1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
For Quarter Ended March 31, 1994 Commission File Number 0-4652
AMERICAN INTERNATIONAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2592361
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
70 Pine Street, New York, New York 10270
- - ---------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-7000
NONE
- - -----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1994 316,874,728.
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AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
(unaudited)
MARCH 31, 1994 DECEMBER 31, 1993
-------------- -----------------
ASSETS:
Investments and cash:
Fixed maturities:
Bonds held to maturity, at amortized cost (market value: 1994-$12,921,000;
1993-$13,278,300) $ 12,424,812 $ 12,193,701
Bonds available for sale, at market value (cost: 1994-$17,342,600;
1993-$16,599,600) 17,802,072 17,562,411
Bonds trading securities, at market value (cost: 1994-$277,900; 1993-$307,900) 262,452 310,834
Preferred stocks, at amortized cost (market value: 1994-$26,100; 1993-$18,000) 12,668 17,428
Equity securities:
Common stocks (cost: 1994-$4,021,700; 1993-$3,720,000) 4,682,316 4,364,410
Non-redeemable preferred stocks (cost: 1994-$99,400; 1993-$108,200) 131,915 123,837
Mortgage loans on real estate, policy and collateral loans 4,259,845 3,576,516
Financial services assets:
Flight equipment primarily under operating leases, net of accumulated
depreciation 9,188,413 8,555,356
Securities available for sale, at market value (cost: 1994-$5,655,900;
1993-$4,971,800) 5,669,472 4,991,105
Trading securities, at market value 2,016,531 2,516,166
Spot commodities, at market value 908,448 764,215
Net unrealized gain on interest rate and currency swaps, options and forward
transactions - 640,120
Unrealized gain on interest rate and currency swaps, options and forward
transactions 5,670,457 -
Receivables from securities brokers and dealers 1,920,565 1,328,391
Securities purchased under agreements to resell, at contract value 2,771,316 2,737,507
Other invested assets 1,568,471 1,265,056
Short-term investments, at cost which approximates market value 4,958,789 5,072,893
Cash 101,609 157,481
------------- -------------
Total investments and cash 74,350,151 66,177,427
Investment income due and accrued 765,436 808,268
Premiums and insurance balances receivable - net 8,641,889 8,364,096
Reinsurance assets 15,951,944 15,883,788
Deferred policy acquisition costs 4,485,318 4,249,409
Investments in partially-owned companies 583,333 571,680
Real estate and other fixed assets, net of accumulated depreciation 1,651,024 1,615,742
Separate and variable accounts 2,341,431 1,914,815
Other assets 1,475,907 1,429,623
------------- -------------
Total assets $ 110,246,433 $ 101,014,848
============= =============
See Accompanying Notes to Financial Statements.
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AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
(unaudited)
MARCH 31, 1994 DECEMBER 31, 1993
-------------- -----------------
LIABILITIES:
Reserve for losses and loss expenses $ 30,460,247 $ 30,046,172
Reserve for unearned premiums 5,768,612 5,515,670
Future policy benefits for life and accident
and health insurance contracts 15,212,520 14,638,382
Policyholders' contract deposits 5,394,780 4,439,839
Other policyholders' funds 1,816,501 1,739,290
Reserve for commissions, expenses and taxes 1,202,695 1,113,397
Insurance balances payable 1,427,295 1,458,383
Funds held by companies under reinsurance treaties 394,219 406,902
Income taxes payable:
Current 298,688 358,219
Deferred 398,310 447,790
Financial services liabilities:
Borrowings under obligations of guaranteed investment agreements 6,021,267 6,735,579
Securities sold under agreements to repurchase, at contract value 2,765,466 2,299,563
Payables to securities brokers and dealers 2,270,091 1,688,147
Securities sold but not yet purchased, principally obligations of the
U.S. Government and Government agencies, at market value 1,239,632 696,454
Spot commodities sold but not yet purchased, at market value 302,643 285,757
Unrealized loss on interest rate and currency swaps, options and forward
transactions 4,979,334 -
Deposits due to banks and other depositors 587,655 557,372
Commercial paper 1,661,593 1,618,979
Notes, bonds and loans payable 5,648,226 5,021,941
Commercial paper 1,490,800 1,529,906
Notes, bonds, loans and mortgages payable 735,886 782,660
Separate and variable accounts 2,341,431 1,914,815
Other liabilities 2,091,577 2,295,436
------------- -------------
Total liabilities 94,509,468 85,590,653
------------- -------------
Preferred shareholders' equity in subsidiary company 200,000 200,000
CAPITAL FUNDS:
Common stock, $2.50 par value; 500,000,000 shares
authorized; shares issued 1994 - 337,390,986;
1993 - 337,390,986 843,477 843,477
Additional paid-in capital 571,468 572,142
Unrealized appreciation of investments, net of taxes 806,241 922,646
Cumulative translation adjustments, net of taxes (327,578) (348,186)
Retained earnings 13,775,381 13,301,529
Treasury stock, at cost; 1994 - 20,516,258;
1993 - 19,762,919 shares of common stock (132,024) (67,413)
------------- -------------
Total capital funds 15,536,965 15,224,195
------------- -------------
Total liabilities and capital funds $ 110,246,433 $ 101,014,848
============= =============
See Accompanying Notes to Financial Statements.
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AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1994 1993
---- ----
General insurance operations:
Net premiums written $ 2,621,305 $ 2,443,810
Change in unearned premium reserve (164,952) (206,222)
------------ -----------
Net premiums earned 2,456,353 2,237,588
Net investment income 354,129 330,656
Realized capital gains 20,094 24,701
------------ -----------
2,830,576 2,592,945
------------ -----------
Losses and loss expenses incurred 1,977,467 1,795,323
Underwriting expenses 483,554 421,131
------------ -----------
2,461,021 2,216,454
------------ -----------
Operating income 369,555 376,491
------------ -----------
Life insurance operations:
Premium income 1,495,099 1,254,309
Net investment income 407,996 349,222
Realized capital gains 28,740 13,090
------------ -----------
1,931,835 1,616,621
------------ -----------
Death and other benefits 576,801 501,668
Increase in future policy benefits 712,453 593,211
Acquisition and insurance expenses 419,460 344,178
------------ -----------
1,708,714 1,439,057
------------ -----------
Operating income 223,121 177,564
------------ -----------
Agency and service fee operating income 15,575 16,015
Financial services operating income 97,098 86,191
Equity in income of minority-owned insurance
operations 7,272 8,887
Other realized capital gains (losses) (10,205) (3,232)
Other income (deductions) - net (24,006) (21,645)
------------ -----------
Income before income taxes and cumulative effect of
accounting changes 678,410 640,271
------------ -----------
Income taxes (benefits) - Current 218,969 223,881
- Deferred (46,177) (58,836)
------------ -----------
172,792 165,045
------------ -----------
Income before cumulative effect of accounting changes 505,618 475,226
Cumulative effect of accounting changes, net of tax
Minority-owned insurance operations - 20,695
------------ -----------
Net income $ 505,618 $ 495,921
============ ===========
Earnings per common share (a):
Income before cumulative effect of accounting changes $ 1.59 $1.49
Cumulative effect of accounting changes, net of tax
Minority-owned insurance operations - 0.07
------------ -----------
Net income $ 1.59 $ 1.56
============ ===========
Cash dividends per common share $ 0.10 $ 0.093
============ ===========
Average shares outstanding (a) 317,456 317,484
------------ -----------
(a) 1993 adjusted for a 50 percent common stock split in the form of a common
stock dividend paid July 30, 1993.
See Accompanying Notes to Financial Statements.
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AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1994 1993
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 505,618 $ 495,921
------------ ------------
Adjustments to reconcile net income to net cash provided by operation activities:
Non-cash revenues, expenses, gains and losses included in income:
Change in:
General and life insurance reserves 1,241,155 1,394,942
Premiums and insurance balances receivable and payable-net (308,881) (439,357)
Reinsurance assets (68,156) (69,472)
Deferred policy acquisition costs (235,909) (204,977)
Investment income due and accrued 42,832 16,860
Funds held under reinsurance treaties (12,683) 35,539
Other policyholders' funds 77,211 106,469
Current and deferred income taxes - net (105,708) 65,223
Reserve for commissions, expenses and taxes 89,298 130,706
Other assets and liabilities - net (250,143) 248,592
Receivables from and payables to securities brokers and dealers-net (10,230) 826,796
Trading securities, at market value 499,635 (45,090)
Spot commodities, at market value (144,233) 76,266
Net unrealized gain on interest rate
and currency swaps, options and forward transactions (51,003) 107,342
Securities purchased under agreements to resell (33,809) 2,293,823
Securities sold under agreements to repurchase 465,903 (1,837,750)
Securities sold but not yet purchased 543,178 20,297
Spot commodities sold but not yet purchased, at market value 16,886 (1,292,059)
Realized capital gains (38,629) (34,559)
Equity in income of partially-owned companies
and other invested assets (14,225) 15,383
Depreciation expenses, principally flight equipment 128,396 107,991
Cumulative effect of accounting changes - (20,695)
Change in cumulative translation adjustments 36,354 39,605
Other - net 214,703 (27,142)
------------ ------------
Total Adjustments 2,081,942 1,514,733
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,587,560 2,010,654
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of fixed maturities, at amortized cost, sold - 447,889
Cost of fixed maturities, at amortized cost, matured or redeemed 172,275 352,977
Cost of bonds, at market, sold 1,890,940 1,536,468
Cost of bonds, at market, matured or redeemed 325,552 180,127
Cost of equity securities sold 740,158 328,659
Realized capital gains 38,629 34,559
Purchases of fixed maturities (3,334,783) (3,203,882)
Purchases of equity securities (1,001,703) (524,086)
Mortgage, policy and collateral loans granted (844,575) (221,279)
Repayments of mortgage, policy and collateral loans 98,756 177,224
Sales or maturities of securities held for investment - 677,935
Sales or maturities of securities available for sale 1,136,306 -
Purchases of securities held for investment - (766,389)
Purchases of securities available for sale (1,798,121) -
Sales of flight equipment 78,630 67,753
Purchases of flight equipment (789,817) (973,548)
Net additions to real estate and other fixed assets (85,549) (57,481)
Sales or distributions of other invested assets 32,446 20,353
Investments in other invested assets (143,809) (93,486)
Change in short-term investments 114,104 284,352
Investments in partially-owned companies (28,005) (1,577)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (3,398,566) (1,733,432)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in policyholders' contract deposits 954,941 (143,369)
Change in deposits due to banks and other depositors 30,283 (483,500)
Change in commercial paper 3,508 52,817
Proceeds from notes, bonds, loans and mortgages payable 1,006,057 597,546
Repayments on notes, bonds, loans and mortgages payable (428,292) (233,685)
Proceeds from guaranteed investment agreements 275,126 762,558
Maturities of guaranteed investment agreements (989,438) (747,196)
Proceeds from common stock issued 3,267 3,492
Cash dividends to shareholders (31,766) (30,450)
Acquisition of treasury stock (68,552) (269)
Redemption of preferred stock - (75,000)
Other - net - (38)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 755,134 (297,094)
------------ ------------
CHANGE IN CASH (55,872) (19,872)
Cash at beginning of year 157,481 136,628
------------ ------------
CASH AT END OF YEAR $ 101,609 $ 116,756
============ ============
See Accompanying Notes to Financial Statements.
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AMERICAN INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
a) These statements are unaudited. In the opinion of management, all
adjustments consisting of normal recurring accruals have been made for a fair
presentation of the results shown.
b) Earnings per share of American International Group, Inc. (AIG) are based
on the weighted average number of common shares outstanding during the period,
retroactively adjusted to reflect a 50 percent common stock split in the form
of a common stock dividend paid July 30, 1993. The effect of potentially
dilutive securities is not significant.
(c) Cash dividends per common share reflect the adjustment for a 50 percent
common stock split in the form of a common stock dividend paid July 30, 1993.
The quarterly dividend rate per common share, commencing with the dividend paid
September 17, 1993 is $.10.
(d) Supplemental cash flow information for the three month period ended March
31, 1994 and 1993 is as follows:
(in thousands)
1994 1993
---- ----
Income taxes paid $ 276,294 $ 90,141
Interest paid $ 196,000 $ 207,000
(e) In March 1992, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts"
(Interpretation), which is effective for fiscal years beginning after December
15, 1993. The Interpretation requires that unrealized gains and losses on
swaps, forwards, options and similar contracts be recognized as assets and
liabilities. Previously, AIG's policy was to record such unrealized gains and
losses on a net basis in the consolidated balance sheet. The Interpretation
allows the netting of such unrealized gains and losses with the same
counterparty when they are included under a master netting arrangement with the
counterparty and the contracts are reported at market value.
Although there was no effect on AIG's operating income upon the adoption
of the Interpretation, AIG now presents certain of its financial services
assets and liabilities, primarily unrealized gain (loss) on interest rate and
currency swaps, options and forward transactions, on a gross basis. Thus, both
consolidated assets and liabilities have increased. The effect of presenting
these assets and liabilities on a gross basis on AIG's consolidated balance
sheet was not significant. Prior years' balance sheets are not required to be
restated.
In November of 1992, FASB issued Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Post-employment Benefits" (FASB
112). FASB 112 established accounting standards for employers who provide
benefits to former or inactive employees after employment but before
retirement. FASB 112 was effective January 1, 1994 and had no significant
effect on AIG's results of operations or financial condition.
(f) For further information, refer to the Form 10-K filing of AIG for the year
ended December 31, 1993.
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AMERICAN INTERNATIONAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operational Review
General Insurance Operations
In AIG's general insurance operations, the net premiums written and net
premiums earned were $2.62 billion and $2.46 billion, respectively, in the first
three months of 1994. These were increases of 7.3 percent and 9.8 percent,
respectively, over the same period of 1993.
The growth in net premiums written in 1994 over 1993 resulted from a
combination of several factors. Although AIG continued to achieve general
price increases in domestic commercial property and some specialty casualty
markets, the primary reasons for growth were price and volume increases
overseas. AIG continues to be disciplined in its underwriting approach,
especially in the domestic primary casualty market, and does not seek net
premium growth where rates do not adequately reflect the assessment of
exposures.
Net premiums written are initially deferred and earned based upon the
terms of the underlying policies. The net unearned premium reserve
constitutes the deferred earnings 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.
Adjusted underwriting profit or loss (operating income less net investment
income and realized capital gains) represents statutory underwriting profit or
loss adjusted primarily for changes in the deferral of acquisition costs. The
adjusted underwriting loss in the first three months of 1994 was $4.7 million
compared to an adjusted underwriting profit of $21.1 million recorded for the
same period in 1993.
The statutory general insurance ratios for the first three months were as
follows:
- - ------------------------------------------------------------------
1994 1993
- - ------------------------------------------------------------------
Loss Ratio 80.50 80.23
Expense Ratio 20.17 19.33
- - ------------------------------------------------------------------
Combined Ratio 100.67 99.56
- - ------------------------------------------------------------------
The gross and net incurred losses as a result of the earthquake which
struck the Los Angeles area of California in January, 1994 were approximately
$150 million and $55 million,
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respectively. Although there were severe winter storms during the first
quarter of 1994, AIG recognizes these as losses in the ordinary course of
business, not as catastrophes. The gross and net catastrophe losses, recorded
in the same period of 1993 approximated $55 million and $8 million,
respectively.
If the catastrophes were excluded from the losses incurred in each three
month period, the pro forma statutory general insurance ratios would be as
follows:
- - -----------------------------------------------------------------
1994 1993
- - -----------------------------------------------------------------
Loss Ratio 78.26 79.88
Expense Ratio 20.17 19.33
- - -----------------------------------------------------------------
Combined Ratio 98.43 99.21
- - -----------------------------------------------------------------
The maintenance of the statutory combined ratio in both periods at a level
approximating 100 is a result of AIG's emphasis on maintaining its underwriting
discipline within the continued overall competitiveness of the domestic market
environment as well as AIG's expense control.
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 the first
quarter of 1994 and 1993 were insignificant. Also, AIG is required to
participate in various involuntary pools (principally workers' compensation
business) which provide insurance coverage for those not able to obtain such
coverage in the voluntary markets. This participation is also recorded upon
notification, as these amounts cannot reasonably be estimated.
At March 31, 1994, general insurance reserves for losses and loss expenses
(loss reserves) amounted to $30.46 billion, an increase of $414.1 million or
1.4 percent over the prior year end. General insurance net loss reserves
represent the accumulation of estimates of ultimate losses, including
provisions for losses incurred but not reported (IBNR), and loss expenses,
reduced by reinsurance recoverable net of an allowance for unrecoverable
reinsurance and very minor amounts of discounting related to certain workers'
compensation claims. The net loss reserves increased $241.0 million or 1.4
percent to $17.80 billion. The
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methods used to determine such estimates and to establish the resulting
reserves are continually reviewed and updated. Any adjustments resulting
therefrom are reflected in operating income currently. It is management's
belief that the general insurance net loss reserves are adequate to cover all
general insurance net losses and loss expenses as at March 31, 1994. In the
future, if the general insurance net loss reserves develop deficiently, such
deficiency would have an adverse impact on such future results of operations.
AIG's reinsurance recoverable results from its reinsurance arrangements.
These arrangements do not relieve AIG from its direct obligation to its
insureds. Thus, a contingent liability of approximately $13 billion existed at
March 31, 1994 with respect to general reinsurance reserves for loss and loss
expenses ceded (reinsurance recoverable) to the extent that reinsurers are
unable to meet their obligations assumed under the reinsurance agreements.
However, AIG holds substantial collateral as security under related reinsurance
agreements in the form of funds, securities and/or irrevocable letters of
credit which can be drawn on for amounts that remain unpaid beyond specified
time periods. Although a provision is recorded for estimated unrecoverable
reinsurance, AIG has been largely successful in prior recovery efforts.
AIG enters into certain intercompany reinsurance transactions for both 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.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business; the
other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of
net losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
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A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. Loss trend factors
reflect many items including changes in claims handling, exposure and policy
forms and current and future estimates of inflation and social inflation.
Thus, many factors are implicitly considered in estimating the year to year
growth in loss costs. Therefore, AIG's carried net long tail loss reserves are
judgmentally set as well as tested for reasonableness using the most
appropriate loss trend factors for each class of business. In the evaluation
of AIG's net loss reserves, loss trend factors have ranged from 7 percent to 22
percent of average loss costs, depending on the particular class and nature of
the business involved. For the majority of long tail casualty lines, net loss
trend factors approximating 10 percent were employed. These factors are
periodically reviewed and subsequently adjusted, as appropriate, to reflect
emerging trends which are based upon past loss experience.
Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can
generally be assumed to be similar to the growth in exposure of such lines.
For example, if the fire insurance coverage remained proportional to the actual
value of the property, the growth in property's exposure to fire loss can be
approximated by the amount of insurance purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive indemnity claims asserting injuries from toxic
waste, hazardous substances, asbestos and other environmental pollutants and
alleged damages to cover the cleanup costs of hazardous waste dump sites
(environmental claims). The vast majority of these environmental claims
emanate from policies written in 1984 and prior years. Commencing in 1985,
standard policies contained an absolute exclusion for pollution related damage.
AIG has established a special environmental claims unit which investigates and
adjusts all such claims.
Estimation of environmental claims loss reserves is a difficult process.
These environmental claims cannot be estimated by conventional reserving
techniques as previously described. Quantitative techniques frequently have to
be supplemented by
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subjective considerations including managerial judgment. Significant factors
which affect the trends which influence the development of environmental claims
are the inconsistent court resolutions, the broadening of the intent of the
policies and scope of coverage and the increasing number of new claims. The
case law that has emerged can be characterized as still being in its infancy
and the likelihood of any firm direction in the near future is very small.
Additionally, the exposure for cleanup costs of hazardous waste dump sites
involves coverage issues such as allocation of responsibility among potential
responsible parties and the government's refusal to release parties. The
cleanup cost exposure may significantly change if the Congressional
reauthorization of Superfund in 1994 is dramatically changed thereby reducing
or increasing litigation and cleanup costs.
In the interim, AIG and other industry members have and will continue to
litigate the broadening judicial interpretation of the policy coverage and the
liability issues. 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 the current reserves held.
This emergence cannot now be reasonably estimated, but could have a material
impact on AIG's future operating results and financial condition. The reserves
carried for these claims as at March 31, 1994 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
those years, the potential impact of these claims is much smaller on the net
loss reserves than on the gross loss reserves. (See the previous discussion on
reinsurance collectibility herein.)
The gross and net IBNR included in the reserve for loss and loss expenses
at March 31, 1994 for environmental claims approximated $252 million and $90
million, respectively; for 1993, $230 million and $80 million, respectively.
Most of the claims included in the following table relate to policies written
in 1984 and prior years.
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A summary of reserve activity, including estimates for applicable IBNR,
relating to environmental claims for the three months ended March 31, 1994 and
1993 was as follows:
(in millions)
- - ----------------------------------------------------------------------------------------------------------------------------------
1994 1993
--------------------------------------------------------------
Gross Net Gross Net
==================================================================================================================================
Reserve for loss and loss
expense at beginning of year $1,478.5 $386.3 $1,222.1 $318.0
Loss and loss expenses incurred 37.0 38.1 137.2 36.6
Loss and loss expenses paid (58.9) (23.1) (74.1) (27.2)
- - ----------------------------------------------------------------------------------------------------------------------------------
Reserve for loss and loss
expenses at end of period $1,456.6 $401.3 $1,285.2 $327.4
==================================================================================================================================
The majority of AIG's exposures for 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.
General insurance net investment income in the first three months of 1994
was $354.1 million, an increase of 7.1 percent from the same period of 1993.
The growth in net investment income was primarily attributable to new cash flow
for investment. The new cash flow was generated from net general insurance
operating cash flow and included the compounding of previously earned and
reinvested net investment income.
General insurance realized capital gains were $20.1 million in the first
three months of 1994 and $24.7 million for the same period of 1993. These
realized gains resulted from the ongoing management of the general insurance
investment portfolios within the overall objectives of the general insurance
operations and arose primarily from the disposition of equity securities,
fixed maturities carried at market value and redemptions of fixed maturities.
General insurance operating income in the first three months of 1994 was
$369.6 million, a decrease of 1.8 percent when compared to $376.5 million in
the same period of 1993. The 1994 operating results were significantly
impacted by the aforementioned catastrophe. The contribution of general
insurance operating
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income to income before income taxes and the cumulative effect of accounting
changes was 54.5 percent in the first three months of 1994 compared to 58.8
percent in the same period of 1993. The decline in the contribution percentage
was a result of the catastrophe loss and the relative growth in life operating
income.
A period to period comparison of operating income is significantly
influenced by the catastrophe losses in any one period as well as the
volatility from one period to the next in realized capital gains. Adjusting
each year to exclude the effects of both catastrophe losses and realized
capital gains, the operating income in 1994 would have increased 12.4
percent over 1993. The increase in the growth rate of 1994 over 1993 after the
aforementioned adjustments was a result of the increased net investment income
as previously discussed and improvement in underwriting results after the
exclusion of the effects of the catastrophes.
Life Insurance Operations
AIG's life insurance operations continued to show growth as a result of
overseas operations, particularly in Asia. AIG's life premium income of $1.50
billion for the first three months of 1994 represented a 19.2 percent increase
from the same period of the prior year. The foreign ordinary life products
were the major contributor to premium growth. In 1994, foreign life operations
produced 93.4 percent of the life premium income and 95.6 percent of the life
insurance operating income as compared to 95.2 percent of life premium income
and 94.4 percent of life insurance operating income for the same period of
1993.
Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial
products are being sold in Japan.
The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with
the financial and investment contract products is investment risk.
Underwriting risk represents the exposure to loss resulting from the
actual policy experience adversely emerging in comparison to the assumptions
made in the product pricing associated with mortality, morbidity, termination
and expenses. AIG's life companies limit their maximum underwriting exposure
on traditional life insurance of a single life to approximately $1 million of
coverage by using yearly renewable term reinsurance. The life insurance
operations have not entered into assumption reinsurance
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14
transactions or surplus relief transactions during the recent three year period
or in the first quarter of 1994.
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 determine if a liquidity excess or deficit is
perceived to exist. 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.
The asset-liability relationship is appropriately managed in AIG's foreign
operations, even though certain territories lack qualified long-term
investments or there are investment restrictions imposed by the local
regulatory authorities. For example, in Japan and several Southeast Asia
territories, the duration of the investments is often for a shorter period than
the effective maturity of such policy liabilities. Therefore, there is a risk
that the reinvestment of the proceeds at the maturity of the investments may be
at a yield below that of the interest required for the accretion of the policy
liabilities. In Japan, the average duration of the investment portfolio
approximates 5 years, while the related policy liabilities are estimated to be
7 years. To maintain an adequate yield to match the interest required over the
duration of the liabilities, constant management focus is required to reinvest
the proceeds of the maturing securities without sacrificing investment quality.
To the extent permitted under local regulation, AIG may invest in qualified
longer-term securities outside Japan to achieve a closer matching in both
duration and the required yield. AIG is able to manage any asset-liability
duration difference through maintenance of sufficient global liquidity and to
support any operational short-fall through its international financial network.
Domestically, the asset-liability matching process is appropriately functioning
as there are investments available to match the duration and the required
yield.
AIG uses asset-liability matching as a management tool to determine the
composition of the invested assets and marketing strategies. As a part of
these strategies, AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest rate or other
economic changes.
-13-
15
Life insurance net investment income increased 16.8 percent to $408.0
million in the first three months of 1994 compared to $349.2 million in the
same period of 1993. The growth in net investment income was primarily
attributable to new cash flow for investment. The new cash flow was generated
from net life insurance operating cash flow and included the compounding of
previously earned and reinvested net investment income.
Life insurance realized capital gains were $28.7 million and $13.1 million
in the first three months of 1994 and 1993, respectively. These realized gains
resulted from the ongoing management of the life insurance investment
portfolios within the overall objectives of the life insurance operations and
arose primarily from the redemption of fixed maturities and, to a lesser
extent, from the disposition of equity securities.
Life insurance operating income in the first three months of 1994
increased 25.7 percent to $223.1 million compared to $177.6 million in the same
period of 1993. Excluding realized capital gains from life insurance operating
income, the increase in 1994 over 1993 would be 18.2 percent. The contribution
of life insurance operating income to income before income taxes and the
cumulative effect of accounting changes amounted to 32.9 percent in 1994
compared to 27.7 percent in 1993. The increase in the contribution percentage
was a result of both the growth in life premium income and net investment
income as well as higher realized capital gains.
Agency and Service Fee Operations
Agency and service fee operating income in the first three months of 1994
decreased 2.7 percent to $15.6 million compared to $16.0 million in the same
period of 1993. Although the growth in risk management services continues,
revenues from AIG's aviation insurance management operations has declined
slightly. Agency and service fee operating income contributed 2.3 percent to
AIG's income before income taxes and the cumulative effect of accounting
changes in 1994 compared to 2.5 percent in 1993.
Financial Services Operations
Financial services operating income amounted to $97.1 million in the first
three months of 1994, an increase of 12.7 percent. This compared to $86.2
million in the same period of 1993. The financial services operating income in
1994 increased over that of 1993 primarily as a result of an increase in the
operating income of International Lease Finance Corporation (ILFC). Both AIG
Trading Group Inc. and its subsidiaries (AIGTG) and AIG Financial Products
Corp. and its subsidiaries (AIGFP) experienced declines in their
-14-
16
respective operating income. The commodities markets in which AIGTG operates
were extremely turbulent during the first quarter of 1994. The general
cautiousness of AIGTG's customers with respect to these markets reduced AIGTG's
trading volume relative to prior quarters. AIGFP's operations are transaction
oriented and non-cyclical. In the first three months of 1994, AIGFP closed
fewer transactions when compared to the same period in 1993. As a transaction
oriented, non-cyclical operation, current and past performance do not provide a
trend for future performance.
Through AIGFP and AIGTG, AIG participates in the derivatives market, which
has expanded significantly during the past several years. Derivative products
typically take the form of futures, forward, swap and option contracts and
derive their values from underlying interest rate, foreign exchange, equity, or
commodity instruments. End users find derivatives to be a cost effective
approach to managing market risks associated with traditional on-balance sheet
financial instruments. As a dealer of derivative contracts, AIG typically acts
as a counterparty to end users or other dealers. Consequently, AIG may build
up substantial positions in derivatives which are managed by taking offsetting
positions in other derivatives, commodities or financial instruments. AIG's
counterparties include financial services companies, governmental units, banks
and industrial companies. In considering AIG's derivative activities, it is
also important to note that all significant derivative activities are conducted
through AIGFP and AIGTG and that AIG's other units, including its insurance
subsidiaries, are not significant end users of derivative products.
The notional amounts used to express the extent of AIG's involvement in
derivatives transactions do not represent a quantification of the market or
credit risks of the positions and are not recorded on the balance sheet.
Dealer or principal related derivatives are carried at their estimated fair
values. Substantially all of AIG's derivative positions at March 31,1994 were
dealer or principal related and thus accounted for in that manner. The
notional amounts represent the amounts used to calculate contractual cash flows
to be exchanged and are generally not actually paid or received, except for
certain contracts such as currency swaps and foreign exchange forwards.
Furthermore, other factors such as offsetting transactions, master netting
agreements and collateral must all be thoroughly considered in any measurement
of risk.
The market risk of derivatives arises principally from the potential for
changes in volatility, interest rates, foreign exchange rates, and equity and
commodity prices. The credit risk of derivatives arises from the potential for
a counterparty to default on its contractual obligations. Credit risk exists
at a particular point in time when a derivative has a positive market value.
Derivatives, other than options, may be in an unrealized
-15-
17
gain or unrealized loss position depending on market rates and contract terms.
Purchased options contracts with positive market values have credit risk.
AIGFP conducts, primarily as principal, an interest rate, currency, equity
and commodity derivative products business and also enters into long dated
forward foreign exchange, option, synthetic security, liquidity facility and
investment contract transactions.
AIGFP generally manages its exposures by taking offsetting positions,
including swaps, options, bonds, forwards or futures contracts. AIGFP manages
its credit risk by internally evaluating the creditworthiness of counterparties
and consulting with widely accepted credit rating services. In addition, AIGFP
enters into master netting agreements, which incorporate the right of set-off
to provide for the net settlement of covered contracts with the same
counterparty, in the event of default or other cancellation of the agreement.
Also, AIGFP requires collateral on certain transactions based on the
creditworthiness of the counterparty.
AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, has in place
effective procedures for evaluating and limiting the credit and market risks to
which it is subject. Management is not aware of any potential counterparty
defaults as of March 31, 1994.
Revenues generated by AIGFP during 1994 were primarily comprised of
interest rate swaps activity, which represented over 50 percent of total AIGFP
revenues.
AIGTG engages as principal in trading activities in certain foreign
exchange, precious and base metals, petroleum and petroleum products and
natural gas markets. AIGTG is exposed to risk of loss through the potential
non-performance of a counterparty on its contractual obligations (credit risk)
and through the potential for changes in value due to fluctuations in interest
and foreign exchange rates and in prices of commodities (market risk).
Generally, AIGTG manages its credit risk through credit reviews, transaction
limits and/or margin requirements. AIGTG manages the market risk of its
various positions and transactions through offsetting transactions such as
purchasing and selling options and forward and futures contracts.
Revenues generated by AIGTG for 1994 were primarily comprised of foreign
exchange activities, which represented over 60 percent of total AIGTG revenues.
-16-
18
ILFC primarily engages in the acquisition of new and used commercial jet
aircraft and the leasing and sale of such aircraft to airlines around the
world. In addition, ILFC is engaged in the remarketing of commercial jets for
airlines and financial institutions. ILFC is exposed to loss through
non-performance of aircraft lessees and through owning and committing to
purchase aircraft which it would be unable to lease. ILFC manages its lessee
non-performance exposure through credit reviews and security deposit
requirements. At March 31, 1994, only 4 of 250 aircraft owned were not leased.
Currently, 79.4 percent of the fleet is leased to foreign carriers.
See also the discussion under "Capital Resources" and "Liquidity" herein.
Financial services operating income represented 14.3 percent of AIG's
income before income taxes and the cumulative effect of accounting changes in
1994. This compares to 13.5 percent in 1993.
Other Operations
In the first three months of 1994, AIG's equity in income of minority-owned
insurance operations was $7.3 million compared to $8.9 million in the same
period of 1993. The decline results from the impact of the previously
mentioned catastrophe losses. The equity interest in insurance companies
represented 1.1 percent of income before income taxes and the cumulative effect
of accounting changes in 1994, compared to 1.4 percent in 1993.
Other realized capital losses amounted to $10.2 million and $3.2 million
in 1994 and 1993, respectively.
Other income (deductions)-net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, minority
interest in certain consolidated companies, realized foreign exchange
transaction gains and losses in substantially all currencies and unrealized
gains and losses in hyperinflationary currencies, as well as the income and
expenses of the parent holding company and other miscellaneous income and
expenses. In the first three months of 1994, net deductions amounted to $24.0
million. In the same period of 1993, net deductions amounted to $21.6 million.
Income before income taxes and the cumulative effect of accounting changes
amounted to $678.4 million in the first three months of 1994 and $640.3 million
in the same period of 1993.
-17-
19
In the first three months of 1994, AIG recorded a provision for income
taxes of $172.8 million compared to the provision of $165.0 million in the same
period of 1993. These provisions represent effective tax rates of 25.5 percent
and 25.8 percent in the respective periods. Income before the cumulative effect
of accounting changes amounted to $505.6 million in the first three months of
1994 and $475.2 million in the same period of 1993. The increase in net income
resulted from those factors described above.
At January 1, 1993, AIG's equity in income of minority-owned insurance
operations was positively impacted by the cumulative effect of accounting
changes on such operations from the adoption of Statement of Accounting
Standards No. 109 "Accounting for Income Taxes" which was partially offset by
the adoption of Statement of Financial Accounting Standards No. 106 "Employer's
Accounting for Postretirement Benefits Other than Pension Plans". AIG's equity
in the cumulative effect of such accounting changes was a net benefit of $20.7
million.
Net income amounted to $505.6 million in the first three months of 1994
and $495.9 million in the same period of 1993. The increase in net income in
1994 over that of 1993 resulted from those factors described above.
Capital Resources
At March 31, 1994, AIG had total capital funds of $15.54 billion and total
borrowings of $15.56 billion.
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20
Total borrowings at March 31, 1994 and December 31, 1993 were as follows:
(in thousands)
- - -------------------------------------------------------------------------------------------------------------
March 31, December 31,
1994 1993
=============================================================================================================
Borrowings under Obligations of
Guaranteed Investment Agreements
AIGFP $ 6,021,300 $ 6,735,600
- - -------------------------------------------------------------------------------------------------------------
Commercial Paper:
AIG Funding, Inc. 824,700 891,700
ILFC* 1,621,000 1,442,400
AICCO 666,100 638,200
AIGFP 40,600 176,600
- - -------------------------------------------------------------------------------------------------------------
Total 3,152,400 3,148,900
- - -------------------------------------------------------------------------------------------------------------
Medium Term Notes:
ILFC* 1,740,200 1,753,700
AIG 285,000 295,000
- - -------------------------------------------------------------------------------------------------------------
Total 2,025,200 2,048,700
- - -------------------------------------------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC* 3,000,000 2,550,000
AIGFP 754,200 521,400
AIG: Lire bonds 159,100 159,100
Zero coupon notes 60,700 59,100
- - -------------------------------------------------------------------------------------------------------------
Total 3,974,000 3,289,600
- - -------------------------------------------------------------------------------------------------------------
Loans and Mortgages Payable 384,900 466,300
($153,800 and $196,900 were not
guaranteed by AIG in 1994 and 1993.)
- - -------------------------------------------------------------------------------------------------------------
Total Borrowings 15,557,800 15,689,100
- - -------------------------------------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 6,515,000 5,943,000
Matched GIA borrowings 6,021,300 6,735,600
- - -------------------------------------------------------------------------------------------------------------
12,536,300 12,678,600
- - -------------------------------------------------------------------------------------------------------------
Remaining borrowings of AIG $ 3,021,500 $ 3,010,500
=============================================================================================================
* AIG does not guarantee or support these borrowings.
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Guaranteed investments agreements (GIAs) serve as the source of proceeds
for AIGFP's investments in a diversified portfolio of securities. (See also
the discussions under "Operational Review" and "Liquidity" herein.)
AIG Funding, Inc. intends to continue to meet AIG's funding requirements
through the issuance of commercial paper guaranteed by AIG. This issuance of
commercial paper is subject to the approval of AIG's Board of Directors. ILFC,
A.I. Credit Corp. (AICCO) and AIGFP issue commercial paper for the funding of
their own operations. AIG does not guarantee AICCO's or ILFC's commercial
paper. However, AIG has entered into an agreement in support of AICCO's
commercial paper. AIG guarantees AIGFP's commercial paper.
ILFC primarily uses the proceeds of its borrowings to acquire new and used
commercial jet aircraft to lease and/or remarket to airlines around the world.
During 1994, ILFC increased the aggregate principal amount outstanding of its
medium term and term notes to $4.74 billion at March 31, 1994, a net increase
of $436.5 million. At March 31, 1994, ILFC had $350 million in aggregate
principal amount of debt securities registered for issuance from time to time.
(See also the discussions under "Operational Review" and "Liquidity" herein.)
During 1994, AIG did not issue any new medium term notes. During 1994,
$10.0 million of previously issued notes matured. At March 31, 1994, AIG had
$247.0 million in aggregate principal amount of debt securities registered for
issuance from time to time.
AIG's capital funds have increased $312.8 million in the first three
months of 1994. Unrealized appreciation of investments, net of taxes,
decreased $116.4 million, primarily resulting from the bond market trends
worldwide and domestic equity markets. Unrealized appreciation of investments,
net of taxes, is now subject to increased volatility resulting from the
changes in the market value of bonds available for sale. The cumulative
translation adjustment loss, net of taxes, decreased $20.6 million as a result
of the general weakness of the U.S. dollar. Retained earnings increased $473.9
million, resulting from net income less dividends.
Commencing in the first quarter of 1994, AIG repurchased shares of its
common stock in the open market. Through March 31, 1994, AIG had repurchased
822,500 common shares costing $68.5 million. Through the end of April 1994,
the common shares purchased year to date were 1.21 million costing $100.7
million.
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Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes
such continued reinvestment in the future will be adequate to meet any
foreseeable capital needs. However, AIG may choose from time to time to raise
additional funds through the issuance of additional securities. At March 31,
1994 there were no significant statutory or regulatory issues which would
impair AIG's financial condition or results of operations. (See also the
discussion under "Liquidity" herein.)
Liquidity
At March 31, 1994, AIG's consolidated invested assets included approximately
$5.06 billion of cash and short-term investments. Consolidated net cash
provided from operating activities in the first three months of 1994 amounted
to approximately $2.59 billion.
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance pretax operating cash flow is
derived from two sources, underwriting operations and investment operations.
In the aggregate, AIG's insurance operations generated approximately $2.0
billion in pretax operating cash flow during the first three months of 1994.
The underwriting cash flow approximated $1.1 billion in the first three months
of 1994. Underwriting cash flow represents periodic premium collections,
including policyholders' contracts deposits, as well as paid loss recoveries
less reinsurance premiums, losses, benefits, and acquisition and operating
expenses paid. Generally, there is a time lag from when premiums are collected
and, when as a result of the occurrence of events specified in the policy, the
losses and benefits are paid. AIG's insurance operations generated
approximately $860 million in investment income cash flow during this period of
1994. Investment income cash flow is primarily derived from interest and
dividends received and includes realized capital gains.
The combined insurance pretax cash flow coupled with the cash and
short-term investments of $4.57 billion provided the insurance operations with
a significant amount of liquidity. This liquidity is available to purchase
high quality and diversified fixed income securities and to a lesser extent
marketable equity securities and
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to provide mortgage loans on real estate, policy and collateral and guaranteed
loans. With this liquidity coupled with proceeds of approximately $3.2 billion
from the maturities, sales and redemptions of fixed income securities and from
the sales of marketable equity securities, AIG purchased approximately $4.3
billion of fixed income securities and marketable equity securities.
Additionally, over $840 million were disbursed for mortgage loans on real
estate, policy and collateral loans. Over $700 million of this was for
new policy loans issued as a result of domestic life insurance operations
associated with corporate owned life insurance.
The following table is a summary of AIG's invested assets, including
investment income due and accrued and real estate, at March 31, 1994 and
December 31, 1993:
(dollars in thousands)
- - -------------------------------------------------------------------------------------------------------------
March 31, 1994 December 31, 1993
Invested Percent Invested Percent
Assets of Total Assets of Total
=============================================================================================================
General insurance $ 22,594,400 29.6% $ 22,573,800 33.2%
Life insurance 23,612,600 31.0 22,037,300 32.4
Financial services 29,606,300 38.8 22,957,300 33.7
Other 422,700 0.6 464,100 0.7
- - -------------------------------------------------------------------------------------------------------------
Total $ 76,236,000 100.0% $ 68,032,500 100.0%
=============================================================================================================
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The following tables are summaries of the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at March 31, 1994 and December 31, 1993:
(dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------------------
Percent Percent Distribution
March 31, 1994 General Life Total of Total Domestic Foreign
=====================================================================================================================
Bonds:
Taxable $ 4,223,400 $13,626,100 $17,849,500 38.6% 37.6% 62.4%
Tax-exempt 12,548,000 --- 12,548,000 27.2 100.0 --
Short-term investments,
including time deposits, and cash 1,534,000 3,032,700 4,566,700 9.9 19.2 80.8
Common stocks 2,787,600 1,817,500 4,605,100 10.0 30.1 69.9
Mortgage loans on real
estate, policy and collateral
loans 41,500 3,417,300 3,458,800 7.5 40.6 59.4
Real estate 331,700 592,700 924,400 2.0 20.0 80.0
Investment income due and
accrued 404,100 343,100 747,200 1.6 53.8 46.2
Other invested assets 724,100 783,200 1,507,300 3.2 48.5 51.5
- - ---------------------------------------------------------------------------------------------------------------------
Total $22,594,400 $23,612,600 $46,207,000 100.0% 52.5% 47.5%
=====================================================================================================================
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(dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------------------------
Percent Percent Distribution
December 31, 1993 General Life Total of Total Domestic Foreign
===========================================================================================================================
Bonds:
Taxable $ 4,234,800 $13,387,800 $17,622,600 39.5% 38.4% 61.6%
Tax-exempt 12,346,700 --- 12,346,700 27.7 100.0 --
Short-term investments, including
time deposits, and cash 1,820,500 2,878,600 4,699,100 10.6 23.1 76.9
Common stocks 2,761,800 1,527,200 4,289,000 9.6 36.1 63.9
Mortgage loans on real estate,
policy and collateral loans 96,300 2,678,200 2,774,500 6.2 24.6 75.4
Real estate 284,300 572,000 856,300 1.9 16.2 83.8
Investment income due and accrued 429,700 363,900 793,600 1.8 54.0 46.0
Other invested assets 599,700 629,600 1,229,300 2.7 53.2 46.8
- - ---------------------------------------------------------------------------------------------------------------------------
Total $22,573,800 $22,037,300 $44,611,100 100.0% 53.0% 47.0%
===========================================================================================================================
With respect to bonds, AIG's strategy is to invest in high quality
securities while maintaining diversification to avoid significant exposure to
issuer, industry and/or country concentrations.
Approximately two-thirds of the fixed maturity investments are domestic
securities. Approximately 43 percent of such domestic securities were rated
AAA and approximately two percent were below investment grade.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services.
However, credit quality rating services similar to the aforementioned rating
agencies are not available in all overseas locations. Thus, AIG annually
reviews the credit quality of the nonrated fixed income investment, including
mortgages, in its foreign portfolio. AIG applies a scale similar to that of
Moody's and S&P to the rating of these securities. Coupling the ratings of
this internal review with those of the independent agencies indicates that
approximately 49 percent of the foreign fixed income investments were rated AAA
and approximately one percent were deemed below investment grade at December 31,
1993. AIG believes that there has been no significant change in these ratings
through March 31, 1994.
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26
Although AIG's fixed income insurance portfolios contain minor amounts of
securities below investment grade, potentially any fixed income security is
subject to downgrade for a variety of reasons subsequent to any balance sheet
date.
Approximately 6 percent of the fixed maturities portfolio are
Collateralized Mortgage Obligations (CMOs). All the CMOs are investment grade
and approximately 95 percent of the CMOs are backed by various U.S. government
agencies. Thus, credit risk is minimal.
There are no interest only or principal only CMOs. CMOs are exposed to
interest rate risk as the duration and ultimate realized yield would be
affected by the accelerated prepayments of the underlying mortgages.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from currency risk and
interest rate risk, AIG and its insurance subsidiaries consider entering into
derivative transactions. To date, such activities have been insignificant.
Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash.
Mortgage loans on real estate, policy, collateral and guaranteed loans
comprise 7.5 percent of AIG's insurance invested assets at March 31, 1994.
AIG's insurance holdings of real estate mortgages amounted to $1.36 billion of
which 35.6 percent was domestic. At March 31, 1994, no domestic mortgages and
only a nominal amount of foreign mortgages were in default. At March 31, 1994,
AIG's insurance holdings of collateral loans amounted to $451.2 million, all of
which were foreign. It is AIG's practice to maintain a maximum loan to value
ratio of 75 percent.
AIG's real estate investment properties are primarily occupied by AIG's
various operations. The current market value of these properties considerably
exceeds their carrying value.
There exist in certain jurisdictions significant regulatory and/or foreign
governmental barriers which may not permit the immediate free flow of funds
between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
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27
The following table is a summary of the composition of AIG's financial
services invested assets, including real estate, at March 31, 1994 and
December 31, 1993:
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------
March 31, 1994 December 31, 1993
-------------- -----------------
Invested Percent Invested Percent
Assets of Total Assets of Total
================================================================================================================
Flight equipment primarily under operating
leases, net of accumulated depreciation $ 9,188,400 31.0% $ 8,555,400 37.3%
Securities available for sale, at market value 5,669,500 19.1 4,991,100 21.7
Trading securities, at market value 2,016,500 6.8 2,516,200 11.0
Securities purchased under agreements
to resell, at contract value 2,771,300 9.4 2,737,500 11.9
Receivables from securities brokers
and dealers 1,920,600 6.5 1,328,400 5.8
Spot commodities, at market value 908,400 3.1 764,200 3.3
Unrealized gain on interest rate and
currency swaps, options and forward transactions* 5,670,500 19.2 -- --
Net unrealized gain on interest rate and currency
swaps, options and forward transactions -- -- 640,100 2.8
Other, including short-term investments 1,461,100 4.9 1,424,400 6.2
- - ----------------------------------------------------------------------------------------------------------------
Total $29,606,300 100.0% $22,957,300 100.0%
================================================================================================================
* See also the discussion under "Accounting Standards: Standards Adopted in
1994" herein.
As previously discussed, the cash for the purchase of flight equipment is
derived primarily from the proceeds of ILFC's debt financing. The primary
sources for the repayment of this debt and the interest expense thereon are the
lease receipts received and proceeds from the sale of flight equipment. During
1994, ILFC obtained net financing of $595.5 million for the acquisition of
flight equipment costing $789.8 million.
Securities available for sale, and securities purchased under agreements
to resell are primarily purchased with the proceeds of AIGFP's GIA financing.
The securities purchased involve varying degrees of credit risk. The average
credit rating of AIGFP's
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28
securities available for sale at March 31, 1994 was AA. Securities purchased
under agreements to resell are treated as collateralized transactions. AIGFP
generally takes possession of securities purchased under agreements to resell.
AIGFP further minimizes its credit risk by monitoring customer credit exposure
and requiring additional collateral to be deposited when deemed necessary.
AIGFP for its own account enters into interest rate, currency, equity and
commodity swaps and forward commitments. AIGFP evaluates the creditworthiness
of its counterparties by internal credit evaluation and consultation with
widely accepted credit-rating services. The average credit rating of AIGFP's
counterparties as a whole, as measured by AIGFP, was AA- at March 31, 1994.
Swaps, options and forward transactions are carried at estimated fair value
based on the use of valuation models that utilize criteria such as current
interest, foreign exchange and volatility rates, as applicable, with the
resulting unrealized gains or losses reflected in the current period's income.
These values are also reviewed by reference to the market levels at which AIGFP
hedges its transactions, and are adjusted as deemed appropriate by management.
The recorded values may be different than the values that might be realized if
AIGFP were to sell or close out the transactions because of limited liquidity
for these instruments. (See also the discussion under "Accounting Standards:
Standards Adopted in 1994" herein.)
AIGTG acts as principal in certain foreign exchange, precious and base
metals, petroleum and petroleum products and natural gas trading activities.
AIGTG owns and may maintain substantially hedged inventories in the commodities
in which it trades. AIGTG supports its trading activities largely through
payables to securities brokers and dealers, securities sold under agreements to
repurchase and spot commodities sold but not yet purchased. Thus, AIGTG's
liquidity is provided through its high volume and rapid turnover activities in
trading, market making and hedging. AIGTG uses derivatives to hedge various
trading positions and transactions from adverse movement in interest rates,
exchange rates and commodity prices.
Recent Developments
In 1989, the National Association of Insurance Commissioners (NAIC)
adopted the "NAIC Solvency Policing Agenda for 1990". Included in this agenda
was the development of Risk-Based Capital (RBC) requirements. RBC relates an
individual insurance company's statutory surplus to the risk inherent in its
overall operations. AIG believes that the development of RBC standards is a
positive step for the insurance industry but further believes the standards in
their present form may lead to an inefficient deployment of
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industry capital. As experience is gained with the application of RBC
standards, it is likely that adjustments to the formula will be made.
Standards for the life RBC formula and a model act have been approved by
regulators and were effective with the 1993 statutory financial statements. At
December 31, 1993 and March 31, 1994, the adjusted capital of each of AIG's
four domestic life companies exceeded each of their RBC standards by multiples
approximating from two to more than four.
RBC standards for property and casualty insurers have been finalized and
are effective with the 1994 statutory financial statements to be filed in 1995.
Applying these RBC standards to AIG's domestic general operations at December
31, 1993 and March 31, 1994 reveals that the capital of each of the domestic
general insurance companies exceeded the RBC requirements. Additionally, no
AIG company is on any regulatory or similar "watch list".
In 1992, domestic life insurance companies were required for regulatory
purposes to adopt two investment reserves, the Asset Valuation Reserve (AVR)
and the Interest Maintenance Reserve (IMR). The AVR is formula based and
applies to all invested assets which are subject to either credit or market
risk. The IMR defers realized capital gains and losses on the sale of fixed
maturities and mortgage loans. The realized gains and losses are subsequently
amortized into investment income over the original term of the disposed assets.
The impact of these reserves on the separately reported statutory income of
certain domestic life companies may be significant in 1994. However, there was
no impact on AIG's GAAP consolidated life insurance operating income presented
herein.
Accounting Standards
Standards adopted in 1994:
In March 1992, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts"
(Interpretation), which is effective for fiscal years beginning after December
15, 1993. The Interpretation requires that unrealized gains and losses on
swaps, forwards, options and similar contracts be recognized as assets and
liabilities. Previously, AIG's policy was to record such unrealized gains and
losses on a net basis in the consolidated balance sheet. The Interpretation
allows the netting of such unrealized gains and losses with the same
counterparty when they are included under a master netting arrangement with the
counterparty and the contracts are reported at market value.
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Although there was no effect on AIG's operating income upon the adoption
of the Interpretation, AIG adopted this interpretation effective January 1,1994
and now presents certain of its financial services assets and liabilities,
primarily unrealized gain (loss) on interest rate and currency swaps, options
and forward transactions, on a gross basis. Thus, both consolidated assets and
liabilities have increased. The effect of presenting these assets and
liabilities on a gross basis on AIG's consolidated balance sheet was not
significant. Prior years' balance sheets are not required to be restated.
In November of 1992, FASB issued Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Post-employment Benefits" (FASB
112). FASB 112 established accounting standards for employers who provide
benefits to former or inactive employees after employment but before
retirement. FASB 112 was effective January 1, 1994 and had no significant
effect on AIG's results of operations or financial condition.
Standards to be adopted in the future:
In May 1993, FASB issued Statement of Financial Accounting Standards No.
114 "Accounting by Creditors for Impairment of a Loan" (FASB 114). FASB 114
addresses the accounting by all creditors for impairment of certain loans. The
impaired loans are to be measured at the present value of all expected future
cash flows. The present value may be determined by discounting the expected
future cash flows at the loan's effective rate or valued at the loan's
observable market price or valued at the fair value of the collateral if the
loan is collateral dependent. This methodology is not expected to produce a
material effect on AIG's results of operations or financial condition.
FASB 114 will be effective for the 1995 financial statements. AIG does
not anticipate adoption prior to the effective date.
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PART II - OTHER INFORMATION
ITEM #6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See accompanying Exhibit Index.
(b) There were no reports on Form 8-K filed for the three months ended
March 31, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN INTERNATIONAL GROUP, INC.
------------------------------------
(Registrant)
s/s Howard I. Smith
------------------------------------
Howard I. Smith
Senior Vice President - Comptroller
(Chief Accounting Officer)
Dated: May 12, 1994
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EXHIBIT INDEX
Exhibit
Number Description Location
- - ------- ----------- --------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession........................ None
4 Instruments defining the rights of security Not required
holders, including indentures.................... to be filed.
10 Material contracts................................ None
11 Statement re computation of per share earnings.... Filed herewith.
12 Statement re computation of ratios................ Filed herewith.
15 Letter re unaudited interim financial information.. None
18 Letter re change in accounting principles.......... None
19 Report furnished to security holders............... None
22 Published report regarding matters submitted to
vote of security holders......................... None
23 Consents of experts and counsel.................... None
24 Power of attorney.................................. None
27 Financial Data Schedule............................ Not required
to be filed.
99 Additional exhibits................................ None
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Exhibit 11
AMERICAN INTERNATIONAL GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31,
----------------------------
1994 1993
---- ----
Average outstanding shares used in the computation
of per share earnings:
Common stock (a) 337,391 337,394
Common stock in treasury (a) (19,935) (19,910)
------------ ------------
317,456 317,484
============ ============
Income before cumulative effect of accounting changes $ 505,618 $ 474,406
Cumulative effect of accounting changes: (b)
Minority-owned insurance operations - 20,695
------------ ------------
Net income (applicable to common stock) (c) $ 505,618 $ 495,101
============ ============
Earnings per common share:
Income before cumulative effect of accounting changes $ 1.59 $ 1.49
Cumulative effect of accounting changes:
Minority-owned insurance operations - 0.07
------------ ------------
Net income $ 1.59 $ 1.56
============ ============
(a) 1993 adjusted for a 50 percent common stock split in the form of a common
stock dividend paid July 30, 1993. The effects of all other common stock
equivalents are not significant.
(b) Represents a net benefit for the cumulative effect of the adoption of
accounting pronouncements related to postretirement benefits (FASB 106)
and income taxes (FASB 109) by minority-owned insurance operations in
1993.
(c) After deduction of preferred stock dividend of $820,000 in 1993.
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Exhibit 12
AMERICAN INTERNATIONAL GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratios)
THREE MONTHS ENDED MARCH 31,
----------------------------
1994 1993
---- ----
Income before income taxes and cumulative effect of
accounting changes $ 678,410 $ 640,271
Less - Equity income of less than 50% owned persons 8,408 10,274
Add - Dividends from less than 50% owned persons 971 1,333
------------ ------------
670,973 631,330
Add -
Fixed charges 358,691 350,131
Less -
Capitalized interest 11,345 11,333
------------ ------------
Income before income taxes, cumulative effect of
accounting changes and fixed charges $ 1,018,319 $ 970,128
============ ============
Fixed charges:
Interest costs $ 341,983 $ 330,487
One-third rental expenses * 16,708 19,644
------------ ------------
Total fixed charges $ 358,691 $ 350,131
============ ============
Ratio of earnings to fixed charges 2.84 2.77
* The proportion deemed representative of the interest factor.
The ratio shown is significantly affected as a result of the inclusion of the
fixed charges and operating results of AIG Financial Products Corp. and its
subsidiaries (AIGFP). AIGFP structures borrowings through guaranteed investment
agreements and engages in other complex financial transactions, including
interest rate and currency swaps. In the course of its business, AIGFP enters
into borrowings that are primarily used to purchase assets that yield rates
greater than the rates on the borrowings with the intent of earning a profit on
the spread and to finance the acquisition of securities utilized to hedge
certain transactions. The pro forma ratios of earnings to fixed charges, which
exclude the effects of the operating results of AIGFP, are 5.63 and 5.91 for
1994 and 1993, respectively. As AIGFP will continue to be a subsidiary, AIG
expects that these ratios will continue to be lower than they would be if the
fixed charges and operating results of AIGFP were not included therein.
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