Commencing with the latter part of the fourth quarter of 2000, HSB, and the third quarter of 1998, Transatlantic and 21st Century were consolidated into AIG's financial statements, as a result of AIG obtaining majority ownership.
In AIG's general insurance operations, 2000 net premiums written and net premiums earned increased 8.0 percent and 12.0 percent, respectively, from those of 1999. During 2000, AIG cancelled or non-renewed approximately $380 million of business worldwide that did not meet AIG's underwrit-
Commencing in the latter part of 1999 and continuing through 2000, the commercial property-casualty market place has experienced rate increases. Virtually all areas of DBG have experienced rate increases. Overall, DBG's net premiums written increased $508 million or 6.1 percent in 2000 over 1999. These increases compared to an increase of $106 million or 1.3 percent in 1999 over 1998.
Growth of 7.3 percent for both foreign general insurance net premiums written and net premiums earned in 2000 over 1999 reflect growth of operations in the United Kingdom, Continental Europe and the Far East. Growth of 16.4 percent and 19.0 percent for foreign general insurance net premiums written and net premiums earned, respectively, reflect growth of operations in the same aforementioned geographic regions and the consolidation of Transatlantic's foreign operations for twelve months in 1999 compared to six months in 1998. Foreign general insurance operations produced 32.9 percent of the general insurance net premiums written in 2000, 33.1 percent in 1999 and 31.6 percent in 1998.
Differences in foreign exchange rates during 2000 relative to 1999 had a negligible effect on foreign general insurance net premiums written when translated from original currencies into U.S. dollars. (See also the discussion under "Capital Resources" herein.)
AIG, along with most general insurance entities, uses the loss ratio, the expense ratio and the combined ratio as measures of performance. The loss ratio is the sum of losses and loss expenses incurred divided by net premiums earned. The expense ratio is statutory underwriting expenses divided by net premiums written. The combined ratio is the sum of the loss ratio and the expense ratio. These ratios are relative measurements that describe for every $100 of net premiums earned or written, the cost of losses and statutory expenses, respectively. The combined ratio presents the total cost per $100 of premium production. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting loss. The statutory general insurance ratios were as follows:
AIG's results reflect the net impact of incurred losses from catastrophes approximating $44 million in 2000, $156 million in 1999 and $110 million in 1998. AIG's gross incurred losses from catastrophes approximated $112 million in 2000, $472 million in 1999 and $625 million in 1998. The impact of losses caused by catastrophes can fluctuate widely from year to year, making comparisons of recurring type business more difficult. The pro forma table below excludes catastrophe losses in order to present comparable results of AIG's recurring core underwriting operations. The pro forma consolidated statutory general insurance ratios would be as follows:
General insurance realized capital gains were $38 million in 2000, $295 million in 1999 and $205 million in 1998. These realized gains resulted from the ongoing management of the general insurance investment portfolios within the overall objectives of the general insurance operations and arose primarily from the disposition of equity securities and available for sale fixed maturities as well as redemptions of fixed maturities.
AIG's general reinsurance assets amounted to $22.90 billion and resulted from AIG's reinsurance arrangements. Thus, a credit exposure existed at December 31, 2000 with respect to reinsurance recoverable to the extent that any reinsurer may not be able to reimburse AIG under the terms of these reinsurance arrangements. AIG manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound, and when necessary AIG holds substantial collateral in the form of funds, securities and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. At December 31, 2000, approximately 43 percent of the general reinsurance assets were from unauthorized reinsurers. In order to obtain statutory recognition, nearly all of these balances were collateralized. The remaining 57 percent of the general reinsurance assets were from authorized reinsurers and over 95 percent of such balances
AIG maintains an allowance for estimated unrecoverable reinsurance and has been largely successful in its previous recovery efforts. At December 31, 2000, AIG had allowances for unrecoverable reinsurance approximating $76 million. At that date AIG had no significant reinsurance recoverables from any individual reinsurer which is financially troubled (e.g., liquidated, insolvent, in receivership or otherwise subject to formal or informal regulatory restriction).
At December 31, 2000, the consolidated general reinsurance assets of $22.90 billion include reinsurance recoverables for paid losses and loss expenses of $3.33 billion and $15.66 billion with respect to the ceded reserve for losses and loss expenses, including ceded losses incurred but not reported (IBNR) (ceded reserves). The ceded reserves represent the accumulation of estimates of ultimate ceded losses including provisions for ceded IBNR and loss expenses. The methods used to determine such estimates and to establish the resulting ceded reserves are continually reviewed and updated. Any adjustments therefrom are reflected in income currently. It is AIG's belief that the ceded reserves at December 31, 2000 were representative of the ultimate losses recoverable. In the future, as the ceded reserves continue to develop to ultimate amounts, the ultimate loss recoverable may be greater or less than the reserves currently ceded.
At December 31, 2000, general insurance reserves for losses and loss expenses (loss reserves) amounted to $40.61 billion. These loss reserves represent the accumulation of estimates of ultimate losses, including IBNR, and loss expenses and amounts of discounting related to certain workers' compensation claims. At December 31, 2000, general insurance net loss reserves increased $117 million from prior year end to $24.95 billion. The net loss reserves represent loss reserves reduced by reinsurance recoverables, net of an allowance for unrecoverable reinsurance. The methods used to determine such estimates and to establish the resulting reserves are continually reviewed and updated. Any adjustments resulting therefrom are reflected in operating income currently. It is management's belief that the general insurance net loss reserves are adequate to cover all general insurance net losses and loss expenses as at December 31, 2000. In the future, if the general insurance net loss reserves develop deficiently, such deficiency would have an adverse impact on such future results of operations.
A variety of actuarial methods and assumptions are normally employed to estimate net losses for long tail casualty lines. These methods ordinarily involve the use of loss trend factors intended to reflect the estimated annual growth in loss costs from one accident year to the next. For the majority of long tail casualty lines, net loss trend factors approximated four percent. Loss trend factors reflect many items including changes in claims handling, exposure and policy forms and current and future estimates of monetary inflation and social inflation. Thus, many factors are implicitly considered in estimating the year to year growth in loss costs. Therefore, AIG's carried net long tail loss reserves are judgmentally set as well as tested for reasonableness using the most appropriate loss trend factors for each class of business. In the evaluation of AIG's net loss reserves, loss trend factors vary slightly, depending on the particular class and nature of the business involved. These factors are periodically reviewed and subsequently adjusted, as appropriate, to reflect emerging trends which are based upon past loss experience.
AIG continues to receive claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter referred to collectively as environmental claims) and indemnity claims asserting injuries from asbestos. The vast majority of these asbestos and environmental claims emanate from policies written in 1984 and prior years. AIG has established a specialized claims unit which investigates and adjusts all such asbestos and environmental claims. Commencing in 1985, standard policies contained an absolute exclusion for pollution related damage. However, AIG currently underwrites environmental impairment liability insurance on a claims made basis and excluded such claims from the analyses included herein.
A summary of asbestos and environmental claims count activity for the years ended December 31, 2000, 1999 and 1998 was as follows:
The developed survival ratios include both involuntary and voluntary indemnity payments. Involuntary payments are primarily attributable to court judgments, court orders, covered claims with no coverage defenses, state mandated cleanup costs, claims where AIG's coverage defenses are minimal, and settlements made less than six months before the first trial setting. Also, AIG considers all legal and loss adjustment payments as involuntary.
AIG's life premium income in 2000 represented a 14.0 percent increase from the prior year. This compares with an increase of 16.0 percent in 1999 over 1998. Foreign life operations produced 90.8 percent, 92.1 percent and 92.4 percent of the life premium income in 2000, 1999 and 1998, respectively. (See also Notes 1, 4 and 6 of Notes to Financial Statements.)
The traditional life products, particularly individual life products, were major contributors to the growth in foreign premium income. These traditional life products, coupled with the increased distribution of financial and investment products contributed to the growth in foreign investment income. A mixture of traditional, accident and health and financial products are being sold in Japan through ALICO.
Differences in foreign exchange rates during 2000 relative to 1999 had a negligible effect on foreign life premium income when translated from original currencies into U.S. dollars.
Life insurance net investment income increased 14.8 percent in 2000 compared to an increase of 19.3 percent in 1999. The growth in net investment income in 2000 and 1999 was attributable to both foreign and domestic new cash flow for investment. The new cash flow was generated from life insurance operations and included the compounding of previously earned and reinvested net investment income. (See also the discussion under "Liquidity" herein.)
Life insurance realized capital losses were $162 million in 2000, $148 million in 1999 and $74 million in 1998. These realized capital losses resulted from the ongoing management of the life insurance investment portfolios within the overall objectives of the life insurance operations and arose primarily from the disposition of equity securities and available for sale fixed maturities as well as redemptions of fixed maturities. The increase in realized capital losses from 1998 to 2000 reflects the impact of higher interest rates, wider spreads between governmental and non-governmental obligations and weaker Asian markets on the customary trading activities of the life insurance investment operations.
Life insurance operating income in 2000 increased 18.5 percent to $3.39 billion compared to an increase of 20.5 percent in 1999. Excluding realized capital gains and losses from life insurance operating income, the percent increases would be 18.1 percent and 22.8 percent in 2000 and 1999, respectively. The contribution of life insurance operating income to income before income taxes and minority interest amounted to 40.6 percent in 2000 compared to 38.0 percent in 1999 and 37.8 percent in 1998.
AIG's financial services subsidiaries engage in diversified financial products and services including premium financing, banking services and consumer finance services.
International Lease Finance Corporation (ILFC) engages primarily in the acquisition of new and used commercial jet aircraft and the leasing and remarketing of such aircraft to airlines around the world. Also, ILFC provides, for a fee, fleet management services to certain third-party operators. (See also Note 18 of Notes to Financial Statements.)
Financial services operations for the twelve month periods ending December 31, 2000, 1999 and 1998 were as follows:
Financial services operating income increased 19.5 percent in 2000 over 1999. This compares with an increase of 24.4 percent in 1999 over 1998.
AIG Consumer Finance Group, Inc., through its subsidiaries, is engaged in developing a multi-product consumer finance business with an emphasis on emerging markets.
Asset management operations for the twelve month periods ending December 31, 2000, 1999 and 1998 were as follows:
Asset management operating income represented 5.2 percent of AIG's income before income taxes and minority interest in 2000. This compares to 4.2 percent and 3.0 percent in 1999 and 1998, respectively.
Other realized capital losses amounted to $14 million, $25 million and $7 million in 2000, 1999 and 1998, respectively.
Income before income taxes and minority interest amounted to $8.35 billion in 2000, $7.51 billion in 1999 and $6.28 billion in 1998.
Net income amounted to $5.64 billion in 2000, $5.06 billion in 1999 and $4.28 billion in 1998. The increases in net income over the three year period resulted from those factors described above.
(a) AIG does not guarantee or support these borrowings. (b) Includes borrowings under Export Credit Facility of $2.07 billion. (c) Capital lease obligations.
During 2000, AIGFP increased the aggregate principal amount outstanding of its notes and bonds payable to $8.76 billion. AIGFP uses the proceeds from the issuance of notes and bonds and GIA borrowings to invest in a diversified portfolio of securities and derivative transactions. The funds may also be temporarily invested in securities purchased under agreements to resell. (See also the discussions under "Operational Review", "Liquidity" and "Derivatives" herein and Notes 1, 8, 9, 12 and 18 of Notes to Financial Statements.)
AIG and Funding have entered into syndicated revolving credit facilities (collectively, the Facility) aggregating $1.5 billion. The Facility consists of $1.0 billion in short-term revolving credit facilities and a $500 million five year revolving credit facility. The Facility can be used for general corporate purposes and also to provide backup for AIG's commercial paper programs administered by Funding. There are currently no borrowings outstanding under the Facility, nor were any borrowings outstanding as of December 31, 2000.
ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for approximately 75 aircraft to be delivered through 2001. ILFC has the right, but is not required, to use the facility to fund 85 percent of each aircraft's purchase price. This facility is guaranteed by various European Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90 percent on the first 75 aircraft depending on the delivery date of the aircraft. Through March 9, 2001, ILFC borrowed $2.2 billion under this facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the accompanying table of borrowings.
Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by statutory authorities. AIG has in the past reinvested most of its unrestricted earnings in its operations and believes such continued reinvestment in the future will be adequate to meet any foreseeable capital needs. However, AIG may choose from time to time to raise additional funds through the issuance of additional securities. At December 31, 2000, there were no significant statutory or regulatory issues which would impair AIG's financial condition, results of operations or liquidity. To AIG's knowledge, no AIG company is on any regulatory or similar "watch list". (See also the discussion under "Liquidity" herein and Note 11 of Notes to Financial Statements.)
AIG's insurance subsidiaries, in common with other insurers, are subject to regulation and supervision by the states and jurisdictions in which they do business. The National Association of Insurance Commissioners (NAIC) has developed Risk-Based Capital (RBC) requirements. RBC relates an individual insurance company's statutory surplus to the risk inher-
Sources of funds considered in meeting the objectives of AIG's financial services operations include guaranteed investment agreements, issuance of long and short-term debt, maturities and sales of securities available for sale, securities sold under repurchase agreements, trading liabilities, securities and spot commodities sold but not yet purchased, issuance of equity, and cash provided from such operations. AIG's strong capital position is integral to managing this liquidity, as it enables AIG to raise funds in diverse markets worldwide. (See also the discussions under "Capital Resources" herein.)
This liquidity is available, among other things, to purchase high quality and diversified fixed income securities and to a lesser extent marketable equity securities and to provide mortgage loans on real estate, policy loans and collateral loans. This cash flow coupled with proceeds of approximately $36 billion from the maturities, sales and redemptions of fixed income securities and from the sale of equity securities was used to purchase approximately $46 billion of fixed income securities and marketable equity securities during 2000.
(a) Includes $846 million of bonds trading securities, at market value. (b) Includes $1.04 billion of non-redeemable preferred stocks, at market value.
The fixed maturity available for sale portfolio is subject to decline in fair value as interest rates rise. Such declines in fair value are presented as a component of comprehensive income in unrealized appreciation of investments, net of taxes.
A significant portion of the foreign insurance fixed income portfolio is rated by Moody's, Standard & Poor's (S&P) or similar foreign services. Similar credit quality rating services are not available in all overseas locations. AIG annually reviews the credit quality of the foreign portfolio nonrated fixed income investments, including mortgages. At December 31, 2000, approximately 11 percent of the foreign fixed income investments were either rated AAA or, on the basis of AIG's internal analysis, were equivalent from a credit standpoint to securities so rated. Approximately 16 percent were below investment grade or not rated at that date. A large portion of the foreign insurance fixed income portfolio are sovereign fixed maturity securities supporting the policy liabilities in the country of issuance.
ment grade and approximately 16 percent of the CMOs were backed by various U.S. government agencies. CMOs are exposed to interest rate risk as the duration and ultimate realized yield would be affected by the accelerated prepayments of the underlying mortgages.
AIG invests in equities for various reasons, including diversifying its overall exposure to interest rate risk. Equity securities are subject to declines in fair value. Such declines in fair value are presented in unrealized appreciation of investments, net of taxes as a component of comprehensive income.
Mortgage loans on real estate, policy and collateral loans comprised 7.5 percent of AIG's insurance invested assets at December 31, 2000. AIG's insurance operations' holdings of real estate mortgages amounted to $6.73 billion of which 78.3 percent was domestic. At December 31, 2000, only a nominal amount were in default. It is AIG's practice to maintain a maximum loan to value ratio of 75 percent at loan origination. At December 31, 2000, AIG's insurance holdings of collateral loans amounted to $868 million, all of which were foreign. It is AIG's strategy to enter into mortgage and collateral loans as an adjunct primarily to life insurance fixed maturity investments. AIG's policy loans increased from $2.82 billion at December 31, 1999 to $3.03 billion at December 31, 2000.
AIG calculated the VaR with respect to the net fair value of each of AIG's insurance segments as of December 31, 2000 and December 31, 1999. AIG has refined its methodology for calculating VaR and the results of the calculations presented herein were performed using historical simulation. Using historical simulation over the delta-normal approach does not significantly change the results of this disclosure. The historical simulation methodology entails re-pricing all assets and liabilities under explicit changes in market rates within a specific historical time period. In this case, the most recent three years of historical market information for interest rates, foreign exchange rates, and equity index prices were used to construct the historical scenarios. For each scenario, each transaction was re-priced. Portfolio, business unit and finally AIG-wide scenario values were then calculated by netting the values of all the underlying assets and liabilities. The final VaR number represents the maximum potential loss incurred by these scenarios with 95% confidence (i.e., only 5% of historical scenarios show losses greater than the VaR figure). A one month holding period was assumed in computing the VaR figure. At December 31, 2000 and December 31, 1999 the VaR of AIG's insurance segments was approximately $744 million and $863 million for general insurance, respectively, and $1.16 billion
and $1.19 billion for life insurance, respectively. The average VaR for 2000 for each of AIG's insurance segments was approximately $811 million for general insurance and $1.16 billion for life insurance. The high and low VaRs for general insurance during 2000 were approximately $954 million and $737 million, respectively. The high and low VaRs for life insurance during 2000 were approximately $1.21 billion and $1.11 billion, respectively.
The following table presents the VaR of each component of market risk for each of AIG's insurance segments as of December 31, 2000 and December 31, 1999. VaR with respect to combined operations cannot be derived by aggregating the individual risk or segment amounts presented herein.
The following table is a summary of the composition of AIG's financial services and asset management invested assets at December 31, 2000 and 1999. (See also the discussions under "Operational Review: Financial Services Operations", "Operational Review: Asset Management Operations", "Capital Resources" and "Derivatives" herein.)
As previously discussed, the cash used for the purchase of flight equipment is derived primarily from the proceeds of ILFC's debt financings. The primary sources for the repayment of this debt and the interest expense thereon are the cash flow from operations, proceeds from the sale of flight equipment and the rollover and refinancing of the prior debt. During 2000, ILFC acquired flight equipment costing $3.43 billion.
At December 31, 2000, ILFC had committed to purchase 488 aircraft deliverable from 2001 through 2009 at an estimated aggregate purchase price of $27.3 billion and had options to purchase 51 aircraft deliverable from 2001 through 2008 at an estimated aggregate purchase price of $3.0 billion. As of March 15, 2001, ILFC has entered into leases for all of the aircraft to be delivered in 2001 and 96 of 421 aircraft to be delivered subsequent to 2001. ILFC will be required to find customers for any aircraft presently on order and any aircraft to be ordered, and it must arrange financing for portions of the purchase price of such equipment. In a rising interest rate environment, ILFC negotiates higher lease rates on any new contracts. ILFC has been successful to date both in placing its new aircraft on lease or under sales contract and obtaining adequate financing.
Securities available for sale is mainly a portfolio of debt securities, where the individual securities have varying degrees of credit risk. At December 31, 2000, 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 $182 million of these securities. There were no securities deemed below investment grade at December 31, 2000. There have been no significant downgrades through March 1, 2001. 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.
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, 2000, the unrealized gains and losses remaining after the benefit of the offsets were $44 million and $11 million, respectively.
As part of its monitoring and controlling of its exposure to market risk, AIGFP applies various testing techniques which reflect potential market movements. These techniques vary by currency and are regularly changed to reflect factors affecting the derivatives portfolio. In addition to the daily monitoring, AIGFP's senior management and local risk managers conduct a weekly review of the derivatives portfolio and existing hedges. This review includes an examination of the portfolio's risk measures, such as aggregate option sensitivity to movements in market variables. AIGFP's management may change these measures to reflect their judgment and evaluation of the dynamics of the markets. This management group will also determine whether additional or alternative action is required in order to manage the portfolio.
an internal methodology which includes interpolation or extrapolation from verifiable prices nearest to the dates of the transactions. The methodology may reflect interest and exchange rates, commodity prices, volatility rates and other relevant factors.
A significant portion of AIGTG's business is transacted in liquid markets. Certain of AIGTG's derivative product exposures are evaluated using simulation techniques which consider such factors as changes in currency and commodity prices, interest rates, volatility levels and the effect of time.
(a) A one month holding period was used to measure the market exposures of AIGFP. (b) A one day holding period was used to measure the market exposures of AIGTG.
The most commonly used swaps are interest rate swaps, currency swaps, equity swaps and swaptions. Such derivatives are traded over the counter. An interest rate swap is a contract between two parties to exchange interest rate payments (typically a fixed interest rate versus a variable interest rate) calculated on a notional principal amount for a specified period of time. The notional amount is not exchanged. Currency and equity swaps are similar to interest rate swaps but may involve the exchange of principal amounts at the commencement and termination of the swap. Swaptions are options where the holder has the right but not the obligation to enter into a swap transaction or cancel an existing swap transaction.
The following tables provide the notional and contractual amounts of AIGFP's and AIGTG's derivatives transactions at December 31, 2000 and December 31, 1999.
The net replacement value most closely represents the net credit risk to AIGFP or the maximum amount exposed to potential loss after the application of the aforementioned strategies, netting under ISDA Master Agreements and applying collateral held. Prior to the application of these credit enhancements, the gross credit risk with respect to these derivative instruments was $33.4 billion at December 31, 2000 and $16.90 billion at December 31, 1999. Subsequent to the application of such credit enhancements, the net exposure to credit risk or the net replacement value of all interest rate, currency and equity swaps, swaptions and forward commitments approximated $9.51 billion at December 31, 2000 and $7.53 billion at December 31, 1999. The net replacement value for
AIGFP determines counterparty credit quality by reference to ratings from independent rating agencies or internal analysis. At December 31, 2000 and December 31, 1999, the counterparty credit quality by derivative product with respect to the net replacement value of AIGFP's derivatives portfolio was as follows:
At December 31, 2000 and December 31, 1999, the counterparty breakdown by industry with respect to the net replacement value of AIGFP's derivatives portfolio was as follows:
The following table provides the contractual and notional amounts and credit exposure, if applicable, by maturity and type of derivative of AIGTG's derivatives portfolio at December 31, 2000 and December 31, 1999. In addition, the estimated positive fair values associated with the derivatives portfolio are also provided and include a maturity profile for the December 31, 2000 balances based upon the expected timing of the future cash flows.
On November 22, 2000, AIG completed its acquisition of HSB Group, Inc. (HSB), which through its subsidiary, The Hartford Steam Boiler Inspection and Insurance Company, provides equipment breakdown and other specialty insurance coverages. Each of the outstanding shares of HSB common stock was exchanged for 0.4178 of a share of AIG common stock resulting in the issuance of 12.2 million shares of AIG com-
mon stock. The acquisition has been accounted for as a purchase and HSB's results of operations have been consolidated with those of AIG since the date of acquisition.
- -------------------------------------------------------------------------------- Page - -------------------------------------------------------------------------------- Report of Independent Accountants 41 Consolidated Balance Sheet at December 31, 2000 and 1999 42 Consolidated Statement of Income for the years ended December 31, 2000, 1999 and 1998 44 Consolidated Statement of Capital Funds for the years ended December 31, 2000, 1999 and 1998 45 Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998 46 Consolidated Statement of Comprehensive Income for the years ended December 31, 2000, 1999 and 1998 48 Notes to Financial Statements 49
Schedules: I--Summary of Investments--Other Than Investments in Related Parties as of December 31, 2000 S-1 II--Condensed Financial Information of Registrant as of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998 S-2 III--Supplementary Insurance Information as of December 31, 2000, 1999 and 1998 and for the years then ended S-4 IV--Reinsurance as of December 31, 2000, 1999 and 1998 and for the years then ended S-5
Policy acquisition costs for traditional life insurance products are generally deferred and amortized over the premium paying period of the policy. Deferred policy acquisition costs and policy initiation costs related to universal life and investment-type products are amortized in relation to expected gross profits over the life of the policies. Policy acquisition costs with respect to universal life and investment-type products
are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the contracts. Estimated gross profits are composed of net interest income, net realized investment gains and losses, variable annuity fees, surrender charges and direct administrative expenses.
As debt and equity securities available for sale are carried at aggregate fair value, an adjustment is made to deferred policy acquisition costs equal to the change in amortization that would have been recorded if such securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The change in this adjustment, net of tax, is included with the change in net unrealized gains/losses on debt and equity securities available for sale that is credited or charged directly to comprehensive income. Deferred policy acquisition costs have been increased by $99 million at December 31, 2000 and increased by $130 million at December 31, 1999 for this adjustment. (See Note 4.)
AIG engages in market making and trading activities, as principal, in foreign exchange, interest rates and precious and base metals. AIG owns inventories in the commodities in which it trades and may reduce the exposure to market risk through the use of swaps, forwards, futures and option contracts.
(e) 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. Interest income on such loans is accrued currently.
(f) Flight Equipment: Flight equipment is stated at cost. Major additions and modifications are capitalized. Normal maintenance and repairs, airframe and engine overhauls and compliance with return conditions of flight equipment on lease are provided by and paid for by the lessee. Under the provisions of most leases for certain airframe and engine overhauls, the lessee is reimbursed for costs incurred up to but not exceeding contingent rentals paid to AIG by the lessee. AIG provides a charge to income for such reimbursements based upon the expected reimbursements during the life of the lease. Depreciation and amortization are computed on the straight-line basis to a residual value of approximately 15 percent over the estimated useful lives of the related assets but not exceeding 25 years. AIG monitors the global aircraft market and the values of various types and models of aircraft within that market relative to the values of its own fleet. If events or circumstances were such that the carrying amount of AIG's aircraft might be impaired, AIG would determine if such impairment existed and recognize such impairment. This caption also includes deposits for aircraft to be purchased.
(i) Spot Commodities, at market value: Spot commodities are carried at current market values and are recorded on a settlement date basis. The exposure to market risk may be reduced through the use of forwards, futures and option contracts. Unrealized gains and losses of both commodities and any derivative transactions are reflected in income currently.
(j) Unrealized Gain and Unrealized Loss on Interest Rate and Currency Swaps, Options and Forward Transactions: Interest rate swaps, currency swaps, equity swaps, swaptions, options and forward transactions are accounted for as contractual commitments recorded on a trade date basis and are carried at current market values or estimated fair values when market values are not available. Unrealized gains and losses are reflected in income currently. Estimated fair values are based on the use of valuation models that utilize, among other things, current interest, foreign exchange and volatility rates. These valuations represent an assessment of the present values of expected future cash flows of these transactions and may include reserves for market risk as deemed appropriate. The portfolio's discounted cash flows are evaluated with reference to current market conditions, maturities within the portfolio and other relevant factors. Based upon this evaluation, it is determined what offsetting transactions, if any, are necessary to reduce the market risk of the portfolio. AIG manages its market risk with a variety of transactions, including swaps, trading securities, futures and forward contracts and other transactions as appropriate. Because of the limited liquidity of some of these instruments, the recorded values of these transactions may be different than the values that might be realized if AIG were to sell or close out the transactions prior to maturity. AIG believes that such differences are not significant to the results of operations, financial condition or liquidity. Such differences would be immediately recognized when the transactions are sold or closed out prior to maturity.
(k) Trading Assets and Trading Liabilities: Trading assets and trading liabilities include option premiums paid and received and receivables from and payables to counterparties which relate to unrealized gains and losses on futures, forwards and options and balances due from and due to clearing brokers and exchanges.
(l) Securities Purchased (Sold) Under Agreements to Resell (Repurchase), at contract value: Purchases of securities under agreements to resell and sales of securities under agreements to repurchase are accounted for as collateralized lending transactions and are recorded at their contracted resale or repurchase amounts, plus accrued interest. Generally, it is AIG's policy to take possession of or obtain a security interest in securities purchased under agreements to resell.
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 $3.5 billion at December 31, 2000. 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 $156 million, $168 million and $176 million, respectively, for the years ended December 31, 2000, 1999 and 1998.
(b) The analysis of the future policy benefits and policyholders' contract deposits liabilities as at December 31, 2000 and 1999 follows:
(ii) Domestically, GICs have market value withdrawal provisions for any funds withdrawn other than benefit responsive payments. Interest rates credited generally range from 4.0 percent to 9.4 percent. The vast majority of these GICs mature within 10 years. Overseas, interest rates credited on GICs generally range from 4.8 percent to 7.3 percent and maturities range from 1 to 6 years.
(b) Includes $51 million increase, $264 million decrease and $301 million increase in unrealized appreciation attributable to participating policyholders at December 31, 2000, 1999 and 1998, respectively.
(d) Market Value of Fixed Maturities and Unrealized Appreciation of Investments: At December 31, 2000 and 1999, the balance of the unrealized appreciation of investments in equity securities (before applicable taxes) included gross gains of approximately $670 million and $1.2 billion and gross losses of approximately $1 billion and $706 million, respectively.
The amortized cost and estimated market value of investments in fixed maturities carried at amortized cost at December 31, 2000 and 1999 were as follows:
The amortized cost and estimated market value of bonds available for sale and carried at market value at December 31, 2000 and 1999 were as follows:
The amortized cost and estimated market values of securities available for sale at December 31, 2000, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
(f) CMOs: At December 31, 2000, CMOs, held by AIG's life companies, were presented as a component of bonds available for sale, at market value. Substantially all of the CMOs were investment grade and approximately 16 percent of the CMOs were backed by various U.S. government agencies. The remaining 84 percent were corporate issuances.
The distribution of the CMOs at December 31, 2000 and 1999 was as follows:
(g) Fixed Maturities Below Investment Grade: At December 31, 2000, fixed maturities held by AIG that were below investment grade or not rated totaled $14.23 billion.
At December 31, 2000, the market value of securities pledged as collateral with respect to these obligations approximated $3.8 billion.
(i) Medium Term Notes Payable Issued by AIG: AIG's Medium Term Notes are unsecured obligations which normally may not be redeemed by AIG prior to maturity and bear interest at either fixed rates set by AIG at issuance or variable rates determined by reference to an interest rate or other formula.
An analysis of AIG's Medium Term Notes for the year ended December 31, 2000 was as follows:
At December 31, 2000, AIG's Medium Term Notes also included notes in aggregate principal amount of $196 million issued by SunAmerica Inc. with maturity dates from 2001 to 2026 at interest rates ranging from 6.03 percent to 7.34 percent. AIG does not intend to have SunAmerica issue its own debt.
During 1997, AIG issued $100 million principal amount of equity-linked Medium Term Notes due July 30, 2004. These notes accrued interest at the rate of 2.25 percent and the total return on these notes was linked to the appreciation in market value of AIG's common stock. In conjunction with the issuance of these notes, AIG entered into a series of swap transactions which effectively converted its interest expense to a fixed rate of 5.87 percent and transferred the equity appreciation exposure to a third party. These notes were redeemed during 2000.
(B) 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.
As of December 31, 2000, notes in aggregate principal amount of $3.46 billion were outstanding with maturity dates from 2001 to 2004 and interest rates ranging from 5.63 percent to 8.88 percent. Term notes in the aggregate principal amount of $350 million are at floating interest rates and the remainder are at fixed rates. These notes provide for a single principal payment at maturity.
At December 31, 2000, the maturity schedule for ILFC's Term Notes was as follows:
ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for approximately 75 aircraft to be delivered through 2001. ILFC has the right, but is not required, to use the facility to fund 85 percent of each aircraft's purchase price. This facility is guaranteed by various European Export Credit Agencies. The interest rate varies from 5.75 percent to 5.90 percent on the first 75 aircraft depending on the delivery date of the aircraft. Through December 31, 2000, ILFC borrowed $2.07 billion under this facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the
At December 31, 2000, ILFC's capital lease obligations were $463 million. Fixed interest rates with respect to these obligations range from 6.18 percent to 6.89 percent; variable rates are referenced to LIBOR. These obligations mature through 2005. The flight equipment associated with the capital lease obligations had a net book value of $1.01 billion.
(g) Revolving Credit Facilities: AIG and Funding have entered into syndicated revolving credit facilities (collectively, the Facility) aggregating $1.5 billion. The Facility consists of $1.0 billion in short-term revolving credit facilities and a $500 million five year revolving credit facility. The Facility can be used for general corporate purposes and also to provide backup for AIG's commercial paper programs administered by Funding. There are currently no borrowings outstanding under the Facility, nor were any borrowings outstanding as of December 31, 2000.
(h) Interest Expense for All Indebtedness: Total interest expense for all indebtedness, net of capitalized interest, aggregated $2.72 billion in 2000, $2.19 billion in 1999 and $1.99 billion in 1998. Cash distributions on the preferred shareholders' equity in subsidiary companies of ILFC and certain SunAmerica and HSB subsidiaries are accounted for as interest expense and included as minority interest in the consolidated statement of income. The cash distributions for ILFC were approximately $19 million for the year ended December 31, 2000 and $17 million in each of the years ended December 31, 1999 and 1998. The cash distributions for the SunAmerica subsidiaries were approximately $62 million for the year ended December 31, 2000 and $40 million in each of the years ended December 31, 1999 and 1998.
Preferred shareholders' equity in subsidiary companies represents preferred stocks issued by ILFC and certain SunAmerica and HSB subsidiaries, wholly owned subsidiaries of AIG.
In connection with the issuance of the 8.35% Trust Originated Preferred Securities and the related purchase by SunAmerica Inc. of the grantor trust's common securities, SunAmerica Inc. issued to the grantor trust $191 million principal amount of 8.35% junior subordinated debentures, due 2044.
(a) AIG parent depends on its subsidiaries for cash flow in the form of loans, advances and dividends. AIG's insurance subsidiaries are subject to regulatory restrictions on the amount of dividends which can be remitted to AIG parent. These restrictions vary by state. For example, unless permitted by the New York Superintendent of Insurance, general insurance companies domiciled in New York may not pay dividends to shareholders which in any twelve month period exceed the lesser of 10 percent of the company's statutory policyholders' surplus or 100 percent of its "adjusted net investment income", as defined. Generally, less severe restrictions applicable to both general and life insurance companies exist in most of the other states in which AIG's insurance subsidiaries are domiciled. Certain foreign jurisdictions have restrictions which generally cause only a temporary delay in the remittance of dividends. There are
(b) At December 31, 2000, there were 6,000,000 shares of AIG's $5 par value serial preferred stock authorized, issuable in series.
(c) The activity for preferred stock issued by SunAmerica Inc. prior to the merger with AIG for the year ended December 31, 1999 and the year ended September 30, 1998 was as follows:
On November 1, 1995, SunAmerica Inc. issued 4,000,000 $3.10 Depositary Shares (the "Series E Depositary Shares"), each representing one-fiftieth of a share of Series E Mandatory Conversion Premium Dividend Preferred Stock, with a liquidation preference of $62 per share. On October 30, 1998, SunAmerica Inc. redeemed all of its Series E Depositary Shares, which resulted in the issuance of 11,250,709 shares of SunAmerica Inc. common stock and cash payment of all accrued and unpaid dividends through the redemption date.
Common stock increased and retained earnings decreased $2.04 billion in 2000, $818 million in 1999 and $949 million in 1998 as a result of common stock splits in the form of 50 percent, 25 percent and 50 percent common stock dividends paid July 28, 2000, July 30, 1999 and July 31, 1998, respectively.
In the normal course of business, various commitments and contingent liabilities are entered into by AIG and certain of its subsidiaries. In addition, AIG guarantees various obligations of certain subsidiaries.
(a) Commitments to extend credit are agreements to lend subject to certain conditions. These commitments generally have fixed expiration dates or termination clauses and typically require payment of a fee. These commitments approximated $500 million and $150 million for December 31, 2000 and 1999, respectively. AIG uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. AIG evaluates each counterparty's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by AIG upon extension of credit, is based on management's credit evaluation of the counterparty.
AIGFP, in the ordinary course of its operations and as principal, structures derivative transactions to meet the needs of investors who may be seeking to hedge certain aspects of such investors' operations. AIGFP may also enter into derivative transactions for its own account. Such derivative transactions include 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. Swaptions are options where the holder has the right but not the obligation to enter into a swap transaction or cancel an existing swap transaction. At December 31, 2000, the notional principal amount of the sum of the swap pays and receives approximated $521.0 billion, primarily related to interest rate swaps of approximately $344.2 billion.
The following table presents AIGFP's futures and forward contracts portfolio by maturity and type of derivative at December 31, 2000 and December 31, 1999:
AIGFP monitors and controls its risk exposure on a daily basis through financial, credit and legal reporting systems and, accordingly, believes that it has in place effective procedures for evaluating and limiting the credit and market risks to which it is subject. Management is not aware of any potential counterparty defaults.
Commissions, transaction and other fees for the twelve months ended December 31, 2000, 1999 and 1998 from AIGFP's operations were $1.06 billion, $737 million and $550 million, respectively.
Futures and forward contracts are contracts for delivery of foreign currencies, commodities or financial indices in which the seller/purchaser agrees to make/take delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise as a result of movements in current market prices from contracted prices and the potential inability of counterparties to meet their obligations under the contracts. Options are contracts that allow the holder of the option to purchase or sell the underlying commodity, currency or index at a specified price and within, or at, a specified period of time. Risks arise as a result of movements in current market prices from contracted prices, and the potential inability of the counterparties to meet their obligations under the contracts. 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, 2000, the contractual amount of AIGTG's futures, forward and option contracts approximated $461.0 billion.
The gross replacement values presented represent the sum of the estimated positive fair values of all of AIGTG's derivatives contracts at December 31, 2000 and December 31, 1999. These values do not represent the credit risk to AIGTG.
Net replacement values presented represent the net sum of estimated positive fair values after the application of legally enforceable master closeout netting agreements and collateral held. The net replacement values most closely represent the net credit risk to AIGTG or the maximum amount exposed to potential loss within a product category. At December 31, 2000, the net replacement value of AIGTG's futures, forward and option contracts and interest rate and currency swaps approximated $4.1 billion.
AIGTG determines counterparty credit quality by reference to ratings from independent rating agencies or internal analysis. At December 31, 2000 and December 31, 1999, the counterparty credit quality and counterparty breakdown by industry with respect to the net replacement value of AIGTG's derivatives portfolio were as follows:
Commissions, transaction and other fees for the twelve months ended December 31, 2000, 1999 and 1998 from AIGTG's operations were $254 million, $227 million and $374 million, respectively.
AIG continues to receive claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter collectively referred to as environmental claims) and indemnity claims asserting injuries from asbestos. Estimation of asbestos and environmental claims loss reserves is a difficult process, as these claims, which emanate from policies written in 1984 and prior years, cannot be estimated by conventional reserving techniques. Asbestos and environmental claims development is affected by factors such as inconsistent court resolutions, the broadening of the intent of policies and scope of coverage and increasing number of new claims. AIG and other industry members have and will continue to litigate the broadening judicial interpretation of policy coverage and the liability issues. If the courts continue in the future to expand the intent of the policies and the scope of the coverage, as they have in the past, additional liabilities would emerge for amounts in excess of reserves held. This emergence cannot now be reasonably estimated, but could have a material impact on AIG's future operating results. The reserves carried for these claims as at December 31, 2000 ($2.45 billion gross; $855 million net) are believed to be adequate as these reserves are based on known facts and current law.
The RBC Model Law provides for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control.
The statutory surplus of each of AIG's domestic general and life insurance subsidiaries exceeded their RBC standards by considerable margins as of December 31, 2000.
Policyholders' contract deposits: Fair values of policyholder contract deposits were estimated using discounted cash flow calculations based upon interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued.
At December 31, 2000, AIG had two types of stock-based compensation plans. One was a stock option plan; the other, an employee stock purchase plan. AIG applies APB Opinion 25 "Accounting for Stock Issued to Employees" and related Interpretations (APB 25) in accounting for its plans. Accordingly, no compensation costs have been recognized for either plan.
Had compensation costs for these plans been determined consistent with the method of Statement of Financial Accounting Standards No. 123 "Accounting for Awards of Stock Based Compensation to Employees" (FASB 123), AIG's net income and earnings per share for the years ended December 31, 2000, 1999 and 1998 would have been reduced to the pro forma amounts as follows:
(b) Includes SunAmerica Inc. shares which were exchanged for AIG shares at an exchange ratio of 0.855 shares of AIG common stock for each share of SunAmerica Inc. common stock for 1998.
During 1999, AIG issued 1,009,968 shares of AIG common stock which vested on the effectiveness of the merger with SunAmerica Inc., and an additional 993,031 shares were issued pursuant to deferred share and share unit obligations. During 2000, deferred share and share unit obligations with respect to an additional 1,224,214 shares of AIG common stock vested, 142,105 shares were issued pursuant to deferred share and share unit obligations and an additional 1,082,109 shares were delivered into a trust in connection with a deferred compensation plan. No additional deferred share or share unit obligations may be granted under the SunAmerica plans. As of December 31, 2000, deferred share and share unit obligations representing 173,615 shares were outstanding but not yet vested.
As a result of the acquisition of HSB Group, Inc. (HSB) in November 2000, HSB options outstanding at the acquisition date were fully vested and were converted into options to purchase AIG common stock at the exchange ratio of 0.4178 shares of AIG common stock for each share of HSB common stock. No further options can be granted under the HSB option plans, but outstanding options so converted continue in force until exercise or expiration. At December 31, 2000, there were 1,605,468 shares of AIG common stock reserved for issuance under the HSB option plans, none of which qualified for ISO Treatment.
In addition, at December 31, 2000, options to purchase 403,595 shares at a weighted average exercise price of $19.81 had been previously granted to AIG non-employee directors and remained outstanding.
Information about stock options outstanding at December 31, 2000, is summarized as follows:
Using the Black-Scholes option-pricing model applicable to SunAmerica Inc. for 1998, the fair value of stock options granted by SunAmerica Inc. was $49 million.
There were 742,773 shares, 892,929 shares and 638,284 shares issued under the 1996 plan at weighted average prices of $52.66, $38.24 and $28.74 for the years ended December 31, 2000, 1999 and 1998, respectively. The excess or deficit of the proceeds over the par value or cost of the common stock issued under these plans was credited or charged to additional paid-in capital.
As of December 31, 2000, there were 542,479 shares of common stock subscribed to at a weighted average price of $69.11 per share pursuant to grants of privileges under the 1996 plan. There were 988,605 shares available for the grant of future purchase privileges under the 1996 plan at December 31, 2000.
The following weighted average assumptions were used for grants in 2000, 1999 and 1998, respectively: dividend yields of 0.17 percent, 0.20 percent and 0.24 percent; expected volatilities of 34.0 percent, 34.0 percent and 33.0 percent; risk-free interest rates of 5.95 percent, 5.33 percent and 5.26 percent; and expected terms of 1 year.
During 1999, there were 42,577 shares of AIG common stock issued under the SunAmerica Inc. employee stock purchase plan at a weighted average price of $32.60. There are no further shares available for grant under this plan.
AIG's U.S. retirement plan is a qualified, noncontributory, defined benefit plan. All qualified employees, other than those of SunAmerica, 21st Century and HSB Group, Inc. who have attained age 21 and completed twelve months of continuous service are eligible to participate in this plan. An employee with 5 or more years of service is entitled to pension benefits beginning at normal retirement at age 65. Benefits are based upon a percentage of average final compensation multiplied by years of credited service limited to 44 years of credited service. The average final compensation is subject to certain limitations. Annual funding requirements are determined based on the "projected unit credit" cost method which attributes a pro rata portion of the total projected benefit payable at normal retirement to each year of credited service.
AIG's U.S. postretirement medical and life insurance benefits are based upon the employee electing immediate retirement and having a minimum of ten years of service. Retirees and their dependents who were age 65 by May 1, 1989 participate in the medical plan at no cost. Employees who retired after May 1, 1989 and on or prior to January 1, 1993 pay the active employee premium if under age 65 and 50 percent of the active employee premium if over age 65. Retiree contributions are subject to adjustment annually. Other cost sharing features of the medical plan include deductibles, coinsurance and Medicare coordination and a lifetime maximum benefit of $1.5 million. The lifetime maximum benefit of the medical plan was increased to $2.0 million effective January 1, 2000. The maximum life insurance benefit prior to age 70 is $32,500, with a maximum of $25,000 thereafter.
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k) plan), which, during the three years ended December 31, 2000, 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.
(c) SunAmerica sponsors a voluntary savings plan for its employees (the SunAmerica 401(k) plan), which, during the three years ended December 31, 2000, provided for salary reduction contributions by qualifying employees and matching contributions by SunAmerica of up to 4 percent of qualifying employees' annual salaries. Under an Executive Savings Plan, designated SunAmerica executives also could defer up to 90 percent of cash compensation during the three years ended December 31, 2000, and SunAmerica matched 4 percent of the participants' base salaries deferred.
(d) HSB sponsors a voluntary savings plan for its employees (the HSB 401(k) plan), which provides for salary reduction contributions by employees and matching contributions by HSB of up to 6 percent of annual salary.
At December 31, 2000, the future minimum lease payments under operating leases were as follows:
Rent expense approximated $342 million, $318 million and $287 million for the years ended December 31, 2000, 1999 and 1998 respectively.
Flight equipment is leased, under operating leases, with remaining terms ranging from one to 14 years.
(a) Ownership: The directors and officers of AIG, together with C.V. Starr & Co., Inc. (Starr), a private holding company, The Starr Foundation and Starr International Company, Inc. (SICO), a private holding company, own or otherwise control approximately 24 percent of the voting stock of AIG. Six directors of AIG also serve as directors of Starr and SICO.
General Insurance: AIG's general insurance subsidiaries are multiple line companies writing substantially all lines of property and casualty insurance.
DBG writes substantially all classes of business insurance accepting such business mainly from insurance brokers. This provides DBG the opportunity to select specialized markets and retain underwriting control. Any licensed broker is able to submit business to DBG without the traditional agent-company contractual relationship, but such broker usually has no authority to commit DBG to accept a risk. Transatlantic's and HSB's domestic operations are included in this group.
Life Insurance: AIG's life insurance subsidiaries offer a wide range of traditional insurance and financial and investment products. Traditional products consist of individual and group life, annuity, endowment and accident and health policies. Financial and investment products consist of single premium annuity, variable annuities, guaranteed investment contracts, universal life and pensions.
Both of these operations sell primarily financial and investment type products.
AIG's three principal asset management operations are SAAMCo, Global Investment and Cap Partners. SAAMCo develops and sells variable annuities and other investment products, sells and manages mutual funds and provides financial services. Global Investment manages third-party institutional, retail and private equity funds invested assets on a global basis, and provides custodial services. Cap Partners organizes, and manages the invested assets of institutional investment funds and may also invest in such funds. Each of these subsidiary operations receives fees for investment products and services provided.
(b) Represents the sum of general net premiums earned, life premium income, net investment income, financial services commissions, transaction and other fees, asset management commissions and other fees, equity in income of minority-owned insurance operations and realized capital gains (losses).
(b) Adjusted underwriting profit (loss) represents statutory underwriting profit or loss adjusted primarily for changes in deferred acquisition costs.
(c) Realized capital gains are not deemed to be an integral part of AIG's general insurance operations' internal reporting groups.
(e) The following table summarizes AIG's financial services operations by major internal reporting group for the years ended December 31, 2000, 1999 and 1998:
The following quarterly financial information for each of the three months ended March 31, June 30, September 30 and December 31, 2000 and 1999 is unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations for such periods, have been made for a fair presentation of the results shown.