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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/x/ SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/ / SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from______to____________
Commission file number 0-4652
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------ -------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
The aggregate market value of the shares of all classes of voting stock of
the registrant held by non-affiliates of the registrant on January 31, 1994 was
approximately $ 20,974,828,000 computed upon the basis of the closing sales
price of the Common Stock on that date.
As of January 31, 1994, there were outstanding 317,648,221 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, 1994 is incorporated by reference in
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
American International Group, Inc. ("AIG"), a Delaware corporation, is a
holding company which through its subsidiaries is primarily engaged in a broad
range of insurance and insurance-related activities in the United States and
abroad. AIG's primary activities include both general and life insurance
operations. The principal insurance company subsidiaries are American Home
Assurance Company ("American Home"), National Union Fire Insurance Company of
Pittsburgh, Pa. ("National Union"), New Hampshire Insurance Company ("New
Hampshire"), Lexington Insurance Company ("Lexington"), American International
Underwriters Overseas, Ltd. ("AIUO"), American Life Insurance Company
("ALICO"), American International Assurance Company, Limited ("AIA"), Nan Shan
Insurance Company, Ltd. ("Nan Shan"), The Philippine American Life Insurance
Company ("PHILAM"), American International Reinsurance Company, Ltd. and United
Guaranty Residential Insurance Company. Other significant activities are
financial services and agency and service fee operations. For information on
AIG's business segments, see Note 19 of Notes to Financial Statements.
All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 1994, beneficial ownership of
approximately 15.9 percent, 3.7 percent and 2.4 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, 1993, AIG and its subsidiaries had approximately 33,000
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, agency and service fee and financial services
operations, equity in income of minority-owned reinsurance companies and
realized capital gains. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 1 and 19 of Notes to
Financial Statements.)
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1993 1992 1991 1990 1989
====================================================================================================================================
GENERAL INSURANCE OPERATIONS:
Gross premiums written $ 14,901,255 $ 13,615,715 $ 13,336,248 $ 11,926,850 $ 11,615,938
Net premiums written 10,025,903 9,138,528 9,146,394 9,267,201 8,940,427
Net premiums earned 9,566,640 9,209,390 9,104,632 9,149,414 8,529,106
Adjusted underwriting profit (loss)(a) 10,391 (195,084) (4,809) 75,184 57,084
Net investment income 1,340,480 1,252,086 1,163,461 1,059,161 954,867
Realized capital gains 65,264 67,134 89,275 120,000 86,050
Operating income 1,416,135 1,124,136 1,247,927 1,254,345 1,098,001
Identifiable assets 46,981,720 42,416,509 29,278,641 27,993,993 25,124,984
LIFE INSURANCE OPERATIONS:
Premium income 5,746,046 4,853,087 4,059,354 3,477,598 2,994,882
Net investment income 1,499,714 1,313,838 1,139,793 977,343 805,542
Realized capital gains (losses) 54,576 43,257 23,219 (6,347) 42,206
Operating income 781,611 667,453 561,839 462,862 453,960
Identifiable assets 28,381,164 23,472,687 19,986,909 16,319,156 13,630,174
Insurance in-force at end of year 257,162,102 210,605,862 193,226,288 160,373,296 131,983,324
AGENCY AND SERVICE FEE OPERATIONS:
Commissions, management and other fees 237,738 225,686 211,210 205,679 209,578
Net investment income 1,903 2,611 4,754 5,226 6,083
Operating income 60,247 52,570 46,202 36,663 34,911
Identifiable assets 179,297 157,280 188,638 168,846 150,509
FINANCIAL SERVICES OPERATIONS:
Commissions, transaction and other fees 1,595,449 1,404,902 1,073,553 704,201 504,777
Operating income 390,038 346,442 222,156 132,505 149,798
Identifiable assets 25,514,258 27,138,230 20,485,838 14,472,483 6,866,037
EQUITY IN INCOME OF MINORITY-OWNED
REINSURANCE OPERATIONS 39,589 27,929 28,806 24,050 21,496
OTHER REALIZED CAPITAL LOSSES (12,742) (11,293) (14,144) (14,258) (4,563)
REVENUES (b) 20,134,657 18,388,627 16,883,913 15,702,067 14,150,024
TOTAL ASSETS 101,014,848 92,722,182 69,389,468 58,201,835 46,036,966
====================================================================================================================================
(a) Adjusted underwriting profit (loss) is statutory underwriting income (loss)
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,
agency commissions, management and other fees, net investment income,
financial services commissions, transaction and other fees, equity in
income of minority-owned reinsurance operations and realized capital gains.
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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, 1993. (See also Note 19 of Notes to
Financial Statements.)
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL
---------------------------
UNITED STATES OTHER UNITED STATES OTHER
TOTAL AND CANADA COUNTRIES AND CANADA COUNTRIES
============================================================================================================================
GENERAL INSURANCE OPERATIONS:
Net premiums earned $ 9,566,640 $6,664,792 $ 2,901,848 69.7% 30.3%
Adjusted underwriting profit (loss) 10,391 (130,275) 140,666 -- --
Net investment income 1,340,480 1,085,953 254,527 81.0 19.0
Realized capital gains 65,264 27,341 37,923 41.9 58.1
Operating income 1,416,135 983,019 433,116 69.4 30.6
Identifiable assets 46,981,720 37,334,348 9,647,372 79.5 20.5
LIFE INSURANCE OPERATIONS:
Premium income 5,746,046 268,358 5,477,688 4.7 95.3
Net investment income 1,499,714 471,459 1,028,255 31.4 68.6
Realized capital gains 54,576 24,133 30,443 44.2 55.8
Operating income 781,611 43,455 738,156 5.6 94.4
Identifiable assets 28,381,164 6,959,646 21,421,518 24.5 75.5
AGENCY AND SERVICE FEE OPERATIONS:
Commissions, management and other fees 237,738 232,937 4,801 98.0 2.0
Net investment income 1,903 1,879 24 98.7 1.3
Operating income 60,247 56,066 4,181 93.1 6.9
Identifiable assets 179,297 161,673 17,624 90.2 9.8
FINANCIAL SERVICES OPERATIONS:
Commissions, transaction and other fees 1,595,449 1,200,420 395,029 75.2 24.8
Operating income 390,038 276,995 113,043 71.0 29.0
Identifiable assets 25,514,258 20,239,195 5,275,063 79.3 20.7
EQUITY IN INCOME OF MINORITY-OWNED
REINSURANCE OPERATIONS 39,589 37,237 2,352 94.1 5.9
OTHER REALIZED CAPITAL GAINS (LOSSES) (12,742) (27,778) 15,036 -- --
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES 2,601,081 1,329,908 1,271,173 51.1 48.9
REVENUES 20,134,657 9,986,731 10,147,926 49.6 50.4
TOTAL ASSETS 101,014,848 64,482,527 36,532,321 63.8 36.2
==========================================================================================================================
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 more than 100 foreign countries.
AIG's business derived from brokers in the United States and Canada is
conducted through its domestic brokerage division, consisting of American Home,
National Union, Lexington and certain other insurance company subsidiaries of
AIG. Also included are the operations of New Hampshire and its subsidiaries,
which were restructured in 1992, thus completing the withdrawal of these
companies from an agency production system. New Hampshire is now integrated
into this division as the AIG company focusing specifically on providing AIG
products and services through brokers to middle market companies.
The domestic brokerage division accepts business mainly from insurance
brokers, enabling selection of specialized markets and retention of
underwriting control. Any licensed broker is able to submit business to these
companies without the traditional agent-company contractual relationship, but
such broker usually has no authority to commit the companies to accept a risk.
In addition to writing substantially all classes of business insurance,
including large commercial or industrial property insurance, excess liability,
inland marine, workers' compensation and excess and umbrella coverages, the
domestic brokerage division offers many specialized forms of insurance such as
directors and officers liability, difference-in-conditions, kidnap-ransom,
export credit and political risk, and various types of professional errors and
omissions coverages. Lexington writes surplus lines, those risks for which
conventional insurance companies do not readily provide insurance coverage,
either because of complexity or because the coverage does not lend itself to
conventional contracts.
Audubon Insurance Company and its subsidiaries ("Audubon") conduct agency
marketing of personal and small commercial coverages in certain Southern and
Western States.
2
4
In early 1994, AIG announced that it was considering the sale of Audubon,
since its agency operations do not have a strategic fit with AIG's brokerage
operations.
American International Insurance Company ("AIIC") engages in mass marketing
of personal lines coverages. Since 1992, AIIC increased its participation in
non-standard auto business in urban markets.
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 commercial mortgage loan
insurance covering first mortgage loans on commercial real estate, 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, and rent guaranty insurance on commercial
and industrial real estate.
AIG's foreign general insurance business comprises primarily risks
underwritten through American International Underwriters ("AIU"), a marketing
unit consisting of wholly owned agencies and insurance companies. It also
includes business written by foreign-based insurance subsidiaries of AIUO for
their own accounts. In general, the same types of policies and marketing
methods, with certain refinements for local laws, customs and needs, are used
in these foreign operations as have been described above in connection with the
domestic operations.
During 1993 domestic general and foreign general insurance business
accounted for 69.9 percent and 30.1 percent, respectively, of AIG's net
premiums written.
AIG's general insurance company subsidiaries worldwide operate primarily by
underwriting and accepting any size risk for their direct account and securing
reinsurance on that portion of the risk in excess of the limit which they wish
to retain. This operating policy differs from that of many insurance companies
which will underwrite only up to their net retention limit, thereby requiring
the broker or agent to secure commitments from other underwriters for the
remainder of the gross risk amount.
The following table summarizes general insurance premiums written and
earned:
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
--------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, WRITTEN EARNED Written Earned Written Earned
=================================================================================================================================
Gross premiums $14,901,255 $14,405,992 $13,615,715 $13,616,700 $13,336,248 $13,234,486
Reinsurance ceded (4,875,352) (4,839,352) (4,477,187) (4,407,310) (4,189,854) (4,129,854)
- ---------------------------------------------------------------------------------------------------------------------------------
Net premiums $10,025,903 $ 9,566,640 $ 9,138,528 $ 9,209,390 $ 9,146,394 $ 9,104,632
=================================================================================================================================
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 18 percent of AIG's net premiums written. This line is well
diversified geographically and is generally written on a retrospectively rated
basis which reduces its exposure to material uncertainty or risks.
Notwithstanding the above, the majority of AIG's insurance business is in
the casualty classes, which tend to involve longer periods of time for the
reporting and settling of claims. This may increase the risk and uncertainty
with respect to AIG's loss reserve development. (See also the Discussion and
Analysis of Consolidated Net Loss and Loss Expense Reserve Development and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
3
5
The following table is a summary of the general insurance operations,
including statutory ratios, by major operating category for the year ended
December 31, 1993. (See also Note 19(b) of Notes to Financial Statements.)
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------
RATIO OF RATIO OF
LOSSES AND UNDERWRITING
LOSS EXPENSES EXPENSES
NET PREMIUMS INCURRED TO INCURRED TO
------------------------------- NET PREMIUMS NET PREMIUMS COMBINED
WRITTEN EARNED EARNED WRITTEN RATIO
==================================================================================================================
Foreign $ 3,019,300 $2,901,800 60.6 34.3 94.9
Commercial casualty(a) 5,368,200 5,174,300 82.1 13.4 95.5
Commercial property 241,400 180,700 108.2 21.8 130.0
Pools and associations(b) 746,400 723,100 135.8 16.3 152.1
Personal lines(c) 471,800 432,400 80.1 24.0 104.1
Mortgage guaranty 178,800 154,300 30.2 28.6 58.8
- ------------------------------------------------------------------------------------------------------------------
Total $10,025,900 $9,566,600 79.2 20.9 100.1
==================================================================================================================
(a) Including workers' compensation and retrospectively rated risks.
(b) Including involuntary pools.
(c) Including mass marketing and specialty programs.
Statutory 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 thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
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*
===================================================================================================================================
1993 $10,025,903 $9,566,640 79.2 20.9 100.1 (0.1) 110.3
1992 9,138,528 9,209,390 81.5 20.9 102.4 (2.4) 119.1
1991 9,146,394 9,104,632 78.9 21.5 100.4 (0.4) 109.5
1990 9,267,201 9,149,414 78.2 21.4 99.6 0.4 109.4
1989 8,940,427 8,529,106 79.5 20.5 100.0 -- 109.7
===================================================================================================================================
* Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders). The ratio for 1993 reflects estimated results
provided by Conning & Company.
During 1993, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 10.0 percent and 10.6 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 results of operations from
the economic environments in any one state, country or geographic region for
the year ended December 31, 1993. During that year, 32.2 percent of general
insurance premiums were written outside of the United States and Canada.
DISCUSSION AND ANALYSIS OF CONSOLIDATED NET LOSS AND LOSS EXPENSE RESERVE
DEVELOPMENT
The reserve for net losses and loss expenses is exclusive of applicable
reinsurance and represents the accumulation of estimates for reported losses
("case basis reserves") and provisions for losses incurred but not reported
("IBNR"). AIG does not discount its loss reserves other than for very minor
amounts related to certain workers' compensation claims.
Loss reserves established with respect to foreign business are set and
monitored in terms of the respective local or functional currency. Therefore,
no assumption is included for changes in currency rates. (See also Note 1(t) of
Notes to Financial Statements.) Losses and loss expenses are charged to income
as incurred.
4
6
Management continually reviews the adequacy of established loss reserves
through the utilization of a number of analytical reserve development
techniques (discussed below). Through the use of these techniques, management
is able to monitor the adequacy of its established reserves, including the
appropriate assumptions for inflation. Also, through reactions to the emergence
of specific development patterns, such as case reserve redundancies or
deficiencies and IBNR emergence, management is able 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 Loss and Loss Expense Reserve
Development", which follows, presents the development of net loss and loss
expense reserves for calendar years 1983 through 1993. 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 loss and loss
expense reserve of $2,800.1 million as of December 31, 1983, by the end of 1993
(ten years later) $2,998.3 million 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 $2,800.1 million was reestimated to be $3,361.5
million at December 31, 1993. 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 deficiency of $50.2 million at December 31, 1993
related to December 31, 1992 net loss and loss expense reserves of $16,756.8
million represents the cumulative amount by which reserves for 1992 and prior
years have developed deficiently during 1993.
ANALYSIS OF CONSOLIDATED NET LOSS AND LOSS EXPENSE RESERVE DEVELOPMENT
(in millions)
- -------------------------------------------------------------------------------------------------
1983 1984 1985 1986 1987 1988
=================================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $2,800.1 $3,132.7 $4,034.9 $6,199.3 $8,670.7 $11,086.1
Paid (Cumulative) as of:
One Year Later 926.7 1,288.8 1,576.1 2,300.1 2,619.2 3,266.9
Two Years Later 1,670.4 2,183.9 2,823.2 3,676.4 4,315.9 5,451.5
Three Years Later 2,066.8 2,723.9 3,321.1 4,340.7 5,496.6 6,904.5
Four Years Later 2,370.8 2,934.6 3,589.5 4,919.1 6,207.5 7,966.2
Five Years Later 2,484.9 3,072.9 3,886.5 5,260.3 6,757.2 8,792.1
Six Years Later 2,567.1 3,235.6 4,055.3 5,593.1 7,246.1
Seven Years Later 2,675.0 3,329.8 4,267.7 5,902.7
Eight Years Later 2,736.1 3,496.2 4,464.7
Nine Years Later 2,867.2 3,640.0
Ten Years Later 2,998.3
Net Liability Reestimated as of:
End of Year 2,800.1 3,132.7 4,034.9 6,199.3 8,670.7 11,086.1
One Year Later 2,713.0 3,269.9 4,164.2 6,268.3 8,523.6 10,923.8
Two Years Later 2,917.3 3,447.0 4,404.2 6,354.3 8,492.4 10,856.9
Three Years Later 2,995.1 3,638.8 4,502.0 6,397.5 8,488.1 10,811.9
Four Years Later 3,100.6 3,669.6 4,573.4 6,491.1 8,472.3 10,774.9
Five Years Later 3,101.6 3,744.2 4,672.4 6,531.2 8,472.0 10,805.1
Six Years Later 3,170.4 3,819.0 4,728.9 6,598.0 8,470.0
Seven Years Later 3,218.3 3,861.2 4,824.5 6,681.0
Eight Years Later 3,246.4 3,953.3 4,925.6
Nine Years Later 3,296.6 3,970.4
Ten Years Later 3,361.5
Redundancy/(Deficiency) (561.4) (837.7) (890.7) (481.7) 200.7 281.0
=================================================================================================
(in millions)
- -------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993
===========================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $12,958.5 $14,699.2 $15,839.9 $16,756.8 $17.557.0
Paid (Cumulative) as of:
One Year Later 3,940.3 4,315.2 4,747.8 4,882.7
Two Years Later 6,476.6 7,349.7 8,015.4
Three Years Later 8,350.8 9,561.0
Four Years Later 9,721.3
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Liability Reestimated as of:
End of Year 12,958.5 14,699.2 15,839.9 16,756.8 17,557.0
One Year Later 12,844.5 14,596.2 15,828.1 16,807.0
Two Years Later 12,843.9 14,595.4 15,902.9
Three Years Later 12,809.2 14,723.7
Four Years Later 12,896.4
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Redundancy/(Deficiency) 62.1 (24.5) (63.0) (50.2)
===========================================================================================
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7
The trend depicted in the latest development year in the reestimated
liability portion of the "Analysis of Consolidated Net Loss and Loss Expense
Reserve Development" table indicates that the overall position of AIG's 1992
and prior reserves one year later is fairly comparable to the trends reflected
in recent years. The variations in development from original reserves in the
later years of the table are relatively insignificant both in terms of
aggregate amounts and as a percentage of the initial reserve balances.
RECONCILIATION OF NET RESERVE FOR LOSSES AND LOSS EXPENSES
(in millions)
- -------------------------------------------------------------------------------------
1993 1992 1991
=====================================================================================
Net reserve for losses and loss
expenses at beginning of year $16,756.8 $15,839.9 $14,699.2
- -------------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 7,530.7 7,497.1 7,263.6
Prior years* 45.3 6.4 (77.1)
- -------------------------------------------------------------------------------------
7,576.0 7,503.5 7,186.5
- -------------------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 1,893.1 1,838.8 1,730.6
Prior years 4,882.7 4,747.8 4,315.2
- -------------------------------------------------------------------------------------
6,775.8 6,586.6 6,045.8
- -------------------------------------------------------------------------------------
Net reserve for losses and loss
expenses at end of year $17,557.0 $16,756.8 $15,839.9
=====================================================================================
* Does not include the effects of foreign exchange adjustments as described
above, which are reflected in the table on page 5.
Approximately 50 percent of the net loss and loss expense reserves are paid
out within two years of the date incurred. The remaining net loss 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, 1993, differs from the total reserve reported in
the Annual Statements filed with state insurance departments and, where
appropriate, with foreign regulatory authorities. The difference at December
31, 1993 is primarily because of minor discounting on certain workers'
compensation claims, estimates for unrecoverable reinsurance and additional
reserves relating to certain foreign operations. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
The reserve for gross loss 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 a manner as previously
described for net loss reserves.
The "Analysis of Consolidated Gross Loss and Loss Expense Reserve
Development", which follows, presents the development of gross loss and loss
expense reserves for calendar years 1992 and 1993. As with the net loss and
loss expense reserve development, the deficiency of $96.6 million is relatively
insignificant both in terms of an aggregate amount and as a percentage of the
initial reserve balance.
Analysis of Consolidated Gross Loss and Loss Expense Reserve Development
(in millions)
- ----------------------------------------------------------------------------------
1992 1993
==================================================================================
Reported as of December 31,
Gross loss and loss expense reserve $28,156.8 $30,046.2
Reinsurance recoverable 11,400.0 12,489.2
Net loss and loss expense reserve 16,756.8 17,557.0
Reestimated one year later,
Gross loss and loss expense reserve 28,253.4
Reinsurance recoverable 11,446.4
Net loss and loss expense reserve 16,807.0
Gross deficiency (96.6)
==================================================================================
LIFE INSURANCE OPERATIONS
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group
life, annuity, and accident and health policies. Financial and investment
products consist of single premium annuity, variable annuities, guaranteed
investment contracts and universal life. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
In the United States, AIG has four domestic life subsidiaries: American
International Life Assurance Company of New York, AIG Life Insurance Company,
Delaware American Life Insurance Company, and Pacific Union Assurance Company.
These companies utilize multiple distribution channels including brokerage and
career and general agents to offer primarily financial and investment products
and specialty forms of accident and health coverage for individuals and groups,
including employee benefit plans. The domestic life business comprised 4.7
percent of total life premium income in 1993.
Life insurance operations in foreign countries comprised 95.3 percent of
life premium income in 1993 and accounted for 94.4 percent of operating income.
AIG operates overseas through two main subsidiary companies, ALICO and AIA. AIA
operates primarily in Hong Kong, Singapore, Malaysia and Thailand. Although
ALICO is incorporated in Delaware, 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
Middle East, and the Far East, with Japan being the largest territory.
6
8
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 ALICO and AIA, AIG also has subsidiary operations in Taiwan
(Nan Shan), Switzerland (Ticino Societa d'Assicurazioni Sulla Vita), Puerto
Rico (AIG Life Insurance Company of Puerto Rico) and the Philippines (PHILAM),
and conducts life insurance business through AIUO subsidiary companies in
certain countries in Central and South America.
The foreign life companies have over 96,000 career agents and sell their
products largely to indigenous persons in local currencies. In addition to the
agency outlets, these companies also distribute their products through direct
marketing channels, such as mass marketing, and through brokers and other
distribution outlets such as financial institutions.
The following table summarizes the life insurance operating results for the
year ended December 31, 1993. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE
NET DIRECT TERMINATION RATE
PREMIUM INVESTMENT OPERATING INSURANCE ----------------
INCOME INCOME INCOME(a) IN-FORCE LAPSE OTHER
=========================================================================================================================
Individual:
Life $4,263,339 $ 915,802 $453,730 $197,346,575(b) 7.6% 1.9%
Annuity 59,068 325,747 17,714 (c)
Accident and health 762,157 51,299 215,395 (c)
Group:
Life 336,623 20,440 16,816 59,815,527 10.6% 12.0%
Pension 6,561 175,453 16,140 (c)
Accident and health 318,298 17,036 19,003 (c)
Realized capital gains -- -- 54,576 (c)
Consolidation adjustments -- (6,063) (11,763) (c)
- -------------------------------------------------------------------------------------------------------------------------
Total $5,746,046 $1,499,714 $781,611 $257,162,102
=========================================================================================================================
(a) Including income related to investment type products.
(b) Including $114.05 billion of whole life insurance and endowments.
(c) Not applicable.
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 19 of Notes to Financial Statements.)
The following table is a summary of the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at December 31, 1993:
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
Percent --------------------
General Life Total of Total Domestic Foreign
====================================================================================================================================
Bonds:
Taxable $ 4,234,800 $13,387,800 $17,622,600 39.5% 38.4% 61.6%
Tax-exempt 12,346,700 -- 12,346,700 27.7 100.0 --
Short-term investments, including
time deposits, and cash 1,820,500 2,878,600 4,699,100 10.6 23.1 76.9
Common stocks 2,761,800 1,527,200 4,289,000 9.6 36.1 63.9
Mortgage loans on real estate, policy and collateral loans 96,300 2,678,200 2,774,500 6.2 24.6 75.4
Real estate 284,300 572,000 856,300 1.9 16.2 83.8
Investment income due and accrued 429,700 363,900 793,600 1.8 54.0 46.0
Other invested assets 599,700 629,600 1,229,300 2.7 53.2 46.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total $22,573,800 $22,037,300 $44,611,100 100.0% 53.0% 47.0%
===================================================================================================================================
7
9
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 thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
ANNUAL AVERAGE CASH AND INVESTED ASSETS
------------------------------------------
CASH RATE OF RETURN
(INCLUDING NET ------------------ REALIZED
SHORT-TERM INVESTED INVESTMENT INVESTED CAPITAL
YEARS ENDED DECEMBER 31, INVESTMENTS) ASSETS(a) TOTAL INCOME(b) TOTAL(c) ASSETS(d) GAINS
==================================================================================================================================
1993 $1,779,647 $19,493,536 $21,273,183 $1,340,480 6.3% 6.9% $65,264
1992 1,766,031 17,982,498 19,748,529 1,252,086 6.3 7.0 67,134
1991 1,828,346 16,615,150 18,443,496 1,163,461 6.3 7.0 89,275
1990 1,842,262 14,818,073 16,660,335 1,059,161 6.4 7.1 120,000
1989 1,762,081 12,943,542 14,705,623 954,867 6.5 7.4 86,050
==================================================================================================================================
(a) Including investment income due and accrued.
(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 thousands)
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS AT END OF PERIOD
-------------------------------------------------
CASH REALIZED
(INCLUDING NET NET YIELD CAPITAL
SHORT-TERM INVESTED INVESTMENT ON MEAN GAINS
YEARS ENDED DECEMBER 31, INVESTMENTS) ASSETS(a) TOTAL INCOME(b) ASSETS(c) (LOSSES)
================================================================================================================================
1993 $2,878,563 $19,158,688 $22,037,251 $1,499,714 7.8% $54,576
1992 2,516,001 15,413,653 17,929,654 1,313,838 8.3 43,257
1991 2,092,084 12,968,083 15,060,167 1,139,793 8.7 23,219
1990 1,789,392 10,602,567 12,391,959 977,343 9.1 (6,347)
1989 1,059,995 9,106,918 10,166,913 805,542 9.1 42,206
================================================================================================================================
(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 (losses).
(c) Calculated on the basis of the formula prescribed by the National
Association of Insurance Commissioners.
8
10
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.)
AGENCY AND SERVICE FEE OPERATIONS
AIG's agency and service fee operations contribute to AIG earnings through fees
as agents and managers, the premiums they generate for AIG's insurance
companies and the revenues they produce from technical and support service
activities.
Several AIG companies act as managing general agents for both AIG
subsidiaries and non-affiliated insurance companies, accepting liability on
risks and actively managing the business produced. These general agencies deal
directly with the producing agents and brokers, exercise full underwriting
control, issue policies, collect premiums, arrange reinsurance, perform
accounting, actuarial and safety and loss control services, adjust and pay
losses and claims, and settle net balances with the represented companies. In
some cases, they also maintain their own and the represented companies'
authority to do business in the jurisdictions in which they operate.
Agency and service fee operations are conducted primarily through AIG Risk
Management, Inc., which provides risk management services to independent
insurance agents, brokers and their customers on a worldwide basis and AIG
Aviation Inc., which sells aviation insurance.
FINANCIAL SERVICES OPERATIONS
AIG operations which contribute to financial services income include primarily
A.I. Credit Corp. ("AICCO"), AIG Financial Products Corp. and its subsidiary
companies ("AIGFP"), AIG Trading Group Inc. and its subsidiaries ("AIGTG"),
International Lease Finance Corporation ("ILFC") and UeberseeBank, AG. AICCO's
business is principally in premium financing. During the year ended December
31, 1993, AICCO financed gross property and casualty premiums exceeding $2.1
billion. AIGFP structures borrowings through guaranteed investment agreements
and engages in other complex financial transactions, including interest rate
and currency swaps. AIGTG engages in various commodities trading, foreign
exchange trading and market making activities. ILFC is engaged primarily
in the acquisition of new and used commercial jet aircraft and the leasing and
remarketing of such aircraft to airlines around the world. UeberseeBank, AG
operates as a Swiss bank. AIG Funding, Inc. provides funding for various AIG
subsidiaries. (See also Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes 1, 9 and 11 of Notes to Financial
Statements.)
The following table is a summary of the composition of AIG's financial
services invested assets and liabilities at December 31, 1993. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)
(in thousands)
================================================================================
Financial services invested assets:
Flight equipment primarily under operating leases,
net of accumulated depreciation $ 8,555,356
Securities available for sale, at market value 4,991,105
Trading securities, at market value 2,516,166
Spot commodities, at market value 764,215
Net unrealized gain on interest rate and currency
swaps, options and forward transactions 640,120
Securities purchased under agreements to resell,
at contract value 2,737,507
Receivables from securities brokers and dealers 1,328,391
Other, including short-term investments 1,424,404
- --------------------------------------------------------------------------------
Total financial services invested assets $22,957,264
================================================================================
Financial services liabilities:
Borrowings under obligations of guaranteed
investment agreements $ 6,735,579
Securities sold under agreements to repurchase,
at contract value 2,299,563
Payables to securities brokers and dealers 1,688,147
Securities sold but not yet purchased, principally
obligations of the U.S. Government and
Government agencies, at market value 696,454
Spot commodities sold but not yet purchased,
at market value 285,757
Deposits due to banks and other depositors 557,372
Commercial paper 1,618,979
Notes, bonds and loans payable 5,021,941
- --------------------------------------------------------------------------------
Total financial services liabilities $18,903,792
================================================================================
Other financial services activities include AIG's 30 percent interest in
AB Asesores CFMB, S.L., a Spanish brokerage, investment banking and private
investment management firm, and certain investment management and venture
capital operations in various overseas financial services sectors.
OTHER OPERATIONS
AIG Global Investors, Inc. and AIG Investment Corporation and its subsidiaries
manage the investment portfolios of various AIG subsidiaries. Other smaller
subsidiaries provide insurance-related services such as adjusting claims and
marketing specialized products. AIG has several other relatively small
subsidiaries which carry on various businesses. Mt. Mansfield Company, Inc.
owns and operates the ski slopes, lifts, school and an inn located at Stowe,
Vermont.
9
11
ADDITIONAL INVESTMENTS
As of March 15, 1994, AIG holds a 46.5 percent interest in Transatlantic
Holdings, Inc., a reinsurance holding company, and a 19.9 percent interest in
Richmond Insurance Company, Ltd., a reinsurer. (See also Note 1(n) of Notes to
Financial Statements.) During 1992, AIG acquired a 20 percent interest through
a purchase of preferred stock in The Robert Plan Corporation, a leading
servicer and underwriter of private passenger and commercial automobile
insurance in urban markets. During 1993, AIG acquired a 23.1 percent interest
in Kroll Associates, an international investigation and consulting firm; AIG
holds a 23.9 percent interest in SELIC Holdings, Ltd., an insurance holding
company and a 24.4 percent interest in IPC Holding, Ltd., a reinsurance holding
company.
LOCATIONS OF CERTAIN ASSETS
As of December 31, 1993, approximately 36 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $164.7
million and $814.0 million of cash and securities, respectively, on deposit
with foreign regulatory authorities. Foreign operations and assets held abroad
may be adversely affected by political developments in foreign countries,
including such possibilities as tax changes, nationalization and changes in
regulatory policy, as well as by consequence of hostilities and unrest. The
risks of such occurrences and their overall effect upon AIG vary from country
to country and cannot easily be predicted. If expropriation or nationalization
does occur, AIG's policy is to take all appropriate measures to seek recovery
of such assets. Certain of the countries in which AIG's business is conducted
have currency restrictions which generally cause a delay in a company's ability
to repatriate assets and profits. (See also Notes 1(t), 2 and 19(d) of Notes to
Financial Statements.)
INSURANCE REGULATION AND COMPETITION
Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such requirements.
(See also Note 10(b) 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, 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 statutory
surplus 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.
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.
Each of AIG's domestic, general and life insurer's statutory surplus
exceeds the risk based capital requirements as of December 31, 1993.
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.
10
12
In addition to licensing requirements, AIG's foreign operations are
also regulated in various jurisdictions with respect to currency, policy
language and terms, amount and type of security deposits, amount and type of
reserves, amount and type of local investment and the share of profits to be
returned to policyholders on participating policies. Some foreign countries
regulate rates in various types of policies. Certain countries have established
reinsurance institutions, wholly or partially owned by the state, to which
admitted insurers are obligated to cede a portion of their business on terms
which do not always allow foreign insurers, including AIG, full compensation.
Regulations governing constitution of technical reserves and remittance
balances in some countries 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 3,100
other stock companies, specialty insurance organizations, mutual companies and
other underwriting organizations. AIG's life insurance companies compete in
the United States with some 1,300 other companies. 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.
ITEM 2. PROPERTIES
AIG and its subsidiaries operate from approximately 250 offices in the United
States, 5 offices in Canada and numerous offices in other foreign countries.
The offices in Manchester, New Hampshire; Springfield, Illinois; Houston,
Texas; Atlanta, Georgia; Baton Rouge, Louisiana; Wilmington, Delaware; Hato
Rey, Puerto Rico; San Diego, California; Greensboro, North Carolina; Livingston
and Morris County, New Jersey; 70 Pine Street, 99 John Street and 72 Wall
Street in New York City; and offices in approximately 30 foreign countries
including Bermuda, Hong Kong, the Philippines, Japan, England, Singapore,
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. (See also the Discussion
and Analysis of Consolidated Net Loss 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 1993.
11
13
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 65 1984
Marshall A. Cohen Director 58 1992
Barber B. Conable, Jr. Director 71 1991
Marion E. Fajen Director 73 1984
Martin S. Feldstein Director 54 1987
Houghton Freeman Director 72 1967
Leslie L. Gonda Director 74 1990
Pierre Gousseland Director 72 1977
M. R. Greenberg* Director, Chairman, and Chief Executive Officer 68 1967
Carla A. Hills Director 60 1993
Frank J. Hoenemeyer Director 74 1985
John I. Howell* Director 77 1969
Edward E. Matthews Director and Vice Chairman-Finance 62 1973
Dean P. Phypers Director 65 1979
John J. Roberts* Director and Vice Chairman-External Affairs 71 1967
Ernest E. Stempel* Director and Vice Chairman-Life Insurance 77 1967
Thomas R. Tizzio* Director and President 56 1982
Brian Duperreault Executive Vice President-Foreign General Insurance 46 1993
Jeffrey W. Greenberg Executive Vice President-Domestic General Insurance-Brokerage 42 1987
Edmund S. W. Tse Executive Vice President-Life Insurance 56 1991
Lawrence W. English Senior Vice President-Administration 52 1985
Axel I. Freudmann Senior Vice President-Human Resources 47 1986
John G. Hughes Senior Vice President-Worldwide Claims 63 1978
Kevin H. Kelley Senior Vice President-Domestic General Insurance-Brokerage 43 1991
R. Kendall Nottingham Senior Vice President-Life Insurance 55 1991
Petros K. Sabatacakis Senior Vice President-Financial Services 47 1992
Robert M. Sandler Senior Vice President, Senior Casualty Actuary and Senior Claims Officer 51 1980
Howard I. Smith Senior Vice President and Comptroller 49 1984
Stephen Y. N. Tse Senior Vice President 63 1974
Wayland M. Mead Acting General Counsel 62 1975
Aloysius B. Colayco Vice President-Foreign Investments 43 1986
Robert K. Conry Vice President and Director of Internal Audit 41 1992
Patrick J. Foley Vice President 63 1982
Robert E. Lewis Vice President and Chief Credit Officer 43 1993
Christian M. Milton Vice President-Reinsurance 46 1985
Nicholas A. O'Kulich Vice President-Life Insurance 50 1991
Douglas A. Paul Vice President-Strategic Planning 45 1983
Frank Petralito II Vice President and Director of Taxes 57 1978
Kathleen E. Shannon Vice President and Secretary 44 1986
Joseph H. Umansky Vice President and Deputy Comptroller 46 1992
John T. Wooster, Jr. Vice President-Communications 54 1989
William N. Dooley Treasurer 40 1992
================================================================================================================================
* Member of Executive Committee.
12
14
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. Jeffrey W. Greenberg is the son of M.R.
Greenberg. There are no other arrangements or understandings between any
director or officer and any other person pursuant to which the director or
officer was elected to such position. Mr. Lewis was Assistant General Manager
for North America, Chief Credit Officer, and senior executive responsible for
risk and exposure management of ING Bank in New York, the bank division of
Internationale Nederlanden Group from 1988 until joining AIG in October, 1993.
Mr. O'Kulich was president of Maccabees Life & Annuity Company from 1982 to
July 31, 1989 and was self employed from August, 1989 until joining AIG in May,
1990. Mr. Sabatacakis was Managing Director and head of the Capital Markets and
Treasury Group of Chemical Banking Corporation prior to joining AIG in
February, 1992. From January, 1988 until joining AIG in October, 1989, Mr.
Wooster headed his own corporate communications and investor relations firm,
Wooster Communications, in New York. Prior to that, he was President of The
Hannaford Company, a Washington-based public relations and public affairs firm.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(a) The table below shows the high and low closing sales prices per share of
AIG's common stock, as reported on the New York Stock Exchange Composite Tape,
for each quarter of 1993 and 1992. All prices are as reported by the National
Quotation Bureau, Incorporated.
- ------------------------------------------------------------------------
1993 1992
-------------------- ------------------
HIGH LOW High Low
========================================================================
First Quarter 85 1/8 75 65 3/8 57 1/8
Second Quarter 88 79 1/8 59 5/8 55 3/8
Third Quarter 100 85 1/2 70 5/8 58 1/2
Fourth Quarter 97 7/8 83 5/8 80 3/8 69 1/8
========================================================================
(b) In 1993, AIG paid a quarterly dividend of 9.3 cents in March and
June and 10.0 cents in September and December for a total cash payment of 38.6
cents per share of common stock. In 1992, AIG paid a quarterly dividend of 8.3
cents in March and June and 9.3 cents in September and December for a total
cash payment of 35.2 cents per share of common stock. These amounts reflect the
adjustment for a 50 percent common stock split in the form of a common stock
dividend paid July 30, 1993. 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. During 1992, serial
preferred stock consisted of 750 shares of Series M-1 Preferred Stock and 750
shares of Series M-2 Preferred Stock. AIG redeemed the Series M-1 on April 2,
1993 and the Series M-2 on March 5, 1993 at a price of $100,000 per share plus
accrued dividends.
See Note 10(b) of Notes to Financial Statements for a discussion of
certain restrictions on the payment of dividends to AIG by some of its
insurance subsidiaries.
(c) The approximate number of holders of Common Stock as of January
31, 1994, based upon the number of record holders, was 14,700.
13
15
ITEM 6. SELECTED FINANCIAL DATA
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data is presented in accordance
with generally accepted accounting principles. This data should be read in
conjunction with the financial statements and accompanying notes included
elsewhere herein.
(in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989
=================================================================================================================================
Revenues(a) $ 20,134,657 $18,388,627 $16,883,913 $15,702,067 $14,150,024
General insurance:
Net premiums written 10,025,903 9,138,528 9,146,394 9,267,201 8,940,427
Net premiums earned 9,566,640 9,209,390 9,104,632 9,149,414 8,529,106
Adjusted underwriting profit (loss) 10,391 (195,084) (4,809) 75,184 57,084
Net investment income 1,340,480 1,252,086 1,163,461 1,059,161 954,867
Realized capital gains 65,264 67,134 89,275 120,000 86,050
Operating income 1,416,135 1,124,136 1,247,927 1,254,345 1,098,001
Life insurance:
Premium income 5,746,046 4,853,087 4,059,354 3,477,598 2,994,882
Net investment income 1,499,714 1,313,838 1,139,793 977,343 805,542
Realized capital gains (losses) 54,576 43,257 23,219 (6,347) 42,206
Operating income 781,611 667,453 561,839 462,862 453,960
Agency and service fee operating income 60,247 52,570 46,202 36,663 34,911
Financial services operating income 390,038 346,442 222,156 132,505 149,798
Equity in income of minority-owned reinsurance
operations 39,589 27,929 28,806 24,050 21,496
Other realized capital losses (12,742) (11,293) (14,144) (14,258) (4,563)
Income before income taxes and cumulative
effect of accounting changes 2,601,081 2,137,048 2,022,575 1,811,534 1,705,688
Income taxes 683,003 512,033 469,566 369,240 338,213
Income before cumulative effect of accounting changes 1,918,078 1,625,015 1,553,009 1,442,294 1,367,475
Cumulative effect of accounting changes, net of tax:
AIG -- 31,941 -- -- --
Minority-owned reinsurance operations 20,695 -- -- -- --
Net income 1,938,773 1,656,956 1,553,009 1,442,294 1,367,475
Earnings per common share:
Income before cumulative effect of
accounting changes 6.04 5.10 4.86 4.61 4.42
Cumulative effect of accounting changes, net of tax:
AIG -- .10 -- -- --
Minority-owned reinsurance operations .07 -- -- -- --
Net income 6.11 5.20 4.86 4.61 4.42
Cash dividends per common share .39 .35 .31 .27 .23
Total assets 101,014,848 92,722,182 69,389,468 58,201,835 46,036,966
Long-term debt(b) 10,955,963 9,517,595 7,591,385 6,780,211 4,060,937
Capital funds (shareholders' equity) 15,224,195 12,782,152 11,463,454 9,904,442 8,405,083
=================================================================================================================================
(a) Represents the sum of general net premiums earned, life premium income,
agency commissions, management and other fees, net investment income,
financial services commissions, transaction and other fees, equity in
income of minority-owned reinsurance operations and realized capital
gains. (See also tables under Item 1, "Business".)
(b) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
14
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATIONAL REVIEW
GENERAL INSURANCE OPERATIONS
In AIG's general insurance operations, 1993 net premiums written and net
premiums earned increased 9.7 percent and 3.9 percent, respectively, from those
of 1992. In 1992, net premiums written decreased 0.1 percent and net premiums
earned increased 1.2 percent when compared to 1991. In 1991, declines occurred
in both net premiums written of 1.3 percent and net premiums earned of 0.5
percent when compared to 1990.
The growth in net premiums written in 1993 over 1992 resulted from a
mix of several factors. AIG achieved general price increases in domestic
commercial property and some specialty casualty markets while overseas, price
and volume increases were realized. During 1992 and 1991, the slowing of growth
in net premiums written was due in part to the competitive pricing environment
in the property-casualty industry in the United States, particularly in
commercial lines. In addition, AIG had withdrawn from certain classes of
business, primarily agency lines and certain segments of workers' compensation
business, because returns on allocated capital or equity were deemed
unacceptable. The estimated impact of AIG's strategy when comparing results for
1992 to those of 1991 was to reduce net premiums written by approximately $680
million, following a similar reduction of approximately $330 million in 1991.
Net premiums written are initially deferred and earned based upon the
terms of the underlying policies. The net unearned premium reserve constitutes
the deferred earnings which are generally earned ratably over the policy
period. Thus, the net unearned premium reserve is not fully recognized as net
premiums earned until the end of the policy period.
Adjusted underwriting profit or loss (operating income less net
investment income and realized capital gains) represents statutory underwriting
profit or loss adjusted primarily for changes in the deferral of acquisition
costs. (See also Note 4 of Notes to Financial Statements.) The adjusted
underwriting profit in 1993 was $10.4 million compared to adjusted underwriting
losses of $195.1 million recorded in 1992 and $4.8 million in 1991.
The statutory general insurance ratios were as follows:
- -------------------------------------------------------------------
1993 1992 1991
===================================================================
Loss Ratio 79.19 81.48 78.93
Expense Ratio 20.88 20.88 21.49
- -------------------------------------------------------------------
Combined Ratio 100.07 102.36 100.42
===================================================================
The gross and net impacts of the catastrophe losses during 1993 were
approximately $134 million and $70 million, respectively. This was
significantly below the approximately $567 million and $192 million in gross
and net catastrophe losses, respectively, recorded in 1992, which included the
three major storms Andrew, Iniki and Omar. Losses of $99 million and $68
million, respectively, were recorded in 1991. If the catastrophes were excluded
from the losses incurred in each period, the pro forma statutory general
insurance ratios would be as follows:
- -------------------------------------------------------------------
1993 1992 1991
===================================================================
Loss Ratio 78.46 79.40 78.19
Expense Ratio 20.88 20.88 21.49
- -------------------------------------------------------------------
Combined Ratio 99.34 100.28 99.68
===================================================================
The maintenance of the statutory combined ratio in all three years at
a level approximating 100 is a result of AIG's emphasis on maintaining its
underwriting discipline within the continued overall competitiveness of the
domestic market environment as well as AIG's expense control.
AIG's operations are negatively impacted under guarantee fund
assessment laws which exist in most states. As a result of operating in a state
which has guarantee fund assessment laws, a solvent insurance company may be
assessed for certain obligations arising from the insolvencies of other
insurance companies which operated in that state. AIG generally records these
assessments upon notice. Additionally, certain states permit at least a portion
of the assessed amount to be used as a credit against a company's future
premium tax liabilities. Therefore, the ultimate net assessment cannot
reasonably be estimated. The guarantee fund assessments net of credits for
1993, 1992 and 1991 were $14.1 million, $27.7 million and $37.9 million,
respectively. Also, AIG is required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated.
At December 31, 1993, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $30.05 billion, an increase of $1.89
billion or 6.7 percent over the prior year end. General insurance net loss
reserves represent the accumulation of estimates of ultimate losses, including
provisions for losses incurred but not reported (IBNR), and loss expenses,
reduced by reinsurance recoverable net of an allowance for unrecoverable
reinsurance and very minor amounts of discounting related to certain workers'
compensation claims. The net loss reserves increased $800.2 million or 4.8
percent to $17.56 billion. The methods used to determine such estimates and to
establish the resulting reserves are continually reviewed and
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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, 1993. In the future, if the general insurance net
loss reserves develop deficiently, such deficiency would have an adverse impact
on such future results of operations.
AIG's reinsurance recoverable results from its reinsurance
arrangements. These arrangements do not relieve AIG from its direct obligation
to its insureds. Thus, a contingent liability of approximately $12 billion
existed at December 31, 1993 with respect to general reinsurance reserves for
loss and loss expenses ceded (reinsurance recoverable) to the extent that
reinsurers are unable to meet their obligations assumed under the reinsurance
agreements. However, AIG holds substantial collateral as security under related
reinsurance agreements in the form of funds, securities and/or irrevocable
letters of credit which can be drawn on for amounts that remain unpaid beyond
specified time periods. Although a provision is recorded for estimated
unrecoverable reinsurance, AIG has been largely successful in prior recovery
efforts. (See also Note 5 of Notes to Financial Statements.)
AIG enters into certain intercompany reinsurance transactions for both
its general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
In a very broad sense, the general loss reserves can be categorized
into two distinct groups: one group being long tail casualty lines of business;
the other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.
Estimation of ultimate net losses and loss expenses (net losses) for
long tail casualty lines of business is a complex process and depends on a
number of factors, including the line and volume of the business involved. In
the more recent accident years of long tail casualty lines there is limited
statistical credibility in reported net losses. That is, a relatively low
proportion of net losses would be reported claims and expenses and an even
smaller proportion would be net losses paid. A relatively high proportion of
net losses would therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed
to estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. Loss trend factors
reflect many items including changes in claims handling, exposure and policy
forms and current and future estimates of inflation and social inflation. Thus,
many factors are implicitly considered in estimating the year to year growth in
loss costs. Therefore, AIG's carried net long tail loss reserves are
judgmentally set as well as tested for reasonableness using the most
appropriate loss trend factors for each class of business. In the evaluation of
AIG's net loss reserves, loss trend factors have ranged from 7 percent to 22
percent of average loss costs, depending on the particular class and nature of
the business involved. For the majority of long tail casualty lines, net loss
trend factors approximating 10 percent were employed. These factors are
periodically reviewed and subsequently adjusted, as appropriate, to reflect
emerging trends which are based upon past loss experience.
Estimation of net losses for short tail business is less complex than
for long tail casualty lines. Loss cost trends for many property lines can
generally be assumed to be similar to the growth in exposure of such lines. For
example, if the fire insurance coverage remained proportional to the actual
value of the property, the growth in property's exposure to fire loss can be
approximated by the amount of insurance purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive indemnity claims asserting injuries from
toxic waste, hazardous substances, asbestos and other environmental pollutants
and alleged damages to cover the clean-up costs of hazardous waste dump sites
(environmental claims). The vast majority of these environmental claims emanate
from policies written in 1984 and prior years. Commencing in 1985, standard
policies contained an absolute exclusion for pollution related damage. AIG has
established a special environmental claims unit which investigates and adjusts
all such claims.
Estimation of environmental claims loss reserves is a difficult
process. These environmental claims cannot be estimated by conventional
reserving techniques as previously described. Quantitative techniques
frequently have to be supplemented by subjective considerations including
managerial judgment. Significant factors which affect the trends which
influence the development of environmental claims are the inconsistent court
resolutions, the broadening of the intent of the policies and scope of coverage
and the increasing number of new claims. The case law that has emerged can be
characterized as still being in its infancy and the likelihood of any firm
direction in the near future is very small. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves coverage issues such as
allocation of responsibility among potentially responsible parties and the
government's refusal to release parties. The cleanup cost exposure may
significantly change if the Congressional reauthorization of Superfund in 1994
is dramatically changed thereby reducing or increasing litigation and cleanup
costs.
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In the interim, AIG and other industry members have and will continue
to litigate the broadening judicial interpretation of the policy coverage and
the liability issues. If the courts continue in the future to expand the intent
of the policies and the scope of the coverage as they have in the past,
additional liabilities would emerge for amounts in excess of the current
reserves held. This emergence cannot now be reasonably estimated, but could
have a material impact on AIG's future operating results and financial
condition. The reserves carried for these claims as at December 31, 1993 are
believed to be adequate as these reserves are based on the known facts and
current law. Furthermore, as AIG's net exposure retained relative to the gross
exposure written was lower in those years, the potential impact of these claims
is much smaller on the net loss reserves than on the gross loss reserves. (See
the previous discussion on reinsurance collectibility herein.)
The gross and net IBNR included in the reserve for loss and loss
expenses at December 31, 1993 for environmental claims approximated $245
million and $85 million, respectively; for 1992, $225 million and $75 million,
respectively; for 1991, $210 million and $60 million, respectively. Most of the
claims included in the following table relate to policies written in 1984 and
prior years.
The majority of AIG's exposures for environmental claims are excess
casualty coverages, not primary coverages. Thus, the litigation costs are
treated in the same manner as indemnity reserves. That is, litigation expenses
are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.
A summary of reserve activity, including estimates for applicable
IBNR, relating to environmental claims at December 31, 1993, 1992 and 1991 is
as follows:
(in millions)
- --------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
------------------------ ---------------------- ----------------------
GROSS NET Gross Net Gross Net
==========================================================================================================================
Reserve for loss and loss
expenses at beginning of year $1,222.1 $318.0 $ 896.5 $262.0 $828.5 $241.0
Loss and loss expenses incurred 584.8 202.6 516.4 120.4 281.0 89.0
Loss and loss expenses paid (328.4) (134.3) (190.8) (64.4) (213.0) (68.0)
- --------------------------------------------------------------------------------------------------------------------------
Reserve for loss and loss
expenses at end of year $1,478.5 $386.3 $1,222.1 $318.0 $896.5 $262.0
==========================================================================================================================
General insurance net investment income in 1993 was $1.34 billion, an
increase of 7.1 percent from 1992. In 1992, net investment income increased 7.6
percent to $1.25 billion from the $1.16 billion earned in 1991. The growth in
net investment income in each of the three years was primarily attributable to
new cash flow for investment. The new cash flow was generated from net general
insurance operating cash flow and included the compounding of previously earned
and reinvested net investment income. The decline in the rate of growth is a
reflection of the general worldwide downward trend in interest rates. (See also
the discussion under "Liquidity" herein.)
General insurance realized capital gains were $65.3 million in 1993,
$67.1 million in 1992 and $89.3 million in 1991. 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 fixed maturities,
including redemptions of fixed maturities.
General insurance operating income in 1993 was $1.42 billion, an
increase of 26.0 percent when compared to $1.12 billion in 1992. The 1992
results reflect a decrease of 9.9 percent from 1991. The 1992 operating results
were significantly impacted by the aforementioned catastrophes. The
contribution of general insurance operating income to income before income
taxes and the cumulative effect of accounting changes was 54.4 percent in 1993
compared to 52.6 percent in 1992 and 61.7 percent in 1991. The changes in the
contribution percentages were due to the aforementioned factors and, in 1992
and 1991, the growth of the financial services operations relative to general
insurance operating income.
A year to year comparison of operating income is significantly
influenced by the catastrophe losses in any one year as well as the volatility
from one year to the next in realized capital gains. Adjusting each year to
exclude the effects of both catastrophe losses and realized capital gains,
operating income would have increased by 13.9 percent in 1993, 1.7 percent in
1992 and 5.1 percent in 1991. The increase in the growth rate of 1993 over 1992
after the aforementioned adjustments was a result of the increased net
investment income as previously discussed and improvement in underwriting
results. The decline in the growth rate in 1992 as compared to 1991 is
primarily a result of the higher level of incurred losses and the general
downward trend in interest rates, as discussed above.
LIFE INSURANCE OPERATIONS
AIG's life insurance operations continued to show growth as a result of
overseas operations, particularly in Asia. AIG's life premium income of $5.75
billion in 1993 represented an 18.4
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percent increase from the prior year. This compares with increases of 19.6
percent and 16.7 percent in 1992 and 1991, respectively. The foreign ordinary
life products were the major contributor to premium growth in all three years.
In 1993, foreign life operations produced 95.3 percent of the life premium
income and 94.4 percent of the operating income. (See also Notes 1, 4 and 6 of
Notes to Financial Statements.)
Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial
products are being sold in Japan.
The risks associated with the traditional and accident and health
products are underwriting risk and investment risk. The risk associated with
the financial and investment contract products is investment risk.
Underwriting risk represents the exposure to loss resulting from the
actual policy experience adversely emerging in comparison to the assumptions
made in the product pricing associated with mortality, morbidity, termination
and expenses. AIG's life companies limit their maximum underwriting exposure on
traditional life insurance of a single life to approximately $1 million of
coverage by using yearly renewable term reinsurance. The life insurance
operations have not entered into assumption reinsurance transactions or surplus
relief transactions during the three year period ended December 31, 1993. (See
also Note 5 of Notes to Financial Statements.)
The investment risk represents the exposure to loss resulting from the
cash flows from the invested assets, primarily long-term fixed rate
investments, being less than the cash flows required to meet the obligations of
the expected policy and contract liabilities and the necessary return on
investments.
To minimize its exposure to investment risk, AIG tests the cash flows
from the invested assets and the policy and contract liabilities using various
interest rate scenarios to determine if a liquidity excess or deficit is
perceived to exist. If a rebalancing of the invested assets to the policy and
contract claims became necessary and did not occur, a demand could be placed
upon liquidity. (See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's
foreign operations, even though certain territories lack qualified long term
investments or there are investment restrictions imposed by the local
regulatory authorities. For example, in Japan and several Southeast Asia
territories, the duration of the investments is often for a shorter period than
the effective maturity of such policy liabilities. Therefore, there is a risk
that the reinvestment of the proceeds at the maturity of the investments may be
at a yield below that of the interest required for the accretion of the policy
liabilities. In Japan, the average duration of the investment portfolio is 5.3
years, while the related policy liabilities are estimated to be 7.4 years. To
maintain an adequate yield to match the interest required over the duration of
the liabilities, constant management focus is required to reinvest the proceeds
of the maturing securities without sacrificing investment quality. To the
extent permitted under local regulation, AIG may invest in qualified
longer-term securities outside Japan to achieve a closer matching in both
duration and the required yield. AIG is able to manage any asset-liability
duration difference through maintenance of sufficient global liquidity and
support of any operational shortfall through its international financial
network. Domestically, the asset-liability matching process is appropriately
functioning as there are investments available to match the duration and the
required yield. (See also the discussion under "Liquidity" herein.)
AIG uses asset-liability matching as a management tool to determine
the composition of the invested assets and marketing strategies. As a part of
these strategies, AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest rate or other
economic changes.
Life insurance net investment income increased 14.1 percent to $1.50
billion in 1993 compared to increases of 15.3 percent and 16.6 percent in 1992
and 1991, respectively. The growth in net investment income in each of the
three years was primarily attributable to new cash flow for investment. The new
cash flow was generated from net life insurance operating cash flow and
included the compounding of previously earned and reinvested net investment
income. The decline in the rate of growth is a reflection of the general
worldwide downward trend in interest rates. (See also the discussion under
"Liquidity" herein.)
Life insurance realized capital gains were $54.6 million in 1993,
$43.3 million in 1992 and $23.2 million in 1991. These realized gains resulted
from the ongoing management of the life insurance investment portfolios within
the overall objectives of the life insurance operations and arose primarily
from the redemption of fixed maturities and, to a smaller extent, from the
disposition of equity securities.
Life insurance operating income in 1993 increased 17.1 percent to
$781.6 million compared to increases of 18.8 percent and 21.4 percent in 1992
and 1991, respectively. Excluding realized capital gains from life insurance
operating income, the percent increases would be 16.5 percent, 15.9 percent and
14.8 percent in 1993, 1992 and 1991, respectively. The contribution of life
insurance operating income to income before income taxes and the cumulative
effect of accounting changes amounted to 30.0 percent in 1993 compared to 31.2
percent in 1992 and 27.8 percent in 1991.
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AGENCY AND SERVICE FEE OPERATIONS
Agency and service fee operating income in 1993 increased 14.6 percent to $60.2
million compared to an increase of 13.8 percent in 1992 and an increase of 26.0
percent in 1991. The increases in operating income in all three years resulted
from the growth of risk management services. Agency and service fee operating
income contributed 2.3 percent to AIG's income before income taxes and the
cumulative effect of accounting changes in 1993 compared to 2.5 percent in 1992
and 2.3 percent in 1991.
FINANCIAL SERVICES OPERATIONS
Financial services operating income amounted to $390.0 million in 1993, an
increase of 12.6 percent. This compares with operating income in 1992 and 1991
of $346.4 million and $222.2 million, respectively, or increases of 55.9
percent and 67.7 percent in 1992 and 1991, respectively. The financial services
operating income in 1993 increased over that of 1992 as a result of increases
in the operating income of International Lease Finance Corporation (ILFC) and
AIG Trading Group Inc. and its subsidiaries (AIGTG). The financial services
operating income in 1992 increased over that of 1991 as a result of increases
in the operating income of AIG Financial Products Corp. and its subsidiaries
(AIGFP), ILFC and AIGTG. The primary reason for the increase in financial
services operating income in 1991 was the inclusion of twelve months results of
operations of ILFC and AIGTG.
Through AIGFP and AIGTG, AIG participates in the derivatives market, which
has expanded significantly during the past several years. Derivative products
typically take the form of futures, forward, swap and option contracts and
derive their values from underlying interest rate, foreign exchange, equity or
commodity instruments. End users find derivatives to be a cost effective
approach to managing market risks associated with traditional on-balance sheet
financial instruments. As a dealer of derivative contracts, AIG typically acts
as a counterparty to end users or other dealers. Consequently, AIG may build up
substantial positions in derivatives which are managed by taking offsetting
positions in other derivatives, commodities or financial instruments. AIG's
counterparties include financial services companies, governmental units, banks
and industrial companies. In considering AIG's derivative activities, it is
also important to note that all significant derivative activities are conducted
through AIGFP and AIGTG and that AIG's other units, including its insurance
subsidiaries, are not significant end users of derivative products.
Although the notional amounts of derivatives are not recorded on the
balance sheet, dealer or principal-related derivatives are carried at their
estimated fair values. Substantially all of AIG's derivative positions at
December 31, 1993 were dealer or principal-related and thus accounted for in
that manner. The notional amounts used to express the extent of AIG's
involvement in derivatives transactions do not represent a quantification of
the market or credit risks of the positions. The notional amounts represent the
amounts used to calculate contractual cash flows to be exchanged and are
generally not actually paid or received, except for certain contracts such as
currency swaps and foreign exchange forwards. Furthermore, other factors such
as offsetting transactions, master netting agreements and collateral must all
be thoroughly considered in any measurement of risk.
The market risk of derivatives arises principally from the potential for
changes in volatility, interest rates, foreign exchange rates, and equity and
commodity prices. The credit risk of derivatives arises from the potential for
a counterparty to default on its contractual obligations. Credit risk exists at
a particular point in time when a derivative has a positive market value.
Derivatives, other than options, may be in an unrealized gain or unrealized
loss position depending on market rates and contract terms. Purchased options
contracts with positive market values have credit risk.
AIGFP conducts, primarily as principal, an interest rate, currency, equity
and commodity derivative products business. AIGFP also enters into long dated
forward foreign exchange, option, synthetic security, liquidity facility and
investment contract transactions.
AIGFP generally manages its exposures by taking offsetting positions,
including swaps, options, bonds, forwards or futures contracts. AIGFP manages
its credit risk by internally evaluating the creditworthiness of counterparties
and consulting with widely accepted credit rating services. In addition, AIGFP
enters into master netting agreements, which incorporate the right of set-off
to provide for the net settlement of covered contracts with the same
counterparty, in the event of default or other cancellation of the agreement.
Also, AIGFP requires collateral on certain transactions based on the credit
worthiness of the counterparty.
AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, has in place
effective procedures for evaluating and limiting the credit and market risks to
which it is subject. Management is not aware of any potential counterparty
defaults as of December 31, 1993.
Revenues generated by AIGFP for 1993 were primarily comprised of interest
rate swaps activity, which represented over 50 percent of total AIGFP revenues.
In August of 1993, the chief executive officer and minority shareholder of
AIGFP left the company and a new management team was put in place. A full and
satisfactory settlement was reached between AIG and the former minority
shareholder. Most members of AIGFP's core group central to the AIGFP operation
have remained at the company.
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During 1993, certain investments held by AIGFP experienced financial
difficulties and suffered significant rating downgrades. The pretax impact on
AIG of the estimated other than temporary impairment in value of these
investments was $215 million. As is AIG's policy in such situations where
credit ratings have deteriorated significantly, these impairments have been
appropriately recognized by charges to income of $104 million in 1993 and $111
million prior to 1993. The charge for the aforementioned impairments relates to
investments made before the new management team was in place. Based on the
latest information available, AIG believes that no further significant
impairments exist.
AIGTG engages as principal in trading activities in certain foreign
exchange, precious and base metals, petroleum and petroleum products and
natural gas markets. AIGTG is exposed to risk of loss through the potential
non-performance of a counterparty on its contractual obligations (credit risk)
and through the potential for changes in value due to fluctuations in interest
and foreign exchange rates and in prices of commodities (market risk).
Generally, AIGTG manages its credit risk through credit reviews, transaction
limits and/or margin requirements. AIGTG manages the market risk of its various
positions and transactions through offsetting transactions such as purchasing
and selling options and forward and futures contracts.
Revenues generated by AIGTG for 1993 were primarily comprised of foreign
exchange activities, which represented over 60 percent of total AIGTG revenues.
ILFC primarily engages in the acquisition of new and used commercial jet
aircraft and the leasing and sale of such aircraft to airlines around the
world. In addition, ILFC is engaged in the remarketing of commercial jets for
airlines and financial institutions. ILFC is exposed to loss through
non-performance of aircraft lessees and through owning and committing to
purchase aircraft which it would be unable to lease. ILFC manages its lessee
non-performance exposure through credit reviews and security deposit
requirements. At December 31, 1993, only one of 230 aircraft owned was not
leased. This aircraft is being converted for freighter service. Currently, 76.5
percent of the fleet is leased to foreign carriers.
See also the discussions under "Capital Resources" and "Liquidity" herein
and Notes 1, 9, 11 and 16 of Notes to Financial Statements.
Financial services operating income represented 15.0 percent of AIG's
income before income taxes and the cumulative effect of accounting changes in
1993. This compares to 16.2 percent and 11.0 percent in 1992 and 1991,
respectively.
OTHER OPERATIONS
In 1993, AIG's equity in income of minority-owned reinsurance operations was
$39.6 million compared to $27.9 million in 1992 and $28.8 million in 1991. The
equity interest in reinsurance companies, which includes two equity operations
which commenced business during 1993, represented 1.5 percent of income before
income taxes and the cumulative effect of accounting changes in 1993, compared
to 1.3 percent in 1992 and 1.4 percent in 1991.
Other realized capital lo