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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
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
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Commission file number 1-8787
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AMERICAN INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2592361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Pine Street, New York, New York 10270
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-7000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $2.50 Per Share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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, 1996 was
approximately $32,958,850,000 computed upon the basis of the closing sales price
of the Common Stock on that date.
As of January 31, 1996, there were outstanding 474,216,248 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 20, 1996 is incorporated by reference in
Part III of this Form 10-K.
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PART I
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ITEM 1. BUSINESS
American International Group, Inc. ("AIG"), a Delaware corporation, is a holding
company which through its subsidiaries is primarily engaged in a broad range of
insurance and insurance-related activities and financial services in the United
States and abroad. AIG's primary activities include both general and life
insurance operations. The principal insurance company subsidiaries are American
Home Assurance Company ("American Home"), National Union Fire Insurance Company
of Pittsburgh, Pa. ("National Union"), New Hampshire Insurance Company ("New
Hampshire"), Lexington Insurance Company ("Lexington"), American International
Underwriters Overseas, Ltd. ("AIUO"), American Life Insurance Company ("ALICO"),
American International Assurance Company, Limited ("AIA"), Nan Shan Life
Insurance Company, Ltd. ("Nan Shan"), The Philippine American Life Insurance
Company ("PHILAM"), American International Reinsurance Company, Ltd. and United
Guaranty Residential Insurance Company. For information on AIG's business
segments, see Note 18 of Notes to Financial Statements.
All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 1996, beneficial ownership of
approximately 16.0 percent, 3.5 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, 1995, AIG and its subsidiaries had approximately 34,500
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 insurance companies and realized
capital gains (losses). (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 1 and 18 of Notes to
Financial Statements.)
(dollars in thousands)
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Years Ended December 31, 1995 1994 1993 1992 1991
===========================================================================================================================
General insurance operations:
Gross premiums written $ 17,895,120 $ 16,392,409 $ 14,901,255 $ 13,615,715 $ 13,336,248
Net premiums written 11,893,022 10,865,753 10,025,903 9,138,528 9,146,394
Net premiums earned 11,405,731 10,286,831 9,566,640 9,209,390 9,104,632
Adjusted underwriting profit (loss) (a) 361,583 147,517 10,391 (195,084) (4,809)
Net investment income 1,545,717 1,435,092 1,340,480 1,252,086 1,163,461
Realized capital gains 68,075 52,487 65,264 67,134 89,275
Operating income 1,975,375 1,635,096 1,416,135 1,124,136 1,247,927
Identifiable assets (b) 56,074,024 51,372,100 46,981,720 42,416,509(b) 29,278,641
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Loss ratio 75.9 77.8 79.2 81.5 78.9
Expense ratio 21.1 20.9 20.9 20.9 21.5
- ---------------------------------------------------------------------------------------------------------------------------
Combined ratio 97.0 98.7 100.1 102.4 100.4
===========================================================================================================================
Life insurance operations:
Premium income 8,038,150 6,724,321 5,746,046 4,853,087 4,059,354
Net investment income 2,264,905 1,748,428 1,499,714 1,313,838 1,139,793
Realized capital gains 32,703 86,706 54,576 43,257 23,219
Operating income 1,090,605 952,484 781,611 667,453 561,839
Identifiable assets (b) 43,280,484 34,496,652 28,381,164 23,472,687(b) 19,986,909
Insurance in-force at end of year 376,097,107 333,378,811 257,162,102 210,605,862 193,226,288
Agency and service fee operations:
Commissions, management and other fees 260,018 236,778 237,738 225,686 211,210
Net investment income 1,855 1,162 1,903 2,611 4,754
Operating income 56,909 54,129 60,247 52,570 46,202
Identifiable assets 149,392 184,310 179,297 157,280 188,638
Financial services operations:
Commissions, transaction and other fees 2,204,090 1,783,239 1,529,079 1,404,902 1,073,553
Operating income 417,741 404,853 390,038 346,442 222,156
Identifiable assets 36,833,772 30,660,776 25,514,258 27,138,230 20,485,838
Equity in income of minority-owned
insurance operations 81,722 56,005 39,589 27,929 28,806
Other realized capital losses (28,944) (52,340) (12,742) (11,293) (14,144)
Revenues (c) 25,874,022 22,358,709 20,068,287 18,388,627 16,883,913
Total assets 134,136,398 114,346,117 101,014,848 92,722,182 69,389,468
===========================================================================================================================
(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) The insurance assets with respect to December 31, 1992 and subsequent years
conform to the requirements of FASB 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts".
(c) 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 insurance operations and realized capital gains.
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The following table shows identifiable assets, revenues and income derived
from operations in the United States and Canada and from operations in other
countries for the year ended December 31, 1995. (See also Note 18 of Notes to
Financial Statements.)
(dollars in thousands)
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Percent of Total
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United States Other United States Other
Total and Canada Countries and Canada Countries
====================================================================================================================================
General insurance operations:
Net premiums earned $ 11,405,731 $ 7,322,531 $ 4,083,200 64.2% 35.8%
Adjusted underwriting profit 361,583 57,514 304,069 15.9 84.1
Net investment income 1,545,717 1,240,174 305,543 80.2 19.8
Realized capital gains (losses) 68,075 71,766 (3,691) -- --
Operating income 1,975,375 1,369,454 605,921 69.3 30.7
Identifiable assets 56,074,024 44,046,477 12,027,547 78.6 21.4
Life insurance operations:
Premium income 8,038,150 463,533 7,574,617 5.8 94.2
Net investment income 2,264,905 846,345 1,418,560 37.4 62.6
Realized capital gains 32,703 1,425 31,278 4.4 95.6
Operating income 1,090,605 60,439 1,030,166 5.5 94.5
Identifiable assets 43,280,484 12,061,000 31,219,484 27.9 72.1
Agency and service fee operations:
Commissions, management and other fees 260,018 255,700 4,318 98.3 1.7
Net investment income 1,855 1,820 35 98.1 1.9
Operating income 56,909 54,038 2,871 95.0 5.0
Identifiable assets 149,392 149,392 -- 100.0 --
Financial services operations:
Commissions, transaction and other fees 2,204,090 1,864,217 339,873 84.6 15.4
Operating income 417,741 281,197 136,544 67.3 32.7
Identifiable assets 36,833,772 30,638,950 6,194,822 83.2 16.8
Equity in income of minority-owned
insurance operations 81,722 58,407 23,315 71.5 28.5
Other realized capital losses (28,944) (28,880) (64) -- --
Income before income taxes and cumulative
effect of accounting changes 3,465,883 1,698,606 1,767,277 49.0 51.0
Revenues 25,874,022 12,097,038 13,776,984 46.8 53.2
Total Assets 134,136,398 84,456,853 49,679,545 63.0 37.0
====================================================================================================================================
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 group, consisting of American Home,
National Union, Lexington and certain other insurance company subsidiaries of
AIG. The primary casualty/risk management division of this group provides
insurance and risk management programs for large corporate customers. The AIG
global risk division designs and implements creative risk financing alternatives
using the insurance and financial services capabilities of AIG. Also included
are the operations of New Hampshire and its subsidiaries, which focus
specifically on providing AIG products and services through brokers to middle
market companies, and regional insurance companies which service the commercial
middle market.
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.
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AIG engages in mass marketing of personal lines coverages, primarily
private passenger auto, through American International Insurance Company and
New Hampshire Indemnity Company, Inc. as well as through its interests in the
Robert Plan Corporation and 20th Century Industries.
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. UGC had approximately $12 billion of mortgage guarantee risk
in-force at December 31, 1995.
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 1995 domestic general and foreign general insurance business
accounted for 64.7 percent and 35.3 percent, respectively, of AIG's net premiums
written.
AIG's general insurance company subsidiaries worldwide operate primarily by
underwriting and accepting any size risk for their direct account and securing
reinsurance on that portion of the risk in excess of the limit which they wish
to retain. This operating policy differs from that of many insurance companies
which will underwrite only up to their net retention limit, thereby requiring
the broker or agent to secure commitments from other underwriters for the
remainder of the gross risk amount.
The following table summarizes general insurance premiums written and
earned:
(in thousands)
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Years Ended December 31, Written Earned
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1995
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Gross premiums $17,895,120 $17,243,829
Ceded premiums (6,002,098) (5,838,098)
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Net premiums $11,893,022 $11,405,731
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1994
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Gross premiums $16,392,409 $15,665,787
Ceded premiums (5,526,656) (5,378,956)
- --------------------------------------------------------------------------------
Net premiums $10,865,753 $10,286,831
================================================================================
1993
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Gross premiums $14,901,255 $14,405,992
Ceded premiums (4,875,352) (4,839,352)
- --------------------------------------------------------------------------------
Net premiums $10,025,903 $ 9,566,640
================================================================================
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 13 percent of AIG's net premiums written. This line is well
diversified geographically and is generally written on a loss sensitive
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.)
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The following table is a summary of the general insurance operations,
including ratios, by major operating category for the year ended December 31,
1995. (See also Note 18(b) of Notes to Financial Statements.)
(dollars in thousands)
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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 $ 4,202,815 $ 4,083,200 59.5 32.5 92.0
Commercial casualty (a) 5,895,757 5,645,281 82.7 13.8 96.5
Commercial property 452,323 403,037 81.4 19.0 100.4
Pools and associations (b) 400,951 394,088 152.1 15.1 167.2
Personal lines (c) 692,747 628,068 83.5 17.7 101.2
Mortgage guaranty 248,429 252,057 43.7 25.3 69.0
- -------------------------------------------------------------------------------------------------------------
Total $11,893,022 $11,405,731 75.9 21.1 97.0
=============================================================================================================
(a) Including workers' compensation and retrospectively rated risks.
(b) Including involuntary pools.
(c) Including mass marketing and specialty programs.
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)
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Ratio of Ratio of
Losses and Underwriting
Loss Expenses Expenses
Net Premiums Incurred to Incurred to Industry
------------------------ Net Premiums Net Premiums Combined Underwriting Combined
Years Ended December 31, Written Earned Earned Written Ratio Margin Ratio*
=============================================================================================================================
1995 $11,893,022 $11,405,731 75.9 21.1 97.0 3.0 108.8
1994 10,865,753 10,286,831 77.8 20.9 98.7 1.3 108.9
1993 10,025,903 9,566,640 79.2 20.9 100.1 (0.1) 107.9
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
=============================================================================================================================
* Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders) and the ratio for 1995 reflects estimated results
provided by Conning & Company.
During 1995, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 7.2 percent and 8.9 percent were
written in California and New York, respectively (no other state accounted for
more than 5 percent of such premiums).
There was no significant adverse effect on AIG's results of operations from
the economic environments in any one state, country or geographic region for the
year ended December 31, 1995.
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 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.
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 1985 through 1995. 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 $11,086.1 million as of December 31, 1988, by the end of 1995
(seven years later) $9,737.0 million
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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 $11,086.1
million was reestimated to be $11,301.5 million at December 31, 1995. This
increase from the original estimate would generally be a combination of a number
of factors, including reserves being settled for larger amounts than originally
estimated. The original estimates will also be increased or decreased as more
information becomes known about the individual claims and overall claim
frequency and severity patterns. The redundancy (deficiency) depicted in the
table, for any particular calendar year, shows the aggregate change in estimates
over the period of years subsequent to the calendar year reflected at the top of
the respective column heading. For example, the redundancy of $280.4 million at
December 31, 1995 related to December 31, 1994 net losses and loss expense
reserves of $18,418.9 million represents the cumulative amount by which reserves
for 1994 and prior years have developed redundantly during 1995.
ANALYSIS OF CONSOLIDATED NET LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
(in millions)
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1985 1986 1987 1988 1989
=========================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $ 4,034.9 $6,199.3 $8,670.7 $11,086.1 $12,958.5
Paid (Cumulative) as of:
One Year Later 1,576.1 2,300.1 2,619.2 3,266.9 3,940.3
Two Years Later 2,823.2 3,676.4 4,315.9 5,451.5 6,476.6
Three Years Later 3,321.1 4,340.7 5,496.6 6,904.5 8,350.8
Four Years Later 3,589.5 4,919.1 6,207.5 7,966.2 9,721.3
Five Years Later 3,886.5 5,260.3 6,757.2 8,792.1 10,764.8
Six Years Later 4,055.3 5,593.1 7,246.1 9,449.6 11,284.8
Seven Years Later 4,267.7 5,902.7 7,616.7 9,737.0
Eight Years Later 4,464.7 6,113.2 7,771.9
Nine Years Later 4,629.6 6,183.0
Ten Years Later 4,683.9
Net Liability Reestimated as of:
End of Year 4,034.9 6,199.3 8,670.7 11,086.1 12,958.5
One Year Later 4,164.2 6,268.3 8,523.6 10,923.8 12,844.5
Two Years Later 4,404.2 6,354.3 8,492.4 10,856.9 12,843.9
Three Years Later 4,502.0 6,397.5 8,488.1 10,811.9 12,809.2
Four Years Later 4,573.4 6,491.1 8,472.3 10,774.9 12,896.4
Five Years Later 4,672.4 6,531.2 8,472.0 10,805.1 13,064.6
Six Years Later 4,728.9 6,598.0 8,470.0 10,953.6 13,426.0
Seven Years Later 4,824.5 6,681.0 8,577.4 11,301.5
Eight Years Later 4,925.6 6,770.0 8,912.3
Nine Years Later 5,052.0 7,074.5
Ten Years Later 5,365.1
Redundancy/(Deficiency) (1,330.2) (875.2) (241.6) (215.4) (467.5)
=========================================================================================
(in millions)
- ------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995
======================================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $14,699.2 $15,839.9 $16,756.8 $17,557.0 $18,418.9 $19,692.8
Paid (Cumulative) as of:
One Year Later 4,315.2 4,747.8 4,882.7 5,146.3 4,775.0
Two Years Later 7,349.7 8,015.4 8,289.4 8,241.7
Three Years Later 9,561.0 10,436.2 10,433.1
Four Years Later 11,223.5 11,814.8
Five Years Later 12,111.6
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Liability Reestimated as of:
End of Year 14,699.2 15,839.9 16,756.8 17,557.0 18,418.9 19,692.8
One Year Later 14,596.2 15,828.1 16,807.0 17,434.3 18,138.5
Two Years Later 14,595.4 15,902.9 16,603.4 17,479.1
Three Years Later 14,723.7 15,989.7 16,778.3
Four Years Later 14,965.4 16,254.2
Five Years Later 15,361.2
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Redundancy/(Deficiency) (662.0) (414.3) (21.5) 77.9 280.4
======================================================================================================
The trend depicted in the latest development year in the reestimated
liability portion of the "Analysis of Consolidated Net Losses and Loss Expense
Reserve Development" table indicates that the overall position of AIG's 1994 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)
- --------------------------------------------------------------------------------
1995 1994 1993
================================================================================
Net reserve for losses and loss
expenses at beginning of year $18,418.9 $17,557.0 $16,756.8
- --------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 8,935.4 8,158.4 7,530.7
Prior years* (275.6) (152.8) 45.3
================================================================================
8,659.8 8,005.6 7,576.0
- --------------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 2,610.9 1,997.4 1,893.1
Prior years 4,775.0 5,146.3 4,882.7
================================================================================
7,385.9 7,143.7 6,775.8
- --------------------------------------------------------------------------------
Net reserve for losses and loss
expenses at end of year $19,692.8 $18,418.9 $17,557.0
================================================================================
* Does not include the effects of foreign exchange adjustments which are
reflected in the "Net Losses and Loss Expense Reserve Development" table.
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Approximately 50 percent of the net losses and loss expense reserves are
paid out within two years of the date incurred. The remaining net losses and
loss expense reserves, particularly those associated with the casualty lines of
business, may extend to 20 years or more.
For further discussion regarding net reserves for losses and loss expenses,
see Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The reserve for losses and loss expenses as reported in AIG's Consolidated
Balance Sheet at December 31, 1995, 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,
1995 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 losses and loss expenses is prior to reinsurance and
represents the accumulation for reported losses and IBNR. Management reviews the
adequacy of established gross loss reserves in the manner previously described
for net loss reserves.
The "Analysis of Consolidated Gross Losses and Loss Expense Reserve
Development", which follows, presents the development of gross losses and loss
expense reserves for calendar years 1992 through 1995. As with the net losses
and loss expense reserve development, the redundancies of $430.0 million, $509.7
million and $676.5 million for 1992, 1993 and 1994, respectively, are relatively
insignificant both in terms of an aggregate amount and as a percentage of the
initial reserve balance.
ANALYSIS OF CONSOLIDATED GROSS LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
(in millions)
- --------------------------------------------------------------------------------
1992 1993 1994 1995
================================================================================
Gross losses and loss
expenses, December 31, $28,156.8 $30,046.2 $31,435.4 $33,046.7
Paid (cumulative) as of:
One Year Later 7,280.9 8,807.1 7,640.0
Two Years Later 13,006.0 13,278.7
Three Years Later 16,432.3
Gross Liability Reestimated
as of:
End of Year 28,156.8 30,046.2 31,435.4 33,046.7
One Year Later 28,253.4 29,865.9 30,758.9
Two Years Later 27,824.8 29,536.5
Three Years Later 27,726.8
Redundancy 430.0 509.7 676.5
- --------------------------------------------------------------------------------
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 5.8
percent of total life premium income in 1995.
Life insurance operations in foreign countries comprised 94.2 percent of
life premium income and 94.5 percent of operating income in 1995. AIG operates
overseas principally through four subsidiary companies, ALICO, AIA , Nan Shan
and PHILAM. 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. AIA operates primarily in Hong Kong, Singapore, Malaysia and
Thailand. Nan Shan operates primarily in Taiwan while PHILAM operates in the
Philippines.
Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial products
are sold in Japan.
In addition to the above, AIG also has subsidiary operations in Switzerland
(Ticino Societa d'Assicurazioni Sulla Vita), Puerto Rico (AIG Life Insurance
Company of Puerto Rico) and conducts life insurance business through AIUO
subsidiary companies in certain countries in Central and South America.
The foreign life companies have approximately 105,000 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.
6
8
The following table summarizes the life insurance operating results for the
year ended December 31, 1995. (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 $5,990,812 $1,516,975 $ 671,003 $297,763,160(b) 6.7% 2.4%
Annuity 95,112 407,148 38,134 (c)
Accident and health 1,144,076 85,713 291,541 (c)
Group:
Life 367,614 24,208 30,029 78,333,947 8.8% 4.0%
Pension 51,503 216,233 18,408 (c)
Accident and health 389,033 23,103 19,923 (c)
Realized capital gains -- -- 32,703 (c)
Consolidation adjustments -- (8,475) (11,136) (c)
- ----------------------------------------------------------------------------------------------------
Total $8,038,150 $2,264,905 $1,090,605 $376,097,107
====================================================================================================
(a) Including income related to investment type products.
(b) Including $193.2 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 18 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, 1995:
(dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
Percent --------------------
General Life Total of Total Domestic Foreign
===================================================================================================================================
Fixed maturities:
Available for sale, at market value(a) $ 9,068,133 $22,168,672 $31,236,805 50.9% 37.5% 62.5%
Held to maturity, at amortized cost(b) 11,545,530 -- 11,545,530 18.8 100.0 --
Equity securities, at market value(c) 3,011,249 2,131,897 5,143,146 8.4 35.8 64.2
Mortgage loans on real estate, policy and collateral loans 54,852 6,887,329 6,942,181 11.3 52.8 47.2
Short-term investments, including
time deposits, and cash 636,709 1,231,817 1,868,526 3.0 25.6 74.4
Real estate 345,336 660,954 1,006,290 1.6 17.3 82.7
Investment income due and accrued 466,744 732,380 1,199,124 2.0 55.3 44.7
Other invested assets 1,421,878 1,055,991 2,477,869 4.0 50.6 49.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total $26,550,431 $34,869,040 $61,419,471 100.0% 51.0% 49.0%
===================================================================================================================================
(a) Includes $428,296 of bonds trading securities, at market value.
(b) Includes $459,505 of preferred stocks, at amortized cost.
(c) Includes $38,989 of preferred stocks, at market value.
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
- -------------------------------------------------------------------------------------------------------------------
1995 $ 795,805 $24,415,940 $25,211,745 $1,545,717 6.1% 6.3% $68,075
1994 1,387,704 21,836,228 23,223,932 1,435,092 6.2 6.6 52,487
1993 1,779,647 19,766,959 21,546,606 1,340,480 6.2 6.8 65,264
1992 1,766,031 18,285,417 20,051,448 1,252,086 6.2 6.8 67,134
1991 1,828,346 16,960,076 18,788,422 1,163,461 6.2 6.9 89,275
- -------------------------------------------------------------------------------------------------------------------
(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and excludes
realized capital gains.
(c) Net investment income divided by the annual average sum of cash and invested
assets.
(d) Net investment income divided by the annual average invested assets.
7
9
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)
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1995 $1,222,375 $29,557,181 $30,779,556 $2,264,905 7.4% 7.7% $32,703
1994 2,045,747 22,317,914 24,363,661 1,748,428 7.2 7.8 86,706
1993 2,697,282 17,286,171 19,983,453 1,499,714 7.5 8.7 54,576
1992 2,304,043 14,190,868 16,494,911 1,313,838 8.0 9.3 43,257
1991 1,940,738 11,785,325 13,726,063 1,139,793 8.3 9.7 23,219
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and excludes
realized capital gains.
(c) Net investment income divided by the annual average sum of cash and invested
assets.
(d) Net investment income divided by the annual average invested assets.
AIG's worldwide insurance investment policy places primary emphasis on
investments in high quality, fixed income securities in all of its portfolios
and, to a lesser extent, investments in marketable common stocks in order to
preserve policyholders' surplus and generate net investment income. The ability
to implement this policy is somewhat limited in certain territories as there may
be a lack of qualified long term investments or investment restrictions may be
imposed by the local regulatory authorities. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
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. AIGFP engages in financial
transactions, including long-dated interest rate and currency swaps and
structures borrowings through guaranteed investment agreements. 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. Other
financial services operations are AIG Global Investment Group, Inc. and its
subsidiaries, which manage the investment portfolios of various AIG
subsidiaries, as well as third-party assets. AIG Asset Management Services, Inc.
and AIG Capital Partners, Inc. are responsible for product design and
origination, as well as marketing and distribution of third-party asset
management products, including retail mutual funds and direct investment
products. (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.)
8
10
The following table is a summary of the composition of AIG's financial
services invested assets and liabilities at December 31, 1995. (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 $12,442,010
Securities available for sale, at market value 3,931,100
Trading securities, at market value 2,641,436
Spot commodities, at market value 1,079,124
Unrealized gain on interest rate and currency
swaps, options and forward transactions 7,250,954
Securities purchased under agreements to resell,
at contract value 2,022,056
Trade receivables 3,321,985
Other, including short-term investments 1,780,296
- --------------------------------------------------------------------------------
Total financial services invested assets $34,468,961
- --------------------------------------------------------------------------------
Financial services liabilities:
Borrowings under obligations of guaranteed
investment agreements $ 5,423,555
Securities sold under agreements to repurchase,
at contract value 1,379,872
Trade payables 2,810,947
Securities sold but not yet purchased, principally
obligations of the U.S. Government and 1,204,386
Government agencies, at market value
Spot commodities sold but not yet purchased,
at market value 783,302
Unrealized loss on interest rate and currency
swaps, options and forward transactions 6,405,045
Deposits due to banks and other depositors 957,441
Commercial paper 1,834,882
Notes, bonds and loans payable 8,932,743
- --------------------------------------------------------------------------------
Total financial services liabilities $29,732,173
- --------------------------------------------------------------------------------
The following table is a summary of the revenues and operating income of
AIG's financial services operations for the year ended December 31, 1995. (See
also Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)
Operating
(in thousands) Revenues Income
- --------------------------------------------------------------------------------
ILFC $1,378,353 $ 263,790
AIGFP* 289,020 140,245
AIGTG* 317,207 68,765
Other 219,510 (55,059)
- -------------------------------------------------------------------------------
Total financial service revenues $2,204,090 $ 417,741
- --------------------------------------------------------------------------------
* Represents net trading revenues.
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
Small AIG subsidiaries provide insurance-related services such as adjusting
claims and marketing specialized products. AIG has several other relatively
minor subsidiaries which carry on various businesses. Mt. Mansfield Company,
Inc. owns and operates the ski slopes, lifts, school and an inn located at
Stowe, Vermont.
ADDITIONAL INVESTMENTS
As of March 15, 1996, AIG holds a 48.3 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.) 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. Other significant investments include
minority positions in the Robert Plan Corporation, Kroll Holdings, Inc.,
Alexander and Alexander Services, Inc. and 20th Century Industries.
LOCATIONS OF CERTAIN ASSETS
As of December 31, 1995, approximately 37 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $1.07
billion of cash and securities on deposit with foreign regulatory authorities.
Foreign operations and assets held abroad may be adversely affected by political
developments in foreign countries, including such possibilities as tax changes,
nationalization and changes in regulatory policy, as well as by consequence of
hostilities and unrest. The risks of such occurrences and their overall effect
upon AIG vary from country to country and cannot easily be predicted. If
expropriation or nationalization does occur, AIG's policy is to take all
appropriate measures to seek recovery of such assets. Certain of the countries
in which AIG's business is conducted have currency restrictions which generally
cause a delay in a company's ability to repatriate assets and profits. (See also
Notes 1(t), 2 and 18(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.)
9
11
AIG's insurance subsidiaries, in common with other insurers, are subject to
regulation and supervision by the states and by other jurisdictions in which
they do business. Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate regulatory and
supervisory powers to an insurance official. The regulation and supervision
relate primarily to approval of policy forms and rates, the standards of
solvency that must be met and maintained, including risk based capital
measurements, the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the size of risks which may be
insured under a single policy, deposits of securities for the benefit of
policyholders, methods of accounting, periodic examinations of the affairs of
insurance companies, the form and content of reports of financial condition
required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of policyholders
rather than security holders. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Risk Based Capital (RBC) is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Thus, inadequately capitalized general and life insurance companies may be
identified.
The RBC formula develops a risk adjusted target level of adjusted statutory
capital by applying certain factors to various asset, premium and reserve items.
Higher factors are applied to more risky items and lower factors are applied to
less risky items. Thus, the target level of statutory surplus varies not only as
a result of the insurer's size, but also on the risk profile of the insurer's
operations.
The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control.
The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 1995.
To the extent that any of AIG's insurance entities would fall below
prescribed levels of surplus, it would be AIG's intention to infuse necessary
capital to support that entity.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business is carried on in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification or revocation by such authorities, and AIU or other AIG
subsidiaries could be prevented from conducting business in certain of the
jurisdictions where they currently operate. In the past, AIU has been allowed to
modify its operations to conform with new licensing requirements in most
jurisdictions.
In addition to licensing requirements, AIG's foreign operations are also
regulated in various jurisdictions with respect to currency, policy language and
terms, amount and type of security deposits, amount and type of reserves, amount
and type of local investment and the share of profits to be returned to
policyholders on participating policies. Some foreign countries regulate rates
in various types of policies. Certain countries have established reinsurance
institutions, wholly or partially owned by the state, to which admitted insurers
are obligated to cede a portion of their business on terms which do not always
allow foreign insurers, including AIG, full compensation. 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 4,300 other
stock companies, specialty insurance organizations, mutual companies and other
underwriting organizations. AIG's life insurance companies compete in the United
States with some 1,600 life insurance companies and other participants in
related financial service fields. Overseas, AIG subsidiaries compete for
business with foreign insurance operations of the larger U.S. insurers and local
companies in particular areas in which they are active.
AIG's financial services subsidiaries, particularly AIGTG and AIGFP,
operate in a highly competitive environment, both domestically and overseas.
Principal sources of competition are banks, investment banks and other non-bank
financial institutions.
ITEM 2. PROPERTIES
AIG and its subsidiaries operate from approximately 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, New Jersey;
70 Pine 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, future operating results or
liquidity. (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.)
10
12
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 1995.
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 67 1984
Lloyd M. Bentsen Director 75 1995
Marshall A. Cohen Director 60 1992
Barber B. Conable, Jr Director 73 1991
Martin S. Feldstein Director 56 1987
Houghton Freeman Director 74 1967
Leslie L. Gonda Director 76 1990
M. R. Greenberg* Director, Chairman, and Chief Executive Officer 70 1967
Carla A. Hills Director 62 1993
Frank J. Hoenemeyer Director 76 1985
John I. Howell* Director 79 1969
Edward E. Matthews Director and Vice Chairman-Finance 64 1973
Dean P. Phypers Director 67 1979
John J. Roberts* Director and Vice Chairman-External Affairs 73 1967
Ernest E. Stempel* Director and Vice Chairman-Life Insurance 79 1967
Thomas R. Tizzio* Director and President 58 1982
Edwin E. Manton Senior Adviser 87 1967
Evan G. Greenberg Executive Vice President-Foreign General Insurance 41 1995
Robert M. Sandler Executive Vice President, Senior Casualty Actuary and Senior Claims Officer 53 1980
Howard I. Smith Executive Vice President and Comptroller 51 1984
Edmund S. W. Tse Executive Vice President-Life Insurance 58 1991
Lawrence W. English Senior Vice President-Administration 54 1985
Axel I. Freudmann Senior Vice President-Human Resources 49 1986
Win J. Neuger Senior Vice President and Chief Investment Officer 46 1995
Petros K. Sabatacakis Senior Vice President-Financial Services 49 1992
William D. Smith Senior Vice President-Domestic General Insurance 51 1995
Florence A. Davis Vice President-General Counsel 41 1995
Robert E. Lewis Vice President and Chief Credit Officer 45 1993
Frank Petralito II Vice President and Director of Taxes 59 1978
Kathleen E. Shannon Vice President and Secretary 46 1986
John T. Wooster, Jr Vice President-Communications 56 1989
William N. Dooley Treasurer 42 1992
- ------------------------------------------------------------------------------------------------------------------------------------
* Member of Executive Committee.
11
13
Except as hereinafter noted, each of the directors who is also an executive
officer of AIG and each of the other executive officers has, for more than five
years, occupied an executive position with AIG or companies that are now its
subsidiaries, or with Starr. Evan G. Greenberg is the son of M.R. Greenberg.
There are no other arrangements or understandings between any director or
officer and any other person pursuant to which the director or officer was
elected to such position. Ms. Davis was a Principal in the legal department and
Worldwide Director of Compliance at Morgan Stanley & Co. Incorporated prior to
joining AIG in April, 1995. 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. Sabatacakis
was Managing Director and head of the Capital Markets and Treasury Group of
Chemical Banking Corporation prior to joining AIG in February, 1992. Mr. Neuger
was Managing Director, Global Investment Management-Equity at Bankers Trust
Company prior to joining AIG in February, 1995.
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 1995 and 1994, as adjusted for the common stock split in the
form of a 50 percent common stock dividend paid July 28, 1995. All prices are as
reported by the National Quotation Bureau, Incorporated.
- --------------------------------------------------------------------------------
1995 1994
---------------- ----------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter 71 7/8 64 5/8 61 3/4 55
Second Quarter 79 1/4 68 7/8 64 3/8 56
Third Quarter 86 1/2 71 5/8 63 7/8 58 3/4
Fourth Quarter 94 7/8 82 5/8 66 1/2 58 3/8
- --------------------------------------------------------------------------------
(b) In 1995, AIG paid a quarterly dividend of 7.7 cents in March and June
and 8.5 cents in September and December for a total cash payment of 32.4 cents
per share of common stock. In 1994, AIG paid a quarterly dividend of 6.7 cents
in March and June and 7.7 cents in September and December for a total cash
payment of 28.8 cents per share of common stock. These amounts reflect the
adjustment for a common stock split in the form of a 50 percent common stock
dividend paid July 28, 1995. Subject to the dividend preference of any of AIG's
serial preferred stock which may be outstanding, the holders of shares of common
stock are entitled to receive such dividends as may be declared by the Board of
Directors from funds legally available therefor.
See Note 10(b) of Notes to Financial Statements for a discussion of certain
restrictions on the payment of dividends to AIG by some of its insurance
subsidiaries.
(c) The approximate number of holders of Common Stock as of January 31,
1996, based upon the number of record holders, was 17,600.
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14
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, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues (a) $ 25,874,022 $ 22,358,709 $ 20,068,287 $18,388,627 $16,883,913
General insurance:
Net premiums written 11,893,022 10,865,753 10,025,903 9,138,528 9,146,394
Net premiums earned 11,405,731 10,286,831 9,566,640 9,209,390 9,104,632
Adjusted underwriting profit (loss) 361,583 147,517 10,391 (195,084) (4,809)
Net investment income 1,545,717 1,435,092 1,340,480 1,252,086 1,163,461
Realized capital gains 68,075 52,487 65,264 67,134 89,275
Operating income 1,975,375 1,635,096 1,416,135 1,124,136 1,247,927
Life insurance:
Premium income 8,038,150 6,724,321 5,746,046 4,853,087 4,059,354
Net investment income 2,264,905 1,748,428 1,499,714 1,313,838 1,139,793
Realized capital gains 32,703 86,706 54,576 43,257 23,219
Operating income 1,090,605 952,484 781,611 667,453 561,839
Agency and service fee operating income 56,909 54,129 60,247 52,570 46,202
Financial services operating income 417,741 404,853 390,038 346,442 222,156
Equity in income of minority-owned insurance
operations 81,722 56,005 39,589 27,929 28,806
Other realized capital losses (28,944) (52,340) (12,742) (11,293) (14,144)
Income before income taxes and cumulative
effect of accounting changes 3,465,883 2,951,979 2,601,081 2,137,048 2,022,575
Income taxes 955,500 776,464 683,003 512,033 469,566
Income before cumulative effect of accounting changes 2,510,383 2,175,515 1,918,078 1,625,015 1,553,009
Cumulative effect of accounting changes, net of tax:
AIG -- -- -- 31,941 --
Minority-owned insurance operations -- -- 20,695 -- --
Net income 2,510,383 2,175,515 1,938,773 1,656,956 1,553,009
Earnings per common share:
Income before cumulative effect of
accounting changes 5.30 4.58 4.03 3.40 3.24
Cumulative effect of accounting changes, net of tax:
AIG -- -- -- .07 --
Minority-owned insurance operations -- -- .04 -- --
Net income 5.30 4.58 4.07 3.47 3.24
Cash dividends per common share .32 .29 .26 .23 .21
Total assets (b) 134,136,398 114,346,117 101,014,848 92,722,182 69,389,468
Long-term debt (c) 13,938,095 12,613,907 10,955,963 9,517,595 7,591,385
Capital funds (shareholders' equity) 19,827,103 16,421,661 15,224,195 12,782,152 11,463,454
- ----------------------------------------------------------------------------------------------------------------------------------
(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 insurance operations and realized capital gains. (See also
tables under Item 1, "Business".)
(b) The assets with respect to December 31, 1992 and subsequent years conform to
the requirements of FASB 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts."
(c) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
13
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONAL REVIEW
GENERAL INSURANCE OPERATIONS
General insurance operations for the twelve month periods ending December 31,
1995, 1994 and 1993 were as follows:
(in thousands)
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
Net premiums written:
Domestic $ 7,690,207 $ 7,132,367 $ 6,979,913
Foreign 4,202,815 3,733,386 3,045,990
- -------------------------------------------------------------------------------
Total $11,893,022 $10,865,753 $10,025,903
- -------------------------------------------------------------------------------
Net premiums earned:
Domestic $ 7,322,531 $ 6,683,656 $ 6,648,472
Foreign 4,083,200 3,603,175 2,918,168
- -------------------------------------------------------------------------------
Total $11,405,731 $10,286,831 $ 9,566,640
- -------------------------------------------------------------------------------
Adjusted underwriting
profit (loss):
Domestic $ 57,514 $ (56,190) $ (122,008)
Foreign 304,069 203,707 132,399
- -------------------------------------------------------------------------------
Total $ 361,583 $ 147,517 $ 10,391
- -------------------------------------------------------------------------------
Net investment income:
Domestic $ 1,240,174 $ 1,147,595 $ 1,085,953
Foreign 305,543 287,497 254,527
- -------------------------------------------------------------------------------
Total $ 1,545,717 $ 1,435,092 $ 1,340,480
- -------------------------------------------------------------------------------
Operating income before
realized capital gains:
Domestic $ 1,297,688 $ 1,091,405 $ 963,945
Foreign 609,612 491,204 386,926
- -------------------------------------------------------------------------------
Total 1,907,300 1,582,609 1,350,871
Realized capital gains 68,075 52,487 65,264
- -------------------------------------------------------------------------------
Operating income $ 1,975,375 $ 1,635,096 $ 1,416,135
- -------------------------------------------------------------------------------
In AIG's general insurance operations, 1995 net premiums written and net
premiums earned increased 9.5 percent and 10.9 percent, respectively, from those
of 1994. In 1994, net premiums written increased 8.4 percent and net premiums
earned increased 7.5 percent when compared to 1993.
The growth in net premiums written in 1995 and 1994 resulted from a
combination of several factors. Domestically, AIG continued to achieve some
general price increases in certain commercial property and specialty casualty
markets, as well as volume growth in personal lines. Overseas, the primary
reasons for growth were price and volume increases. Foreign general insurance
operations produced 35.3 percent of the general insurance net premiums written
in 1995, 34.4 percent in 1994 and 30.4 percent in 1993.
In comparing the foreign exchange rates used to translate AIG's foreign
general operations during 1995 to those foreign exchange rates used to translate
AIG's foreign general operations during 1994, the U.S. dollar declined in value
in relation to most major foreign currencies in which AIG transacts business.
Accordingly, when foreign net premiums written were translated into U.S. dollars
for the purposes of consolidation, total general insurance net premiums written
were approximately 2.3 percentage points greater than they would have been if
translated utilizing those exchange rates which prevailed during 1994.
Net premiums written are initially deferred and earned based upon the terms
of the underlying policies. The net unearned premium reserve constitutes the
deferred revenues which are generally earned ratably over the policy period.
Thus, the net unearned premium reserve is not fully recognized as net premiums
earned until the end of the policy period.
The statutory general insurance ratios were as follows:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Domestic:
Loss Ratio 85.11 86.83 87.19
Expense Ratio 14.88 14.59 15.05
- --------------------------------------------------------------------------------
Combined Ratio 99.99 101.42 102.24
- --------------------------------------------------------------------------------
Foreign:
Loss Ratio 59.46 61.12 60.97
Expense Ratio 32.51 33.04 34.26
- --------------------------------------------------------------------------------
Combined Ratio 91.97 94.16 95.23
- --------------------------------------------------------------------------------
Consolidated:
Loss Ratio 75.93 77.82 79.19
Expense Ratio 21.11 20.93 20.88
- --------------------------------------------------------------------------------
Combined Ratio 97.04 98.75 100.07
- --------------------------------------------------------------------------------
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 deferred acquisition costs. The adjusted
underwriting profits were $361.6 million in 1995, $147.5 million in 1994 and
$10.4 million in 1993. (See also Notes 4 and 18 of Notes to Financial
Statements.)
AIG's results reflect the net impact with respect to incurred losses of
catastrophes approximating $100 million in 1995, $55 million in 1994 and $70
million in 1993. AIG's gross incurred losses from catastrophes approximated $190
million in 1995, $174 million in 1994 and $134 million in 1993. The Kobe Japan
earthquake which struck in early 1995 resulted in gross and net incurred losses
to AIG of approximately $73 million and $30 million, respectively. A substantial
portion of the remaining balances resulted from storms which struck portions of
the United States and the Caribbean. The Northridge earthquake which struck the
Los Angeles area of California in January, 1994, resulted in gross and net
incurred losses of approximately $174 million and $55 million, respectively. If
these catastrophes were excluded from the losses incurred in each period, the
pro forma consolidated statutory general insurance ratios would be as follows:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Loss Ratio 75.05 77.29 78.46
Expense Ratio 21.11 20.93 20.88
- --------------------------------------------------------------------------------
Combined Ratio 96.16 98.22 99.34
- --------------------------------------------------------------------------------
14
16
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Excluding the effects of the aforementioned catastrophes, the general
insurance operation has improved significantly over the three year period. AIG's
ability to maintain the pro forma combined ratio below 100 is primarily
attributable to the profitability of AIG's foreign general insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.
General insurance net investment income in 1995 increased 7.7 percent when
compared to 1994. In 1994, net investment income increased 7.1 percent over
1993. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment. The new cash flow was
generated from net general insurance operating cash flow and included the
compounding of previously earned and reinvested net investment income. (See also
the discussion under "Liquidity" herein.)
General insurance realized capital gains were $68.1 million in 1995, $52.5
million in 1994 and $65.3 million in 1993. These realized gains resulted from
the ongoing management of the general insurance investment portfolios within the
overall objectives of the general insurance operations and arose primarily from
the disposition of equity securities and available for sale and trading fixed
maturities as well as redemptions of fixed maturities.
General insurance operating income in 1995 increased 20.8 percent when
compared to 1994. The 1994 results reflect an increase of 15.5 percent from
1993. The contribution of general insurance operating income to income before
income taxes and the cumulative effect of accounting changes was 57.0 percent in
1995 compared to 55.4 percent in 1994 and 54.4 percent in 1993.
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 22.6 percent in 1995 and 15.3 percent in 1994. The
increase in the growth rate of 1995 over 1994 and 1994 over 1993 after the
aforementioned adjustments was a result of the increased net investment income
and improvement in underwriting results.
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 100 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $16.88 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 1995 with respect to reinsurance recoverable to the extent that any
reinsurer may not be able to reimburse AIG under the terms of these reinsurance
arrangements. AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound, and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods. The application of
this collateral against balances due or any changes to the amount of collateral
are based on the development of losses recoverable on an individual reinsurer
basis. This development includes losses incurred but not reported (IBNR).
Approximately 50 percent of the general reinsurance asset is from unauthorized
reinsurers. In order to obtain statutory recognition, nearly all of these
balances are collateralized. The remaining 50 percent of the general reinsurance
asset is from authorized reinsurers and over 96 percent of such balances are
from reinsurers rated A-(excellent) or better, as rated by A.M. Best. This
rating is a measure of financial strength. The terms authorized and
unauthorized pertain to regulatory categories, not creditworthiness.
AIG maintains a provision for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 1995,
AIG had allowances for unrecoverable reinsurance approximating $125 million. At
that date, and prior to this allowance, AIG had no significant reinsurance
recoverables from any individual reinsurer which is financially troubled (e.g.,
liquidated, insolvent, in receivership or otherwise subject to formal or
informal regulatory restriction).
AIG's Reinsurance Security Department conducts ongoing detailed assessments
of the reinsurance markets and current and potential reinsurers both foreign and
domestic. Such assessments include, but are not limited to, identifying if a
reinsurer is appropriately licensed, and has sufficient financial capacity, and
the local economic environment in which a foreign reinsurer operates. This
department also reviews the nature of the risks ceded and the need for
collateral. In addition, AIG's Credit Risk Committee reviews the credit limits
for and concentrations with any one reinsurer.
AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
The consolidated general reinsurance assets of $16.88 billion include
reinsurance recoverables for (i) paid losses and loss expenses of $1.74 billion
and (ii) $13.35 billion with respect to the ceded reserve for losses and loss
expenses, including ceded IBNR (ceded reserves). The ceded reserves represent
the accumulation of estimates of ultimate ceded losses including provisions for
ceded IBNR and loss expenses. The methods used to determine such estimates and
to establish the resulting ceded reserves are continually reviewed and updated.
Any adjustments
15
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
therefrom are reflected in income currently. It is AIG's belief
that the ceded reserves at December 31, 1995 were representative of the ultimate
losses recoverable. In the future, as the ceded reserves continue to develop to
ultimate amounts, the ultimate loss recoverable may be greater or less than the
reserves currently ceded.
At December 31, 1995, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $33.05 billion, an increase of $1.61
billion or 5.1 percent over the prior year end and represent the accumulation of
estimates of ultimate losses, including IBNR, and loss expenses and minor
amounts of discounting related to certain workers' compensation claims. General
insurance net loss reserves increased $1.27 billion or 6.9 percent to $19.69
billion and represent loss reserves reduced by reinsurance recoverable, net of
an allowance for unrecoverable reinsurance. The methods used to determine such
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting therefrom are reflected in operating income
currently. It is management's belief that the general insurance net loss
reserves are adequate to cover all general insurance net losses and loss
expenses as at December 31, 1995. In the future, if the general insurance net
loss reserves develop deficiently, such deficiency would have an adverse impact
on such future results of operations.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business; the
other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. Loss trend factors
reflect many items including changes in claims handling, exposure and policy
forms and current and future estimates of monetary inflation and social
inflation. Thus, many factors are implicitly considered in estimating the year
to year growth in loss costs. Therefore, AIG's carried net long tail loss
reserves are judgmentally set as well as tested for reasonableness using the
most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. For the
majority of long tail casualty lines, net loss trend factors approximating nine
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, and other environmental pollutants and alleged
damages to cover the cleanup costs of hazardous waste dump sites (hereinafter
collectively referred to as environmental claims) and indemnity claims asserting
injuries from asbestos. The vast majority of these asbestos and environmental
claims emanate from policies written in 1984 and prior years. Commencing in
1985, standard policies contained an absolute exclusion for pollution related
damage. However, AIG currently underwrites pollution impairment liability
insurance on a claims made basis and excluded such claims from the analyses
included herein. AIG has established a specialized claims unit which
investigates and adjusts all such asbestos and environmental claims.
Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends
which influence the development of asbestos and environmental claims are the
inconsistent court resolutions, judicial interpretations which broaden 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 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 expected in 1996 dramatically changes, thereby reducing or
increasing litigation and cleanup costs.
In the interim, AIG and other industry members have and will continue to
litigate the broadening judicial interpretation of the policy coverage and the
liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims. Such development will
be
16
18
American International Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
changes in Superfund and waste dump site coverage issues. Additional liabilities
could emerge for amounts in excess of the current reserves held. Although this
emergence cannot now be reasonably estimated, it could have a material adverse
impact on AIG's future operating results. The reserves carried for these claims
at December 31, 1995 are believed to be adequate as these reserves are based on
the known facts and current law. Furthermore, as AIG's net exposure retained
relative to the gross exposure written was lower in 1984 and prior years, the
potential impact of these claims is much smaller on the net loss reserves than
on the gross loss reserves. (See the previous discussion on reinsurance
collectibility herein.)
The majority of AIG's exposures for asbestos and environmental claims are
excess casualty coverages, not primary coverages. Thus, the litigation costs
are treated in the same manner as indemnity reserves. That is, litigation
expenses are included within the limits of the liability AIG incurs. Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.
A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and environmental claims separately and combined at
December 31, 1995, 1994 and 1993 was as follows:
(in millions)
- ---------------------------------------------------------------------------------------------------------------------
1995 1994 1993
----------------- ----------------- ------------------
Gross Net Gross Net Gross Net
- ---------------------------------------------------------------------------------------------------------------------
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 686.0 $130.2 $ 656.0 $116.7 $ 558.4 $ 86.9
Losses and loss expenses incurred 197.7 20.5 149.2 45.8 242.9 65.1
Losses and loss expenses paid (138.9) (22.8) (119.2) (32.3) (145.3) (35.3)
- ---------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 744.8 $127.9 $ 686.0 $130.2 $ 656.0 $ 116.7
- ---------------------------------------------------------------------------------------------------------------------
Environmental:
Reserve for losses and loss expenses at beginning of year $ 728.1 $200.1 $ 684.8 $191.5 $ 566.4 $ 166.6
Losses and loss expenses incurred 684.9 231.7 187.5 61.8 278.6 106.5
Losses and loss expenses paid (215.1) (52.5) (144.2) (53.2) (160.2) (81.6)
- ---------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,197.9 $379.3 $ 728.1 $200.1 $ 684.8 $ 191.5
- ---------------------------------------------------------------------------------------------------------------------
Combined:
Reserve for losses and loss expenses at beginning of year $1,414.1 $330.3 $1,340.8 $308.2 $1,124.8 $ 253.5
Losses and loss expenses incurred 882.6 252.2 336.7 107.6 521.5 171.6
Losses and loss expenses paid (354.0) (75.3) (263.4) (85.5) (305.5) (116.9)
- ---------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,942.7 $507.2 $1,414.1 $330.3 $1,340.8 $ 308.2
- ---------------------------------------------------------------------------------------------------------------------
The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at December 31, 1995, 1994 and 1993 were estimated as follows:
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
1995 1994 1993
----------------- ----------------- ------------------
Gross Net Gross Net Gross Net
- ---------------------------------------------------------------------------------------------------------------------
Combined $665,000 $218,000 $150,000 $30,000 $150,000 $30,000
- ---------------------------------------------------------------------------------------------------------------------
17
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
A summary of asbestos and environmental claims count activity for the years
ended December 31, 1995, 1994 and 1993 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- --------------------------------- ---------------------------------
Asbestos Environmental Combined Asbestos Environmental Combined Asbestos Environmental Combined
- ------------------------------------------------------------------------------------------------------------------------------------
Claims at beginning of 5,947 16,223 22,170 5,522 16,661 22,183 5,490 14,169 19,659
year
Claims during year:
Opened 1,026 5,045 6,071 1,626 3,178 4,804 1,381 4,875 6,256
Settled (93) (663) (756) (106) (501) (607) (144) (455) (599)
Dismissed or
otherwise
resolved (1,636) (2,747) (4,383) (1,095) (3,115) (4,210) (1,205) (1,928) (3,133)
- ------------------------------------------------------------------------------------------------------------------------------------
Claims at end of year 5,244 17,858 23,102 5,947 16,223 22,170 5,522 16,661 22,183
- ------------------------------------------------------------------------------------------------------------------------------------
The average cost per claim settled, dismissed or otherwise resolved for the
years ended December 31, 1995, 1994 and 1993 was as follows:
- --------------------------------------------------------------------------------
1995 1994 1993
---------------- ---------------- -----------------
Gross Net Gross Net Gross Net
- --------------------------------------------------------------------------------
Asbestos $80,300 $13,200 $99,300 $26,900 $107,700 $26,200
Environmental 63,100 15,400 39,900 14,700 67,200 34,200
Combined 68,900 14,700 54,700 17,700 81,900 31,300
- --------------------------------------------------------------------------------
An insurance rating agency has developed a survival ratio to measure the
number of years it would take a company to exhaust both its asbestos and
environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. The higher the
ratio, the more years the reserves for losses and loss expenses cover these
claims payments. These ratios are computed based on the respective ending
reserves for losses and loss expenses over the respective claims settlements
during the fiscal year. Such payments i