In AIG's general insurance operations, 1994 net premiums written and net premiums earned increased 8.4 percent and 7.5 percent, respectively, from those of 1993. In 1993, net premiums written increased 9.7 percent and net premiums earned increased 3.9 percent when compared to 1992.
During 1994, the U.S. dollar declined in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, the translation of foreign net premiums written into U.S. dollars for the purposes of consolidation caused the increase in total net premiums written to be approximately one and one-half percentage points greater than it would have been if translated utilizing exchange rates prevailing in 1993.
The Northridge earthquake which struck the Los Angeles area of California in January, 1994, resulted in gross and net incurred losses of approximately $174 million and $55 million, respectively. Although there were severe winter storms during the first quarter of 1994, AIG considered these as losses incurred in the ordinary course of business, not as catastrophes. The gross and net losses recorded in 1993 for catastrophes were approximately $134 million and $70 million, respectively. The catastrophes incurred in both 1994 and 1993 were significantly below the gross and net catastrophe losses of approximately $567 million and $192 million, respectively, recorded in 1992. Three major storms, Andrew, Iniki and Omar, occurred in 1992. If the catastrophes were excluded from the losses incurred in each period, the pro forma consolidated statutory general insurance ratios would be as follows:
Adjusted underwriting profit or loss (operating income less net investment income and realized capital gains) represents statutory underwriting profit or loss adjusted primarily for changes in deferred acquisition costs. (See also Note 4 of Notes to Financial Statements.) The adjusted underwriting profit in 1994 was $147.5 million compared to an adjusted underwriting profit of $10.4 million recorded in 1993 and an adjusted underwriting loss of $195.1 million in 1992. (See also Note 19 of Notes to Financial Statements.)
General insurance operating income in 1994 increased 15.5 percent when compared to 1993. The 1993 results reflect an increase of 26.0 percent from 1992. The contribution of general insurance operating income to income before income taxes and the cumulative effect of accounting changes was 55.4 percent in 1994 compared to 54.4 percent in 1993 and 52.6 percent in 1992.
AIG is a major purchaser of reinsurance for its general insurance operations. AIG is cognizant of the need to exercise good judgment in the selection and approval of both domestic and foreign companies participating in its reinsurance programs. AIG insures risks in over 100 countries and its reinsurance programs must be coordinated in order to provide AIG the level of reinsurance protection which AIG desires. These reinsurance arrangements do not relieve AIG from its direct obligations to its insureds.
AIG's general reinsurance assets amounted to $16.29 billion and resulted from its reinsurance arrangements. Thus, a credit exposure existed at December 31, 1994 with respect to reinsurance recoverable to the extent that any reinsurer may not be able to reimburse AIG under the terms of these reinsurance arrangements. AIG manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound, and when necessary AIG holds substantial collateral in the form of funds, securities and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods. The application of this collateral against balances due or any changes to the amount of collateral are based on the development of losses recoverable on an individual reinsurer basis. This development includes losses incurred but not reported (IBNR). Approximately 59 percent of reinsurance recoverable is from unauthorized reinsurers. In order to obtain statutory recognition, nearly all of these balances are collateralized. The remaining 41 percent of the reinsurance recoverable is from authorized reinsurers and over 90 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 enters into certain intercompany reinsurance transactions for its general and life operations. AIG enters these transactions as a sound and prudent business practice in order to maintain underwriting control and spread insurance risk
among various legal entities. These reinsurance agreements have been approved by the appropriate regulatory authorities. All material intercompany transactions have been eliminated in consolidation.
At December 31, 1994, general insurance reserves for losses and loss expenses (loss reserves) amounted to $31.44 billion, an increase of $1.39 billion or 4.6 percent over the prior year end. General insurance net loss reserves represent the accumulation of estimates of ultimate losses, including IBNR, and loss expenses, reduced by reinsurance recoverable net of an allowance for unrecoverable reinsurance and minor amounts of discounting related to certain workers' compensation claims. The net loss reserves increased $861.9 million or 4.9 percent to $18.42 billion. The methods used to determine such estimates and to establish the resulting reserves are continually reviewed and updated. Any adjustments resulting therefrom are reflected in operating income currently. It is management's belief that the general insurance net loss reserves are adequate to cover all general insurance net losses and loss expenses as at December 31, 1994. 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. 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. For the majority of long tail casualty lines, net loss trend factors approximating 10 percent were employed. These factors are periodically reviewed and subsequently adjusted, as appropriate, to reflect emerging trends which are based upon past loss experience.
small. Additionally, the exposure for cleanup costs of hazardous waste dump sites involves issues such as allocation of responsibility among potentially responsible parties and the government's refusal to release parties. The cleanup cost exposure may significantly change if the Congressional reauthorization of Superfund expected in 1995 dramatically changes, thereby reducing or increasing litigation and cleanup costs.
A summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims separately and combined at December 31, 1994 and 1993 was as follows:
The gross and net IBNR included in the aforementioned reserve for losses and loss expenses at December 31, 1994 and 1993 were estimated as follows:
Recently, 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. 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 respective 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, do have significant impact on the amount of asbestos and environmental losses and loss expense reserves, ultimate payments thereof and the resultant ratio. In addition to the study published by that insurance rating agency, another published study projected significantly lower ultimate costs for toxic waste cleanups for the insurance industry.
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 1994, 1993 and 1992 were $48.2 million, $69.1 million and $27.7 million, respectively. Also, AIG is required to participate in various involuntary pools (principally workers' compensation business) which provide insurance coverage for those not able to obtain such coverage in the voluntary markets. This participation is also recorded upon notification, as these amounts cannot reasonably be estimated. (See also Note 19 of Notes to Financial Statements.)
AIG's life insurance operations continued to show growth as a result of overseas operations, particularly in Asia. AIG's life premium income in 1994 represented an 17.0 percent increase from the prior year. This compares with an increase of 18.4 percent in 1993 over 1992. Foreign life operations produced 94.5 percent, 95.3 percent and 94.4 percent of the life premium income in 1994, 1993 and 1992, respectively. (See also Notes 1, 4 and 6 of Notes to Financial Statements.)
As previously discussed, the U.S. dollar declined in value in relation to most major foreign currencies in which AIG transacts business. Accordingly, the translation of foreign life premium income into U.S. dollars for purposes of consolidation caused the increase in total premium income to be approximately two percentage points greater than it would have been if translated utilizing exchange rates prevailing in 1993.
Life insurance net investment income increased 16.6 percent in 1994 compared to an increase of 14.1 percent in 1993. The growth in net investment income was primarily attributable to new cash flow for investment.
The traditional life products, such as whole and term life and endowments, were the major contributors to the growth in foreign premium income and investment income, particularly in Asia, and continue to be the primary source of growth in the life segment. A mixture of traditional, accident and health and financial products are being sold in Japan.
Life insurance realized capital gains were $86.7 million in 1994, $54.6 million in 1993 and $43.3 million in 1992. These realized gains 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 and redemptions of fixed maturities.
Life insurance operating income in 1994 increased 21.9 percent to $952.5 million compared to an increase of 17.1 percent in 1993. Excluding realized capital gains from life insurance operating income, the percent increases would be 19.1 percent and 16.5 percent in 1994 and 1993, respectively. The contribution of life insurance operating income to income before income taxes and the cumulative effect of accounting changes amounted to 32.3 percent in 1994 compared to 30.0 percent in 1993 and 31.2 percent in 1992.
Financial services operations for the twelve month periods ending December 31, 1994, 1993 and 1992 were as follows:
AIG Trading Group Inc. and its subsidiaries (AIGTG), derive a substantial portion of their revenues from market making and trading activities, as principals, in foreign exchange, interest rates, precious and base metals, petroleum and natural
Financial services operating income represented 13.7 percent of AIG's income before income taxes and the cumulative effect of accounting changes in 1994. This compares to 15.0 percent and 16.2 percent in 1993 and 1992, respectively.
Minority interest represents minority shareholders' equity in income of certain consolidated subsidiaries. In 1994, minority interest amounted to $29.7 million. In 1993 and 1992, minority interest amounted to $26.9 million and $11.2 million, respectively.
In 1994, AIG recorded a provision for income taxes of $776.5 million compared to the provisions of $683.0 million and $512.0 million in 1993 and 1992, respectively. These provisions represent effective tax rates of 26.3 percent in 1994 and 1993 and 24.0 percent in 1992. The most significant cause for the increase in the effective tax rate for 1993 was the Omnibus Budget Reconciliation Act of 1993 (the Act). Among other things, the Act increased the corporate tax rate to 35 percent from 34 percent, effective January 1, 1993. Additionally, the 1993 effective tax rate was influenced by higher state and local income taxes. (See Note 3 of Notes to Financial Statements.)
At January 1, 1993, AIG's equity in income of minority-owned insurance operations was positively impacted by the cumulative effect of accounting changes on such operations from the adoption of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes"(FASB 109), which was partially offset by the adoption of Statement of Financial Accounting Standards No. 106 "Employer's Accounting for Postretirement Benefits Other than Pension Plans" (FASB 106). AIG's equity in the cumulative effect of such accounting changes was a net benefit of $20.7 million.
AIG had adopted FASB 106 and FASB 109 effective as at January 1, 1992, recording a cumulative effect net benefit of $31.9 million. The pretax cumulative charge of adopting FASB 106 was $83.1 million and the net of tax cumulative charge was $54.8 million. The cumulative effect of adopting FASB 109 was a benefit of $86.7 million.
Net income amounted to $2.18 billion in 1994, $1.94 billion in 1993 and $1.66 billion in 1992. The increases in net income over the three year period resulted from those factors described above.
At December 31, 1994, AIG had total capital funds of $16.42 billion and total borrowings of $17.52 billion.
Total borrowings at December 31, 1994 and 1993 were as follows:
AIG Funding, Inc. (Funding), through the issuance of commercial paper, fulfills the short-term cash requirements of AIG and its subsidiaries. Funding intends to continue to meet AIG's funding requirements through the issuance of commercial paper guaranteed by AIG. This issuance of commercial paper is subject to the approval of AIG's Board of Directors. ILFC, A.I. Credit Corp. (AICCO) and AIGFP issue commercial paper for the funding of their own operations. AIG does not guarantee AICCO's or ILFC's commercial paper. However, AIG has entered into an agreement in support of AICCO's commercial paper. AIG guarantees AIGFP's commercial paper. (See also the discussion under "Derivatives" herein and Note 9 of Notes to Financial Statements.)
On December 15, 1994, AIG and Funding entered into two syndicated revolving credit facilities (the Facilities) aggregating $1 billion. The Facilities consist of a $500 million 364 day revolving credit facility and a $500 million five year revolving credit facility. The Facilities represent a consolidation of domestic and international bilateral lines of credit and can be used for general corporate purposes. The Facilities also provide backup for AIG's commercial paper programs administered by Funding. There are currently no borrowings outstanding under either of the Facilities, nor were any borrowings outstanding as of December 31, 1994.
During 1994, ILFC increased the aggregate principal amount outstanding of its medium term and term notes to $4.95 billion at December 31, 1994, a net increase of $645.8 million. At December 31, 1994, ILFC had $1.6 billion in aggregate principal amount of debt securities registered for issuance from time to time. The cash used to purchase flight equipment is derived primarily from the proceeds of ILFC's debt financing. The primary sources for the repayment of this debt and the interest expense thereon are the lease receipts received and proceeds from the sale of flight equipment. During 1994, ILFC obtained net financing of $1.76 billion for the acquisition of flight equipment costing $2.73 billion. Additional funds were provided by operating cash flow and the sale of flight equipment. ILFC sold $100 million of Market Auction Preferred Stock in 1993. Additionally, $100 million of Market Auction Preferred Stock was sold in February, 1995. The proceeds from the sale of these securities were used to reduce ILFC's maturing debt. (See also the discussions under "Operational Review" and "Liquidity" herein and Notes 1, 9 and 16 of Notes to Financial Statements.)
changes in the market value of bonds available for sale. The cumulative translation adjustment loss, net of taxes, decreased $60.1 million as a result of the general weakness of the U.S. dollar against most major currencies. Retained earnings increased $2.04 billion, resulting from net income less dividends.
In December 1994, the Mexican peso was devalued significantly against the U.S. dollar, as well as other currencies. AIG's Mexican operations constitute only a minor part of AIG's consolidated general and life operations and therefore the devaluation had little effect on AIG's results of operations or financial condition. It is also anticipated that there will be little impact going forward.
During 1994, AIG repurchased 2.09 million shares of its common stock in the open market at a cost of $177.7 million.
During 1993, preferred stock issued and outstanding decreased $7,500 and additional paid-in capital declined approximately $150 million due to the redemption of Series M-1 and M-2 Exchangeable Money Market Cumulative Serial Preferred Stock. Common stock increased by $281.2 million and additional paid-in capital decreased by that amount as a result of a common stock split in the form of a 50 percent stock dividend paid July 30, 1993. (See also Note 10 of Notes to Financial Statements.)
Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by statutory authorities. AIG has in the past reinvested most of its unrestricted earnings in its operations and believes such continued reinvestment in the future will be adequate to meet any foreseeable capital needs. However, AIG may choose from time to time to raise additional funds through the issuance of additional securities. At December 31, 1994, there were no significant statutory or regulatory issues which would impair AIG's financial condition, results of operations or liquidity. (See also the discussion under "Liquidity" herein and Note 10 of Notes to Financial Statements.)
The liquidity of the combined insurance operations is derived both domestically and abroad. The combined insurance pretax operating cash flow is derived from two sources, underwriting operations and investment operations. In the aggregate, AIG's insurance operations generated approximately $7.9 billion in pretax cash flow during 1994. Cash flow includes periodic premium collections, including policyholders' contract deposits, paid loss recoveries less reinsurance premiums, losses, benefits, acquisition and operating expenses paid and investment income. Generally, there is a time lag from when premiums are collected and, when as a result of the occurrence of events specified in the policy, the losses and benefits are paid. AIG's insurance investment operations generated approximately $3.1 billion in investment income cash flow during 1994. Investment income cash flow is primarily derived from interest and dividends received and includes realized capital gains.
The following table is a summary of AIG's invested assets by significant segment, including investment income due and accrued and real estate, at December 31, 1994 and 1993:
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, 1994 and 1993:
With respect to fixed maturities, AIG's strategy is to invest in high quality securities while maintaining diversification to avoid significant exposure to issuer, industry and/or country concentrations.
A significant portion of the foreign insurance fixed income portfolio is rated by Moody's, Standard & Poor's (S&P) or similar foreign services. However, similar credit quality rating services are not available in all overseas locations. Thus, AIG annually reviews the credit quality of the nonrated fixed income investments, including mortgages, in its foreign portfolio. AIG applies a scale similar to that of Moody's and S&P to the rating of these securities. Coupling the ratings of this internal review with those of the independent agencies indicates that approximately 42 percent of the foreign fixed income investments were rated AAA, less than one percent were deemed below investment grade and approximately 4 percent were not rated at December 31, 1994.
Although AIG's fixed income insurance portfolios contain only minor amounts of securities below investment grade, potentially any fixed income security is subject to downgrade for a variety of reasons subsequent to any balance sheet date. There have been no significant downgrades as at March 1, 1995.
At December 31, 1994, approximately 5 percent of the fixed maturities portfolio was Collateralized Mortgage Obligations (CMOs). All of the CMOs were investment grade and approximately 86 percent of the CMOs were backed by various U.S. government agencies. Thus, credit risk was minimal. CMOs are exposed to interest rate risk as the duration and ultimate realized yield would be affected by the accelerated prepayments of the underlying mortgages. There were no interest only or principal only CMOs.
When permitted by regulatory authorities and when deemed necessary to protect insurance assets, including invested assets, from currency risk and interest rate risk, AIG and its insurance subsidiaries enter into derivative transactions as end users. To date, such activities have been minor. (See also the discussion under "Derivatives" herein.)
As previously discussed, the cash used for the purchase of flight equipment is derived primarily from the proceeds of ILFC's debt financing. The primary sources for the repayment of this debt and the interest expense thereon are the lease receipts received and proceeds from the sale of flight equipment. During 1994, ILFC obtained net financing of $1.76 billion for the acquisition of flight equipment costing $2.73 billion. Additional funds were provided by operating cash flow and the sale of flight equipment.
At December 31, 1994, ILFC had committed to purchase 236 aircraft deliverable from 1995 through 2000 at an estimated aggregate purchase price of $13.4 billion and had options to purchase an additional 51 aircraft deliverable through 2001 at an estimated aggregate exercisable price of $2.8 billion. As at March 15, 1995, ILFC has entered into leases, letters of intent to lease or is in various stages of negotiation for 63 of 68 aircraft to be delivered in 1995 and 54 of 168 aircraft to be delivered subsequent to 1995. ILFC will be required to find customers for any aircraft presently on order and any new aircraft to be ordered, and it must arrange financing for portions of the purchase price of such equipment. In a rising interest rate environment, ILFC negotiates higher lease rates on any new contracts. ILFC has been successful to date both in placing its new aircraft on lease or under sales contract and obtaining adequate financing.
AIGFP's positions are carried at market value or at estimated fair value when market prices are not readily available. These values represent assessments of the present value of expected future cash flows. The recorded values of these transactions may be less than the values that might be realized, if AIGFP were to sell or close out the transactions prior to maturity. AIGFP reduces its economic risk exposure through similarly valued offsetting transactions including swaps, trading securities, forwards and futures. AIG believes that the impact of such limited liquidity would not be significant to AIG's financial condition or its overall liquidity. (See also the discussion under "Derivatives" herein.)
Securities available for sale, at market value and securities purchased under agreements to resell are primarily purchased with the proceeds of AIGFP's GIA financings and term borrowings. As the GIA and term borrowings combined net balances have declined since December 31, 1993, the proceeds from the disposal of securities available for sale and securities purchased under agreements to resell have been used to fund the maturing GIAs. (See also the discussion under "Capital Resources" herein.)
Securities available for sale is mainly a portfolio of debt securities, where the individual securities have varying degrees of credit risk. At December 31, 1994, the average credit rating to this portfolio was AA as determined through rating agencies or internal review. There were no securities deemed below investment grade. There have been no significant downgrades through March 1, 1995. Securities purchased under agreements to resell are treated as collateralized transactions. AIGFP generally takes possession of securities purchased under agreements to resell. AIGFP further minimizes its credit risk by monitoring counterparty credit exposure and, when AIGFP deems necessary, it requires additional collateral to be deposited. Trading securities, at market value are marked to market daily and are held to meet the short-term risk management objectives of AIGFP.
AIGTG acts as principal in certain foreign exchange, interest rate, precious and base metals, petroleum and natural gas trading activities. AIGTG owns inventories in the commodities in which it trades and may reduce the exposure to market risk through the use of forwards, futures and option contracts. AIGTG uses derivatives to manage the economic exposure of its various trading positions and transactions from adverse movement in interest rates, exchange rates and commodity prices. AIGTG supports its trading activities largely through trade payables, short-term borrowings and spot commodities sold but not yet purchased. (See also the discussions under "Capital Resources" and "Derivatives" herein.)
Derivatives are generally either negotiated over the counter contracts or standardized contracts executed on an exchange. Standardized exchange traded derivatives include futures and options which can be readily bought or sold over
recognized security exchanges and settled through such clearing houses. Negotiated over the counter derivatives include forwards, swaps and options. Over the counter derivatives are generally not traded like exchange traded securities. However, in the normal course of business, with the agreement of the original counterparty, these contracts may be terminated or assigned to another counterparty.
AIG actively manages the exposures to limit the potential to loss, while maximizing the rewards afforded by these business opportunities. In doing so, AIG must manage a variety of exposures to risk including credit risk, market risk, liquidity risk and legal risk.
Market risk principally arises from the uncertainty that future earnings are exposed to potential changes in volatility, interest rates, foreign exchange rates, and equity and commodity prices. AIG generally controls its exposure to market risk by taking offsetting positions. AIG's philosophy with respect to its financial services operations is to minimize or set limits for open or uncovered positions that are to be carried. Credit risk exposure is separately managed. (See the discussion on the management of credit risk below).
extrapolation from verifiable prices nearest to the dates of the transactions. The methodology may reflect interest and exchange rates, volatility rates and other relevant factors.
The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG included in the financial services assets and liabilities at December 31, 1994 were as follows:
(c) The net replacement value with respect to purchased option contracts of AIGTG at December 31, 1994 was $275.1 million.
cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps. The timing and the amount of cash flows relating to foreign exchange forwards and exchange traded futures and options contracts are determined by the contractual agreements.
The following table presents AIGFP's derivatives portfolio by maturity and type of derivative at December 31, 1994:
* Exchange traded futures are not deemed to have significant credit exposure as the exchanges guarantee that every contract will be properly settled.
At December 31, 1994, the counterparty credit quality by derivative product with respect to the net replacement value of AIGFP's derivatives portfolio was as follows:
At December 31, 1994, the counterparty breakdown by industry with respect to the net replacement value of AIGFP's derivatives portfolio was as follows:
(a) Exchange traded options are not deemed to have significant credit exposure as the exchanges guarantee that every option will be properly settled.
(c) Options obligate AIGTG to buy or sell the underlying item if the option purchaser chooses to exercise. The amounts do not represent credit exposures.
At December 31, 1994, the counterparty breakdown by industry with respect to the net replacement value of AIGTG's derivatives portfolio was as follows:
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 insurance investment operations; to date, such activities have been minor.
Management of AIG's liquidity profile is designed to ensure that even under adverse conditions AIG is able to raise funds at the most economical cost to fund maturing liabilities and capital and liquidity requirements of its subsidiaries. Sources of funds considered in meeting these objectives include guaranteed investment agreements, issuance of long and short-term debt, maturities and sales of securities available for sale, securities sold under repurchase agreements, trade payables, securities and spot commodities sold, not yet purchased, issuance of equity, and cash provided from operations. AIG's strong capital position is integral to managing liquidity, as it enables AIG to raise funds in diverse markets worldwide. (See also the discussions under "Capital Resources" and "Liquidity" herein.)
Legal risk arises from the uncertainty of the enforceability, through legal or judicial processes, of the obligations of AIG's clients and counterparties, including contractual provisions intended to reduce credit exposure by providing for the netting of mutual obligations. (See also the discussion on master netting
In 1992, domestic life insurance companies were required for regulatory purposes to fully adopt two investment reserves, the Asset Valuation Reserve (AVR) and the Interest Maintenance Reserve (IMR). The AVR is formula based and applies to all invested assets which are subject to either credit or market risk. The IMR defers realized capital gains and losses on the sale of fixed maturities and mortgage loans. The realized gains and losses are subsequently amortized into investment income over the original term of the disposed assets. The impact of these reserves on the separately reported statutory income of certain domestic life companies was significant in 1994. However, there was no impact on AIG's 1994 GAAP consolidated life insurance operating income presented herein.
In July 1994, AIG acquired $200 million of 8 percent convertible preferred stock of Alexander & Alexander Services Inc. (A&A), an independent insurance brokerage operation. The preferred stock is convertible into common stock of A&A at $17 per share. Both the convertible preferred stock and the common stock are non-voting in the hands of AIG. AIG may elect in the future to exchange its non-voting common stock for up to 9.9 percent of A&A's voting common stock. The dividend will be paid in-kind for the first two years; and, at A&A's option, for an additional three years.
In March 1992, the Financial Accounting Standards Board (FASB) issued Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts" (Interpretation), which is effective for fiscal years beginning after December 15, 1993. The Interpretation requires that unrealized gains and losses on swaps, forwards, options and similar contracts be recognized as assets and liabilities. Previously, AIG's policy was to record such unrealized gains and losses on a net basis in the consolidated balance sheet. The Interpretation allows the netting of such unrealized gains and losses with the same counterparty when they are included under a master netting arrangement with the counterparty and the contracts are reported at market or fair value.
In November 1992, FASB issued Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Post-employment Benefits" (FASB 112). FASB 112 established accounting standards for employers who provide benefits to former or inactive employees after employment but before
In October 1994, FASB issued Statement of Financial Accounting Standards No. 119 "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" (FASB 119). FASB 119 requires disclosure about derivative financial instruments and amends FASB Statement No. 105 "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk" (FASB 105) and FASB Statement No. 107 "Disclosure about Fair Value of Financial Instruments".
As discussed in Note 1(w) of Notes to Financial Statements, the Company changed its method of accounting for investments in certain fixed maturity securities in 1993, and in 1992 for income taxes and postretirement benefits other than pensions.
American International Group, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CAPITAL FUNDS
(a) PRINCIPLES OF CONSOLIDATION:The consolidated financial statements include the accounts of American International Group, Inc. and all significant subsidiaries (AIG). All material intercompany accounts and transactions have been eliminated.
FINANCIAL SERVICES OPERATIONS: AIG conducts, primarily as principal, an interest rate, currency, and equity derivative products business which includes long-dated transactions. AIG also enters into guaranteed investment agreement transactions. In the course of conducting this business, AIG also engages in a variety of other related financial transactions, including offsetting transactions.
AIG, as lessor, leases flight equipment principally under operating leases. Accordingly, income is reported over the life of the lease as rentals become receivable under the provisions of the lease or, in the case of leases with varying payments, under the straight-line method over the noncancelable term of the lease. In certain cases, leases provide for additional amounts contingent on usage. AIG also is a marketer of flight equipment and marketing revenues from such operations consisting of net gains on sales of flight equipment, commissions and net gains on dispositions of leased flight equipment.
Realized capital gains and losses are determined principally by specific identification. Where declines in values of securities below cost or amortized cost are considered to be other than temporary, a charge would be reflected in income for the difference between amortized cost and estimated net realizable value.
(f) SECURITIES AVAILABLE FOR SALE, AT MARKET VALUE: These securities are held to meet long term investment objectives and are accounted for as available for sale, carried at market value and are recorded on a trade date basis. Unrealized gains and losses are reflected in capital funds, net of any related deferred income taxes.
(g) 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 marked to market daily. The unrealized gains and losses are reflected in income daily.
(h) SPOT COMMODITIES, AT MARKET VALUE: Spot commodities, which include commodities and options, are valued at market and are recorded on a trade date basis. The unrealized gains and losses are reflected in income currently. The exposure to market risk may be reduced through the use of forwards, futures and option contracts. These contracts are valued at market and are recorded as contractual commitments on a trade date basis. The unrealized gains and losses on open contracts are reflected in income currently.
(l) OTHER INVESTED ASSETS: Other invested assets consist primarily of investments 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 depending upon the nature of the underlying assets. Unrealized gains and losses from the revaluation of those investments carried at market are reflected in capital funds, net of any related taxes.
(m) REINSURANCE ASSETS: Reinsurance assets include the balances due from both reinsurance and insurance companies under the terms of AIG's reinsurance arrangements for paid and unpaid losses and loss expenses, ceded unearned premiums and ceded future policy benefits for life and accident and health insurance contracts and benefits paid and unpaid. It also includes funds held under reinsurance treaties.
interest in Richmond Insurance Company; its 23.9 percent interest in SELIC Holdings, Ltd; and 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. At December 31, 1994, the market value of AIG's investment in Transatlantic exceeded its carrying value by approximately $239.3 million.
(o) 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.
(p) SEPARATE AND VARIABLE ACCOUNTS: Separate and variable accounts represent funds for which investment income and investment gains and losses accrue directly to the policyholders. Each account has specific investment objectives, and the assets are carried at market value. The assets of each account are legally segregated and are not subject to claims which arise out of any other business of AIG.
(q) SECURITIES SOLD BUT NOT YET PURCHASED, PRINCIPALLY OBLIGATIONS OF THE U.S. GOVERNMENT AND GOVERNMENT AGENCIES, AT MARKET VALUE: Securities sold but not yet purchased represent sales of securities not owned at the time of sale. These obligations are recorded on a trade date basis and are carried at current market values. The unrealized gains and losses are reflected in income currently.
(r) SPOT COMMODITIES SOLD BUT NOT YET PURCHASED, AT MARKET VALUE: Spot commodities sold but not yet purchased represent sales of commodities not owned at the time of sale. These obligations are recorded on a trade date basis and are carried at market values based upon current commodity prices. The unrealized gains and losses are reflected in income currently.
(s) PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY COMPANY: Preferred shareholders' equity in subsidiary company relates to outstanding market auction preferred stock of International Lease Finance Corporation (ILFC), a wholly owned subsidiary of AIG.
(i) STANDARDS ADOPTED IN 1994: In March 1992, the Financial Accounting Standards Board (FASB) issued Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts" (Interpretation), which is effective for fiscal years beginning after December 15, 1993. The Interpretation requires that unrealized gains and losses on swaps, forwards, options and similar contracts be recognized as assets and liabilities. Previously, AIG's policy was to record such unrealized gains and losses on a net basis in the consolidated balance sheet. The Interpretation allows the netting of such unrealized gains and losses with the same counterparty when they are included under a master netting arrangement with the counterparty and the contracts are reported at market value.
In November 1992, FASB issued Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" (FASB 112). FASB 112 establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. FASB 112 was adopted by AIG effective January 1, 1994 and had no significant impact on AIG's results of operations, financial condition or liquidity.
In October 1994, FASB issued Statement of Financial Accounting Standards No. 119 "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" (FASB 119). FASB 119 requires disclosure about derivative financial instruments and amends FASB 105 "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk" (FASB 105) and FASB 107 "Disclosure about Fair Value of Financial Instruments".
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 37 percent and 36 percent of consolidated assets at December 31, 1994 and 1993, respectively, and 52 percent, 50 percent and 47 percent of revenues for the years ended December 31, 1994, 1993 and 1992, respectively, were located in or derived from foreign countries (other than Canada). (See Note 19.)
(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 1985 through 1988 have been issued and Letters of Protest contesting the assessments have been filed with the Internal Revenue Service. It is management's belief that there are substantial arguments in support of the positions taken by AIG in its Letters of Protest. Management also believes that the final result of these examinations will be immaterial to the financial statements.
Foreign income not expected to be taxed in the United States has arisen because AIG's foreign subsidiaries were generally not subject to U.S. income taxes on income earned prior to January 1, 1987. Such income would become subject to U.S. income taxes at current tax rates if remitted to the United States or if other events occur which would make these amounts currently taxable. The cumulative amount of undistributed earnings of AIG's foreign subsidiaries currently not subject to U.S. income taxes was approximately $2.6 billion at December 31, 1994. Management presently has no intention of subjecting these accumulated earnings to material U.S. income taxes and no provision has been made in the accompanying financial statements for such taxes.
During 1994, the Internal Revenue Service issued Treasury Regulations that affect the tax accounting method for companies which enter into hedging transactions. The expected effect of these Regulations is to accelerate the timing of AIG's income tax payments. None of these 1994 changes will have a material effect on AIG's net income.
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. 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.
In the normal course of their operations, certain AIG subsidiaries are provided reinsurance coverages from AIG's minority-owned reinsurance companies. During 1994, 1993 and 1992, the premiums written which were ceded to Transatlantic amounted to $200,000,000, $238,100,000 and $210,700,000, respectively.
For the years ended December 31, 1994, 1993 and 1992, reinsurance recoveries, which reduced loss and loss expenses incurred, amounted to $4.84 billion, $4.45 billion and $4.19 billion, respectively.
Life insurance recoveries, which reduced death and other benefits, approximated $96.0 million, $76.7 million and $64.8 million, respectively, for each of the years ended December 31, 1994, 1993 and 1992.
Life insurance assumed represented 0.1 percent of gross life insurance in-force at December 31, 1994, and 0.5 percent for 1993 and 1.7 percent for 1992, and 0.1 percent, 0.1 percent and 0.2 percent of gross premium income for each of the periods ended December 31, 1994, 1993 and 1992, respectively.
6. RESERVE FOR LOSSES AND LOSS EXPENSES AND FUTURE LIFE POLICY BENEFITS AND POLICYHOLDERS' CONTRACT DEPOSITS
(iv) Participating life business represented approximately 27 percent of the gross insurance in-force at December 31, 1994 and 48 percent of gross premium income in 1994. 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.
(d) The liability for policyholders' contract deposits has been established based on the following assumptions:
(i) Interest rates credited on deferred annuities vary by year of issuance and range from 8.2 percent to 4.0 percent. Credited interest rate guarantees are generally for a period of one year. Withdrawal charges generally range from 6.0 percent to 10.0 percent grading to 0 percent over a period of 7 to 10 years.
(iii) Interest rates on corporate-owned life insurance business are guaranteed at 4 percent and credited on average 9.7 percent on funds supported by policy loans.
(iv) The universal life funds have credited interest rates of 6 percent to 7 percent and guarantees ranging from 4 percent to 5.5 percent depending on the year of issue. Additionally, universal life funds are subject to surrender charges that amount to 7.5 percent of the fund balance and grade off over no more than 15 years from issue.
(e) Experience adjustments, relating to future policy benefits and policyholders' contract deposits, vary according to the type of contract and the territory in which the policy is in force. In general terms, investments, mortality and morbidity results may be passed through by experience credits or as an adjustment to the premium mechanism, subject to local regulatory guidance.
AIG's insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by domestic or foreign insurance regulatory authorities. The differences between statutory financial statements and financial statements prepared in accordance with generally accepted accounting principles (GAAP) vary between domestic and foreign jurisdictions. The principal differences are that statutory financial statements do not reflect deferred policy acquisition costs and deferred income taxes, all bonds are carried at amortized cost and reinsurance assets and liabilities are presented net of reinsurance. AIG's use of permitted statutory accounting practices does not have a significant impact on statutory surplus.
(a) STATUTORY DEPOSITS: Cash and securities with carrying values of $3.04 billion and $2.95 billion were deposited by AIG's subsidiaries under requirements of regulatory authorities as of December 31, 1994 and 1993, respectively.
(b) NET INVESTMENT INCOME: An analysis of the net investment income from the general and life insurance operations follows:
(c) INVESTMENT GAINS AND LOSSES: The realized capital gains and increase or decrease in unrealized appreciation of investments for 1994, 1993 and 1992 were as follows:
(a) In 1994, the realized gains (losses) resulted from the sale of available for sale fixed maturities. Prior to 1994, a majority of the gains (losses) realized resulted from sales of bonds carried at market value.
(b) Includes $511.8 million increase in unrealized appreciation attributable to participating policyholders at December 31, 1993.
(c) Includes $440.5 million decrease in unrealized appreciation attributable to participating policyholders at December 31, 1994.
(d) MARKET VALUE OF FIXED MATURITIES AND UNREALIZED APPRECIATION OF INVESTMENTS: At December 31, 1994, the balance of the unrealized appreciation of investments in equity securities (before applicable taxes) included gross gains of approximately $1,320,000,000 and gross losses of approximately $914,500,000.
The deferred tax payable related to the net unrealized appreciation of investments was $57,547,000 at December 31, 1994 and $404,264,000 at December 31, 1993.
The amortized cost and estimated market value of investments in fixed maturities carried at amortized cost at December 31, 1994 and December 31, 1993 were as follows:
The amortized cost and estimated market value of bonds available for sale and carried at market value at December 31, 1994 and 1993 were as follows:
(e) CMOs: CMOs, held by AIG's life companies, are presented as a component of bonds available for sale, at market. The CMOs are principally U.S. government and government agency backed and AAA rated securities. These represent 86 percent of the CMOs held. Whole loans represent 14 percent of the CMOs held and are investment grade.
The distribution of the CMOs at December 31, 1994 and 1993 was as follows:
(f) FIXED MATURITIES BELOW INVESTMENT GRADE: At December 31, 1994, the fixed maturities and securities available for sale held by AIG that were below investment grade were insignificant.
(h) At December 31, 1994, non-income producing invested assets were insignificant.
Commercial paper issued by Funding is guaranteed by AIG. AIG has entered into an agreement in support of AICCO's commercial paper. AIG does not guarantee ILFC's commercial paper.
(i) MEDIUM TERM NOTES PAYABLE ISSUED BY AIG: AIG's Medium Term Notes are unsecured obligations which may not be redeemed by AIG prior to maturity and bear interest at either fixed rates set by AIG at issuance or variable rates determined by reference to an interest rate or other formula.
An analysis of the Medium Term Notes for the year ended December 31, 1994 was as follows:
(ii) ITALIAN LIRE BONDS: In December, 1991, AIG issued unsecured bonds denominated in Italian Lire. The principal amount of 200 billion Italian Lire Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent which is paid annually. These bonds are not redeemable prior to maturity, except in the event of certain changes involving taxation in the United States or the imposition of certain certification, identification or reporting requirements.
Simultaneous with the issuance of this debt, AIG entered into a swap transaction which effectively converted AIG's net interest expense to a U.S. dollar liability of approximately 7.9 percent, which requires the payment of proceeds at maturity of approximately $159 million in exchange for 200 billion Italian Lire and interest thereon.
As of December 31, 1994, notes in aggregate principal amount of $2,950,000,000 were outstanding with maturity dates varying from 1995 to 2004 and interest rates ranging from 4.75 percent to 8.88 percent. These notes provide for a single principal payment at maturity.
At December 31, 1994, the maturity schedule for ILFC's Term Notes was as follows:
(f) INTEREST EXPENSE FOR ALL INDEBTEDNESS: Total interest expense for all indebtedness, net of capitalized interest, aggregated $1,289,277,000 in 1994, $1,103,955,000 in 1993 and $1,128,007,000 in 1992. Interest expense paid approximated $1,055,503,000 in 1994, $1,017,066,000 in 1993 and $1,051,976,000 in 1992.
(c) The common stock activity for the three years ended December 31, 1994 was as follows:
(a) Commitments to extend credit are agreements to lend subject to certain conditions. These commitments generally have fixed expiration dates or termination clauses and typically require payment of a fee. At December 31, 1994 and 1993, these commitments, made principally by AIG Capital Corp., approximated $133,000,000 and $140,700,000 respectively. AIG uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. AIG evaluates each counterparty's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by AIG upon extension of credit, is based on management's credit evaluation of the counterparty.
The following tables provide the notional and contractual amounts of AIGFP's derivatives portfolio at December 31, 1994. The notional amounts used to express the extent of AIGFP's involvement in derivatives transactions represent a standard of measurement of the volume of AIGFP's swaps business. Notional amount is not a quantification of market risk or credit risk and it may not necessarily be recorded on the balance sheet. Notional amounts represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps. The timing and the amount of cash flows relating to foreign exchange forwards and exchange traded futures and options contracts are determined by the contractual agreements.
Futures and forward contracts are contracts for delivery of foreign currencies, commodities or financial indices in which the seller/purchaser agrees to make/take delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise as a result of movements in current market prices from contracted prices and the potential inability of counterparties to meet their obligations under the contracts. At December 31, 1994, the contractual amount of AIGFP's futures and forward contracts approximated $15.2 billion.
AIGFP extensively uses legally enforceable master closeout netting agreements. Thus, contracts subject to such arrangements permit AIGFP to offset its receivables from and payables to the same counterparty. As a result, the net replacement value represents the net sum of estimated positive fair values after the application of such agreements and collateral held. The net replacement value most closely represents the net credit risk to AIGFP or the maximum amount exposed to potential loss. The net replacement value of all interest rate, currency, and equity/commodity swaps and swaptions at December 31, 1994, approximated $4.6 billion. The net replacement value for futures and forward contracts at December 31, 1994, approximated $31.4 million.
AIGFP has entered into commitments to provide liquidity for certain insured variable rate bonds issued by municipal entities. The bond agreements allow the holders, in certain circumstances, to tender the bonds to the issuer at par value. In the event a remarketing agent of an issuer is unable to resell such bonds, AIGFP would be obligated to purchase the bonds at par value. AIGFP would receive interest on any bonds purchased at rates above the then prevailing market rates. These liquidity facilities aggregate $436 million and extend through December 31, 1997. Additional commitments to provide liquidity for bonds not yet issued by municipal entities aggregated $1.3 billion at December 31, 1994. It is management's intention, as with existing obligations, to remove itself from this risk through bank participations before the issuance of the underlying bonds. Therefore, in management's opinion, it is unlikely that AIGFP will become obligated to purchase any bonds pursuant to the liquidity facilities.
The gross replacement values presented represent the sum of the estimated fair values of all of AIGTG's derivatives contracts at December 31, 1994. These values do not represent the credit risk to AIGTG.
Futures and forward contracts are contracts for delivery of foreign currencies, commodities or financial indices in which the seller/purchaser agrees to make/take delivery at a specified future date of a specified instrument at a specified price or yield. Risks arise as a result of movements in current market prices from contracted prices and the potential inability of counterparties to meet their obligations under the contracts. At December 31, 1994, the contractual amount of AIGTG's futures and forward contracts approximated $212.7 billion.
The following table presents AIGTG's derivatives portfolio and the associated credit exposure by maturity and type of derivative at December 31, 1994:
Options are contracts that allow the holder of the option to purchase or sell the underlying commodity, currency or index at a specified price and within, or at, a specified period of time. Risks arise as a result of movements in current market prices from contracted prices, and the potential inability of the counterparties to meet their obligations under the contracts. At December 31, 1994, the contractual amounts of AIGTG's purchased options approximated $15.2 billion.
AIGTG independently evaluates the creditworthiness of its counterparties, taking into account credit ratings assigned by recognized statistical rating organizations. In addition, AIGTG's credit approval process involves pre-set counterparty, country and industry credit exposure limits and, for particularly credit intensive transactions, obtaining approval from AIG's Credit Risk Committee. The maximum potential loss will increase or decrease during the life of the derivative commitments as a function of maturity and market conditions.
At December 31, 1994, AIGTG had issued and outstanding $142 million principal amount of letters of credit. These letters of credit were issued primarily to various exchanges.
(e) At December 31, 1994, ILFC had committed to purchase 236 aircraft deliverable from 1995 through 2000 at an estimated aggregate purchase price of $13.4 billion. Concurrently, at December 31, 1994, ILFC had options to purchase 51 aircraft deliverable through 2001 at an estimated aggregate purchase price of $2.8 billion. ILFC will be required to find customers for any new aircraft ordered and arrange financing for portions of the purchase price of such equipment.
AIG continues to receive indemnity claims asserting injuries from toxic waste, hazardous substances, and other environmental pollutants and alleged damages to cover the cleanup costs of hazardous waste dump sites (hereinafter collectively referred to as environmental claims) and indemnity claims asserting injuries from asbestos. Estimation of asbestos and environmental claims loss reserves is a difficult process, as these claims, which emanate from policies written in 1984 and prior years, cannot be estimated by conventional reserving techniques. Asbestos and environmental claims development is affected by factors such as inconsistent court resolutions, the broadening of the intent of policies and scope of coverage and increasing number of new claims. AIG and other industry members have and will continue to litigate the broadening judicial interpretation of policy coverage and the liability issues. If the courts continue in the future to expand the intent of the policies and the scope of the coverage, as they have in the past, additional liabilities would emerge for amounts in excess of reserves held. This emergence cannot now be reasonably estimated, but could have a material impact on AIG's future operating results. The reserves carried for these claims as at December 31, 1994 ($1.41 billion gross; $330.3 million net) are believed to be adequate as these reserves are based on known facts and current law. Furthermore, as AIG's net exposure retained relative to the gross exposure written was lower in those years, the potential impact of these claims is much smaller on the net loss reserves than on the gross loss reserves.
Securities held for investment: Fair values for securities held for investment carried at amortized cost were based upon quoted market prices. For securities for which market prices were not readily available, fair values were estimated using quoted market prices of comparable investments.
AIG's 1984 employee stock purchase plan was adopted at the 1984 shareholders' meeting and became effective as of July 1, 1984. Eligible employees receive privileges to purchase up to an aggregate of 1,312,500 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.
Under each plan, 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 all options expire 10 years from the date of the grant. As of December 31, 1994, outstanding options granted with respect to 2,001,274 shares qualified for Incentive Stock Option treatment under the Economic Recovery Tax Act of 1981.
Additional information with respect to the AIG plans at December 31, 1994 was as follows:
AIG's U.S. retirement plan is a qualified, noncontributory, defined benefit plan. All qualified employees who have attained age 21 and completed six months of continuous service are eligible to participate in this plan. An employee with 5 or more years of service is entitled to pension benefits beginning at normal retirement at age 65. Benefits are based upon a percentage of average final compensation multiplied by years of credited service commencing April 1, 1985 and limited to 44 years of credited service. The average final compensation is subject to certain limitations. Annual funding requirements are determined based on the "projected unit credit" cost method which attributes a pro rata portion of the total projected benefit payable at normal retirement to each year of credited service.
Eligibility for participation in the various non-U.S. retirement plans is either based on completion of a specified period of continuous service or date of hire, subject to age limitation. While benefits vary, they are generally based on the employees' years of credited service and average compensation in the years preceding retirement.
Assumptions associated with the projected benefit obligation and expected long-term rate of return on plan assets at December 31, 1994 were as follows:
The following table sets forth the funded status of the various pension plans and the amounts recognized in the accompanying consolidated balance sheet as of December 31, 1994 and 1993:
(b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k) plan), which, during the three years ended December 31, 1994, provided for salary reduction contributions by employees and matching contributions by AIG of up to 2 percent of annual salary.
* The Medical trend rate grades downward from years 1 through 7 domestically and years 1 through 9 for the foreign benefits. The trend rates remain level thereafter.
The following table sets forth the liability for the accrued postretirement benefits of the various plans, and amounts recognized in the accompanying consolidated balance sheet as of December 31, 1994 and 1993. These plans are not funded currently.
The net periodic postretirement costs for the years ended December 31, 1994, 1993 and 1992 included the following components:
Flight equipment is leased, under operating leases, for periods ranging from one to twelve years.
(a) Represents a net benefit for the cumulative effect of the adoption of accounting pronouncements related to postretirement benefits (FASB 106) and income taxes (FASB 109) by minority-owned insurance operations in 1993.
The following table is a summary of the operations by major operating segments for the years ended December 31, 1994, 1993 and 1992:
(a) Including other operations and other income (deductions)-net, which are not deemed to be reportable segments.
(e) Assets as at December 31, 1993 and 1992 have been adjusted to conform to the requirements of FASB 113.