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.
(a) 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). Commencing in 1997, agency operations were presented as a component of general insurance and 1996 agency results have been reclassified to conform to this presentation. (b) Per share amounts for all periods presented have been retroactively adjusted to reflect all stock dividends and splits and reflect the adoption of the Statement of Financial Accounting Standards No. 128 "Earnings per Share." (c) Cash dividends have not been restated to reflect dividends paid by SunAmerica Inc. (d) Including commercial paper and excluding that portion of long-term debt maturing in less than one year.
Domestic general insurance operations are comprised of the Domestic Brokerage Group (DBG), which includes The Hartford Steam Boiler Inspection and Insurance Company (HSB) and the domestic operations of Transatlantic Holdings, Inc. (Transatlantic), Personal Lines, including 21st Century Insurance Group (21st Century), and Mortgage Guaranty.
Personal Lines engages in the mass marketing of personal lines insurance, primarily private passenger auto and homeowners and personal umbrella coverages.
General insurance operations for the twelve month periods ending December 31, 2000, 1999 and 1998 were as follows:
ing standards. In 1999, net premiums written increased 11.2 percent and net premiums earned increased 10.3 percent when compared to 1998.
Personal Lines' net premiums written increased 16.1 percent or $348 million in 2000 over 1999, compared to an increase of 52.0 percent or $740 million in 1999 over 1998. The growth in 2000 primarily resulted from an increase in the number of policies issued with respect to preferred, standard and non-standard auto risks. 21st Century was consolidated into AIG's Personal Lines results for the twelve months of 1999 and last six months of 1998. Approximately half the growth in 1999 over 1998 was attributable to the inclusion of twelve months of operations of 21st Century. The remainder of the growth was due to the aforementioned growth in policy issuance. AIG has filed for rate increases in a number of states where inadequate rates persist.
A major part of the discipline of a successful general insurance company is to produce an underwriting profit, exclusive of investment income. If underwriting is not profitable, losses incurred are a major factor. The result is that the premiums are inadequate to pay for losses and expenses and produce a profit; therefore, investment income must be used to cover underwriting losses. If assets and the income therefrom are insufficient to pay claims and expenses over extended periods, an insurance company cannot survive. For these reasons, AIG views and manages its underwriting operations separately from its investment operations.
The adjusted underwriting profits were $785 million in 2000, $669 million in 1999 and $531 million in 1998. Domestic adjusted underwriting profit increased primarily as a result of the disciplined underwriting of DBG. In 1999, 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 addition, AIG does not seek net premium growth where rates do not adequately reflect its assessment of exposures.
General insurance operating income in 2000 increased 1.3 percent when compared to 1999. The 1999 results reflect an increase of 18.9 percent from 1998. The contribution of general insurance operating income to income before income taxes and minority interest was 42.2 percent in 2000 compared to 46.3 percent in 1999 and 46.6 percent in 1998.
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.
Estimation of asbestos and environmental claims loss reserves is a difficult process. These asbestos and environmental claims cannot be estimated by conventional reserving techniques as previously described. Quantitative techniques frequently have to be supplemented by subjective considerations including managerial judgment. Significant factors which affect the trends which influence the development of asbestos and environmental claims are the inconsistent court resolutions and judicial interpretations which broaden the intent of the policies and scope of coverage. The current case law can be characterized as still evolving and there is little likelihood that any firm direction will develop in the near future. Additionally, the exposure for cleanup costs of hazardous waste dump sites involves issues such as allocation of responsibility among potentially responsible parties and the government's refusal to release parties. The cleanup cost exposure may significantly change if potential Congressional reauthorization of Superfund dramatically changes the current program.
In the interim, AIG and other industry members have and will continue to litigate the broadening judicial interpretation of the policy coverage and the liability issues. At the current time, it is not possible to determine the future development of asbestos and environmental claims with the same degree of reliability as is the case for other types of claims. Such development will be affected by the extent to which courts continue to expand the intent of the policies and the scope of the coverage, as they have in the past, as well as by the changes in Superfund and waste dump site coverage issues. Although the estimated liabilities for these claims are subject to a significantly greater margin of error than for other claims, the reserves carried for these claims at December 31, 2000 are believed to be adequate as these reserves are based on the known facts and current law. Furthermore, as AIG's net exposure retained relative to the gross exposure written was lower in 1984 and prior years, the potential impact of these claims is much smaller on the net loss reserves than on the gross loss reserves. In the future, if the environmental claims develop deficiently, such deficiency would have an adverse impact on future results of operations. (See the previous discussion on reinsurance collectibility herein.)
A summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims separately and combined at December 31, 2000, 1999 and 1998 follows.
The gross and net IBNR included in the aforementioned reserve for losses and loss expenses at December 31, 2000, 1999 and 1998 were estimated as follows:
The average cost per claim settled, dismissed or otherwise resolved for the years ended December 31, 2000, 1999 and 1998 was as follows:
AIG's survival ratios for involuntary asbestos and environmental claims, separately and combined, were based upon a three year average payment. These ratios for the years ended December 31, 2000, 1999 and 1998 were as follows:
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 2000, 1999 and 1998 were $15 million, $15 million and $16 million, respectively.
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.
AIG's three principal overseas life operations are American Life Insurance Company (ALICO), American International Assurance Company, Limited together with American International Assurance Company (Bermuda) Limited (AIA) and Nan Shan Life Insurance Company, Ltd. (Nan Shan). ALICO is incorporated in Delaware and all of its business is written outside of the United States. ALICO has
operations either directly or through subsidiaries in approximately 50 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.)
Life insurance operations for the twelve month periods ending December 31, 2000, 1999 and 1998 were as follows:
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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 investments or there are investment restrictions imposed by the local regulatory authorities. For example, in Japan and several Southeast Asia territories, the duration of the investments is often for a shorter period than the effective maturity of the related policy liabilities. Therefore, there is a risk that the reinvestment of the proceeds at the maturity of the initial investments may be at a yield below that of the interest required for the accretion of the policy liabilities. At December 31, 2000, the average duration of the investment portfolio in Japan was 6.0 years.
Additionally, there exists a future investment risk associated with certain policies currently in force which will have premium receipts in the future. That is, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities. The anticipated average period for the receipt and investment of these future premium receipts is 6.1 years. These durations compare with an estimated average duration of 10.4 years for the corresponding policy liabilities. To maintain an adequate yield to match the interest necessary to support future policy liabilities, constant management focus is required to reinvest the proceeds of the maturing securities and to invest the future premium receipts without sacrificing investment quality. To the extent permitted under local regulation, AIG may invest in qualified longer-term securities outside Japan to achieve a closer matching in both duration and the required yield. AIG is able to manage any asset-liability duration difference through maintenance of sufficient global liquidity and to support any operational shortfall through its international financial network. (See also the discussion under "Liquidity" herein.)
AIG uses asset-liability matching as a management tool to determine the composition of the invested assets and marketing strategies. As a part of these strategies, AIG may determine that it is economically advantageous to be temporarily in an unmatched position due to anticipated interest rate or other economic changes.
AIG Trading Group Inc. and its subsidiaries (AIGTG) engage in various commodities trading, foreign exchange trading, interest rate swaps and market making activities. (See also Note 18 of Notes to Financial Statements.)
Financial services operating income represented 15.5 percent of AIG's income before income taxes and minority interest in 2000. This compares to 14.4 percent and 13.8 percent in 1999 and 1998, respectively.
ILFC generates its revenues primarily from leasing new and used commercial jet aircraft to domestic and foreign airlines. Revenues also result from the remarketing of commercial jets for its own account, for airlines and for financial institutions. Revenues in 2000 increased 11.3 percent from 1999 compared to a 9.6 percent increase during 1999 from 1998. The revenue growth in each year resulted primarily from the increase in flight equipment available for operating lease, the increase in the relative cost of the leased fleet and the increase in the relative composition of the fleet with wide bodies which typically receive higher lease payments. Approximately 20 percent of ILFC's operating lease revenues are derived from U.S. and Canadian airlines. During 2000, operating income increased 10.8 percent from 1999 and 19.0 percent during 1999 from 1998. ILFC finances its purchases of aircraft primarily through the issuance of a variety of debt instruments. The composite borrowing rates at December 31, 2000, 1999 and 1998 were 6.37 percent, 6.14 percent and 6.03 percent, respectively. (See also the discussions under "Capital Resources" and "Liquidity" herein and Note 18 of Notes to Financial Statements.)
ILFC is exposed to loss through non-performance of aircraft lessees, through owning aircraft which it would be unable to sell or re-lease at acceptable rates at lease expiration and through committing to purchase aircraft which it would be unable to lease. ILFC manages its lessee non-performance exposure through credit reviews and security deposit requirements. At December 31, 2000, there were 380 aircraft subject to operating leases and there were three aircraft off lease. Two of the off lease aircraft were re-leased in early 2001. (See also the discussions under "Capital Resources" and "Liquidity" herein.)
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 2000 increased 43.3 percent from 1999 compared to a 33.9 percent increase during 1999 from 1998. During 2000, operating income increased 34.5 percent from 1999 and increased 49.4 percent during 1999 from 1998. 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 2000 increased 11.6 percent from 1999 compared to a 39.2 percent decrease during 1999 from 1998. During 2000, operating income decreased 43.2 percent from 1999 compared to a 11.4 percent decrease during 1999 from 1998. 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 asset management operations offer a wide variety of investment vehicles and services, including variable annuities, mutual funds, and investment asset management. Such products and services are offered to individuals and institutions both domestically and internationally.
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 third-party institutional, retail and private equity funds invested assets on a global basis, and provides custodial services. Cap Partners organizes, and manages the invested assets of institutional investment funds and may also invest in such funds. Each of these subsidiary operations receives fees for investment products and services provided.
Asset management operating income increased 37.0 percent in 2000 over 1999. This compares with an increase of 64.3 percent in 1999 over 1998.
At December 31, 2000, AIG's third party assets under management, including both retail mutual funds and institutional accounts, approximated $35 billion.
In 1998, AIG's equity in income of minority-owned insurance operations was $57 million and represented 0.9 percent of income before income taxes and minority interest. In 2000 and 1999, AIG did not report equity in income of minority-owned insurance operations as a result of the consolidation of the operations of Transatlantic and SELIC Holdings, Ltd. 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 2000, AIG recorded a provision for income taxes of $2.46 billion compared to the provisions of $2.22 billion and $1.79 billion in 1999 and 1998, respectively. These provisions represent effective tax rates of 29.4 percent in 2000, 29.5 percent in 1999 and 28.4 percent in 1998. (See Note 3 of Notes to Financial Statements.)
Minority interest represents minority shareholders' equity in income of certain majority-owned consolidated subsidiaries. Minority interest amounted to $255 million, $238 million and $210 million in 2000, 1999 and 1998, respectively.
At December 31, 2000, AIG had total capital funds of $39.62 billion and total borrowings of $40.23 billion. At that date, $36.30 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.
Total borrowings and borrowings not guaranteed or matched at December 31, 2000 and 1999 were as follows:
AIG Funding, Inc. (Funding), through the issuance of commercial paper, fulfills the short-term cash requirements of AIG and its non-insurance subsidiaries. Funding intends to continue to meet AIG's funding requirements through the issuance of commercial paper guaranteed by AIG. This issuance of Funding's commercial paper is subject to the approval of AIG's Board of Directors. ILFC and A.I. Credit Corp. (AICCO) as well as AIG Credit Card Company (Taiwan) - (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited - (AIGF-Taiwan), both consumer finance subsidiaries in Taiwan, have issued commercial paper for the funding of their own operations. At December 31, 2000, AIG did not guarantee or support the commercial paper of any of its subsidiaries other than Funding and AICCO. In early 2001, AICCO ceased issuing commercial paper under its program and the agreement which AIG had provided supporting the commercial paper was terminated; AICCO's funding requirements are now met through Funding's program. (See also the discussion under "Derivatives" herein and Note 9 of Notes to Financial Statements.)
During 2000, AIG issued $233 million principal amount of Medium Term Notes and $132 million of previously issued notes matured or were called. At December 31, 2000, AIG had $781 million in aggregate principal amount of debt securities registered for issuance from time to time. In early 2001, AIG established a new Medium Term Note program under which these securities may be issued.
AIG's capital funds increased $6.31 billion during 2000. Unrealized appreciation of investments, net of taxes increased $177 million. During 2000, the cumulative translation adjustment loss, net of taxes, increased $210 million. The change from year to year with respect to the unrealized appreciation of investments, net of taxes was primarily impacted by the decline in domestic interest rates. The cumulative translation adjustment loss, net of taxes was primarily impacted by the general strength in the U.S. dollar relative to certain currencies in Southeast Asia and South America. (See also the discussion under "Operational Review" and "Liquidity" herein.) Retained earnings increased $3.26 billion, resulting from net income less dividends.
ent in its overall operations. At December 31, 2000, the adjusted capital of each of AIG's domestic general companies and of each of AIG's domestic life companies exceeded each of their RBC standards by considerable margins.
At December 31, 2000, AIG's consolidated invested assets included $6.09 billion of cash and short-term investments. Consolidated net cash provided from operating activities in 2000 amounted to $5.94 billion.
In addition to the combined insurance pre-tax operating cash flow, AIG's insurance operations held $5.52 billion in cash and short-term investments at December 31, 2000. The aforementioned operating cash flow and the cash and short-term balances held provided AIG's insurance operations with a significant amount of liquidity.
The following table is a summary of AIG's invested assets by significant segment, including investment income due and accrued of $2.42 billion and $2.05 billion and real estate of $1.87 billion and $1.62 billion, at December 31, 2000 and 1999, 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, 2000 and 1999:
At December 31, 2000, approximately 57 percent of the fixed maturities investments were domestic securities. Approximately 37 percent of such domestic securities were rated AAA. Approximately 13 percent were below investment grade or not rated.
At December 31, 2000, approximately 17 percent of the fixed maturities portfolio was collateralized mortgage obligations (CMOs), including commercial mortgage backed securities. Substantially all of the CMOs were invest-
The average, high and low VaRs for the interest rate component of market risk for the year ended December 31, 2000 were approximately $419 million, $454 million and $338 million, respectively, for general insurance and approximately $1.09 billion, $1.21 billion and $950 million, respectively, for life insurance. The average, high and low VaRs for the currency component were approximately $49 million, $65 million and $29 million, respectively, for general insurance and approximately $430 million, $566 million and $372 million, respectively, for life insurance; and the average, high and low VaRs for the equity component were approximately $694 million, $828 million and $603 million, respectively, for general insurance and approximately $315 million, $396 million and $293 million, respectively, for life insurance.
ILFC is exposed to market risk and the risk of loss of fair value resulting from adverse fluctuations in interest rates. As of December 31, 2000 and December 31, 1999, AIG statistically measured the aforementioned loss of fair value through the application of a VaR model. In this analysis, the net fair value of ILFC was determined using the financial instrument assets which included the tax adjusted future flight equipment lease revenue and the financial instrument liabilities which included the future servicing of the current debt. The estimated impact of the current derivative positions was also taken into account.
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, 2000 and December 31, 1999. 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, 2000 and December 31, 1999, the VaR with respect to the aforementioned net fair value of ILFC was approximately $11 million and $50 million, respectively.
AIGFP's derivative transactions are carried at market value or at estimated fair value when market prices are not readily available. AIGFP reduces its economic risk exposure through similarly valued offsetting transactions including swaps, trading securities, options, forwards and futures. The estimated fair values of these transactions represent assessments of the present value of expected future cash flows. These transactions are exposed to liquidity risk if AIGFP were to sell or close out the transactions prior to maturity. AIG believes that the impact of any such limited liquidity would not be significant to AIG's financial condition or its overall liquidity. (See also the discussion under "Operational Review: Financial Services Operations" and "Derivatives" herein.)
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG included in the financial services assets and liabilities at December 31, 2000 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, 2000, AIGTG's replacement values with respect to interest rate and currency swaps were $484 million.
The senior management of AIG defines the policies and establishes general operating parameters for AIGFP and AIGTG. AIG's senior management has established various oversight committees to review the various financial market, operational and credit issues of AIGFP and AIGTG. The senior managements of AIGFP and AIGTG report the results of their respective operations to and review future strategies with AIG's senior management.
AIGTG's approach to managing market risk is to establish an appropriate offsetting position to a particular transaction or group of transactions depending upon the extent of market risk AIGTG expects to reduce.
AIGFP and AIGTG are both exposed to the risk of loss of fair value from adverse fluctuations in interest rate and foreign currency exchange rates and equity and commodity prices. AIG statistically measured the losses of fair value through the application of a VaR model. AIG separately calculated the VaR with respect to AIGFP and AIGTG, as AIG manages these operations separately.
AIG calculated the VaR with respect to AIGFP and AIGTG as of December 31, 2000 and December 31, 1999. AIG has refined its methodology for calculating VaR and the results of the calculations presented herein were performed using historical simulation. Using historical simulation over the delta-normal approach does not significantly change the results of this disclosure. The historical simulation methodology entails re-pricing all assets and liabilities under explicit changes in market rates within a specific historical time period. In this case, the most recent three years of historical market information for interest rates, foreign exchange rates, and equity index prices were used to construct the historical scenarios. For each scenario, each transaction was re-priced. Portfolio, business unit and finally AIG-wide scenario values were then calculated by netting the values of all the underlying assets and liabilities. The final VaR number represents the maximum potential loss incurred by these scenarios with 95% confidence (i.e., only 5% of historical scenarios show losses greater than the VaR figure).
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, 2000 and December 31, 1999. VaR with respect to combined operations cannot be derived by aggregating the individual risk presented herein.
The average, high and low VaRs on a combined basis for the year ended December 31, 2000 were approximately $15 million, $24 million and $8 million, respectively, for AIGFP and approximately $5 million, $6 million and $4 million, respectively, for AIGTG. The average, high and low VaRs for the interest rate component of market risk were approximately $15 million, $23 million and $7 million, respectively, for AIGFP and approximately $3 million, $4 million and $3 million, respectively, for AIGTG for that year. The average, high and low VaRs for the currency component were approximately $267,000, $396,000 and $118,000, respectively, for AIGFP and approximately $3 million, $4 million and $2 million, respectively, for AIGTG; and the average, high and low VaRs for the equity/commodity component were approximately $1 million, $2 million and $371,000, respectively, for AIGFP.
A counterparty may default on any obligation to AIG, including a derivative contract. Credit risk is a consequence of extending credit and/or carrying trading and investment positions. Credit risk exists for a derivative contract when that contract has an estimated positive fair value. To help manage this risk, the credit departments of AIGFP and AIGTG operate within the guidelines of the AIG Credit Risk Committee, which sets credit policy and limits for counterparties and provides limits for derivative transactions with counterparties having different credit ratings. In addition to credit ratings, this committee takes into account other factors, including the industry and country of the counterparty. Transactions which fall outside these pre-established guidelines require the approval of the AIG Credit Risk Committee. It is also AIG's policy to establish reserves for potential credit impairment when necessary.
futures and forward contracts approximated $204 million at December 31, 2000 and $5 million at December 31, 1999. The net replacement value most closely represents the net credit risk to AIGFP or the maximum amount exposed to potential loss.
The following table presents AIGFP's derivatives portfolio by maturity and type of derivative at December 31, 2000 and December 31, 1999:
The gross replacement values presented in the following table represent the sum of the estimated positive fair values of all of AIGTG's derivatives contracts at December 31, 2000 and December 31, 1999. These values do not represent the credit risk to AIGTG.
The net replacement values presented represent the net sum of estimated positive fair values after the application of legally enforceable master 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.
(a) Sold options obligate AIGTG to buy or sell the underlying item if the option purchaser chooses to exercise. The amounts do not represent credit exposure. (b) The net replacement values with respect to exchange traded futures and options, forward contracts and purchased over the counter options are presented as a component of trading assets in the accompanying balance sheet. The net replacement values with respect to interest rate and currency swaps are presented as a component of unrealized gain on interest rate and currency swaps, options and forward transactions in the accompanying balance sheet.
As an end user, AIG and its subsidiaries, including its insurance subsidiaries, use derivatives to aid in managing AIG's foreign exchange translation exposure. Derivatives may also be used to minimize certain exposures with respect to AIG's debt financing and its insurance operations; to date, such activities have not been significant.
AIG has formed a Derivatives Review Committee. This committee, with certain exceptions, provides an independent review of any proposed derivative transaction. The committee examines, among other things, the nature and purpose of the derivative transaction, its potential credit exposure, if any, and the estimated benefits. This committee does not review those derivative transactions entered into by AIGFP and AIGTG for their own accounts.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FASB 133). In June 2000, FASB issued Statement of Financial Accounting Standards No. 138 "Accounting for Derivative Instruments and Hedging Activities-an amendment of FASB Statement No.133" (FASB 138).
Together, these Statements require AIG to recognize all derivatives in the consolidated balance sheet at fair value. The financial statement recognition of the change in the fair value of a derivative depends on a number of factors, including the intended use of the derivative and the extent to which it is effective as part of a hedge transaction. Due to the operating nature of AIGFP and AIGTG, the changes in fair value of their derivative transactions are currently presented, in all material respects, as a component of AIG's operating income. FASB 133 and FASB 138 are effective for AIG for the year commencing January 1, 2001. AIG estimates that it will record in its first quarter of 2001 consolidated statement of income, in accordance with the transition provisions of FASB 133, a cumulative effect of an accounting change adjustment gain of $17 million. This gain represents the net fair value of all previously unrecorded derivative instruments as of January 1, 2001, net of taxes and after the application of hedge accounting. AIG also estimates that it will record in its first quarter of 2001 consolidated statement of comprehensive income, a cumulative effect of an accounting change adjustment loss of $211 million. The loss represents the reduction of other comprehensive income, net of taxes, arising from the fair value of all derivative contracts designated as cash flow hedging instruments.
On February 23, 2001, AIG announced that it had been named the exclusive sponsor for the reorganization of The Chiyoda Mutual Life Insurance Company (Chiyoda) by its Legal Trustee. In connection with the reorganization, AIG expects to make a capital contribution to Chiyoda of approximately $522 million. AIG expects to close the transaction by mid-April, subject to the approval of Japanese regulatory authorities.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the consolidated financial position of American International Group, Inc. and its subsidiaries (the "Company") at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
(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 have been restated to combine SunAmerica Inc.'s financial statements for its fiscal year ended September 30 with AIG's December 31 financial statements.
The following is a reconciliation of the individual company results to the combined results for the 1998 twelve month period:
AIG subsidiaries write property, casualty, marine, life and financial lines insurance in approximately 130 countries and jurisdictions. Certain of AIG's foreign subsidiaries included in the consolidated financial statements report on a fiscal year ending November 30. All material intercompany accounts and transactions have been eliminated.
(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 1999 and 1998 financial statements to conform to their 2000 presentation.
Life Insurance Operations: 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. Premiums for traditional life insurance products and life contingent annuities, excluding accident and health products, are recognized as revenues when due. Estimates for premiums due but not yet collected are accrued. 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. Accident and health products are accounted for in a manner similar to general insurance products described above. Investment income reflects certain 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, 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 is also a remarketer of flight equipment for its own account and for airlines and financial institutions, and provides, for a fee, fleet management services to certain third-party operators. AIG's revenues from such operations consist of net gains on sales of flight equipment and commissions.
(c) Non-cash Transactions: During 2000, AIG issued 17.77 million common shares in connection with acquisitions. 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.
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 over their estimated lives.
Common and non-redeemable preferred stocks are carried at current market values. Dividend income is generally recognized when receivable.
(h) Trading Securities, at market value: Trading securities are held to meet short term investment objectives, including hedging securities. These securities are recorded on a trade date basis and carried at current market values. Unrealized gains and losses are reflected in income currently.
(m) Other Invested Assets: Other invested assets consist primarily of investments by AIG's insurance operations in joint ventures and partnerships and other investments not classified elsewhere herein. The joint ventures and partnerships are carried at equity or cost depending on the nature of the invested asset and the ownership percentage thereof. Other investments are carried at cost or market values depending upon the nature of the underlying assets. Unrealized gains and losses from the revaluation of those investments carried at market values are reflected in comprehensive income, net of any related deferred income taxes.
(p) Real Estate and Other Fixed Assets: The costs of buildings and furniture and equipment are depreciated principally on a straight-line basis over their estimated useful lives (maximum of 40 years for buildings and 10 years for furniture and equipment). Expenditures for maintenance and repairs are charged to income as incurred; expenditures for betterments are capitalized and depreciated.
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, 2000, there were no impairments.
(q) 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.
(r) Securities and Spot Commodities Sold but not yet Purchased, at market value: Securities and spot commodities sold but not yet purchased represent sales of securities and spot commodities not owned at the time of sale. The obligations arising from such transactions are recorded on a trade date basis and carried at the respective current market values or current commodity prices. Unrealized gains or losses are reflected in income currently.
(s) Preferred Shareholders' Equity in Subsidiary Companies: Preferred shareholders' equity in subsidiary companies relates to outstanding preferred stock or interest of ILFC and certain subsidiaries of SunAmerica and HSB, wholly owned subsidiaries of AIG. Cash distributions on such preferred stock or interest are accounted for as interest expense and included as minority interest in the consolidated statement of income.
those shares used in basic earnings per share plus shares that would have been outstanding assuming issuance of common shares for all dilutive potential common shares outstanding, retroactively adjusted to reflect all stock dividends and stock splits.
The computation of earnings per share for December 31, 2000, 1999 and 1998 was as follows:
(w) Accounting Standards: In June 1998, FASB issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FASB 133). In June 2000, FASB issued Statement of Financial Accounting Standards No. 138 "Accounting for Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133" (FASB 138).
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, 2000 and 1999 and 50 percent, 50 percent and 48 percent of revenues for the years ended December 31, 2000, 1999 and 1998, respectively, were located in or derived from foreign countries (other than Canada). (See Note 18.)
(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal income tax return. Revenue Agent's Reports assessing additional taxes for the years 1987, 1988, 1989 and 1990 have been issued and Letters of Protest contesting the assessments have been filed with the Internal Revenue Service. In addition, Revenue Agent's Reports assessing additional taxes for the years ended September 30, 1993 and 1994 have been issued to SunAmerica. Such assessments relate to years prior to the acquisition of SunAmerica by AIG. Letters of Protest contesting the assessments have been filed with the Internal Revenue Service. Issues regarding SunAmerica's tax years ending November 30, 1988 and September 30, 1989, 1990, 1991 and 1992 have recently been agreed to with the Internal Revenue Service. It is management's belief that there are substantial arguments in support of the positions taken by AIG and SunAmerica in their Letters of Protest. AIG also believes that the impact of the results of these examinations will not be significant to AIG's financial condition, results of operations or liquidity.
(b) The U.S. Federal income tax rate is 35 percent for 2000, 1999 and 1998. Actual tax expense on income differs from the "expected" amount computed by applying the Federal income tax rate because of the following:
(c) The components of the net deferred tax liability as of December 31, 2000 and December 31, 1999 were as follows:
General reinsurance is effected under reinsurance treaties and by negotiation on individual risks. Certain of these reinsurance arrangements consist of excess of loss contracts which protect AIG against losses over stipulated amounts. Ceded premiums are considered prepaid reinsurance premiums and are amortized into income over the contract period in proportion to the protection received. Amounts recoverable from general reinsurers are estimated in a manner consistent with the claims liabilities associated with the reinsurance and presented as a component of reinsurance assets.
General insurance premiums written and earned were comprised of the following:
For the years ended December 31, 2000, 1999 and 1998, reinsurance recoveries, which reduced loss and loss expenses incurred, amounted to $6.00 billion, $5.13 billion and $5.36 billion, respectively.
Life insurance assumed represented 0.2 percent of gross life insurance in-force at December 31, 2000, 0.2 percent for 1999 and 0.3 percent for 1998 and life insurance premium income assumed represented 0.3 percent of gross premium income for each of the periods ended December 31, 2000, 1999 and 1998.
Supplemental information for gross loss and benefit reserves net of ceded reinsurance at December 31, 2000 and 1999 follows:
6. Reserve for Losses and Loss Expenses and Future Life Policy Benefits and Policyholders' Contract Deposits (continued)
(iv) Participating life business represented approximately 31 percent of the gross insurance in-force at December 31, 2000 and 43 percent of gross premium income in 2000. The amount of annual dividends to be paid is determined locally by the Boards of Directors. Provisions for future dividend payments are computed by jurisdiction, reflecting local regulations.
(i) Interest rates credited on deferred annuities, which vary by territory and year of issuance, range from 2.0 percent to 9.0 percent. Credited interest rate guarantees are generally for a period of one year. Withdrawal charges generally range from zero percent to 10.0 percent grading to zero over a period of zero to 10 years.
(iv) The universal life funds have credited interest rates of 4.5 percent to 7.5 percent and guarantees ranging from 4.0 percent to 5.5 percent depending on the year of issue. Additionally, universal life funds are subject to surrender charges that amount to 11.0 percent of the fund balance grading to zero over a period not longer than 20 years.
(a) Statutory Deposits: Cash and securities with carrying values of $5.37 billion and $4.34 billion were deposited by AIG's subsidiaries under requirements of regulatory authorities as of December 31, 2000 and 1999, respectively.
The deferred tax asset related to the net unrealized depreciation of investments was $19 million at December 31, 2000 and the deferred tax asset related to the net unrealized depreciation of investments was $191 million at December 31, 1999.
The amortized cost and estimated market values of fixed maturities held to maturity and fixed maturities available for sale at December 31, 2000, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
(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, 2000, 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 $33 million.
The amortized cost, related hedges and estimated market value of securities available for sale and carried at market value at December 31, 2000 and 1999 were as follows:
No securities available for sale were below investment grade at December 31, 2000.
AIG is not exposed to any significant credit concentration risk of a single or group non-governmental issuer.
At December 31, 2000, the gross weighted average coupon of this portfolio was 6.96 percent. The gross weighted average life of this portfolio was approximately 6.30 years.
At December 31, 2000 and 1999, the market value of the CMO portfolio was $17.61 billion and $14.94 billion, respectively; the amortized cost was approximately $17.58 billion in 2000 and $15.63 billion in 1999. AIG's CMO portfolio is readily marketable. There were no derivative (high risk) CMO securities contained in this portfolio at December 31, 2000 and 1999.
(h) At December 31, 2000, non-income producing invested assets were insignificant.
At December 31, 2000, AIG's debt outstanding of $40.23 billion, shown below, included borrowings of $36.30 billion which were either not guaranteed by AIG or were matched borrowings under obligations of guaranteed investment agreements (GIAs) or matched notes and bonds payable.
The amount of long-term borrowings is $25.24 billion and the amount of short-term borrowings is $14.99 billion. Long-term borrowings include commercial paper; short-term borrowings represent borrowings that mature in less than one year.
(a) Commercial Paper: At December 31, 2000, the commercial paper issued and outstanding was as follows:
The interest rates on AIG's Medium Term Notes range from 0.50 percent to 7.15 percent. To the extent deemed appropriate, AIG may enter into swap transactions to reduce its effective borrowing rates with respect to these notes.
During 2000, AIG issued $210 million principal amount of equity-linked Medium Term Notes due May 15, 2007. These notes accrue interest at the rate of 0.50 percent and the total return on these notes is linked to the appreciation in market value of AIG's common stock. The notes may be redeemed, at the option of AIG, as a whole but not in part, at any time on or after May 15, 2003. In conjunction with the issuance of these notes, AIG entered into a series of swap transactions which effectively converted its interest expense to a fixed rate of 7.17 percent and transferred the equity appreciation exposure to a third party. AIG is exposed to credit risk with respect to the counterparties to these swap transactions.
At December 31, 2000, the maturity schedule for AIG's outstanding Medium Term Notes, including those issued by SunAmerica Inc., was as follows:
As of December 31, 2000, notes in aggregate principal amount of $3.18 billion were outstanding with maturity dates from 2001 to 2005 at interest rates ranging from 5.20 percent to 8.55 percent. These notes provide for a single principal payment at the maturity of each note.
At December 31, 2000, the maturity schedule for ILFC's outstanding Medium Term Notes was as follows:
(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 principal 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 65.26 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 2000 and 1999, no notes were repurchased. At December 31, 2000, the notes outstanding after prior purchases had a face value of $189 million, an unamortized discount of $62 million and a net book value of $127 million. The amortization of the original issue discount was recorded as interest expense.
(C) Notes and Debentures Issued by SunAmerica Inc.: As of December 31, 2000, Notes and Debentures issued by SunAmerica Inc. in aggregate principal amount of $433 million (net of amortized discount of $42 million) were outstanding with maturity dates from 2007 to 2097 at interest rates ranging from 5.60 percent to 9.95 percent.
At December 31, 2000, ILFC had $75 million in aggregate principal amount of debt securities registered for issuance from time to time, which debt had been sold as of March 16, 2001. An additional $2.0 billion principal amount of debt securities was registered as of January 5, 2001, under which $800 million in notes were sold as of March 16, 2001. A $750 million Medium Term Note program was implemented on January 19, 2001 under which $200 million has been sold as of March 16, 2001. In addition, ILFC established a Euro Medium Term Note program for $2.0 billion, under which $771 million in notes were sold through December 31, 2000.
accompanying table of borrowings. At December 31, 2000, the future minimum payments for ILFC's borrowings under the Export Credit Facility were as follows:
(iii) Notes and Bonds Payable Issued by AIGFP: At December 31, 2000, AIGFP's notes and bonds outstanding, the proceeds of which are invested in a segregated portfolio of securities available for sale, were as follows:
AIGFP is also obligated under various notes maturing from 2001 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, 2000, these notes had a U.S. dollar carrying value of $1.3 billion.
(e) Loans and Mortgages Payable: Loans and mortgages payable at December 31, 2000, consisted of the following:
At December 31, 2000, the maturity schedule for ILFC's capital lease obligations, were as follows:
(f) As of December 31, 2000, the combined principal payments due of all significant debt, excluding commercial paper, in each of the next five years and periods thereafter were as follows:
(a) ILFC: The preferred stock consists of 4,000 shares of market auction preferred stock ("MAPS") in eight series of 500 shares each. Each of these shares has a liquidation value of $100,000 per share and is not convertible. The dividend rate, other than the initial rate, for each dividend period for each series is reset approximately every seven weeks (49 days) on the basis of orders placed in an auction. At December 31, 2000, the dividend rate ranged from 4.98 percent to 5.25 percent.
In March 2001, SunAmerica Capital Trust II redeemed the 8.35% Trust Originated Preferred Securities for a cash payment equal to the liquidation amount of $185 million plus accrued and unpaid dividends at redemption date. Concurrently, SunAmerica redeemed all of the related 8.35% junior subordinated debentures, due 2044, for a liquidation amount of $191 million plus accrued interest.
The grantor trusts are accounted for as wholly owned subsidiaries of AIG. The debentures issued to the grantor trusts and the common securities purchased by SunAmerica Inc. from the grantor trusts are eliminated in the consolidated balance sheet.
In connection with the issuance of 7.5% Non-Voting Preferred Interests by Total return LLC in March 2000, SunAmerica issued a $350 million promissory note to Total Return LLC, due 2003. The preferred interests receive cash distributions and the note bears interest at a rate of 7.5%. The common interests in Total Return LLC are wholly owned by SunAmerica, and the common interests and the note are eliminated in the consolidated balance sheet.
(c) HSB: The preferred stock consists of $110 million liquidation amount of Exchange Capital Securities issued by HSB Capital I, a statutory business trust wholly owned by HSB, which has invested $113.4 million in debt securities of HSB. The capital securities accrue and pay quarterly cash distributions at a variable rate equal to 90 day LIBOR plus 0.91% of the stated liquidation amount of $1,000 per capital security, which rate was 6.6% at December 31, 2000. The capital securities are not redeemable prior to July 15, 2007 and are mandatorily redeemable upon the maturity of the debt securities on July 15, 2027 or the earlier redemption of the debt securities. AIG has issued a guarantee of the obligations of HSB, which together with the terms of the debt securities, the guarantee of HSB with respect to the capital securities, the indenture and the trust agreement with respect to the trust provide a full and unconditional guarantee of payments due on the capital securities. The trust is accounted for as a wholly owned subsidiary of AIG. The debt securities issued to the trust and the common securities issued by the trust to HSB are eliminated in the consolidated balance sheet.
(d) The common stock activity for the three years ended December 31, 2000 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.
(e) On November 6, 1996, SunAmerica Inc. issued 11,500,000 8 1/2% Premium Equity Redemption Cumulative Security Units (the "Units") with a stated amount of $37.50 per Unit. Each Unit consisted of a stock purchase contract (the "Contract") and a United States Treasury Note (the "Treasury Note") having a principal amount equal to the stated amount. These Units were scheduled to mature on October 31, 1999. The holders of the Units received interest on the Treasury Notes payable by the United States Government at a rate of 7 1/2% per annum and Contract fees payable at a rate of 1% per annum (both, the "Unit Payments") based upon the stated amount. The Units provided that SunAmerica Inc. would deliver on October 31, 1999 to the holder of each Unit one and one-half shares of common stock of SunAmerica Inc., subject to adjustment under certain defined circumstances, and obligated the holder of the Unit to pay to SunAmerica Inc. $37.50 per Unit. The Treasury Notes were held by a collateral agent to secure payment to SunAmerica Inc. as required under the Contract, but could be redeemed by the holders of the Units under certain defined circumstances. SunAmerica Inc. redeemed all of its Units on December 6, 1998. In connection with this redemption, SunAmerica Inc. issued 10,108,229 shares of SunAmerica Inc. common stock and made a cash payment for all accrued and unpaid Contract fees.
(f) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB 130) was adopted by AIG effective January 1, 1998. FASB 130 establishes standards for reporting comprehensive income and its components as part of capital funds. The reclassification adjustments with respect to available for sale securities were $(138) million, $122 million and $124 million for December 31, 2000, 1999 and 1998, respectively.
(c) AIGFP becomes a party to derivative financial instruments in the normal course of its business and to reduce its currency, interest rate and equity exposures. Interest rate, currency and equity risks related to such instruments are reflected in the consolidated financial statements to the extent these instruments are carried at a market or a fair value, whichever is appropriate. Because of limited liquidity of certain of these instruments, the recorded estimated fair values of such instruments may be different than the values that might be realized if AIGFP were to sell or close out the transactions prior to maturity.
The following tables provide the contractual and notional amounts of derivatives transactions of AIGFP and AIGTG at December 31, 2000.
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, 2000, the contractual amount of AIGFP's futures and forward contracts approximated $33.9 billion.
These instruments involve, to varying degrees, elements of credit risk not explicitly recognized in the consolidated financial statements.
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. Management believes that 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 $33.4 billion at December 31, 2000 and $16.90 billion at December 31, 1999. Subsequent to the application of such credit enhancements, the net exposure to credit risk or the net replacement value of all interest rate, currency, and equity swaps, swaptions and forward commitments approximated $9.51 billion at December 31, 2000 and $7.53 billion at December 31, 1999. The net replacement value for futures and forward contracts approximated $204 million at December 31, 2000 and $5 million at December 31, 1999. The net replacement value most closely represents the net credit risk to AIGFP or the maximum amount exposed to potential loss.
(a) Sold options obligate AIGTG to buy or sell the underlying item if the option purchaser chooses to exercise. The amounts do not represent credit exposure.
*Exchange traded futures and options are not deemed to have significant credit exposure as the exchanges guarantee that every contract will be properly settled on a daily basis.
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, 2000, AIGTG did not have a significant concentration of credit risk from either an individual counterparty or group of counterparties.
At December 31, 2000, AIGTG had issued and outstanding a $28 million principal amount letter of credit. This letter of credit was issued to a central bank.
(e) As a component of its asset and liability management strategy, SunAmerica utilizes swap agreements to match more closely the cash flows of its assets to the cash flows of its liabilities. SunAmerica uses these swap agreements to hedge against the risk of interest rate changes. At December 31, 2000, SunAmerica's swap agreements had an aggregate notional principal amount of $12.25 billion. These agreements mature in various years through 2030.
For investment purposes, SunAmerica has entered into various total return agreements with an aggregate notional amount of $28 million (the "notional amount") at December 31, 2000. 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 ($39 million) and ($12 million) for the years ended December 31, 2000 and 1999, respectively, and ($34 million) for the year ended September 30, 1998. AIG guarantees the payment obligations of SunAmerica under such agreements.
(f) At December 31, 2000, ILFC had committed to purchase 488 aircraft deliverable from 2001 through 2009 at an estimated aggregate purchase price of $27.3 billion and had options to purchase 51 aircraft deliverable from 2001 through 2008 at an estimated aggregate purchase price of $3.0 billion. 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.
A summary of reserve activity, including estimates for applicable incurred but not reported losses and loss expenses, relating to asbestos and environmental claims separately and combined at December 31, 2000, 1999 and 1998 follows.
(i) SunAmerica has established a deferred compensation plan for its registered representatives, pursuant to which participants have the opportunity to invest deferred commissions and fees on a notional basis. The value of the deferred compensation fluctuates with the value of the deferred investment alternatives chosen. AIG has provided a full and unconditional guarantee of the obligations of SunAmerica to pay the deferred compensation under the plan.
Securities available for sale: Fair values for securities available for sale and related hedges were based on quoted market prices. For securities and related hedges for which market prices were not readily available, fair values were estimated using quoted market prices of comparable investments.
Unrealized gains and losses on interest rate and currency swaps, options and forward transactions: Fair values for swaps, options and forward transactions were based on the use of valuation models that utilize, among other things, current interest, foreign exchange and volatility rates, as applicable.
The carrying values and fair values of AIG's financial instruments at December 31, 2000 and December 31, 1999 and the average fair values with respect to derivative positions during 2000 and 1999 were as follows: (in millions)
(i) Stock Option Plan: On September 15, 1999, the AIG Board of Directors adopted a 1999 stock option plan (the 1999 Plan), which provides that options to purchase a maximum of 15,000,000 shares of common stock can 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 375,000 shares. Options granted under this Plan expire not more than 10 years from the date of the grant. Options with respect to 13,500 shares and 12,000 shares were granted to non-employee members of the Board of Directors on September 15, 1999 and May 17, 2000, respectively. 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 Incentive Stock Option Treatment under the Economic Recovery Tax Act of 1981 (ISO Treatment). The Plan, and the options previously granted thereunder, were approved by the shareholders at the 2000 Annual Meeting of Shareholders. At December 31, 2000, 12,842,155 shares were reserved for future grants under the 1999 Plan. The 1999 Plan superceded the 1991 employee stock option plan (the 1991 Plan) and the previously superceded 1987 employee stock option plan (the 1987 Plan), although outstanding options granted under both the 1991 Plan and the 1987 Plan continue in force until exercise or expiration. At December 31, 2000, there were 15,991,621 shares reserved for issuance under the 1999, 1991, and 1987 Plans.
During 2000 and 1999, AIG granted options with respect to 413,500 shares and 574,500 shares, respectively, 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 ISO Treatment. The agreements with respect to all other options granted to employees 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, 2000, outstanding options granted with respect to 8,875,310 shares qualified for ISO Treatment.
At January 1, 1999, the merger date, SunAmerica Inc. had five stock-based compensation plans pursuant to which options, restricted stock and deferred share and share unit obligations had been issued and remained outstanding. Options granted under these plans had an exercise price equal to the market price on the date of grant, had a maximum term of ten years and generally became exercisable ratably over a five-year period. Substantially all of the SunAmerica Inc. options outstanding at the merger date became fully vested on that date and were converted into options to purchase AIG common stock at the exchange ratio of 0.855 shares of AIG common stock for each share of SunAmerica Inc. common stock. No further options can be granted under the SunAmerica Inc. plans, but outstanding options so converted continue in force until exercise or expiration. At December 31, 2000, there were 20,574,062 shares of AIG common stock reserved for issuance on exercise of options under these plans. None of these options qualified for ISO Treatment as of December 31, 2000.
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. During 2000, options with respect to 760,070 shares were exercised with delivery deferred. At December 31, 2000, optionees had made valid elections to defer delivery of 858,703 shares of AIG common stock upon exercise of options expiring during 2001.
Additional information with respect to AIG's plans at December 31, 2000, and changes for the three years then ended, were as follows:
The fair values of stock options granted during the years ended December 31, 2000, 1999 and 1998 were $85 million, $71 million and $28 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 2000, 1999 and 1998, respectively: dividend yields of 0.17 percent, 0.20 percent and 0.24 percent; expected volatilities of 27.0 percent, 25.0 percent and 22.0 percent; risk-free interest rates of 5.42 percent, 5.33 percent and 4.73 percent and expected terms of 7 years.
(ii) Employee Stock Purchase Plan: AIG's 1996 Employee Stock Purchase Plan was adopted at its 1996 shareholders' meeting and became effective as of July 1, 1996. Eligible employees may receive privileges to purchase up to an aggregate of 4,218,750 shares of AIG common stock, at a price equal to 85 percent of the fair market value on the date of the grant of the purchase privilege. Purchase privileges are granted annually and were originally 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. 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.
The fair values of purchase privileges granted during the years ended December 31, 2000, 1999 and 1998 were $13 million, $13 million and $10 million, respectively. The weighted average fair values per share of those purchase rights granted in 2000, 1999 and 1998 were $19.36, $14.04 and $10.31, respectively. The fair value of each purchase right is estimated on the date of the subscription using the Black-Scholes model.
AIG has adopted a Supplemental Executive Retirement Plan (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. The Supplemental Plan also provides a benefit equal to the reduction in benefits payable under the AIG retirement plan as a result of Federal limitations on benefits payable thereunder. Currently, the Supplemental Plan is unfunded.
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, 2000 and 1999:
For measurement purposes, an 8.5 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2000.
The rate was assumed to decrease gradually 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 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.
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $300 million, $256 million and $51 million, respectively, as of December 31, 2000 and $291 million, $251 million and $54 million as of December 31, 1999.
(b) Minimum future rental income on noncancelable operating leases of flight equipment which have been delivered at December 31, 2000 was as follows:
(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. There are no significant receivables from/payables to related parties at December 31, 2000. Net commission payments to Starr aggregated approximately $60 million in 2000, $45 million in 1999 and $46 million in 1998, from which Starr is required to pay commissions due originating brokers and its operating expenses. AIG also received approximately $13 million in 2000, $11 million in 1999 and $13 million in 1998 from Starr and paid approximately $41,000 in 2000, $42,000 in 1999 and $37,000 in 1998 to Starr in rental fees. AIG also received approximately $1 million in 2000, 1999 and 1998 from SICO and paid approximately $1 million in each of the years 2000, 1999 and 1998 to SICO as reimbursement for services rendered at cost. AIG also paid to SICO $4 million in 2000, 1999 and 1998 in rental fees.
AIG's three principal overseas life operations are ALICO, AIA and Nan Shan. ALICO is incorporated in Delaware and all of its business is written outside of the United States. ALICO has operations either directly or through subsidiaries in approximately 50 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.
Asset Management: AIG's asset management operations offer a wide variety of investment vehicles and services, including variable annuities, mutual funds and investment asset management. Such products and services are offered to individuals and institutions both domestically and internationally.
(b) The following table summarizes the operations by major operating segment for the years ended December 31, 2000, 1999 and 1998:
(c) The following table summarizes AIG's general insurance operations by major internal reporting group for the years ended December 31, 2000, 1999 and 1998:
(a) Includes other operations which are not required to be reported separately and adjustments and eliminations.
(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.