In AIG's general insurance operations, 1997 net premiums written and net premiums earned increased 5.6 percent and 4.8 percent, respectively, from those of 1996. In 1996, net premiums written increased 6.7 percent and net premiums earned increased 3.9 percent when compared to 1995.
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 resolutions and judicial interpretations which broaden the intent of the policies and scope of coverage. The current caselaw 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. The cleanup cost exposure may significantly change if the Congressional reauthorization of Superfund dramatically changes, thereby reducing or increasing litigation and cleanup costs.
ILFC is exposed to loss 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. At December 31, 1997, there were 297 aircraft subject to operating leases. Two other aircraft were committed for sale. (See also the discussions under "Capital Resources" and "Liquidity" herein.)
During 1997, AIGFP decreased the aggregate principal amount outstanding of its notes and bonds payable to $4.86 billion, a net decrease of $384.3 million and increased its net GIA borrowings by $2.28 billion. AIGFP uses the proceeds from the issuance of notes and bonds to invest in a segregated portfolio of securities available for sale, although these funds may be temporarily invested in securities purchased under agreements to resell. Funds received from GIA borrowings are invested in a diversified portfolio of securities and derivative transactions. (See also the discussions under "Operational Review", "Liquidity" and "Derivatives" herein and Notes 1, 8, 9 and 11 of Notes to Financial Statements.)
The following table presents the VaR of each component of market risk for each of AIG's insurance segments as of December 31, 1997:
AIGFP's interest rate risk on securities available for sale, at market, is 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, 1997, the unrealized gains and losses remaining after the benefit of the offsets were $6.6 million and $6.5 million, respectively.
AIG's Market Risk Management Department provides detailed independent review of AIG's market exposures, particularly those market exposures of AIGFP and AIGTG. This
The following table presents AIGFP's derivatives portfolio by maturity and type of derivative at December 31, 1997 and December 31, 1996:
AIG has adopted all requirements of FASB 128 herein and all prior period information has been restated.
AIG has also initiated formal communications to those non-AIG entities which have significant transactions with AIG to coordinate the Year 2000 conversions.
In January 1998, AIG purchased the 76.1 percent of the outstanding shares of SELIC Holdings, Ltd. (SELIC) which AIG did not own. Prior to the purchase of these shares, SELIC's operations were accounted for on an equity basis and presented as a component of equity in income of minority-owned insurance operations. Subsequent to the acquisition, SELIC will be consolidated as a component of general insurance operations.
(l) 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 nature of the invested asset and the ownership percentage thereof. Other investments are carried at cost or market values depending upon the nature of the underlying assets. Unrealized gains and losses from the revaluation of those investments carried at market values are reflected in capital funds, net of any related deferred income taxes.
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 $2.9 billion at December 31, 1997. 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.
Life insurance recoveries, which reduced death and other benefits, approximated $136.5 million, $113.5 million and $111.4 million, respectively, for the years ended December 31, 1997, 1996 and 1995.
(a) The realized gains (losses) resulted from the sale of available for sale fixed maturities. (b) Includes $157.5 million decrease, $51.2 million increase and $480.9 million increase in unrealized appreciation attributable to participating policyholders at December 31, 1997, 1996 and 1995, respectively.
The amortized cost and estimated market value of bonds available for sale and carried at market value at December 31, 1997 and 1996 were as follows:
At December 31, 1997, the gross weighted average coupon of this portfolio was 7.5 percent. The gross weighted average life of this portfolio was 5.8 years.
(b) 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 and range up to 9.8 percent.
The gross replacement values presented represent the sum of the estimated positive fair values of all of AIGTG's derivatives contracts at December 31, 1997 and December 31, 1996. These values do not represent the credit risk to AIGTG.
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. Additionally, AIG follows a policy of minimizing interest rate risks associated with GIAs by entering into swap transactions.
As of December 31, 1997, there were 181,049 shares of common stock subscribed to at a weighted average price of $77.37 per share pursuant to grants of privileges under the 1996 plan. There were 1,171,866 shares available for the grant of future purchase privileges under the 1996 plan at December 31, 1997.
Net pension cost for the years ended December 31, 1997, 1996 and 1995 included the following components:
The following table is a summary of the operations by major operating segments for the years ended December 31, 1997, 1996 and 1995: