SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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
AMERICAN INTERNATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2592361
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
70 PINE STREET, NEW YORK, NEW YORK 10270
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 770-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
COMMON STOCK, PAR VALUE $2.50 PER SHARE NEW YORK STOCK EXCHANGE, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
-------------------
NONE ______________
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ].
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE ACT).
YES [X] NO [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD
BY NONAFFILIATES OF THE REGISTRANT COMPUTED BY REFERENCE TO THE PRICE AT WHICH
THE COMMON EQUITY WAS LAST SOLD AS OF JUNE 28, 2002 (THE LAST BUSINESS DAY OF
THE REGISTRANT'S MOST RECENTLY COMPLETED SECOND FISCAL QUARTER), WAS
APPROXIMATELY $140,718,844,000.
AS OF JANUARY 31, 2003, THERE WERE OUTSTANDING 2,609,826,299 SHARES OF
COMMON STOCK, $2.50 PAR VALUE PER SHARE, 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 14, 2003 IS INCORPORATED BY REFERENCE IN
PART III OF THIS FORM 10-K.
PART I
ITEM 1. BUSINESS
American International Group, Inc. (AIG), a Delaware corporation, is a holding
company which through its subsidiaries is engaged in a broad range of insurance
and insurance-related activities in the United States and abroad. AIG's primary
activities include both general and life insurance operations. Other significant
activities include financial services, and retirement savings and asset
management. The principal general insurance company subsidiaries are American
Home Assurance Company (American Home), National Union Fire Insurance Company of
Pittsburgh, Pa. (National Union), New Hampshire Insurance Company (New
Hampshire), Lexington Insurance Company (Lexington), The Hartford Steam Boiler
Inspection and Insurance Company (HSB), Transatlantic Reinsurance Company,
American International Underwriters Overseas, Ltd. (AIUO) and United Guaranty
Residential Insurance Company. Significant life insurance operations include
those conducted through American Life Insurance Company (ALICO), American
International Assurance Company Limited, together with American International
Assurance Company (Bermuda) Limited (AIA), Nan Shan Life Insurance Company, Ltd.
(Nan Shan), American International Reinsurance Company, Ltd., AIG Star Life
Insurance Co., Ltd., AIG Annuity Insurance Company (AIG Annuity), the AIG
American General Life Companies (American General Life), and SunAmerica Life
Insurance Company (SunAmerica Life). AIG's financial services operations are
conducted primarily through International Lease Finance Corporation (ILFC), AIG
Financial Products Corp. and its subsidiaries (AIGFP), and American General
Finance, Inc. and its subsidiaries (AGF), while retirement savings and asset
management operations include The Variable Annuity Life Insurance Company
(VALIC), AIG SunAmerica Asset Management Corp. (SAAMCo), AIG SunAmerica Life
Assurance Company (formerly known as Anchor National Life Insurance Company) and
AIG Global Investment Group, Inc. and its subsidiaries (AIG Global Investment
Group).
On August 29, 2001, AIG acquired American General Corporation (AGC). In
connection with the acquisition, AIG issued approximately 290 million shares of
common stock, $2.50 par value per share (common stock) in an exchange for all
the outstanding common stock of AGC based on an exchange ratio of 0.5790 of a
share of AIG common stock for each share of AGC common stock. The acquisition
was accounted for as a pooling of interests and all prior historical financial
information presented herein has been restated to include AGC. The merger of
SunAmerica Inc., a leading company in the retirement savings and asset
accumulation business, with and into AIG became effective January 1, 1999. The
transaction was treated as a pooling of interests for accounting purposes. AIG
issued 0.855 shares of common stock in exchange for each share of SunAmerica
Inc. stock outstanding at the effective time of the merger for an aggregate
issuance of approximately 187.5 million shares. For information on AIG's
business segments, see Note 2 of Notes to Financial Statements.
All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 2003, beneficial ownership of
approximately 12.0 percent, 2.2 percent and 1.8 percent of AIG common stock, was
held by Starr International Company, Inc. (SICO), The Starr Foundation and C.V.
Starr & Co., Inc. (Starr), respectively.
At December 31, 2002, AIG and its subsidiaries had approximately 80,000
employees.
AIG's Internet address for its corporate website is www.aigcorporate.com.
AIG makes available free of charge, on or through the Investor Information
section of AIG's corporate website, Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after such materials are
electronically filed with, or furnished to, the Securities and Exchange
Commission.
THROUGHOUT THIS ANNUAL REPORT ON FORM 10-K, AIG PRESENTS ITS OPERATIONS IN
THE WAY IT BELIEVES WILL BE MOST MEANINGFUL, AS WELL AS MOST TRANSPARENT.
CERTAIN OF THE MEASUREMENTS USED BY AIG MANAGEMENT ARE "NON-GAAP FINANCIAL
MEASURES" UNDER SECURITIES AND EXCHANGE COMMISSION RULES AND REGULATIONS.
OPERATING INCOME AND RELATED RATES OF PERFORMANCE ARE SHOWN EXCLUSIVE OF
REALIZED CAPITAL GAINS (LOSSES) AND EXCLUSIVE OF ONE OR MORE OF THE 2002 RESERVE
CHARGE WHICH IS DISCUSSED UNDER LOSS RESERVE CHARGE IN MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 2001 ACQUISITION,
RESTRUCTURING AND RELATED CHARGES, AND 2001 WORLD TRADE CENTER AND RELATED
LOSSES (WTC LOSSES). PREMIUM INCOME, GROSS PREMIUMS WRITTEN, STATUTORY
UNDERWRITING PROFIT (LOSS) AND COMBINED RATIOS ARE PRESENTED IN ACCORDANCE WITH
ACCOUNTING PRINCIPLES PRESCRIBED BY INSURANCE REGULATORY AUTHORITIES. A
RECONCILIATION OF THE "NON-GAAP FINANCIAL MEASURES" TO THE MOST EQUIVALENT
MEASUREMENTS PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) IS PRESENTED ON PAGE 20 OF THIS ANNUAL REPORT ON FORM 10-K.
FOR AN EXPLANATION OF WHY AIG MANAGEMENT CONSIDERS THESE "NON-GAAP MEASURES"
USEFUL TO INVESTORS, SEE EXECUTIVE SUMMARY IN MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
1
THE FOLLOWING TABLE SHOWS THE GENERAL DEVELOPMENT OF THE BUSINESS OF AIG ON A
CONSOLIDATED BASIS, THE CONTRIBUTIONS MADE TO AIG'S CONSOLIDATED REVENUES AND
OPERATING INCOME AND THE ASSETS HELD, IN THE PERIODS INDICATED BY ITS GENERAL
INSURANCE, LIFE INSURANCE, FINANCIAL SERVICES, AND RETIREMENT SAVINGS & ASSET
MANAGEMENT OPERATIONS, EQUITY IN INCOME OF MINORITY-OWNED INSURANCE COMPANIES
AND OTHER REALIZED CAPITAL GAINS (LOSSES). (SEE ALSO MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND NOTES 1 AND 2 OF
NOTES TO FINANCIAL STATEMENTS.)
(dollars in millions)
------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000 1999 1998
====================================================================================================================================
GENERAL INSURANCE OPERATIONS:
Gross premiums written $ 37,537 $ 29,640 $ 25,050 $ 22,569 $ 20,684
Net premiums written 27,414 20,101 17,526 16,224 14,586
Net premiums earned 24,269 19,365 17,407 15,544 14,098
Adjusted underwriting profit (loss)(a) (1,235)(b) 88(c) 785 669 531
Net investment income 2,760 2,893 2,701 2,517 2,192
Realized capital gains (losses) (858) (130) 38 295 205
Operating income 667(b) 2,851(c) 3,524 3,481 2,928
Identifiable assets 109,068 91,544 85,270 76,725 73,226
------------------------------------------------------------------------------------------------------------------------------------
Loss ratio 85.8 79.5 75.3 75.5 75.6
Expense ratio 20.2 21.2 21.4 20.8 20.8
------------------------------------------------------------------------------------------------------------------------------------
Combined ratio 106.0(b) 100.7(c) 96.7 96.3 96.4
====================================================================================================================================
LIFE INSURANCE OPERATIONS:
Premium income 20,320 19,063 17,163 15,476 13,719
Net investment income 12,274 11,084 9,962 8,932 8,065
Realized capital losses (1,053) (254) (162) (148) (74)
Operating income (d) 4,929 4,675 4,058 3,610 3,249
Identifiable assets 339,847 296,648 248,982 231,843 197,851
Insurance in-force at end of year 1,324,451 1,228,501 971,892 950,933 845,045
FINANCIAL SERVICES OPERATIONS:
Commissions, transaction and other fees 6,815 6,485 5,954 5,069 4,653
Operating income 2,189 1,991 1,666 1,417 1,172
Identifiable assets 124,617 107,322 94,173 78,868 70,065
RETIREMENT SAVINGS & ASSET
MANAGEMENT OPERATIONS:
Commissions and other fees 3,485 3,712 3,465 3,093 2,715
Operating income 1,016 1,088 1,108 873 673
Identifiable assets 2,567 1,842 1,590 1,132 915
EQUITY IN INCOME OF MINORITY-OWNED
INSURANCE OPERATIONS -- -- -- -- 40
OTHER REALIZED CAPITAL GAINS (LOSSES) (530) (452) (190) (44) (1)
REVENUES (E) 67,482 61,766 56,338 50,734 45,612
TOTAL ASSETS 561,229 493,061 426,671 383,685 338,783
====================================================================================================================================
(a) Adjusted underwriting profit, a GAAP measure, is statutory underwriting
income adjusted primarily for changes in the deferral of acquisition costs.
This adjustment is necessary to present the financial statements in
accordance with generally accepted accounting principles.
(b) In the fourth quarter of 2002, after completion of its annual review of
General Insurance loss and loss adjustment expense reserves, AIG increased
its net loss reserves pertaining to accident years 1997 through 2001 by
$2.8 billion. Excluding the loss reserve charge, the general insurance
combined ratio would have been 94.4.
(c) Includes $769 million in World Trade Center and related losses ("WTC
losses"). Excluding WTC losses, the general insurance combined ratio would
have been 96.7.
(d) Includes $131 million in WTC losses in 2001.
(e) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, retirement savings & asset management commissions and other fees,
equity in income of minority-owned insurance operations, and realized
capital gains (losses).
2
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, 2002. (SEE ALSO NOTE 2 OF NOTES TO
FINANCIAL STATEMENTS.)
(dollars in millions)
------------------------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL
UNITED STATES OTHER UNITED STATES OTHER
TOTAL AND CANADA COUNTRIES AND CANADA COUNTRIES
==============================================================================================================================
GENERAL INSURANCE OPERATIONS:
Net premiums earned $ 24,269 $ 17,821 $ 6,448 73.4% 26.6%
Adjusted underwriting profit (loss)* (1,235) (1,756) 521 -- --
Net investment income 2,760 2,081 679 75.4 24.6
Realized capital losses (858) (510) (348) -- --
Operating income (loss)* 667 (185) 852 -- --
Identifiable assets 109,068 80,703 28,365 74.0 26.0
LIFE INSURANCE OPERATIONS:
Premium income 20,320 4,622 15,698 22.7 77.3
Net investment income 12,274 8,325 3,949 67.8 32.2
Realized capital losses (1,053) (984) (69) -- --
Operating income 4,929 1,704 3,225 34.6 65.4
Identifiable assets 339,847 234,450 105,397 69.0 31.0
FINANCIAL SERVICES OPERATIONS:
Commissions, transaction and other fees 6,815 5,889 926 86.4 13.6
Operating income 2,189 1,682 507 76.8 23.2
Identifiable assets 124,617 109,032 15,585 87.5 12.5
RETIREMENT SAVINGS & ASSET MANAGEMENT OPERATIONS:
Commissions and other fees 3,485 3,041 444 87.3 12.7
Operating income 1,016 893 123 87.9 12.1
Identifiable assets 2,567 1,230 1,337 47.9 52.1
OTHER REALIZED CAPITAL LOSSES (530) (506) (24) -- --
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 8,142 3,379 4,763 41.5 58.5
REVENUES 67,482 39,779 27,703 58.9 41.1
TOTAL ASSETS 561,229 409,195 152,034 72.9 27.1
==============================================================================================================================
* Includes net loss reserve charge of $2.8 billion.
GENERAL INSURANCE OPERATIONS
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance. One or more of these
companies is licensed to write substantially all of these lines in all states of
the United States and in approximately 70 foreign countries.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group (DBG), which includes the operations of HSB; Transatlantic
Holdings, Inc. (Transatlantic); Personal Lines, including 21st Century Insurance
Group (21st Century); and Mortgage Guaranty.
AIG's primary domestic division is DBG. DBG's business is derived from
brokers in the United States and Canada and is conducted through its general
insurance subsidiaries including American Home, National Union, Lexington and
certain other general insurance company subsidiaries of AIG. The AIG Risk
Management operation provides insurance and risk management programs for large
corporate customers. The AIG Risk Finance division designs and implements risk
financing alternatives using the insurance and financial services capabilities
of AIG. Also included are the operations of AIG Environmental which focuses
specifically on providing specialty products to clients with environmental
exposures.
DBG writes substantially all classes of business insurance accepting such
business mainly from insurance brokers. This provides DBG the opportunity to
select specialized markets and retain underwriting control. Any licensed broker
is able to submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no authority to commit DBG
to accept a risk.
In addition to writing substantially all classes of business insurance,
including large commercial or industrial property insurance, excess liability,
inland marine, environmental, workers' compensation and excess and umbrella
coverages, DBG offers many specialized forms of insurance such as equipment
breakdown, directors and officers liability, difference-in-conditions,
kidnap-ransom, export credit and political risk, and various types of
professional errors and omissions coverages. Lexington writes surplus lines,
those risks for which conventional insurance companies do not readily provide
insurance coverage, either because of complexity or because the coverage does
not lend itself to conventional contracts.
3
Transatlantic offers reinsurance capacity on both treaty and facultative
basis. Transatlantic structures traditional and non-traditional programs for a
full range of property and casualty products with an emphasis on specialty risk.
AIG engages in mass marketing of personal lines coverages, primarily
private passenger auto and homeowners and personal umbrella coverages,
principally through American International Insurance Company and 21st Century.
The business of United Guaranty Corporation (UGC) and its subsidiaries is
also included in the domestic operations of AIG. The principal business of the
UGC subsidiaries is the writing of residential mortgage loan insurance, which is
guaranty insurance on conventional first mortgage loans on single-family
dwellings and condominiums. Such insurance protects lenders against loss if
borrowers default. UGC subsidiaries also write home equity and property
improvement loan insurance on loans to finance residential property
improvements, alterations and repairs and for other purposes not necessarily
related to real estate. UGC had approximately $22 billion of mortgage guarantee
risk in-force at December 31, 2002.
AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters (AIU), a marketing unit consisting
of wholly owned agencies and insurance companies. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General group uses various
marketing methods to write both business and personal lines insurance with
certain refinements for local laws, customs and needs. AIU operates in over 70
countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America.
During 2002, DBG and the Foreign General insurance group accounted for 55.5
percent and 21.9 percent, respectively, of AIG's net premiums written.
AIG's general insurance company subsidiaries worldwide operate primarily by
underwriting and accepting risks for their direct account and securing
reinsurance on that portion of the risk in excess of the limit which they wish
to retain. This operating policy differs from that of many insurance companies
which will underwrite only up to their net retention limit, thereby requiring
the broker or agent to secure commitments from other underwriters for the
remainder of the gross risk amount.
THE FOLLOWING TABLE SUMMARIZES GENERAL INSURANCE PREMIUMS WRITTEN AND EARNED:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, WRITTEN EARNED
================================================================================
2002
Gross premiums $ 37,537 $ 34,381
Ceded premiums (10,123) (10,112)
--------------------------------------------------------------------------------
Net premiums $ 27,414 $ 24,269
================================================================================
2001
Gross premiums $ 29,640 $ 28,850
Ceded premiums (9,539) (9,485)
--------------------------------------------------------------------------------
Net premiums $ 20,101 $ 19,365
================================================================================
2000
Gross premiums $ 25,050 $ 24,062
Ceded premiums (7,524) (6,655)
--------------------------------------------------------------------------------
Net premiums $ 17,526 $ 17,407
================================================================================
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 diversified both in terms of lines of business and geographic
locations. Of the general insurance lines of business, workers' compensation was
approximately 12 percent of AIG's net premiums written. This line of business is
also diversified geographically.
The majority of AIG's general insurance business is in the casualty
classes, which tend to involve longer periods of time for the reporting and
settling of claims. This may increase the risk and uncertainty with respect to
AIG's loss reserve development. (See also the Discussion and Analysis of
Consolidated Net Losses and Loss Expense Reserve Development and Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
4
LOSS AND EXPENSE RATIOS OF AIG'S CONSOLIDATED GENERAL INSURANCE OPERATIONS ARE
SET FORTH IN THE FOLLOWING TABLE. (SEE ALSO MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.)
(dollars in millions)
-----------------------------------------------------------------------------------------------------------------------------------
RATIO OF RATIO OF
LOSSES AND UNDERWRITING
LOSS EXPENSES EXPENSES
INCURRED TO INCURRED TO INDUSTRY
NET PREMIUMS NET PREMIUMS NET PREMIUMS COMBINED UNDERWRITING COMBINED
YEARS ENDED DECEMBER 31, WRITTEN EARNED EARNED WRITTEN RATIO MARGIN RATIO(c)
===================================================================================================================================
2002 $27,414 $24,269 85.8 20.2 106.0(a) (6.0) 109.0
2001 20,101 19,365 79.5 21.2 100.7(b) (0.7) 115.3
2000 17,526 17,407 75.3 21.4 96.7 3.3 108.6
1999 16,224 15,544 75.5 20.8 96.3 3.7 107.1
1998 14,586 14,098 75.6 20.8 96.4 3.6 104.9
===================================================================================================================================
(a) Excluding the net loss reserve charge of $2.8 billion, the general
insurance combined ratio would have been 94.4.
(b) Excluding WTC losses, the general insurance combined ratio would have been
96.7.
(c) Source: Best's Aggregates & Averages (Stock insurance companies, after
dividends to policyholders): the ratios for 2002 and 2001 were obtained
from Fox-Pitt, Kelton Inc. The ratio for 2002 reflects estimated results.
During 2002, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 10.2 percent, 7.4 percent and 6.7
percent were written in California, New York and Illinois, respectively. No
other state accounted for more than 5 percent of such premiums.
There was no significant adverse effect on AIG's general insurance results
of operations from the economic environments in any one state, country or
geographic region for the year ended December 31, 2002. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
DISCUSSION AND ANALYSIS OF CONSOLIDATED NET LOSSES AND LOSS EXPENSE RESERVE
DEVELOPMENT
The reserve for net losses and loss expenses represents the accumulation of
estimates for reported losses ("case basis reserves") and provisions for losses
incurred but not reported (IBNR), both reduced by applicable reinsurance
recoverable. Losses and loss expenses are charged to income as incurred. AIG
discounts certain of its loss reserves principally related to workers'
compensation lines of business.
Loss reserves established with respect to foreign business are set and
monitored in terms of the respective local or functional currency. Therefore, no
assumption is included for changes in currency rates. (See also Note 1(v) of
Notes to Financial Statements.)
Management 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 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 Excluding Asbestos and Environmental Net Losses and Loss Expense
Reserve Development" table, which follows, presents the development of net
losses and loss expense reserves for calendar years 1992 through 2002. 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 $19.19 billion as of December 31, 1995, by
the end of 2002 (seven years later) $15.49 billion had actually been paid in
settlement of these net loss reserves. In addition, as reflected in the lower
section of the table, the original reserve of $19.19 billion was reestimated to
be $18.10 billion at December 31, 2002. This decrease from the original estimate
would generally be a combination of a number of factors, including reserves
being settled for smaller amounts than originally estimated. The original
estimates will also be increased or decreased as more information becomes known
about the individual claims and overall claim frequency and severity patterns.
The redundancy (deficiency) depicted in the table, for any particular calendar
year, shows the aggregate change in estimates over the period of years
subsequent to the calendar year reflected at the top of the respective column
heading. For example, the deficiency of $3.90 billion at December 31, 2002
related to December 31, 2001 net losses and loss expense reserves of $25.18
billion represents the cumulative amount by which reserves for 2001 and prior
years have developed deficiently during 2002. The deficiency that has emerged in
the last year can be attributed principally to a series of excessive jury awards
in certain liability or casualty lines of business. Market rates in certain
classes of business and expanded policy form coverages, which were prevalent in
the marketplace in the accident years 1997 through 2001, contributed to this
issue. Corrective pricing and revision of policy forms are taking place. Tort
reform is still critically needed in the U.S. although a great deal of effort
5
has been undertaken in individual states to correct the abuse that has
prevailed. The reserve for net losses and loss expenses with respect to
Transatlantic and 21st Century are included only in the consolidated net losses
and loss expenses commencing with the year ended December 31, 1998. Reserve
development for these operations is included only for 1998 and subsequent
periods.
ANALYSIS OF CONSOLIDATED NET LOSSES AND LOSS EXPENSE RESERVE DEVELOPMENT
EXCLUDING ASBESTOS AND ENVIRONMENTAL NET LOSSES AND LOSS EXPENSE RESERVE
DEVELOPMENT
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. (SEE ALSO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.)
(in millions)
-----------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
===================================================================================================================================
Reserve for Net Losses and
Loss Expenses, Excluding
Asbestos and Environmental
Losses and Loss Expenses,
December 31, $16,503 $17,249 $18,089 $19,186 $19,664 $20,384 $23,754 $23,709 $24,097 $25,177 $29,653
Paid (Cumulative) as of:
One Year Later 4,766 5,061 4,700 5,174 5,507 5,576 6,657 7,712 9,069 10,250
Two Years Later 8,088 8,082 7,891 8,515 8,832 9,305 11,373 13,426 15,804
Three Years Later 10,157 10,137 10,048 10,673 11,094 12,122 15,031 18,130
Four Years Later 11,337 11,726 11,683 12,128 12,948 14,172 18,284
Five Years Later 12,448 12,871 12,734 13,466 14,401 16,025
Six Years Later 13,274 13,560 13,689 14,601 15,653
Seven Years Later 13,771 14,285 14,421 15,487
Eight Years Later 14,310 14,866 15,114
Nine Years Later 14,768 15,405
Ten Years Later 15,255
Net Liability Reestimated as of:
End of Year 16,503 17,249 18,089 19,186 19,664 20,384 23,754 23,709 24,097 25,177 29,653
One Year Later 16,382 17,019 17,556 18,568 19,118 19,903 23,229 23,345 24,563 29,131
Two Years Later 16,073 16,813 17,355 18,347 18,910 19,771 22,827 24,111 28,257
Three Years Later 15,997 16,790 17,293 18,141 18,934 19,428 23,306 26,951
Four Years Later 16,081 16,960 17,090 18,292 18,670 19,532 24,994
Five Years Later 16,362 16,969 17,155 18,161 18,568 20,213
Six Years Later 16,404 17,080 17,169 17,836 18,923
Seven Years Later 16,582 17,146 16,838 18,101
Eight Years Later 16,731 16,968 17,052
Nine Years Later 16,690 17,110
Ten Years Later 16,804
Redundancy/(Deficiency) (301) 139 1,037 1,085 741 171 (1,240) (3,242) (4,160) (3,954)
Less effect of 21st Century
homeowners and earthquake
lines in runoff (117) (111) (110) (56)
Redundancy/(Deficiency)
excluding 21st Century
homeowners and
earthquake lines (1,123) (3,131) (4,050) (3,898)
===================================================================================================================================
6
ANALYSIS OF CONSOLIDATED NET LOSSES AND LOSS EXPENSE RESERVE DEVELOPMENT
THE FOLLOWING TABLE INCLUDES FOR EACH CALENDAR YEAR THE NET LOSS AND LOSS
EXPENSE RESERVES AND THE DEVELOPMENT THEREOF WITH RESPECT TO ASBESTOS AND
ENVIRONMENTAL CLAIMS. (SEE ALSO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.)
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
====================================================================================================================================
Reserve for Net Losses and Loss
Expenses, December 31, $16,757 $17,557 $18,419 $19,693 $20,407 $21,171 $24,619 $24,600 $24,952 $25,896 $30,350
Paid (Cumulative) as of:
One Year Later 4,883 5,146 4,775 5,281 5,616 5,716 6,779 7,783 9,263 10,396
Two Years Later 8,289 8,242 8,073 8,726 9,081 9,559 11,565 13,690 16,144
Three Years Later 10,433 10,404 10,333 11,024 11,456 12,442 15,416 18,540
Four Years Later 11,718 12,095 12,107 12,591 13,376 14,684 18,815
Five Years Later 12,931 13,378 13,270 13,994 15,018 16,679
Six Years Later 13,894 14,179 14,290 15,317 16,412
Seven Years Later 14,502 14,968 15,209 16,344
Eight Years Later 15,105 15,735 16,043
Nine Years Later 15,749 16,414
Ten Years Later 16,375
Net Liability Reestimated as of:
End of Year 16,757 17,557 18,419 19,693 20,407 21,171 24,619 24,600 24,952 25,896 30,350
One Year Later 16,807 17,434 18,139 19,413 20,009 20,890 24,237 24,265 25,471 29,969
Two Years Later 16,603 17,479 18,269 19,330 19,999 20,886 23,864 25,082 29,284
Three Years Later 16,778 17,782 18,344 19,327 20,151 20,572 24,392 28,043
Four Years Later 17,182 18,090 18,344 19,604 19,916 20,715 26,202
Five Years Later 17,600 18,300 18,535 19,500 19,851 21,513
Six Years Later 17,844 18,537 18,575 19,212 20,323
Seven Years Later 18,148 18,629 18,281 19,592
Eight Years Later 18,320 18,485 18,608
Nine Years Later 18,314 18,742
Ten Years Later 18,542
Redundancy/(Deficiency) (1,785) (1,185) (189) 101 84 (342) (1,583) (3,443) (4,332) (4,073)
Less effect of 21st Century
homeowners and earthquake
lines in runoff (117) (111) (110) (56)
Redundancy/(Deficiency)
excluding 21st Century
homeowners and
earthquake lines (1,466) (3,332) (4,222) (4,017)
====================================================================================================================================
7
RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS EXPENSES
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
Net reserve for losses and loss
expenses at beginning of year $25,896 $24,952 $24,600
Acquisition (a) -- -- 236
--------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 16,741 14,870 13,356
Prior years (b) 4,073 536 (252)
--------------------------------------------------------------------------------
20,814 15,406 13,104
--------------------------------------------------------------------------------
Losses and loss expenses paid:
Current year 5,964 5,199 5,205
Prior years 10,396 9,263 7,783
--------------------------------------------------------------------------------
16,360 14,462 12,988
--------------------------------------------------------------------------------
Net reserve for losses and loss
expenses at end of year (c) $30,350 $25,896 $24,952
================================================================================
(a) Acquisition includes the opening balances with respect to HSB in 2000.
(b) Does not include the effects of foreign exchange adjustments which are
reflected in the "Net Losses and Loss Expense Reserve Development" table.
(c) See also Note 6(a) of Notes to Financial Statements.
For further discussion regarding net reserves for losses and loss
expenses, see Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The reserve for losses and loss expenses as reported in AIG's
Consolidated Balance Sheet at December 31, 2002, differs from the total reserve
reported in the Annual Statements filed with state insurance departments and,
where appropriate, with foreign regulatory authorities. The differences at
December 31, 2002 relate primarily to reserves for certain foreign operations.
(See also Management's Discussion and Analysis of Financial Condition and
Results of Operations.)
The reserve for gross losses and loss expenses is prior to reinsurance and
represents the accumulation for reported losses and IBNR. Management reviews the
adequacy of established gross loss reserves in the manner previously described
for net loss reserves.
8
ANALYSIS OF CONSOLIDATED GROSS LOSSES AND LOSS EXPENSE RESERVE DEVELOPMENT
THE "ANALYSIS OF CONSOLIDATED GROSS LOSSES AND LOSS EXPENSE RESERVE DEVELOPMENT"
TABLE, WHICH FOLLOWS, PRESENTS THE DEVELOPMENT OF GROSS LOSSES AND LOSS EXPENSE
RESERVES FOR CALENDAR YEARS 1992 THROUGH 2002.
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
====================================================================================================================================
Gross Losses and
Loss Expenses,
December 31, $28,157 $30,046 $31,435 $33,047 $33,430 $33,400 $38,310 $38,252 $40,613 $44,792 $51,539
Paid (Cumulative) as of:
One Year Later 7,281 8,807 7,640 8,392 9,199 9,185 10,344 12,543 12,905 14,934
Two Years Later 13,006 13,279 13,036 15,496 15,043 14,696 19,155 19,350 24,079
Three Years Later 16,432 17,311 17,540 18,837 18,721 19,706 24,309 28,699
Four Years Later 18,550 20,803 20,653 21,811 21,729 22,659 30,301
Five Years Later 21,322 22,895 22,634 23,463 23,498 27,554
Six Years Later 22,807 23,779 24,205 24,927 26,649
Seven Years Later 23,684 25,239 24,882 28,234
Eight Years Later 25,060 26,314 27,404
Nine Years Later 26,094 28,221
Ten Years Later 27,556
Gross Liability Reestimated
as of:
End of Year 28,157 30,046 31,435 33,047 33,430 33,400 38,310 38,252 40,613 44,792 51,539
One Year Later 28,253 29,866 30,759 32,372 32,777 32,337 37,161 37,998 41,443 49,565
Two Years Later 27,825 29,537 30,960 32,398 31,719 32,251 37,959 40,454 46,259
Three Years Later 27,727 30,362 30,825 31,759 31,407 32,810 39,713 43,865
Four Years Later 28,625 31,020 30,508 31,604 32,388 34,449 41,828
Five Years Later 29,701 30,881 30,417 32,425 32,979 35,316
Six Years Later 29,605 30,969 31,128 32,869 33,328
Seven Years Later 29,929 31,546 31,524 33,227
Eight Years Later 30,452 31,841 31,875
Nine Years Later 30,956 32,044
Ten Years Later 30,968
Redundancy/(Deficiency) (2,811) (1,998) (440) (180) 102 (1,916) (3,518) (5,613) (5,646) (4,773)
Less effect of 21st Century
homeowners and earthquake
lines in runoff (117) (111) (110) (56)
Redundancy/(Deficiency)
excluding 21st Century
homeowners and
earthquake lines (3,401) (5,502) (5,536) (4,717)
====================================================================================================================================
LIFE INSURANCE OPERATIONS
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group life,
annuity, endowment and accident and health policies. Financial and investment
products consist of fixed and variable annuities, guaranteed investment
contracts and pensions. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Life insurance operations in foreign countries comprised 77.3 percent of
life premium income and 65.4 percent of operating income in 2002. AIG operates
overseas principally through ALICO, AIA and Nan Shan. ALICO is incorporated in
Delaware and all of its business is written outside of the United States. ALICO
has operations either directly or through subsidiaries in approximately 50
countries located in Europe, Africa, Latin America, the Caribbean, the Middle
East, and the Far East, with Japan being the largest territory. AIG added
significantly to its presence in Japan with the acquisition of AIG Star Life
Insurance Co., Ltd. in 2001, as a result of the reorganization of Chiyoda Mutual
Life Insurance Company. AIA operates primarily in China (including Hong Kong),
Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. (See also Note 2
of Notes to Financial Statements.)
AIG's principal domestic life insurance subsidiaries include AIG American
General Life, AIG Annuity and SunAmerica Life. These companies utilize multiple
distribution channels including brokerage and career and general agents to offer
traditional life products as well as financial and
9
investment products. The domestic life operations comprised 22.7 percent of
total life premium income in 2002.
There was no significant adverse effect on AIG's life insurance results of
operations from economic environments in any one state, country or geographic
region for the year ended December 31, 2002. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial products
are sold in Japan.
In addition to the above, AIG also has subsidiary operations in the
Philippines, Canada, Mexico, Poland, Switzerland, Puerto Rico, and conducts life
insurance business through AIUO subsidiary companies, in Russia, Israel and in
certain countries in Central and South America.
The foreign life companies have over 195,000 career agents and sell their
products largely to indigenous persons in local currencies. In addition to the
agency outlets, these companies also distribute their products through direct
marketing channels, such as mass marketing, and through brokers and other
distribution outlets such as financial institutions.
THE FOLLOWING TABLES SUMMARIZE THE LIFE INSURANCE OPERATING RESULTS PRESENTED ON
A MAJOR PRODUCT BASIS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000. (SEE
ALSO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.)
(in millions)
------------------------------------------------------------------------------------------------------------------
2002 2001(a) 2000(a)
==================================================================================================================
GAAP PREMIUMS:
Domestic:
Life Insurance $ 1,626 $ 1,515 $ 1,522
Individual Fixed Annuities (b) 42 437 380
Guaranteed Investment Contracts 28 -- (7)
Home Service 854 876 953
Group Life/Health 967 925 969
Pension and Investment Products (b) 1,105 1,144 665
Accident & Health (c) -- 51 327
------------------------------------------------------------------------------------------------------------------
Total Domestic 4,622 4,948 4,809
------------------------------------------------------------------------------------------------------------------
Foreign:
Life Insurance 12,000 10,771 9,474
Personal Accident 2,491 2,196 1,924
Group Products 1,094 1,050 851
Guaranteed Investment Contracts 113 98 105
------------------------------------------------------------------------------------------------------------------
Total Foreign 15,698 14,115 12,354
------------------------------------------------------------------------------------------------------------------
Total GAAP premiums $ 20,320 $ 19,063 $ 17,163
==================================================================================================================
PREMIUM INCOME, DEPOSITS AND OTHER CONSIDERATIONS (d) (e):
Domestic:
Life Insurance (f) $ 2,411 $ 2,724 $ 2,256
Individual Fixed Annuities 10,328 7,605 5,079
Guaranteed Investment Contracts 9,078 8,242 6,752
Home Service 861 878 953
Group Life/Health 976 930 969
Pension and Investment Products 1,782 3,020 2,368
Accident & Health(c) -- 157 327
------------------------------------------------------------------------------------------------------------------
Total Domestic 25,436 23,556 18,704
------------------------------------------------------------------------------------------------------------------
Foreign:
Life Insurance 13,440 12,066 10,256
Personal Accident 2,497 2,173 1,923
Group Products 1,579 1,660 1,266
Guaranteed Investment Contracts 5,710 4,162 6,070
------------------------------------------------------------------------------------------------------------------
Total Foreign 23,226 20,061 19,515
------------------------------------------------------------------------------------------------------------------
Total premium income, deposits and other considerations $ 48,662 $ 43,617 $ 38,219
==================================================================================================================
10
(in millions)
------------------------------------------------------------------------------------------------------------------
2002 2001(a) 2000(a)
==================================================================================================================
NET INVESTMENT INCOME:
Domestic:
Life Insurance $ 1,417 $ 1,329 $ 1,306
Individual Fixed Annuities 3,229 2,874 2,708
Guaranteed Investment Contracts 2,052 1,836 1.321
Home Service 683 653 669
Group Life/Health 108 105 107
Pension and Investment Products 836 702 662
Accident & Health (c) -- 5 8
------------------------------------------------------------------------------------------------------------------
Total Domestic 8,325 7,504 6,781
------------------------------------------------------------------------------------------------------------------
Foreign:
Life Insurance 3,206 2,848 2,432
Personal Accident 141 128 129
Group Products 255 227 223
Guaranteed Investment Contracts 359 387 406
Intercompany Adjustments (12) (10) (9)
------------------------------------------------------------------------------------------------------------------
Total Foreign 3,949 3,580 3,181
------------------------------------------------------------------------------------------------------------------
Total net investment income $ 12,274 $ 11,084 $ 9,962
==================================================================================================================
OPERATING INCOME BEFORE REALIZED CAPITAL LOSSES:
Domestic:
Life Insurance (g) $ 777 $ 555 $ 614
Individual Fixed Annuities 729 679 611
Guaranteed Investment Contracts 581 445 159
Home Service 382 374 353
Group Life/Health 101 87 69
Pension and Investment Products 118 144 150
Accident & Health (c) -- 4 23
------------------------------------------------------------------------------------------------------------------
Total Domestic (g) 2,688 2,288 1,979
------------------------------------------------------------------------------------------------------------------
Foreign:
Life Insurance 2,411 1,914 1,558
Personal Accident 681 572 531
Group Products 175 127 107
Guaranteed Investment Contracts 39 38 54
Intercompany Adjustments (12) (10) (9)
------------------------------------------------------------------------------------------------------------------
Total Foreign 3,294 2,641 2,241
------------------------------------------------------------------------------------------------------------------
Total operating income before realized capital losses 5,982 4,929 4,220
Realized capital losses (1,053) (254) (162)
------------------------------------------------------------------------------------------------------------------
Total operating income (g) $ 4,929 $ 4,675 $ 4,058
==================================================================================================================
LIFE INSURANCE IN-FORCE:
Domestic $ 577,686 $ 517,067 $ 477,576
Foreign (h) 746,765 711,434 494,316
------------------------------------------------------------------------------------------------------------------
Total $ 1,324,451 $ 1,228,501 $ 971,892
==================================================================================================================
(a) Restated to conform to the 2002 presentation.
(b) 2001 and 2000 GAAP premiums included certain annuity products now reported
in Pension and Investment Products.
(c) Beginning 2001, certain Accident & Health operations are part of DBG.
(d) Represents a non-GAAP measurement used by AIG to help manage its life
insurance operation, and may not be comparable to similarly captioned
measurements used by other life insurance companies.
(e) Premium income, deposits and other considerations represent aggregate
business activity during the respective periods.
(f) The decline in life premiums is due primarily to lower private placement
and corporate life market sales.
(g) 2001 included WTC losses of $131 million.
(h) Increase in 2001 reflects acquisition of AIG Star Life Insurance Co., Ltd.
in April 2001.
11
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 and 8 of Notes to Financial Statements.)
THE FOLLOWING TABLES SUMMARIZE THE COMPOSITION OF AIG'S INSURANCE INVESTED
ASSETS BY INSURANCE SEGMENT, INCLUDING INVESTMENT INCOME DUE AND ACCRUED AND
REAL ESTATE, AT DECEMBER 31, 2002 AND 2001:
(dollars in millions)
----------------------------------------------------------------------------------------------------------------------------------
GENERAL LIFE PERCENT PERCENT DISTRIBUTION
--------------------
DECEMBER 31, 2002 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
==================================================================================================================================
Fixed maturities, at market value (a) $ 35,990 $206,003 $241,993 76.9% 69.1% 30.9%
Equity securities, at market value (b) 3,928 2,931 6,859 2.2 53.4 46.6
Mortgage loans on real estate, policy and collateral loans 35 18,901 18,936 6.0 68.8 31.2
Short-term investments, including time
deposits, and cash 1,833 5,048 6,881 2.2 42.5 57.5
Real estate 488 2,367 2,855 0.9 24.8 75.2
Investment income due and accrued 729 3,489 4,218 1.4 64.2 35.8
Securities lending collateral 7,249 16,445 23,694 7.5 75.8 24.2
Other invested assets 5,226 3,954 9,180 2.9 82.1 17.9
----------------------------------------------------------------------------------------------------------------------------------
Total $ 55,478 $259,138 $314,616 100.0% 68.6% 31.4%
==================================================================================================================================
(a) Includes $981 million of bond trading securities, at market value.
(b) Includes $1.58 billion of non-redeemable preferred stocks, at market value.
(dollars in millions)
-----------------------------------------------------------------------------------------------------------------------------------
General Life Percent Percent Distribution
--------------------
December 31, 2001 Insurance Insurance Total of Total Domestic Foreign
===================================================================================================================================
Fixed maturities, at market value (a) $ 29,602 $169,750 $199,352 77.6% 68.8% 31.2%
Equity securities, at market value (b) 4,568 3,139 7,707 3.0 53.9 46.1
Mortgage loans on real estate, policy and collateral loans 58 17,975 18,033 7.0 68.0 32.0
Short-term investments, including time
deposits, and cash 1,620 5,287 6,907 2.7 49.3 50.7
Real estate 410 2,106 2,516 1.0 21.5 78.5
Investment income due and accrued 573 3,001 3,574 1.4 63.9 36.1
Securities lending collateral 992 9,581 10,573 4.1 74.9 25.1
Other invested assets 5,336 2,937 8,273 3.2 82.2 17.8
-----------------------------------------------------------------------------------------------------------------------------------
Total $ 43,159 $213,776 $256,935 100.0% 68.0% 32.0%
===================================================================================================================================
(a) Includes $842 million of bond trading securities, at market value.
(b) Includes $1.72 billion of non-redeemable preferred stocks, at market value.
12
THE FOLLOWING TABLE SUMMARIZES THE INVESTMENT RESULTS OF THE GENERAL INSURANCE
OPERATIONS. (SEE ALSO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND NOTE 8 OF NOTES TO FINANCIAL
STATEMENTS.)
(dollars in millions)
------------------------------------------------------------------------------------------------------------------
ANNUAL AVERAGE CASH AND INVESTED ASSETS
---------------------------------------
CASH REALIZED
(INCLUDING NET CAPITAL
SHORT-TERM INVESTED INVESTMENT RATE OF RETURN ON GAINS
YEARS ENDED DECEMBER 31, INVESTMENTS) ASSETS(a) TOTAL INCOME(b) INVESTED ASSETS (LOSSES)
==================================================================================================================
2002 $ 1,726 $47,592 $49,318 $ 2,760 5.6%(c) 5.8%(d) $ (858)
2001 1,533 41,492 43,025 2,893 6.7 (c) 7.0 (d) (130)
2000 1,212 39,801 41,013 2,701 6.6 (c) 6.8 (d) 38
1999 925 38,084 39,009 2,517 6.5 (c) 6.6 (d) 295
1998 745 34,619 35,364 2,192 6.2 (c) 6.3 (d) 205
==================================================================================================================
(a) Including investment income due and accrued and real estate.
(b) Net investment income is after deduction of investment expenses and
excludes realized capital gains (losses).
(c) Net investment income divided by the annual average sum of cash and
invested assets.
(d) Net investment income divided by the annual average invested assets.
THE FOLLOWING TABLE SUMMARIZES THE INVESTMENT RESULTS OF THE LIFE INSURANCE
OPERATIONS. (SEE ALSO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND NOTE 8 OF NOTES TO FINANCIAL
STATEMENTS.)
(dollars in millions)
-----------------------------------------------------------------------------------------------------------------------
ANNUAL AVERAGE CASH AND INVESTED ASSETS
---------------------------------------
CASH
(INCLUDING NET REALIZED
SHORT-TERM INVESTED INVESTMENT RATE OF RETURN ON CAPITAL
YEARS ENDED DECEMBER 31, INVESTMENTS) ASSETS(a) TOTAL INCOME(b) INVESTED ASSETS LOSSES
=======================================================================================================================
2002 $ 5,167 $231,290 $236,457 $ 12,274 5.2%(c) 5.3%(d) $ (1,053)
2001 5,054 186,103 191,157 11,084 5.8 (c) 6.0 (d) (254)
2000 5,670 155,477 161,147 9,962 6.2 (c) 6.4 (d) (162)
1999 6,590 141,771 148,361 8,932 6.0 (c) 6.3 (d) (148)
1998 5,251 124,764 130,015 8,065 6.2 (c) 6.5 (d) (74)
=======================================================================================================================
(a) Including investment income due and accrued, real estate.
(b) Net investment income is after deduction of investment expenses and
excludes realized capital gains (losses).
(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.
13
AIG's worldwide insurance investment policy places primary emphasis on
investments in high quality, fixed income securities in all of its portfolios
and, to a lesser extent, investments in marketable common stocks in order to
preserve policyholders' surplus and generate net investment income. The ability
to implement this policy is somewhat limited in certain territories as there may
be a lack of qualified long term investments or investment restrictions may be
imposed by the local regulatory authorities. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
FINANCIAL SERVICES OPERATIONS
AIG's financial services subsidiaries engage in diversified financial products
and services including aircraft leasing, consumer and insurance premium
financing, capital markets structuring and market-making activities.
ILFC engages primarily in the acquisition of commercial jet aircraft and
the leasing and remarketing of such aircraft to airlines around the world. Also,
ILFC provides, for a fee, fleet management services to certain third-party
operators. (See also Note 2 of Notes to Financial Statements.)
AIGFP engages in a wide variety of financial transactions, including
long-dated interest rate, currency, equity and credit derivatives and structured
borrowing through notes, bonds and guaranteed investment agreements. AIGFP does
not engage in trading activities with respect to commodity contracts. (See also
Note 2 of Notes to Financial Statements.)
AIG's Consumer Finance operations include AGF as well as AIG Consumer
Finance Group, Inc. (AIGCFG). (See also Note 2 of Notes to Financial
Statements.)
AGF provides a wide variety of consumer finance products, including real
estate mortgages, consumer loans, retail sales finance and credit related
insurance to customers in the United States.
AIGCFG, through its subsidiaries, is engaged in developing a multi-product
consumer finance business with an emphasis on emerging markets.
Together ILFC, AIGFP and AIG's Consumer Finance operations comprise 97.2
percent of the commissions, transaction and other fees of AIG's consolidated
financial services operations.
THE FOLLOWING TABLE IS A SUMMARY OF THE REVENUES AND OPERATING INCOME OF AIG'S
PRINCIPAL FINANCIAL SERVICES OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002,
2001 AND 2000. (SEE ALSO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND NOTE 1 OF NOTES TO FINANCIAL
STATEMENTS.)
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
REVENUES:
ILFC (a) $2,845 $2,613 $2,441
AIGFP (b) 1,306 1,178 1,056
Consumer Finance (c) 2,473 2,560 2,325
OPERATING INCOME:
ILFC $ 801 $ 749 $ 654
AIGFP 808 758 648
Consumer Finance 549 505 386
================================================================================
(a) Revenues were primarily from aircraft lease rentals.
(b) Revenues were primarily fees from proprietary positions entered into in
connection with counterparty transactions.
(c) Revenues were primarily finance charges.
Imperial A.I. Credit Companies also contribute to financial services
income. This operation engages principally in insurance premium financing. (See
also Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1, 9 and 12 of Notes to Financial Statements.)
RETIREMENT SAVINGS & ASSET MANAGEMENT OPERATIONS
AIG's retirement savings & asset management operations offer a wide variety
of investment vehicles and services, including variable annuities, mutual funds,
and investment asset management. Such products and services are offered to
individuals and institutions both domestically and overseas.
AIG's principal retirement savings & asset management operations are
conducted through AIG SunAmerica Inc. and its subsidiaries (AIG SunAmerica),
VALIC and its related marketing entities (AIG VALIC) and AIG Global Investment
Group. AIG SunAmerica develops and sells variable annuities and other investment
products, sells and manages mutual funds and provides financial services. AIG
VALIC provides tax qualified annuities to the employees of educational,
healthcare and governmental entities. AIG Global Investment Group manages
third-party institutional, retail and private equity funds invested assets on a
global basis, provides securities lending and custodial services and organizes,
and manages the invested assets of institutional private equity investment
funds. Each of these subsidiary operations receives fees for investment products
and services provided.
14
THE FOLLOWING TABLE IS A SUMMARY OF THE REVENUES AND OPERATING INCOME OF AIG'S
PRINCIPAL RETIREMENT SAVINGS & ASSET MANAGEMENT OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000. (SEE ALSO MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND NOTE 1 OF NOTES TO
FINANCIAL STATEMENTS.)
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
REVENUES:
AIG VALIC $2,133 $2,110 $2,230
AIG SunAmerica 563 652 750
Other* 789 950 485
--------------------------------------------------------------------------------
Total $3,485 $3,712 $3,465
================================================================================
OPERATING INCOME:
AIG VALIC $ 730 $ 630 $ 692
AIG SunAmerica 32 185 326
Other* 254 273 90
--------------------------------------------------------------------------------
Total $1,016 $1,088 $1,108
================================================================================
* Includes AIG Global Investment Group, John McStay Investment Counsel, L.P.
and certain overseas variable annuity operations.
THE FOLLOWING TABLE IS A SUMMARY OF THE COMPOSITION OF AIG'S FINANCIAL SERVICES
INVESTED ASSETS AND LIABILITIES AT DECEMBER 31, 2002 AND 2001. (SEE ALSO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND NOTE 1 OF NOTES TO FINANCIAL STATEMENTS.)
(in millions)
------------------------------------------------------------------------------------------
2002 2001
==========================================================================================
Financial services invested assets:
Flight equipment primarily under operating
leases, net of accumulated depreciation $ 26,867 $ 22,710
Finance receivables, net of allowance 15,857 13,955
Unrealized gain on interest rate and currency
swaps, options and forward transactions 15,376 11,493
Securities available for sale, at market value 16,687 17,801
Trading securities, at market value 4,146 5,733
Securities purchased under agreements to
resell, at contract value 25,560 21,638
Trading assets 4,786 6,234
Spot commodities, at market value 489 352
Other, including short-term investments 5,110 4,379
------------------------------------------------------------------------------------------
Total $114,878 $104,295
==========================================================================================
Financial services liabilities:
Borrowings under obligations of guaranteed
investment agreements* $ 14,850 $ 16,392
Securities sold under agreements to
repurchase, at contract value 9,162 11,818
Trading liabilities 3,825 4,372
Securities and spot commodities sold but
not yet purchased, at market value 11,765 8,331
Unrealized loss on interest rate and currency
swaps, options and forward transactions 11,265 8,813
Trust deposits and deposits due to banks
and other depositors 2,987 2,290
Commercial paper* 7,467 8,523
Notes, bonds, loans and mortgages payable* 43,233 33,676
------------------------------------------------------------------------------------------
Total $104,554 $ 94,215
==========================================================================================
* See also Note 9 of Notes to Financial Statements.
OTHER OPERATIONS
Certain other AIG subsidiaries provide insurance-related services such as
adjusting claims and marketing specialized products. AIG also has several other
subsidiaries which engage in various businesses. For example, American
International Technology Enterprises, Inc. provides information technology and
processing services to businesses worldwide. Mt. Mansfield Company, Inc. owns
and operates the ski slopes, lifts, school and an inn located at Stowe, Vermont.
ADDITIONAL INVESTMENTS
AIG holds a 24.3 percent interest in IPC Holdings, Ltd., a reinsurance holding
company, a 23.4 percent interest in Allied World Assurance Holdings, Ltd., a
property-casualty insurance holding company and a 22.1 percent interest in The
Fuji Fire and Marine Insurance Co., Ltd., a general insurance company. (See also
Note 1(q) of Notes to Financial Statements.)
LOCATIONS OF CERTAIN ASSETS
As of December 31, 2002, approximately 27 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $1.44
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 and 2 of Notes to Financial Statements.)
INSURANCE REGULATION AND COMPETITION
Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such requirements.
(See also Note 11 of Notes to Financial Statements.)
15
AIG's insurance subsidiaries, in common with other insurers, are subject to
regulation and supervision by the states and by other jurisdictions in which
they do business. Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate regulatory and
supervisory powers to an insurance official. The regulation and supervision
relate primarily to approval of policy forms and rates, the standards of
solvency that must be met and maintained, including risk based capital
measurements, the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the size of risks which may be
insured under a single policy, deposits of securities for the benefit of
policyholders, methods of accounting, periodic examinations of the affairs of
insurance companies, the form and content of reports of financial condition
required to be filed, and reserves for unearned premiums, losses and other
purposes. In general, such regulation is for the protection of policyholders
rather than security holders. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Risk Based Capital (RBC) is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Thus, inadequately capitalized general and life insurance companies may be
identified.
The RBC formula develops a risk adjusted target level of adjusted statutory
capital by applying certain factors to various asset, premium and reserve items.
Higher factors are applied to more risky items and lower factors are applied to
less risky items. Thus, the target level of statutory surplus varies not only as
a result of the insurer's size, but also on the risk profile of the insurer's
operations.
The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control.
The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards as of December 31, 2002.
To the extent that any of AIG's insurance entities would fall below
prescribed levels of surplus, it would be AIG's intention to infuse necessary
capital to support that entity.
Privacy provisions of the Gramm-Leach-Bliley Act became fully effective in
2001. These provisions established consumer protections regarding the security
and confidentiality of nonpublic personal information and require full
disclosure of the privacy policies of financial institutions to their consumer
customers. There is also legislation pending in the United States Congress and
various states designed to provide additional privacy protections to consumer
customers of financial institutions. These statutes and similar legislation and
regulations in the United States or other jurisdictions could impact AIG's
ability to market its products or otherwise limit the nature or scope of AIG's
insurance and financial services operations.
A substantial portion of AIG's general insurance business and a majority of
its life insurance business is carried on in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification or revocation by such authorities, and AIU or other AIG
subsidiaries could be prevented from conducting business in certain of the
jurisdictions where they currently operate. In the past, AIU has been allowed to
modify its operations to conform with new licensing requirements in most
jurisdictions.
In addition to licensing requirements, AIG's foreign operations are also
regulated in various jurisdictions with respect to currency, policy language and
terms, amount and type of security deposits, amount and type of reserves, amount
and type of local investment and the share of profits to be returned to
policyholders on participating policies. Some foreign countries regulate rates
on various types of policies. Certain countries have established reinsurance
institutions, wholly or partially owned by the state, to which admitted insurers
are obligated to cede a portion of their business on terms which do not always
allow foreign insurers, including AIG, full compensation. In some countries,
regulations governing constitution of technical reserves and remittance balances
may hinder remittance of profits and repatriation of assets.
16
The insurance industry is highly competitive. Within the United States,
AIG's general insurance subsidiaries compete with approximately 3,000 other
stock companies, specialty insurance organizations, mutual companies and other
underwriting organizations. AIG's life insurance companies compete in the United
States with approximately 1,800 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 operate in a highly competitive
environment, both domestically and overseas. Principal sources of competition
are banks, investment banks and other non-bank financial institutions. With the
acquisition of AGC, the focus of AIG's financial services operations became more
consumer-oriented, thereby increasing the risks of regulatory supervision and
intervention.
ITEM 2. PROPERTIES
AIG and its subsidiaries operate from approximately 2,200 offices in the United
States, 10 offices in Canada and numerous offices in approximately 100 foreign
countries. The offices in Springfield, Illinois; Amarillo, Ft. Worth and
Houston, Texas; Baton Rouge, Louisiana; Wilmington, Delaware; Hato Rey and
Isabella, Puerto Rico; Tampa, Florida; Livingston, New Jersey; Evansville,
Indiana; Nashville, Tennessee; 70 Pine Street, 72 Wall Street and 175 Water
Street in New York City; and offices in approximately 30 foreign countries
including Bermuda, Chile, Hong Kong, the Philippines, Japan, England, Singapore,
Switzerland, Taiwan and Thailand are located in buildings owned by AIG and its
subsidiaries. The remainder of the office space utilized by AIG subsidiaries is
leased.
ITEM 3. LEGAL PROCEEDINGS
AIG and its subsidiaries, in common with the insurance industry in general, are
subject to litigation, including claims for punitive damages, in the normal
course of their business. AIG does not believe that such litigation will have a
material adverse effect on its financial condition, future operating results or
liquidity. (See also the Discussion and Analysis of Consolidated Net Losses and
Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
In late 2002, a shareholder derivative action was filed in Delaware Chancery
Court alleging breaches of fiduciary duty of loyalty and care against AIG's
directors. AIG management believes the allegations of the complaint are without
merit. AIG's Board of Directors has appointed a special committee of independent
directors to review the complaint and respond to the lawsuit.
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 2002.
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.
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. There are no other arrangements or understandings between any
director or officer and any other person pursuant to which the director or
officer was elected to such position. Prior to joining AIG in 1998, Mr. Patrikis
was First Vice President at the Federal Reserve Bank of New York, previously
having served as Executive Vice President and General Counsel. Prior to joining
AIG in 2001, Mr. Rautenberg was Vice President and General Manager, Corporate
Communications at Canon, U.S.A. from September 2000 to June, 2001 and for five
years prior to that he was the senior corporate communications executive at
Reliance Group Holdings. Prior to joining AIG in September 2002, Mr. Bensinger
was Executive Vice President and Chief Financial Officer of Combined Specialty
Group, Inc. (a division of Aon Corporation) commencing in March 2002, and served
as Executive Vice President of Trenwick Group, Ltd. from October 1999 through
December 2001 and as President of Chartwell Re Corp. from March 1993 until
October 1999.
17
-----------------------------------------------------------------------------------------------------------------
SERVED AS DIRECTOR
NAME TITLE AGE OR OFFICER SINCE
=================================================================================================================
M. Bernard Aidinoff* Director 74 1984
Eli Broad Director 69 1999
Pei-yuan Chia Director 64 1996
Marshall A. Cohen Director 68 1992
Barber B. Conable, Jr. Director 80 1991
Martin S. Feldstein Director 63 1987
Ellen V. Futter Director 53 1999
M. R. Greenberg* Director, Chairman and Chief Executive Officer 77 1967
Carla A. Hills* Director 69 1993
Frank J. Hoenemeyer* Director 83 1985
Richard C. Holbrooke Director 61 2001
Edward E. Matthews* Director and Senior Advisor 71 1973
Howard I. Smith Director, Vice Chairman, Chief Financial Officer and Chief 58 1984
Administrative Officer
Martin J. Sullivan Director, Vice Chairman and Co-Chief Operating Officer 48 1997
Thomas R. Tizzio* Director and Senior Vice Chairman-General Insurance 65 1982
Edmund S. W. Tse Director, Senior Vice Chairman and Co-Chief Operating Officer 65 1991
Jay S. Wintrob Director and Executive Vice President-Retirement Savings 46 1999
Frank G. Wisner Director and Vice Chairman-External Affairs 64 1997
Frank G. Zarb* Director 67 2001
John A. Graf Executive Vice President-Retirement Savings 43 2002
Donald P. Kanak Executive Vice President and President of AIG Companies in 50 1998
Japan and Korea
Rodney O. Martin, Jr. Executive Vice President-Life Insurance 50 2002
Kristian P. Moor Executive Vice President-Domestic General Insurance 43 1998
Win J. Neuger Executive Vice President and Chief Investment Officer 53 1995
R. Kendall Nottingham Executive Vice President-Life Insurance 64 1998
Robert M. Sandler Executive Vice President, Senior Casualty Actuary and Senior 60 1980
Claims Officer
William N. Dooley Senior Vice President-Financial Services 50 1992
Lawrence W. English Senior Vice President-Administration 61 1985
Axel I. Freudmann Senior Vice President-Human Resources 56 1986
Ernest T. Patrikis Senior Vice President and General Counsel 59 1998
Richard W. Scott Senior Vice President-Investments 49 2002
Steven J. Bensinger Vice President and Treasurer 48 2002
Michael J. Castelli Vice President and Comptroller 47 1998
Keith L. Duckett Vice President and Director of Internal Audit 42 2001
Peter K. Lathrop Vice President and Director of Taxes 60 2001
Robert E. Lewis Vice President and Chief Credit Officer 52 1993
Charles M. Lucas Vice President and Director of Market Risk Management 64 1996
Steven A. Rautenberg Vice President-Communications 53 2001
Brian T. Schreiber Vice President-Strategic Planning 37 2002
Kathleen E. Shannon Vice President and Secretary 53 1986
=================================================================================================================
* Member of Executive Committee.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(A) THE TABLE BELOW SHOWS THE HIGH AND LOW CLOSING SALES PRICES PER SHARE OF
AIG'S COMMON STOCK ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE, FOR EACH
QUARTER OF 2002 AND 2001.
--------------------------------------------------------------------------------
2002 2001
------------------- -------------------
HIGH LOW High Low
================================================================================
First Quarter 79.61 70.15 96.88 75.12
Second Quarter 75.26 62.84 86.51 76.18
Third Quarter 67.91 51.10 87.06 67.05
Fourth Quarter 67.89 52.45 86.01 76.74
================================================================================
(b) In 2002, AIG paid a quarterly dividend of 4.2 cents in March and June
and 4.7 cents in September and December for a total cash payment of 17.8 cents
per share of common stock. In 2001, AIG paid a quarterly dividend of 3.7 cents
in March and June and 4.2 cents in September and December for a total cash
payment of 15.8 cents per share of common stock. Subject to the dividend
preference of any of AIG's serial preferred stock which may be outstanding, the
holders of shares of common stock are entitled to receive such dividends as may
be declared by the Board of Directors from funds legally available therefor.
See Note 11(a) of Notes to Financial Statements for a discussion of certain
restrictions on the payment of dividends to AIG by some of its insurance
subsidiaries.
(c) The approximate number of holders of common stock as of January 31,
2003, based upon the number of record holders, was 60,000.
(d) Information relating to compensation plans under which equity
securities of AIG are authorized for issuance is set forth under "Equity
Compensation Plan Information" on page 12 of the Proxy Statement for AIG's 2003
Annual Meeting of Shareholders to be held on May 14, 2003 and all such
information is incorporated herein by reference.
18
ITEM 6. SELECTED FINANCIAL DATA
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED
FINANCIAL DATA
THE FOLLOWING SELECTED CONSOLIDATED FINANCIAL DATA, WHICH HAS BEEN RESTATED TO
GIVE RETROACTIVE EFFECT TO THE ACQUISITIONS OF AGC AND SUNAMERICA INC. ON A
POOLING OF INTERESTS BASIS, IS PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. THIS DATA SHOULD BE READ IN CONJUNCTION WITH THE
SUPPLEMENTAL FINANCIAL STATEMENTS AND ACCOMPANYING NOTES INCLUDED ELSEWHERE
HEREIN.
(in millions, except per share amounts)
---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000 1999 1998
=================================================================================================================================
Revenues (a):
Premiums and other considerations $ 44,589 $ 38,428 $ 34,570 $ 31,020 $ 27,817
Net investment income 15,034 13,977 12,663 11,449 10,257
Realized capital gains (losses) (2,441) (836) (314) 103 130
Other revenues 10,300 10,197 9,419 8,162 7,408
Total revenues 67,482 61,766 56,338 50,734 45,612
Benefits and expenses
Incurred policy losses and benefits 41,927 35,054 30,864 27,495 24,676
Insurance acquisition and other operating expenses 17,413 16,556 15,136 13,840 13,353
Acquisition, restructuring and related charges -- 2,017 315 -- --
Total benefits and expenses 59,340 53,627 46,315 41,335 38,029
Income before income taxes, minority interest and cumulative
effect of accounting changes (b) 8,142 8,139 10,023 9,399 7,583
Income taxes 2,328 2,339 2,971 2,833 2,190
Income before minority interest and cumulative effect
of accounting changes 5,814 5,800 7,052 6,566 5,393
Minority interest (295) (301) (413) (380) (347)
Income before cumulative effect of accounting changes 5,519 5,499 6,639 6,186 5,046
Cumulative effect of accounting changes, net of tax -- (136) -- -- --
Net income 5,519 5,363 6,639 6,186 5,046
Earnings per common share (c):
Basic
Income before cumulative effect of accounting changes 2.11 2.10 2.55 2.37 1.96
Cumulative effect of accounting changes -- (0.05) -- -- --
Net income 2.11 2.05 2.55 2.37 1.96
Diluted
Income before cumulative effect of accounting changes 2.10 2.07 2.52 2.34 1.92
Cumulative effect of accounting changes -- (0.05) -- -- --
Net income 2.10 2.02 2.52 2.34 1.92
Cash dividends per common share (d) .18 .16 .14 .13 .11
Total assets 561,229 493,061 426,671 383,685 338,783
Long-term debt (e) 49,416 46,395 38,069 34,583 33,655
Capital funds (shareholders' equity) 59,103 52,150 47,439 39,641 38,909
=================================================================================================================================
(a) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, retirement savings & asset management commissions and other fees,
equity in income of minority-owned insurance operations, and realized
capital gains (losses).
(b) Includes net loss reserve charge of $2.8 billion in 2002 and WTC losses of
$900 million in 2001.
(c) Per share amounts for all periods presented have been retroactively
adjusted to reflect all stock dividends and splits and reflect the adoption
of the Statement of Financial Accounting Standards No. 128 "Earnings per
Share."
(d) Cash dividends have not been restated to reflect dividends paid by
SunAmerica Inc., the Maryland corporation which was merged into AIG on
January 1, 1999, nor AGC which was acquired by AIG on August 29, 2001.
(e) Including commercial paper and excluding that portion of long-term debt
maturing in less than one year. (See also Note 9 of Notes to Financial
Statements.)
19
Set forth below are reconciliations of each "non-GAAP financial measure" used in
this Annual Report on Form 10-K to its most equivalent measure presented on a
GAAP basis. For an explanation of why AIG management considers these "non-GAAP
measures" useful, see Executive Summary in Management's Discussion and Analysis
of Financial Condition and Results of Operations.
GENERAL INSURANCE REVENUES:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
Net premiums earned $ 24,269 $ 19,365 $ 17,407
Net investment income 2,760 2,893 2,701
Realized capital gains (losses) (858) (130) 38
--------------------------------------------------------------------------------
As adjusted - Management
reporting basis $ 26,171 $ 22,128 $ 20,146
================================================================================
GENERAL INSURANCE OPERATING INCOME AS REPORTED:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
Net premiums written $ 27,414 $ 20,101 $ 17,526
Change in unearned
premium reserve (3,145) (736) (119)
--------------------------------------------------------------------------------
Net premiums earned 24,269 19,365 17,407
Losses incurred 18,449 13,228 11,379
Loss expenses incurred 2,365 2,178 1,725
Underwriting expenses 4,690 3,871 3,518
--------------------------------------------------------------------------------
Adjusted underwriting profit (loss) (1,235) 88 785
Net investment income 2,760 2,893 2,701
Realized capital gains (losses) (858) (130) 38
--------------------------------------------------------------------------------
Operating income $ 667 $ 2,851 $ 3,524
================================================================================
GENERAL INSURANCE OPERATING INCOME AS ADJUSTED:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
As reported $ 667 $ 2,851 $ 3,524
Loss reserve charge 2,800 -- --
WTC losses -- 769 --
Realized capital (gains) losses 858 130 (38)
--------------------------------------------------------------------------------
As adjusted - Management
reporting basis $ 4,325 $ 3,750 $ 3,486
================================================================================
LIFE PREMIUM INCOME:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
As reported $20,320 $19,063 $17,163
Deposits and considerations not
deemed to be GAAP revenue 28,342 24,554 21,056
--------------------------------------------------------------------------------
Premium income, deposits and
other considerations $48,662 $43,617 $38,219
================================================================================
LIFE INSURANCE REVENUES:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
Premium income $ 20,320 $ 19,063 $ 17,163
Net investment income 12,274 11,084 9,962
Realized capital gains (losses) (1,053) (254) (162)
--------------------------------------------------------------------------------
As adjusted - Management
reporting basis $ 31,541 $ 29,893 $ 26,963
================================================================================
LIFE INSURANCE OPERATING INCOME:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
As reported $4,929 $4,675 $4,058
WTC losses -- 131 --
Realized capital losses 1,053 254 162
--------------------------------------------------------------------------------
As adjusted - Management
reporting basis $5,982 $5,060 $4,220
================================================================================
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
As reported $ 8,142 $ 8,139 $10,023
Loss reserve charge 2,800 -- --
WTC losses -- 900 --
Realized capital losses 2,441 836 314
Acquisition, restructuring and
related charges -- 2,017 315
--------------------------------------------------------------------------------
As adjusted - Management
reporting basis $13,383 $11,892 $10,652
================================================================================
NET INCOME:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
As reported $ 5,519 $ 5,363 $ 6,639
Loss reserve charge 1,794 -- --
WTC losses -- 533 --
Realized capital losses 1,596 542 214
Acquisition, restructuring and
related charges -- 1,385 207
Cumulative effect of
accounting changes -- 136 --
--------------------------------------------------------------------------------
As adjusted - Management
reporting basis $ 8,909 $ 7,959 $ 7,060
================================================================================
20
INDEX TO FINANCIAL INFORMATION
American International Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is designed to provide the reader a narrative with respect to AIG's
operations, financial condition and liquidity and certain other significant
matters.
INDEX
Page
Executive Summary 22
Consolidated Results 22
Critical Accounting Estimates 24
Operational Review 24
General Insurance Operations 24
General Insurance Results 25
Reinsurance 27
Reserve for Losses and Loss Expenses 28
Loss Reserve Charge 29
Asbestos and Environmental Claims 30
Life Insurance Operations 33
Life Insurance Results 34
Underwriting and Investment Risk 34
Financial Services Operations 36
Financial Services Results 36
Retirement Savings & Asset Management Operations 38
Retirement Savings & Asset Management Results 38
Other Operations 38
Capital Resources 39
Borrowings 39
Capital Funds 41
Stock Repurchase 41
Dividends from Insurance Subsidiaries 41
Regulation and Supervision 41
Contractual Obligations and Other Commercial Commitments 42
Special Purpose Vehicles 42
Liquidity 43
Invested Assets 44
Insurance Invested Assets 44
Fixed Maturity Investments 45
Credit Quality 45
Equity Investments 45
Valuation of Invested Assets 45
Mortgage Investments 47
Short-term Investments 47
Real Estate Investments 47
Other Investments 47
Managing Market Risk 48
Financial Services Invested Assets 49
Managing Market Risk 51
Derivatives 53
Counterparty Credit Quality 54
Fair Value Source 55
Notional Amounts 56
Accounting Standards 57
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report and other publicly available documents may include, and AIG's
officers and representatives may from time to time make, statements which may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are not historical
facts but instead represent only AIG's belief regarding future events, many of
which, by their nature, are inherently uncertain and outside of AIG's control.
These statements may address, among other things, AIG's strategy for growth,
product development, regulatory approvals, market position, financial results
and reserves. It is possible that AIG's actual results and financial condition
may differ, possibly materially, from the anticipated results and financial
condition indicated in these forward-looking statements. Important factors that
could cause AIG's actual results to differ, possibly materially, from those in
the specific forward-looking statements are discussed throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. AIG is not under any obligation to (and expressly disclaims any such
obligations to) update or alter any forward-looking statement, whether written
or oral, that may be made from time to time, whether as a result of new
information, future events or otherwise.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
EXECUTIVE SUMMARY
AIG's operations are conducted principally through four business segments:
general insurance, life insurance, financial services and retirement savings &
asset management. Within each of these business segments are various operating
groups generally formed based upon products or services which may be offered in
different geographic locations.
[FLOWCHART]
Throughout this Management's Discussion and Analysis of Financial Condition and
Results of Operations, AIG presents its operations in the way it believes will
be most meaningful, as well as most transparent. Operating income is shown
exclusive of realized capital gains (losses) because the determination to
realize capital gains or losses is generally independent of the insurance
underwriting process. Operating income and the related performance rates are
also shown exclusive of one or more of the 2002 reserve charge discussed under
"Loss Reserve Charge" herein, 2001 acquisition, restructuring and related
charges, and 2001 World Trade Center and related losses (WTC losses) because AIG
believes that these items are sufficiently unusual that they do not reflect the
underlying basic performance of the business. Net income is presented exclusive
of these items as well as the cumulative effect of accounting changes for the
same reason. Premium income, gross premiums written, statutory underwriting
profit (loss) and combined ratios are presented in accordance with accounting
principles prescribed by insurance regulatory authorities because these are
standard measures of performance used in the insurance industry and thus allow
more meaningful comparisons with AIG's insurance competitors. A reconciliation
of these measurements to the most equivalent measurements presented in
accordance with Generally Accepted Accounting Principles (GAAP) is presented on
page 20.
CONSOLIDATED RESULTS
AIG's revenues in 2002 increased 9.3 percent to $67.5 billion when compared to
$61.8 billion in 2001. Growth in revenues was primarily attributable to the
growth in net premiums earned from the general insurance operations. This growth
was negatively impacted by realized capital losses incurred. The following
tables reconcile results reported on a GAAP basis to the presentation AIG
management believes is most meaningful.
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
As reported $ 8,142 $ 8,139 $10,023
Loss reserve charge 2,800 -- --
WTC losses -- 900 --
Realized capital losses 2,441 836 314
Acquisition, restructuring and related charges -- 2,017 315
--------------------------------------------------------------------------------
As adjusted -- Management reporting basis $13,383 $11,892 $10,652
================================================================================
NET INCOME:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
As reported $ 5,519 $ 5,363 $ 6,639
Loss reserve charge 1,794 -- --
WTC losses -- 533 --
Realized capital losses 1,596 542 214
Acquisition, restructuring and related charges -- 1,385 207
Cumulative effect of accounting changes -- 136 --
--------------------------------------------------------------------------------
As adjusted -- Management reporting basis $ 8,909 $ 7,959 $ 7,060
================================================================================
AIG's income before income taxes, minority interest and cumulative effect
of accounting changes increased modestly in 2002 when compared to 2001. Factors
influencing the growth were not only the increase in realized capital losses but
also the impact of the $2.8 billion loss reserve charge in 2002. (See discussion
under "Loss Reserve Charge" herein.) If the realized capital losses and such
loss reserve charge were excluded from 2002 income and $836 million in realized
capital losses, $900 million in WTC losses and $2.02 billion of acquisition,
restructuring and related charges were excluded in 2001, AIG's growth in income
before taxes, minority interest and cumulative effect of accounting changes
would be 12.5 percent. AIG believes that the growth rates discussed above are
more representative of the overall growth of its operations than the rates
determined including the impact of events AIG views as unusual and unlikely to
recur.
22
American International Group, Inc. and Subsidiaries
AIG's net income in 2002 increased 2.9 percent to $5.52 billion when
compared to $5.36 billion in 2001. Excluding net of tax, realized capital gains
(losses), the $1.8 billion loss reserve charge in 2002, the $1.38 billion of
acquisition, restructuring and related charges, $533 million in WTC losses, and
$136 million cumulative effect of accounting changes incurred in 2001, AIG's net
income in 2002 increased 11.9 percent.
THE FOLLOWING TABLE SUMMARIZES THE OPERATIONS OF EACH PRINCIPAL SEGMENT FOR
2002, 2001 AND 2000. (SEE ALSO NOTE 2 OF NOTES TO FINANCIAL STATEMENTS.) :
(in millions)
-------------------------------------------------------------------------------
2002 2001 2000
===============================================================================
Revenues:
General insurance(a) $ 26,171 $ 22,128 $ 20,146
Life insurance(b) 31,541 29,893 26,963
Financial services(c) 6,815 6,485 5,954
Retirement savings & asset
management(d) 3,485 3,712 3,465
Other (530) (452) (190)
-------------------------------------------------------------------------------
Total $ 67,482 $ 61,766 $ 56,338
===============================================================================
Operating income:
General insurance $ 667 $ 2,851 $ 3,524
Life insurance 4,929 4,675 4,058
Financial services 2,189 1,991 1,666
Retirement savings & asset management 1,016 1,088 1,108
Other (659) (2,466) (333)
-------------------------------------------------------------------------------
Total $ 8,142 $ 8,139 $ 10,023
===============================================================================
(a) Represents the sum of net premiums earned, net investment income and
realized capital gains (losses).
(b) Represents the sum of life premium income, net investment income and
realized capital gains (losses).
(c) Represents financial services commissions, transactions and other fees.
(d) Represents retirement savings & asset management commissions and other
fees.
GENERAL INSURANCE
General insurance operating income decreased 76.6 percent in 2002 compared to
2001. The primary reasons for this decline were the loss reserve charge of $2.8
billion and an increase in realized capital losses of over $700 million.
Excluding realized capital gains (losses), the loss reserve charge in 2002 and
WTC losses of $769 million, including $200 million from Transatlantic, in 2001,
general insurance operating income increased 15.4 percent.
LIFE INSURANCE
Life insurance operating income increased 5.4 percent in 2002 compared to 2001,
impacted by an increase in realized capital losses of nearly $800 million.
Excluding realized capital gains (losses) and WTC losses of $131 million in
2001, life insurance operating income increased 18.2 percent, reflecting
operating income growth in each of AIG's principal life insurance businesses.
FINANCIAL SERVICES
Financial services operating income increased 9.9 percent in 2002 compared to
2001, reflecting the continued growth of each of its principal operations.
RETIREMENT SAVINGS & ASSET MANAGEMENT
Retirement savings & asset management operating income decreased 6.6 percent in
2002 when compared to 2001. Results in the variable annuity business continue to
be impacted by weak equity markets in the United States and around the world.
REALIZED CAPITAL LOSSES
During 2002, AIG incurred net realized capital losses of $2.44 billion,
including $356 million from WorldCom Inc. securities.
CAPITAL RESOURCES
At December 31, 2002, AIG had total capital funds of $59.10 billion and total
borrowings of $71.89 billion. At that date, $64.98 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
During 2002, AIG repurchased in the open market 10,858,000 shares of its
common stock.
LIQUIDITY
At December 31, 2002, consolidated invested assets were $432.36 billion
including $8.16 billion in cash and short-term investments. Consolidated net
cash provided from operating activities in 2002 amounted to $18.69 billion. AIG
believes that its liquid assets, cash provided by operations and access to the
capital markets will enable it to meet any forseeable cash requirements.
OUTLOOK
Premium rates in the General Insurance business are continuing to strengthen
both domestically and in key international markets, along with policy
restrictions and exclusions. AIG expects that such growth will continue through
2003. Such increases in premium growth will have a strong positive impact on
cash flow available for investment. Thus, General Insurance's net investment
income is expected to rise in future quarters even in the current interest rate
environment.
In the Life Insurance segment, AIG expects continued growth with respect
to its domestic individual fixed annuity operation, while in overseas markets,
AIG's life insurance operations are expected to continue double digit growth.
AIG continues to expand its operations in China, becoming the first foreign
insurance organization to have wholly owned life insurance operations in
Beijing, Suzhou, Dongguan and Jiangmen, as well as previously established
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
operations in Shanghai, Foshan, Guangzhou and Shenzhen. AIG also expects India
and Vietnam to offer additional opportunities for growth.
AIG expects that ILFC will continue its growth and operating profitability
even as the airline industry remains under stress. ILFC derives over 80 percent
of its lease revenues from foreign carriers, thus limiting its exposure to the
domestic commercial aviation market which is significantly more depressed than
the rest of the industry. AIG is also optimistic about opportunities for growth
in its consumer finance business through continued expansion of overseas credit
card operations and alternative distribution systems such as the use of the
Internet. During 2003, AIG also expects to expand its recently formed
international retirement savings operations.
CRITICAL ACCOUNTING ESTIMATES
Note 1 of Notes to Financial Statements provides a summary of the GAAP
accounting policies significant to AIG. Among these policies requiring
significant judgment, AIG considers its most critical accounting estimates those
with respect to reserves for losses and loss expenses, future policy benefits
for life and accident and health contracts, deferred policy acquisition costs,
and fair value determinations with respect to certain assets and liabilities of
certain of the subsidiaries of AIG's financial services operations. These
accounting estimates require the use of assumptions about matters that are
highly uncertain at the time of estimation. Reserves for losses and loss
expenses are estimated using data where the more recent accident years of long
tail casualty lines have limited statistical credibility in reported net losses.
(See also the discussions "Reserve for Losses and Loss Expenses", "Loss Reserve
Charge", and "Asbestos and Environmental Claims" herein.) The liability for
future policy benefits for life and accident and health contracts include
estimates for interest rates, mortality and surrender rates and invested asset
performance. (See also the discussion "Life Insurance Operations".)
Recoverability of deferred policy acquisition costs are contingent upon the
underlying insurance operations being profitable. (See also the discussions
"General Insurance Operations", "Life Insurance Operations" and "Retirement
Savings and Asset Management Operations" herein.) Fair value determinations with
respect to certain assets and liabilities of certain subsidiaries of AIG's
financial services operations are arrived at through the use of valuation
models. (See also the discussion "Managing Market Risk" herein.)
OPERATIONAL REVIEW
On August 29, 2001, American General Corporation (AGC), was acquired by AIG. In
connection with the acquisition, AIG issued approximately 290 million shares of
its common stock in exchange for all the outstanding common stock of AGC based
on an exchange ratio of 0.5790 of a share of AIG common stock for each share of
AGC common stock. The acquisition was accounted for as a pooling of interests
and the accompanying financial statements have been prepared to retroactively
combine AGC's financial statements with AIG's financial statements.
GENERAL INSURANCE OPERATIONS
AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance.
Domestic general insurance operations are comprised of the Domestic
Brokerage Group (DBG), which includes The Hartford Steam Boiler Inspection and
Insurance Company (HSB); Transatlantic Holdings, Inc. (Transatlantic); Personal
Lines, including 21st Century Insurance Group (21st Century); and Mortgage
Guaranty.
AIG's Foreign General insurance group accepts risks primarily underwritten
through American International Underwriters (AIU), a marketing unit consisting
of wholly owned agencies and insurance entities. The Foreign General insurance
group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. (See also Note 2 of Notes to Financial
Statements.)
GENERAL INSURANCE OPERATIONS FOR 2002, 2001 AND 2000 WERE AS FOLLOWS:
(in millions)
-------------------------------------------------------------------------------
2002 2001 2000
===============================================================================
Net premiums written $ 27,414 $ 20,101 $ 17,526
Change in unearned
premium reserve (3,145) (736) (119)
-------------------------------------------------------------------------------
Net premiums earned 24,269 19,365 17,407
Losses incurred 18,449(a) 13,228(c) 11,379
Loss expensesincurred 2,365(b) 2,178 1,725
Underwriting expenses 4,690 3,871 3,518
-------------------------------------------------------------------------------
Adjusted underwriting
profit (loss) (1,235) 88 785
Net investment income 2,760 2,893 2,701
Realized capital gains (losses) (858) (130) 38
-------------------------------------------------------------------------------
Operating income $ 667 $ 2,851 $ 3,524
===============================================================================
(a) Includes loss reserve charge of $2.8 billion.
(b) Includes 21st Century's loss adjustment expense pre-tax provision of $43
million for SB1899 Northridge earthquake claims.
(c) Includes WTC losses of $769 million in the aggregate.
24
American International Group, Inc. and Subsidiaries
GENERAL INSURANCE OPERATIONS BY MAJOR OPERATING UNIT FOR 2002, 2001 AND 2000
WERE AS FOLLOWS:
(in millions)
-----------------------------------------------------------------------------------
2002 2001 2000
===================================================================================
Net premiums written:
Domestic General
DBG(a) $ 15,214 $ 10,197 $ 7,934
Transatlantic 2,500 1,906 1,659
Personal Lines 3,182 2,454 2,510
Mortgage Guaranty 508 494 453
Foreign General(a) 6,010 5,050 4,970
-----------------------------------------------------------------------------------
Total $ 27,414 $ 20,101 $ 17,526
===================================================================================
Net premiums earned:
Domestic General
DBG(a) $ 13,053 $ 9,776 $ 8,023
Transatlantic 2,369 1,790 1,632
Personal Lines 2,913 2,478 2,401
Mortgage Guaranty 502 489 452
Foreign General(a) 5,432 4,832 4,899
-----------------------------------------------------------------------------------
Total $ 24,269 $ 19,365 $ 17,407
===================================================================================
Adjusted underwriting
profit (loss):
Domestic General
DBG(a) $ (2,049)(b) $ (338)(c) $ 177
Transatlantic (58)(b) (274)(c) 1
Personal Lines 29(d) (92) (37)
Mortgage Guaranty 278 311 270
Foreign General(a) 565 481(c) 374
-----------------------------------------------------------------------------------
Total $ (1,235) $ 88 $ 785
===================================================================================
Net investment income:
Domestic General
DBG $ 1,609 $ 1,827 $ 1,614
Transatlantic 252 240 234
Personal Lines 122 114 113
Mortgage Guaranty 139 106 93
Intercompany adjustments
and eliminations - net 23 23 77
Foreign General 615 583 570
-----------------------------------------------------------------------------------
Total $ 2,760 $ 2,893 $ 2,701
===================================================================================
Operating income (loss) before
realized capital gains (losses):
Domestic General
DBG(a) $ (440)(b) $ 1,489(c) $ 1,791
Transatlantic 194(b) (34)(c) 235
Personal Lines 151(d) 22 76
Mortgage Guaranty 417 417 363
Intercompany adjustments
and eliminations - net 23 23 77
Foreign General(a) 1,180 1,064(c) 944
-----------------------------------------------------------------------------------
Total 1,525 2,981 3,486
Realized capital gains (losses) (858) (130) 38
-----------------------------------------------------------------------------------
Operating income $ 667(b) $ 2,851(c) $ 3,524
===================================================================================
(a) Reflects the realignment of certain internal divisions in each year.
(b) Includes loss reserve charge of $2.8 billion in the aggregate.
(c) Includes WTC losses of $769 million in the aggregate.
(d) Includes 21st Century's loss adjustment expense pre-tax provision of $43
million for SB1899 Northridge earthquake claims.
General Insurance Results
NET PREMIUMS WRITTEN AND NET PREMIUMS EARNED in 2002 increased 36.4
percent and 25.3 percent, respectively, from those of 2001. In 2001, net
premiums written increased 14.7 percent and net premiums earned increased 11.2
percent when compared to 2000.
Commencing in the latter part of 1999 and continuing through 2002 and into
the current quarter, the commercial property-casualty market place has
experienced rate increases. Virtually all areas of DBG have experienced rate
increases as well as maintaining an excellent retention rate for desired renewal
business. The vast majority of the increase in 2002 resulted from rate increases
with respect to renewed business. Overall, DBG's net premiums written increased
$5.02 billion or 49.2 percent in 2002 over 2001. These increases compared to an
increase of $2.26 billion or 28.5 percent in 2001 over 2000. DBG produced 55.5
percent of the general insurance net premiums written in 2002, 50.7 percent in
2001 and 45.3 percent in 2000.
Personal Lines' net premiums written increased 29.7 percent or $728
million in 2002 over 2001, reflecting auto insurance rate increases in many
states, compared to a decrease of 2.2 percent or $56 million in 2001 from 2000.
Foreign General insurance net premiums written increased 19.0 percent and
net premiums earned increased 12.4 percent. Foreign General insurance operations
produced 21.9 percent of the general insurance net premiums written in 2002,
25.1 percent in 2001 and 28.4 percent in 2000.
In comparing the foreign currency exchange rates used to translate the
results of AIG's foreign general operations during 2002 to those foreign
currency exchange rates used to translate AIG's Foreign General results during
2001, the U.S. dollar strengthened slightly 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 the
preparation of the consolidated financial statements, total general insurance
net premiums written were approximately 1.2 percentage points less than they
would have been if translated utilizing those foreign currency exchange rates
which prevailed during 2001.
Net premiums written are initially deferred and earned based upon the
terms of the underlying policies. The net unearned premium reserve constitutes
deferred revenues which are generally earned ratably over the policy period.
Thus, the net unearned premium reserve is not fully recognized as net premiums
earned until the end of the policy period.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
AIG, along with most general insurance entities, uses the loss ratio, the
expense ratio and the combined ratio as measures of performance. The loss ratio
is the sum of losses and loss expenses incurred divided by net premiums earned.
The expense ratio is statutory underwriting expenses divided by net premiums
written. The combined ratio is the sum of the loss ratio and the expense ratio.
These ratios are relative measurements that describe for every $100 of net
premiums earned or written, the cost of losses and statutory expenses,
respectively. The combined ratio presents the total cost per $100 of premium
production. A combined ratio below 100 demonstrates underwriting profit; a
combined ratio above 100 demonstrates underwriting loss.
THE STATUTORY GENERAL INSURANCE RATIOS, INCLUDING THE $2.8 BILLION LOSS RESERVE
CHARGE IN 2002 AND $769 MILLION OF WTC LOSSES IN 2001, WERE AS FOLLOWS:
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
Domestic General:
Loss Ratio 92.86 85.89 80.99
Expense Ratio 17.72 17.64 17.39
--------------------------------------------------------------------------------
Combined Ratio 110.58 103.53 98.38
================================================================================
Foreign General:
Loss Ratio 61.13 60.51 60.71
Expense Ratio 28.99 31.67 31.69
--------------------------------------------------------------------------------
Combined Ratio 90.12 92.18 92.40
================================================================================
Consolidated:
Loss Ratio* 85.76 79.55 75.28
Expense Ratio 20.19 21.16 21.45
--------------------------------------------------------------------------------
Combined Ratio 105.95 100.71 96.73
================================================================================
* The impact of the loss reserve charge and the WTC losses on the loss ratio
was an increase of 11.54 in 2002 and 3.97 in 2001.
AIG believes that underwriting profit is the true measure of the
performance of the core business of a general insurance company.
Underwriting profit is measured in two ways: statutory underwriting profit
and Generally Accepted Accounting Principles (GAAP) underwriting profit.
Statutory underwriting profit is arrived at by reducing net premiums
earned by net losses and loss expenses incurred and net expenses incurred.
Statutory accounting differs from GAAP, as statutory accounting, in general,
requires immediate expense recognition and ignores the matching of revenues and
expenses as required by GAAP. That is, for statutory purposes, expenses are
recognized immediately, not over the same period that the revenues are earned.
A basic premise of GAAP accounting is the recognition of expenses at the
same time revenues are earned, the principle of matching. Therefore, to convert
underwriting results to a GAAP basis, acquisition expenses are deferred
(deferred acquisition costs - DAC) and amortized over the period the related
premiums written are earned. Accordingly, the statutory underwriting profit has
been adjusted as a result of acquisition expenses being deferred as required by
GAAP. Thus, "adjusted underwriting profit" is a GAAP measurement which can be
viewed as gross margin or an intermediate subtotal in calculating operating
income and net income. DAC is reviewed for recoverability and such review
requires significant management judgment. (See also Notes 1, 2 and 4 of Notes to
Financial Statements.)
A major part of the discipline of a successful general insurance company
is to produce an underwriting profit, exclusive of investment income. If
underwriting is not profitable, losses incurred are a major factor. The result
is that the premiums are inadequate to pay for losses and expenses and produce a
profit; therefore, investment income must be used to cover underwriting losses.
If assets and the income therefrom are insufficient to pay claims and expenses
over extended periods, an insurance company cannot survive. For these reasons,
AIG views and manages its underwriting operations separately from its investment
operations. (See also the discussion under "Liquidity" herein.)
The underwriting environment varies from country to country, as does the
degree of litigation activity. Regulation, product type and competition have a
direct impact on pricing and consequently profitability as reflected by adjusted
underwriting profit and statutory general insurance ratios.
In 2002, AIG's general insurance results reflect the net impact of the
loss reserve charge of $2.8 billion with respect to accident years 1997 through
2001. Such charge was the result of AIG's annual year-end review of general
insurance loss reserves. (See also the discussion under "Loss Reserve Charge"
herein.) In addition, these results reflect the net impact of catastrophe losses
approximating $57 million in 2002, $867 million in 2001 (which include $769
million in WTC losses and $50 million with respect to the Northridge earthquake,
following the unprecedented decision by the State of California to require all
insurers to reopen claims nearly eight years after the occurrence), and $44
million in 2000. On a gross basis, incurred losses included $3.5 billion
attributable to the loss reserve charge and approximately $245 million from
catastrophes in 2002, and catastrophe losses of $2.15 billion in 2001 (which
include $2.0 billion in WTC losses), and $112 million in 2000.
With respect to catastrophe losses, AIG believes that it has taken
appropriate steps to reduce the magnitude of possible future losses. The
occurrence of one or more catastrophic events of unanticipated frequency or
severity, such as a terrorist attack, earthquake or hurricane, that causes
insured losses, however, could have a material adverse effect on AIG's results
of operations, liquidity or financial condition. Current techniques and models
may not accurately predict in the future the probability of catastrophic events
and the extent of the resulting losses. Moreover, one or more catastrophe losses
could impact negatively AIG's reinsurers and result in an inability of AIG to
collect reinsurance recoverables. The impact of losses caused by catastrophes
can fluctuate widely
26
American International Group, Inc. and Subsidiaries
from year to year, making comparisons of recurring type business more difficult.
The pro forma table below excludes the loss reserve charge in 2002, WTC losses
in 2001 and catastrophe losses in all three years in order to present comparable
results of AIG's ongoing underwriting operations.
ON THE BASIS DISCUSSED ABOVE, THE PRO FORMA CONSOLIDATED STATUTORY GENERAL
INSURANCE RATIOS WOULD BE AS FOLLOWS:
-------------------------------------------------------------------------------
2002 2001 2000
===============================================================================
Published Loss Ratio 85.76 79.55 75.28
Loss reserve charge (11.54) -- --
WTC Losses -- (3.97) --
Catastrophes (0.23) (0.50) (0.25)
-------------------------------------------------------------------------------
Pro Forma 73.99 75.08 75.03
Expense Ratio 20.19 21.16 21.45
-------------------------------------------------------------------------------
Combined Ratio 94.18 96.24 96.48
===============================================================================
AIG's historic ability to maintain its combined pro forma 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 premium growth where rates do not adequately reflect its
assessment of exposures.
GENERAL INSURANCE NET INVESTMENT INCOME in 2002 decreased 4.6 percent when
compared to 2001. In 2001, net investment income increased 7.1 percent over
2000. The decrease in net investment income in 2002 was primarily a result of
lower earnings with respect to the general insurance private equity portfolio.
Also, interest income earned from the general insurance bond portfolio was
impacted by lower yields as the proceeds from maturing fixed income securities
were reinvested. However, the cash flow resulting from the growth in net
premiums written should have a positive impact on net investment income in
future quarters. The growth in net investment income in 2001 and 2000 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 LOSSES were $858 million in 2002 and
$130 million in 2001, and realized capital gains were $38 million in 2000. These
realized gains and losses resulted from the ongoing investment management of the
general insurance 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. (See the discussion on "Valuation of Invested Assets" herein.)
THE FOLLOWING TABLE RECONCILES GENERAL INSURANCE OPERATING INCOME ON A GAAP
BASIS TO MANAGEMENT'S PRESENTATION HEREIN:
(in millions)
-------------------------------------------------------------------------------
2002 2001 2000
===============================================================================
As reported $ 667 $ 2,851 $ 3,524
Loss reserve charge 2,800 -- --
WTC losses -- 769 --
Realized capital (gains) losses 858 130 (38)
--------------------------------=----------------------------------------------
As adjusted -- Management reporting basis $ 4,325 $ 3,750 $ 3,486
================================--=============================================
GENERAL INSURANCE OPERATING INCOME in 2002 decreased 76.6 percent when
compared to 2001. This decline in the growth rate was caused by the $2.8 billion
loss reserve charge as well as the $728 million increase in realized capital
losses in 2002. If such loss reserve charge and realized capital losses were
excluded from 2002 general insurance operations and the WTC losses and realized
capital losses were excluded from 2001 general insurance operations, the growth
in 2002 when compared to 2001 would be 15.4 percent. General insurance operating
income in 2001 decreased 19.1 percent when compared to 2000 primarily due to the
WTC losses. If the WTC losses, as well as realized capital losses, were excluded
from 2001 general insurance operations and realized capital gains were excluded
from 2000 general insurance operations, the increase would be 7.6 percent to
$3.75 billion during 2001.
The contribution of general insurance operating income to income before
income taxes, minority interest and cumulative effect of accounting changes was
8.2 percent in 2002 compared to 35.0 percent in 2001 and 35.2 percent in 2000.
If the loss reserve charge in 2002 and the WTC losses in 2001 were excluded from
each year's general insurance operating income and each of these years excluded
realized capital losses or gains, as well as acquisition, restructuring and
related charges were excluded from income before income taxes, minority interest
and cumulative effect of accounting changes in 2001 and 2000, the general
insurance operating income contribution to income before income taxes, minority
interest and cumulative effect of accounting changes would be 32.3 percent, 31.5
percent and 32.7 percent in 2002, 2001 and 2000, respectively.
Reinsurance
AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise good judgment in the
selection and approval of both domestic and foreign companies participating in
its reinsurance programs. AIG insures risks in over 70 countries and its
reinsurance programs must be coordinated in order to provide AIG the level of
reinsurance protection that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
AIG'S GENERAL REINSURANCE ASSETS amounted to $28.77 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 2002 with respect to reinsurance recoverable to the extent that any
reinsurer may not be able to reimburse AIG under the terms of these reinsurance
arrangements. AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound, and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods on an individual
reinsurer basis. At December 31, 2002, approximately 40 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, the majority of these balances were collateralized. The
remaining 60 percent of the general reinsurance assets were from authorized
reinsurers and over 90 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, 2002,
AIG had allowances for unrecoverable reinsurance approximating $120 million. At
that date, AIG had no significant reinsurance recoverables from any individual
reinsurer which is financially troubled (e.g., liquidated, insolvent, in
receivership or otherwise subject to formal or informal regulatory restriction).
AIG's Reinsurance Security Department conducts ongoing detailed
assessments of the reinsurance markets and current and potential reinsurers,
both foreign and domestic. Such assessments include, but are not limited to,
identifying if a reinsurer is appropriately licensed, and has sufficient
financial capacity, and the local economic environment in which a foreign
reinsurer operates. This department also reviews the nature of the risks ceded
and the need for collateral. In addition, AIG's Credit Risk Committee reviews
the credit limits for and concentrations with any one reinsurer.
AIG enters into certain intercompany reinsurance transactions for its
general and life operations. AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All material
intercompany transactions have been eliminated in consolidation.
At December 31, 2002, the consolidated general reinsurance assets of
$28.77 billion include reinsurance recoverables for paid losses and loss
expenses of $4.19 billion and $21.19 billion with respect to the ceded reserve
for losses and loss expenses, including ceded losses incurred but not reported
(IBNR) (ceded reserves). The ceded reserves represent the accumulation of
estimates of ultimate ceded losses including provisions for ceded IBNR and loss
expenses. The methods used to determine such estimates and to establish the
resulting ceded reserves are continually reviewed and updated. Any adjustments
thereto are reflected in income currently. It is AIG's belief that the ceded
reserves at December 31, 2002 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.
Reserve for Losses and Loss Expenses
THE TABLE BELOW CLASSIFIES AS OF DECEMBER 31, 2002 THE COMPONENTS OF THE GENERAL
INSURANCE RESERVE FOR LOSSES AND LOSS EXPENSES (LOSS RESERVES) WITH RESPECT TO
MAJOR LINES OF BUSINESS ON A STATUTORY BASIS*:
(in millions)
--------------------------------------------------------------------------------
Other Liability Occurrence $14,132
Other Liability Claims Made 8,559
Workers Compensation 6,064
Auto Liability 4,290
International 2,797
Property 2,691
Reinsurance 1,591
Medical Malpractice 1,560
Aircraft 1,448
Products Liability 1,262
Accident & Health 1,009
Fidelity/Surety 875
Other 5,261
--------------------------------------------------------------------------------
Total $51,539
================================================================================
* Presented pursuant to statutory reporting requirements as prescribed by
the National Association of Insurance Commissioners.
At December 31, 2002, the loss reserves amounted to $51.54 billion. These
loss reserves represent the accumulation of estimates of ultimate losses,
including IBNR and loss expenses. Certain of these loss reserves are discounted.
These discounted reserves relate primarily to certain workers' compensation
claims. At December 31, 2002, general insurance net loss reserves increased
$4.45 billion from prior year end to $30.35 billion. The net loss reserves
represent loss reserves reduced by reinsurance recoverables, net of an allowance
for unrecoverable reinsurance. The methods used to determine such estimates and
to establish the resulting reserves are continually reviewed and updated. Any
adjustments resulting therefrom are reflected in operating income currently. It
is management's belief that the general insurance net loss reserves are adequate
to cover all general insurance net losses and loss expenses as at December 31,
2002. While AIG annually reviews the adequacy of established loss reserves,
there can be no assurance that AIG's ultimate loss reserves will not adversely
develop and materially exceed AIG's loss reserves as of December 31, 2002. In
the future, if the general insurance net loss reserves develop deficiently, such
deficiency would have an adverse impact on future results of operations. See
"Loss Reserve Charge" below.
In a very broad sense, the general loss reserves can be categorized into
two distinct groups, one group being long tail casualty lines of business. Such
lines include excess and umbrella liability, directors and officers' liability,
professional liability, medical malpractice, general liability, products'
28
American International Group, Inc. and Subsidiaries
liability, and related classes. The other group is short tail lines of business
consisting principally of property lines, personal lines and certain classes of
casualty lines.
Estimation of ultimate net losses and loss expenses (net losses) for long
tail casualty lines of business is a complex process and depends on a number of
factors, including the line and volume of the business involved. In the more
recent accident years of long tail casualty lines there is limited statistical
credibility in reported net losses. That is, a relatively low proportion of net
losses would be reported claims and expenses and an even smaller proportion
would be net losses paid. A relatively high proportion of net losses would
therefore be IBNR.
A variety of actuarial methods and assumptions are normally employed to
estimate net losses for long tail casualty lines. These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next. For the majority of
long tail casualty lines, net loss trend factors approximated six percent. Loss
trend factors reflect many items including changes in claims handling, exposure
and policy forms; current and future estimates of monetary inflation and social
inflation and increases in litigation and awards. 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, 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. See "Loss Reserve Charge" below.
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.
AIG's annual reserve review does not calculate a range of loss reserve
estimates. Because AIG's general insurance business is primarily in volatile
long tail casualty lines driven almost entirely by severity rather than
frequency of claims, developing a range around loss reserve estimates would not
be meaningful. An estimate is calculated which AIG's actuaries believe provides
a reasonable estimate of the required reserve. This amount is evaluated against
actual carried reserves.
It should also be noted that AIG's overall book of business consists of
hundreds of segments or classes of business that are individually reviewed as
part of the overall analysis of loss reserves. Most of these would fall into the
category of longer tail lines of business. Due to the multitude of such classes
and the volume of detail for each, it would not be possible to provide complete
claim frequency, settlement, closure and other data for all such segments, nor
does AIG believe that such disclosure by class of business would be meaningful
or useful to the reader. It should be noted that none of the other segments or
classes reflects the highly uncertain qualities that apply to the asbestos and
environmental claims. For example, traditional actuarial methodologies can be
applied to classes such as excess casualty, directors and officers liability,
healthcare, and the other long tail coverages that AIG writes. These
methodologies cannot be applied to asbestos and environmental exposures. Other
than asbestos and environmental exposures, there is no area of significant
exposure to AIG for which traditional actuarial methodologies cannot be applied.
For other property and short tail casualty lines, the loss trend is
implicitly assumed to develop at the rate that reported net losses develop 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.
Loss Reserve Charge
Following completion of its annual year-end net loss reserve study, AIG
increased general insurance loss and loss adjustment reserves, incurring a net,
after-tax charge of $1.8 billion in the fourth quarter of 2002.
THE TABLE BELOW CLASSIFIES THE COMPONENTS OF THE NET LOSS RESERVE CHARGE BY
ACCIDENT YEAR AND MAJOR LINE OF BUSINESS:
(in millions)
--------------------------------------------------------------------------------
Line of Accident Carried Reserves Loss Reserve
Business Year December 31, 2001 Charge
================================================================================
Other Liability Occurrence(a) 1997 $ 359 $ 175
1998 594 352
1999 766 305
2000 998 335
2001 1,895 276
--------------------------------------------------------------------------------
Total $ 1,443
--------------------------------------------------------------------------------
Other Liability Claims Made(b) 1997 $ 271 $ --
1998 444 135
1999 371 382
2000 893 185
2001 1,647 103
--------------------------------------------------------------------------------
Total $ 805
--------------------------------------------------------------------------------
Workers' Compensation(c) 1996
&Prior $ 1,102 $ 144
1997 206 58
1998 128 33
1999 214 29
2000 548 --
2001 844 30
--------------------------------------------------------------------------------
Total $ 294
--------------------------------------------------------------------------------
Medical Malpractice 1997 $ 31 $ 58
1998 48 35
1999 70 46
2000 75 19
2001 121 --
--------------------------------------------------------------------------------
Total $ 158
--------------------------------------------------------------------------------
Reinsurance 1998 $ 126 $ 33
1999 113 34
2000 158 33
--------------------------------------------------------------------------------
Total $ 100
================================================================================
Total $ 2,800
================================================================================
(a) Primarily excess casualty.
(b) Primarily directors and officers.
(c) Primarily excess workers' compensation.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In conducting its 2002 year end loss reserve analysis, AIG considered all
classes of business that could be volatile and directly incorporated that
specific class analysis into its overall results.
AIG's method for determining reserves for volatile long tail lines relies
on the use of expected loss ratios such as the method known as the
"Bornhuetter/Ferguson" method. This methodology essentially ignores all recent
accident years for which loss development is too immature to give reliable
results and, instead, bases the reserve estimate on the more mature prior
accident year results.
In its 2002 year end analysis, AIG observed that the more recent immature
accident years were showing significant increases in loss development. As a
result, AIG modified its historical assumptions in producing an estimate of
required reserves. A key modification was to give additional weight to the
actual loss development in the immature years. For example, for AIG's excess
casualty lead umbrella segment, AIG used the loss development for accident year
1999, even though that development normally would be considered too immature to
produce reliable results (and therefore, not used under historical assumptions).
Another key change for the most recent accident years (generally accident years
2000, 2001, 2002) is, although AIG continued to use actuarial assumptions that
rely on expected loss ratios (such as the Bornhuetter/Ferguson method mentioned
above), the expected loss ratio assumptions used gave far greater weight to more
recent accident year experience than was the case in the historical assumptions.
For example, for the excess casualty lead umbrella segment described above, AIG
actuaries gave 100 percent weight to the results of the 1997 through 1999
accident years only, giving no weight to the more favorable development of all
prior years, in setting expected loss ratio assumptions for accident years 2000
to 2002. Again, using the lead umbrella segment as an example, rather than using
the historical trend factor of 2.5 percent per year as actually experienced, AIG
used 7.5 percent as the annual loss cost trend factor reflecting the more
current experience.
Loss development trends for volatile long tail lines such as excess
casualty and directors and officers liability have not followed any consistent
trend. This has at times led to overstated loss ratio projections and is a key
reason why AIG has customarily utilized the historical projection (Bornhuetter/
Ferguson) method. For long tail lines, judgment is required in analyzing the
appropriate weighting of current trends to avoid overreacting to data anomalies
that may distort such current trends.
AIG's annual loss reserve review commences late in the third quarter and
is completed late in the fourth quarter of each year. Although the year end 2001
annual loss reserve review, completed approximately one year ago, did show some
indications of adverse development from most of the classes which required the
increase in 2002, at that time, the indicated amount of reserve increase needed
was immaterial. Furthermore, it was believed that the potential risk of adverse
development from those reserves was mitigated for purposes of the overall loss
development by what appeared at the time to be a potential redundancy in the
adequacy of the unearned premium reserve as of year end 2001 as premium rates
had been increased sharply in 2001. During 2002, however, there was substantial
adverse development in AIG's excess casualty and directors and officers lines of
business, as well as lesser amounts in certain other classes, including
healthcare liability. These adverse developments were significant enough to not
only cause a deficiency in the level of carried reserves, but to also suggest
that AIG's assumptions for testing its reserves needed to be modified to account
for the development in loss trends that was emerging for 1997 and subsequent
accident years (as more fully discussed above). Using the modified assumptions,
AIG's actuaries conducted further analysis of the reserves required as of
December 31, 2002. Given the accuracy of the historical approach and the
uncertainty of the more recent trends, AIG decided to give approximately equal
weight to both sets of assumptions in establishing the carried reserves as of
December 31, 2002.
Given the scope and complexity of AIG's general insurance operations and
the extensive work and time required to review reserves, AIG's annual year end
loss reserve review commences late in the third quarter. Recognition of the
adverse development occurred at the end of the fourth quarter of 2002 as this
was the quarter in which the year end 2002 loss reserve review was completed.
The year end 2001 loss reserve review indicated that AIG's carried reserves as
of year end 2001 were reasonable.
As described above, the trend AIG recognized as driving the change in the
estimate is the adverse loss cost trend which occurred beginning with accident
year 1997 and continued and accelerated in accident years 1998 and 1999. The
increase in loss trends is concentrated in high severity coverages, such as
excess casualty, excess workers' compensation, directors and officers liability,
and healthcare liability. The change in the estimate correlates with this trend.
Asbestos and Environmental Claims
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter referred to
collectively as environmental claims) and indemnity claims asserting injuries
from asbestos.
The vast majority of these asbestos and environmental claims emanate from
policies written in 1984 and prior years. AIG established over a decade ago
specialized toxic tort and environmental claim units, which investigate and
adjust all such asbestos and environmental claims. These units utilize a
comprehensive ground up approach to claim adjusting by thoroughly evaluating
each exposure on a claim by claim basis. Commencing in 1985, standard policies
contained an absolute exclusion for pollution related damage and an absolute
asbestos exclusion was also implemented. However, AIG currently underwrites
environmental impairment liability insurance on a claims made basis and has
excluded such claims from the analyses included herein.
Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and environmental claims cannot be estimated
by conventional reserving techniques as previously described. Quantitative
techniques frequently have to be supplemented by subjective considerations
including managerial judgment. Significant factors which affect the trends which
influence the development of asbestos and environmental claims are the
inconsistent court
30
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
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.
In the interim, AIG and other industry members have and will continue to
litigate the broadening judicial interpretation of the policy coverage and the
liability issues. At the current time, it is not possible to determine the
future development of asbestos and environmental claims with the same degree of
reliability as is the case for other types of claims. Such development will be
affected by the extent to which courts continue to expand the intent of the
policies and the scope of the coverage, as they have in the past, as well as by
the changes in Superfund and waste dump site coverage issues. Although the
estimated liabilities for these claims are subject to a significantly greater
margin of error than for other claims, the reserves carried for these claims at
December 31, 2002 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. In the future, if the environmental claims develop
deficiently, such deficiency would have an adverse impact on future results of
operations. (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.
In asbestos, for example, AIG has resolved all claims with respect to
miners and product manufacturers (Tier 1), for which payments are completed or
reserves are established to cover future payment obligations. Asbestos claims
with respect to products containing asbestos (Tier 2) accounts are generally
very mature losses, and have been appropriately recognized and reserved by AIG's
asbestos claims operation. AIG believes that the vast majority of the incoming
claims, with respect to products containing small amounts of asbestos and
companies in the distribution chain and parties with remote, ill-defined
involvement with asbestos (Tier 3 and 4), should not impact its coverage; this
is due to a combination of factors, including the increasingly peripheral
companies being named in asbestos litigation, smaller limits issued to
peripheral defendants, tenuous liability cases against peripheral defendants,
attachment points of the excess policies, and the manner in which resolution of
these weaker cases would be allocated among all insurers, including non-AIG
companies, over a long period of time.
A SUMMARY OF RESERVE ACTIVITY, INCLUDING ESTIMATES FOR APPLICABLE IBNR, RELATING
TO ASBESTOS AND ENVIRONMENTAL CLAIMS SEPARATELY AND COMBINED AT DECEMBER 31,
2002, 2001 AND 2000 FOLLOWS:
(in millions)
--------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
GROSS NET Gross Net Gross Net
==========================================================================================================================
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 1,114 $ 312 $ 1,100 $ 338 $ 1,093 $ 306
Losses and loss expenses incurred* 395 168 358 92 405 80
Losses and loss expenses paid* (205) (80) (344) (118) (398) (48)
--------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 1,304 $ 400 $ 1,114 $ 312 $ 1,100 $ 338
==========================================================================================================================
Environmental:
Reserve for losses and loss expenses at beginning of year $ 1,115 $ 407 $ 1,345 $ 517 $ 1,519 $ 585
Losses and loss expenses incurred* (140) (44) (41) (34) (44) (45)
Losses and loss expenses paid* (143) (67) (189) (76) (130) (23)
--------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 832 $ 296 $ 1,115 $ 407 $ 1,345 $ 517
==========================================================================================================================
Combined:
Reserve for losses and loss expenses at beginning of year $ 2,229 $ 719 $ 2,445 $ 855 $ 2,612 $ 891
Losses and loss expenses incurred* 255 124 317 58 361 35
Losses and loss expenses paid* (348) (147) (533) (194) (528) (71)
--------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 2,136 $ 696 $ 2,229 $ 719 $ 2,445 $ 855
==========================================================================================================================
* All amounts pertain to policies underwritten in prior years.
THE GROSS AND NET IBNR INCLUDED IN THE RESERVE FOR LOSSES AND LOSS EXPENSES AT
DECEMBER 31, 2002, 2001 AND 2000 WERE ESTIMATED AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
GROSS NET Gross Net Gross Net
==========================================================================================================================
Combined $ 1,022 $ 283 $ 1,038 $ 278 $ 1,042 $ 314
==========================================================================================================================
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
A SUMMARY OF ASBESTOS AND ENVIRONMENTAL CLAIMS COUNT ACTIVITY FOR THE YEARS
ENDED DECEMBER 31, 2002, 2001 AND 2000 WAS AS FOLLOWS:
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
--------------------------------- --------------------------------- ---------------------------------
ASBESTOS ENVIRONMENTAL COMBINED Asbestos Environmental Combined Asbestos Environmental Combined
====================================================================================================================================
Claims at beginning of year 6,672 9,364 16,036 6,796 11,323 18,119 6,746 13,432 20,178
Claims during year:
Opened 959 1,657 2,616 739 1,892 2,631 650 1,697 2,347
Settled (154) (546) (700) (124) (988) (1,112) (101) (584) (685)
Dismissed or
otherwise resolved (392) (1,480) (1,872) (739) (2,863) (3,602) (499) (3,222) (3,721)
------------------------------------------------------------------------------------------------------------------------------------
Claims at end of year 7,085 8,995 16,080 6,672 9,364 16,036 6,796 11,323 18,119
====================================================================================================================================
THE AVERAGE COST PER CLAIM SETTLED, DISMISSED OR OTHERWISE RESOLVED FOR THE
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 WAS AS FOLLOWS:
--------------------------------------------------------------------------------
Gross Net
================================================================================
2002
ASBESTOS $375,500 $146,500
ENVIRONMENTAL 70,600 33,100
COMBINED 135,300 57,200
================================================================================
2001
Asbestos $398,600 $136,700
Environmental 49,100 19,700
Combined 113,100 41,200
================================================================================
2000
Asbestos $663,300 $ 80,000
Environmental 34,200 6,000
Combined 119,800 16,100
================================================================================
A.M. Best, an insurance rating agency, has developed a survival ratio to
measure the number of years it would take a company to exhaust both its asbestos
and environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. This is a ratio
derived by taking the current ending losses and loss expense reserves and
dividing by the average annual payments for the prior three years. Therefore,
the ratio derived is a simplistic measure of an estimate of the number of years
it would be before the current ending losses and loss expense reserves would be
paid off using recent average payments. The higher the ratio, the more years the
reserves for losses and loss expenses cover these claims payments. These ratios
are computed based on the ending reserves for losses and loss expenses over the
respective claims settlements during the fiscal year. Such payments include
indemnity payments and legal and loss adjustment payments. It should be noted,
however, that this is an extremely simplistic approach to measuring asbestos and
environmental reserve levels. Many factors, such as aggressive settlement
procedures, mix of business and level of coverage provided, have significant
impact on the amount of asbestos and environmental losses and loss expense
reserves, ultimate payments thereof and the resultant ratio.
The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments are primarily attributable to court
judgments, court orders, covered claims with no coverage defenses, state
mandated cleanup costs, claims where AIG's coverage defenses are minimal, and
settlements made less than six months before the first trial setting. Also, AIG
considers all legal and loss adjustment payments as involuntary.
AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.
AIG'S SURVIVAL RATIOS FOR INVOLUNTARY ASBESTOS AND ENVIRONMENTAL CLAIMS,
SEPARATELY AND COMBINED, WERE BASED UPON A THREE YEAR AVERAGE PAYMENT. THESE
RATIOS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 WERE AS FOLLOWS:
--------------------------------------------------------------------------------
Gross Net
================================================================================
2002
INVOLUNTARY SURVIVAL RATIOS:
ASBESTOS 4.1 4.9
ENVIRONMENTAL 17.6 13.3
COMBINED 7.3 7.9
================================================================================
2001
Involuntary survival ratios:
Asbestos 3.3 4.3
Environmental 18.7 16.5
Combined 6.8 8.7
================================================================================
2000
Involuntary survival ratios:
Asbestos 3.6 6.8
Environmental 20.0 16.9
Combined 7.6 11.5
================================================================================
AIG's operations are negatively impacted under guarantee fund assessment
laws which exist in most states. As a result of operating in a state which has
guarantee fund assessment laws, a solvent insurance company may be assessed for
certain obligations arising from the insolvencies of other insurance companies
which operated in that state. AIG generally records these assessments upon
notice. Additionally, certain states permit at least a portion of the assessed
amount to be used as a credit against a company's future premium tax
liabilities. Therefore, the ultimate net
32
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
assessment cannot reasonably be estimated. The guarantee fund assessments net of
credits for 2002, 2001 and 2000 were $76 million, $24 million and $15 million,
respectively.
AIG is also required to participate in various involuntary pools
(principally workers' compensation business) which provide insurance coverage
for those not able to obtain such coverage in the voluntary markets. This
participation is also recorded upon notification, as these amounts cannot
reasonably be estimated.
LIFE INSURANCE OPERATIONS
AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. Traditional products consist of
individual and group life, annuity, endowment and accident and health policies.
Financial and investment products consist of fixed and variable annuities,
guaranteed investment contracts and pensions. (See also Note 2 of Notes to
Financial Statements.)
LIFE INSURANCE OPERATIONS PRESENTED ON A MAJOR PRODUCT BASIS FOR 2002, 2001 AND
2000 WERE AS FOLLOWS:
(in millions)
---------------------------------------------------------------------------------------------
2002 2001(a) 2000(a)
=============================================================================================
GAAP premiums:
Domestic:
Life Insurance $ 1,626 $ 1,515 $ 1,522
Individual Fixed Annuities(b) 42 437 380
Guaranteed Investment
Contracts 28 -- (7)
Home Service 854 876 953
Group Life/Health 967 925 969
Pension and Investment Products(b) 1,105 1,144 665
Accident & Health(c) -- 51 327
---------------------------------------------------------------------------------------------
Total Domestic 4,622 4,948 4,809
---------------------------------------------------------------------------------------------
Foreign:
Life Insurance 12,000 10,771 9,474
Personal Accident 2,491 2,196 1,924
Group Products 1,094 1,050 851
Guaranteed Investment
Contracts 113 98 105
---------------------------------------------------------------------------------------------
Total Foreign 15,698 14,115 12,354
---------------------------------------------------------------------------------------------
Total GAAP premiums $ 20,320 $ 19,063 $ 17,163
=============================================================================================
Premium income, deposits
and other considerations(d)(e):
Domestic:
Life Insurance(f) $ 2,411 $ 2,724 $ 2,256
Individual Fixed Annuities 10,328 7,605 5,079
Guaranteed Investment
Contracts 9,078 8,242 6,752
Home Service 861 878 953
Group Life/Health 976 930 969
Pension and Investment Products 1,782 3,020 2,368
Accident & Health(c) -- 157 327
---------------------------------------------------------------------------------------------
Total Domestic $ 25,436 $ 23,556 $ 18,704
=============================================================================================
Foreign:
Life Insurance 13,440 12,066 10,256
Personal Accident 2,497 2,173 1,923
Group Products 1,579 1,660 1,266
Guaranteed Investment
Contracts 5,710 4,162 6,070
---------------------------------------------------------------------------------------------
Total Foreign 23,226 20,061 19,515
---------------------------------------------------------------------------------------------
Total premium income, deposits
and other considerations $ 48,662 $ 43,617 $ 38,219
=============================================================================================
Net investment income:
Domestic:
Life Insurance $ 1,417 $ 1,329 $ 1,306
Individual Fixed Annuities 3,229 2,874 2,708
Guaranteed Investment
Contracts 2,052 1,836 1,321
Home Service 683 653 669
Group Life/Health 108 105 107
Pension and Investment
Products 836 702 662
Accident & Health(c) -- 5 8
---------------------------------------------------------------------------------------------
Total Domestic 8,325 7,504 6,781
---------------------------------------------------------------------------------------------
Foreign:
Life Insurance 3,206 2,848 2,432
Personal Accident 141 128 129
Group Products 255 227 223
Guaranteed Investment
Contracts 359 387 406
Intercompany Adjustments (12) (10) (9)
---------------------------------------------------------------------------------------------
Total Foreign 3,949 3,580 3,181
---------------------------------------------------------------------------------------------
Total net investment income $ 12,274 $ 11,084 $ 9,962
=============================================================================================
Operating income before
realized capital losses:
Domestic:
Life Insurance(g) $ 777 $ 555 $ 614
Individual Fixed Annuities 729 679 611
Guaranteed Investment
Contracts 581 445 159
Home Service 382 374 353
Group Life/Health 101 87 69
Pension and Investment
Products 118 144 150
Accident & Health(c) -- 4 23
---------------------------------------------------------------------------------------------
Total Domestic(g) 2,688 2,288 1,979
---------------------------------------------------------------------------------------------
Foreign:
Life Insurance 2,411 1,914 1,558
Personal Accident 681 572 531
Group Products 175 127 107
Guaranteed Investment
Contracts 39 38 54
Intercompany Adjustments (12) (10) (9)
---------------------------------------------------------------------------------------------
Total Foreign 3,294 2,641 2,241
---------------------------------------------------------------------------------------------
Total operating income before
realized capital losses 5,982 4,929 4,220
Realized capital losses (1,053) (254) (162)
---------------------------------------------------------------------------------------------
Total operating income(g) $ 4,929 $ 4,675 $ 4,058
=============================================================================================
Life insurance in-force:
Domestic $ 577,686 $ 517,067 $ 477,576
Foreign(h) 746,765 711,434 494,316
---------------------------------------------------------------------------------------------
Total $ 1,324,451 $ 1,228,501 $ 971,892
=============================================================================================
(a) Restated to conform to the 2002 presentation.
(b) 2001 and 2000 GAAP premiums included certain annuity products now reported
in Pension and Investment Products.
(c) Beginning 2001, certain Accident & Health operations are part of DBG.
(d) Represents a non-GAAP measurement used by AIG to help manage its life
insurance operation, and may not be comparable to similarly captioned
measurements used by other life insurance companies.
(e) Premium income, deposits and other considerations represent aggregate
business activity during the respective periods.
(f) The decline in life premiums is due primarily to lower private placement
and corporate life market sales.
(g) 2001 included WTC losses of $131 million.
(h) Increase in 2001 reflects acquisition of AIG Star Life Insurance Co., Ltd.
in April 2001.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Life Insurance Results
LIFE INSURANCE OPERATING INCOME in 2002 increased 5.4 percent to $4.93
billion compared to an increase of 15.2 percent in 2001. This decline in the
growth rate was caused by the $799 million increase in realized capital losses.
If such losses were excluded from both the 2002 and 2001 life insurance
operating income and WTC losses of $131 million excluded from 2001 life
operating income, the growth in 2002 life operating income when compared to 2001
life operating income would be 18.2 percent.
THE FOLLOWING TABLE RECONCILES THE LIFE OPERATING INCOME REPORTED ON A GAAP
BASIS TO THE PRESENTATION AIG MANAGEMENT BELIEVES IS MOST MEANINGFUL:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
As reported $4,929 $4,675 $4,058
WTC losses -- 131 --
Realized capital losses 1,053 254 162
--------------------------------------------------------------------------------
As adjusted -- Management reporting basis $5,982 $5,060 $4,220
================================================================================
The contribution of life insurance operating income to income before
income taxes, minority interest and cumulative effect of accounting changes and
excluding acquisition, restructuring and related charges amounted to 60.5
percent in 2002 compared to 46.0 percent in 2001 and 39.3 percent in 2000. The
increase in contribution percentage was influenced by the impact of the general
insurance loss reserve charge in 2002 and the WTC losses in 2001 on general
insurance operating income and its reduced contribution to income before income
taxes, minority interest and cumulative effect of accounting changes.
If the loss reserve charge and realized capital losses were excluded from
2002 income before income taxes, minority interest and cumulative effect of
accounting changes and WTC losses from 2001 and realized capital losses and
acquisition restructuring and related charges were excluded from 2001 and 2000
income before income taxes, minority interest and cumulative effect of
accounting changes, the contribution of life operating income to income before
income taxes, minority interest and cumulative effect of accounting changes
would be 44.7 percent, 42.6 percent and 39.6 percent in 2002, 2001 and 2000,
respectively.
AIG'S GAAP LIFE PREMIUM INCOME IN 2002 REPRESENTED A 6.6 PERCENT INCREASE
FROM THE PRIOR YEAR. The slowing in growth in 2002 reflected lower demand and
sales of annuities in connection with corporate pension restructuring activities
in domestic operations. This compares with an increase of 11.1 percent in 2001
over 2000. Foreign life operations produced 77.3 percent, 74.0 percent and 72.0
percent of the GAAP life premium income in 2002, 2001 and 2000, respectively.
(See also Notes 1, 4 and 6 of Notes to Financial Statements.)
The traditional life products, particularly individual life products, were
major contributors to the growth in foreign premium income. These traditional
life products, coupled with the increased distribution of financial and
investment products contributed to the growth in foreign investment income. A
mixture of traditional, accident and health and financial products are being
sold in Japan through ALICO and AIG Star Life.
Since AIG purchased AIG Star Life, a part of the income earned by AIG Star
Life has resulted from surrender charges earned on policies that were either
surrendered or lapsed. This favorable impact on operating income was anticipated
when AIG took control. As these surrenders diminish in subsequent periods,
operating income from that source will also be impacted. The majority of AIG
Star Life's future income is expected to be related to continuing premiums paid
on renewal business, and new business to be generated from a growing agency
force.
As previously discussed, the U.S. dollar strengthened slightly in relation
to most major foreign currencies in which AIG transacts business. Accordingly
for 2002, when foreign life premium income was translated into U.S. dollars for
purposes of the preparation of the consolidated financial statements, total life
premium income was approximately 1.6 percentage points less than it would have
been if translated utilizing exchange rates prevailing in 2001.
LIFE INSURANCE NET INVESTMENT INCOME increased 10.7 percent in 2002
compared to an increase of 11.3 percent in 2001. The growth in net investment
income was attributable to both foreign and domestic new cash flow for
investment. The new cash flow was generated from life insurance operations and
included the compounding of previously earned and reinvested net investment
income. (See also the discussion under "Liquidity" herein.)
LIFE INSURANCE REALIZED CAPITAL LOSSES were $1.05 billion in 2002, $254
million in 2001 and $162 million in 2000. These realized capital losses resulted
from the ongoing investment management of the life insurance portfolios within
the overall objectives of the life insurance operations and arose primarily from
the disposition of equity securities and available for sale fixed maturities as
well as redemptions of fixed maturities. (See also the discussion on "Valuation
of Invested Assets" herein.)
Underwriting and Investment Risk
The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk. The risk associated with the
financial and investment contract products is primarily investment risk.
Underwriting risk represents the exposure to loss resulting from the
actual policy experience adversely emerging in comparison to the assumptions
made in the product pricing associated with mortality, morbidity, termination
and expenses. AIG's foreign life companies limit their maximum underwriting
exposure on traditional life insurance of
34
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
a single life to approximately $1.5 million dollars of coverage and AIG's
domestic life companies, limit their maximum underwriting exposure on
traditional life insurance of a single life to $2.5 million of coverage by using
yearly renewable term reinsurance. (See also Note 5 of Notes to Financial
Statements and the discussion under "Liquidity" herein.)
The investment risk represents the exposure to loss resulting from the
cash flows from the invested assets, primarily long-term fixed rate investments,
being less than the cash flows required to meet the obligations of the expected
policy and contract liabilities and the necessary return on investments. (See
also the discussion under "Liquidity" herein.)
To minimize its exposure to investment risk, AIG tests the cash flows from
the invested assets and the policy and contract liabilities using various
interest rate scenarios to assess whether there is a liquidity excess or
deficit. If a rebalancing of the invested assets to the policy and contract
claims became necessary and did not occur, a demand could be placed upon
liquidity. (See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, even though certain
territories lack qualified long-term investments or there are investment
restrictions imposed by the local regulatory authorities. For example, in Japan
and several Southeast Asia territories, the duration of the investments is often
for a shorter period than the effective maturity of the related policy
liabilities. Therefore, there is a risk that the reinvestment of the proceeds at
the maturity of the initial investments may be at a yield below that of the
interest required for the accretion of the policy liabilities. Additionally,
there exists a future investment risk associated with certain policies currently
in force which will have premium receipts in the future. That is, the investment
of these future premium receipts may be at a yield below that required to meet
future policy liabilities.
To maintain an adequate yield to match the interest necessary to support
future policy liabilities, constant management focus is required to reinvest the
proceeds of the maturing securities and to invest the future premium receipts
while continuing to maintain satisfactory investment quality.
To the extent permitted under local regulation, AIG may invest in
qualified longer-term securities outside Japan to achieve a closer matching in
both duration and the required yield. AIG is able to manage any asset-liability
duration difference through maintenance of sufficient global liquidity and to
support any operational shortfall through its international financial network.
(See also the discussion under "Liquidity" herein.)
The asset-liability relationship is appropriately managed in AIG's
domestic operations, as there is ample supply of qualified long-term
investments.
AIG uses asset-liability matching as a management tool worldwide to
determine the composition of the invested assets and appropriate marketing
strategies. As a part of these strategies, AIG may determine that it is
economically advantageous to be temporarily in an unmatched position due to
anticipated interest rate or other economic changes.
For the ALICO operations in Japan, the variable life contract separate
account fund performance has varied from the level assumed in the original
pricing of the product. Thus, a general account liability has been established
for the potential shortfall of future contract revenues. The ultimate liability
is predominately dependent upon the fund performance in the future.
Deferred policy acquisition costs (DAC) for life insurance products arises
from the deferral of those costs that vary with, and are directly related to,
the acquisition of new or renewal business. Policy acquisition costs for
traditional life insurance products are generally deferred and amortized over
the premium paying period of the policy. Policy acquisition costs which relate
to universal life and investment-type products (non-traditional life products)
are deferred and amortized, with interest, in relation to the historical and
future incidence of estimated gross profits to be realized over the estimated
lives of the contracts. Estimated gross profits include investment income and
gains and losses on investments less interest required as well as other charges
in the contract less actual mortality and expenses. Current experience and
changes in the expected future gross profits are analyzed to determine the
impact on the amortization of DAC. The estimation of projected gross profits
requires significant management judgment. The elements with respect to the
current and projected gross profits are reviewed and analyzed quarterly and are
appropriately adjusted.
DAC for both traditional life and non-traditional life products are
subject to review for recoverability, which involve estimating the future
profitability of current business. This review also involves significant
management judgment. (See also Note 4 of Notes to Financial Statements.)
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
FINANCIAL SERVICES OPERATIONS
AIG's financial services subsidiaries engage in diversified financial
products and services including aircraft leasing, consumer and insurance premium
financing, and capital markets structuring and market-making activities. (See
also Note 2 of Notes to Financial Statements.)
FINANCIAL SERVICES OPERATIONS FOR 2002, 2001 AND 2000 WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
Revenues:
ILFC (a) $ 2,845 $ 2,613 $ 2,441
AIGFP (b) 1,306 1,178 1,056
Consumer Finance (c) 2,473 2,560 2,325
Other 191 134 132
--------------------------------------------------------------------------------
Total $ 6,815 $ 6,485 $ 5,954
================================================================================
Operating income:
ILFC $ 801 $ 749 $ 654
AIGFP 808 758 648
Consumer Finance 549 505 386
Other, including intercompany adjustments 31 (21) (22)
--------------------------------------------------------------------------------
Total $ 2,189 $ 1,991 $ 1,666
================================================================================
(a) Revenues were primarily from aircraft lease rentals.
(b) Revenues were primarily fees from proprietary positions entered into in
connection with counterparty transactions.
(c) Revenues were primarily finance charges.
FINANCIAL SERVICES RESULTS
FINANCIAL SERVICES OPERATING INCOME increased 9.9 percent in 2002 over
2001. This compares with an increase of 19.5 percent in 2001 over 2000.
Financial services operating income represented 26.9 percent of AIG's
income before income taxes, minority interest and cumulative effect of
accounting changes and excluding acquisition, restructuring and related charges
in 2002. This compares to 19.6 percent and 16.1 percent in 2001 and 2000,
respectively. The increase in contribution percentage was influenced by the
impact of the general insurance loss reserve charge in 2002 and the WTC losses
in 2001 on general insurance operating income and its reduced contribution to
income before income taxes, minority interest and cumulative effect of
accounting changes.
ILFC generates its revenues primarily from leasing commercial jet aircraft
to domestic and foreign airlines. Revenues also result from the remarketing of
commercial jets for its own account, for airlines and for financial
institutions. Revenues in 2002 increased 8.9 percent from 2001 compared to an
7.0 percent increase during 2001 from 2000. The revenue growth in each year
resulted primarily from the increase in flight equipment under operating lease
and the increase in the relative cost of the leased fleet. ILFC has historically
derived over 80 percent of its lease revenues with respect to flight equipment
from airlines based outside the United States and is not significantly exposed
to current domestic airline difficulties.
ILFC has historically re-leased aircraft returning at the end of a lease
before the aircraft returns to ILFC. For aircraft returning before the end of
their lease terms, ILFC has generally been able to re-lease aircraft returned
from the prior lessee within two to three months of its return. As a lessor,
ILFC considers an aircraft "idle" or "off lease" when the aircraft is not
subject to a signed lease agreement or signed letter of intent. ILFC had one
aircraft off lease at December 31, 2002 which had been off lease for less than
three months. No impairments have been recognized related to these aircraft as
ILFC believes that the existing service potential of the aircraft in ILFC's
portfolio has not been diminished and ILFC has been able to re-lease the
aircraft without diminution in lease rates from those previously obtained that
would require an impairment write-down.
ILFC management is very active in the airline industry. Management
formally reviews regularly, and no less frequently than quarterly, issues
affecting ILFC's fleet, including events and circumstances that may cause
impairment of aircraft values. Management evaluates aircraft in the fleet as
necessary, based on these events and circumstances in accordance with Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144). No impairments have been recognized
related to these aircraft. (See also the discussions under "Liquidity" herein.)
During 2002, ILFC's operating income increased 6.9 percent from 2001 and
14.6 percent during 2001 from 2000. ILFC finances its purchases of aircraft
primarily through the issuance of a variety of debt instruments. The composite
borrowing rates at December 31, 2002, 2001 and 2000 were 4.73 percent, 5.07
percent and 6.37 percent, respectively. (See also the discussions under "Capital
Resources" and "Liquidity" herein and Note 2 of Notes to Financial Statements.)
ILFC is exposed to operating loss and liquidity strain through
non-performance of aircraft lessees, through owning aircraft which it would be
unable to sell or re-lease at acceptable rates at lease expiration and through
committing to purchase aircraft which it would be unable to lease. ILFC manages
its lessee non-performance exposure through credit reviews and security deposit
requirements. As a result of these measures and its own contingency planning,
ILFC did not suffer any material losses from airline shutdowns in the aftermath
of the September 11 terrorist attacks, but there can be no assurance that ILFC
will successfully manage the risks relating to the impact of possible future
deterioration in the airline industry. Approximately 86 percent of ILFC's fleet
is leased to non-U.S. carriers, and this fleet, the most efficient in the
airline industry, continues to be in high demand from such carriers. (See also
the discussions under "Capital Resources" and "Liquidity" herein.)
AIGFP participates in the derivatives dealer market conducting, primarily
as principal, an interest rate, currency, equity and credit derivative products
business. AIGFP also enters into structured transactions including long-dated
36
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
forward foreign exchange contracts, option transactions, liquidity facilities
and investment agreements and invests in a diversified portfolio of securities.
AIGFP derives substantially all its revenues from proprietary positions entered
in connection with counterparty transactions rather than from speculative
transactions.
As a dealer, AIGFP marks its transactions daily to fair value. Thus, a
gain or loss on each transaction is recognized daily. AIGFP hedges the market
risks arising from its transactions. Therefore, revenues and operating income
are not significantly exposed to or affected by market fluctuations and
volatility. Revenues of AIGFP and the percentage change in revenues for any
given period are significantly affected by the number and size of transactions
entered into by AIGFP during that period relative to those entered into during
the prior period. Operating income and the percentage change in operating income
for any period are determined by the number, size and profitability of the
transactions attributable to that period relative to those attributable to the
prior period. The realization of operating income as measured by the receipt of
funds is not a significant event as the profit or loss on each of AIGFP's
transactions has already been reflected in operating income. Revenues in 2002
increased 10.9 percent from 2001 compared to a 11.6 percent increase during 2001
from 2000. During 2002, operating income increased 6.6 percent from 2001 and
increased 17.0 percent during 2001 from 2000. As AIGFP is a transaction-oriented
operation, current and past revenues and operating results may not provide a
basis for predicting future performance.
THE BREAKDOWN BY PERCENTAGE CONTRIBUTION OF REVENUES AND OPERATING INCOME FOR
AIGFP IN 2002, 2001 AND 2000 IS SET FORTH BELOW. THE PERCENTAGES FOR OPERATING
INCOME ARE THE SAME AS THOSE FOR REVENUES BECAUSE EXPENSES ARE ALLOCATED ACROSS
ALL PRODUCTS IN PROPORTION TO THE REVENUES GENERATED BY THAT PRODUCT. MATERIAL
CHANGES IN THE DISTRIBUTION OF REVENUES AND OPERATING INCOME ARE NOT MEANINGFUL
BECAUSE OF THE TRANSACTIONAL NATURE OF AIGFP'S BUSINESS.
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
Spread Income on Investments and Borrowings 48% 36% 32%
Interest Rate Products 19 29 30
Equity Linked Products 3 14 25
Credit Linked Products 29 11 12
Other revenue 1 10 1
================================================================================
Financial market conditions in 2002 compared with 2001 were characterized
by a continuing decline in interest rates across fixed income markets globally,
a worldwide slump in credit prices with the concomitant widening of credit
spreads, and a continuing decline in equity valuations. AIGFP's results in 2002
compared with 2001 reflected a shift in product segment activity to respond to
these conditions. In particular, AIGFP experienced increases in demand for
credit linked products that addressed the risk management needs of its
counterparties (see also the discussion under "Derivatives" herein). The
increase in spread income on investments and borrowings reflected the widening
of credit spreads, as well as an increase in asset class diversification.
Finally, the sharp decline in equity linked products reflected substantially
reduced demand for products that hedge appreciated equity positions.
Derivative transactions are entered into in the ordinary course of AIGFP's
business. Therefore, income on interest rate, equity and credit derivatives
along with their related hedges are recorded on a mark to market value or at
estimated fair value where market prices are not readily available with the
resulting unrealized gains or losses reflected in the income statement in the
current year. In 2002, less than five percent of revenues resulted from
transactions valued at estimated fair value. The mark to fair value of
derivative transactions is reflected in the balance sheet in the captions
"Unrealized gain on interest rate and currency swaps, options and forward
transactions" and "Unrealized loss on interest rate and currency swaps, options
and forward transactions". The unrealized gain represents the net receivable
from counterparties, and the unrealized loss represents the net payable to
counterparties. These amounts will change from one period to the next due to
changes in interest rates, currency rates, equity prices and other market
variables, as well as cash movements, execution of new transactions and the
maturing of existing transactions. Spread income on investments and borrowings
are recorded on an accrual basis over the life of the transaction. Investments
are classified as available for sale securities and are marked to market with
the resulting gains or losses reflected in the equity section.
The most significant component of AIGFP's operating expenses is
compensation, which approximated 36 percent, 31 percent and 31 percent of
revenues in 2002, 2001 and 2000, respectively.
Domestically, AIG's consumer finance operations derive a substantial
portion of their revenues from finance charges assessed on outstanding mortgages
and finance receivables from the sub-prime market, while overseas operations are
engaged in developing a multi-product consumer finance business with an emphasis
on emerging markets. Revenues in 2002 decreased 3.4 percent from 2001 compared
to a 10.1 percent increase during 2001 from 2000, but 2002 operating income
increased 8.9 percent from 2001 and 30.8 percent during 2001 from 2000. The
decline in revenues was the result of lower yields on the finance receivables,
but borrowing costs also declined significantly so that spreads, and therefore
profits, increased as a result. The growth in revenues during 2001 was generally
due to the growth in the average finance receivables. The increases in operating
income resulted from the growth in finance charges inuring from larger loan
balances and improved credit quality of the receivables portfolio, partially
offset by lower yields on finance receivables in 2001. (See also the discussions
under "Capital Resources" and "Liquidity" herein.)
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Consumer finance operations are exposed to loss when contractual payments
are not received; collection exposure is managed through the mix of types of
loans and security thereon. (See also Notes 8 and 9 of Notes to Financial
Statements.)
RETIREMENT SAVINGS & ASSET MANAGEMENT OPERATIONS
AIG's retirement savings & asset management operations offer a wide variety of
investment products, including variable annuities and mutual funds, as well as
investment services, including investment asset management. Such products and
services are offered to individuals and institutions both domestically and
overseas.
For variable annuities, AIG's policy has been to adjust amortization
assumptions for deferred acquisition costs (DAC) when estimates of current or
future gross profits to be realized from these contracts are revised. With
respect to variable annuities sold domestically (representing the vast majority
of AIG's variable annuity business), the assumption for the long-term annual net
growth rate of the equity markets used in the determination of DAC amortization
is approximately 10 percent. A methodology referred to as "reversion to the
mean" is used to maintain this long-term net growth rate assumption, while
giving consideration to short-term variations in equity markets.
A number of guaranteed minimum death benefits (GMDB) and other similar
benefits are offered on variable annuities. GMDB-related contract benefits
incurred, net of reinsurance were $77 million, $20 million and $3 million for
2002, 2001 and 2000, respectively. The significant increase in 2002 is directly
related to the worldwide slump in equity markets. In accordance with GAAP, AIG
expenses these benefits in the period incurred. With respect to the other
benefits, substantially all of AIG's policy obligations are reinsured.
RETIREMENT SAVINGS & ASSET MANAGEMENT OPERATIONS FOR 2002, 2001 AND 2000 WERE AS
FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
Revenues:
AIG VALIC $2,133 $2,110 $2,230
AIG SunAmerica 563 652 750
Other* 789 950 485
--------------------------------------------------------------------------------
Total $3,485 $3,712 $3,465
================================================================================
Operating income:
AIG VALIC $ 730 $ 630 $ 692
AIG SunAmerica 32 185 326
Other* 254 273 90
--------------------------------------------------------------------------------
Total $1,016 $1,088 $1,108
================================================================================
* Includes AIG Global Investment Group, John McStay Investment Counsel, L.P.
and certain overseas variable annuity operations.
Retirement Savings & Asset Management Results
RETIREMENT SAVINGS & ASSET MANAGEMENT OPERATING INCOME decreased 6.6
percent in 2002 from 2001, reflecting the continued volatility in worldwide
equity markets. This compares with a decrease of 1.8 percent in 2001 from 2000.
Retirement savings & asset management operating income represented 12.5
percent of AIG's income before income taxes, minority interest and cumulative
effect of accounting changes and excluding acquisition, restructuring and
related charges. This compares to 10.7 percent in both 2001 and 2000.
At December 31, 2002, AIG's third party assets under management, including
both retail mutual funds and institutional accounts, approximated $40 billion.
OTHER OPERATIONS
Other realized capital losses amounted to $530 million, $452 million and $190
million in 2002, 2001 and 2000, respectively.
Other income (deductions)-net includes income generated by the investment
of capital held by AIG SunAmerica outside of its life insurance subsidiaries,
AIG's equity in certain minor majority-owned subsidiaries and certain
partially-owned companies, realized foreign exchange transaction gains and
losses in substantially all currencies and unrealized gains and losses in
hyperinflationary currencies, as well as the income and expenses of the parent
holding company and other miscellaneous income and expenses. Other income
(deductions)-net amounted to $(129) million, $3 million and $172 million in
2002, 2001 and 2000, respectively. This decline was primarily the result of
weaker performance of
38
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
AIG SunAmerica investments in partnerships and private equities and 21st
Century's third quarter 2002 pre-tax charge of $37 million to write off
capitalized costs associated with a software development project. Acquisition,
restructuring and related charges of $2.02 billion were incurred in 2001 in
connection with the acquisition of AGC, including $654 million paid by AGC in
connection with the termination of AGC's merger agreement with Prudential plc.
Charges of $315 million in 2000 were incurred by AGC in connection with
acquisitions by AGC prior to its acquisition by AIG. (See also Note 19 of Notes
to Financial Statements.)
Income before income taxes and minority interest amounted to $8.14 billion
in 2002. Income before income taxes, minority interest and cumulative effect of
accounting changes amounted to $8.14 billion in 2001. Income before income taxes
and minority interest amounted to $10.02 billion in 2000.
In 2002, AIG recorded a provision for income taxes of $2.33 billion
compared to the provisions of $2.34 billion and $2.97 billion in 2001 and 2000,
respectively. These provisions represent effective tax rates of 28.6 percent in
2002, 28.7 percent in 2001 and 29.6 percent in 2000. (See Note 3 of Notes to
Financial Statements.)
Minority interest represents minority shareholders' equity in income of
certain majority-owned consolidated subsidiaries. Minority interest amounted to
$295 million, $301 million and $413 million in 2002, 2001 and 2000,
respectively.
Income before the cumulative effect of accounting changes amounted to
$5.52 billion in 2002, $5.50 billion in 2001 and $6.64 billion in 2000.
Net income amounted to $5.52 billion in 2002, $5.36 billion in 2001 and
$6.64 billion in 2000. The increase in 2002 and the decrease in 2001 in net
income over the three year period resulted from those factors described above.
CAPITAL RESOURCES
At December 31, 2002, AIG had total capital funds of $59.10 billion and total
borrowings of $71.89 billion. At that date, $64.98 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
Borrowings
TOTAL BORROWINGS AND BORROWINGS NOT GUARANTEED OR MATCHED AT DECEMBER 31, 2002
AND 2001 WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
December 31, 2002 2001
================================================================================
GIAs -- AIGFP $14,850 $16,392
--------------------------------------------------------------------------------
Commercial Paper:
ILFC (a) 4,213 3,494
AGF (a) 2,956 4,853
AIG Funding, Inc. 1,645 902
AIG Credit Card Company (Taiwan) (a) 234 68
AIG Finance (Taiwan) Limited (a) 64 107
AGC -- 2,468
--------------------------------------------------------------------------------
Total 9,112 11,892
--------------------------------------------------------------------------------
Medium Term Notes:
AGF (a) 7,719 4,100
ILFC (a) 4,970 4,809
AIG 998 542
--------------------------------------------------------------------------------
Total 13,687 9,451
--------------------------------------------------------------------------------
Notes and Bonds Payable:
AIGFP 16,940 13,920
ILFC (a) (b) 9,825 7,073
AGF (a) 2,266 2,201
AIG 1,608 1,577
AGC 1,542 1,340
--------------------------------------------------------------------------------
Total 32,181 26,111
--------------------------------------------------------------------------------
Loans and Mortgages Payable:
AIGCFG (a) 735 885
AIG 697 345
ILFC (a) (c) 261 365
AIG Finance (Hong Kong) Limited (a) 229 290
Other subsidiaries (a) 133 --
--------------------------------------------------------------------------------
Total 2,055 1,885
--------------------------------------------------------------------------------
Total Borrowings 71,885 65,731
--------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 33,605 28,245
Matched GIA borrowings -- AIGFP 14,850 16,392
Matched notes and bonds payable -- AIGFP 16,526 12,185
--------------------------------------------------------------------------------
64,981 56,822
--------------------------------------------------------------------------------
Remaining borrowings of AIG $ 6,904 $ 8,909
================================================================================
(a) AIG does not guarantee these borrowings.
(b) Includes borrowings under Export Credit Facility of $2.09 billion.
(c) Capital lease obligations.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
AT DECEMBER 31, 2002, THE COMMERCIAL PAPER ISSUED AND OUTSTANDING WAS AS
FOLLOWS:
(dollars in millions)
--------------------------------------------------------------------------------
UNAMORTIZED WEIGHTED WEIGHTED
NET DISCOUNT AVERAGE AVERAGE
BOOK AND ACCRUED FACE INTEREST MATURITY
VALUE INTEREST AMOUNT RATE IN DAYS
================================================================================
ILFC $4,213 $ 6 $4,219 1.46% 35
AGF 2,956 3 2,959 1.43 33
Funding 1,645 1 1,646 1.45 20
AIGCCC --
Taiwan* 234 1 235 2.61 31
AIGF --
Taiwan* 64 -- 64 4.09 60
--------------------------------------------------------------------------------
Total $9,112 $ 11 $9,123 -- --
================================================================================
* Issued in Taiwan N.T. dollars at prevailing local interest rates.
See also Note 9 of Notes to Financial Statements.
During 2002, AIGFP increased the aggregate principal amount outstanding of
its notes and bonds payable to $16.94 billion. AIGFP uses the proceeds from the
issuance of notes and bonds and GIA borrowings to invest in a diversified
portfolio of securities and derivative transactions. The funds may also be
temporarily invested in securities purchased under agreements to resell. (See
also the discussions under "Operational Review", "Liquidity" and "Derivatives"
herein and Notes 1, 2, 8, 9, and 12 of Notes to Financial Statements.)
AIG Funding, Inc. (Funding), through the issuance of commercial paper,
helps fulfill the short-term cash requirements of AIG and its subsidiaries.
Funding intends to continue to meet AIG's funding requirements through the
issuance of commercial paper guaranteed by AIG. The issuance of Funding's
commercial paper is subject to the approval of AIG's Board of Directors.
ILFC and A.I. Credit Corp. (AICCO), AIG Credit Card Company (Taiwan) --
(AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited -- (AIGF-Taiwan), both consumer
finance subsidiaries in Taiwan, AGC and AGF have issued commercial paper for the
funding of their own operations. At December 31, 2002, AIG did not guarantee the
commercial paper of any of its subsidiaries other than Funding. On July 8, 2002,
AGC ceased issuing commercial paper under its program. AGC's funding
requirements are now being met through Funding's commercial paper program. (See
also the discussion under "Derivatives" herein and Note 9 of Notes to Financial
Statements.)
AIG and Funding are parties to unsecured syndicated revolving credit
facilities (collectively, the Facility) aggregating $2.75 billion. The Facility
consists of $1.375 billion in a short-term revolving credit facility and $1.375
billion in a five year revolving credit facility. The Facility can be used for
general corporate purposes and also to provide backup for Funding's commercial
paper programs. There are currently no borrowings outstanding under the
Facility, nor were any borrowings outstanding as of December 31, 2002.
AGF is a party to unsecured syndicated revolving credit facilities
aggregating $3.0 billion. The facilities consist of $1.5 billion in a short-term
revolving credit facility and $1.5 billion in a five year revolving credit
facility, which support AGF's commercial paper borrowings. There are currently
no borrowings under these facilities, nor were any borrowings outstanding as of
December 31, 2002. AGF had $4.3 billion in aggregate principal amount of debt
securities registered and available for issuance at December 31, 2002. AGF uses
the proceeds from the issuance of notes and bonds for the funding of its finance
receivables.
As of November 2001, AIG guaranteed the notes and bonds of AGC. During
2002, AGC issued $200 million in notes which matured in March 2003. These notes
are included in Notes and Bonds Payable in the preceding table of borrowings.
ILFC is a party to unsecured syndicated revolving credit facilities
aggregating $3.15 billion to support its commercial paper program. The
facilities consist of $2.15 billion in a short-term revolving credit facility
and $1.0 billion in a three year revolving credit facility. There are currently
no borrowings under these facilities, nor were any borrowings outstanding as of
December 31, 2002.
At December 31, 2002, ILFC had increased the aggregate principal amount
outstanding of its medium term and long-term notes to $14.80 billion, a net
increase of $2.91 billion, and recorded a net decline in its capital lease
obligations of $104 million and a net increase in its commercial paper of $719
million. ILFC had $6.08 billion of debt securities registered for public sale at
December 31, 2002. During the second quarter of 2002, ILFC expanded its Euro
Medium Term Note Program from $2.0 billion to $4.0 billion, under which $2.31
billion in notes were sold through December 31, 2002. Notes issued under this
program are included in Notes and Bonds Payable in the preceding table of
borrowings.
ILFC had a $4.3 billion Export Credit Facility for use in connection with
the purchase of approximately 75 aircraft delivered through 2001. This facility
was guaranteed by various European Export Credit Agencies. The interest rate
varies from 5.75 percent to 5.90 percent on these borrowings depending on the
delivery date of the aircraft. At December 31, 2002, ILFC had $2.09 billion
outstanding under this facility. The debt is collateralized by a pledge of the
shares of a subsidiary of ILFC, which holds title to the aircraft financed under
the facility. Borrowings with respect to this facility are included in Notes and
Bonds Payable in the preceding table of borrowings.
The proceeds of ILFC's debt financing are primarily used to purchase
flight equipment, including progress payments during the construction phase. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight
40
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
equipment and the rollover and refinancing of the prior debt. (See also the
discussions under "Operational Review" and "Liquidity" herein.)
AIGFP has established a Euro Medium Term Note Program under which an
aggregate principal amount of up to $4.0 billion of notes may be issued. As of
December 31, 2002, $2.09 billion of notes had been issued under the program, all
of which are currently outstanding. Notes issued under this program are included
in Notes and Bonds Payable in the preceding table of borrowings.
During 2002, AIG issued $504 million principal amount of Medium Term
Notes, and $48 million of previously issued notes matured. At December 31, 2002,
AIG had $140 million in aggregate principal amount of debt securities registered
for issuance from time to time.
On November 9, 2001, AIG received proceeds of approximately $1 billion
from the issuance of Zero Coupon Convertible Senior Debentures Due 2031 with an
aggregate principal amount at maturity of approximately $1.52 billion.
Commencing January 1, 2002, the debentures are convertible into shares of AIG
common stock at a conversion rate of 6.0627 shares per $1,000 principal amount
of debentures if AIG common stock trades at certain levels for certain time
periods. The debentures are callable by AIG on or after November 9, 2006. Also,
holders can require AIG to repurchase these debentures once every five years.
Capital Funds
AIG's capital funds increased $6.95 billion during 2002. Unrealized
appreciation of investments, net of taxes increased $3.15 billion. During 2002,
the cumulative translation adjustment loss, net of taxes, increased $381
million. The change for 2002 with respect to the unrealized appreciation of
investments, net of taxes, was primarily impacted by the decrease in domestic
interest rates. The 2001 transfer of bonds in the held to maturity at amortized
cost to the bonds available for sale at market value in accordance with the
transition provisions of Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities," resulted in a
gain of $339 million recorded in the statement of comprehensive income as a
cumulative effect of an accounting change adjustment. The 2001 capital funds
included a cumulative effect of an accounting change adjustment gain of $150
million. During 2002, there was a loss of $293 million, net of taxes relating to
derivative contracts designated as cash flow hedging instruments. (See also the
discussion under "Operational Review" and "Liquidity" herein, Notes 1(y) and
8(d) of Notes to Financial Statements and the Consolidated Statement of
Comprehensive Income.) During 2002, retained earnings increased $5.05 billion,
resulting from net income less dividends.
Stock Repurchase
During 2002, AIG repurchased in the open market 10,858,000 shares of its
common stock. During 2003 through March 20, 2003 AIG repurchased in the open
market an additional 1,625,000 shares of its common stock. AIG intends to
continue to buy its common shares in the open market for general corporate
purposes, including to satisfy its obligations under various employee benefit
plans.
Dividends from Insurance Subsidiaries
Payments of dividends to AIG by its insurance subsidiaries are subject to
certain restrictions imposed by statutory authorities. AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes such
continued reinvestment in the future will be adequate to meet any foreseeable
capital needs. However, AIG may choose from time to time to raise additional
funds through the issuance of additional securities. At December 31, 2002, there
were no significant statutory or regulatory issues which would impair AIG's
financial condition, results of operations or liquidity, but there can be no
assurance that such issues will not arise in the future. To AIG's knowledge, no
AIG company is on any regulatory or similar "watch list". (See also the
discussion under "Liquidity" herein and Note 11 of Notes to Financial
Statements.)
Regulation and Supervision
AIG's insurance subsidiaries, in common with other insurers, are subject
to regulation and supervision by the states and jurisdictions in which they do
business. The National Association of Insurance Commissioners (NAIC) has
developed Risk-Based Capital (RBC) requirements. RBC relates an individual
insurance company's statutory surplus to the risk inherent in its overall
operations. At December 31, 2002, the adjusted capital of each of AIG's domestic
general companies and of each of AIG's domestic life companies exceeded each of
their RBC standards. Federal, state or local legislation may affect AIG's
ability to operate and expand its various financial services businesses and
changes in the current laws, regulations or interpretations thereof may have a
material adverse effect on these businesses.
A substantial portion of AIG's general insurance business and a majority
of its life insurance business are conducted in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification and revocation. Thus, AIG's insurance subsidiaries could be
prevented from conducting future business in certain of the jurisdictions where
they currently operate. AIG's international operations include operations in
various developing nations. Both current and future foreign operations could be
adversely affected by unfavorable political developments up to and including
nationalization of AIG's operations without compensation. Adverse effects
resulting from any one country may impact AIG's results of operations, liquidity
and financial condition depending on the magnitude of the event and AIG's net
financial exposure at that time in that country.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Contractual Obligations and
Other Commercial Commitments
THE MATURITY SCHEDULE OF AIG'S CONTRACTUAL OBLIGATIONS AT DECEMBER 31, 2002 WAS
AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------------------
DECEMBER 31, 2002 PAYMENTS DUE BY PERIOD
----------------- ----------------------------------------------------------
2004 2006 REMAINING
THROUGH THROUGH YEARS AFTER
TOTAL 2003 2005 2007 2007
============================================================================================
Borrowings* $62,773 $22,468 $13,485 $ 8,410 $18,410
Operating Leases 2,105 477 594 318 716
Aircraft Purchase Commitments 29,816 4,430 9,807 9,354 6,225
Other Long-Term Obligations:
ILFC 853 391 462 -- --
Other 152 17 46 39 50
--------------------------------------------------------------------------------------------
Total $95,699 $27,783 $24,394 $18,121 $25,401
============================================================================================
*Excludes commercial paper and includes ILFC's capital lease obligations.
THE MATURITY SCHEDULE OF AIG'S OTHER COMMERCIAL COMMITMENTS AT DECEMBER 31, 2002
WAS AS FOLLOWS:
(in millions)
---------------------------------------------------------------------------------------
AMOUNT OF COMMITMENT EXPIRATION
------------------------------------------------------
TOTAL LESS
AMOUNTS THAN 1 1-3 4-5 AFTER 5
COMMITTED YEAR YEARS YEARS YEARS
=======================================================================================
Letters of Credit:
AIGFP $ 811 $ 16 $ 9 $ 5 $ 781
Other 397 137 241 -- 19
Guarantees:
AIG SunAmerica 5,103 118 2,137 -- 2,848
Other 663 473 66 20 104
Other Commercial Commitments:
AIGFP (a) 4,232 3 12 337 3,880
ILFC (b) 2,109 232 706 816 355
AIG SunAmerica 1,144 228 458 458 --
Other 1,103 532 303 194 74
---------------------------------------------------------------------------------------
Total $15,562 $1,739 $3,932 $1,830 $8,061
=======================================================================================
(a) Primarily liquidity facilities provided in connection with certain
municipal swap transactions.
(b) Primarily in connection with options to acquire aircraft.
Special Purpose Vehicles
AIG uses special purposes vehicles (SPVs) primarily in connection with
certain guaranteed investment contract programs (GIC Programs) written by its
life insurance subsidiaries, certain products provided by AIGFP, and certain
invested asset and asset management activities.
In the GIC Programs, AIG's life insurance subsidiaries (principally
SunAmerica Life Insurance Company) provide guaranteed investment contracts
(GICs) to SPVs which are not controlled by AIG. The SPVs issue notes or bonds
which are sold to third party institutional investors. Neither AIG nor the
insurance company issuing the GICs has any obligation to the investors in the
notes or bonds. The proceeds from the securities issued by the SPV are invested
by the SPV in the GICs. The insurance company subsidiaries use their proceeds to
invest in a diversified portfolio of securities, primarily investment grade
bonds (see also the discussion under "Liquidity: Insurance Invested Assets").
Both the assets and the liabilities of the insurance companies arising from
these GIC Programs are presented in AIG's consolidated balance sheet. Thus, at
December 31, 2002, approximately $29 billion of policyholders' contract deposits
represented liabilities from issuances of GICs included in these GIC Programs,
offset by the proceeds from the issuances, which are included as insurance
invested assets.
AIGFP uses SPVs as an integral part of its ongoing operations with respect
to specific structured transactions with independent third parties. In most
instances, AIGFP controls and manages the assets and liabilities with respect to
these SPVs, subject to certain transaction specific limitations. These SPVs are
fully consolidated by AIG (see the discussions of AIGFP under "Operations
Review: Financial Services Operations"). AIGFP also sponsors an SPV that issues
commercial paper and secured liquidity notes to third-party institutional
investors. This SPV uses the proceeds of these offerings to obtain beneficial
interests in certain financial assets (total assets of approximately $900
million),
42
American International Group, Inc. and Subsidiaries
which serve as collateral for the securities issued by the SPV. AIGFP provides
credit and liquidity support to this SPV, which is not consolidated by AIG.
AIG's insurance operations also invest in assets of SPVs. These SPVs are
established by unrelated third parties. Investments include collateralized
mortgage backed securities and similar securities backed by pools of mortgages,
consumer receivables or other assets. The investment in an SPV allows AIG's
insurance entities to purchase assets permitted by insurance regulations while
maximizing the return on these assets.
AIG provides investment management services to certain SPVs. AIG receives
management fees for these services and may take a minority ownership interest in
these SPVs, which interests are then included as investments in AIG's
consolidated balance sheet. AIG services may be terminated with or without
cause.
To facilitate and expand certain retirement savings and asset management
activities, AIG establishes SPVs. AIG receives fees for management of the assets
held in the SPV which support the issuance of securities such as collateralized
bond obligations sold by the SPV to independent third party investors. These
SPVs serve a variety of business purposes, including financing, liquidity, or to
facilitate independent third party management participation.
AIG has established stringent guidelines with respect to the formation of
and investment in SPVs. (See also the discussion under "Accounting Standards"
herein.)
LIQUIDITY
AIG's liquidity is primarily derived from the operating cash flows of its
general and life insurance operations.
At December 31, 2002, AIG's consolidated invested assets included $8.16
billion of cash and short-term investments. Consolidated net cash provided from
operating activities in 2002 amounted to $18.69 billion.
Sources of funds considered in meeting the objectives of AIG's financial
services operations include guaranteed investment agreements, issuance of
long-term and short-term debt, maturities and sales of securities available for
sale, securities sold under repurchase agreements, trading liabilities,
securities and spot commodities sold but not yet purchased, issuance of equity,
and cash provided from such operations. AIG's strong capital position is
integral to managing this liquidity, as it enables AIG to raise funds in diverse
markets worldwide. (See also the discussion under "Capital Resources" herein.)
Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.
The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated approximately $40.3 billion in
pre-tax cash flow during 2002. Cash flow includes periodic premium collections,
including policyholders' contract deposits, cash flows from investment
operations and paid loss recoveries less reinsurance premiums, losses, benefits,
and acquisition and operating expenses. Generally, there is a time lag from when
premiums are collected and, when as a result of the occurrence of events
specified in the policy, the losses and benefits are paid. AIG's insurance
investment operations generated approximately $12.5 billion in investment income
cash flow during 2002. Investment income cash flow is primarily derived from
interest and dividends received and includes realized capital gains net of
realized capital losses. (See also the discussions under "Operational Review:
General Insurance Operations" and "Life Insurance Operations" herein.)
With respect to general insurance operations, if paid losses accelerated
beyond AIG's ability to fund such paid losses from current operating cash flows,
AIG would need to liquidate a portion of its general insurance investment
portfolio and/or arrange for financing. Potential events causing such a
liquidity strain could be the result of several catastrophic events occurring in
a relatively short period of time. Additional strain on liquidity could occur if
the investments sold to fund such paid losses were sold into a depressed market
place and/or reinsurance recoverable on such paid losses became uncollectible or
collateral supporting such reinsurance recoverable significantly decreased in
value. (See also the discussions under "Operational Review: General Insurance
Operations" herein.)
With respect to life insurance operations, if a substantial portion of the
life insurance operations bond portfolio diminished significantly in value
and/or defaulted, AIG would need to liquidate other portions of its life
insurance investment portfolio and/or arrange financing. Potential events
causing such a liquidity strain could be the result of economic collapse of a
nation or region in which AIG life insurance operations exist, nationalization,
terrorist acts or other such economic or political upheaval. (See also the
discussions under "Operational Review: Life Insurance Operations" herein.)
In addition to the combined insurance pre-tax operating cash flow, AIG's
insurance operations held $6.88 billion in cash and short-term investments at
December 31, 2002. Operating cash flow and the cash and short-term balances held
provided AIG's insurance operations with a significant amount of liquidity.
This liquidity is available, among other things, to purchase predominately
high quality and diversified fixed income securities and, to a lesser extent,
marketable equity securities, and to provide mortgage loans on real estate,
policy loans and collateral loans. This cash flow coupled with proceeds of
approximately $120 billion from the maturities, sales and redemptions of fixed
income securities and from the sale of equity securities was used to purchase
approximately $158 billion of fixed income securities and marketable equity
securities during 2002.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INVESTED ASSETS
THE FOLLOWING TABLE IS A SUMMARY OF AIG'S INVESTED ASSETS BY SIGNIFICANT
SEGMENT, INCLUDING INVESTMENT INCOME DUE AND ACCRUED OF $4.30 BILLION AND $3.68
BILLION AND REAL ESTATE OF $3.30 BILLION AND $2.65 BILLION, AT DECEMBER 31, 2002
AND 2001, RESPECTIVELY:
(dollars in millions)
--------------------------------------------------------------------------------
INVESTED PERCENT
ASSETS OF TOTAL
================================================================================
2002
GENERAL INSURANCE $ 55,478 12.8%
LIFE INSURANCE 259,138 59.9
FINANCIAL SERVICES 114,878 26.6
OTHER 2,868 0.7
--------------------------------------------------------------------------------
TOTAL $432,362 100.0%
================================================================================
2001
General insurance $ 43,159 11.8%
Life insurance 213,776 58.6
Financial services 104,295 28.6
Other 3,722 1.0
--------------------------------------------------------------------------------
Total $364,952 100.0%
================================================================================
INSURANCE INVESTED ASSETS
THE FOLLOWING TABLES SUMMARIZE THE COMPOSITION OF AIG'S INSURANCE INVESTED
ASSETS BY INSURANCE SEGMENT, INCLUDING INVESTMENT INCOME DUE AND ACCRUED AND
REAL ESTATE, AT DECEMBER 31, 2002 AND 2001:
(dollars in millions)
-----------------------------------------------------------------------------------------------------------------------
PERCENT DISTRIBUTION
GENERAL LIFE PERCENT --------------------
DECEMBER 31, 2002 INSURANCE INSURANCE TOTAL OF TOTAL DOMESTIC FOREIGN
-----------------------------------------------------------------------------------------------------------------------
FIXED MATURITIES AT MARKET VALUE (a) $35,990 $206,003 $241,993 76.9% 69.1% 30.9%
EQUITY SECURITIES, AT MARKET VALUE (b) 3,928 2,931 6,859 2.2 53.4 46.6
MORTGAGE LOANS ON REAL ESTATE, POLICY AND
COLLATERAL LOANS 35 18,901 18,936 6.0 68.8 31.2
SHORT-TERM INVESTMENTS, INCLUDING TIME DEPOSITS,
AND CASH 1,833 5,048 6,881 2.2 42.5 57.5
REAL ESTATE 488 2,367 2,855 0.9 24.8 75.2
INVESTMENT INCOME DUE AND ACCRUED 729 3,489 4,218 1.4 64.2 35.8
SECURITIES LENDING COLLATERAL 7,249 16,445 23,694 7.5 75.8 24.2
OTHER INVESTED ASSETS 5,226 3,954 9,180 2.9 82.1 17.9
-----------------------------------------------------------------------------------------------------------------------
TOTAL $55,478 $259,138 $314,616 100.0% 68.6% 31.4%
=======================================================================================================================
(a) Includes $981 million of bond trading securities, at market value.
(b) Includes $1.58 billion of non-redeemable preferred stocks, at market
value.
(dollars in millions)
----------------------------------------------------------------------------------------------------------------------------
Percent Distribution
General Life Percent --------------------
December 31, 2001 Insurance Insurance Total of Total Domestic Foreign
============================================================================================================================
Fixed maturities at market value (a) $29,602 $169,750 $199,352 77.6% 68.8% 31.2%
Equity securities, at market value (b) 4,568 3,139 7,707 3.0 53.9 46.1
Mortgage loans on real estate, policy and collateral
loans 58 17,975 18,033 7.0 68.0 32.0
Short-term investments, including time deposits, and
cash 1,620 5,287 6,907 2.7 49.3 50.7
Real estate 410 2,106 2,516 1.0 21.5 78.5
Investment income due and accrued 573 3,001 3,574 1.4 63.9 36.1
Securities lending collateral 992 9,581 10,573 4.1 74.9 25.1
Other invested assets 5,336 2,937 8,273 3.2 82.2 17.8
----------------------------------------------------------------------------------------------------------------------------
Total $43,159 $213,776 $256,935 100.0% 68.0% 32.0%
============================================================================================================================
(a) Includes $842 million of bond trading securities, at market value.
(b) Includes $1.72 billion of non-redeemable preferred stocks, at market
value.
44
American International Group, Inc. and Subsidiaries
Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.
FIXED MATURITY INVESTMENTS
With respect to fixed maturities, AIG's general strategy is to invest in high
quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities. (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)
The fair value of the fixed maturity available for sale portfolio is
subject to decline as interest rates rise and subject to increase as interest
rates decline. Such changes in fair value are presented as a component of
comprehensive income in unrealized appreciation of investments, net of taxes.
The fixed maturities held to maturity portfolio were transferred to bonds
available for sale, at market value as at January 1, 2001 as permitted and in
accordance with the transition provisions of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FAS 133).
(See Note 1(y) of Notes to Financial Statements.)
CREDIT QUALITY
At December 31, 2002, approximately 69 percent of the fixed maturities
investments were domestic securities. Approximately 33 percent of such domestic
securities were rated AAA by one or more of the principal rating agencies.
Approximately 10 percent were below investment grade or not rated.
A significant portion of the foreign insurance fixed income portfolio is
rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar
credit quality rating services are not available in all overseas locations. AIG
annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At December 31, 2002, approximately 16
percent of the foreign fixed income investments were either rated AAA or, on the
basis of AIG's internal analysis, were equivalent from a credit standpoint to
securities so rated. Approximately 11 percent were below investment grade or not
rated at that date. A large portion of the foreign insurance fixed income
portfolio are sovereign fixed maturity securities supporting the policy
liabilities in the country of issuance.
Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date.
EQUITY INVESTMENTS
AIG invests in equities for various reasons, including diversifying its overall
exposure to interest rate risk. Equity securities are subject to declines in
fair value. Such declines in fair value are presented in unrealized appreciation
of investments, net of taxes as a component of comprehensive income.
VALUATION OF INVESTED ASSETS
The valuation of invested assets involves obtaining a market value for each
security. The source for the market value is generally from market exchanges,
with the exception of non-traded securities. Another aspect of valuation
pertains to impairment.
As a matter of policy, the determination that a security has incurred an
other-than-temporary decline in value and the amount of any loss recognition
requires the judgment of AIG's management and a continual review of its
investments.
In general, a security is considered a candidate for impairment if it
meets any of the following criteria:
- Trading at a significant discount to par, amortized cost (if lower)
or cost for an extended period of time;
- The occurrence of a discrete credit event resulting in (i) the
issuer defaulting on a material outstanding obligation; or (ii) the
issuer seeking protection from creditors under the bankruptcy laws
or any similar laws intended for the court supervised reorganization
of insolvent enterprises; or (iii) the issuer proposing a voluntary
reorganization pursuant to which creditors are asked to exchange
their claims for cash or securities having a fair value
substantially lower than par value of their claims; or
- In the opinion of AIG's management, it is unlikely that AIG will
realize a full recovery on its investment, irrespective of the
occurrence of one of the foregoing events.
Once a security has been identified as potentially impaired, the amount of
such impairment is determined by reference to that security's contemporaneous
market price. However, the market price following a significant credit event of
any issuer may be volatile after such an event. Factors such as market
liquidity, hedge fund activity, sensitivity to "headline" risk, and the widening
of bid/ask spreads contribute to price volatility. Because of such volatility,
the market price may not be indicative of the fair value of such an investment;
and consequently, not indicative of a reasonable estimate of realizable value.
AIG has the ability to hold any security to its stated maturity.
Therefore, the decision to sell reflects the judgment of AIG's management that
the security sold is unlikely to provide, on a relative value basis, as
attractive a return in the future as alternative securities entailing comparable
risks. With respect to distressed securities, the sale decision reflects
management's judgment that the risk-discounted anticipated ultimate recovery is
less than the value achievable on sale.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As a result of these policies, AIG recorded in 2002 impairment losses net
of taxes of approximately $795 million, of which $305 million was recognized in
the three months ended December 31, 2002.
The most significant impairment charge for any single credit for 2002 was
approximately $231 million net of tax with respect to AIG's holdings in WorldCom
Inc. (WorldCom). This charge was recorded in the quarter ended June 30, 2002.
Excluding AIG's holdings in WorldCom for 2002, no impairment charge with
respect to any one single credit was significant to AIG's consolidated financial
condition or results of operations and no individual impairment loss exceeded
approximately 1.4 percent of consolidated net income for 2002. At December 31,
2002, AIG believes that the circumstances which caused WorldCom's fair value to
significantly decline were not characteristic of AIG's other holdings.
AIG measured the impairment charge with respect to WorldCom by reference
to the market price of the WorldCom securities as of June 30, 2002.
Excluding the impairments noted above, the changes in market value for
AIG's available for sale portfolio, which constitutes the vast majority of AIG's
investments, were recorded in equity as unrealized gains or losses.
At December 31, 2002, the unrealized losses after taxes of the fixed
maturity securities were approximately $2.7 billion. At December 31, 2002, the
unrealized losses after taxes of the equity securities portfolio were
approximately $650 million.
At December 31, 2002, aggregate unrealized gains after taxes were $9.6
billion and aggregate unrealized losses after taxes were $3.4 billion. No single
issuer accounted for more than three percent of the unrealized losses.
At December 31, 2002, the fair value of AIG's fixed maturities and equity
securities aggregated to approximately $250.4 billion. Of this aggregate fair
value, approximately 1.4 percent represented securities trading at or below 75
percent of amortized cost or cost.
The impact on net income of unrealized losses after taxes will be further
mitigated upon realization, because certain realized losses will be charged to
participating policy-holder accounts, or realization will result in current
decreases in the amortization of certain deferred acquisition costs.
AT DECEMBER 31, 2002, THE UNREALIZED LOSSES AFTER TAXES FOR FIXED MATURITY
SECURITIES AND EQUITY SECURITIES INCLUDED THE FOLLOWING INDUSTRY CONCENTRATIONS:
(in millions)
--------------------------------------------------------------------------------
UNREALIZED LOSSES
CONCENTRATION AFTER TAXES
================================================================================
INVESTMENT GRADE:
Airline related $199
Cable and Media $ 28
Energy $153
Telecommunications $ 55
--------------------------------------------------------------------------------
NOT RATED AND BELOW INVESTMENT GRADE:
Airline related $131
Cable and Media $ 76
Energy $492
Telecommunications $111
================================================================================
THE AMORTIZED COST OF FIXED MATURITIES AVAILABLE FOR SALE IN AN UNREALIZED LOSS
POSITION AT DECEMBER 31, 2002, BY CONTRACTUAL MATURITY, IS SHOWN BELOW:
(in millions)
--------------------------------------------------------------------------------
AMORTIZED
COST
================================================================================
Due in one year or less $ 1,180
Due after one year through five years 7,096
Due after five years through ten years 12,144
Due after ten years 14,517
--------------------------------------------------------------------------------
Total $34,937
================================================================================
In the twelve months ended December 31, 2002, the pre-tax realized losses
incurred with respect to the sale of fixed maturities and equity securities were
$4.1 billion. The aggregate fair value of securities sold was $65.4 billion,
which was approximately 94 percent of amortized cost. The average period of time
that securities sold at a loss during the quarter and twelve months ended
December 31, 2002 were trading continuously at a price below book value was
approximately eight months.
46
American International Group, Inc. and Subsidiaries
THE "AGING" OF PRE-TAX UNREALIZED LOSS POSITIONS AT DECEMBER 31, 2002, IS SHOWN
BELOW:
(dollars in millions)
--------------------------------------------------------------------------------
NUMBER BOOK UNREALIZED NUMBER
OF MONTHS VALUE LOSSES* OF ITEMS
================================================================================
INVESTMENT GRADE BONDS
0-6 $16,980 $ 917 1,054
7-12 3,852 275 275
>12 5,455 774 513
--------------------------------------------------------------------------------
BELOW INVESTMENT GRADE BONDS
0-6 $ 2,397 $ 433 347
7-12 2,404 524 270
>12 3,849 1,234 470
--------------------------------------------------------------------------------
TOTAL BONDS
0-6 $19,377 $ 1,350 1,401
7-12 6,256 799 545
>12 9,304 2,008 983
================================================================================
EQUITIES
0-6 $ 1,029 $ 217 536
7-12 1,515 591 469
>12 686 217 341
================================================================================
* As more fully described above, upon realization, certain realized losses will
be charged to participating policyholder accounts, or realization will result
in a current decrease in the amortization of certain deferred acquisition
costs.
Note: At December 31, 2002, aggregate pre-tax unrealized gains were $14.7
billion.
As stated previously, the valuation for AIG's investment portfolio comes
from a market exchange, with the exception of non-traded securities. AIG
considers non-traded securities to mean certain fixed income investments,
certain structured securities, direct private equities, limited partnerships and
hedge funds. The aggregate carrying value of these securities at December 31,
2002 was approximately $29.6 billion.
The methodology used to estimate fair value of non-traded fixed income
investments is by reference to traded securities with similar attributes and
using a matrix pricing methodology. This technique takes into account such
factors as the industry, the security's rating and tenor, its coupon rate, its
position in the capital structure of the issuer, and other relevant factors. The
change in fair value is recognized as a component of unrealized appreciation.
For certain structured securities, the carrying value is based on an
estimate of the security's future cash flows pursuant to the requirements of
Emerging Issues Task Force Issue No. 99-20 "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets." The change in carrying value is recognized in income.
Direct private equities, hedge funds and limited partnerships in which AIG
holds in the aggregate less than a five percent interest, are carried at fair
value. The change in fair value is recognized as a component of Other
comprehensive income.
With respect to hedge funds and limited partnerships in which AIG holds in
the aggregate a five percent or greater interest, AIG's carrying value is the
net asset value. The changes in such net asset values are recorded in income.
AIG obtains the fair value of its investments in limited partnerships and
hedge funds from information provided by the sponsors of each of these
investments, the accounts of which are generally audited on an annual basis.
Each of these investment categories is regularly tested to determine if
impairment in value exists. Various valuation techniques are used with respect
to each category in this determination.
MORTGAGE INVESTMENTS
Mortgage loans on real estate, policy and collateral loans comprised 6.0 percent
of AIG's insurance invested assets at December 31, 2002. AIG's insurance
operations' holdings of real estate mortgages amounted to $11.45 billion of
which 86.9 percent was domestic. At December 31, 2002, only a nominal amount was
in default. It is AIG's practice to maintain a maximum loan to value ratio of 75
percent at loan origination. At December 31, 2002, AIG's insurance holdings of
collateral loans amounted to $1.44 billion, all of which were foreign. It is
AIG's strategy to enter into mortgage and collateral loans as an adjunct
primarily to life insurance fixed maturity investments. AIG's policy loans
increased from $5.79 billion at December 31, 2001 to $6.05 billion at December
31, 2002.
SHORT-TERM INVESTMENTS
Short-term investments represent amounts invested in various internal and
external money market funds, time deposits and cash held.
REAL ESTATE INVESTMENTS
AIG's real estate investment properties are primarily occupied by AIG's various
operations. The current market value of these properties considerably exceeds
their carrying value.
OTHER INVESTMENTS
Other invested assets were primarily comprised of limited partnerships and
outside managed funds.
When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as end users. (See
also the discussion under "Derivatives" herein.)
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent. These barriers generally cause only minor delays in the outward
remittance of the funds.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Managing Market Risk
AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.
AIG believes that statistical models alone do not provide a reliable
method of monitoring and controlling market risk. While VaR models are
relatively sophisticated, the quantitative market risk information generated is
limited by the assumptions and parameters established in creating the related
models. Therefore, such models are tools and do not substitute for the
experience or judgment of senior management.
AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.
Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately.
As a result, AIG manages separately the invested assets of each. Accordingly,
the VaR analysis was separately performed for the general and the life insurance
operations.
AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of December 31, 2002 and December 31, 2001. AIG uses the
historical simulation methodology which entails re-pricing all assets and
liabilities under explicit changes in market rates within a specific historical
time period. In this case, the most recent three years of historical market
information for interest rates, foreign exchange rates, and equity index prices
were used to construct the historical scenarios. For each scenario, each
transaction was re-priced. Portfolio, business unit and finally AIG-wide
scenario values were then calculated by netting the values of all the underlying
assets and liabilities. The final VaR number represents the maximum potential
loss incurred by these scenarios with 95 percent confidence (i.e., only 5
percent of historical scenarios show losses greater than the VaR figure). A one
month holding period was assumed in computing the VaR figure.
THE FOLLOWING TABLE PRESENTS THE VAR ON A COMBINED BASIS AND OF EACH COMPONENT
OF MARKET RISK FOR EACH OF AIG'S INSURANCE SEGMENTS AS OF DECEMBER 31, 2002 AND
DECEMBER 31, 2001. VAR WITH RESPECT TO COMBINED OPERATIONS CANNOT BE DERIVED BY
AGGREGATING THE INDIVIDUAL RISK OR SEGMENT AMOUNTS PRESENTED HEREIN.
(in millions)
--------------------------------------------------------------------------------
GENERAL
INSURANCE LIFE INSURANCE
----------------- ---------------------
2002 2001 2002 2001
================================================================================
Market Risk:
Combined $809 $779 $1,798 $1,804
Interest rate 413 425 1,507 1,631
Currency 66 34 166 134
Equity 798 710 975 627
================================================================================
THE FOLLOWING TABLE PRESENTS THE AVERAGE, HIGH AND LOW VARS ON A COMBINED BASIS
AND OF EACH COMPONENT OF MARKET RISK FOR EACH OF AIG'S INSURANCE SEGMENTS AS OF
DECEMBER 31, 2002 AND DECEMBER 31, 2001.
(in millions)
-----------------------------------------------------------------------------------
2002 2001
AVERAGE HIGH LOW Average High Low
===================================================================================
General Insurance:
Market Risk:
Combined $ 778 $ 863 $ 643 $ 797 $ 837 $ 744
Interest rate 410 425 399 449 464 425
Currency 49 66 34 46 59 34
Equity 740 822 599 741 812 603
Life Insurance:
Market Risk:
Combined $1,876 $1,979 $1,798 $1,572 $1,804 $1,354
Interest rate 1,695 1,874 1,507 1,512 1,631 1,364
Currency 130 166 108 216 373 134
Equity 770 975 627 430 627 332
===================================================================================
48
American International Group, Inc. and Subsidiaries
FINANCIAL SERVICES INVESTED ASSETS
THE FOLLOWING TABLE IS A SUMMARY OF THE COMPOSITION OF AIG'S FINANCIAL SERVICES
INVESTED ASSETS AT DECEMBER 31, 2002 AND 2001. (SEE ALSO THE DISCUSSIONS UNDER
"OPERATIONAL REVIEW: FINANCIAL SERVICES OPERATIONS", "CAPITAL RESOURCES" AND
"DERIVATIVES" HEREIN.)
(dollars in millions)
------------------------------------------------------------------------------------------------------
2002 2001
--------------------- ---------------------
INVESTED PERCENT Invested Percent
ASSETS OF TOTAL Assets of Total
======================================================================================================
Flight equipment primarily under operating leases,
net of accumulated depreciation $ 26,867 23.4% $ 22,710 21.8%
Finance receivables, net of allowance 15,857 13.8 13,955 13.4
Unrealized gain on interest rate and currency swaps,
options and forward transactions 15,376 13.4 11,493 11.0
Securities available for sale, at market value 16,687 14.5 17,801 17.1
Trading securities, at market value 4,146 3.6 5,733 5.5
Securities purchased under agreements to resell, at
contract value 25,560 22.2 21,638 20.7
Trading assets 4,786 4.2 6,234 6.0
Spot commodities, at market value 489 0.4 352 0.3
Other, including short-term investments 5,110 4.5 4,379 4.2
------------------------------------------------------------------------------------------------------
Total $114,878 100.0% $104,295 100.0%
======================================================================================================
As previously discussed, the cash used for the purchase of flight
equipment is derived primarily from the proceeds of ILFC's debt financings. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. During 2002, ILFC acquired
flight equipment costing $5.30 billion. (See also the discussion under
"Operational Review: Financial Services Operations" and "Capital Resources"
herein.)
At December 31, 2002, ILFC had committed to purchase 523 aircraft
deliverable from 2003 through 2010 at an estimated aggregate purchase price of
$29.8 billion and had options to purchase 18 aircraft deliverable from 2003
through 2008 at an estimated aggregate purchase price of $1.3 billion.
Subsequent to December 31, 2002, ILFC cancelled delivery of four of the 523
aircraft. As of March 20, 2003, ILFC has entered into leases for 86 of 90
aircraft to be delivered in 2003 and 49 of 82 aircraft to be delivered in 2004
and 26 of 347 aircraft to be delivered subsequent to 2004. ILFC will be required
to find customers for any aircraft presently on order and any aircraft to be
ordered, and it must arrange financing for portions of the purchase price of
such equipment. In a rising interest rate environment, ILFC negotiates higher
lease rates on any new contracts. ILFC has been successful to date both in
placing its new aircraft on lease or under sales contract and obtaining adequate
financing, but there can be no assurance that such success will continue in
future environments.
ILFC is exposed to market risk and the risk of loss of fair value and
possible liquidity strain resulting from adverse fluctuations in interest rates.
As of December 31, 2002 and December 31, 2001, AIG statistically measured the
loss of fair value through the application of a VaR model. In this analysis, the
net fair value of ILFC was determined using the financial instrument assets
which included the tax adjusted future flight equipment lease revenue and the
financial instrument liabilities which included the future servicing of the
current debt. The estimated impact of the current derivative positions was also
taken into account.
AIG calculated the VaR with respect to the net fair value of ILFC using
the historical simulation methodology, as previously described. As of December
31, 2002 and December 31, 2001, the VaR with respect to the net fair value of
ILFC was approximately $20 million and $10 million, respectively.
AIG's Consumer Finance operations provide a wide variety of consumer
finance products both domestically and overseas. Such products include real
estate mortgages, consumer loans, and retail sales finance. These products are
funded through various borrowings including commercial paper and medium term
notes. AIG's Consumer Finance operations are exposed to credit risk and risk of
loss resulting from adverse fluctuations in interest rates. Over half of the
loan balance is related to real estate loans which are substantially
collateralized by the related properties.
With respect to credit losses, the allowance for finance receivable losses
is maintained at a level considered adequate to absorb anticipated credit losses
existing in that portfolio.
AIGFP's derivative transactions are carried at market value or at
estimated fair value when market prices are not readily available. AIGFP reduces
its economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were required to sell or close out the transactions prior to
maturity. AIG believes that the impact of any such limited
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
liquidity would not be significant to AIG's financial condition or its overall
liquidity. (See also the discussion under "Operational Review: Financial
Services Operations" and "Derivatives" herein.)
AIGFP uses the proceeds from the issuance of notes and bonds and GIA
borrowings to invest in a diversified portfolio of securities, including
securities available for sale, at market, and derivative transactions. The funds
may also be temporarily invested in securities purchased under agreements to
resell. The proceeds from the disposal of the aforementioned securities
available for sale and securities purchased under agreements to resell have been
used to fund the maturing GIAs or other AIGFP financings. (See also the
discussion under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At December
31, 2002, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. AIGFP has also
entered into credit derivative transactions to hedge its credit risk associated
with $66 million of these securities. Securities deemed below investment grade
at December 31, 2002 amounted to approximately $100 million in fair value
representing 0.6 of one percent of the total AIGFP securities available for
sale. $30 million of this amount is hedged with a credit derivative. There have
been no significant downgrades through March 1, 2003. Securities purchased under
agreements to resell are treated as collateralized transactions. AIGFP takes
possession of or obtains a security interest in securities purchased under
agreements to resell. AIGFP further minimizes its credit risk by monitoring
counterparty credit exposure and, when AIGFP deems necessary, it requires
additional collateral to be deposited. Trading securities, at market value are
marked to market daily and are held to meet the short-term risk management
objectives of AIGFP.
AIGFP is exposed to credit risk. If its securities available for sale
portfolio were to suffer significant default and the collateral held declined
significantly in value with no replacement or the credit default swap
counterparty failed to perform, AIGFP could have a liquidity strain. AIG
guarantees AIGFP's debt and, as a result, is responsible for all of AIGFP's
obligations.
AIG Trading Group Inc. (AIGTG) conducts, as principal, market making and
trading activities in foreign exchange, and commodities, primarily precious and
base metals. AIGTG owns inventories in the commodities in which it trades and
may reduce the exposure to market risk through the use of swaps, forwards,
futures and option contracts. AIGTG uses derivatives to manage the economic
exposure of its various trading positions and transactions from adverse
movements of interest rates, foreign currency exchange rates and commodity
prices. AIGTG supports its trading activities largely through trading
liabilities, unrealized losses on swaps, short-term borrowings, securities sold
under agreements to repurchase and securities and commodities sold but not yet
purchased. (See also the discussions under "Capital Resources" and "Derivatives"
herein.)
THE GROSS UNREALIZED GAINS AND GROSS UNREALIZED LOSSES OF AIGFP AND AIGTG
INCLUDED IN THE FINANCIAL SERVICES ASSETS AND LIABILITIES AT DECEMBER 31, 2002
WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
================================================================================
Securities available for sale, at market value (a) $ 761 $ 789
Unrealized gain/loss on interest rate and currency swaps,
options and forward transactions (b) (c) 15,376 11,265
Trading assets 9,271 7,685
Spot commodities, at market value -- 13
Trading liabilities -- 1,602
Securities and spot commodities sold but not yet
purchased, at market value -- 204
================================================================================
(a) See also Note 8(e) of Notes to Financial Statements.
(b) These amounts are also presented as the respective balance sheet amounts.
(c) At December 31, 2002, AIGTG's replacement values with respect to interest
rate and currency swaps were $440 million.
AIGFP's interest rate and currency risks on securities available for sale,
at market, are managed by taking offsetting positions on a security by security
basis, thereby offsetting a significant portion of the unrealized appreciation
or depreciation. At December 31, 2002, the unrealized gains and losses remaining
after the benefit of the offsets were $62 million and $90 million, respectively.
Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, at market value are marked to market daily with the
unrealized gain or loss being recognized in income at that time. These
securities are held to meet the short-term risk management objectives of AIGFP
and AIGTG.
The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.
AIG actively manages the exposures to limit potential losses, while
maximizing the rewards afforded by these business opportunities. In doing so,
AIG must continually manage a variety of exposures including credit, market,
liquidity, operational and legal risks.
50
American International Group, Inc. and Subsidiaries
Managing Market Risk
Market risk arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
exchange rates, and equity and commodity prices. AIG generally controls its
exposure to market risk by taking offsetting positions. AIG's philosophy with
respect to its financial services operations is to minimize or set limits for
open or uncovered positions that are to be carried. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk below.)
AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This department determines whether AIG's market risks, as well as
those market risks of individual subsidiaries, are within the parameters
established by AIG's senior management. Well established market risk management
techniques such as sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain subsidiaries are managed
and hedged by that subsidiary.
AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.
AIGFP is exposed to market risk due to changes in and volatility of
foreign currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.
AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.
AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market risk exposure. AIGFP values its
portfolio, including interest rate swaps, currency swaps, equity swaps,
swaptions, options and forwards, at market value or estimated fair value when
market values are not readily available. Unrealized gains and losses, with
respect to this portfolio are reflected in income currently. These valuations
represent an assessment of the present values of expected future cash flows of
AIGFP's transactions and may include reserves for such risks as are deemed
appropriate by AIGFP's and AIG's management. AIGFP evaluates the portfolio's
discounted cash flows with reference to current market conditions, maturities
within the portfolio and other relevant factors. Estimated fair values are based
upon the use of valuation models. These models utilize, among other things,
market liquidity and current interest, foreign exchange and volatility rates.
AIGFP attempts to secure reliable and independent current market prices, such as
published exchange prices, external subscription services such as from Bloomberg
or Reuters or third party broker quotes for use in this model. When such prices
are not available, AIGFP uses an internal methodology which includes
interpolation or extrapolation from verifiable prices nearest to the dates of
the transactions. Historically, actual results have not materially deviated from
these models. These valuation models are integrated into the evaluation of the
portfolio, as described above, in order to provide timely information for the
market risk management of the portfolio. Based upon this evaluation, AIGFP
determines what, if any, offsetting transactions are necessary to reduce the
market risk exposure of the portfolio. AIG manages its market risk with a
variety of transactions, including swaps, trading securities, futures and
forward contracts and other transactions as appropriate. The recorded values of
these transactions may be different than the values that might be realized if
AIGFP were required to sell or close out the transactions prior to maturity. AIG
believes that such differences are not significant to the results of operations,
financial condition or liquidity. Such differences would be immediately
recognized when the transactions are sold or closed out prior to maturity.
Additionally, depending upon the changes in interest rates and other
market movements during the day, AIGFP's system will produce reports for
management's consideration for intra-day offsetting positions. Overnight, the
system generates reports which recommend the types of offsets management should
consider for the following day. Additionally, AIGFP operates in major business
centers overseas and is essentially open for business 24 hours a day. Thus, the
market exposure and offset strategies are monitored, reviewed and coordinated
around the clock. Therefore, offsetting adjustments can be made as and when
necessary from any AIGFP office in the world.
As part of its monitoring and controlling of its exposure to market risk,
AIGFP applies various testing techniques which reflect potential market
movements. These techniques vary by currency and are regularly changed to
reflect factors affecting the derivatives portfolio. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges. This review includes an
examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables. AIGFP's management may change
these measures to reflect
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
their judgment and evaluation of the dynamics of the markets. This management
group will also determine whether additional or alternative action is required
in order to manage the portfolio.
All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.
AIGTG's approach to managing market risk is to establish an appropriate
offsetting position to a particular transaction or group of transactions
depending upon the extent of market risk AIGTG expects to reduce.
AIGTG's senior management has established positions and stop-loss limits
for each line of business. AIGTG's traders are required to maintain positions
within these limits. These positions are monitored during the day either
manually and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading books'
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management. Based upon these and other reports,
AIGTG's senior management may determine to adjust AIGTG's risk profile.
AIGTG attempts to secure reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses an internal methodology which includes interpolation
or extrapolation from verifiable prices nearest to the dates of the
transactions. Historically, actual results have not materially deviated from
these models. The methodology may reflect interest and exchange rates, commodity
prices, volatility rates, market liquidity and other relevant factors.
Unrealized gains and losses, with respect to AIGTG's positions are reflected in
income currently.
A significant portion of AIGTG's business is transacted in liquid markets.
Certain of AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels, market liquidity and the effect of
time.
AIGFP and AIGTG are both exposed to the risk of loss of fair value from
adverse fluctuations in interest rate and foreign currency exchange rates and
equity and commodity prices. AIG statistically measured the losses of fair value
through the application of a VaR model. AIG separately calculated the VaR with
respect to AIGFP and AIGTG, as AIG manages these operations separately.
AIGFP's and AIGTG's asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange traded
investments, derivative instruments and commodities. Because the market risk
with respect to securities available for sale, at market is substantially
hedged, segregation of market sensitive instruments into trading and other than
trading was not deemed necessary.
AIG calculated the VaR with respect to AIGFP and AIGTG as of December 31,
2002 and December 31, 2001. AIG uses the historical simulation methodology which
entails re-pricing all assets and liabilities under explicit changes in market
rates within a specific historical time period. In this case, the most recent
three years of historical market information for interest rates, foreign
exchange rates, and equity index prices were used to construct the historical
scenarios. For each scenario, each transaction was re-priced. Portfolio,
business unit and finally AIG-wide scenario values were then calculated by
netting the values of all the underlying assets and liabilities. The final VaR
number represents the maximum potential loss incurred by these scenarios with 95
percent confidence (i.e., only 5 percent of historical scenarios show losses
greater than the VaR figure).
THE FOLLOWING TABLE PRESENTS THE VAR ON A COMBINED BASIS AND OF EACH COMPONENT
OF AIGFP'S AND AIGTG'S MARKET RISK AS OF DECEMBER 31, 2002 AND DECEMBER 31,
2001. VAR WITH RESPECT TO COMBINED OPERATIONS CANNOT BE DERIVED BY AGGREGATING
THE INDIVIDUAL RISK PRESENTED HEREIN.
(in millions)
--------------------------------------------------------------------------------
AIGFP (A) AIGTG (B)
---------------- ----------------
2002 2001 2002 2001
================================================================================
Market Risk:
Combined $ 4 $12 $ 2 $ 2
Interest rate 4 12 2 2
Currency -- -- -- 1
Equity 1 1 -- --
================================================================================
(a) A one month holding period was used to measure the market exposures of
AIGFP.
(b) A one day holding period was used to measure the market exposures of
AIGTG.
52
American International Group, Inc. and Subsidiaries
THE FOLLOWING TABLE PRESENTS THE AVERAGE, HIGH AND LOW VARS ON A COMBINED BASIS
AND OF EACH COMPONENT OF AIGFP'S AND AIGTG'S MARKET RISK AS OF DECEMBER 31, 2002
AND 2001.
(in millions)
--------------------------------------------------------------------------------
2002 2001
-------------------- --------------------
AVERAGE HIGH LOW Average High Low
================================================================================
AIGFP Market Risk:
Combined $ 8 $12 $ 4 $12 $15 $ 9
Interest rate 7 12 4 11 15 8
Currency 1 4 -- -- 1 --
Equity 1 2 1 1 2 --
AIGTG Market Risk:
Combined $ 2 $ 3 $ 2 $ 3 $ 6 $ 2
Interest rate 2 3 2 3 4 2
Currency 1 1 -- 2 3 1
================================================================================
DERIVATIVES
Derivatives are financial arrangements among two or more parties. The returns of
the derivatives are linked to or "derived" from some underlying equity, debt,
commodity or other asset, liability, or index. Derivatives payments may be based
on interest rates and exchange rates and/or prices of certain securities,
certain commodities, or financial or commodity indices. The more significant
types of derivative arrangements in which AIG transacts are swaps, forwards,
futures and options. In the normal course of business, with the agreement of the
original counterparty, these contracts may be terminated early or assigned to
another counter-party.
The overwhelming majority of AIG's derivatives activities are conducted
through AIGFP and AIGTG, thus permitting AIG to participate in the derivatives
dealer market acting primarily as principal. In these derivative operations, AIG
structures agreements which generally allow its counterparties to enter into
transactions with respect to changes in interest and exchange rates, securities'
prices and certain commodities and financial or commodity indices. AIG's
customers such as corporations, financial institutions, multinational
organizations, sovereign entities, government agencies and municipalities use
derivatives to hedge their own market exposures. For example, a futures, forward
or option contract can be used to protect the customers' assets or liabilities
against price fluctuations.
A counterparty may default on any obligation to AIG, including a
derivative contract. Credit risk is a consequence of extending credit and/or
carrying trading and investment positions. Credit risk exists for a derivative
contract when that contract has a positive fair value to AIG. To help manage
this risk, the credit departments of AIGFP and AIGTG operate within the
guidelines set by the AIG Credit Risk Committee. This committee establishes the
credit policy, sets limits for counterparties and provides limits for derivative
transactions with counterparties having different credit ratings. In addition to
credit ratings, this committee takes into account other factors, including the
industry and country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.
AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by recognized
statistical rating organizations. If it is determined that a counterparty
requires credit enhancement, then one or more enhancement techniques will be
used. Examples of such enhancement techniques include letters of credit,
guarantees, collateral, credit triggers, credit derivatives and margin
agreements.
A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements. Management believes that such
agreements provide for legally enforceable set-off in the event of default.
Also, under such agreements, in connection with a counterparty desiring to
terminate a contract prior to maturity, AIGFP may be permitted to set-off its
receivables from that counterparty against AIGFP's payables to that same
counterparty arising out of all included transactions. Excluding regulated
exchange transactions, AIGTG, whenever possible, enters into netting agreements
with its counterparties which are similar in effect to those discussed above.
Discussions with respect to AIGFP's and AIGTG's counterpart credit
quality, fair value source and notional amounts follow.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Counterparty Credit Quality
The following tables provide the counterparty credit quality amounts of
AIGFP's and AIGTG's derivatives transactions at December 31, 2002 and December
31, 2001.
The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
netting under ISDA Master Agreements and excluding collateral held. Subsequent
to the application of such credit enhancements, the net exposure to credit risk
or the net replacement value of all interest rate, currency and equity swaps,
swaptions and forward commitments approximated $14.98 billion at December 31,
2002, including $1.9 billion of collateral held; and $10.84 billion at December
31, 2001. The net replacement value for futures and forward contracts
approximated $110 million at December 31, 2002 and $64 million at December 31,
2001.
AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or, where such ratings are not available, by
internal analysis. At December 31, 2002 and December 31, 2001, the concentration
of credit exposure with respect to counterparties judged A or higher by AIGFP
was 92 percent and 93 percent, respectively.
THE COUNTERPARTY CREDIT QUALITY DETERMINED BY AIGFP BY DERIVATIVE PRODUCT WITH
RESPECT TO THE NET REPLACEMENT VALUE OF AIGFP'S DERIVATIVES PORTFOLIO WAS AS
FOLLOWS:
(in millions)
-------------------------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------------
SWAPS AND FUTURES AND TOTAL Total
SWAPTIONS FORWARD CONTRACTS 2002 2001
===============================================================================
Counterparty credit quality:
AAA $ 7,082 $ 95 $ 7,177 $ 4,388
AA 3,856 15 3,871 3,214
A 2,887 -- 2,887 2,498
BBB 1,120 -- 1,120 784
Below investment grade 35 -- 35 23
-------------------------------------------------------------------------------
Total $14,980 $ 110 $15,090 $10,907
===============================================================================
AT DECEMBER 31, 2002 AND DECEMBER 31, 2001, THE COUNTERPARTY BREAKDOWN BY
INDUSTRY WITH RESPECT TO THE NET REPLACEMENT VALUE OF AIGFP'S DERIVATIVES
PORTFOLIO WAS AS FOLLOWS:
(in millions)
----------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------------
SWAPS AND FUTURES AND TOTAL Total
SWAPTIONS FORWARD CONTRACTS 2002 2001
========================================================================================
Non-U.S. banks $ 3,310 $ -- $ 3,310 $ 2,464
Insured municipalities 925 -- 925 638
U.S. industrials 2,773 -- 2,773 2,113
Governmental 520 -- 520 563
Non-U.S. financial service companies 474 -- 474 428
Non-U.S. industrials 1,452 -- 1,452 1,289
Special purpose 3,252 -- 3,252 1,851
U.S. banks 416 15 431 72
U.S. financial service companies 1,846 95 1,941 1,211
Supranationals 12 -- 12 278
----------------------------------------------------------------------------------------
Total $14,980 $ 110 $15,090 $10,907
========================================================================================
With respect to AIGTG's derivatives contracts at December 31, 2002 and
December 31, 2001, the net replacement values represent the net sum of estimated
positive fair values after the application of legally enforceable master netting
agreements and collateral held. The net replacement values most closely
represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.
Subsequent to the application of such credit enhancements, the net
exposure to credit risk or the net replacement value of all futures, forwards,
swaptions and purchased options contracts and interest rate and currency swaps
was $2.29 billion and $3.05 billion at December 31, 2002 and December 31, 2001,
respectively.
54
American International Group, Inc. and Subsidiaries
AIGTG'S NET REPLACEMENT VALUE AT DECEMBER 31, 2002 AND 2001 WAS AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------
TWO THROUGH SIX THROUGH AFTER TOTAL Total
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS 2002 2001
================================================================================================================================
Credit exposure:
Futures, forwards, swaptions and purchased options
contracts and interest rate and currency swaps:
Gross replacement value $ 5,678 $ 2,861 $ 2,735 $ 46 $ 11,320 $ 10,074
Master netting arrangements (3,895) (2,286) (2,563) (32) (8,776) (6,691)
Collateral (85) (96) (63) (8) (252) (330)
--------------------------------------------------------------------------------------------------------------------------------
Net replacement value* $ 1,698 $ 479 $ 109 $ 6 $ 2,292 $ 3,053
================================================================================================================================
* The net replacement values with respect to exchange traded futures and
options, forward contracts and purchased over the counter options are
presented as a component of trading assets in the accompanying balance
sheet. The net replacement values with respect to interest rate and
currency swaps are presented as a component of unrealized gain on interest
rate and currency swaps, options and forward transactions in the
accompanying balance sheet.
AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or, where such ratings are not available, internal
analysis. At December 31, 2002 and December 31, 2001, the concentration of
credit exposure with respect to counterparties judged A or higher by AIGTG was
75 percent and 78 percent, respectively.
ALSO, AS OF DECEMBER 31, 2002 AND 2001, THE COUNTERPARTY CREDIT QUALITY AND
COUNTERPARTY BREAKDOWN BY INDUSTRY WITH RESPECT TO THE NET REPLACEMENT VALUE OF
AIGTG'S DERIVATIVES PORTFOLIO WERE AS FOLLOWS:
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
------------------------
2002 2001
====================================================================================================================================
Counterparty credit quality:
AAA $ 347 $ 391
AA 622 1,117
A 739 863
BBB 193 330
Below investment grade 63 130
Not externally rated, including exchange traded futures and options* 328 222
------------------------------------------------------------------------------------------------------------------------------------
Total $2,292 $3,053
====================================================================================================================================
Counterparty breakdown by industry:
Non U.S. banks $ 927 $1,151
U.S. industrials 369 503
Governmental 37 71
Non-U.S. financial service companies 105 187
Non-U.S. industrials 144 190
U.S. banks 157 353
U.S. financial service companies 225 376
Exchanges* 328 222
------------------------------------------------------------------------------------------------------------------------------------
Total $2,292 $3,053
====================================================================================================================================
* Exchange traded futures and options are not deemed to have significant
credit exposure as the exchanges guarantee that every contract will be
properly settled on a daily basis.
Fair Value Source
The fair value sources of the net replacement values of AIGFP's
derivatives portfolio were based on valuation models. Although these models are
proprietary, the inputs were obtained from independently published exchange
prices, external subscription services' prices such as Bloomberg or Reuters or
third party broker quotes for use in these models. In the minimal instances when
such prices are not available, AIGFP uses an internal methodology which includes
interpolation or extrapolation from verifiable prices nearest to the dates of
the transactions.
55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
AT DECEMBER 31, 2002 AND DECEMBER 31, 2001, THE FAIR VALUE SOURCE OF THE NET
REPLACEMENT VALUE OF AIGTG'S DERIVATIVES PORTFOLIO WAS AS FOLLOWS:
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
MATURITY OF FAIR VALUE OF CONTRACTS
-------------------------------------------------------------------
TWO THROUGH SIX THROUGH AFTER TOTAL TOTAL
SOURCE OF FAIR VALUE ONE YEAR FIVE YEARS TEN YEARS TEN YEARS 2002 2001
====================================================================================================================================
Prices actively quoted $1,698 $ -- $ -- $ -- $1,698 $2,412
Prices provided by other external sources -- 357 -- -- 357 530
Prices based on models and other valuation methods -- 122 109 6 237 111
------------------------------------------------------------------------------------------------------------------------------------
Total $1,698 $ 479 $ 109 $ 6 $2,292 $3,053
====================================================================================================================================
Notional Amounts
The notional amounts used to express the extent of AIGFP's and AIGTG's
involvement in swap transactions represent a standard of measurement of the
volume of AIGFP's and AIGTG's swaps business. Notional amount is not a
quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.
The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.
THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL AND NOTIONAL AMOUNTS BY MATURITY
AND TYPE OF DERIVATIVE OF AIGFP'S DERIVATIVES PORTFOLIO AT DECEMBER 31, 2002 AND
DECEMBER 31, 2001.
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
----------------------------------------------
TWO THROUGH SIX THROUGH AFTER TOTAL Total
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS 2002 2001
====================================================================================================================================
AIGFP interest rate, currency and equity swaps and
swaptions:
Notional amount:*
Interest rate swaps $147,331 $289,463 $128,118 $ 15,082 $579,994 $436,669
Currency swaps 47,120 80,486 42,945 6,436 176,987 139,174
Swaptions and equity swaps 20,672 26,169 9,111 4,484 60,436 58,491
------------------------------------------------------------------------------------------------------------------------------------
Total $215,123 $396,118 $180,174 $ 26,002 $817,417 $634,334
====================================================================================================================================
Exchange traded futures contracts contractual amount $ 10,524 $ -- $ -- $ -- $ 10,524 $ 10,036
====================================================================================================================================
Over the counter forward contracts contractual amount $ 43,220 $ 220 $ 187 $ -- $ 43,627 $ 58,003
====================================================================================================================================
* Notional amount is not representative of either market risk or credit
risk.
AIGFP enters into credit derivative transactions in the ordinary course of
its business. The overwhelming majority of AIGFP's credit derivatives require
AIGFP to provide credit protection on a designated portfolio of loans or debt
securities. AIGFP provides such credit protection only on a "second loss" basis,
under which AIGFP's payment obligations arise only after credit losses in the
designated portfolio exceed a specified threshold amount or level of "first
losses." The threshold amount of credit losses that must be realized before
AIGFP has any payment obligation is negotiated by AIGFP for each transaction to
provide that the likelihood of any payment obligation by AIGFP under each
transaction is remote, even in severe recessionary market scenarios.
In many cases, the credit risk associated with a designated portfolio is
tranched into different layers of risk, which are then analyzed and rated by the
credit rating agencies. Typically, there will be an equity layer covering the
first credit losses in respect of the portfolio up to a specified percentage of
the total portfolio, and then successive layers that are rated, generally a BBB
rated layer, an A rated layer, an AA rated layer and an AAA rated layer. In
transactions that are rated, the risk layer or tranche that is immediately
junior to the threshold level above which AIGFP's payment obligation would arise
is rated AAA by the rating agencies. For that reason, the risk layer assumed by
AIGFP with respect to the designated portfolio in these transactions is often
called the "super senior" risk layer, defined as the layer of credit risk senior
to a risk layer that has been rated AAA by the credit rating agencies or if the
transaction is not rated, equivalent thereto. For example, in a transaction with
an equity layer covering credit losses from 0 to 2 percent of the total
portfolio, a BBB rated layer covering credit losses from 2 to 4 percent, an A
rated layer from 4 to 6 percent, an AA rated layer from 6 to 8 percent and an
AAA rated layer from 8 to 11 percent, AIGFP would cover credit losses arising in
respect of the portfolio that exceed an 11 percent first loss threshold amount,
and thereby bear risk that is senior to the 8 to 11 percent AAA rated risk
layer.
56
American International Group, Inc. and Subsidiaries
AIGFP continually monitors the underlying portfolios to determine whether
the credit loss experience for any particular portfolio has caused the
likelihood of AIGFP having a payment obligation under the transaction to be
greater than super senior risk. AIGFP maintains the ability opportunistically to
hedge specific securities in a portfolio thereby further limiting its exposure
to loss and has hedged outstanding transactions in this manner on occasion.
AIGFP has never had a payment obligation under these credit derivatives
transactions. Furthermore, based on portfolio credit losses experienced to date
under all outstanding transactions, no transaction has experienced credit losses
in an amount that has made the likelihood of AIGFP having to make a payment, in
AIGFP's view, to be greater than remote, even in severe recessionary market
scenarios. At December 31, 2002 the notional amount with respect to AIGFP's
credit derivative portfolio was $125.7 billion.
THE FOLLOWING TABLE PROVIDES THE CONTRACTUAL AND NOTIONAL AMOUNTS BY MATURITY
AND TYPE OF DERIVATIVE OF AIGTG'S DERIVATIVES PORTFOLIO AT DECEMBER 31, 2002 AND
DECEMBER 31, 2001.
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------
TWO THROUGH SIX THROUGH AFTER TOTAL Total
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS 2002 2001
====================================================================================================================================
Contractual amount of futures, forwards and options:
Exchange traded futures and options $ 11,834 $ 1,451 $ 50 $ -- $ 13,335 $ 14,977
====================================================================================================================================
Over the counter forwards $168,572 $ 13,562 $ 1,977 $ 36 $184,147 $184,102
====================================================================================================================================
Over the counter purchased options $ 72,800 $ 17,657 $ 25,053 $ 252 $115,762 $138,655
====================================================================================================================================
Over the counter sold options (a) $ 69,247 $ 16,771 $ 25,255 $ 401 $111,674 $137,661
====================================================================================================================================
Notional amount (b)
Interest rate swaps and forward rate agreements $ 16,440 $ 33,866 $ 4,613 $ 140 $ 55,059 $ 59,683
Currency swaps 2,351 5,866 327 -- 8,544 11,092
Swaptions 3,608 5,789 1,118 -- 10,515 7,280
------------------------------------------------------------------------------------------------------------------------------------
Total $ 22,399 $ 45,521 $ 6,058 $ 140 $ 74,118 $ 78,055
====================================================================================================================================
(a) Sold options obligate AIGTG to buy or sell the underlying item if the
option purchaser chooses to exercise. The amounts do not represent credit
exposure.
(b) Notional amount is not representative of either market risk or credit
risk.
In addition to its role as derivatives dealer through AIGFP and AIGTG, AIG
and its subsidiaries, including its insurance subsidiaries, use derivatives
primarily to minimize AIG's asset-liability exposure and foreign currency and
interest rate exposures. These transactions are generally executed with AIGFP
and AIGTG as counterparty, who in turn hedge these transactions in the market
place. Thus, AIGFP and AIGTG assume the credit risk exposure.
AIG also uses derivatives to help match assets and liabilities in several
of its businesses, including its insurance operations. For example, AIG can use
currency and interest rate swaps to convert foreign-currency investment contract
liabilities into U.S. dollar-based exposures. Thus, these liabilities are more
properly matched with U.S. dollar assets. In life insurance, AIG uses swaps to
reduce the mismatch between long dated life insurance liabilities and shorter
dated local currency assets. Swaps also enable AIG to balance its asset and
liability durations in consumer finance operations.
AIG's Derivatives Review Committee provides an independent review of any
proposed derivative transaction. The committee examines, among other things, the
nature and purpose of the derivative transaction, its potential credit exposure,
if any, and the estimated benefits. This committee does not review those
derivative transactions entered into by AIGFP and AIGTG for their own accounts.
Generally, AIG conducts its businesses in the currencies of the local
operating environment. Thus, exchange gains or losses occur when AIG's foreign
currency net investment is affected by changes in the foreign exchange rates
relative to the U.S. dollar from one reporting period to the next.
Legal risk arises from the uncertainty of the enforceability, through
legal or judicial processes, of the obligations of AIG's clients and
counterparties, including contractual provisions intended to reduce credit
exposure by providing for the netting of mutual obligations. (See also the
discussion on master netting agreements above.)
ACCOUNTING STANDARDS
In June 2001, FASB issued Statement of Financial Accounting Standard No.
141 "Business Combinations" (FAS 141). FAS 141 requires AIG to apply the
purchase method of accounting for all acquisitions initiated after June 30,
2001.
In June 2001, FASB issued Statement of Financial Accounting Standards No.
142 "Goodwill and Other Intangible Assets" (FAS 142). As of January 1, 2002, AIG
adopted FAS 142. FAS 142 requires AIG to discontinue the amortization of
goodwill in its consolidated income statement. Amortization
57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
expense recorded in AIG's consolidated statement of income amounted to $163
million and $98 million pre-tax for 2001 and 2000, respectively.
FAS 142 requires goodwill to be subject to an assessment of impairment on
an annual basis, or more frequently if circumstances indicate that a possible
impairment has occurred. The assessment of impairment involves a two-step
process prescribed in FAS 142, whereby an initial assessment for potential
impairment is performed, followed by a measurement of the amount of impairment,
if any. FAS 142 also requires the completion of a transitional impairment test
in the year of adoption, with any identified impairments recognized as a
cumulative effect of a change in accounting principles. During the second
quarter, AIG completed its transitional impairment test for 2002, resulting in
no impairment.
Changes in the carrying amount of goodwill are primarily caused as a
result of foreign currency translation adjustments.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN45). FIN45 requires that, for
guarantees within its scope that are issued or amended after December 31, 2002,
a liability for the fair value of the obligation undertaken in issuing the
guarantee be established, and recognized through earnings. FIN45 also requires
additional disclosures in financial statements starting with AIG's 2002 year-end
financial statements.
AIG believes that the impact of FIN45 on its results of operations and
financial condition will not be significant.
AIG guarantees the indebtedness of third parties principally in connection
with AIG SunAmerica's investments in affordable housing properties. The
guarantees are issued primarily to facilitate financing for the construction of
the underlying properties, and range in duration of up to ten years. The loans
are secured by the underlying real estate. Since the inception of this
investment program over ten years ago, payments under these guarantees have been
insignificant. This is due to the fact that the loans are first backed by the
creditworthiness of the third party general partner, and secondly, are secured
by the underlying properties. The maximum exposure under these guarantees as of
December 31, 2002 is approximately $4.2 billion.
In addition, AIG's real estate investment operations will occasionally
extend guarantees to real estate partnerships in which they are an investor. The
guarantees facilitate financing for the construction, and/or purchase of land.
There have been no payments to date under these guarantees. This is due to the
fact that the loans are first backed by the creditworthiness of the third party
general partner, and secondly, are secured by the underlying properties. The
maximum exposure under these guarantees as of December 31, 2002 is approximately
$130 million.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN46). FIN46 changes the method of determining
whether certain entities should be consolidated in AIG's consolidated financial
statements. An entity is subject to FIN46 and is called a variable interest
entity (VIE) if it has (i) equity that is insufficient to permit the entity to
finance its activities without additional subordinated financial support from
other parties, or (ii) equity investors that cannot make significant decisions
about the entity's operations, or that do not absorb the expected losses or
receive the expected returns of the entity. All other entities are evaluated for
consolidation under existing guidance. A VIE is consolidated by its primary
beneficiary, which is the party that has a majority of the expected losses or a
majority of the expected residual returns of the VIE, or both.
The provisions of FIN46 are to be applied immediately to VIEs created
after January 31, 2003, and to VIEs in which AIG obtains an interest after that
date. For VIEs in which AIG holds a variable interest that it acquired before
February 1, 2003, FIN46 applies to the fiscal quarter ended September 30, 2003.
For any VIE that must be consolidated under FIN46 that was created before
February 1, 2003, the assets, liabilities and noncontrolling interest of the VIE
would be initially measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change.
AIG is currently evaluating the impact of applying FIN46 to existing VIEs
in which it has a variable interest, and believes that the impact on its results
of operations and financial condition will not be significant. (See also the
discussions under Note 20 of Notes to Financial Statements and "Special Purpose
Vehicles" included herein.)
58
American International Group, Inc. and Subsidiaries
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Included in Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
ITEM 8. Financial Statements and Supplementary Data
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES INDEX TO FINANCIAL
STATEMENTS AND SCHEDULES
--------------------------------------------------------------------------------
Page
================================================================================
Report of Independent Accountants 60
Consolidated Balance Sheet at December 31, 2002 and 2001 61
Consolidated Statement of Income for the years ended
December 31, 2002, 2001 and 2000 63
Consolidated Statement of Capital Funds for the years
ended December 31, 2002, 2001 and 2000 64
Consolidated Statement of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 65
Consolidated Statement of Comprehensive Income for the
years ended December 31, 2002, 2001 and 2000 67
Notes to Financial Statements 68
Schedules:
I -- Summary of Investments-Other Than Investments in
Related Parties as of December 31, 2002 S-1
II -- Condensed Financial Information of Registrant as
of December 31, 2002 and 2001 and for the years
ended December 31, 2002, 2001 and 2000 S-2
III -- Supplementary Insurance Information as of
December 31, 2002, 2001 and 2000 and for the
years then ended S-4
IV -- Reinsurance as of December 31, 2002, 2001 and
2000 and for the years then ended S-5
59
The Board of Directors and Shareholders
American International Group, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the consolidated
financial position of American International Group, Inc. and subsidiaries (the
"Company") at December 31, 2002 and 2001, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedules listed in the accompanying index present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 12, 2003
60
American International Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
====================================================================================================================================
ASSETS:
Investments, financial services assets and cash:
Fixed maturities:
Bonds available for sale, at market value (amortized cost: 2002 - $232,121;
2001 - $196,111) $242,385 $199,774
Bond trading securities, at market value (cost: 2002 - $963; 2001 - $844) 981 842
Equity securities:
Common stocks (cost: 2002 - $6,152; 2001 - $6,963) 5,482 6,188
Non-redeemable preferred stocks (cost: 2002 - $1,678; 2001 - $1,840) 1,584 1,749
Mortgage loans on real estate, net of allowance (2002 - $110; 2001 - $114) 11,541 10,774
Policy loans 6,046 5,786
Collateral and guaranteed loans, net of allowance (2002 - $54; 2001 - $23) 2,341 2,407
Financial services assets:
Flight equipment primarily under operating leases, net of accumulated depreciation
(2002 - $4,426; 2001 - $3,492) 26,867 22,710
Securities available for sale, at market value (cost: 2002 - $16,715;
2001 - $17,793) 16,687 17,801
Trading securities, at market value 4,146 5,733
Spot commodities, at market value 489 352
Unrealized gain on interest rate and currency swaps, options and forward transactions 15,376 11,493
Trading assets 4,786 6,234
Securities purchased under agreements to resell, at contract value 25,661 21,681
Finance receivables, net of allowance (2002 - $477; 2001 - $532) 15,857 13,955
Securities lending collateral 23,694 10,574
Other invested assets 12,680 12,704
Short-term investments, at cost (approximates market value) 6,993 7,168
Cash 1,165 698
------------------------------------------------------------------------------------------------------------------------------------
Total investments, financial services assets and cash 424,761 358,623
Investment income due and accrued 4,297 3,681
Premiums and insurance balances receivable, net of allowance (2002 - $150; 2001 - $127) 13,088 12,412
Reinsurance assets, net of allowances 29,882 27,199
Deferred policy acquisition costs 22,256 19,357
Investments in partially-owned companies 1,575 902
Real estate and other fixed assets, net of accumulated depreciation
(2002 - $3,727; 2001 - $3,532) 5,382 4,833
Separate and variable accounts 46,248 51,954
Goodwill 6,079 6,102
Other assets 7,661 7,998
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $561,229 $493,061
====================================================================================================================================
See Accompanying Notes to Financial Statements.
61
American International Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET (CONTINUED)
(in millions, except share amounts)
------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
====================================================================================================================================
LIABILITIES:
Reserve for losses and loss expenses $ 51,539 $ 44,792
Reserve for unearned premiums 16,336 13,148
Future policy benefits for life and accident and health insurance contracts 72,547 64,998
Policyholders' contract deposits 142,160 119,402
Other policyholders' funds 7,582 7,611
Reserve for commissions, expenses and taxes 3,429 3,381
Insurance balances payable 3,273 3,207
Funds held by companies under reinsurance treaties 3,425 2,685
Income taxes payable:
Current 793 405
Deferred 4,289 2,881
Financial services liabilities:
Borrowings under obligations of guaranteed investment agreements 14,850 16,392
Securities sold under agreements to repurchase, at contract value 9,162 11,818
Trading liabilities 3,825 4,372
Securities and spot commodities sold but not yet purchased, at market value 11,765 8,331
Unrealized loss on interest rate and currency swaps, options and forward transactions 11,265 8,813
Trust deposits and deposits due to banks and other depositors 2,987 2,290
Commercial paper 7,467 8,523
Notes, bonds, loans and mortgages payable 43,233 33,676
Commercial paper 1,645 3,369
Notes, bonds, loans and mortgages payable 4,690 3,771
Separate and variable accounts 46,248 51,954
Minority interest 1,580 1,509
Securities lending payable 23,694 10,574
Other liabilities 12,189 10,807
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 499,973 438,709
------------------------------------------------------------------------------------------------------------------------------------
PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES 2,153 2,202
------------------------------------------------------------------------------------------------------------------------------------
Capital funds:
Common stock, $2.50 par value; 5,000,000,000 shares authorized;
shares issued 2002 - 2,751,327,476; 2001 - 2,750,237,554 6,878 6,876
Additional paid-in capital 607 669
Retained earnings 52,270 47,218
Accumulated other comprehensive income (loss) 691 (1,725)
Treasury stock, at cost; 2002 - 141,726,645; 2001 - 134,805,555 shares of common stock
(including 119,244,379 and 133,200,400 shares, respectively, held by subsidiaries) (1,343) (888)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS 59,103 52,150
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES AND CAPITAL FUNDS $ 561,229 $ 493,061
====================================================================================================================================
See Accompanying Notes to Financial Statements.
62
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
====================================================================================================================================
REVENUES:
Premiums and other considerations $ 44,589 $ 38,428 $ 34,570
Net investment income 15,034 13,977 12,663
Realized capital gains (losses) (2,441) (836) (314)
Other revenues 10,300 10,197 9,419
------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 67,482 61,766 56,338
------------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Incurred policy losses and benefits 41,927 35,054 30,864
Insurance acquisition and other operating expenses 17,413 16,556 15,136
Acquisition, restructuring and related charges -- 2,017 315
------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 59,340 53,627 46,315
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES 8,142 8,139 10,023
------------------------------------------------------------------------------------------------------------------------------------
INCOME TAXES:
Current 1,972 1,919 1,697
Deferred 356 420 1,274
------------------------------------------------------------------------------------------------------------------------------------
2,328 2,339 2,971
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 5,814 5,800 7,052
------------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST (295) (301) (413)
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 5,519 5,499 6,639
------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF ACCOUNTING CHANGES, NET OF TAX -- (136) --
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,519 $ 5,363 $ 6,639
====================================================================================================================================
EARNINGS PER COMMON SHARE:
Basic
Income before cumulative effect of accounting changes $ 2.11 $ 2.10 $ 2.55
Cumulative effect of accounting changes -- (0.05) --
Net income 2.11 2.05 2.55
------------------------------------------------------------------------------------------------------------------------------------
Diluted
Income before cumulative effect of accounting changes $ 2.10 $ 2.07 $ 2.52
Cumulative effect of accounting changes -- (0.05) --
Net income 2.10 2.02 2.52
====================================================================================================================================
AVERAGE SHARES OUTSTANDING:
Basic 2,612 2,621 2,607
Diluted 2,634 2,650 2,638
====================================================================================================================================
See Accompanying Notes to Financial Statements.
63
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CAPITAL FUNDS
(in millions, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
====================================================================================================================================
COMMON STOCK:
Balance at beginning of year $ 6,876 $ 6,914 $ 4,870
Issuance of common stock -- -- 7
Adjustment in connection with AGC acquisition -- (43) --
Stock split effected as dividend -- -- 2,037
Issued under stock option and stock purchase plans 2 5 --
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 6,878 6,876 6,914
------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 669 2,830 2,324
Issuance of common stock -- -- (7)
Excess of cost over proceeds of common stock issued under
stock option and stock purchase plans (94) 2 (161)
Excess of proceeds over cost of common stock
issued in connection with acquisitions -- -- 616
Conversion of preferred stock and preferred securities -- -- (83)
Adjustment in connection with AGC acquisition 5 (2,135) --
Other 27 (28) 141
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 607 669 2,830
------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 47,218 42,598 38,772
Net income 5,519 5,363 6,639
Stock dividends to shareholders -- -- (2,037)
Cash dividends to shareholders:
Preferred -- -- (1)
Common ($.18, $.16 and $.14 per share, respectively) (467) (743) (775)
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 52,270 47,218 42,598
------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year (1,725) (2,440) (3,381)
Unrealized appreciation of investments - net
of reclassification adjustments 4,727 1,513 1,467
Deferred income tax expense on changes (1,579) (500) (316)
Foreign currency translation adjustments (419) (455) (273)
Applicable income tax benefit on changes 38 111 63
Net derivative losses arising from cash flow hedging activities (479) (541) --
Deferred income tax benefit on changes 186 98 --
Cumulative effect of accounting change, net of tax -- 489 --
Retirement plan liabilities adjustment, net of tax (58) -- --
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 2,416 715 941
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 691 (1,725) (2,440)
------------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST:
Balance at beginning of year (888) (2,463) (2,944)
Cost of shares acquired during year (734) (1,042) (1,407)
Issued under stock option and stock purchase plans 260 271 343
Issued for conversion of preferred stock and preferred securities -- -- 418
Issued in connection with acquisitions -- -- 1,127
Adjustment in connection with AGC acquisition -- 2,311 --
Other 19 35 --
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,343) (888) (2,463)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS AT END OF YEAR $ 59,103 $ 52,150 $ 47,439
====================================================================================================================================
See Accompanying Notes to Financial Statements.
64
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
====================================================================================================================================
SUMMARY:
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 18,688 $ 8,362 $ 9,081
NET CASH USED IN INVESTING ACTIVITIES (46,598) (31,298) (20,828)
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,377 23,112 11,843
------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH 467 176 96
CASH AT BEGINNING OF YEAR 698 522 426
------------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 1,165 $ 698 $ 522
====================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,519 $ 5,363 $ 6,639
====================================================================================================================================
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Non-cash revenues, expenses, gains and losses included in income:
Change in:
General and life insurance reserves 16,725 7,405 7,928
Premiums and insurance balances receivable and payable - net (744) 588 1,016
Reinsurance assets (2,683) (4,590) (3,657)
Deferred policy acquisition costs (3,850) (1,104) (1,465)
Investment income due and accrued (616) (124) (346)
Funds held under reinsurance treaties 740 1,228 572
Other policyholders' funds (29) 727 239
Current and deferred income taxes - net 745 648 1,408
Reserve for commissions, expenses and taxes 48 55 68
Other assets and liabilities - net 1,300 836 (1,068)
Trading assets and liabilities - net 901 831 (721)
Trading securities, at market value 1,587 1,614 (2,956)
Spot commodities, at market value (137) 11 320
Net unrealized (gain) loss on interest rate and currency swaps,
options and forward transactions (1,431) (1,026) (2,347)
Securities purchased under agreements to resell (3,980) (6,690) (4,094)
Securities sold under agreements to repurchase (2,656) 510 5,192
Securities and spot commodities sold but not yet purchased,
at market value 3,434 630 1,288
Realized capital gains (losses) 2,441 836 314
Equity in income of partially-owned companies and other invested assets (229) (479) (327)
Amortization of premium and discount on securities (195) (285) (269)
Depreciation expenses, principally flight equipment 1,653 1,437 1,243
Change in cumulative translation adjustments (405) (439) (273)
Provision for finance receivable losses 402 395 307
Other - net 148 (15) 70
------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 13,169 2,999 2,442
------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 18,688 $ 8,362 $ 9,081
====================================================================================================================================
See Accompanying Notes to Financial Statements.
65
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
====================================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of fixed maturities, at amortized cost matured or redeemed $ -- $ -- $ 1,227
Cost of bonds, at market sold 99,777 94,825 37,700
Cost of bonds, at market matured or redeemed 13,666 14,403 7,359
Cost of equity securities sold 6,509 6,321 5,162
Realized capital gains (losses) (2,441) (836) (314)
Purchases of fixed maturities (149,537) (132,961) (58,001)
Purchases of equity securities (5,955) (6,619) (6,085)
Acquisitions, net of cash acquired -- (383) (17)
Mortgage, policy and collateral loans granted (2,867) (2,037) (2,341)
Repayments of mortgage, policy and collateral loans 2,011 1,392 2,106
Sales of securities available for sale 4,382 5,816 5,588
Maturities of securities available for sale 3,882 2,303 1,559
Purchases of securities available for sale (7,134) (11,264) (8,890)
Sales of flight equipment 184 220 713
Purchases of flight equipment (5,302) (4,415) (3,432)
Net additions to real estate and other fixed assets (924) (700) (1,033)
Sales or distributions of other invested assets 12,182 4,298 4,397
Investments in other invested assets (12,423) (5,531) (6,285)
Change in short-term investments 175 5,434 1,314
Investments in partially-owned companies (479) (541) 79
Finance receivable originations and purchases (10,066) (8,774) (7,812)
Finance receivable principal payments received 7,762 7,751 6,346
Other - net -- -- (168)
------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $ (46,598) $ (31,298) $ (20,828)
====================================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in policyholders' contract deposits $ 22,758 $ 13,943 $ 5,451
Change in trust deposits and deposits due to banks and other depositors 697 395 (280)
Change in commercial paper (2,421) (1,156) 2,222
Proceeds from notes, bonds, loans and mortgages payable 21,896 27,347 12,212
Repayments on notes, bonds, loans and mortgages payable (11,950) (17,597) (10,770)
Proceeds from guaranteed investment agreements 7,167 10,410 9,957
Maturities of guaranteed investment agreements (8,709) (7,613) (5,792)
Redemption of subsidiary company preferred stock (50) (1,248) --
Proceeds from common stock issued 168 239 144
Proceeds from subsidiary company issuance of preferred stock -- -- 742
Cash dividends to shareholders (467) (743) (776)
Acquisition of treasury stock (734) (1,042) (1,402)
Other - net 22 177 135
------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 28,377 $ 23,112 $ 11,843
====================================================================================================================================
SUPPLEMENTARY INFORMATION:
TAXES PAID $ 1,203 $ 1,475 $ 1,345
====================================================================================================================================
INTEREST PAID $ 3,590 $ 3,950 $ 3,524
====================================================================================================================================
See Accompanying Notes to Financial Statements.
66
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
====================================================================================================================================
COMPREHENSIVE INCOME:
Net income $ 5,519 $ 5,363 $ 6,639
------------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME:
Unrealized appreciation of investments - net
of reclassification adjustments 4,727 1,513 1,467
Deferred income tax expense on above changes (1,579) (500) (316)
Foreign currency translation adjustments (a) (419) (455) (273)
Applicable income tax benefit on above changes 38 111 63
Net derivative losses arising from cash flow hedging activities (479) (541) --
Deferred income tax benefit on above changes 186 98 --
Retirement plan liabilities adjustment, net of tax (58) -- --
Cumulative effect of accounting change, net of tax (b) -- 150 --
Cumulative effect of accounting change, net of tax (c) -- 339 --
------------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME 2,416 715 941
------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 7,935 $ 6,078 $ 7,580
====================================================================================================================================
(a) Includes insignificant derivative gains and losses arising from hedges of
net investments in foreign operations.
(b) Consists of derivative gains and losses qualifying for cash flow hedging
arising from the adoption of Statement of Financial Accounting Standards
No. 138 "Accounting for Derivative Instruments and Hedging Activities --
an amendment of FASB Statement No. 133" (collectively, FAS 133).
(c) Represents the unrealized appreciation arising from the transfer of the
bonds held to maturity portfolio to the bonds available for sale portfolio
in connection with the implementation of FAS 133.
See Accompanying Notes to Financial Statements.
67
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION: On August 29, 2001 American General Corporation
(AGC), was acquired by American International Group, Inc.(AIG). In connection
with the acquisition, AIG issued approximately 290 million shares of its common
stock in exchange for all the outstanding common stock of AGC based on an
exchange ratio of 0.5790 of a share of AIG common stock for each share of AGC
common stock. The acquisition was accounted for as a pooling of interests and
the accompanying financial statements have been prepared to retroactively
combine AGC's financial statements with AIG's financial statements for all
periods presented.
All of the share information included herein reflects the application of
the exchange ratio to the number of shares of AGC common stock outstanding at
the relevant times rather than the number of shares of AIG common stock actually
issued or outstanding at such times. In addition, AGC convertible preferred
stock has been included based on its AGC common stock equivalent in the restated
capital accounts.
THE FOLLOWING IS A RECONCILIATION OF THE INDIVIDUAL COMPANY RESULTS TO THE
COMBINED RESULTS FOR 2000:
(in millions)
--------------------------------------------------------------------------------
AIG AGC Total
================================================================================
Revenues $45,245 $11,093 $56,338
Net income 5,636 1,003 6,639
================================================================================
AIG subsidiaries write property, casualty, marine, life and financial
lines insurance in approximately 130 countries and jurisdictions. Certain of
AIG's foreign subsidiaries included in the consolidated financial statements
report on a fiscal year ending November 30. The consolidated financial
statements include the accounts of AIG and its majority owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
HSB Group, Inc. (HSB) was acquired on November 22, 2000 and consolidated
into AIG's financial statements during the fourth quarter of 2000. This
acquisition was accounted for as a purchase.
(B) BASIS OF PRESENTATION: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Certain accounts have been reclassified in the 2001 and 2000 financial
statements to conform to their 2002 presentation.
General Insurance Operations: AIG's general insurance subsidiaries are
multiple line companies writing substantially all lines of property and casualty
insurance. Premiums are earned primarily on a pro rata basis over the term of
the related coverage. The reserve for unearned premiums represents the portion
of premiums written relating to the unexpired terms of coverage.
Acquisition costs represent those costs, including commissions, that vary
with and are primarily related to the acquisition of new business. These costs
are deferred and amortized over the period in which the related premiums written
are earned. The deferred acquisition cost (DAC) asset is reviewed for
recoverability based on the profitability of the underlying insurance contracts.
Investment income is not anticipated in the deferral of acquisition costs.
Losses and loss expenses are charged to income as incurred. The reserve
for losses and loss expenses represents the accumulation of estimates for
reported losses and includes provisions for losses incurred but not reported.
The methods of determining such estimates and establishing resulting reserves,
including amounts relating to reserves for estimated unrecoverable reinsurance,
are reviewed and updated. Adjustments resulting therefrom are reflected in
income currently. AIG discounts certain of its loss reserves which are primarily
related to certain workers' compensation claims. (See Note 6.)
Life Insurance Operations: AIG's life insurance subsidiaries offer a wide
range of traditional insurance and financial and investment products.
Traditional products consist of individual and group life, annuity, endowment
and accident and health policies. Financial and investment products consist of
single premium annuity, guaranteed investment contracts, universal life and
pensions.
Premiums for traditional life insurance products and life contingent
annuities, excluding accident and health products, are recognized as revenues
when due. Estimates for premiums due but not yet collected are accrued. Benefits
and expenses are provided against such revenues to recognize profits over the
estimated life of the policies. Revenues for universal life and investment-type
products consist of policy charges for the cost of insurance, administration and
surrenders during the period. Policy charges collected with respect to future
services are deferred and recognized in a manner similar to the deferred policy
acquisition costs related to such products. Expenses include interest credited
to policy account balances and benefit payments made in excess of policy account
balances. Accident and health products are accounted for in a manner similar to
general insurance products described above. Investment income reflects certain
amounts of realized capital gains where the gains are deemed to be an inherent
element in pricing certain life products in some foreign countries.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Policy acquisition costs
68
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
and policy initiation costs related to universal life and investment-type
products (non-traditional products) are deferred and amortized, with interest,
in relation to the incidence of estimated gross profits to be realized over the
estimated lives of the contracts. Estimated gross profits are composed of net
interest income, net realized investment gains and losses, variable annuity
fees, surrender charges and direct administrative expenses.
The resulting DAC asset is reviewed for recoverability based on the
profitability (both current and projected future) of the underlying insurance
contracts.
The deferred acquisition costs with respect to non-traditional products
are adjusted with respect to estimated gross profits as a result of changes in
the net unrealized gains or losses on debt and equity securities available for
sale. That is, as debt and equity securities available for sale are carried at
aggregate fair value, an adjustment is made to deferred policy acquisition costs
equal to the change in amortization that would have been recorded if such
securities had been sold at their stated aggregate fair value and the proceeds
reinvested at current yields. The change in this adjustment, net of tax, is
included with the change in net unrealized gains/losses on debt and equity
securities available for sale that is credited or charged directly to
comprehensive income. Deferred policy acquisition costs have been decreased by
$1.23 billion at December 31, 2002 and decreased by $280 million at December 31,
2001 for this adjustment. (See Note 4.)
The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.
Financial Services Operations: AIG participates in the derivatives dealer
market conducting, primarily as principal, an interest rate, currency, equity
and credit derivative products business. AIG also enters into structured
transactions, including long-dated forward foreign exchange contracts, option
transactions, liquidity facilities and investment agreements, and invests in a
diversified portfolio of securities.
AIG engages in market making and trading activities, as principal, in
foreign exchange, interest rates and precious and base metals. AIG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIG, as lessor, leases flight equipment principally under operating
leases. Accordingly, income is recognized over the life of the lease as rentals
become receivable under the provisions of the lease or, in the case of leases
with varying payments, under the straight-line method over the noncancelable
term of the lease. In certain cases, leases provide for additional payments
contingent on usage. Rental income is recognized at the time such usage occurs
less a provision for future contractual aircraft maintenance. AIG is also a
remarketer of flight equipment for its own account and for airlines and
financial institutions, and provides, for a fee, fleet management services to
certain third-party operators. AIG's revenues from such operations consist of
net gains on sales of flight equipment and commissions.
AIG provides a wide variety of consumer finance products, including
mortgages, retail sales finance and credit related insurance.
Retirement Savings & Asset Management Operations: AIG's retirement savings
& asset management operations offer a wide variety of investment vehicles and
services, including variable annuities, mutual funds and investment asset
management. Such products and services are offered to individuals and
institutions both domestically and internationally. The fees generated with
respect to retirement savings & asset management operations are recognized as
revenues when earned. Costs incurred in the sale of variable annuities and
mutual funds are deferred and subsequently amortized. With respect to variable
annuities, acquisition costs are amortized in relation to the incidence of
estimated gross profits to be realized over the estimated lives of the variable
annuity contracts. With respect to the sale of mutual funds, acquisition costs
are amortized over the estimated lives of the funds obtained.
(C) NON-CASH TRANSACTIONS: During 2001 and 2000, AIG issued 291.6 million
and 17.8 million common shares, respectively, in connection with acquisitions.
(D) INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES: Where AIG may
not have the positive intent to hold bonds and preferred stocks until maturity,
these securities are considered to be available for sale and carried at current
market values. Interest income with respect to fixed maturity securities is
accrued currently.
Fixed maturities held to maturity, at amortized cost, were transferred to
bonds available for sale, at market value, as of January 1, 2001 as permitted
and in accordance with the transition provisions of the Financial Accounting
Standards No. 138 "Accounting for Derivative Instruments and Hedging Activities
-- an amendment of FASB Statement No. 133" (collectively, FAS 133). (See Notes
1(y) and 8(d)).
Included in the bonds available for sale are collateralized mortgage
obligations (CMOs). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments over their estimated lives.
Bond trading securities are carried at current market values, as it is
AIG's intention to sell these securities in the near term.
Common and non-redeemable preferred stocks are carried at current market
values. Dividend income is generally recognized when receivable.
69
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Unrealized gains and losses from investments in equity securities and
fixed maturities available for sale are reflected as a separate component of
comprehensive income, net of deferred income taxes in capital funds currently.
Unrealized gains and losses from investments in trading securities are reflected
in income currently.
Realized capital gains and losses are determined principally by specific
identification. Where declines in values of securities below cost or amortized
cost are considered to be other than temporary, a charge is reflected in income
for the difference between cost or amortized cost and estimated net fair value.
In January 2001, the Emerging Issues Task Force (EITF) issued EITF 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." EITF 99-20 provides
guidance on the calculation of interest income and the recognition of
impairments related to beneficial interests held in an investment portfolio.
Beneficial interests are investments that represent rights to receive specified
cash flows from a pool of underlying assets (e.g., collateralized debt
obligations). In accordance with the transition provisions of EITF 99-20, AIG
recorded in its consolidated income statement for 2001 a cumulative effect of an
accounting change adjustment loss of $130 million ($200 million before tax).
(E) MORTGAGE LOANS ON REAL ESTATE, POLICY AND COLLATERAL LOANS -- NET:
Mortgage loans on real estate, policy loans and collateral loans are carried at
unpaid principal balances. Interest income on such loans is accrued currently.
Impairment of mortgage loans on real estate and collateral loans is based
upon certain risk factors and when collection of all amounts due under the
contractual term is not probable. This impairment is generally measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate subject to the fair value of underlying collateral.
Interest income on such loans is recognized as cash is received.
There is no allowance for policy loans, as these loans serve to reduce the
death benefit paid when the death claim is made and the balances are effectively
collateralized by the cash surrender value of the policy.
(F) FLIGHT EQUIPMENT: Flight equipment is stated at cost. Major additions
and modifications are capitalized. Normal maintenance and repairs, airframe and
engine overhauls and compliance with return conditions of flight equipment on
lease are provided by and paid for by the lessee. Under the provisions of most
leases for certain airframe and engine overhauls, the lessee is reimbursed for
costs incurred up to but not exceeding contingent rentals paid to AIG by the
lessee. AIG provides a charge to income for such reimbursements based upon the
expected reimbursements during the life of the lease. Depreciation and
amortization are computed on the straight-line basis to a residual value of
approximately 15 percent over the estimated useful lives of the related assets
but not exceeding 25 years. AIG monitors the global aircraft market and the
values of various types and models of aircraft within that market relative to
the values of its own fleet. If events or circumstances were such that the
carrying amount of AIG's aircraft might be impaired, AIG would determine if such
impairment existed and recognize such impairment in accordance with Financial
Accounting Standards Board (FASB) Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This caption also includes
deposits for aircraft to be purchased.
At the time the assets are retired or disposed of, the cost and associated
accumulated depreciation and amortization are removed from the related accounts
and the difference, net of proceeds, is recorded as a gain or loss.
(G) SECURITIES AVAILABLE FOR SALE, AT MARKET VALUE:
These securities are held to meet long term investment objectives and are
accounted for as available for sale, carried at current market values and
recorded on a trade date basis. Unrealized gains and losses from valuing these
securities and any related hedges are reflected in capital funds currently, net
of any related deferred income taxes. When the underlying security is sold, the
realized gain or loss resulting from the hedging derivative transaction is
recognized in income in that same period as the realized gain or loss of the
hedged security.
(H) FINANCE RECEIVABLES: Finance charges are recognized as revenue using
the interest method. Revenue ceases to be accrued when contractual payments are
not received for four consecutive months for loans and retail sales contracts,
and for six months for revolving retail accounts and private label receivables.
Extension fees, late charges, and prepayment penalties are recognized as revenue
when received.
Direct costs of originating loans, net of non-refundable points and fees,
are deferred and included in the carrying amount of the related loans. The
amount deferred is recognized as an adjustment to finance charge revenues, using
the interest method over the lesser of the contractual term or the expected life
based on prepayment experience. If loans are prepaid, any remaining deferral is
charged or credited to revenue.
Foreclosure proceedings are initiated on real estate loans when four
monthly installments are past due and these loans are charged off at
foreclosure. All other finance receivables are charged off when minimal or no
collections have been made for six months.
The allowance for finance receivable losses is maintained at a level
considered adequate to absorb anticipated credit losses in the existing
portfolio. The portfolio is periodically evaluated on a pooled basis and
considers factors such as economic conditions, portfolio composition, and loss
and delinquency experience in the evaluation of the allowance.
70
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(I) TRADING SECURITIES, AT MARKET VALUE: Trading securities are held to
meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and carried at current market
values. Unrealized gains and losses are reflected in income currently.
(J) SPOT COMMODITIES, AT MARKET VALUE: Spot commodities are carried at
current market values and are recorded on a trade date basis. The exposure to
market risk may be reduced through the use of forwards, futures and option
contracts. Unrealized gains and losses of both commodities and any derivative
transactions are reflected in income currently.
(K) UNREALIZED GAIN AND UNREALIZED LOSS ON INTEREST RATE AND CURRENCY
SWAPS, OPTIONS AND FORWARD TRANSACTIONS: Interest rate swaps, currency swaps,
equity swaps, swaptions, options and forward transactions are accounted for as
contractual commitments recorded on a trade date basis and are carried at
current market values or estimated fair values when market values are not
available. Unrealized gains and losses are reflected in income currently.
Estimated fair values are based on the use of valuation models that utilize,
among other things, current interest, foreign exchange and volatility rates.
AIG Financial Products Corp. and its subsidiaries (AIGFP) attempt to secure
reliable and independent current market prices, such as published exchange
prices, external subscription services' prices such as Bloomberg or Reuters or
third party broker quotes for use in these models. When such prices are not
available, AIGFP uses an internal methodology which includes interpolation or
extrapolation from verifiable prices nearest to the dates of the transactions.
These valuations represent an assessment of the present values of expected
future cash flows of these transactions and reflect market and credit risk. The
portfolio's discounted cash flows are evaluated with reference to current
market conditions, maturities within the portfolio and other relevant factors.
Based upon this evaluation, it is determined what offsetting transactions, if
any, are necessary to reduce the market risk of the portfolio. AIG manages its
market risk with a variety of transactions, including swaps, trading
securities, futures and forward contracts and other transactions as
appropriate. Because of the limited liquidity of some of these instruments, the
recorded values of these transactions may be different than the values that
might be realized if AIG were to sell or close out the transactions prior to
maturity. AIG believes that such differences are not significant to the results
of operations, financial condition or liquidity. Such differences would be
immediately recognized when the transactions are sold or closed out prior to
maturity.
(L) TRADING ASSETS AND TRADING LIABILITIES: Trading assets and trading
liabilities include option premiums paid and received and receivables from and
payables to counterparties which relate to unrealized gains and losses on
futures, forwards and options and balances due from and due to clearing brokers
and exchanges.
Futures, forwards and options purchased and written are accounted for as
contractual commitments on a trade date basis and are carried at fair values.
Unrealized gains and losses are reflected in income currently. The fair values
of futures contracts are based on closing exchange quotations.
Commodity forward transactions are carried at fair values derived from dealer
quotations and underlying commodity exchange quotations. For long dated forward
transactions, where there are no dealer or exchange quotations, fair values are
derived using internally developed valuation methodologies based on available
market information. Options are carried at fair values based on the use of
valuation models that utilize, among other things, current interest or commodity
rates and foreign exchange and volatility rates, as applicable.
(M) SECURITIES PURCHASED (SOLD) UNDER AGREEMENTS TO RESELL (REPURCHASE),
AT CONTRACT VALUE: Purchases of securities under agreements to resell and sales
of securities under agreements to repurchase are accounted for as collateralized
lending transactions and are recorded at their contracted resale or repurchase
amounts, plus accrued interest. Generally, it is AIG's policy to take possession
of or obtain a security interest in securities purchased under agreements to
resell.
AIG minimizes the credit risk that counterparties to transactions might
be unable to fulfill their contractual obligations by monitoring customer credit
exposure and collateral value and generally requiring additional collateral to
be deposited with AIG when deemed necessary.
AIG also enters into dollar roll agreements. These are agreements to sell
mortgage-backed securities and to repurchase substantially the same securities
at a specified price and date in the future. The dollar rolls are accounted for
as collateralized financings and the repurchase obligation is a component of
other liabilities. At December 31, 2002, 2001 and 2000, there were no dollar
rolls outstanding.
(N) SECURITIES LENDING COLLATERAL AND SECURITIES LENDING PAYABLE: AIG's
insurance operations lend their securities and primarily take cash as collateral
with respect to the securities lent. Income earned on invested collateral, net
of interest payable to the collateral provider is recorded in net investment
income.
(O) OTHER INVESTED ASSETS: Other invested assets consist primarily of
investments by AIG's insurance operations in joint ventures and partnerships,
and other investments not classified elsewhere herein.
The joint ventures and partnerships are carried at equity or cost
depending on the equity ownership position.
Other investments are carried at cost or market values depending upon the
nature of the underlying assets.
71
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(P) REINSURANCE ASSETS: Reinsurance assets include the balances due from
both reinsurance and insurance companies under the terms of AIG's reinsurance
agreements for paid and unpaid losses and loss expenses, ceded unearned premiums
and ceded future policy benefits for life and accident and health insurance
contracts and benefits paid and unpaid. Amounts related to paid and unpaid
losses and loss expenses with respect to these reinsurance agreements are
substantially collateralized.
(Q) INVESTMENTS IN PARTIALLY-OWNED COMPANIES: The equity method of
accounting is used for AIG's investment in companies in which AIG's ownership
interest approximates twenty but is not greater than fifty percent
(minority-owned companies). At December 31, 2002, AIG's significant investments
in partially-owned companies included its 24.3 percent interest in IPC Holdings,
Ltd., its 23.4 percent interest in Allied World Assurance Holdings, Ltd. and its
22.1 percent interest in The Fuji Fire and Marine Insurance Co., Ltd. This
balance sheet caption also includes investments in less significant
partially-owned companies and in certain minor majority-owned subsidiaries. The
amounts of dividends received from unconsolidated entities owned less than 50
percent were $13 million, $3 million and $3 million in 2002, 2001 and 2000,
respectively. The undistributed earnings of unconsolidated entities owned less
than 50 percent was $155 million as of December 31, 2002.
(R) REAL ESTATE AND OTHER FIXED ASSETS: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs are
charged to income as incurred; expenditures for betterments are capitalized and
depreciated.
From time to time, AIG assesses the carrying value of its real estate
relative to the market values of real estate within the specific local area. At
December 31, 2002, there were no impairments.
(S) SEPARATE AND VARIABLE ACCOUNTS: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders who predominantly bear the investment risk.
Each account has specific investment objectives, and the assets are carried at
market value. The assets of each account are legally segregated and are not
subject to claims which arise out of any other business of AIG. The liabilities
for these accounts are equal to the account assets.
(T) SECURITIES AND SPOT COMMODITIES SOLD BUT NOT YET PURCHASED, AT MARKET
VALUE: Securities and spot commodities sold but not yet purchased represent
sales of securities and spot commodities not owned at the time of sale. The
obligations arising from such transactions are recorded on a trade date basis
and carried at the respective current market values or current commodity prices.
Unrealized gains or losses are reflected in income currently.
(U) PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES: Preferred
shareholders' equity in subsidiary companies relates to outstanding preferred
stock or interest of ILFC and certain subsidiaries of AIG SunAmerica, AGC and
HSB, wholly owned subsidiaries of AIG. Cash distributions on such preferred
stock or interest are accounted for as interest expense and included as minority
interest in the consolidated statement of income.
(V) TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FAS 52). Under FAS 52, functional currency assets and liabilities
are translated into U.S. dollars generally using current rates of exchange
prevailing at the balance sheet date of each respective subsidiary and the
related translation adjustments are recorded as a separate component of
comprehensive income, net of any related taxes in capital funds. Functional
currencies are generally the currencies of the local operating environment.
Income statement accounts expressed in functional currencies are translated
using average exchange rates. The adjustments resulting from translation of
financial statements of foreign entities operating in highly inflationary
economies are recorded in income. Exchange gains and losses resulting from
foreign currency transactions are also recorded in income currently. The
exchange gain or loss with respect to utilization of foreign exchange hedging
instruments is recorded as a component of comprehensive income.
(W) INCOME TAXES: Deferred federal and foreign income taxes are provided
for temporary differences for the expected future tax consequences of events
that have been recognized in AIG's financial statements or tax returns.
(X) EARNINGS PER SHARE: Basic earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. Diluted earnings per share are
based on those shares used in basic earnings per share plus shares that would
have been outstanding assuming issuance of common shares for all dilutive
potential common shares outstanding, retroactively adjusted to reflect all stock
dividends and stock splits.
72
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
THE COMPUTATION OF EARNINGS PER SHARE FOR DECEMBER 31, 2002, 2001 AND 2000 WAS
AS FOLLOWS:
(in millions, except per share amounts)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
NUMERATOR FOR BASIC EARNINGS
PER SHARE:
Income before cumulative effect
of accounting changes $ 5,519 $ 5,499 $ 6,639
Cumulative effect of accounting
changes, net of tax -- (136) --
Net income 5,519 5,363 6,639
--------------------------------------------------------------------------------
Net income applicable to
common stock $ 5,519 $ 5,363 $ 6,639
================================================================================
DENOMINATOR FOR BASIC EARNINGS
PER SHARE:
Average shares outstanding used in the
computation of per share earnings:
Common stock issued 2,752 2,762 2,796
Common stock in treasury (140) (141) (189)
--------------------------------------------------------------------------------
Average shares outstanding-- basic 2,612 2,621 2,607
================================================================================
NUMERATOR FOR DILUTED EARNINGS
PER SHARE:
Income before cumulative effect
of accounting changes $ 5,519 $ 5,499 $ 6,639
Cumulative effect of accounting
changes, net of tax -- (136) --
Net income 5,519 5,363 6,639
Dividends on convertible preferred
securities -- -- 5
--------------------------------------------------------------------------------
Net income applicable to common stock $ 5,519 $ 5,363 $ 6,644
================================================================================
DENOMINATOR FOR DILUTED EARNINGS
PER SHARE:
Average shares outstanding 2,612 2,621 2,607
Incremental shares from potential
common stock:
Average number of shares arising
from outstanding employee stock
plans (treasury stock method) 22 29 27
Average number of shares issuable
upon conversion of convertible
securities and preferred stock -- -- 4
--------------------------------------------------------------------------------
Average shares outstanding-- diluted 2,634 2,650 2,638
================================================================================
EARNINGS PER SHARE:
Basic:
Income before cumulative effect
of accounting changes $ 2.11 $ 2.10 $ 2.55
Cumulative effect of accounting changes -- (0.05) --
Net income $ 2.11 $ 2.05 $ 2.55
--------------------------------------------------------------------------------
Diluted:
Income before cumulative effect
of accounting changes $ 2.10 $ 2.07 $ 2.52
Cumulative effect of accounting changes -- (0.05) --
Net income $ 2.10 $ 2.02 $ 2.52
================================================================================
(Y) DERIVATIVES: In June 1998, the Financial Accounting Standards Board
(FASB) issued FAS 133. In June 2000, FASB issued Statement of Financial
Accounting Standards No. 138 "Accounting for Derivative Instruments and Hedging
Activities--an amendment of FASB Statement No. 133" (collectively, FAS 133).
FAS 133 requires AIG to recognize all derivatives in the consolidated
balance sheet at fair value. The financial statement recognition of the change
in the fair value of a derivative depends on a number of factors, including the
intended use of the derivative and the extent to which it is effective as part
of a hedge transaction. The changes in fair value of the derivative transactions
of AIGFP and AIG Trading Group Inc. and its subsidiaries (AIGTG) are currently
presented, in all material respects, as a component of AIG's operating income.
The discussion below relates to the derivative activities of AIG other than
those of AIGFP and AIGTG.
On the date the derivative contract is entered into, AIG designates the
derivative as: (i) a hedge of the subsequent changes in the fair value of a
recognized asset or liability or of an unrecognized firm commitment ("fair
value" hedge); (ii) a hedge of a forecasted transaction, or the variability of
cash flows to be received or paid related to a recognized asset or liability
("cash flow" hedge); or (iii) a hedge of a net investment in a foreign
operation. Fair value and cash flow hedges may involve foreign currencies
("foreign currency hedges"). The gain or loss in the fair value of a derivative
that is designated, qualifies and is highly effective as a fair value hedge is
recorded in current period earnings, along with the loss or gain on the hedged
item attributable to the hedged risk. The gain or loss in the fair value of a
derivative that is designated, qualifies and is highly effective as a cash flow
hedge is recorded in other comprehensive income, until earnings are affected by
the variability of cash flows. The gain or loss in the fair value of a
derivative that is designated, qualifies and is highly effective as a hedge of a
net investment in a foreign operation is recorded in the foreign currency
translation adjustments account within other comprehensive income. Changes in
the fair value of derivatives used for other than the above hedging activities
are reported in current period earnings.
AIG documents all relationships between hedging instruments and hedged
items, as well as its risk-management objectives and strategy for undertaking
various hedge transactions. This process includes linking all derivatives that
are designated as hedges to specific assets or liabilities on the balance sheet,
or specific firm commitments or forecasted transactions. AIG also assesses, both
at the hedge's inception and on an ongoing basis, whether the derivatives used
in hedging transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items.
In accordance with the transition provisions of FAS 133, AIG recorded in
its consolidated income statement for 2001 a cumulative effect of an accounting
change adjustment loss of $6 million. This loss represents the net fair value of
all previous unrecorded derivative instruments as of January 1, 2001, net of tax
and after the application of hedge accounting. AIG also recorded in its
consolidated statement of comprehensive income for 2001 a cumulative effect of
an accounting change adjustment gain of $150 million. This gain represents the
increase in other comprehensive income, net of taxes,
73
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
arising from recognizing the fair value of all derivative contracts designated
as cash flow hedging instruments, and to a lesser extent, hedging instruments
used to hedge net investments in foreign operations.
AIG (excluding its two trading operations, AIGFP and AIGTG) uses
derivative instruments (principally swap and forward contracts) to minimize
AIG's asset-liability exposure and foreign currency and interest rate exposures.
These risks arise primarily from available-for-sale fixed income securities,
debt, and policyholder account balance liabilities associated with guaranteed
investment contracts. Other hedging activities, such as those involving
forecasted transactions or equity securities, are not significant. During 2002,
there were no hedges that were discontinued or otherwise no longer qualify as
hedges under FAS 133. With respect to both fair value hedges and cash flow
hedges, hedge ineffectiveness was insignificant for 2002. During 2002, there
were minor reclassifications to earnings from other comprehensive income under
cash flow hedge accounting. These reclassifications were connected to programs
of synthetically converting certain investment securities, debt issuances or
policyholder account balance liabilities associated with guaranteed investment
contracts, from a floating interest rate to a fixed interest rate. As at
December 31, 2002, the maximum amount of net derivative losses to be
reclassified into net income within the next twelve months is insignificant. The
maximum length of time over which future cash flows are hedged is approximately
16 years.
In addition to hedging activities, AIG also uses derivative instruments
with respect to investment operations, which include, among other things,
writing option contracts, and purchasing investments with embedded derivatives,
such as equity linked notes and convertible bonds. All changes in the market
value of these derivatives are recorded in earnings. AIG bifurcates an embedded
derivative where: (i) the economic characteristics of the embedded instruments
are not clearly and closely related to those of the remaining components of the
financial instrument; and (ii) a separate instrument with the same terms as the
embedded instrument meets the definition of a derivative under FAS 133.
In accordance with the transition provisions of FAS 133, AIG transferred
bonds in the held to maturity, at amortized cost category into the bonds
available for sale, at market value category at January 1, 2001. The amortized
cost of the bonds transferred was $11.53 billion. The unrealized appreciation,
net of deferred tax expense was approximately $339 million at the date of
transfer and was recorded as a cumulative effect of an accounting change within
other comprehensive income. Under the provisions of FAS 133, such a transfer
does not affect AIG's intent nor its ability to hold current or future bonds to
their maturity.
(Z) GOODWILL AND INTANGIBLE ASSETS: In June 2001, FASB issued Statement
of Financial Accounting Standard No. 141 "Business Combinations" (FAS 141). FAS
141 requires AIG, among other things, to apply the purchase method of accounting
for all acquisitions initiated after June 30, 2001.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" (FAS 142). As of January 1, 2002, AIG adopted FAS 142. FAS
142 requires AIG to discontinue the amortization of goodwill in its consolidated
income statement. Amortization expense recorded in AIG's consolidated statement
of income amounted to $163 million and $98 million pre-tax for 2001 and 2000,
respectively.
FAS 142 requires goodwill to be subject to an assessment of impairment on
an annual basis, or more frequently if circumstances indicate that a possible
impairment has occurred. The assessment of impairment involves a two-step
process prescribed in FAS 142, whereby an initial assessment for potential
impairment is performed, followed by a measurement of the amount of impairment,
if any. FAS 142 also requires the completion of a transitional impairment test
in the year of adoption, with any identified impairments recognized as a
cumulative effect of change in accounting principles. During the second quarter,
AIG completed its transitional impairment test for 2002, resulting in no
impairment.
Changes in the carrying amount of goodwill are primarily caused as a
result of foreign currency translation adjustments.
(AA) ACCOUNTING STANDARDS: In November 2002, FASB issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN45). FIN45 requires
that, for guarantees within its scope that are issued or amended after December
31, 2002, a liability for the fair value of the obligation undertaken in issuing
the guarantee be established and recognized through earnings. FIN45 also
requires additional disclosures in financial statements starting with AIG's 2002
year-end financial statements.
AIG believes that the impact of FIN45 on its results of operations and
financial condition will not be significant.
AIG guarantees the indebtedness of third parties principally in
connection with AIG SunAmerica Inc.'s (AIG SunAmerica) investments in affordable
housing properties. The guarantees are issued primarily to facilitate financing
for the construction of the underlying properties, and range in duration of up
to ten years. The loans are secured by the underlying real estate. Since the
inception of this investment program over ten years ago, payments under these
guarantees have been insignificant. This is due to the fact that the loans are
first backed by the creditworthiness of the third party general partner, and
secondly, are secured by the underlying properties. The maximum exposure under
these guarantees as of December 31, 2002 is approximately $4.2 billion.
74
American International Group, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In addition, AIG's real estate investment operations will occasionally
extend guarantees to real estate partnerships in which they are an investor. The
guarantees facilitate financing for the construction, and/or purchase of land.
There have been no losses incurred on any guarantee to date. This is due to the
fact that the loans are first backed by the creditworthiness of the third party
general partner, and secondly, are secured by the underlying properties. The
maximum exposure of these guarantees as of December 31, 2002 is approximately
$130 million.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN46). FIN46 changes the method of determining
whether certain entities should be consolidated in AIG's consolidated financial
statements. An entity is subject to FIN46 and is called a Variable Interest
Entity (VIE) if it has (i) equity that is insufficient to permit the entity to
finance its activities without additional subordinated financial support from
other parties, or (ii) equity investors that cannot make significant decisions
about the entity's operations, or do not absorb the expected losses or receive
the expected returns of the entity. All other entities are evaluated for
consolidation under existing guidance. A VIE is consolidated by its primary
beneficiary, which is the party that has a majority of the expected losses or a
majority of the expected residual returns of the VIE, or both.
The provisions of FIN46 are to be applied immediately to VIEs created
after January 31, 2003, and to VIEs in which AIG obtains an interest after that
date. For VIEs in which AIG holds a variable interest that it acquired before
February 1, 2003, FIN46 applies to the fiscal quarter ended September 30, 2003.
For any VIEs that must be consolidated under FIN46 that were created before
February 1, 2003, the assets, liabilities and noncontrolling interest of the VIE
would be initially measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change.
AIG is currently evaluating the impact of applying FIN46 to existing VIEs
in which it has a variable interest, and believes that the impact on its results
of operations and financial condition will not be significant. (See Note 20 of
Notes to Financial Statements.)
2. SEGMENT INFORMATION
Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds which
generally cause a delay in the outward remittance of such funds. Approximately
27 percent and 26 percent of consolidated assets at December 31, 2002 and 2001,
respectively, and 41 percent of revenues in each of the years ended December 31,
2002, 2001 and 2000, respectively, were located in or derived from foreign
countries (other than Canada).
(a) AIG's operations are conducted principally through four business segments.
These segments and their respective operations are as follows:
General Insurance: AIG's general insurance subsidiaries are multiple line
companies writing substantially all lines of property and casualty insurance.
The Domestic Brokerage Group (DBG) writes substantially all classes of
business insurance accepting such business mainly from insurance brokers. This
provides DBG the opportunity to select specialized markets and retain
underwriting control. Any licensed broker is able to submit business to DBG
without the traditional agent-company contractual relationship, but such broker
usually has no authority to commit DBG to accept a risk. HSB's operations are
included in this group.
Transatlantic Holdings, Inc. (Transatlantic) offers through its
reinsurance company subsidiaries reinsurance capacity both domestically and
overseas on treaty and facultative basis for a full range of property and
casualty products.
Personal Lines engages in the mass marketing of personal lines insurance,
primarily private passenger auto, homeowners and personal umbrella coverages.
Mortgage Guaranty provides guaranty insurance primarily on conventional
first mortgage loans on single family dwellings and condominiums.
AIG's Foreign General insurance group accepts risks primarily
underwritten through American International Underwriters (AIU), a marketing unit
consisting of wholly owned agencies and insurance entities. The Foreign General
insurance group also includes business written by AIG's foreign-based insurance
subsidiaries for their own accounts. The Foreign General group uses various
marketing methods to write both business and personal lines insurance with
certain refinements for local laws, customs and needs. AIU operates in over 70
countries in Asia, the Pacific Rim, Europe, Africa, Middle East and Latin
America.
Life Insurance: AIG's life insurance subsidiaries offer a wide range of
traditional insurance and financial and investment products. Traditional
products consist of individual and group life, annuity, endowment and accident
and health policies. Financial and investment products consist of fixed and
variable annuities, guaranteed investment contracts and pensions.
AIG's three principal overseas life operations are American Life
Insurance Company (ALICO), American International Assurance Company, Ltd. (AIA)
and Nan Shan Life Insurance Company, Ltd. (Nan Shan). ALICO is
75
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SEGMENT INFORMATION (continued)
incorporated in Delaware and all of its business is written outside of the
United States. ALICO has operations either directly or through subsidiaries in
approximately 50 countries located in Europe, Africa, Latin America, the
Caribbean, the Middle East, and the Far East, with Japan being the largest
territory. In 2001, AIG added significantly to its presence in Japan with the
acquisition of AIG Star Life Insurance Co, Ltd. (AIG Star Life) as a result of
the reorganization of Chiyoda Mutual Life Insurance Company. AIA operates
primarily in China, (including Hong Kong), Singapore, Malaysia and Thailand. Nan
Shan operates in Taiwan. AIG's principal domestic life insurance subsidiaries
include the AIG American General Life Companies, AIG Annuity Insurance Company
and SunAmerica Life Insurance Company. These companies utilize multiple
distribution channels including brokerage and career and general agents to offer
traditional life products as well as financial investment products.
Financial Services: AIG's financial services subsidiaries engage in
diversified financial products and services including aircraft leasing, consumer
and insurance premium financing, and capital markets structuring and
market-making activities.
International Lease Finance Corporation (ILFC) engages primarily in the
acquisition of commercial jet aircraft and the leasing and remarketing of such
aircraft to airlines around the world. Also, ILFC provides, for a fee, fleet
management services to certain third-party operators.
AIG Financial Products Corp. and its subsidiaries (AIGFP) engage in a
wide variety of financial transactions, including long-dated interest rate,
currency, equity and credit derivatives and structured borrowings through notes,
bonds and guaranteed investment agreements. AIGFP does not engage in trading
activities with respect to commodity contracts. AIG Trading Group Inc. through
its subsidiaries (AIGTG) engages in various commodity trading, foreign exchange
trading, and market making activities.
AIG's Consumer Finance operations include American General Finance, Inc.
as well as AIG Consumer Finance Group, Inc. (AIGCFG). AGF and AIGCFG provide a
wide variety of consumer finance products, including real estate mortgages,
consumer loans, retail sales finance and credit related insurance to customers
both domestically and overseas, particularly emerging markets.
Retirement Savings & Asset Management: AIG's retirement savings & asset
management operations offer a wide variety of investment products, including
variable annuities, and mutual funds, as well as investment services, including
investment asset management. Such products and services are offered to
individuals and institutions both domestically and overseas.
AIG's principal retirement savings & asset management operations are
conducted through AIG SunAmerica, The Variable Annuity Life Insurance Company
(VALIC), and the subsidiaries and affiliated companies of AIG Global Investment
Group, Inc. (AIG Global Investment Group). AIG SunAmerica develops and sells
variable annuities and other investment products, sells and manages mutual funds
and provides financial services. VALIC provides tax qualified annuities to
employees of educational, healthcare and governmental entities. AIG Global
Investment Group manages third-party institutional, retail and private equity
funds' invested assets on a global basis, and provides securities lending and
custodial services. An AIG Global Investment Group member organizes and manages
the invested assets of institutional private equity investment funds. Each of
these subsidiary operations receives fees for investment products and services
provided.
76
American International Group, Inc. and Subsidiaries
2. SEGMENT INFORMATION (continued)
(B) THE FOLLOWING TABLE SUMMARIZES THE OPERATIONS BY MAJOR OPERATING SEGMENT FOR
THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000:
OPERATING SEGMENTS-2002
---------------------------------------------------------------------------------------------------------
RETIREMENT
SAVINGS TOTAL RECLASSIFICATIONS
GENERAL LIFE FINANCIAL & ASSET REPORTABLE AND
(in millions) INSURANCE INSURANCE SERVICES MANAGEMENT OTHER(A) SEGMENTS ELIMINATIONS CONSOLIDATED
===================================================================================================================================
Revenues (b) $ 26,171 $ 31,541 $ 6,815 $ 3,485 $ (530) $ 67,482 $ -- $ 67,482
Interest revenue -- -- 3,787 65 -- 3,852 -- 3,852
Interest expense -- 76 3,327 11 215 3,629 -- 3,629
Realized capital gains
(losses) (858) (1,053) -- -- (530) (2,441) -- (2,441)
Operating income (loss)
before minority
interest 667(c) 4,929 2,189 1,016 (659) 8,142 -- 8,142
Income taxes (benefits) 210 1,979 765 355 (981) 2,328 -- 2,328
Depreciation expense 178 239 1,097 7 132 1,653 -- 1,653
Capital expenditures 323 725 5,395 59 150 6,652 -- 6,652
Identifiable assets 109,068 339,847 124,617 2,567 60,769 636,868 (75,639) 561,229
===================================================================================================================================
Operating Segments-2001
--------------------------------------------------------------------------------------------------------
Retirement
Savings Total Reclassifications
General Life Financial & Asset Reportable and
(in millions) Insurance Insurance Services Management Other(a) Segments Eliminations Consolidated
===================================================================================================================================
Revenues (b) $ 22,128 $ 29,893 $ 6,485 $ 3,712 $ (452) $ 61,766 $ -- $ 61,766
Interest revenue -- -- 3,983 84 -- 4,067 -- 4,067
Interest expense 2 109 3,596 17 314 4,038 -- 4,038
Realized capital gains
(losses) (130) (254) -- -- (452) (836) -- (836)
Operating income (loss)
before minority
interest 2,851(d) 4,675(d) 1,991 1,088 (2,466)(e) 8,139 -- 8,139
Income taxes (benefits) 742 1,579 706 366 (1,054) 2,339 -- 2,339
Depreciation expense 189 216 910 5 117 1,437 -- 1,437
Capital expenditures 290 842 4,529 11 156 5,828 -- 5,828
Identifiable assets 91,544 296,648 107,322 1,842 54,749 552,105 (59,044) 493,061
===================================================================================================================================
Operating Segments-2000
---------------------------------------------------------------------------------------------------------
Retirement
Savings Total Reclassifications
General Life Financial & Asset Reportable and
(in millions) Insurance Insurance Services Management Other(a) Segments Eliminations Consolidated
===================================================================================================================================
Revenues (b) $ 20,146 $ 26,963 $ 5,954 $ 3,465 $ (190) $ 56,338 $ -- $ 56,338
Interest revenue -- -- 3,557 94 -- 3,651 -- 3,651
Interest expense 5 144 3,276 15 265 3,705 -- 3,705
Realized capital gains
(losses) 38 (162) -- -- (190) (314) -- (314)
Operating income (loss)
before minority
interest 3,524 4,058 1,666 1,108 (333) 10,023 -- 10,023
Income taxes (benefits) 931 1,315 581 388 (244) 2,971 -- 2,971
Depreciation expense 149 149 833 4 108 1,243 -- 1,243
Capital expenditures 278 501 3,748 18 184 4,729 -- 4,729
Identifiable assets 85,270 248,982 94,173 1,590 41,460 471,475 (44,804) 426,671
===================================================================================================================================
(a) Includes AIG Parent and other operations which are not required to be
reported separately.
(b) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, retirement savings & asset management commissions and other fees and
realized capital gains (losses).
(c) Includes loss reserve charge of $2.8 billion.
(d) Includes $769 million and $131 million with respect to WTC losses for
general and life insurance operations, respectively.
(e) Includes acquisition, restructuring and related charges of $2,017 million.
77
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SEGMENT INFORMATION (continued)
(C) THE FOLLOWING IS AIG'S CONSOLIDATED STATEMENT OF SEGMENT OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000:
CONSOLIDATED STATEMENT OF SEGMENT OPERATIONS
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
General insurance operations:
Net premiums written $ 27,414 $ 20,101 $ 17,526
Change in unearned
premium reserve (3,145) (736) (119)
--------------------------------------------------------------------------------
Net premiums earned 24,269 19,365 17,407
Net investment income 2,760 2,893 2,701
Realized capital gains (losses) (858) (130) 38
--------------------------------------------------------------------------------
General insurance revenues 26,171 22,128 20,146
================================================================================
Losses incurred 18,449(A) 12,459 11,379
Losses incurred: World Trade
Center and related
losses (WTC) -- 769 --
Loss expenses incurred 2,365(B) 2,178 1,725
Underwriting expenses 4,690 3,871 3,518
--------------------------------------------------------------------------------
General insurance benefits
and expenses 25,504 19,277 16,622
================================================================================
General insurance operating
income 667(A)(B) 2,851 3,524
--------------------------------------------------------------------------------
Life insurance
Premium income 20,320 19,063 17,163
Net investment income 12,274 11,084 9,962
Realized capital gains (losses) (1,053) (254) (162)
--------------------------------------------------------------------------------
Life insurance revenues 31,541 29,893 26,963
================================================================================
Death and other benefits 10,552 10,449 8,264
Death and other benefits:
WTC -- 131 --
Increase in future policy
benefits 10,561 9,068 9,496
Acquisition and insurance
expenses 5,499 5,570 5,145
--------------------------------------------------------------------------------
Life insurance benefits
and expenses 26,612 25,218 22,905
================================================================================
Life insurance operating income 4,929 4,675 4,058
--------------------------------------------------------------------------------
Financial services
operating income 2,189 1,991 1,666
Retirement savings &
asset management
operating income 1,016 1,088 1,108
Other realized capital
gains (losses) (530) (452) (190)
Other income (deductions) -
net (129)(C) 3 172
Acquisition, restructuring
and related charges -- (2,017) (315)
--------------------------------------------------------------------------------
Income before income taxes,
minority interest and
cumulative effect of
accounting changes $ 8,142 $ 8,139 $ 10,023
================================================================================
(a) Includes loss reserve charge of $2.8 billion.
(b) Includes 21st Century's loss adjustment expense pre-tax provision of $43
million for SB 1899 Northridge earthquake claims.
(c) Includes 21st Century's pre-tax charge of $37 million to write off
capitalized costs associated with a software development project.
78
American International Group, Inc. and Subsidiaries
2. SEGMENT INFORMATION (continued)
(D) THE FOLLOWING TABLE SUMMARIZES AIG'S GENERAL INSURANCE OPERATIONS BY MAJOR
INTERNAL REPORTING GROUP FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000:
GENERAL INSURANCE-2002
----------------------------------------------------------------------------------------------------------
DOMESTIC TOTAL RECLASSIFICATIONS TOTAL
BROKERAGE PERSONAL MORTGAGE FOREIGN REPORTABLE AND GENERAL
(in millions) GROUP TRANSATLANTIC LINES GUARANTY GENERAL SEGMENT ELIMINATIONS INSURANCE
====================================================================================================================================
Net premiums written $ 15,214 $ 2,500 $ 3,182 $ 508 $ 6,010 $ 27,414 $ -- $ 27,414
Net premiums earned 13,053 2,369 2,913 502 5,432 24,269 -- 24,269
Losses & loss expenses
incurred 13,244 1,796 2,365 88 3,321 20,814 -- 20,814
Underwriting expenses 1,858 631 519 136 1,546 4,690 -- 4,690
Adjusted underwriting
profit (loss)(a)(c) (2,049) (58) 29 278 565 (1,235) -- (1,235)
Net investment income 1,609 252 122 139 615 2,737 23 2,760
Operating income (loss)
before realized
capital gains (b) (440)(C)(E) 194(C) 151 417 1,180 1,502 23 1,525
Depreciation expense 72 3 27 3 73 178 -- 178
Capital expenditures 101 1 38 2 181 323 -- 323
Identifiable assets 73,588 7,287 3,516 2,547 25,638 112,576 (3,508) 109,068
========================================================================================================================== =========
General Insurance-2001
-----------------------------------------------------------------------------------------------------------
Domestic Total Reclassifications Total
Brokerage Personal Mortgage Foreign Reportable and General
(in millions) Group Transatlantic Lines Guaranty General Segment Eliminations Insurance
====================================================================================================================================
Net premiums written $ 10,197 $ 1,906 $ 2,454 $ 494 $ 5,050 $ 20,101 $ -- $ 20,101
Net premiums earned 9,776 1,790 2,478 489 4,832 19,365 -- 19,365
Losses & loss expenses
incurred 8,728 1,562 2,130 63 2,923 15,406 -- 15,406
Underwriting expenses 1,386 502 440 115 1,428 3,871 -- 3,871
Adjusted underwriting
profit (loss)(a)(d) (338) (274) (92) 311 481 88 -- 88
Net investment income 1,827 240 114 106 583 2,870 23 2,893
Operating income (loss)
before realized
capital gains (b) (d) 1,489(e) (34) 22 417 1,064 2,958 23 2,981
Depreciation expense 83 3 28 4 71 189 -- 189
Capital expenditures 106 2 69 3 110 290 -- 290
Identifiable assets 60,604 6,741 3,863 2,219 21,781 95,208 (3,664) 91,544
====================================================================================================================================
General Insurance-2000
-----------------------------------------------------------------------------------------------------------
Domestic Total Reclassifications Total
Brokerage Personal Mortgage Foreign Reportable and General
(in millions) Group Transatlantic Lines Guaranty General Segment Eliminations Insurance
====================================================================================================================================
Net premiums written $ 7,934 $ 1,659 $ 2,510 $ 453 $ 4,970 $17,526 $ -- $17,526
Net premiums earned 8,023 1,632 2,401 452 4,899 17,407 -- 17,407
Losses & loss expenses
incurred 6,843 1,197 2,022 68 2,974 13,104 -- 13,104
Underwriting expenses 1,003 434 416 114 1,551 3,518 -- 3,518
Adjusted underwriting
profit (loss)(a) 177 1 (37) 270 374 785 -- 785
Net investment income 1,614 234 113 93 570 2,624 77 2,701
Operating income before
realized capital
gains(b) 1,791(e) 235 76 363 944 3,409 77 3,486
Depreciation expense 52 2 19 5 71 149 -- 149
Capital expenditures 102 2 75 4 95 278 -- 278
Identifiable assets 57,302 5,523 3,776 1,867 19,626 88,094 (2,824) 85,270
====================================================================================================================================
(a) Adjusted underwriting profit (loss) is a GAAP measure that represents
statutory underwriting profit or loss adjusted primarily for changes in
deferred acquisition costs.
(b) Realized capital gains are not deemed to be an integral part of AIG's
general insurance operations' internal reporting groups.
(c) Includes loss reserve charge of $2.7 billion and $100 million for DBG and
Transatlantic, respectively.
(d) Includes $769 million with respect to WTC losses: DBG: $544 million;
Transatlantic: $200 million; Foreign General: $25 million.
(e) Includes $333 million, $139 million ($198 million excluding WTC losses) and
$224 million for the twelve months ended December 31, 2002, 2001 and 2000,
respectively, with respect to the Lexington Surplus Lines Pool.
79
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SEGMENT INFORMATION (continued)
(E) THE FOLLOWING TABLE SUMMARIZES AIG'S LIFE INSURANCE OPERATIONS BY MAJOR
INTERNAL REPORTING GROUP FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000:
LIFE INSURANCE-2002
-----------------------------------------------------------------------------------------------
ALICO AIA TOTAL RECLASSIFICATIONS
AND AND DOMESTIC REPORTABLE AND TOTAL LIFE
(in millions) STAR LIFE(A) NAN SHAN LIFE OTHER SEGMENT ELIMINATIONS INSURANCE
================================================================================================================================
Premium income $ 5,747 $ 9,606 $ 4,622 $ 345 $ 20,320 $-- $ 20,320
Net investment income 1,605 2,156 8,325 188 12,274 -- 12,274
Operating income before
realized capital gains (b) 1,562 1,622 2,688 110 5,982 -- 5,982
Depreciation expense 73 48 112 6 239 -- 239
Capital expenditures 245 148 330 2 725 -- 725
Identifiable assets 55,112 49,919 233,004 2,406 340,441 (594) 339,847
================================================================================================================================
Life Insurance-2001
------------------------------------------------------------------------------------------------
ALICO AIA Total Reclassifications
and and Domestic Reportable and Total Life
(in millions) Star Life(a) Nan Shan Life Other Segment Eliminations Insurance
====================================================================================================================================
Premium income $ 5,212 $ 8,485 $ 4,948 $ 418 $ 19,063 $ -- $ 19,063
Net investment income 1,502 1,880 7,504 198 11,084 -- 11,084
Operating income before
realized capital gains (b) (c) 1,048 1,483 2,288 110 4,929 -- 4,929
Depreciation expense 65 40 104 7 216 -- 216
Capital expenditures 506 81 238 17 842 -- 842
Identifiable assets 45,767 41,854 206,734 2,877 297,232 (584) 296,648
====================================================================================================================================
Life Insurance-2000
--------------------------------------------------------------------------------------------------
AIA Total Reclassifications
and Domestic Reportable and Total Life
(in millions) ALICO Nan Shan Life Other Segment Eliminations Insurance
===================================================================================================================================
Premium income $ 4,134 $ 7,859 $ 4,809 $ 361 $ 17,163 $-- $ 17,163
Net investment income 1,346 1,688 6,781 147 9,962 -- 9,962
Operating income before
realized capital gains (b) 757 1,409 1,979 75 4,220 -- 4,220
Depreciation expense 46 33 62 8 149 -- 149
Capital expenditures 313 58 98 32 501 -- 501
Identifiable assets 28,532 32,697 186,111 1,807 249,147 (165) 248,982
===================================================================================================================================
(a) Increase in 2001 reflects acquisition of AIG Star Life Insurance Co. Ltd.
in April 2001.
(b) Realized capital gains are not deemed to be an integral part of AIG's life
insurance operations' internal reporting groups.
(c) Includes $131 million with respect to WTC losses.
80
American International Group, Inc. and Subsidiaries
2. SEGMENT INFORMATION (continued)
(F) THE FOLLOWING TABLE SUMMARIZES AIG'S FINANCIAL SERVICES OPERATIONS BY
MAJOR INTERNAL REPORTING GROUP FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
2000:
FINANCIAL SERVICES-2002
----------------------------------------------------------------------------------------------
TOTAL RECLASSIFICATIONS TOTAL
CONSUMER REPORTABLE AND FINANCIAL
(in millions) ILFC AIGFP(A) FINANCE OTHER SEGMENT ELIMINATIONS SERVICES
==================================================================================================================================
Commissions, transaction and
other fees and loan fees (b) $ 2,845 $ 1,306 $ 2,473 $ 807 $ 7,431 $ (616) $ 6,815
Interest revenue 25 1,471 2,180 247 3,923 (136) 3,787
Interest expense 900 1,731 639 133 3,403 (76) 3,327
Operating income (loss) 801 808 549 116 2,274 (85) 2,189
Depreciation expense 964 46 32 55 1,097 -- 1,097
Capital expenditures 5,304 27 24 40 5,395 -- 5,395
Identifiable assets 27,771 56,495 18,900 26,706 129,872 (5,255) 124,617
==================================================================================================================================
Financial Services-2001
------------------------------------------------------------------------------------------------
Total Reclassifications Total
Consumer Reportable and Financial
(in millions) ILFC AIGFP(a) Finance Other Segment Eliminations Services
====================================================================================================================================
Commissions, transaction and
other fees and loan fees (b) $ 2,613 $ 1,178 $ 2,560 $ 748 $ 7,099 $ (614) $ 6,485
Interest revenue 33 1,638 2,231 297 4,199 (216) 3,983
Interest expense 850 1,883 753 244 3,730 (134) 3,596
Operating income (loss) 749 758 505 66 2,078 (87) 1,991
Depreciation expense 811 9 34 56 910 -- 910
Capital expenditures 4,418 17 39 55 4,529 -- 4,529
Identifiable assets 23,424 50,324 16,945 20,008 110,701 (3,379) 107,322
====================================================================================================================================
Financial Services-2000
------------------------------------------------------------------------------------------------
Total Reclassifications Total
Consumer Reportable and Financial
(in millions) ILFC AIGFP(a) Finance Other Segment Eliminations Services
====================================================================================================================================
Commissions, transaction and
other fees and loan fees (b) $ 2,441 $ 1,056 $ 2,325 $ 702 $ 6,524 $ (570) $ 5,954
Interest revenue 38 1,540 1,956 267 3,801 (244) 3,557
Interest expense 824 1,552 756 282 3,414 (138) 3,276
Operating income (loss) 654 648 386 52 1,740 (74) 1,666
Depreciation expense 729 8 29 67 833 -- 833
Capital expenditures 3,435 216 40 57 3,748 -- 3,748
Identifiable assets 19,984 41,837 15,460 19,341 96,622 (2,449) 94,173
====================================================================================================================================
(a) AIGFP's interest revenue and interest expense are reported as net revenues
in the caption "Commissions, transactions and other fees and loan fees".
(b) Commissions, transaction and other fees and loan fees are the sum of the
net gain or loss of trading activities, the net change in unrealized gain
or loss, the net interest revenues from forward rate agreements and
interest rate swaps, and where applicable, management and incentive fees
from asset management activities.
81
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SEGMENT INFORMATION (continued)
(G) A SUBSTANTIAL PORTION OF AIG'S OPERATIONS IS CONDUCTED IN COUNTRIES OTHER
THAN THE UNITED STATES AND CANADA. THE FOLLOWING TABLE SUMMARIZES AIG'S
OPERATIONS BY MAJOR GEOGRAPHIC SEGMENT. ALLOCATIONS HAVE BEEN MADE ON THE BASIS
OF THE LOCATION OF OPERATIONS AND ASSETS.
GEOGRAPHIC SEGMENTS-2002
------------------------------------------------
OTHER
(in millions) DOMESTIC(A) FAR EAST FOREIGN CONSOLIDATED
Revenues (b) $39,779 $19,223 $ 8,480 $67,482
Real estate and other fixed assets, net of accumulated depreciation 2,529 2,041 812 5,382
Flight equipment primarily under operating leases, net of accumulated
depreciation 26,867 -- -- 26,867
Geographic Segments-2001
------------------------------------------------
Other
(in millions) Domestic(a) Far East Foreign Consolidated
Revenues (b) $36,191 $17,128 $ 8,447 $61,766
Real estate and other fixed assets, net of accumulated depreciation 2,220 1,824 789 4,833
Flight equipment primarily under operating leases, net of accumulated
depreciation 22,710 -- -- 22,710
Geographic Segments-2000
------------------------------------------------
Other
(in millions) Domestic(a) Far East Foreign Consolidated
Revenues (b) $33,492 $15,311 $ 7,535 $56,338
Real estate and other fixed assets, net of accumulated depreciation 2,104 1,264 758 4,126
Flight equipment primarily under operating leases, net of accumulated
depreciation 19,325 -- -- 19,325
(a) Including revenues from general insurance operations in Canada of $225
million, $158 million and $206 million in 2002, 2001 and 2000,
respectively.
(b) Represents the sum of general net premiums earned, life premium income, net
investment income, financial services commissions, transaction and other
fees, asset management commissions and other fees and realized capital
gains (losses).
3. FEDERAL INCOME TAXES
(a) AIG and its domestic subsidiaries, excluding the AGC and AIG SunAmerica life
insurance companies and their subsidiaries, file a consolidated U.S. Federal
income tax return. Each of AGC's and AIG SunAmerica's life insurance companies
and their subsidiaries file a consolidated U.S. Federal income tax return.
Revenue Agent's Reports proposing to assess additional taxes for the
years 1989-1990 and 1991-1996 have been issued to AIG and Letters of Protest
contesting the proposed assessments have been filed with the Internal Revenue
Service (IRS). In addition, Revenue Agent's Reports proposing to assess
additional taxes for the years ended September 30, 1993-1994 and 1995-1996 have
been issued to AIG SunAmerica. Such proposed assessments relate to years prior
to AIG's acquisition of SunAmerica Inc. Letters of Protest contesting the
proposed assessments have been filed with the IRS. It is management's belief
that there are substantial arguments in support of the positions taken by AIG
and AIG SunAmerica in their Letters of Protest. AGC's tax years through 1999
have been audited and settled with the IRS. Although the final outcome of any
issues raised in connection with these examinations is uncertain, AIG believes
that the tax obligation, including interest thereon, will not be significant to
AIG's financial condition, results of operations or liquidity.
A component of life insurance surplus accumulated prior to 1984 is not
taxable unless it exceeds certain statutory limitations or is distributed to
shareholders. This surplus, accumulated in policyholder surplus accounts,
totaled approximately $945 million at December 31, 2002. AIG has not made any
provision in the accompanying financial statements for taxation of this amount
as management has no intention of making any distributions from this surplus.
Foreign income not expected to be taxed in the United States has arisen
because AIG's foreign subsidiaries were generally not subject to U.S. income
taxes on income earned prior to January 1, 1987. Such income would become
subject to U.S. income taxes at current tax rates if remitted to the United
States or if other events occur which would make these amounts currently
taxable. The cumulative amount of translated undistributed earnings of AIG's
foreign subsidiaries currently not subject to U.S. income taxes was
approximately $5.1 billion at December 31, 2002. Management presently has not
subjected and has no intention of subjecting these accumulated earnings to
material U.S. income taxes and no provision has been made in the accompanying
financial statements for such taxes.
82
American International Group, Inc. and Subsidiaries
3. FEDERAL INCOME TAXES (continued)
(B) THE U.S. FEDERAL INCOME TAX RATE IS 35 PERCENT FOR 2002, 2001 AND 2000.
ACTUAL TAX EXPENSE ON INCOME DIFFERS FROM THE "EXPECTED" AMOUNT COMPUTED BY
APPLYING THE FEDERAL INCOME TAX RATE BECAUSE OF THE FOLLOWING:
(dollars in millions)
------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
---------------------- ---------------------- -----------------------
PERCENT Percent Percent
OF PRE-TAX of pre-tax of pre-tax
AMOUNT INCOME Amount income Amount income
====================================================================================================================================
"Expected" tax expense $ 2,850 35.0% $ 2,849 35.0% $ 3,508 35.0%
Adjustments:
Tax exempt interest (266) (3.4) (277) (3.4) (294) (2.9)
Dividends received deduction (69) (0.8) (64) (0.8) (50) (0.5)
State income taxes 38 0.5 49 0.6 52 0.5
Foreign income not expected to be
taxed in the U.S., less foreign income taxes (93) (1.1) (149) (1.8) (110) (1.1)
Affordable housing tax credits (35) (0.4) (37) (0.5) (48) (0.5)
Other (97) (1.2) (32) (0.4) (87) (0.9)
------------------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 2,328 28.6% $ 2,339 28.7% $ 2,971 29.6%
Foreign and domestic components of actual tax expense:
Foreign:
Current $ 663 $ 449 $ 450
Deferred 516 304 131
Domestic*:
Current 1,309 1,470 1,244
Deferred (160) 116 1,146
------------------------------------------------------------------------------------------------------------------------------------
Total $ 2,328 $ 2,339 $ 2,971
====================================================================================================================================
* Including U.S. tax on foreign income.
PRE-TAX DOMESTIC AND FOREIGN INCOME WAS AS FOLLOWS FOR THE YEARS ENDED DECEMBER
31, 2002, 2001 AND 2000:
(in millions)
--------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------
Domestic* $ 3,397 $ 3,860 $ 6,471
Foreign* 4,745 4,279 3,552
--------------------------------------------------------------------------------
Total $ 8,142 $ 8,139 $10,023
================================================================================
* The components of domestic and foreign income and tax expense reflect the
location in which the income and tax expense was generated and incurred,
respectively.
83
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEDERAL INCOME TAXES (continued)
(C) THE COMPONENTS OF THE NET DEFERRED TAX LIABILITY AS OF DECEMBER 31, 2002 AND
DECEMBER 31, 2001 WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
2002 2001
================================================================================
Deferred tax assets:
Loss reserve discount $ 1,317 $ 1,269
Unearned premium reserve reduction 465 365
Adjustment to life policy reserves 2,473 1,970
Accruals not currently deductible,
cumulative translation adjustment
and other 3,035 2,098
--------------------------------------------------------------------------------
7,290 5,702
--------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 5,534 4,357
Financial service products mark to market
differential 641 622
Depreciation of flight equipment 2,403 1,928
Unrealized appreciation of investments 2,003 590
Other 998 1,086
--------------------------------------------------------------------------------
11,579 8,583
--------------------------------------------------------------------------------
Net deferred tax liability $ 4,289 $ 2,881
================================================================================
4. DEFERRED POLICY ACQUISITION COSTS
THE FOLLOWING REFLECTS THE POLICY ACQUISITION COSTS DEFERRED FOR AMORTIZATION
AGAINST FUTURE INCOME AND THE RELATED AMORTIZATION CHARGED TO INCOME FOR GENERAL
AND LIFE INSURANCE OPERATIONS, EXCLUDING CERTAIN AMOUNTS DEFERRED AND AMORTIZED
IN THE SAME PERIOD:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
General insurance operations:
Balance at beginning of year $ 2,651 $ 2,438 $ 2,132
--------------------------------------------------------------------------------
Acquisition costs deferred
Commissions 1,604 1,012 876
Other 1,505 1,217 1,138
--------------------------------------------------------------------------------
3,109 2,229 2,014
--------------------------------------------------------------------------------
Amortization charged to income
Commissions 1,025 880 748
Other 1,251 1,136 960
--------------------------------------------------------------------------------
2,276 2,016 1,708
--------------------------------------------------------------------------------
Balance at end of year $ 3,484 $ 2,651 $ 2,438
================================================================================
Life insurance operations:
Balance at beginning of year $ 16,706 $ 15,298 $ 14,552
--------------------------------------------------------------------------------
Addition from acquisitions 358 874 --
Acquisition costs deferred
Commissions 2,714 2,244 2,117
Other 1,734 1,341 943
--------------------------------------------------------------------------------
4,806 4,459 3,060
--------------------------------------------------------------------------------
Amortization charged to income
Commissions 1,215 1,009 1,376
Other* 969 1,198 182
--------------------------------------------------------------------------------
2184 2,207 1,558
Effect of net unrealized gains
(losses) on securities (951) (467) (361)
--------------------------------------------------------------------------------
Increase (decrease) due to
foreign exchange 395 (377) (395)
--------------------------------------------------------------------------------
Balance at end of year $ 18,772 $ 16,706 $ 15,298
================================================================================
Total deferred policy
acquisition costs $ 22,256 $ 19,357 $ 17,736
================================================================================
* Includes adjustments as a result of changes in the net unrealized gains or
losses on debt and equity securities available for sale. Such adjustments
were included with the change in net unrealized gains/losses on debt and
equity securities available for sale that were credited or charged directly
to comprehensive income.
84
American International Group, Inc. and Subsidiaries
5. REINSURANCE
In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.
General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Ceded premiums are considered prepaid reinsurance premiums
and are amortized into income over the contract period in proportion to the
protection received. Amounts recoverable from general reinsurers are estimated
in a manner consistent with the claims liabilities associated with the
reinsurance and presented as a component of reinsurance assets.
AIG life companies limit exposure to loss on any single life. For
ordinary insurance, AIG retains a maximum of approximately $1.5 million dollars
of coverage per individual life with respect to AIG's overseas life operations
and $2.5 million of coverage per individual life with respect to AIG's domestic
life operations. There are smaller retentions for other lines of business. Life
reinsurance is effected principally under yearly renewable term treaties. The
premiums with respect to these treaties are considered prepaid reinsurance
premiums and are amortized into income over the contract period in proportion to
the protection provided. Amounts recoverable from life reinsurers are estimated
in a manner consistent with the assumptions used for the underlying policy
benefits and are presented as a component of reinsurance assets.
GENERAL INSURANCE PREMIUMS WRITTEN AND EARNED WERE COMPRISED OF THE FOLLOWING:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, WRITTEN EARNED
================================================================================
2002
GROSS PREMIUMS $ 37,537 $ 34,381
CEDED PREMIUMS (10,123) (10,112)
--------------------------------------------------------------------------------
NET PREMIUMS $ 27,414 $ 24,269
================================================================================
2001
Gross premiums $ 29,640 $ 28,850
Ceded premiums (9,539) (9,485)
--------------------------------------------------------------------------------
Net premiums $ 20,101 $ 19,365
================================================================================
2000
Gross premiums $ 25,050 $ 24,062
Ceded premiums (7,524) (6,655)
--------------------------------------------------------------------------------
Net premiums $ 17,526 $ 17,407
================================================================================
For the years ended December 31, 2002, 2001 and 2000, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $10.28
billion, $8.80 billion and $6.00 billion, respectively.
LIFE INSURANCE NET PREMIUM INCOME WAS COMPRISED OF THE FOLLOWING:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
================================================================================
Gross premium income $ 21,237 $ 19,978 $ 17,925
Ceded premiums (917) (915) (762)
--------------------------------------------------------------------------------
Net premium income $ 20,320 $ 19,063 $ 17,163
================================================================================
Life insurance recoveries, which reduced death and other benefits,
approximated $624 million, $646 million and $331 million, respectively, for the
years ended December 31, 2002, 2001 and 2000.
AIG's reinsurance arrangements do not relieve AIG from its direct
obligation to its insureds. Thus, a credit exposure exists with respect to both
general and life reinsurance ceded to the extent that any reinsurer is unable to
meet the obligations assumed under the reinsurance agreements. AIG holds
substantial collateral as security under related reinsurance agreements in the
form of funds, securities and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely
successful in prior recovery efforts.
AIG evaluates the financial condition of its reinsurers through an
internal reinsurance security committee consisting of members of AIG's senior
management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract.
LIFE INSURANCE CEDED TO OTHER INSURANCE COMPANIES WAS AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
================================================================================
Life insurance in-force $278,704 $238,644 $185,705
Life insurance assumed represented 0.2 percent of gross life insurance
in-force at December 31, 2002, 2001 and 2000 and life insurance premium income
assumed represented 0.2 percent, 0.3 percent and 0.4 percent of gross premium
income for the periods ended December 31, 2002, 2001 and 2000.
85
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REINSURANCE (continued)
SUPPLEMENTAL INFORMATION FOR GROSS LOSS AND BENEFIT RESERVES NET OF CEDED
REINSURANCE AT DECEMBER 31, 2002 AND 2001 FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
AS NET OF
REPORTED REINSURANCE
================================================================================
2002
Reserve for losses and loss expenses $(51,539) $(30,350)
Future policy benefits for life and accident
and health insurance contracts (72,547) (71,436)
Premiums and insurance balances
receivable-net 13,088 17,279
Reserve for unearned premiums (16,336) (12,945)
Reinsurance assets 29,882 --
================================================================================
2001
Reserve for losses and loss expenses $(44,792) $(25,896)
Future policy benefits for life and accident
and health insurance contracts (64,998) (63,894)
Premiums and insurance balances
receivable-net 12,412 16,233
Reserve for unearned premiums (13,148) (9,770)
Reinsurance assets 27,199 --
================================================================================
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS
(A) THE FOLLOWING ANALYSIS PROVIDES A RECONCILIATION OF THE ACTIVITY IN THE
RESERVE FOR LOSSES AND LOSS EXPENSES:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
================================================================================
At beginning of year:
Reserve for losses and
loss expenses $ 44,792 $ 40,613 $ 38,252
Reinsurance recoverable (18,896) (15,661) (13,652)
--------------------------------------------------------------------------------
25,896 24,952 24,600
--------------------------------------------------------------------------------
Acquisitions -- -- 236
--------------------------------------------------------------------------------
Losses and loss expenses incurred:
Current year 16,741 14,870 13,356
Prior years 4,073 536 (252)
--------------------------------------------------------------------------------
Total 20,814 15,406 13,104
================================================================================
Losses and loss expenses paid:
Current year 5,964 5,199 5,205
Prior years 10,396 9,263 7,783
--------------------------------------------------------------------------------
Total 16,360 14,462 12,988
================================================================================
At end of year:
Net reserve for losses and
loss expenses 30,350 25,896 24,952
Reinsurance recoverable 21,189 18,896 15,661
--------------------------------------------------------------------------------
Total $ 51,539 $ 44,792 $ 40,613
================================================================================
(B) THE ANALYSIS OF THE FUTURE POLICY BENEFITS AND POLICYHOLDERS' CONTRACT
DEPOSITS LIABILITIES AS AT DECEMBER 31, 2002 AND 2001 FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
2002 2001
================================================================================
Future policy benefits:
Long duration contracts $ 70,096 $ 63,013
Short duration contracts 2,451 1,985
Total $ 72,547 $ 64,998
Policyholders' contract deposits:
Annuities $ 84,903 $ 72,100
Guaranteed investment contracts (GICs)* 37,772 31,551
Corporate life products 2,124 1,977
Universal life 13,080 11,869
Other investment contracts 4,281 1,905
--------------------------------------------------------------------------------
Total $142,160 $119,402
================================================================================
* Includes approximately $29 billion and $22 billion in the respective years
in connection with GIC Programs. See discussion in Note 20 "Special Purpose
Vehicles."
(C) Long duration contract liabilities included in future policy
benefits, as presented in the table above, result from traditional life
products. Short duration contract liabilities are primarily accident and health
products. The liability for future life policy benefits has been established
based upon the following assumptions:
(i) Interest rates (exclusive of immediate/terminal funding annuities),
which vary by territory, year of issuance and products, range from 1.5 percent
to 12.0 percent within the first 20 years. Interest rates on immediate/terminal
funding annuities are at a maximum of 11.2 percent and grade to not greater than
6.2 percent.
(ii) Mortality and surrender rates are based upon actual experience by
geographical area modified to allow for variations in policy form. The weighted
average lapse rate, including surrenders, for individual and group life
approximated 7.3 percent.
(iii) The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the benefit of AIG are
restricted in some cases by the insurance contracts and by the local insurance
regulations of the countries in which the policies are in force.
(iv) Participating life business represented approximately 28 percent of
the gross insurance in-force at December 31, 2002 and 39 percent of gross
premium income in 2002. The amount of annual dividends to be paid is determined
locally by the Boards of Directors. Provisions for future dividend payments are
computed by jurisdiction, reflecting local regulations.
(D) The liability for policyholders' contract deposits has been
established based on the following assumptions:
(i) Interest rates credited on deferred annuities, which vary by
territory and year of issuance, range from 1.5 percent to 9.3 percent. Current
declared interest rates are generally guaranteed to remain in effect for a
period of one year though
86
American International Group, Inc. and Subsidiaries
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND
POLICYHOLDERS' CONTRACT DEPOSITS (continued)
some are guaranteed for longer periods. Withdrawal charges generally range from
zero percent to 18.0 percent grading to zero over a period of zero to 15 years.
(ii) Domestically, GICs have market value withdrawal provisions for any
funds withdrawn other than benefit responsive payments. Interest rates credited
generally range from 1.2 percent to 9.0 percent. The vast majority of these GICs
mature within 10 years. Overseas, interest rates credited on GICs generally
range from 2.1 percent to 7.3 percent and maturities range from 1 to 5 years.
(iii) Interest rates on corporate life insurance products are guaranteed
at 4.0 percent and the weighted average rate credited in 2002 was 5.8 percent.
(iv) The universal life funds have credited interest rates of 3.8
percent to 7.5 percent and guarantees ranging from 3.0 percent to 5.5 percent
depending on the year of issue. Additionally, universal life funds are subject
to surrender charges that amount to 11.4 percent of the aggregate fund balance
grading to zero over a period not longer than 20 years.
(E) Certain products, which are short duration contracts, are subject to
experience adjustments. These include group life and group medical products,
credit life contracts, accident & health insurance contracts/riders attached to
life policies and, to a limited extent, reinsurance agreements with other direct
insurers. Ultimate premiums from these contracts are estimated and recognized as
revenue and the unearned portions of the premiums are held as reserves.
Experience adjustments vary according to the type of contract and the territory
in which the policy is in force and are subject to local regulatory guidance.
7. STATUTORY FINANCIAL DATA
STATUTORY SURPLUS AND NET INCOME FOR GENERAL INSURANCE AND LIFE INSURANCE
OPERATIONS AS REPORTED TO REGULATORY AUTHORITIES WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
================================================================================
Statutory surplus:
General insurance $16,765(A) $17,717 $16,934
Life insurance 22,716 18,302 16,849
Statutory net income (b):
General insurance 277(A) 1,922 2,508
Life insurance 2,529 2,106 2,314
================================================================================
(a) Includes loss reserve charge, net of t ax of $1.8 billion.
(b) Includes net realized capital gains and losses.
AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with GAAP vary between domestic and foreign jurisdictions. The principal
differences are that statutory financial statements do not reflect deferred
policy acquisition costs and deferred income taxes, all bonds are carried at
amortized cost and reinsurance assets and liabilities are presented net of
reinsurance. AIG's use of permitted statutory accounting practices does not have
a significant impact on statutory surplus.
8. INVESTMENT INFORMATION
(A) STATUTORY DEPOSITS: Cash and securities with carrying values of $5.20
billion and $4.55 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 2002 and 2001,
respectively.
(B) NET INVESTMENT INCOME: AN ANALYSIS OF THE NET INVESTMENT INCOME FROM THE
GENERAL AND LIFE INSURANCE OPERATIONS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
================================================================================
General insurance:
Fixed maturities $ 1,793 $ 1,811 $ 1,815
Equity securities 245 269 214
Short-term investments 37 64 70
Other 804 941 745
--------------------------------------------------------------------------------
Total investment income 2,879 3,085 2,844
Investment expenses 119 192 143
--------------------------------------------------------------------------------
Net investment income $ 2,760 $ 2,893 $ 2,701
================================================================================
Life insurance:
Fixed maturities $10,381 $ 9,018 $ 8,263
Equity securities 98 146 112
Short-term investments 245 281 332
Interest on mortgage, policy
and collateral loans 1,137 1,141 1,075
Other 669 863 479
--------------------------------------------------------------------------------
Total investment income 12,530 11,449 10,261
Investment expenses 256 365 299
--------------------------------------------------------------------------------
Net investment income $12,274 $11,084 $ 9,962
================================================================================
87
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT INFORMATION (continued)
(C) INVESTMENT GAINS AND LOSSES: THE REALIZED CAPITAL GAINS (LOSSES) AND
INCREASE (DECREASE) IN UNREALIZED APPRECIATION OF INVESTMENTS WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
================================================================================
Realized capital gains (losses)
on investments:
Fixed maturities (a) $ (989) $ (525) $ (622)
Equity securities (879) (114) 340
Other (573) (197) (32)
--------------------------------------------------------------------------------
Realized capital gains (losses) $(2,441) $ (836) $ (314)
================================================================================
Increase (decrease) in unrealized
appreciation of investments:
Fixed maturities $ 6,600 $ 3,827 $ 2,782
Equity securities 116 (528) (897)
Other (b) (1,989) (1,264) (418)
--------------------------------------------------------------------------------
Increase (decrease) in
unrealized appreciation $ 4,727 $ 2,035 $ 1,467
================================================================================
(a) The realized gains (losses) resulted primarily from the disposition of
available for sale fixed maturities.
(b) Includes $758 million increase, $598 million increase and $51 million
increase in unrealized appreciation attributable to participating
policy-holders at December 31, 2002, 2001 and 2000, respectively.
THE GROSS GAINS AND GROSS LOSSES REALIZED ON THE DISPOSITION OF AVAILABLE FOR
SALE SECURITIES WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
================================================================================
2002
Bonds $1,811 $2,800
Common stocks 363 1,192
Preferred stocks 12 62
Financial services securities available for sale 2 1
--------------------------------------------------------------------------------
Total $2,188 $4,055
================================================================================
2001
Bonds $1,475 $1,969
Common stocks 437 527
Preferred stocks 14 38
Financial services securities available for sale 7 2
--------------------------------------------------------------------------------
Total $1,933 $2,536
================================================================================
2000
Bonds $ 393 $1,001
Common stocks 791 397
Preferred stocks 47 27
Financial services securities available for sale 8 --
--------------------------------------------------------------------------------
Total $1,239 $1,425
================================================================================
(D) MARKET VALUE OF FIXED MATURITIES AND UNREALIZED APPRECIATION OF
INVESTMENTS: At December 31, 2002 and 2001, the balance of the unrealized
appreciation of investments in equity securities (before applicable taxes)
included gross gains of approximately $261 million and $403 million and gross
losses of approximately $1.0 billion and $1.3 billion, respectively.
The deferred tax liability related to the net unrealized appreciation of
investments was $2.0 billion at December 31, 2002 and the deferred tax liability
related to the net unrealized appreciation of investments was $590 million at
December 31, 2001.
THE AMORTIZED COST AND ESTIMATED MARKET VALUE OF BONDS AVAILABLE FOR SALE AND
CARRIED AT MARKET VALUE AT DECEMBER 31, 2002 AND 2001 WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
================================================================================
2002
Fixed maturities
available for sale:
Bonds:
U.S. Government (a) $ 4,916 $ 248 $ 12 $ 5,152
States (b) 41,533 1,984 106 43,411
Foreign
governments 33,885 3,371 51 37,205
All other corporate 151,787 8,818 3,988 156,617
--------------------------------------------------------------------------------
Total bonds $232,121 $ 14,421 $ 4,157 $242,385
================================================================================
2001
Fixed maturities
available for sale:
Bonds:
U.S. Government (a) $ 3,750 $ 121 $ 28 $ 3,843
States (b) 34,202 939 320 34,821
Foreign
governments 28,220 2,023 98 30,145
All other corporate 129,939 3,979 2,953 130,965
--------------------------------------------------------------------------------
Total bonds $196,111 $ 7,062 $ 3,399 $199,774
================================================================================
(a) Including U.S. Government agencies and authorities.
(b) Including municipalities and political subdivisions.
88
American International Group, Inc. and Subsidiaries
8. INVESTMENT INFORMATION (continued)
THE AMORTIZED COST AND ESTIMATED MARKET VALUES OF FIXED MATURITIES AVAILABLE FOR
SALE AT DECEMBER 31, 2002, BY CONTRACTUAL MATURITY, ARE SHOWN BELOW. ACTUAL
MATURITIES MAY DIFFER FROM CONTRACTUAL MATURITIES BECAUSE CERTAIN BORROWERS HAVE
THE RIGHT TO CALL OR PREPAY CERTAIN OBLIGATIONS WITH OR WITHOUT CALL OR
PREPAYMENT PENALTIES.
(in millions)
--------------------------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
================================================================================
Fixed maturities available for sale:
Due in one year or less $ 11,943 $ 12,163
Due after one year through five years 48,802 50,446
Due after five years through ten years 72,297 75,497
Due after ten years 99,079 104,279
--------------------------------------------------------------------------------
Total available for sale $232,121 $242,385
================================================================================
(E) SECURITIES AVAILABLE FOR SALE: AIGFP follows a policy of minimizing
interest rate, equity and currency risks associated with securities available
for sale by entering into swap or other transactions. In addition, to reduce its
credit risk, AIGFP has entered into credit derivative transactions with respect
to $66 million of securities available for sale. At December 31, 2002, the
cumulative decrease in carrying value of the securities available for sale and
related hedges as a result of marking to market such securities net of hedging
transactions was $28 million.
THE AMORTIZED COST, RELATED HEDGES AND ESTIMATED MARKET VALUE OF SECURITIES
AVAILABLE FOR SALE AND CARRIED AT MARKET VALUE AT DECEMBER 31, 2002 AND 2001
WERE AS FOLLOWS:
(in millions)
------------------------------------------------------------------------------------------------------
UNREALIZED
GAINS
GROSS GROSS (LOSSES) - NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED ON HEDGING MARKET
COST GAINS LOSSES TRANSACTIONS* VALUE
======================================================================================================
2002
Securities available for sale:
Corporate and bank debt $ 9,595 $ 848 $ 86 $ (777) $ 9,580
Foreign government obligations 63 13 1 (12) 63
Asset-backed and collateralized 4,181 535 (10) (572) 4,154
Preferred stocks 1,192 40 7 (31) 1,194
U.S. Government obligations 1,684 147 (2) (137) 1,696
Total $16,715 $ 1,583 $ 82 $(1,529) $16,687
2001
Securities available for sale:
Corporate and bank debt $10,936 $ 198 $ 352 $ 183 $10,965
Foreign government obligations 1,154 8 7 (1) 1,154
Asset-backed and collateralized 4,276 98 83 (41) 4,250
Preferred stocks 1,204 1 14 19 1,210
U.S. Government obligations 223 12 3 (10) 222
Total $17,793 $ 317 $ 459 $ 150 $17,801
* The cumulative decrease in carrying value of securities available for sale
and related hedges as a result of marking to market such securities net of
hedging transactions was $28 million.
89
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT INFORMATION (continued)
THE AMORTIZED COST AND ESTIMATED MARKET VALUES OF SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 2002, BY CONTRACTUAL MATURITY, ARE SHOWN BELOW. ACTUAL
MATURITIES MAY DIFFER FROM CONTRACTUAL MATURITIES BECAUSE CERTAIN BORROWERS HAVE
THE RIGHT TO CALL OR PREPAY CERTAIN OBLIGATIONS WITH OR WITHOUT CALL OR
PREPAYMENT PENALTIES.
(in millions)
--------------------------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
================================================================================
Securities available for sale:
Due in one year or less $ 3,393 $ 3,419
Due after one year through five years 3,801 3,807
Due after five years through ten years 1,480 1,478
Due after ten years 3,860 3,829
Asset-backed and collateralized 4,181 4,154
--------------------------------------------------------------------------------
Total securities available for sale $16,715 $16,687
================================================================================
Only an insignificant amount of securities available for sale were below
investment grade at December 31, 2002.
(F) FINANCE RECEIVABLES: FINANCE RECEIVABLES, NET OF UNEARNED FINANCE CHARGES,
WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
Real estate loans $ 9,819 $ 7,980 $ 7,670
Non-real estate loans 3,138 3,288 3,157
Credit card loans 1,215 1,091 757
Retail sales finance 1,888 1,845 1,730
Other loans 274 283 505
--------------------------------------------------------------------------------
Total finance receivables 16,334 14,487 13,819
Allowance for losses (477) (532) (492)
--------------------------------------------------------------------------------
Finance receivables, net $ 15,857 $ 13,955 $ 13,327
================================================================================
(G) CMOS: At December 31, 2002, CMOs, held by AIG's life companies, were
presented as a component of bonds available for sale, at market value.
Substantially all of the CMOs were investment grade and approximately 24 percent
of the CMOs were backed by various U.S. government agencies. The remaining 76
percent were corporate issuances.
THE DISTRIBUTION OF THE CMOS AT DECEMBER 31, 2002 AND 2001 WAS AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
2002 2001
================================================================================
GNMA 1% 3%
FHLMC 13 12
FNMA 9 10
VA 1 1
Non-governmental 76 74
--------------------------------------------------------------------------------
100% 100%
================================================================================
AIG is not exposed to any significant credit concentration risk of a
single or group non-governmental issuer.
At December 31, 2002, the gross weighted average coupon of this portfolio
was 6.09 percent. The gross weighted average life of this portfolio was
approximately 5.10 years.
At December 31, 2002 and 2001, the market value of the CMO portfolio was
$35.61 billion and $32.62 billion, respectively; the amortized cost was
approximately $34.30 billion in 2002 and $32.20 billion in 2001. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 2002 and 2001.
(H) FIXED MATURITIES BELOW INVESTMENT GRADE: At December 31, 2002, fixed
maturities held by AIG that were below investment grade or not rated totaled
$23.94 billion.
(I) At December 31, 2002, non-income producing invested assets were
insignificant.
90
American International Group, Inc. and Subsidiaries
9. DEBT OUTSTANDING
AT DECEMBER 31, 2002, AIG'S DEBT OUTSTANDING OF $71.89 BILLION, SHOWN BELOW,
INCLUDED BORROWINGS OF $64.98 BILLION WHICH WERE EITHER NOT GUARANTEED BY AIG OR
WERE MATCHED BORROWINGS UNDER OBLIGATIONS OF GUARANTEED INVESTMENT AGREEMENTS
(GIAS) OR MATCHED NOTES AND BONDS PAYABLE.
(in millions)
--------------------------------------------------------------------------------
Borrowings under obligations of GIAs - AIGFP $14,850
================================================================================
Commercial Paper:
ILFC (a) 4,213
AGF (a) 2,956
Funding 1,645
AIGCCC - Taiwan (a) 234
AIGF - Taiwan (a) 64
--------------------------------------------------------------------------------
Total 9,112
--------------------------------------------------------------------------------
Medium Term Notes:
AGF (a) 7,719
ILFC (a) 4,970
AIG 998
--------------------------------------------------------------------------------
Total 13,687
--------------------------------------------------------------------------------
Notes and Bonds Payable:
AIGFP 16,940
ILFC(a) (b) 9,825
AGF (a) 2,266
AIG 1,608
AGC 1,542
--------------------------------------------------------------------------------
Total 32,181
--------------------------------------------------------------------------------
Loans and Mortgages Payable:
AIGCFG (a) 735
AIG 697
ILFC (a) (c) 261
AIG Finance (Hong Kong) Limited (a) 229
Other subsidiaries (a) 133
--------------------------------------------------------------------------------
Total 2,055
--------------------------------------------------------------------------------
Total Borrowings 71,885
--------------------------------------------------------------------------------
Borrowings not guaranteed by AIG 33,605
Matched GIA borrowings - AIGFP 14,850
Matched notes and bonds payable - AIGFP 16,526
64,981
Remaining borrowings of AIG $ 6,904
================================================================================
(a) AIG does not guarantee these borrowings.
(b) Includes borrowings under Export Credit Facility of $2.09 billion.
(c) Capital lease obligations.
The amount of long-term borrowings is $49.42 billion and the amount of
short-term borrowings is $22.47 billion. Long-term borrowings include commercial
paper and short-term borrowings represent borrowings that mature in less than
one year.
(A) BORROWINGS UNDER OBLIGATIONS OF GUARANTEED INVESTMENT AGREEMENTS:
Borrowings under obligations of guaranteed investment agreements, which are
guaranteed by AIG, are recorded at the amount outstanding under each contract.
Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings are primarily fixed, vary
by maturity, and range up to 9.8 percent.
PAYMENTS DUE UNDER THESE INVESTMENT AGREEMENTS IN EACH OF THE NEXT FIVE YEARS
ENDING DECEMBER 31, AND THE PERIODS THEREAFTER BASED ON THE EARLIEST CALL DATES,
WERE AS FOLLOWS:
(in millions)
================================================================================
2003 $ 5,756
2004 677
2005 383
2006 196
2007 180
Remaining years after 2007 7,658
--------------------------------------------------------------------------------
Total $14,850
================================================================================
At December 31, 2002, the market value of securities pledged as
collateral with respect to these obligations approximated $4.8 billion.
Funds received from GIA borrowings are invested in a diversified
portfolio of securities and derivative transactions.
(B) COMMERCIAL PAPER: AT DECEMBER 31, 2002, THE COMMERCIAL PAPER ISSUED AND
OUTSTANDING WAS AS FOLLOWS:
(dollars in millions)
--------------------------------------------------------------------------------
UNAMORTIZED WEIGHTED WEIGHTED
NET DISCOUNT AVERAGE AVERAGE
BOOK AND ACCRUED FACE INTEREST MATURITY
VALUE INTEREST AMOUNT RATE IN DAYS
================================================================================
ILFC $4,213 $ 6 $4,219 1.46% 35
AGF 2,956 3 2,959 1.43 33
Funding 1,645 1 1,646 1.45 20
AIGCCC - Taiwan* 234 1 235 2.61 31
AIGF - Taiwan* 64 -- 64 4.09 60
--------------------------------------------------------------------------------
Total $9,112 $ 11 $9,123 -- --
================================================================================
* Issued in Taiwan N.T. dollars at prevailing local interest rates.
At December 31, 2002, AIG did not guarantee the commercial paper of any
of its subsidiaries other than Funding. On July 8, 2002, AGC ceased issuing
commercial paper under its program. AGC's funding requirements are now being met
through Funding's commercial paper program.
91
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DEBT OUTSTANDING (continued)
(C) MEDIUM TERM NOTES PAYABLE:
(i) Medium Term Notes Payable Issued by AGF: AGF's Medium Term Notes are
unsecured obligations which generally may not be redeemed by AGF prior to
maturity and bear interest at either fixed rates set by AGF at issuance or
variable rates determined by reference to an interest rate or other formula.
As of December 31, 2002, notes aggregating $7.72 billion were
outstanding with maturity dates ranging from 2003 to 2012 at interest rates
ranging from 1.48 percent to 7.95 percent. To the extent deemed appropriate,
AGF may enter into swap transactions to reduce its effective borrowing rates
with respect to these notes.
AT DECEMBER 31, 2002, THE MATURITY SCHEDULE FOR AGF'S OUTSTANDING MEDIUM TERM
NOTES WAS AS FOLLOWS:
(in millions)
================================================================================
2003 $ 625
2004 1,898
2005 1,080
2006 1,274
2007 1,356
Remaining years after 2007 1,486
--------------------------------------------------------------------------------
Total $7,719
================================================================================
(ii) Medium Term Notes Payable Issued by ILFC: ILFC's Medium Term Notes
are unsecured obligations which may not be redeemed by ILFC prior to maturity
and bear interest at fixed rates set by ILFC at issuance.
As of December 31, 2002, notes aggregating $4.97 billion were outstanding
with maturity dates from 2003 to 2007 at interest rates ranging from 3.95
percent to 8.26 percent. These notes provide for a single principal payment at
the maturity of each note.
AT DECEMBER 31, 2002, THE MATURITY SCHEDULE FOR ILFC'S OUTSTANDING MEDIUM TERM
NOTES WAS AS FOLLOWS:
(in millions)
================================================================================
2003 $2,447
2004 1,053
2005 850
2006 250
2007 370
--------------------------------------------------------------------------------
Total $4,970
================================================================================
(iii) Medium Term Notes Payable Issued by AIG: AIG's Medium Term Notes
are unsecured obligations which generally may not be redeemed by AIG prior to
maturity and bear interest at either fixed rates set by AIG at issuance or
variable rates determined by reference to an interest rate or other formula.
AN ANALYSIS OF AIG'S MEDIUM TERM NOTES FOR THE YEAR ENDED DECEMBER 31, 2002 WAS
AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
AIG SUNAMERICA INC. TOTAL
================================================================================
Balance December 31, 2001 $371 $171 $542
Issued during year 504 -- 504
Matured during year (24) (24) (48)
--------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2002 $851 $147 $998
================================================================================
The interest rates on AIG's Medium Term Notes range from 0.50 percent to
4.52 percent. To the extent deemed appropriate, AIG may enter into swap
transactions to reduce its effective borrowing rates with respect to these
notes.
At December 31, 2002, Medium Term Notes issued by SunAmerica Inc.
aggregating $147 million had maturity dates ranging from 2003 to 2026 at
interest rates ranging from 6.03 percent to 7.34 percent.
During 2000, AIG issued $210 million of equity-linked Medium Term Notes
due May 15, 2007. These notes accrue interest at the rate of 0.50 percent and
the total return on these notes is linked to the appreciation in market value of
AIG's common stock. The notes may be redeemed, at the option of AIG, as a whole
but not in part, at any time on or after May 15, 2003. In conjunction with the
issuance of these notes, AIG entered into a series of swap transactions which
effectively converted its interest expense to a fixed rate of 7.17 percent until
May 15, 2003 and 0.50 percent thereafter and transferred the equity appreciation
exposure to a third party for the life of the notes. AIG is exposed to credit
risk with respect to the counterparties to these swap transactions.
AT DECEMBER 31, 2002, THE MATURITY SCHEDULE FOR AIG'S OUTSTANDING MEDIUM TERM
NOTES, INCLUDING THOSE ISSUED BY SUNAMERICA INC., WAS AS FOLLOWS:
(in millions)
================================================================================
2003 $162
2004 23
2005 555
2006 24
2007 210
Remaining years after 2007 24
--------------------------------------------------------------------------------
Total $998
================================================================================
At December 31, 2002, AIG had $140 million of debt securities registered
and available for issuance from time to time.
92
American International Group, Inc. and Subsidiaries
9. DEBT OUTSTANDING (continued)
(D) NOTES AND BONDS PAYABLE:
(I) NOTES AND BONDS PAYABLE ISSUED BY AIGFP: AT DECEMBER 31, 2002, AIGFP'S NOTES
AND BONDS OUTSTANDING, THE PROCEEDS OF WHICH ARE INVESTED IN A SEGREGATED
PORTFOLIO OF SECURITIES AVAILABLE FOR SALE, WERE AS FOLLOWS:
(dollars in millions)
--------------------------------------------------------------------------------
RANGE OF
RANGE OF INTEREST U.S. DOLLAR
MATURITIES CURRENCY RATES CARRYING VALUE
================================================================================
2003-2031 U.S. dollar 1.21-6.29% $ 8,016
2003-2026 United Kingdom pound 3.69-5.74 2,555
2003 Euro 2.82-7.76 1,612
2006-2008 New Zealand dollar 6.30-8.35 628
2003 Japanese yen 0.03-4.50 342
--------------------------------------------------------------------------------
Total $13,153
================================================================================
AIGFP is also obligated under various bonds maturing from 2003 through
2042. The majority of these notes are denominated in U.S. dollars, Euros and
Japanese yen. The weighted average interest rate of these bonds is 4.06 percent.
At December 31, 2002, the remaining bonds had a U.S. dollar carrying value of
$3.79 billion.
AT DECEMBER 31, 2002, THE MATURITY SCHEDULE FOR AIGFP'S NOTES AND BONDS PAYABLE
WAS AS FOLLOWS:
(in millions)
================================================================================
2003 $ 9,024
2004 1,706
2005 545
2006 596
2007 387
Remaining years after 2007 4,682
--------------------------------------------------------------------------------
Total $16,940
================================================================================
AIG guarantees all of AIGFP's debt.
(ii) Notes Issued by ILFC: ILFC has issued unsecured obligations which
may not be redeemed prior to maturity.
As of December 31, 2002, notes aggregating $7.48 billion were outstanding
with maturity dates from 2003 to 2009 and interest rates ranging from 3.32
percent to 8.38 percent. Notes aggregating $1.38 billion are at floating
interest rates and the remainder are at fixed rates. These notes provide for a
single principal payment at maturity.
AT DECEMBER 31, 2002, THE MATURITY SCHEDULE FOR ILFC'S NOTES WAS AS FOLLOWS:
(in millions)
================================================================================
2003 $ 950
2004 1,863
2005 826
2006 700
2007 1,954
Remaining years after 2007 1,182
--------------------------------------------------------------------------------
Total $7,475
================================================================================
ILFC had $6.08 billion of debt securities registered for public sale at
December 31, 2002. During the second quarter of 2002, ILFC expanded its Euro
Medium Term Note Program from $2.0 billion to $4.0 billion, under which $2.31
billion in notes were sold through December 31, 2002. ILFC has eliminated the
currency exposure arising from the notes by either hedging the notes through
swaps, or through the offset provided by operating lease payments. ILFC
translates the debt into U.S. dollars using current exchange rates. The foreign
exchange adjustment for the euro denominated note was $265 million at December
31, 2002. Notes issued under this program are included in Notes and Bonds
Payable in the accompanying table of borrowings.
ILFC had a $4.3 billion Export Credit Facility for use in connection with
the purchase of approximately 75 aircraft delivered through 2001. This facility
was guaranteed by various European Export Credit Agencies. The interest rate
varies from 5.75 percent to 5.90 percent on these borrowings depending on the
delivery date of the aircraft. At December 31, 2002, ILFC had $2.09 billion
outstanding under this facility. The debt is collateralized by a pledge of the
shares of a subsidiary of ILFC, which holds title to the aircraft financed under
the facility. Borrowings with respect to this facility are included in Notes and
Bonds Payable.
AT DECEMBER 31, 2002, THE FUTURE MINIMUM PAYMENTS FOR ILFC'S BORROWINGS UNDER
THE EXPORT CREDIT FACILITY WERE AS FOLLOWS:
(in millions)
2003 $ 284
2004 284
2005 284
2006 284
2007 284
Remaining years after 2007 665
Total $2,085
AIG does not guarantee any of the debt obligations of ILFC.
(iii) Notes and Bonds Payable Issued by AGF: As of December 31, 2002, AGF
notes aggregating $2.27 billion were outstanding with maturity dates ranging
from 2003 to 2009 at interest rates ranging from 5.75 percent to 8.45 percent.
These notes provide for a single principal payment at maturity.
93
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DEBT OUTSTANDING (continued)
AT DECEMBER 31, 2002, THE MATURITY SCHEDULES FOR AGF TERM NOTES AND BONDS WERE
AS FOLLOWS:
(in millions)
================================================================================
2003 $1,368
2004 200
2005 399
2006 --
2007 --
Remaining years after 2007 299
--------------------------------------------------------------------------------
Total $2,266
================================================================================
AGF had $4.3 billion of debt securities registered and available for
issuance at December 31, 2002. AGF uses the proceeds from the issuance of notes
and bonds for the funding of its finance receivables.
AIG does not guarantee any of the debt obligations of AGF.
(iv) Notes, Bonds and Debentures Issued by AIG.
(A) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of $750
million. The notes were offered at 12 percent of principal amount at stated
maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG
from the issuance were $86 million. The notes are redeemable at any time in
whole or in part at the option of AIG at 100 percent of their principal amount
at stated maturity. The notes are also redeemable at the option of AIG or bearer
notes may be redeemed at the option of the holder in the event of certain
changes involving taxation in the United States at prices ranging from 80.78
percent currently, to 89.88 percent after August 15, 2003, of the principal
amount at stated maturity together with accrued amortization of original issue
discount from the preceding August 15. During 2002 and 2001, no notes were
repurchased. At December 31, 2002, the notes outstanding after prior purchases
had a face value of $189 million, an unamortized discount of $31 million and a
net book value of $158 million. The amortization of the original issue discount
was recorded as interest expense.
(B) Zero Coupon Convertible Senior Debentures: On November 9, 2001, AIG
issued zero coupon convertible senior debentures in the aggregate principal
amount at stated maturity of $1.52 billion. The notes were offered at 65.8
percent of principal amount at stated maturity, bear no interest unless
contingent interest becomes payable under certain conditions and are due
November 9, 2031. The net proceeds to AIG were $990 million. Commencing January
1, 2002, holders may convert the debentures into shares of AIG common stock at a
conversion rate of 6.0627 shares per $1,000 principal amount of debentures on
any day if AIG's common stock price exceeds 120 percent of the conversion price
on the last trading day of the preceding fiscal quarter for a set period of
time, and after September 30, 2031, on any day if AIG's common stock price
exceeds such amount for one day, subject to certain restrictions. The debentures
are redeemable by AIG on or after November 9, 2006 at specified redemption
prices. Holders may require AIG to repurchase the debentures at specified
repurchase prices on November 9, 2006, 2011, 2016, 2021 and 2026. At December
31, 2002, the debentures outstanding had a face value of $1.52 billion,
unamortized discount of $504 million and a net book value of $1.02 billion. The
amortization of the original issue discount was recorded as a component of other
income (deductions)-net.
(C) Italian Lire Bonds: In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire that accrued interest at a rate of 11.7 percent per
annum. The principal amount of 200 billion Italian Lire Bonds matured December
4, 2001.
(D) Notes and Debentures Issued by SunAmerica Inc.: As of December 31,
2002, notes and debentures issued by SunAmerica Inc. aggregating $434 million
(net of amortized discount of $41 million) were outstanding with maturity dates
from 2007 to 2097 at interest rates ranging from 5.60 percent to 9.95 percent.
(v) Notes and Bonds Payable Issued by AGC: As of December 31, 2002, AGC
notes aggregating $1.54 billion were outstanding with maturity dates ranging
from 2003 to 2029 at interest rates ranging up to 7.75 percent.
AT DECEMBER 31, 2002, THE MATURITY SCHEDULES FOR AGC NOTES AND BONDS WERE AS
FOLLOWS:
(in millions)
================================================================================
2003 $ 300
2004 149
2005 297
2006 --
2007 --
Remaining years after 2007 796
--------------------------------------------------------------------------------
Total $1,542
================================================================================
As of November 2001, AIG guaranteed the notes and bonds of AGC. During
2002, AGC issued $200 million in notes which matured in March 2003. These notes
are included in Notes and Bonds Payable in the accompanying table of borrowings.
94
American International Group, Inc. and Subsidiaries
9. DEBT OUTSTANDING (continued)
(E) LOANS AND MORTGAGES PAYABLE: LOANS AND MORTGAGES PAYABLE AT DECEMBER 31,
2002, CONSISTED OF THE FOLLOWING:
(in millions)
--------------------------------------------------------------------------------
UNCOLLATERALIZED COLLATERALIZED
LOANS LOANS AND
PAYABLE MORTGAGES PAYABLE
================================================================================
ILFC $ -- $261
AIG Finance (Hong Kong)
Limited 229 --
CFG 735 --
AIG 554 143
Other subsidiaries 67 66
--------------------------------------------------------------------------------
Total $1,585 $470
================================================================================
At December 31, 2002, ILFC's capital lease obligations were $261 million.
Fixed interest rates with respect to these obligations range from 6.18 percent
to 6.89 percent; variable rates are referenced to LIBOR. These obligations
mature through 2005. The flight equipment associated with the capital lease
obligations had a net book value of $892 million.
AT DECEMBER 31, 2002, THE MATURITY SCHEDULE FOR ILFC'S CAPITAL LEASE
OBLIGATIONS, WERE AS FOLLOWS:
(in millions)
================================================================================
2003 $128
2004 113
2005 45
--------------------------------------------------------------------------------
Total minimum lease obligations 286
Less amount representing interest 25
--------------------------------------------------------------------------------
Present value of net minimum capital lease obligations $261
================================================================================
(F) AS OF DECEMBER 31, 2002, THE COMBINED PAYMENTS DUE OF ALL SIGNIFICANT DEBT,
EXCLUDING COMMERCIAL PAPER, IN EACH OF THE NEXT FIVE YEARS AND PERIODS
THEREAFTER WERE AS FOLLOWS:
(in millions)
================================================================================
2003 $22,468
2004 8,186
2005 5,299
2006 3,406
2007 5,004
Remaining years after 2007 18,410
--------------------------------------------------------------------------------
Total $62,773
================================================================================
(G) REVOLVING CREDIT FACILITIES: AIG and Funding are parties to unsecured
syndicated revolving credit facilities (collectively, the Facility) aggregating
$2.75 billion. The Facility consists of $1.375 billion in a short-term revolving
credit facility and $1.375 billion in a five year revolving credit facility. The
Facility can be used for general corporate purposes and also to provide backup
for AIG's commercial paper programs administered by Funding. There are currently
no borrowings outstanding under the Facility, nor were any borrowings
outstanding as of December 31, 2002.
AGF is a party to unsecured syndicated revolving credit facilities
aggregating $3.0 billion. The facilities consist of $1.5 billion in a short-term
revolving credit facility and $1.5 billion in a five year revolving credit
facility, which support AGF's commercial paper borrowings. There are currently
no borrowings under these facilities, nor were any borrowings outstanding as of
December 31, 2002.
ILFC is a party to unsecured syndicated revolving credit facilities
aggregating $3.15 billion to support its commercial paper program. The
facilities consist of $2.15 billion in a short-term revolving credit facility
and $1.0 billion in a three year revolving credit facility. There are currently
no borrowings under these facilities, nor were any borrowings outstanding as of
December 31, 2002.
(H) INTEREST EXPENSE FOR ALL INDEBTEDNESS: Total interest expense for all
indebtedness, net of capitalized interest, aggregated $3.57 billion in 2002,
$3.97 billion in 2001 and $3.64 billion in 2000. Capitalized interest was $61
million in 2002, $71 million in 2001 and $69 million in 2000. Cash distributions
on the preferred shareholders' equity in subsidiary companies of ILFC and
certain AIG SunAmerica, AGC and HSB subsidiaries are accounted for as interest
expense and included as minority interest in the consolidated statement of
income. The cash distributions for ILFC were approximately $5 million, $15
million and $19 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The cash distributions for the AIG SunAmerica subsidiaries were
approximately $8 million, $46 million and $62 million for the years ended
December 31, 2002, 2001 and 2000, respectively. The cash distributions for AGC
subsidiaries were approximately $129 million, $153 million and $158 million for
the years ended December 31, 2002, 2001 and 2000, respectively.
95
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANIES
Preferred shareholders' equity in subsidiary companies represents preferred
stocks issued by ILFC and certain SunAmerica, AGC and HSB subsidiaries, wholly
owned subsidiaries of AIG.
(A) ILFC: At December 31, 2002, the preferred stock consists of 1,000
shares of market auction preferred stock ("MAPS") in two series (Series A and B)
of 500 shares each. Each of the MAPS shares has a liquidation value of $100,000
per share and is not convertible. The dividend rate, other than the initial
rate, for each dividend period for each series is reset approximately every
seven weeks (49 days) on the basis of orders placed in an auction. ILFC
repurchased all of the shares of five additional series for their liquidation
value in the fourth quarter of 2001 and a sixth in the first six months of 2002.
No gains or losses were recognized. During 2001, ILFC extended the term of the
Series A to five years at a dividend rate of 5.90 percent. At December 31, 2002,
the dividend rate for Series B was 2.15 percent.
(B) AIG SUNAMERICA: The preferred stock consists of $350 million
liquidation amount of 7.5% Non-Voting Preferred Interests issued by Total Return
LLC, a wholly owned subsidiary of AIG SunAmerica, in March 2000. The preferred
stock was redeemed in March 2003.
In March 2001, SunAmerica Capital Trust II redeemed the 8.35% Trust
Originated Preferred Securities for $185 million plus accrued and unpaid
dividends to the redemption date. Concurrently, AIG SunAmerica redeemed all of
the related 8.35% junior subordinated debentures, due 2044, for $191 million
plus accrued interest.
In December 2001, SunAmerica Capital Trust III redeemed the 8.30% Trust
Originated Preferred Securities for $310 million plus accrued and unpaid
dividends to the redemption date. Concurrently, AIG SunAmerica redeemed all of
the related 8.30% junior subordinated debentures, due 2045, for $321 million
plus accrued interest.
(C) AGC: The preferred stock has been issued by five subsidiary trusts
(the subsidiaries).
The sole assets of these subsidiaries are Junior Subordinated Debentures
(Subordinated Debentures) issued by AGC. These subsidiaries have no independent
operations. The Subordinated Debentures are eliminated in consolidation.
The interest terms and payment dates of the Subordinated Debentures held
by the subsidiaries correspond to those of the subsidiaries' preferred
securities. AGC's obligations under the Subordinated Debentures and related
agreements, when taken together, constitute a full and unconditional guarantee
by AGC of payments due on the preferred securities. The Subordinated Debentures
are redeemable, under certain conditions, at the option of AGC on a
proportionate basis.
The preferred stock consists of $100 million liquidation value of 8.05%
preferred stock issued by American General Capital III in December 2000, $300
million liquidation value of 8.5% preferred stock issued by American General
Capital II in June 2000, $200 million liquidation value of 7.875% preferred
stock issued by American General Capital I in September 1999, $500 million
liquidation value of 8.125% preferred stock issued by American General
Institutional Capital B in March 1997, and $500 million liquidation value of
7.57% preferred stock issued by American General Institutional Capital A in
December 1996.
In July 2001, $215 million liquidation value of 8.125% preferred stock
were redeemed by American General Capital, L.L.C. and $287 million liquidation
value of 8.45% preferred stock were redeemed by American General Capital, L.L.C.
On March 1, 2000, AGC redeemed 2.3 million shares or $85 million of its 7
percent convertible preferred stock by issuing 3.8 million shares of AGC common
stock. On June 30, 2000, holders converted approximately 5 million shares or
$250 million of 6 percent convertible preferred securities issued by American
General Delaware, L.L.C. into 12.3 million shares of AGC common stock.
(D) HSB: The preferred stock consists of $95 million liquidation value of
Exchange Capital Securities issued in July 1997 by HSB Capital I, a statutory
business trust wholly owned by HSB. The sole assets of HSB Capital I are
invested in debt securities of HSB. The capital securities accrue and pay
quarterly cash distributions at a variable rate equal to 90 day LIBOR plus 0.91%
of the stated liquidation amount of $1,000 per capital security, which rate was
2.29% at December 31, 2002. The capital securities are not redeemable prior to
July 15, 2007 and are mandatorily redeemable upon the maturity of the debt
securities on July 15, 2027 or the earlier redemption of the debt securities.
AIG has issued a guarantee of the obligations of HSB, which together with the
terms of the debt securities, the guarantee of HSB with respect to the capital
securities, the indenture and the trust agreement with respect to the trust
provide a full and unconditional guarantee of payments due on the capital
securities. The trust is accounted for as a wholly owned subsidiary of AIG. The
debt securities issued to the trust and the common securities issued by the
trust to HSB are eliminated in the consolidated balance sheet.
96
American International Group, Inc. and Subsidiaries
11. CAPITAL FUNDS
(a) AIG parent depends on its subsidiaries for cash flow in the form of loans,
advances and dividends. AIG's insurance subsidiaries are subject to regulatory
restrictions on the amount of dividends which can be remitted to AIG parent.
These restrictions vary by state. For example, unless permitted by the New York
Superintendent of Insurance, general insurance companies domiciled in New York
may not pay dividends to shareholders which in any twelve month period exceed
the lesser of 10 percent of the company's statutory policyholders' surplus or
100 percent of its "adjusted net investment income", as defined. Generally, less
severe restrictions applicable to both general and life insurance companies
exist in most of the other states in which AIG's insurance subsidiaries are
domiciled. Certain foreign jurisdictions have restrictions which generally cause
only a temporary delay in the remittance of dividends. There are also various
local restrictions limiting cash loans and advances to AIG by its subsidiaries.
Largely as a result of the restrictions, approximately 72 percent of
consolidated capital funds were restricted from immediate transfer to AIG parent
at December 31, 2002.
(b) At December 31, 2002, there were 6,000,000 shares of AIG's $5 par
value serial preferred stock authorized, issuable in series.
(C) THE COMMON STOCK ACTIVITY FOR THE THREE YEARS ENDED DECEMBER 31, 2002 WAS AS
FOLLOWS:
====================================================================================================================================
2002 2001 2000(a)
------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of year 2,615,431,999 2,622,605,925 1,836,381,824
Acquired during the year (10,959,815) (14,690,943) (19,677,939)
Issued pursuant to Restricted Stock
Unit Obligations -- 580,843 --
Conversion of preferred stock and
securities -- -- 9,317,340
Issued under stock option and purchase
plans 4,633,631 6,718,336 7,307,010
Issued in connection with acquisitions 176,076 510,684 17,774,094
Issued under contractual obligations 318,940 297,715 63,277
Stock split effected as stock dividend -- -- 814,956,829
Other (b) -- (590,561) (43,516,510)
------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of year 2,609,600,831 2,615,431,999 2,622,605,925
====================================================================================================================================
(a) Outstanding shares have been adjusted to reflect the conversion of all
outstanding AGC shares by converting each outstanding share of AGC to
0.5790 shares of AIG.
(b) Primarily shares issued to AIG and subsidiaries as part of stock split
effected as stock dividend and conversion of SunAmerica Inc.
non-transferrable Class B stock to common stock.
Common stock increased and retained earnings decreased $2.04 billion in
2000 as a result of a common stock split in the form of 50 percent common stock
dividend paid July 28, 2000.
12. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, various commitments and contingent liabilities
are entered into by AIG and certain of its subsidiaries. In addition, AIG
guarantees various obligations of certain subsidiaries.
(a) Commitments to extend credit are agreements to lend subject to certain
conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. These commitments
approximated $400 million and $300 million for December 31, 2002 and 2001,
respectively. AIG uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. AIG
evaluates each counterparty's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by AIG upon extension of
credit, is based on management's credit evaluation of the counterparty.
(b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the elements
of currency, interest rate, equity and commodity risks are reflected in the
consolidated balance sheet. Collateral is required, at the discretion of AIG, on
certain transactions based on the creditworthiness of the counterparty.
(c) AIGFP becomes a party to derivative financial instruments in the
normal course of its business and to reduce its currency, interest rate and
equity exposures. Interest rate, currency and equity risks related to such
instruments are reflected in the consolidated financial statements to the extent
these instruments are carried at a market or a fair value, whichever is
appropriate. The recorded estimated fair values of such instruments may be
different than the values that might be realized if AIGFP were required to sell
or close out the transactions prior to maturity.
AIGFP, in the ordinary course of its operations and as principal,
structures derivative transactions to meet the needs of investors who may be
seeking to hedge certain aspects of such investors' operations. AIGFP may also
enter into derivative transactions for its own account. Such derivative
97
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENT
LIABILITIES (continued)
transactions include interest rate, currency and equity swaps, swaptions and
forward commitments. Interest rate swap transactions generally involve the
exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. AIGFP typically becomes a
principal in the exchange of interest payments between the parties and,
therefore, may be exposed to loss, if counter-parties default. Currency and
equity swaps are similar to interest rate swaps, but involves the exchange of
specific currencies or the cashflows based on the underlying equity securities
or indices. Also, they may involve the exchange of principal amounts at the
beginning and end of the transaction. Swaptions are options where the holder has
the right but not the obligation to enter into a swap transaction or cancel an
existing swap transaction. At December 31, 2002, the notional principal amount
of the sum of the swap pays and receives approximated $817.4 billion, primarily
related to interest rate swaps of approximately $580.0 billion.
The notional amounts used to express the extent of involvement in swap
transactions represent a standard of measurement of the volume of swaps business
of AIGFP. Notional amount is not a quantification of market risk or credit risk
and it may not necessarily be recorded on the balance sheet. Notional amounts
represent those amounts used to calculate contractual cash flows to be exchanged
and are not paid or received, except for certain contracts such as currency
swaps.
The timing and the amount of cash flows relating to AIGFP's foreign exchange
forwards and exchange traded futures and options contracts are determined by
each of the respective contractual agreements.
THE FOLLOWING TABLE PRESENTS AIGFP'S DERIVATIVES PORTFOLIO BY MATURITY AND TYPE
OF DERIVATIVE AT DECEMBER 31, 2002 AND DECEMBER 31, 2001:
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
---------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL Total
YEAR FIVE YEARS TEN YEARS YEARS 2002 2001
====================================================================================================================================
Interest rate, currency and equity swaps and swaptions:
Notional amount:*
Interest rate swaps $147,331 $289,463 $128,118 $ 15,082 $579,994 $436,669
Currency swaps 47,120 80,486 42,945 6,436 176,987 139,174
Swaptions and equity swaps 20,672 26,169 9,111 4,484 60,436 58,491
------------------------------------------------------------------------------------------------------------------------------------
Total $215,123 $396,118 $180,174 $ 26,002 $817,417 $634,334
====================================================================================================================================
*Notional amount is not representative of either market risk or credit risk.
Futures and forward contracts are contracts for delivery of foreign
currencies or financial indices in which the seller/ purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise as a result of movements in current market
prices from contracted prices and the potential inability of counter-parties to
meet their obligations under the contracts. At December 31, 2002, the
contractual amount of AIGFP's futures and forward contracts approximated $54.2
billion.
THE FOLLOWING TABLE PRESENTS AIGFP'S FUTURES AND FORWARD CONTRACTS PORTFOLIO BY
MATURITY AND TYPE OF DERIVATIVE AT DECEMBER 31, 2002 AND DECEMBER 31, 2001:
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
-------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL Total
YEAR FIVE YEARS TEN YEARS YEARS 2002 2001
====================================================================================================================================
Exchange traded futures contracts contractual amount $10,524 -- -- -- $10,524 $10,036
====================================================================================================================================
Over the counter forward contracts contractual amount $43,220 $ 220 $ 187 -- $43,627 $58,003
====================================================================================================================================
AIGFP enters into credit derivative transactions in the ordinary course of
its business. The overwhelming majority of AIGFP's credit derivatives require
AIGFP to provide credit protection on a designated portfolio of loans or debt
securities. AIGFP provides such credit protection only on a "second loss" basis,
under which AIGFP's payment obligations arise only after credit losses in the
designated portfolio exceed a specified threshold amount or level of "first
losses." The threshold amount of credit losses that must be realized before
AIGFP has any payment obligation is negotiated for each transaction by
98
American International Group, Inc. and Subsidiaries
12. COMMITMENTS AND CONTINGENT
LIABILITIES (continued)
AIGFP to provide that the likelihood of any payment obligation by AIGFP under
each transaction is remote, even in severe recessionary market scenarios.
In many cases, the credit risk associated with a designated portfolio is
tranched into different layers of risk, which are then analyzed and rated by the
credit rating agencies. Typically, there will be an equity layer covering the
first credit losses in respect of the portfolio up to a specified percentage of
the total portfolio, and then successive layers that are rated, generally a BBB
rated layer, and A rated layer, an AA rated layer and an AAA rated layer. In
transactions that are rated, the risk layer or tranche that is immediately
junior to the threshold level above which AIGFP's payment obligation would arise
is rated AAA by the rating agencies. For that reason, the risk layer assumed by
AIGFP with respect to the designated portfolio in these transactions is often
called the "super senior" risk layer, defined as the layer of credit risk senior
to a risky layer that has been rated AAA by the credit rating agencies or if the
transaction is not rated, equivalent thereto. For example, in a transaction with
an equity layer covering credit losses from 0 to 2 percent of the total
portfolio, a BBB rated layer covering credit losses from 2 to 4 percent, an A
rated layer from 4 to 6 percent, an AA rated layer from 6 to 8 percent and a AAA
rated layer from 8 to 11 percent. AIGFP would cover credit losses arising in
respect of the portfolio that exceeded an 11 percent first loss threshold
amount, and thereby bear risk that is senior to the 8 to 11 percent AAA rated
risk layer.
AIGFP continually monitors the underlying portfolios to determine whether
the credit loss experience for any particular portfolio has caused the
likelihood of AIGFP having a payment obligation under the transaction to be
greater than super senior risk. AIGFP maintains the ability opportunistically to
hedge specific securities in a portfolio and thereby further limit its exposure
to loss, AIGFP has hedged outstanding transactions in this manner on occasion.
AIGFP has never had a payment obligation under these credit derivatives
transactions. Furthermore, based on portfolio credit losses experienced to date
under all outstanding transactions, no transaction has experienced credit losses
in an amount that has made the likelihood of AIGFP having to make a payment, in
AIGFP's view, to be greater than remote, even in severe recessionary market
scenarios. At December 31, 2002, the notional amount with respect to AIGFP's
credit derivative portfolio was $125.7 billion.
AIGFP utilizes various credit enhancements, including letters of credit,
guarantees, collateral, credit triggers, credit derivatives and margin
agreements to reduce the credit exposure relating to these off-balance sheet
financial instruments. AIGFP requires credit enhancements in connection with
specific transactions based on, among other things, the creditworthiness of the
counterparties and the transaction's size and maturity. In addition, AIGFP's
derivative transactions are generally documented under ISDA Master Agreements.
Management believes that such agreements provide for legally enforceable set-off
and close out netting of exposures to specific counterparties. Under such
agreements, in connection with an early termination of a transaction, AIGFP is
permitted to set-off its receivables from a counter-party against its payables
to the same counterparty arising out of all included transactions. As a result,
the net replacement value represents the net sum of estimated positive fair
values after the application of netting agreements excluding collateral held.
The net exposure to credit risk or the net replacement value of all interest
rate, currency, and equity swaps, swaptions and forward commitments approximated
$14.98 billion at December 31, 2002 and $10.84 billion at December 31, 2001. The
net replacement value for futures and forward contracts approximated $110
million at December 31, 2002 and $64 million at December 31, 2001. The net
replacement value most closely represents the net credit risk to AIGFP or the
maximum amount exposed to potential loss.
AIGFP independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGFP's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The average credit rating of AIGFP's counterparties as a whole (as
measured by AIGFP) is equivalent to AA. The maximum potential loss will increase
or decrease during the life of the derivative commitments as a function of
maturity and market conditions.
99
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENT
LIABILITIES (continued)
AIGFP DETERMINES COUNTERPARTY CREDIT QUALITY BY REFERENCE TO RATINGS FROM
INDEPENDENT RATING AGENCIES OR INTERNAL ANALYSIS. AT DECEMBER 31, 2002 AND
DECEMBER 31, 2001, THE COUNTERPARTY CREDIT QUALITY BY DERIVATIVE PRODUCT WITH
RESPECT TO THE NET REPLACEMENT VALUE OF AIGFP'S DERIVATIVES PORTFOLIO WAS AS
FOLLOWS:
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
---------------------------------
SWAPS AND FUTURES AND TOTAL Total
SWAPTIONS FORWARD CONTRACTS 2002 2001
====================================================================================================================================
Counterparty credit quality:
AAA $ 7,082 $ 95 $ 7,177 $ 4,388
AA 3,856 15 3,871 3,214
A 2,887 -- 2,887 2,498
BBB 1,120 -- 1,120 784
Below investment grade 35 -- 35 23
------------------------------------------------------------------------------------------------------------------------------------
Total $14,980 $ 110 $15,090 $10,907
====================================================================================================================================
AT DECEMBER 31, 2002 AND DECEMBER 31, 2001, THE COUNTERPARTY BREAKDOWN BY
INDUSTRY WITH RESPECT TO THE NET REPLACEMENT VALUE OF AIGFP'S DERIVATIVES
PORTFOLIO WAS AS FOLLOWS:
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
NET REPLACEMENT VALUE
----------------------------
SWAPS AND FUTURES AND TOTAL Total
SWAPTIONS FORWARD CONTRACTS 2002 2001
====================================================================================================================================
Non-U.S. banks $ 3,310 $ -- $ 3,310 $ 2,464
Insured municipalities 925 -- 925 638
U.S. industrials 2,773 -- 2,773 2,113
Governmental 520 -- 520 563
Non-U.S. financial service 474 -- 474 428
companies
Non-U.S. industrials 1,452 -- 1,452 1,289
Special purpose 3,252 -- 3,252 1,851
U.S. banks 416 15 431 72
U.S. financial service companies 1,846 95 1,941 1,211
Supranationals 12 -- 12 278
------------------------------------------------------------------------------------------------------------------------------------
Total $14,980 $ 110 $15,090 $10,907
====================================================================================================================================
Securities sold, but not yet purchased represent obligations of AIGFP to
deliver specified securities at their contracted prices, and thereby create a
liability to repurchase the securities in the market at prevailing prices.
AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, believes that it
has in place effective procedures for evaluating and limiting the credit and
market risks to which it is subject. Management is not aware of any potentially
significant counterparty defaults.
Revenues for the twelve months ended December 31, 2002, 2001 and 2000 from
AIGFP's operations were $1.31 billion, $1.18 billion and $1.06 billion,
respectively.
(d) AIGTG becomes a party to derivative financial instruments in the
normal course of its business and to reduce its currency, interest rate and
commodity exposures.
Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future date of a specified
instrument, at a specified price or yield. Options are contracts that allow the
holder of the option to purchase or sell the underlying commodity, currency or
index at a specified price and within, or at, a specified period of time. As a
writer of options, AIGTG generally receives an option premium and then manages
the risk of any unfavorable change in the value of the underlying commodity,
currency or index. Risks arise as a result of movements in current market prices
from contracted prices, and the potential inability of the counterparties to
meet their obligations under the contracts. At December 31, 2002, the
contractual amount of AIGTG's futures, forward and option contracts approximated
$424.9 billion.
100
American International Group, Inc. and Subsidiaries
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The following table provides the contractual and notional amounts and
credit exposure, if applicable, by maturity and type of derivative of AIGTG's
derivatives portfolio at December 31, 2002 and December 31, 2001. The gross
replacement values presented represent the sum of the estimated positive fair
values of all of AIGTG's derivatives contracts at December 31, 2002 and December
31, 2001. These values do not represent the credit risk to AIGTG.
Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss within a product category. At December 31, 2002, the net
replacement value of AIGTG's futures, forward and option contracts and interest
rate and currency swaps approximated $2.3 billion.
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
REMAINING LIFE
-------------------------------------------------
ONE TWO THROUGH SIX THROUGH AFTER TEN TOTAL Total
YEAR FIVE YEARS TEN YEARS YEARS 2002 2001
====================================================================================================================================
Contractual amount of futures, forwards and options:
Exchange traded futures and options $ 11,834 $ 1,451 $ 50 $ -- $ 13,335 $ 14,977
====================================================================================================================================
Over the counter forwards $ 168,572 $ 13,562 $ 1,977 $ 36 $ 184,147 $ 184,102
====================================================================================================================================
Over the counter purchased options $ 72,800 $ 17,657 $ 25,053 $ 252 $ 115,762 $ 138,655
====================================================================================================================================
Over the counter sold options (a) $ 69,247 $ 16,771 $ 25,255 $ 401 $ 111,674 $ 137,661
Notional amount (c):
Interest rate swaps and forward rate agreements $ 16,440 $ 33,866 $ 4,613 $ 140 $ 55,059 $ 59,683
Currency swaps 2,351 5,866 327 -- 8,544 11,092
Swaptions 3,608 5,789 1,118 -- 10,515 7,280
------------------------------------------------------------------------------------------------------------------------------------
Total $ 22,399 $ 45,521 $ 6,058 $ 140 $ 74,118 $ 78,055
====================================================================================================================================
Credit exposure:
Futures, forwards swaptions and purchased options
contracts and interest rate and currency swaps:
Gross replacement value $ 5,678 $ 2,861 $ 2,735 $ 46 $ 11,320 $ 10,074
Master netting arrangements (3,895) (2,286) (2,563) (32) (8,776) (6,691)
Collateral (85) (96) (63) (8) (252) (330)
------------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b) $ 1,698 $ 479 $ 109 $ 6 $ 2,292 $ 3,053
====================================================================================================================================
(a) Sold options obligate AIGTG to buy or sell the underlying item if the
option purchaser chooses to exercise. The amounts do not represent credit
exposure.
(b) The net replacement values with respect to exchange traded futures and
options, forward contracts and purchased over the counter options are
presented as a component of trading assets in the accompanying balance
sheet. The net replacement values with respect to interest rate and
currency swaps are presented as a component of unrealized gain on interest
rate and currency swaps, options and forward transactions in the
accompanying balance sheet.
(c) Notional amount is not representative of either market risk or credit
risk.
101
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
AIGTG independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGTG's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The maximum potential loss will increase or decrease during the life
of the derivative commitments as a function of maturity and market conditions.
AIGTG DETERMINES COUNTERPARTY CREDIT QUALITY BY REFERENCE TO RATINGS FROM
INDEPENDENT RATING AGENCIES OR INTERNAL ANALYSIS. AT DECEMBER 31, 2002 AND
DECEMBER 31, 2001, THE COUNTERPARTY CREDIT QUALITY AND COUNTERPARTY BREAKDOWN
BY INDUSTRY WITH RESPECT TO THE NET REPLACEMENT VALUE OF AIGTG'S DERIVATIVES
PORTFOLIO WERE AS FOLLOWS:
(in millions)
--------------------------------------------------------------------------------
NET REPLACEMENT VALUE
2002 2001
================================================================================
Counterparty credit quality:
AAA $ 347 $ 391
AA 622 1,117
A 739 863
BBB 193 330
Below investment grade 63 130
Not externally rated, including
exchange traded futures and options* 328 222
--------------------------------------------------------------------------------
Total $2,292 $3,053
================================================================================
Counterparty breakdown by industry:
Non-U.S. banks $ 927 $1,151
U.S. industrials 369 503
Governmental 37 71
Non-U.S. financial service companies 105 187
Non-U.S. industrials 144 190
U.S. banks 157 353
U.S. financial service companies 225 376
Exchanges* 328 222
--------------------------------------------------------------------------------
Total $2,292 $3,053
================================================================================
* Exchange traded futures and options are not deemed to have significant
credit exposure as the exchanges guarantee that every contract will be
properly settled on a daily basis.
Spot commodities sold but not yet purchased represent obligations of AIGTG
to deliver spot commodities at their contracted prices and thereby create a
liability to repurchase the spot commodities in the market at prevailing prices.
AIGTG limits its risks by holding offsetting positions. In addition, AIGTG
monitors and controls its risk exposures through various monitoring systems
which evaluate AIGTG's market and credit risks, and through credit approvals and
limits. At December 31, 2002, AIGTG did not have a significant concentration of
credit risk from either an individual counter-party or group of counterparties.
AIG has issued unconditional guarantees with respect to the prompt
payment, when due, of all present and future obligations and liabilities of
AIGFP and AIGTG arising from transactions entered into by AIGFP and AIGTG.
(e) At December 31, 2002, ILFC had committed to purchase 523 aircraft
deliverable from 2003 through 2010 at an estimated aggregate purchase price of
$29.8 billion and had options to purchase 18 aircraft deliverable from 2003
through 2008 at an estimated aggregate purchase price of $1.3 billion. ILFC will
be required to find customers for any aircraft acquired, and it must arrange
financing for portions of the purchase price of such equipment.
(f) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.
However, the recent trend of increasing jury awards and settlements makes it
somewhat more difficult to assess the ultimate outcome of such litigation.
AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter collectively
referred to as environmental claims) and indemnity claims asserting injuries
from asbestos. Estimation of asbestos and environmental claims loss reserves is
a difficult process, as these claims, which emanate from policies written in
1984 and prior years, cannot be estimated by conventional reserving techniques.
Asbestos and environmental claims development is affected by factors such as
inconsistent court resolutions, the broadening of the intent of policies and
scope of coverage and increasing number of new claims. AIG and other industry
members have and will continue to litigate the broadening judicial
interpretation of policy coverage and the liability issues. If the courts
continue in the future to expand the intent of the policies and the scope of the
coverage, as they have in the past, additional liabilities would emerge for
amounts in excess of reserves held. This emergence cannot now be reasonably
estimated, but could have a material impact on AIG's future operating results.
The reserves carried for these claims as at December 31, 2002 ($2.14 billion
gross; $696 million net) are believed to be adequate as these reserves are based
on known facts and current law.
AIG's general insurance companies have a special asbestos and
environmental (A & E) claims unit actively managing A & E claims. AIG's
experienced claims professionals evaluate case reserves for AIG losses at the
earliest possible time, reserving to ultimate probable loss based upon known
facts, current law, jurisdiction, policy language and other factors. AIG
routinely reviews the adequacy of A & E case reserves. AIG does not discount A &
E reserves.
102
American International Group, Inc. and Subsidiaries
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
AIG uses primarily two methods to test the A & E reserves. One method, the
Market Share method, produces indicated A & E reserve needs by applying the
appropriate AIG company market share to estimated potential industry ultimate
loss/loss expense based on the latest estimates from A.M. Best and Tillinghast.
A second method, a frequency/severity approach, is also utilized. This approach
utilizes current information as the basis of an analysis that predicts for the
next 10 years (up to the year 2012 with respect to the year ended December 31,
2002), the number of future environmental claims expected and the average
severity of each. The trend in frequency created is based upon assumptions
judged by AIG to be the most reasonable. The trend in severity starts with
initial severities based on actual average current severity (under the varying
case adequacy assumptions) and trending forward under assumptions deemed most
reasonable by AIG. A similar frequency/severity analysis is also performed for
asbestos.
A SUMMARY OF RESERVE ACTIVITY, INCLUDING ESTIMATES FOR APPLICABLE INCURRED BUT
NOT REPORTED LOSSES AND LOSS EXPENSES, RELATING TO ASBESTOS AND ENVIRONMENTAL
CLAIMS SEPARATELY AND COMBINED AT DECEMBER 31, 2002, 2001 AND 2000 FOLLOWS.
(in millions)
----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- ---------------------
GROSS NET Gross Net Gross Net
==================================================================================================================================
Asbestos:
Reserve for losses and loss expenses at beginning of year $ 1,114 $ 312 $ 1,100 $ 338 $ 1,093 $ 306
Losses and loss expenses incurred* 395 168 358 92 405 80
Losses and loss expenses paid* (205) (80) (344) (118) (398) (48)
----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 1,304 $ 400 $ 1,114 $ 312 $ 1,100 $ 338
==================================================================================================================================
Environmental:
Reserve for losses and loss expenses at beginning of year $ 1,115 $ 407 $ 1,345 $ 517 $ 1,519 $ 585
Losses and loss expenses incurred* (140) (44) (41) (34) (44) (45)
Losses and loss expenses paid* (143) (67) (189) (76) (130) (23)
----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 832 $ 296 $ 1,115 $ 407 $ 1,345 $ 517
==================================================================================================================================
Combined:
Reserve for losses and loss expenses at beginning of year $ 2,229 $ 719 $ 2,445 $ 855 $ 2,612 $ 891
Losses and loss expenses incurred* 255 124 317 58 361 35
Losses and loss expenses paid* (348) (147) (533) (194) (528) (71)
----------------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year $ 2,136 $ 696 $ 2,229 $ 719 $ 2,445 $ 855
==================================================================================================================================
* All amounts pertain to policies underwritten in prior years.
(g) 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 as of December 31, 2002.
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.
(h) SAI Deferred Compensation Holdings, Inc., a wholly-owned subsidiary of
AIG, has established a deferred compensation plan for registered representatives
of certain AIG subsidiaries, pursuant to which participants have the opportunity
to invest deferred commissions and fees on a notional basis. The value of the
deferred compensation fluctuates with the value of the deferred investment
alternatives chosen. AIG has provided a full and unconditional guarantee of the
obligations of SAI Deferred Compensation Holdings, Inc. to pay the deferred
compensation under the plan.
103
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FAS 107) requires disclosure of fair value
information about financial instruments, as defined therein, for which it is
practicable to estimate such fair value. These financial instruments may or may
not be recognized in the consolidated balance sheet. In the measurement of the
fair value of certain financial instruments, quoted market prices were not
available and other valuation techniques were utilized. These derived fair value
estimates are significantly affected by the assumptions used. FAS 107 excludes
certain financial instruments, including those related to insurance contracts.
The following methods and assumptions were used by AIG in estimating the
fair value of the financial instruments presented:
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Fixed maturity securities: Fair values for fixed maturity securities
carried at amortized cost or at market value were generally based upon quoted
market prices. For certain fixed maturity securities for which market prices
were not readily available, fair values were estimated using values obtained
from independent pricing services. No other fair valuation techniques were
applied to these securities as AIG believes it would have to expend excessive
costs for the benefits derived.
Equity securities: Fair values for equity securities were based upon
quoted market prices.
Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.
Trading assets and trading liabilities: Fair values for trading assets and
trading liabilities approximate the carrying values presented in the
consolidated balance sheet.
Finance receivables: the fair values of finance receivables were estimated
using discounted cash flow calculations based upon the weighted average rates
currently being offered for similar finance receivables.
Securities available for sale: Fair values for securities available for
sale and related hedges were based on quoted market prices. For securities and
related hedges for which market prices were not readily available, fair values
were estimated using quoted market prices of comparable investments.
Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.
Spot commodities: Fair values for spot commodities were based on current
market prices.
Unrealized gains and losses on interest rate and currency swaps, options
and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among other
things, current interest, foreign exchange and volatility rates, as applicable.
Securities purchased (sold) under agreements to resell (repurchase), at
contract value: As these securities (obligations) are short-term in nature, the
contract values approximate fair values.
Other invested assets: For assets for which market prices were not readily
available, fair valuation techniques were not applied as AIG believes it would
have to expend excessive costs for the benefits derived.
Policyholders' contract deposits: Fair values of policy-holder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
GIAs: Fair values of AIG's obligations under investment type agreements
were estimated using discounted cash flow calculations based on interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued.
Securities and spot commodities sold but not yet purchased: The carrying
amounts for the financial instruments approximate fair values. Fair values for
spot commodities sold short were based on current market prices.
Trust deposits and deposits due to banks and other depositors: To the
extent certain amounts are not demand deposits or certificates of deposit which
mature in more than one year, fair values were not calculated as AIG believes it
would have to expend excessive costs for the benefits derived.
Commercial paper: The carrying amount of AIG's commercial paper borrowings
approximates fair value.
Notes, bonds, loans and mortgages: Where practical, the fair values of
these obligations were estimated using discounted cash flow calculations based
upon AIG's current incremental borrowing rates for similar types of borrowings
with maturities consistent with those remaining for the debt being valued.
104
American International Group, Inc. and Subsidiaries
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
THE CARRYING VALUES AND FAIR VALUES OF AIG'S FINANCIAL INSTRUMENTS AT DECEMBER
31, 2002 AND DECEMBER 31, 2001 AND THE AVERAGE FAIR VALUES WITH RESPECT TO
DERIVATIVE POSITIONS DURING 2002 AND 2001 WERE AS FOLLOWS:
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
-------------------------------- -------------------------------
AVERAGE Average
CARRYING FAIR FAIR Carrying Fair Fair
VALUE VALUE VALUE Value Value Value
====================================================================================================================================
Assets:
Fixed maturities $243,366 $243,366 $ -- $200,616 $200,616 $ --
Equity securities 7,066 7,066 -- 7,937 7,937 --
Mortgage loans on real estate, policy and collateral loans 19,928 21,244 -- 18,967 19,615 --
Securities available for sale 16,687 16,687 16,796 17,801 17,801 17,096
Finance receivables, net of allowance 15,857 15,888 -- 13,955 13,253 --
Trading securities 4,146 4,146 5,071 5,733 5,733 6,387
Spot commodities 489 489 431 352 352 408
Unrealized gain on interest rate and currency swaps,
options and forward transactions 15,376 15,376 13,112 11,493 11,493 11,792
Trading assets 4,786 4,786 4,769 6,234 6,234 7,111
Securities purchased under agreements to resell 25,661 25,661 -- 21,681 21,681 --
Other invested assets 12,680 12,680 -- 12,704 12,704 --
Securities lending collateral 23,694 23,694 -- 10,574 10,574 --
Short-term investments 6,993 6,993 -- 7,168 7,168 --
Cash 1,165 1,165 -- 698 698 --
Liabilities:
Policyholders' contract deposits 142,160 143,519 -- 119,402 116,040 --
Borrowings under obligations of guaranteed
investment agreements 14,850 17,256 -- 16,392 17,201 --
Securities sold under agreements to repurchase 9,162 9,162 -- 11,818 11,818 --
Trading liabilities 3,825 3,825 3,856 4,372 4,372 4,714
Securities and spot commodities sold but not yet purchased 11,765 11,765 9,103 8,331 8,331 7,268
Unrealized loss on interest rate and currency swaps,
options and forward transactions 11,265 11,265 9,842 8,813 8,813 9,186
Trust deposits and deposits due to banks and other depositors 2,987 3,045 -- 2,290 2,589 --
Commercial paper 9,112 9,112 -- 11,892 11,892 --
Notes, bonds, loans and mortgages payable 47,923 49,071 -- 37,447 34,640 --
====================================================================================================================================
105
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. STOCK COMPENSATION PLANS
(a) At December 31, 2002, AIG had three types of stock-based compensation plans:
(i) a stock option plan; (ii) an incentive stock plan under which restricted
stock units had been issued; and (iii) an employee stock purchase plan. AIG
applied APB Opinion 25 "Accounting for Stock Issued to Employees" and related
Interpretations (APB 25) in accounting for each plan. Accordingly, no
compensation costs have been recognized for the plans.
AIG will adopt Statement of Financial Accounting Standards No. 123
"Accounting for Awards of Stock Based Compensation to Employees" (FAS 123) and
Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure" (FAS 148) effective January 1, 2003.
FAS 123 requires that the fair value of shares granted under AIG's stock option
plan, shares subscribed under AIG's employee stock purchase plan and AIG's
restricted stock units be recognized in earnings over the respective vesting
periods. The fair value of the stock options granted and the employee purchase
plan shares subscribed will be determined through the use of an option-pricing
model. The fair value of the restricted stock units is the share market value at
the date of the grant. The impact of recognizing the fair value of the AIG's
stock compensation is expected to be insignificant to AIG's earnings.
FAS 148 provides transitioning guidance for a voluntary change of the
application of FAS 123 and amends the disclosure requirements of FAS 123.
Commencing January 1, 2003, AIG will be applying the "Prospective Method" in
transitioning to the application of FAS 123. This method transitions the
recognition with respect to stock based compensation to those awards granted or
shares subscribed on or after January 1, 2003.
The table which follows is not representative of the impact of AIG's 2003
adoption of the Prospective Method with respect to the implementation of FAS
123.
HAD COMPENSATION COSTS FOR THESE PLANS BEEN DETERMINED CONSISTENT WITH THE
METHOD OF FAS 123, AIG'S NET INCOME AND EARNINGS PER SHARE FOR THE YEARS
ENDED DECEMBER 31, 2002, 2001 AND 2000 WOULD HAVE BEEN REDUCED TO THE PRO
FORMA AMOUNTS AS FOLLOWS:
(in millions, except per share amounts)
--------------------------------------------------------------------------------
2002 2001 2000
================================================================================
Net income:
As reported $ 5,519 $ 5,363 $ 6,639
Pro forma 5,464 5,226 6,593
Earnings per share -- diluted:
As reported $ 2.10 $ 2.02 $ 2.52
Pro forma 2.07 1.97 2.50
================================================================================
At December 31, 2002, AIG changed its option-pricing model from the
Black-Scholes model to a binomial model (AIG model) that takes possible early
exercise of options into account. The model uses the forfeiture and exercise
historical experiences to determine the option value. It also takes into account
the illiquid nature of employee options, something that the Black-Scholes model
does not consider. For these reasons, AIG believes that the AIG model provides a
fair value that is more representative of actual historic experience than that
value calculated in previous years.
The fair values with respect to 2001 and 2000 were recalculated using the
AIG model. The pro forma recognition of such fair value had insignificant impact
on the pro forma amounts disclosed above.
The fair values of stock options granted during the three years ended
December 31, 2002, 2001, and 2000 were $140 million, $195 million, including $90
million in fair value with respect to shares granted in connection with the AGC
acquisition, and $58 million, respectively. The fair value of those options
granted in each of the three years was derived using the AIG model.
The following weighted average assumptions were used for stock options
granted in 2002, 2001 and 2000, respectively: dividend yields of 0.26 percent,
0.19 percent and 0.17 percent; expected volatilities of 34 percent, 32 percent
and 31 percent; risk-free interest rates of 4.33 percent, 4.85 percent and 6.14
percent; and expected terms of 7 years in each year.
Also, included in the above table is the compensation expense with respect
to AIG's employee stock purchase plan. The fair value calculated was derived by
using the AIG model. The pro forma recognition of such fair value had an
insignificant impact on the pro forma amounts disclosed above.
The fair values of purchase privileges granted during the years ended
December 31, 2002, 2001 and 2000 were $8 million, $12 million and $9 million,
respectively. The weighted average fair values per share of those purchase
rights granted in 2002, 2001 and 2000 were $12.42, $17.69 and $18.65,
respectively. The fair value of each purchase right was derived at the date of
the subscription using the AIG model.
The following weighted average assumptions were used for purchase
privileges granted in 2002, 2001 and 2000, respectively: dividend yields of 0.26
percent, 0.19 percent and 0.17 percent; expected volatilities of 34.0 percent,
32.0 percent and 31.0 percent; risk-free interest rates of 1.26 percent, 3.17
percent and 5.92 percent; and expected terms of 1 year.
(I) STOCK OPTION PLAN: On September 15, 1999, the AIG Board of Directors
adopted a 1999 stock option plan (the 1999 Plan), which provides that options to
purchase a maximum of 15,000,000 shares of common stock can be granted to
certain key employees and members of the Board of Directors at prices not less
than fair market value at the date of grant. The 1999 Plan limits the maximum
number of shares as
106
American International Group, Inc. and Subsidiaries
14. STOCK COMPENSATION PLANS (continued)
to which stock options may be granted to any employee in any one year to 375,000
shares. Options granted under this Plan expire not more than 10 years from the
date of the grant. Options with respect to 27,500 shares, 25,000 shares and
12,000 shares were granted to non-employee members of the Board of Directors on
May 15, 2002, May 16, 2001 and May 17, 2000, respectively. These options become
exercisable on the first anniversary of the date of grant, expire 10 years from
the date of grant and do not qualify for Incentive Stock Option Treatment under
the Section 422 of the Internal Revenue Code (ISO Treatment). The Plan, and the
options previously granted thereunder, were approved by the shareholders at the
2000 Annual Meeting of Shareholders. At December 31, 2002, 4,140,235 shares were
reserved for future grants under the 1999 Plan. The 1999 Plan superseded the
1991 employee stock option plan (the 1991 Plan) and the previously superseded
1987 employee stock option plan (the 1987 Plan), although outstanding options
granted under the 1991 Plan continue in force until exercise or expiration. At
December 31, 2002, there were 20,537,641 shares reserved for issuance under the
1999 and 1991 Plans.
During 2002 and 2001, AIG granted options with respect to 356,034 shares
and 837,275 shares, respectively, which become exercisable on the fifth
anniversary of the date of grant and expire 10 years from the date of grant.
These options do not qualify for ISO Treatment. The agreements with respect to
all other options granted to employees under these plans provide that 25 percent
of the options granted become exercisable on the anniversary of the date of
grant in each of the four years following that grant and expire 10 years from
the date of the grant. As of December 31, 2002, outstanding options granted with
respect to 10,234,385 shares qualified for ISO Treatment.
At January 1, 1999, the merger date, SunAmerica Inc. had five stock-based
compensation plans pursuant to which options, restricted stock and deferred
share and share unit obligations had been issued and remained outstanding.
Options granted under these plans had an exercise price equal to the market
price on the date of grant, had a maximum term of ten years and generally became
exercisable ratably over a five-year period. Substantially all of the SunAmerica
Inc. options outstanding at the merger date became fully vested on that date and
were converted into options to purchase AIG common stock at the exchange ratio
of 0.855 shares of AIG common stock for each share of SunAmerica Inc. common
stock. No further options can be granted under the SunAmerica Inc. plans, but
outstanding options so converted continue in force until exercise or expiration.
At December 31, 2002, there were 18,401,020 shares of AIG common stock reserved
for issuance on exercise of options under these plans. None of these options
qualified for ISO Treatment as of December 31, 2002.
During 1999, AIG issued 1,009,968 shares of AIG common stock which vested
on the effectiveness of the merger with SunAmerica Inc., and an additional
993,031 shares were issued pursuant to deferred share and share unit
obligations. During 2000, deferred share and share unit obligations with respect
to an additional 1,224,214 shares of AIG common stock vested, 142,105 shares
were issued pursuant to deferred share and share unit obligations and an
additional 1,082,109 shares were delivered into a trust in connection with a
deferred compensation plan. During 2002 and 2001, deferred share and share unit
obligations with respect to an additional 1,895 shares and 19,930 shares,
respectively, of AIG common stock vested and were issued. No additional deferred
share or share unit obligations may be granted under the SunAmerica plans. As of
December 31, 2002, deferred share and share unit obligations with respect to
65,657 shares remained outstanding under the SunAmerica plans.
In 1999, the AIG Board of Directors construed the AIG stock option plans
to allow deferral of delivery of AIG shares otherwise deliverable upon the
exercise of an option to a date or dates specified by the optionee upon the
request of an optionee. During 2002, options with respect to 590,048 shares were
exercised with delivery deferred. At December 31, 2002, optionees had made valid
elections to defer delivery of 439,635 shares of AIG common stock upon exercise
of options expiring during 2003.
As a result of the acquisition of HSB in November 2000, HSB options
outstanding at the acquisition date were fully vested and were converted into
options to purchase AIG common stock at the exchange ratio of 0.4178 shares of
AIG common stock for each share of HSB common stock. No further options can be
granted under the HSB option plans, but outstanding options so converted
continue in force until exercise or expiration. At December 31, 2002, there were
1,413,268 shares of AIG common stock reserved for issuance under the HSB option
plans, none of which qualified for ISO Treatment.
At August 29, 2001, AGC had stock-based compensation plans pursuant to
which options and restricted share units had been issued and remained
outstanding. Options granted under these plans had an exercise price equal to
the market price on the date of the grant, had a maximum term of ten years and
generally became exercisable ratably over a three-year period. All of the AGC
options outstanding at the acquisition date became fully vested on that date and
were converted into options to purchase AIG common stock at an exchange ratio of
0.5790 shares of AIG common stock for each share of AGC common stock. No further
options can be granted under the AGC plans, but outstanding options so converted
continue in force until exercise or expiration. At December 31, 2002, there were
13,862,087 shares of AIG common stock reserved for issuance on exercise of
options under these plans. Options with respect to 1,898,266 of these shares
qualified for ISO Treatment as of December 31, 2002.
107
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. STOCK COMPENSATION PLANS (continued)
ADDITIONAL INFORMATION WITH RESPECT TO AIG'S PLANS AT DECEMBER 31, 2002, AND
CHANGES FOR THE THREE YEARS THEN ENDED, WERE AS FOLLOWS:
----------------------------------------------------------------------------------------------------------------------
2002 2001
--------------------------- ---------------------------
WEIGHTED Weighted
AVERAGE Average
SHARES EXERCISE PRICE Shares Exercise Price
======================================================================================================================
Shares Under Option:
Outstanding at beginning of year 54,295,320 $42.68 38,171,151 $31.53
Outstanding at beginning of year - AGC -- -- 15,100,013 51.87
Granted 5,683,324 66.17 8,771,982 71.56
Assumed upon acquisition from HSB -- -- -- --
Exercised (4,242,718) 35.04 (6,209,008) 41.16
Exercised, delivery deferred (590,048) 6.60 (847,128) 3.76
Forfeited (931,862) 72.29 (691,690) 55.55
----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 54,214,016 $45.63 54,295,320 $42.68
----------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 43,978,843 $39.30 47,346,372 $37.39
----------------------------------------------------------------------------------------------------------------------
Weighted average fair value per share of options granted $24.65 $22.25
======================================================================================================================
-----------------------------------------------------------------------------------------
2000
---------------------------
Weighted
Average
Shares Exercise Price
=========================================================================================
Shares Under Option:
Outstanding at beginning of year 41,415,126 $23.29
Outstanding at beginning of year - AGC -- --
Granted 2,179,220 95.48
Assumed upon acquisition from HSB 1,605,468 81.43
Exercised (5,796,592) 13.80
Exercised, delivery deferred (760,070) 3.06
Forfeited (472,001) 36.70
-----------------------------------------------------------------------------------------
Outstanding at end of year 38,171,151 $31.53
-----------------------------------------------------------------------------------------
Options exercisable at year-end 32,778,411 $24.87
-----------------------------------------------------------------------------------------
Weighted average fair value per share of options granted $34.22
=========================================================================================
In addition, at December 31, 2002, options to purchase 358,594 shares at a
weighted average exercise price of $20.31 had been previously granted to AIG
non-employee directors and remained outstanding.
INFORMATION ABOUT STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 2002, IS SUMMARIZED
AS FOLLOWS:
------------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
====================================================================================================================================
Range of Exercise Prices:
$ 4.47- 14.44 7,380,455 2.0 years $ 7.87 7,380,455 $ 7.87
15.31- 24.68 8,903,526 3.7 years 20.30 8,903,526 20.30
25.42- 38.43 7,974,008 5.1 years 34.52 7,974,008 34.52
40.24- 57.80 7,823,354 6.4 years 52.32 7,767,954 52.30
58.74- 63.67 9,869,612 7.8 years 60.10 5,346,248 59.17
64.01- 77.17 4,629,753 7.7 years 66.84 4,210,465 66.45
78.65 - 100.57 7,633,308 8.3 years 84.83 2,396,187 88.38
------------------------------------------------------------------------------------------------------------------------------------
54,214,016 $45.63 43,978,843 $39.30
====================================================================================================================================
(II) 2002 STOCK INCENTIVE PLAN: AIG's 2002 Stock Incentive Plan was
adopted at its 2002 shareholders' meeting and amended and restated by the AIG
Board of Directors on September 18, 2002. This plan provides that equity-based
or equity-related awards with respect to up to a maximum of 16,000,000 shares of
common stock can be issued to officers, employees or members of the Board of
Directors of AIG. Under the Plan, no grantee may receive awards covering more
than 250,000 shares of common stock. During 2002, AIG granted restricted stock
units (RSUs) relating to 171,215 shares of common stock to employees. These RSUs
will vest on the fourth anniversary of the date of grant assuming continued
employment through such date. AIG reserves the right to make payment for the
RSUs in shares of common stock or the cash equivalent on the date of vesting. At
December 31, 2002, there were 15,828,785 shares of common stock reserved for
issuance in connection with future grants of awards under the Plan.
(III) PERFORMANCE-BASED RESTRICTED STOCK UNITS: During 2002 and 2001, AIG
issued performance-based restricted stock units with respect to 4,783 shares and
124,365 shares, respectively, of AIG common stock in connection with contractual
obligations as a result of the AGC acquisition.
(IV) EMPLOYEE STOCK PURCHASE PLAN: AIG's 1996 Employee Stock Purchase Plan
was adopted at its 1996 shareholders' meeting and became effective as of July 1,
1996. Eligible employees may receive privileges to purchase up to an aggregate
of 4,218,750 shares of AIG common stock, at a price equal to 85 percent of the
fair market value on the date of the grant of the purchase privilege. Purchase
privileges are granted annually and were originally limited to the number of
whole shares that could be purchased by an amount equal to 5 percent of an
employee's annual salary or $5,500, whichever was less. Beginning with the
January 1, 1998
108
American International Group, Inc. and Subsidiaries
14. STOCK COMPENSATION PLANS (continued)
subscription, the maximum allowable purchase limitation increased to 10 percent
of an employee's annual salary or $10,000 per year, whichever is less, and the
eligibility requirement was reduced from two years to one year.
There were 274,442 shares, 503,847 shares and 742,773 shares issued under
the 1996 plan at weighted average prices of $70.76, $62.02 and $52.66 for the
years ended December 31, 2002, 2001 and 2000, respectively. The excess or
deficit of the proceeds over the par value or cost of the common stock issued
under these plans was credited or charged to additional paid-in capital.
As of December 31, 2002, there were 636,853 shares of common stock
subscribed to at a weighted average price of $54.52 per share pursuant to grants
of privileges under the 1996 plan. There were 56,720 shares available for the
grant of future purchase privileges under the 1996 plan at December 31, 2002.
(b) The following are disclosures with respect to the stock compensation
plans of AGC prior to its acquisition by AIG. Both share information and
exercise price information have been recalculated to reflect the exchange ratio
of 0.5790 shares of AIG common stock for each outstanding share of AGC's common
stock. All of AGC's options vested immediately prior to the closing date of the
acquisition.
AGC's long-term incentive plans provide for the award of stock options,
restricted stock awards, and performance awards to key employees and directors.
Stock options constitute the majority of awards. AGC recognized no expense for
stock options since the market price equaled the exercise price at the grant
date.
For restricted stock and performance awards, the grant date market value
was amortized to expense over the vesting period. AGC adjusted the expense to
reflect changes in market value of AGC's common stock and anticipated
performance levels for those awards with performance criteria.
AGC STOCK OPTION ACTIVITY WAS AS FOLLOWS:
--------------------------------------------------------------------------------
2000
---------------------
Average
Options Exercise
(000's) Price
--------------------------------------------------------------------------------
Balance at January 1 11,405 $48.91
Granted 5,437 55.32
Exercised (1,084) 35.42
Forfeited (658) 56.41
--------------------------------------------------------------------------------
Balance at December 31 15,100 $51.87
--------------------------------------------------------------------------------
Exercisable at December 31 5,898 $44.87
--------------------------------------------------------------------------------
Weighted average fair value
per share of options granted $16.93
================================================================================
Options could not be exercised prior to six months after, nor after 10
years from, grant date. For certain stock options, one reload option was granted
for each previously-owned share of common stock tendered to exercise options.
Reload options vested immediately and were exercisable for the remaining term of
the original options. Reload options are no longer being granted.
109
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. EMPLOYEE BENEFITS
(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation.
The HSB retirement plan was merged into the AIG U.S. retirement plan
effective April 1, 2001. The AGC retirement plan was merged into the AIG U.S.
retirement plan effective January 1, 2002.
AIG's U.S. retirement plan is a qualified, noncontributory, defined
benefit plan. All qualified employees, other than those of 21st Century, who
have attained age 21 and completed twelve months of continuous service are
eligible to participate in this plan. An employee with 5 or more years of
service is entitled to pension benefits beginning at normal retirement at age
65. Benefits are based upon a percentage of average final compensation
multiplied by years of credited service limited to 44 years of credited service
with the exception of AGC employees where the credited service limitation is 40
years of credited service. The average final compensation is subject to certain
limitations. Annual funding requirements are determined based on the "projected
unit credit" cost method which attributes a pro rata portion of the total
projected benefit payable at normal retirement to each year of credited service.
AIG SunAmerica began participation in the plan on January 1, 2003.
AIG has adopted a Supplemental Executive Retirement Plan (Supplemental
Plan) to provide additional retirement benefits to designated executives and key
employees. Under the Supplemental Plan, the annual benefit, not to exceed 60
percent of average final compensation, accrues at a percentage of average final
pay multiplied for each year of credited service reduced by any benefits from
the current and any predecessor retirement plans, Social Security, if any, and
from any qualified pension plan of prior employers. The Supplemental Plan also
provides a benefit equal to the reduction in benefits payable under the AIG U.S.
retirement plan as a result of Federal tax limitations on benefits payable
there-under. Currently, the Supplemental Plan is unfunded. AGC has adopted a
Supplemental Plan which is similar to AIG's. HSB has adopted a separate
Supplemental Plan.
Eligibility for participation in the various non-U.S. retirement plans is
either based on completion of a specified period of continuous service or date
of hire, subject to age limitation. Where non-U.S. retirement plans are defined
benefit plans, they are generally based on the employees' years of credited
service and average compensation in the years preceding retirement.
In addition to AIG's defined benefit pension plan, AIG and its
subsidiaries provide a postretirement benefit program for medical care and life
insurance, domestically and in certain foreign countries. Eligibility in the
various plans is generally based upon completion of a specified period of
eligible service and reaching a specified age. Benefits vary by geographic
location.
AIG's U.S. postretirement medical and life insurance benefits are based
upon the employee electing immediate retirement and having a minimum of ten
years of service. Retirees who were age 65 by May 1, 1989 and their dependents
participate in the medical plan at no cost. Employees who retired after May 1,
1989 and on or prior to January 1, 1993 pay the active employee premium if under
age 65 and 50 percent of the active employee premium if over age 65. Retiree
contributions are subject to adjustment annually. Other cost sharing features of
the medical plan include deductibles, coinsurance and Medicare coordination and
a lifetime maximum benefit of $2.0 million. The maximum life insurance benefit
prior to age 70 is $32,500, with a maximum of $25,000 thereafter.
Effective January 1, 1993, both plans' provisions were amended. Employees
who retire after January 1, 1993 are required to pay the actual cost of the
medical benefits premium reduced by a credit which is based on years of service
at retirement. The life insurance benefit varies by age at retirement from
$5,000 for retirement at ages 55 through 59; $10,000 for retirement at ages 60
through 64 and $15,000 for retirement at ages 65 and over.
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k)
plan), which, during the three years ended December 31, 2002, provided for
salary reduction contributions by employees and matching contributions by AIG of
up to 6 percent of annual salary depending on the employees' years of service.
(c) AIG SunAmerica sponsors a voluntary savings plan for its employees
(the SunAmerica 401(k) plan), which, during the three years ended December 31,
2002, provided for salary reduction contributions by qualifying employees and
matching contributions by AIG SunAmerica of up to 4 percent of qualifying
employees' annual salaries. Under an Executive Savings Plan, designated AIG
SunAmerica executives also could defer up to 90 percent of cash compensation
during the three years ended December 31, 2002, and AIG SunAmerica matched 4
percent of the participants' base salaries deferred.
(d) AGC sponsors a voluntary savings plan for its employees (the AGC
401(k) plan), which provides for salary reduction contributions by employees and
matching contributions by AGC of up to 4.5 percent of annual salary.
(e) HSB sponsored a voluntary savings plan for its employees (the HSB
401(k) plan), which provided for salary reduction contributions by employees and
matching contributions by HSB of up to 6 percent of annual salary. The HSB
voluntary savings plan merged into the AIG voluntary savings plan on January 1,
2002.
110
American International Group, Inc. and Subsidiaries
15. EMPLOYEE BENEFITS (continued)
(f) AIG has certain benefits provided to inactive employees who are not
retirees. Certain of these benefits are insured and expensed currently; other
expenses are provided for currently. Such uninsured expenses include medical and
life insurance continuation, and COBRA medical subsidies.
THE FOLLOWING TABLE SETS FORTH THE CHANGE IN BENEFIT OBLIGATION, CHANGE IN
PLAN ASSETS AND WEIGHTED AVERAGE ASSUMPTIONS ASSOCIATED WITH VARIOUS PENSION
PLAN AND POSTRETIREMENT BENEFITS. THE WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS
WITH RESPECT TO ALL PLANS PRESENTED WERE 5.52 PERCENT DISCOUNT RATE, 7.96
PERCENT AS TO THE EXPECTED RETURN ON PLAN ASSETS AND 3.59 PERCENT AS TO THE
RATE OF COMPENSATION INCREASE. THE AMOUNTS ARE RECOGNIZED IN THE ACCOMPANYING
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2002 AND 2001:
(in millions)
--------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
---------------------------------- ----------------------------------
NON-U.S. U.S. NON-U.S. U.S.
2002 PLANS PLANS TOTAL PLANS PLANS TOTAL
================================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 958 $ 1,829 $ 2,787 $ 12 $ 233 $ 245
Service cost 48 74 122 1 4 5
Interest cost 30 141 171 1 16 17
Participant contributions 6 -- 6 -- -- --
Actuarial loss 18 182 200 2 24 26
Plan amendments and mergers (20) 3 (17) -- (19) (19)
Benefits paid (64) (81) (145) -- (20) (20)
Effect of foreign currency fluctuation 111 -- 111 -- -- --
Curtailment (16) (2) (18) -- -- --
--------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 1,071 $ 2,146 $ 3,217 $ 16 $ 238 $ 254
================================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 455 $ 1,930 $ 2,385 $ -- $ -- $ --
Actual return on plan assets net of expenses (22) (234) (256) -- -- --
Employer contributions 57 82 139 -- 20 20
Participant contributions 6 -- 6 -- -- --
Benefits paid (64) (81) (145) -- (20) (20)
Effect of foreign currency fluctuation 53 -- 53 -- -- --
Curtailment (6) -- (6) -- -- --
--------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year* $ 479 $ 1,697 $ 2,176 $ -- $ -- $ --
================================================================================================================================
Reconciliation of funded status:
Funded status $ (592) $ (449) $(1,041) $ (16) $ (238) $ (254)
Unrecognized actuarial (gain)/loss 189 809 998 -- 48 48
Unrecognized transition obligation 5 1 6 -- -- --
Unrecognized prior service cost (15) 20 5 -- (52) (52)
--------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (413) $ 381 $ (32) $ (16) $ (242) $ (258)
================================================================================================================================
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 2 $ 520 $ 522 $ -- $ -- $ --
Accrued benefit liability (583) (162) (745) (16) (242) (258)
Intangible asset 168 23 191 -- -- --
--------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (413) $ 381 $ (32) $ (16) $ (242) $ (258)
================================================================================================================================
For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 2002.
The rate was assumed to decrease gradually to 5.0 percent for 2008 and remain at
that level thereafter.
* Plan assets are invested primarily in fixed-income securities and listed
stocks.
111
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. EMPLOYEE BENEFITS (continued)
(in millions)
-------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------------------- ----------------------------------
Non-U.S. U.S. Non-U.S. U.S.
2001 Plans Plans Total Plans Plans Total
===============================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 462 $ 1,415 $ 1,877 $ 10 $ 197 $ 207
Acquisition 533 211 744 -- 28 28
Service cost 38 70 108 1 4 5
Interest cost 25 127 152 -- 16 16
Participant contributions 5 -- 5 -- -- --
Actuarial loss 38 102 140 1 9 10
Plan amendment -- 4 4 -- -- --
Benefits paid (75) (90) (165) -- (21) (21)
Effect of foreign currency fluctuation (59) -- (59) -- -- --
Curtailment (9) (10) (19) -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 958 $ 1,829 $ 2,787 $ 12 $ 233 $ 245
===============================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 255 $ 1,936 $ 2,191 $ -- $ -- $ --
Acquisition 203 277 480 -- -- --
Actual return on plan assets net of expenses (32) (227) (259) -- -- --
Employer contributions 126 45 171 -- 21 21
Participant contributions 5 -- 5 -- -- --
Benefits paid (75) (90) (165) -- (21) (21)
Asset adjustment -- (1) (1) -- -- --
Effect of foreign currency fluctuation (25) -- (25) -- -- --
Curtailment (2) (10) (12) -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year* $ 455 $ 1,930 $ 2,385 $ -- $ -- $ --
===============================================================================================================================
Reconciliation of funded status:
Funded status $ (503) $ 101 $ (402) $ (12) $ (233) $ (245)
Unrecognized actuarial (gain)/loss 131 224 355 -- 25 25
Unrecognized transition obligation 6 2 8 -- -- --
Unrecognized prior service cost 4 21 25 -- (38) (38)
Benefit payments -- -- -- -- 2 2
-------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (362) $ 348 $ (14) $ (12) $ (244) $ (256)
===============================================================================================================================
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 1 $ 492 $ 493 $ -- $ -- $ --
Accrued benefit liability (458) (172) (630) (12) (244) (256)
Intangible asset 95 28 123 -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at year end $ (362) $ 348 $ (14) $ (12) $ (244) $ (256)
===============================================================================================================================
For measurement purposes, an 8.0 percent annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 2001.
The rate was assumed to decrease gradually to 5.0 percent for 2007 and remain at
that level thereafter.
* Plan assets are invested primarily in fixed-income securities and listed
stocks.
112
American International Group, Inc. and Subsidiaries
15. EMPLOYEE BENEFITS (continued)
THE NET BENEFIT COST FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
INCLUDED THE FOLLOWING COMPONENTS:
(in millions)
-----------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
----------------------------- ----------------------------
NON-U.S. U.S. NON-U.S. U.S.
PLANS PLANS TOTAL PLANS PLANS TOTAL
===========================================================================================================
2002
Components of net period benefit cost:
Service cost $ 48 $ 74 $ 122 $ 1 $ 4 $ 5
Interest cost 30 141 171 1 16 17
Expected return on assets (19) (176) (195) -- -- --
Amortization of prior service cost -- 2 2 -- (6) (6)
Amortization of transitional liability 2 1 3 -- -- --
Recognized actuarial loss 15 3 18 -- -- --
Gain due to Curtailment on Settlement (10) 3 (7) -- 1 1
-----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 66 $ 48 $ 114 $ 2 $ 15 $ 17
===========================================================================================================
2001
Components of net period benefit cost:
Service cost $ 38 $ 70 $ 108 $ 1 $ 4 $ 5
Interest cost 25 127 152 -- 16 16
Expected return on assets (16) (204) (220) -- -- --
Amortization of prior service cost 2 3 5 -- (4) (4)
Amortization of transitional liability 2 1 3 -- -- --
Recognized actuarial loss 5 2 7 -- -- --
Gain due to Curtailment on Settlement (7) 18 11 -- -- --
-----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 49 $ 17 $ 66 $ 1 $ 16 $ 17
===========================================================================================================
2000
Components of net period benefit cost:
Service cost $ 32 $ 57 $ 89 $ 1 $ 4 $ 5
Interest cost 15 101 116 -- 16 16
Expected return on assets (12) (172) (184) -- -- --
Amortization of prior service cost 2 2 4 -- (4) (4)
Amortization of transitional liability 2 1 3 -- -- --
Recognized actuarial loss 2 (11) (9) -- -- --
-----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 41 $ (22) $ 19 $ 1 $ 16 $ 17
===========================================================================================================
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $1.32 billion, $1.18 billion and $535 million,
respectively, as of December 31, 2002 and $1.19 billion, $1.06 billion and $499
million as of December 31, 2001.
At December 31, 2002, there were 1.2 million shares of AIG common stock
with a value of $69.9 million included in the plan assets. The benefit plans
have purchased annuity contracts from AIG's subsidiaries to provide $56 million
of future annual benefits principally to certain AGC retirees.
On December 31, 1998, AIG amended its retirement and postretirement
healthcare plan to provide increased benefits to certain employees who retire
prior to age 65. Assumed healthcare cost trend rates have a significant effect
on the amounts reported for the healthcare plan.
A ONE-PERCENTAGE-POINT CHANGE IN ASSUMED HEALTHCARE COST TREND RATES WOULD HAVE
THE FOLLOWING EFFECTS:
(in millions)
--------------------------------------------------------------------------------
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
================================================================================
Effect on total of service and interest
cost components $1 $1
Effect on postretirement benefit obligation 7 7
================================================================================
16. STARR INTERNATIONAL COMPANY, INC. PLAN
Starr International Company, Inc. (SICO) provides a Deferred Compensation Profit
Participation Plan (SICO Plan) to certain AIG employees. The SICO Plan came into
being in 1975 when the voting shareholders and Board of Directors of SICO, a
private holding company whose principal asset consists of AIG common stock,
decided that a portion of the capital value of SICO should be used to provide an
incentive plan for the current and succeeding managements of all American
International companies, including AIG.
113
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. STARR INTERNATIONAL COMPANY, INC. PLAN (continued)
Participation in the SICO Plan by any person, and the amount of such
participation, is at the sole discretion of SICO's Board of Directors, and none
of the costs of the various benefits provided under such plan is paid by or
charged to AIG. The SICO Plan provides that shares currently owned by SICO may
be set aside by SICO for the benefit of the participant and distributed upon
retirement. The SICO Board of Directors may permit an early pay-out of units
under certain circumstances. Prior to pay-out, the participant is not entitled
to vote, dispose of or receive dividends with respect to such shares, and shares
are subject to forfeiture under certain conditions, including but not limited to
the participant's voluntary termination of employment with AIG prior to normal
retirement age. In addition, SICO's Board of Directors may elect to pay a
participant cash in lieu of shares of AIG common stock. If the expenses of the
SICO Plan had been reflected by AIG, the pre-tax amounts accrued would have been
$49.4 million, $55.7 million and $76.8 million for 2002, 2001 and 2000,
respectively.
17. LEASES
(a) AIG and its subsidiaries occupy leased space in many locations under
various long-term leases and have entered into various leases covering the
long-term use of data processing equipment.
AT DECEMBER 31, 2002, THE FUTURE MINIMUM LEASE PAYMENTS UNDER OPERATING
LEASES WERE AS FOLLOWS:
(in millions)
================================================================================
2003 $ 477
2004 346
2005 248
2006 179
2007 139
Remaining years after 2007 716
--------------------------------------------------------------------------------
Total $2,105
================================================================================
Rent expense approximated $503 million, $472 million and $412 million for
the years ended December 31, 2002, 2001 and 2000 respectively.
(B) MINIMUM FUTURE RENTAL INCOME ON NONCANCELABLE OPERATING LEASES OF FLIGHT
EQUIPMENT WHICH HAVE BEEN DELIVERED AT DECEMBER 31, 2002 WAS AS FOLLOWS:
(in millions)
================================================================================
2003 $ 2,306
2004 2,081
2005 1,790
2006 1,451
2007 1,145
Remaining years after 2007 2,913
--------------------------------------------------------------------------------
Total $11,686
================================================================================
Flight equipment is leased, under operating leases, with remaining terms
ranging from one to 15 years.
18. OWNERSHIP AND TRANSACTIONS WITH RELATED PARTIES
(A) OWNERSHIP: The directors and officers of AIG, together with C.V. Starr &
Co., Inc. (Starr), a private holding company, The Starr Foundation and Starr
International Company, Inc. (SICO), a private holding company, owned or
otherwise controlled approximately 21 percent of the voting stock of AIG at
December 31, 2002. Six directors of AIG also serve as directors of Starr and
SICO.
(B) TRANSACTIONS WITH RELATED PARTIES: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries
for the production and management of insurance business. There are no
significant receivables from/payables to related parties at December 31, 2002.
Payment for the production of insurance business to Starr aggregated
approximately $116 million in 2002, $88 million in 2001 and $60 million in 2000,
from which Starr generally is required to pay commissions due originating
brokers and its operating expenses. AIG also received approximately $17 million
in 2002 and $14 million in both 2001 and 2000 from Starr and paid approximately
$352,000 in 2002, $320,000 in 2001 and $224,000 in 2000 to Starr in rental fees
and $262,000 for services in 2002, 2001 and 2000. AIG also received
approximately $3 million in 2002 and $4 million in 2001 and $1 million in 2000,
respectively, from SICO and paid approximately $1 million in each of the years
2002, 2001 and 2000 to SICO as reimbursement for services rendered at cost. AIG
also paid to SICO $5 million in 2002, and $4 million in both 2001 and 2000 in
rental fees.
19. ACQUISITION, RESTRUCTURING AND RELATED CHARGES
During the third quarter of 2001, AGC was consolidated into AIG and charges in
connection with this acquisition totaled $1.36 billion for that quarter. During
the second quarter of 2001, AGC incurred $654 million in connection with the
termination of its merger agreement with Prudential plc. Thus, for all of 2001,
AIG incurred $2.02 billion of charges in connection with the acquisition of AGC.
With respect to the charges of $1.36 billion incurred in the third quarter
of 2001, approximately $512 million was related to direct costs of the
acquisition. Of the $512 million, $85 million was attributable to investment
banking, legal and accounting fees. The remaining direct costs of $427 million
were related to employee severance and other termination benefits, and other
compensation costs related to change in control agreements with AGC executives.
The costs were also based in part on a projected elimination of positions, in
accordance with AIG's post-business combination plans, which were intended to
enhance the effectiveness and efficiency of the combined operations.
114
American International Group, Inc. and Subsidiaries
19. ACQUISITION, RESTRUCTURING AND RELATED CHARGES (continued)
Of the total direct costs of $512 million, $416 million or 82 percent have
been paid as of December 31, 2002, including approximately $305 million paid
during 2001. In addition, during 2002, $32 million of liabilities were utilized
to absorb other insignificant merger-related expenses. The balance, $64 million,
is recorded as a component of "Other Liabilities" as of December 31, 2002.
With respect to the elimination of positions, 2,287 terminations were
included in AIG's original post-business combination plans. As of December 31,
2002, terminations totaled 1,714, including 609 made during 2001. The remaining
573 terminations are scheduled to occur in 2003, in accordance with AGC's
employee termination program.
The indirect costs of $851 million represented charges resulting from
post-business combination plans, recognizing that certain assets will have no
future economic benefit or ability to generate future revenues. Such charges
include asset impairments charges related to software, leasehold improvements
and certain goodwill. Also included were certain adjustments associated with
conforming AGC's balances to AIG's existing accounting policies and
methodologies. Of the $851 million, $782 million had been applied as of December
31, 2002, including $669 million in 2001. The balance, $69 million, remains
outstanding and is reflected as a component of "Other Liabilities" as of
December 31, 2002.
20. SPECIAL PURPOSE VEHICLES
AIG is a party to numerous entities that may be considered to be Variable
Interest Entities (VIEs) under FIN46. Principally, such entities include special
purpose vehicles (SPVs). AIG uses SPVs primarily in connection with certain
guaranteed investment contract programs (GIC Programs) written by its life
insurance subsidiaries, certain products provided by AIGFP, and certain invested
asset and asset management activities.
In the GIC Programs, AIG's life insurance subsidiaries (principally
SunAmerica Life Insurance Company) provide guaranteed investment contracts
(GICs) to SPVs which are not controlled by AIG. The SPVs issue notes or bonds
which are sold to third party institutional investors. Neither AIG nor the
insurance company issuing the GICs has any obligation to the investors in the
notes or bonds. The proceeds from the SPVs issuance of securities are used to
invest in the GICs. The insurance company subsidiaries use these proceeds to
invest in a diversified portfolio of securities, primarily investment grade
bonds. Both the assets and the liabilities of the insurance companies arising
from these GIC Programs are presented in AIG's consolidated balance sheet. Thus,
at December 31, 2002, approximately $29 billion of policyholders' contract
deposits represented liabilities from issuances of GICs included in these GIC
Programs, offset by the proceeds from the issuances included as insurance
invested assets.
AIGFP uses SPVs as an integral part of its ongoing operations with respect
to specific structured transactions with independent third parties. In most
instances, AIGFP controls and manages the assets and liabilities with respect to
these SPVs, subject to certain transaction specific limitations. These SPVs are
fully consolidated by AIG. AIGFP also sponsors an SPV that issues commercial
paper and secured liquidity notes to third-party institutional investors. This
SPV uses the proceeds of these offerings to obtain beneficial interests in
certain financial assets (total assets of approximately $900 million), which
serve as collateral for the securities issued by the SPV. AIGFP provides credit
and liquidity support to this SPV, which is not consolidated by AIG.
AIG's insurance operations also invest in assets of SPVs. These SPVs are
established by unrelated third parties. Investments include collateralized
mortgage backed securities and similar securities backed by pools of mortgages,
consumer receivables or other assets. The investment in an SPV allows AIG's
insurance entities to purchase assets permitted by insurance regulations while
maximizing the return on these assets.
AIG provides investment management services to certain SPVs. AIG receives
management fees for these services and may take a minority ownership interest in
these SPVs, which interests are then included as investments in AIG's
consolidated balance sheet. AIG services may be terminated with or without
cause.
To facilitate and expand certain retirement savings and asset management
activities, AIG establishes SPVs. AIG receives fees for management of the assets
held in the SPV which support the issuance of securities such as collateralized
bond obligations sold by the SPV to independent third party investors. These
SPVs serve a variety of business purposes, including financing, liquidity, or to
facilitate independent third party management participation.
115
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
21. SUMMARY OF QUARTERLY FINANCIAL INFORMATION UNAUDITED
THE FOLLOWING QUARTERLY FINANCIAL INFORMATION FOR EACH OF THE THREE MONTHS
ENDED MARCH 31, JUNE 30, SEPTEMBER 30 AND DECEMBER 31, 2002 AND 2001 IS
UNAUDITED. HOWEVER, IN THE OPINION OF MANAGEMENT, ALL ADJUSTMENTS (CONSISTING
OF NORMAL RECURRING ADJUSTMENTS) NECESSARY TO PRESENT FAIRLY THE RESULTS OF
OPERATIONS FOR SUCH PERIODS, HAVE BEEN MADE FOR A FAIR PRESENTATION OF THE
RESULTS SHOWN.
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------------- ------------------- ------------------- --------------------
(in millions, except per share amounts) 2002 2001 2002 2001 2002 2001 2002 2001
================================================================================================================================
Revenues $ 16,137 $ 14,793 $ 16,662 $ 15,153 $ 17,150 $ 15,582 $ 17,533 $ 16,238
Net income (loss) 1,980 1,855 1,801 1,315 1,841 327 (103) 1,866
================================================================================================================================
Net income per common share:
Basic $ 0.76 $ 0.71 $ 0.69 $ 0.50 $ 0.70 $ 0.12 $ (0.04) $ 0.72
Diluted 0.75 0.70 0.68 0.50 0.70 0.12 (0.03) 0.70
Average shares outstanding:
Basic 2,615 2,623 2,613 2,621 2,610 2,620 2,610 2,615
Diluted 2,641 2,651 2,640 2,651 2,634 2,651 2,633 2,645
================================================================================================================================
116
American International Group, Inc. and Subsidiaries
22. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT BY AGC
THE FOLLOWING CONDENSED CONSOLIDATING FINANCIAL STATEMENTS ARE PROVIDED IN
COMPLIANCE WITH REGULATION S-X OF THE SECURITIES AND EXCHANGE COMMISSION. AGC
IS A HOLDING COMPANY AND A WHOLLY-OWNED SUBSIDIARY OF AIG. AIG PROVIDES A
FULL AND UNCONDITIONAL GUARANTEE OF ALL OUTSTANDING DEBT OF AGC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
AMERICAN
INTERNATIONAL
GROUP, INC. AGC OTHER CONSOLIDATED
(in millions) GUARANTOR ISSUER SUBSIDIARIES ELIMINATIONS AIG
====================================================================================================================================
Assets:
Invested assets $ 1,208 $ -- $428,496 $ (6,108) $423,596
Cash 18 1 1,146 -- 1,165
Carrying value of subsidiaries and partially
owned companies, at equity 59,003 17,981 12,607 (88,016) 1,575
Other assets 2,450 2,714 130,049 (320) 134,893
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 62,679 $ 20,696 $572,298 $(94,444) $561,229
====================================================================================================================================
Liabilities:
Insurance liabilities $ 422 $ -- $296,474 $ (30) $296,866
Debt 2,606 3,200 72,356 (6,277) 71,885
Other liabilities 548 3,197 127,716 (239) 131,222
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 3,576 6,397 496,546 (6,546) 499,973
====================================================================================================================================
Preferred shareholders' equity in subsidiary companies -- -- 2,153 -- 2,153
Total Capital Funds 59,103 14,299 73,599 (87,898) 59,103
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities, Preferred Shareholders' Equity
in Subsidiary Companies and Capital Funds $ 62,679 $ 20,696 $572,298 $(94,444) $561,229
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001
====================================================================================================================================
American
International
Group, Inc. AGC Other Consolidated
(in millions) Guarantor Issuer Subsidiaries Eliminations AIG
====================================================================================================================================
Assets:
Invested assets $ 1,405 $ -- $359,891 $ (3,371) $357,925
Cash 1 1 696 -- 698
Carrying value of subsidiaries and partially
owned companies, at equity 52,117 12,022 3,509 (66,746) 902
Other assets 2,395 2,799 129,276 (934) 133,536
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 55,918 $ 14,822 $493,372 $(71,051) $493,061
====================================================================================================================================
Liabilities:
Insurance liabilities $ 320 $ -- $256,219 $ -- $256,539
Debt 2,119 5,500 61,048 (2,936) 65,731
Other liabilities 1,329 1,267 114,735 (892) 116,439
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 3,768 6,767 432,002 (3,828) 438,709
------------------------------------------------------------------------------------------------------------------------------------
Preferred shareholders' equity in subsidiary companies -- -- 2,602 (400) 2,202
Total Capital Funds 52,150 8,055 58,768 (66,823) 52,150
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities, Preferred Shareholders' Equity
in Subsidiary Companies and Capital Funds $ 55,918 $ 14,822 $493,372 $(71,051) $493,061
====================================================================================================================================
117
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
22. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT BY AGC
(continued)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------------------------------------
AMERICAN
INTERNATIONAL
GROUP, INC. AGC OTHER CONSOLIDATED
(in millions) GUARANTOR ISSUER SUBSIDIARIES ELIMINATIONS AIG
================================================================================================================================
Operating Income $ 398 $ -- $ 8,403 $ -- $ 8,801
Equity in undistributed net income of
consolidated subsidiaries 4,547 1,182 -- (5,729) --
Dividend income from consolidated subsidiaries 1,644 532 -- (2,176) --
Other (905) (192) 438 -- (659)
Income taxes (benefits) 165 (56) 2,219 -- 2,328
Minority interest -- -- (295) -- (295)
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,519 $ 1,578 $ 6,327 $(7,905) $ 5,519
================================================================================================================================
Year ended December 31, 2001
------------------------------------------------------------------------------------------------------------------------------------
American
International
Group, Inc. AGC Other Consolidated
(in millions) Guarantor Issuer Subsidiaries Eliminations AIG
====================================================================================================================================
Operating Income $ 368 $ -- $ 10,237 $ -- $ 10,605
Equity in undistributed net income of
consolidated subsidiaries 3,340 199 -- (3,539) --
Dividend income from consolidated subsidiaries 2,236 826 -- (3,062) --
Other (204) (1,525) (737) -- (2,466)
Income taxes (benefits) 352 (514) 2,501 -- 2,339
Minority interest -- -- (301) -- (301)
Cumulative effect of accounting changes (25) (49) (62) -- (136)
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,363 $ (35) $ 6,636 $ (6,601) $ 5,363
====================================================================================================================================
Year ended December 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
American
International
Group, Inc. AGC Other Consolidated
(in millions) Guarantor Issuer Subsidiaries Eliminations AIG
====================================================================================================================================
Operating Income $ 264 $ -- $ 10,092 $ -- $ 10,356
Equity in undistributed net income of
consolidated subsidiaries 5,233 659 -- (5,892) --
Dividend income from consolidated subsidiaries 1,514 557 -- (2,071) --
Other (87) (324) 78 -- (333)
Income taxes (benefits) 285 (111) 2,797 -- 2,971
Minority interest -- -- (413) -- (413)
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,639 $ 1,003 $ 6,960 $ (7,963) $ 6,639
====================================================================================================================================
118
American International Group, Inc. and Subsidiaries
22. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT BY AGC
(continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------------------------------------
AMERICAN INTERNATIONAL
GROUP, INC. AGC OTHER CONSOLIDATED
(in millions) GUARANTOR ISSUER SUBSIDIARIES AIG
================================================================================================================================
Net cash provided by operating activities $ 2,235 $ 4,054 $ 12,399 $ 18,688
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing:
Invested assets disposed (1,203) -- 148,813 147,610
Invested assets acquired (83) -- (193,201) (193,284)
Other 16 (1,684) 744 (924)
--------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,270) (1,684) (43,644) (46,598)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in debts 68 (2,300) 8,215 5,983
Other (1,016) (70) 23,480 22,394
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (948) (2,370) 31,695 28,377
--------------------------------------------------------------------------------------------------------------------------------
Change in cash 17 -- 450 467
Cash at beginning of year 1 1 696 698
--------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 18 $ 1 $ 1,146 $ 1,165
================================================================================================================================
Year Ended December 31, 2001
--------------------------------------------------------------------------------------------------------------------------------
American International
Group, Inc. AGC Other Consolidated
(in millions) Guarantor Issuer Subsidiaries AIG
================================================================================================================================
Net cash provided by operating activities $ 2,019 $ 51 $ 6,292 $ 8,362
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing:
Invested assets disposed (879) -- 142,265 141,386
Invested assets acquired (535) -- (171,449) (171,984)
Other (75) (276) (349) (700)
--------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,489) (276) (29,533) (31,298)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in debts 627 604 10,160 11,391
Other (1,157) (381) 13,259 11,721
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (530) 223 23,419 23,112
--------------------------------------------------------------------------------------------------------------------------------
Change in cash -- (2) 178 176
Cash at beginning of year 1 3 518 522
--------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 1 $ 1 $ 696 $ 698
================================================================================================================================
Year Ended December 31, 2000
--------------------------------------------------------------------------------------------------------------------------------
American International
Group, Inc. AGC Other Consolidated
(in millions) Guarantor Issuer Subsidiaries AIG
================================================================================================================================
Net cash provided by operating activities $ 1,358 $ 464 $ 7,259 $ 9,081
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing:
Invested assets disposed (677) -- 73,745 73,068
Invested assets acquired (131) -- (92,732) (92,863)
Other (26) (72) (935) (1,033)
--------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (834) (72) (19,922) (20,828)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in debts 579 479 6,771 7,829
Other (1,105) (869) 5,988 4,014
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (526) (390) 12,759 11,843
--------------------------------------------------------------------------------------------------------------------------------
Change in cash (2) 2 96 96
Cash at beginning of year 3 1 422 426
--------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 1 $ 3 $ 518 $ 522
================================================================================================================================
119
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with accountants on accounting
and financial disclosure within the twenty-four months ending December 31, 2002.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Except for the information provided in Part I under the heading "Directors and
Executive Officers of the Registrant", this item is omitted because a definitive
proxy statement which involves the election of directors will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the fiscal year pursuant to Regulation 14A.
ITEM 11. Executive Compensation
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 13. Certain Relationships and Related Transactions
This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 14. Controls and Procedures
AIG's disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports that AIG files or submits under the
Securities Exchange Act of 1934, as amended (Exchange Act), is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. Disclosure controls
and procedures include controls and procedures designed to ensure that
information required to be disclosed by AIG in the reports that it files or
submits under the Exchange Act is accumulated and communicated to AIG's
management, including AIG's Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. AIG's
Chief Executive Officer and the Chief Financial Officer have reviewed the
effectiveness of AIG's disclosure controls and procedures within 90 days of the
filing date of this Annual Report on Form 10-K and have concluded that the
disclosure controls and procedures are effective. There were no significant
changes in AIG's internal controls or in other factors that could significantly
affect these controls subsequent to the most recent date of evaluation by AIG's
Chief Executive Officer and Chief Financial Officer.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) FINANCIAL STATEMENTS AND EXHIBITS.
1. Financial Statements and Schedules. See accompanying Index to
Financial Statements.
2. Exhibits. See accompanying Exhibit Index.
(b) REPORTS ON FORM 8-K.
During the three months ended December 31, 2002, there were no Current
Reports filed on Form 8-K.
120
(This page intentionally left blank)
121
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT ON
FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF NEW YORK AND STATE OF NEW YORK, ON THE 31ST OF MARCH,
2003.
AMERICAN INTERNATIONAL GROUP, INC.
By /S/ M.R. GREENBERG
----------------------------
(M.R. Greenberg, Chairman and Chief Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THIS ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN THE CAPACITIES INDICATED ON THE 31ST OF MARCH, 2003 AND EACH OF THE
UNDERSIGNED PERSONS, IN ANY CAPACITY, HEREBY SEVERALLY CONSTITUTES M.R.
GREENBERG, MARTIN J. SULLIVAN AND HOWARD I. SMITH AND EACH OF THEM, SINGULARLY,
HIS TRUE AND LAWFUL ATTORNEY WITH FULL POWER TO THEM AND EACH OF THEM TO SIGN
FOR HIM, AND IN HIS NAME AND IN THE CAPACITIES INDICATED BELOW, THIS ANNUAL
REPORT ON FORM 10-K AND ANY AND ALL AMENDMENTS THERETO.
SIGNATURE TITLE
/s/ M.R. Greenberg Chairman, Chief Executive Officer
---------------------------------
(M.R. GREENBERG) and Director
(Principal Executive Officer)
/s/ Howard I. Smith
---------------------------------
(HOWARD I. SMITH) Vice Chairman, Chief Administrative
Officer, Chief Financial Officer
and Director
(Principal Financial Officer)
/s/ Michael J. Castelli
---------------------------------
(MICHAEL J. CASTELLI) Vice President and Comptroller
(Principal Accounting Officer)
/s/ M. Bernard Aidinoff
--------------------------------- Director
(M. BERNARD AIDINOFF)
/s/ Eli Broad
--------------------------------- Director
(ELI BROAD)
/s/ Pei-yuan Chia
--------------------------------- Director
(PEI-YUAN CHIA)
/s/ Marshall A. Cohen
--------------------------------- Director
(MARSHALL A. COHEN)
/s/ Barber B. Conable, Jr.
--------------------------------- Director
(BARBER B. CONABLE, JR.)
II-1
SIGNATURES - (CONTINUED)
SIGNATURE TITLE
--------- -----
/s/ Martin S. Feldstein Director
-------------------------------------------
(MARTIN S. FELDSTEIN)
/s/ Ellen V. Futter Director
-------------------------------------------
(ELLEN V. FUTTER)
/s/ Carla A. Hills Director
-------------------------------------------
(CARLA A. HILLS)
/s/ Frank J. Hoenemeyer Director
-------------------------------------------
(FRANK J. HOENEMEYER)
/s/ Richard C. Holbrooke Director
-------------------------------------------
(RICHARD C. HOLBROOKE)
/s/ Edward E. Matthews Director
-------------------------------------------
(EDWARD E. MATTHEWS)
/s/ Martin J. Sullivan
------------------------------------------- Director
(MARTIN J. SULLIVAN)
/s/ Thomas R. Tizzio Director
-------------------------------------------
(THOMAS R. TIZZIO)
/s/ Edmund S.W. Tse Director
-------------------------------------------
(EDMUND S.W. TSE)
/s/ Jay S. Wintrob Director
-------------------------------------------
(JAY S. WINTROB)
/s/ Frank G. Wisner Director
-------------------------------------------
(FRANK G. WISNER)
/s/ Frank G. Zarb Director
-------------------------------------------
(FRANK G. ZARB)
II-2
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, M.R. Greenberg, certify that:
1. I have reviewed this annual report on Form 10-K of American
International Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ M.R. Greenberg
------------------------------------
M.R. Greenberg
Chairman and Chief Executive Officer
Date: March 31, 2003
II-3
CERTIFICATION
I, Howard I. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of American
International Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Howard I. Smith
-------------------------------------
Howard I. Smith
Vice Chairman, Chief Financial Officer
and Chief Administrative Officer
Date: March 31, 2003
II-4
SCHEDULE I
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 2002
(in millions)
--------------------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
COST* VALUE BALANCE SHEET
==========================================================================================================================
Fixed maturities:
Bonds:
United States Government and government agencies
and authorities $ 4,928 $ 5,165 $ 5,165
States, municipalities and political subdivisions 41,535 43,413 43,413
Foreign governments 34,487 37,818 37,818
Public utilities 15,793 16,383 16,383
All other corporate 136,341 140,587 140,587
-----------------------------------------------------------------------------------------------------------------------
Total bonds 233,084 243,366 243,366
-----------------------------------------------------------------------------------------------------------------------
Total fixed maturities 233,084 243,366 243,366
-----------------------------------------------------------------------------------------------------------------------
Equity securities:
Common stocks:
Public utilities 172 155 155
Banks, trust and insurance companies 554 547 547
Industrial, miscellaneous and all other 5,426 4,780 4,780
-----------------------------------------------------------------------------------------------------------------------
Total common stocks 6,152 5,482 5,482
Non-redeemable preferred stocks 1,678 1,584 1,584
-----------------------------------------------------------------------------------------------------------------------
Total equity securities 7,830 7,066 7,066
-----------------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate, policy and collateral loans 19,928 19,928 19,928
Financial services assets:
Flight equipment primarily under operating leases, net of
accumulated depreciation 26,867 -- 26,867
Securities available for sale, at market value 16,715 16,687 16,687
Trading securities, at market value -- 4,146 4,146
Spot commodities, at market value -- 489 489
Unrealized gain on interest rate and currency swaps
options and forward transactions -- 15,376 15,376
Trading assets -- 4,786 4,786
Securities purchased under agreements to resell, at contract value 25,661 -- 25,661
Securities lending collateral 23,694 23,694
Other invested assets 12,680 -- 12,680
Finance receivables, net of allowance 15,857 -- 15,857
Short-term investments, at cost (approximates market value) 6,993 -- 6,993
-----------------------------------------------------------------------------------------------------------------------
Total investments -- -- $423,596
=======================================================================================================================
*Original cost of equity securities and, as to fixed maturities, original cost
reduced by repayments and adjusted for amortization of premiums or accrual of
discounts.
S-1
SCHEDULE II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET -- PARENT COMPANY ONLY
(in millions)
------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 18 $ 1
Short-term investments 144 7
Invested assets 1,064 1,398
Carrying value of subsidiaries and partially-owned companies, at equity 59,003 52,117
Premiums and insurance balances receivable-- net 199 145
Other assets 2,251 2,250
------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 62,679 55,918
------------------------------------------------------------------------------------------------------------
LIABILITIES:
Insurance balances payable 422 320
Due to affiliates-- net 2,142 894
Medium term notes payable 998 542
Term notes payable 434 433
Zero coupon notes 1,174 1,144
Other liabilities (1,594) 435
------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,576 3,768
------------------------------------------------------------------------------------------------------------
CAPITAL FUNDS:
Common stock 6,878 6,876
Additional paid-in capital 607 669
Retained earnings 52,270 47,218
Accumulated other comprehensive income (loss) 691 (1,725)
Treasury stock (1,343) (888)
------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL FUNDS 59,103 52,150
------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL FUNDS $ 62,679 $ 55,918
============================================================================================================
STATEMENT OF INCOME -- PARENT COMPANY ONLY
(in millions)
----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
======================================================================================================================
Agency loss $ (12) $ (4) $ (11)
Financial services income 419 360 280
Asset management income (loss) (9) 12 (5)
Dividend income from consolidated subsidiaries:
Cash 1,644 2,194 1,514
Other -- 42 --
Dividend income from partially-owned companies -- 2 --
Equity in undistributed net income of consolidated subsidiaries
and partially-owned companies 4,547 3,340 5,233
Other income (deductions)-- net (905) (206) (87)
----------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting changes 5,684 5,740 6,924
Income taxes 165 352 285
----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes 5,519 5,388 6,639
----------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting changes, net of tax -- (25) --
----------------------------------------------------------------------------------------------------------------------
Net income $ 5,519 $ 5,363 $ 6,639
======================================================================================================================
See Accompanying Notes to Financial Statements.
S-2
SCHEDULE II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
STATEMENT OF CASH FLOWS -- PARENT COMPANY ONLY
(in millions)
-----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2002 2001 2000
=============================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,519 $ 5,363 $ 6,639
-----------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Non-cash revenues, expenses, gains and losses included in income:
Equity in undistributed net income of consolidated subsidiaries and
partially-owned companies (4,547) (3,340) (5,233)
Change in premiums and insurance balances receivable and payable-- net 48 (4) 7
Change in cumulative translation adjustments (15) 21 85
Other-- net 1,230 (21) (140)
-----------------------------------------------------------------------------------------------------------------------------
Total adjustments (3,284) (3,344) (5,281)
-----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,235 2,019 1,358
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (83) (535) (131)
Sale of investments 415 -- 1
Change in short-term investments (137) (5) (1)
Change in collateral and guaranteed loans -- 10 10
Contributions to subsidiaries and investments in partially-owned companies (1,481) (884) (687)
Other-- net 16 (75) (26)
-----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,270) (1,489) (834)
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in medium term notes 456 (40) 101
Change in term notes 1 -- 1
Proceeds from issuance of zero coupon notes -- 1,000 --
Redemption of Italian Lire bonds -- (159) --
Proceeds from common stock issued 168 233 142
Change in loans payable (389) (174) 477
Cash dividends to shareholders (467) (383) (335)
Acquisition of treasury stock (734) (978) (947)
Other-- net 17 (29) 35
-----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (948) (530) (526)
-----------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH 17 -- (2)
CASH AT BEGINNING OF YEAR 1 1 3
-----------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 18 $ 1 $ 1
=============================================================================================================================
NOTES TO FINANCIAL STATEMENTS-- PARENT COMPANY ONLY
(1) Agency operations conducted in New York through the North American
Division of AIU are included in the financial statements of the parent
company.
(2) Certain accounts have been reclassified in the 2001 and 2000 financial
statements to conform to their 2002 presentation.
(3) "Equity in undistributed net income of consolidated subsidiaries and
partially-owned companies" in the accompanying Statement of Income--
Parent Company Only-- includes equity in income of the minority-owned
insurance operations.
(4) See also Notes to Consolidated Financial Statements.
S-3
SCHEDULE III
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 2002, 2001 AND 2000 AND FOR THE YEARS THEN ENDED
(in millions)
Reserves for
Losses and Losses and Amortization
Deferred Loss Reserve Policy Loss of Deferred
Policy Expenses, for and Net Expenses Policy Other Net
Acquisition Future Policy Unearned Contract Premium Investment Incurred, Acquisition Operating Premiums
Segment Costs Benefits(a) Premiums Claims(b) Revenue Income Benefits Costs(c) Expenses Written
==================================================================================================================================
2002
GENERAL INSURANCE $ 3,484 $ 51,539 $16,336 $ -- $24,269 $ 2,760 $20,814 $2,276 $ 2,414 $27,414
LIFE INSURANCE 18,772 72,547 -- 1,649 20,320 12,274 21,113 2,184 3,315 --
----------------------------------------------------------------------------------------------------------------------------------
$ 22,256 $124,086 $16,336 $ 1,649 $44,589 $15,034 $41,927 $4,460 $ 5,729 $27,414
==================================================================================================================================
2001
General insurance $ 2,651 $ 44,792 $13,148 $ -- $19,365 $ 2,893 $15,406 $2,016 $ 1,855 $20,101
Life insurance 16,706 64,998 -- 1,473 19,063 11,084 19,648 2,207 3,350 --
----------------------------------------------------------------------------------------------------------------------------------
$ 19,357 $109,790 $13,148 $ 1,473 $38,428 $13,977 $35,054 $4,223 $ 5,205 $20,101
==================================================================================================================================
2000
General insurance $ 2,438 $ 40,613 $12,510 $ -- $17,407 $ 2,701 $13,104 $1,708 $ 1,810 $17,526
Life insurance 15,298 51,532 -- 1,414 17,163 9,962 17,760 1,558 2,011 --
----------------------------------------------------------------------------------------------------------------------------------
$ 17,736 $ 92,145 $12,510 $ 1,414 $34,570 $12,663 $30,864 $3,266 $ 3,821 $17,526
==================================================================================================================================
(a) Reserves for losses and loss expenses with respect to the general
insurance operations are net of discounts of $1.50 billion, $1.42 billion
and $1.29 billion for 2002, 2001 and 2000, respectively.
(b) Reflected in insurance balances payable on the accompanying balance sheet.
(c) Amounts shown for general insurance segment exclude amounts deferred and
amortized in the same period.
S-4
SCHEDULE IV
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
AS OF DECEMBER 31, 2002, 2001 AND 2000 AND FOR THE YEARS THEN ENDED
(dollars in millions)
-------------------------------------------------------------------------------------------------
PERCENT OF
CEDED ASSUMED AMOUNT
TO OTHER FROM OTHER NET ASSUMED
GROSS AMOUNT COMPANIES COMPANIES AMOUNT TO NET
=================================================================================================
2002
LIFE INSURANCE IN-FORCE $1,322,404 $278,704 $2,047 $1,045,747 0.2%
------------------------------------------------------------------------------------------------
PREMIUMS:
GENERAL INSURANCE $ 32,718 $ 10,123 $4,819 $ 27,414 17.6%
LIFE INSURANCE 21,201 917 36 20,320* 0.2
------------------------------------------------------------------------------------------------
TOTAL PREMIUMS $ 53,919 $ 11,040 $4,855 $ 47,734 10.2%
================================================================================================
2001
Life insurance in-force $1,226,339 $238,644 $2,162 $ 989,857 0.2%
------------------------------------------------------------------------------------------------
Premiums:
General insurance $ 25,279 $ 9,539 $4,361 $ 20,101 21.7%
Life insurance 19,920 915 58 19,063* 0.3
------------------------------------------------------------------------------------------------
Total premiums $ 45,199 $ 10,454 $4,419 $ 39,164 11.3%
================================================================================================
2000
Life insurance in-force $ 969,919 $185,705 $1,973 $ 786,187 0.3%
================================================================================================
Premiums:
General insurance $ 20,116 $ 7,524 $4,934 $ 17,526 28.1%
Life insurance 17,850 762 75 17,163* 0.4
------------------------------------------------------------------------------------------------
Total premiums $ 37,966 $ 8,286 $5,009 $ 34,689 14.4%
================================================================================================
*Includes accident and health premiums of $3.45 billion, $3.18 billion and $2.58
billion in 2002, 2001 and 2000, respectively.
S5
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
2 Plan of acquisition, reorganization, arrangement, liquidation
or succession
Agreement and Plan of Merger, dated as of May 11, Incorporated by reference to Exhibit 2.1(i)(a) to
2001, among American International Group, Inc., AIG's Registration Statement on Form S-4 (File
Washington Acquisition Corporation and American No.333-62688)
General Corporation
3(i)(a) Restated Certificate of Incorporation of AIG Incorporated by reference to Exhibit 3(i) to AIG's
Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 1-8787).
3(i)(b) Certificate of Amendment of Certificate of Incorporation of Incorporated by reference to Exhibit 3(i) to AIG's
AIG, filed June 3, 1998 Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (File No. 1-8787).
3(i)(c) Certificate of Merger of SunAmerica Inc. with and into AIG, Incorporated by reference to Exhibit 3(i) to AIG's
filed December 30, 1998 and effective January 1, 1999 Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 1-8787).
3(i)(d) Certificate of Amendment of Certificate of Incorporation Incorporated by reference to Exhibit 3(i)(c) to
of AIG, filed June 5, 2000 AIG's Registration Statement on Form S-4
(File No. 333-45828).
3(ii) By-laws of AIG Incorporated by reference to Exhibit 3(ii) to AIG's
Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 1-8787).
4 Instruments defining the rights of security holders, Certain instruments defining the rights of holders
including indentures of long-term debt securities of AIG and its
subsidiaries are omitted pursuant to Item
601(b)(4)(iii) of Regulation S-K. AIG hereby
undertakes to furnish to the Commission, upon
request, copies of any such instruments.
9 Voting Trust Agreement None.
10 Material contracts*
(a) AIG 1969 Employee Stock Option Plan and Filed as exhibit to AIG's Registration Statement
Agreement Form (File No. 2-44043) and incorporated herein by
reference.
(b) AIG 1972 Employee Stock Option Plan Filed as exhibit to AIG's Registration Statement
(File No. 2-44702) and incorporated herein by
reference.
(c) AIG 1972 Employee Stock Purchase Plan Filed as exhibit to AIG's Registration Statement
(File No. 2-44043) and incorporated herein by
reference.
(d) AIG 1984 Employee Stock Purchase Plan Filed as exhibit to AIG's Registration Statement
(File No. 2-91945) and incorporated herein by
reference.
(e) AIG 1996 Employee Stock Purchase Plan Filed as exhibit to AIG's Definitive Proxy
Statement dated April 2, 1996 (File No. 1-
8787) and incorporated herein by reference.
------------------
* All material contracts are management contracts or compensatory plans or
arrangements.
II-5
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
(f) AIG 1977 Stock Option and Stock Appreciation Filed as exhibit to AIG's Registration Statement
Rights Plan (File No. 2-59317) and incorporated herein by
reference.
(g) AIG 1982 Employee Stock Option Plan Filed as exhibit to AIG's Registration Statement
(File No. 2-78291) and incorporated herein by
reference.
(h) AIG 1987 Employee Stock Option Plan Filed as exhibit to AIG's Definitive Proxy
Statement dated April 6, 1987 (File No. 0-
4652) and incorporated herein by reference.
(i) AIG 1991 Employee Stock Option Plan Filed as exhibit to AIG's Definitive Proxy
Statement dated April 4, 1997 (File No. 1-
8787) and incorporated herein by reference.
(j) AIG 1999 Stock Option Plan Filed as exhibit to AIG's Definitive Proxy
Statement dated April 6, 2000 (File No. 1-
8787) and incorporated herein by reference.
(k) AIG Amended and Restated 2002 Stock Incorporated by reference to Exhibit 4(a) to AIG's
Incentive Plan Registration Statement on Form S-8 (File No.
333-101967).
(l) AIG Executive Deferred Compensation Plan Incorporated by reference to Exhibit 4(a) to AIG's
Registration Statement on Form S-8 (File No.
333-101640).
(m) AIG Supplemental Incentive Savings Plan Incorporated by reference to Exhibit 4(b) to AIG's
Registration Statement on Form S-8 (File No.
333-101640).
(n) AIRCO 1972 Employee Stock Option Plan Incorporated by reference to AIG's Joint Proxy
Statement and Prospectus (File No. 2-61994).
(o) AIRCO 1977 Stock Option and Stock Incorporated by reference to AIG's Joint Proxy
Appreciation Rights Plan Statement and Prospectus (File No. 2-61994).
(p) Purchase Agreement between AIA and Mr. Incorporated by reference to Exhibit 10(l) to AIG's
E.S.W. Tse. Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-8787).
(q) Retention and Employment Agreement between Incorporated by reference to Exhibit 10(m) to
AIG and Jay S. Wintrob AIG's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-
8787).
(r) SunAmerica Inc. 1988 Employee Stock Plan Incorporated by reference to Exhibit 4(a) to AIG's
Registration Statement on Form S-8 (File No.
333-70069).
(s) SunAmerica 1997 Employee Incentive Stock Incorporated by reference to Exhibit 4(b) to AIG's
Plan Registration Statement on Form S-8 (File No.
333-70069).
(t) SunAmerica Non-employee Directors' Stock Incorporated by reference to Exhibit 4(c) to AIG's
Option Plan Registration Statement on Form S-8 (File No.
333-70069).
(u) SunAmerica 1995 Performance Stock Plan Incorporated by reference to Exhibit 4(d) to AIG's
Registration Statement on Form S-8 (File No.
333-70069).
(v) SunAmerica Inc. 1998 Long-Term Performance- Incorporated by reference to Exhibit 4(e) to AIG's
Based Incentive Plan For the Chief Executive Registration Statement on Form S-8 (File No.
Officer 333-70069).
II-6
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
(w) SunAmerica Inc. Long-Term Performance-Based Incorporated by reference to Exhibit 4(f) to AIG's
Incentive Plan Amended and Restated 1997 Registration Statement on Form S-8 (File No.
333-70069).
(x) SunAmerica Five Year Deferred Cash Plan Incorporated by reference to Exhibit 4(a) to AIG's
Registration Statement on Form S-8 (File No.
333-31346).
(y) SunAmerica Executive Savings Plan Incorporated by reference to Exhibit 4(b) to AIG's
Registration Statement on Form S-8 (File No.
333-31346).
(z) HSB Group, Inc. 1995 Stock Option Plan Incorporated by reference to Exhibit 10(iii)(f) to
HSB's Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 1-13135).
(aa) HSB Group, Inc. 1985 Stock Option Plan Incorporated by reference to Exhibit 10(iii)(a)
HSB's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 1- 13135).
(bb) HSB Group, Inc. Employee's Thrift Incentive Incorporated by reference to Exhibit 4(i)(c) to The
Plan Hartford Steam Boiler Inspection and Insurance
Company's Registration Statement on Form S-
8 (File No. 33-36519).
(cc) American General Corporation 1984 Stock and Incorporated by reference to Exhibit 10.1 to
Incentive Plan American General Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (File
No.1-7981)
(dd) Amendment to American General Corporation Incorporated by reference to Exhibit 10.2 to
1984 Stock and Incentive Plan (January 2000) American General Corporation's Annual Report
on Form 10-K for the year ended December 31,
1999 (File No. 1-7981)
(ee) American General Corporation 1994 Stock and Incorporated by reference to Exhibit 10.2 to
Incentive Plan (January 2000) American General Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998 (File No. 1-7981)
(ff) Amendment to American General Corporation Incorporated by reference to Exhibit 10.4 to
1994 Stock and Incentive Plan (January 1999) American General Corporation's Annual Report
on Form 10-K for the year ended December 31,
1999 (File No. 1-7981)
(gg) Amendment to American General Corporation Incorporated by reference to Exhibit 10.5 to
1994 Stock and Incentive Plan (January 2000) American General Corporation's Annual Report
on Form 10-K for the year ended December 31,
1999 (File No. 1-7981)
(hh) Amendment to American General Corporation Incorporated by reference to Exhibit 10.1 to
1994 Stock and Incentive Plan (November 2000) American General Corporation's Quarterly
Report on Form 10-Q for the quarter ended
September 30,2000 (File No. 1-7981)
II-7
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
(ii) American General Corporation 1997 Stock and Incorporated by reference to Exhibit 10.3 to
Incentive Plan American General Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998
(File No. 1-7981)
(jj) Amendment to American General Corporation Incorporated by reference to Exhibit 10.7 to
1997 Stock and Incentive Plan (January 1999) American General Corporation's Annual Report
on Form 10-K for the year ended December 31,
1999 (File No. 1-7981)
(kk) Amendment to American General Corporation Incorporated by reference to Exhibit 10.2 to
1997 Stock and Incentive Plan (November 2000) American General Corporation's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 1-7981)
(ll) American General Corporation 1999 Stock and Incorporated by reference to Exhibit 10.4 to
Incentive Plan American General Corporation's Annual Report
on Form 10-K for the year ended December 31,
1998 (File No. 1-7981)
(mm) Amendment to American General Corporation Incorporated by reference to Exhibit 10.9 to
1999 Stock and Incentive Plan (January 1999) American General Corporation's Annual Report
on Form 10-K for the year ended December 31,
1999 (File No. 1-7981)
(nn) Amendment to American General Corporation Incorporated by reference to Exhibit 10.3 to
1999 Stock and Incentive Plan (November 2000) American General Corporation's Quarterly
Report on Form 10-Q for the quarter ended
September 30,2000 (File No. 1-7981)
(oo) Amended and Restated American General Incorporated by reference to Exhibit 10.13 to
Corporation Deferred Compensation Plan American General Corporation's Annual Report
(12/11/00) on Form 10-K for the year ended December 31,
2000 (File No. 1-7981)
(pp) Amended and Restated Restoration of Retirement Incorporated by reference to Exhibit 10.14 to
Income Plan for Certain Employees Participating American General Corporation's Annual Report
in the Restated American General Retirement on Form 10-K for the year ended December 31,
Plan (Restoration of Retirement Income Plan) 2000 (File No. 1-7981)
(12/31/98)
(qq) Amended and Restated American General Incorporated by reference to Exhibit 10.15 to
Supplemental Thrift Plan (12/31/98) American General Corporation's Annual Report
on Form 10-K for the year ended December 31,
2000 (File No. 1-7981)
(rr) American General Employees' Thrift and Incorporated by reference to Exhibit 4(a) to AIG's
Incentive Plan (restated July 1, 2001) Registration Statement on Form S-8 (File No.
333-68640)
II-8
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
(ss) American General Agents' and Managers' Thrift Incorporated by reference to Exhibit 4(b) to AIG's
and Incentive Plan (restated July 1, 2001) Registration Statement on Form S-8 (File No.
333-68640)
(tt) CommLoCo Thrift Plan (restated July 1, 2001) Incorporated by reference to Exhibit 4(c) to AIG's
Registration Statement on Form S-8 (File No.
68640)
(uu) Western National Corporation 1993 Stock and Incorporated by reference to Exhibit 10.18 to
Incentive Plan, as amended Western National Corporation's Annual Report
on Form 10-K for the year ended December 31,
1995 (File No. 1-12540)
(vv) USLIFE Corporation 1991 Stock Option Plan, as Incorporated by reference to USLIFE Corporation's
amended Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995 (File No. 1-5683)
(ww) Employment Agreement, Amendment to Employment Filed herewith.
Agreement, Second Amendment to Employment
Agreement, Split-Dollar Agreement, including
Assignment of Life Insurance Policy as
Collateral, and First Amendment to Split-Dollar
Agreement, with John A. Graf
(xx) Employment Agreement, Amendment to Employment Filed herewith.
Agreement, and Split-Dollar Agreement, including
Assignment of Life Insurance Policy as Collateral,
with Rodney O. Martin, Jr.
11 Statement re computation of per share earnings Included in Note 1(x) of Notes to Financial
Statements.
12 Statements re computation of ratios Filed herewith.
13 Annual report to security holders Not required to be filed.
16 Letter re change in certifying accountant Not required to be filed.
18 Letter re change in accounting principles None.
21 Subsidiaries of the Registrant Filed herewith.
23 Consent of PricewaterhouseCoopers LLP Filed herewith.
24 Power of attorney Included on the signature page hereof.
99 Additional exhibits None.
II-9