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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, 2000
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
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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, 2001 was
approximately $152,474,241,000 computed upon the basis of the closing sales
price of the Common Stock on that date.
As of January 31, 2001, there were outstanding 2,333,119,315 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 16, 2001 is incorporated by reference in
Part III of this Form 10-K.
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2
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 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. Other significant activities include financial services and asset
management. 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"), The Hartford Steam
Boiler Inspection and Insurance Company ("HSB"), Transatlantic Reinsurance
Company, 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. The merger of SunAmerica Inc., a leading company in the
retirement savings and asset accumulation business, with and into AIG became
effective January 1, 1999. The transaction was treated as a pooling of interests
for accounting purposes. AIG issued 0.855 shares of common stock 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. For
information on AIG's business segments, see Note 18 of Notes to Financial
Statements.
All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 2001, beneficial ownership of
approximately 13.6 percent, 2.7 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, 2000, AIG and its subsidiaries had approximately 61,000
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, asset
management 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 18 of
Notes to Financial Statements.)
(dollars in millions)
- -----------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996
=====================================================================================================
General insurance operations:
Gross premiums written $ 25,050 $ 22,569 $ 20,684 $ 18,742 $ 18,319
Net premiums written 17,526 16,224 14,586 13,408 12,692
Net premiums earned 17,407 15,544 14,098 12,421 11,855
Adjusted underwriting profit(a) 785 669 531 490 450
Net investment income 2,701 2,517 2,192 1,854 1,691
Realized capital gains 38 295 205 128 65
Operating income 3,524 3,481 2,928 2,472 2,206
Identifiable assets 85,270 76,725 73,226 62,386 58,792
- -----------------------------------------------------------------------------------------------------
Loss ratio 75.3 75.5 75.6 75.3 75.9
Expense ratio 21.4 20.8 20.8 20.9 20.6
- -----------------------------------------------------------------------------------------------------
Combined ratio 96.7 96.3 96.4 96.2 96.5
=====================================================================================================
Life insurance operations:
Premium income 13,610 11,942 10,293 9,956 8,995
Net investment income 7,123 6,206 5,201 4,521 3,805
Realized capital gains (losses) (162) (148) (74) (9) 4
Operating income 3,387 2,858 2,373 2,048 1,657
Identifiable assets 142,045 128,697 103,611 87,747 72,275
Insurance in-force at end of year 583,059 584,959 503,649 443,323 429,992
Financial services operations:
Commissions, transaction and other fees 4,052 3,340 3,044 3,042 2,379
Operating income 1,293 1,081 869 671 501
Identifiable assets 81,016 66,567 59,198 51,110 43,074
Asset management operations:
Commissions and other fees 1,217 985 707 555 444
Operating income 430 314 191 127 101
Identifiable assets 1,590 1,132 915 646 787
Equity in income of minority-owned
insurance operations -- -- 57 114 99
Other realized capital losses (14) (25) (7) (29) (12)
Revenues (b) 45,972 40,656 35,716 32,553 29,325
Total assets 306,577 268,238 233,676 199,614 172,330
=====================================================================================================
(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, asset management commissions and other fees, equity in income
of minority-owned insurance operations, and realized capital gains
(losses). Commencing in 1997, agency operations were presented as a
component of general insurance and 1996 agency results have been
reclassified to conform to this presentation.
1
3
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, 2000. (See also Note 18 of Notes to
Financial Statements.)
(dollars in millions)
- -----------------------------------------------------------------------------------------------------------------
Percent of Total
--------------------------
United States Other United States Other
Total and Canada Countries and Canada Countries
=================================================================================================================
General insurance operations:
Net premiums earned $17,407 $11,739 $ 5,668 67.4% 32.6%
Adjusted underwriting profit 785 450 335 57.3 42.7
Net investment income 2,701 2,076 625 76.9 23.1
Realized capital gains 38 34 4 89.8 10.2
Operating income 3,524 2,560 964 72.7 27.3
Identifiable assets 85,270 64,381 20,889 75.5 24.5
Life insurance operations:
Premium income 13,610 1,255 12,355 9.2 90.8
Net investment income 7,123 3,926 3,197 55.1 44.9
Realized capital gains (losses) (162) (168) 6 -- --
Operating income 3,387 1,143 2,244 33.8 66.2
Identifiable assets 142,045 79,174 62,871 55.7 44.3
Financial services operations:
Commissions, transaction and other fees 4,052 3,250 802 80.2 19.8
Operating income 1,293 934 359 72.3 27.7
Identifiable assets 81,016 67,727 13,289 83.6 16.4
Asset management operations:
Commissions and other fees 1,217 1,028 189 84.4 15.6
Operating income 430 405 25 94.1 5.9
Identifiable assets 1,590 818 772 51.4 48.6
Other realized capital losses (14) (14) -- -- --
Income before income taxes and minority interest 8,349 4,797 3,552 57.5 42.5
Revenues 45,972 23,126 22,846 50.3 49.7
Total Assets 306,577 207,914 98,663 67.8 32.2
=================================================================================================================
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 70 foreign countries.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group, which includes the domestic operations of Transatlantic
Holdings, Inc. ("Transatlantic") and HSB, Personal Lines, including 21st Century
Insurance Group (21st Century), and Mortgage Guaranty.
Commencing with the third quarter of 1998, Transatlantic and 21st 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 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 DBG's environmental unit which focuses specifically on providing
specialty products to clients with environmental exposures.
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, environmental, workers' compensation and excess and umbrella
coverages, DBG offers many specialized forms of insurance such as equipment
breakdown, 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 and homeowners and personal umbrella coverages,
principally through American International Insurance Company and 21st Century.
2
4
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 $22 billion of mortgage guarantee
risk in-force at December 31, 2000.
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 2000, DBG and the Foreign General insurance group accounted for
50.2 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 risks 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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2000
Gross premiums $25,050 $24,062
Ceded premiums (7,524) (6,655)
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Net premiums $17,526 $17,407
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1999
Gross premiums $22,569 $21,187
Ceded premiums (6,345) (5,643)
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Net premiums $16,224 $15,544
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1998
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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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 9 percent of AIG's net premiums written. This line is well
diversified geographically.
The majority of AIG's general 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.)
3
5
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*
===============================================================================================================================
2000 $17,526 $17,407 75.3 21.4 96.7 3.3 109.6
1999 16,224 15,544 75.5 20.8 96.3 3.7 107.1
1998 14,586 14,098 75.6 20.8 96.4 3.6 104.9
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
===============================================================================================================================
*Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders); the ratio for 2000 reflects estimated results.
During 2000, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 12.7 percent and 6.9 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, 2000. (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 represents the accumulation
of estimates for reported losses ("case basis reserves") and provisions for
losses incurred but not reported ("IBNR"), both reduced by applicable
reinsurance recoverable. Losses and loss expenses are charged to income as
incurred. AIG discounts certain of its loss reserves principally related to
workers' compensation lines of business.
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(t) 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 1990 through 2000. 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 $17.56 billion as of December 31, 1993, by the end of 2000
(seven years later) $14.97 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 $17.56 billion was reestimated to be $18.63 billion at
December 31, 2000. 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 $335 million at December 31, 2000 related to December 31, 1999 net
losses and loss expense reserves of $24.60 billion represents the cumulative
amount by which reserves for 1999 and prior years have developed redundantly
during 2000. The reserve for net losses and loss expenses with respect to
Transatlantic and 21st Century are included only in the consolidated net losses
and loss expenses commencing with the year ended December 31, 1998. Reserve
development for these operations is included only for 1998 and subsequent
periods.
Over the past several years, AIG has 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.
4
6
Analysis of Consolidated Net Losses and
Loss Expense Reserve Development
(in millions)
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
===================================================================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $14,699 $15,840 $16,757 $17,557 $18,419 $19,693 $20,407 $21,171 $24,619 $24,600 $24,952
Paid (Cumulative) as of:
One Year Later 4,315 4,748 4,883 5,146 4,775 5,281 5,616 5,716 6,779 7,783
Two Years Later 7,350 8,015 8,289 8,242 8,073 8,726 9,081 9,559 11,565
Three Years Later 9,561 10,436 10,433 10,404 10,333 11,024 11,456 12,442
Four Years Later 11,224 11,815 11,718 12,095 12,107 12,591 13,376
Five Years Later 12,112 12,611 12,931 13,378 13,270 13,994
Six Years Later 12,615 13,472 13,894 14,179 14,290
Seven Years Later 13,235 14,193 14,502 14,968
Eight Years Later 13,804 14,654 15,105
Nine Years Later 14,147 15,158
Ten Years Later 14,573
Net Liability Reestimated as of:
End of Year 14,699 15,840 16,757 17,557 18,419 19,693 20,407 21,171 24,619 24,600 24,952
One Year Later 14,596 15,828 16,807 17,434 18,139 19,413 20,009 20,890 24,237 24,265
Two Years Later 14,595 15,903 16,603 17,479 18,269 19,330 19,999 20,886 23,864
Three Years Later 14,724 15,990 16,778 17,782 18,344 19,327 20,151 20,572
Four Years Later 14,965 16,254 17,182 18,090 18,344 19,604 19,916
Five Years Later 15,361 16,712 17,600 18,300 18,535 19,500
Six Years Later 15,845 17,095 17,844 18,537 18,575
Seven Years Later 16,161 17,356 18,148 18,629
Eight Years Later 16,385 17,679 18,320
Nine Years Later 16,687 17,872
Ten Years Later 16,915
Redundancy/(Deficiency) (2,216) (2,032) (1,563) (1,072) (156) 193 491 599 755 335
===================================================================================================================================
5
7
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)
- ------------------------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
====================================================================================================================================
Reserve for Net Losses and
Loss Expenses, Excluding
Asbestos and Environmental
Losses and Loss Expenses,
December 31, $14,539 $15,639 $16,503 $17,249 $18,089 $19,186 $19,664 $20,384 23,754 $23,709 $24,097
Paid (Cumulative) as of:
One Year Later 4,260 4,691 4,766 5,061 4,700 5,174 5,507 5,576 6,657 7,712
Two Years Later 7,237 7,842 8,088 8,082 7,891 8,515 8,832 9,305 11,373
Three Years Later 9,333 10,178 10,157 10,137 10,048 10,673 11,094 12,122
Four Years Later 10,912 11,483 11,337 11,726 11,683 12,128 12,948
Five Years Later 11,727 12,175 12,448 12,871 12,734 13,466
Six Years Later 12,126 12,935 13,274 13,560 13,689
Seven Years Later 12,646 13,519 13,771 14,285
Eight Years Later 13,079 13,870 14,310
Nine Years Later 13,312 14,311
Ten Years Later 13,677
Net Liability Reestimated as of:
End of Year 14,539 15,639 16,503 17,249 18,089 19,186 19,664 20,384 23,754 23,709 24,097
One Year Later 14,341 15,518 16,382 17,019 17,556 18,568 19,118 19,903 23,229 23,345
Two Years Later 14,232 15,422 16,073 16,813 17,355 18,347 18,910 19,771 22,827
Three Years Later 14,190 15,403 15,997 16,790 17,293 18,141 18,934 19,428
Four Years Later 14,327 15,417 16,081 16,960 17,090 18,292 18,670
Five Years Later 14,472 15,562 16,362 16,969 17,155 18,161
Six Years Later 14,648 15,808 16,404 17,080 17,169
Seven Years Later 14,828 15,869 16,582 17,146
Eight Years Later 14,854 16,067 16,731
Nine Years Later 15,032 16,238
Ten Years Later 15,241
Redundancy/(Deficiency) (702) (599) (228) 103 920 1,025 994 956 927 364
====================================================================================================================================
Reconciliation of Net Reserve for Losses and
Loss Expenses
(in millions)
- ----------------------------------------------------------------------------
2000 1999 1998
============================================================================
Net reserve for losses and loss
expenses at beginning of year $24,600 $24,619 $21,171
Acquisitions (a) 236 -- 2,896
- ----------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 13,356 12,122 10,938
Prior years (b) (252) (384) (281)
- ----------------------------------------------------------------------------
13,104 11,738 10,657
- ----------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 5,205 4,978 4,389
Prior years 7,783 6,779 5,716
- ----------------------------------------------------------------------------
12,988 11,757 10,105
- ----------------------------------------------------------------------------
Net reserve for losses and loss
expenses at end of year (c) $24,952 $24,600 $24,619
============================================================================
(a) Acquisitions include the opening balances with respect to HSB in 2000 and
Transatlantic and 21st Century in 1998.
(b) Does not include the effects of foreign exchange adjustments which are
reflected in the "Net Losses and Loss Expense Reserve Development" table.
(c) See also Note 6(a) of Notes to Financial Statements.
Approximately 48 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, 2000, 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, 2000 relate primarily to reserves for 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 IBNR. Management reviews the
adequacy of established gross loss reserves in the manner previously described
for net loss reserves.
6
8
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 2000. As with the net losses
and loss expense reserve development, the deficiencies of $2.30 billion and
$1.50 billion for 1992 and 1993, and redundancies of $307 million, $622 million,
$1.04 billion, $590 million, $351 million and $254 million for 1994, 1995, 1996,
1997, 1998 and 1999 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)
- ------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999 2000
==================================================================================================================
Gross Losses and
Loss Expenses,
December 31, $28,157 $30,046 $31,435 $33,047 $33,430 $33,400 $38,310 $38,252 $40,613
Paid (Cumulative)
as of:
One Year Later 7,281 8,807 7,640 8,392 9,199 9,185 10,344 12,543
Two Years Later 13,006 13,279 13,036 15,496 15,043 14,696 19,155
Three Years Later 16,432 17,311 17,540 18,837 18,721 19,706
Four Years Later 18,550 20,803 20,653 21,811 21,729
Five Years Later 21,322 22,895 22,634 23,463
Six Years Later 22,807 23,779 24,205
Seven Years Later 23,684 25,239
Eight Years Later 25,060
Gross Liability Reestimated
as of:
End of Year 28,157 30,046 31,435 33,047 33,430 33,400 38,310 38,252 40,613
One Year Later 28,253 29,866 30,759 32,372 32,777 32,337 37,161 37,998
Two Years Later 27,825 29,537 30,960 32,398 31,719 32,251 37,959
Three Years Later 27,727 30,362 30,825 31,759 31,407 32,810
Four Years Later 28,625 31,020 30,508 31,604 32,388
Five Years Later 29,701 30,881 30,417 32,425
Six Years Later 29,605 30,969 31,128
Seven Years Later 29,929 31,546
Eight Years Later 30,452
Redundancy/(Deficiency) (2,295) (1,500) 307 622 1,042 590 351 254
==================================================================================================================
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 90.8 percent of
life premium income and 66.2 percent of operating income in 2000. 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
88.1 percent of AIG's consolidated life premium income in 2000. (See also Note
18 of Notes to Financial Statements.)
AIG's domestic life operations are comprised of two separate operations,
AIG's domestic life companies and the life insurance subsidiaries of SunAmerica.
AIG's domestic life subsidiaries are American International Life Assurance
Company of New York and AIG Life Insurance 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. SunAmerica sells primarily financial and
investment type products. The domestic life operations comprised 9.2 percent of
total life premium income in 2000.
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, 2000. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
7
9
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 the
Philippines, Canada, Mexico, Poland, Switzerland, Puerto Rico, and conducts life
insurance business through AIUO subsidiary companies in Russia, Israel and in
certain countries in Central and South America.
The foreign life companies have over 140,000 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 tables summarize the life insurance operating results for
the years ended December 31, 2000, 1999 and 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 -----------------
December 31, 2000 Income Income Income(a) In-Force Lapse Other
=======================================================================================================================
Individual:
Life $ 9,533 $3,081 $1,664 $427,108(b) 8.3% 1.5%
Annuity 490 1,467 289 (c)
Accident and health 1,945 130 529 (c)
Group:
Life 653 40 83 155,951 7.7% 4.2%
Pension 351 2,383 952 (c)
Accident and health 638 31 41 (c)
Realized capital losses -- -- (162) (c)
Consolidation adjustments -- (9) (9) (c)
- -----------------------------------------------------------------------------------------------------------------------
Total $13,610 $7,123 $3,387 $583,059
=======================================================================================================================
(a) Including income related to investment type products.
(b) Including $282.7 billion of whole life insurance and endowments.
(c) Not applicable.
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------
Average
Net Termination Rate
Premium Investment Operating Insurance -----------------
December 31, 1999 Income Income Income(a) In-Force Lapse Other
=======================================================================================================================
Individual:
Life $ 8,491 $2,630 $1,487 $431,507(b) 7.0% 1.6%
Annuity 334 1,600 244 (c)
Accident and health 1,643 115 432 (c)
Group:
Life 619 37 66 153,452 8.5% 2.7%
Pension 252 1,805 765 (c)
Accident and health 603 27 20 (c)
Realized capital losses -- -- (148) (c)
Consolidation adjustments -- (8) (8) (c)
- ----------------------------------------------------------------------------------------------------------------------
Total $11,942 $6,206 $2,858 $584,959
=======================================================================================================================
(a) Including income related to investment type products.
(b) Including $304.7 billion of whole life insurance and endowments.
(c) Not applicable.
- ----------------------------------------------------------------------------------------------------------------------
Average
Net Termination Rate
Premium Investment Operating Insurance -----------------
December 31, 1998 Income Income Income(a) In-Force Lapse Other
=======================================================================================================================
Individual:
Life $ 7,391 $2,260 $1,244 $381,181(b) 6.8% 1.4%
Annuity 284 1,598 292 (c)
Accident and health 1,297 95 361 (c)
Group:
Life 513 32 55 122,468 10.6% 5.1%
Pension 229 1,197 480 (c)
Accident and health 579 27 23 (c)
Realized capital losses -- -- (74) (c)
Consolidation adjustments -- (8) (8) (c)
- -----------------------------------------------------------------------------------------------------------------------
Total $10,293 $5,201 $2,373 $503,649
=======================================================================================================================
(a) Including income related to investment type products.
(b) Including $280.1 billion of whole life insurance and endowments.
(c) Not applicable.
8
10
AIG's individual life insurance and group life insurance portfolio
accounted for 49 percent, 52 percent and 53 percent of AIG's consolidated life
insurance operating income before realized capital losses for the years ended
December 31, 2000, 1999 and 1998, respectively. For the years ended December 31,
2000, 1999 and 1998, 63.1 percent, 64.7 percent and 68.0 percent, respectively,
of consolidated life operating income before realized capital 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 18 of Notes to Financial Statements.)
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, 2000 and 1999:
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
General Life Percent ---------------------
December 31, 2000 Insurance Insurance Total of Total Domestic Foreign
==================================================================================================================================
Fixed maturities:
Available for sale, at market value (a) $18,168 $72,159 $ 90,327 63.8% 51.8% 48.2%
Held to maturity, at amortized cost 11,533 -- 11,533 8.1 100.0 --
Equity securities, at market value (b) 4,666 2,309 6,975 4.9 55.4 44.6
Mortgage loans on real estate, policy and collateral loans 65 10,563 10,628 7.5 58.6 41.4
Short-term investments, including time deposits, and cash 1,448 4,066 5,514 3.9 44.8 55.2
Real estate 408 1,359 1,767 1.3 16.6 83.4
Investment income due and accrued 584 1,689 2,273 1.6 46.8 53.2
Other invested assets 6,020 6,566 12,586 8.9 88.3 11.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total $42,892 $98,711 $141,603 100.0% 58.9% 41.1%
==================================================================================================================================
(a) Includes $846 million of bonds trading securities, at market value.
(b) Includes $1.04 billion of non-redeemable preferred stocks, at market
value.
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
General Life Percent ---------------------
December 31, 1999 Insurance Insurance Total of Total Domestic Foreign
====================================================================================================================================
Fixed maturities:
Available for sale, at market value (a) $16,903 $61,022 $ 77,925 61.6% 53.5% 46.5%
Held to maturity, at amortized cost 12,078 -- 12,078 9.5 100.0 --
Equity securities, at market value (b) 4,000 2,503 6,503 5.1 50.2 49.8
Mortgage loans on real estate, policy and collateral loans 70 10,420 10,490 8.3 57.0 43.0
Short-term investments, including time deposits, and cash 977 5,710 6,687 5.3 45.1 54.9
Real estate 381 1,141 1,522 1.2 18.5 81.5
Investment income due and accrued 576 1,421 1,997 1.6 48.0 52.0
Other invested assets 4,150 5,138 9,288 7.4 85.1 14.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total $39,135 $87,355 $126,490 100.0% 59.5% 40.5%
====================================================================================================================================
(a) Includes $1.04 billion of bonds trading securities, at market value.
(b) Includes $697 million of non-redeemable preferred stocks, at market value.
9
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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
================================================================================================================================
2000 $1,212 $39,801 $41,013 $2,701 6.6%(c) 6.8%(d) $ 38
1999 925 38,084 39,009 2,517 6.5 (c) 6.6 (d) 295
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
================================================================================================================================
(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)
================================================================================================================================
2000 $4,888 $88,145 $93,033 $7,123 7.7%(c) 8.1%(d) $(162)
1999 5,772 75,444 81,216 6,206 7.6 (c) 8.2 (d) (148)
1998 4,619 65,796 70,415 5,201 7.4 (c) 7.9 (d) (74)
1997 2,467 57,849 60,316 4,521 7.5 (c) 7.8 (d) (9)
1996 1,809 48,158 49,967 3,805 7.6 (c) 7.9 (d) 4
================================================================================================================================
(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 aircraft, consumer and premium financing, and banking
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. Also, ILFC provides,
for a fee, fleet management services to certain third-party operators. (See also
Note 18 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 18 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 18 of Notes to Financial Statements.)
Together these three operations comprise 92.6 percent of the commissions,
transaction and other fees of AIG's consolidated financial services operations.
10
12
The following table is a summary of the composition of AIG's financial
services and asset management invested assets and liabilities at December 31,
2000 and 1999. (See also Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 1 of Notes to Financial
Statements.)
(in millions)
- ----------------------------------------------------------------------------
2000 1999
============================================================================
Financial services and asset management
invested assets:
Flight equipment primarily under operating
leases, net of accumulated depreciation $19,325 $17,334
Unrealized gain on interest rate and currency
swaps, options and forward transactions 10,235 7,931
Securities available for sale, at market value 14,669 12,954
Trading securities, at market value 7,347 4,391
Securities purchased under agreements to
resell, at contract value 14,979 10,897
Trading assets 7,045 5,793
Spot commodities, at market value 363 683
Other, including short-term investments 2,785 2,565
- ----------------------------------------------------------------------------
Total $76,748 $62,548
============================================================================
Financial services and asset management liabilities:
Borrowings under obligations of guaranteed
investment agreements $13,595 $ 9,430
Securities sold under agreements to
repurchase, at contract value 11,308 6,116
Trading liabilities 4,352 3,821
Securities and spot commodities sold but not
yet purchased, at market value 7,701 6,413
Unrealized loss on interest rate and currency
swaps, options and forward transactions 8,581 8,624
Trust deposits and deposits due to banks and
other depositors 1,895 2,175
Commercial paper 4,259 2,958
Notes, bonds and loans payable 17,923 16,806
- ----------------------------------------------------------------------------
Total $69,614 $56,343
============================================================================
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,
2000, 1999 and 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)
- ----------------------------------------------------------------------------
Operating
Revenues Income
============================================================================
2000
ILFC $2,441 $654
AIGFP* 1,056 648
AIGTG* 254 62
- ----------------------------------------------------------------------------
1999
ILFC $2,194 $590
AIGFP* 737 482
AIGTG* 227 109
- ----------------------------------------------------------------------------
1998
ILFC $2,002 $496
AIGFP* 550 323
AIGTG* 374 123
============================================================================
*Revenues represent commissions, transaction and other fees.
A.I. Credit Corp. also contributes to financial services income. This
operation engages principally in premium financing. AIG Consumer Finance Group,
Inc., through its subsidiaries, is engaged in developing a multi-product
consumer finance business with an emphasis on emerging markets. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1, 9 and 12 of Notes to Financial Statements.)
Asset Management Operations
AIG's asset management operations offer a wide variety of investment vehicles
and services, including variable annuities, mutual funds, and investment asset
management. Such products and services are offered to individuals and
institutions both domestically and internationally.
AIG's three principal asset management operations are SunAmerica's asset
management operations (SAAMCo), AIG Global Investment Group, Inc. and its
subsidiaries (Global Investment) and AIG Capital Partners, Inc. (Cap Partners).
SAAMCo develops and sells variable annuities and other investment products,
sells and manages mutual funds and provides financial services. Global
Investment manages third-party institutional, retail and private equity funds
invested assets on a global basis, and provides custodial services. Cap Partners
organizes, and manages the invested assets of institutional investment funds and
may also invest in such funds. Each of these subsidiary operations receives fees
for investment products and services provided.
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
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(o) of Notes to Financial Statements.)
Locations of Certain Assets
As of December 31, 2000, approximately 32 percent of the consolidated
assets of AIG were located in foreign countries (other than Canada), including
$816 million 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
11
13
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 18 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 11 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
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, 2000.
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.
Privacy provisions of the Gramm-Leach-Bliley Act are fully effective in
2001 and establish new consumer protections regarding the security,
confidentiality, and uses of nonpublic personal information of individuals. The
law also requires financial institutions to disclose their privacy policies to
their customers. Additional privacy legislation pending in the United States
Congress, several states, and other countries is designed to provide further
privacy protections to consumers of financial products and services. These
statutes and regulations may result in additional regulatory compliance costs,
limit AIG's ability to market its products, or otherwise constrain the nature
or scope of AIG's insurance and financial services operations.
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
on 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 360 offices in the
United States, 5 offices in Canada and numerous offices in approximately 100
foreign countries. The offices in Springfield, Illinois; Houston, Texas;
Atlanta, Georgia; Baton Rouge,
12
14
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
There were no matters submitted to a vote of security holders during the fourth
quarter of 2000.
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 72 1984
Eli Broad Director 67 1999
Pei-yuan Chia Director 62 1996
Marshall A. Cohen Director 66 1992
Barber B. Conable, Jr. Director 78 1991
Martin S. Feldstein Director 61 1987
Ellen V. Futter Director 51 1999
M. R. Greenberg* Director, Chairman and Chief Executive Officer 75 1967
Carla A. Hills Director 67 1993
Frank J. Hoenemeyer* Director 81 1985
Richard C. Holbrooke Director 59 2001
Edward E. Matthews* Director and Vice Chairman-Investments and Financial Services 69 1973
Howard I. Smith Director, Executive Vice President and Chief Financial Officer 56 1984
Thomas R. Tizzio* Director and Senior Vice Chairman-General Insurance 63 1982
Edmund S. W. Tse Director and Vice Chairman-Life Insurance 63 1991
Jay S. Wintrob Director 44 1999
Frank G. Wisner Director and Vice Chairman-External Affairs 62 1997
Frank G. Zarb Director 65 2001
Kristian P. Moor Executive Vice President-Domestic General Insurance 41 1998
R. Kendall Nottingham Executive Vice President-Life Insurance 62 1998
Robert M. Sandler Executive Vice President, Senior Casualty Actuary and Senior Claims Officer 58 1980
Martin J. Sullivan Executive Vice President-Foreign General Insurance 46 1997
William N. Dooley Senior Vice President-Financial Services 48 1992
Lawrence W. English Senior Vice President-Administration 59 1985
Axel I. Freudmann Senior Vice President-Human Resources 54 1986
Win J. Neuger Senior Vice President and Chief Investment Officer 51 1995
Ernest T. Patrikis Senior Vice President and General Counsel 57 1998
Michael J. Castelli Vice President and Comptroller 45 1998
Donald P. Kanak Vice President and Chief Executive Officer of AIG Companies in Japan and Korea 48 1998
Robert E. Lewis Vice President and Chief Credit Officer 50 1993
Charles M. Lucas Vice President and Director of Market Risk Management 62 1996
Carol A. McFate Vice President and Treasurer 48 1998
Frank Petralito II Vice President and Director of Taxes 64 1978
Kathleen E. Shannon Vice President and Secretary 51 1986
John T. Wooster, Jr. Vice President-Communications 61 1989
====================================================================================================================================
*Member of Executive Committee.
13
15
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. 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. 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. Ms. McFate was Assistant Treasurer of AIG and Director of Financial
Analysis of AIG prior to being elected Treasurer of AIG in 1998. 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.
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 on the New York Stock Exchange Composite Tape, for each
quarter of 2000 and 1999, as adjusted for the common stock split in the form of
a 50 percent common stock dividend paid July 28, 2000 and the common stock split
in the form of a 25 percent common stock dividend paid July 30, 1999.
- ----------------------------------------------------------------------------
2000 1999
---------------- ---------------
High Low High Low
============================================================================
First Quarter 76.04 54.29 65.40 52.00
Second Quarter 82.17 67.75 70.90 59.47
Third Quarter 95.69 78.79 66.50 56.33
Fourth Quarter 103.69 90.13 74.46 54.67
============================================================================
(b) In 2000, AIG paid a quarterly dividend of 3.3 cents in March and June
and 3.7 cents in September and December for a total cash payment of 14 cents per
share of common stock. In 1999, AIG paid a quarterly dividend of 3.0 cents in
March and June and 3.3 cents in September and December for a total cash payment
of 12.6 cents per share of common stock. These amounts reflect the adjustment
for common stock splits described above. 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 11(a) 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,
2001, based upon the number of record holders, was 32,000.
================================================================================
14
16
ITEM 6. Selected Financial Data
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data, which has been restated to
include the operations of SunAmerica Inc., the Maryland corporation which was
merged into AIG on January 1, 1999, on a pooling of interest basis, 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, 2000 1999 1998 1997 1996
===============================================================================================================================
Revenues (a) $ 45,972 $ 40,656 $ 35,716 $ 32,553 $ 29,325
General insurance:
Net premiums written 17,526 16,224 14,586 13,408 12,692
Net premiums earned 17,407 15,544 14,098 12,421 11,855
Adjusted underwriting profit 785 669 531 490 450
Net investment income 2,701 2,517 2,192 1,854 1,691
Realized capital gains 38 295 205 128 65
Operating income 3,524 3,481 2,928 2,472 2,206
Life insurance:
Premium income 13,610 11,942 10,293 9,956 8,995
Net investment income 7,123 6,206 5,201 4,521 3,805
Realized capital gains (losses) (162) (148) (74) (9) 4
Operating income 3,387 2,858 2,373 2,048 1,657
Financial services operating income 1,293 1,081 869 671 501
Asset management operating income 430 314 191 127 101
Equity in income of minority-owned insurance operations -- -- 57 114 99
Other realized capital losses (14) (25) (7) (29) (12)
Other income (deductions)-net (271) (197) (134) (93) (84)
Income before income taxes and minority interest 8,349 7,512 6,277 5,310 4,468
Income taxes 2,458 2,219 1,785 1,525 1,234
Income before minority interest 5,891 5,293 4,492 3,785 3,234
Minority interest (255) (238) (210) (74) (63)
Net income 5,636 5,055 4,282 3,711 3,171
Earnings per common share (b):
Basic 2.43 2.18 1.87 1.63 1.39
Diluted 2.41 2.15 1.83 1.60 1.37
Cash dividends per common share (c) .14 .13 .11 .10 .09
Total assets 306,577 268,238 233,676 199,614 172,330
Long-term debt (d) 25,242 22,896 22,720 18,950 18,079
Capital funds (shareholders' equity) 39,619 33,306 30,123 26,585 23,705
===============================================================================================================================
(a) Represents the sum of general net premiums earned, life premium income,
net investment income, financial services commissions, transaction and
other fees, asset management commissions and other fees, equity in income
of minority-owned insurance operations, and realized capital gains
(losses). Commencing in 1997, agency operations were presented as a
component of general insurance and 1996 agency results have been
reclassified to conform to this presentation.
(b) Per share amounts for all periods presented have been retroactively
adjusted to reflect all stock dividends and splits and reflect the
adoption of the Statement of Financial Accounting Standards No. 128
"Earnings per Share."
(c) Cash dividends have not been restated to reflect dividends paid by
SunAmerica Inc.
(d) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
15
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American International Group, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statement Regarding Forward-Looking Information
This Annual Report and other publicly available documents may include, and AIG's
officers and representatives may from time to time make, statements which may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are not historical
facts but instead represent only AIG's belief regarding future events, many of
which, by their nature, are inherently uncertain and outside of AIG's control.
These statements may address, among other things, AIG's strategy for growth,
product development, regulatory approvals, market position, financial results
and reserves. It is possible that AIG's actual results and financial condition
may differ, possibly materially, from the anticipated results and financial
condition indicated in these forward-looking statements. Important factors that
could cause AIG's actual results to differ, possibly materially, from those in
the specific forward-looking statements are discussed throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. AIG is not under any obligation to (and expressly disclaims any such
obligations to) update or alter any forward-looking statement, whether written
or oral, that may be made from time to time, whether as a result of new
information, future events or otherwise.
Operational Review
General Insurance Operations
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group (DBG), which includes The Hartford Steam Boiler Inspection and
Insurance Company (HSB) and the domestic operations of Transatlantic Holdings,
Inc. (Transatlantic), Personal Lines, including 21st Century Insurance Group
(21st Century), and Mortgage Guaranty.
Commencing with the latter part of the fourth quarter of 2000, HSB, and
the third quarter of 1998, Transatlantic and 21st Century were consolidated into
AIG's financial statements, as a result of AIG obtaining majority ownership.
DBG is AIG's 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.
Personal Lines engages in the mass marketing of personal lines insurance,
primarily private passenger auto and homeowners and personal umbrella coverages.
Mortgage Guaranty provides guaranty insurance on conventional first
mortgage loans on single family dwellings and condominiums.
AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters (AIU), a marketing unit consisting
of wholly owned agencies and insurance entities. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General insurance group uses
various marketing methods to write both business and personal lines insurance
with certain refinements for local laws, customs and needs. AIU operates in over
70 countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America. Transatlantic's foreign operations are included in this group. (See
also Note 18 of Notes to Financial Statements.)
General insurance operations for the twelve month periods ending December
31, 2000, 1999 and 1998 were as follows:
(in millions)
- ----------------------------------------------------------------------------
2000 1999 1998
============================================================================
Net premiums written*:
Domestic $11,768 $10,856 $ 9,976
Foreign 5,758 5,368 4,610
- ----------------------------------------------------------------------------
Total $17,526 $16,224 $14,586
============================================================================
Net premiums earned*:
Domestic $11,739 $10,263 $ 9,659
Foreign 5,668 5,281 4,439
- ----------------------------------------------------------------------------
Total $17,407 $15,544 $14,098
============================================================================
Adjusted underwriting profit*:
Domestic $ 450 $ 368 $ 15
Foreign 335 301 516
- ----------------------------------------------------------------------------
Total $ 785 $ 669 $ 531
============================================================================
Net investment income:
Domestic $ 2,076 $ 1,995 $ 1,754
Foreign 625 522 438
- ----------------------------------------------------------------------------
Total $ 2,701 $ 2,517 $ 2,192
============================================================================
Operating income before
realized capital gains*:
Domestic $ 2,526 $ 2,363 $ 1,769
Foreign 960 823 954
- ----------------------------------------------------------------------------
Total 3,486 3,186 2,723
Realized capital gains 38 295 205
- ----------------------------------------------------------------------------
Operating income $ 3,524 $ 3,481 $ 2,928
============================================================================
*Reflects the realignment of certain internal divisions.
In AIG's general insurance operations, 2000 net premiums written and net
premiums earned increased 8.0 percent and 12.0 percent, respectively, from those
of 1999. During 2000, AIG cancelled or non-renewed approximately $380 million of
business worldwide that did not meet AIG's underwrit-
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American International Group, Inc. and Subsidiaries
ing standards. In 1999, net premiums written increased 11.2 percent and net
premiums earned increased 10.3 percent when compared to 1998.
General insurance domestic net premiums written and net premiums earned
were as follows:
(in millions)
- ----------------------------------------------------------------------------
2000 1999 1998
============================================================================
Net premiums written:
DBG* $ 8,805 $ 8,297 $8,191
Personal Lines 2,510 2,162 1,422
Mortgage Guaranty 453 397 363
- ----------------------------------------------------------------------------
Total* $11,768 $10,856 $9,976
============================================================================
Net premiums earned:
DBG* $ 8,886 $ 7,788 $8,002
Personal Lines 2,401 2,079 1,280
Mortgage Guaranty 452 396 377
- ----------------------------------------------------------------------------
Total* $11,739 $10,263 $9,659
============================================================================
*Reflects the realignment of certain internal divisions.
Commencing in the latter part of 1999 and continuing through 2000, the
commercial property-casualty market place has experienced rate increases.
Virtually all areas of DBG have experienced rate increases. Overall, DBG's net
premiums written increased $508 million or 6.1 percent in 2000 over 1999. These
increases compared to an increase of $106 million or 1.3 percent in 1999 over
1998.
Personal Lines' net premiums written increased 16.1 percent or $348
million in 2000 over 1999, compared to an increase of 52.0 percent or $740
million in 1999 over 1998. The growth in 2000 primarily resulted from an
increase in the number of policies issued with respect to preferred, standard
and non-standard auto risks. 21st Century was consolidated into AIG's Personal
Lines results for the twelve months of 1999 and last six months of 1998.
Approximately half the growth in 1999 over 1998 was attributable to the
inclusion of twelve months of operations of 21st Century. The remainder of the
growth was due to the aforementioned growth in policy issuance. AIG has filed
for rate increases in a number of states where inadequate rates persist.
Growth of 7.3 percent for both foreign general insurance net premiums
written and net premiums earned in 2000 over 1999 reflect growth of operations
in the United Kingdom, Continental Europe and the Far East. Growth of 16.4
percent and 19.0 percent for foreign general insurance net premiums written and
net premiums earned, respectively, reflect growth of operations in the same
aforementioned geographic regions and the consolidation of Transatlantic's
foreign operations for twelve months in 1999 compared to six months in 1998.
Foreign general insurance operations produced 32.9 percent of the general
insurance net premiums written in 2000, 33.1 percent in 1999 and 31.6 percent in
1998.
Differences in foreign exchange rates during 2000 relative to 1999 had a
negligible effect on foreign general insurance net premiums written when
translated from original currencies into U.S. dollars. (See also the discussion
under "Capital Resources" herein.)
Because of the nature and diversity of AIG's operations and the continuing
rapid changes in the insurance industry worldwide, together with the factors
discussed above, it is difficult to assess further or project future growth in
AIG's net premiums written and reserve for losses and loss expenses.
Net premiums written are initially deferred and earned based upon the
terms of the underlying policies. The net unearned premium reserve constitutes
deferred revenues which are generally earned ratably over the policy period.
Thus, the net unearned premium reserve is not fully recognized as net premiums
earned until the end of the policy period.
AIG, along with most general insurance entities, uses the loss ratio, the
expense ratio and the combined ratio as measures of performance. The loss ratio
is the sum of losses and loss expenses incurred divided by net premiums earned.
The expense ratio is statutory underwriting expenses divided by net premiums
written. The combined ratio is the sum of the loss ratio and the expense ratio.
These ratios are relative measurements that describe for every $100 of net
premiums earned or written, the cost of losses and statutory expenses,
respectively. The combined ratio presents the total cost per $100 of premium
production. A combined ratio below 100 demonstrates underwriting profit; a
combined ratio above 100 demonstrates underwriting loss. The statutory general
insurance ratios were as follows:
- ----------------------------------------------------------------------------
2000 1999 1998
============================================================================
Domestic:
Loss Ratio 81.00 81.30 83.98
Expense Ratio 16.94 16.33 16.06
- ----------------------------------------------------------------------------
Combined Ratio 97.94 97.63 100.04
============================================================================
Foreign:
Loss Ratio 63.44 64.27 57.32
Expense Ratio 30.65 29.95 30.96
- ----------------------------------------------------------------------------
Combined Ratio 94.09 94.22 88.28
============================================================================
Consolidated:
Loss Ratio 75.28 75.51 75.59
Expense Ratio 21.45 20.84 20.77
- ----------------------------------------------------------------------------
Combined Ratio 96.73 96.35 96.36
============================================================================
AIG believes that underwriting profit is the true measure of the
performance of the core business of a general insurance company.
Underwriting profit is measured in two ways: statutory underwriting profit
and Generally Accepted Accounting Principles (GAAP) underwriting profit.
Statutory underwriting profit is arrived at by reducing net premiums earned
by net losses and loss expenses incurred and net expenses incurred. Statutory
accounting differs from GAAP, as statutory accounting requires immediate expense
recognition and ignores the matching of revenues and expenses as required by
GAAP. That is, for statutory purposes, all expenses, most specifically
acquisition expenses, are recognized immediately, not consistent with the
revenues earned.
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19
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (CONTINUED)
A basic premise of GAAP accounting is the recognition of expenses at the
same time revenues are earned, the principle of matching. Therefore, to convert
underwriting results to a GAAP basis, acquisition expenses are deferred and
recognized together with the related revenues. Accordingly, the statutory
underwriting profit has been adjusted as a result of acquisition expenses being
deferred as required by GAAP. Thus, "adjusted underwriting profit" is a GAAP
measurement which can be viewed as gross margin or an intermediate subtotal in
calculating operating income and net income.
A major part of the discipline of a successful general insurance company
is to produce an underwriting profit, exclusive of investment income. If
underwriting is not profitable, losses incurred are a major factor. The result
is that the premiums are inadequate to pay for losses and expenses and produce a
profit; therefore, investment income must be used to cover underwriting losses.
If assets and the income therefrom are insufficient to pay claims and expenses
over extended periods, an insurance company cannot survive. For these reasons,
AIG views and manages its underwriting operations separately from its investment
operations.
The adjusted underwriting profits were $785 million in 2000, $669 million
in 1999 and $531 million in 1998. Domestic adjusted underwriting profit
increased primarily as a result of the disciplined underwriting of DBG. In 1999,
foreign underwriting profit declined primarily as a result of catastrophe losses
from European storms. The regulatory, product type and competitive environment
as well as the degree of litigation activity in any one country varies
significantly. These factors have a direct impact on pricing and consequently
profitability as reflected by adjusted underwriting profit and statutory general
insurance ratios. (See also Notes 4 and 18 of Notes to Financial Statements.)
AIG's results reflect the net impact of incurred losses from catastrophes
approximating $44 million in 2000, $156 million in 1999 and $110 million in
1998. AIG's gross incurred losses from catastrophes approximated $112 million in
2000, $472 million in 1999 and $625 million in 1998. The impact of losses caused
by catastrophes can fluctuate widely from year to year, making comparisons of
recurring type business more difficult. The pro forma table below excludes
catastrophe losses in order to present comparable results of AIG's recurring
core underwriting operations. The pro forma consolidated statutory general
insurance ratios would be as follows:
- --------------------------------------------
2000 1999 1998
============================================
Loss Ratio 75.03 74.51 74.81
Expense Ratio 21.45 20.84 20.77
- --------------------------------------------
Combined Ratio 96.48 95.35 95.58
============================================
AIG's historic ability to maintain its combined ratio below 100 is
primarily attributable to the profitability of AIG's foreign general insurance
operations and AIG's emphasis on maintaining its disciplined underwriting,
especially in the domestic specialty markets. In addition, AIG does not seek net
premium growth where rates do not adequately reflect its assessment of
exposures.
General insurance net investment income in 2000 increased 7.3 percent when
compared to 1999. In 1999, net investment income increased 14.8 percent over
1998. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment and the consolidation of
Transatlantic and 21st Century for twelve months in 1999 compared to six months
in 1998. 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 $38 million in 2000, $295
million in 1999 and $205 million in 1998. 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 2000 increased 1.3 percent when
compared to 1999. The 1999 results reflect an increase of 18.9 percent from
1998. The contribution of general insurance operating income to income before
income taxes and minority interest was 42.2 percent in 2000 compared to 46.3
percent in 1999 and 46.6 percent in 1998.
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 70 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $22.90 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 2000 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, 2000, approximately 43 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, nearly all of these balances were collateralized. The
remaining 57 percent of the general reinsurance assets were from authorized
reinsurers and over 95 percent of such balances
18
20
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American International Group, Inc. and Subsidiaries
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, 2000,
AIG had allowances for unrecoverable reinsurance approximating $76 million. At
that date 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, 2000, the consolidated general reinsurance assets of
$22.90 billion include reinsurance recoverables for paid losses and loss
expenses of $3.33 billion and $15.66 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, 2000 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, 2000, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $40.61 billion. These loss reserves
represent the accumulation of estimates of ultimate losses, including IBNR, and
loss expenses and amounts of discounting related to certain workers'
compensation claims. At December 31, 2000, general insurance net loss reserves
increased $117 million from prior year end to $24.95 billion. The net loss
reserves represent loss reserves reduced by reinsurance recoverables, net of an
allowance for unrecoverable reinsurance. The methods used to determine such
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting therefrom are reflected in operating income
currently. It is management's belief that the general insurance net loss
reserves are adequate to cover all general insurance net losses and loss
expenses as at December 31, 2000. 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. Such
lines include excess and umbrella liability, directors and officers' liability,
professional liability, medical malpractice, general liability, products'
liability, and related classes. These lines account for approximately one-half