The gross and net IBNR included in the aforementioned reserve for losses and loss expenses at December 31, 1996, 1995 and 1994 were estimated as follows:
Life insurance operating income in 1996 increased 21.4 percent to $1.32 billion compared to an increase of 14.5 percent in 1995. Excluding realized capital gains from life insurance operating income, the percent increases would be 21.8 percent and 22.2 percent in 1996 and 1995, respectively. The contribution of life insurance operating income to income before income taxes amounted to 33.0 percent in 1996 compared to 31.5 percent in 1995 and 32.3 percent in 1994.
AIG Financial Products Corp. and its subsidiaries (AIGFP) participate in the derivatives dealer market conducting, primarily as principal, an interest rate, currency and equity derivative products business. AIGFP 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. AIGFP derives substantially all its revenues from proprietary positions entered in connection with counterparty transactions rather than from speculative transactions. Revenues in 1996 increased 27.7 percent from 1995 compared to a 3.6 percent increase during 1995 from 1994. During 1996, operating income increased 34.9 percent from 1995 and increased 7.0 percent during 1995 from 1994. As AIGFP is a transaction-oriented operation, current and past revenues and operating results may not provide a basis for predicting future performance. (See also the discussions under "Capital Resources," "Liquidity" and "Derivatives" herein.)
Minority interest represents minority shareholders' equity in income of certain consolidated subsidiaries. In 1996, minority interest amounted to $43.2 million. In 1995 and 1994, minority interest amounted to $36.3 million and $29.7 million, respectively.
AIG's capital funds increased $2.22 billion during 1996. Unrealized appreciation of investments, net of taxes declined $16.7 million. Subsequent to AIG's adoption of Financial Accounting Standards No. 115 "Accounting for Certain Investments on Debt and Equity Securities", unrealized appreciation of investments, net of taxes, is subject to increased volatility resulting from the changes in the market value of bonds available for sale. During 1996, the cumulative translation adjustment loss, net of taxes, increased $37.1 million and retained earnings increased $2.72 billion, resulting from net income less dividends.
At December 31, 1996, 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 by considerable margins.
Securities available for sale is mainly a portfolio of debt securities, where the individual securities have varying degrees of credit risk. At December 31, 1996, 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 $2.4 billion of these securities. There were no securities deemed below investment grade. There have been no significant downgrades through March 1, 1997. 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.
A futures or forward contract is a legal contract between two parties to purchase or sell at a specified future date a specified quantity of a commodity, security, currency, financial index or other instrument, at a specified price. A futures contract is traded on an exchange, while a forward contract is executed over the counter.
(H) SPOT COMMODITIES, AT MARKET VALUE: Spot commodities are carried at current market values and are recorded on a settlement date basis. Unrealized gains and losses are reflected in income currently. The exposure to market risk may be reduced through the use of forwards, futures and option contracts.
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.
The gross gains and gross losses realized on the disposition of available for sale securities for 1996, 1995 and 1994 follow:
(ii) Italian Lire Bonds: In December, 1991, AIG issued unsecured bonds denominated in Italian Lire. The principal amount of 200 billion Italian Lire Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent which is paid annually. These bonds are not redeemable prior to maturity, except in the event of certain changes involving taxation in the United States or the imposition of certain certification, identification or reporting requirements.
AIGFP has also issued various credit linked notes maturing from 1997 through 2000. These notes have been issued to hedge certain credit risks in AIGFP's portfolio of securities available for sale. The notes are primarily U.S. dollar denominated and have U.S. dollar interest rates ranging from 5.4 percent to 6.3 percent. AIGFP's payment obligations under these notes would be reduced or eliminated upon the occurrence of a payment default or a bankruptcy event with respect to certain third party credit that is being hedged. At December 31, 1996, these notes had a U.S. dollar carrying value of $2.08 billion. No obligations under these notes were reduced or eliminated during 1996.
The net trading revenues for the twelve months ended December 31, 1996 from AIGTG's operations were $288.6 million.
The following table presents ILFC's notional amounts of its interest rate swaps, swaptions and interest rate floors by maturity at December 31, 1996:
Off-balance sheet financial instruments: Financial instruments which are not currently recognized in the consolidated balance sheet of AIG are principally commitments to extend credit and financial guarantees. The unrecognized fair values of these instruments represent fees currently charged to enter into similar agreements, taking into account the remaining terms of the current agreements and the counterparties' credit standings. No valuation was made as AIG believes it would have to expend excessive costs for the benefits derived.
The fair values of purchase privileges granted during the years ended December 31, 1996 and 1995 were $3,039,000 and $2,005,000, respectively. The weighted average fair values per share of those purchase rights granted in 1996 and 1995
The following table sets forth the liability for the accrued postretirement benefits of the various plans, and amounts recognized in the accompanying consolidated balance sheet as of December 31, 1996 and 1995. These plans are not funded currently. (in thousands)