1
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Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[x] SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[_] SECURITIES EXCHANGE ACT OF 1934
For the Transition period from___________________to____________________
Commission file number 1-8787
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AMERICAN INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2592361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Pine Street, New York, New York 10270
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-7000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $2.50 Per Share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_].
The aggregate market value of the shares of all classes of voting stock of
the registrant held by non-affiliates of the registrant on January 31, 1999 was
approximately $119,407,069,000 computed upon the basis of the closing sales
price of the Common Stock on that date.
As of January 31, 1999, there were outstanding 1,238,282,249 shares of
Common Stock, $2.50 par value, of the registrant.
Documents Incorporated by Reference:
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 19, 1999 is incorporated by reference in
Part III of this Form 10-K.
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PART I
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ITEM 1. BUSINESS
American International Group, Inc. ("AIG"), a Delaware corporation, is a holding
company which through its subsidiaries is primarily engaged in a broad range of
insurance and insurance-related activities and financial services in the United
States and abroad. AIG's primary activities include both general and life
insurance operations. The principal insurance company subsidiaries are American
Home Assurance Company ("American Home"), National Union Fire Insurance Company
of Pittsburgh, Pa. ("National Union"), New Hampshire Insurance Company ("New
Hampshire"), Lexington Insurance Company ("Lexington"), Transatlantic Holdings,
Inc. ("Transatlantic"), American International Underwriters Overseas, Ltd.
("AIUO"), American Life Insurance Company ("ALICO"), American International
Assurance Company, Limited together with American International Assurance
Company (Bermuda) Limited ("AIA"), Nan Shan Life Insurance Company, Ltd. ("Nan
Shan"), American International Reinsurance Company, Ltd. and United Guaranty
Residential Insurance Company. On January 1, 1999, AIG acquired SunAmerica Inc.,
which through its subsidiaries specializes in the retirement savings and asset
accumulation business. For information on AIG's business segments, see Note 17
of Notes to Financial Statements.
All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 1999, beneficial ownership of
approximately 13.7 percent, 2.9 percent and 2.0 percent of AIG's Common Stock,
$2.50 par value ("Common Stock"), was held by Starr International Company, Inc.
("SICO"), The Starr Foundation and C. V. Starr & Co., Inc. ("Starr"),
respectively.
At December 31, 1998, AIG and its subsidiaries had approximately 48,000
employees.
The following table shows the general development of the business of AIG on
a consolidated basis, the contributions made to AIG's consolidated revenues and
operating income and the assets held, in the periods indicated by its general
insurance, life insurance, financial services operations, equity in income of
minority-owned insurance companies and other realized capital losses. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1 and 17 of Notes to Financial Statements.)
(dollars in millions)
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YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
==========================================================================================================
GENERAL INSURANCE OPERATIONS:
Gross premiums written $ 20,684 $ 18,742 $ 18,319 $ 17,895 $ 16,392
Net premiums written 14,586 13,408 12,692 11,893 10,866
Net premiums earned 14,098 12,421 11,855 11,406 10,287
Adjusted underwriting profit (a) 531 490 450 417 201
Net investment income 2,192 1,854 1,691 1,547 1,436
Realized capital gains 205 128 65 68 51
Operating income 2,928 2,472 2,206 2,032 1,688
Identifiable assets 73,226 62,386 58,792 56,223 51,556
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Loss ratio 75.6 75.3 75.9 75.9 77.8
Expense ratio 20.8 20.9 20.6 20.7 20.5
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Combined ratio 96.4 96.2 96.5 96.6 98.3
==========================================================================================================
LIFE INSURANCE OPERATIONS:
Premium income 10,247 9,926 8,978 8,038 6,724
Net investment income 3,232 2,896 2,676 2,265 1,748
Realized capital gains (losses) (35) 21 35 33 87
Operating income 1,780 1,571 1,324 1,091 952
Identifiable assets 64,333 52,104 48,376 43,280 34,497
Insurance in-force at end of year 499,167 436,573 421,983 376,097 333,379
FINANCIAL SERVICES OPERATIONS:
Commissions, transaction and other fees 3,305 3,272 2,556 2,204 1,784
Operating income 913 701 524 418 405
Identifiable assets 60,113 51,756 43,861 36,834 30,661
EQUITY IN INCOME OF MINORITY-OWNED
INSURANCE OPERATIONS 57 114 99 82 56
OTHER REALIZED CAPITAL LOSSES (5) (30) (12) (29) (51)
REVENUES (B) 33,296 30,602 27,943 25,614 22,122
TOTAL ASSETS 194,398 163,971 148,431 134,136 114,346
==========================================================================================================
(a) Adjusted underwriting profit is statutory underwriting income adjusted
primarily for changes in deferral of acquisition costs. This adjustment is
necessary to present the financial statements in accordance with generally
accepted accounting principles.
(b) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, equity in income of minority-owned insurance operations and realized
capital gains (losses). In 1997, agency operations were presented as a
component of general insurance and for years prior to 1997 agency results
have been reclassified to conform to this presentation.
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The following table shows identifiable assets, revenues and income derived
from operations in the United States and Canada and from operations in other
countries for the year ended December 31, 1998. (See also Note 17 of Notes to
Financial Statements.)
(dollars in millions)
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PERCENT OF TOTAL
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UNITED STATES OTHER UNITED STATES OTHER
TOTAL AND CANADA COUNTRIES AND CANADA COUNTRIES
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GENERAL INSURANCE OPERATIONS:
Net premiums earned $ 14,098 $ 9,471 $ 4,627 67.2% 32.8%
Adjusted underwriting profit 531 9 522 1.6 98.4
Net investment income 2,192 1,754 438 80.0 20.0
Realized capital gains 205 198 7 96.6 3.4
Operating income 2,928 1,961 967 67.0 33.0
Identifiable assets 73,226 57,166 16,060 78.1 21.9
LIFE INSURANCE OPERATIONS:
Premium income 10,247 738 9,509 7.2 92.8
Net investment income 3,232 920 2,312 28.5 71.5
Realized capital losses (35) (1) (34) -- --
Operating income 1,780 149 1,631 8.4 91.6
Identifiable assets 64,333 15,772 48,561 24.5 75.5
FINANCIAL SERVICES OPERATIONS:
Commissions, transaction and other fees 3,305 2,682 623 81.1 18.9
Operating income 913 580 333 63.5 36.5
Identifiable assets 60,113 49,766 10,347 82.8 17.2
EQUITY IN INCOME OF MINORITY-OWNED
INSURANCE OPERATIONS 57 44 13 77.0 23.0
OTHER REALIZED CAPITAL GAINS (LOSSES) (5) 12 (17) -- --
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 5,529 2,617 2,912 47.3 52.7
REVENUES 33,296 15,818 17,478 47.5 52.5
TOTAL ASSETS 194,398 119,098 75,300 61.3 38.7
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GENERAL INSURANCE OPERATIONS
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance. One or more of these
companies is licensed to write substantially all of these lines in all states of
the United States and in approximately 100 foreign countries.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group, including the domestic operations of Transatlantic, Personal
Lines, including 20th Century Industries (20th Century) and Mortgage Guaranty.
Commencing with the third quarter of 1998, Transatlantic and 20th Century
were consolidated into AIG's financial statements, as a result of AIG obtaining
majority ownership.
AIG's primary domestic division is the Domestic Brokerage Group (DBG).
DBG's business is derived from brokers in the United States and Canada and is
conducted through its general insurance subsidiaries including American Home,
National Union, Lexington, Transatlantic and certain other insurance company
subsidiaries of AIG. The primary casualty/risk management division of DBG
provides insurance and risk management programs for large corporate customers.
The AIG Risk Finance division designs and implements creative risk financing
alternatives using the insurance and financial services capabilities of AIG.
Also included are the operations of New Hampshire and its subsidiaries, which
focus specifically on providing AIG products and services through brokers to
middle market companies, and regional insurance companies which service the
commercial middle market.
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.
In addition to writing substantially all classes of business insurance,
including large commercial or industrial property insurance, excess liability,
inland marine, workers' compensation and excess and umbrella coverages, DBG
offers many specialized forms of insurance such as directors and officers
liability, difference-in-conditions, kidnap-ransom, export credit and political
risk, and various types of professional errors and omissions coverages.
Lexington writes surplus lines, those risks for which conventional insurance
companies do not readily provide insurance coverage, either because of
complexity or because the coverage does not lend itself to conventional
contracts.
AIG engages in mass marketing of personal lines coverages, primarily
private passenger auto, through American International Insurance Company and
20th Century.
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The business of United Guaranty Corporation ("UGC") and its subsidiaries is
also included in the domestic operations of AIG. The principal business of the
UGC subsidiaries is the writing of residential mortgage loan insurance, which is
guaranty insurance on conventional first mortgage loans on single-family
dwellings and condominiums. Such insurance protects lenders against loss if
borrowers default. UGC subsidiaries also write home equity and property
improvement loan insurance on loans to finance residential property
improvements, alterations and repairs and for other purposes not necessarily
related to real estate. UGC had approximately $17 billion of mortgage guarantee
risk in-force at December 31, 1998.
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 companies. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General 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. Transatlantic's foreign operations are included in this group.
During 1998, DBG and the Foreign General insurance group accounted for 54.9
percent and 32.9 percent, respectively, of AIG's net premiums written.
AIG's general insurance company subsidiaries worldwide operate primarily by
underwriting and accepting any size risk for their direct account and securing
reinsurance on that portion of the risk in excess of the limit which they wish
to retain. This operating policy differs from that of many insurance companies
which will underwrite only up to their net retention limit, thereby requiring
the broker or agent to secure commitments from other underwriters for the
remainder of the gross risk amount.
The following table summarizes general insurance premiums written and
earned:
(in millions)
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YEARS ENDED DECEMBER 31, WRITTEN EARNED
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1998
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Gross premiums $ 20,684 $ 20,092
Ceded premiums (6,098) (5,994)
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Net premiums $ 14,586 $ 14,098
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1997
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Gross premiums $ 18,742 $ 17,566
Ceded premiums (5,334) (5,145)
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Net premiums $ 13,408 $ 12,421
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1996
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Gross premiums $ 18,319 $ 17,580
Ceded premiums (5,627) (5,725)
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Net premiums $ 12,692 $ 11,855
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The utilization of reinsurance is closely monitored by an internal
reinsurance security committee, consisting of members of AIG's senior
management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 5 of Notes to Financial Statements.)
AIG is well diversified both in terms of lines of business and geographic
locations. Of the general insurance lines of business, workers' compensation was
approximately 8 percent of AIG's net premiums written. This line is well
diversified geographically.
The majority of AIG's insurance business is in the casualty classes, which
tend to involve longer periods of time for the reporting and settling of claims.
This may increase the risk and uncertainty with respect to AIG's loss reserve
development. (See also the Discussion and Analysis of Consolidated Net Losses
and Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
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Loss and expense ratios of AIG's consolidated general insurance operations
are set forth in the following table. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
(dollars in millions)
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RATIO OF RATIO OF
LOSSES AND UNDERWRITING
LOSS EXPENSES EXPENSES
NET PREMIUMS INCURRED TO INCURRED TO INDUSTRY
-------------------------- NET PREMIUMS NET PREMIUMS COMBINED UNDERWRITING COMBINED
YEARS ENDED DECEMBER 31, WRITTEN EARNED EARNED WRITTEN RATIO MARGIN RATIO*
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1998 $14,586 $14,098 75.6 20.8 96.4 3.6 103.7
1997 13,408 12,421 75.3 20.9 96.2 3.8 101.5
1996 12,692 11,855 75.9 20.6 96.5 3.5 106.3
1995 11,893 11,406 75.9 20.7 96.6 3.4 106.7
1994 10,866 10,287 77.8 20.5 98.3 1.7 108.9
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* Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders) and the ratio for 1998 reflects estimated
results provided by Conning & Company.
During 1998, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 12.9 percent and 10.4 percent were
written in California and New York, respectively. No other state accounted for
more than 5 percent of such premiums.
There was no significant adverse effect on AIG's general insurance results
of operations from the economic environments in any one state, country or
geographic region for the year ended December 31, 1998. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
DISCUSSION AND ANALYSIS OF CONSOLIDATED NET LOSSES AND LOSS EXPENSE RESERVE
DEVELOPMENT
The reserve for net losses and loss expenses is exclusive of applicable
reinsurance and represents the accumulation of estimates for reported losses
("case basis reserves") and provisions for losses incurred but not reported
("IBNR"). Losses and loss expenses are charged to income as incurred. AIG
discounts certain of its loss reserves which are related to certain workers'
compensation claims.
Loss reserves established with respect to foreign business are set and
monitored in terms of the respective local or functional currency. Therefore, no
assumption is included for changes in currency rates. (See also Note 1(s) of
Notes to Financial Statements.)
Management continually reviews the adequacy of established loss reserves
through the utilization of a number of analytical reserve development
techniques. Through the use of these techniques, management is able to monitor
the adequacy of its established reserves and determine appropriate assumptions
for inflation. Also, analysis of emerging specific development patterns, such as
case reserve redundancies or deficiencies and IBNR emergence, allows management
to currently determine any required adjustments. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
The "Analysis of Consolidated Net Losses and Loss Expense Reserve
Development", which follows, presents the development of net losses and loss
expense reserves for calendar years 1988 through 1998. The upper half of the
table shows the cumulative amounts paid during successive years related to the
opening loss reserves. For example, with respect to the net losses and loss
expense reserve of $15.84 billion as of December 31, 1991, by the end of 1998
(seven years later) $14.19 billion had actually been paid in settlement of these
net loss reserves. In addition, as reflected in the lower section of the table,
the original reserve of $15.84 billion was reestimated to be $17.36 billion at
December 31, 1998. This increase from the original estimate would generally be a
combination of a number of factors, including reserves being settled for larger
amounts than originally estimated. The original estimates will also be increased
or decreased as more information becomes known about the individual claims and
overall claim frequency and severity patterns. The redundancy (deficiency)
depicted in the table, for any particular calendar year, shows the aggregate
change in estimates over the period of years subsequent to the calendar year
reflected at the top of the respective column heading. For example, the
redundancy of $281 million at December 31, 1998 related to December 31, 1997 net
losses and loss expense reserves of $21.17 billion represents the cumulative
amount by which reserves for 1997 and prior years have developed redundantly
during 1998. The reserve for net losses and loss expenses with respect to
Transatlantic and 20th Century are only included in the consolidated net losses
and loss expenses as of December 31, 1998. No reserve development is presented
herein as these operations were not majority owned subsidiaries prior to the
third quarter of 1998.
Over the past several years, AIG has significantly strengthened its net
loss and loss expense reserves with respect to asbestos and environmental
losses. This strengthening is the primary cause of the adverse development
reflected in certain calendar years in the net loss and loss expense reserves
shown in the following table.
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ANALYSIS OF CONSOLIDATED NET LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
(in millions)
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1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
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Reserve for Net Losses and Loss
Expenses, December 31, $11,086 $12,958 $14,699 $15,840 $16,757 $17,557 $18,419 $19,693 $20,407 $21,171 $24,619
Paid (Cumulative) as of:
One Year Later 3,267 3,940 4,315 4,748 4,883 5,146 4,775 5,281 5,616 5,716
Two Years Later 5,452 6,477 7,350 8,015 8,289 8,242 8,073 8,726 9,081
Three Years Later 6,905 8,351 9,561 10,436 10,433 10,404 10,333 11,024
Four Years Later 7,966 9,721 11,224 11,815 11,718 12,095 12,107
Five Years Later 8,792 10,765 12,112 12,611 12,931 13,378
Six Years Later 9,450 11,285 12,615 13,472 13,894
Seven Years Later 9,737 11,517 13,235 14,193
Eight Years Later 9,813 11,953 13,804
Nine Years Later 10,140 12,402
Ten Years Later 10,525
Net Liability Reestimated
as of:
End of Year 11,086 12,958 14,699 15,840 16,757 17,557 18,419 19,693 20,407 21,171 24,619
One Year Later 10,924 12,845 14,596 15,828 16,807 17,434 18,139 19,413 20,009 20,890
Two Years Later 10,857 12,844 14,595 15,903 16,603 17,479 18,269 19,330 19,999
Three Years Later 10,812 12,809 14,724 15,990 16,778 17,782 18,344 19,327
Four Years Later 10,775 12,896 14,965 16,254 17,182 18,090 18,344
Five Years Later 10,805 13,065 15,361 16,712 17,600 18,300
Six Years Later 10,954 13,426 15,845 17,095 17,844
Seven Years Later 11,302 13,931 16,161 17,356
Eight Years Later 11,799 14,180 16,385
Nine Years Later 12,025 14,457
Ten Years Later 12,304
Redundancy/(Deficiency) (1,218) (1,499) (1,686) (1,516) (1,087) (743) 75 366 408 281
====================================================================================================================================
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The following table excludes for each calendar year the net loss and loss
expense reserves and the development thereof with respect to asbestos and
environmental claims. Thus, AIG's loss and loss expense reserves excluding
asbestos and environmental claims are developing adequately. (See also
management's Discussion and Analysis of Financial condition and Results of
Operations.)
ANALYSIS OF CONSOLIDATED NET LOSSES AND LOSS EXPENSE
RESERVE DEVELOPMENT EXCLUDING ASBESTOS AND
ENVIRONMENTAL NET LOSSES AND LOSS EXPENSE RESERVE
DEVELOPMENT
(in millions)
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1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
====================================================================================================================================
Reserve for net losses and
loss Expenses, Excluding
Asbestos and Environmental
Losses and Loss Expenses,
December 31, $11,006 $12,838 $14,539 $15,639 $16,503 $17,249 $18,089 $19,186 $19,664 $20,384 $23,754
Paid (Cumulative) as of:
One Year Later 3,267 3,940 4,260 4,691 4,766 5,061 4,700 5,174 5,507 5,576
Two Years Later 5,452 6,422 7,237 7,842 8,088 8,082 7,891 8,515 8,832
Three Years Later 6,851 8,240 9,333 10,178 10,157 10,137 10,048 10,673
Four Years Later 7,857 9,496 10,912 11,483 11,337 11,726 11,683
Five Years Later 8,569 10,456 11,727 12,175 12,448 12,871
Six Years Later 9,145 10,904 12,126 12,935 13,274
Seven Years Later 9,362 11,034 12,646 13,519
Eight Years Later 9,339 11,370 13,079
Nine Years Later 9,570 11,684
Ten Years Later 9,824
Net Liability Reestimated
as of:
End of Year 11,006 12,838 14,539 15,639 16,503 17,249 18,089 19,186 19,664 20,384 23,754
One Year Later 10,804 12,684 14,341 15,518 16,382 17,019 17,556 18,568 19,118 19,903
Two Years Later 10,697 12,591 14,232 15,422 16,073 16,813 17,355 18,347 18,910
Three Years Later 10,562 12,449 14,190 15,403 15,997 16,790 17,293 18,141
Four Years Later 10,420 12,368 14,327 15,417 16,081 16,960 17,090
Five Years Later 10,282 12,431 14,472 15,562 16,362 16,969
Six Years Later 10,326 12,544 14,648 15,808 16,404
Seven Years Later 10,430 12,748 14,828 15,869
Eight Years Later 10,635 12,861 14,854
Nine Years Later 10,728 12,941
Ten Years Later 10,814
Redundancy/(Deficiency): 192 (103) (315) (230) 99 280 999 1,045 754 481
====================================================================================================================================
RECONCILIATION OF NET RESERVE FOR LOSSES AND
LOSS EXPENSES
(in millions)
- -------------------------------------------------------------------------------
1998 1997 1996
===============================================================================
Net reserve for losses and loss
expenses at beginning of year $ 21,171 $ 20,407 $ 19,693
Acquisitions(a) 2,896 -- --
- -------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 10,938 9,732 9,273
Prior years(b) (281) (376) (276)
- -------------------------------------------------------------------------------
10,657 9,356 8,997
- -------------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 4,389 2,976 3,002
Prior years 5,716 5,616 5,281
- -------------------------------------------------------------------------------
10,105 8,592 8,283
- -------------------------------------------------------------------------------
Net reserve for losses and loss
expenses at end of year $ 24,619 $ 21,171 $ 20,407
===============================================================================
(a) Acquisitions include the opening balances with respect to Transatlantic
and 20th Century.
(b) Does not include the effects of foreign exchange adjustments which are
reflected in the "Net Losses and Loss Expense Reserve Development" table.
Approximately 45 percent of the net losses and loss expense reserves are
paid out within two years of the date incurred. The remaining net losses and
loss expense reserves, particularly those associated with the casualty lines of
business, may extend to 20 years or more.
For further discussion regarding net reserves for losses and loss expenses,
see Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The reserve for losses and loss expenses as reported in AIG's Consolidated
Balance Sheet at December 31, 1998, differs from the total reserve reported in
the Annual Statements filed with state insurance departments and, where
appropriate, with foreign regulatory authorities. The differences at December
31, 1998 relate primarily to estimates for unrecoverable reinsurance and
additional reserves relating to certain foreign operations. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
The reserve for gross losses and loss expenses is prior to reinsurance and
represents the accumulation for reported losses and
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8
IBNR. Management reviews the adequacy of established gross loss reserves in the
manner previously described for net loss reserves.
The "Analysis of Consolidated Gross Losses and Loss Expense Reserve
Development", which follows, presents the development of gross losses and loss
expense reserves for calendar years 1992 through 1998. As with the net losses
and loss expense reserve development, the deficiencies of $1.45 billion and $835
million for 1992 and 1993, and redundancies of $927 million, $1.29 billion,
$1.71 billion and $1.06 billion for 1994, 1995, 1996 and 1997, respectively, are
relatively insignificant both in terms of an aggregate amount and as a
percentage of the initial reserve balance.
ANALYSIS OF CONSOLIDATED GROSS LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
(in millions)
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1992 1993 1994 1995 1996 1997 1998
===================================================================================================================================
Gross losses and
loss expenses,
December 31, $28,157 $30,046 $31,435 $33,047 $33,430 $33,400 $38,310
Paid (cumulative)
as of:
One Year Later 7,281 8,807 7,640 8,392 9,199 9,185
Two Years Later 13,006 13,279 13,036 15,496 15,043
Three Years Later 16,432 17,311 17,540 18,837
Four Years Later 18,550 20,803 20,653
Five Years Later 21,322 22,895
Six Years Later 22,807
Gross Liability
Reestimated
as of:
End of Year 28,157 30,046 31,435 33,047 33,430 33,400 38,310
One Year Later 28,253 29,866 30,759 32,372 32,777 32,337
Two Years Later 27,825 29,537 30,960 32,398 31,719
Three Years Later 27,727 30,362 30,825 31,759
Four Years Later 28,625 31,020 30,508
Five Years Later 29,701 30,881
Six Years Later 29,605
Redundancy/(Deficiency) (1,448) (835) 927 1,288 1,711 1,063
===================================================================================================================================
LIFE INSURANCE OPERATIONS
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group life,
annuity, endowment and accident and health policies. Financial and investment
products consist of single premium annuity, variable annuities, guaranteed
investment contracts, universal life and pensions. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
Life insurance operations in foreign countries comprised 92.8 percent of
life premium income and 91.6 percent of operating income in 1998. AIG operates
overseas principally through 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. AIA operates primarily in Hong Kong, Singapore,
Malaysia and Thailand. Nan Shan operates in Taiwan. These operations comprised
90.4 percent of AIG's consolidated life premium income. (See also Note 17 of
Notes to Financial Statements.)
In the United States, AIG has four domestic life subsidiaries: American
International Life Assurance Company of New York, AIG Life Insurance Company,
Delaware American Life Insurance Company, and Pacific Union Assurance Company.
These companies utilize multiple distribution channels including brokerage and
career and general agents to offer primarily life insurance, financial and
investment products and specialty forms of accident and health coverage for
individuals and groups, including employee benefit plans. The domestic life
business comprised 7.2 percent of total life premium income in 1998.
There was no significant adverse effect on AIG's life insurance results of
operations from economic environments in any one state, country or geographic
region for the year ended December 31, 1998. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial products
are sold in Japan.
In addition to the above, AIG also has subsidiary operations in
Switzerland, Puerto Rico, and conducts life insurance business through AIUO
subsidiary companies in certain countries in Central and South America.
7
9
The foreign life companies have approximately 120,000 career agents and
sell their products largely to indigenous persons in local currencies. In
addition to the agency outlets, these companies also distribute their products
through direct marketing channels, such as mass marketing, and through brokers
and other distribution outlets such as financial institutions.
The following table summarizes the life insurance operating results for the
year ended December 31, 1998. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE
NET TERMINATION RATE
PREMIUM INVESTMENT OPERATING INSURANCE ----------------
INCOME INCOME INCOME(A) IN-FORCE LAPSE OTHER
====================================================================================================================================
Individual:
Life $ 7,391 $2,260 $1,244 $376,699(b) 6.9% 1.4%
Annuity 238 510 88 (c)
Accident and health 1,297 95 361 (c)
Group:
Life 513 32 55 122,468 10.6% 5.1%
Pension 229 316 52 (c)
Accident and health 579 27 23 (c)
Realized capital gains -- -- (35) (c)
Consolidation adjustments -- (8) (8) (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $10,247 $3,232 $1,780 $499,167
====================================================================================================================================
(a) Including income related to investment type products.
(b) Including $266.8 billion of whole life insurance and endowments.
(c) Not applicable.
AIG's individual life insurance and group life insurance portfolio
accounted for 71 percent, 69 percent and 68 percent of AIG's consolidated life
insurance operating income before realized capital gains or losses for the years
ended December 31, 1998, 1997 and 1996, respectively. For each of those years,
92 percent of consolidated life operating income before realized capital gains
or losses was derived from foreign operations.
INSURANCE INVESTMENT OPERATIONS
A significant portion of AIG's general and life operating revenues are derived
from AIG's insurance investment operations. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 1, 2, 8
and 17 of Notes to Financial Statements.)
The following table is a summary of the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at December 31, 1998:
(dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT -------------------------
INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
===================================================================================================================================
Fixed maturities:
Available for sale, at market value(a) $15,939 $33,163 $49,102 56.1% 40.3% 59.7%
Held to maturity, at amortized cost 12,658 -- 12,658 14.4 100.0 --
Equity securities, at market value(b) 3,923 1,717 5,640 6.4 51.1 48.9
Mortgage loans on real estate, policy and collateral loans 70 6,400 6,470 7.4 31.5 68.5
Short-term investments, including
time deposits, and cash 873 4,039 4,912 5.6 21.6 78.4
Real estate 393 1,070 1,463 1.7 15.2 84.8
Investment income due and accrued 568 900 1,468 1.7 41.4 58.6
Other invested assets 4,459 1,426 5,885 6.7 80.4 19.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total $38,883 $48,715 $87,598 100.0% 50.2% 49.8%
===================================================================================================================================
(a) Includes $1,005 of bonds trading securities, at market value.
(b) Includes $301 of preferred stocks, at market value.
8
10
The following table summarizes the investment results of the general
insurance operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
ANNUAL AVERAGE CASH AND INVESTED ASSETS
--------------------------------------------
CASH
(INCLUDING NET REALIZED
SHORT-TERM INVESTED INVESTMENT RATE OF RETURN ON CAPITAL
YEARS ENDED DECEMBER 31, INVESTMENTS) ASSETS(A) TOTAL INCOME(B) INVESTED ASSETS GAINS
====================================================================================================================================
1998 $ 745 $34,619 $35,364 $2,192 6.2% (c) 6.3%(d) $205
1997 611 29,704 30,315 1,854 6.1(c) 6.2(d) 128
1996 630 27,048 27,678 1,691 6.1(c) 6.3(d) 65
1995 825 24,417 25,242 1,547 6.1(c) 6.3(d) 68
1994 1,442 21,837 23,279 1,436 6.2(c) 6.6(d) 51
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and
excludes realized capital gains.
(c) Net investment income divided by the annual average sum of cash and
invested assets.
(d) Net investment income divided by the annual average invested assets.
The following table summarizes the investment results of the life insurance
operations. (See also Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)
(dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
ANNUAL AVERAGE CASH AND INVESTED ASSETS
---------------------------------------------
CASH REALIZED
(INCLUDING NET CAPITAL
SHORT-TERM INVESTED INVESTMENT RATE OF RETURN ON GAINS
YEARS ENDED DECEMBER 31, INVESTMENTS) ASSETS(A) TOTAL INCOME((B) INVESTED ASSETS (LOSSES)
===================================================================================================================================
1998 $3,224 $41,657 $44,881 $3,232 7.2%(c) 7.7%(d) $(35)
1997 1,706 38,063 39,769 2,896 7.3(c) 7.6(d) 21
1996 1,117 35,563 36,680 2,676 7.3(c) 7.5(d) 35
1995 1,222 29,557 30,779 2,265 7.4(c) 7.7(d) 33
1994 2,046 22,318 24,364 1,748 7.2(c) 7.8(d) 87
===================================================================================================================================
(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and
excludes realized capital gains.
(c) Net investment income divided by the annual average sum of cash and
invested assets.
(d) Net investment income divided by the annual average invested assets.
AIG's worldwide insurance investment policy places primary emphasis on
investments in high quality, fixed income securities in all of its portfolios
and, to a lesser extent, investments in marketable common stocks in order to
preserve policyholders' surplus and generate net investment income. The ability
to implement this policy is somewhat limited in certain territories as there may
be a lack of qualified long term investments or investment restrictions may be
imposed by the local regulatory authorities. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
FINANCIAL SERVICES OPERATIONS
AIG's financial services subsidiaries engage in diversified financial products
and services including asset management, premium financing, banking services and
consumer finance services.
International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. (See also Note 17 of
Notes to Financial Statements.)
AIG Financial Products Corp. and its subsidiaries (AIGFP)structure
financial transactions, including long-dated interest rate and currency swaps
and structures borrowing through notes, bonds and guaranteed investment
agreements. (See also Note 17 of Notes to Financial Statements.)
AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various
commodities trading, foreign exchange trading, interest rate swaps and market
making activities. (See also Note 17 of Notes to Financial Statements.)
Together these three operations comprise 88.5 percent of the commissions,
transactions and other fees of AIG's consolidated financial services operations.
Other AIG operations which contribute to financial services income include
primarily A.I. Credit Corp. (AICCO), AIG Private Bank Ltd. and AIG Global
Investment Group, Inc. AICCO's business is principally in premium financing. AIG
Private Bank Ltd. operates as a Swiss bank. AIG Global Investment Group, Inc.
operations include the management of the investment portfolios of various AIG
subsidiaries, as well as third-party assets, and is responsible for product
design and origination, marketing and distribution of third-party asset
management products, including retail mutual funds, direct
9
11
investment, and real estate investment, management and development. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1, 9 and 11 of Notes to Financial Statements.)
The following table is a summary of the composition of AIG's financial
services invested assets and liabilities at December 31, 1998. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)
(in millions)
================================================================================
Financial services invested assets:
Flight equipment primarily under operating leases,
net of accumulated depreciation $16,330
Securities available for sale, at market value 10,674
Trading securities, at market value 5,668
Spot commodities, at market value 476
Unrealized gain on interest rate and currency
swaps, options and forward transactions 9,881
Trading assets 6,229
Securities purchased under agreements to resell,
at contract value 4,838
Other, including short-term investments 2,523
- --------------------------------------------------------------------------------
Total financial services invested assets $56,619
================================================================================
Financial services liabilities:
Borrowings under obligations of guaranteed
investment agreements $ 9,188
Securities sold under agreements to repurchase,
at contract value 4,473
Trading liabilities 4,664
Securities and spot commodities sold but
not yet purchased, at market value 4,457
Unrealized loss on interest rate and currency
swaps, options and forward transactions 7,055
Deposits due to banks and other depositors 1,242
Commercial paper 3,204
Notes, bonds and loans payable 15,249
- --------------------------------------------------------------------------------
Total financial services liabilities $49,532
================================================================================
The following table is a summary of the revenues and operating income of
AIG's principal financial services operations for the year ended December 31,
1998. (See also Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 1 of Notes to Financial Statements.)
Operating
(in millions) Revenues Income
================================================================================
ILFC $2,002 $ 496
AIGFP* 550 323
AIGTG* 374 123
================================================================================
* Represents net trading revenues.
OTHER OPERATIONS
Small AIG subsidiaries provide insurance-related services such as adjusting
claims and marketing specialized products. AIG has several other relatively
minor subsidiaries which carry on various businesses. American International
Technology Enterprises, Inc. provides information technology and processing
services to businesses worldwide. Mt. Mansfield Company, Inc. owns and operates
the ski slopes, lifts, school and an inn located at Stowe, Vermont.
ADDITIONAL INVESTMENTS
On January 29, 1998, AIG purchased the 76.1 percent interest in SELIC Holdings,
Ltd. which it previously did not own. AIG holds a 24.4 percent interest in IPC
Holdings, Ltd., a reinsurance holding company and a 19.9 percent interest in
Richmond Insurance Company, Ltd., a reinsurer. (See also Note 1(n) of Notes to
Financial Statements.)
LOCATIONS OF CERTAIN ASSETS
As of December 31, 1998, approximately 39 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $1.02
billion of cash and securities on deposit with foreign regulatory authorities.
Foreign operations and assets held abroad may be adversely affected by political
developments in foreign countries, including such possibilities as tax changes,
nationalization and changes in regulatory policy, as well as by consequence of
hostilities and unrest. The risks of such occurrences and their overall effect
upon AIG vary from country to country and cannot easily be predicted. If
expropriation or nationalization does occur, AIG's policy is to take all
appropriate measures to seek recovery of such assets. Certain of the countries
in which AIG's business is conducted have currency restrictions which generally
cause a delay in a company's ability to repatriate assets and profits. (See also
Notes 1, 2 and 17 of Notes to Financial Statements.)
INSURANCE REGULATION AND COMPETITION
Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such requirements.
(See also Note 10 of Notes to Financial Statements.)
AIG's insurance subsidiaries, in common with other insurers, are subject
to regulation and supervision by the states and by other jurisdictions in which
they do business. Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate regulatory and
supervisory powers to an insurance official. The regulation and supervision
relate primarily to approval of policy forms and rates, the standards of
solvency that must be met and maintained, including risk based capital
measurements, the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the size of risks which may be
insured under a single policy, deposits of securities for the benefit of
policyholders, methods of accounting, periodic examinations of the affairs of
insurance companies, the form and content of reports of financial condition
10
12
required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of policyholders
rather than security holders. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Risk Based Capital (RBC) is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Thus, inadequately capitalized general and life insurance companies may be
identified.
The RBC formula develops a risk adjusted target level of adjusted statutory
capital by applying certain factors to various asset, premium and reserve items.
Higher factors are applied to more risky items and lower factors are applied to
less risky items. Thus, the target level of statutory surplus varies not only as
a result of the insurer's size, but also on the risk profile of the insurer's
operations.
The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control.
The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 1998.
To the extent that any of AIG's insurance entities would fall below
prescribed levels of surplus, it would be AIG's intention to infuse necessary
capital to support that entity.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business is carried on in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification or revocation by such authorities, and AIU or other AIG
subsidiaries could be prevented from conducting business in certain of the
jurisdictions where they currently operate. In the past, AIU has been allowed to
modify its operations to conform with new licensing requirements in most
jurisdictions.
In addition to licensing requirements, AIG's foreign operations are also
regulated in various jurisdictions with respect to currency, policy language and
terms, amount and type of security deposits, amount and type of reserves, amount
and type of local investment and the share of profits to be returned to
policyholders on participating policies. Some foreign countries regulate rates
in various types of policies. Certain countries have established reinsurance
institutions, wholly or partially owned by the state, to which admitted insurers
are obligated to cede a portion of their business on terms which do not always
allow foreign insurers, including AIG, full compensation. In some countries,
regulations governing constitution of technical reserves and remittance balances
may hinder remittance of profits and repatriation of assets.
The insurance industry is highly competitive. Within the United States,
AIG's general insurance subsidiaries compete with approximately 3,000 other
stock companies, specialty insurance organizations, mutual companies and other
underwriting organizations. AIG's life insurance companies compete in the United
States with some 1,700 life insurance companies and other participants in
related financial service fields. Overseas, AIG subsidiaries compete for
business with foreign insurance operations of the larger U.S. insurers and local
companies in particular areas in which they are active.
AIG's financial services subsidiaries, particularly AIGTG and AIGFP,
operate in a highly competitive environment, both domestically and overseas.
Principal sources of competition are banks, investment banks and other non-bank
financial institutions.
ITEM 2.PROPERTIES
AIG and its subsidiaries operate from approximately 350 offices in the United
States, 5 offices in Canada and numerous offices in other foreign countries. The
offices in Springfield, Illinois; Houston, Texas; Atlanta, Georgia; Baton Rouge,
Louisiana; Wilmington, Delaware; Hato Rey, Puerto Rico; San Diego, California;
Greensboro, North Carolina; Livingston, New Jersey; 70 Pine Street, 72 Wall
Street and 175 Water Street in New York City; and offices in approximately 30
foreign countries including Bermuda, Chile, Hong Kong, the Philippines, Japan,
England, Singapore, Switzerland, Taiwan and Thailand are located in buildings
owned by AIG and its subsidiaries. The remainder of the office space utilized by
AIG subsidiaries is leased.
ITEM 3.LEGAL PROCEEDINGS
AIG and its subsidiaries, in common with the insurance industry in general, are
subject to litigation, including claims for punitive damages, in the normal
course of their business. AIG does not believe that such litigation will have a
material adverse effect on its financial condition, future operating results or
liquidity. (See also the Discussion and Analysis of Consolidated Net Losses and
Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Shareholders held on November 18, 1998, the
Shareholders approved, by a vote of 892,871,603 shares to 1,009,655 shares, with
3,105,028 shares abstaining, a proposal to approve and adopt the Agreement and
Plan of Merger between AIG and SunAmerica Inc. and the merger contemplated
thereby.
11
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DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the directors and executive
officers of AIG. All directors are elected at the annual meeting of
shareholders. All officers serve at the pleasure of the Board of Directors, but
subject to the foregoing, are elected for terms of one year expiring in May of
each year.
- -----------------------------------------------------------------------------------------------------------------------------------
SERVED AS
DIRECTOR OR
OFFICER
NAME TITLE AGE SINCE
===================================================================================================================================
M. Bernard Aidinoff* Director 70 1984
Eli Broad Director 65 1999
Pei-yuan Chia Director 60 1996
Marshall A. Cohen Director 63 1992
Barber B. Conable, Jr. Director 76 1991
Martin S. Feldstein Director 59 1987
Ellen V. Futter Director 49 1999
Leslie L. Gonda Director 79 1990
Evan G. Greenberg* Director, President and Chief Operating Officer 44 1995
M. R. Greenberg* Director, Chairman and Chief Executive Officer 73 1967
Carla A. Hills Director 65 1993
Frank J. Hoenemeyer* Director 79 1985
Edward E. Matthews* Director and Vice Chairman-Investments and Financial Services 67 1973
Dean P. Phypers Director 70 1979
Howard I. Smith Director, Executive Vice President, Chief Financial Officer and Comptroller 54 1984
Thomas R. Tizzio* Director and Senior Vice Chairman-General Insurance 61 1982
Edmund S. W. Tse Director and Vice Chairman-Life Insurance 61 1991
Jay S. Wintrob Director 42 1999
Frank G. Wisner Director and Vice Chairman-External Affairs 60 1997
Edwin E. Manton Senior Advisor 90 1967
John J. Roberts Senior Advisor 76 1967
Ernest E. Stempel Senior Advisor 82 1967
Kristian P. Moor Executive Vice President-Domestic General Insurance 39 1998
R. Kendall Nottingham Executive Vice President-Life Insurance 60 1998
Robert M. Sandler Executive Vice President, Senior Casualty Actuary and Senior Claims Officer 56 1980
Martin J. Sullivan Executive Vice President-Foreign General Insurance 44 1997
William N. Dooley Senior Vice President-Financial Services 45 1992
Lawrence W. English Senior Vice President-Administration 57 1985
Axel I. Freudmann Senior Vice President-Human Resources 52 1986
Win J. Neuger Senior Vice President and Chief Investment Officer 49 1995
Ernest T. Patrikis Senior Vice President and General Counsel 55 1998
Robert E. Lewis Vice President and Chief Credit Officer 48 1993
Charles M. Lucas Vice President and Director of Market Risk Management 60 1996
Frank Petralito II Vice President and Director of Taxes 62 1978
Kathleen E. Shannon Vice President and Secretary 49 1986
John T. Wooster, Jr. Vice President-Communications 59 1989
Carol A. McFate Treasurer 46 1998
- -----------------------------------------------------------------------------------------------------------------------------------
* Member of Executive Committee.
Except as hereinafter noted, each of the directors who is also an executive
officer of AIG and each of the other executive officers has, for more than five
years, occupied an executive position with AIG or companies that are now its
subsidiaries, or with Starr. Evan G. Greenberg is the son of M.R. Greenberg.
There are no other arrangements or understandings between any director or
officer and any other person pursuant to which the director or officer was
elected to such position. Mr. Neuger was Managing Director, Global Investment
Management-Equity at Bankers Trust Company prior to joining AIG in February,
1995. Prior to joining AIG in 1998, Mr. Patrikis was First Vice President at the
Federal Reserve Bank of New York, previously having served as Executive Vice
President and General Counsel. Mr. Lucas was Senior Vice President at Republic
National Bank of New York prior to joining AIG in 1996. Ms. McFate was Assistant
Treasurer of AIG and Director of Financial Analysis of AIG prior to being
elected Treasurer of AIG in 1998 and was Senior Vice President-Investment
Management at Prudential Insurance Company prior to joining AIG in 1994. Mr.
Wisner served as a career foreign service officer with the United States
Department of State from 1961 through July, 1997, with his last position being
Ambassador to India.
12
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PART II
================================================================================
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(a) The table below shows the high and low closing sales prices per share of
AIG's common stock, as reported on the New York Stock Exchange Composite Tape,
for each quarter of 1998 and 1997, as adjusted for the common stock split in the
form of a 50 percent common stock dividend paid July 31, 1998. All prices are as
reported by the National Quotation Bureau, Incorporated.
- --------------------------------------------------------------------------------
1998 1997
------------------- ----------------------
HIGH LOW HIGH LOW
================================================================================
First Quarter 86 1/4 67 56 7/8 47 13/16
Second Quarter 97 5/16 81 13/16 66 13/16 50 11/16
Third Quarter 101 15/16 76 1/4 71 62 15/16
Fourth Quarter 100 7/8 66 9/16 74 5/8 65 5/16
- --------------------------------------------------------------------------------
(b) In 1998, AIG paid a quarterly dividend of 5.0 cents in March and June
and 5.6 cents in September and December for a total cash payment of 21.2 cents
per share of common stock. In 1997, AIG paid a quarterly dividend of 4.5 cents
in March and June and 5.0 cents in September and December for a total cash
payment of 19 cents per share of common stock. These amounts reflect the
adjustment for a common stock split in the form of a 50 percent common stock
dividend paid July 31, 1998. Subject to the dividend preference of any of AIG's
serial preferred stock which may be outstanding, the holders of shares of common
stock are entitled to receive such dividends as may be declared by the Board of
Directors from funds legally available therefor.
See Note 10(b) of Notes to Financial Statements for a discussion of certain
restrictions on the payment of dividends to AIG by some of its insurance
subsidiaries.
(c) The approximate number of holders of Common Stock as of January 31,
1999, based upon the number of record holders, was 24,200.
================================================================================
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ITEM 6.SELECTED FINANCIAL DATA
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data is presented in accordance
with generally accepted accounting principles. This data should be read in
conjunction with the financial statements and accompanying notes included
elsewhere herein.
(in millions, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
===================================================================================================================================
Revenues (a) $ 33,296 $ 30,602 $ 27,943 $ 25,614 $ 22,122
General insurance:
Net premiums written 14,586 13,408 12,692 11,893 10,866
Net premiums earned 14,098 12,421 11,855 11,406 10,287
Adjusted underwriting profit 531 490 450 417 201
Net investment income 2,192 1,854 1,691 1,547 1,436
Realized capital gains 205 128 65 68 51
Operating income 2,928 2,472 2,206 2,032 1,688
Life insurance:
Premium income 10,247 9,926 8,978 8,038 6,724
Net investment income 3,232 2,896 2,676 2,265 1,748
Realized capital gains (losses) (35) 21 35 33 87
Operating income 1,780 1,571 1,324 1,091 952
Financial services operating income 913 701 524 418 405
Equity in income of minority-owned insurance
operations 57 114 99 82 56
Other realized capital losses (5) (30) (12) (29) (51)
Income before income taxes and minority interest 5,529 4,731 4,056 3,502 2,982
Income taxes 1,594 1,367 1,116 956 776
Income before minority interest 3,935 3,364 2,940 2,546 2,206
Minority interest (169) (32) (43) (36) (30)
Net income 3,766 3,332 2,897 2,510 2,176
Earnings per common share (b):
Basic 3.59 3.16 2.73 2.35 2.04
Diluted 3.57 3.15 2.72 2.35 2.03
Cash dividends per common share .21 .19 .17 .14 .13
Total assets 194,398 163,971 148,431 134,136 114,346
Long-term debt (c) 21,504 17,814 17,506 14,453 12,614
Capital funds (shareholders' equity) 27,131 24,001 22,044 19,827 16,422
===================================================================================================================================
(a) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, equity in income of minority-owned insurance operations and realized
capital gains (losses). In 1997, agency operations were presented as a
component of general insurance and for years prior to 1997 agency results
have been reclassified to conform to this presentation. (See also tables
under Item 1, "Business".)
(b) Per share amounts for all periods presented reflect the adoption of the
Statement of Financial Accounting Standards No. 128 "Earnings per Share."
(c) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
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16
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
American International Group, Inc. and Subsidiaries
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATIONAL REVIEW
GENERAL INSURANCE OPERATIONS
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance. One or more of these
companies is licensed to write substantially all of these lines in all states of
the United States and in approximately 100 foreign countries.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group, including the domestic operations of Transatlantic Holdings,
Inc. (Transatlantic), Personal Lines, including 20th Century Industries (20th
Century) and Mortgage Guaranty.
Commencing with the third quarter of 1998, Transatlantic and 20th Century
were consolidated into AIG's financial statements, as a result of AIG obtaining
majority ownership.
The Domestic Brokerage Group (DBG) is the primary domestic 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.
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 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. Transatlantic's foreign operations are included in this group. (See
also Note 17 of Notes to Financial Statements.)
General insurance operations for the twelve month periods ending December
31, 1998, 1997 and 1996 were as follows:
(in millions)
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Net premiums written:
Domestic $ 9,787 $ 9,038 $ 8,367
Foreign 4,799 4,370 4,325
- --------------------------------------------------------------------------------
Total $ 14,586 $ 13,408 $ 12,692
================================================================================
Net premiums earned:
Domestic $ 9,471 $ 8,352 $ 7,822
Foreign 4,627 4,069 4,033
- --------------------------------------------------------------------------------
Total $ 14,098 $ 12,421 $ 11,855
================================================================================
Adjusted underwriting
profit (loss):
Domestic $ 9 $ (7) $ 52
Foreign 522 497 398
- --------------------------------------------------------------------------------
Total $ 531 $ 490 $ 450
================================================================================
Net investment income:
Domestic $ 1,754 $ 1,485 $ 1,352
Foreign 438 369 339
- --------------------------------------------------------------------------------
Total $ 2,192 $ 1,854 $ 1,691
================================================================================
Operating income before
realized capital gains:
Domestic $ 1,763 $ 1,478 $ 1,404
Foreign 960 866 737
- --------------------------------------------------------------------------------
Total 2,723 2,344 2,141
Realized capital gains 205 128 65
- --------------------------------------------------------------------------------
Operating income $ 2,928 $ 2,472 $ 2,206
================================================================================
In AIG's general insurance operations, 1998 net premiums written and net
premiums earned increased 8.8 percent and 13.5 percent, respectively, from those
of 1997. In 1997, net premiums written increased 5.6 percent and net premiums
earned increased 4.8 percent when compared to 1996.
The commercial insurance market remains highly competitive and excessively
capitalized. DBG has been able to sustain some growth in various specialty
markets. However, DBG has also non-renewed certain of its policies where
underwriting and pricing standards could not be achieved.
Domestic growth was primarily achieved through the growth in the personal
auto insurance segment of Personal Lines.
Foreign general insurance operations produced 32.9 percent of the general
insurance net premiums written in 1998, 32.6 percent in 1997 and 34.1 percent in
1996.
In comparing the foreign exchange rates used to translate the results of
the Foreign General insurance group's operations during 1998 to those foreign
exchange rates used to translate the Foreign General insurance group's results
during 1997, the U.S. dollar strengthened in value in relation to most major
foreign currencies in which the Foreign General insurance group conducts its
business. Accordingly, if the Foreign General insurance group's net premiums
written were translated into U.S. dollars utilizing those exchange rates which
prevailed in 1997, thus mitigating the effects of the U.S. dollar's general
strengthening, the Foreign General insurance group's premium
15
17
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
growth would have been 17.5 percent. This growth equates to growth in original
currency. The Far East operations, particularly personal lines, were the primary
source for such growth. (See also the discussion under "Capital Resources"
herein.)
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.
The statutory general insurance ratios were as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Domestic:
Loss Ratio 84.25 84.44 85.21
Expense Ratio 15.87 15.90 14.79
- --------------------------------------------------------------------------------
Combined Ratio 100.12 100.34 100.00
================================================================================
Foreign:
Loss Ratio 57.87 56.61 57.82
Expense Ratio 30.76 31.16 31.77
- --------------------------------------------------------------------------------
Combined Ratio 88.63 87.77 89.59
================================================================================
Consolidated:
Loss Ratio 75.59 75.33 75.89
Expense Ratio 20.77 20.87 20.58
- --------------------------------------------------------------------------------
Combined Ratio 96.36 96.20 96.47
================================================================================
Adjusted underwriting profit (operating income less net investment income
and realized capital gains) represents statutory underwriting profit or loss
adjusted primarily for changes in deferred policy acquisition costs. The
adjusted underwriting profits were $531 million in 1998, $490 million in 1997
and $450 million in 1996. (See also Notes 4 and 17 of Notes to Financial
Statements.)
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $110 million in 1998, $16 million in 1997 and $78 million in 1996.
AIG's gross incurred losses from catastrophes approximated $625 million in 1998,
$22 million in 1997 and $240 million in 1996. If these catastrophes were
excluded from the losses incurred in each period, the pro forma consolidated
statutory general insurance ratios would be as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Loss Ratio 74.81 75.20 75.23
Expense Ratio 20.77 20.87 20.58
- --------------------------------------------------------------------------------
Combined Ratio 95.58 96.07 95.81
================================================================================
AIG's ability to maintain its combined ratio below 100 is primarily
attributable to the profitability of AIG's foreign general insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.
General insurance net investment income in 1998 increased 18.3 percent when
compared to 1997. In 1997, net investment income increased 9.6 percent over
1996. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment. The new cash flow was
generated from net general insurance operating cash flow and included the
compounding of previously earned and reinvested net investment income. (See also
the discussion under "Liquidity" herein and Note 8 of Notes to Financial
Statements.)
General insurance realized capital gains were $205 million in 1998, $128
million in 1997 and $65 million in 1996. These realized gains resulted from the
ongoing management of the general insurance investment portfolios within the
overall objectives of the general insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.
General insurance operating income in 1998 increased 18.4 percent when
compared to 1997. The 1997 results reflect an increase of 12.1 percent from
1996. The contribution of general insurance operating income to income before
income taxes and minority interest was 53.0 percent in 1998 compared to 52.3
percent in 1997 and 54.4 percent in 1996.
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 100 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $17.61 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 1998 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, 1998, approximately 50 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, nearly all of these balances were collateralized. The
remaining 50 percent of the general reinsurance assets were from authorized
reinsurers and over 93 percent of such balances are from reinsurers rated
A-(excellent) or better, as rated by A.M. Best. This rating is a measure of
financial strength. The terms authorized and unauthorized pertain to regulatory
categories, not creditworthiness.
AIG maintains an allowance for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 1998,
AIG had allowances for
16
18
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
unrecoverable reinsurance approximating $105 million. At that date, and prior to
this allowance, AIG had no significant reinsurance recoverables from any
individual reinsurer which is financially troubled (e.g., liquidated, insolvent,
in receivership or otherwise subject to formal or informal regulatory
restriction).
AIG's Reinsurance Security Department conducts ongoing detailed assessments
of the reinsurance markets and current and potential reinsurers both foreign and
domestic. Such assessments include, but are not limited to, identifying if a
reinsurer is appropriately licensed, and has sufficient financial capacity, and
the local economic environment in which a foreign reinsurer operates. This
department also reviews the nature of the risks ceded and the need for
collateral. In addition, AIG's Credit Risk Committee reviews the credit limits
for and concentrations with any one reinsurer.
AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
At December 31, 1998, the consolidated general reinsurance assets of $17.61
billion include reinsurance recoverables for paid losses and loss expenses of
$1.72 billion and $13.69 billion with respect to the ceded reserve for losses
and loss expenses, including ceded losses incurred but not reported (IBNR)
(ceded reserves). The ceded reserves represent the accumulation of estimates of
ultimate ceded losses including provisions for ceded IBNR and loss expenses. The
methods used to determine such estimates and to establish the resulting ceded
reserves are continually reviewed and updated. Any adjustments therefrom are
reflected in income currently. It is AIG's belief that the ceded reserves at
December 31, 1998 were representative of the ultimate losses recoverable. In the
future, as the ceded reserves continue to develop to ultimate amounts, the
ultimate loss recoverable may be greater or less than the reserves currently
ceded.
At December 31, 1998, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $38.31 billion. These loss reserves
represent the accumulation of estimates of ultimate losses, including IBNR, and
loss expenses and minor amounts of discounting related to certain workers'
compensation claims. At December 31, 1998, general insurance net loss reserves
increased $3.45 billion to $24.62 billion. These loss reserves represent loss
reserves reduced by reinsurance recoverable, net of an allowance for
unrecoverable reinsurance. The methods used to determine such estimates and to
establish the resulting reserves are continually reviewed and updated. Any
adjustments resulting therefrom are reflected in operating income currently. It
is management's belief that the general insurance net loss reserves are adequate
to cover all general insurance net losses and loss expenses as at December 31,
1998. In the future, if the general insurance net loss reserves develop
deficiently, such deficiency would have an adverse impact on such future results
of operations.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business; the
other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. 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 and current and future estimates of monetary inflation and
social inflation. Thus, many factors are implicitly considered in estimating the
year to year growth in loss costs. Therefore, AIG's carried net long tail loss
reserves are judgmentally set as well as tested for reasonableness using the
most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. These
factors are periodically reviewed and subsequently adjusted, as appropriate, to
reflect emerging trends which are based upon past loss experience.
Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in 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 claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter referred to
collectively as environmental claims) and indemnity claims asserting injuries
from asbestos. The vast majority of these asbestos and
17
19
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
environmental claims emanate from policies written in 1984 and prior years. AIG
has established a specialized claims unit which investigates and adjusts all
such asbestos and environmental claims. Commencing in 1985, standard policies
contained an absolute exclusion for pollution related damage. However, AIG
currently underwrites environmental impairment liability insurance on a claims
made basis and excluded such claims from the analyses included herein.
Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends which
influence the development of asbestos and environmental claims are the
inconsistent court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current case law can be
characterized as still evolving and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves issues such as allocation
of responsibility among potentially responsible parties and the government's
refusal to release parties. The cleanup cost exposure may significantly change
if the Congressional reauthorization of Superfund dramatically changes, thereby
reducing or increasing litigation and cleanup costs. Additionally, proposed
legislation, if passed in current form, would be expected to reduce ultimate
asbestos exposure.
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
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 December
31, 1998 are believed to be adequate as these reserves are based on the known
facts and current law. Furthermore, as AIG's net exposure retained relative to
the gross exposure written was lower in 1984 and prior years, the potential
impact of these claims is much smaller on the net loss reserves than on the
gross loss reserves. (See the previous discussion on reinsurance collectibility
herein.)
The majority of AIG's exposures for asbestos and environmental claims are
excess casualty coverages, not primary coverages. Thus, the litigation costs are
treated in the same manner as indemnity reserves. That is, litigation expenses
are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.
A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and environmental claims separately and combined at
December 31, 1998, 1997 and 1996 follows. The 1998 reserve activity includes
Transatlantic.
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- --------------------
GROSS NET GROSS NET GROSS NET
===================================================================================================================================
Asbestos:
Reserve for losses and loss expenses
at beginning of year $ 842 $ 195 $ 876 $ 172 $ 744 $ 127
Losses and loss expenses incurred 375 111 238 68 393 103
Losses and loss expenses paid (253) (47) (272) (45) (261) (58)
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 964 $ 259 $ 842 $ 195 $ 876 $ 172
===================================================================================================================================
Environmental:
Reserve for losses and loss expenses
at beginning of year $1,467 $ 593 $1,427 $ 571 $1,198 $ 380
Losses and loss expenses incurred 285 106 223 85 379 240
Losses and loss expenses paid (216) (93) (183) (63) (150) (49)
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses
at end of year $1,536 $ 606 $1,467 $ 593 $1,427 $ 571
===================================================================================================================================
Combined:
Reserve for losses and loss expenses
at beginning of year $2,309 $ 788 $2,303 $ 743 $1,942 $ 507
Losses and loss expenses incurred 660 217 461 153 772 343
Losses and loss expenses paid (469) (140) (455) (108) (411) (107)
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses
at end of year $2,500 $ 865 $2,309 $ 788 $2,303 $ 743
===================================================================================================================================
18
20
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at December 31, 1998, 1997 and 1996 were estimated as follows:
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------- -------------------- ---------------------
GROSS NET GROSS NET GROSS NET
====================================================================================================================================
Combined $979 $359 $1,004 $394 $1,070 $437
====================================================================================================================================
A summary of asbestos and environmental claims count activity for the years
ended December 31, 1998, 1997 and 1996 was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- --------------------------------- ----------------------------------
ASBESTOS ENVIRONMENTAL COMBINED ASBESTOS ENVIRONMENTAL COMBINED ASBESTOS ENVIRONMENTAL COMBINED
====================================================================================================================================
Claims at beginning of year 6,150 17,422 23,572 5,668 17,395 23,063 5,244 17,858 23,102
Claims during year:
Opened 887 3,502 4,389 1,073 3,624 4,697 1,083 3,836 4,919
Settled (81) (677) (758) (169) (644) (813) (117) (466) (583)
Dismissed or otherwise
resolved (568) (3,687) (4,255) (422) (2,953) (3,375) (542) (3,833) (4,375)
- ------------------------------------------------------------------------------------------------------------------------------------
Claims at end of year 6,388 16,560 22,948 6,150 17,422 23,572 5,668 17,395 23,063
====================================================================================================================================
The average cost per claim settled, dismissed or otherwise resolved for the
years ended December 31, 1998, 1997 and 1996 was as follows:
- --------------------------------------------------------------------------------
GROSS NET
================================================================================
1998
Asbestos $390,300 $ 71,800
Environmental 49,600 21,500
Combined 93,700 28,000
================================================================================
1997
Asbestos $460,600 $ 77,000
Environmental 51,000 17,600
Combined 108,800 26,000
================================================================================
1996
Asbestos $396,700 $ 88,500
Environmental 34,900 11,400
Combined 83,000 21,600
================================================================================
An insurance rating agency has developed a survival ratio to measure the
number of years it would take a company to exhaust both its asbestos and
environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. The higher the
ratio, the more years the reserves for losses and loss expenses cover these
claims payments. These ratios are computed based on the 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 include court judgments, court orders,
covered claims with no coverage defenses, state mandated cleanup costs, claims
where AIG's coverage defenses are minimal, and settlements made less than six
months before the first trial setting. Also, AIG considers all legal and loss
adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios for the years ended December 31, 1998, 1997 and 1996 were as follows:
- --------------------------------------------------------------------------------
GROSS NET
================================================================================
1998
Involuntary survival ratios:
Asbestos 3.7 5.2
Environmental 17.0 17.2
Combined 7.8 10.8
================================================================================
1997
Involuntary survival ratios:
Asbestos 3.8 4.6
Environmental 14.6 18.0
Combined 7.7 11.2
================================================================================
1996
Involuntary survival ratios:
Asbestos 5.1 4.6
Environmental 16.2 18.8
Combined 9.4 11.5
================================================================================
19
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 1998, 1997 and 1996
were $16 million, $15 million and $19 million, respectively.
AIG is also required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated.
LIFE INSURANCE OPERATIONS
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group life,
annuity, endowment and accident and health policies. Financial and investment
products consist of single premium annuity, variable annuities, guaranteed
investment contracts, universal life and pensions.
AIG's three principal overseas life operations are American Life Insurance
Company (ALICO), American International Assurance Company, Limited together with
American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan
Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and
all of its business is written outside of the United States. ALICO has
operations either directly or through subsidiaries in approximately 50 countries
located in Europe, Africa, Latin America, the Caribbean, the Middle East, and
the Far East, with Japan being the largest territory. AIA operates primarily in
Hong Kong, Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. (See
also Note 17 of Notes to Financial Statements.)
Life insurance operations for the twelve month periods ending December 31,
1998, 1997 and 1996 were as follows:
(in millions)
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Premium income:
Domestic $ 738 $ 553 $ 535
Foreign 9,509 9,373 8,443
- --------------------------------------------------------------------------------
Total $ 10,247 $ 9,926 $ 8,978
================================================================================
Net investment income:
Domestic $ 920 $ 839 $ 930
Foreign 2,312 2,057 1,746
- --------------------------------------------------------------------------------
Total $ 3,232 $ 2,896 $ 2,676
================================================================================
Operating income before
realized capital gains (losses):
Domestic $ 150 $ 125 $ 100
Foreign 1,665 1,425 1,189
- --------------------------------------------------------------------------------
Total 1,815 1,550 1,289
Realized capital gains (losses) (35) 21 35
- --------------------------------------------------------------------------------
Operating income $ 1,780 $ 1,571 $ 1,324
================================================================================
Life insurance in-force:
Domestic $ 61,223 $ 59,517 $ 60,419
Foreign 437,944 377,056 361,564
- --------------------------------------------------------------------------------
Total $ 499,167 $ 436,573 $ 421,983
================================================================================
AIG's life premium income in 1998 represented a 3.2 percent increase from
the prior year. This compares with an increase of 10.6 percent in 1997 over
1996. Foreign life operations produced 92.8 percent, 94.4 percent and 94.0
percent of the life premium income in 1998, 1997 and 1996, respectively. (See
also Notes 1, 4 and 6 of Notes to Financial Statements.)
AIG's life insurance operations, demonstrating the strength of its
franchise, continued to show growth in original currencies. As previously
discussed, the U.S. dollar strengthened in value in relation to most major
foreign currencies in which AIG conducts its foreign life operations,
particularly AIA and Nan Shan. Accordingly, if foreign life premium income was
translated into U.S. dollars utilizing those exchange rates which prevailed in
1997, thus mitigating the effects of the U.S. dollar's general strengthening,
foreign life premium growth would have been 15.4 percent. This growth equates to
growth in original currency. (See also the discussion under "Capital Resources"
herein.)
The traditional life products were the major contributors to the growth in
foreign premium income and investment income, particularly those countries in
which AIA and Nan Shan operate. A mixture of traditional, accident and health
and financial products are being sold in Japan through ALICO.
Life insurance net investment income increased 11.6 percent in 1998
compared to an increase of 8.2 percent in 1997. The growth in net investment
income in 1998 and 1997 was primarily attributable to foreign new cash flow for
investment. The new cash flow was generated from life insurance operations and
included the compounding of previously earned and reinvested net investment
income. (See also the discussion under "Liquidity" herein.)
20
22
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
Life insurance realized capital losses were $35 million in 1998, compared
to realized capital gains of $21 million in 1997 and $35 million in 1996. These
realized gains and losses resulted from the ongoing management of the life
insurance investment portfolios within the overall objectives of the life
insurance operations and arose primarily from the disposition of equity
securities and available for sale fixed maturities as well as redemptions of
fixed maturities.
Life insurance operating income in 1998 increased 13.3 percent to $1.78
billion compared to an increase of 18.7 percent in 1997. Excluding realized
capital gains and losses from life insurance operating income, the percent
increases would be 17.1 percent and 20.3 percent in 1998 and 1997, respectively.
The contribution of life insurance operating income to income before income
taxes and minority interest amounted to 32.2 percent in 1998 compared to 33.2
percent in 1997 and 32.6 percent in 1996.
The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with the
financial and investment contract products is investment risk.
Underwriting risk represents the exposure to loss resulting from the actual
policy experience adversely emerging in comparison to the assumptions made in
the product pricing associated with mortality, morbidity, termination and
expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately one million dollars
of coverage by using yearly renewable term reinsurance. The life insurance
operations have not entered into assumption reinsurance transactions or surplus
relief transactions during the three year period ended December 31, 1998. (See
also Note 5 of Notes to Financial Statements.)
The investment risk represents the exposure to loss resulting from the cash
flows from the invested assets, primarily long-term fixed rate investments,
being less than the cash flows required to meet the obligations of the expected
policy and contract liabilities and the necessary return on investments.
To minimize its exposure to investment risk, AIG tests the cash flows from
the invested assets and the policy and contract liabilities using various
interest rate scenarios to assess whether there is a liquidity excess or
deficit. If a rebalancing of the invested assets to the policy and contract
claims became necessary and did not occur, a demand could be placed upon
liquidity. (See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term investments or there are investment
restrictions imposed by the local regulatory authorities. For example, in Japan
and several Southeast Asia territories, the duration of the investments is often
for a shorter period than the effective maturity of the related 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. Additionally, there exists
a future investment risk that is associated with certain policies which have
future premium receipts. That is, the investment of these future premium
receipts may be at a yield below that required to meet future policy
liabilities. At December 31, 1998, the average duration of the investment
portfolio in Japan was 5.6 years. With respect to the investment of the future
premium receipts the average duration is estimated to be 6.1 years. These
durations compare with an estimated average duration of 8.7 years for the
corresponding policy liabilities. To maintain an adequate yield to match the
interest necessary to support future policy liabilities, constant management
focus is required to reinvest the proceeds of the maturing securities and to
invest the future premium receipts without sacrificing investment quality. To
the extent permitted under local regulation, AIG may invest in qualified
longer-term securities outside Japan to achieve a closer matching in both
duration and the required yield. AIG is able to manage any asset-liability
duration difference through maintenance of sufficient global liquidity and to
support any operational shortfall through its international financial network.
Domestically, active monitoring assures appropriate asset-liability matching as
there are investments available to match the duration and the required yield.
(See also the discussion under "Liquidity" herein.)
AIG uses asset-liability matching as a management tool to determine the
composition of the invested assets and marketing strategies. As a part of these
strategies, AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest rate or other
economic changes.
FINANCIAL SERVICES OPERATIONS
AIG's financial services subsidiaries engage in diversified financial products
and services including asset management, premium financing, banking services and
consumer finance services.
International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. (See also Note 17 of
Notes to Financial Statements.)
AIG Financial Products Corp. and its subsidiaries (AIGFP)structure
financial transactions, including long-dated interest rate and currency swaps
and structures borrowings through notes, bonds and guaranteed investment
agreements. (See also Note 17 of Notes to Financial Statements.)
AIG Trading Group Inc. and its subsidiaries (AIGTG)engage in various
commodities trading, foreign exchange trading, interest rate swaps and market
making activities. (See also Note 17 of Notes to Financial Statements.)
21
23
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Financial services operations for the twelve month periods ending December
31, 1998, 1997 and 1996 were as follows:
(in millions)
- -------------------------------------------------------------------------------
1998 1997 1996
===============================================================================
Revenues:
International Lease Finance Corp. $ 2,002 $ 1,857 $ 1,560
AIG Financial Products Corp.* 550 452 369
AIG Trading Group Inc.* 374 562 289
Other 379 401 338
- -------------------------------------------------------------------------------
Total $ 3,305 $ 3,272 $ 2,556
===============================================================================
Operating income:
International Lease Finance Corp. $ 496 $ 382 $ 307
AIG Financial Products Corp. 323 241 189
AIG Trading Group Inc. 123 127 80
Other, including intercompany
adjustments (29) (49) (52)
- -------------------------------------------------------------------------------
Total $ 913 $ 701 $ 524
===============================================================================
*Represents net trading revenues.
Financial services operating income increased 30.2 percent in 1998 over
1997. This compares with an increase of 33.9 percent in 1997 over 1996.
Financial services operating income represented 16.5 percent of AIG's
income before income taxes and minority interest in 1998. This compares to 14.8
percent and 12.9 percent in 1997 and 1996, respectively.
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 1998 increased 7.8 percent from 1997
compared to a 19.0 percent increase during 1997 from 1996. The revenue growth in
each year resulted primarily from the increase in flight equipment available for
operating lease, the increase in the relative cost of the leased fleet, the
increase in the relative composition of the fleet with wide bodies which
typically receive higher lease payments and, in 1997, an increase in the number
of aircraft sold. Approximately 20 percent of ILFC's operating lease revenues
are derived from U.S. and Canadian airlines. During 1998, operating income
increased 29.6 percent from 1997 and 24.6 percent during 1997 from 1996. The
composite borrowing rates at December 31, 1998, 1997 and 1996 were 6.03 percent,
6.44 percent and 6.23 percent, respectively. (See also the discussions under
"Capital Resources" and "Liquidity" herein and Note 17 of Notes to Financial
Statements.)
ILFC is exposed to loss 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. At December
31, 1998, there were 329 aircraft subject to operating leases and there were no
aircraft off lease. (See also the discussions under "Capital Resources" and
"Liquidity" herein.)
AIG Financial Products Corp. and its subsidiaries (AIGFP) participate in
the derivatives dealer market conducting, primarily as principal, an interest
rate, currency, equity and credit derivative products business. AIGFP also
enters into structured transactions including long-dated forward foreign
exchange contracts, option transactions, liquidity facilities and investment
agreements and invests in a diversified portfolio of securities. AIGFP derives
substantially all its revenues from proprietary positions entered in connection
with counterparty transactions rather than from speculative transactions.
Revenues in 1998 increased 21.7 percent from 1997 compared to a 22.4 percent
increase during 1997 from 1996. During 1998, operating income increased 34.0
percent from 1997 and increased 27.4 percent during 1997 from 1996. As AIGFP is
a transaction-oriented operation, current and past revenues and operating
results may not provide a basis for predicting future performance. (See also the
discussions under "Capital Resources," "Liquidity" and "Derivatives" herein and
Note 17 of Notes to Financial Statements.)
AIG Trading Group Inc. and its subsidiaries (AIGTG) derive a substantial
portion of their revenues from market making and trading activities, as
principals, in foreign exchange, interest rates and precious and base metals.
Revenues in 1998 decreased 33.5 percent from 1997 compared to a 94.7 percent
increase during 1997 from 1996. During 1998, operating income decreased 2.4
percent from 1997 compared to a 57.9 percent increase during 1997 from 1996. The
declines in 1998 relative to 1997 resulted primarily from the decline in trading
volume during 1998. A substantial portion of AIGTG's improvement during 1997
over 1996 was currency trading activity in volatile foreign exchange markets. As
AIGTG is a transaction-oriented operation, current and past revenues and
operating results may not provide a basis for predicting future performance or
for comparing revenues to operating income. (See also the discussions under
"Capital Resources," "Liquidity" and "Derivatives" herein and Note 17 of Notes
to Financial Statements.)
In December 1997, AIGTG sold its energy operations. The sale of these
operations did not have a significant impact on AIG's results of operations.
OTHER OPERATIONS
In 1998, AIG's equity in income of minority-owned insurance operations was $57
million compared to $114 million in 1997 and $99 million in 1996. In 1998, the
equity interest in insurance companies represented 1.0 percent of income before
income taxes and minority interest compared to 2.4 percent in both 1997 and
1996. The decrease in income of minority-owned insurance operations from 1997 to
1998, resulted primarily from the consolidation of Transatlantic's operations
into general insurance operating results. In addition, SELIC Holdings, Ltd. was
consolidated earlier this year. IPC Holdings, Ltd., the remaining operation
included in equity in income of minority-owned insurance operations in previous
periods is now reported as a component of other income (deductions) - net.
22
24
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
Other realized capital losses amounted to $5 million, $30 million and $12
million in 1998, 1997 and 1996, respectively.
Other income (deductions)-net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, realized
foreign exchange transaction gains and losses in substantially all currencies
and unrealized gains and losses in hyperinflationary currencies, costs
associated with the Year 2000 computer issues, as well as the income and
expenses of the parent holding company and other miscellaneous income and
expenses. In 1998, net deductions amounted to $144 million. In 1997 and 1996,
net deductions amounted to $97 million and $85 million, respectively. (See also
the discussion under "Recent Developments" herein.)
Income before income taxes and minority interest amounted to $5.53 billion
in 1998, $4.73 billion in 1997 and $4.06 billion in 1996.
In 1998, AIG recorded a provision for income taxes of $1.59 billion
compared to the provisions of $1.37 billion and $1.12 billion in 1997 and 1996,
respectively. These provisions represent effective tax rates of 28.8 percent in
1998, 28.9 percent in 1997 and 27.5 percent in 1996. (See Note 3 of Notes to
Financial Statements.)
Minority interest represents minority shareholders' equity in income of
certain majority-owned consolidated subsidiaries. Minority interest amounted to
$169 million, $32 million and $43 million in 1998, 1997 and 1996, respectively.
The increase in 1998 from 1997 was primarily related to the minority
shareholders' equity resulting when Transatlantic and 20th Century were
consolidated during 1998.
Net income amounted to $3.77 billion in 1998, $3.33 billion in 1997 and
$2.90 billion in 1996. The increases in net income over the three year period
resulted from those factors described above.
CAPITAL RESOURCES
At December 31, 1998, AIG had total capital funds of $27.13 billion and total
borrowings of $30.69 billion. At that date, $27.80 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
Total borrowings and borrowings not guaranteed or matched at December 31,
1998 and 1997 were as follows:
(in millions)
- --------------------------------------------------------------------------------
December 31, 1998 1997
================================================================================
GIAs-- AIGFP $ 9,188 $ 8,000
- --------------------------------------------------------------------------------
Commercial Paper:
AIG Funding 637 308
ILFC (a) 3,204 2,208
AICCO 727 834
Universal Finance Company (UFC) (a) 68 25
- --------------------------------------------------------------------------------
Total 4,636 3,375
- --------------------------------------------------------------------------------
Medium Term Notes:
ILFC (a) 3,348 2,897
AIG 239 248
- --------------------------------------------------------------------------------
Total 3,587 3,145
- --------------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC (a) 3,825 3,950
AIGFP 7,265 4,859
AIG: Lire bonds 159 159
Zero coupon notes 102 91
- --------------------------------------------------------------------------------
Total 11,351 9,059
- --------------------------------------------------------------------------------
Loans and Mortgages Payable:
ILFC (a) (b) 811 904
SPC Credit, Ltd. (SPC) (a) 532 539
AIG Consumer Finance (a) 254 --
AIG 334 239
- --------------------------------------------------------------------------------
Total 1,931 1,682
- --------------------------------------------------------------------------------
Total Borrowings 30,693 25,261
- --------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 12,042 10,523
Matched GIA borrowings 9,188 8,000
Matched notes and
bonds payable-- AIGFP 6,565 3,755
- --------------------------------------------------------------------------------
27,795 22,278
- --------------------------------------------------------------------------------
Remaining borrowings of AIG $ 2,898 $ 2,983
================================================================================
(a) AIG does not guarantee or support these borrowings.
(b) Capital lease obligations.
See also Note 9 of Notes to Financial Statements.
During 1998, AIGFP increased the aggregate principal amount outstanding of
its notes and bonds payable to $7.27 billion, a net increase of $2.41 billion
and increased its net GIA borrowings by $1.19 billion. AIGFP uses the proceeds
from the issuance of notes and bonds and GIA borrowings to invest in a
diversified portfolio of securities and derivative transactions. The funds may
also be temporarily invested in securities purchased under agreements to resell.
(See also the discussions under "Operational Review", "Liquidity" and
"Derivatives" herein and Notes 1, 8, 9, 11 and 17 of Notes to Financial
Statements.)
AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its non-insurance
subsidiaries. Funding intends to continue to meet AIG's funding requirements
through the issuance of commercial paper guaranteed by AIG. This issuance of
Funding's commercial paper is subject to the approval of AIG's Board of
Directors. ILFC, A.I. Credit Corp. (AICCO) and UFC, a consumer finance
subsidiary in Taiwan, issue commercial paper for the funding of their own
operations. AIG does
23
25
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
not guarantee AICCO's, ILFC's or UFC's commercial paper. However, AIG has
entered into an agreement in support of AICCO's commercial paper. From time to
time, AIGFP may issue commercial paper, which AIG guarantees, to fund its
operations. At December 31, 1998, AIGFP had no commercial paper outstanding.
(See also the discussion under "Derivatives" herein and Note 9 of Notes to
Financial Statements.)
AIG and Funding have entered into two syndicated revolving credit
facilities (the Facilities) aggregating $1 billion. The Facilities consist of a
$500 million 364 day revolving credit facility and a $500 million five year
revolving credit facility. The Facilities can be used for general corporate
purposes and also provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under
either of the Facilities, nor were any borrowings outstanding as of December 31,
1998.
At December 31, 1998, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $7.17 billion, a net increase
of $326 million, and recorded a net decline in its capital lease obligations of
$93 million and a net increase in its commercial paper of $996 million. At
December 31, 1998, ILFC had $565 million in aggregate principal amount of debt
securities registered for issuance from time to time. Through March 15, 1999,
ILFC reduced this registered amount to $100 million through the sale of debt
securities amounting to $465 million aggregate principal amount. Also, in March
1999, ILFC registered $2.0 billion in aggregate principal amount of debt
securities for issuance from time to time. At that time, the aggregate principal
amount of registered debt available for issuance was $2.1 billion. The proceeds
of ILFC's debt financing are primarily used to purchase flight equipment,
including progress payments during the construction phase. The primary sources
for the repayment of this debt and the interest expense thereon are the cash
flow from operations, proceeds from the sale of flight equipment and the
rollover and refinancing of the prior debt. (See also the discussions under
"Operational Review" and "Liquidity" herein.)
During 1998, AIG issued $31 million principal amount of Medium Term Notes
and $40 million of previously issued notes matured.
At December 31, 1998, AIG had $508 million in aggregate principal amount of
debt securities registered for issuance from time to time.
AIG's capital funds increased $3.13 billion during 1998. Unrealized
appreciation of investments, net of taxes decreased $278 million. During 1998,
the cumulative translation adjustment loss, net of taxes, increased $100
million. The changes from year to year with respect to the unrealized
appreciation of investments, net of taxes and the cumulative translation
adjustment loss, net of taxes were primarily impacted by each of the economic
situations in Japan and Southeast Asia and the general strength of the U.S.
dollar against most currencies in which AIG conducts operations. (See also the
discussion under "Operational Review" and "Liquidity" herein.) Retained earnings
increased $2.59 billion, resulting from net income less dividends.
During 1998, AIG repurchased 1,044,750 shares of its common stock in the
open market at a cost of $77 million. Shares repurchased prior to July 31, 1998,
have been adjusted for the three for two stock split in the form of a 50 percent
common stock dividend. AIG intends to continue to buy its common shares in the
open market to satisfy its obligations under various employee benefit plans.
Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At December 31, 1998, 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 and Note 10 of Notes to Financial
Statements.)
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
December 31, 1998, the adjusted capital of each of AIG's domestic general
companies and of each of AIG's domestic life companies exceeded each of their
RBC standards by considerable margins.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business 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.
LIQUIDITY
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
At December 31, 1998, AIG's consolidated invested assets included $5.25
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in 1998 amounted to $7.04 billion.
Sources of funds considered in meeting the objectives of AIG's financial
services operations include guaranteed investment agreements, issuance of long
and short-term debt, maturities and sales of securities available for sale,
securities sold under repurchase agreements, trading liabilities, securities and
spot commodities sold but not yet purchased, issuance of equity, and cash
provided from such operations. AIG's strong capital position is integral to
managing this liquidity, as it enables AIG to raise funds in diverse markets
worldwide. (See also the discussions under "Capital Resources" herein.)
24
26
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated approximately $12 billion in
pre-tax cash flow during 1998. Cash flow includes periodic premium collections,
including policyholders' contract deposits, paid loss recoveries less
reinsurance premiums, losses, benefits, acquisition and operating expenses.
Generally, there is a time lag from when premiums are collected and, when as a
result of the occurrence of events specified in the policy, the losses and
benefits are paid. AIG's insurance investment operations generated approximately
$5.6 billion in investment income cash flow during 1998. Investment income cash
flow is primarily derived from interest and dividends received and includes
realized capital gains net of realized capital losses.
In addition to the combined insurance pre-tax operating cash flow, AIG's
insurance operations held $4.91 billion in cash and short-term investments at
December 31, 1998. The aforementioned operating cash flow and the cash and
short-term balances held provided AIG's insurance operations with a significant
amount of liquidity.
This liquidity is available, among other things, to purchase high quality
and diversified fixed income securities and to a lesser extent marketable equity
securities and to provide mortgage loans on real estate, policy loans and
collateral loans. This cash flow coupled with proceeds of approximately $20
billion from the maturities, sales and redemptions of fixed income securities
and from the sale of equity securities was used to purchase approximately $26
billion of fixed income securities and marketable equity securities during 1998.
The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued and real estate, at
December 31, 1998 and 1997:
(dollars in millions)
- -------------------------------------------------------------------------------
INVESTED PERCENT
ASSETS OF TOTAL
===============================================================================
1998
General insurance $ 38,883 26.8%
Life insurance 48,715 33.6
Financial services 56,619 39.1
Other 714 0.5
- -------------------------------------------------------------------------------
Total $144,931 100.0%
===============================================================================
1997
General insurance $ 31,844 26.0%
Life insurance 41,047 33.5
Financial services 48,899 39.9
Other 662 0.6
- -------------------------------------------------------------------------------
Total $122,452 100.0%
===============================================================================
25
27
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
INSURANCE INVESTED ASSETS
The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at December 31, 1998 and 1997:
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ----------------------
DECEMBER 31, 1998 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
====================================================================================================================================
Fixed maturities:
Available for sale, at market value (a) $15,939 $33,163 $49,102 56.1% 40.3% 59.7%
Held to maturity, at amortized cost 12,658 -- 12,658 14.4 100.0 --
Equity securities, at market value (b) 3,923 1,717 5,640 6.4 51.1 48.9
Mortgage loans on real estate, policy and collateral loans 70 6,400 6,470 7.4 31.5 68.5
Short-term investments, including time deposits, and cash 873 4,039 4,912 5.6 21.6 78.4
Real estate 393 1,070 1,463 1.7 15.2 84.8
Investment income due and accrued 568 900 1,468 1.7 41.4 58.6
Other invested assets 4,459 1,426 5,885 6.7 80.4 19.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total $38,883 $48,715 $87,598 100.0% 50.2% 49.8%
====================================================================================================================================
(a) Includes $1,005 of bonds trading securities, at market value.
(b) Includes $301 of preferred stock, at market value.
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT ----------------------
DECEMBER 31, 1997 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
====================================================================================================================================
Fixed maturities:
Available for sale, at market value (a) $11,326 $27,340 $38,666 53.0% 37.8% 62.2%
Held to maturity, at amortized cost (b) 12,770 -- 12,770 17.5 100.0 --
Equity securities, at market value (c) 3,314 1,816 5,130 7.0 43.5 56.5
Mortgage loans on real estate, policy and collateral loans 50 6,148 6,198 8.5 39.0 61.0
Short-term investments, including time deposits, and cash 617 2,409 3,026 4.2 33.1 66.9
Real estate 402 980 1,382 1.9 16.8 83.2
Investment income due and accrued 529 817 1,346 1.9 39.7 60.3
Other invested assets 2,836 1,537 4,373 6.0 76.7 23.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total $31,844 $41,047 $72,891 100.0% 51.0% 49.0%
====================================================================================================================================
(a) Includes $719 of bonds trading securities, at market value.
(b) Includes $239 of preferred stock, at amortized cost.
(c) Includes $112 of preferred stock, at market value.
Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.
With respect to fixed maturities, AIG's general strategy is to invest in
high quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)
The fixed maturity available for sale portfolio is subject to decline in
fair value as interest rates rise. Such declines in fair value are presented as
a component of capital funds in unrealized appreciation of investments, net of
taxes.
The fixed maturities held to maturity portfolio is exposed to adverse
interest rate fluctuations. However, AIG has the ability and intent to hold such
securities to maturity. Therefore, there would be no detrimental impact to AIG's
results of operations or financial condition as a result of such fluctuations.
At December 31, 1998, approximately 52.6 percent of the fixed maturities
investments were domestic securities. Approximately 39 percent of such domestic
securities were rated AAA. Approximately 11 percent were below investment grade
or not rated.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations.
AIGannually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At December 31, 1998, approximately 17
percent of the foreign fixed income investments were either rated AAA or, on the
basis of AIG's internal analysis, were equivalent from a credit standpoint to
securities so rated. Approximately 15 percent were below investment grade or not
rated at that date. The decline in credit worthiness results not from a change
in investment policy but rather from economic turmoil, particularly in Southeast
Asia. A large portion of these fixed maturity securities are sovereign fixed
maturity securities supporting the policy liabilities in the country of
issuance.
26
28
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
At December 31, 1998, approximately four percent of the fixed maturities
portfolio was collateralized mortgage obligations (CMOs), including minor
amounts with respect to commercial mortgage backed securities. All of the CMOs
were investment grade and approximately 49 percent of the CMOs were backed by
various U.S. government agencies. 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. There were no interest only or
principal only CMOs at December 31, 1998.
Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date. There have been no significant
downgrades as of March 1, 1999.
AIG invests in equities for reasons including diversifying its overall
exposure to interest rate risk. Equity securities are subject to declines in
fair value. Such declines in fair value are presented as components of capital
funds in unrealized appreciation of investments, net of taxes.
Mortgage loans on real estate, policy and collateral loans comprised 7.4
percent of AIG's insurance invested assets at December 31, 1998. AIG's insurance
operations' holdings of real estate mortgages amounted to $2.76 billion of which
36.7 percent was domestic. At December 31, 1998, no domestic mortgages and only
a nominal amount of foreign mortgages were in default. It is AIG's practice to
maintain a maximum loan to value ratio of 75 percent at loan origination. At
December 31, 1998, AIG's insurance holdings of collateral loans amounted to
$1.16 billion, all of which were foreign. It is AIG's strategy to enter into
mortgage and collateral loans as an adjunct primarily to life insurance fixed
maturity investments. AIG's policy loans decreased from $2.67 billion at
December 31, 1997 to $2.54 billion at December 31, 1998.
Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash held.
AIG's real estate investment properties are primarily occupied by AIG's
various operations. The current market value of these properties considerably
exceeds their carrying value.
Other invested assets were primarily comprised of both foreign and domestic
private placements, limited partnerships and outside managed funds.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIGand its
insurance subsidiaries may enter into derivative transactions as end users. To
date, such activities have not been significant. (See also the discussion under
"Derivatives" herein.)
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.
AIG believes that statistical models alone do not provide a reliable method
of monitoring and controlling market risk. While VaR models are relatively
sophisticated, the quantitative market risk information generated is limited by
the assumptions and parameters established in creating the related models.
Therefore, such models are tools and do not substitute for the experience or
judgment of senior management.
AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.
Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.
AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of December 31, 1998 and December 31, 1997. These
calculations used the variance-covariance (delta-normal) methodology. These
calculations also used daily historical interest and foreign currency exchange
rates and equity prices in the two years ending December 31, 1998 and 1997, as
applicable. The VaR model estimated the volatility of each of these rates,
equity prices and the correlations among them. For interest rates, each
country's yield curve was constructed using eleven separate points on this curve
to model possible curve movements. Inter-country correlations were also used.
The redemption experience of municipal and corporate fixed maturities and
mortgage securities was taken into account as well as the use of financial
modeling. Thus, the
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
VaR measured the sensitivity of the asset and the liability portfolios of each
of the aforementioned market exposures. Each sensitivity was estimated
separately to capture the market exposures within each insurance segment. These
sensitivities were then applied to a database, which contained both historical
ranges of movements in all market factors and the correlations among them. The
results were aggregated to provide a single amount that depicts the maximum
potential loss in fair value at a confidence level of 95 percent for a time
period of one month. At December 31, 1998 and December 31, 1997 the VaR of AIG's
insurance segments was approximately $760 million and $520 million for general
insurance, respectively and $955 million and $799 million for life insurance,
respectively.
The following table presents the VaR of each component of market risk for
each of AIG's insurance segments as of December 31, 1998 and December 31, 1997.
VaR with respect to combined operations cannot be derived by aggregating the
individual risk or segment amounts presented herein.
(in millions)
- --------------------------------------------------------------------------------
GENERAL LIFE
INSURANCE INSURANCE
--------------- -----------------
MARKET RISK 1998 1997 1998 1997
================================================================================
Interest rate $159 $236 $810 $779
Currency 24 26 416 85
Equity 684 355 234 120
================================================================================
FINANCIAL SERVICES INVESTED ASSETS
The following table is a summary of the composition of AIG's financial services
invested assets at December 31, 1998 and 1997. (See also the discussions under
"Operational Review: Financial Services Operations", "Capital Resources" and
"Derivatives" herein.)
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
-------------------- --------------------
INVESTED PERCENT INVESTED PERCENT
ASSETS OF TOTAL ASSETS OF TOTAL
====================================================================================================================================
Flight equipment primarily under operating leases,
net of accumulated depreciation $16,330 28.8% $14,438 29.5%
Unrealized gain on interest rate and currency swaps,
options and forward transactions 9,881 17.5 7,422 15.2
Securities available for sale, at market value 10,674 18.9 9,145 18.7
Trading securities, at market value 5,668 10.0 3,975 8.1
Securities purchased under agreements to resell, at contract value 4,838 8.5 4,551 9.3
Trading assets 6,229 11.0 6,715 13.8
Spot commodities, at market value 476 0.8 460 0.9
Other, including short-term investments 2,523 4.5 2,193 4.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total $56,619 100.0% $48,899 100.0%
====================================================================================================================================
As previously discussed, the cash used for the purchase of flight equipment
is derived primarily from the proceeds of ILFC's debt financings. The primary
sources for the repayment of this debt and the interest expense thereon are the
cash flow from operations, proceeds from the sale of flight equipment and the
rollover and refinancing of the prior debt. During 1998, ILFC acquired flight
equipment costing $3.16 billion.
At December 31, 1998, ILFC had committed to purchase or had secured
positions for 303 aircraft deliverable from 1999 through 2006 at an estimated
aggregate purchase price of $17.4 billion. As of March 15, 1999, ILFC has
entered into leases, letters of intent to lease or is in various stages of
negotiation for all of the aircraft to be delivered in 1999 and 57 of 247
aircraft to be delivered subsequent to 1999. ILFC will be required to find
customers for any aircraft presently on order and any aircraft to be ordered,
and it must arrange financing for portions of the purchase price of such
equipment. In a rising interest rate environment, ILFC negotiates higher lease
rates on any new contracts. ILFC has been successful to date both in placing its
new aircraft on lease or under sales contract and obtaining adequate financing.
ILFC is exposed to market risk and the risk of loss of fair value resulting
from adverse fluctuations in interest rates. As of December 31, 1998, AIG
statistically measured the aforementioned loss of fair value through the
application of a VaR model. In this analysis, the net fair value of ILFC was
determined using the financial instrument assets which included the tax adjusted
future flight equipment lease revenue and the financial instrument liabilities
which included the future servicing of the current debt. The estimated impact of
the current derivative positions was also taken into account.
AIG calculated the VaR with respect to the net fair value of ILFC using the
variance-covariance (delta-normal) methodology. This calculation also used daily
historical interest rates for the two years ending December 31, 1998. The VaR
model estimated the volatility of each of these interest rates and the
correlation among them. The yield curve was constructed using eleven key points
on the curve to model possible curve movements. Thus, the VaR measured the
sensitivity of the assets and liabilities to the calculated interest rate
exposures. These sensitivities were then applied to a database, which contained
the historical ranges of movements in interest rates and the correlation among
them. The results were aggregated to provide a single amount that depicts the
maximum potential loss in fair value of a confidence level of 95 percent for a
time period of one month. As of December 31, 1998, the VaR with respect to the
aforementioned net fair value of ILFC was $9 million.
28
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American International Group, Inc. and Subsidiaries
AIGFP's derivative transactions are carried at market value or at estimated
fair value when market prices are not readily available. AIGFP reduces its
economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were to sell or close out the transactions prior to maturity. AIG
believes that the impact of any such limited liquidity would not be significant
to AIG's financial condition or its overall liquidity. (See also the discussion
under "Operational Review: Financial Services Operations" and "Derivatives"
herein.)
AIGFP uses the proceeds from the issuance of notes and bonds and GIA
borrowings to invest in a diversified portfolio of securities, including
securities available for sale, at market, and derivative transactions. The funds
may also be temporarily invested in securities purchased under agreements to
resell. The proceeds from the disposal of the aforementioned securities
available for sale and securities purchased under agreements to resell have been
used to fund the maturing GIAs or other AIGFP financings. (See also the
discussion under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At December
31, 1998, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. AIGFP has also
entered into credit derivative transactions to hedge its credit risk associated
with $435 million of these securities. There were no securities deemed below
investment grade at December 31, 1998. There have been no significant downgrades
through March 1, 1999. Securities purchased under agreements to resell are
treated as collateralized transactions. AIGFP takes possession of or obtains a
security interest in securities purchased under agreements to resell. AIGFP
further minimizes its credit risk by monitoring counterparty credit exposure
and, when AIGFP deems necessary, it requires additional collateral to be
deposited. Trading securities, at market value are marked to market daily and
are held to meet the short-term risk management objectives of AIGFP.
AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates and precious and base metals. AIGTG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements of interest rates, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities largely through trading liabilities, unrealized losses on swaps,
short-term borrowings, securities sold under agreements to repurchase and
securities and commodities sold but not yet purchased. (See also the discussions
under "Capital Resources" and "Derivatives" herein.)
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at December 31, 1998
were as follows:
(in millions)
- ------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
==============================================================================
Securities available for sale, at market value(a) $ 483 $ 476
Unrealized gain/loss on interest rate
and currency swaps, options
and forward transactions (b)(c) 9,881 7,055
Trading assets 7,435 4,611
Spot commodities, at market value -- 12
Trading liabilities -- 3,257
Securities and spot commodities sold but
not yet purchased, at market value 407 --
==============================================================================
(a) See also Note 8 (e) of Notes to Financial Statements.
(b) These amounts are also presented as the respective balance sheet amounts.
(c) At December 31, 1998, AIGTG's replacement values with respect to interest
rate and currency swaps were $642 million.
AIGFP's interest rate and currency risks on securities available for sale,
at market, are managed by taking offsetting positions on a security by security
basis, thereby offsetting a significant portion of the unrealized appreciation
or depreciation. At December 31, 1998, the unrealized gains and losses remaining
after the benefit of the offsets were $43 million and $35 million, respectively.
Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities are held to meet the short-term risk management objectives of AIGFP
and AIGTG.
The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.
AIG actively manages the exposures to limit potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must manage a variety of exposures including credit, market, liquidity,
operational and legal risks.
Market risk arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
exchange rates, and equity and commodity prices. AIG generally controls its
exposure to market risk by taking offsetting positions. AIG's philosophy with
respect to its financial services operations is to minimize or set limits for
open or uncovered positions that are to be carried. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk below.)
29
31
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This department determines whether AIG's market risks, as well as
those market risks of individual subsidiaries, are within the parameters
established by AIG's senior management. Well established market risk management
techniques such as sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain subsidiaries are managed
and hedged by that subsidiary.
AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.
AIGFP is exposed to market risk due to changes in and volatility of foreign
currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.
AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.
AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market risk exposure. AIGFP values its
portfolio at market value or estimated fair value when market values are not
readily available. These valuations represent an assessment of the present
values of expected future cash flows of AIGFP's transactions and may include
reserves for such risks as are deemed appropriate by AIGFP's and AIG's
management. AIGFP evaluates the portfolio's discounted cash flows with reference
to current market conditions, maturities within the portfolio and other relevant
factors. Based upon this evaluation, AIGFP determines what, if any, offsetting
transactions are necessary to reduce the market risk exposure of the portfolio.
The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.
Additionally, depending upon the changes in interest rates and other market
movements during the day, the system will produce reports for management's
consideration for intra-day offsetting positions. Overnight, the system
generates reports which recommend the types of offsets management should
consider for the following day. Additionally, AIGFP operates in major business
centers overseas and is essentially open for business 24 hours a day. Thus, the
market exposure and offset strategies are monitored, reviewed and coordinated
around the clock. Therefore, offsetting adjustments can be made as and when
necessary from any AIGFP office in the world.
As part of its monitoring and controlling of its exposure to market risk,
AIGFP applies various testing techniques which reflect potential market
movements. These techniques vary by currency and are regularly changed to
reflect factors affecting the derivatives portfolio. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges. This review includes an
examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables. AIGFP's management may change
these measures to reflect their judgment and evaluation of the dynamics of the
markets. This management group will also determine whether additional or
alternative action is required in order to manage the portfolio. AIG utilizes an
outside consultant to provide the managements of AIG and AIGFP with comfort that
the system produces representative values.
All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.
AIGTG's approach to managing market risk is to establish an appropriate
offsetting position to a particular transaction or group of transactions
depending upon the extent of market risk AIGTG expects to reduce.
AIGTG's senior management has established positions and stop-loss limits
for each line of business. AIGTG's traders are required to maintain positions
within these limits. These positions are monitored during the day either
manually and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading books
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management. Based upon these and other reports,
AIGTG's senior management may determine to adjust AIGTG's risk profile.
AIGTG attempts to secure reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses an internal methodology which includes interpolation
or extrapolation from verifiable prices nearest to the dates of the
transactions. The methodology may reflect interest and exchange rates, commodity
prices, volatility rates and other relevant factors.
A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels and the effect of time. Though not
indicative of the future, past volatile market scenarios have represented profit
opportunities for AIGTG.
30
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
AIGFP and AIGTG are both exposed to the risk of loss of fair value from
adverse fluctuations in interest rate and foreign currency exchange rates and
equity and commodity prices. AIG statistically measured the losses of fair value
through the application of a VaR model. AIG separately calculated the VaR with
respect to AIGFP and AIGTG, as AIG manages these operations separately.
AIGFP's and AIGTG's asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange traded
investments, derivative instruments and commodities. Since the market risk with
respect to securities available for sale, at market is substantially hedged,
segregation of market sensitive instruments into trading and other than trading
was not deemed necessary.
AIG calculated the VaR with respect to AIGFP and AIGTG as of December 31,
1998 and December 31, 1997. These calculations used the variance-covariance
(delta-normal) methodology. These calculations also used, where appropriate for
each entity, daily historical interest and foreign currency exchange rates and
equity/commodity prices in the two years ending December 31, 1998 and December
31, 1997, as applicable. The VaR model estimated the volatility of each of these
rates, prices and the correlations among them. For interest rates, the yield
curves of the United States and certain foreign countries were constructed using
eleven separate points on each country's yield curve to model possible curve
movements. Inter-country correlations were also used. The redemption experience
of corporate fixed maturities was taken into account. Thus, the VaR measured the
sensitivity of the asset and the liability portfolios of each of the market
exposures. Each sensitivity was estimated separately to capture the market
exposures within each entity. These sensitivities were then applied to a
database, which contained both historical ranges of movements in all market
factors and the correlations among them. The results depict the maximum
potential loss in fair value at a confidence level of 95 percent.
Given the distinct business strategies at AIGFP and AIGTG, the VaR
calculations used different time periods to measure market exposures. Many of
AIGFP's customized, longer-term contracts may require several days to transact
and hedge. AIG therefore used a one month holding period to measure market
exposures for AIGFP. The large majority of AIGTG's contracts can be arranged and
hedged within one day. AIG therefore used a one day holding period to measure
market exposures at AIGTG.
The following table presents the VaR on a combined basis and of each
component of AIGFP's and AIGTG's market risk as of December 31, 1998 and
December 31, 1997. VaR with respect to combined operations cannot be derived by
aggregating the individual risk presented herein.
(in millions)
- --------------------------------------------------------------------------------
AIGFP(A) AIGTG(B)
---------------- ---------------
MARKET RISKS 1998 1997 1998 1997
================================================================================
Combined $42 $24 $3 $4
Interest rate 42 24 3 4
Currency -- -- 2 2
Equity/Commodity 2 -- -- --
================================================================================
(a) A one month holding period was used to measure the market exposures of
AIGFP.
(b) A one day holding period was used to measure the market exposures of AIGTG.
DERIVATIVES
Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying equity, debt, commodity or other
asset, liability, or index. Derivatives payments may be based on interest rates
and exchange rates and/or prices of certain securities, certain commodities, or
financial or commodity indices. The more significant types of derivative
arrangements in which AIG transacts are swaps, forwards, futures, options and
related instruments.
The most commonly used swaps are interest rate and currency swaps. An
interest rate swap is a contract between two parties to exchange interest rate
payments (typically a fixed interest rate versus a variable interest rate)
calculated on a notional principal amount for a specified period of time. The
notional amount is not exchanged. A currency swap is similar but the notional
amounts are different currencies which are typically exchanged at the
commencement and termination of the swap based upon negotiated exchange rates.
A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a commodity,
security, currency, financial index or other instrument, at a specified price. A
futures contract is traded on an exchange, while a forward contract is executed
over the counter.
Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and options.
An option contract generally provides the option purchaser with the right
but not the obligation to buy or sell during a period of time or at a specified
date the underlying instrument at a set price. The option writer is obligated to
sell or buy the underlying item if the option purchaser chooses to exercise his
right. The option writer receives a nonrefundable fee or premium paid by the
option purchaser.
31
33
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange
traded securities. However, in the normal course of business, with the agreement
of the original counterparty, these contracts may be terminated early or
assigned to another counterparty.
All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.
A counterparty may default on any obligation to AIG, including a derivative
contract. Credit risk is a consequence of extending credit and/or carrying
trading and investment positions. Credit risk exists for a derivative contract
when that contract has an estimated positive fair value. To help manage this
risk, the credit departments of AIGFP and AIGTG operate within the guidelines of
the AIG Credit Risk Committee, which sets credit policy and limits for
counterparties and provides limits for derivative transactions with
counterparties having different credit ratings. In addition to credit ratings,
this committee takes into account other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral credit triggers and credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements that provide for legally enforceable
set-off and close out netting of exposures in the event of default. Under such
agreements, in connection with the early termination of a transaction, AIGFP is
permitted to set-off its receivables from a counterparty against AIGFP's
payables to that same counterparty arising out of all included transactions.
Excluding regulated exchange transactions, AIGTG, whenever possible, enters into
netting agreements with its counterparties which are similar in effect to those
discussed above.
The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivatives transactions at December 31, 1998 and December
31, 1997.
The notional amounts used to express the extent of AIGFP's and AIGTG's
involvement in swap transactions represent a standard of measurement of the
volume of AIGFP's and AIGTG's swaps business. Notional amount is not a
quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.
The timing and the amount of cash flows relating to 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 net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, set-off and netting under ISDA Master Agreements
and collateral held.
32
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 1998 and December 31, 1997:
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
-------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1998 1997
====================================================================================================================================
Interest rate, currency and equity/commodity
swaps and swaptions:
Notional amount:
Interest rate swaps $ 85,379 $105,850 $57,556 $ 7,132 $255,917 $200,491
Currency swaps 27,943 26,154 16,916 2,881 73,894 54,748
Swaptions and equity swaps 2,306 6,102 5,780 1,497 15,685 11,217
- ------------------------------------------------------------------------------------------------------------------------------------
Total $115,628 $138,106 $80,252 $11,510 $345,496 $266,456
====================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts contractual amount $ 8,290 -- -- -- $ 8,290 $ 4,411
====================================================================================================================================
Over the counter forward contracts contractual amount $ 42,825 $ 61 $ 12 -- $ 42,898 $ 13,271
====================================================================================================================================
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1998 and
December 31, 1997, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
-------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 1998 1997
===================================================================================================================================
Counterparty credit quality:
AAA $2,360 $ -- $2,360 $2,327
AA 3,358 330 3,688 2,311
A 1,789 94 1,883 1,165
BBB 1,040 45 1,085 608
Below investment grade 210 -- 210 290
- -----------------------------------------------------------------------------------------------------------------------------------
Total $8,757 $469 $9,226 $6,701
===================================================================================================================================
33
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At December 31, 1998 and December 31, 1997, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
-----------------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 1998 1997
==================================================================================================================================
Non-U.S. banks $2,708 $169 $2,877 $2,263
Insured municipalities 784 -- 784 757
U.S. industrials 1,120 5 1,125 514
Governmental 603 -- 603 677
Non-U.S. financial service companies 272 -- 272 65
Non-U.S. industrials 1,145 -- 1,145 1,035
Special purpose 423 -- 423 163
U.S. banks 617 294 911 585
U.S. financial service companies 931 1 932 434
Supranationals 154 -- 154 208
- ---------------------------------------------------------------------------------------------------------------------------------
Total $8,757 $469 $9,226 $6,701
==================================================================================================================================
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 1998 and December 31, 1997. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the December 31,
1998 balances based upon the expected timing of the future cash flows.
The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
1998 and December 31, 1997. These values do not represent the credit risk to
AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1998 and December 31, 1997:
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1998 1997
===================================================================================================================================
Contractual amount of futures, forwards and options:
Exchange traded futures and options $ 9,777 $ 1,985 $ 74 $ -- $ 11,836 $ 24,579
===================================================================================================================================
Forwards $ 263,312 $ 17,306 $ 1,539 $ -- $ 282,157 $ 267,959
===================================================================================================================================
Over the counter purchased options $ 31,039 $ 21,300 $ 5,213 $ 1,308 $ 58,860 $ 60,274
===================================================================================================================================
Over the counter sold options (a) $ 31,922 $ 20,374 $ 5,091 $ 1,474 $ 58,861 $ 58,190
===================================================================================================================================
Notional amount:
Interest rate swaps and forward rate agreements $ 77,872 $ 24,605 $ 7,334 $ 980 $ 110,791 $ 77,503
Currency swaps 1,488 4,854 1,170 -- 7,512 6,489
Swaptions 81 1,377 1,889 2,419 5,766 1,634
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 79,441 $ 30,836 $ 10,393 $ 3,399 $ 124,069 $ 85,626
===================================================================================================================================
Credit exposure:
Futures, forwards, swaptions and purchased
options contracts and interest rate
and currency swaps:
Gross replacement value $ 7,274 $ 1,806 $ 544 $ 167 $ 9,791 $ 11,020
Master netting arrangements (4,224) (930) (306) (150) (5,610) (5,798)
Collateral (313) (29) (15) (2) (359) (225)
- -----------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b) $ 2,737 $ 847 $ 223 $ 15 $ 3,822 $ 4,997
===================================================================================================================================
(a) Sold options obligate AIGTG to buy or sell the underlying item if the
option purchaser chooses to exercise. The amounts do not represent credit
exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts and purchased over the counter options are
presented as a component of trading assets in the accompanying balance
sheet. The net replacement values with respect to interest rate and
currency swaps are presented as a component of unrealized gain on interest
rate and currency swaps, options and forward transactions in the
accompanying balance sheet.
34
36
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1998 and
December 31, 1997, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:
(in millions)
- --------------------------------------------------------------------------------
NET REPLACEMENT VALUE
---------------------
1998 1997
================================================================================
Counterparty credit quality:
AAA $ 462 $ 753
AA 1,821 2,503
A 1,066 1,024
BBB 221 343
Below investment grade 26 98
Not externally rated, including
exchange traded futures and options* 226 276
- --------------------------------------------------------------------------------
Total $3,822 $4,997
================================================================================
Counterparty breakdown by industry:
Non-U.S. banks $1,253 $2,686
U.S. industrials 381 164
Governmental 184 135
Non-U.S. financial service companies 406 260
Non-U.S. industrials 150 168
U.S. banks 593 560
U.S. financial service companies 629 748
Exchanges* 226 276
- --------------------------------------------------------------------------------
Total $3,822 $4,997
================================================================================
* Exchange traded futures and options are not deemed to have significant
credit exposure as the exchanges guarantee that every contract will be
properly settled on a daily basis.
Generally, AIG manages and operates its businesses in the currencies of the
local operating environment. Thus, exchange gains or losses occur when AIG's
foreign currency net investment is affected by changes in the foreign exchange
rates relative to the U.S. dollar from one reporting period to the next.
As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and its insurance operations; to date, such
activities have not been significant.
AIG has formed a Derivatives Review Committee. This committee, with certain
exceptions, provides an independent review of any proposed derivative
transaction. The committee examines, among other things, the nature and purpose
of the derivative transaction, its potential credit exposure, if any, and the
estimated benefits. This committee does not review those derivative transactions
entered into by AIGFP and AIGTG for their own account.
AIG, through its Foreign Exchange Operating Committee, evaluates each of
its worldwide consolidated foreign currency net asset or liability positions and
manages AIG's translation exposure to adverse movement in currency exchange
rates. AIG may use forward exchange contracts and purchase options where the
cost of such is reasonable and markets are liquid to reduce these exchange
translation exposures. The exchange gain or loss with respect to these hedging
instruments is recorded on an accrual basis as a component of comprehensive
income in capital funds.
Legal risk arises from the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of AIG's clients and counterparties,
including contractual provisions intended to reduce credit exposure by providing
for the netting of mutual obligations. (See also the discussion on master
netting agreements above.) AIG seeks to eliminate or minimize such uncertainty
through continuous consultation with internal and external legal advisors, both
domestically and abroad, in order to understand the nature of legal risk, to
improve documentation and to strengthen transaction structure.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FASB
130) and Statement of Financial Accounting Standards No. 131 "Disclosure about
Segments of an Enterprise and Related Information" (FASB 131).
FASB 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. FASB 130 was
effective for AIG as of January 1, 1998. FASB 130 had no impact on AIG's results
of operations, financial condition or liquidity.
FASB 131 establishes standards for the way AIG is required to disclose
certain information about its operating segments in its annual financial
statements and certain selected information in its interim financial statements.
FASB 131 establishes, where practicable, standards with respect to geographic
areas, among other things. Certain descriptive information is also required.
FASB 131 was effective for the year ended December 31, 1998 and has been adopted
herein.
In February 1998, FASB issued Statement of Financial Accounting Standards
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits"(FASB 132). This statement requires AIG to revise its disclosures about
pension and other postretirement benefit plans and does not change the
measurement or recognition of these plans. Also, FASB 132 requires additional
information on changes in the benefit obligations and fair values of plan
assets. FASB 132 was effective for the year ended December 31, 1998 and has been
adopted herein.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FASB 133).
This statement requires AIG to recognize all derivatives in the consolidated
balance sheet measuring these derivatives at fair value. The recognition of the
change in the fair value of a derivative depends on a number of factors,
including the intended use of the derivative. Currently, AIGTG and AIGFP
present, in all material respects, the changes in fair value of their derivative
transactions as a component of AIG's operating income. AIG is
35
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
evaluating the impact of FASB 133 with respect to derivative transactions
entered into by other AIG operations. AIG believes that the impact of FASB 133
on its results of operations, financial condition or liquidity will not be
significant. FASB 133 is effective for the year commencing January 1, 2000.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." This statement provides guidance for the
recording of a liability for insurance-related assessments. The statement
requires that a liability be recognized in certain defined circumstances. AIG
believes that the impact of this statement on its results of operations,
financial condition or liquidity will not be significant. This statement is
effective for the year commencing January 1, 1999.
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." This
statement identifies several methods of deposit accounting and provides guidance
on the application of each method. This statement classifies insurance and
reinsurance contracts for which the deposit method is appropriate as contracts
that (i) transfer only significant timing risk, (ii) transfer only significant
underwriting risk, (iii) transfer neither significant timing nor underwriting
risk, and (iv) have an indeterminate risk. AIGbelieves that the impact of this
statement on its results of operations, financial condition or liquidity will
not be significant. This statement is effective for the year commencing January
1, 2000. Restatement of previously issued financial statements is not permitted.
YEAR 2000 ISSUES
Any statements contained herein that are not historical facts, or that might be
considered an opinion or projection, whether expressed or implied, are meant as,
and should be considered, forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are based on assumptions and opinions concerning a variety of known and unknown
risks, including those risks related to the Year 2000 issue. If any assumptions
or opinions prove incorrect, any forward-looking statements made on that basis
may also prove materially incorrect.
The Year 2000 issue arises from computer programs being written using two
digits rather than four digits to define the applicable year. This could result
in a failure of the information technology systems (IT systems) and other
equipment containing imbedded technology (non-IT systems) in the year 2000,
causing disruption of operations of AIG, its lessees, vendors, or business
partners.
AIG has developed a plan to address the Year 2000 issue as it affects AIG's
internal IT and non-IT systems, and to assess Year 2000 issues relating to third
parties with whom AIG has critical relationships.
The plan for addressing internal systems includes an assessment of internal
IT and non-IT systems and equipment affected by the Year 2000 issue; definition
of strategies to address affected systems and equipment; remediation of
identified affected systems and equipment; and internal certification that each
internal system is Year 2000 compliant. AIG has remediated, tested and returned
to production substantially all of its internal IT systems. AIG continues to
remediate and test internal non-IT systems and expects to complete remediation
by mid-1999.
AIG has also initiated formal communications with respect to the Year 2000
issue to those third parties which have significant interaction with AIG.
Currently, AIG is unable to ascertain whether all such third parties will
successfully address the Year 2000 issue, particularly those third parties
outside the United States where it is believed that remediation efforts relating
to the Year 2000 issue may be less advanced. While AIG expects to have no
interruption of operations as a result of its internal IT and non-IT systems,
significant uncertainties remain about the effect on AIG of third parties who
are not Year 2000 compliant. AIG will continue to monitor third party Year 2000
issue readiness to determine whether additional or alternative measures may be
necessary. Such measures may include the selection of alternate third parties or
other actions designed to mitigate the effects of a third party's lack of
preparedness. There can be no assurance that unresolved Year 2000 issues of
third parties will not have a material adverse impact on AIG's results of
operations, financial condition or liquidity. AIG is considering the effects of
Year 2000 related failures on its business and, as the most reasonably likely
worst case scenarios become more clearly identified, AIG will develop
appropriate contingency plans.
The costs associated with addressing the Year 2000 issue, including
developing and implementing the above stated plans and remediating affected
systems and equipment, has approximated $115 million and has been expensed as
incurred.
RECENT DEVELOPMENTS
On January 1, 1999, certain of the member nations of the European Economic and
Monetary Union (EMU) adopted a common currency, the euro. Once the national
currencies are phased out, the euro will be the sole legal tender of each of
these nations. During the transition period, commerce of these nations will be
transacted in the euro or in the currently existing national currency.
AIG has identified the significant issues and is prepared with respect to
the phase in of and ultimate redenomination to the euro. Any costs associated
with the adoption of the euro are expensed as incurred and are not material to
AIG's results of operations, financial condition or liquidity.
The merger of SunAmerica Inc., a leading company in the retirement savings
and asset accumulation business, with and into AIG was effective January 1,
1999. The transaction will be treated as a pooling of interests for accounting
purposes.
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
AIG issued 0.855 shares in exchange for each share of SunAmerica Inc. stock
outstanding at the effective time of the merger for an aggregate issuance of
approximately 187.5 million shares. (See also Note 19 of Notes to Financial
Statements.)
- --------------------------------------------------------------------------------
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
- --------------------------------------------------------------------------------
Page
- --------------------------------------------------------------------------------
Report of Independent Accountants 38
Consolidated Balance Sheet at
December 31, 1998 and 1997 39
Consolidated Statement of Income for the
years ended December 31, 1998, 1997
and 1996 41
Consolidated Statement of Capital Funds
for the years ended December 31, 1998,
1997 and 1996 42
Consolidated Statement of Cash Flows for
the years ended December 31, 1998,
1997 and 1996 43
Consolidated Statement of Comprehensive Income
for the years ended December 31, 1998, 1997
and 1996 45
Notes to Financial Statements 46
Schedules:
I--Summary of Investments--Other Than
Investments in Related
Parties as of
December 31, 1998 S-1
II--Condensed Financial Information of
Registrant as of December 31, 1998
and 1997 and for the years ended
December 31, 1998, 1997 and 1996 S-2
III--Supplementary Insurance Information as
of December 31, 1998, 1997 and
1996 and for the years then ended S-4
IV--Reinsurance as of December 31, 1998,
1997 and 1996 and for the years
then ended S-5
37
39
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN INTERNATIONAL GROUP, INC.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the consolidated financial
position of American International Group, Inc. and subsidiaries at December 31,
1998 and 1997, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 11, 1999.
38
40
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CONSOLIDATED BALANCE SHEET American International Group, Inc. and Subsidiaries
(in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
==================================================================================================================================
ASSETS:
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized cost: 1998-$46,190;
1997-$36,568) $ 48,243 $ 38,078
Bonds held to maturity, at amortized cost (market value: 1998-$13,633;
1997-$13,366) 12,658 12,530
Bonds trading securities, at market value (cost: 1998-$990; 1997-$700) 1,005 719
Preferred stocks, at amortized cost (market value: 1997-$531) -- 239
Equity securities:
Common stocks (cost: 1998-$5,430; 1997-$4,625) 5,565 5,209
Non-redeemable preferred stocks (cost: 1998-$335; 1997-$138) 328 139
Mortgage loans on real estate, policy and collateral loans-net 8,247 7,920
Financial services assets:
Flight equipment primarily under operating leases, net of accumulated depreciation
(1998-$2,048; 1997-$1,657) 16,330 14,438
Securities available for sale, at market value (amortized cost: 1998-$10,667;
1997-$9,145) 10,674 9,145
Trading securities, at market value 5,668 3,975
Spot commodities, at market value 476 460
Unrealized gain on interest rate and currency swaps, options and forward transactions 9,881 7,422
Trading assets 6,229 6,715
Securities purchased under agreements to resell, at contract value 4,838 4,551
Other invested assets 6,419 4,681
Short-term investments, at cost (approximates market value) 4,944 3,333
Cash 303 87
- ----------------------------------------------------------------------------------------------------------------------------------
Total investments and cash 141,808 119,641
Investment income due and accrued 1,571 1,368
Premiums and insurance balances receivable-net 11,679 10,283
Reinsurance assets 17,744 16,111
Deferred policy acquisition costs 7,647 6,593
Investments in partially-owned companies 418 1,121
Real estate and other fixed assets, net of accumulated depreciation
(1998-$1,733; 1997-$1,513) 2,651 2,342
Separate and variable accounts 7,256 3,994
Other assets 3,624 2,518
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $194,398 $163,971
==================================================================================================================================
See Accompanying Notes to Financial Statements
39
41
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET (continued)
American International Group, Inc. and Subsidiaries
(in millions, except share amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
=================================================================================================================================
LIABILITIES:
Reserve for losses and loss expenses $ 38,310 $ 33,400
Reserve for unearned premiums 10,009 8,739
Future policy benefits for life and accident and health insurance contracts 29,571 24,502
Policyholders' contract deposits 12,573 10,323
Other policyholders' funds 2,720 2,352
Reserve for commissions, expenses and taxes 2,225 1,740
Insurance balances payable 2,283 1,703
Funds held by companies under reinsurance treaties 837 337
Income taxes payable:
Current 222 585
Deferred 852 471
Financial services liabilities:
Borrowings under obligations of guaranteed investment agreements 9,188 8,000
Securities sold under agreements to repurchase, at contract value 4,473 2,706
Trading liabilities 4,664 5,366
Securities and spot commodities sold but not yet purchased, at market value 4,457 5,172
Unrealized loss on interest rate and currency swaps, options and forward transactions 7,055 5,980
Deposits due to banks and other depositors 1,242 972
Commercial paper 3,204 2,208
Notes, bonds and loans payable 15,249 12,609
Commercial paper 1,432 1,167
Notes, bonds, loans and mortgages payable 1,620 1,277
Separate and variable accounts 7,256 3,994
Other liabilities 7,425 5,967
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 166,867 139,570
- ---------------------------------------------------------------------------------------------------------------------------------
PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANY 400 400
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL FUNDS:
Common stock, $2.50 par value; 2,000,000,000 shares authorized; shares issued
1998-1,138,658,321; 1997-759,121,505 2,847 1,898
Additional paid-in capital 85 106
Retained earnings 25,513 22,921
Accumulated other comprehensive income (206) 172
Treasury stock, at cost; 1998-88,929,071; 1997-59,603,224 shares of common stock
(including 62,589,661 and 41,726,541 shares, respectively, held by subsidiaries) (1,108) (1,096)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS 27,131 24,001
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL FUNDS $ 194,398 $ 163,971
=================================================================================================================================
See Accompanying Notes to Financial Statements.
40
42
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CONSOLIDATED STATEMENT OF INCOME
American International Group, Inc. and Subsidiaries
(in millions, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
=================================================================================================================================
GENERAL INSURANCE OPERATIONS:
Net premiums written $ 14,586 $ 13,408 $ 12,692
Change in unearned premium reserve (488) (987) (837)
- ---------------------------------------------------------------------------------------------------------------------------------
Net premiums earned 14,098 12,421 11,855
Net investment income 2,192 1,854 1,691
Realized capital gains 205 128 65
- ---------------------------------------------------------------------------------------------------------------------------------
16,495 14,403 13,611
- ---------------------------------------------------------------------------------------------------------------------------------
Losses incurred 9,164 7,801 7,279
Loss expenses incurred 1,493 1,555 1,718
Underwriting expenses (principally policy acquisition costs) 2,910 2,575 2,408
- ---------------------------------------------------------------------------------------------------------------------------------
13,567 11,931 11,405
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,928 2,472 2,206
- ---------------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE OPERATIONS:
Premium income 10,247 9,926 8,978
Net investment income 3,232 2,896 2,676
Realized capital (losses) gains (35) 21 35
- ---------------------------------------------------------------------------------------------------------------------------------
13,444 12,843 11,689
Death and other benefits 4,543 4,052 3,733
Increase in future policy benefits 4,551 4,759 4,370
Acquisition and insurance expenses 2,570 2,461 2,262
- ---------------------------------------------------------------------------------------------------------------------------------
11,664 11,272 10,365
OPERATING INCOME 1,780 1,571 1,324
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES OPERATING INCOME 913 701 524
- ---------------------------------------------------------------------------------------------------------------------------------
EQUITY IN INCOME OF MINORITY-OWNED INSURANCE OPERATIONS 57 114 99
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER REALIZED CAPITAL LOSSES (5) (30) (12)
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)-NET (144) (97) (85)
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 5,529 4,731 4,056
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME TAXES:
Current 931 1,274 1,071
Deferred 663 93 45
- ---------------------------------------------------------------------------------------------------------------------------------
1,594 1,367 1,116
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 3,935 3,364 2,940
- ---------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST (169) (32) (43)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,766 $ 3,332 $ 2,897
=================================================================================================================================
EARNINGS PER COMMON SHARE:
Basic $3.59 $3.16 $2.73
Diluted 3.57 3.15 2.72
=================================================================================================================================
AVERAGE SHARES OUTSTANDING:
Basic 1,050 1,053 1,060
Diluted 1,055 1,057 1,064
=================================================================================================================================
See Accompanying Notes to Financial Statements.
41
43
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CAPITAL FUNDS
American International Group, Inc. and Subsidiaries
(in millions, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
=================================================================================================================================
COMMON STOCK:
Balance at beginning of year $ 1,898 $ 1,265 $ 1,265
Stock split effected as dividend 949 633 --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 2,847 1,898 1,265
- ---------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 106 127 132
Excess of cost over proceeds of common stock issued
under stock option and stock purchase plans (28) (29) (16)
Other 7 8 11
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 85 106 127
- ---------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 22,921 20,421 17,698
Net income 3,766 3,332 2,897
Stock dividends to shareholders (949) (633) --
Cash dividends to shareholders:
Common ($.21, $.19 and $.17 per share, respectively) (225) (199) (174)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 25,513 22,921 20,421
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year 172 885 939
Unrealized appreciation (depreciation) of investments-net
of reclassification adjustments (366) (117) 9
Deferred income tax benefit (expense) on changes 88 89 (26)
Foreign currency translation adjustments (137) (754) (67)
Applicable income tax benefit on changes 37 69 30
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (378) (713) (54)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (206) 172 885
- ---------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST:
Balance at beginning of year (1,096) (654) (207)
Cost of shares acquired during year (81) (508) (494)
Issued under stock option and stock purchase plans 68 66 39
Other 1 -- 8
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,108) (1,096) (654)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS AT END OF YEAR $ 27,131 $ 24,001 $ 22,044
=================================================================================================================================
See Accompanying Notes to Financial Statements.
42
44
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
American International Group, Inc. and Subsidiaries
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
===================================================================================================================================
SUMMARY:
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,036 $ 3,035 $ 9,575
NET CASH USED IN INVESTING ACTIVITIES (14,368) (4,856) (14,455)
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,548 1,849 4,851
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH 216 28 (29)
CASH AT BEGINNING OF YEAR 87 59 88
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 303 $ 87 $ 59
===================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 3,766 $ 3,332 $ 2,897
- -----------------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Non-cash revenues, expenses, gains and losses included in income:
Change in:
General and life insurance reserves 6,990 1,767 4,131
Premiums and insurance balances receivable and payable-net (733) (796) (261)
Reinsurance assets (972) 416 352
Deferred policy acquisition costs (978) (121) (704)
Investment income due and accrued (111) (170) 15
Funds held under reinsurance treaties 370 (47) 39
Other policyholders' funds 368 133 128
Current and deferred income taxes-net 206 477 (78)
Reserve for commissions, expenses and taxes 455 229 254
Other assets and liabilities-net (347) 468 (394)
Trading assets and liabilities-net (216) (869) (57)
Trading securities, at market value (1,693) (1,617) 284
Spot commodities, at market value (16) (255) 179
Net unrealized gain on interest rate and currency swaps,
options and forward transactions (1,382) 49 (131)
Securities purchased under agreements to resell (287) (2,909) 379
Securities sold under agreements to repurchase 1,767 (333) 1,659
Securities and spot commodities sold but not yet
purchased, at market value (715) 3,603 364
Realized capital gains (165) (119) (88)
Equity in income of partially-owned companies and other invested assets (176) (157) (153)
Depreciation expenses, principally flight equipment 932 873 806
Change in cumulative translation adjustments (137) (754) (67)
Other-net 110 (165) 21
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 3,270 (297) 6,678
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,036 $ 3,035 $ 9,575
===================================================================================================================================
See Accompanying Notes to Financial Statements.
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- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
American International Group, Inc. and Subsidiaries
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
===================================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of fixed maturities, at amortized cost matured or redeemed $ 1,578 $ 1,226 $ 1,627
Cost of bonds, at market sold 11,089 9,308 9,514
Cost of bonds, at market matured or redeemed 4,610 3,775 2,481
Cost of equity securities sold 2,784 2,262 2,758
Realized capital gains 165 119 88
Purchases of fixed maturities (22,638) (16,922) (19,511)
Purchases of equity securities (3,277) (1,916) (3,218)
Acquisitions, net of cash acquired (515) -- --
Mortgage, policy and collateral loans granted (1,894) (2,243) (3,276)
Repayments of mortgage, policy and collateral loans 1,567 2,200 3,260
Sales of securities available for sale 2,618 4,310 2,062
Maturities of securities available for sale 1,848 3,232 1,603
Purchases of securities available for sale (5,967) (6,916) (9,531)
Sales of flight equipment 687 2,231 1,363
Purchases of flight equipment (3,160) (3,435) (3,254)
Net additions to real estate and other fixed assets (624) (517) (581)
Sales or distributions of other invested assets 1,479 1,274 1,198
Investments in other invested assets (3,293) (1,479) (1,263)
Change in short-term investments (1,424) (1,325) 264
Investments in partially-owned companies (1) (40) (39)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $(14,368) $ (4,856) $(14,455)
===================================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in policyholders' contract deposits $ 2,250 $ 1,015 $ 222
Change in deposits due to banks and other depositors 270 (234) 249
Change in commercial paper 1,261 (1,123) 1,331
Proceeds from notes, bonds, loans and mortgages payable 7,811 7,604 6,150
Repayments on notes, bonds, loans and mortgages payable (4,973) (7,016) (2,775)
Liquidation of zero coupon notes payable -- (12) --
Proceeds from guaranteed investment agreements 6,540 4,930 3,583
Maturities of guaranteed investment agreements (5,353) (2,653) (3,283)
Proceeds from common stock issued 40 37 23
Cash dividends to shareholders (225) (200) (174)
Acquisition of treasury stock (81) (508) (494)
Other-net 8 9 19
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 7,548 $ 1,849 $ 4,851
===================================================================================================================================
SUPPLEMENTARY INFORMATION:
TAXES PAID $ 1,162 $ 808 $ 1,068
===================================================================================================================================
INTEREST PAID $ 1,919 $ 1,734 $ 1,595
===================================================================================================================================
See Accompanying Notes to Financial Statements.
44
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- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
American International Group, Inc. and Subsidiaries
(in millions)
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
=================================================================================================================================
COMPREHENSIVE INCOME:
Net income $ 3,766 $ 3,332 $ 2,897
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME:
Unrealized appreciation (depreciation) of investments-net
of reclassification adjustments (366) (117) 9
Deferred income tax benefit (expense) on changes 88 89 (26)
Foreign currency translation adjustments (137) (754) (67)
Applicable income tax benefit on changes 37 69 30
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (378) (713) (54)
- ---------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 3,388 $ 2,619 $ 2,843
=================================================================================================================================
See Accompanying Notes to Financial Statements.
45
47
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of American International Group, Inc. and all significant
subsidiaries (AIG). Some of AIG's foreign subsidiaries report on a fiscal year
ending November 30. All material intercompany accounts and transactions have
been eliminated. Commencing with the third quarter 1998, Transatlantic and 20th
Century were consolidated into AIG's financial statements as AIG became the
majority shareholder of these entities.
(B) BASIS OF PRESENTATION: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Certain accounts have been reclassified in the 1997 and 1996 financial
statements to conform to their 1998 presentation.
General Insurance Operations: AIG's general insurance subsidiaries are
multiple line companies writing substantially all lines of property and casualty
insurance. One or more of these companies is licensed to write substantially all
of these lines in all states of the United States and in more than 100 foreign
countries. Premiums are earned primarily on a pro rata basis over the term of
the related coverage. The reserve for unearned premiums represents the portion
of premiums written relating to the unexpired terms of coverage.
Acquisition costs are deferred and amortized over the period in which the
related premiums written are earned. Investment income is not anticipated in the
deferral of acquisition costs. (See Note 4.)
Losses and loss expenses are charged to income as incurred. The reserve for
losses and loss expenses represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The methods
of determining such estimates and establishing resulting reserves, including
amounts relating to reserves for estimated unrecoverable reinsurance, are
continually reviewed and updated. Adjustments resulting therefrom are reflected
in income currently. AIG discounts certain of its loss reserves which are
primarily related to certain workers' compensation claims. (See Note 6.)
Life Insurance Operations: AIG's life insurance subsidiaries offer a wide
range of traditional insurance and financial and investment products. One or
more of these subsidiaries is licensed to write life insurance in all states of
the United States and in over 70 foreign countries. Traditional products consist
of individual and group life, annuity, endowment and accident and health
policies. Financial and investment products consist of single premium annuity,
variable annuities, guaranteed investment contracts and universal life. Premiums
for traditional life insurance products are generally recognized as revenues
over the premium paying period of the related policies. Benefits and expenses
are provided against such revenues to recognize profits over the estimated life
of the policies. Revenues for universal life and investment-type products
consist of policy charges for the cost of insurance, administration, and
surrenders during the period. Expenses include interest credited to policy
account balances and benefit payments made in excess of policy account balances.
Investment income reflects certain minor amounts of realized capital gains where
the gains are deemed to be an inherent element in pricing certain life products
in some foreign countries.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Deferred policy acquisition costs and policy initiation costs related to
universal life and investment-type products are amortized in relation to
expected gross profits over the life of the policies. (See Note 4.)
The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.
Financial Services Operations: AIG participates in the derivatives dealer
market conducting, primarily as principal, an interest rate, currency, equity
and credit derivative products business. AIG also enters into structured
transactions including long-dated forward foreign exchange contracts, option
transactions, liquidity facilities and investment agreements and invests in a
diversified portfolio of securities.
AIG engages in market making and trading activities, as principal, in
foreign exchange, interest rates and precious and base metals. AIG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIG, as lessor, leases flight equipment principally under operating leases.
Accordingly, income is reported over the life of the lease as rentals become
receivable under the provisions of the lease or, in the case of leases with
varying payments, under the straight-line method over the noncancelable term of
the lease. In certain cases, leases provide for additional amounts contingent on
usage. AIG is also a remarketer of flight equipment for its own account and for
airlines and financial institutions. AIG's revenues from such operations consist
of net gains on sales of flight equipment and commissions.
(C) INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at current market values.
Interest income with respect to fixed maturity securities is accrued currently.
46
48
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Included in the bonds available for sale are collateralized mortgage
obligations (CMOs). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments over their estimated life.
Bond trading securities are carried at current market values, as it is
AIG's intention to sell these securities in the near term.
Common and non-redeemable preferred stocks are carried at current market
values. Dividend income is generally recognized when receivable.
Unrealized gains and losses from investments in equity securities and fixed
maturities available for sale are reflected as a separate component of
comprehensive income, net of deferred income taxes in capital funds currently.
Unrealized gains and losses from investments in trading securities are reflected
in income currently.
Realized capital gains and losses are determined principally by specific
identification. Where declines in values of securities below cost or amortized
cost are considered to be other than temporary, a charge is reflected in income
for the difference between cost or amortized cost and estimated net realizable
value.
(D) MORTGAGE LOANS ON REAL ESTATE, POLICY AND COLLATERAL LOANS--NET:
Mortgage loans on real estate, policy loans and collateral loans are carried at
unpaid principal balances. Interest income on such loans is accrued currently.
Impairment of mortgage loans on real estate and collateral loans is
generally measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate subject to the fair value of
underlying collateral. Interest income on such loans is recognized as cash is
received.
(E) FLIGHT EQUIPMENT: Flight equipment is stated at cost. Major additions
and modifications are capitalized. Normal maintenance and repairs, airframe and
engine overhauls and compliance with return conditions of flight equipment on
lease are provided by and paid for by the lessee. Under the provisions of most
leases for certain airframe and engine overhauls, the lessee is reimbursed for
costs incurred up to but not exceeding contingent rentals paid to AIG by the
lessee. AIG provides a charge to income for such reimbursements based upon the
expected reimbursements during the life of the lease. Depreciation and
amortization are computed on the straight-line basis to a residual value of
approximately 15 percent over the estimated useful lives of the related assets
but not exceeding 25 years. This caption also includes deposits for aircraft to
be purchased.
At the time the assets are retired or disposed of, the cost and associated
accumulated depreciation and amortization are removed from the related accounts
and the difference, net of proceeds, is recorded as a gain or loss.
(F) SECURITIES AVAILABLE FOR SALE, AT MARKET VALUE: These securities are
held to meet long term investment objectives and are accounted for as available
for sale, carried at current market values and recorded on a trade date basis.
Unrealized gains and losses from valuing these securities and any related hedges
are reflected in capital funds currently, net of any related deferred income
taxes. When the underlying security is sold, the realized loss or gain resulting
from the hedging derivative transaction is recognized in income in that same
period as the realized gain or loss of the hedged security.
(G) TRADING SECURITIES, AT MARKET VALUE: Trading securities are held to
meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and carried at current market
values. Unrealized gains and losses are reflected in income currently.
(H) SPOT COMMODITIES, AT MARKET VALUE: Spot commodities are carried at
current market values and are recorded on a settlement date basis. The exposure
to market risk may be reduced through the use of forwards, futures and option
contracts. Unrealized gains and losses of both commodities and any derivative
transactions are reflected in income currently.
(I) UNREALIZED GAIN AND UNREALIZED LOSS ON INTEREST RATE AND CURRENCY
SWAPS, OPTIONS AND FORWARD TRANSACTIONS: Swaps, options and forward transactions
are accounted for as contractual commitments recorded on a trade date basis and
are carried at current market values or estimated fair values when market values
are not available. Unrealized gains and losses are reflected in income
currently. Estimated fair values are based on the use of valuation models that
utilize, among other things, current interest, foreign exchange and volatility
rates. These valuations represent an assessment of the present values of
expected future cash flows of these transactions and may include reserves for
market risk as deemed appropriate. The portfolio's discounted cash flows are
evaluated with reference to current market conditions, maturities within the
portfolio and other relevant factors. Based upon this evaluation, it is
determined what offsetting transactions, if any, are necessary to reduce the
market risk of the portfolio. AIG manages its market risk with a variety of
transactions, including swaps, trading securities, futures contracts and other
transactions as appropriate. Because of the limited liquidity of some of these
instruments, the recorded values of these transactions may be different than the
values that might be realized if AIG were to sell or close out the transactions
prior to maturity. AIG believes that such differences are not significant to the
results of operations, financial condition or liquidity.
(J) TRADING ASSETS AND TRADING LIABILITIES: Trading assets and trading
liabilities include option premiums paid and received and receivables from and
payables to counterparties which relate to unrealized gains and losses on
futures, forwards and options and balances due from and due to clearing brokers
and exchanges.
47
49
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Futures, forwards and options purchased and written are accounted for as
contractual commitments on a trade date basis and are carried at fair values.
Unrealized gains and losses are reflected in income currently. The fair values
of futures contracts are based on closing exchange quotations. Commodity forward
transactions are carried at fair values derived from dealer quotations and
underlying commodity exchange quotations. For long dated forward transactions,
where there are no dealer or exchange quotations, fair values are derived using
internally developed valuation methodologies based on available market
information. Options are carried at fair values based on the use of valuation
models that utilize, among other things, current interest or commodity rates and
foreign exchange and volatility rates, as applicable.
(K) SECURITIES PURCHASED (SOLD) UNDER AGREEMENTS TO RESELL (REPURCHASE), AT
CONTRACT VALUE: Purchases of securities under agreements to resell and sales of
securities under agreements to repurchase are accounted for as collateralized
transactions and are recorded at their contracted resale or repurchase amounts,
plus accrued interest. Generally, it is AIG's policy to take possession of or
obtain a security interest in securities purchased under agreements to resell.
AIG minimizes the credit risk that counterparties to transactions might be
unable to fulfill their contractual obligations by monitoring customer credit
exposure and collateral value and generally requiring additional collateral to
be deposited with AIG when deemed necessary.
(L) OTHER INVESTED ASSETS: Other invested assets consist primarily of
investments by AIG's insurance operations in joint ventures and partnerships and
other investments not classified elsewhere herein. The joint ventures and
partnerships are carried at equity or cost depending on the nature of the
invested asset and the ownership percentage thereof. Other investments are
carried at cost or market values depending upon the nature of the underlying
assets. Unrealized gains and losses from the revaluation of those investments
carried at market values are reflected in capital funds, net of any related
deferred income taxes.
(M) REINSURANCE ASSETS: Reinsurance assets include the balances due from
both reinsurance and insurance companies under the terms of AIG's reinsurance
arrangements for paid and unpaid losses and loss expenses, ceded unearned
premiums and ceded future policy benefits for life and accident and health
insurance contracts and benefits paid and unpaid. It also includes funds held
under reinsurance treaties.
(N) INVESTMENTS IN PARTIALLY-OWNED COMPANIES: The equity method of
accounting is used for AIG's investment in companies in which AIG's ownership
interest approximates twenty but is not greater than fifty percent
(minority-owned companies). Equity in income of minority-owned insurance
operations is presented separately in the consolidated statement of income.
Equity in net income of other unconsolidated companies is principally included
in other income (deductions)-net. At December 31, 1998, AIG's significant
investments in partially-owned companies included its 19.9 percent interest in
Richmond Insurance Company; and its 24.4 percent interest in IPC Holdings, Ltd.
This balance sheet caption also includes investments in less significant
partially-owned companies and in certain minor majority-owned subsidiaries. The
amount of dividends received from unconsolidated subsidiaries owned less than 50
percent were $24 million, $30 million and $13 million in 1998, 1997 and 1996
respectively. The undistributed earnings of unconsolidated subsidiaries owned
less than 50 percent was $59 million as of December 31, 1998.
In January 1998, AIG purchased the 76.1 percent of the outstanding shares
of SELIC Holdings, Ltd. (SELIC) which AIG did not own. Prior to the purchase of
these shares, SELIC's operations were accounted for on an equity basis and
presented as a component of equity in income of minority-owned insurance
operations. Subsequent to the acquisition, SELIC was consolidated as a component
of general insurance operations.
As a result of purchases of the common stock of Transatlantic, as of August
1998, AIG owns more than 50 percent of the voting securities of Transatlantic.
Commencing with the third quarter of 1998, AIG accounted for its investment in
Transatlantic on a consolidated basis.
(O) REAL ESTATE AND OTHER FIXED ASSETS: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs are
charged to income as incurred; expenditures for betterments are capitalized
and depreciated.
(P) SEPARATE AND VARIABLE ACCOUNTS: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of each
account are legally segregated and are not subject to claims which arise out of
any other business of AIG.
(Q) SECURITIES AND SPOT COMMODITIES SOLD BUT NOT YET PURCHASED, AT MARKET
VALUE: Securities and spot commodities sold but not yet purchased represent
sales of securities and spot commodities not owned at the time of sale. The
obligations arising from such transactions are recorded on a trade date basis
and carried at the respective current market values or current commodity prices.
(R) PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANY: Preferred
shareholders' equity in subsidiary company relates to outstanding market auction
preferred stock of International Lease Finance Corporation (ILFC), a wholly
owned subsidiary of AIG. Dividends on such preferred stock are accounted for as
interest expense and included as minority interest in the consolidated statement
of income.
48
50
- --------------------------------------------------------------------------------
American International Group, inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(S) TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FASB 52). Under FASB 52, functional currency assets and
liabilities are translated into U.S. dollars generally using current rates of
exchange and the related translation adjustments are recorded as a separate
component of comprehensive income, net of any related taxes in capital funds.
Functional currencies are generally the currencies of the local operating
environment. Income statement accounts expressed in functional currencies are
translated using average exchange rates. The adjustments resulting from
translation of financial statements of foreign entities operating in highly
inflationary economies are recorded in income. Exchange gains and losses
resulting from foreign currency transactions are also recorded in income
currently. The exchange gain or loss with respect to utilization of foreign
exchange hedging instruments is recorded as a component of capital funds.
(T) INCOME TAXES: Deferred federal and foreign income taxes are provided
for temporary differences for the expected future tax consequences of events
that have been recognized in AIG's financial statements or tax returns.
(U) EARNINGS PER SHARE: Basic earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. Diluted earnings per share are
based on those shares used in basic earnings per share plus shares that would
have been outstanding assuming issuance of common shares for all dilutive
potential common shares outstanding, retroactively adjusted to reflect all stock
dividends and stock splits.
The computation of earnings per share for December 31, 1998, 1997 and 1996
was as follows:
(in millions, except per share amounts)
- -----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
=============================================================================
NUMERATOR:
Net income applicable
to common stock $ 3,766 $ 3,332 $ 2,897
=============================================================================
DENOMINATOR:
Average outstanding shares used
in the computation of per share
earnings:
Common stock issued 1,139 1,139 1,139
Common stock in treasury (89) (86) (79)
- -----------------------------------------------------------------------------
Average outstanding shares-basic 1,050 1,053 1,060
=============================================================================
Stock options and stock purchase plan
(treasury stock method) 5 4 4
- -----------------------------------------------------------------------------
Average outstanding shares-diluted 1,055 1,057 1,064
=============================================================================
Earnings per share:
Basic $ 3.59 $ 3.16 $ 2.73
Diluted 3.57 3.15 2.72
=============================================================================
(V) ACCOUNTING STANDARDS: In June 1997, FASB issued Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (FASB 130) and
Statement of Financial Accounting Standards No. 131 "Disclosure about Segments
of an Enterprise and Related Information" (FASB 131).
FASB 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. FASB 130 was
effective for AIG as of January 1, 1998. FASB 130 had no impact on AIG's results
of operations, financial condition or liquidity.
FASB 131 establishes standards for the way AIG is required to disclose
information about its operating segments in its annual financial statements and
selected information in its interim financial statements. FASB 131 establishes,
where practicable, standards with respect to geographic areas, among other
things. Certain descriptive information is also required. FASB 131 was effective
for the year ended December 31, 1998 and has been adopted herein.
In February 1998, FASB issued Statement of Financial Accounting Standards
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits"(FASB 132). This statement requires AIG to revise its disclosures about
pension and other postretirement benefit plans and does not change the
measurement or recognition of these plans. Also, FASB 132 requires additional
information on changes in the benefit obligations and fair values of plan
assets. FASB132 was effective for the year ended December 31, 1998 and has been
adopted herein.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FASB 133).
This statement requires AIG to recognize all derivatives in the consolidated
balance sheet measuring these derivatives at fair value. The recognition of the
change in the fair value of a derivative depends on a number of factors,
including the intended use of the derivative. Currently, AIG Financial Products
Corp. and its subsidiaries (AIGFP) and AIG Trading Group Inc. and its
subsidiaries (AIGTG) present, in all material respects, the changes in fair
value of their derivative transactions as a component of AIG's operating income.
AIG is evaluating the impact of FASB 133 with respect to derivative transactions
entered into by other AIG operations. AIG believes that the impact of FASB 133
on its results of operations, financial condition or liquidity will not be
significant. FASB 133 is effective for the year commencing January 1, 2000.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." This statement provides guidance for the
recording of a liability for insurance-related assessments. The statement
requires that a liability be recognized in certain defined circumstances. AIG
believes that the impact of this
49
51
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
statement on its results of operations, financial condition or liquidity will
not be significant. This statement is effective for the year commencing January
1, 1999.
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." This
statement identifies several methods of deposit accounting and provides guidance
on the application of each method. This statement classifies insurance and
reinsurance contracts for which the deposit method is appropriate as contracts
that (i) transfer only significant timing risk, (ii) transfer only significant
underwriting risk, (iii) transfer neither significant timing nor underwriting
risk, and (iv) have an indeterminate risk. AIG believes that the impact of this
statement on its results of operations, financial condition or liquidity will
not be significant. This statement is effective for the year commencing January
1, 2000. Restatement of previously issued financial statements is not permitted.
2. FOREIGN OPERATIONS
Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds which
generally cause a delay in the outward remittance of such funds. Approximately
39 percent and 36 percent of consolidated assets at December 31, 1998 and 1997,
respectively, and 53 percent of revenues for the year ended December 31, 1998
and 54 percent for each of the years ended December 31, 1997 and 1996,
respectively, were located in or derived from foreign countries (other than
Canada). (See Note 17.)
3. FEDERAL INCOME TAXES
(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal income
tax return. Revenue Agent's Reports assessing additional taxes for the years
1987, 1988, 1989 and 1990 have been issued and Letters of Protest contesting the
assessments have been filed with the Internal Revenue Service. It is
management's belief that there are substantial arguments in support of the
positions taken by AIG in its Letters of Protest. AIG also believes that the
impact of the results of these examinations will not be significant to AIG's
financial condition, results of operations or liquidity.
Foreign income not expected to be taxed in the United States has arisen
because AIG's foreign subsidiaries were generally not subject to U.S. income
taxes on income earned prior to January 1, 1987. Such income would become
subject to U.S. income taxes at current tax rates if remitted to the United
States or if other events occur which would make these amounts currently
taxable. The cumulative amount of translated undistributed earnings of AIG's
foreign subsidiaries currently not subject to U.S. income taxes was
approximately $3.3 billion at December 31, 1998. Management presently has not
subjected and has no intention of subjecting these accumulated earnings to
material U.S. income taxes and no provision has been made in the accompanying
financial statements for such taxes.
(b) The U.S. Federal income tax rate is 35 percent for 1998, 1997 and 1996.
Actual tax expense on income differs from the "expected" amount computed by
applying the Federal income tax rate because of the following:
(dollars in millions)
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
-------------------- ------------------ -------------------
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
=================================================================================================================================
"Expected" tax expense $ 1,935 35.0% $ 1,656 35.0% $ 1,420 35.0%
Adjustments:
Tax exempt interest (284) (5.1) (287) (6.1) (279) (6.9)
Dividends received deduction (11) (0.2) (15) (0.3) (24) (0.6)
State income taxes 25 0.5 31 0.7 47 1.2
Foreign income not expected to be taxed in the U.S.,
less foreign income taxes (85) (1.5) (33) (0.7) (22) (0.5)
Other 14 0.1 15 0.3 (26) (0.7)
- ---------------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 1,594 28.8% $ 1,367 28.9% $ 1,116 27.5%
=================================================================================================================================
Foreign and domestic components of actual tax expense:
Foreign:
Current $ 386 $ 317 $ 392
Deferred 31 75 (1)
Domestic*:
Current 545 957 679
Deferred 632 18 46
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 1,594 $ 1,367 $ 1,116
=================================================================================================================================
*Including U.S. tax on foreign income.
50
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American International Group, Inc. and Subsidiaries
3. FEDERAL INCOME TAXES (continued)
(c) The components of the net deferred tax liability as of December 31, 1998 and
December 31, 1997 were as follows:
(in millions)
- -------------------------------------------------------------------------------
1998 1997
===============================================================================
Deferred tax assets:
Loss reserve discount $1,275 $1,235
Unearned premium reserve reduction 390 322
Accruals not currently deductible 555 505
Adjustment to life policy reserves 636 650
Cumulative translation adjustment 151 116
Other 8 18
- -------------------------------------------------------------------------------
3,015 2,846
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 1,614 1,387
Financial service products
mark to market differential 224 144
Depreciation of flight equipment 1,137 943
Acquisition net asset basis adjustments 93 119
Unrealized appreciation of investments 601 593
Other 198 131
- -------------------------------------------------------------------------------
3,867 3,317
- -------------------------------------------------------------------------------
Net deferred tax liability $ 852 $ 471
===============================================================================
4. DEFERRED POLICY ACQUISITION COSTS
The following reflects the policy acquisition costs deferred for amortization
against future income and the related amortization charged to income for general
and life insurance operations, excluding certain amounts deferred and amortized
in the same period:
(in millions)
- -----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
=============================================================================
General insurance operations:
Balance at beginning of year $ 1,637 $ 1,416 $ 1,290
- -----------------------------------------------------------------------------
Acquisition costs deferred
Commissions 664 592 592
Other 909 845 714
- -----------------------------------------------------------------------------
1,573 1,437 1,306
- -----------------------------------------------------------------------------
Amortization charged to income
Commissions 568 552 557
Other 790 664 623
- -----------------------------------------------------------------------------
1,358 1,216 1,180
- -----------------------------------------------------------------------------
Balance at end of year $ 1,852 $ 1,637 $ 1,416
=============================================================================
Life insurance operations:
Balance at beginning of year $ 4,956 $ 5,055 $ 4,478
- -----------------------------------------------------------------------------
Acquisition costs deferred
Commissions 873 931 941
Other 395 403 400
- -----------------------------------------------------------------------------
1,268 1,334 1,341
- -----------------------------------------------------------------------------
Amortization charged to income
Commissions 383 411 427
Other 206 220 201
- -----------------------------------------------------------------------------
589 631 628
- -----------------------------------------------------------------------------
Increase (decrease) due to
foreign exchange 160 (802) (136)
Balance at end of year $ 5,795 $ 4,956 $ 5,055
=============================================================================
Total deferred policy acquisition costs $ 7,647 $ 6,593 $ 6,471
=============================================================================
5. REINSURANCE
In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.
General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Amounts recoverable from general reinsurers are estimated in
a manner consistent with the claims liabilities associated with the reinsurance
and presented as a component of reinsurance assets.
AIG life companies limit exposure to loss on any single life. For ordinary
insurance, AIG retains a maximum of approximately one million dollars of
coverage per individual life. There are smaller retentions for other lines of
business. Life reinsurance is effected principally under yearly renewable term
treaties. Amounts recoverable from life reinsurers are estimated in a manner
consistent with the assumptions used for the underlying policy benefits and are
presented as a component of reinsurance assets.
General insurance premiums written and earned were comprised of the
following:
(in millions)
- -----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, WRITTEN EARNED
=============================================================================
1998
Gross premiums $ 20,684 $ 20,092
Ceded premiums (6,098) (5,994)
- -----------------------------------------------------------------------------
Net premiums $ 14,586 $ 14,098
=============================================================================
1997
Gross premiums $ 18,742 $ 17,566
Ceded premiums (5,334) (5,145)
- -----------------------------------------------------------------------------
Net premiums $ 13,408 $ 12,421
=============================================================================
1996
Gross premiums $ 18,319 $ 17,580
Ceded premiums (5,627) (5,725)
- -----------------------------------------------------------------------------
Net premiums $ 12,692 $ 11,855
=============================================================================
For the years ended December 31, 1998, 1997 and 1996, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $5.36
billion, $4.59 billion and $5.07 billion, respectively.
51
53
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REINSURANCE (continued)
Life insurance net premium income was comprised of the following:
(in millions)
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
===============================================================================
Gross premium income $ 10,532 $ 10,212 $ 9,239
Ceded premiums (285) (286) (261)
- -------------------------------------------------------------------------------
Net premium income $ 10,247 $ 9,926 $ 8,978
===============================================================================
Life insurance recoveries, which reduced death and other benefits,
approximated $138 million, $136 million and $113 million, respectively, for the
years ended December 31, 1998, 1997 and 1996.
AIG's reinsurance arrangements do not relieve AIG from its direct
obligation to its insureds. Thus, a credit exposure exists with respect to both
general and life reinsurance ceded to the extent that any reinsurer is unable to
meet the obligations assumed under the reinsurance agreements. AIG holds
substantial collateral as security under related reinsurance agreements in the
form of funds, securities and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely
successful in prior recovery efforts.
AIG evaluates the financial condition of its reinsurers through an internal
reinsurance security committee consisting of members of AIG's senior management.
No single reinsurer is a material reinsurer to AIG nor is AIG's business
substantially dependent upon any reinsurance contract.
Life insurance ceded to other insurance companies was as follows:
(in millions)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
================================================================================
Life insurance in-force $58,235 $50,924 $44,691
================================================================================
Life insurance assumed represented 0.3 percent of gross life insurance
in-force at December 31, 1998 and 1997 and 0.2 percent for 1996, and life
insurance premium income assumed represented 0.3 percent, 0.2 percent and 0.1
percent of gross premium income for the periods ended December 31, 1998, 1997
and 1996.
Supplemental information for gross loss and benefit reserves net of ceded
reinsurance at December 31, 1998 and 1997 follows:
(in millions)
- --------------------------------------------------------------------------------
As Net of
Reported Reinsurance
================================================================================
DECEMBER 31, 1998
Reserve for losses and loss expenses $(38,310) $(24,619)
Future policy benefits for life and accident
and health insurance contracts (29,571) (29,433)
Premiums and insurance balances
receivable-net 11,679 13,394
Funds held under reinsurance treaties -- 446
Reserve for unearned premiums (10,009) (8,255)
Reinsurance assets 17,744 --
================================================================================
December 31, 1997
Reserve for losses and loss expenses $(33,400) $(21,171)
Future policy benefits for life and accident
and health insurance contracts (24,502) (24,374)
Premiums and insurance balances
receivable-net 10,283 12,306
Funds held under reinsurance treaties -- 81
Reserve for unearned premiums (8,739) (7,089)
Reinsurance assets 16,111 --
================================================================================
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS
(a) The following analysis provides a reconciliation of the activity in the
reserve for losses and loss expenses:
(in millions)
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
===============================================================================
At beginning of year:
Reserve for losses and
loss expenses $33,400 $33,430 $33,047
Reinsurance recoverable (12,229) (13,023) (13,354)
- -------------------------------------------------------------------------------
21,171 20,407 19,693
- -------------------------------------------------------------------------------
Acquisitions 2,896 -- --
Losses and loss expenses incurred:
Current year 10,938 9,732 9,273
Prior year (281) (376) (276)
- -------------------------------------------------------------------------------
Total 10,657 9,356 8,997
===============================================================================
Losses and loss expenses paid:
Current year 4,389 2,976 3,002
Prior year 5,716 5,616 5,281
- -------------------------------------------------------------------------------
Total 10,105 8,592 8,283
===============================================================================
At end of year:
Net reserve for losses and
loss expenses 24,619 21,171 20,407
Reinsurance recoverable 13,691 12,229 13,023
- -------------------------------------------------------------------------------
Total $38,310 $33,400 $33,430
===============================================================================
52
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS (continued)
(b) The analysis of the future policy benefits and policyholders' contract
deposits liabilities as at December 31, 1998 and 1997 follows:
(in millions)
- --------------------------------------------------------------------------------
1998 1997
================================================================================
Future policy benefits:
Long duration contracts $28,535 $23,918
Short duration contracts 1,036 584
- --------------------------------------------------------------------------------
Total $29,571 $24,502
================================================================================
Policyholders' contract deposits:
Annuities $ 5,159 $ 4,759
Guaranteed investment contracts (GICs) 3,626 2,677
Corporate life products 2,266 1,967
Universal life 639 540
Other investment contracts 883 380
- --------------------------------------------------------------------------------
Total $12,573 $10,323
================================================================================
(c) Long duration contract liabilities included in future policy benefits,
as presented in the table above, result from traditional life products. Short
duration contract liabilities are primarily accident and health products. The
liability for future life policy benefits has been established based upon the
following assumptions:
(i) Interest rates (exclusive of immediate/terminal funding annuities),
which vary by territory, year of issuance and products, range from 3.0 percent
to 12.0 percent within the first 20 years. Interest rates on immediate/terminal
funding annuities are at a maximum of 12.2 percent and grade to not greater than
7.5 percent.
(ii) Mortality and surrender rates are based upon actual experience by
geographical area modified to allow for variations in policy form. The weighted
average lapse rate, including surrenders, for individual and group life
approximated 7.8 percent.
(iii) The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the benefit of AIG are
restricted in some cases by the insurance contracts and by the local insurance
regulations of the countries in which the policies are in force.
(iv) Participating life business represented approximately 30 percent of
the gross insurance in-force at December 31, 1998 and 46 percent of gross
premium income in 1998. The amount of dividends to be paid is determined
annually by the Boards of Directors. Anticipated dividends are considered as a
planned contractual benefit in computing the value of future policy benefits and
are provided ratably over the premium-paying period of the contracts.
(d) The liability for policyholders' contract deposits has been established
based on the following assumptions:
(i) Interest rates credited on deferred annuities, which vary by territory
and year of issuance, range from 3.0 percent to 7.1 percent. Credited interest
rate guarantees are generally for a period of one year. Withdrawal charges
generally range from 3.0 percent to 10.0 percent grading to zero over a period
of 5 to 10 years.
(ii) Domestically, GICs have market value withdrawal provisions for any
funds withdrawn other than benefit responsive payments. Interest rates credited
generally range from 4.7 percent to 8.1 percent and maturities range from 1 to
20 years. Overseas, primarily in the United Kingdom, GIC type contracts are
credited at rates ranging from 4.6 percent to 6.5 percent with guarantees
generally being one year. Contracts in other foreign locations have interest
rates, maturities and withdrawal charges based upon local economic and
regulatory conditions.
(iii) Interest rates on corporate life insurance products are guaranteed at
4.0 percent and the weighted average rate credited in 1998 was 7.0 percent.
(iv) The universal life funds have credited interest rates of 4.5 percent
to 7.5 percent and guarantees ranging from 3.5 percent to 5.5 percent depending
on the year of issue. Additionally, universal life funds are subject to
surrender charges that amount to 11.0 percent of the fund balance grading to
zero over a period not longer than 20 years.
(e) Experience adjustments, relating to future policy benefits and
policyholders' contract deposits, vary according to the type of contract and the
territory in which the policy is in force. In general terms, investments,
mortality and morbidity results may be passed through by experience credits or
as an adjustment to the premium mechanism, subject to local regulatory guidance.
7. STATUTORY FINANCIAL DATA
Statutory surplus and net income for general insurance and life insurance
operations as reported to regulatory authorities were as follows:
(in millions)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
================================================================================
Statutory surplus:
General insurance $15,523 $14,071 $12,311
Life insurance 6,912 5,535 5,542
Statutory net income*:
General insurance 2,252 2,041 1,727
Life insurance 823 1,100 851
================================================================================
* Includes net realized capital gains and losses.
AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with GAAP vary between domestic and foreign jurisdictions. The principal
differences are that statutory financial statements do not reflect deferred
policy acquisition costs and deferred income taxes, all bonds are carried at
amortized cost and reinsurance assets and liabilities are presented net of
reinsurance. AIG's use of permitted statutory accounting practices does not have
a significant impact on statutory surplus.
53
55
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT INFORMATION
(A) STATUTORY DEPOSITS: Cash and securities with carrying values of $4.09
billion and $3.86 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 1998 and 1997,
respectively.
(B) NET INVESTMENT INCOME: An analysis of the net investment income from
the general and life insurance operations follows:
(in millions)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
================================================================================
General insurance:
Fixed maturities $1,663 $1,490 $1,392
Equity securities 80 55 75
Short-term investments 73 40 41
Other (net of interest
expense on funds held) 481 337 253
- --------------------------------------------------------------------------------
Total investment income 2,297 1,922 1,761
Investment expenses 105 68 70
- --------------------------------------------------------------------------------
Net investment income $2,192 $1,854 $1,691
================================================================================
Life insurance:
Fixed maturities $2,321 $2,031 $1,773
Equity securities 49 64 87
Short-term investments 224 70 62
Interest on mortgage, policy
and collateral loans 527 539 678
Other 269 309 194
- --------------------------------------------------------------------------------
Total investment income 3,390 3,013 2,794
Investment expenses 158 117 118
- --------------------------------------------------------------------------------
Net investment income $3,232 $2,896 $2,676
================================================================================
(C) INVESTMENT GAINS AND LOSSES: The realized capital gains (losses) and
increase (decrease) in unrealized appreciation of investments for 1998, 1997 and
1996 were as follows:
(in millions)
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
===============================================================================
Realized capital gains (losses)
on investments:
Fixed maturities (a) $ 119 $ 86 $ (33)
Equity securities 90 125 157
Other (44) (92) (36)
- -------------------------------------------------------------------------------
Realized capital gains $ 165 $ 119 $ 88
===============================================================================
Increase (decrease) in unrealized
appreciation of investments:
Fixed maturities $ 543 $ 228 $(227)
Equity securities (457) (423) 266
Other (b) (452) 78 (30)
- -------------------------------------------------------------------------------
Increase (decrease) in unrealized
appreciation $(366) $(117) $ 9
===============================================================================
(a) The realized gains (losses) resulted from the sale of available for sale
fixed maturities.
(b) Includes $301 million increase, $158 million decrease and $51 million
increase in unrealized appreciation attributable to participating
policyholders at December 31, 1998, 1997 and 1996, respectively.
The gross gains and gross losses realized on the disposition of available
for sale securities for 1998, 1997 and 1996 follow:
(in millions)
- --------------------------------------------------------------------------------
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
================================================================================
1998
Bonds $204 $ 69
Common stocks 528 453
Preferred stocks 3 5
Financial services securities available for sale 4 --
- --------------------------------------------------------------------------------
Total $739 $527
================================================================================
1997
Bonds $ 79 $ 72
Common stocks 536 413
Preferred stocks 3 1
Financial services securities available for sale 6 2
- --------------------------------------------------------------------------------
Total $624 $488
================================================================================
1996
Bonds $ 55 $ 80
Common stocks 354 201
Preferred stocks 4 1
Financial services securities available for sale 7 1
- --------------------------------------------------------------------------------
Total $420 $283
================================================================================
(D) MARKET VALUE OF FIXED MATURITIES AND UNREALIZED APPRECIATION OF
INVESTMENTS: At December 31, 1998 and 1997, the balance of the unrealized
appreciation of investments in equity securities (before applicable taxes)
included gross gains of approximately $1.3 billion and $1.8 billion and gross
losses of approximately $1.2 billion and $1.3 billion, respectively.
The deferred tax payable related to the net unrealized appreciation of
investments was $601 million at December 31, 1998 and $593 million at December
31, 1997.
54
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
8. INVESTMENT INFORMATION (continued)
The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 1998 and 1997 were as
follows:
(in millions)
- --------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
================================================================================
1998
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 9 $ 1 $ -- $ 10
States (b) 12,648 975 2 13,621
All other corporate 1 1 -- 2
- --------------------------------------------------------------------------------
Total fixed maturities $12,658 $ 977 $ 2 $13,633
================================================================================
1997
Fixed maturities held to
maturity:
Bonds:
U.S. Government (a) $ 9 $ 1 $ -- $ 10
States (b) 12,521 836 1 13,356
- --------------------------------------------------------------------------------
Total bonds 12,530 837 1 13,366
Preferred stocks 239 292 -- 531
- --------------------------------------------------------------------------------
Total fixed maturities $12,769 $ 1,129 $ 1 $13,897
================================================================================
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market value of bonds available for sale
and carried at market value at December 31, 1998 and 1997 were as follows:
(in millions)
- ---------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
=================================================================================
1998
Fixed maturities available for sale:
Bonds:
U.S. Government (a) $ 2,069 $ 178 $ 1 $ 2,246
States (b) 6,514 427 65 6,876
Foreign governments 10,523 671 42 11,152
All other corporate 27,084 1,197 312 27,969
- ---------------------------------------------------------------------------------
Total bonds $46,190 $ 2,473 $ 420 $48,243
- ---------------------------------------------------------------------------------
1997
Fixed maturities available for sale:
Bonds:
U.S. Government (a) $ 1,254 $ 117 $ 1 $ 1,370
States (b) 5,870 333 2 6,201
Foreign governments 8,311 374 104 8,581
All other corporate 21,133 905 112 21,926
- --------------------------------------------------------------------------------
Total bonds $36,568 $ 1,729 $ 219 $38,078
================================================================================
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
The amortized cost and estimated market values of fixed maturities held to
maturity and fixed maturities available for sale at December 31, 1998, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
(in millions)
- --------------------------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
================================================================================
Fixed maturities held to maturity:
Due in one year or less $ 520 $ 554
Due after one year through five years 1,722 1,849
Due after five years through ten years 3,075 3,314
Due after ten years 7,341 7,916
- --------------------------------------------------------------------------------
Total held to maturity $12,658 $13,633
================================================================================
Fixed maturities available for sale:
Due in one year or less $ 3,347 $ 3,388
Due after one year through five years 17,731 18,375
Due after five years through ten years 15,031 15,780
Due after ten years 10,081 10,700
- --------------------------------------------------------------------------------
Total available for sale $46,190 $48,243
================================================================================
(E) SECURITIES AVAILABLE FOR SALE: AIGFP follows a policy of minimizing
interest rate, equity and currency risks associated with securities available
for sale by entering into swap or other transactions. In addition, to reduce its
credit risk, AIGFP has entered into credit derivative transactions with respect
to $435 million of securities available for sale. At December 31, 1998, the
cumulative increase in carrying value of the securities available for sale and
related hedges as a result of marking to market such securities net of hedging
transactions was $7 million.
55
57
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT INFORMATION (continued)
The amortized cost, related hedges and estimated market value of securities
available for sale and carried at market value at December 31, 1998 and 1997
were as follows:
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAINS
GROSS GROSS (LOSSES) - NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED ON HEDGING MARKET
COST GAINS LOSSES TRANSACTIONS VALUE
====================================================================================================================================
1998
Securities available for sale:
Corporate and bank debt $ 5,440 $149 $13 $(131) $ 5,445
Foreign government obligations 405 16 1 (15) 405
Asset-backed and collateralized 3,037 91 8 (95) 3,025
Preferred stocks 970 10 -- 3 983
U.S. Government obligations 815 15 -- (14) 816
- ------------------------------------------------------------------------------------------------------------------------------------
Total $10,667 $281 $22 $(252) $10,674
====================================================================================================================================
1997
Securities available for sale:
Corporate and bank debt $ 5,203 $ 45 $37 $ (10) $ 5,201
Foreign government obligations 337 2 30 29 338
Asset-backed and collateralized 2,344 34 16 (17) 2,345
Preferred stocks 675 -- 1 1 675
U.S. Government obligations 586 12 -- (12) 586
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 9,145 $ 93 $84 $ (9) $ 9,145
====================================================================================================================================
The amortized cost and estimated market values of securities available for
sale at December 31, 1998, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain borrowers have
the right to call or prepay certain obligations with or without call or
prepayment penalties.
(in millions)
- --------------------------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
================================================================================
Securities available for sale:
Due in one year or less $ 807 $ 807
Due after one year through five years 4,445 4,459
Due after five years through ten years 1,293 1,299
Due after ten years 1,085 1,084
Asset-backed and collateralized 3,037 3,025
- --------------------------------------------------------------------------------
Total available for sale $10,667 $10,674
================================================================================
No securities available for sale were below investment grade at December
31, 1998.
(F) CMOS: At December 31, 1998, CMOs, held by AIG's life companies, were
presented as a component of bonds available for sale, at market value. All of
the CMOs were investment grade and approximately 49 percent of the CMOs were
backed by various U.S. government agencies. The remaining 51 percent were
corporate issuances.
At December 31, 1998 and 1997, the market value of the CMO portfolio was
$2.65 billion and $2.58 billion, respectively; the amortized cost was
approximately $2.56 billion in 1998 and $2.47 billion in 1997. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 1998 and 1997.
The distribution of the CMOs at December 31, 1998 and 1997 was as follows:
- --------------------------------------------------------------------------------
1998 1997
================================================================================
GNMA 14% 20%
FHLMC 18 19
FNMA 14 16
VA 3 4
Other 51 41
- --------------------------------------------------------------------------------
100% 100%
================================================================================
At December 31, 1998, the gross weighted average coupon of this portfolio
was 6.9 percent. The gross weighted average life of this portfolio was 5.12
years.
(G) FIXED MATURITIES BELOW INVESTMENT GRADE: At December 31, 1998, fixed
maturities held by AIG that were below investment grade or not rated totaled
$7.18 billion.
(H) At December 31, 1998, non-income producing invested assets were
insignificant.
56
58
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
9. DEBT OUTSTANDING
At December 31, 1998, AIG's debt outstanding of $30.69 billion, shown below,
included borrowings of $27.80 billion which were either not guaranteed by AIG or
were matched borrowings under obligations of guaranteed investment agreements
(GIAs) or matched notes and bonds payable.
(in millions)
================================================================================
Borrowings under obligations of
GIAs-- AIGFP $ 9,188
- --------------------------------------------------------------------------------
Commercial Paper:
AIG Funding Inc. (Funding) 637
ILFC (a) 3,204
A.I. Credit Corp. (AICCO) 727
Universal Finance Company (UFC) (a) 68
- --------------------------------------------------------------------------------
Total 4,636
- --------------------------------------------------------------------------------
Medium Term Notes:
ILFC (a) 3,348
AIG 239
- --------------------------------------------------------------------------------
Total 3,587
- --------------------------------------------------------------------------------
Notes and Bonds Payable:
ILFC (a) 3,825
AIGFP 7,265
AIG: Lire bonds 159
Zero coupon notes 102
- --------------------------------------------------------------------------------
Total 11,351
- --------------------------------------------------------------------------------
Loans and Mortgages Payable:
ILFC (a) (b) 811
SPC Credit Limited (SPC) (a) 532
Consumer Finance (a) 254
AIG 334
Total 1,931
Total Borrowings 30,693
Borrowings not guaranteed by AIG 12,042
Matched GIA borrowings 9,188
Matched notes and bonds payable-- AIGFP 6,565
- --------------------------------------------------------------------------------
27,795
- --------------------------------------------------------------------------------
Remaining borrowings of AIG $ 2,898
================================================================================
(a) AIG does not guarantee or support these borrowings.
(b) Capital lease obligations.
(A) COMMERCIAL PAPER: At December 31, 1998, the commercial paper issued and
outstanding was as follows:
(dollars in millions)
- -----------------------------------------------------------------------------
WEIGHTED
NET AVERAGE WEIGHTED
BOOK UNAMORTIZED FACE INTEREST AVERAGE
VALUE DISCOUNT AMOUNT RATE MATURITY
=============================================================================
Funding $ 637 $ 2 $ 639 5.07% 28 days
ILFC 3,204 11 3,215 5.30 83 days
AICCO 727 2 729 5.24 20 days
UFC* 68 1 69 7.04 182 days
- -----------------------------------------------------------------------------
Total $4,636 $16 $4,652 -- --
=============================================================================
* Issued in Taiwan N.T. dollars at prevailing local interest rates.
Commercial paper issued by Funding is guaranteed by AIG. AIG has entered
into an agreement in support of AICCO's commercial paper. AIG does not guarantee
ILFC's or UFC's commercial paper.
(B) BORROWINGS UNDER OBLIGATIONS OF GUARANTEED INVESTMENT AGREEMENTS:
Borrowings under obligations of guaranteed investment agreements, which are
guaranteed by AIG, are recorded at the amount outstanding under each contract.
Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings are primarily fixed and
range up to 9.8 percent.
Payments due under these investment agreements in each of the next five
years ending December 31, and the periods thereafter based on the earliest call
dates, were as follows:
(in millions)
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
===============================================================================
1999 $4,460
2000 865
2001 370
2002 110
2003 67
Remaining years after 2003 3,316
- -------------------------------------------------------------------------------
Total $9,188
===============================================================================
At December 31, 1998, the market value of securities pledged as collateral
with respect to these obligations approximated $961 million.
Funds received from GIA borrowings are invested in a diversified portfolio
of securities and derivative transactions.
(C) MEDIUM TERM NOTES PAYABLE:
(i) Medium Term Notes Payable Issued by AIG:AIG's Medium Term Notes are
unsecured obligations which normally may not be redeemed by AIG prior to
maturity and bear interest at either fixed rates set by AIG at issuance or
variable rates determined by reference to an interest rate or other formula.
An analysis of the Medium Term Notes for the year ended December 31, 1998
was as follows:
(in millions)
- ------------------------------------------------------------------
MEDIUM TERM NOTE SERIES: B E TOTAL
==================================================================
Balance December 31, 1997 $40 $208 $248
Issued during year -- 31 31
Matured during year (40) -- (40)
- ------------------------------------------------------------------
Balance December 31, 1998 $-- $239 $239
==================================================================
The interest rates on this debt range from 2.25 percent to 6.25 percent. To
the extent deemed appropriate, AIG may enter into swap transactions to reduce
its effective borrowing rates with respect to these notes.
During 1997, AIG issued $100 million principal amount of equity-linked
Medium Term Notes due July 30, 2004. These notes accrue interest at the rate of
2.25 percent and the total return on these notes is linked to the appreciation
in market value of AIG's common stock. The notes may be redeemed, at the option
of AIG, as a whole but not in part, at any time on or after July 30, 2000. In
conjunction with the issuance of these notes, AIG entered into a series of swap
transactions
57
59
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DEBT OUTSTANDING (continued)
which effectively converted its interest expense to a fixed rate of 5.87 percent
and transferred the equity appreciation exposure to a third party.
At December 31, 1998, the maturity schedule for AIG's outstanding Medium
Term Notes was as follows:
(in millions)
- ----------------------------------------------------------------------------
PRINCIPAL
AMOUNT
============================================================================
1999 $108
2000 31
Remaining years after 2003 100
- ----------------------------------------------------------------------------
Total $239
============================================================================
At December 31, 1998, AIG had $508 million principal amount of Term Notes
registered and available for issuance from time to time.
(ii) Medium Term Notes Payable Issued by ILFC:ILFC's Medium Term Notes are
unsecured obligations which may not be redeemed by ILFC prior to maturity and
bear interest at fixed rates set by ILFC at issuance.
As of December 31, 1998, notes in aggregate principal amount of $3.35
billion were outstanding with maturity dates from 1999 to 2005 at interest rates
ranging from 4.85 percent to 8.55 percent. These notes provide for a single
principal payment at the maturity of each note.
At December 31, 1998, the maturity schedule for ILFC's outstanding Medium
Term Notes was as follows:
(in millions)
- --------------------------------------------------------------------------------
Principal
Amount
================================================================================
1999 $ 733
2000 1,005
2001 867
2002 378
2003 260
Remaining years after 2003 105
- --------------------------------------------------------------------------------
Total $3,348
================================================================================
(D) NOTES AND BONDS PAYABLE:
(i) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of $750
million. The notes were offered at 12 percent of principal amount at stated
maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG
from the issuance were $86 million. The notes are redeemable at any time in
whole or in part at the option of AIG at 100 percent of their principal amount
at stated maturity. The notes are also redeemable at the option of AIG or bearer
notes may be redeemed at the option of the holder in the event of certain
changes involving taxation in the United States at prices ranging from 52.72
percent currently, to 89.88 percent after August 15, 2003, of the principal
amount at stated maturity together with accrued amortization of original issue
discount from the preceding August 15. During 1998 and 1997, no notes were
repurchased. At December 31, 1998, the notes outstanding had a face value of
$189 million, an unamortized discount of $87 million and a net book value of
$102 million. The amortization of the original issue discount was recorded as
interest expense.
(ii) Italian Lire Bonds: In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire. The principal amount of 200 billion Italian Lire
Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent
which is paid annually. These bonds are not redeemable prior to maturity, except
in the event of certain changes involving taxation in the United States or the
imposition of certain certification, identification or reporting requirements.
Simultaneous with the issuance of this debt, AIG entered into a swap
transaction which effectively converted AIG's net interest expense to a U.S.
dollar liability of approximately 7.9 percent, which requires the payment of
proceeds at maturity of approximately $159 million in exchange for 200 billion
Italian Lire and interest thereon.
(iii) Term Notes Issued by ILFC: ILFC has issued unsecured obligations
which may not be redeemed prior to maturity.
As of December 31, 1998, notes in aggregate principal amount of $3.83
billion were outstanding with maturity dates from 1999 to 2004 and interest
rates ranging from 5.50 percent to 8.88 percent. Term notes in the aggregate
principal amount of $300 million are at floating interest rates and the
remainder are at fixed rates. These notes provide for a single principal payment
at maturity.
At December 31, 1998, the maturity schedule for ILFC's Term Notes was as
follows:
(in millions)
================================================================================
PRINCIPAL
AMOUNT
================================================================================
1999 $1,150
2000 900
2001 1,075
2002 400
2003 200
Remaining years after 2003 100
- --------------------------------------------------------------------------------
Total $3,825
================================================================================
AIG does not guarantee any of the debt obligations of ILFC.
58
60
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
9. DEBT OUTSTANDING (continued)
(iv) Notes and Bonds Payable Issued by AIGFP:At December 31, 1998, AIGFP's
bonds outstanding, the proceeds of which are invested in a segregated portfolio
of securities available for sale, were as follows:
(dollars in millions)
=========================================================================
YEAR OF INTEREST U.S. DOLLAR
ISSUE MATURITY CURRENCY RATE CARRYING VALUE
=========================================================================
1993 1999 French franc 4.60% $ 515
1998 1999 United Kingdom pound 6.91 414
1998 1999 Denmark krone 3.56 115
1997 2002 US dollar 5.16 150
1997 1999 Irish punt 6.20 158
1997 2000 Irish punt 6.19 294
1997 2000 Irish punt 5.95 148
1997 2002 New Zealand dollar 8.52 125
1998 1999 Italian lire 7.19 327
1998 2020 US dollar 8.75 129
1998 2020 US dollar 8.75 378
1997 1999 New Zealand dollar 9.43 117
1996 1999 New Zealand dollar 8.51 354
1998 2000 Irish punt 6.51 141
1995 2000 Italian lire 7.76 123
1998 2001 US dollar 5.47 500
1998 2001 US dollar 5.45 850
1998 2003 US dollar 5.47 1,000
1998 2022 US dollar 7.25 120
1998 1999 US dollar 5.63 210
1998 2002 Japanese yen 4.50 190
- -------------------------------------------------------------------------
Total $6,358
=========================================================================
AIGFP is also obligated under various notes maturing from 1999 through
2026. The majority of these notes are denominated in U.S. dollars and bear
interest at various interest rates. At December 31, 1998, these notes had a U.S.
dollar carrying value of $907 million.
AIG guarantees all of AIGFP's debt.
(E) LOANS AND MORTGAGES PAYABLE: Loans and mortgages payable at December
31, 1998, consisted of the following:
(in millions)
===============================================================================
CONSUMER
ILFC SPC FINANCE AIG TOTAL
- -------------------------------------------------------------------------------
Uncollateralized
loans payable $ -- $532 $254 $123 $ 909
Collateralized loans and
mortgages payable 811 -- -- 211 1,022
- -------------------------------------------------------------------------------
Total $811 $532 $254 $334 $1,931
- -------------------------------------------------------------------------------
At December 31, 1998, ILFC's capital lease obligations were $811 million.
Fixed interest rates with respect to these obligations range from 6.18 percent
to 6.89 percent; variable rates are referenced to LIBOR. These obligations
mature through 2005. The flight equipment associated with the capital lease
obligations had a net book value of $1.14 billion.
(F) REVOLVING CREDIT FACILITIES: AIG and Funding have entered into two
syndicated revolving credit facilities (the Facilities) aggregating $1 billion.
The Facilities consist of a $500 million 364 day revolving credit facility and a
$500 million five year revolving credit facility. The Facilities can be used for
general corporate purposes and also provide backup for AIG's commercial paper
programs administered by Funding. There are currently no borrowings outstanding
under either of the Facilities, nor were any borrowings outstanding as of
December 31, 1998.
(G) INTEREST EXPENSE FOR ALL INDEBTEDNESS: Total interest expense for all
indebtedness, net of capitalized interest, aggregated $1.87 billion in 1998,
$1.70 billion in 1997 and $1.49 billion in 1996. Dividends on the preferred
stock of ILFC are accounted for as interest expense and included as minority
interest in the consolidated statement of income. The dividends for December 31,
1998, 1997 and 1996 were approximately $17 million in each of the three years.
10. CAPITAL FUNDS
(a) At December 31, 1998, there were 6,000,000 shares of AIG's $5 par value
serial preferred stock authorized, issuable in series.
(b) AIG parent depends on its subsidiaries for cash flow in the form of
loans, advances and dividends. AIG's insurance subsidiaries are subject to
regulatory restrictions on the amount of dividends which can be remitted to AIG
parent. These restrictions vary by state. For example, unless permitted by the
New York Superintendent of Insurance, general insurance companies domiciled in
New York may not pay dividends to shareholders which in any twelve month period
exceed the lesser of 10 percent of the company's statutory policyholders'
surplus or 100 percent of its "adjusted net investment income", as defined.
Generally, less severe restrictions applicable to both general and life
insurance companies exist in most of the other states in which AIG's insurance
subsidiaries are domiciled. Certain foreign jurisdictions have restrictions
which generally cause only a temporary delay in the remittance of dividends.
There are also various local restrictions limiting cash loans and advances to
AIG by its subsidiaries. Largely as a result of the restrictions, approximately
65 percent of consolidated capital funds were restricted from immediate transfer
to AIG parent at December 31, 1998.
59
61
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL FUNDS (continued)
(c) The common stock activity for the three years ended December 31, 1998
was as follows:
- -------------------------------------------------------------------------------
1998 1997 1996
===============================================================================
Shares outstanding at
beginning of year 699,518,281 469,441,146 474,184,226
Acquired during year (974,815) (4,657,254) (5,384,672)
Issued under stock option
and purchase plans 1,171,964 984,322 540,768
Issued in connection with
acquisition -- 4,391 100,824
Issued under contractual
obligations 37,123 1,967 --
Stock split effected
as stock dividend 379,536,828 253,037,334 --
Other* (29,560,131) (19,293,625) --
- -------------------------------------------------------------------------------
Shares outstanding
at end of year 1,049,729,250 699,518,281 469,441,146
===============================================================================
* Shares issued to AIG and subsidiaries as part of stock split effected as
stock dividend.
Common stock increased and retained earnings decreased $949 million in 1998
and $633 million in 1997 as a result of common stock splits in the form of 50
percent common stock dividends paid July 31, 1998 and July 25, 1997,
respectively.
(d) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB
130) was adopted by AIG effective January 1, 1998. FASB 130 establishes
standards for reporting comprehensive income and its components as part of
capital funds. The reclassification adjustments with respect to available for
sale securities were $165 million, $119 million and $88 million for December 31,
1998, 1997 and 1996, respectively.
11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, various commitments and contingent liabilities
are entered into by AIG and certain of its subsidiaries. In addition, AIG
guarantees various obligations of certain subsidiaries.
(a) Commitments to extend credit are agreements to lend subject to certain
conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. These commitments,
made principally by AIG Capital Corp., approximated $92 million for both
December 31, 1998 and December 31, 1997. AIG uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. AIG evaluates each counterparty's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
AIG upon extension of credit, is based on management's credit evaluation of the
counterparty.
(b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the elements
of currency, interest rate, equity and commodity risks are reflected in the
consolidated balance sheet. In addition, these instruments involve, to varying
degrees, elements of credit risk not explicitly recognized in the consolidated
balance sheet. Collateral is required, at the discretion of AIG, on certain
transactions based on the creditworthiness of the counterparty.
(c) AIGFP becomes a party to off-balance sheet financial instruments in the
normal course of its business and to reduce its currency, interest rate and
equity exposures. Interest rate, currency and equity risks related to such
instruments are reflected in the consolidated financial statements to the extent
these instruments are carried at a market or a fair value, whichever is
appropriate. Because of limited liquidity of certain of these instruments, the
recorded estimated fair values of such instruments may be different than the
values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity.
AIGFP, as principal and for its own account, enters into interest rate,
currency and equity swaps, swaptions and forward commitments. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
AIGFP typically becomes a principal in the exchange of interest payments between
the parties and, therefore, may be exposed to loss, if counterparties default.
Currency and equity swaps are similar to interest rate swaps, but may involve
the exchange of principal amounts at the beginning and end of the transaction.
At December 31, 1998, the notional principal amount of the sum of the swap pays
and receives approximated $345.5 billion, primarily related to interest rate
swaps of approximately $255.9 billion.
The following tables provide the contractual and notional amounts of
derivatives transactions of AIGFP and AIGTG at December 31, 1998.
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.
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American International Group, Inc. and Subsidiaries
11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 1998 and December 31, 1997:
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
-------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1998 1997
===================================================================================================================================
Interest rate, currency and equity/commodity swaps
and swaptions:
Notional amount:
Interest rate swaps $ 85,379 $105,850 $57,556 $ 7,132 $255,917 $200,491
Currency swaps 27,943 26,154 16,916 2,881 73,894 54,748
Swaptions and equity swaps 2,306 6,102 5,780 1,497 15,685 11,217
- -----------------------------------------------------------------------------------------------------------------------------------
Total $115,628 $138,106 $80,252 $11,510 $345,496 $266,456
===================================================================================================================================
Futures and forward contracts are contracts for delivery of foreign
currencies or financial indices in which the seller/purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise as a result of movements in current market
prices from contracted prices and the potential inability of counterparties to
meet their obligations under the contracts. At December 31, 1998, the
contractual amount of AIGFP's futures and forward contracts approximated $51.2
billion.
The following table presents AIGFP's futures and forward contracts
portfolio by maturity and type of derivative at December 31, 1998 and December
31, 1997:
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
-------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1998 1997
====================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts contractual amount $ 8,290 -- -- -- $ 8,290 $ 4,411
====================================================================================================================================
Over the counter forward contracts contractual amount $42,825 $61 $12 -- $42,898 $13,271
====================================================================================================================================
These instruments involve, to varying degrees, elements of credit risk not
explicitly recognized in the consolidated financial statements. AIGFP utilizes
various credit enhancements, including collateral, credit triggers and credit
derivatives to reduce the credit exposure relating to these off-balance sheet
financial instruments. AIGFP requires credit enhancements in connection with
specific transactions based on, among other things, the creditworthiness of the
counterparties and the transaction's size and maturity. In addition, AIGFP's
derivative transactions are generally documented under ISDA Master Agreements.
Such agreements provide for legally enforceable set-off and close out netting of
exposures to specific counterparties. Under such agreements, in connection with
an early termination of a transaction, AIGFP is permitted to set off its
receivables from a counterparty against its payables to the same counterparty
arising out of all included transactions. As a result, the net replacement value
represents the net sum of estimated positive fair values after the application
of such strategies, agreements and collateral held. The net replacement value
most closely represents the net credit risk to AIGFP or the maximum amount
exposed to potential loss. The net replacement value of all interest rate,
currency, and equity swaps, swaptions and forward commitments at December 31,
1998, approximated $8.76 billion. The net replacement value for futures and
forward contracts at December 31, 1998, approximated $469 million.
AIGFP independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGFP's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The average credit rating of AIGFP's counterparties as a whole (as
measured by AIGFP) is equivalent to AA. The maximum potential loss will increase
or decrease during the life of the derivative commitments as a function of
maturity and market conditions.
61
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1998 and
December 31, 1997, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
-----------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 1998 1997
====================================================================================================================================
Counterparty credit quality:
AAA $2,360 $ -- $2,360 $2,327
AA 3,358 330 3,688 2,311
A 1,789 94 1,883 1,165
BBB 1,040 45 1,085 608
Below investment grade 210 -- 210 290
- ------------------------------------------------------------------------------------------------------------------------------------
Total $8,757 $ 469 $9,226 $6,701
====================================================================================================================================
At December 31, 1998 and December 31, 1997, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
-----------------------------
SWAPS AND FUTURES AND TOTAL TOTAL
SWAPTIONS FORWARD CONTRACTS 1998 1997
===================================================================================================================================
Non-U.S. banks $2,708 $169 $2,877 $2,263
Insured municipalities 784 -- 784 757
U.S. industrials 1,120 5 1,125 514
Governmental 603 -- 603 677
Non-U.S. financial service companies 272 -- 272 65
Non-U.S. industrials 1,145 -- 1,145 1,035
Special purpose 423 -- 423 163
U.S. banks 617 294 911 585
U.S. financial service companies 931 1 932 434
Supranationals 154 -- 154 208
- -----------------------------------------------------------------------------------------------------------------------------------
Total $8,757 $469 $9,226 $6,701
===================================================================================================================================
AIGFP has entered into commitments to provide liquidity for certain
tax-exempt variable rate demand notes issued by municipal entities. The
agreements allow the holders, in certain circumstances, to tender the notes to
the issuer at par value. In the event a remarketing agent of an issuer is unable
to resell such tendered notes, AIGFP would be obligated to purchase the notes at
par value. With respect to certain notes that have been issued, AIGFP has
fulfilled its liquidity commitments by arranging bank liquidity facilities.
These banks agree to purchase the notes that AIGFP is otherwise obligated to
purchase in connection with a failed remarketing. It is the intention of AIGFP
to arrange similar liquidity with respect to the $123 million aggregate amount
of notes that are expected to be issued through 1999.
Securities sold, but not yet purchased represent obligations of AIGFP to
deliver specified securities at their contracted prices, and thereby create a
liability to repurchase the securities in the market at prevailing prices.
AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, believes that it
has in place effective procedures for evaluating and limiting the credit and
market risks to which it is subject. Management is not aware of any potential
counterparty defaults.
The net trading revenues for the twelve months ended December 31, 1998,
1997 and 1996 from AIGFP's operations were $550 million, $452 million and $369
million, respectively.
(d) AIGTG becomes a party to off-balance sheet financial instruments in the
normal course of its business and to reduce its currency, interest rate and
commodity exposures.
The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 1998 and December 31, 1997. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the December 31,
1998 balances based upon the expected timing of the future cash flows.
Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks arise as a result of movements
in current market prices from con-
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American International Group, Inc. and Subsidiaries
11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
tracted prices and the potential inability of counterparties to meet their
obligations under the contracts. Options are contracts that allow the holder of
the option to purchase or sell the underlying commodity, currency or index at a
specified price and within, or at, a specified period of time. Risks arise as a
result of movements in current market prices from contracted prices, and the
potential inability of the counterparties to meet their obligations under the
contracts. As a writer of options, AIGTG generally receives an option premium
and then manages the risk of any unfavorable change in the value of the
underlying commodity, currency or index. At December 31, 1998, the contractual
amount of AIGTG's futures, forward and option contracts approximated $411.71
billion.
The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
1998 and December 31, 1997. These values do not represent the credit risk to
AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss within a product category. At December 31, 1998, the net
replacement value of AIGTG's futures, forward and option contracts and interest
rate and currency swaps approximated $3.8 billion.
The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1998 and December 31, 1997:
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL TOTAL
YEAR FIVE YEARS TEN YEARS YEARS 1998 1997
===================================================================================================================================
Contractual amount of futures, forwards and options:
Exchange traded futures and options $ 9,777 $ 1,985 $ 74 $ -- $ 11,836 $ 24,579
===================================================================================================================================
Forwards $263,312 $ 17,306 $ 1,539 $ -- $282,157 $267,959
===================================================================================================================================
Over the counter purchased options $ 31,039 $ 21,300 $ 5,213 $ 1,308 $ 58,860 $ 60,274
===================================================================================================================================
Over the counter sold options (a) $ 31,922 $ 20,374 $ 5,091 $ 1,474 $ 58,861 $ 58,190
===================================================================================================================================
Notional amount:
Interest rate swaps and forward rate agreements $ 77,872 $ 24,605 $ 7,334 $ 980 $110,791 $ 77,503
Currency swaps 1,488 4,854 1,170 -- 7,512 6,489
Swaptions 81 1,377 1,889 2,419 5,766 1,634
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 79,441 $ 30,836 $ 10,393 $ 3,399 $124,069 $ 85,626
===================================================================================================================================
Credit exposure:
Futures, forwards swaptions and purchased options contracts
and interest rate and currency swaps:
Gross replacement value $ 7,274 $ 1,806 $ 544 $ 167 $ 9,791 $ 11,020
Master netting arrangements (4,224) (930) (306) (150) (5,610) (5,798)
Collateral (313) (29) (15) (2) (359) (225)
- ------------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b) $ 2,737 $ 847 $ 223 $ 15 $ 3,822 $ 4,997
====================================================================================================================================
(a) Sold options obligate AIGTG to buy or sell the underlying item if the
option purchaser chooses to exercise. The amounts do not represent credit
exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts and purchased over the counter options are
presented as a component of trading assets in the accompanying balance
sheet. The net replacement values with respect to interest rate and
currency swaps are presented as a component of unrealized gain on interest
rate and currency swaps, options and forward transactions in the
accompanying balance sheet.
AIGTG independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGTG's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The maximum potential loss will increase or decrease during the life
of the derivative commitments as a function of maturity and market conditions.
63
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1998 and
December 31, 1997, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:
(in millions)
- ------------------------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------
1998 1997
==============================================================================
Counterparty credit quality:
AAA $ 462 $ 753
AA 1,821 2,503
A 1,066 1,024
BBB 221 343
Below investment grade 26 98
Not externally rated, including
exchange traded futures and options* 226 276
- ------------------------------------------------------------------------------
Total $3,822 $4,997
==============================================================================
Counterparty breakdown by industry:
Non-U.S. banks $1,253 $2,686
U.S. industrials 381 164
Governmental 184 135
Non-U.S. financial service companies 406 260
Non-U.S. industrials 150 168
U.S. banks 593 560
U.S. financial service companies 629 748
Exchanges* 226 276
- ------------------------------------------------------------------------------
Total $3,822 $4,997
==============================================================================
* Exchange traded futures and options are not deemed to have significant
credit exposure as the exchanges guarantee that every contract will be
properly settled on a daily basis.
Spot commodities sold but not yet purchased represent obligations of AIGTG
to deliver spot commodities at their contracted prices and thereby create a
liability to repurchase the spot commodities in the market at prevailing prices.
AIGTG limits its risks by holding offsetting positions. In addition, AIGTG
monitors and controls its risk exposures through various monitoring systems
which evaluate AIGTG's market and credit risks, and through credit approvals and
limits. At December 31, 1998, AIGTG did not have a significant concentration of
credit risk from either an individual counterparty or group of counterparties.
The net trading revenues for the twelve months ended December 31, 1998,
1997 and 1996 from AIGTG's operations were $374 million, $562 million and $289
million, respectively.
At December 31, 1998, AIGTG had issued and outstanding $140 million
principal amount of letters of credit. These letters of credit were issued
primarily to various exchanges.
AIG has issued unconditional guarantees with respect to the prompt payment,
when due, of all present and future obligations and liabilities of AIGFP and
AIGTG arising from transactions entered into by AIGFP and AIGTG.
(e) At December 31, 1998, ILFC had committed to purchase or had secured
positions for 303 aircraft deliverable from 1999 through 2006 at an estimated
aggregate purchase price of $17.4 billion. ILFC will be required to find
customers for any aircraft presently on order and any aircraft to be ordered,
and it must arrange financing for portions of the purchase price of such
equipment.
(f) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter collectively
referred to as environmental claims) and indemnity claims asserting injuries
from asbestos. Estimation of asbestos and environmental claims loss reserves is
a difficult process, as these claims, which emanate from policies written in
1984 and prior years, cannot be estimated by conventional reserving techniques.
Asbestos and environmental claims development is affected by factors such as
inconsistent court resolutions, the broadening of the intent of policies and
scope of coverage and increasing number of new claims. AIG and other industry
members have and will continue to litigate the broadening judicial
interpretation of policy coverage and the liability issues. If the courts
continue in the future to expand the intent of the policies and the scope of the
coverage, as they have in the past, additional liabilities would emerge for
amounts in excess of reserves held. This emergence cannot now be reasonably
estimated, but could have a material impact on AIG's future operating results.
The reserves carried for these claims as at December 31, 1998 ($2.5 billion
gross; $865 million net) are believed to be adequate as these reserves are based
on known facts and current law.
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American International Group, Inc. and Subsidiaries
11. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
A summary of reserve activity, including estimates for applicable incurred
but not reported losses and loss expenses, relating to asbestos and
environmental claims separately and combined at December 31, 1998, 1997 and 1996
follows. The 1998 reserve activity includes Transatlantic.
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
GROSS NET GROSS NET GROSS NET
===================================================================================================================================
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 842 $ 195 $ 876 $ 172 $ 744 $ 127
Losses and loss expenses incurred 375 111 238 68 393 103
Losses and loss expenses paid (253) (47) (272) (45) (261) (58)
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 964 $ 259 $ 842 $ 195 $ 876 $ 172
===================================================================================================================================
Environmental:
Reserve for losses and loss expenses at beginning of year $ 1,467 $ 593 $ 1,427 $ 571 $ 1,198 $ 380
Losses and loss expenses incurred 285 106 223 85 379 240
Losses and loss expenses paid (216) (93) (183) (63) (150) (49)
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 1,536 $ 606 $ 1,467 $ 593 $ 1,427 $ 571
===================================================================================================================================
Combined:
Reserve for losses and loss expenses at beginning of year $ 2,309 $ 788 $ 2,303 $ 743 $ 1,942 $ 507
Losses and loss expenses incurred 660 217 461 153 772 343
Losses and loss expenses paid (469) (140) (455) (108) (411) (107)
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 2,500 $ 865 $ 2,309 $ 788 $ 2,303 $ 743
===================================================================================================================================
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FASB 107) requires disclosure of fair value
information about financial instruments, as defined therein, for which it is
practicable to estimate such fair value. These financial instruments may or may
not be recognized in the consolidated balance sheet. In the measurement of the
fair value of certain of the financial instruments, quoted market prices were
not available and other valuation techniques were utilized. These derived fair
value estimates are significantly affected by the assumptions used. FASB 107
excludes certain financial instruments, including those related to insurance
contracts.
The following methods and assumptions were used by AIG in estimating the
fair value of the financial instruments presented:
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Fixed maturity securities: Fair values for fixed maturity securities
carried at amortized cost or at market value were generally based upon quoted
market prices. For certain fixed maturity securities for which market prices
were not readily available, fair values were estimated using values obtained
from independent pricing services. No other fair valuation techniques were
applied to these securities as AIG believes it would have to expend excessive
costs for the benefits derived.
Equity securities: Fair values for equity securities were based upon quoted
market prices.
Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.
Trading assets and trading liabilities: Fair values for trading assets and
trading liabilities approximate the carrying values presented in the
consolidated balance sheet.
Securities available for sale: Fair values for securities available for
sale and related hedges were based on quoted market prices. For securities and
related hedges for which market prices were not readily available, fair values
were estimated using quoted market prices of comparable investments.
Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.
Spot commodities: Fair values for spot commodities were based on current
market prices.
Unrealized gains and losses on interest rate and currency swaps, options
and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among other
things, current interest, foreign exchange and volatility rates, as applicable.
65
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Securities purchased (sold) under agreements to resell (repurchase), at
contract value: As these securities (obligations) are short-term in nature, the
contract values approximate fair values.
Other invested assets: For assets for which market prices were not readily
available, fair valuation techniques were not applied as AIG believes it would
have to expend excessive costs for the benefits derived.
Policyholders' contract deposits: Fair values of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
GIAs: Fair values of AIG's obligations under investment type agreements
were estimated using discounted cash flow calculations based on interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued. Additionally, AIG follows a
policy of minimizing interest rate risks associated with GIAs by entering into
swap transactions.
Securities and spot commodities sold but not yet purchased: The carrying
amounts for the financial instruments approximate fair values. Fair values for
spot commodities sold short were based on current market prices.
Deposits due to banks and other depositors: To the extent certain amounts
are not demand deposits or certificates of deposit which mature in more than one
year, fair values were not calculated as AIG believes it would have to expend
excessive costs for the benefits derived.
Commercial paper: The carrying amount of AIG's commercial paper borrowings
approximates fair value.
Notes, bonds, loans and mortgages payable: Where practical, the fair values
of these obligations were estimated using discounted cash flow calculations
based upon AIG's current incremental borrowing rates for similar types of
borrowings with maturities consistent with those remaining for the debt being
valued.
The carrying values and fair values of AIG's financial instruments at
December 31, 1998 and December 31, 1997 and the average fair values with respect
to derivative positions during 1998 and 1997 were as follows:
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------------------
AVERAGE AVERAGE
CARRYING FAIR FAIR CARRYING FAIR FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
====================================================================================================================================
Fixed maturities $61,906 $62,881 $ -- $51,566 $52,694 $ --
Equity securities 5,893 5,893 -- 5,348 5,348 --
Mortgage loans on real estate, policy and collateral loans 8,247 8,246 -- 7,920 7,967 --
Securities available for sale 10,674 10,674 8,855 9,145 9,145 8,653
Trading securities 5,668 5,668 5,682 3,975 3,975 2,905
Spot commodities 476 476 442 460 460 450
Unrealized gain on interest rate and currency swaps, options
and forward transactions 9,881 9,881 9,997 7,422 7,422 7,226
Trading assets 6,229 6,229 6,048 6,715 6,715 5,481
Securities purchased under agreements to resell 4,838 4,838 -- 4,551 4,551 --
Other invested assets 6,419 6,419 -- 4,681 4,681 --
Short-term investments 4,944 4,944 -- 3,333 3,333 --
Cash 303 303 -- 87 87 --
Policyholders' contract deposits 12,573 12,800 -- 10,323 10,433 --
Borrowings under obligations of guaranteed
investment agreements 9,188 10,146 -- 8,000 8,676 --
Securities sold under agreements to repurchase 4,473 4,473 -- 2,706 2,706 --
Trading liabilities 4,664 4,664 4,824 5,366 5,366 4,549
Securities and spot commodities sold but not yet purchased 4,457 4,457 5,614 5,172 5,172 3,648
Unrealized loss on interest rate and currency swaps, options
and forward transactions 7,055 7,055 6,805 5,980 5,980 5,270
Deposits due to banks and other depositors 1,242 1,319 -- 972 972 --
Commercial paper 4,636 4,636 -- 3,375 3,375 --
Notes, bonds, loans and mortgages payable 16,869 17,196 -- 13,886 13,960 --
====================================================================================================================================
Off-balance sheet financial instruments: Financial instruments which are
not currently recognized in the consolidated balance sheet of AIG are
principally commitments to extend credit and financial guarantees. The
unrecognized fair values of these instruments represent fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
current agreements and the counterparties' credit standings. No valuation was
made as AIG believes it would have to expend excessive costs for the benefits
derived.
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American International Group, Inc. and Subsidiaries
13. STOCK COMPENSATION PLANS
At December 31, 1998, AIG had two types of stock-based compensation plans. One
was a stock option plan; the other, an employee stock purchase plan. AIG applies
APB Opinion 25 "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation costs
have been recognized for either plan.
Had compensation costs for these plans been determined consistent with the
method of Statement of Financial Accounting Standards No. 123 "Accounting for
Awards of Stock Based Compensation to Employees," AIG's net income and earnings
per share for the years ended December 31, 1998, 1997 and 1996 would have been
reduced to the pro forma amounts as follows:
(in millions, except per share amounts)
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Net income:
As reported $ 3,766 $ 3,332 $ 2,897
Pro forma 3,749 3,323 2,892
Earnings per share-
diluted:
As reported $ 3.57 $ 3.15 $ 2.72
Pro forma 3.55 3.14 2.72
================================================================================
(A) STOCK OPTION PLAN: On December 19, 1991, the AIG Board of Directors
adopted a 1991 employee stock option plan (the 1991 Plan), which provided that
options to purchase a maximum of 10,125,000 shares of common stock could be
granted to officers and other key employees at prices not less than fair market
value at the date of grant. Both the 1991 Plan, and the options with respect to
252,870 shares granted thereunder on December 19, 1991, were approved by
shareholders at the 1992 Annual Meeting. An amendment to the 1991 Plan, approved
by shareholders at the 1997 Annual Meeting, increased the aggregate number of
shares available for grant to 17,718,750 shares to assure that adequate shares
are available for grant during the remaining term of the 1991 Plan. A second
amendment to the 1991 Plan limits the maximum number of shares as to which stock
options may be granted to any employee in any one year to 202,500 shares. At
December 31, 1998, 9,184,869 shares were reserved for future grants under the
amended 1991 Plan. As of March 18, 1992, no further options could be granted
under the 1987 employee stock option plan (the 1987 Plan), but outstanding
options granted under the 1987 Plan continue in force until exercise or
expiration. At December 31, 1998, there were 8,882,557 shares reserved for
issuance under these plans.
Under each plan, 25 percent of the options granted become exercisable on
the anniversary of the date of grant in each of the four years following that
grant and all options expire 10 years from the date of the grant. As of December
31, 1998, outstanding options granted with respect to 5,762,938 shares qualified
for Incentive Stock Option treatment under the Economic Recovery Tax Act of
1981.
Additional information with respect to AIG's plans at December 31, 1998,
and changes for the three years then ended, was as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ---------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
=================================================================================================================================
Shares Under Option:
Outstanding at beginning of year 9,310,014 $32.65 9,705,984 $26.12 9,294,103 $21.73
Granted 915,319 87.42 1,115,325 70.52 1,402,650 48.25
Exercised (1,192,871) 18.33 (1,402,982) 17.41 (887,740) 14.83
Forfeited (149,905) 46.86 (108,313) 34.73 (103,029) 28.22
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 8,882,557 $39.98 9,310,014 $32.65 9,705,984 $26.12
- ---------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 6,282,271 $28.38 6,342,378 $23.01 6,531,486 $19.17
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per share
of options granted $30.67 $26.21 $18.23
=================================================================================================================================
67
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. STOCK COMPENSATION PLANS (continued)
Information about stock options outstanding at December 31, 1998, is
summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
==============================================================================================================================
$11.58 - 19.11 1,987,821 2.0 years $14.61 1,987,821 $14.61
23.56 - 30.89 2,691,004 5.0 years 26.36 2,671,978 26.33
32.44 - 44.72 1,037,071 6.9 years 40.85 759,892 40.84
48.72 - 58.17 1,212,551 7.9 years 48.86 601,157 48.79
66.00 - 78.33 1,058,216 8.9 years 70.91 261,423 70.83
80.17 - 98.46 895,894 9.9 years 87.65 -- --
- ------------------------------------------------------------------------------------------------------------------------------
8,882,557 $39.98 6,282,271 $28.38
==============================================================================================================================
The fair values of stock options granted during the years ended December
31, 1998, 1997 and 1996 were $28 million, $29 million and $26 million,
respectively. The fair value of each option is estimated on the date of the
grant using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for grants in 1998,
1997 and 1996, respectively: dividend yields of 0.24 percent, 0.30 percent and
0.33 percent; expected volatilities of 22.0 percent, 20.0 percent and 20.0
percent; risk-free interest rates of 4.73 percent, 6.03 percent and 6.29 percent
and expected terms of 7 years.
(B) EMPLOYEE STOCK PURCHASE PLAN: AIG's 1984 employee stock purchase plan
was adopted at its 1984 shareholders' meeting and became effective as of July 1,
1984. Eligible employees could receive privileges to purchase up to an aggregate
of 4,429,687 shares of AIG common stock, at a price equal to 85 percent of the
fair market value on the date of grant of the purchase privilege. Purchase
privileges were granted annually and were limited to the number of whole shares
that could be purchased by an amount equal to 5 percent of an employee's annual
salary or $5,500, whichever was less.
AIG's 1996 employee stock purchase plan was adopted at its 1996
shareholders' meeting and became effective as of July 1, 1996, replacing the
1984 plan. Eligible employees may receive privileges to purchase up to an
aggregate of 2,250,000 shares of AIG common stock, at a price equal to 85
percent of the fair market value on the date of the grant of the purchase
privilege. Purchase privileges are granted annually and are limited to the
number of whole shares that can be purchased by an amount equal to 5 percent of
an employee's annual salary or $5,500, whichever is less. Beginning with the
January 1, 1998 subscription, the maximum allowable purchase limitation
increased to 10 percent of an employee's annual salary or $10,000 per year,
whichever is less, and the eligibility requirement was reduced from two years to
one year. In all other respects, the 1996 plan is identical to the 1984 plan.
There were 104,008 shares and 328,988 shares issued under the 1984 plan at
weighted average prices of $35.17 and $29.73 for the years ended December 31,
1997 and 1996, respectively. There were 340,419 shares and 220,627 shares issued
under the 1996 plan at weighted average prices of $53.89 and $38.51 for the
years ended December 31, 1998 and 1997, respectively. The excess or deficit of
the proceeds over the par value or cost of the common stock issued under these
plans was credited or charged to additional paid-in capital.
As of December 31, 1998, there were 396,285 shares of common stock
subscribed to at a weighted average price of $71.63 per share pursuant to grants
of privileges under the 1996 plan. There were 1,292,668 shares available for the
grant of future purchase privileges under the 1996 plan at December 31, 1998.
The fair values of purchase privileges granted during the years ended
December 31, 1998, 1997 and 1996 were $10 million, $4 million and $3 million,
respectively. The weighted average fair values per share of those purchase
rights granted in 1998, 1997 and 1996 were $19.33, $13.35 and $8.76,
respectively. The fair value of each purchase right is estimated on the date of
the subscription using the Black-Scholes model.
The following weighted average assumptions were used for grants in 1998,
1997 and 1996, respectively: dividend yields of 0.24 percent, 0.30 percent and
0.37 percent; expected volatilities of 33.0 percent, 26.0 percent and 21.9
percent; risk-free interest rates of 5.26 percent, 5.81 percent and 5.54
percent; and expected terms of 1 year.
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American International Group, Inc. and Subsidiaries
14. EMPLOYEE BENEFITS
(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation.
AIG's U.S. retirement plan is a qualified, noncontributory, defined benefit
plan. All qualified employees, including those of Transatlantic, who have
attained age 21 and completed twelve months of continuous service are eligible
to participate in this plan. An employee with 5 or more years of service is
entitled to pension benefits beginning at normal retirement at age 65. Benefits
are based upon a percentage of average final compensation multiplied by years of
credited service limited to 44 years of credited service. The average final
compensation is subject to certain limitations. Annual funding requirements are
determined based on the "projected unit credit" cost method which attributes a
pro rata portion of the total projected benefit payable at normal retirement to
each year of credited service.
AIG has adopted a Supplemental Executive Retirement Program (Supplemental
Plan) to provide additional retirement benefits to designated executives and key
employees. Under the Supplemental Plan, the annual benefit, not to exceed 60
percent of average final compensation, accrues at a percentage of average final
pay multiplied for each year of credited service reduced by any benefits from
the current and any predecessor retirement plans, Social Security, if any, and
from any qualified pension plan of prior employers. The Supplemental Plan also
provides a benefit equal to the reduction in benefits payable under the AIG
retirement plan as a result of Federal limitations on benefits payable
thereunder. Currently, the Supplemental Plan is unfunded.
Eligibility for participation in the various non-U.S. retirement plans is
either based on completion of a specified period of continuous service or date
of hire, subject to age limitation. Where non-U.S. retirement plans are defined
benefit plans, they are generally based on the employees' years of credited
service and average compensation in the years preceding retirement.
In addition to AIG's defined benefit pension plan, AIG and its subsidiaries
provide a postretirement benefit program for medical care and life insurance,
domestically and in certain foreign countries. Eligibility in the various plans
is generally based upon completion of a specified period of eligible service and
reaching a specified age. Benefits vary by geographic location.
AIG's U.S. postretirement medical and life insurance benefits are based
upon the employee electing immediate retirement and having a minimum of ten
years of service. Retirees and their dependents who were age 65 by May 1, 1989
participate in the medical plan at no cost. Employees who retired after May 1,
1989 and on or prior to January 1, 1993 pay the active employee premium if under
age 65 and 50 percent of the active employee premium if over age 65. Retiree
contributions are subject to adjustment annually. Other cost sharing features of
the medical plan include deductibles, coinsurance and Medicare coordination and
a lifetime maximum benefit of $1 million. The lifetime maximum benefit of the
medical plan was increased to $1.5 million effective January 1, 1999. The
maximum life insurance benefit prior to age 70 is $32,500, with a maximum of
$25,000 thereafter.
Effective January 1, 1993, both plans' provisions were amended. Employees
who retire after January 1, 1993 are required to pay the actual cost of the
medical benefits premium reduced by a credit which is based upon age and years
of service at retirement. The life insurance benefit varies by age at retirement
from $5,000 for retirement at ages 55 through 59 to $15,000 for retirement at
ages 65 and over. These plans also benefit Transatlantic's employees.
(b) AIG sponsors a voluntary savings plan for domestic employees, including
those of Transatlantic, (a 401(k) plan), which, during the three years ended
December 31, 1998, provided for salary reduction contributions by employees and
matching contributions by AIG of up to 6 percent of annual salary depending on
the employees' years of service.
(c) AIG has certain benefits provided to former or inactive employees who
are not retirees. Certain of these benefits are insured and expensed currently;
other expenses are provided for currently. Such uninsured expenses include long
and short-term disability medical and life insurance continuation, short-term
disability income continuation and COBRA medical subsidies. The provision for
these benefits at December 31, 1998 was $5 million. The incremental expense was
insignificant.
69
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
14. EMPLOYEE BENEFITS (continued)
The following table sets forth the change in benefit obligation, change in
plan assets and weighted average assumptions associated with various pension
plan and postretirement benefits. The amounts are recognized in the accompanying
consolidated balance sheet as of December 31, 1998 and 1997:
(in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------------------ --------------------------------
NON-U.S. U.S. NON-U.S. U.S.
1998 PLANS PLANS TOTAL PLANS PLANS TOTAL
==================================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 330 $ 363 $ 693 $ 19 $ 70 $ 89
Acquisitions(a) -- 49 49 -- 1 1
Service cost 32 33 65 1 2 3
Interest cost 16 29 45 -- 5 5
Participant contributions 4 -- 4 -- -- --
Actuarial (gain)/loss 21 33 54 (13) 5 (8)
Benefits paid (18) (8) (26) -- (5) (5)
Effect of foreign currency fluctuation 42 -- 42 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 427 $ 499 $ 926 $ 7 $ 78 $ 85
==================================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 160 $ 297 $ 457 $ -- $ -- $--
Acquisitions(a) -- 37 37 -- -- --
Actual return on plan assets net of expenses 20 55 75 -- -- --
Employer contributions 24 18 42 -- 5 5
Participant contributions 4 -- 4 -- -- --
Benefits paid (18) (8) (26) -- (5) (5)
Effect of foreign currency fluctuation 18 -- 18 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year(b) $ 208 $ 399 $ 607 $ -- $ -- $ --
==================================================================================================================================
Reconciliation of funded status:
Funded status $(219) $(100) $(319) $ (7) $ (78) $ (85)
Unrecognized actuarial (gain)/loss 80 (4) 76 -- 16 16
Unrecognized transition (asset)/obligation 13 7 20 -- -- --
Unrecognized prior service cost 13 21 34 -- (21) (21)
- ----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $(113) $ (76) $(189) $ (7) $ (83) $ (90)
==================================================================================================================================
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 4 $ -- $ 4 $ -- $ -- $ --
Accrued benefit liability (175) (83) (258) (7) (83) (90)
Intangible asset 58 7 65 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $(113) $ (76) $(189) $ (7) $ (83) $ (90)
==================================================================================================================================
Weighted-average assumptions as of December 31,
Discount rate 3.0-10.0% 6.75% 6.25-7.0% 6.75%
Expected return on plan assets 3.5-13.0 8.5 N/A N/A
Rate of compensation increase 2.0-10.0 5.0 N/A N/A
==================================================================================================================================
For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1998.
The rate was assumed to decrease gradually to 5.5 percent for 2000 and remain at
that level thereafter.
(a) Acquisitions include the opening balances with respect to Transatlantic and
20th Century. Transatlantic's domestic employees are and have been covered
by AIG's plans.
(b) Plan assets are invested primarily in fixed-income securities and listed
stocks.
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American International Group, Inc. and Subsidiaries
14. EMPLOYEE BENEFITS (continued)
(in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------------------ --------------------------------
NON-U.S. U.S. NON-U.S. U.S.
1997 PLANS PLANS TOTAL PLANS PLANS TOTAL
==================================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 340 $ 273 $ 613 $ 17 $ 59 $ 76
Service cost 21 23 44 2 1 3
Interest cost 13 21 34 -- 4 4
Participant contributions 4 -- 4 -- -- --
Plan amendments -- 5 5 -- 4 4
Actuarial (gain)/loss 6 47 53 -- 6 6
Benefits paid (12) (6) (18) -- (4) (4)
Effect of foreign currency fluctuation (42) -- (42) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 330 $ 363 $ 693 $ 19 $ 70 $ 89
==================================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 171 $ 231 $ 402 $ -- $ -- $ --
Asset adjustment -- (1) (1) -- -- --
Actual return on plan assets net of expenses -- 54 54 -- -- --
Employer contributions 15 19 34 -- -- --
Participant contributions 4 -- 4 -- -- --
Benefits paid (12) (6) (18) -- -- --
Effect of foreign currency fluctuation (18) -- (18) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year* $ 160 $ 297 $ 457 $ -- $ -- $ --
==================================================================================================================================
Reconciliation of funded status:
Funded status $(170) $ (66) $(236) $ (19) $ (70) $ (89)
Unrecognized actuarial (gain)/loss 65 (16) 49 -- 11 11
Unrecognized transition (asset)/obligation 12 7 19 -- -- --
Unrecognized prior service cost 14 21 35 -- (22) (22)
- ----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (79) $ (54) $(133) $ (19) $ (81) $(100)
==================================================================================================================================
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 6 $ -- $ 6 $ -- $ -- $ --
Accrued benefit liability (133) (58) (191) (19) (81) (100)
Intangible asset 48 4 52 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (79) $ (54) $(133) $ (19) $ (81) $(100)
==================================================================================================================================
Weighted-average assumptions as of December 31,
Discount rate 3.5-10.0% 7.0% 7.0-10.0% 7.0%
Expected return on plan assets 4.0-9.2 9.0 N/A N/A
Rate of compensation increase 2.5-10.0 5.0 N/A N/A
==================================================================================================================================
For measurement purposes, an 8.5 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1997.
The rate was assumed to decrease gradually to 5.5 percent for 2000 and remain at
that level thereafter.
* Plan assets are invested primarily in fixed-income securities and listed
stocks.
71
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
14. EMPLOYEE BENEFITS (continued)
The net benefit cost for the years ended December 31, 1998, 1997, and 1996
included the following components:
(in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------------------- ------------------------------
NON-U.S. U.S. NON-U.S. U.S.
PLANS PLANS TOTAL PLANS PLANS TOTAL
==================================================================================================================================
1998
Components of net period benefit cost:
Service cost $ 32 $ 33 $ 65 $ 1 $ 2 $ 3
Interest cost 16 29 45 1 5 6
Expected return on assets (9) (29) (38) -- -- --
Amortization of prior service cost 2 2 4 -- (1) (1)
Amortization of transitional (asset)/liability 2 1 3 (1) -- (1)
Recognized actuarial (gain)/loss 3 1 4 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 46 $ 37 $ 83 $ 1 $ 6 $ 7
==================================================================================================================================
1997
Components of net period benefit cost:
Service cost $ 21 $ 23 $ 44 $ 1 $ 2 $ 3
Interest cost 13 21 34 1 4 5
Expected return on assets (9) (20) (29) -- -- --
Amortization of prior service cost 2 2 4 -- (1) (1)
Amortization of transitional (asset)/liability 2 2 4 -- -- --
Recognized actuarial (gain)/loss 2 -- 2 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 31 $ 28 $ 59 $ 2 $ 5 $ 7
==================================================================================================================================
1996
Components of net period benefit cost:
Service cost $ 23 $ 21 $ 44 $ 1 $ 1 $ 2
Interest cost 14 18 32 1 4 5
Expected return on assets (9) (17) (26) -- -- --
Amortization of prior service cost 2 1 3 -- (1) (1)
Amortization of transitional (asset)/liability 2 2 4 -- -- --
Recognized actuarial (gain)/loss 2 -- 2 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 34 $ 25 $ 59 $ 2 $ 4 $ 6
==================================================================================================================================
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $460 million, $394 million and $196 million,
respectively, as of December 31, 1998 and $314 million, $268 million and $119
million as of December 31, 1997.
On December 31, 1998, the company amended its retirement and postretirement
healthcare plan to provide increased benefits to certain employees who retire
prior to age 65.
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plan. A one- percentage-point change in
assumed healthcare cost trend rates would have the following effects:
(in millions)
- ------------------------------------------------------------------------------
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
==============================================================================
Effect on total of service and interest
cost components $1 $--
Effect on postretirement benefit
obligation 4 (3)
==============================================================================
15. LEASES
(a) AIG and its subsidiaries occupy leased space in many locations under various
long-term leases and have entered into various leases covering the long-term use
of data processing equipment.
At December 31, 1998, the future minimum lease payments under operating
leases were as follows:
(in millions)
================================================================================
1999 $ 252
2000 193
2001 151
2002 112
2003 112
Remaining years after 2003 419
- --------------------------------------------------------------------------------
Total $1,239
================================================================================
Rent expense approximated $272 million, $241 million and $219 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
72
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- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
15. LEASES (continued)
(b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 1998 was as follows:
(in millions)
================================================================================
1999 $1,589
2000 1,391
2001 1,237
2002 1,055
2003 803
Remaining years after 2003 1,173
- --------------------------------------------------------------------------------
Total $7,248
================================================================================
Flight equipment is leased, under operating leases, for periods ranging
from one to 12 years.
16. OWNERSHIP AND TRANSACTIONS WITH RELATED PARTIES
(A) OWNERSHIP: The directors and officers of AIG, the directors and holders of
common stock of C.V. Starr & Co., Inc. (Starr), a private holding company, The
Starr Foundation, Starr International Company, Inc. (SICO), a private holding
company, and Starr own or otherwise control approximately 28 percent of the
voting stock of AIG. Six directors of AIG also serve as directors of Starr and
SICO.
(B) TRANSACTIONS WITH RELATED PARTIES: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries
for the production and management of insurance business. There are no
significant receivables from/payables to related parties at December 31, 1998.
Net commission payments to Starr aggregated approximately $46 million in 1998
and 1997 and $48 million in 1996, from which Starr is required to pay
commissions due originating brokers and its operating expenses. AIG also
received approximately $13 million in 1998, $14 million in 1997 and $15 million
in 1996 from Starr and paid approximately $37,000 in 1998 and $35,000 in 1997
and $34,000 in 1996 to Starr in rental fees. AIG also received approximately $1
million in 1998, 1997 and 1996 from SICO and paid approximately $1 million in
each of the years 1998, 1997 and 1996 to SICO as reimbursement for services
rendered at cost. AIG also paid to SICO $4 million in 1998, 1997 and 1996 in
rental fees.
17. SEGMENT INFORMATION
(a) AIG's operations are conducted principally through three business segments.
These segments and their respective operations are as follows:
General Insurance - AIG's general insurance subsidiaries are multiple line
companies writing substantially all lines of property and casualty insurance.
One or more of these companies is licensed to write substantially all of these
lines in all states of the United States and in approximately 100 foreign
countries.
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's domestic operations are included in this
group.
AIG's Foreign General insurance group accepts risks primarily underwritten
through 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 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. Transatlantic's foreign operations are included in this
group.
Life Insurance - AIG's life insurance subsidiaries offer a wide range of
traditional insurance and financial and investment products. One or more of
these subsidiaries is licensed to write life insurance in all states in the
United States and in over 70 foreign countries. Traditional products consist of
individual and group life, annuity, endowment and accident and health policies.
Financial and investment products consist of single premium annuity, variable
annuities, guaranteed investment contracts, universal life and pensions.
AIG's three principal overseas life operations are ALICO, AIA and 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. AIA operates primarily in Hong Kong, Singapore, Malaysia and
Thailand. Nan Shan operates in Taiwan.
Financial Services - AIG's financial services subsidiaries engage in
diversified financial products and services including asset management, premium
financing, banking services and consumer finance services.
ILFC engages primarily in the acquisition of new and used commercial jet
aircraft and the leasing and remarketing of such aircraft to airlines around the
world.
73
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
17. SEGMENT INFORMATION (continued)
AIGFP structures financial transactions, including long-dated interest rate
and currency swaps and structures borrowings through notes, bonds and guaranteed
investment agreements.
AIGTG engages in various commodities trading, foreign exchange trading,
interest rate swaps and market making activities.
(b) The following table summarizes the operations by major operating
segment for the years ended December 31, 1998, 1997 and 1996:
OPERATING SEGMENTS-1998
-------------------------------------------------------------------
GENERAL LIFE FINANCIAL
(in millions) INSURANCE INSURANCE SERVICES OTHER(a) CONSOLIDATED
====================================================================================================================================
Revenues (b) $ 16,495 $ 13,444 $ 3,305 $ 52 $ 33,296
Interest revenue -- -- 1,225 -- 1,225
Interest expense 7 64 1,840 36 1,947
Realized capital gains (losses) 205 (35) -- (5) 165
Operating income (loss) before minority interest 2,928 1,780 913 (92) 5,529
Income taxes 646 562 317 69 1,594
Equity in income of minority-owned insurance operations 57 -- -- -- 57
Depreciation expense 109 63 665 95 932
Capital expenditures 220 277 3,266 142 3,905
Identifiable assets 73,226 64,333 60,113 (3,274) 194,398
====================================================================================================================================
OPERATING SEGMENTS-1997
-------------------------------------------------------------------
GENERAL LIFE FINANCIAL
(in millions) INSURANCE INSURANCE SERVICES OTHER(a) CONSOLIDATED
====================================================================================================================================
Revenues (b) $ 14,403 $ 12,843 $ 3,272 $ 84 $ 30,602
Interest revenue -- -- 1,009 -- 1,009
Interest expense 2 29 1,689 34 1,754
Realized capital gains (losses) 128 21 -- (30) 119
Operating income (loss) before minority interest 2,472 1,571 701 (13) 4,731
Income taxes 514 501 258 94 1,367
Equity in income of minority-owned insurance operations 114 -- -- -- 114
Depreciation expense 89 56 654 74 873
Capital expenditures 166 346 3,519 174 4,205
Identifiable assets 62,386 52,104 51,756 (2,275) 163,971
====================================================================================================================================
OPERATING SEGMENTS-1996
-------------------------------------------------------------------
GENERAL LIFE FINANCIAL
(in millions) INSURANCE INSURANCE SERVICES OTHER(a) CONSOLIDATED
====================================================================================================================================
Revenues (b) $ 13,611 $ 11,689 $ 2,556 $ 87 $ 27,943
Interest revenue -- -- 869 -- 869
Interest expense 2 18 1,493 29 1,542
Realized capital gains (losses) 65 35 -- (12) 88
Operating income before minority interest 2,206 1,324 524 2 4,056
Income taxes 456 415 190 55 1,116
Equity in income of minority-owned insurance operations 99 -- -- -- 99
Depreciation expense 85 54 593 74 806
Capital expenditures 133 237 3,358 167 3,895
Identifiable assets 58,792 48,376 43,861 (2,598) 148,431
====================================================================================================================================
(a) Includes AIG Parent and other operations which are not required to be
reported separately, other income (deductions)-net and adjustments and
eliminations.
(b) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transactions and other
fees, equity in income of minority-owned insurance operations and realized
capital gains (losses).
74
76
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
17. SEGMENT INFORMATION (continued)
(c) The following table summarizes AIG's general insurance operations by
major internal reporting group for the years ended December 31, 1998, 1997 and
1996:
GENERAL INSURANCE-1998
--------------------------------------------------------------
DOMESTIC TOTAL
BROKERAGE FOREIGN GENERAL
(in millions) GROUP GENERAL OTHER(a) INSURANCE
====================================================================================================================================
Net premiums written $ 8,002 $ 4,799 $ 1,785 $ 14,586
Net premiums earned 7,814 4,627 1,657 14,098
Losses & loss expenses incurred 6,862 2,678 1,117 10,657
Underwriting expenses 1,169 1,427 314 2,910
Adjusted underwriting profit (loss) (b) (217) 522 226 531
Net investment income 1,570 438 184 2,192
Operating income before realized capital gains (c) 1,353 960 410 2,723
Equity in income of minority-owned insurance operations 57 -- -- 57
Depreciation expense 34 63 12 109
Capital expenditures 66 110 44 220
Identifiable assets 53,844 16,060 3,322 73,226
====================================================================================================================================
GENERAL INSURANCE-1997
--------------------------------------------------------------
DOMESTIC TOTAL
BROKERAGE FOREIGN GENERAL
(in millions) GROUP GENERAL OTHER(a) INSURANCE
====================================================================================================================================
Net premiums written $ 7,885 $ 4,370 $ 1,153 $ 13,408
Net premiums earned 7,207 4,069 1,145 12,421
Losses & loss expenses incurred 6,268 2,304 784 9,356
Underwriting expenses 1,080 1,268 227 2,575
Adjusted underwriting profit (loss) (b) (141) 497 134 490
Net investment income 1,356 369 129 1,854
Operating income before realized capital gains (c) 1,215 866 263 2,344
Equity in income of minority-owned insurance operations 114 -- -- 114
Depreciation expense 27 57 5 89
Capital expenditures 61 94 11 166
Identifiable assets 46,548 13,405 2,433 62,386
====================================================================================================================================
GENERAL INSURANCE-1996
--------------------------------------------------------------
DOMESTIC TOTAL
BROKERAGE FOREIGN GENERAL
(in millions) GROUP GENERAL OTHER(a) INSURANCE
====================================================================================================================================
Net premiums written $ 7,324 $ 4,325 $ 1,043 $ 12,692
Net premiums earned 6,763 4,033 1,059 11,855
Losses & loss expenses incurred 5,886 2,332 779 8,997
Underwriting expenses 916 1,303 189 2,408
Adjusted underwriting profit (loss) (b) (39) 398 91 450
Net investment income 1,242 339 110 1,691
Operating income before realized capital gains (c) 1,203 737 201 2,141
Equity in income of minority-owned insurance operations 99 -- -- 99
Depreciation expense 27 54 4 85
Capital expenditures 41 86 6 133
Identifiable assets 43,718 13,025 2,049 58,792
====================================================================================================================================
(a) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(b) Adjusted underwriting profit (loss) represents statutory underwriting
profit or loss adjusted primarily for changes in deferred acquisition
costs.
(c) Realized capital gains are not deemed to be an integral part of AIG's
general insurance operations' internal reporting groups.
75
77
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
17. SEGMENT INFORMATION (continued)
(d) The following table summarizes AIG's life insurance operations by major
reporting group for the years ended December 31, 1998, 1997 and 1996:
LIFE INSURANCE-1998
-------------------------------------------------------------
AIA TOTAL
AND LIFE
(in millions) ALICO NAN SHAN OTHER(a) INSURANCE
====================================================================================================================================
Premium income $ 3,212 $ 6,052 $ 983 $10,247
Net investment income 1,019 1,189 1,024 3,232
Operating income before realized capital gains(b) 576 1,040 199 1,815
Depreciation expense 31 25 7 63
Capital expenditures 201 64 12 277
Identifiable assets 23,495 23,860 16,978 64,333
====================================================================================================================================
LIFE INSURANCE-1997
-------------------------------------------------------------
AIA TOTAL
AND LIFE
(in millions) ALICO NAN SHAN OTHER(a) INSURANCE
====================================================================================================================================
Premium income $ 2,811 $ 6,278 $ 837 $ 9,926
Net investment income 754 1,188 954 2,896
Operating income before realized capital gains(b) 461 895 194 1,550
Depreciation expense 24 25 7 56
Capital expenditures 197 132 17 346
Identifiable assets 16,745 20,003 15,356 52,104
====================================================================================================================================
LIFE INSURANCE-1996
-------------------------------------------------------------
AIA TOTAL
AND LIFE
(in millions) ALICO NAN SHAN OTHER(a) INSURANCE
====================================================================================================================================
Premium income $ 2,595 $ 5,592 $ 791 $ 8,978
Net investment income 663 979 1,034 2,676
Operating income before realized capital gains(b) 396 731 162 1,289
Depreciation expense 21 24 9 54
Capital expenditures 199 29 9 237
Identifiable assets 14,839 20,474 13,063 48,376
====================================================================================================================================
(a) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
(b) Realized capital gains are not deemed to be an integral part of AIG's life
insurance operations' internal reporting groups.
76
78
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
17. SEGMENT INFORMATION (continued)
(e) The following table summarizes AIG's financial services operations by
major reporting group for the years ended December 31, 1998, 1997 and 1996:
FINANCIAL SERVICES-1998
------------------------------------------------------------------------
TOTAL
FINANCIAL
(in millions) ILFC AIGFP(a) AIGTG OTHER(b) SERVICES
====================================================================================================================================
Commissions, transactions and other fees $ 2,002 $ 550 $ 374 $ 379 $ 3,305
Interest revenue 49 941 74 161 1,225
Interest expense 694 997 59 90 1,840
Operating income (loss) 496 323 123 (29) 913
Depreciation expense 581 6 8 70 665
Capital expenditures 3,160 3 13 90 3,266
Identifiable assets 16,846 28,080 10,526 4,661 60,113
====================================================================================================================================
FINANCIAL SERVICES-1997
------------------------------------------------------------------------
TOTAL
FINANCIAL
(in millions) ILFC AIGFP(a) AIGTG OTHER(b) SERVICES
====================================================================================================================================
Commissions, transactions and other fees $ 1,857 $ 452 $ 562 $ 401 $ 3,272
Interest revenue 41 768 88 112 1,009
Interest expense 691 857 42 99 1,689
Operating income (loss) 382 241 127 (49) 701
Depreciation expense 576 7 6 65 654
Capital expenditures 3,436 5 9 69 3,519
Identifiable assets 15,028 22,941 10,017 3,770 51,756
====================================================================================================================================
FINANCIAL SERVICES-1996
------------------------------------------------------------------------
TOTAL
FINANCIAL
(in millions) ILFC AIGFP(a) AIGTG OTHER(b) SERVICES
====================================================================================================================================
Commissions, transactions and other fees $ 1,560 $ 369 $ 289 $ 338 $ 2,556
Interest revenue 44 675 38 112 869
Interest expense 624 737 26 106 1,493
Operating income (loss) 307 189 80 (52) 524
Depreciation expense 526 9 6 52 593
Capital expenditures 3,254 10 16 78 3,358
Identifiable assets 14,394 20,288 5,115 4,064 43,861
====================================================================================================================================
(a) AIGFP's interest revenue and interest expense are reported as net revenues.
(b) Includes other operations which are not required to be reported separately
and adjustments and eliminations.
77
79
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
17. SEGMENT INFORMATION (continued)
(f) A substantial portion of AIG's operations is conducted in countries
other than the United States and Canada. The following table summarizes AIG's
operations by major geographic segment. Allocations have been made on the basis
of the location of operations and assets.
GEOGRAPHIC SEGMENTS-1998
--------------------------------------------------
OTHER
(in millions) DOMESTIC(a) FAR EAST FOREIGN CONSOLIDATED
====================================================================================================================================
Revenues (b) $15,818 $10,571 $ 6,907 $33,296
Real estate and other fixed assets, net of accumulated depreciation 975 895 781 2,651
Flight equipment primarily under operating leases, net of accumulated depreciation 16,330 -- -- 16,330
====================================================================================================================================
GEOGRAPHIC SEGMENTS-1997
--------------------------------------------------
OTHER
(in millions) DOMESTIC(a) FAR EAST FOREIGN CONSOLIDATED
====================================================================================================================================
Revenues (b) $14,141 $11,671 $ 4,790 $30,602
Real estate and other fixed assets, net of accumulated depreciation 867 779 696 2,342
Flight equipment primarily under operating leases, net of accumulated depreciation 14,438 -- -- 14,438
====================================================================================================================================
GEOGRAPHIC SEGMENTS-1996
--------------------------------------------------
OTHER
(in millions) DOMESTIC(a) FAR EAST FOREIGN CONSOLIDATED
====================================================================================================================================
Revenues (b) $12,955 $10,691 $ 4,297 $27,943
Real estate and other fixed assets, net of accumulated depreciation 811 748 564 2,123
Flight equipment primarily under operating leases, net of accumulated depreciation 13,809 -- -- 13,809
====================================================================================================================================
(a) Including general insurance operations in Canada.
(b) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, equity in income of minority-owned insurance operations and realized
capital gains (losses).
78
80
- --------------------------------------------------------------------------------
American International Group, Inc. and Subsidiaries
18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION -
UNAUDITED
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1998 and 1997 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------------- ----------------- ------------------ ------------------
(in millions, except per share amounts) 1998 1997 1998 1997 1998(a) 1997 1998(a) 1997
==================================================================================================================================
Revenues $7,689 $7,189 $8,143 $7,758 $8,399 $7,704 $9,065 $7,951
Net income 887 781 942 826 931 840 1,006 885
==================================================================================================================================
Net income per common share:
Basic $ 0.84 $ 0.74 $ 0.90 $ 0.78 $ 0.89 $ 0.80 $ 0.96 $ 0.84
Diluted 0.84 0.74 0.89 0.78 0.89 0.79 0.95 0.84
Average shares outstanding:
Basic 1,049 1,056 1,050 1,053 1,050 1,052 1,050 1,050
Diluted 1,054 1,061 1,055 1,058 1,055 1,057 1,055 1,055
==================================================================================================================================
(a) Including the operations of Transatlantic and 20th Century.
19. PRO FORMA FINANCIAL DATA - UNAUDITED
On January 1, 1999, AIG issued 187,543,737 shares of its common stock for all
the outstanding common stock of SunAmerica Inc. (based on an exchange ratio of
0.855 shares of AIG common stock for each share of SunAmerica Inc. common
stock). Because the merger, which will be accounted for as a pooling of
interests, occurred subsequent to December 31, 1998, the historical information
presented herein does not give effect to the impact of the merger.
However, the following unaudited pro forma data summarizes the combined
results of operations of AIG and SunAmerica Inc. as if the merger had been in
effect for all periods presented. SunAmerica Inc. results of operations are
based upon a fiscal year ended September 30 for all periods presented.
(in millions, except share amounts)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
================================================================================
Revenues $35,874 $32,687 $29,415
Net income 4,282 3,711 3,172
Earnings per share:
Basic $3.51 $3.06 $2.61
Diluted 3.44 3.00 2.56
================================================================================
79
81
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting
and financial disclosure within the twenty-four months ending December 31, 1998.
- --------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Except for the information provided in Part I under the heading "Directors and
Executive Officers of the Registrant", this item is omitted because a definitive
proxy statement which involves the election of directors will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the fiscal year pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
- --------------------------------------------------------------------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND EXHIBITS.
1. Financial Statements and Schedules. See accompanying Index to
Financial Statements.
2. Exhibits.
2--Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession.
3--Articles of Incorporation and By-Laws.
4--Instruments Defining the Rights of Security Holders.
10--Material Contracts.
11--Computation of Earnings Per Share for the Years Ended
December 31, 1998, 1997, 1996, 1995 and 1994.
12--Computation of Ratios of Earnings to Fixed Charges for the
Years Ended December 31, 1998, 1997, 1996, 1995 and 1994.
21--Subsidiaries of Registrant.
23--Consent of PricewaterhouseCoopers LLP.
24--Power of Attorney.
27--Financial Data Schedule.
99--Undertakings.
(b) REPORTS ON FORM 8-K.
During the three months ended December 31, 1998, one Current Report on Form
8-K, dated October 22, 1998, was filed to report AIG's Press Release, dated
October 22, 1998, reporting the earnings of AIG for the quarter and nine months
ended September 30, 1998.
80
82
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, THE ISSUER HAS DULY CAUSED THIS ANNUAL REPORT ON FORM
10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED,
IN THE CITY OF NEW YORK AND STATE OF NEW YORK, ON THE 31ST DAY OF MARCH, 1999.
AMERICAN INTERNATIONAL GROUP, INC.
By S/S M.R. GREENBERG
-----------------------------
(M. R. Greenberg, Chairman)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THIS ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN THE CAPACITIES INDICATED ON THE 31ST DAY OF MARCH, 1999 AND EACH OF THE
UNDERSIGNED PERSONS, IN ANY CAPACITY, HEREBY SEVERALLY CONSTITUTES M.R.
GREENBERG, EDWARD E. MATTHEWS AND HOWARD I. SMITH AND EACH OF THEM, SINGULARLY,
HIS TRUE AND LAWFUL ATTORNEY WITH FULL POWER TO THEM AND EACH OF THEM TO SIGN
FOR HIM, AND IN HIS NAME AND IN THE CAPACITIES INDICATED BELOW, THIS ANNUAL
REPORT ON FORM 10-K AND ANY AND ALL AMENDMENTS THERETO.
SIGNATURE TITLE
--------- -----
S/S M.R. GREENBERG Chairman and Director
- ---------------------------- (Principal Executive Officer)
(M. R. GREENBERG)
S/S HOWARD I. SMITH Executive Vice President,
- ---------------------------- Chief Financial Officer,
(HOWARD I. SMITH) Comptroller and Director
(Principal Financial
and Accounting Officer)
S/S M. BERNARD AIDINOFF Director
- ----------------------------
(M. BERNARD AIDINOFF)
S/S ELI BROAD Director
- ----------------------------
(ELI BROAD)
S/S PEI-YUAN CHIA Director
- ----------------------------
(PEI-YUAN CHIA)
S/S MARSHALL A. COHEN Director
- ----------------------------
(MARSHALL A. COHEN)
S/S BARBER B. CONABLE, JR Director
- ----------------------------
(BARBER B. CONABLE, JR.)
S/S MARTIN S. FELDSTEIN Director
- ----------------------------
(MARTIN S. FELDSTEIN)
Director
- ----------------------------
(ELLEN V. FUTTER)
II-1
83
SIGNATURES- (Continued)
SIGNATURE TITLE
--------- -----
Director
- ----------------------------
(LESLIE L. GONDA)
S/S EVAN G. GREENBERG Director
- ----------------------------
(EVAN G. GREENBERG)
S/S CARLA A. HILLS Director
- ----------------------------
(CARLA A. HILLS)
S/S FRANK J. HOENEMEYER Director
- ----------------------------
(FRANK J. HOENEMEYER)
S/S EDWARD E. MATTHEWS Director
- ----------------------------
(EDWARD E. MATTHEWS)
S/S DEAN P. PHYPERS Director
- ----------------------------
(DEAN P. PHYPERS)
S/S THOMAS R. TIZZIO Director
- ----------------------------
(THOMAS R. TIZZIO)
S/S EDMUND S.W. TSE Director
- ----------------------------
(EDMUND S.W. TSE)
S/S JAY S. WINTROB Director
- ----------------------------
(JAY S. WINTROB)
S/S FRANK G. WISNER Director
- ----------------------------
(Frank G. Wisner)
II-2
84
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------ ----------- --------
2 Plan of acquisition, reorganization, arrangement, liquidation
or succession ..................................................... Agreement and Plan of Merger, dated as of August
19, 1998, between SunAmerica Inc. and AIG,
incorporated herein by reference to Exhibit 2
to AIG's Registration Statement on Form S-4
(File No. 333-65441).
3(i)(a) Restated Certificate of Incorporation of AIG ...................... Incorporated by reference to Exhibit 3(i) to
AIG's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 1-8787).
3(i)(b) Certificate of Amendment of Certificate of Incorporation of
AIG, filed June 3, 1998 ........................................... Incorporated by reference to Exhibit 3(i) to
AIG's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File No.
1-8787).
3(i)(c) Certificate of Merger of SunAmerica Inc. with and into AIG,
filed December 30, 1998 and effective January 1, 1999 ............ Filed herewith.
3(ii) By-laws of AIG .................................................... Filed herewith.
4 Instruments defining the rights of security holders, including
indentures
(a) Fiscal Agency Agreement dated as of October 1, 1984
between AIG and Citibank, N.A ............................ Not required to be filed.*
(b) Indenture dated as of July 15, 1989 between AIG and The
Bank of New York ......................................... Not required to be filed.*
(c) Subordinated Indenture, dated as of October 28, 1996,
between SunAmerica Inc. and The First National Bank of
Chicago, as Trustee ...................................... Not required to be filed.*
(d) Senior Indenture, dated as of April 15, 1993, between
SunAmerica Inc. and The First National Bank of Chicago,
as Trustee ............................................... Not required to be filed.*
(e) Supplemental Indenture, dated as of June 28, 1993, between
SunAmerica Inc. and The First National Bank of Chicago, as
Trustee, supplementing the Senior Indenture, dated as of
April 15, 1993 ........................................... Not required to be filed.*
(f) Supplemental Indenture, dated as of October 28, 1996,
between SunAmerica Inc. and The First National Bank of
Chicago, as Trustee, supplementing the Senior Indenture,
dated as of April 15, 1993 ............................... Not required to be filed.*
(g) Third Supplemental Indenture, dated as of January 1, 1999,
among SunAmerica Inc., AIG and The First National Bank of
Chicago, as Trustee, supplementing the Senior Indenture,
dated as of April 15, 1993 ............................... Not required to be filed.*
(h) Junior Subordinated Indenture, dated as of March 15, 1995,
between SunAmerica Inc. and The First National Bank of
Chicago, as Trustee ...................................... Not required to be filed.*
(i) First Supplemental Indenture, dated as of March 15, 1995,
between SunAmerica Inc. and The First National Bank of
Chicago, as Trustee, supplementing the Junior Subordinated
Indenture, dated as of March 15, 1995 .................... Not required to be filed.*
(j) Second Supplemental Indenture, dated as of October 11,
1995, between SunAmerica Inc. and The First National Bank
of Chicago, as Trustee, supplementing the Junior
Subordinated Indenture dated as of March 15, 1995 ........ Not required to be filed.*
(k) Supplemental Indenture, dated as of October 28, 1996,
between SunAmerica Inc. and The First National Bank of
Chicago, as Trustee, supplementing the Junior Subordinated
Indenture, dated as of March 15, 1995 .................... Not required to be filed.*
(l) Fourth Supplemental Indenture, dated as of November 13,
1996, between SunAmerica Inc. and The First National Bank
of Chicago, as Trustee, supplementing the Junior
Subordinated Indenture, dated as of March 15, 1995 ....... Not required to be filed.*
(m) Fifth Supplemental Indenture, dated as of January 1, 1999,
among SunAmerica Inc., AIG and The First National Bank of
Chicago, as Trustee, supplementing the Junior Subordinated
Indenture, dated as of March 15, 1995 .................... Not required to be filed.*
(n) Senior Indenture, dated as of November 15, 1991, between
SunAmerica Inc. (as successor in interest to Broad Inc.)
and Security Pacific National Bank, as Trustee ........... Not required to be filed.*
(o) Tri-Party Agreement, dated as of July 1, 1993, among
The First National Bank of Chicago, Bank of America, NT &
SA and SunAmerica Inc., appointing The First National Bank
of Chicago as Successor Trustee to Bank of America NT & SA
(as successor in interest to Security Pacific National
Bank), amending the Senior Indenture, dated as of November
15, 1991 ................................................. Not required to be filed.*
(p) First Supplemental Indenture, dated as of January 1, 1999,
among SunAmerica Inc., AIG and The First National Bank of
Chicago, as Trustee, supplementing Senior Indenture, dated
November 15, 1991 ........................................ Not required to be filed.*
(q) Amended and Restated Declaration of Trust of SunAmerica
Capital Trust I, dated as of June 6, 1995, among
SunAmerica Inc. and the Trustees of the Trust ............ Not required to be filed.*
(r) Amended and Restated Declaration of Trust of SunAmerica
Capital Trust II, dated as of October 11, 1995, among
SunAmerica Inc. and the Trustees of the Trust ............ Not required to be filed.*
(s) Amended and Restated Declaration of Trust of SunAmerica
Capital Trust III, dated as of November 13, 1996, among
SunAmerica Inc. and the Trustees of the Trust ............ Not required to be filed.*
(t) Guarantee Agreement, dated as of October 11, 1995, between
SunAmerica Inc. and The Bank of New York, as Guaranty
Trustee, relating to the Preferred Securities of
SunAmerica Capital Trust II.. ............................ Not required to be filed.*
(u) Amendment to Guarantee, dated as of January 1, 1999, among
SunAmerica Inc., AIG and The Bank of New York, as Guaranty
Trustee, amending Guarantee Agreement, dated as of October
11, 1995, between SunAmerica Inc. and The Bank of New York,
as Guaranty Trustee ...................................... Not required to be filed.*
(v) Guarantee Agreement, dated as of November 13, 1996, between
SunAmerica Inc. and The Bank of New York, as Guaranty
Trustee, relating to the Preferred Securities of
SunAmerica Capital Trust III ............................. Not required to be filed.*
(w) Amendment to Guarantee, dated as of January 1, 1999, among
SunAmerica Inc., AIG and The Bank of New York, as Guaranty
Trustee, amending Guarantee Agreement, dated November 13,
1996, between SunAmerica Inc. and The Bank of New York,
as Guaranty Trustee ...................................... Not required to be filed.*
-----------------
* The Registrant hereby agrees to file with the Commission
a copy of any instrument defining the rights of the holders
of the Registrant's long-term debt upon request of the
Commission.
II-3
85
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------ ----------- --------
9 Voting Trust Agreement None.
10 Material contracts**
(a) AIG 1969 Employee Stock Option Plan and
Agreement Form ........................................... Filed as exhibit to AIG's Registration Statement
(File No. 2-44043) and incorporated herein by
reference.
(b) AIG 1972 Employee Stock Option Plan ...................... Filed as exhibit to AIG's Registration Statement
(File No. 2-44702) and incorporated herein by
reference.
(c) AIG 1972 Employee Stock Purchase Plan .................... Filed as exhibit to AIG's Registration Statement
(File No. 2-44043) and incorporated herein by
reference.
(d) AIG 1984 Employee Stock Purchase Plan .................... Filed as exhibit to AIG's Registration Statement
(File No. 2-91945) and incorporated herein by
reference.
(e) AIG1996 Employee Stock Purchase Plan ..................... Filed as exhibit to AIG's Definitive Proxy
Statement dated April 2, 1996 (File No.
1-8787) and incorporated herein by reference.
(f) AIG 1977 Stock Option and Stock Appreciation
Rights Plan .............................................. Filed as exhibit to AIG's Registration Statement
(File No. 2-59317) and incorporated herein by
reference.
(g) AIG 1982 Employee Stock Option Plan ...................... Filed as exhibit to AIG's Registration Statement
(File No. 2-78291) and incorporated herein by
reference.
(h) AIG 1987 Employee Stock Option Plan ...................... Filed as exhibit to AIG's Definitive Proxy
Statement dated as of April 6, 1987 (File No.
0-4652) and incorporated herein by reference.
(i) AIG 1991 Employee Stock Option Plan ...................... Filed as exhibit to AIG's Definitive Proxy
Statement dated as of April 4, 1997 (File No.
1-8787) and incorporated herein by reference.
(j) AIRCO 1972 Employee Stock Option Plan .................... Incorporated by reference to AIG's Joint Proxy
Statement and Prospectus (File No. 2-61994).
(k) AIRCO 1977 Stock Option and Stock
Appreciation Rights Plan ................................. Incorporated by reference to AIG's Joint Proxy
Statement and Prospectus (File No.2-61994).
(l) Purchase Agreement between AIA and
Mr. E.S.W. Tse. .......................................... Incorporated by reference to Exhibit 10(l) to
AIG's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No.1-8787).
(m) Retention and Employment Agreement between
AIG and Jay S. Wintrob .................................. Filed herewith.
(n) SunAmerica Inc. 1988 Employee Stock Plan ................. Incorporated by reference to Exhibit 4(a) to
AIG's Registration Statement on Form S-8
(File No. 333-70069).
(o) SunAmerica 1997 Employee Incentive Stock Plan ............ Incorporated by reference to Exhibit 4(b) to
AIG's Registration Statement on Form S-8
(File No. 333-70069).
(p) SunAmerica Non-employee Directors' Stock
Option Plan .............................................. Incorporated by reference to Exhibit 4(c) to
AIG's Registration Statement on Form S-8
(File No. 333-70069).
- -------------
** All material contracts are management contracts or compensatory plans or
arrangements.
II-4
86
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------ ----------- --------
(q) SunAmerica 1995 Performance Stock Plan ................... Incorporated by reference to Exhibit 4(d) to
AIG's Registration Statement on Form S-8
(File No. 333-70069).
(r) SunAmerica Inc. 1998 Long-Term Performance-Based
Incentive Plan For the Chief Executive Officer ........... Incorporated by reference to Exhibit 4(e) to
AIG's Registration Statement on Form S-8
(File No. 333-70069).
(s) SunAmerica Inc. Long-Term Performance-Based Incentive
Plan Amended and Restated 1997 ........................... Incorporated by reference to Exhibit 4(e) to
AIG's Registration Statement on Form S-8
(File No. 333-70069).
11 Statement re computation of per share earnings .................... Filed herewith.
12 Statements re computation of ratios ............................... Filed herewith.
13 Annual report to security holders ................................. Not required to be filed.
18 Letter re change in accounting principles ......................... None.
21 Subsidiaries of the Registrant .................................... Filed herewith.
22 Published report regarding matters submitted to vote of
security holders .................................................. None.
23 Consent of PricewaterhouseCoopers LLP ............................. Filed herewith.
24 Power of attorney ................................................. Included on the signature page hereof.
27 Financial Data Schedule ........................................... Provided herewith.
99 Undertakings by the Registrant required by Item 17 of Form S-3 and
Item 21 of Form S-8, deemed to be incorporated by reference into
AIG's Registration Statements on Forms S-3 and S-8 (No. 2-38768,
No.2-44043, No. 2-45346, No. 2-51498, No. 2-59317, No. 2-61858, No.
2-62760, No. 2-64336, No. 2-67600, No. 2-72058, No. 2-75874, No.
2-75875, No. 2-78291, No. 2-87005, No. 2-82989, No. 2-90756, No.
2-91945, No. 2-95589, No. 2- 97439, No. 33-8495, No. 33-13874, No.
33-18073, No. 33-25291, No. 33-41643, No. 33-48996, No. 33-57250,
No. 33-60327, No. 33-60827, No. 33-62821, No. 333-21365, No.
333-48639, No. 333-58095, No. 333-70069 and No. 333-74187) ........ Filed herewith.
II-5
1
Exhibit 3(i)(c)
CERTIFICATE OF MERGER
of
SUNAMERICA INC.
with and into
AMERICAN INTERNATIONAL GROUP, INC.
Pursuant to Section 252(c) of the General Corporation Law of the
State of Delaware, American International Group, Inc., a Delaware corporation,
hereby certifies the following information relating to the merger of SunAmerica
Inc., a Maryland corporation, with and into American International Group, Inc.
(the "Merger"):
1. The name and state of incorporation of each of American
International Group, Inc. and SunAmerica Inc. (the "Constituent Corporations")
are:
Name State
---- -----
American International Group, Inc. Delaware
SunAmerica Inc. Maryland
2. The Agreement and Plan of Merger, dated as of August 19, 1998,
between SunAmerica Inc. and American International Group, Inc. (the "Merger
Agreement"), setting forth the terms and conditions of the Merger, has been
approved, adopted, certified, executed and acknowledged by each of the
Constituent Corporations in accordance with the provisions of Section 252(c) of
the General Corporation Law of the State of Delaware.
3. The name of the surviving corporation is American International
Group, Inc.
4. The Certificate of Incorporation of American International Group,
Inc. in effect immediately prior to the effective time of the merger shall be
the certificate of incorporation of the surviving corporation, without any
change, alteration or amendment pursuant to the merger
5. The executed Merger Agreement is on file at the principal place
of business of the surviving corporation, which is located at 70 Pine Street,
New York, New York 10270.
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6. A copy of the Merger Agreement will be furnished by the surviving
corporation, on request and without cost, to any stockholder of either of the
Constituent Corporations.
7. SunAmerica Inc. is a corporation duly organized and existing
under the laws of the State of Maryland having an authorized capital stock
consisting of 350,000,000 shares of common stock, par value $1.00 per share,
25,000,000 shares of Nontransferable Class B Stock, par value $1.00 per share,
15,000,000 shares of Transferable Class B Stock, par value $1.00 per share, and
20,000,000 shares of preferred stock, no par value.
8. This Certificate of Merger shall become effective on January 1,
1999 at 3:01 a.m. (New York City time).
3
IN WITNESS WHEREOF, American International Group, Inc. has caused
this Certificate of Merger to be executed as of the 30th day of December, 1998.
AMERICAN INTERNATIONAL GROUP, INC.
By: /s/ Howard I. Smith
---------------------------------
Name: Howard I. Smith
Title: Executive Vice President
ATTEST:
By: /s/ Kathleen E. Shannon
---------------------------------
Name: Kathleen E. Shannon
Title: Secretary
1
Exhibit 3(ii)
AMERICAN INTERNATIONAL GROUP, INC.
BY-LAWS
ARTICLE I
Stockholders
Section 1.1. Annual Meetings. An annual meeting of stockholders shall be
held for the election of directors at such date, time and place either within or
without the State of Delaware as may be designated by the Board of Directors
from time to time. Any other proper business may be transacted at the annual
meeting.
Section 1.2. Special Meetings. Special meetings of stockholders for any
purpose or purposes may be called at any time by the Chairman, a Vice Chairman,
if any, the President, if any, the Secretary or the Board of Directors, to be
held at such date, time and place either within or without the State of Delaware
as may be stated in the notice of the meeting. A special meeting of stockholders
shall be called by the Secretary upon the written request, stating the purpose
of the meeting, of stockholders who together own of record twenty-five percent
of the outstanding shares of each class of stock entitled to vote at such
meeting.
Section 1.3. Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of
such meeting to each stockholder entitled to vote at such meeting. If mailed,
such notice shall be deemed to be given when deposited in the United States
mail, postage prepaid, directed to the stockholder at such stockholder's address
as it appears on the records of the Corporation. No business other than that
stated in the notice shall be transacted at any special meeting without the
unanimous consent of all the stockholders entitled to vote thereat.
Section 1.4. Adjournments. Any meeting of stockholders, annual or special,
may adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken;
provided, that if the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. At the adjourned meeting the Corporation may transact any
business which might have been transacted at the original meeting.
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Section 1.5. Quorum. At each meeting of stockholders, except where
otherwise provided by law or the certificate of incorporation or these by-laws,
the holders of a majority of the outstanding shares of each class of stock
entitled to vote at the meeting, present in person or represented by proxy,
shall constitute a quorum. In the absence of a quorum, the stockholders so
present may, by majority vote, adjourn the meeting from time to time in the
manner provided by Section 1.4 of these by-laws until a quorum shall attend.
Shares of its own capital stock belonging on the record date for the meeting to
the Corporation or to another corporation, if a majority of the shares entitled
to vote in the election of directors of such other corporation is held, directly
or indirectly, by the Corporation, shall neither be entitled to vote nor be
counted for quorum purposes; provided, however, that the foregoing shall not
limit the right of the Corporation to vote stock, including but not limited to
its own stock, held by it in a fiduciary capacity.
Section 1.6. Organization. Meetings of stockholders shall be presided over
by the Chairman, or in the absence of the Chairman by a Vice Chairman, if any,
or in the absence of a Vice Chairman by the President, if any, or in the absence
of the President by a Vice President, or in the absence of the foregoing persons
by a chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, or in the absence of the Secretary an Assistant
Secretary shall so act, or in their absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 1.7. Classes or Series of Stock; Voting Proxies. For purposes of
this Article I, two or more classes or series of stock shall be considered a
single class if and to the extent that the holders thereof are entitled to vote
together as a single class at the meeting. Unless otherwise provided in the
certificate of incorporation, each stockholder entitled to vote at any meeting
of stockholders shall be entitled to one vote for each share of stock held by
such stockholder which has voting power upon the matter in question. Each
stockholder entitled to vote at a meeting of stockholders or to express consent
or dissent to corporate action in writing without a meeting may authorize
another person or persons to act for such stockholder by proxy, but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. A duly executed proxy shall be irrevocable
if it states that it is irrevocable and if and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date with the Secretary of
the Corporation. Voting at meetings of stockholders need not be by written
ballot and need not be conducted by inspectors unless the holders of a majority
of the outstanding shares of all classes of stock entitled to vote thereon
present in person or by proxy at such meeting shall so determine. At all
meetings of stockholders for the election of directors a plurality of the votes
cast shall be sufficient to elect. With respect to other matters, unless
otherwise provided by law or by the certificate of incorporation or these
by-laws, the affirmative vote of the holders of a majority of the shares of all
classes of stock present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders,
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provided that (except as otherwise required by law or by the certificate of
incorporation) the Board of Directors may require a larger vote upon any such
matter. Where a separate vote by class is required, the affirmative vote of the
holders of a majority of the shares of each class present in person or
represented by proxy at the meeting shall be the act of such class, except as
otherwise provided by law or by the certificate of incorporation or these
by-laws.
Section 1.8. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
nor less than ten days before the date of any meeting, nor more than sixty days
prior to any other action. If no record date is fixed: (1) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (2) the record date
for determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the board is necessary, shall
be the day on which the first written consent is expressed; and (3) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 1.9. List of Stockholders Entitled to Vote. The Secretary shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 1.10. Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the certificate of incorporation, any action required by law to be
taken at any annual or special meeting of stockholders of the Corporation, or
any action which may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the
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action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 1.11. Advance Notice of Stockholder Nominees for Director and
Other Stockholder Proposals. (a) The matters to be considered and brought before
any annual or special meeting of stockholders of the Corporation shall be
limited to only such matters, including the nomination and election of
directors, as shall be brought properly before such meeting in compliance with
the procedures set forth in this Section 1.11.
(b) For any matter to be properly brought before any annual meeting of
stockholders, the matter must be (i) specified in the notice of annual meeting
given by or at the direction of the Board of Directors, (ii) otherwise brought
before the annual meeting by or at the direction of the Board of Directors or
(iii) brought before the annual meeting in the manner specified in this Section
1.11(b)(x) by a stockholder that holds of record stock of the Corporation
entitled to vote at the annual meeting on such matter (including any election of
a director) or (y) by a person (a "Nominee Holder") that holds such stock
through a nominee or "street name" holder of record of such stock and can
demonstrate to the Corporation such indirect ownership of, and such Nominee
Holder's entitlement to vote, such stock on such matter. In addition to any
other requirements under applicable law, the certificate of incorporation and
these by-laws, persons nominated by stockholders for election as directors of
the Corporation and any other proposals by stockholders shall be properly
brought before an annual meeting of stockholders only if notice of any such
matter to be presented by a stockholder at such meeting (a "Stockholder Notice")
shall be delivered to the Secretary at the principal executive office of the
Corporation not less than ninety nor more than one hundred and twenty days prior
to the first anniversary date of the annual meeting for the preceding year;
provided, however, that if and only if the annual meeting is not scheduled to be
held within a period that commences thirty days before and ends thirty days
after such anniversary date (an annual meeting date outside such period being
referred to herein as an "Other Meeting Date"), such Stockholder Notice shall be
given in the manner provided herein by the later of (i) the close of business on
the date ninety days prior to such Other Meeting Date or (ii) the close of
business on the tenth day following the date on which such Other Meeting Date is
first publicly announced or disclosed. Any stockholder desiring to nominate any
person or persons (as the case may be) for election as a director or directors
of the Corporation at an annual meeting of stockholders shall deliver, as part
of such Stockholder Notice, a statement in writing setting forth the name of the
person or persons to be nominated, the number and class of all shares of each
class of stock of the Corporation owned of record and beneficially by each such
person, as reported to such stockholder by such person, the information
regarding each such person required by paragraphs (a), (e) and (f) of Item 401
of Regulation S-K adopted by the Securities and Exchange Commission, each such
person's signed consent to serve as a director of the Corporation if elected,
such stockholder's name and address, the number and class of all shares of each
class of stock of the Corporation owned of record and beneficially by such
stockholder and, in the case of a Nominee Holder, evidence establishing such
Nominee Holder's indirect ownership of stock and entitlement to vote such stock
for the election of directors at the annual meeting. Any stockholder who gives a
Stockholder Notice of any matter (other than a nomination for director) proposed
to be brought before an annual meeting of stockholders shall deliver, as part of
such Stockholder Notice, the text of the proposal to be presented and a brief
written statement of the reasons why such stockholder favors the proposal and
setting forth such stockholder's name and address, the number and class of all
shares of each class of stock of the Corporation owned of
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record and beneficially by such stockholder, any material interest of such
stockholder in the matter proposed (other than as a stockholder), if applicable,
and, in the case of a Nominee Holder, evidence establishing such Nominee
Holder's indirect ownership of stock and entitlement to vote such stock on the
matter proposed at the annual meeting. As used in these by-laws, shares
"beneficially owned" shall mean all shares which such person is deemed to
beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange
Act of 1934 (the "Exchange Act"). If a stockholder is entitled to vote only for
a specific class or category of directors at a meeting (annual or special), such
stockholder's right to nominate one or more individuals for election as a
director at the meeting shall be limited to such class or category of directors.
Notwithstanding any provision of this Section 1.11 to the contrary, in the
event that the number of directors to be elected to the Board of Directors of
the Corporation at the next annual meeting of stockholders is increased by
virtue of an increase in the size of the Board of Directors and either all of
the nominees for director at the next annual meeting of stockholders or the size
of the increased Board of Directors is not publicly announced or disclosed by
the Corporation at least one hundred days prior to the first anniversary of the
preceding year's annual meeting, a Stockholder Notice shall also be considered
timely hereunder, but only with respect to nominees to stand for election at the
next annual meeting as the result of any new positions created by such increase,
if it shall be delivered to the Secretary at the principal executive office of
the Corporation not later than the close of business on the tenth day following
the first day on which all such nominees or the size of the increased Board of
Directors shall have been publicly announced or disclosed.
(c) Except as provided in the immediately following sentence, no matter
shall be properly brought before a special meeting of stockholders unless such
matter shall have been brought before the meeting pursuant to the Corporation's
notice of such meeting. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any stockholder entitled to vote for the election of such director(s)
at such meeting may nominate a person or persons (as the case may be) for
election to such position(s) as are specified in the Corporation's notice of
such meeting, but only if the Stockholder Notice required by Section 1.11(b)
hereof shall be delivered to the Secretary at the principal executive office of
the Corporation not later than the close of business on the tenth day following
the first day on which the date of the special meeting and either the names of
all nominees proposed by the Board of Directors to be elected at such meeting or
the number of directors to be elected shall have been publicly announced or
disclosed.
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(d) For purposes of this Section 1.11, a matter shall be deemed to have
been "publicly announced or disclosed" if such matter is disclosed in a press
release reported by the Dow Jones News Service, the Associated Press or a
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission.
(e) In no event shall the adjournment of an annual meeting or a special
meeting, or any announcement thereof, commence a new period for the giving of
notice as provided in this Section 1.11. This Section 1.11 shall not apply to
(i) any stockholder proposal made pursuant to Rule 14a-8 under the Exchange Act
or (ii) any nomination of a director in an election in which only the holders of
one or more series of Preferred Stock of the Corporation issued pursuant to
Article FOUR of the certificate of incorporation are entitled to vote (unless
otherwise provided in the terms of such stock).
(f) The chairman of any meeting of stockholders, in addition to making any
other determinations that may be appropriate to the conduct of the meeting,
shall have the power and duty to determine whether notice of nominees and other
matters proposed to be brought before a meeting has been duly given in the
manner provided in this Section 1.11 and, if not so given, shall direct and
declare at the meeting that such nominees and other matters shall not be
considered.
Section 1.12. Approval of Stockholder Proposals. Except as otherwise
required by law, any matter (other than a nomination for director) that has been
properly brought before an annual or special meeting of stockholders of the
Corporation by a stockholder (including a Nominee Holder) in compliance with the
procedures set forth in Section 1.11 shall require for approval thereof the
affirmative vote of the holders of not less than a majority of all outstanding
shares of Common Stock of the Corporation and all other outstanding shares of
stock of the Corporation entitled to vote on such matter, with such outstanding
shares of Common Stock and other stock considered for this purpose as a single
class. Any vote of stockholders required by this Section 1.12 shall be in
addition to any other vote of stockholders of the Corporation that may be
required by law, the certificate of incorporation or these by-laws, by any
agreement with a national securities exchange or otherwise.
ARTICLE II
Board of Directors
Section 2.1. Powers; Number; Qualifications. The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors, except as may be otherwise provided by law or in the certificate of
incorporation. The Board shall consist of not less than seven nor more than 21
members, the number thereof to be determined from time to time by the Board;
provided, however, that in determining the number of directors no account shall
be taken of any non-voting director, including any
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advisory or honorary director, that may be elected from time to time by a
majority of the Board of Directors. The number of directors may be increased by
amendment of these by-laws by the affirmative vote of a majority of the
directors then in office, although less than a quorum, or by the affirmative
vote of the holders of a majority of the outstanding shares of all classes of
stock entitled to vote thereon, and by like vote the additional directors may be
elected to hold office until the next succeeding annual meeting of stockholders
and until their respective successors are elected and qualified or until their
respective earlier resignations or removals. Directors need not be stockholders.
Section 2.2. Election; Term of Office; Resignation; Removal; Vacancies.
Each director shall hold office until the annual meeting of stockholders next
succeeding his or her election and until his or her successor is elected and
qualified or until his or her earlier resignation or removal. Any director may
resign at any time upon written notice to the Board of Directors or to the
Chairman or the Secretary of the Corporation. Such resignation shall take effect
at the time specified therein, and no acceptance of such resignation shall be
necessary to make it effective. Any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; and any vacancy so
created may be filled by the holders of a majority of the shares then entitled
to vote at an election of directors. Whenever the holders of any class or series
of stock are entitled to elect one or more directors by the provisions of the
certificate of incorporation, the provisions of the preceding sentence shall
apply, in respect to the removal without cause of a director or directors so
elected, to the vote of the holders of the outstanding shares of that class or
series and not to the vote of the outstanding shares as a whole. Unless
otherwise provided in the certificate of incorporation or these by-laws,
vacancies (other than any vacancy created by removal of a director by
shareholder vote) and newly created directorships resulting from any increase in
the authorized number of directors elected by all of the stockholders having the
right to vote as a single class or from any other cause may be filled by a
majority of the directors then in office, although less than a quorum, or by the
sole remaining director. Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may, unless otherwise provided in the
certificate of incorporation, be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by the sole
remaining director so elected.
Section 2.3. Regular Meetings. Regular meetings of the Board of Directors
may be held at such places within or without the State of Delaware and at such
times as the Board may from time to time determine, and if so determined notice
thereof need not be given.
Section 2.4. Special Meetings. Special meetings of the Board of Directors
may be held at any time or place within or without the State of Delaware
whenever called by the Chairman or by the Secretary on the written request of
any two directors. Reasonable notice thereof shall be given by the person
calling the meeting.
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Section 2.5. Participation in Meetings by Conference Telephone Permitted.
Unless otherwise restricted by the certificate of incorporation or these
by-laws, members of the Board of Directors, or any committee designated by the
Board, may participate in a meeting of the Board or of such committee, as the
case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this by-law shall
constitute presence in person at such meeting.
Section 2.6. Quorum; Vote Required for Action. At all meetings of the
Board of Directors a majority of the entire Board shall constitute a quorum for
the transaction of business. The vote of a majority of the directors present at
a meeting at which a quorum is present shall be the act of the Board unless the
certificate of incorporation or these by-laws shall require a vote of a greater
number. In case at any meeting of the Board a quorum shall not be present, a
majority of the members of the Board present may adjourn the meeting from time
to time until a quorum shall attend, and notice need not be given of any such
adjourned meeting if the time and place thereof are announced at the meeting at
which adjournment is taken.
Section 2.7. Organization. Meetings of the Board of Directors shall be
presided over by the Chairman, or in the absence of the Chairman by a Vice
Chairman, if any, or in the absence of a Vice Chairman by the President, if any,
or in their absence by a chairman chosen at the meeting. The Secretary, or in
the absence of the Secretary an Assistant Secretary, shall act as secretary of
the meeting, but in the absence of the Secretary and any Assistant Secretary the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.8. Action by Directors Without a Meeting. Unless otherwise
restricted by the certificate of incorporation or these by-laws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
Section 2.9. Compensation of Directors. The Board of Directors shall have
the authority to fix the compensation of directors.
ARTICLE III
Committees
Section 3.1. Committees. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of two or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or
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disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent permitted by applicable law and
provided in the resolution of the Board or in these by-laws, shall have and may
exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Such committee or
committees shall have such name or names as may be stated in these by-laws or as
may be determined from time to time by resolution adopted by the Board of
Directors. The committees shall keep regular minutes of their proceedings and
report the same to the Board of Directors when required. If the committee is for
the purpose of managing the business of a division of the Corporation, at the
option of the Board of Directors and provided that two directors serve on such
committee, one or more of the members of the committee may be an officer or
officers or employee or employees of the Corporation or a subsidiary thereof who
are not directors, provided further that neither the quorum nor any action of
the committee shall be determined by the presence or vote of any such member who
is not a director.
The Executive Committee, if one shall be designated, to the extent
permitted by applicable law shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it. Except as otherwise provided from
time to time in resolutions passed by a majority of the whole Board of
Directors, the powers and authority of the Executive Committee shall include the
power and authority to declare a dividend on stock, to authorize the issuance of
stock and to adopt a certificate of ownership and merger pursuant to Section 253
of the Delaware General Corporation Law.
The Audit Committee, if one shall be designated, shall be composed of at
least three directors, all of whom shall be persons who are not officers or
employees of the Corporation or any of its parents or affiliates. Such Committee
shall have the duty to advise the Board of Directors and the officers generally
in matters relating to audits of the records of account of the Corporation and
its subsidiaries. Such Committee shall recommend to the Board of Directors the
nomination of the independent public accountants for the ensuing fiscal year,
shall meet from time to time with the independent public accountants to review
the scope of any proposed audit and to review the financial statements of the
Corporation and its subsidiaries and the public accountants' certificate
relating thereto, and may also meet with such internal auditors as may be
employed by the Corporation or its subsidiaries.
The Finance Committee, if one shall be designated, shall direct the
financial and investment policy of the Corporation. Subject to the control of
the Board of Directors, it shall have power to invest and reinvest the assets of
the Corporation in such securities or other property as it may elect and to
change such investments at such time or times as it
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may deem proper, all subject to the requirements of law, and to assist, counsel
and advise the Finance and Investment Committees of the Corporation's
subsidiaries. All action taken by the Finance Committee shall be reported to the
Board at its meeting next succeeding such action.
Section 3.2. Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board may adopt, amend and repeal
rules for the conduct of its business. In the absence of a provision by the
Board or a provision in the rules of such committee to the contrary, a majority
of the members of such committee shall constitute a quorum for the transaction
of business, the vote of a majority of the members present at a meeting at the
time of such vote if a quorum is then present shall be the act of such
committee, and in other respects each committee shall conduct its business in
the same manner as the Board conducts its business pursuant to Article II of
these by-laws.
ARTICLE IV
Officers
Section 4.1. Officers; Election. As soon as practicable after the annual
meeting of stockholders in each year, the Board of Directors shall elect a
Chairman and a Secretary, and it may, if it so determines, elect one or more
Vice Chairman and a President. The Board may also elect one or more Vice
Presidents, one or more Assistant Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers and such other
officers as the Board may deem desirable or appropriate and may give any of them
such further designations or alternate titles as it considers desirable. Any
number of offices may be held by the same person.
Section 4.2. Term of Office; Resignation; Removal; Vacancies. Except as
otherwise provided in the resolution of the Board of Directors electing any
officer each officer shall hold office until the first meeting of the Board
after the annual meeting of stockholders next succeeding his or her election,
and until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Any officer may resign at any time upon written
notice to the Board or to the Chairman or the Secretary of the Corporation. Such
resignation shall take effect at the time specified therein, and no acceptance
of such resignation shall be necessary to make it effective. The Board may
remove any officer with or without cause at any time. Any such removal shall be
without prejudice to the contractual rights of such officer, if any, with the
Corporation, but the election of an officer shall not of itself create
contractual rights. Any vacancy occurring in any office of the Corporation by
death, resignation, removal or otherwise may be filled for the unexpired portion
of the term by the Board at any regular or special meeting.
Section 4.3. Chairman. The Chairman shall preside at all meetings of the
Board of Directors and of the stockholders at which he or she shall be present.
The Chairman shall be the chief executive officer and shall have general charge
and supervision of the
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business of the Corporation and, in general, shall perform all duties incident
to the office of chairman of a corporation and such other duties as may, from
time to time, be assigned to him or her by the Board or as may be provided by
law.
Section 4.4. Vice Chairman. In the absence of the Chairman, a Vice
Chairman, if any, shall preside at all meetings of the Board of Directors and of
the stockholders at which he or she shall be present and shall have and may
exercise such powers as may, from time to time, be assigned to him or her by the
Board or as may be provided by law.
Section 4.5. President. In the absence of the Chairman and a Vice
Chairman, the President, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he or she shall be present and shall
have and may exercise such powers as may, from time to time, be assigned to him
or her by the Board or as may be provided by law.
Section 4.6. Vice Presidents. The Vice President or Vice Presidents, at
the request or in the absence of the President or during the President's
inability to act, shall perform the duties of the President, and when so acting
shall have the powers of the President. Vice Presidents include all Executive
Vice Presidents and Senior Vice Presidents. If there be more than one Vice
President, the Board of Directors may determine which one or more of the Vice
Presidents shall perform any of such duties; or if such determination is not
made by the Board, the Chairman may make such determination; otherwise any of
the Vice Presidents may perform any of such duties. The Vice President or Vice
Presidents shall have such other powers and shall perform such other duties as
may, from time to time, be assigned to him or her or them by the Board or the
Chairman or as may be provided by law.
Section 4.7. Secretary. The Secretary shall have the duty to record the
proceedings of the meetings of the stockholders, the Board of Directors and any
committees in a book to be kept for that purpose, shall see that all notices are
duly given in accordance with the provisions of these by-laws or as required by
law, shall be custodian of the records of the Corporation, may affix the
corporate seal to any document the execution of which, on behalf of the
Corporation, is duly authorized, and when so affixed may attest the same, and,
in general, shall perform all duties incident to the office of secretary of a
corporation and such other duties as may, from time to time, be assigned to him
or her by the Board or the Chairman or as may be provided by law.
Section 4.8. Treasurer. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation and shall deposit or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust companies
or other depositories as shall, from time to time, be selected by or under
authority of the Board of Directors. If required by the Board, the Treasurer
shall give a bond for the faithful discharge of his or her duties, with such
surety or sureties as the Board may determine. The Treasurer shall keep or cause
to be kept full and accurate records of all receipts and disbursements in books
of the Corporation, shall
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render to the Chairman and to the Board, whenever requested, an account of the
financial condition of the Corporation, and, in general, shall perform all the
duties incident to the office of treasurer of a corporation and such other
duties as may, from time to time, be assigned to him or her by the Board or the
Chairman or as may be provided by law.
Section 4.9. Other Officers. The other officers, if any, of the
Corporation, including any Assistant Vice Presidents, shall have such powers and
duties in the management of the Corporation as shall be stated in a resolution
of the Board of Directors which is not inconsistent with these by-laws and, to
the extent not so stated, as generally pertain to their respective offices,
subject to the control of the Board. The Board may require any officer, agent or
employee to give security for the faithful performance of his or her duties.
ARTICLE V
Stock
Section 5.1. Certificates. Every holder of stock in the Corporation shall
be entitled to have a certificate signed by or in the name of the Corporation by
the Chairman or a Vice Chairman, if any, or the President, if any, or a Vice
President and by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary, of the Corporation, certifying the number of shares owned
by such holder in the Corporation. If such certificate is manually signed by one
officer or manually countersigned by a transfer agent or by a registrar, any
other signature on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent or registrar at the date of issue.
Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The Corporation may issue a new certificate of stock in the place
of any certificate theretofore issued by it, alleged to have been lost, stolen
or destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or such owner's legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
ARTICLE VI
Miscellaneous
Section 6.1. Fiscal Year. The fiscal year of the Corporation shall be the
calendar year.
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Section 6.2. Seal. The Corporation may have a corporate seal which shall
have the name of the Corporation inscribed thereon and shall be in such form as
may be approved from time to time by the Board of Directors. The corporate seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
in any other manner reproduced.
Section 6.3. Waiver of Notice of Meetings of Stockholders, Directors and
Committees. Whenever notice is required to be given by law or under any
provision of the certificate of incorporation or these by-laws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors or members of a committee of directors need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these by-laws.
Section 6.4. Indemnification of Directors, Officers and Employees. The
Corporation shall indemnify to the full extent authorized by law any person made
or threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or such person's testator or intestate is or
was a director, officer or employee of the Corporation or serves or served at
the request of the Corporation any other enterprise as a director, officer,
employee or agent. For purposes of this by-law, the term "Corporation" shall
include any predecessor of the Corporation and any constituent corporation
(including any constituent of a constituent) absorbed by the Corporation in a
consolidation or merger: the term "other enterprise" shall include any
corporation, partnership, joint venture, trust or employee benefit plan; service
"at the request of the Corporation" shall include service as a director, officer
or employee of the Corporation which imposes duties on, or involves services by,
such director, officer or employee with respect to an employee benefit plan, its
participants or beneficiaries; any excise taxes assessed on a person with
respect to an employee benefit plan shall be deemed to be indemnifiable
expenses; and action by a person with respect to an employee benefit plan which
such person reasonably believes to be in the interest of the participants and
beneficiaries of such plan shall be deemed to be action not opposed to the best
interests of the Corporation.
Section 6.5. Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or her or their
votes are counted for such
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purpose,if: (1) the material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the Board or the
committee, and the Board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or (2)
the material facts as to his or her relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or (3) the contract or transaction is
fair as to the Corporation as of the time it is authorized, approved or
ratified, by the Board, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board or of a committee which authorizes the contract or
transaction.
Section 6.6. Form of Records. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of account
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs or any other information storage device,
provided that the records so kept can be converted into clearly legible form
within a reasonable time. The Corporation shall so convert any records so kept
upon the request of any person entitled to inspect the same.
Section 6.7. Dividends. Subject to the provisions of the certificate of
incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the Corporation as and when they deem expedient. Before declaring any
dividend, the Board may cause to be set apart out of any funds of the
Corporation available for dividends, such sum or sums as the directors from time
to time in their discretion deem proper for working capital or as a reserve fund
to meet contingencies or for equalizing dividends or for such other purposes as
the directors shall deem conducive to the interests of the Corporation.
Section 6.8. Checks. All checks, drafts or other orders for the payment of
money, notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed by such officer or officers, agent or agents of the
Corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
Section 6.9. Amendment of By-Laws. These by-laws may be amended or
repealed, and new by-laws adopted, by the affirmative vote of a majority of the
Board of Directors, but the holders of a majority of the shares then entitled to
vote may adopt additional by-laws and may amend or repeal any by-law whether or
not adopted by them.
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Exhibit 10(m)
RETENTION AND EMPLOYMENT AGREEMENT
AGREEMENT by and among SunAmerica Inc., a Maryland corporation (the
"Company"), and Jay Wintrob (the "Executive"), dated as of the 2lst day of
December, 1998.
1. Employment Period. Subject to the consummation of the
transactions contemplated by the Agreement and Plan of Merger (the "Merger
Agreement") dated as of August 19, 1998 between the Company and American
International Group, Inc., a Delaware corporation ("AIG"), the Company hereby
agrees to continue to employ the Executive, and the Executive hereby agrees to
remain in the employ of the Company subject to the terms and conditions of this
Agreement, for the period commencing on the closing date of the transactions
contemplated by the Merger Agreement (the "Commencement Date") and ending on the
third anniversary thereof (the "Employment Period").
2. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, the Executive shall be based at the location set forth on
Exhibit A attached hereto, and shall have a title and responsibilities no less
significant than those set forth on Exhibit A.
(ii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote full attention and time during normal business hours to the
business and affairs of the Company and to use the Executive's reasonable best
efforts to perform such responsibilities in a professional manner in accordance
with the Company's written policies regarding professional and ethical conduct.
Subject to prior approval to the extent required in accordance with Company
Policy 1OOOA, it shall not be a violation of this Agreement for the executive to
serve on corporate, civic or charitable boards or committees, or manage personal
investments, so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement.
(b) Compensation. (i) Base Salary. During the Employment
Period, the Executive shall receive an annual base salary (the "Annual Base
Salary") of not less than the annual base salary in effect with respect to the
Executive immediately prior to the Commencement Date. The Annual Base Salary
shall be paid no less frequently than in equal monthly installments.
(ii) Annual Bonus. During the Employment Period, the Executive
shall be entitled to participate in all bonus and incentive compensation plans,
practices, policies and programs (the "Compensation Plans") available generally
to other peer executives of the Company and its affiliated companies. For
purposes of this Agreement, the phrase "peer executives of the Company and its
affiliated companies" shall mean those officers of SunAmerica Inc. and its
affiliated companies and, following the Commencement Date, those officers of the
subsidiaries and business units of AIG that continue the business operations of
SunAmerica Inc. and its affiliated companies, that have a level of title, duties
and responsibilities comparable to the Executive. Such Compensation Plans shall
provide the Executive with the opportunity under reasonable expectations of
Company performance to earn annually an amount
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of cash bonus and incentive compensation at least equal, in the aggregate, to
the average annual cash bonus and incentive compensation earned by the Executive
(including any portions thereof deferred into the SunAmerica Inc. Executive
Savings Plan (the "ESP") or applied to reimburse the Company for an earlier
advance) with respect to the Company's two full fiscal years immediately
preceding the Commencement Date.
(iii) Retention Bonus. Subject to the provisions of Section
4(a), on the third anniversary of the Commencement Date, the Executive shall be
entitled to a cash bonus in the amount set forth on Exhibit A hereto (the
"Retention Bonus"), provided that the Executive has been continuously employed
by the Company and/or any of its affiliates from the Commencement Date through
the third anniversary of the Commencement Date. The Retention Bonus will be paid
to the Executive within 10 business days after the third anniversary of the
Commencement Date unless, prior to the second anniversary of the Commencement
Date, the Executive elects to have such Retention Bonus deferred and paid in one
or more periodic installments in accordance with the ESP (or a successor plan)
or deferred on such other terms as may be agreed to by the Company and the
Executive.
(iv) Savings, Retirement and Incentive Plans. During the
Employment Period, the Executive shall be eligible to participate in the
Company's savings, retirement and incentive plans, practices, policies and
programs in which the Executive participated immediately prior to the
Commencement Date and, if such plans, practices, policies, and programs are not
continued, in all savings, retirement and incentive plans, practices, policies
and programs to the extent applicable to other peer executives of the Company
and its affiliates; provided that, in all circumstances, the cash and
equity-based incentive awards and rights granted to the Executive prior to the
Commencement Date, as listed on Exhibit B hereto, shall continue to be honored
and shall remain outstanding, notwithstanding any prior termination or
suspension of the applicable Company plan pursuant to which they were awarded.
During the period from the Commencement Date through the first anniversary
thereof, the benefits provided to the Executive under such plans, practices,
policies and programs will be substantially similar in the aggregate to those
currently provided by the Company to the Executive (except with respect to
additional awards following the Commencement Date under plans involving the
issuance of shares). For purposes of all such plans, the Executive shall receive
full credit for all service with the company prior to the Commencement Date for
purposes of eligibility to participate and receive benefits and vesting, but not
for benefit accruals or the amount or level of employer contributions in any AIG
retirement plan.
(v) Welfare and Other Benefit Plans. During the Employment
Period, the Executive and/or the Executive's family, as the case may be, shall
be eligible for participation in and shall receive all benefits under welfare,
fringe, vacation and other similar benefit plans, practices, policies and
programs in effect with respect to peer executives of the Company and its
affiliated companies (including, without limitation, medical, prescription,
dental, disability, employee life, group life, accidental death and travel
accident insurance plans and programs) on the same basis as peer executives of
the Company and its affiliated companies. During the period from the
Commencement Date through the first anniversary thereof, the benefits provided
to the Executive under such plans, practices, policies and programs will be
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substantially similar in the aggregate to those currently provided by the
Company to the Executive. For purposes of all such plans, the Executive shall
receive full credit for all service with the Company prior to the Commencement
Date for all purposes, except for benefit levels or amounts under any AIG
welfare benefit plans. With respect to welfare benefit plans, any preexisting
condition exclusions and eligibility waiting periods thereunder shall be waived
with respect to the Executive and the Executive's eligible dependents and any
covered expenses incurred on or before the Commencement Date shall be taken into
account for purposes of satisfying applicable deductibles and annual
out-of-pocket limits after the Commencement Date.
(vi) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable business
expenses incurred by the Executive, in accordance with the policies of the
Company.
(vii) Indemnity. The Executive shall be indemnified by the
Company against claims arising in connection with the Executive's status as an
employee, officer, director or agent of the Company or any of its affiliates in
accordance with the Company's indemnity policies for its senior executives.
(viii) Vacation. During the Employment Period, the Executive
shall be entitled to annual vacation at least equal to the number of weeks of
paid vacation per year that the Executive was entitled to immediately prior to
the Commencement Date.
(ix) Perquisites. During the Employment Period, the Executive
will receive perquisites no less favorable than those received by peer
executives of the Company and its affiliates.
3. Termination of Employment. (a) Death or Disability. The
Executive's employment shall terminate automatically upon the Executive's death
during the Employment Period. If the Company determines in good faith that the
Executive has suffered a Disability during the Employment Period (pursuant to
the definition of Disability set forth below), it may give to the Executive
written notice in accordance with Section 10(b) of this Agreement of its
intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the Executive
shall not have returned to full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" shall mean the absence of the Executive
from the Executive's duties with the Company on a full-time basis for 120
consecutive days (or, if longer, the period required for coverage under the
Company's long-term disability plan under which the Executive is covered) as a
result of incapacity due to mental or physical illness or injury.
(b) Cause. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Agreement. "Cause"
shall mean:
(i) gross misconduct by the Executive intending to cause
damage to the Company, or (ii) a material breach by Executive of this Agreement,
which is not remedied within
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30 days after receipt of written notice from the Company delivered to the
Executive within 90 days after the Company first became aware of such claimed
act or breach describing such claimed act or breach and setting forth the
Company's intention to terminate the employment of the Executive if such breach
is not remedied. No breach, act or failure to act on the Executive's part shall
constitute "Cause" if such breach, act or failure to act resulted from the
Executive's incapacity due to physical or mental illness or injury or a
resignation by the Executive for Good Reason.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean a material breach by the Company of this Agreement, which is not remedied
within 30 days after receipt of written notice from the Executive delivered to
the Company within 90 days after the Executive first became aware of such
claimed breach describing such claimed breach and setting forth the Executive's
intention to terminate his employment if such breach is not remedied, including
(i) any action or failure to act by the Company which results in the Executive's
position, authority or duties being reduced in any material respect below the
level specified in Section 2(a)(i) and Exhibit A of this Agreement, (ii) any
failure by the Company to comply in any material respect with the provisions of
Section 2(b) of this Agreement, (iii) relocation of the Executive's principal
place of employment to any location that is more than 50 miles from the location
specified in Section 2(a)(i) and Exhibit A of this Agreement, (iv) any purported
termination by the Company of the Executive's employment otherwise than as
expressly permitted by this Agreement, or (v) the failure of the Company to
obtain an agreement reasonably satisfactory to the Executive from any successor
to assume and agree to perform this Agreement, as contemplated in Section 8
hereof or, if the business for which the Executive's services are principally
performed is sold or transferred, the failure of the Company to obtain such an
agreement from the purchaser or transferee of such business.
(d) Notice of Termination. Any termination by the Company for Cause,
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 10(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) specifies
the termination date (which date shall be not more than 30 days after the giving
of such notice). The failure by the Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company, respectively,
from asserting such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date that is one day after the last day of the
cure period, to the extent applicable, or such later date set forth in the
Notice of Termination, (ii) if the Executive's employment is terminated by
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the Company other than for Cause or Disability, or the Executive resigns without
Good Reason, the Date of Termination shall be the date on which the Company or
the Executive notifies the Executive or the Company, respectively, of such
termination and (iii) if the Executive's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
4. Obligations of the Company upon Termination. (a) Good Reason;
Other Than for Cause. If, during the Employment Period, the Company shall
terminate the Executive's employment other than for Cause, including by reason
of the Executive's death or Disability, or the Executive shall terminate
employment for Good Reason:
(i) The Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the sum of (1) the Executive's
Annual Base Salary through the Date of Termination, (2) the product of (x) an
amount equal to the average annual cash bonus and incentive compensation earned
by the Executive (including any portions thereof deferred into the ESP or
applied to reimburse the Company for an earlier advance) with respect to the
Company's two full fiscal years immediately preceding the Commencement Date and
(y) a fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of which is
365, and (3) any compensation previously deferred by the Executive (together
with any accrued interest or earnings thereon), unless the Executive has
previously instructed the Company to pay such deferred amounts in a lump sum or
in periodic installments in accordance with the terms of a previous deferral
election, in each case to the extent not theretofore paid (the sum of the
amounts described in clauses (1), (2) and (3) shall be hereinafter referred to
as the "Accrued Obligations"); and
(ii) the Company shall pay to the Executive in a lump sum in
cash within 30 days of the Date of Termination an amount equal to the Retention
Bonus to the extent not theretofore paid; and
(iii) for the 15-month period following the Date of
Termination, the Executive shall continue to be provided with the benefits and
rights described in Section 2(b)(iv) and shall be deemed to be employed by the
Company for purposes of all benefits and rights described therein, provided that
the Executive shall not be entitled to additional awards under any of the
Company's incentive plans and shall cease to accrue additional benefits (other
than earnings on amounts maintained in the Company's 401(k) and deferred
compensation plans in accordance with their terms) under any qualified and
nonqualified retirement plans; and
(iv) for the 12-month period following the Date of
Termination, the Executive and the Executive's dependents shall continue to be
eligible to participate in the medical, dental, health, life and other welfare
benefit plans and arrangements applicable to the Executive immediately prior to
the Date of Termination on the same terms and conditions (including the amount
of the Executive's required contributory premium payments) in effect for the
Executive and the Executive's dependents immediately prior to the Date of
Termination; and
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(v) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts or
benefits required to be paid or provided or which the Executive is entitled to
receive under any plan, program, policy or practice or contract or agreement of
the Company and its affiliated companies, including, without limitation,
benefits under outstanding awards (as set forth in Exhibit B hereto) granted to
the Executive, but excluding any broad-based severance plan or policy (such
other amounts and benefits shall be hereinafter referred to as the "Other
Benefits").
(b) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause or the Executive terminates employment without
Good Reason during the Employment Period, the Company shall (x) pay to the
Executive in a lump sum in cash within 30 days after the Date of Termination the
Accrued Obligations less the amount determined under Section 4(a)(i)(2), and (y)
timely pay or provide to the Executive the Other Benefits, in each case to the
extent theretofore unpaid.
(c) Release. If the Executive's employment shall terminate during
the Employment Period, the Executive agrees, upon payment to the Executive of
all amounts due under Section 4(a) or 4(b), as applicable, to execute a release
of claims in the form of Exhibit C hereto.
5. Binding Arbitration. Any controversy or claim arising out of or
relating to this Agreement (including any claims relating to employment or the
termination of employment, whether arising under federal, state or local law and
whether in contract or in tort and including any discrimination or common law
claims, but excluding workers' compensation and unemployment insurance) shall at
the request of either party be determined by arbitration. The arbitration shall
be conducted in Los Angeles, California, in accordance with the United States
Arbitration Act (Title 9, United States Code), notwithstanding any choice of law
provision in this Agreement, and under the rules of the American Arbitration
Association. The dispute shall be submitted to a single arbitrator to be
mutually agreed upon by the parties. If the parties cannot agree on a single
arbitrator, each party shall appoint one arbitrator who shall then jointly
appoint a single arbitrator. The arbitrator shall give effect to applicable
statutes of limitations. Any controversy concerning whether an issue is
arbitrable shall be determined by the arbitrator. Judgment upon the arbitration
award may be entered in any court having jurisdiction. The institution and
maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief. The Company agrees to
pay for the costs of arbitration and shall reimburse the Executive for his
reasonable attorneys' fees, provided the Executive prevails on at least one
material issue in the arbitration.
6. Confidential Information/Nonsolicitation. (a) The Executive
shall hold in a fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or any of
its affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during the Executive's employment by the Company or
any of its affiliated companies and which shall not be or become
-6-
7
public knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it or to an attorney retained by the
Executive.
(b) While employed by the Company or any of its affiliates and for
one year after the Executive's termination of employment, the Executive will
not, directly or indirectly, on behalf of the Executive or any other person, (i)
solicit for employment by other than the Company any person employed by the
Company or its affiliates (or any independent contractor involved in the sale or
manufacture of products sold or manufactured by the Company or any of its
affiliates) at the Commencement Date, nor will the Executive, directly or
indirectly, on behalf of the Executive or any other person, solicit for
employment by other than the Company any person known by the Executive to be
employed (or to be an independent contractor involved in the sale or manufacture
of products sold or manufactured by the Company or any of its affiliates) at the
time by the Company or its affiliates; (ii) make any public statement concerning
the Company, any of its affiliates or subsidiaries, or Executive's employment
unless previously approved by the Company, except as may be required by law or
legal process; (iii) induce, attempt to induce or knowingly encourage any
Customer (as defined below) to divert any business or income from the Company or
any of its affiliates or to stop or alter the manner in which they are then
doing business with the Company or any of its affiliates; or (iv) induce,
attempt to induce or knowingly encourage, directly or through an intermediary
such as a registered representative, insurance agent or a broker-dealer firm,
any contractholder, shareholder or client, as the case may be, to cancel,
surrender, lapse or not renew any insurance or annuity policy, mutual fund
shares or trust services offered by a subsidiary of the Company. The term
"Customer" shall mean any individual or business firm that was or is a customer
or client of, or one that was or is a party in a selling agreement with, or
whose business was actively solicited by, the Company or any of its affiliates
at any time, regardless of whether such customer was generated, in whole or in
part, by Executive's efforts.
(c) The provisions of this Section 6 shall remain in full force and
effect as specified herein notwithstanding the earlier termination of the
Executive's employment hereunder.
7. Specific Performance. The Executive acknowledges that a violation
on his part of any of the covenants contained in Section 6 hereof would cause
immeasurable and irreparable damage to the Company and that damages would be
inadequate and insufficient. Accordingly, the Executive agrees that the Company
shall be entitled to injunctive relief in any court of competent jurisdiction
for any actual or threatened violation of any such covenant in addition to any
other remedies it may have. The Executive agrees that in the event that any
arbitrator or court of competent jurisdiction shall finally hold that any
provision of Section 6 hereof is void or constitutes an unreasonable restriction
against the Executive, the provisions of such Section 6 shall not be rendered
void but shall apply to such extent as such arbitrator or court may determine
constitutes a reasonable restriction under the circumstances.
-7-
8
8. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, or any business
of the Company for which the Executive's services are principally performed, to
assume expressly and agree to perform this Agreement. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which assumes this Agreement by
operation of law, or otherwise. As used herein, the terms "affiliates" and
"affiliated companies" shall mean any company controlled by, controlling or
under common control with the Company; and the term "Agreement" shall mean this
Retention and Employment Agreement and the Exhibits hereto, which are
incorporated herein and made a part hereof.
9. Indemnification by the Company. (a) Based on the information and
calculations supplied by the Company and its advisors, the Company and the
Executive believe that no excise tax will be imposed under Section 4999 of the
Code on any payments, distributions or other items included or includable in
income from the Company to or for the benefit of the Executive. However, as a
result of the uncertainty of the application of Section 4999, and subject to the
Company's rights under Section 9(b) hereof, if it shall be determined that any
such payment, distribution or other item included or includable in income from
the Company to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 9) (a "Payment") is or will be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Company shall indemnify the Executive against and hold
the Executive harmless, on an after-tax basis, from such Excise Tax and shall
promptly pay to the Executive an amount in cash (the "Indemnification Payment")
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Indemnification Payment, the Executive retains
an amount of the Indemnification Payment equal to the Excise Tax imposed upon
the Payments.
(b) The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Executive of the Excise Tax and, as a result, payment by the Company of
the Indemnification Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of
-8-
9
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which he or she gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to such
claim is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. The Company shall control
all proceedings taken in connection with such contest and, at its sole option,
may pursue or forgo any and all administrative appeals, proceedings, hearings
and conferences with the taxing authority in respect of such claim and may, at
its sole option, either direct the Executive to pay the tax claimed and sue for
a refund or contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which the
Indemnification Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(c) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(b), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the
-9-
10
requirements of Section 9(b)) promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(b), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall be considered to be a portion of
the Indemnification Payment required to be paid.
10. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives. The provisions of Sections 2(b)(vii), 4, 5, 6, 7, 8, 9 and this
Section 10 shall survive, and remain in full force and effect following, any
termination of the Executive's employment hereunder; and notwithstanding the
earlier expiration or termination of this Agreement or anything contained herein
to the contrary, the provisions of Sections 2(b)(vii) and 9 hereof shall remain
in full force and effect until the day following the expiration of the statute
of limitations applicable thereto. This Agreement shall be rendered null and
void if, prior to the Closing, the Merger Agreement is terminated and the merger
between the Company and AIG is abandoned pursuant to Article VIII of the Merger
Agreement.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: Jay Wintrob
SunAmerica Inc.
1 SunAmerica Center
Los Angeles, California 90067-6022
If to the Company: SunAmerica Inc.
1 SunAmerica Center
Los Angeles, California 90067-6022
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and, such
amounts shall not be reduced whether or not the Executive obtains other
employment. Amounts which are vested benefits or which the Executive
-10-
11
is otherwise entitled to receive under any plan, policy, practice or program of
or any contract or agreement with the Company or any of its affiliated companies
at or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ Jay Wintrob
------------------------
JAY WINTROB
SUNAMERICA INC.
By /s/ Eli Broad
----------------------
12
Exhibit A:
Name: Wintrob, Jay
Title: Vice Chairman and Chief Operating Officer, SAI & President,
SunAmerica Investments and/or other title(s) assigned by Eli
Broad.
Responsibilities: Comparable to current duties at SAI, and/or other duties
assigned by Eli Broad.
Location: 1 SunAmerica Center, Los Angeles, CA 90067
Retention Bonus: $5,000,000
13
EXHIBIT B
Executive's Outstanding Awards
Executive has been granted the stock options listed on Schedule B-1, and
the shares of restricted stock, the super share award(s) and the cash bonus
award listed on Schedule B-2 (together, "Awards").
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") constitutes a Change of Ownership under the Company's 1988 Employee
Stock Option Plan, 1997 Employee Incentive Stock Plan, and Long-Term Incentive
Plan (the "Award Plans"). At the time of Closing, each unvested stock option
shall vest and become fully exercisable, and shall remain exercisable thereafter
through the expiration date or earlier cancellation of such stock option, and
all restrictions on shares of restricted stock (not including "super shares")
and on Executive's cash bonus award shall lapse (notwithstanding information set
forth on the attached Schedules regarding the dates on which such Awards were
otherwise to become exercisable or restrictions on such Awards were otherwise to
lapse).
Pursuant to and in accordance with the terms of the Award Plans, the
Executive has the right to satisfy his or her tax withholding obligations with
respect to any Award by directing the Company to withhold from the shares
issuable or deliverable to the Executive under such Award a number of shares
having a fair market value equal to the amount of tax required to be withheld
upon the lapse of restrictions applicable to or exercise of such Award;
provided, however, that if the Executive signs an "Affiliates Letter" as
described in Section 6.8 of the Merger Agreement, the Executive agrees to pay
withholding tax arising from the lapse of restrictions applicable to or exercise
of any Awards during the period beginning 30 days prior to the date of the
Closing and ending on the date (the "Permitted Sale Date") on which the
Executive may first sell shares of AIG capital stock in accordance with such
"Affiliates Letter", by delivering to the Company, within 10 business days
following the Permitted Sale Date, cash or a number of shares having a fair
market value equal to the amount of tax required to be withheld. If the
Executive signs such an "Affiliates Letter", his or her agreement set forth in
the preceding sentence shall, within the meaning of and pursuant to the Award
Plans, constitute "arrangements satisfactory to the Committee" regarding payment
of any taxes required to be withheld with respect to Executive's Awards, and
payment to the Company of such withholding taxes shall not be a condition to the
lapse of restrictions pertaining to, or the delivery of shares in connection
with the exercise of, any Award prior to the time that the Executive may sell
shares of AIG capital stock in accordance with such "Affiliates Letter".
Capitalized terms used and not otherwise defined in this Exhibit B shall
have the meanings given such terms in Executive's Employment Agreement, to which
this Exhibit B is attached.
14
Grant Detail Report SunAmerica Inc.
Exercisable as of 11/25/1998 Schedule B-1
- --------------------------------------------------------------------------------
JAY S. WINTROB
[ADDRESS]
[SOCIAL SECURITY NUMBER]
Grant Expiration Plan Grant Options Option Options Options
Date Date ID Type Granted Price Outstanding Vested
- ---------------------------------------------------------------------------------------------
3/1/1989 3/1/1999 1988 Non-Qualified 225,000 $1.444500 0 0
Exercises
- ----------------------------------
Date Exercised Price
7/16/1997 112,500 $37.375000
11/20/1998 112,500 $76.969900
- ---------------------------------------------------------------------------------------------
3/1/1989 3/1/1999 1988 Non-Qualified 112,500 $1.444500 75,000 75,000
Exercises
- ----------------------------------
Date Exercised Price
11/20/1998 37,500 $76.969900
- ---------------------------------------------------------------------------------------------
7/25/1990 7/25/2000 1988 Non-Qualified 135,000 $2.208900 135,000 135,000
- ---------------------------------------------------------------------------------------------
7/25/1991 7/25/2001 1988 Non-Qualified 112,500 $2.346700 112,500 112,500
- ---------------------------------------------------------------------------------------------
7/30/1992 7/30/2002 1988 Non-Qualified 112,500 $4.500000 112,500 112,500
- ---------------------------------------------------------------------------------------------
7/29/1993 7/29/2003 1988 Non-Qualified 90,000 $7.152700 90,000 90,000
- ---------------------------------------------------------------------------------------------
7/29/1994 7/29/2004 1988 Non-Qualified 101,250 $10.013300 101,250 81,000
Options Becoming Exercisable
20,250 on 7/29/1999
- ---------------------------------------------------------------------------------------------
7/28/1995 7/28/2005 1988 Non-Qualified 112,500 $12.306700 112,500 67,500
Options Becoming Exercisable
22,500 on 7/28/1999 22,500 on 7/28/2000
- ---------------------------------------------------------------------------------------------
8/1/1996 8/1/2006 1988 Non-Qualified 90,000 $20.458300 90,000 36,000
- --------------------------------------------------------------------------------
page 85
15
Grant Detail Report SunAmerica Inc.
Exercisable as of 11/25/1998
- --------------------------------------------------------------------------------
JAY S. WINTROB
[ADDRESS]
[SOCIAL SECURITY NUMBER]
Grant Expiration Plan Grant Options Option Options Options
Date Date ID Type Granted Price Outstanding Vested
- ---------------------------------------------------------------------------------------------
Options Becoming Exercisable
18,000 on 8/1/1999 18,000 on 8/1/2000 18,000 on 8/1/2001
- ---------------------------------------------------------------------------------------------
11/7/1996 11/7/2006 1997 Non-Qualified 165,000 $27.166700 165,000 0
Options Becoming Exercisable
165,000 on 11/7/2005
- ---------------------------------------------------------------------------------------------
8/4/1997 8/4/2007 1997 Non-Qualified 47,700 $39.354200 47,700 9,540
Options Becoming Exercisable
9,540 on 8/4/1999 9,540 on 8/4/2000 9,540 on 8/4/2001 9,540 on 8/4/2002
- ---------------------------------------------------------------------------------------------
Totals 1,303,950 1,041,450 719,040
- --------------------------------------------------------------------------------
page 86
16
SCHEDULE B-2 - As of 11/1/98
JAY WINTROB
RESTRICTED STOCK / STOCK UNITS
Grant Date Number of shares of Restricted Stock / Stock Units
---------- --------------------------------------------------
1987 Plan 26,127
7/28/94 135,000
12/23/94 225,000
5/31/95 112,500
SUPER SHARES
Grant Date Number of shares subject to Super Share Award
---------- ---------------------------------------------
12/23/94 112,500
5/31/95 56,250
CASH BONUS AWARD
Grant Date Dollar Amount of Award
---------- ----------------------
11/7/96 $4,482,500
17
Exhibit C
RESIGNATION AND GENERAL RELEASE AGREEMENT
This Resignation and General Release Agreement ("Release Agreement"), made
this ______ of ______________, ______, by and between _____________________
("Executive"), an individual, and ______________________ Inc. (together with its
subsidiaries, affiliates and successors, the "Company"), a ______________
corporation, is an agreement which includes a general release of claims.
Capitalized terms not defined in this Release Agreement shall have the meanings
ascribed to such terms in that certain Employment Agreement between the
Executive and the Company dated as of _____________________________ (the
"Employment Agreement").
WHEREAS, pursuant to the Employment Agreement, the Executive agreed to
execute this Release Agreement upon any termination of employment during the
Employment Period, as such term is defined in the Employment Agreement, and upon
payment of certain amounts specified in the Employment Agreement; and
WHEREAS, Executive and the Company now desire to terminate Executive's
employment relationship with the Company during the Employment Period.
NOW THEREFORE, in consideration of the mutual terms, conditions and
covenants contained in this Release Agreement, Executive and the Company agree
as follows:
1. Executive hereby relinquishes Executive's position as
____________________________ effective ________________, and resigns as an
employee of the Company in any other capacity, such resignation to be effective
_____________________. Such date coincides with the Date of Termination
determined in accordance with Section 3(e) of the Employment Agreement. E
Executive and the Company represent and warrant that any employment relationship
between them terminates on the Date of Termination, and that they shall have no
further employment relationship except as may be set forth in this Release
Agreement [insert if termination under Section 4(a): and to the extent necessary
for Executive to receive the benefits contemplated by Sections 4(a)(iii) and
4(a)(iv) of the Employment Agreement]. Notwithstanding such termination of
employment or any provision of this Release Agreement to the contrary, Executive
shall be entitled to all rights and benefits to be provided to Executive
following the Date of Termination under or pursuant to the terms of the
Employment Agreement, including, without limitation, those specified in Section
4 [insert as applicable (a) or (b)] thereof. Executive and the Company each
acknowledge and agree to abide by their respective obligations pursuant to the
Sections of the Employment Agreement that survive, and remain in full force and
effect, notwithstanding any termination of Executive's employment, as specified
in Section 10(a) of the Employment Agreement.
2. The Company shall pay Executive $_______________ in a lump sum in cash,
less standard withholding and authorized deductions, no later than the 30th day
after the Date of Termination, so long as Executive has not revoked this Release
Agreement prior to the date of such payment. Such payment represents all cash
amounts due on or prior to such date from the Company to Executive under Section
4 [insert as applicable: (a) or (b)] of the
1
18
Employment Agreement. This Release Agreement shall be null and void if any
amount or amounts payable to Executive under or pursuant to the terms of the
Employment Agreement are not paid when due.
3. (a) Except for the compensation, rights and benefits to be paid or
provided to Executive, and other obligations of the Company to be complied with,
following the Date of Termination under or pursuant to the terms of the
Employment Agreement, as set forth therein or in Paragraphs 1 and 2 hereof,
which shall not be limited in any way by the provisions of this Paragraph 3, and
except as provided below, Executive on behalf of Executive, Executive's
descendants, dependents, heirs, executors, administrator, assigns, and
successors, and each of them, hereby covenants not to sue and fully releases and
discharges the Company, and its subsidiaries and affiliates, past and present,
and each of them, as well as its and their trustees, directors, officers,
agents, attorneys, insurers, employees, stockholders, representatives, assigns,
and successors, past and present, and each of them, hereinafter and collectively
referred to as "Releasees," with respect to and from any and all claims, wages,
demands, rights, liens, agreements, contracts, covenants, actions, suits, causes
of action, obligations, debts, costs, expenses, attorneys' fees, damages,
judgments, orders and liabilities of whatever kind or nature in law, equity or
otherwise, whether now known or unknown, suspected or unsuspected, and whether
or not concealed or hidden, which Executive now owns or holds or Executive has
at any time heretofore owned or held or may in the future hold as against said
Releasees, arising out of or in any way connected with Executive's employment
relationship with the Company, or termination of that employment relationship,
or any other transactions, occurrences, acts or omissions or any loss, damage or
injury whatever, known or unknown, suspected or unsuspected, resulting from any
act or omission by or on the part of said Releasees, or any of them, committed
or omitted prior to the date of this Release Agreement including, without
limiting the generality of the foregoing, any claim under Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with
Disabilities Act, the Family and Medical Leave Act of 1993, the California Fair
Employment and Housing Act, the California Family Rights Act or any claim for
severance pay, bonus, sick leave, holiday pay, vacation pay, life insurance,
health or medical insurance or any other fringe benefit or disability; provided,
however, that, nothing herein shall be deemed to constitute a waiver of
Executive's rights under COBRA.
(b) Except for those obligations of Executive to be complied with
following the Date of Termination, as identified in the Employment Agreement or
arising out of this Agreement, and except as provided below, the Company hereby
acknowledges full and complete satisfaction of and releases and discharges, and
covenants not to sue, Executive from and with respect to any and all claims,
agreements, obligations, losses, damages, injuries, demands and causes of
action, known or unknown, suspected or unsuspected, arising out of or in any way
connected with Executive's employment relationship with or termination from the
Company, or any other occurrences, actions, omissions or claims whatever, known
or unknown, suspected or unsuspected, which the Company now owns or holds or has
at any time heretofore owned or held against as Executive, provided, however,
that such release of Executive shall not extend to any claims, known or unknown,
suspected or unsuspected, against Executive which arise out of facts which are
finally adjudged by a court of competent jurisdiction to be a crime under any
federal.
2
19
state, or local statute, law, ordinance or regulation, or which are based upon
facts which give rise to a recovery by the Company under any applicable policies
of insurance solely as a result of actions or omissions by Executive and as to
which the insurer has a right to subrogation.
(c) It is the intention of Executive and the Company in executing
this Release Agreement that the same shall be effective as a bar to each and
even claim, demand and cause of action hereinabove specified (specifically
excluding from such bar claims, demands and causes of action relating to or
arising out of those matters set forth as exceptions in, or included in the
proviso clauses of, Paragraphs 3(a) and 3(b) hereof (the "Continuing Claims")).
In furtherance of this intention, Executive and the Company hereby expressly
waive any and all rights and benefits conferred upon each of them by the
provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE or any similar provision
and each expressly consents that this Release Agreement shall be given full
force and effect according to each and all of its express terms and provisions,
including those related to unknown and unsuspected claims, demands and causes of
action, if any, as well as those relating to any other claims, demands and
causes of action hereinabove specified (specifically excluding from such waiver
and consent claims, demands and causes of action relating to or arising out of
the Continuing Claims ). SECTION 1542 provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Executive and the Company acknowledge that they each may hereafter discover
claims or facts in addition to or different from those which each now knows or
believes to exist with respect to the subject matter of this Release Agreement
and which, if known or suspected at the time of executing this Release
Agreement, may have materially affected this settlement. Nevertheless, Executive
and the Company each hereby waives any right, claim or cause of action that
might arise as a result of such different or additional claims or facts
(specifically excluding from such waiver any rights, claims or causes of action
relating to or arising out of the Continuing Claims). Executive and the Company
individually acknowledge that they each understand the significance and
consequence of such release and such specific waiver of SECTION 1542.
4. Executive expressly acknowledges and agrees that, by entering into this
Release Agreement, Executive is waiving any and all rights or claims that
Executive may have arising under the Age Discrimination in Employment Act of
1967, as amended, which have arisen on or before the date of execution of this
Release Agreement. Executive further expressly acknowledges and agrees that:
(a) In return for this Release Agreement, Executive will receive
consideration beyond that which Executive is already entitled to receive before
entering into this Release Agreement:
3
20
(b) Executive was orally advised by the Company and is hereby
advised in writing by this Release Agreement to consult with an attorney before
signing this Release Agreement;
(c) Executive was given a copy of this Release Agreement on
_________________, and informed that Executive had 21 days within which to
consider the Release Agreement; and
(d) Executive was informed that Executive has seven (7) days
following the date of execution of the Release Agreement in which to revoke the
Release Agreement.
5. Executive and the Company each warrant and represent to the other that
they have not heretofore assigned or transferred to any person not a party to
this Release Agreement any matter released pursuant to Paragraph 3 and 4 hereof
or any part or portion thereof.
6. The parties agree that the terms and conditions of this Release
Agreement are confidential as between the parties and shall not be disclosed,
except as required by law or to enforce this Release Agreement. Without limiting
the generality of the foregoing, the parties will not respond to or in any way
participate in or contribute to any public discussion, notice or other publicity
concerning, or in any way relating to, execution of this Release Agreement or
the events (including any negotiations) which led to its execution.
7. Neither the Executive nor the Company shall assign or transfer any
rights under this Release Agreement without the other party's prior written
consent, and any attempt of assignment or transfer without such consent shall be
void.
8. This instrument constitutes and contains the final understanding
between the parties and is intended by the parties as a complete and exclusive
statement of the terms of their agreement. Except as otherwise set forth herein,
it supersedes and replaces all prior negotiations and all agreements proposed or
otherwise, whether written or oral, concerning the subject matters hereof. This
Release Agreement may be modified only with a written instrument duly executed
by each of the parties. No person has any authority to make any representation
or promise on behalf of any of the parties not set forth herein and this Release
Agreement has not been executed in reliance upon any representations or promises
except those contained herein. Any dispute between the parties hereto with
respect to the subject matter hereof shall at the request of either party be
determined by binding arbitration in accordance with the provisions of Section 5
of the Employment Agreement, which Section 5 is incorporated herein and made a
part hereof by this reference.
9. If any provision of this Release Agreement or the application thereof
is held invalid, the invalidity shall not affect other provisions or
applications of the Release Agreement which can be given effect without the
invalid provisions or applications and to this end the provisions of this
Release Agreement are declared to be severable.
10. This Release Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without reference to
principles of conflict of laws.
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21
11. This Release Agreement may be executed in counterparts, and each
counterpart, when executed, shall have the efficacy of a signed original, but
all executed counterparts shall constitute one and the same agreement.
12. No waiver of any breach of any term or provision of this Release
Agreement shall be construed to be, or shall be, a waiver of any other breach of
this Release Agreement. No waiver shall be binding unless in writing and signed
by the party waiving the breach.
13. The parties agree to cooperate fully and to execute any and all
supplementary documents and to take all additional actions that may be necessary
or appropriate to give full force to the basic terms and intent of this Release
Agreement and which are not inconsistent with its terms.
The parties acknowledge that they have each read the foregoing Release
Agreement and accept and agree to the provisions it contains and hereby execute
it voluntarily with full understanding of its consequences.
EXECUTED this ___day of ____________, _________ in ________________.
---------------------------------
NAME
SUNAMERICA INC.
By:
------------------------------
NAME & TITLE
5
22
EMPLOYMENT AGREEMENT
AGREEMENT by and between SunAmerica Inc., a Maryland corporation
(the "Company"), and Jay S. Wintrob (the "Executive"), dated as of the 27th day
of April, 1995.
In view of Executive's long-term service with and continuing
contribution to the Company, the Company's Board of Directors (the "Board")
believes it is in the best interests of the Company and its shareholders to
secure Executive's continued services by reducing the personal uncertainties and
risks associated with the possibility or occurrence of a Change of Control (as
defined in Exhibit A). The Board has, therefor, caused the Company to enter into
this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Effective Date.
(a) The "Effective Date" shall mean the first date following the
eighth anniversary of Executive's employment with the Company and prior to April
27, 2000 on which a Change of Control occurs; provided that no Change of Control
shall be deemed to have occurred so long as Eli Broad continues to serve as the
Chief Executive Officer of the Company or continues to beneficially own more
than 35% of the Outstanding Company Voting Securities (as such terms are defined
in Exhibit A). Notwithstanding anything in this Agreement to the contrary, if a
Change of Control occurs within one year after termination of Executive's
employment with the Company, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who had taken steps reasonably calculated to effect the Change of Control
or (ii) otherwise arose in connection with or anticipation of the Change of
Control, then the "Effective Date" shall mean the date immediately prior to the
date of such termination of employment.
(b) The Executive and the Company acknowledge that, prior to the
Effective Date, the employment of the Executive by the Company is "at will" and
may be terminated by either the Executive or the Company at any time. Moreover,
if prior to the Effective Date, the Executive's employment with the Company
terminates, then the Executive shall have no further rights under this
Agreement.
2. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company, in accordance with the terms and provisions of this Agreement, for the
period
23
commencing on the Effective Date and ending on the fifth anniversary of such
date (the "Employment Period").
3. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including titles and reporting requirements), authority and duties shall
be at least commensurate in all material respects with those held,
exercised and assigned during the 180-day period immediately preceding the
Effective Date and (B) the Executive's services shall be performed at the
location where he was employed immediately preceding the Effective Date or
any office which is the headquarters of the Company and is less than 50
miles from such location.
(ii) During the Employment Period, the Executive agrees to
devote his full business time and attention to the business and affairs of
the Company and to use his reasonable best efforts to perform faithfully
and efficiently the responsibilities assigned to him in accordance with
this Agreement. During the Employment Period it shall not be a violation
of this Agreement for the Executive to (A) serve on civic or charitable
boards or committees, (B) fulfill speaking engagements and (C) manage
personal investments, so long as such activities do not significantly
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary at least equal to his annual base
salary in effect immediately prior to the Effective Date.
(ii) Compensation Plans. During the Employment Period, the
Executive shall be entitled to participate in all bonus and incentive
compensation plans, practices, policies and programs ("Compensation
Plans") available generally to other peer executives of the Company and
its affiliated companies. Such Compensation Plans shall provide the
Executive with the opportunity under reasonable expectations of Company
performance to earn an amount of bonus and incentive compensation at least
equal, in the aggregate, to the average annual bonus and incentive
compensation received by Executive with respect to the Company's two full
fiscal years immediately preceding the Effective Date or, if greater, an
amount consistent with the
24
bonus and incentive compensation paid to other peer executives of the
Company and its affiliated companies.
(iii) Additional Benefits and Policies. During the Employment
Period, the Executive shall be entitled to (A) life and executive medical
insurance and other welfare benefits and fringe benefits, (B) prompt
reimbursement for all reasonable employment expenses incurred by the
Executive, (C) paid vacation, and (D) an office and secretarial and other
assistants, in each case in accordance with the policies, practices and
procedures of the Company in effect generally with respect to other peer
executives of the Company and its affiliated companies.
(iv) Affiliated Companies. For purposes of this Agreement, the
term "affiliated companies" will not include any corporation or other
entity not controlled by the Company but deemed to be an affiliate because
of the ownership or control of Eli Broad.
4. Termination of Employment.
(a) Certain Definitions. The terms "Cause," "Disability," "Good
Reason" and "Notice off Termination," as used in this Agreement, are defined in
Exhibit A, which is incorporated in and made a part of this Agreement.
(b) Termination of Employment. The Executive's employment shall
terminate automatically upon the Executive's death during the Employment Period.
The Company may terminate the Executive's employment during the Employment
Period for Cause or due to the Executive's Disability. The Executive may
terminate his employment during the Employment Period for Good Reason.
(c) Notice of Termination. Any termination by the Company for Cause
or Disability, or by the Executive for Good Reason, shall be communicated by
Notice of Termination to the other party hereto given in accordance with Section
9(b). The failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason, Cause or Disability shall not waive any right of the Executive or the
Company hereunder or preclude the Executive or the Company from asserting such
fact or circumstance in enforcing the Executive's or the Company's rights
hereunder.
5. Obligations of the Company upon Termination.
(a) Payments Upon Termination. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability, or the Executive shall terminate his employment for Good Reason, the
Company shall
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25
pay to the Executive as severance an amount in cash equal to (i) Executive's
average annual cash compensation (base salary plus any bonus or incentive
compensation) earned during the Company's three full fiscal years immediately
preceding the fiscal year in which the Date of Termination occurs (the "Average
Cash Compensation"), multiplied by (ii) a fraction, the numerator of which is
the number of days remaining, after the Date of Termination (as defined in
Exhibit A), in the Employment Period, and the denominator of which is 365;
provided, however, that in no event will the amount of such payment be less than
one or more than two times the Average Cash Compensation (the "Severance
Amount"). One half of such Severance Amount shall be paid to Executive in a lump
sum within 10 days after the Date of Termination, with the remaining one half
payable in equal installments on the last day of each of the twelve calendar
months immediately following the Date of Termination. In addition to any amounts
that may be due to Executive pursuant to the previous two sentences or any other
provision of this Agreement, upon termination of the Executive's employment with
the Company during the Employment Period for any reason whatsoever, the Company
(i) will pay to executive, within 10 days after the Date of Termination, any
amount of base salary accrued but unpaid through the Date of Termination, any
compensation previously deferred by the Executive and accrued vacation pay, and
(ii) will timely pay or provide to the Executive and/or his family any other
amounts or benefits required to be paid or provided, or which the Executive
and/or his family is eligible to receive, pursuant to this Agreement or under
any plan, program, policy or practice, contract or agreement of the Company
applicable to the Executive or generally applicable to other peer executives of
the Company and its affiliated companies (except for severance payments under
the severance plan in effect for all Company employees, the benefits under which
are replaced during the Employment Period by the provisions of this Section
5(a)).
(b) Effect of Termination on Restricted Stock and Stock Options.
Notwithstanding any other provision of this Agreement, of any Company plan or
any agreement between Executive and the Company, if Executive's employment with
the Company is terminated during the Employment Period (i) by the Company other
than for Cause or Disability, or by Executive for Good Reason, then (x) all
options to purchase securities of the Company theretofore granted to Executive
and not fully exercisable shall become exercisable in full and may be exercised
by Executive at any time prior to the one-year anniversary of the Date of
Termination, and (y) all restrictions on any shares of restricted stock granted
by the Company to and then held by Executive (other than "Super Shares," as
defined in the Company's 1995 Performance Stock Plan) shall lapse, and (z) the
Company shall issue to Executive the number of Super Shares subject to
Executive's outstanding awards and as to which the applicable Super Performance
Objectives (as defined in the Company's 1995 Performance Stock Plan) have been
achieved on or prior to the
4
26
Date of Termination, or, if such objectives have not been achieved by such date,
as to which the Company's Board determines, in the reasonable exercise of its
business judgement and based on the Company's actual and reasonably anticipated
financial results through the end of the applicable Performance Period (as
defined in the Company's 1995 Performance Stock Plan), that the applicable Super
Performance Objectives are reasonably certain to be achieved by the end of such
Performance Period, or (ii) by reason of the Executive's death or Disability,
then (x) all restrictions will lapse on that number of shares of restricted
stock then held by Executive as to which such restrictions would have lapsed on
or prior to the Date of Termination had each agreement between the Company and
Executive regarding grants of restricted stock provided for restrictions to
lapse on 1 2/3% of the number of shares (other than "Super Shares") included in
such grant at the end of each month following the date of such grant, and (y)
the Company shall issue to Executive a number of Super Shares equal to the
number that would have been issued pursuant to Section 5(b)(i)(z) above had
Executive's employment been terminated by the Company other than for Cause or
Disability, multiplied by a fraction, the numerator of which is the number of
shares of restricted stock as to which restrictions will lapse in accordance
with Section 5(b)(ii)(x) above and the denominator of which is the number of
shares of restricted stock held by Executive as of the Date of Termination.
Certificates representing the number of shares of Company common stock as to
which restrictions shall have lapsed and to be issued to Executive under awards
of Super Shares pursuant to the previous sentence shall be delivered to
Executive (or his estate or legal representatives) by the Company, free of any
restrictive legends or conditions, within 10 days after the Date of Termination.
This Section 5(b) shall be deemed an amendment to any agreements between the
Company and the Executive with respect to outstanding stock options, shares of
restricted stock or Super Shares.
6. Non-exclusivity of Rights; Option to Waive Benefits. Nothing in this
Agreement shall prevent or limit the Executive's continuing or future
participation in any plan, program, policy or practice provided by the Company
or any of its affiliated companies and for which the Executive may qualify
(except for the severance plan in effect for all Company employees, the benefits
under which are replaced during the Employment Period by the provisions of
Section 5(a) hereof), nor shall anything herein reduce such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement. In no event shall the
Executive be obligated to seek other employment or take any other
5
27
action by way of mitigation of the amounts payable to the Executive under any of
the provisions of this Agreement and such amounts shall not be reduced whether
or not the Executive obtains other employment. Executive shall be entitled to
refuse or defer all or any portion of any payments or benefits under this
Agreement, by delivering written notice of such refusal or deferral to the
Company in writing, if he determines that the receipt of such payment or benefit
may result in adverse tax consequences to him; provided that such refusal or
deferral shall not extend or modify the period during which options may be
exercised or restrictions may lapse on restricted shares or Super Shares or as
to which performance is measured under any Company benefit or stock plan.
7. Successors. This Agreement is personal to the Executive and shall not
be assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives. This Agreement shall inure to the benefit
of and be binding upon the Company and its successors and assigns. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets that becomes subject to this Agreement
by operation of law or otherwise.
8. Confidentiality and Solicitation. During the performance of Executive's
duties on behalf of the Company, Executive will receive and be entrusted with
certain confidential and/or secret information of a proprietary nature.
Executive shall not disclose or use, during his employment or any time
thereafter, any such information which is not otherwise publicly available,
except as may be required by law. Executive agrees that during his employment he
will not engage as a director, officer, owner, part-owner (five or more percent
shareholder), joint venturer or otherwise, in any business competitive with the
Company or any of its affiliated companies; provided that passive investments
are permitted by this sentence. In the event of termination of Executive's
employment for any reason, for a period of one year thereafter, Executive will
not (a) employ or seek to employ or engage any employee of the Company or any of
its affiliated companies, or (b) make any public statement concerning the
Company, any of its affiliates or affiliated companies, or his employment unless
previously approved by the Company, except as may be required by law.
9. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of California. The captions of this Agreement are not
part of the provisions hereof and shall have no force or effect. This Agreement
may not be amended or modified otherwise than by a written agreement
6
28
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: Jay S. Wintrob
2465 La Condesa Drive
Los Angeles, CA 90049
If to the Company: SunAmerica Inc.
1 SunAmerica Center
Century City
Los Angeles, CA 90071-6022
Attention: Chief Executive Officer
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) If any legal action shall be brought for the enforcement of this
Agreement, or because of any alleged dispute, breach or default hereunder, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in such action in addition to any other
relief to which it or he may be entitled.
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
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29
IN WITNESS WHEREOF, the Executive has executed this Agreement and,
pursuant to the authorization from its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
by: /s/ Jay S. Wintrob
----------------------------
Jay S. Wintrob
SUNAMERICA INC.
By: /s/ Eli Broad
-------------------------
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30
EXHIBIT A
Certain Definitions
I. "Cause." For purposes of this Agreement, "Cause" shall mean (i) the
conviction of the Executive of a felony or other crime involving fraud,
dishonesty or moral turpitude, (ii) fraud with respect to the business of the
Company, or (iii) a material breach by the Executive of the Executive's
obligations under Section 3(a) of this Agreement (other than as a result of
incapacity due to physical or mental illness), which is willful and deliberate
or the result of Executive's gross neglect of duties, and which is not remedied
in a reasonable period of time after receipt of written notice from the Board of
Directors of the Company specifying such breach.
II. "Change of Control." For purposes of this Agreement, a "Change of Control"
shall mean the occurrence of any of the following events:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more, or
such greater percentage as shall be required to make such individual, entity or
group, immediately following such acquisition, the largest holder, of the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that the following acquisitions
shall not constitute a Change of Control: (i) any acquisition directly from the
Company (excluding an acquisition by virtue of the exercise of a conversion
privilege), (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, or (iv) any acquisition by any
corporation pursuant to a reorganization, merger or consolidation, if, following
such reorganization, merger or consolidation, the conditions described in
clauses (A), (B) and (C) of subsection (c) of this paragraph II are satisfied;
or
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such
A-1
31
individual whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
(c) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company, (ii) a reorganization, consolidation
or merger (a "Reorganization"), or (iii) the sale or other disposition of all or
substantially all of the assets of the Company (a "Sale"), unless, following the
consummation of any such Reorganization or Sale, the following requirements are
satisfied with respect to the corporation resulting from such Reorganization, or
the corporation which has acquired all or substantially all of the assets of the
Company: (A) more than 60% of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners of the Outstanding
Company Voting Securities immediately prior to such Reorganization or Sale, in
substantially the same proportion as their ownership, immediately prior to such
Reorganization or Sale of the Outstanding Company Voting Securities, (B) no
Person (excluding the Company and any employee benefit plan (or related trust)
of the Company or such corporation and any Person beneficially owning,
immediately prior to such reorganization, consolidation or merger, or such sale
or other disposition, directly or indirectly, 20% or more of the Outstanding
Company Voting Securities) beneficially owns, directly or indirectly, 20% or
more of the combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of directors and (C)
at least a majority of the members of the board of directors of such corporation
were members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such Reorganization or Sale.
If any of the foregoing events occurs and Eli Broad is then the
Chief Executive Officer of the Company or the beneficial owner of more than 35%
of the Outstanding Company Voting Securities, then, notwithstanding the
foregoing, such Change of Control shall be deemed to have occurred on the first
date on which Mr. Broad is no longer the Chief Executive Officer of the Company
or the beneficial owner of more than 35% of the Outstanding Company Voting
Securities.
III. "Date of Termination." For purposes of this Agreement, the "Date of
Termination" means (i) if the Executive's employment is terminated by the
Company for Cause or Disability, or by the Executive for Good Reason, the date
of receipt of the Notice of Termination or any later date specified therein, as
the case may be, (ii) if the Executive's employment is terminated by the
A-2
32
Company other than for Cause or Disability, the Date of Termination shall be the
date on which the Company notifies the Executive of such termination and (iii)
if the Executive's employment is terminated by reason of death, the Date of
Termination shall be the date of Executive's death.
IV. "Disability." For purposes of this Agreement, "Disability" shall mean the
absence of the Executive from his duties with the Company on a full-time basis
for 120 consecutive days as a result of incapacity due to mental or physical
illness which is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Executive or his legal
representative (such agreement as to acceptability not to be withheld
unreasonably).
V. "Good Reason." For purposes of this Agreement, "Good Reason" shall mean:
(i) any action or failure to act by the Company which results
in Executive's position (including titles and reporting requirements),
authority or duties being reduced below the level specified in Section
3(a) (i) (A) of this Agreement;
(ii) any failure by the Company to comply with the provisions
of Section 3(b) of this Agreement;
(iii) the Company's requiring the Executive to be based at any
office or location other than that described in Section 3(a) (i) (B) of
this Agreement; or
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement.
VI. "Notice of Termination." For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment (specifying the provision of
this Agreement relied upon) and (ii) if the Date of Termination is other than
the date of receipt of such notice, specifies the termination date (which date
shall be not more than 15 days after the giving of such notice).
A-3
33
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT dated as of February __, 1997
amends in the respects set forth herein that certain Employment Agreement by and
between SunAmerica Inc., a Maryland Corporation, (the "Company"), and Jay S.
Wintrob (the "Executive"), dated as of April 27, 1995.
Section 5(b) of the Employment Agreement is amended to include the following
sentence to the end of that Section:
References in this Agreement to "options," "restricted stock" and "Super
Shares" shall include all similar awards or plans offering similar
benefits to the Employee, including, without limitation, any restricted
stock units awarded under the 1995 Performance Stock Plan or the 1988
Employee Stock Plan, stock options under the 1997 Employee Incentive Stock
Plan, and awards under the 1997 Long-Term, Incentive Plan.
IN WITNESS WHEREOF, the Employee has executed this Amendment and, pursuant to
the authorization from the Board of Directors, the Company has caused this
Amendment to be executed in its name on its behalf, all as of the day and year
first above written.
/s/ Jay S. Wintrob
----------------------------
Jay S. Wintrob
SUNAMERICA INC.
By: /s/ Eli Broad
-------------------------
Eli Broad
1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE American International Group, Inc. and Subsidiaries
(in millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 (a) 1997 (b) 1996 (b) 1995 (b) 1994 (b)
====================================================================================================================================
NUMERATOR:
Net income applicable to common stock $3,766 $3,332 $2,897 $2,510 $2,176
====================================================================================================================================
DENOMINATOR:
Average outstanding shares used in the computation of
per share earnings:
Common stock issued 1,139 1,139 1,139 1,138 1,139
Common stock in treasury (89) (86) (79) (72) (70)
- ------------------------------------------------------------------------------------------------------------------------------------
Average outstanding shares-- basic 1,050 1,053 1,060 1,066 1,069
====================================================================================================================================
Stock options and stock purchase plan (treasury stock method) 5 4 4 4 3
- ------------------------------------------------------------------------------------------------------------------------------------
Average outstanding shares-- diluted 1,055 1,057 1,064 1,070 1,072
====================================================================================================================================
Earnings per share:
Basic $3.59 $3.16 $2.73 $2.35 $2.04
Diluted $3.57 $3.15 $2.72 $2.35 $2.03
====================================================================================================================================
(a) The number of common shares outstanding as of December 31, 1998 was 1,050.
The number of common shares that would have been outstanding as of December
31, 1998 assuming the exercise or issuance of all dilutive potential common
shares outstanding is 1,055.
(b) Share information reflects common stock splits in the form of 50 percent
common stock dividends paid July 31, 1998, July 25, 1997 and July 28, 1995.
II-6
1
COMPUTATION OF RATIOS OF EXHIBIT 12
EARNINGS TO FIXED CHARGES American International Group, Inc. and Subsidiaries
(in millions, except ratios)
- ----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
==================================================================================================================================
Income before income taxes and minority interest $5,529 $4,731 $4,056 $3,502 $2,982
Less-Equity income of less than 50% owned persons 98 120 121 91 54
Add-Dividends from less than 50% owned persons 24 30 13 6 4
- ----------------------------------------------------------------------------------------------------------------------------------
5,455 4,641 3,948 3,417 2,932
Add-Fixed charges 2,038 1,834 1,615 1,484 1,405
Less-Capitalized interest 74 50 50 51 46
==================================================================================================================================
Income before income taxes, minority interest
and fixed charges $7,419 $6,425 $5,513 $4,850 $4,291
==================================================================================================================================
Fixed charges:
Interest costs $1,947 $1,754 $1,542 $1,412 $1,335
Rental expense* 91 80 73 72 70
- ----------------------------------------------------------------------------------------------------------------------------------
Total fixed charges $2,038 $1,834 $1,615 $1,484 $1,405
==================================================================================================================================
Ratio of earnings to fixed charges 3.64 3.50 3.41 3.27 3.05
==================================================================================================================================
* The proportion deemed representative of the interest factor.
The ratios shown are significantly affected as a result of the inclusion of the
fixed charges and operating results of AIG Financial Products Corp. and its
subsidiaries (AIGFP). AIGFP structures borrowings through guaranteed investment
agreements and engages in other complex financial transactions, including
interest rate and currency swaps. In the course of its business, AIGFP enters
into borrowings that are primarily used to purchase assets that yield rates
greater than the rates on the borrowings with the intent of earning a profit on
the spread and to finance the acquisition of securities utilized to hedge
certain transactions. The pro forma ratios of earnings to fixed charges,
excluding the effects of the operating results of AIGFP, are 5.86, 5.45, 5.23,
4.82 and 5.30 for 1998, 1997, 1996, 1995 and 1994, respectively. As AIGFP will
continue to be a subsidiary, AIG expects that these ratios will continue to be
lower than they would be if the fixed charges and operating results of AIGFP
were not included therein.
II-7
1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
% OF VOTING
SECURITIES
OWNED BY ITS
JURISDICTION OF IMMEDIATE
NAME OF CORPORATION INCORPORATION PARENT (1)
- -------------------------------------------------------------------------------------------------------------------------
Starr Delaware (2)
SICO Panama (2)
AIG (Registrant)(3) Delaware (4)
AICCO New Hampshire 100%
AIG Asset Management Group, Inc. Delaware 100%
AIG Capital Partners, Inc. Delaware 100%
AIG Aviation, Inc. Georgia 100%
AIG Capital Corp. Delaware 100%
AIG Capital Management Corp. Delaware 100%
AIG Claim Services, Inc. Delaware 100%
AIG Consumer Finance, Inc. Delaware 100%
AIG Finance Holdings, Inc. New York 100%
SPC Credit Limited Hong Kong 100%
AIG Financial Products Corp. Delaware 100%
AIG Funding, Inc. Delaware 100%
AIG Global Investment Group, Inc. Delaware 100%
AIG Global Trade & Political Risk Insurance Company New Jersey 100%
AIG Life Insurance Company Delaware 78.9% (5)
AIG Life Insurance Company of Canada Canada 100%
AIG Life Insurance Company of Puerto Rico Puerto Rico 100%
AIG Marketing, Inc. Delaware 100%
AIG Private Bank Ltd. Switzerland 100%
AIG Risk Management, Inc. New York 100%
AIG Trading Group Inc. Delaware 80%
AIU Insurance Company New York 52% (6)
AIU North America, Inc. New York 100%
American Home New York 100%
AIG Hawaii Insurance Company, Inc. Hawaii 100%
American International Insurance Company New York 100%
American International Insurance Company of California, Inc. California 100%
American International Insurance Company of New Jersey New Jersey 100%
Minnesota Insurance Company Minnesota 100%
Transatlantic Holdings, Inc. Delaware 33.98% (7)
American International Group Data Center, Inc. New Hampshire 100%
American International Life Assurance Company of New York New York 77.52% (8)
American International Reinsurance Company Limited Bermuda 100%
AIA Hong Kong 100%
Australian American Assurance Company Limited Australia 100%
American International Assurance Company (Bermuda) Limited Bermuda 100%
Nan Shan Life Insurance Company, Ltd. Taiwan 94.12%
American International Underwriters Corporation New York 100%
AIUO Bermuda 100%
AIG Europe (Ireland) Ltd. Ireland 100%
Universal Insurance Co., Ltd. Thailand 100%
Interamericana Compania de Seguros Gerais (Brazil) Brazil 100%
La Seguridad de Centroamerica, Compania de Seguros, Sociedad Anonima Guatemala 100%
American International Insurance Company of Puerto Rico Puerto Rico 100%
La Interamerica Compania de Seguros Generales S.A. Colombia 100%
American International Underwriters G.m.b.H. Germany 100%
Underwriters Adjustment Company, Inc. Panama 100%
II-8
2
SUBSIDIARIES OF REGISTRANT--(continued)
% OF VOTING
SECURITIES
OWNED BY ITS
JURISDICTION OF IMMEDIATE
NAME OF CORPORATION INCORPORATION PARENT (1)
- -------------------------------------------------------------------------------------------------------------------------
American Life Insurance Company Delaware 100%
AIG Brasil Holding Ltd. Brazil 73.6% (9)
Kenya American Insurance Company Limited Kenya 100%
ALICO France 89%
American Security Life Insurance Company, Ltd. Switzerland 99.8%
Birmingham Fire Insurance Company of Pennsylvania Pennsylvania 100%
China America Insurance Company, Ltd. Delaware 50%
Commerce and Industry Insurance Company New York 100%
Commerce and Industry Insurance Company of Canada Ontario 100%
Delaware American Life Insurance Company Delaware 100%
Hawaii Insurance Consultants, Ltd. Hawaii 100%
Imperial Premium Finance, Inc. Delaware 100%
The Insurance Company of the State of Pennsylvania Pennsylvania 100%
Landmark Insurance Company California 100%
Le Metropolitana de Seguros, C. por A. Dominican Republic 100%
Mt. Mansfield Company, Inc. Vermont 100%
National Union Pennsylvania 100%
American International Specialty Lines Insurance Company Alaska 70% (10)
International Lease Finance Corporation California 100%
Lexington Delaware 70% (10)
JI Accident & Fire Insurance Co. Ltd. Japan 50%
National Union Fire Insurance Company of Louisiana Louisiana 100%
NHIG Holding Corp. Delaware 100%
Audubon Insurance Company Louisiana 100%
Audubon Indemnity Company Mississippi 100%
Agency Management Corporation Louisiana 100%
The Gulf Agency, Inc. Alabama 100%
New Hampshire Pennsylvania 100%
AIG Europe, S.A. France (11)
A.I. Network Corporation New Hampshire 100%
Marketpac International, Inc. Delaware 100%
American International Pacific Insurance Company Colorado 100%
American International South Insurance Company Pennsylvania 100%
Granite State Insurance Company Pennsylvania 100%
New Hampshire Indemnity Company, Inc. Pennsylvania 100%
AIG National Insurance Company, Inc. New York 100%
Illinois National Insurance Co. Illinois 100%
New Hampshire Insurance Services, Inc. New Hampshire 100%
PHILAM Philippines 99%
Pacific Union Assurance Company California 100%
The Philippine American General Insurance Company, Inc. Philippines 100%
Philam Insurance Company, Inc. Philippines 100%
The Philippine American Assurance Company, Inc. Philippines 25%
Pine Street Real Estate Holdings Corp. New Hampshire (12)
American International Realty Corp. Delaware 100%
II-9
3
SUBSIDIARIES OF REGISTRANT--(continued)
% OF VOTING
SECURITIES
OWNED BY ITS
JURISDICTION OF IMMEDIATE
NAME OF CORPORATION INCORPORATION PARENT (1)
- -------------------------------------------------------------------------------------------------------------------------
Risk Specialist Companies, Inc. Delaware 100%
SunAmerica Inc. Delaware 100%
Anchor National Life Insurance Company Arizona 100%
CalAmerica Life Insurance Company California 100%
First SunAmerica Life Insurance Company New York 100%
Resources Trust Company Colorado 100%
SunAmerica Asset Management Corp. Delaware 100%
SunAmerica Life Insurance Company Arizona 100%
SunAmerica National Life Insurance Company Arizona 100%
20th Century Industries California 58%
20th Century Insurance Company California 100%
21st Century Insurance Company California 100%
20th Century Insurance Company of Arizona Arizona 51% (13)
UGC North Carolina 36.31% (14)
United Guaranty Insurance Company North Carolina 100%
United Guaranty Mortgage Insurance Company North Carolina 100%
United Guaranty Mortgage Insurance Company of North Carolina North Carolina 100%
United Guaranty Residential Insurance Company of North Carolina North Carolina 100%
United Guaranty Residential Insurance Company North Carolina 75% (15)
United Guaranty Commercial Insurance Company of North Carolina North Carolina 100%
United Guaranty Commercial Insurance Company North Carolina 100%
United Guaranty Credit Insurance Company North Carolina 100%
United Guaranty Services, Inc. North Carolina 100%
==========================================================================================================================
(1) Percentages include directors' qualifying shares.
(2) The directors and executive officers of AIG as a group own 79.50 percent of
the voting common stock of Starr and 75 percent of the voting stock of
SICO. Six of the directors of AIG also serve as directors of Starr and
SICO.
(3) All subsidiaries listed are consolidated in the accompanying financial
statements. Certain subsidiaries have been omitted from the tabulation. The
omitted subsidiaries, when considered in the aggregate as a single
subsidiary, do not constitute a significant subsidiary.
(4) The common stock is owned 13.7 percent by SICO, 2.0 percent by Starr and
2.9 percent by The Starr Foundation.
(5) Also owned 21.1 percent by Commerce & Industry Insurance Company.
(6) Also owned 8 percent by The Insurance Company of the State of Pennsylvania,
32 percent by National Union, and 8 percent by Birmingham.
(7) Also owned 21.1 percent by American International Group, Inc.
(8) Also owned 22.48 percent by American Home.
(9) Also owned 26.4 percent by American International Group, Inc.
(10) Also owned 20 percent by The Insurance Company of the State of Pennsylvania
and 10 percent by Birmingham.
(11) 100 percent to be held with other AIG companies.
(12) Owned by 13 AIG subsidiaries.
(13) Also owned 49 percent by 20th Century Industries.
(14) Also owned 45.88 percent by National Union, 16.95 percent by New Hampshire
and 0.86 percent by The Insurance Company of the State of Pennsylvania.
(15) Also owned 25 percent by United Guaranty Residential Insurance Company of
North Carolina.
II-10
1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
American International Group, Inc. on Form S-8 (No. 2-38768, No. 2-44043, No.
2-45346, No. 2-51498, No. 2-59317, No. 2-61858, No. 2-62760, No. 2-64336, No.
2-67600, No. 2-72058, No. 2-75874, No. 2-75875, No. 2-78291, No. 2-87005, No.
2-82989, No. 2-90756, No. 2-91945, No. 2-95589, No. 2-97439, No. 33-8495, No.
33-18073, No. 33-57250, No. 33-60327, No. 333-48639, No. 333-58095 and No.
333-70069) of our report dated February 11, 1999, on our audits of the
consolidated financial statements and financial statement schedules of American
International Group, Inc. and subsidiaries as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998, which report
is included in the Annual Report on Form 10-K of American International Group,
Inc. for the year 1998, and to the reference to our firm under the headings
"Financial Statements" or "Experts" included in the Prospectuses.
PricewaterhouseCoopers LLP
New York, New York
March 31, 1999.
II-11
7
1,000,000
12-MOS
DEC-31-1998
JAN-01-1998
DEC-31-1998
48,243
12,658
13,633
5,893
3,290
1,552
141,505
303
17,744
7,647
194,398
67,881
10,009
0
15,293
21,505
0
0
2,847
24,284
194,398
24,345
5,424
165
(144)
19,751
1,947
3,533
5,529
1,594
3,766
0
0
0
3,766
3.59
3.57
21,171
10,938
(281)
4,389
5,716
24,619
281
Amount represents income before income taxes and minority interest.
Earnings per share information reflects a common stock split in the form
of a 50 percent common stock dividend paid July 31, 1998. Prior period
financial data schedules have not been restated for this stock split.
Includes net loss reserves resulting from the acquisitions of Transatlantic
and 20th Century.
1
Exhibit 99
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i)to include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933 unless the information required to be included in
such post-effective amendment is contained in a periodic report filed by
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 and incorporated herein by reference,
(ii)to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement unless the information required to be included in
such post-effective amendment is contained in a periodic report filed by
the registrant pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 and incorporated herein by reference, and
(iii)to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
(2) that, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering; and
(4) that, for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given, a copy of the registrant's annual report to shareholders for its last
fiscal year, unless such employee otherwise has received a copy of such report
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120-day period the
annual report for the last fiscal year will be furnished to each such employee.
(c) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan, who do not otherwise
receive such material as shareholders of the registrant, at the time and in the
manner such material is sent to its shareholders, copies of all reports, proxy
statements and other communications distributed to its shareholders generally.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-12
2
Schedule I
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1998
(in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
BALANCE
TYPE OF INVESTMENT COST* VALUE SHEET
==================================================================================================================================
Fixed maturities:
Bonds:
United States Government and government agencies
and authorities $ 2,135 $ 2,303 $ 2,301
States, municipalities and political subdivisions 19,415 20,762 19,789
Foreign governments 11,202 11,846 11,846
Public utilities 3,874 4,213 4,213
All other corporate 23,212 23,757 23,757
- ----------------------------------------------------------------------------------------------------------------------------------
Total bonds 59,838 62,881 61,906
Preferred stocks -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 59,838 62,881 61,906
- ----------------------------------------------------------------------------------------------------------------------------------
Equity securities:
Common stocks:
Public utilities 249 275 275
Banks, trust and insurance companies 760 828 828
Industrial, miscellaneous and all other 4,421 4,462 4,462
- ----------------------------------------------------------------------------------------------------------------------------------
Total common stocks 5,430 5,565 5,565
Non-redeemable preferred stocks 335 328 328
- ----------------------------------------------------------------------------------------------------------------------------------
Total equity securities 5,765 5,893 5,893
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate, policy and collateral loans 8,247 8,247 8,247
Financial services assets:
Flight equipment primarily under operating leases, net of
accumulated depreciation 16,330 -- 16,330
Securities available for sale, at market value 10,667 10,674 10,674
Trading securities, at market value -- 5,668 5,668
Spot commodities, at market value -- 476 476
Unrealized gain on interest rate and currency swaps,
options and forward transactions -- 9,881 9,881
Trading assets 6,229 -- 6,229
Securities purchased under agreements to resell, at contract value 4,838 -- 4,838
Other invested assets 6,419 -- 6,419
Short-term investments, at cost (approximates market value) 4,944 -- 4,944
- ----------------------------------------------------------------------------------------------------------------------------------
Total investments $ 123,277 $ -- $ 141,505
==================================================================================================================================
* Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
S-1
3
Schedule II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET -- PARENT COMPANY ONLY
(in millions)
- -----------------------------------------------------------------------------
DECEMBER 31, 1998 1997
=============================================================================
ASSETS:
Cash $2 $4
Short-term investments 10 1
Invested assets 815 584
Carrying value of subsidiaries and partially-
owned companies, at equity 27,745 24,477
Premiums and insurance balances receivable-net 56 62
Other assets 440 270
- -----------------------------------------------------------------------------
TOTAL ASSETS $29,068 $25,398
- -----------------------------------------------------------------------------
LIABILITIES:
Insurance balances payable $229 $205
Due to affiliates-net 747 230
Medium term notes payable 239 248
Zero coupon notes 102 91
Italian Lire bonds 159 159
Other liabilities 461 464
- -----------------------------------------------------------------------------
TOTAL LIABILITIES $1,937 $1,397
- -----------------------------------------------------------------------------
CAPITAL FUNDS:
Common stock $2,847 $1,898
Additional paid-in capital 85 106
Retained earnings 25,513 22,921
Accumulated other comprehensive income (206) 172
Treasury stock (1,108) (1,096)
- -----------------------------------------------------------------------------
TOTAL CAPITAL FUNDS 27,131 24,001
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL FUNDS $29,068 $25,398
=============================================================================
STATEMENT OF INCOME--PARENT COMPANY ONLY
(in millions)
- -----------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
===============================================================================================
Agency income (loss) $ (6) $ -- $ 1
Financial services income 263 106 227
Dividend income from consolidated subsidiaries:
Cash 856 1,458 1,142
Dividend income from partially-owned companies 14 22 7
Equity in undistributed net income of consolidated subsidiaries
and partially-owned companies 3,130 2,341 1,900
Other income (deductions)-net (119) (302) (81)
- -----------------------------------------------------------------------------------------------
Income before income taxes 4,138 3,625 3,196
Income taxes 372 293 299
- -----------------------------------------------------------------------------------------------
Net income $ 3,766 $ 3,332 $ 2,897
===============================================================================================
S-2
4
SCHEDULE II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
STATEMENT OF CASH FLOWS--PARENT COMPANY ONLY
(in millions)
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
=================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,766 $ 3,332 $ 2,897
- ---------------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Non-cash revenues, expenses, gains and losses included in income:
Equity in undistributed net income of consolidated subsidiaries and
partially-owned companies (3,130) (2,341) (1,900)
Change in premiums and insurance balances receivable and payable-net 30 32 22
Change in cumulative translation adjustments (18) 41 66
Other-net 174 401 (294)
- ---------------------------------------------------------------------------------------------------------------------------------
Total adjustments (2,944) (1,867) (2,106)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 822 1,465 791
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investments (154) (10) --
Sale of investments -- -- 34
Change in short-term investments (9) (1) 10
Change in collateral and guaranteed loans (25) (237) 2
Contributions to subsidiaries and investments in partially-owned companies (551) (700) (292)
Other-net (36) (4) (94)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (775) (952) (340)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in medium term notes (9) 108 25
Proceeds from common stock issued 40 37 23
Change in loans payable 218 44 151
Cash dividends to shareholders (225) (199) (174)
Acquisition of treasury stock (81) (508) (494)
Other-net 8 8 19
- -----------------------------------------------------------------------------`----------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (49) (510) (450)
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH (2) 3 1
CASH AT BEGINNING OF YEAR 4 1 --
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 2 $ 4 $ 1
=================================================================================================================================
NOTES TO FINANCIAL STATEMENTS--PARENT COMPANY ONLY
(1) Agency operations conducted in New York through the North American Division
of AIU are included in the financial statements of the parent company.
(2) Certain accounts have been reclassified in the 1997 and 1996 financial
statements to conform to their 1998 presentation.
(3) "Equity in undistributed net income of consolidated subsidiaries and
partially-owned companies" in the accompanying Statement of Income--Parent
Company Only--includes equity in income of the minority-owned insurance
operations.
(4) See also Notes to Consolidated Financial Statements.
S-3
5
SCHEDULE III
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 1998, 1997 AND 1996 AND FOR THE YEARS THEN ENDED
(in millions)
- -----------------------------------------------------------------------------------
RESERVES FOR
LOSSES AND
DEFERRED LOSS RESERVE POLICY
POLICY EXPENSES, FOR AND
ACQUISITION FUTURE POLICY UNEARNED CONTRACT PREMIUM
SEGMENT COSTS BENEFITS(A) PREMIUMS CLAIMS(B) REVENUE
- -----------------------------------------------------------------------------------
1998
GENERAL INSURANCE $ 1,852 $38,310 $10,009 $ -- $14,098
LIFE INSURANCE 5,795 29,571 -- 1,135 10,247
- -----------------------------------------------------------------------------------
$ 7,647 $67,881 $10,009 $ 1,135 $24,345
===================================================================================
1997
General insurance $ 1,637 $33,400 $ 8,739 $ -- $12,421
Life insurance 4,956 24,502 -- 795 9,926
- -----------------------------------------------------------------------------------
$ 6,593 $57,902 $ 8,739 $ 795 $22,347
===================================================================================
1996
General insurance $ 1,416 $33,430 $ 7,599 $ -- $11,855
Life insurance 5,055 24,003 -- 794 8,978
- -----------------------------------------------------------------------------------
$ 6,471 $57,433 $ 7,599 $ 794 $20,833
===================================================================================
(in millions)
- --------------------------------------------------------------------------------------------
LOSSES AND AMORTIZATION
LOSS OF DEFERRED
NET EXPENSES POLICY OTHER NET
INVESTMENT INCURRED, ACQUISITION OPERATING PREMIUMS
SEGMENT INCOME BENEFITS COSTS(C) EXPENSES WRITTEN
============================================================================================
1998
GENERAL INSURANCE $ 2,192 $10,657 $ 1,358 $ 1,552 $14,586
LIFE INSURANCE 3,232 9,094 589 1,981 --
- --------------------------------------------------------------------------------------------
$ 5,424 $19,751 $ 1,947 $ 3,533 $14,586
============================================================================================
1997
General insurance $ 1,854 $ 9,356 $ 1,216 $ 1,359 $13,408
Life insurance 2,896 8,811 631 1,830 --
- --------------------------------------------------------------------------------------------
$ 4,750 $18,167 $ 1,847 $ 3,189 $13,408
============================================================================================
1996
General insurance $ 1,691 $ 8,997 $ 1,180 $ 1,228 $12,692
Life insurance 2,676 8,103 628 1,634 --
- --------------------------------------------------------------------------------------------
$ 4,367 $17,100 $ 1,808 $ 2,862 $12,692
============================================================================================
(a) Reserves for losses and loss expenses with respect to the general insurance
operations are net of discounts of $551 million, $294 million and $62
million for 1998, 1997 and 1996, respectively.
(b) Reflected in insurance balances payable on the accompanying balance sheet.
(c) Amounts shown for general insurance segment exclude amounts deferred and
amortized in the same period.
S-4
6
SCHEDULE IV
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
AS OF DECEMBER 31, 1998, 1997 AND 1996 AND FOR THE YEARS THEN ENDED
(dollars in millions)
- ---------------------------------------------------------------------------------------------------------------------------------
PERCENT OF
CEDED ASSUMED AMOUNT
TO OTHER FROM OTHER NET ASSUMED
GROSS AMOUNT COMPANIES COMPANIES AMOUNT TO NET
=================================================================================================================================
1998
Life insurance in-force $497,876 $ 58,235 $ 1,291 $440,932 0.3%
=================================================================================================================================
Premiums:
General insurance $ 17,931 $ 6,098 $ 2,753* $ 14,586 18.9%
Life insurance 10,504 285 28 10,247 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total premiums $ 28,435 $ 6,383 $ 2,781 $ 24,833 11.2%
=================================================================================================================================
1997
Life insurance in-force $435,330 $ 50,924 $ 1,243 $385,649 0.3%
=================================================================================================================================
Premiums:
General insurance $ 17,097 $ 5,334 $ 1,645 $ 13,408 12.3%
Life insurance 10,191 286 21 9,926 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
Total premiums $ 27,288 $ 5,620 $ 1,666 $ 23,334 7.1%
=================================================================================================================================
1996
Life insurance in-force $421,167 $ 44,691 $ 816 $377,292 0.2%
=================================================================================================================================
Premiums:
General insurance $ 16,696 $ 5,627 $ 1,623 $ 12,692 12.8%
Life insurance 9,227 261 12 8,978 0.1
- ---------------------------------------------------------------------------------------------------------------------------------
Total premiums $ 25,923 $ 5,888 $ 1,635 $ 21,670 7.5%
=================================================================================================================================
* The increase results from the consolidation of Transatlantic.
S-5
