AIG and its subsidiaries operate from approximately 250 offices in the United States, 5 offices in Canada and numerous offices in other foreign countries. The offices in Manchester, New Hampshire; Springfield, Illinois; Houston, Texas; Atlanta, Georgia; Baton Rouge, Louisiana; Wilmington, Delaware; Hato Rey, Puerto Rico; San Diego, California; Greensboro, North Carolina; Livingston and Morris County, New Jersey; 70 Pine Street, 99 John Street and 72 Wall Street in New York City; and offices in approximately 30 foreign countries including Bermuda, Hong Kong, the Philippines, Japan, England, Singapore, Taiwan and Thailand are located in buildings owned by AIG and its subsidiaries. The remainder of the office space utilized by AIG subsidiaries is leased.
In AIG's general insurance operations, 1993 net premiums written and net premiums earned increased 9.7 percent and 3.9 percent, respectively, from those of 1992. In 1992, net premiums written decreased 0.1 percent and net premiums earned increased 1.2 percent when compared to 1991. In 1991, declines occurred in both net premiums written of 1.3 percent and net premiums earned of 0.5 percent when compared to 1990.
The growth in net premiums written in 1993 over 1992 resulted from a mix of several factors. AIG achieved general price increases in domestic commercial property and some specialty casualty markets while overseas, price and volume increases were realized. During 1992 and 1991, the slowing of growth in net premiums written was due in part to the competitive pricing environment in the property-casualty industry in the United States, particularly in commercial lines. In addition, AIG had withdrawn from certain classes of business, primarily agency lines and certain segments of workers' compensation business, because returns on allocated capital or equity were deemed unacceptable. The estimated impact of AIG's strategy when comparing results for 1992 to those of 1991 was to reduce net premiums written by approximately $680 million, following a similar reduction of approximately $330 million in 1991.
The maintenance of the statutory combined ratio in all three years at a level approximating 100 is a result of AIG's emphasis on maintaining its underwriting discipline within the continued overall competitiveness of the domestic market environment as well as AIG's expense control.
AIG's operations are negatively impacted under guarantee fund assessment laws which exist in most states. As a result of operating in a state which has guarantee fund assessment laws, a solvent insurance company may be assessed for certain obligations arising from the insolvencies of other insurance companies which operated in that state. AIG generally records these assessments upon notice. Additionally, certain states permit at least a portion of the assessed amount to be used as a credit against a company's future premium tax liabilities. Therefore, the ultimate net assessment cannot reasonably be estimated. The guarantee fund assessments net of credits for 1993, 1992 and 1991 were $14.1 million, $27.7 million and $37.9 million, respectively. Also, AIG is required to participate in various involuntary pools (principally workers' compensation business) which provide insurance coverage for those not able to obtain such coverage in the voluntary markets. This participation is also recorded upon notification, as these amounts cannot reasonably be estimated.
At December 31, 1993, general insurance reserves for losses and loss expenses (loss reserves) amounted to $30.05 billion, an increase of $1.89 billion or 6.7 percent over the prior year end. General insurance net loss reserves represent the accumulation of estimates of ultimate losses, including provisions for losses incurred but not reported (IBNR), and loss expenses, reduced by reinsurance recoverable net of an allowance for unrecoverable reinsurance and very minor amounts of discounting related to certain workers' compensation claims. The net loss reserves increased $800.2 million or 4.8 percent to $17.56 billion. 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, 1993. 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.
Estimation of ultimate net losses and loss expenses (net losses) for long tail casualty lines of business is a complex process and depends on a number of factors, including the line and volume of the business involved. In the more recent accident years of long tail casualty lines there is limited statistical credibility in reported net losses. That is, a relatively low proportion of net losses would be reported claims and expenses and an even smaller proportion would be net losses paid. A relatively high proportion of net losses would therefore be IBNR.
For other property and short tail casualty lines, the loss trend is implicitly assumed to grow at the rate that reported net losses grow from one year to the next. The concerns noted above for longer tail casualty lines with respect to the limited statistical credibility of reported net losses generally do not apply to shorter tail lines.
AIG continues to receive indemnity claims asserting injuries from toxic waste, hazardous substances, asbestos and other environmental pollutants and alleged damages to cover the clean-up costs of hazardous waste dump sites (environmental claims). The vast majority of these environmental claims emanate from policies written in 1984 and prior years. Commencing in 1985, standard policies contained an absolute exclusion for pollution related damage. AIG has established a special environmental claims unit which investigates and adjusts all such claims.
The majority of AIG's exposures for environmental claims are excess casualty coverages, not primary coverages. Thus, the litigation costs are treated in the same manner as indemnity reserves. That is, litigation expenses are included within the limits of the liability AIG incurs. Individual significant claim liabilities, where future litigation costs are reasonably determinable, are established on a case basis.
A summary of reserve activity, including estimates for applicable IBNR, relating to environmental claims at December 31, 1993, 1992 and 1991 is as follows:
General insurance net investment income in 1993 was $1.34 billion, an increase of 7.1 percent from 1992. In 1992, net investment income increased 7.6 percent to $1.25 billion from the $1.16 billion earned in 1991. The growth in net investment income in each of the three years was primarily attributable to new cash flow for investment. The new cash flow was generated from net general insurance operating cash flow and included the compounding of previously earned and reinvested net investment income. The decline in the rate of growth is a reflection of the general worldwide downward trend in interest rates. (See also the discussion under "Liquidity" herein.)
General insurance operating income in 1993 was $1.42 billion, an increase of 26.0 percent when compared to $1.12 billion in 1992. The 1992 results reflect a decrease of 9.9 percent from 1991. The 1992 operating results were significantly impacted by the aforementioned catastrophes. The contribution of general insurance operating income to income before income taxes and the cumulative effect of accounting changes was 54.4 percent in 1993 compared to 52.6 percent in 1992 and 61.7 percent in 1991. The changes in the contribution percentages were due to the aforementioned factors and, in 1992 and 1991, the growth of the financial services operations relative to general insurance operating income.
AIG's life insurance operations continued to show growth as a result of overseas operations, particularly in Asia. AIG's life premium income of $5.75 billion in 1993 represented an 18.4
The investment risk represents the exposure to loss resulting from the cash flows from the invested assets, primarily long-term fixed rate investments, being less than the cash flows required to meet the obligations of the expected policy and contract liabilities and the necessary return on investments.
In August of 1993, the chief executive officer and minority shareholder of AIGFP left the company and a new management team was put in place. A full and satisfactory settlement was reached between AIG and the former minority shareholder. Most members of AIGFP's core group central to the AIGFP operation have remained at the company.
During 1993, certain investments held by AIGFP experienced financial difficulties and suffered significant rating downgrades. The pretax impact on AIG of the estimated other than temporary impairment in value of these investments was $215 million. As is AIG's policy in such situations where credit ratings have deteriorated significantly, these impairments have been appropriately recognized by charges to income of $104 million in 1993 and $111 million prior to 1993. The charge for the aforementioned impairments relates to investments made before the new management team was in place. Based on the latest information available, AIG believes that no further significant impairments exist.
Revenues generated by AIGTG for 1993 were primarily comprised of foreign exchange activities, which represented over 60 percent of total AIGTG revenues.
In 1993, AIG's equity in income of minority-owned reinsurance operations was $39.6 million compared to $27.9 million in 1992 and $28.8 million in 1991. The equity interest in reinsurance companies, which includes two equity operations which commenced business during 1993, represented 1.5 percent of income before income taxes and the cumulative effect of accounting changes in 1993, compared to 1.3 percent in 1992 and 1.4 percent in 1991.
Other income (deductions)-net includes AIG's equity in certain minor majority-owned subsidiaries and certain partially-owned companies, minority interest in certain consolidated companies, realized foreign exchange transaction gains and losses in substantially all currencies and unrealized gains and losses in hyperinflationary currencies, as well as the income and expenses of the parent holding company and other miscellaneous income and expenses. In 1993, net deductions amounted to $73.8 million. In both 1992 and 1991, net deductions amounted to $70.2 million.
At January 1, 1993, AIG's equity in income of minority-owned reinsurance operations was positively impacted by the cumulative effect of accounting changes on such operations from the adoption of FASB 109, which was partially offset by the adoption of Statement of Financial Accounting Standards No. 106
"Employer's Accounting for Postretirement Benefits Other than Pension Plans" (FASB 106). AIG's equity in the cumulative effect of such accounting changes was a net benefit of $20.7 million.
At December 31, 1993, AIG had total capital funds of $15.22 billion and total borrowings of $15.69 billion.
GIAs serve as the source of proceeds for AIGFP's investments in a diversified portfolio of securities. (See also the discussions under "Operational Review" and "Liquidity" herein and Notes 1, 9 and 11 of Notes to Financial Statements.)
AIG's capital funds have increased $2.44 billion in 1993. Unrealized appreciation of investments, net of taxes, increased $792.8 million, primarily as a result of the general market trends worldwide, particularly overseas, and to a lesser extent, the adoption of Financial Accounting Standards No. 115 "Accounting for Certain Debt and Equity Securities" (FASB 115). Unrealized appreciation of investments, net of taxes, will now be subject to increased volatility resulting from the changes in the market value of bonds available for sale. (See also the discussion under "Accounting Standards" herein.) The cumulative translation adjustment loss, net of taxes, increased $14.3 million, and retained earnings increased $1.81 billion, resulting from net income less dividends.
and additional paid-in capital decreased by that amount as a result of a common stock split in the form of a 50 percent stock dividend paid July 30, 1993. (See also Note 10 of Notes to Financial Statements.)
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, 1993 there were no significant statutory or regulatory issues which would impair AIG's financial condition or results of operations. (See also the discussion under "Liquidity" herein and Note 10 of Notes to Financial Statements.)
At December 31, 1993, AIG's consolidated invested assets included approximately $5.23 billion of cash and short-term investments. Consolidated net cash provided from operating activities in 1993 amounted to approximately $6.47 billion.
The following table is a summary of the composition of AIG's invested assets, including investment income due and accrued and real estate, at December 31, 1993:
A significant portion of the foreign insurance fixed income portfolio is rated by Moody's, Standard & Poor's (S&P) or similar foreign services. However, credit quality rating services similar to the aforementioned rating agencies are not available in all overseas locations. Thus, AIG annually reviews the credit quality of the nonrated fixed income investments, including mortgages, in its foreign portfolio. AIG applies a scale similar to that of Moody's and S&P to the rating of these securities. Coupling the ratings of this internal review with those of the independent agencies indicates that approximately 49 percent of the foreign fixed income investments were rated AAA and approximately one percent were deemed below investment grade at December 31, 1993.
When permitted by regulatory authorities and when deemed necessary to protect insurance assets, including invested assets, from currency risk and interest rate risk, AIG and its insurance subsidiaries consider entering into derivative transactions. To date, such activities have been insignificant.
The following table is a summary of the composition of AIG's financial services invested assets, including real estate, at December 31, 1993:
At December 31, 1993, ILFC had committed to purchase 227 aircraft deliverable from 1994 through 1999 at an estimated aggregate purchase price of $12.9 billion and had options to purchase an additional 58 aircraft deliverable through 1999 at an estimated aggregate exercisable price of $3.4 billion. As of March 1, 1994, ILFC has entered into leases, letters of intent to lease or is in various stages of negotiation for 52 of 56 aircraft to be delivered in 1994 and 40 of 171 aircraft to be delivered subsequent to 1994. ILFC will be required to find customers for any aircraft presently on order and any new aircraft to be ordered, and it must arrange financing for portions of the purchase price of such equipment. ILFC has been successful to date both in placing its new aircraft on lease or sales contract and obtaining adequate financing.
AIGFP for its own account enters into interest rate, currency, equity and commodity swaps and forward commitments. AIGFP evaluates the credit worthiness of its counter-parties by internal credit evaluation and consultation with widely accepted credit-rating services. The average credit rating of AIGFP's counterparties as a whole, as measured by AIGFP, was AA-- at December 31, 1993. Swaps, options and forward transactions are carried at estimated fair value based on the use of valuation models that utilize, among other things, current interest, foreign exchange and volatility rates, as applicable, with the resulting unrealized gains or losses reflected in the current period's income. These values are also reviewed by reference to the market levels at which AIGFP hedges its transactions, and are adjusted as deemed appropriate by management. The recorded values may be different than the values that might be realized if AIGFP were to sell or close out the transactions because of limited liquidity for these instruments.
AIGTG acts as principal in certain foreign exchange, precious and base metals, petroleum and petroleum products and natural gas trading activities. AIGTG owns and may maintain substantially hedged inventories in the commodities in which it trades. AIGTG supports its trading activities largely through payables to securities brokers and dealers, securities sold under agreements to repurchase and spot commodities sold but not yet purchased. Thus, AIGTG's liquidity is provided through its high volume and rapid turnover activities in trading, market making and hedging. AIGTG uses derivatives to hedge various trading positions and transactions from adverse movement in interest rates, exchange rates and commodity prices.
In 1989, the National Association of Insurance Commissioners (NAIC) adopted the "NAIC Solvency Policing Agenda for 1990". Included in this agenda was the development of Risk-Based Capital (RBC) requirements. RBC relates an individual insurance company's statutory surplus to the risk inherent in its overall operations. AIG believes that the development of RBC standards is a positive step for the insurance industry but further believes the standards in their present form may lead to an inefficient deployment of industry capital. As experience is gained with the application of RBC standards, it is likely that adjustments to the formula will be made.
RBC standards for property and casualty insurers were finalized in principle in December 1993 and will be effective with the 1994 statutory financial statements to be filed in 1995. Applying these RBC standards to AIG's domestic general operations at December 31, 1993 reveals that the capital of each of the domestic general insurance companies exceeds the RBC requirements. Additionally, no AIG company is on any regulatory or similar "watch list".
In 1992, domestic life insurance companies were required for regulatory purposes to fully adopt two investment reserves, the Asset Valuation Reserve (AVR) and the Interest Maintenance Reserve (IMR). The AVR is formula based and applies to all invested assets which are subject to either credit or market risk. The IMR defers realized capital gains and losses on the sale of fixed maturities and mortgage loans. The realized gains and losses are subsequently amortized into investment income over the original term of the disposed assets. The impact of these reserves on the separately reported statutory income of certain domestic life companies was significant in 1993. However, there was no impact on AIG's 1993 GAAP consolidated life insurance operating income presented herein.
In January 1994, the Los Angeles area of California suffered severe damage as a result of an earthquake. The impact of the insured losses on AIG's 1994 results of operations is currently estimated to be approximately $55 million net of reinsurance recoverable of approximately $95 million.
1992 has been appropriately reclassified to reflect the new presentation. FASB 113 also establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance ceded and prescribes accounting and reporting standards for the contract. There has been no material effect on AIG's general or life insurance operating income as a result of the adoption of FASB 113. (See also Note 5 of Notes to Financial Statements.)
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (FASB 115), and AIG adopted this standard at December 31, 1993. The pretax increase in carrying value of bonds available for sale as a result of marking to market was $919.3 million. The portion which inured to the benefit of policyholders was $511.8 million, which has been recorded as a component of future policy benefits for life and accident and health insurance contracts. Thus, the unrealized appreciation of investments increased $251.0 million, net of taxes of $156.5 million.
FASB 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows:
During 1993, the Emerging Issues Task Force (EITF) of FASB adopted an accounting rule "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" (EITF Issue No. 93-6). This rule encompasses any multiyear retrospectively rated contract requiring that insurers recognize as assets the reinsurer's obligations, and that ceding insurers accrue liabilities for the contract obligations. AIG has analyzed the aspects of this accounting rule and determined that there was no significant impact on AIG's results of operations or financial condition.
In March 1992, FASB issued Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts" (Interpretation), which is effective for fiscal years beginning after December 15, 1993. The Interpretation requires that unrealized gains and losses on swaps, forwards, options and similar contracts be recognized as assets and liabilities, whereas AIG's current policy is to record such unrealized gains and losses on a net basis in the consolidated balance sheet. The Interpretation allows the netting of such unrealized gains and losses with the same counterparty when they are included under a master netting arrangement with the counterparty and the contracts are reported at market value.
FASB 114 will be effective for the 1995 financial statements. AIG does not anticipate adoption prior to the effective date.
We have audited the consolidated financial statements of American International Group, Inc. and subsidiaries listed in the index on page 26 of this Form 10-K. These financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American International Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Life Insurance Operations: Premiums for traditional life insurance products are generally recognized as revenues over the premium paying period of the related policies. Benefits and expenses are provided against such revenues to recognize profits over the estimated life of the policies. Revenues for universal life and investment-type products consist of policy charges for the cost of insurance, administration, and surrenders during the period. Expenses include interest credited to policy account balances and benefit payments made in excess of policy account balances. Investment income reflects certain minor amounts of realized capital gains where the gains are deemed to be an inherent element in pricing certain life products in some foreign countries.
AIG engages as principal in trading activities in certain foreign exchange, precious and base metals, petroleum and petroleum products and natural gas markets. AIG owns and maintains substantial inventories in the commodities in which it trades. Substantially all spot commodities are hedged by futures and forward contracts to minimize exposure to market risk. Additionally, AIG acts as an adviser in evaluating and subsequently customizing specific programs for customers to manage their foreign exchange exposure.
AIG, as lessor, leases flight equipment principally under operating leases. Accordingly, income is reported over the life of the lease as rentals become receivable under the provisions of the lease or, in the case of leases with varying payments, under the straight-line method over the noncancelable term of the lease. In certain cases, leases provide for additional amounts contingent on usage. AIG also is a marketer of flight equipment and marketing revenues from such operations consist of net gains on sales of flight equipment, commissions and net gains on dispositions of leased flight equipment.
(C) INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES: Bonds and preferred stocks held to maturity, both of which are principally owned by the insurance subsidiaries, are carried at amortized cost where AIG has the ability and positive intent to hold these securities until maturity. Where AIG may not have the positive intent to hold these securities until maturity, those bonds are considered to be available for sale and carried at market values. Included in the bonds available for sale are collateralized mortgage obligations (CMOs). Premiums and discounts arising from the purchase of CMOs are treated as yield adjustments. Bond trading securities are carried at market value, as it is AIG's intention to sell these securities in the near term. Common and preferred stocks available for sale are carried at market value.
Unrealized gains and losses from investments in available for sale securities are reflected in capital funds, net of any related deferred income taxes. Changes in unrealized gains and losses from investments in trading securities are reflected in income currently.
(D) MORTGAGE LOANS ON REAL ESTATE, POLICY AND COLLATERAL LOANS: Mortgage loans on real estate, policy loans and collateral loans are carried at unpaid principal balances.
(E) 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 hours utilized during the period and the expected reimbursement 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. This caption also includes deposits for aircraft to be purchased.
At the time the assets are retired or disposed of, the cost and associated accumulated depreciation and amortization are removed from the related accounts and the difference, net of proceeds, is recorded as a gain or loss.
(F) SECURITIES AVAILABLE FOR SALE, AT MARKET VALUE: These securities are held to meet long term investment objectives and are accounted for as available for sale. In 1992 these securities were carried at amortized cost.
(H) SPOT COMMODITIES, AT MARKET VALUE: Spot commodities, which include commodities and foreign currency options, are valued at market and are recorded on a trade date basis. The unrealized gains and losses are reflected in income currently. Substantially all spot commodities are hedged by futures and forward contracts. These contracts are valued at market and are recorded as contractual commitments on a trade basis. The unrealized gains and losses on open contracts are reflected in income currently.
(K) 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 transactions and are recorded at their contracted resale or repurchase amounts, plus accrued interest. Generally, it is AIG's policy to take possession of securities purchased under agreements to resell.
(M) REINSURANCE ASSETS: Reinsurance assets include the balances due from other insurance companies under the terms of AIG's reinsurance arrangements for paid and unpaid losses and loss expenses, unearned reinsurance premium ceded and for future policy benefits for life and accident and health insurance contracts and benefits paid. It also includes funds held under reinsurance treaties.
(P) SEPARATE AND VARIABLE ACCOUNTS: Separate and variable accounts represent funds for which investment income and investment gains and losses accrue directly to the policyholders. Each account has specific investment objectives, and the assets are carried at market value. The assets of each account are legally segregated and are not subject to claims which arise out of any other business of AIG.
(Q) SECURITIES SOLD BUT NOT YET PURCHASED, PRINCIPALLY OBLIGATIONS OF THE U.S. GOVERNMENT AND GOVERNMENT AGENCIES, AT MARKET VALUE: Securities sold but not yet purchased represent sales of securities not owned at the time of sale. These obligations are recorded on a trade date basis and are carried at current market values. The unrealized gains and losses are reflected in income currently.
(R) SPOT COMMODITIES SOLD BUT NOT YET PURCHASED, AT MARKET VALUE: Spot commodities sold but not yet purchased represent sales of commodities not owned at the time of sale. These obligations are recorded on a trade date basis and are carried at market values based upon current commodity prices. The unrealized gains and losses are reflected in income currently.
(S) PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANY: Preferred shareholders' equity in subsidiary company relates to outstanding market auction preferred stock of International Lease Finance Corporation (ILFC), a wholly owned subsidiary of AIG.
(T) TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts expressed in foreign currencies are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" (FASB 52). Under FASB 52, functional currency assets and liabilities are translated into U.S. dollars generally using current rates of exchange and the related translation adjustments are recorded as a separate component of capital funds. Functional currencies are generally the currencies of the local operating environment. Income statement accounts expressed in functional currencies are translated using average exchange rates. The adjustments resulting from translation of financial statements of foreign entities operating in highly inflationary economies are recorded in income. Exchange gains and losses resulting from foreign currency transactions are also recorded in income.
(U) INCOME TAXES: Deferred federal and foreign income taxes are provided for temporary differences for the expected future tax consequences of events that have been recognized in AIG's financial statements or tax returns.
(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.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards No. 115 "Accounting for Certain Investments on Debt and Equity Securities" (FASB 115) and AIG adopted this standard at December 31, 1993. The pretax increase in carrying value of bonds available for sale as a result of marking to market was $919.3 million. The portion which inured to the benefit of policyholders was $511.8 million, which has been recorded as a component of future policy benefits for life and accident and health insurance contracts. Thus, the unrealized appreciation of investments increased $251.0 million, net of taxes of $156.5 million.
o 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.
During 1993, the Emerging Issues Task Force (EITF) of the FASB adopted an accounting rule "Accounting for Multiple-Year Retrospectively Rated Contract by Ceding and Assuming Enterprises" (EITF Issue No. 93-6). This rule encompasses any multiyear retrospectively rated contract requiring that insurers recognize as assets the reinsurer's obligations, and that ceding insurers accrue liabilities for the contract obligations. AIG has analyzed the aspects of this accounting rule and determined that there was no significant impact on AIG's results of operations or financial condition.
(iii) Standards to Be Adopted: In March, 1992, FASB issued Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts" (Interpretation), which is effective for fiscal years beginning after December 15, 1993. The Interpretation requires that unrealized gains and losses on swaps, forwards, options and similar contracts be recognized as assets and liabilities, whereas AIG's current policy is to record such unrealized gains and losses on a net basis in the consolidated balance sheet. The Interpretation allows the netting of such unrealized gains and losses with the same counterparty when they are included under a master netting arrangement with the counterparty and the contracts are reported at market value.
In November of 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" (FASB 112). FASB 112 establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. FASB 112 is effective for the 1994 financial statements. There will be no material effect on AIG's results of operations or financial condition.
In May 1993, FASB issued Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" (FASB 114). FASB 114 addresses the accounting by all creditors for impairment of certain loans. The impaired loans are to be measured at the present value of all expected future cash flows. The present value may be determined by discounting the expected future cash flows at the loan's effective rate or valued at the loan's observable market price or valued at the fair value of the collateral if the loan is collateral dependent. This methodology is not expected to produce a material effect on AIG's results of operations or financial condition.
Certain subsidiaries operate solely outside of the United States. Their assets and liabilities are located principally in the countries where the insurance risks are written and/or investment and noninsurance related operations are located. In addition, certain of AIG's domestic subsidiaries have branch and/or subsidiary operations and substantial assets and liabilities in foreign countries. Certain countries have restrictions on the conversions of funds which generally cause a delay in the outward remittance of such funds. Approximately 36 percent of consolidated assets at both December 31, 1993 and 1992, and 50 percent, 47 percent and 43 percent of revenues for the years ended December 31, 1993, 1992 and 1991, respectively, were located in or derived from foreign countries (other than Canada). (See Note 19.)
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 undistributed earnings of AIG's foreign subsidiaries currently not subject to U.S. income taxes was approximately $2.2 billion at December 31, 1993. The unrecognized deferred tax liability has not been determined as it is not practicable. Management presently 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.
Income taxes paid in 1993, 1992 and 1991 amounted to $466,600,000, $328,900,000 and $376,800,000, respectively.
(b) The U.S. Federal income tax rate is 35 percent for 1993 and 34 percent for 1992 and 1991. Actual tax expense on income differs from the "expected" amount computed by applying the Federal income tax rate because of the following:
(a) See discussion in Note 3(a). (b) Including U.S. tax on foreign income.
* 1993 and 1992 information is not required under FASB 109.
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 its business and limit its potential for losses arising from large risks.
In the normal course of their operations, certain AIG subsidiaries are provided reinsurance coverages from AIG's minority-owned reinsurance companies. During 1993, 1992 and 1991, the premiums written which were ceded to Transatlantic amounted to $238,100,000, $210,700,000 and $257,700,000, respectively.
Life insurance recoveries, which reduced death and other benefits, approximated $169.8 million and $125.0 million respectively, for each of the years ended December 31, 1993 and 1992.
assumed under the reinsurance agreements. AIG holds substantial collateral as security under related reinsurance agreements in the form of funds, securities and/or letters of credit. A provision has been recorded for estimated unrecoverable reinsurance. AIG has been largely successful in prior recovery efforts.
Life insurance assumed represented 1 percent of gross life insurance in-force at December 31, 1993, and 2 percent for both 1992 and 1991, and 0.1 percent, 0.2 percent and 0.3 percent of gross premium income for each of the periods ended December 31, 1993, 1992 and 1991, respectively.
Supplemental information for gross loss and benefit reserves net of ceded reinsurance at December 31, 1993 is as follows:
(a) The analysis of the future policy benefits and policyholders' contract deposits liabilities as at December 31, 1993 follows:
(b) 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:
(i) Interest rates (exclusive of immediate/terminal funding annuities), which vary by territory, year of issuance and products, range from 2.2 percent to 12.0 percent within the first 20 years. Interest rates on immediate/terminal funding annuities are at a maximum of 13.3 percent and grade to not greater than 7.5 percent.
(i) Interest rates credited on deferred annuities vary by year of issuance and range from 8.2 percent to 4.8 percent. Credited interest rate guarantees are generally for a period of one year. Withdrawal charges generally range from 6 percent to 10 percent grading to 0 percent over a period of 7 to 10 years.
(ii) Domestically, GICs have market value withdrawal provisions for any funds withdrawn other than benefit responsive payments. Interest rates credited generally range from 4.8 percent to 9.2 percent and maturities range from 2 to 7 years. Overseas, primarily in the United Kingdom, GIC type contracts are credited at rates ranging from 4.0 percent to 9.0 percent with maturities generally being 1 to 2 years. Contracts in other foreign locations have interest rates, maturities and withdrawal charges based upon local economic and regulatory conditions.
(d) Experience adjustments, relating to future policy benefits and policyholders' contract deposits, vary according to the type of contract and the territory in which the policy is in force. In general terms, investments, mortality and morbidity results may be passed through by experience credits or as an adjustment to the premium mechanism, subject to local regulatory guidance.
At December 31, 1992, the balance of the unrealized appreciation of investments in equity securities (before applicable taxes) included gross gains of approximately $423,100,000 and gross losses of approximately $308,200,000.
The amortized cost and estimated market value of investments in fixed maturities carried at amortized cost at December 31, 1993 and December 31, 1992 were as follows:
(a) Including U.S. Government agencies and authorities. (b) Including municipalities and political subdivisions.
(E) CMOs: CMOs, held by AIG's domestic life companies, are principally U.S. government and government agency backed and AAA rated securities. These represent 95 percent of the CMOs held. Whole loans represent 5 percent of the CMOs held and are investment grade. These CMOs are held by AIG's domestic life company which operates overseas.
*At December 31, 1993, borrowings not guaranteed by AIG were $5,942,961.
(A) COMMERCIAL PAPER: At December 31, 1993, the commercial paper issued and outstanding was as follows:
An analysis of the Medium Term Notes for the year ended December 31, 1993 is as follows:
At December 31, 1993, the maturity schedule for AIG's outstanding Medium Term Notes was as follows:
At December 31, 1993, AIG had $247,000,000 principal amount of Series D Medium Term Notes registered and available for issuance from time to time.
As of December 31, 1993, notes in aggregate principal amount of $1,753,685,000 were outstanding with maturity dates varying from 1994 to 2003 at interest rates ranging from 3.57 percent to 10.25 percent. These notes provide for a single principal payment at the maturity of each note.
(i) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero coupon notes in the aggregate principal amount at stated maturity of $750,000,000. The notes were offered at 12 percent of principal amount at stated maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG from the issuance were $85,625,000. The notes are redeemable at any time in whole or in part at the option of AIG at 100 percent of their principal amount at stated maturity. The notes are also redeemable at the option of AIG or bearer notes may be redeemed at the option of the holder in the event of certain changes involving taxation in the United States at prices ranging from 30.92 percent currently, to 89.88 percent after August
15, 2003, of the principal amount at stated maturity together with accrued amortization of original issue discount from the preceding August 15. During 1993, no notes were repurchased. During 1992, AIG repurchased notes with a face value of $17,500,000, realizing a loss of $2,126,000. At December 31, 1993, the notes outstanding have a face value of $189,200,000, an unamortized discount of $130,084,000 and a net book value of $59,116,000. The amortization of the original issue discount is recorded as interest expense.
At December 31, 1993, the maturity schedule for ILFC's Term Notes was as follows:
(a) At December 31, 1993, 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.
During 1993, 1992 and 1991, dividends paid on the MMP aggregated $1,043,000, $4,471,000 and $7,262,000, respectively.
(c) The common stock activity for the three years ended December 31, 1993 was as follows:
AIG and certain of its subsidiaries become parties to financial instruments with off-balance-sheet risk as a result of trading activities and to reduce currency, interest rate, equity and commodity exposures. To the extent those instruments are carried at their estimated fair value, the elements of currency, interest rate, equity and commodity risks are reflected in the consolidated balance sheet. In addition, these instruments involve, to varying degrees, elements of credit risk not explicitly recognized in the consolidated balance sheet. Collateral is required, at the discretion of AIG, on certain transactions based on the creditworthiness of the counterparty.
AIGFP becomes party to off-balance-sheet financial instruments in the normal course of its business and to reduce its currency, interest rate, equity and commodity exposures.
Forward and future contracts are contracts for delivery of foreign currencies, commodities, securities, equity indexes or money market instruments 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 deviations in current market conditions from contracted levels and the potential inability of counterparties to meet the terms of their contracts. The notional amounts for each AIGFP contract are converted to five-year equivalent amounts, a measurement used to standardize the various maturities within the portfolio. At December 31, 1993, the notional principal amount of forward contracts entered into by AIGFP, expressed in five-year equivalent amounts, approximated $247 million. The contractual amounts of futures commitments to purchase and commitments to sell approximated $25.5 billion and $4.6 billion, respectively.
AIGFP evaluates the creditworthiness of its counterparties by internally evaluating counterparties by individual credits and consulting with widely accepted credit-rating services. The average credit rating of AIGFP's counterparties as a whole (as measured by AIGFP) is equivalent to AA-. The maximum potential loss will increase or decrease during the life of the swaps and forward commitments as a function of maturity and market conditions.
Securities sold, but not yet purchased represent obligations of AIGFP to deliver specified securities at their contracted prices, and thereby create a liability to repurchase the securities in the market at prevailing prices.
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 as of December 31, 1993.
At December 31, 1993, ILFC had committed to purchase 227 aircraft deliverable from 1994 through 1999 at an estimated aggregate purchase price of $12.9 billion. Concurrently, at December 31, 1993, ILFC had options to purchase 58 aircraft deliverable through 1999 at an estimated aggregate purchase price of $3.4 billion. ILFC will be required to find customers for any new aircraft ordered and arrange financing for portions of the purchase price of such equipment.
AIG and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims for punitive damages, in the normal course of their business. AIG does not believe that such litigation will have a material effect on its operating results and financial condition.
of coverage and increasing number of new claims. AIGand 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 and financial condition. The reserves carried for these claims as at December 31, 1993 ($1.48 billion gross; $368.3 million net) are believed to be adequate as these reserves are based on known facts and current law. Furthermore, as AIG's net exposure retained relative to the gross exposure written was lower in those years, the potential impact of these claims is much smaller on the net loss reserves than on the gross loss reserves.
Equity securities: Fair values for equity securities were based upon quoted market prices.
Spot commodities sold but not yet purchased: The carrying amounts for these financial instruments approximate fair values.
Commercial paper: The carrying amount of AIG's commercial paper borrowings approximates fair value.
The carrying values and fair values of AIG's financial instruments at December 31, 1993 and December 31, 1992 were as follows:
Purchase privileges are granted annually and are limited to the number of whole shares that can be purchased by an amount equal to 5 percent of an employee's annual salary or $3,750, whichever is less.
Additional information with respect to the AIG plans at December 31, 1993 was as follows:
AIG's U.S. retirement plan is a qualified, noncontributory, defined benefit plan. All qualified employees who have attained age 21 and completed six 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
AIG has adopted a Supplemental Executive Retirement Program (Supplemental Plan) to provide additional retirement benefits to designated executives and key employees. Under the Supplemental Plan, the annual benefit, not to exceed 60 percent of average final compensation, accrues at a percentage of average final pay multiplied for each year of credited service reduced by any benefits from the current and any predecessor retirement plans, Social Security, if any, and from any qualified pension plan of prior employers. Effective January 1, 1991, the Supplemental Plan also provides a benefit equal to the reduc-tion in benefits payable under the AIG retirement plan as a result of Federal limitations on benefits payable thereunder. Currently, the Supplemental Plan is unfunded.
Net pension cost for the years ended December 31, 1993, 1992 and 1991 included the following components:
* Net pension expense included $20,999, $13,478 and $13,433 related to non-U.S. plans for 1993, 1992 and 1991, respectively.
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k) plan), which provides for salary reduction contributions by employees and matching contributions by AIG of up to 2 percent of annual salary.
AIG's U.S. postretirement medical and life insurance benefits are based upon the employee reaching age 55 with 10 years of service to be eligible for an immediate benefit from the U.S. retirement plan. Retirees and their dependents who were age 65 by May 1, 1989 participate in the medical plan at no cost. All other retirees and dependents over age 65 pay 50 percent of the premium that is paid by current active employees. Retirees under age 65 pay the full active premium and covered dependents pay twice the active employee amounts. Contri-butions 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 $1,000,000. The maximum life insurance benefit prior to age 70 is $32,500, with a maximum of $25,000 thereafter.
AIG adopted FASB 106 effective January 1, 1992. Prior to adoption, AIG expensed these postretirement benefits on a pay-as-you-go basis. The cumulative effect of the accounting change relative to the adoption of FASB 106 was $54.8 million, net of tax.
Assumptions associated with the accrued postretirement benefit liability at December 31, 1993 were as follows:
NOTES TO FINANCIAL STATEMENTS (continued) American International Group, Inc. and Subsidiaries
(a) AIG and its subsidiaries occupy leased space in many locations under various long-term leases and have entered into various leases covering the long-term use of data processing equipment. At December 31, 1993, the future minimum lease payments under operating leases were as follows:
(A) OWNERSHIP: The directors and officers of AIG, the directors and holders of common stock of C. V. Starr & Co., Inc. (Starr), a private holding company, The Starr Foundation, Starr International Company, Inc. (SICO), a private holding company, and Starr own or otherwise control approximately 29 percent of the voting stock of AIG. Six directors of AIG also serve as directors of Starr and SICO.
(B) TRANSACTIONS WITH RELATED PARTIES: During the ordinary course of business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries for the production and management of insurance business. Net commission payments to Starr aggregated approximately $25,800,000 in 1993, $21,200,000 in 1992 and $19,600,000 in 1991, from which Starr is required to pay commissions due originating brokers and its operating expenses. AIG also received approximately $11,800,000 in 1993, $11,500,000 in 1992 and $10,500,000 in 1991 from Starr and paid approximately $60,000 in 1993 and $50,000 in 1992 and 1991 to Starr as reimbursement for services provided at cost. AIG also received approximately $600,000 in 1993 and $800,000 in 1992 and 1991 from SICO and paid approximately $1,100,000 in 1993, $900,000 in 1992 and $800,000 in 1991 to SICO as reimbursement for services rendered at cost. AIG also paid to SICO $3,400,000 in 1993, $3,800,000 in 1992 and $4,700,000 in 1991 in rental fees.
(a) AIG's operations are conducted principally through five business segments. These segments and their respective operations are as follows:
Parent - AIG parent is a holding company owning directly or indirectly all of the capital stock of certain insurance, insurance related and financial services companies in both the United States and abroad.
The following table is a summary of the operations by major operating segments for the years ended December 31, 1993, 1992 and 1991:
(b) The following table is a summary of AIG's general insurance operations by major operating category for the years ended December 31, 1993, 1992 and 1991:
(a) Including general insurance operations in Canada. (b) Revenues are derived from revenues of the general, life, agency and service fee and financial services operations, equity in income of minority-owned reinsurance operations and realized capital gains attributable to the segments. (c) Assets as at December 31, 1993 and 1992 have been adjusted to conform to the requirements of FASB 113.