Estimation of environmental claims loss reserves is a difficult process. These environmental claims cannot be estimated by conventional reserving techniques as previously described. Quantitative techniques frequently have to be supplemented by subjective considerations including managerial judgment. Significant factors which affect the trends which influence the development of environmental claims are the inconsistent court resolutions, the broadening of the intent of the policies and scope of coverage and the increasing number of new claims. The case law that has emerged can be characterized as still being in its infancy and the likelihood of any firm direction in the near future is very small. Additionally, the exposure for cleanup costs of hazardous waste dump sites involves coverage issues such as allocation of responsibility among potentially responsible parties and the government's refusal to release parties. The cleanup cost exposure may significantly change if the Congressional reauthorization of Superfund in 1994 is dramatically changed thereby reducing or increasing litigation and cleanup costs.
AIGFP generally manages its exposures by taking offsetting positions, including swaps, options, bonds, forwards or futures contracts. AIGFP manages its credit risk by internally evaluating the creditworthiness of counterparties and consulting with widely accepted credit rating services. In addition, AIGFP enters into master netting agreements, which incorporate the right of set-off to provide for the net settlement of covered contracts with the same counterparty, in the event of default or other cancellation of the agreement. Also, AIGFP requires collateral on certain transactions based on the credit worthiness of the counterparty.
See also the discussions under "Capital Resources" and "Liquidity" herein and Notes 1, 9, 11 and 16 of Notes to Financial Statements.
Income before income taxes and the cumulative effect of accounting changes amounted to $2.60 billion in 1993 and $2.14 billion in 1992. Income before income taxes was $2.02 billion in 1991.
The following table is a summary of the composition of AIG's insurance invested assets by insurance segment, including investment income due and accrued and real estate, at December 31, 1993:
Mortgage loans on real estate, policy, collateral and guaranteed loans comprise 6.2 percent of AIG's insurance invested assets at December 31, 1993. AIG's insurance holdings of real estate mortgages amounted to $1.31 billion of which 36.4 percent was domestic. At December 31, 1993, no domestic mortgages and only a nominal amount of foreign mortgages were in default. At December 31, 1993, AIG's insurance holdings of collateral loans amounted to $482.4 million, all of which were foreign. It is AIG's practice to maintain a maximum loan to value ratio of 75 percent.
There exist in certain jurisdictions significant regulatory and/or foreign governmental barriers 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.
At January 1, 1993, AIG adopted Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" (FASB 113). This statement specifies the accounting for the reinsuring (ceding) of insurance contracts and, effective in the first quarter of 1993, eliminates the reporting of assets and liabilities net of the effects of reinsurance. As required by FASB 113, the reserve for losses and loss expenses, the reserve for unearned premiums and future policy benefits for life and accident and health insurance contracts have been presented gross of ceded reinsurance in the accompanying December 31, 1993 balance sheet. A reinsurance asset was established to include the aforementioned ceded reinsurance balances. The balance sheet at December 31,
For the years ended December 31, 1993 and 1992, reinsurance recoveries, which reduced loss and loss expenses incurred, amounted to $4.45 billion and $4.19 billion, respectively.
* A majority of the gains realized resulted from sales of bonds carried at market value.
The amortized cost and estimated market value of bonds available for sale and carried at market value at December 31, 1993 were as follows:
(G) During 1993, certain investments held by AIGFP experienced financial difficulties and suffered rating downgrades. The pretax impact on AIG of the estimated other than temporary impairment in value of these investments was $215 million. As is AIG's policy in such situations where credit ratings have deteriorated significantly, these impairments have been appropriately recognized by charges to income of $104 million in 1993 and $111 million prior to 1993.
The net periodic postretirement costs for the years ended December 31, 1993 and 1992 included the following components: