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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934
For the Transition period from________________________to_______________________
Commission file number 1-8787
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American International Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2592361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Pine Street, New York, New York 10270
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-7000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $2.50 Per Share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [].
The aggregate market value of the shares of all classes of voting stock of
the registrant held by non-affiliates of the registrant on January 31, 1997 was
approximately $40,736,413,000 computed upon the basis of the closing sales price
of the Common Stock on that date.
As of January 31, 1997, there were outstanding 469,493,068 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 21, 1997 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, 1997, beneficial ownership of
approximately 16.1 percent, 3.4 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, 1996, AIG and its subsidiaries had approximately 36,600
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 other
realized capital losses. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 1 and 18 of Notes to
Financial Statements.)
(dollars in thousands)
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YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992
====================================================================================================================================
GENERAL INSURANCE OPERATIONS:
Gross premiums written $ 18,319,132 $ 17,895,120 $ 16,392,409 $ 14,901,255 $ 13,615,715
Net premiums written 12,691,679 11,893,022 10,865,753 10,025,903 9,138,528
Net premiums earned 11,854,815 11,405,731 10,286,831 9,566,640 9,209,390
Adjusted underwriting profit (loss) (a) 398,944 361,583 147,517 10,391 (195,084)
Net investment income 1,689,371 1,545,717 1,435,092 1,340,480 1,252,086
Realized capital gains 64,985 68,075 52,487 65,264 67,134
Operating income 2,153,300 1,975,375 1,635,096 1,416,135 1,124,136
Identifiable assets 58,702,967 56,074,024 51,372,100 46,981,720 42,416,509
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Loss ratio 75.9 75.9 77.8 79.2 81.5
Expense ratio 21.0 21.1 20.9 20.9 20.9
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Combined ratio 96.9 97.0 98.7 100.1 102.4
====================================================================================================================================
LIFE INSURANCE OPERATIONS:
Premium income 8,978,246 8,038,150 6,724,321 5,746,046 4,853,087
Net investment income 2,675,881 2,264,905 1,748,428 1,499,714 1,313,838
Realized capital gains 34,798 32,703 86,706 54,576 43,257
Operating income 1,323,758 1,090,605 952,484 781,611 667,453
Identifiable assets 48,376,033 43,280,484 34,496,652 28,381,164 23,472,687
Insurance in-force at end of year 421,983,133 376,097,107 333,378,811 257,162,102 210,605,862
AGENCY AND SERVICE FEE OPERATIONS:
Commissions, management and other fees 262,705 260,018 236,778 237,738 225,686
Net investment income 1,427 1,855 1,162 1,903 2,611
Operating income 52,267 56,909 54,129 60,247 52,570
Identifiable assets 88,768 149,392 184,310 179,297 157,280
FINANCIAL SERVICES OPERATIONS:
Commissions, transaction and other fees 2,555,477 2,204,090 1,783,239 1,529,079 1,404,902
Operating income 523,906 417,741 404,853 390,038 346,442
Identifiable assets 43,861,592 36,833,772 30,660,776 25,514,258 27,138,230
EQUITY IN INCOME OF MINORITY-OWNED
INSURANCE OPERATIONS 99,359 81,722 56,005 39,589 27,929
OTHER REALIZED CAPITAL LOSSES (11,792) (28,944) (52,340) (12,742) (11,293)
REVENUES (B) 28,205,272 25,874,022 22,358,709 20,068,287 18,388,627
TOTAL ASSETS 148,431,002 134,136,398 114,346,117 101,014,848 92,722,182
====================================================================================================================================
(a) Adjusted underwriting profit (loss) is statutory underwriting income (loss)
adjusted primarily for changes in deferral of acquisition costs. This
adjustment is necessary to present the financial statements in accordance
with generally accepted accounting principles.
(b) Represents the sum of general net premiums earned, life premium income,
agency commissions, management and other fees, net investment income,
financial services commissions, transaction and other fees, equity in
income of minority-owned insurance operations and realized capital gains
(losses).
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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, 1996. (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 $ 11,854,815 $ 7,821,605 $ 4,033,210 66.0% 34.0%
Adjusted underwriting profit 398,944 1,039 397,905 0.3 99.7
Net investment income 1,689,371 1,350,159 339,212 79.9 20.1
Realized capital gains 64,985 47,492 17,493 73.1 26.9
Operating income 2,153,300 1,398,690 754,610 65.0 35.0
Identifiable assets 58,702,967 45,134,163 13,568,804 76.9 23.1
LIFE INSURANCE OPERATIONS:
Premium income 8,978,246 535,579 8,442,667 6.0 94.0
Net investment income 2,675,881 930,350 1,745,531 34.8 65.2
Realized capital gains 34,798 671 34,127 2.0 98.0
Operating income 1,323,758 101,158 1,222,600 7.6 92.4
Identifiable assets 48,376,033 12,183,892 36,192,141 25.2 74.8
AGENCY AND SERVICE FEE OPERATIONS:
Commissions, management and other fees 262,705 259,701 3,004 98.9 1.1
Net investment income 1,427 1,404 23 98.4 1.6
Operating income 52,267 50,859 1,408 97.3 2.7
Identifiable assets 88,768 88,768 -- 100.0 --
FINANCIAL SERVICES OPERATIONS:
Commissions, transaction and other fees 2,555,477 2,207,417 348,060 86.4 13.6
Operating income 523,906 372,422 151,484 71.1 28.9
Identifiable assets 43,861,592 37,532,716 6,328,876 85.6 14.4
EQUITY IN INCOME OF MINORITY-OWNED
INSURANCE OPERATIONS 99,359 70,143 29,216 70.6 29.4
OTHER REALIZED CAPITAL LOSSES (11,792) (9,932) (1,860) -- --
INCOME BEFORE INCOME TAXES 4,013,222 1,877,203 2,136,019 46.8 53.2
REVENUES 28,205,272 13,214,589 14,990,683 46.9 53.1
TOTAL ASSETS 148,431,002 92,088,305 56,342,697 62.0 38.0
====================================================================================================================================
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
Risk Finance division designs and implements creative risk financing
alternatives using the insurance and financial services capabilities of AIG.
Also included are the operations of New Hampshire and its subsidiaries, which
focus specifically on providing AIG products and services through brokers to
middle market companies, and regional insurance companies which service the
commercial middle market.
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.
AIG engages in mass marketing of personal lines coverages, primarily
private passenger auto, through American International Insurance Company and New
Hampshire
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Indemnity Company, Inc. as well as through joint ventures with 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 home equity and property
improvement loan insurance on loans to finance residential property
improvements, alterations and repairs and for other purposes not necessarily
related to real estate. UGC had approximately $15 billion of mortgage guarantee
risk in-force at December 31, 1996.
AIG's foreign general insurance business is comprised primarily of 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 1996, domestic general and foreign general insurance business
accounted for 65.9 percent and 34.1 percent, respectively, of AIG's net premiums
written.
AIG's general insurance company subsidiaries worldwide operate primarily by
underwriting and accepting any size risk for their direct account and securing
reinsurance on that portion of the risk in excess of the limit which they wish
to retain. This operating policy differs from that of many insurance companies
which will underwrite only up to their net retention limit, thereby requiring
the broker or agent to secure commitments from other underwriters for the
remainder of the gross risk amount.
The following table summarizes general insurance premiums written and
earned:
(in thousands)
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Years Ended December 31, Written Earned
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1996
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Gross premiums $18,319,132 $17,579,868
Ceded premiums (5,627,453) (5,725,053)
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Net premiums $12,691,679 $11,854,815
============================================================================
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
============================================================================
1994
- ----------------------------------------------------------------------------
Gross premiums $16,392,409 $15,665,787
Ceded premiums (5,526,656) (5,378,956)
- ----------------------------------------------------------------------------
Net premiums $10,865,753 $10,286,831
============================================================================
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 14 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.
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,
1996. (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 $ 4,324,847 $ 4,033,210 57.8 31.8 89.6
Commercial casualty (a) 6,398,039 5,853,271 81.2 14.7 95.9
Commercial property 490,644 480,388 104.6 21.2 125.8
Pools and associations (b) 435,127 429,565 146.4 12.2 158.6
Personal lines (c) 725,295 734,042 85.1 15.3 100.4
Mortgage guaranty 317,727 324,339 47.7 24.8 72.5
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Total $12,691,679 $11,854,815 75.9 21.0 96.9
====================================================================================================================================
(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*
====================================================================================================================================
1996 $12,691,679 $11,854,815 75.9 21.0 96.9 3.1 105.5
1995 11,893,022 11,405,731 75.9 21.1 97.0 3.0 106.7
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
====================================================================================================================================
* Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders) and the ratio for 1996 reflects estimated
results provided by Conning & Company.
During 1996, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 7.6 percent and 7.7 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, 1996.
DISCUSSION AND ANALYSIS OF CONSOLIDATED NET LOSSES AND LOSS EXPENSE RESERVE
DEVELOPMENT
The reserve for net losses and loss expenses is exclusive of applicable
reinsurance and represents the accumulation of estimates for reported losses
("case basis reserves") and provisions for losses incurred but not reported
("IBNR"). 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. Through the use of these techniques, management is able to monitor
the adequacy of its established reserves and determine appropriate assumptions
for inflation. Also, analysis of emerging specific development patterns, such as
case reserve redundancies or deficiencies and IBNR emergence, allows management
to currently determine any required adjustments. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
The "Analysis of Consolidated Net Losses and Loss Expense Reserve
Development", which follows, presents the development of net losses and loss
expense reserves for calendar years 1986 through 1996. The upper half of the
table shows the cumulative amounts paid during successive years related to the
opening loss reserves. For example, with respect to the net losses and loss
expense reserve of $12,958.5 million as of December 31, 1989, by the end of 1996
(seven years later) $11,517.3 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 $12,958.5
million was reestimated to be $13,930.7 million at December 31, 1996. 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 $280.0 million at
December 31, 1996 related to December 31, 1995 net losses and loss expense
reserves of $19,692.8 million represents the cumulative amount by which reserves
for 1995 and prior years have developed redundantly during 1996.
Over the past several years, AIG has significantly strengthened its net
loss and loss expense reserves with respect to asbestos and environmental
losses. This strengthening is the primary cause of the adverse development
reflected in certain calendar years in the net loss and loss expense reserves
shown in the following table.
ANALYSIS OF CONSOLIDATED NET LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
(in millions)
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1986 1987 1988 1989 1990 1991 1992 1993 1994
====================================================================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $6,199.3 $8,670.7 $11,086.1 $12,958.5 $14,699.2 $15,839.9 $16,756.8 $17,557.0 $18,418.9
Paid (Cumulative) as of:
One Year Later 2,300.1 2,619.2 3,266.9 3,940.3 4,315.2 4,747.8 4,882.7 5,146.3 4,775.0
Two Years Later 3,676.4 4,315.9 5,451.5 6,476.6 7,349.7 8,015.4 8,289.4 8,241.7 8,072.6
Three Years Later 4,340.7 5,496.6 6,904.5 8,350.8 9,561.0 10,436.2 10,433.1 10,403.5
Four Years Later 4,919.1 6,207.5 7,966.2 9,721.3 11,223.5 11,814.8 11,718.1
Five Years Later 5,260.3 6,757.2 8,792.1 10,764.8 12,111.6 12,611.4
Six Years Later 5,593.1 7,246.1 9,449.6 11,284.8 12,614.9
Seven Years Later 5,902.7 7,616.7 9,737.0 11,517.3
Eight Years Later 6,113.2 7,771.9 9,813.0
Nine Years Later 6,183.0 7,764.7
Ten Years Later 6,123.7
Net Liability Reestimated as of:
End of Year 6,199.3 8,670.7 11,086.1 12,958.5 14,699.2 15,839.9 16,756.8 17,557.0 18,418.9
One Year Later 6,268.3 8,523.6 10,923.8 12,844.5 14,596.2 15,828.1 16,807.0 17,434.3 18,138.5
Two Years Later 6,354.3 8,492.4 10,856.9 12,843.9 14,595.4 15,902.9 16,603.4 17,479.1 18,268.9
Three Years Later 6,397.5 8,488.1 10,811.9 12,809.2 14,723.7 15,989.7 16,778.3 17,781.7
Four Years Later 6,491.1 8,472.3 10,774.9 12,896.4 14,965.4 16,254.2 17,181.7
Five Years Later 6,531.2 8,472.0 10,805.1 13,064.6 15,361.2 16,712.4
Six Years Later 6,598.0 8,470.0 10,953.6 13,426.0 15,844.5
Seven Years Later 6,681.0 8,577.4 11,301.5 13,930.7
Eight Years Later 6,770.0 8,912.3 11,798.9
Nine Years Later 7,074.5 9,391.1
Ten Years Later 7,546.4
Redundancy/(Deficiency) (1,347.1) (720.4) (712.8) (972.2) (1,145.3) (872.5) (424.9) (224.7) 150.0
====================================================================================================================================
(in millions)
- --------------------------------------------------------
1995 1996
========================================================
Reserve for Net Losses and Loss
Expenses, December 31, $19,692.8 $20,407.3
Paid (Cumulative) as of:
One Year Later 5,281.4
Two Years Later
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Liability Reestimated as of:
End of Year 19,692.8 20,407.3
One Year Later 19,412.8
Two Years Later
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Redundancy/(Deficiency) 280.0
========================================================
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The following table excludes for each calendar year the net loss and
loss expense reserves and the development thereof with respect to asbestos and
environmental claims. Thus, AIG's loss and loss expense reserves excluding
asbestos and environmental claims are developing adequately. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
ANALYSIS OF CONSOLIDATED NET LOSSES AND LOSS EXPENSE
RESERVE DEVELOPMENT EXCLUDING ASBESTOS AND
ENVIRONMENTAL NET LOSSES AND LOSS EXPENSE RESERVE
DEVELOPMENT.
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994
====================================================================================================================================
Reserve for Net Losses and Loss
Expenses, Excluding Asbestos
and Environmental Losses and
Loss Expenses, December 31, $6,199.3 $8,630.6 $11,005.9 $12,838.3 $14,538.9 $15,639.5 $16,503.4 $17,248.7 $18,088.6
Paid (Cumulative) as of:
One Year Later 2,300.1 2,619.2 3,266.9 3,940.3 4,259.7 4,690.8 4,766.1 5,060.9 4,699.6
Two Years Later 3,676.4 4,315.9 5,451.5 6,422.0 7,237.4 7,842.0 8,087.9 8,081.5 7,890.5
Three Years Later 4,340.7 5,496.6 6,850.5 8,240.1 9,332.8 10,178.1 10,157.3 10,137.0
Four Years Later 4,919.1 6,155.7 7,856.9 9,495.6 10,911.6 11,482.9 11,336.9
Five Years Later 5,208.9 6,655.0 8,569.4 10,456.3 11,726.6 12,174.8
Six Years Later 5,493.3 7,032.7 9,145.1 10,904.3 12,125.9
Seven Years Later 5,709.9 7,322.1 9,361.6 11,033.5
Eight Years Later 5,841.1 7,407.3 9,338.8
Nine Years Later 5,845.4 7,306.3
Ten Years Later 5,698.7
Net Liability Reestimated as of:
End of Year 6,199.3 8,630.6 11,005.9 12,838.3 14,538.9 15,639.5 16,503.4 17,248.7 18,088.6
One Year Later 6,228.2 8,443.4 10,803.6 12,684.2 14,340.7 15,518.4 16,382.3 17,019.2 17,556.0
Two Years Later 6,274.1 8,372.2 10,696.6 12,590.9 14,231.6 15,422.4 16,072.6 16,812.6 17,355.2
Three Years Later 6,277.3 8,327.8 10,562.2 12,449.4 14,190.1 15,402.9 15,996.7 16,790.0
Four Years Later 6,330.8 8,227.0 10,419.9 12,367.5 14,326.7 15,416.9 16,081.1
Five Years Later 6,289.4 8,127.6 10,282.2 12,430.8 14,472.0 15,562.1
Six Years Later 6,260.8 7,961.4 10,325.8 12,544.1 14,648.3
Seven Years Later 6,197.2 7,962.8 10,429.9 12,747.8
Eight Years Later 6,181.2 8,056.3 10,635.4
Nine Years Later 6,248.8 8,254.5
Ten Years Later 6,453.3
Redundancy/(Deficiency): (254.0) 376.1 370.5 90.5 (109.4) 77.4 422.3 458.7 733.4
====================================================================================================================================
(in millions)
- ----------------------------------------------------------
1995 1996
==========================================================
Reserve for Net Losses and Loss
Expenses, Excluding Asbestos
and Environmental Losses and
Loss Expenses, December 31, $19,185.6 $19,664.4
Paid (Cumulative) as of:
One Year Later 5,174.1
Two Years Later
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Liability Reestimated as of:
End of Year 19,185.6 19,664.4
One Year Later 18,567.7
Two Years Later
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Redundancy/(Deficiency): 617.9
==========================================================
RECONCILIATION OF NET RESERVE FOR LOSSES AND
LOSS EXPENSES
(in millions)
- -----------------------------------------------------------------------------
1996 1995 1994
=============================================================================
Net reserve for losses and loss
expenses at beginning of year $19,692.8 $18,418.9 $17,557.0
- ----------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 9,272.4 8,935.4 8,158.4
Prior years* (276.0) (275.6) (152.8)
- -----------------------------------------------------------------------------
8,996.4 8,659.8 8,005.6
- -----------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 3,000.5 2,610.9 1,997.4
Prior years 5,281.4 4,775.0 5,146.3
- -----------------------------------------------------------------------------
8,281.9 7,385.9 7,143.7
- -----------------------------------------------------------------------------
Net reserve for losses and loss
expenses at end of year $20,407.3 $19,692.8 $18,418.9
============================================================================
* Does not include the effects of foreign exchange adjustments which are
reflected in the "Net Losses and Loss Expense Reserve Development" table.
Approximately 45 percent of the net losses and loss expense reserves are
paid out within two years of the date incurred. The remaining net losses and
loss expense reserves, particularly those associated with the casualty lines of
business, may extend to 20 years or more.
For further discussion regarding net reserves for losses and loss expenses,
see Management's Discussion and Analysis of Financial Condition and Results of
Operations.
6
8
The reserve for losses and loss expenses as reported in AIG's Consolidated
Balance Sheet at December 31, 1996, 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,
1996 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 1996. As with the net losses
and loss expense reserve development, the deficiencies of $468.2 million and
$315.8 million for 1992 and 1993, and redundancies of $475.4 million and $675.0
million for 1994 and 1995, respectively, are relatively insignificant both in
terms of an aggregate amount and as a percentage of the initial reserve balance.
ANALYSIS OF CONSOLIDATED GROSS LOSSES AND
LOSS EXPENSE RESERVE DEVELOPMENT
(in millions)
- --------------------------------------------------------------------------------
1992 1993 1994 1995 1996
================================================================================
Gross losses and
loss expenses,
December 31, $28,156.8 $30,046.2 $31,435.4 $33,046.7 $33,429.8
Paid (cumulative)
as of:
One Year Later 7,280.9 8,807.1 7,640.0 8,392.1
Two Years Later 13,006.0 13,278.7 13,035.8
Three Years Later 16,432.3 17,311.4
Four Years Later 18,550.0
Gross Liability
Reestimated
as of:
End of Year 28,156.8 30,046.2 31,435.4 33,046.7 33,429.8
One Year Later 28,253.4 29,865.9 30,758.9 32,371.7
Two Years Later 27,824.8 29,536.5 30,960.0
Three Years Later 27,726.8 30,362.0
Four Years Later 28,625.0
Redundancy/(Deficiency) (468.2) (315.8) 475.4 675.0
================================================================================
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, universal life and pensions. (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 6.0
percent of total life premium income in 1996.
Life insurance operations in foreign countries comprised 94.0 percent of
life premium income and 92.4 percent of operating income in 1996. 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 Caribbean, the Middle East, and the Far East, with Japan
being the largest territory. AIA operates primarily in Hong Kong, Singapore,
Malaysia and Thailand. Nan Shan operates in Taiwan 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 110,000 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.
7
9
The following table summarizes the life insurance operating results for
the year ended December 31, 1996. (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 $ 6,815,334 $ 1,873,011 $ 827,906 $325,857,244(b) 6.9% 1.5%
Annuity 121,227 424,664 57,088 (c)
Accident and health 1,151,520 96,351 304,574 (c)
Group:
Life 375,896 25,114 50,124 96,125,889 10.8% 5.4%
Pension 102,544 244,268 27,099 (c)
Accident and health 411,725 22,611 32,307 (c)
Realized capital gains -- -- 34,798 (c)
Consolidation adjustments -- (10,138) (10,138) (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 8,978,246 $ 2,675,881 $ 1,323,758 $421,983,133
====================================================================================================================================
(a) Including income related to investment type products.
(b) Including $222.5 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, 1996:
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Distribution
Percent --------------------
General Life Total of Total Domestic Foreign
====================================================================================================================================
Fixed maturities:
Available for sale, at market value(a) $ 9,713,937 $26,058,027 $35,771,964 53.2% 34.6% 65.4%
Held to maturity, at amortized cost(b) 12,736,225 -- 12,736,225 18.9 100.0 --
Equity securities, at market value(c) 3,265,756 2,608,309 5,874,065 8.7 33.9 66.1
Mortgage loans on real estate, policy
and collateral loans 50,578 6,224,878 6,275,456 9.3 43.1 56.9
Short-term investments, including
time deposits, and cash 598,076 1,002,060 1,600,136 2.4 19.0 81.0
Real estate 409,808 843,933 1,253,741 1.9 18.2 81.8
Investment income due and accrued 493,338 697,891 1,191,229 1.8 44.4 55.6
Other invested assets 1,511,135 1,056,772 2,567,907 3.8 51.6 48.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total $28,778,853 $38,491,870 $67,270,723 100.0% 47.9% 52.1%
====================================================================================================================================
(a) Includes $364,069 of bonds trading securities, at market value.
(b) Includes $477,247 of preferred stocks, at amortized cost.
(c) Includes $46,732 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
(including Net Realized
short-term Invested Investment Rate of Return on Capital
Years Ended December 31, investments) Assets(a) Total Income(b) Invested Assets Gains
====================================================================================================================================
1996 $ 617,393 $27,047,250 $27,664,643 $1,689,371 6.1%(c) 6.2%(d) $64,985
1995 795,805 24,415,940 25,211,745 1,545,717 6.1 (c) 6.3 (d) 68,075
1994 1,387,704 21,836,228 23,223,932 1,435,092 6.2 (c) 6.6 (d) 52,487
1993 1,779,647 19,766,959 21,546,606 1,340,480 6.2 (c) 6.8 (d) 65,264
1992 1,766,031 18,285,417 20,051,448 1,252,086 6.2 (c 6.8 (d) 67,134
====================================================================================================================================
(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.
8
10
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
(INCLUDING NET REALIZED
SHORT-TERM INVESTED INVESTMENT RATE OF RETURN ON CAPITAL
YEARS ENDED DECEMBER 31, INVESTMENTS) ASSETS(A) TOTAL INCOME(B) INVESTED ASSETS GAINS
====================================================================================================================================
1996 $1,116,938 $35,563,517 $36,680,455 $2,675,881 7.3%(c) 7.5%(d) $34,798
1995 1,222,375 29,557,181 30,779,556 2,264,905 7.4 (c) 7.7 (d) 32,703
1994 2,045,747 22,317,914 24,363,661 1,748,428 7.2 (c) 7.8 (d) 86,706
1993 2,697,282 17,286,171 19,983,453 1,499,714 7.5 (c) 8.7 (d) 54,576
1992 2,304,043 14,190,868 16,494,911 1,313,838 8.0 (c) 9.3 (d) 43,257
====================================================================================================================================
(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. AIG Reinsurance Advisors, Inc.
provides access to structured reinsurance for insurers and reinsurers worldwide.
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 structures financial
transactions, including long-dated interest rate and currency swaps and
structures borrowings through notes, bonds and guaranteed investment agreements.
AIGTG engages in various commodities trading, foreign exchange trading 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 Corp., which
manages 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.)
9
11
The following table is a summary of the composition of AIG's financial
services invested assets and liabilities at December 31, 1996. (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 $13,808,660
Securities available for sale, at market value 9,785,909
Trading securities, at market value 2,357,812
Spot commodities, at market value 204,705
Unrealized gain on interest rate and currency
swaps, options and forward transactions 6,906,012
Securities purchased under agreements to resell,
at contract value 1,642,591
Trading assets 3,793,433
Other, including short-term investments 2,439,749
- --------------------------------------------------------------------------------
Total financial services invested assets $40,938,871
================================================================================
Financial services liabilities:
Borrowings under obligations of guaranteed
investment agreements $ 5,723,228
Securities sold under agreements to repurchase,
at contract value 3,039,423
Trading liabilities 3,313,508
Securities and spot commodities sold but
not yet purchased, at market value 1,568,542
Unrealized loss on interest rate and currency
swaps, options and forward transactions 5,414,433
Deposits due to banks and other depositors 1,206,374
Commercial paper 2,739,388
Notes, bonds and loans payable 12,312,805
- --------------------------------------------------------------------------------
Total financial services liabilities $35,317,701
================================================================================
The following table is a summary of the revenues and operating income of
AIG's financial services operations for the year ended December 31, 1996. (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 $1,560,228 $306,853
AIGFP* 369,194 189,157
AIGTG* 288,551 80,156
Other 337,504 (52,260)
- --------------------------------------------------------------------------------
Total financial service revenues $2,555,477 $523,906
================================================================================
* 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. American International
Technology Enterprises, Inc. provides information technology and processing
services to businesses worldwide. Mt. Mansfield Company, Inc. owns and operates
the ski slopes, lifts, school and an inn located at Stowe, Vermont.
ADDITIONAL INVESTMENTS
As of March 14, 1997, AIG holds a 49.1 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 Holdings,
Ltd., a reinsurance holding company. Other significant investments include
minority positions in The Robert Plan Corporation and 20th Century Industries.
LOCATIONS OF CERTAIN ASSETS
As of December 31, 1996, approximately 38 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $1.10
billion of cash and securities on deposit with foreign regulatory authorities.
Foreign operations and assets held abroad may be adversely affected by political
developments in foreign countries, including such possibilities as tax changes,
nationalization and changes in regulatory policy, as well as by consequence of
hostilities and unrest. The risks of such occurrences and their overall effect
upon AIG vary from country to country and cannot easily be predicted. If
expropriation or nationalization does occur, AIG's policy is to take all
appropriate measures to seek recovery of such assets. Certain of the countries
in which AIG's business is conducted have currency restrictions which generally
cause a delay in a company's ability to repatriate assets and profits. (See also
Notes 1, 2 and 18 of Notes to Financial Statements.)
INSURANCE REGULATION AND COMPETITION
Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such requirements.
(See also Note 10 of Notes to Financial Statements.)
AIG's insurance subsidiaries, in common with other insurers, are subject to
regulation and supervision by the states and by other jurisdictions in which
they do business. Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate regulatory and
supervisory powers to an insurance official. The regulation and supervision
relate primarily to approval of policy forms and rates, the standards of
solvency that must be met and maintained, including risk based capital
measurements, the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the
10
12
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, 1996.
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 Springfield, Illinois; Houston, Texas; Atlanta, Georgia; Baton Rouge,
Louisiana; Wilmington, Delaware; Hato Rey, Puerto Rico; San Diego, California;
Greensboro, North Carolina; Livingston, New Jersey; 70 Pine Street, 72 Wall
Street and 175 Water Street in New York City; and offices in approximately 30
foreign countries including Bermuda, 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 Losses and
Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
ITEM 4.SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1996.
11
13
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the directors and executive
officers of AIG. All directors are elected at the annual meeting of
shareholders. All officers serve at the pleasure of the Board of Directors, but
subject to the foregoing, are elected for terms of one year expiring in May of
each year.
- ------------------------------------------------------------------------------------------------------------------------------------
Served as
Director or
Officer
Name Title Age Since
====================================================================================================================================
M. Bernard Aidinoff* Director 68 1984
Lloyd M. Bentsen Director 76 1995
Pei-yuan Chia Director 58 1996
Marshall A. Cohen Director 61 1992
Barber B. Conable, Jr. Director 74 1991
Martin S. Feldstein Director 57 1987
Leslie L. Gonda Director 77 1990
Evan G. Greenberg Director and Executive Vice President-Foreign General Insurance 42 1995
M. R. Greenberg* Director, Chairman, and Chief Executive Officer 71 1967
Carla A. Hills Director 63 1993
Frank J. Hoenemeyer* Director 77 1985
Edward E. Matthews* Director and Vice Chairman-Investments and Financial Services 65 1973
Dean P. Phypers Director 68 1979
John J. Roberts* Director and Vice Chairman-External Affairs 74 1967
Thomas R. Tizzio* Director and President 59 1982
Edmund S. W. Tse Director and Executive Vice President-Life Insurance 59 1991
Edwin E. Manton Senior Advisor 88 1967
Ernest E. Stempel Senior Advisor 80 1967
Robert M. Sandler Executive Vice President, Senior Casualty Actuary and Senior Claims Officer 54 1980
Howard I. Smith Executive Vice President, Chief Financial Officer and Comptroller 52 1984
Lawrence W. English Senior Vice President-Administration 55 1985
Axel I. Freudmann Senior Vice President-Human Resources 50 1986
Win J. Neuger Senior Vice President and Chief Investment Officer 47 1995
Petros K. Sabatacakis Senior Vice President-Financial Services 50 1992
Florence A. Davis Vice President-General Counsel 42 1995
Robert E. Lewis Vice President and Chief Credit Officer 46 1993
Frank Petralito II Vice President and Director of Taxes 60 1978
Kathleen E. Shannon Vice President and Secretary 47 1986
John T. Wooster, Jr. Vice President-Communications 57 1989
William N. Dooley Vice President and Treasurer 43 1992
====================================================================================================================================
* Member of Executive Committee.
Except as hereinafter noted, each of the directors who is also an executive
officer of AIG and each of the other executive officers has, for more than five
years, occupied an executive position with AIG or companies that are now its
subsidiaries, or with Starr. Evan G. Greenberg is the son of M.R. Greenberg.
There are no other arrangements or understandings between any director or
officer and any other person pursuant to which the director or officer was
elected to such position. 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.
12
14
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 1996 and 1995, 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.
- --------------------------------------------------------------------------------
1996 1995
-------------- --------------
High Low High Low
================================================================================
First Quarter 102 3/4 89 3/8 71 7/8 64 5/8
Second Quarter 98 5/8 88 1/8 79 1/4 68 7/8
Third Quarter 100 7/8 90 1/8 86 1/2 71 5/8
Fourth Quarter 115 1/8 101 1/2 94 7/8 82 5/8
================================================================================
(b) In 1996, AIG paid a quarterly dividend of 8.5 cents in March and June
and 10.0 cents in September and December for a total cash payment of 37.0 cents
per share of common stock. 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. 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,
1997, based upon the number of record holders, was 18,000.
================================================================================
13
15
ITEM 6.SELECTED FINANCIAL DATA
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data is presented in accordance
with generally accepted accounting principles. This data should be read in
conjunction with the financial statements and accompanying notes included
elsewhere herein.
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues (a) $ 28,205,272 $ 25,874,022 $ 22,358,709 $ 20,068,287 $ 18,388,627
General insurance:
Net premiums written 12,691,679 11,893,022 10,865,753 10,025,903 9,138,528
Net premiums earned 11,854,815 11,405,731 10,286,831 9,566,640 9,209,390
Adjusted underwriting profit (loss) 398,944 361,583 147,517 10,391 (195,084)
Net investment income 1,689,371 1,545,717 1,435,092 1,340,480 1,252,086
Realized capital gains 64,985 68,075 52,487 65,264 67,134
Operating income 2,153,300 1,975,375 1,635,096 1,416,135 1,124,136
Life insurance:
Premium income 8,978,246 8,038,150 6,724,321 5,746,046 4,853,087
Net investment income 2,675,881 2,264,905 1,748,428 1,499,714 1,313,838
Realized capital gains 34,798 32,703 86,706 54,576 43,257
Operating income 1,323,758 1,090,605 952,484 781,611 667,453
Agency and service fee operating income 52,267 56,909 54,129 60,247 52,570
Financial services operating income 523,906 417,741 404,853 390,038 346,442
Equity in income of minority-owned insurance
operations 99,359 81,722 56,005 39,589 27,929
Other realized capital losses (11,792) (28,944) (52,340) (12,742) (11,293)
Income before income taxes and cumulative
effect of accounting changes 4,013,222 3,465,883 2,951,979 2,601,081 2,137,048
Income taxes 1,115,965 955,500 776,464 683,003 512,033
Income before cumulative effect of accounting
changes 2,897,257 2,510,383 2,175,515 1,918,078 1,625,015
Cumulative effect of accounting changes, net
of tax:
AIG -- -- -- -- 31,941
Minority-owned insurance operations -- -- -- 20,695 --
Net income 2,897,257 2,510,383 2,175,515 1,938,773 1,656,956
Earnings per common share:
Income before cumulative effect of
accounting changes 6.15 5.30 4.58 4.03 3.40
Cumulative effect of accounting changes,
net of tax:
AIG -- -- -- -- .07
Minority-owned insurance operations -- -- -- .04 --
Net income 6.15 5.30 4.58 4.07 3.47
Cash dividends per common share .37 .32 .29 .26 .23
Total assets 148,431,002 134,136,398 114,346,117 101,014,848 92,722,182
Long-term debt (b) 17,506,359 14,452,851 12,613,907 10,955,963 9,517,595
Capital funds (shareholders' equity) 22,044,224 19,827,103 16,421,661 15,224,195 12,782,152
====================================================================================================================================
(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
(losses). (See also tables under Item 1, "Business".)
(b) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year.
14
16
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
American International Group, Inc. and Subsidiaries
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Operational Review
General Insurance Operations
General insurance operations for the twelve month periods ending December 31,
1996, 1995 and 1994 were as follows:
(in thousands)
- --------------------------------------------------------------------------------
1996 1995 1994
================================================================================
Net premiums written:
Domestic $ 8,366,832 $ 7,690,207 $ 7,132,367
Foreign 4,324,847 4,202,815 3,733,386
- --------------------------------------------------------------------------------
Total $12,691,679 $11,893,022 $10,865,753
================================================================================
Net premiums earned:
Domestic $ 7,821,605 $ 7,322,531 $ 6,683,656
Foreign 4,033,210 4,083,200 3,603,175
- --------------------------------------------------------------------------------
Total $11,854,815 $11,405,731 $10,286,831
================================================================================
Adjusted underwriting profit (loss):
Domestic $ 1,039 $ 57,514 $ (56,190)
Foreign 397,905 304,069 203,707
- --------------------------------------------------------------------------------
Total $ 398,944 $ 361,583 $ 147,517
================================================================================
Net investment income:
Domestic $ 1,350,159 $ 1,240,174 $ 1,147,595
Foreign 339,212 305,543 287,497
- --------------------------------------------------------------------------------
Total $ 1,689,371 $ 1,545,717 $ 1,435,092
================================================================================
Operating income before realized capital gains:
Domestic $ 1,351,198 $ 1,297,688 $ 1,091,405
Foreign 737,117 609,612 491,204
- --------------------------------------------------------------------------------
Total 2,088,315 1,907,300 1,582,609
Realized capital gains 64,985 68,075 52,487
- --------------------------------------------------------------------------------
Operating income $ 2,153,300 $ 1,975,375 $ 1,635,096
================================================================================
In AIG's general insurance operations, 1996 net premiums written and net
premiums earned increased 6.7 percent and 3.9 percent, respectively, from those
of 1995. In 1995, net premiums written increased 9.5 percent and net premiums
earned increased 10.9 percent when compared to 1994.
The growth in net premiums written in 1996 and 1995 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 mortgage guaranty insurance and personal
lines. Overseas, the primary reason for growth was volume increases. Foreign
general insurance operations produced 34.1 percent of the general insurance net
premiums written in 1996, 35.3 percent in 1995 and 34.4 percent in 1994.
In comparing the foreign exchange rates used to translate AIG's foreign
general operations during 1996 to those foreign exchange rates used to translate
AIG's foreign general operations during 1995, the U.S. dollar strengthened 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 2.9 percentage points less than they would
have been if translated utilizing those exchange rates which prevailed during
1995.
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:
- --------------------------------------------------------------------------------
1996 1995 1994
================================================================================
Domestic:
Loss Ratio 85.21 85.11 86.83
Expense Ratio 15.40 14.88 14.59
- --------------------------------------------------------------------------------
Combined Ratio 100.61 99.99 101.42
================================================================================
Foreign:
Loss Ratio 57.82 59.46 61.12
Expense Ratio 31.77 32.51 33.04
- --------------------------------------------------------------------------------
Combined Ratio 89.59 91.97 94.16
================================================================================
Consolidated:
Loss Ratio 75.89 75.93 77.82
Expense Ratio 20.98 21.11 20.93
- --------------------------------------------------------------------------------
Combined Ratio 96.87 97.04 98.75
================================================================================
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 $398.9 million in 1996, $361.6 million in 1995 and
$147.5 million in 1994. (See also Notes 4 and 18 of Notes to Financial
Statements.)
AIG's results reflect the net impact with respect to incurred losses from
catastrophes approximating $78 million in 1996, $100 million in 1995 and $55
million in 1994. AIG's gross incurred losses from catastrophes approximated $240
million in 1996, $190 million in 1995 and $174 million in 1994. 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:
- --------------------------------------------------------------------------------
1996 1995 1994
================================================================================
Loss Ratio 75.23 75.05 77.29
Expense Ratio 20.98 21.11 20.93
- --------------------------------------------------------------------------------
Combined Ratio 96.21 96.16 98.22
================================================================================
15
17
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
AIG's ability to maintain its combined ratio below 100 is primarily
attributable to the profitability of AIG's foreign general insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.
General insurance net investment income in 1996 increased 9.3 percent when
compared to 1995. In 1995, net investment income increased 7.7 percent over
1994. The growth in net investment income in each of the three years was
primarily attributable to new cash flow for investment. The new cash flow was
generated from net general insurance operating cash flow and included the
compounding of previously earned and reinvested net investment income. (See also
the discussion under "Liquidity" herein and Note 8 of Notes to Financial
Statements.)
General insurance realized capital gains were $65.0 million in 1996, $68.1
million in 1995 and $52.5 million in 1994. These realized gains resulted from
the ongoing management of the general insurance investment portfolios within the
overall objectives of the general insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities.
General insurance operating income in 1996 increased 9.0 percent when
compared to 1995. The 1995 results reflect an increase of 20.8 percent from
1994. The contribution of general insurance operating income to income before
income taxes was 53.7 percent in 1996 compared to 57.0 percent in 1995 and 55.4
percent in 1994.
A year to year comparison of operating income can be 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 7.9 percent in 1996 and 22.6 percent in
1995. The decrease in the growth rate of 1996 over 1995 was caused in part by
the effects of the strengthening U.S. dollar against major foreign currencies as
previously described and the slightly increased domestic combined ratio. The
increase in the growth rate of 1995 over 1994 after the aforementioned
adjustments was a result of the increased net investment income and significant
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 $16.31 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 1996 with respect to reinsurance recoverable to the extent that any
reinsurer may not be able to reimburse AIG under the terms of these reinsurance
arrangements. AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound, and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods on an individual
reinsurer basis. This development includes losses incurred but not reported
(IBNR). At December 31, 1996, approximately 50 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, nearly all of these balances are collateralized. The
remaining 50 percent of the general reinsurance assets were from authorized
reinsurers and over 97 percent of such balances are from reinsurers rated A-
(excellent) or better, as rated by A.M. Best. This rating is a measure of
financial strength. The terms authorized and unauthorized pertain to regulatory
categories, not creditworthiness.
AIG maintains an allowance for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 1996,
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 has not entered into any material cessions
that would provide surplus relief.
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.
16
18
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The consolidated general reinsurance assets of $16.31 billion at December
31, 1996 include reinsurance recoverables for (i) paid losses and loss expenses
of $1.83 billion and (ii) $13.02 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 therefrom are reflected in
income currently. It is AIG's belief that the ceded reserves at December 31,
1996 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, 1996, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $33.43 billion, an increase of $383.1
million or 1.2 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 $714.5 million or 3.6 percent to $20.41
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, 1996. In the future, if the general insurance net
loss reserves develop deficiently, such deficiency would have an adverse impact
on such future results of operations.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups: one group being long tail casualty lines of business; the
other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. For the majority of
long tail casualty lines, net loss trend factors approximated eight percent.
Loss trend factors reflect many items including changes in claims handling,
exposure and policy forms and current and future estimates of monetary inflation
and social inflation. Thus, many factors are implicitly considered in estimating
the year to year growth in loss costs. Therefore, AIG's carried net long tail
loss reserves are judgmentally set as well as tested for reasonableness using
the most appropriate loss trend factors for each class of business. In the
evaluation of AIG's net loss reserves, loss trend factors vary slightly,
depending on the particular class and nature of the business involved. These
factors are periodically reviewed and subsequently adjusted, as appropriate, to
reflect emerging trends which are based upon past loss experience.
Estimation of net losses for short tail business is less complex than for
long tail casualty lines. Loss cost trends for many property lines can generally
be assumed to be similar to the growth in exposure of such lines. For example,
if the fire insurance coverage remained proportional to the actual value of the
property, the growth in property's exposure to fire loss can be approximated by
the amount of insurance purchased.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next. The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.
AIG continues to receive 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
referred to collectively 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. AIG has
established a specialized claims unit which investigates and adjusts all such
asbestos and environmental claims. Commencing in 1985, standard policies
contained an absolute exclusion for pollution related damage. However, AIG
currently underwrites pollution impairment liability insurance on a claims made
basis and excluded such claims from the analyses included herein.
Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends and
influence the development of asbestos and environmental claims are the
inconsistent court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current case law can be
characterized as still evolving and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves issues such as allocation
of responsibility among potentially responsible parties and the government's
refusal to release parties. The cleanup cost
17
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
exposure may significantly change if the Congressional reauthorization of
Superfund 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 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, 1996 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, 1996, 1995 and 1994 was as follows:
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------ ------------------ -------------------
Gross Net Gross Net Gross Net
====================================================================================================================================
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 744.8 $ 127.9 $ 686.0 $130.2 $ 656.0 $116.7
Losses and loss expenses incurred(a) 392.5 102.7 197.7 20.5 149.2 45.8
Losses and loss expenses paid(b) (261.4) (58.3) (138.9) (22.8) (119.2) (32.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 875.9 $ 172.3 $ 744.8 $127.9 $ 686.0 $130.2
====================================================================================================================================
Environmental:
Reserve for losses and loss expenses at beginning of year $1,197.9 $ 379.3 $ 728.1 $200.1 $ 684.8 $191.5
Losses and loss expenses incurred(a) 379.6 240.3 684.9 231.7 187.5 61.8
Losses and loss expenses paid (150.1) (49.0) (215.1) (52.5) (144.2) (53.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $1,427.4 $ 570.6 $1,197.9 $379.3 728.1 $200.1
====================================================================================================================================
Combined:
Reserve for losses and loss expenses at beginning of year $1,942.7 $ 507.2 $1,414.1 $330.3 $1,340.8 $308.2
Losses and loss expenses incurred 772.1 343.0 882.6