AIG and its subsidiaries operate from approximately 360 offices in the United States, 5 offices in Canada and numerous offices in approximately 100 foreign countries. The offices in Springfield, Illinois; Houston, Texas; Atlanta, Georgia; Baton Rouge, Louisiana; Wilmington, Delaware; Hato Rey, Puerto Rico; San Diego, California; Greensboro, North Carolina; Livingston, New Jersey; 70 Pine Street, 72 Wall Street and 175 Water Street in New York City; and offices in approximately 30 foreign countries including Bermuda, Chile, Hong Kong, the Philippines, Japan, England, Singapore, Switzerland, 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.
Personal Lines engages in the mass marketing of personal lines insurance, primarily private passenger auto and includes homeowners and personal umbrella coverages.
In AIG's general insurance operations, 1999 net premiums written and net premiums earned increased 11.2 percent and 10.3 percent, respectively, from those of 1998. In 1998, net premiums written increased 8.8 percent and net premiums earned increased 13.5 percent when compared to 1997.
General insurance domestic net premiums written and net premiums earned were as follows:
A basic premise of GAAP accounting is the recognition of expenses at the same time revenues are earned, the principle of matching. Therefore, to convert underwriting results to a GAAP basis, acquisition expenses are deferred and recognized together with the related revenues. Accordingly, the statutory underwriting profit has been adjusted as a result of acquisition expenses being deferred as required by GAAP. Thus, "adjusted underwriting profit" is a GAAP measurement which can be viewed as gross margin or an intermediate subtotal in calculating operating income and net income.
The adjusted underwriting profits were $669 million in 1999, $531 million in 1998 and $490 million in 1997. Domestic adjusted underwriting profit increased primarily as a result of the disciplined underwriting of DBG. Foreign underwriting profit declined primarily as a result of catastrophe losses from European storms. The regulatory, product type and competitive environment as well as the degree of litigation activity in any one country varies significantly. These factors have a direct impact on pricing and consequently profitability as reflected by adjusted underwriting profit and statutory general insurance ratios. (See also Notes 4 and 18 of Notes to Financial Statements.)
AIG's historic ability to maintain its combined ratio below 100 is primarily attributable to the profitability of AIG's foreign general insurance operations and AIG's emphasis on maintaining its disciplined underwriting, especially in the domestic specialty markets. In 1999, the discipline in domestic underwriting was critical in maintaining underwriting profit as the foreign general combined ratio rose because of the impact of catastrophe losses. In addition, AIG does not seek net premium growth where rates do not adequately reflect its assessment of exposures.
General insurance net investment income in 1999 increased 14.8 percent when compared to 1998. In 1998, net investment income increased 18.3 percent over 1997. The growth in net investment income in each of the three years was primarily attributable to new cash flow for investment and the consolidation of Transatlantic and 21st Century for twelve months in 1999 compared to six months in 1998. 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. (See also the discussion under "Liquidity" herein and Note 8 of Notes to Financial Statements.)
General insurance operating income in 1999 increased 18.9 percent when compared to 1998. The 1998 results reflect an increase of 18.4 percent from 1997. The contribution of general insurance operating income to income before income taxes and minority interest was 46.3 percent in 1999 compared to 46.6 percent in 1998 and 1997.
tion, nearly all of these balances were collateralized. The remaining 50 percent of the general reinsurance assets were from authorized reinsurers and over 95 percent of such balances are from reinsurers rated A-(excellent) or better, as rated by A.M. Best. This rating is a measure of financial strength. The terms authorized and unauthorized pertain to regulatory categories, not creditworthiness.
AIG maintains an allowance for estimated unrecoverable reinsurance and has been largely successful in its previous recovery efforts. At December 31, 1999, AIG had allowances for unrecoverable reinsurance approximating $78 million. At that date, and prior to this allowance, 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, 1999, the consolidated general reinsurance assets of $19.13 billion include reinsurance recoverables for paid losses and loss expenses of $2.54 billion and $13.65 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, 1999 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, 1999, general insurance reserves for losses and loss expenses (loss reserves) amounted to $38.25 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, 1999, general insurance net loss reserves decreased $19 million from prior year end to $24.60 billion. The decrease was primarily attributable to the change in the mix of business. That is, claims with respect to personal lines increased relative to commercial lines. Thus, the subsequent payment of these personal lines claims is significantly faster as these claims are deemed short tail lines, as described below. 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, 1999. 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 five 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.
The majority of AIG's exposures for asbestos and 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.
The gross and net IBNR included in the aforementioned reserve for losses and loss expenses at December 31, 1999, 1998 and 1997 were estimated as follows:
A.M. Best, an insurance rating agency, has developed a survival ratio to measure the number of years it would take a company to exhaust both its asbestos and environmental reserves for losses and loss expenses based on that company's current level of asbestos and environmental claims payments. This is a ratio derived by taking the current ending losses and loss expense reserves and dividing by the average annual payments for the prior three years. Therefore, the ratio derived is a simplistic measure of an estimate of the number of years it would be before the current ending losses and loss expense reserves would be paid off using recent average payments. The higher the ratio, the more years the reserves for losses and loss expenses cover these claims payments. These ratios are computed based on the ending reserves for losses and loss expenses over the respective claims settlements during the fiscal year. Such payments include indemnity payments and legal and loss adjustment payments. It should be noted, however, that this is an extremely simplistic approach to measuring asbestos and environmental reserve levels. Many factors, such as aggressive settlement procedures, mix of business and level of coverage provided, have significant impact on the amount of asbestos and environmental losses and loss expense reserves, ultimate payments thereof and the resultant ratio.
countries located in Europe, Africa, Latin America, the Caribbean, the Middle East, and the Far East, with Japan being the largest territory. AIA operates primarily in Hong Kong, Singapore, Malaysia and Thailand. Nan Shan operates in Taiwan. AIG's domestic life operations are comprised of two separate operations, AIG's domestic life companies and the life insurance subsidiaries of SunAmerica Inc. (SunAmerica), a Delaware corporation which owns substantially all of the subsidiaries which were owned by SunAmerica Inc., the Maryland corporation which was merged into AIG in January 1999. Both of these operations sell primarily financial and investment type products. (See also Note 18 of Notes to Financial Statements.)
AIG's life premium income in 1999 represented a 16.0 percent increase from the prior year. This compares with an increase of 3.4 percent in 1998 over 1997. Foreign life operations produced 92.1 percent, 92.4 percent and 94.1 percent of the life premium income in 1999, 1998 and 1997, respectively. (See also Notes 1, 4 and 6 of Notes to Financial Statements.)
Differences in foreign exchange rates during 1999 relative to 1998 had a negligible effect on foreign life premium income when translated from original currencies into U.S. dollars.
Life insurance net investment income increased 19.3 percent in 1999 compared to an increase of 15.0 percent in 1998. The growth in net investment income in 1999 and 1998 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 $148 million in 1999, $74 million in 1998 and $9 million in 1997. 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 risks associated with the traditional life and accident and health products are underwriting risk and investment risk. The risk associated with the financial and investment contract products is investment risk.
The asset-liability relationship is appropriately managed in AIG's foreign operations, as it has been throughout AIG's history, even though certain territories lack qualified long-term
AIG Financial Products Corp. and its subsidiaries (AIGFP) structure financial transactions, including long-dated interest rate and currency swaps and structured borrowings through notes, bonds and guaranteed investment agreements. (See also Note 18 of Notes to Financial Statements.)
Financial services operating income represented 14.4 percent of AIG's income before income taxes and minority interest in 1999. This compares to 13.8 percent and 12.6 percent in 1998 and 1997, respectively.
AIGFP participates in the derivatives dealer market conducting, primarily as principal, an interest rate, currency, equity and credit derivative products business. AIGFP also enters into structured transactions including long-dated forward foreign exchange contracts, option transactions, liquidity facilities and investment agreements and invests in a diversified portfolio of securities. AIGFP derives substantially all its revenues from proprietary positions entered in connection with counterparty transactions rather than from speculative transactions. Revenues in 1999 increased 33.9 percent from 1998 compared to a 21.7 percent increase during 1998 from 1997. During 1999, operating income increased 49.4 percent from 1998 and increased 34.0 percent during 1998 from 1997. As AIGFP is a transaction-oriented operation, current and past revenues and operating results may not provide a basis for predicting future performance. (See also the discussions under "Capital Resources," "Liquidity" and "Derivatives" herein and Note 18 of Notes to Financial Statements.)
AIGTG derives a substantial portion of their revenues from market making and trading activities, as principals, in foreign exchange, interest rates and precious and base metals. Revenues in 1999 decreased 39.2 percent from 1998 compared to a 33.5 percent decrease during 1998 from 1997. During 1999, operating income decreased 11.4 percent from 1998 compared to a 2.4 percent decrease during 1998 from 1997. The declines in 1999 and 1998 relative to 1997 resulted primarily from the decline in trading volume during those years, particularly as a result of less volatile foreign exchange markets. As AIGTG is a transaction-oriented operation, current and past revenues and operating results may not provide a basis for predicting future performance or for comparing revenues to operating income. (See also the discussions under "Capital Resources," "Liquidity" and "Derivatives" herein and Note 18 of Notes to Financial Statements.)
AIG's three principal asset management operations are SunAmerica's asset management operations (SAAMCo), AIG Global Investment Group, Inc. and its subsidiaries (Global Investment) and AIG Capital Partners, Inc. (Cap Partners). SAAMCo develops and sells variable annuities and other investment products, sells and manages mutual funds and provides financial services. Global Investment manages invested assets of institutions, including insurance companies and pension funds, 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.
Asset management operating income increased 64.3 percent in 1999 over 1998. This compares with an increase of 50.4 percent in 1998 over 1997.
In 1998, AIG's equity in income of minority-owned insurance operations was $57 million compared to $114 million in 1997. In 1998, the equity interest in insurance companies represented 0.9 percent of income before income taxes and minority interest compared to 2.1 percent in 1997. In 1999, AIG did not report equity in income of minority-owned insurance operations as a result of the consolidation of Transatlantic's and SELIC Holdings, Ltd. operations into general insurance operating results. IPC Holdings, Ltd., the remaining operation included in equity in income of minority-owned insurance operations in previous periods is now reported as a component of other income (deductions)--net.
In 1999, AIG recorded a provision for income taxes of $2.22 billion compared to the provisions of $1.79 billion and $1.53 billion in 1998 and 1997, respectively. These provisions represent effective tax rates of 29.5 percent in 1999, 28.4 percent in 1998 and 28.7 percent in 1997. (See Note 3 of Notes to Financial Statements.)
At December 31, 1999, AIG had total capital funds of $33.31 billion and total borrowings of $32.98 billion. At that date, $29.65 billion of such borrowings were either not guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
During 1999, AIGFP increased the aggregate principal amount outstanding of its notes and bonds payable to $7.90 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.)
During 1999, AIG issued $152 million principal amount of Medium Term Notes and $108 million of previously issued notes matured.
At December 31, 1999, AIG had $356 million in aggregate principal amount of debt securities registered for issuance from time to time. An additional $658 million principal amount of debt securities was registered as of March 3, 2000.
ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for approximately 75 aircraft to be delivered from 1999 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 8, 2000, ILFC borrowed $1.50 billion under this facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the accompanying table of borrowings.
During 1999 and prior to the five for four split in the form of a 25 percent common stock dividend, AIG repurchased in the open market 931,000 shares of its common stock. Subsequent to the common stock dividend, AIG repurchased 11,633,200 shares of its common stock. AIG intends to continue to buy its common shares in the open market for general corporate purposes, including to satisfy its obligations under various employee benefit plans.
A substantial portion of AIG's general insurance business and a majority of its life insurance business are conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies from minimal in some to stringent in others. Generally, AIG, as well as the underwriting companies operating in such jurisdictions, must satisfy local regulatory requirements.
At December 31, 1999, AIG's consolidated invested assets included $7.14 billion of cash and short-term investments. Consolidated net cash provided from operating activities in 1999 amounted to $10.32 billion.
In addition to the combined insurance pre-tax operating cash flow, AIG's insurance operations held $6.69 billion in cash and short-term investments at December 31, 1999. The aforementioned operating cash flow and the cash and short-term balances held provided AIG's insurance operations with a significant amount of liquidity.
This liquidity is available, among other things, to purchase high quality and diversified fixed income securities and to a lesser extent equity securities and to provide mortgage loans on real estate, policy loans and collateral loans. This cash flow coupled with proceeds of approximately $40 billion from the maturities, sales and redemptions of fixed income securities and from the sale of equity securities was used to purchase approximately $54 billion of fixed income securities and equity securities during 1999.
The following table is a summary of AIG's invested assets by significant segment, including investment income due and accrued of $2.05 billion and $1.87 billion and real estate of $1.62 billion and $1.61 billion, at December 31, 1999 and 1998, respectively:
The following tables summarize the composition of AIG's insurance invested assets by insurance segment, including investment income due and accrued and real estate, at December 31, 1999 and 1998:
Mortgage loans on real estate, policy and collateral loans comprised 8.3 percent of AIG's insurance invested assets at December 31, 1999. AIG's insurance operations' holdings of real estate mortgages amounted to $6.64 billion of which 74.6 percent was domestic. At December 31, 1999, 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, 1999, AIG's insurance holdings of collateral loans amounted to $1.03 billion, 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 $2.63 billion at December 31, 1998 to $2.82 billion at December 31, 1999.
The following table presents the VaR of each component of market risk for each of AIG's insurance segments as of December 31, 1999 and December 31, 1998. 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, 1999 and 1998. (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 1999, ILFC acquired flight equipment costing $3.37 billion.
AIG calculated the VaR with respect to the net fair value of ILFC using the variance-covariance (delta-normal) methodology. This calculation also used daily historical interest rates for the two years ending December 31, 1999 and December 31, 1998. The VaR model estimated the volatility of each of these interest rates and the correlation among them. The yield curve was constructed using eleven key points on the curve to model possible curve movements. Thus, the VaR measured the sensitivity of the assets and liabilities to the calculated interest rate exposures. These sensitivities were then applied to a database, which contained the historical ranges of movements in
interest rates and the correlation among them. The results were aggregated to provide a single amount that depicts the maximum potential loss in fair value of a confidence level of 95 percent for a time period of one month. As of December 31, 1999 and December 31, 1998, the VaR with respect to the aforementioned net fair value of ILFC was approximately $50 million and $9 million, respectively.
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG included in the financial services assets and liabilities at December 31, 1999 were as follows:
(a) See also Note 8(e) of Notes to Financial Statements. (b) These amounts are also presented as the respective balance sheet amounts. (c) At December 31, 1999, AIGTG's replacement values with respect to interest rate and currency swaps were $315 million.
AIGTG attempts to secure reliable current market prices, such as published prices or third party quotes, to value its derivatives. Where such prices are not available, AIGTG uses
AIG calculated the VaR with respect to AIGFP and AIGTG as of December 31, 1999 and December 31, 1998. These calculations used the variance-covariance (delta-normal) methodology. These calculations also used, where appropriate for each entity, daily historical interest and foreign currency exchange rates and equity/commodity prices in the two years ending December 31, 1999 and December 31, 1998, as applicable. The VaR model estimated the volatility of each of these rates, prices and the correlations among them. For interest rates, the yield curves of the United States and certain foreign countries were constructed using eleven separate points on each country's yield curve to model possible curve movements. Inter-country correlations were also used. The redemption experience of corporate fixed maturities was taken into account. Thus, the VaR measured the sensitivity of the asset and the liability portfolios of each of the market exposures. Each sensitivity was estimated separately to capture the market exposures within each entity. These sensitivities were then applied to a database, which contained both historical ranges of movements in all market factors and the correlations among them. The results depict the maximum potential loss in fair value at a confidence level of 95 percent.
The following table presents the VaR on a combined basis and of each component of AIGFP's and AIGTG's market risk as of December 31, 1999 and December 31, 1998. VaR with respect to combined operations cannot be derived by aggregating the individual risk presented herein.
A significant majority of AIGFP's transactions are contracted and documented under ISDA Master Agreements that provide for legally enforceable set-off in the event of default. Also, under such agreements, in connection with a counterparty desiring to terminate a contract prior to maturity, AIGFP may be permitted to set-off its receivables from that counterparty against AIGFP's payables to that same counterparty arising out of all included transactions. Excluding regulated exchange transactions, AIGTG, whenever possible, enters into netting agreements with its counterparties which are similar in effect to those discussed above.
The gross replacement values presented represent the sum of the estimated positive fair values of all of AIGTG's derivatives contracts at December 31, 1999 and December 31, 1998. These values do not represent the credit risk to AIGTG.
The 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.
FASB 131 establishes standards for the way AIG is required to disclose certain information about its operating segments in its annual financial statements and certain selected information in its interim financial statements. FASB 131 establishes, where practicable, standards with respect to geographic areas, among other things. Certain descriptive information is also required. FASB 131 was effective for the year ended December 31, 1998.
AIG developed and implemented a plan to address the Year 2000 issue as it affected AIG's internal IT and non-IT systems, and assessed Year 2000 issues relating to third parties with whom AIG has critical relationships. AIG has not experienced any business disruption from the Year 2000 issue. Its IT and non-IT systems were compliant on January 1, 2000, and there have been no problems related to any third party compliance.
(a) Principles of Consolidation: On January 1, 1999 (the merger date), SunAmerica Inc., a Maryland corporation, merged with and into AIG. AIG issued 187.5 million shares of its common stock in exchange for all the outstanding common stock and Class B stock of SunAmerica Inc., based on an exchange ratio of 0.855 shares of AIG common stock for each share of SunAmerica Inc. stock. A newly formed Delaware company, SunAmerica Inc. (SunAmerica) holds substantially all of the assets previously held by the Maryland corporation. The merger was accounted for as a pooling of interests and the accompanying financial statements for 1998 and prior years have been restated to combine SunAmerica Inc.'s financial statements for its fiscal years ended September 30 with AIG's December 31 financial statements.
The financial statements for the quarter ended March 31, 1999, included in the AIG Quarterly Report on Form 10-Q reflected the operations of SunAmerica on a pooling of interests basis and the change of its fiscal year from September 30 to December 31. For the period October 1, 1998 through December 31, 1998, SunAmerica Inc.'s revenues were $318 million, operating income was $52 million and net income was $29 million; dividends distributed were $33 million. Thus, capital funds at December 31, 1999 reflect the net decrease in SunAmerica Inc.'s retained earnings of $4 million and the decline of $94 million in accumulated other comprehensive income.
(b) Basis of Presentation: The accompanying financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain accounts have been reclassified in the 1998 and 1997 financial statements to conform to their 1999 presentation.
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
(c) Non-cash Transaction: In July 1998, 224,950 shares of 21st Century's Series A preferred stock were converted into 19,584,368 shares of 21st Century's common stock.
AIG minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and generally requiring additional collateral to be deposited with AIG when deemed necessary.
(o) Investments in Partially-Owned Companies: The equity method of accounting is used for AIG's investment in companies in which AIG's ownership interest approximates twenty but is not greater than fifty percent (minority-owned companies). Equity in income of minority-owned insurance operations is presented separately in the consolidated statement of income. Equity in net income of other unconsolidated companies is principally included in other income (deductions)--net. At December 31, 1999, AIG's significant investments in partially-owned companies included its 24.4 percent interest in IPC Holdings, Ltd. This balance sheet caption also includes investments in less significant partially-owned companies and in certain minor majority-owned subsidiaries. The amounts of dividends received from unconsolidated subsidiaries owned less than 50 percent were $13 million, $24 million and $30 million in 1999, 1998 and 1997 respectively. The undistributed earnings of unconsolidated subsidiaries owned less than 50 percent was $82 million as of December 31, 1999.
From time to time, AIG assesses the carrying value of its real estate relative to the market values of real estate within the specific local area. At December 31, 1999, there were no impairments.
(s) Preferred Shareholders' Equity in Subsidiary Companies: Preferred shareholders' equity in subsidiary companies relates to outstanding preferred stock of ILFC and certain subsidiaries of SunAmerica, both wholly owned subsidiaries of AIG. Dividends on such preferred stock are accounted for as interest expense and included as minority interest in the consolidated statement of income.
(w) Accounting Standards: In June 1997, FASB issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FASB 130) and Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information" (FASB 131).
FASB 130 establishes standards for reporting comprehensive income and its components in a full set of general purpose financial statements. FASB 130 was effective for AIG as of January 1, 1998.
FASB 131 establishes standards for the way AIG is required to disclose information about its operating segments in its annual financial statements and selected information in its interim financial statements. FASB 131 establishes, where practicable, standards with respect to geographic areas, among other things. Certain descriptive information is also required. FASB 131 was effective for the year ended December 31, 1998.
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 non-insurance 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 32 percent of consolidated assets at December 31, 1999 and 1998 and 50 percent, 49 percent and 51 percent of revenues for the years ended December 31, 1999, 1998 and 1997, respectively, were located in or derived from foreign countries (other than Canada). (See Note 18.)
AIG life companies limit exposure to loss on any single life. For ordinary insurance, AIG retains a maximum of approximately one million dollars of coverage per individual life. There are smaller retentions for other lines of business. Life reinsurance is effected principally under yearly renewable term treaties. The premiums with respect to these treaties are considered prepaid reinsurance premiums and are amortized into income over the contract period in proportion to the protection provided. Amounts recoverable from life reinsurers are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented as a component of reinsurance assets.
For the years ended December 31, 1999, 1998 and 1997, reinsurance recoveries, which reduced loss and loss expenses incurred, amounted to $5.13 billion, $5.36 billion and $4.59 billion, respectively.
Life insurance recoveries, which reduced death and other benefits, approximated $168 million, $176 million and $190 million, respectively, for the years ended December 31, 1999, 1998 and 1997.
(b) The analysis of the future policy benefits and policyholders' contract deposits liabilities as at December 31, 1999 and 1998 follows:
(ii) Mortality and surrender rates are based upon actual experience by geographical area modified to allow for variations in policy form. The weighted average lapse rate, including surrenders, for individual and group life approximated 7.4 percent.
(iv) Participating life business represented approximately 30 percent of the gross insurance in-force at December 31, 1999 and 46 percent of gross premium income in 1999. The amount of dividends to be paid is determined annually by the Boards of Directors. Anticipated dividends are considered as a planned contractual benefit in computing the value of future policy benefits and are provided ratably over the premium-paying period of the contracts.
(iii) Interest rates on corporate life insurance products are guaranteed at 4.0 percent and the weighted average rate credited in 1999 was 6.7 percent.
(c) Investment Gains and Losses: The realized capital gains (losses) and increase (decrease) in unrealized appreciation of investments for 1999, 1998 and 1997 were as follows:
(d) Market Value of Fixed Maturities and Unrealized Appreciation of Investments: At December 31, 1999 and 1998, the balance of the unrealized appreciation of investments
The deferred tax asset related to the net unrealized depreciation of investments was $191 million at December 31, 1999 and the deferred tax payable related to the net unrealized appreciation of investments was $707 million at December 31, 1998.
The amortized cost and estimated market value of bonds available for sale and carried at market value at December 31, 1999 and 1998 were as follows:
(e) Securities Available for Sale: AIGFP follows a policy of minimizing interest rate, equity and currency risks associated with securities available for sale by entering into swap or other transactions. In addition, to reduce its credit risk, AIGFP has entered into credit derivative transactions with respect to $182 million of securities available for sale. At December 31, 1999, the cumulative increase in carrying value of the securities available for sale and related hedges as a result of marking to market such securities net of hedging transactions was $34 million.
No securities available for sale were below investment grade at December 31, 1999.
At December 31, 1999 and 1998, the market value of the CMO portfolio was $14.94 billion and $7.29 billion, respectively; the amortized cost was approximately $15.63 billion in 1999 and $7.07 billion in 1998. AIG's CMO portfolio is readily marketable. There were no derivative (high risk) CMO securities contained in this portfolio at December 31, 1999 and 1998.
The distribution of the CMOs at December 31, 1999 and 1998 was as follows:
At December 31, 1999, the gross weighted average coupon of this portfolio was 6.8 percent. The gross weighted average life of this portfolio was approximately 6.38 years.
The amount of long-term borrowings is $22.90 billion and the amount of short-term borrowings is $10.08 billion. Long-term borrowings include commercial paper; short-term borrowings represent borrowings that mature in less than one year.
At December 31, 1999, AIG's Medium Term Notes also included notes in aggregate principal amount of $198 million issued by SunAmerica Inc. with maturity dates from 2000 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.
At December 31, 1999, the maturity schedule for AIG's outstanding Medium Term Notes, including those issued by SunAmerica Inc., was as follows:
As of December 31, 1999, notes in aggregate principal amount of $3.23 billion were outstanding with maturity dates from 2000 to 2005 at interest rates ranging from 5.15 percent to 8.55 percent. These notes provide for a single principal payment at the maturity of each note.
(A) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero coupon notes in the aggregate principal amount at stated maturity of $750 million. The notes were offered at 12 percent of princi pal amount at stated maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG from the issuance were $86 million. 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 58.66 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 1999 and 1998, no notes were repurchased. At December 31, 1999, the notes outstanding after prior purchases had a face value of $189 million, an unamortized discount of $75 million and a net book value of $114 million. The amortization of the original issue discount was recorded as interest expense.
rity, 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, 1999, notes in aggregate principal amount of $3.72 billion were outstanding with maturity dates from 2000 to 2004 and interest rates ranging from 5.50 percent to 8.88 percent. Term notes in the aggregate principal amount of $100 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, 1999, the maturity schedule for ILFC's Term Notes was as follows:
Also included in term notes are ILFC's borrowings under an Export Credit Facility.
ILFC has an Export Credit Facility up to a maximum of $4.3 billion, for approximately 75 aircraft to be delivered from 1999 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, 1999, ILFC borrowed $1.30 billion under this facility. Borrowings with respect to this facility are included in Notes and Bonds Payable in the accompanying table of borrowings.At December 31, 1999, the future minimum payments for ILFC's borrowings under the Export Credit Facility was as follows:
AIGFP is also obligated under various notes maturing from 2000 through 2026. The majority of these notes are denominated in U.S. dollars and Euros and bear interest at various interest rates. At December 31, 1999, these notes had a U.S. dollar carrying value of $1.3 billion.
At December 31, 1999, ILFC's capital lease obligations were $670 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 $1.05 billion.
(f) CMOs: Combined principal payments due of all significant debt, excluding commercial paper, in each of the next five years ending December 31, 1999, and periods thereafter were as follows:
Preferred shareholders' equity in subsidiary companies represents preferred stocks issued by ILFC and certain SunAmerica subsidiaries, wholly owned subsidiaries of AIG.
(b) SunAmerica: The preferred stock consists of $185 million liquidation amount of 8.35% Trust Originated Preferred Securities issued by SunAmerica Capital Trust II in October 1995 and $310 million liquidation amount of 8.30% Trust Originated Preferred Securities issued by SunAmerica Capital Trust III in November 1996.
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, which are redeemable at the option of AIG on or after September 30, 2000 at a redemption price of $25 per debenture plus accrued and unpaid interest.
(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 also various local restrictions limiting cash loans and advances to AIG by its subsidiaries. Largely as a result of the restrictions, approximately 65 percent of consolidated capital funds were restricted from immediate transfer to AIG parent at December 31, 1999.
(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 two years ended September 30, 1998 was as follows:
At September 30, 1996, SunAmerica Inc. had outstanding 486,800 shares of Adjustable Rate Cumulative Preferred Stock, Series C (the "Series C Preferred Shares"), with a liquidation preference of $100 per share. On October 4, 1996, SunAmerica Inc. redeemed all of the Series C Preferred Shares for a cash payment equal to the total liquidation amount of $49 million plus accrued and unpaid dividends to the redemption date.
In 1992, SunAmerica Inc. issued 5,620,000 shares of 9 1/4% Preferred Stock, Series B (the "Series B Preferred Shares"), with a liquidation preference of $25 per share. On June 13, 1995, SunAmerica Inc. exchanged 2,105,235 Series B Preferred Shares with a liquidation preference of $53 million for $53 million liquidation amount of 9.95% Trust Originated Preferred Securities of SunAmerica Capital Trust I. On June 16, 1997, SunAmerica Inc. redeemed all of the remaining Series B Preferred Shares for a cash payment equal to the total liquidation amount of approximately $88 million plus accrued and unpaid dividends to the redemption date.
(d) The common stock activity for the three years ended December 31, 1999 was as follows:
(a) Outstanding shares have been adjusted to reflect the conversion of all outstanding SunAmerica Inc. shares by converting each outstanding share of SunAmerica Inc. to 0.855 shares of AIG. (b) Shares issued to AIG and subsidiaries as part of stock split effected as stock dividend and conversion of SunAmerica Inc. non-transferrable Class B stock to common stock.
Common stock increased and retained earnings decreased $818 million in 1999, $949 million in 1998 and $633 million in 1997 as a result of common stock splits in the form of 25 percent, 50 percent and 50 percent common stock dividends paid July 30, 1999, July 31, 1998 and July 25, 1997, respectively.
The following tables provide the contractual and notional amounts of derivatives transactions of AIGFP and AIGTG at December 31, 1999.
The following table presents AIGFP's derivatives portfolio by maturity and type of derivative at December 31, 1999 and December 31, 1998:
Futures and forward contracts are contracts for delivery of foreign currencies 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. At December 31, 1999, the contractual amount of AIGFP's futures and forward contracts approximated $28.5 billion.
AIGFP utilizes various credit enhancements, including collateral, credit triggers and credit derivatives to reduce the credit exposure relating to these off-balance sheet financial instruments. AIGFP requires credit enhancements in connection with specific transactions based on, among other things, the creditworthiness of the counterparties and the transaction's size and maturity. In addition, AIGFP's derivative transactions are generally documented under ISDA Master Agreements. Such agreements provide for legally enforceable set-off and close out netting of exposures to specific counterparties. Under such agreements, in connection with an early termination of a transaction, AIGFP is permitted to set off its receivables from a counterparty against its payables to the same counterparty arising out of all included transactions. As a result, the net replacement value represents the net sum of estimated positive fair values after the application of such strategies, agreements and collateral held. Prior to the application of the aforementioned credit enhancements, the gross exposure to credit risk with respect to these derivative instruments was $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 at December 31, 1999, approximated $7.53 billion. The net replacement value for futures and forward contracts at December 31, 1999, approximated $5 million. The net replacement value most closely represents the net credit risk to AIGFP or the maximum amount exposed to potential loss.
The following tables provide the contractual and notional amounts of AIGTG's derivatives portfolio at December 31, 1999 and December 31, 1998. In addition, the estimated positive fair
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, 1999, the net replacement value of AIGTG's futures, forward and option contracts and interest rate and currency swaps approximated $3.1 billion.
The following tables present AIGTG's derivatives portfolio and the associated credit exposure, if applicable, by maturity and type of derivative at December 31, 1999 and December 31, 1998:
AIGTG limits its risks by holding offsetting positions. In addition, AIGTG monitors and controls its risk exposures through various monitoring systems which evaluate AIGTG's market and credit risks, and through credit approvals and limits. At December 31, 1998, AIGTG did not have a significant concentration of credit risk from either an individual counterparty or group of counterparties.
Commissions, transaction and other fees for the twelve months ended December 31, 1999, 1998 and 1997 from AIGTG's operations were $227 million, $374 million and $562 million, respectively.
For investment purposes, SunAmerica has entered into various total return agreements with an aggregate notional amount of $576 million (the "notional amount") at December 31, 1999. The total return agreements effectively exchange a fixed rate of interest (the "payment amount") on the notional amount for the coupon income plus or minus the increase or decrease in the fair value of specified non-investment grade bonds (the "bonds"). SunAmerica is exposed to potential loss with respect to credit risk on the underlying non-investment grade bonds and fair value risk resulting from the payment amount and any depreciation in the aggregate fair value of the bonds below the notional amount. SunAmerica is also exposed to potential credit loss in the event of nonperformance by the investment grade rated counterparty with respect to any increase in the aggregate market value of the bonds above the notional amount. However, nonperformance is not anticipated and, therefore, no collateral is held or pledged. The agreements are marked to market and the change in market value is recognized currently in life investment income. Net amounts received (paid) are included in operating income and totaled ($12 million) for the year ended December 31, 1999 and ($34 million) and $35 million for the years ended September 30, 1998 and 1997, respectively. AIG guarantees the payment obligations of SunAmerica under such agreements.
(f) At December 31, 1999, ILFC had committed to purchase 331 aircraft deliverable from 2000 through 2007 at an estimated aggregate purchase price of $16.4 billion and had options to purchase 83 aircraft deliverable from 2000 through 2007 at an estimated aggregate purchase price of $3.9 billion. 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.
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, 1999.
Spot commodities: Fair values for spot commodities were based on current market prices.
(i) Stock Option Plan: On December 19, 1991, the AIG Board of Directors adopted a 1991 employee stock option plan (the 1991 Plan), which provided that options to purchase a maximum of 12,656,250 shares of common stock could be granted to officers and other key employees at prices not less than fair market value at the date of grant. Both the 1991 Plan, and the options with respect to 316,087 shares granted thereunder on December 19, 1991, were approved by shareholders at the 1992 Annual Meeting. An amendment to the 1991 Plan, approved by shareholders at the 1997 Annual Meeting, increased the aggregate number of shares available for grant to 22,148,437 shares to assure that adequate shares are available for grant during the remaining term of the 1991 Plan. A second amendment to the 1991 Plan limits the maximum number of shares as to which stock options may be granted to any employee in any one year to 253,125 shares. At December 31, 1999, 9,499,167 shares were reserved for future grants under the amended 1991 Plan. As of March 18, 1992, no further options could be granted under the 1987 employee stock option plan (the 1987 Plan), but outstanding options granted under the 1987 Plan continue in force until exercise or expiration. At December 31, 1999, there were 11,654,856 shares reserved for issuance under these plans.
During 1999, AIG granted options with respect to 383,000 shares which become exercisable on the fifth anniversary of the date of grant and expire 10 years from the date of grant. These options do not qualify for Incentive Stock Option Treatment under the Economic Recovery Tax Act of 1981 (ISO Treatment). The agreements with respect to all other options granted under these plans provide that 25 percent of the options granted become exercisable on the anniversary of the date of grant in each of the four years following that grant and expire 10 years from the date of the grant. As of December 31, 1999, outstanding options granted with respect to 6,694,496 shares qualified for ISO Treatment.
On September 15, 1999, the AIG Board of Directors adopted a 1999 stock option plan (the 1999 Plan), which provided that options to purchase a maximum of 10,000,000 shares of common stock could be granted to certain key employees and members of the Board of Directors at prices not less than fair market value at the date of grant. The 1999 Plan limits the maximum number of shares as to which stock options may be granted to any employee in any one year to 250,000 shares. Options granted under this Plan expire not more than 10 years from the date of the grant. Options with respect to 9,000 shares were granted to members of the Board of Directors on September 15, 1999. These options become exercisable on the first anniversary of the date of grant, expire 10 years from the date of grant and do not qualify for ISO Treatment. The Plan, and the options granted thereunder, are subject to approval by the shareholders at the 2000 Annual Meeting of Shareholders.
In 1999, the AIG Board of Directors amended the AIG stock option plans to allow deferral of delivery of AIG shares otherwise deliverable upon the exercise of an option to a date or dates specified by the optionee upon the request of an optionee. At December 31, 1999, optionees had made valid elections to defer delivery of 506,716 shares and 389,079 shares of AIG common stock, respectively, upon exercise of options expiring during 2000 and 2001.
Additional information with respect to AIG's plans at December 31, 1999, and changes for the three years then ended, were as follows:
In addition, at December 31, 1999, options to purchase 316,406 shares at a weighted average exercise price of $29.47 had been previously granted to AIG directors and remained outstanding.
The fair values of stock options granted during the years ended December 31, 1999, 1998 and 1997 were $71 million, $28 million and $29 million, respectively. The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for grants in 1999, 1998 and 1997, respectively: dividend yields of 0.20 percent, 0.24 percent and 0.30 percent; expected volatilities of 25.0 percent, 22.0 percent and 20.0 percent; risk-free interest rates of 5.33 percent, 4.73 percent and 6.03 percent and expected terms of 7 years.
(ii) Employee Stock Purchase Plan: AIG's 1984 employee stock purchase plan was adopted at its 1984 shareholders' meeting and became effective as of July 1, 1984. Eligible employees could receive privileges to purchase up to an aggregate of 5,537,108 shares of AIG common stock, at a price equal to 85 percent of the fair market value on the date of grant of the purchase privilege. Purchase privileges were granted annually and were limited to the number of whole shares that could be purchased by an amount equal to 5 percent of an employee's annual salary or $5,500, whichever was less.
amount equal to 5 percent of an employee's annual salary or $5,500, whichever is less. Beginning with the January 1, 1998 subscription, the maximum allowable purchase limitation increased to 10 percent of an employee's annual salary or $10,000 per year, whichever is less, and the eligibility requirement was reduced from two years to one year. In all other respects, the 1996 plan is identical to the 1984 plan.
There were 130,010 shares issued under the 1984 plan at a weighted average price of $28.14 for the year ended December 31, 1997. There were 595,286 shares, 425,523 shares and 275,783 shares issued under the 1996 plan at weighted average prices of $57.36, $43.11 and $30.81 for the years ended December 31, 1999, 1998 and 1997, 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.
The fair values of purchase privileges granted during the years ended December 31, 1999, 1998 and 1997 were $13 million, $10 million and $4 million, respectively. The weighted average fair values per share of those purchase rights granted in 1999, 1998 and 1997 were $21.06, $15.46 and $10.68, respectively. The fair value of each purchase right is estimated on the date of the subscription using the Black-Scholes model.
The following weighted average assumptions were used for grants in 1999, 1998 and 1997, respectively: dividend yields of 0.20 percent, 0.24 percent and 0.30 percent; expected volatilities of 34.0 percent, 33.0 percent and 26.0 percent; risk-free interest rates of 5.33 percent, 5.26 percent and 5.81 percent; and expected terms of 1 year.
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k) plan), which, during the three years ended December 31, 1999, 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, 1999, 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, 1999, and SunAmerica matched 4 percent of the participants' base salaries deferred.
The following table sets forth the change in benefit obligation, change in plan assets and weighted average assumptions associated with various pension plan and postretirement benefits. The amounts are recognized in the accompanying consolidated balance sheet as of December 31, 1999 and 1998:
For measurement purposes, a 9.0 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 1999. The rate was assumed to decrease to 5.0 percent for 2007 and remain at that level thereafter. * Plan assets are invested primarily in fixed-income securities and listed stocks.
For measurement purposes, a 7.5 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 1998. The rate was assumed to decrease gradually to 5.5 percent for 2000 and remain at that level thereafter. (a) Acquisitions include the opening balances with respect to Transatlantic and 21st Century. Transatlantic's domestic employees are and have been covered by AIG's plans. (b) Plan assets are invested primarily in fixed-income securities and listed stocks.
The net benefit cost for the years ended December 31, 1999, 1998, and 1997 included the following components:
On December 31, 1998, AIG amended its retirement and postretirement healthcare plan to provide increased benefits to certain employees who retire prior to age 65. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plan. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
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.
Financial Services - AIG's financial services subsidiaries engage in diversified financial products and services including premium financing, banking services and consumer finance services.
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.
AIGFP structures financial transactions, including long-dated interest rate and currency swaps and structured borrowings through notes, bonds and guaranteed investment agreements.
AIGTG engages in various commodities trading, foreign exchange trading, interest rate swaps and market making activities.
(a) Includes AIG Parent and other operations which are not required to be reported separately, other income (deductions)-net and adjustments and eliminations.
(d) The following table summarizes AIG's life insurance operations by major reporting group for the years ended December 31, 1999, 1998 and 1997:
(a) Includes other operations which are not required to be reported separately and adjustments and eliminations. (b) Realized capital gains are not deemed to be an integral part of AIG's life insurance operations' internal reporting groups.
(a) AIGFP's interest revenue and interest expense are reported as net revenues. (b) Includes other operations which are not required to be reported separately and adjustments and eliminations. (c) Commissions, transaction and other fees are the sum of the net gain or loss of trading activities, the net change in unrealized gain or loss, the net interest revenues from forward rate agreements and interest rate swaps, and where applicable, management and incentive fees from asset management activities.
(a) Including general insurance operations in Canada. (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).