Net premiums written are initially deferred and earned based upon the terms of the underlying policies. The net unearned premium reserve constitutes the deferred revenues which are generally earned ratably over the policy period. Thus, the net unearned premium reserve is not fully recognized as net premiums earned until the end of the policy period.
Life insurance operations for the twelve month periods ending December 31, 1994, 1993 and 1992 were as follows:
Other realized capital losses amounted to $52.3 million, $12.7 million and $11.3 million in 1994, 1993 and 1992, respectively.
Income before income taxes and the cumulative effect of accounting changes amounted to $2.95 billion in 1994 and $2.60 billion in 1993. Income before income taxes was $2.14 billion in 1992.
GIAs serve as the primary source of proceeds for AIGFP's investments in a diversified portfolio of securities and derivative transactions. During 1994, the GIA balance declined $1.2 billion. As a result, AIGFP increased its term notes payable $526.7 million to $1.05 billion as an additional source of funding for its operating activities. (See also the discussions under "Operational Review", "Liquidity" and "Derivatives" herein and Notes 1, 9 and 11 of Notes to Financial Statements.)
AIG's capital funds have increased $1.20 billion in 1994. Unrealized appreciation of investments, net of taxes, decreased $738.1 million, primarily resulting from the rise in domestic interest rates and its effect on the market values of bonds worldwide. As a result of adopting Financial Accounting Standards No. 115 "Accounting for Certain Investments on Debt and Equity Securities", unrealized appreciation of investments, net of taxes, is now subject to increased volatility resulting from the
Additionally, depending upon the nature of interest rates and market movements during the day, the 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.
AIGFP carries its derivatives at market or estimated fair value, whichever is appropriate. Because of limited liquidity of these instruments, the recorded estimated fair values of these derivatives may be different than the values that might be realized if AIGFP were to sell or close out the transactions prior to maturity. (See also the discussions under "Operational Review: Financial Services", "Liquidity" and "Accounting Standards: Standards Adopted in 1994" herein.)
The following tables provide the notional and contractual amounts of AIGFP's derivatives portfolio at December 31, 1994. The notional amounts used to express the extent of AIGFP's involvement in derivatives transactions represent a standard of measurement of the volume of AIGFP'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
(a) Exchange traded futures are not deemed to have significant credit exposure as the exchanges guarantee that every contract will be properly settled.
agreements above.) AIG seeks to eliminate or minimize such uncertainty through continuous consultation with internal and external legal advisors, both domestically and abroad, in order to understand the nature of legal risk, to improve documentation and to strengthen transaction structure.
(d) 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. Impairment of mortgage loans on real estate and collateral loans 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.
(v) EARNINGS PER SHARE: 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. The effect of all other common stock equivalents is not significant for any period presented.
(ii) STANDARDS ADOPTED PRIOR TO 1994: In 1990, FASB issued Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FASB 106). FASB 106 establishes accounting for postretirement benefits, principally postretirement health care and life insurance benefits. It requires accrual accounting for postretirement benefits during the years that an employee renders services. FASB 106 has been adopted effective January 1, 1992. The consolidated transition liability was approximately $83.1 million, including minor amounts for certain foreign plans. The transition liability was recognized immediately at adoption as a change in accounting principle. The cumulative effect of the adoption of FASB 106 was a charge of $54.8 million, net of a tax benefit of $28.3 million.
* Where an enterprise has the positive intent and ability to hold debt securities to maturity, those securities are deemed to be held to maturity securities and reported at amortized cost.
* Where an enterprise purchases debt and equity securities principally for the purpose of selling them in the near term, those securities are deemed to be trading securities and are reported at fair value, with the unrealized gains and losses included in operating income.
(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. These long duration products generally have fixed cash values and there are no surrender charges. The liability for future life policy benefits has been established based upon the following assumptions:
(ii) Domestically, GICs have market value withdrawal provisions for any funds withdrawn other than benefit responsive payments. Interest rates credited generally range from 4.7 percent to 9.1 percent and maturities range from 2 to 7 years. Overseas, primarily in the United Kingdom, GIC type contracts are credited at rates ranging from 4.5 percent to 7.0 percent with maturities generally being one year. Contracts in other foreign locations have interest rates, maturities and withdrawal charges based upon local economic and regulatory conditions.
(a) At December 31, 1994, there were 6,000,000 shares of AIG's $5 par value serial preferred stock authorized, issuable in series. AIG redeemed the Exchangeable Money Market Cumulative Serial Preferred(TM) Stock, Series M-1 on April 2, 1993 and the Exchangeable Money Market Cumulative Serial Preferred Stock, Series M-2 (Series M-1 and M-2 together, MMP(TM)), on March 5, 1993 at a price of $100,000 per share plus accrued dividends.
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. At December 31, 1994, the contractual amounts for sold options approximated $14.2 billion.
The following methods and assumptions were used by AIG in estimating the fair value of the financial instruments presented:
As of December 31, 1994, there were 91,906 shares of common stock subscribed to at a weighted average price of $73.77 per share pursuant to grants of privileges under the 1984 plan. There were 90,661 shares, 93,447 shares and 92,220 shares issued under the 1984 plan at weighted average prices of $75.55, $54.46 and $49.66 for the years ended December 31, 1994, 1993 and 1992, respectively. The excess of the proceeds over the par value or cost of the common stock issued was credited to additional paid-in capital. There were 253,528 shares available for the grant of future purchase privileges under the 1984 plan at December 31, 1994.
(b) Minimum future rental income on noncancelable operating leases of flight equipment which have been delivered at December 31, 1994 was as follows: