Adjusted underwriting profit (operating income less net investment income and realized capital gains) represents statutory underwriting profit or loss adjusted primarily for changes in deferred policy acquisition costs. The adjusted underwriting profits were $531 million in 1998, $490 million in 1997 and $450 million in 1996. (See also Notes 4 and 17 of Notes to Financial Statements.)
AIG's three principal overseas life operations are American Life Insurance Company (ALICO), American International Assurance Company, Limited together with American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan Life Insurance Company, Ltd. (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. AIA operates primarily in Hong Kong, Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. (See also Note 17 of Notes to Financial Statements.)
(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, 1998, AIGTG's replacement values with respect to interest rate and currency swaps were $642 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, 1998, the unrealized gains and losses remaining after the benefit of the offsets were $43 million and $35 million, respectively.
The gross replacement values presented represent the sum of the estimated positive fair values of all of AIGTG's derivatives contracts at December 31, 1998 and December 31, 1997. These values do not represent the credit risk to AIGTG.
In June 1998, FASB issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FASB 133). This statement requires AIG to recognize all derivatives in the consolidated balance sheet measuring these derivatives at fair value. The recognition of the change in the fair value of a derivative depends on a number of factors, including the intended use of the derivative. Currently, AIGTG and AIGFP present, in all material respects, the changes in fair value of their derivative transactions as a component of AIG's operating income. AIG is
At December 31, 1998, AIG had $508 million principal amount of Term Notes registered and available for issuance from time to time.
AIGFP, as principal and for its own account, enters into 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 counterparties default. Currency and equity swaps are similar to interest rate swaps, but may involve the exchange of principal amounts at the beginning and end of the transaction. At December 31, 1998, the notional principal amount of the sum of the swap pays and receives approximated $345.5 billion, primarily related to interest rate swaps of approximately $255.9 billion.
The fair values of stock options granted during the years ended December 31, 1998, 1997 and 1996 were $28 million, $29 million and $26 million, respectively. The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model.
(b) AIG sponsors a voluntary savings plan for domestic employees, including those of Transatlantic, (a 401(k) plan), which, during the three years ended December 31, 1998, 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.
(a) Includes AIG Parent and other operations which are not required to be reported separately, other income (deductions)-net and adjustments and eliminations. (b) Represents the sum of general net premiums earned, life premium income, net investment income, financial services commissions, transactions and other fees, equity in income of minority-owned insurance operations and realized capital gains (losses).
On January 1, 1999, AIG issued 187,543,737 shares of its common stock for all the outstanding common stock of SunAmerica Inc. (based on an exchange ratio of 0.855 shares of AIG common stock for each share of SunAmerica Inc. common stock). Because the merger, which will be accounted for as a pooling of interests, occurred subsequent to December 31, 1998, the historical information presented herein does not give effect to the impact of the merger.