasury stock		(176	)		(732	)
	Other — net		1			19

Net cash provided by financing activities			19,289			22,206

Change in cash			(216	)		195
Cash at beginning of period			1,165			698

Cash at end of period		$	949		$	893

See Accompanying Notes to Financial Statements.

AMERICAN INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions)

(unaudited)



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

			2003			2002			2003			2002

Net income			$	6,567		$	5,623		$	2,337		$	1,842
Other comprehensive income:
	Unrealized appreciation (depreciation) of investments — net of reclassification adjustments			4,340			3,915			(3,249	)		3,986
		Deferred income tax (expense) benefit on changes		(1,529	)		(1,315	)		1,159			(1,388	)
	Foreign currency translation adjustments^(a)			(38	)		(283	)		(494	)		64
		Applicable income tax (expense) benefit on changes		54			(20	)		133			(72	)
	Net derivative gains (losses) arising from cash flow hedging activities			383			(566	)		261			(524	)
		Deferred income tax (expense) benefit on changes		(122	)		205			(94	)		179
	Retirement plan liabilities adjustment, net of tax			(68	)		(35	)		(2	)		(5	)

Other comprehensive income				3,020			1,901			(2,286	)		2,240

Comprehensive income			$	9,587		$	7,524		$	51		$	4,082


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

See Accompanying Notes to Financial Statements.

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

September 30, 2003

(unaudited)

1) Financial Statement Presentation

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

2) Segment Information

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



		Operating Segments


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

		2003			2002			2003			2002

Revenues^(a):
	General Insurance	$	25,258		$	19,156		$	8,958		$	6,647
	Life Insurance		25,844			23,558			8,532			8,005
	Financial Services		5,495			4,961			1,885			1,720
	Retirement Services & Asset Management		2,768			2,637			956			901
	Other		(241	)		(363	)		(25	)		(123	)

Consolidated		$	59,124		$	49,949		$	20,306		$	17,150

Operating income^(b):
	General Insurance	$	3,596		$	2,711		$	1,240		$	842
	Life Insurance		4,201			3,799			1,445			1,255
	Financial Services		1,762			1,568			609			552
	Retirement Services & Asset Management		917			808			333			228
	Other		(618	)		(431	)		(123	)		(148	)

Consolidated		$	9,858		$	8,455		$	3,504		$	2,729


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

^(b)	Represents income before income taxes and minority interest.

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

CONSOLIDATED STATEMENT OF SEGMENT OPERATIONS

(in millions)

(unaudited)



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

		2003			2002			2003			2002

General insurance operations:
	Net premiums written	$	26,053		$	20,202		$	8,966		$	7,085
	Change in unearned premium reserve		(2,721	)		(2,640	)		(675	)		(889	)

	Net premiums earned		23,332			17,562			8,291			6,196
	Net investment income		2,257			2,086			742			661
	Realized capital gains (losses)		(331	)		(492	)		(75	)		(210	)

	General insurance revenues		25,258			19,156			8,958			6,647

	Losses and loss expenses incurred		17,234			13,091			6,106			4,608
	Underwriting expenses		4,428			3,354			1,612			1,197

	General insurance benefits and expenses		21,662			16,445			7,718			5,805

	General insurance operating income		3,596			2,711			1,240			842

Life insurance operations:
	GAAP premiums		16,563			15,031			5,430			5,088
	Net investment income		10,057			9,128			3,362			3,179
	Realized capital gains (losses)		(776	)		(601	)		(260	)		(262	)

	Life insurance revenues		25,844			23,558			8,532			8,005

	Death and other benefits		8,168			7,814			2,799			2,630
	Increase in future policy benefits		9,003			7,825			2,755			2,707
	Acquisition and insurance expenses		4,472			4,120			1,533			1,413

	Life insurance benefits and expenses		21,643			19,759			7,087			6,750

	Life insurance operating income		4,201			3,799			1,445			1,255

Financial services operating income			1,762			1,568			609			552
Retirement services & asset management operating income			917			808			333			228
Other realized capital gains (losses)			(241	)		(363	)		(25	)		(123	)
Other income (deductions) — net			(377	)		(68	)		(98	)		(25	)

Income before income taxes and minority interest		$	9,858		$	8,455		$	3,504		$	2,729

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



		General Insurance


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

		2003			2002			2003			2002

Revenues:
	Domestic Brokerage Group	$	13,916		$	10,220		$	4,905		$	3,496
	Transatlantic		2,528			1,935			939			702
	Personal Lines		2,761			2,176			959			746
	Mortgage Guaranty		489			494			155			166
	Foreign General		5,597			4,329			1,996			1,532
	Reclassifications and Eliminations		(33	)		2			4			5

Total General Insurance		$	25,258		$	19,156		$	8,958		$	6,647

Operating Income:
	Domestic Brokerage Group	$	2,017		$	1,587		$	629		$	544
	Transatlantic		277			221			101			75
	Personal Lines		173			101			75			15
	Mortgage Guaranty		319			331			100			95
	Foreign General		1,136			946			408			317
	Reclassifications and Eliminations		5			17			2			6
	Realized capital gains (losses)		(331	)		(492	)		(75	)		(210	)

Total General Insurance		$	3,596		$	2,711		$	1,240		$	842

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



		Life Insurance


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

		2003			2002			2003			2002

Revenues:
	American International Assurance and Nan Shan Life	$	9,458		$	8,559		$	3,141		$	2,780
	ALICO and AIG Star Life		6,077			5,542			2,025			1,941
	Domestic Life		9,957			9,098			3,247			3,163
	Other		352			359			119			121

Total Life Insurance		$	25,844		$	23,558		$	8,532		$	8,005

Operating Income:
	American International Assurance and Nan Shan Life	$	1,385		$	1,205		$	483		$	398
	ALICO and AIG Star Life		1,324			1,095			466			396
	Domestic Life		2,149			2,000			730			692
	Other		119			100			26			31
	Realized capital gains (losses)		(776	)		(601	)		(260	)		(262	)

Total Life Insurance		$	4,201		$	3,799		$	1,445		$	1,255

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



		Financial Services


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

		2003			2002			2003		2002

Revenues:
	Aircraft Finance	$	2,272		$	2,096		$	785	$	729
	Capital Markets*		1,242			1,035			434		383
	Consumer Finance		1,957			1,838			664		611
	Other		24			(8	)		2		(3	)

Total Financial Services		$	5,495		$	4,961		$	1,885	$	1,720

Operating income:
	Aircraft Finance	$	548		$	588		$	190	$	207
	Capital Markets*		729			592			241		204
	Consumer Finance		489			409			174		144
	Other		(4	)		(21	)		4		(3	)

Total Financial Services		$	1,762		$	1,568		$	609	$	552


*	Represents AIG Financial Products Corp. and AIG Trading Group Inc.

3) Earnings per share

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

Computation of Earnings Per Share:



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

		2003			2002			2003			2002

Numerator:
Net income (applicable to common stock)		$	6,567		$	5,623		$	2,337		$	1,842

Denominator:
Basic:
Average outstanding shares used in the computation of per share earnings:
	Common stock		2,752			2,752			2,752			2,752
	Common stock in treasury		(142	)		(139	)		(142	)		(142	)

Average outstanding shares — basic			2,610			2,613			2,610			2,610

Diluted:
Average outstanding shares used in the computation of per share earnings:
	Common stock		2,752			2,752			2,752			2,752
	Common stock in treasury		(142	)		(139	)		(142	)		(142	)
Stock options and stock purchase plan (treasury stock method)			18			22			18			24

Average outstanding shares — diluted			2,628			2,635			2,628			2,634

Net income per share:
	Basic	$	2.52		$	2.15		$	0.90		$	0.70

	Diluted	$	2.50		$	2.13		$	0.89		$	0.70

AIG does not have any anti-dilutive shares.

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

4) Cash Flow Information

Cash flow information for the nine month periods ended September 30, 2003 and 2002 is as follows:


	2003		2002


	(in millions)
Income taxes paid	$	1,861	$	1,173
Interest paid	$	2,792	$	2,538

5) Acquisition, Restructuring and Related Charges

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

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

Of the total direct costs of $512 million, $444 million have been paid as of September 30, 2003, including approximately $28 million, $111 million and $305 million paid during the first nine months of 2003, and the twelve months of 2002 and 2001, respectively. In addition, during 2002, $32 million of liabilities were utilized to absorb other insignificant merger-related expenses. The balance, $36 million, is recorded as a component of “Other Liabilities” as of September 30, 2003.

With respect to the elimination of positions, 2,287 terminations were included in AIG’s original post-business combination plans. As of September 30, 2003, terminations totaled 2,123; including 409, 1,105 and 609 made during 2003, 2002 and 2001, respectively. The majority of the remaining 164 terminations are scheduled to occur in 2003, in accordance with AGC’s employee termination program.

The indirect costs of $851 million represented charges resulting from post-business combination plans, recognizing that certain assets will have no future economic benefit or ability to generate future revenues. Such charges include asset impairment charges related to software, leasehold improvements and certain goodwill. Also included were certain adjustments associated with conforming AGC’s balances to AIG’s existing accounting policies and methodologies. Of the $851 million, $793 million had been applied as at September 30, 2003, including $11 million, $113 million and $669 million in the first nine months of 2003, and the twelve months of 2002 and 2001, respectively. The balance, $58 million, is reflected as a component of “Other Liabilities” as of September 30, 2003.

6) Starr International Company, Inc. Plan

Starr International Company, Inc. (SICO) provides a Deferred Compensation Profit Participation Plan (SICO Plan) to certain AIG employees. The SICO Plan came into being in 1975 when the voting shareholders and Board of Directors of SICO, a private holding company whose principal asset consists of AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including AIG. Participation in the SICO Plan by any person, and the amount of such participation, is at the sole discretion of SICO’s Board of Directors, and none of the costs of the various benefits provided under such plan is paid by or charged to AIG. The SICO Plan provides that shares currently owned by SICO may be set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors may permit an early pay-out under certain circumstances. Prior to pay-out, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture

under certain conditions, including but not limited to the participant’s voluntary termination of employment with AIG prior to normal retirement age. In addition, SICO’s Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock. If the expenses of the SICO Plan had been reflected by AIG, the pre-tax amounts accrued would have been $96.3 million for the first nine months of 2003 and $37.0 million for the same period of 2002 and $32.1 million and $11.9 million for the third quarter 2003 and 2002, respectively.

7) 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) 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.

b) AIGFP and AIGTG each become parties to derivative financial instruments in the normal course of their business and to reduce currency, interest rate, commodity and equity exposures. Interest rate, currency, commodity and equity risks related to such instruments are reflected in the consolidated financial statements to the extent these instruments are carried at a market or a fair value, whichever is appropriate. The recorded estimated fair values of such instruments may be different than the values that might be realized if AIGFP and AIGTG were required to sell or close out the transactions prior to maturity.

AIGFP and AIGTG, in the ordinary course of their operations and as principal, structure derivative transactions to meet the needs of counterparties who may be seeking to hedge certain aspects of such counterparties’ operations. AIGFP and AIGTG may also enter into derivative transactions for their own account, primarily to manage risk. Such derivative transactions include interest rate, currency, commodity and equity swaps, swaptions, forward and option commitments. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. AIGFP and AIGTG typically become a principal in the exchange of interest payments between the parties and, therefore, may be exposed to loss, if counterparties default. Currency, commodity and equity swaps are similar to interest rate swaps, but involve the exchange of specific currencies or the cashflows based on the underlying commodity, and equity securities or indices. Also, they may involve the exchange of principal amounts at the beginning and end of the transaction. Swaptions are options where the holder has the right but not the obligation to enter into a swap transaction or cancel an existing swap transaction. At September 30, 2003, the notional principal amount of the sum of the swap pays and receives approximated $1,115.2 billion, primarily related to interest rate swaps of approximately $710.5 billion. The following tables provide the contractual and notional amounts of derivatives transactions, by maturity and type, of AIGFP and AIGTG at September 30, 2003 and December 31, 2002.

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

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

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



(in millions)


		Remaining Life of Notional Amount*

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


AIGFP and AIGTG interest rate, currency and equity swaps and swaptions:
Notional amount:
	Interest rate swaps	$	188,937	$	361,700	$	146,049	$	13,818	$	710,504	$	631,464
	Currency swaps		52,230		114,965		52,265		6,653		226,113		185,531
	Swaptions and equity swaps		125,111		30,869		21,266		1,312		178,558		186,014

Total		$	366,278	$	507,534	$	219,580	$	21,783	$	1,115,175	$	1,003,009


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

Futures and forward contracts are contracts for delivery of foreign currencies, commodities or financial indices in which the seller/purchaser agrees to make/take delivery at a specified future date of a specified instrument, at a specified price or yield. Options are contracts that allow the holder of the option to purchase or sell the underlying commodity, currency or index at a specified price and within, or at, a specified period of time. As a writer of options, AIGFP and AIGTG generally receive an option premium and then manage the risk of any unfavorable change in the value of the underlying commodity, currency or index. Risks arise as a result of movements in current market prices from contracted prices, and the potential inability of the counterparties to meet their obligations under the contracts. At September 30, 2003, the contractual amount of AIGFP’s and AIGTG’s futures, forward and option contracts approximated $340.0 billion.

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



(in millions)


	Remaining Life

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


Futures, forward and option contracts:
Exchange traded futures and options contracts contractual amount	$	14,145	$	953	$	105	$	—	$	15,203	$	23,859

Over the counter forward contracts contractual amount	$	307,002	$	13,733	$	4,006	$	36	$	324,777	$	219,099

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

In many cases, the credit risk associated with a designated portfolio is tranched into different layers of risk, which are then analyzed and rated by the credit rating agencies. Typically, there will be an equity layer covering the first credit losses in respect of the portfolio up to a specified percentage of the total portfolio, and then successive layers that are rated, generally a BBB rated layer, an A rated layer, an AA rated layer and an AAA rated layer. In transactions that are rated, the risk layer or tranche that is immediately junior to the threshold level above which AIGFP’s payment obligation would arise is rated AAA by the rating agencies. For that reason, the risk layer assumed by AIGFP with respect to the designated portfolio in these transactions is often called the “super senior” risk layer, defined as the layer of credit risk senior to a risk layer that has been

rated AAA by the credit rating agencies or if the transaction is not rated, equivalent thereto. For example, in a transaction with an equity layer covering credit losses from 0 to 2 percent of the total portfolio, a BBB rated layer covering credit losses from 2 to 4 percent, an A rated layer from 4 to 6 percent, an AA rated layer from 6 to 8 percent and a AAA rated layer from 8 to 11 percent, AIGFP would cover credit losses arising in respect of the portfolio that exceeded an 11 percent first loss threshold amount, and thereby bear risk that is senior to the 8 to 11 percent AAA rated risk layer.

AIGFP continually monitors the underlying portfolios to determine whether the credit loss experience for any particular portfolio has caused the likelihood of AIGFP having a payment obligation under the transaction to be super senior risk. AIGFP maintains the ability opportunistically to hedge specific securities in a portfolio thereby further limiting its exposure to loss and has hedged outstanding transactions in this manner on occasion. AIGFP has never had a payment obligation under these credit derivatives transactions. Furthermore, based on portfolio credit losses experienced to date under all outstanding transactions, no transaction has experienced credit losses in an amount that has made the likelihood of AIGFP having to make a payment, in AIGFP’s view, to be greater than remote, even in severe recessionary market scenarios. At September 30, 2003, the notional amount with respect to AIGFP’s credit derivative portfolio was $160.29 billion.

AIGFP and AIGTG utilize various credit enhancements, including letters of credit, guarantees, collateral, credit triggers, credit derivatives and margin agreements to reduce the credit exposure relating to these off-balance sheet financial instruments. AIGFP and AIGTG require credit enhancements in connection with specific transactions based on, among other things, the creditworthiness of the counterparties and the transaction’s size and maturity. In addition, AIGFP’s and AIGTG’s derivative transactions are generally documented under ISDA Master Agreements. Management believes that such agreements provide for legally enforceable set-off and close out netting of exposures to specific counterparties. Under such agreements, in connection with an early termination of a transaction, AIGFP and AIGTG are permitted to set-off their receivables from a counterparty against their payables to the same counterparty arising out of all included transactions. As a result, the net replacement value represents the net sum of estimated positive fair values after the application of such strategies, agreements and collateral held. Subsequent to the application of such credit enhancements, the net exposure to credit risk or the net replacement value of all interest rate, currency, commodity and equity swaps, options, swaptions, forward commitments, futures and forward contracts approximated $19.52 billion at September 30, 2003 and $17.38 billion at December 31, 2002. The net replacement value most closely represents the net credit risk to AIGFP and AIGTG or the maximum amount exposed to potential loss.

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

AIGFP and AIGTG determine counterparty credit quality by reference to ratings from independent rating agencies or, where such ratings are not available, by internal analysis. At September 30, 2003 and December 31, 2002, the counterparty credit quality with respect to the net replacement value of AIGFP’s and AIGTG’s derivatives portfolios were as follows:



(in millions)


		Net Replacement Value

		2003		2002



Counterparty credit quality:
	AAA	$	8,007	$	7,524
	AA		5,540		4,493
	A		4,811		3,626
	BBB		551		1,313
	Below investment grade		120		98
	Exchange traded futures and options^(a)		492		328

Total^(b)		$	19,521	$	17,382


^(a)	Exchange traded futures and options are not deemed to have significant credit exposures as the exchanges guarantee that every contract will be properly settled on a daily basis.
^(b)	The net replacement values with respect to exchange traded futures and options, forward contracts and purchased over the counter options are presented as a component of trading assets in the accompanying balance sheet. The net replacement values with respect to interest rate and currency swaps are presented as a component of unrealized gain on interest rate and currency swaps, options and forward transactions in the accompanying balance sheet.

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



(in millions)


	Net Replacement Value

	2003		2002


Non-U.S. banks	$	5,437	$	4,237
Insured municipalities		707		925
U.S. industrials		1,984		3,142
Governmental		696		557
Non-U.S. financial service companies		731		579
Non-U.S. industrials		1,724		1,596
Special purpose		3,640		3,252
U.S. banks		708		588
U.S. financial service companies		3,393		2,166
Supranationals		9		12
Exchanges^*		492		328

Total	$	19,521	$	17,382


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

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

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

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

Revenues for the nine months ended September 30, 2003 and 2002 from the Capital Markets operations (representing AIGFP and AIGTG) were $1.24 billion and $1.04 billion, respectively.

c) At September 30, 2003, ILFC had committed to purchase 470 aircraft deliverable from 2003 through 2010 at an estimated aggregate purchase price of $27.0 billion and had options to purchase 12 aircraft at an estimated aggregate purchase price of $776 million. 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.

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

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

AIG continues to receive claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter collectively referred to as environmental claims) and indemnity claims asserting injuries from asbestos. Estimation of asbestos and environmental claims loss reserves is a difficult process, as these claims, which emanate from policies written in 1984 and prior years, cannot be estimated by conventional reserving techniques. Asbestos and environmental claims development is affected by factors such as inconsistent court 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, 2003 ($2.11 billion gross; $690 million net) are believed to be adequate as these reserves are based on known facts and current law.

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

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

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



(in millions)


	2003						2002

	Gross			Net			Gross			Net


Asbestos:
Reserve for losses and loss expenses at beginning of year	$	1,304		$	400		$	1,114		$	312
Losses and loss expenses incurred*		163			54			187			100
Losses and loss expenses paid*		(224	)		(55	)		(143	)		(53	)

Reserve for losses and loss expenses at end of period	$	1,243		$	399		$	1,158		$	359

Environmental:
Reserve for losses and loss expenses at beginning of year	$	832		$	296		$	1,115		$	407
Losses and loss expenses incurred*		131			30			(62	)		(29	)
Losses and loss expenses paid*		(92	)		(35	)		(121	)		(50	)

Reserve for losses and loss expenses at end of period	$	871		$	291		$	932		$	328

Combined:
Reserve for losses and loss expenses at beginning of year	$	2,136		$	696		$	2,229		$	719
Losses and loss expenses incurred*		294			84			125			71
Losses and loss expenses paid*		(316	)		(90	)		(264	)		(103	)

Reserve for losses and loss expenses at end of period	$	2,114		$	690		$	2,090		$	687


*	All amounts pertain to policies underwritten in prior years.

8) Debt Outstanding

At September 30, 2003, AIG’s debt outstanding of $76.74 billion, shown below, included borrowings of $67.66 billion which were either not guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable. Borrowings at September 30, 2003 and December 31, 2002 were as follows:



(in millions)

		2003		2002


Borrowings under obligations of GIAs — AIGFP		$	14,093	$	14,850

Commercial Paper:
	ILFC^(a)		1,499		4,213
	AGF^(a)		3,007		2,956
	AIG Funding, Inc.		2,846		1,645
	AIG Credit Card Company (Taiwan)^(a)		259		234
	AIG Finance (Taiwan) Limited^(a)		12		64

	Total		7,623		9,112

Medium Term Notes:
	AGF^(a)		8,500		7,719
	ILFC^(a)		6,025		4,970
	AIG		806		998

	Total		15,331		13,687

Notes and Bonds Payable:
	AIGFP		17,424		16,940
	ILFC^(a)(b)		13,938		9,825
	AGF^(a)		2,204		2,266
	AIG		3,133		1,608
	AGC		1,243		1,542

	Total		37,942		32,181



(in millions)

		2003		2002


Loans and Mortgages Payable:
	AIG		373		697
	AIGCFG^(a)		564		735
	ILFC^(a)(c)		181		261
	AIG Finance (Hong Kong) Limited^(a)		200		229
	Other subsidiaries^(a)		437		133

	Total		1,755		2,055

	Total Borrowings		76,744		71,885

Borrowings not guaranteed by AIG			36,826		33,605
Matched GIA borrowings — AIGFP			14,093		14,850
Matched notes and bonds payable — AIGFP			16,741		16,526

			67,660		64,981

Remaining borrowings of AIG		$	9,084	$	6,904

^(a) AIG does not guarantee these borrowings.

^(b) Includes borrowings under Export Credit Facility of $1.9 billion.

^(c) Capital lease obligations.

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



(dollars in millions)

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


ILFC	$	1,499	$	1	$	1,500		1.07	%	27
AGF		3,007		2		3,009		1.06		29
Funding		2,846		2		2,848		1.04		26
AIGCCC — Taiwan*		259		1		260		1.70		77
AIGF — Taiwan*		12		—		12		1.13		38

Total	$	7,623	$	6	$	7,629		—		—


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

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



(in millions)

	2003		2002


Short-term borrowings	$	20,761	$	22,468
Long-term borrowings*		55,983		49,417

Total borrowings	$	76,744	$	71,885

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

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 borrowings may also be temporarily invested in securities purchased under agreements to resell.

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

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

facility and $1.375 billion in a five year revolving credit facility. The Facility can be used for general corporate purposes and also to provide backup for Funding’s commercial paper programs. There are currently no borrowings outstanding under the Facility, nor were any borrowings outstanding as of September 30, 2003.

AGF is a party to unsecured syndicated revolving credit facilities aggregating $3.0 billion. The facilities consist of $1.5 billion in a short-term revolving credit facility and $1.5 billion in a five year revolving credit facility, which support AGF’s commercial paper borrowings. There are currently no borrowings under these facilities, nor were any borrowings outstanding as of September 30, 2003. AGF had $2.8 billion in aggregate principal amount of debt securities registered and available for issuance at September 30, 2003. AGF uses the proceeds from the issuance of notes and bonds for the funding of its finance receivables.

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

ILFC is a party to unsecured syndicated revolving credit facilities aggregating $3.15 billion to support its commercial paper program. The facilities consist of $2.15 billion in a short-term revolving credit facility and $1.0 billion in a three year revolving credit facility. There are currently no borrowings outstanding under these facilities, nor were any borrowings outstanding as of September 30, 2003. On October 17, 2003, ILFC replaced its $3.15 billion loan facilities with new facilities totaling $4.2 billion with the same terms and conditions as the previous facilities.

At September 30, 2003, ILFC had increased the aggregate amount outstanding of its medium term and long term notes to $19.96 billion, a net increase of $5.17 billion from December 31, 2002 (of which $237 million results from foreign exchange translation), and recorded a net decline in its capital lease obligations of $80 million and a net decrease in its commercial paper of $2.71 billion. At September 30, 2003, ILFC had $11.08 billion of debt securities registered for public sale. During the nine months ended September 30, 2003, $5.61 billion of debt securities were issued. During the second quarter of 2003, ILFC expanded its Euro Medium Term Note Program to $5.0 billion, under which $2.81 billion in notes were sold through September 30, 2003. ILFC has substantially eliminated the currency exposure arising from foreign currency denominated notes by either hedging the notes through swaps or through the offset provided by operating lease payments. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

ILFC had a $4.3 billion Export Credit Facility for use in connection with the purchase of approximately 75 aircraft delivered through 2001. This facility was guaranteed by various European Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90 percent on these borrowings depending on the delivery date of the aircraft. At September 30, 2003, ILFC had $1.9 billion outstanding under this facility. The debt is collateralized by a pledge of the shares of a subsidiary of ILFC, which holds title to the aircraft financed under the facility. During the nine months ended September 30, 2003, ILFC entered into various bank financings for a total funded amount of $1.2 billion. The financings mature through 2009. One tranche of one of the loans totaling $410 million was funded in Japanese yen and swapped to US dollars. The interest rates are LIBOR based and ranged from 2.063 percent to 2.745 percent at September 30, 2003. Borrowings with respect to these facilities are included in Notes and Bonds Payable in the preceding table of borrowings.

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

AIGFP has established a Euro Medium Term Note Program under which an aggregate principal amount of up to $4.0 billion of notes may be outstanding. As of September 30, 2003, $3.30 billion of notes had been issued under the program, $3.08 billion of which are outstanding. Notes issued under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

has no current plans to issue the equity, equity-linked or capital securities included in the registration statement, but intends to continue its customary practice of issuing securities from time to time for general corporate purposes.

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

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

9) Information Provided in Connection with Outstanding Debt of AGC

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

Condensed Consolidating Balance Sheets


September 30, 2003		American
		International
		Group, Inc.		AGC		Other					Consolidated
		Guarantor		Issuer		Subsidiaries		Eliminations			AIG
(in millions)
Assets:
	Invested assets	$	2,301	$	—	$	497,931	$	(10,085	)	$	490,147
	Cash		7		—		942		—			949
	Carrying value of subsidiaries and partially owned companies, at equity		68,546		21,196		12,751		(101,084	)		1,409
	Other assets		2,729		2,701		151,397		(1,676	)		155,151

Total Assets		$	73,583	$	23,897	$	663,021	$	(112,845	)	$	647,656

Liabilities:
	Insurance liabilities	$	400	$	—	$	347,535	$	25		$	347,960
	Debt		3,938		2,823		79,864		(9,881	)		76,744
	Other liabilities		1,075		3,984		151,521		(1,984	)		154,596

Total Liabilities			5,413		6,807		578,920		(11,840	)		579,300

Preferred shareholders’ equity in subsidiary companies			—		—		186		—			186
Total Capital Funds			68,170		17,090		83,915		(101,005	)		68,170

Total Liabilities, Preferred Shareholders’ Equity in Subsidiary Companies and Capital Funds		$	73,583	$	23,897	$	663,021	$	(112,845	)	$	647,656


December 31, 2002		American
		International
		Group, Inc.		AGC		Other					Consolidated
		Guarantor		Issuer		Subsidiaries		Eliminations			AIG
(in millions)
Assets:
	Invested assets	$	1,208	$	—	$	428,496	$	(6,108	)	$	423,596
	Cash		18		1		1,146		—			1,165
	Carrying value of subsidiaries and partially owned companies, at equity		59,003		17,981		12,607		(88,016	)		1,575
	Other assets		2,450		2,714		130,049		(320	)		134,893

Total Assets		$	62,679	$	20,696	$	572,298	$	(94,444	)	$	561,229

Condensed Consolidating Balance Sheets — (continued)


December 31, 2002		American
		International
		Group, Inc.		AGC		Other					Consolidated
		Guarantor		Issuer		Subsidiaries		Eliminations			AIG
(in millions)
Liabilities:
	Insurance liabilities	$	422	$	—	$	296,474	$	(30	)	$	296,866
	Debt		2,606		3,200		72,356		(6,277	)		71,885
	Other liabilities		548		3,197		127,716		(239	)		131,222

Total liabilities			3,576		6,397		496,546		(6,546	)		499,973

Preferred shareholders’ equity in subsidiary companies			—		—		2,153		—			2,153
Total Capital Funds			59,103		14,299		73,599		(87,898	)		59,103

Total Liabilities, Preferred Shareholders’ Equity in Subsidiary Companies and Capital Funds		$	62,679	$	20,696	$	572,298	$	(94,444	)	$	561,229

Condensed Consolidating Statements of Income


Nine months ended September 30, 2003	American
	International
	Group, Inc.			AGC			Other						Consolidated
	Guarantor			Issuer			Subsidiaries			Eliminations			AIG
(in millions)
Operating income	$	354		$	—		$	10,122		$	—		$	10,476
Equity in undistributed net income of consolidated subsidiaries		5,887			1,254			—			(7,141	)		—
Dividend income from consolidated subsidiaries		832			180			—			(1,012	)		—
Other		(334	)		(72	)		(212	)		—			(618	)
Income taxes (benefits)		172			(14	)		2,847			—			3,005
Minority interest		—			—			(286	)		—			(286	)

Net income (loss)	$	6,567		$	1,376		$	6,777		$	(8,153	)	$	6,567


Nine months ended September 30, 2002	American
	International
	Group, Inc.			AGC			Other						Consolidated
	Guarantor			Issuer			Subsidiaries			Eliminations			AIG
(in millions)
Operating income	$	448		$	—		$	8,438		$	—		$	8,886
Equity in undistributed net income of consolidated subsidiaries		4,574			826			—			(5,400	)		—
Dividend income from consolidated subsidiaries		1,048			532			—			(1,580	)		—
Other		(187	)		(144	)		(100	)		—			(431	)
Income taxes (benefits)		260			(37	)		2,358			—			2,581
Minority interest		—			—			(251	)		—			(251	)

Net income (loss)	$	5,623		$	1,251		$	5,729		$	(6,980	)	$	5,623

Condensed Consolidating Statements of Income (continued)


Three months ended September 30, 2003	American
	International
	Group, Inc.			AGC			Other						Consolidated
	Guarantor			Issuer			Subsidiaries			Eliminations			AIG
(in millions)
Operating income	$	105		$	—		$	3,522		$	—		$	3,627
Equity in undistributed net income of consolidated subsidiaries		2,217			447			—			(2,664	)		—
Dividend income from consolidated subsidiaries		287			72			—			(359	)		—
Other		(140	)		(32	)		49			—			(123	)
Income taxes (benefits)		132			(11	)		948			—			1,069
Minority interest		—			—			(98	)		—			(98	)

Net income (loss)	$	2,337		$	498		$	2,525		$	(3,023	)	$	2,337


Three months ended September 30, 2002	American
	International
	Group, Inc.			AGC			Other						Consolidated
	Guarantor			Issuer			Subsidiaries			Eliminations			AIG
(in millions)
Operating income	$	161		$	—		$	2,716		$	—		$	2,877
Equity in undistributed net income of consolidated subsidiaries		1,369			461			—			(1,830	)		—
Dividend income from consolidated subsidiaries		610			54			—			(664	)		—
Other		(46	)		(77	)		(25	)		—			(148	)
Income taxes (benefits)		252			(37	)		602			—			817
Minority interest		—			—			(70	)		—			(70	)

Net income (loss)	$	1,842		$	475		$	2,019		$	(2,494	)	$	1,842

Condensed Consolidating Statements of Cash Flows


Nine months ended September 30, 2003		American
		International
		Group, Inc.			AGC			Other			Consolidated
		Guarantor			Issuer			Subsidiaries			AIG
(in millions)
Net cash provided by operating activities		$	806		$	1,269		$	18,506		$	20,581
Cash flows from investing:
	Invested assets disposed		(1,795	)		—			114,727			112,932
	Invested assets acquired		—			—			(150,151	)		(150,151	)
	Acquisitions, net of cash acquired		—			—			(2,091	)		(2,091	)
Other			(45	)		(836	)		105			(776	)

Net cash provided by (used in) investing activities			(1,840	)		(836	)		(37,410	)		(40,086	)

Cash flows from financing activities:
	Change in debts		1,554			(377	)		3,514			4,691
	Other		(531	)		(57	)		15,186			14,598

Net cash provided by (used in) financing activities			1,023			(434	)		18,700			19,289

Change in cash			(11	)		(1	)		(204	)		(216	)
Cash at beginning of period			18			1			1,146			1,165

Cash at end of period		$	7		$	—		$	942		$	949


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		$	7,359		$	10,963
Cash flows from investing:
	Invested assets disposed		(160	)		—			98,405			98,245
	Invested assets acquired		(79	)		—			(130,693	)		(130,772	)
Other			(29	)		(279	)		(139	)		(447	)

Net cash used in investing activities			(268	)		(279	)		(32,427	)		(32,974	)

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

10) Information with Respect to Certain Finance Subsidiary Registrants

a) 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.

b) AIG Liquidity Corp., a wholly-owned subsidiary of AIG, may from time to time enter into standby bond purchase agreements in respect of certain municipal bonds. In addition to, or as an alternative to entering into a standby purchase agreement, AIG Liquidity Corp. may from time to time issue direct-pay letters of credit in respect of such municipal bonds. AIG Liquidity Corp.’s payment obligations under each such standby purchase agreement or letter of credit will be fully and unconditionally guaranteed by AIG pursuant to a general guarantee relating to all standby purchase agreements or letters of credit or a specific guarantee relating to the relevant standby purchase agreement or letter of credit.

During the quarter ended September 30, 2003, AIG Liquidity Corp. offered payment obligations up to a maximum amount of $26.0 million under a standby purchase agreement in support of certain municipal bonds.

11) Accounting Standards

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

AIG guarantees the indebtedness of third parties principally in connection with AIG SunAmerica Inc.’s (AIG SunAmerica) investments in affordable housing properties. The guarantees are issued primarily to facilitate financing for the construction of the underlying properties, and range in duration of up to ten years. Since the inception of this investment program over ten years ago, payments under these guarantees have been insignificant. This is due to the fact that the loans are first backed by the creditworthiness of the third party general partner; and secondly, are secured by the underlying properties. The maximum exposure before consideration of the applicable security under these guarantees as of September 30, 2003 is approximately $2.9 billion.

In addition, AIG’s real estate investment operations will occasionally extend similar guarantees to real estate partnerships in which they are an investor. The guarantees facilitate financing for the construction, and/or purchase of land. There have been no payments to date under these guarantees. This is due to the fact that the loans are first backed by the creditworthiness of the third party general partner; and secondly, are secured by the underlying properties. The maximum exposure before consideration of the applicable security under these guarantees as of September 30, 2003 is approximately $175 million.

Through its ILFC subsidiary, AIG has also provided other types of guarantees. From time to time, ILFC participates with airlines, banks and other financial institutions to assist in financing aircraft by providing asset guarantees, put options or loan guarantees. Historically, losses arising from these guarantees have been immaterial, as ILFC has recourse to the value of the underlying aircraft, which offsets ILFC’s exposure, should ILFC be called upon to fulfill its obligations under these guarantees. The maximum exposure before consideration of the applicable security of these guarantees as of September 30, 2003 is approximately $964 million.

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

The provisions of FIN46 are to be applied immediately to VIEs created after January 31, 2003 and to VIEs in which AIG obtains an interest after that date. For VIEs in which AIG holds a variable interest that it acquired before February 1, 2003, FIN46 was to be applied at the beginning of the fiscal quarter ended September 30, 2003. However, the FASB, at its meeting on October 8, 2003, issued staff position 46-6, “Effective Date of FASB Interpretation No. 46, Consolidation of VIEs” (FSP46-6). FSP46-6 delayed the implementation provisions for entities created before February 1, 2003 to the fiscal quarter ended December 31, 2003. Therefore, AIG delayed implementation of the provisions of FIN46 related to entities created before February 1, 2003 from July 1, 2003 to December 31, 2003. For any VIEs that must be consolidated under FIN46 that were created before February 1, 2003, the assets, liabilities and noncontrolling interest of the VIEs will be initially measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change.

FASB continues to re-evaluate and potentially modify many of the provisions of FIN46. In its present form, AIG estimates that it will consolidate approximately $6 billion of assets and liabilities, and will record a one-time cumulative accounting charge upon adoption of FIN46 which will not have a material effect on AIG’s results of operations. Of that total approximately $3.5 billion relates to third party investments in Collateralized Bond and Loan Obligation trusts (collectively, Collateralized Debt Obligation trusts or CDO trusts), that are managed by AIG subsidiaries. The AIG subsidiaries receive fees for management of the assets held in the CDO trust, which support the issuance of securities sold by the CDO trust. AIG subsidiaries may take minority equity and/or fixed-income security interests in the CDO trust. AIG subsidiaries have entered into such arrangements to expand their asset management activities. In these structures, the third-party investors have recourse only to the CDO trust and have no recourse to AIG subsidiaries.

In addition, approximately $2 billion relates to other liabilities arising from AIG’s real estate partnerships, principally connected to affordable housing transactions involving AIG SunAmerica subsidiaries. Of the $2 billion, only approximately $200 million relates to third-party debt obligations and approximately $100 million relates to third-party equity.

Of the remainder, approximately $500 million involves ILFC and arises principally from a sale-leaseback transaction.

In addition to the VIE activities noted above, AIG uses VIEs primarily in connection with certain guaranteed investment contract programs (GIC Programs) written by its life insurance subsidiaries, certain products provided by AIGFP, and certain invested asset activities.

In the GIC Programs, AIG’s life insurance subsidiaries (principally SunAmerica Life Insurance Company) provide guaranteed investment contracts (GICs) to VIEs which are not controlled by that subsidiary or any other AIG entity and for which no AIG entity has a direct variable interest, as defined under FIN 46, in the entity. The VIE issues notes or bonds which are sold to third party institutional investors. Neither the insurance company issuing the GICs nor any other AIG entity has any obligation to the investors in the notes or bonds. The proceeds from the securities issued by the VIE are invested by the VIE in the GICs. The insurance company subsidiaries use their proceeds to invest in a diversified portfolio of securities, primarily investment grade bonds. Both the assets and the liabilities of the insurance companies arising from these GIC Programs are presented in AIG’s consolidated balance sheet. Thus, at September 30, 2003, approximately $34 billion of policyholders’ contract deposits represented liabilities from issuances of GICs included in these GIC Programs, offset by the proceeds from the issuances, which are included as insurance invested assets.

AIGFP uses VIEs as an integral part of its ongoing operations with respect to specific structured transactions with independent third parties. In most instances, AIGFP controls and manages the assets and liabilities with respect to these VIEs, subject to certain transaction specific limitations. These VIEs are fully consolidated by AIG. AIGFP also sponsors a VIE that issues commercial paper and secured liquidity notes to third-party institutional investors. This VIE uses the proceeds of these offerings to obtain beneficial interests in certain financial assets (total assets of approximately $865 million), which serve as collateral for the securities issued by the VIE. AIGFP provides credit and liquidity support to this VIE, which is not required to be consolidated by AIG pursuant to FIN 46.

AIG’s insurance operations also invest in assets of VIEs. These VIEs are established by unrelated third parties. Investments include collateralized mortgage backed securities and similar securities backed by pools of mortgages, consumer receivables or other assets. The investment in a VIE allows AIG’s insurance entities increased flexibility to purchase assets permitted by insurance regulations. These VIEs are not required to be consolidated by AIG pursuant to FIN 46.

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

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

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

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

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



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

			2003			2002			2003			2002
(in millions, except per share amounts)
Net income, as reported			$	6,567		$	5,623		$	2,337		$	1,842
Actual stock-based compensation recognized, net of tax				11			—			5			—

				6,578			5,623			2,342			1,842
Pro forma stock-based compensation, net of tax				43			42			14			14
Actual stock-based compensation recognized, net of tax				11			—			5			—

Net income, pro forma			$	6,524		$	5,581		$	2,323		$	1,828

Earnings per common share:
	Basic:
		Net income, as reported	$	2.52		$	2.15		$	0.90		$	0.70
		Stock-based compensation, net of tax		(0.02	)		(0.01	)		(0.01	)		—

		Net income, pro forma	$	2.50		$	2.14		$	0.89		$	0.70

	Diluted:
		Net income, as reported	$	2.50		$	2.13		$	0.89		$	0.70
		Stock-based compensation, net of tax		(0.02	)		(0.01	)		(0.01	)		—

		Net income, pro forma	$	2.48		$	2.12		$	0.88		$	0.70

Average shares outstanding:
Basic				2,610			2,613			2,610			2,610
Diluted				2,628			2,635			2,628			2,634

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

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

FAS 150 is effective for the quarter ending September 30, 2003. As of September 30, 2003, $1.68 billion of preferred instruments previously classified on AIG’s consolidated balance sheet as “Preferred shareholders’ equity in subsidiary companies” shall now be classified in a new liability caption entitled “Preferred shareholders’ equity in subsidiary companies subject to mandatory redemption.” Restatement of financial statements for prior periods is not permitted.

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1). FASB did not object to the issuance of SOP 03-1. This statement is effective as of January 1, 2004, and will require AIG to recognize a liability for guaranteed minimum death benefits and other living benefits related to its variable annuity and variable life contracts and modify certain disclosures and financial statement presentations for these products. AIG continues to evaluate the provisions of SOP 03-1. Management currently expects the one-time cumulative accounting charge upon adoption to approximate $200 million after income taxes, to be recorded in the first quarter of 2004, which is not material to AIG’s financial condition or liquidity.

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.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

Index


			Page

Executive Summary				28
	Consolidated Results			28
	Critical Accounting Estimates			30
	Operational Review			31
	General Insurance Operations			31
		General Insurance Results		32
		Reinsurance		34
		Reserve for Losses and Loss Expenses		35
		Asbestos and Environmental Claims		38
	Life Insurance Operations			40
		Life Insurance Results		41
		Underwriting and Investment Risk		42
	Financial Services Operations			43
		Financial Services Results		44
	Retirement Services & Asset Management Operations			46
		Retirement Services & Asset Management Results		47
	Other Operations			47
Capital Resources				47
	Borrowings			48
	Capital Funds			50
	Stock Repurchase			50
	Dividends from Insurance Subsidiaries			50
	Regulation and Supervision			50
	Contractual Obligations and Other
		Commercial Commitments		51
	Special Purpose Vehicles			51
Liquidity				52
Invested Assets				53
	Insurance Invested Assets			53
		Fixed Maturity Investments		54
		Credit Quality		54
		Equity Investments		54
		Valuation of Invested Assets		54
		Mortgage Investments		57
		Short-term Investments		57
		Real Estate Investments		57
		Other Investments		57
		Managing Market Risk		57
	Financial Services Invested Assets			59
		Managing Market Risk		61
Derivatives				63
	Counterparty Credit Quality			63
	Fair Value Source			64
	Notional Amounts			64
Accounting Standards				66
Recent Developments				69
Controls and Procedures				70

Executive Summary

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

(FLOW CHART)

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

Consolidated Results

AIG’s revenues in the first nine months of 2003 increased 18.4 percent to $59.12 billion when compared to $49.9 billion in the same period of 2002. Growth in revenues was primarily attributable to the

growth in net premiums earned from the global insurance operations. This growth was negatively impacted by realized capital losses incurred of $1.35 billion in 2003 compared to $1.46 billion in 2002.

AIG’s income before income taxes and minority interest increased 16.6 percent in the first nine months of 2003 when compared to the same period of 2002. General insurance operating income was the primary reason for this growth. Similarly, general insurance operating income was the primary factor in the 28.4 percent growth in AIG’s income before income taxes and minority interest for the third quarter of 2003 when compared to the third quarter of 2002.

AIG’s effective income tax rates were 30.48 percent for net income and 33.58 percent for realized capital gains (losses) in 2003 compared to 30.53 percent and 34.76 percent, respectively, in 2002.

AIG’s net income in the first nine months of 2003 increased 16.8 percent to $6.57 billion when compared to $5.62 billion in the same period of 2002. For the third quarter of 2003, AIG’s net income increased 26.9 percent to $2.34 billion when compared to $1.84 billion in the same period of 2002. For both the nine month and three month periods, general insurance operating income as well as reduced realized capital losses overall, were the primary factors for these increases over 2002.

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



(in millions)

		2003			2002


Revenues:
	General insurance^(a)	$	25,258		$	19,156
	Life insurance^(b)		25,844			23,558
	Financial services^(c)		5,495			4,961
	Retirement services & asset management^(d)		2,768			2,637
	Other		(241	)		(363	)

Total		$	59,124		$	49,949

Operating income:
	General insurance	$	3,596		$	2,711
	Life insurance		4,201			3,799
	Financial services		1,762			1,568
	Retirement services & asset management		917			808
	Other		(618	)		(431	)

Total		$	9,858		$	8,455

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

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

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

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

General Insurance: General insurance operating income increased 32.7 percent in the first nine months of 2003 compared to the same period in 2002. General insurance operating income increased 47.4 percent in the third quarter of 2003 when compared to the same period of 2002. These significant increases were primarily attributable to strong growth in operating income with respect to Domestic Brokerage Group’s and Foreign General’s operations. In addition, the level of realized capital losses with respect to general insurance operations amounted to $331 million and $492 million for the first nine months of 2003 and 2002, respectively, and $75 million and $210 million for the third quarter of 2003 and 2002, respectively.

Life Insurance: Life insurance operating income increased 10.6 percent in the first nine months of 2003 compared to the same period in 2002. This increase resulted from growth in each of AIG’s principal life insurance businesses, partially offset by realized capital losses of $776 million and $601 million for the first nine months of 2003 and 2002, respectively.

Financial Services: Financial services operating income increased 12.3 percent in the first nine months of 2003 compared to the same period in 2002, reflecting profits derived from a diversified range of businesses and products.

Retirement Services & Asset Management: Retirement services & asset management operating income increased 13.5 percent in the first nine months of 2003 when compared to the same period in 2002 as a result of the upturn in the stock market and the improved economic outlook.

Realized Capital Losses: During the first nine months of 2003 and third quarter of 2003, AIG’s realized capital losses aggregated $1.35 billion and $360 million, respectively. These realized capital losses primarily reflect impairment loss provisions. Upon the ultimate disposition of these holdings, a portion of these losses may be recovered depending on future market conditions.

Capital Resources: At September 30, 2003, AIG had total capital funds of $68.17 billion and total borrowings of $76.74 billion. At that date, $67.66 billion of such borrowings were either not

guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable.

During the period from January 1, 2003 through September 30, 2003, AIG repurchased in the open market 3,322,500 shares of its common stock.

Liquidity: At September 30, 2003, consolidated invested assets were $499.9 billion including $15.43 billion in cash and short-term investments. Consolidated net cash provided from operating activities in the first nine months of 2003 amounted to $20.58 billion.

Outlook

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

In the Life Insurance segment, AIG expects continued growth overall, focused in its major product lines such as Life Insurance, Personal Accident, Pension & Investment Products, and Group Life/Health. AIG continues to expand its operations in China, becoming the first foreign insurance organization to have wholly owned life insurance operations in Beijing, Suzhou, Dongguan and Jiangmen as well as previously established operations in Shanghai, Foshan, Guangzhou and Shenzhen. AIG also expects India, Korea and Vietnam to offer additional opportunities for growth. Asia, the largest region of Foreign Life, had good operating income and premium growth in the first nine months of 2003.

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

AIG has many promising growth initiatives underway around the world in its insurance and other operations. Cooperative agreements such as those in Russia and with the People’s Insurance Company of China are expected to expand distribution networks for AIG’s products and investment opportunities.

Critical Accounting Estimates

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

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

Reserves for Losses and Loss Expenses (General Insurance):


	•	Loss trend factors: used to establish expected loss ratios for subsequent accident years based on the projected loss ratio for prior accident years.

	•	Expected loss ratios for the latest accident year: i.e. accident year 2002 for the year end 2002 loss reserve analysis. For low frequency, high severity classes such as Excess Casualty and Directors and Officers Liability, expected loss ratios generally are utilized for at least the three most recent accident years.

	•	Loss development factors: used to project the reported losses for each accident year to an ultimate amount.

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


	•	Interest rates, which vary by territory, year of issuance and products.

	•	Mortality, morbidity and surrender rates based upon actual experience by geographical region modified to allow for variation in policy form.

	•	Restrictions exist with respect to the amount of current and prior operating income and current unrealized appreciation of investments which can inure to the benefit of AIG. Such restrictions have been imposed by local insurance regulations in certain countries in which AIG transacts business.

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


	•	Estimated future profitability of current business.

	•	Estimated gross profits to be realized over the estimated duration of the contracts (non-traditional life).

	•	Estimated gross profits, as described above, include investment income and gains and losses on investments less required interest, actual mortality and other expenses.

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


	•	Valuation models utilizing factors, such as market liquidity and current interest, foreign exchange and volatility rates.

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

Operational Review

General Insurance Operations

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

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

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

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

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

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

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

As previously noted, AIG believes it should present and discuss its financial information in a manner most meaningful to its investors. Accordingly, in its general insurance business, AIG uses certain non-GAAP measures, where AIG has determined these measurements to be useful and meaningful.

A critical discipline of a successful general insurance business is the objective to produce operating income from underwriting exclusive of investment related income. When underwriting is not profitable, premiums are inadequate to pay for insured losses and underwriting related expenses. In these situations, the addition of general insurance related investment income and realized capital gains may, however, enable a general insurance business to produce operating income. If underwriting losses persist over extended periods, an insurance company will likely not continue to exist as a going concern. For these reasons, AIG views underwriting profit to be critical in the overall evaluation of performance. Although in and of itself not a GAAP measurement, AIG believes this measurement is a useful and meaningful disclosure. (See also the discussion under “Liquidity” herein.)

General insurance operating income is comprised of underwriting profit, net investment income and realized capital gains and losses. These components, as well as net premiums written, net premiums earned and statutory ratios for the nine month periods ending September 30, 2003 and 2002 were as follows:



(in millions, except ratios)

		2003			2002


Net premiums written:
	DBG	$	14,734		$	11,030
	Transatlantic		2,472			1,843
	Personal Lines		2,704			2,369
	Mortgage Guaranty		390			381
	Foreign General		5,753			4,579

Total		$	26,053		$	20,202

Net premiums earned:
	DBG	$	12,829		$	9,379
	Transatlantic		2,319			1,745
	Personal Lines		2,644			2,107
	Mortgage Guaranty		365			376
	Foreign General		5,175			3,955

Total		$	23,332		$	17,562

Underwriting profit:
	DBG	$	721		$	402
	Transatlantic		75			31
	Personal Lines		73			10
	Mortgage Guaranty		208			222
	Foreign General		593			452

Total		$	1,670		$	1,117

Net investment income:
	DBG	$	1,296		$	1,185
	Transatlantic		202			190
	Personal Lines		100			91
	Mortgage Guaranty		111			109
	Intercompany adjustments and eliminations — net		5			17
	Foreign General		543			494

Total		$	2,257		$	2,086

Realized capital gains (losses)			(331	)		(492	)

Operating income		$	3,596		$	2,711

Domestic General:
	Loss Ratio		77.55			78.41
	Expense Ratio		16.69			17.86

Combined Ratio			94.24			96.27

Foreign General:
	Loss Ratio		60.94			61.25
	Expense Ratio		26.87			28.30

Combined Ratio			87.81			89.55

Consolidated:
	Loss Ratio		73.87			74.54
	Expense Ratio		18.94			20.23

Combined Ratio			92.81			94.77

General Insurance Results

During the first nine months of 2003, net premiums written and net premiums earned increased 29.0 percent and 32.9 percent, respectively, from those of 2002.

Commencing in the latter part of 1999 and continuing through and into the current quarter, the commercial property-casualty market place has experienced rate increases. Virtually all areas of DBG have experienced rate increases, as well as maintaining an excellent retention rate for desired renewal business. The vast majority of the increase in the first nine months of 2003 resulted from rate increases with respect to renewed business. Overall, DBG’s net premiums written increased $3.70 billion or 33.6 percent in the first nine months of 2003 over 2002. Adjusting this growth for cancelled or non-renewed business, such growth would have approximated 40 percent.

Personal Lines’ net premiums written increased 14.1 percent or $335 million in the first nine

months of 2003 from 2002, reflecting auto insurance rate increases in many states.

Foreign General insurance net premiums written increased 25.6 percent and net premiums earned increased 30.8 percent in the first nine months of 2003 when compared to the same period of 2002.

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

In comparing the average foreign currency exchange rates used to translate the results of AIG’s foreign general operations during the first nine months of 2003 to those average foreign currency exchange rates used to translate AIG’s Foreign General results during the same period of 2002, the U.S. dollar weakened slightly in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, when foreign net premiums written were translated into U.S. dollars for the purposes of the preparation of the consolidated financial statements, total general insurance net premiums written were approximately 1.8 percentage points more than they would have been if translated utilizing those average foreign currency exchange rates which prevailed during that same period of 2002.

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

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

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

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

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

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

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

The effects of catastrophes incurred in the first nine months of 2003 and 2002 were insignificant. With respect to catastrophe losses, AIG believes that it has taken appropriate steps to reduce the magnitude of possible future losses. The occurrence of one or more catastrophic events of unanticipated frequency or severity, such as a terrorist attack, earthquake, or hurricane, that causes insured losses, however, could have a material adverse effect on AIG’s results of operations, liquidity or financial condition. Current techniques and models may not accurately predict in the future the probability of catastrophic events and the extent of the resulting losses. Moreover, one or more catastrophe losses

could impact negatively AIG’s reinsurers and result in an inability of AIG to collect reinsurance recoverables. The impact of losses caused by catastrophes can fluctuate widely from period to period, making comparisons of recurring type business more difficult.

General insurance net investment income in the first nine months of 2003 increased 8.2 percent when compared to the same period of 2002. The invested cash flow resulting from the growth in net premiums written in this and prior periods had a positive impact on net investment income. (See also the discussion under “Liquidity” herein.)

General insurance realized capital losses were $331 million and $492 million in the first nine months of 2003 and 2002, respectively. These realized capital losses resulted from the ongoing management of the general insurance investment portfolios within the overall objectives of the general insurance operations and reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings. (See the discussion on “Valuation of Invested Assets” herein.)

General insurance operating income for the first nine months of 2003 increased 32.7 percent to $3.60 billion. The contribution of general insurance operating income to AIG’s consolidated income before income taxes and minority interest was 36.5 percent during the first nine months of 2003 compared to 32.1 percent in the same period of 2002.

Reinsurance

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

AIG’s general reinsurance assets amounted to $31.68 billion at September 30, 2003 and resulted from AIG’s reinsurance arrangements. Thus, a credit exposure existed at September 30, 2003 with respect to reinsurance recoverable to the extent that any reinsurer may not be able to reimburse AIG under the terms of these reinsurance arrangements. AIG manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound, and when necessary AIG holds substantial collateral in the form of funds, securities and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. At December 31, 2002, approximately 40 percent of the general reinsurance assets were from unauthorized reinsurers. In order to obtain statutory recognition, the majority of these balances were collateralized. The remaining 60 percent of the general reinsurance assets were from authorized reinsurers and over 90 percent of such balances are from reinsurers rated A-(excellent) or better, as rated by A.M. Best. Through September 30, 2003, these distribution percentages have not changed significantly. This rating is a measure of financial strength. The terms authorized and unauthorized pertain to regulatory categories, not creditworthiness.

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

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

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

At September 30, 2003, the general reinsurance assets of $31.68 billion include reinsurance recoverables for paid losses and loss expenses of $4.11 billion and $23.36 billion with respect to the ceded reserve for losses and loss expenses, including

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

Reserve for Losses and Loss Expenses

The table below classifies as of September 30, 2003 the components of the general insurance reserve for losses and loss expenses (loss reserves) with respect to major lines of business on a statutory basis*:



(in millions)

Other Liability Occurrence	$	15,513
Other Liability Claims Made		10,296
Workers Compensation		7,066
Auto Liability		5,417
International		3,215
Property		3,293
Reinsurance		2,177
Medical Malpractice		1,789
Aircraft		1,568
Products Liability		1,281
Accident & Health		1,132
Fidelity/Surety		1,008
Other		4,693

Total	$	58,448


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

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

At September 30, 2003, general insurance net loss reserves increased $4.35 billion from prior year end to $35.09 billion. The net loss reserves represent loss reserves reduced by reinsurance recoverables, net of an allowance for unrecoverable reinsurance. The methods used to determine such estimates and to establish the resulting reserves are continually reviewed and updated. Any adjustments resulting therefrom are reflected in operating income currently. It is management’s belief that the general insurance net loss reserves are adequate to cover all general insurance net losses and loss expenses as at September 30, 2003. There can be no assurance that AIG’s ultimate loss reserves will not adversely develop and materially exceed AIG’s loss reserves as of September 30, 2003. In the future, if the general insurance net loss reserves develop deficiently, such deficiency would have an adverse impact on future results of operations.

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

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

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

A number of actuarial assumptions are made in the review of reserves for each individual segment.

For segments in longer tail lines of business, actuarial assumptions generally are made with respect to the following:


	1.	Loss trend factors which are used to establish expected loss ratios for subsequent accident years based on the projected loss ratio for prior accident years.

	2.	Expected loss ratios for the latest accident year (i.e. accident year 2002 for the year end 2002 loss reserve analysis) and in some cases, for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend (See 1 above) and the impact of rate changes and other quantifiable factors. For low frequency, high severity classes such as Excess Casualty and Directors and Officers Liability (D & O), expected loss ratios generally are utilized for at least the three most recent accident years.

	3.	Loss development factors which are used to project the reported losses for each accident year to an ultimate basis.

AIG records quarterly changes in loss reserves for each of its many general insurance profit centers. The overall change in AIG’s loss reserves is based on the sum of these profit center level changes. For most profit centers which write longer tail classes of casualty coverage, the process of recording quarterly loss reserve changes involves determining the estimated current loss ratio for each class of coverage. This loss ratio is multiplied by the current quarter’s net earned premium for that class of coverage to determine the quarter’s total estimated net incurred loss and loss expense. The change in loss reserves for the quarter for each class is thus the difference between the net incurred loss and loss expense, estimated as described above, and the net paid losses and loss expenses in the quarter.

The process of determining the current loss ratio for each class or business segment begins in the profit centers in the latter part of the previous year. The loss ratios determined for each profit center are based on a variety of factors. These include, but are not limited to, the following considerations: prior accident year and policy year loss ratios; actual and anticipated rate changes; actual and anticipated changes in coverage, reinsurance, or mix of business; actual and anticipated changes in external factors impacting results, such as trends in loss costs or in the legal and claims environment. Each profit center’s loss ratio for the following year is subject to review by the profit center’s management, by actuarial and accounting staff, and ultimately by senior management. At the close of each quarter, the assumptions underlying the loss ratios are reviewed to determine if the loss ratios based thereon remain appropriate. This process includes a review of the actual claims experience in the quarter, actual rate changes achieved, actual changes in coverage, reinsurance or mix of business, and changes in all other factors that may affect the loss ratio. When this review suggests that the initially determined loss ratio is no longer appropriate, the loss ratio for current business would be changed to reflect the revised assumptions.

For profit centers or business segments writing short tail coverages, such as property coverages, the process of recording quarterly loss reserve changes is geared toward maintaining an appropriate reserve level for the outstanding exposure, rather than determining an expected loss ratio for current business. For example, the IBNR reserve required for a class of property business might be expected to approximate 20 percent of the latest year’s earned premium, and this level of reserve would be maintained regardless of the loss ratio emerging in the current quarter. The 20 percent factor would be adjusted to reflect changes in rate levels, loss reporting patterns, known exposures to large unreported losses, or other factors affecting the particular class of business.

A comprehensive annual loss reserve review is conducted in the fourth quarter of each year for each AIG general insurance subsidiary. These reviews are conducted in full detail for each class or segment of business for each subsidiary, and thus consist of literally hundreds of individual analyses. The purpose of these reviews is to confirm the reasonableness of the reserves carried by each of the individual subsidiaries, and thereby of AIG’s overall carried reserves. The reserve analysis for each business segment or class is performed by the actuarial personnel who are most familiar with that segment’s business. In completing these detailed actuarial reserve analyses, the actuaries are required to make numerous assumptions, including for example the

selection of loss development factors and loss cost trend factors. They are also required to determine and select the most appropriate actuarial method(s) to employ for each business segment. Additionally, they must determine the appropriate segmentation of data or segments from which the adequacy of the reserves can be most accurately tested. In the course of these detailed reserve reviews for each business segment, a point estimate of the loss reserve is generally determined. The sum of these point estimates for each of the individual business segments for each subsidiary provides an overall actuarial point estimate of the loss reserve for that subsidiary. The overall actuarial point estimate is compared to the subsidiary’s carried loss reserve. If the carried reserve can be supported by actuarial methods and assumptions which are also believed to be reasonable, then the carried reserve would generally be considered reasonable and no adjustment would be considered. The ultimate process by which the actual carried reserves are determined considers not only the actuarial point estimate but a myriad of other factors. Other crucial internal and external factors considered include a qualitative assessment of inflation and other economic conditions in the United States and abroad, changes in the legal, regulatory, judicial and social environments, underlying policy pricing, terms and conditions, and claims handling.

In the 2002 year-end actuarial loss reserve analysis for DBG, the more recent accident years showed significant increases in loss development for the excess casualty and directors and officers liability classes, as well as lesser amounts in certain other classes including healthcare liability. As a result, the actuaries performing the loss reserve analyses for these classes modified their historical assumptions in producing the point estimate of required reserves. A key modification was to give additional weight to the actual loss development in the immature years. For example, for the excess casualty lead umbrella segment, the actual loss developments for accident year 1999 were used, even though that development normally would have been considered too immature to produce reliable results (and therefore, not used under historical assumptions). Another key change for the most recent accident years (generally accident years 2000, 2001 and 2002) was, although the actuaries continued to use actuarial assumptions that rely on expected loss ratios based on the results of prior accident years, the expected loss ratio assumptions used gave far greater weight to more recent accident year experience than was the case in the historical assumptions. Thus for the excess casualty lead umbrella segment described above, the actuaries gave 100 percent weight to the results of the 1997 through 1999 accident years only, giving no weight to the more favorable development of all prior years, in setting expected loss ratio assumptions for accident years 2000 to 2002. Again, using the lead umbrella segment as an example, rather than using the historical loss trend factor of 2.5 percent per year as actually experienced, the actuaries used 7.5 percent as the annual loss cost trend factor, reflecting the more current experience. As a result of the modified assumptions, the actuaries developed a second point estimate of the net loss reserve for DBG.

Loss development trends for long tail lines such as Excess Casualty and D&O, however, have not followed any consistent trend. This has at times led to overstated loss ratio projections and is a key reason why the actuaries have customarily utilized the historical projection method, which gave more weight to the experience of older, more mature accident years. For long tail lines, judgment is required in analyzing the appropriate weighting of current trends to avoid overreacting to data anomalies that may distort such current trends. Given the accuracy of the historical approach and the uncertainty of the more recent trends, AIG management decided to give approximately equal weight to the point estimate of the required reserve resulting from the historical assumptions and the point estimate of the required reserve from the modified assumptions described above in determining the actual loss reserve carried at year-end 2002.

AIG’s annual loss reserve does not calculate a range of loss reserve estimates. Because AIG’s general insurance business is primarily in long tail casualty lines driven almost entirely by severity rather than frequency of claims, developing a range around loss reserve estimates would not be meaningful. An estimate is calculated which AIG’s actuaries believe provides a reasonable estimate of the required reserve. This amount is evaluated against actual carried reserves. It must be understood that there is the potential for significant variation in the actual results versus the assumptions used to test the reserves, particularly for the long tail casualty classes of business such as excess casualty. As an

example, for the lead umbrella segment of the excess casualty class of business, a 5 percent change in the assumed loss cost trend from each accident year to the next would cause approximately a $300 million impact (either positively or negatively) in the net loss and loss expense reserve position for that segment. As noted above, the modified assumptions used in the year-end 2002 loss reserve review adjusted the loss trend assumption from the historical 2.5 percent to 7.5 percent. Thus, this change in assumptions caused approximately a $300 million change in the overall AIG loss reserve position. In the early 1990’s actual loss cost trends were negative for the excess casualty class, whereas in the late 1990’s they spiked significantly and ran well into the double digits. Thus, while the 7.5 percent assumption used in the modified assumptions for year-end 2002 is believed to be reasonable, there can be no assurance that actual loss trends will not deviate significantly from this assumption. Another key assumption for long tail classes such as excess casualty is the loss development factors which are utilized to project the reported losses for each year to an ultimate basis. Generally, actual historical loss development factors are used to project future loss development. However, there can be no assurance that future loss development patterns will be the same as in the past. Again using the excess casualty class as an example, if future loss development factors differed by 5 percent from those utilized in the year-end 2002 loss reserve review, there would be approximately a $200 million impact to the overall AIG loss reserve position.

Asbestos and Environmental Claims

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

Estimation of asbestos and environmental claims loss reserves is a difficult process. These asbestos and environmental claims cannot be estimated by conventional reserving techniques 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, 2003 are believed to be adequate as these reserves are based on the known facts and current law. Furthermore, as AIG’s net exposure retained relative to the gross exposure written was lower in 1984 and prior years, the potential impact of these claims is much smaller on the net loss reserves than on the gross loss reserves. In the future, if the environmental claims develop deficiently, such deficiency would have an adverse impact on future results of operations. (See the

previous discussion on reinsurance collectibility herein.)

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

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

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




(in millions)


	2003						2002

	Gross			Net			Gross			Net


Asbestos:
Reserve for losses and loss expenses at beginning of year	$	1,304		$	400		$	1,114		$	312
Losses and loss expenses incurred*		163			54			187			100
Losses and loss expenses paid*		(224	)		(55	)		(143	)		(53	)

Reserve for losses and loss expenses at end of period	$	1,243		$	399		$	1,158		$	359

Environmental:
Reserve for losses and loss expenses at beginning of year	$	832		$	296		$	1,115		$	407
Losses and loss expenses incurred*		131			30			(62	)		(29	)
Losses and loss expenses paid*		(92	)		(35	)		(121	)		(50	)

Reserve for losses and loss expenses at end of period	$	871		$	291		$	932		$	328

Combined:
Reserve for losses and loss expenses at beginning of year	$	2,136		$	696		$	2,229		$	719
Losses and loss expenses incurred*		294			84			125			71
Losses and loss expenses paid*		(316	)		(90	)		(264	)		(103	)

Reserve for losses and loss expenses at end of period	$	2,114		$	690		$	2,090		$	687


*	All amounts pertain to policies underwritten in prior years.

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



(in millions)


	2003				2002

	Gross		Net		Gross		Net


Combined	$	1,039	$	284	$	1,022	$	283

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





		2003									2002

		Asbestos			Environmental			Combined			Asbestos			Environmental			Combined


Claims at beginning of year			7,085			8,995			16,080			6,670			9,364			16,034
Claims during year:
	Opened		335			944			1,279			752			1,283			2,035
	Settled		(62	)		(119	)		(181	)		(80	)		(456	)		(536	)
	Dismissed or otherwise resolved		(119	)		(1,146	)		(1,265	)		(287	)		(1,087	)		(1,374	)

Claims at end of period			7,239			8,674			15,913			7,055			9,104			16,159

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, 2003 and 2002 were as follows:

2003

2002

Gross

Net

Gross

Net

Involuntary survival ratios:

Asbestos

4.4

3.7

4.2

Environmental

16.4

11.8

17.9

13.9

Combined

7.7

7.1

7.1

7.5

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

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

Life Insurance Operations

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

AIG’s three principal overseas life operations are American Life Insurance Company (ALICO), American International Assurance Company, Limited together with American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and all of its business is written outside of the United States. ALICO has operations either directly or through subsidiaries in approximately 50 countries located in Europe, Africa, Latin America, the Caribbean, the Middle East, and the Far East, with Japan being the largest territory. In 2001, AIG added significantly to its presence in Japan with the acquisition of AIG Star Life Insurance Co., Ltd., (AIG Star Life) as a result of the reorganization of Chiyoda Mutual Life Insurance Company. AIA operates primarily in China (including Hong Kong), Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. AIG’s principal domestic

life insurance subsidiaries include AIG American General Life Companies, AIG Annuity Insurance Company and SunAmerica Life Insurance Company. These companies utilize multiple distribution channels including brokerage and career and general agents to offer traditional life products as well as financial investment products. (See also Note 2 of Notes to Financial Statements.)

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



(in millions)

			2003			2002


GAAP premiums:
	Domestic:
		Life Insurance	$	1,314		$	1,198
		Individual Fixed Annuities		40			28
		Individual Fixed Annuities — Runoff(a)		2			6
		Home Service		625			642
		Group Life/Health		765			729
		Pension and Investment Products		1,051			881
		Guaranteed Investment Contracts		14			34

	Total Domestic			3,811			3,518

	Foreign:
		Life Insurance		9,537			8,754
		Personal Accident		2,186			1,823
		Group Products		945			849
		Guaranteed Investment Contracts		84			87

	Total Foreign			12,752			11,513

	Total GAAP premiums		$	16,563		$	15,031

Net investment income:
	Domestic:
		Life Insurance	$	966		$	945
		Individual Fixed Annuities		2,156			1,851
		Individual Fixed Annuities — Runoff(a)		528			542
		Home Service		511			508
		Group Life/Health		87			80
		Pension and Investment Products		717			603
		Guaranteed Investment Contracts		1,628			1,622

	Total Domestic			6,593			6,151

	Foreign:
		Life Insurance		2,820			2,454
		Personal Accident		118			104
		Group Products		248			172
		Guaranteed Investment Contracts		288			256
		Intercompany Adjustments		(10	)		(9	)

	Total Foreign			3,464			2,977

Total net investment income			$	10,057		$	9,128

Realized capital gains (losses)				(776	)		(601	)

Total operating income			$	4,201		$	3,799

Life insurance in-force(b):
		Domestic	$	623,397		$	577,686
		Foreign(c)		783,040			746,765

Total			$	1,406,437		$	1,324,451

(a) Represents runoff annuity business largely sold through discontinued distribution channels.

(b) Amounts presented were as at September 30, 2003 and December 31, 2002.

Life Insurance Results

Life insurance operating income increased 10.6 percent to $4.20 billion during the first nine months of 2003 when compared to the same period last year.

The contribution of life insurance operating income to AIG’s consolidated income before income taxes and minority interest amounted to 42.6 percent during the first nine months of 2003 compared to 44.9 percent in the same period of 2002. Contributing to the group’s performance were improved profit margins resulting from expense reductions, redeployment of invested assets achieving increased yields, monitoring of crediting rates to maintain margins and increased production of protection policies in Asia.

AIG’s GAAP life premiums during the first nine months of 2003 increased by $1.53 billion, representing a 10.2 percent increase from the same period in 2002. Domestically, the growth is predominantly attributable to the Pension & Investment Products (which include structured settlements), Life Insurance and Group Life/Health. With respect to the Foreign Life segment, the majority of the growth was attributable to the Life Insurance and Personal Accident lines of business. This growth was most significant in Southeast Asia where AIG maintains significant market share established by its strong agency force and in Japan where AIG is benefiting from a flight to quality. Foreign life operations produced 77.0 percent and 76.6 percent of AIG’s consolidated GAAP life premiums in 2003 and 2002, respectively.

New cash flows from guaranteed investment contract (GIC) sales were lower for the first nine months of 2003 compared to the same period in 2002 which is attributable to the opportunistic nature of the business, and that AIG subsidiaries only issue GICs when interest rate spreads are favorable.

While this has an impact on overall cash flow, there is an immaterial impact on life GAAP premiums, net investment income and operating income.

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

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

As previously discussed, the U.S. dollar weakened slightly in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, for the first nine months of 2003, when foreign life premiums were translated into U.S. dollars for purposes of the preparation of the consolidated financial statements, total life premiums were approximately 1.9 percentage points more than they would have been if translated utilizing average exchange rates prevailing in 2002.

Life insurance net investment income increased 10.2 percent during the first nine months of 2003. The growth in net investment income was attributable to both foreign and domestic invested new cash flow for investment as well as returns on nontraditional investments. This cash flow was generated from life insurance operations and included the compounding of previously earned and reinvested net investment income. (See also the discussion under “Liquidity” herein.)

Life insurance realized capital losses for the first nine months were $776 million in 2003 and $601 million in 2002. These realized capital losses resulted from the ongoing management of the life insurance investment portfolios within the overall objectives of the life insurance operations and reflect continued weakness in the equity markets and impairment loss provisions for both equity and fixed income holdings. (See the discussion on “Valuation of Invested Assets” herein.)

Underwriting and Investment Risk

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

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

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

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

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

associated with certain policies currently in force which will have premium receipts in the future. That is, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.

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

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

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

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

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

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

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

Financial Services Operations

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

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

During the third quarter, AIG combined the operations of AIG Financial Products Corp and its subsidiaries (AIGFP) and AIG Trading Group Inc. and its subsidiaries (AIGTG) into a Capital Markets reporting unit. AIGFP engages as principal in standard and customized interest rate, currency, equity, and credit products with top tier corporations, financial institutions, governments, agencies, institutional investors, and high net worth individuals throughout the world. AIGFP also raises funds through municipal re-investment contracts and other private and public security offerings, investing the proceeds in a diversified portfolio of high grade securities and derivative transactions. AIGTG engages in various commodity and foreign exchange trading and market making activities. (See also Note 2 of Notes to Financial Statements.)

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

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



(in millions)

	2003			2002


Revenues:
Aircraft Finance^(a)	$	2,272		$	2,096
Capital Markets^(b)		1,242			1,035
Consumer Finance^(c)		1,957			1,838
Other		24			(8	)

Total	$	5,495		$	4,961

Operating income:
Aircraft Finance	$	548		$	588
Capital Markets		729			592
Consumer Finance		489			409
Other, including intercompany adjustments		(4	)		(21	)

Total	$	1,762		$	1,568

^(a) Revenues were from ILFC aircraft lease rentals.

^(b) Revenues were primarily fees from AIGFP and AIGTG proprietary positions entered into in connection with counterparty transactions.

^(c) Revenues were primarily finance charges.

Financial Services Results

Financial services operating income increased 12.3 percent in the first nine months of 2003 over the same period of 2002. Financial services operating income represented 17.9 percent of AIG’s consolidated income before income taxes and minority interest in the first nine months of 2003. This compares to 18.6 percent in the same period of 2002.

ILFC generates its revenues primarily from leasing new and used commercial jet aircraft to domestic and foreign airlines. Revenues also result from the remarketing of commercial jets for its own account, for airlines and for financial institutions. Revenues in the first nine months of 2003 increased 8.4 percent from the same period of 2002. The revenue growth resulted primarily from the increase in flight equipment under operating lease and the increase in the relative cost of the leased fleet. ILFC has historically derived over 80 percent of its lease revenues with respect to flight equipment from airlines based outside the United States and is not significantly exposed to current domestic airline difficulties. Passenger miles in Asia, a major market for ILFC, have increased substantially as the risk of SARS has abated.

ILFC typically contracts to re-lease aircraft before the end of the existing lease term. For aircraft returned before the end of the lease term, ILFC has generally been able to re-lease such aircraft within two to six months of its return. While some of the lease rates for aircraft that have been redeployed are lower, this is partially offset by low interest rates, which reduce ILFC’s financing costs. As a lessor, ILFC considers an aircraft “idle” or “off lease” when the aircraft is not subject to a signed lease agreement or signed letter of intent. There were no aircraft off lease at September 30, 2003. All new aircraft deliveries in 2003 and 2004 have been leased.

At the conclusion of the third quarter, ILFC entered into a securitization of a portfolio of 37 aircraft, of which nine are to be transferred into this securitization subsequent to September 30, 2003. Certain of AIG’s life insurance and retirement services businesses purchased a large share of this securitization. This transaction had an insignificant impact on the results of the consolidated operations of AIG.

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

During the first nine months of 2003, ILFC’s operating income decreased 6.7 percent from the same period of 2002 principally due to the impact of

certain bankruptcy and other settlements received in 2002.

ILFC finances its purchases of aircraft primarily through the issuance of a variety of debt instruments. The composite borrowing rates at the end of the first nine months of 2003 and 2002 were 4.63 percent and 4.95 percent, respectively. (See also the discussions under “Capital Resources” and “Liquidity” herein and Note 2 of Notes to Financial Statements.)

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

AIGFP and AIGTG derive substantially all their revenues from proprietary positions entered in connection with counterparty transactions rather than from speculative transactions. AIGFP and AIGTG participate in the derivatives dealer market conducting, primarily as principal, an interest rate, currency, equity, commodity and credit derivative products business. As dealers, AIGFP and AIGTG mark their transactions daily to fair value. Thus, a gain or loss on each transaction is recognized daily. AIGFP and AIGTG hedge the market risks arising from their transactions. Therefore, revenues and operating income are not significantly exposed to or affected by market fluctuations and volatility. Revenues of AIGFP and AIGTG and the percentage change in revenues for any given period are significantly affected by the number and size of transactions entered into by AIGFP and AIGTG 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. Generally, the realization of operating income as measured by the receipt of funds over the course of time is not a significant reporting event as the profit or loss on AIGFP’s and AIGTG’s derivatives transactions have already been reflected in operating income at fair value at the inception.

Capital Markets revenues in the first nine months of 2003 increased 20.0 percent from the same period of 2002. During the first nine months of 2003, operating income increased 23.1 percent from the same period of 2002. Such increases in revenues and operating income were attributable to AIGFP’s interest rate business segment. As AIGFP and AIGTG are transaction-oriented operations, current and past revenues and operating results may not provide a basis for predicting future performance. The breakdown by percentage contribution of revenues and operating income for AIGFP and AIGTG in the first nine months of 2003 and 2002 is set forth below. The percentages for operating income are the same as those for revenues because expenses are allocated across all products in proportion to the revenues generated by that product. Material changes in the distribution of revenues and operating income from period to period are not unusual due to the transactional nature of AIGFP’s and AIGTG’s business.




	2003			2002


Spread Income on Investments and Borrowings		33	%		44	%
Interest Rate and Currency Products		38			24
Commodity and Commodity Linked Products		3			7
Equity Linked Products		3			3
Credit Linked Products		22			21
Other revenue		1			1

Derivative transactions are entered into in the ordinary course of AIGFP’s and AIGTG’s business. Therefore, income on interest rate, equity, commodity and credit derivatives along with their related hedges are recorded on a mark to market value or at estimated fair value where market prices are not readily available with the resulting unrealized gains or losses reflected in the income statement in the current year. In the first nine months of 2003, less than five percent of revenues resulted from transactions valued at estimated fair value. The mark to fair value of derivative transactions is reflected in the balance sheet in the captions “Unrealized gain on interest rate and currency swaps, options and forward transactions” and “Unrealized loss on interest rate and currency swaps, options and forward transactions”. The unrealized gain represents the

aggregate of each net receivable by counterparty, and the unrealized loss represents the aggregate of each net payable by counterparty. These amounts will change from one period to the next due to changes in interest rates, currency rates, equity prices and other market variables, as well as cash movements, execution of new transactions and the maturing of existing transactions. Spread income on investments and borrowings are recorded on an accrual basis over the life of the transaction. Investments are classified as available for sale securities and are marked to market with the resulting unrealized gains or losses reflected in the equity section.

The most significant component of AIGFP’s and AIGTG’s operating expenses is compensation, which approximated 33 percent and 34 percent of revenues in the first nine months of 2003 and 2002, respectively.

Domestically, AIG’s consumer finance operations derive a substantial portion of their revenues from finance charges assessed on outstanding mortgages and finance receivables from the sub-prime market, while overseas operations are engaged in developing a multi-product consumer finance business with an emphasis on emerging markets. Revenues increased 6.5 percent in the first nine months of 2003 from the same period in 2002; operating income increased 19.4 percent compared to the 2002 period. The increase in revenues was the result of growth in average finance receivables and credit quality continues to be strong. Further reductions of the cost to borrow led to an improvement in the operating income over the previous period.

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

Retirement Services & Asset Management Operations

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

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

For variable annuities, AIG’s policy has been to adjust amortization assumptions for DAC when estimates of current or future gross profits to be realized from these contracts are revised. With respect to variable annuities sold domestically (representing the vast majority of AIG’s variable annuity business), the assumption for the long-term annual net growth rate of the equity markets used in the determination of DAC amortization is approximately 10 percent. A methodology referred to as “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 $58 million and $54 million for the nine months ended September 30, 2003 and 2002, respectively. In accordance with GAAP, AIG expenses these benefits in the period paid.

Retirement services & asset management operations for the nine month periods ending September 30, 2003 and 2002 were as follows:



(in millions)

	2003		2002


Revenues:
AIG VALIC	$	1,702	$	1,606
AIG SunAmerica		388		454
Other*		678		577

Total	$	2,768	$	2,637

Operating income:
AIG VALIC	$	675	$	572
AIG SunAmerica		23		57
Other*		219		179

Total	$	917	$	808


*	Includes AIG Global Investment Group and certain overseas variable annuity operations.

Retirement Services & Asset Management Results

Retirement services & asset management operating income in the first nine months of 2003 increased 13.5 percent when compared to the same period of 2002 as a result of the upturn in the stock market and the improved economic outlook.

Retirement services & asset management operating income represented 9.3 percent of AIG’s consolidated income before income taxes and minority interest in the first nine months of 2003. This compares to 9.6 percent in the same period of 2002.

At September 30, 2003, AIG’s third party assets under management, including both retail mutual funds and institutional accounts, approximated $45 billion.

Other Operations

Other realized capital losses amounted to $241 million and $363 million in the first nine months of 2003 and 2002, respectively.

Other income (deductions)-net includes income generated by the investment of capital held by AIG SunAmerica outside of its life insurance subsidiaries, AIG’s equity in certain minor majority-owned subsidiaries and certain partially-owned companies, realized foreign exchange transaction gains and losses in substantially all currencies and unrealized gains and losses in hyperinflationary currencies, as well as the income and expenses of the parent holding company and other miscellaneous income and expenses. In the first nine months of 2003, other income (deductions) — net amounted to $(377) million. In the same period of 2002, other income (deductions) — net amounted to $(68) million. This decline was primarily the result of increases in pension, interest and administrative expenses, as well as the capital contribution of certain AIG SunAmerica partnership investments previously included herein to the life insurance and retirement services operations.

Income before income taxes and minority interest amounted to $9.86 billion in the first nine months of 2003 compared to $8.46 billion in the same period of 2002.

In the first nine months of 2003, AIG recorded a provision for income taxes of $3.01 billion compared to the provision of $2.58 billion in the same period of 2002. These provisions represent effective tax rates of 30.5 percent in the first nine months of 2003 and 2002.

Minority interest represents minority shareholders’ equity in income of certain majority-owned consolidated subsidiaries. Minority interest amounted to $286 million and $251 million in the first nine months of 2003 and 2002, respectively.

Net income amounted to $6.57 billion in the first nine months of 2003 and $5.62 billion in the same period of 2002. The increases in net income over the periods resulted from those factors described above.

Capital Resources

At September 30, 2003, AIG had total capital funds of $68.17 billion and total borrowings of $76.74 billion. At that date, $67.66 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, 2003 and December 31, 2002 were as follows:



(in millions)

		2003		2002


GIAs — AIGFP		$	14,093	$	14,850

Commercial Paper:
	ILFC^(a)		1,499		4,213
	AGF^(a)		3,007		2,956
	AIG Funding, Inc. (Funding)		2,846		1,645
	AIG Credit Card Company (Taiwan)^(a)		259		234
	AIG Finance (Taiwan) Limited^(a)		12		64

	Total		7,623		9,112

Medium Term Notes:
	AGF^(a)		8,500		7,719
	ILFC^(a)		6,025		4,970
	AIG		806		998

	Total		15,331		13,687

Notes and Bonds Payable:
	AIGFP		17,424		16,940
	ILFC^(a)(b)		13,938		9,825
	AGF^(a)		2,204		2,266
	AIG		3,133		1,608
	AGC		1,243		1,542

	Total		37,942		32,181

Loans and Mortgages Payable:
	AIG		373		697
	AIGCFG^(a)		564		735
	ILFC^(a)(c)		181		261
	AIG Finance (Hong Kong) Limited^(a)		200		229
	Other subsidiaries^(a)		437		133

	Total		1,755		2,055

	Total Borrowings		76,744		71,885

Borrowings not guaranteed by AIG			36,826		33,605
Matched GIA borrowings — AIGFP			14,093		14,850
Matched notes and bonds payable — AIGFP			16,741		16,526

			67,660		64,981

Remaining borrowings of AIG		$	9,084	$	6,904

^(a) AIG does not guarantee these borrowings.

^(b) Includes borrowings under Export Credit Facility of $1.9 billion.

^(c) Capital lease obligations.

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



(dollars in millions)

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


ILFC	$	1,499	$	1	$	1,500		1.07	%		27
AGF		3,007		2		3,009		1.06			29
Funding		2,846		2		2,848		1.04			26
AIGCCC — Taiwan*		259		1		260		1.70			77
AIGF — Taiwan*		12		—		12		1.13			38

Total	$	7,623	$	6	$	7,629		—			—


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

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



(in millions)

	2003		2002


Short-term borrowings	$	20,761	$	22,468
Long-term borrowings^*		55,983		49,417

Total borrowings	$	76,744	$	71,885


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

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

through Funding’s commercial paper program. (See also the discussion under “Derivatives” herein.)

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

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

under this program are included in Notes and Bonds Payable in the preceding table of borrowings.

During the first nine months of 2003, AIG did not issue any medium term notes and $192 million of previously issued notes matured. At September 30, 2003, AIG had $140 million in aggregate principal amount of debt securities registered for issuance from time to time. AIG has filed a universal shelf registration statement to sell up to $5.1 billion of debt securities, preferred and common stock and other securities. AIG has no current plans to issue the equity, equity-linked or capital securities included in the registration statement, but intends to continue its customary practice of issuing securities from time to time for general corporate purposes.

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

Capital Funds

AIG’s capital funds increased $9.07 billion during the first nine months of 2003. Unrealized appreciation of investments, net of taxes increased $2.81 billion. During the first nine months of 2003, the cumulative translation adjustment loss, net of taxes, decreased $16 million. The change from period to period with respect to the unrealized appreciation of investments, net of taxes was primarily impacted by the decrease in domestic interest rates. During the first nine months of 2003, there was a gain of $261 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 2003, retained earnings increased $6.15 billion, resulting from net income less dividends.

Stock Repurchase

During the period from January 1, 2003 through September 30, 2003, AIG repurchased in the open market 3,322,500 shares of its common stock. AIG intends to continue to buy its common stock for general corporate purposes, including to satisfy its obligations under various employee benefit plans.

Dividends from Insurance Subsidiaries

Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by statutory authorities. AIG has in the past reinvested most of its unrestricted earnings in its operations and believes such continued reinvestment in the future will be adequate to meet any foreseeable capital needs. However, AIG may choose from time to time to raise additional funds through the issuance of additional securities. At September 30, 2003, there were no significant statutory or regulatory issues which would impair AIG’s financial condition, results of operations or liquidity. To AIG’s knowledge, no AIG company is on any regulatory or similar “watch list”. (See also the discussion under “Liquidity” herein.)

Regulation and Supervision

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

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

Contractual Obligations and Other Commercial Commitments

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

(in millions)



		Payments due by Period

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


Borrowings*		$	69,121	$	20,761	$	14,491	$	10,994	$	22,875
Aircraft Purchase Commitments			27,049		889		10,155		9,352		6,653
Other Long-Term Obligations:
	ILFC		468		6		462		—		—

Total		$	96,638	$	21,656	$	25,108	$	20,346	$	29,528


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

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

(in millions)

Amount of Commitment Expiration

Total

Less

Amounts

than 1

1-3

4-5

After 5

September 30, 2003

Committed

year

years

Letters of Credit:

AIG SunAmerica

153

—

Standby Letters of Credit: