In AIG's general insurance operations, 2001 net premiums written and net premiums earned increased 14.7 percent and 11.2 percent, respectively, from those of 2000. During 2001, AIG cancelled or non-renewed approximately $571 million of business worldwide that did not meet AIG's underwriting standards. In 2000, net premiums written increased 8.0 percent and net premiums earned increased 12.0 percent when compared to 1999.
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 with respect to ALICO Japan's operations is 6.4 years. These durations compare with an estimated average duration with respect to ALICO Japan's operations of 10.5 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
Financial services operating income represented 19.7 percent of AIG's income before income taxes, minority interest and cumulative effect of accounting changes and excluding acquisition, restructuring and related charges in 2001. This compares to 16.2 percent and 15.2 percent in 2000 and 1999, respectively. The increase in contribution percentage was influenced by the impact of the WTC losses on general insurance operating income and its reduced contribution to income before income taxes, minority interest and cumulative effect of accounting changes.
AIG's retirement savings & asset management operations offer a wide variety of investment products, including variable annuities and mutual funds, as well as investment services, including investment asset management. Such products and services are offered to individuals and institutions both domestically and overseas.
Net income amounted to $5.36 billion in 2001, $6.64 billion in 2000 and $6.19 billion in 1999. The decrease in 2001 and increase in 2000 in net income over the three year period resulted from those factors described above.
ILFC and A.I. Credit Corp. (AICCO), AIG Credit Card Company (Taiwan) -- (AIGCCC-Taiwan) and AIG Finance (Taiwan) Limited -- (AIGF-Taiwan), both consumer finance subsidiaries in Taiwan, AGC and AGF have issued commercial paper for the funding of their own operations. At December 31, 2001, AIG did not guarantee the commercial paper of any of its subsidiaries other than Funding and AGC. 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.)
(a) Primarily liquidity facilities provided in connection with certain municipal swap transactions.
AIG provides investment management services to certain SPVs. AIG receives management fees for these services and may take a minority ownership interest in these SPVs. AIG services may be terminated with or without cause.
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, 2001 and 2000:
Mortgage loans on real estate, policy and collateral loans comprised 6.6 percent of AIG's insurance invested assets at December 31, 2001. AIG's insurance operations' holdings of real estate mortgages amounted to $10.71 billion of which 85.6 percent was domestic. At December 31, 2001, only a nominal amount were in default. It is AIG's practice to maintain a maximum loan to value ratio of 75 percent at loan origination. At December 31, 2001, AIG's insurance holdings of collateral loans amounted to $667 million, all of which were foreign. It is AIG's strategy to enter into mortgage and collateral loans as an adjunct primarily to life insurance fixed maturity investments. AIG's policy loans increased from $5.47 billion at December 31, 2000 to $5.79 billion at December 31, 2001.
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 a positive fair value to AIG. To help manage this risk, the credit departments of AIGFP and AIGTG operate within the guidelines set by the AIG Credit Risk Committee. This committee establishes the credit policy, sets 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.
AIGFP determines counterparty credit quality by reference to ratings from independent rating agencies or, where such ratings are not available, by internal analysis. At December 31, 2001 and December 31, 2000, the concentration of credit exposure with respect to counterparties judged A or higher by AIGFP was 93 percent and 87 percent, respectively. The counterparty credit quality determined by AIGFP by derivative product with respect to the net replacement value of AIGFP's derivatives portfolio was as follows:
AIG also uses derivatives to help match assets and liabilities in several of its businesses, including its insurance operations. For example, AIG can use currency and interest rate swaps to convert foreign-currency investment contract liabilities into US dollar-based exposures. Thus, these liabilities are more properly matched with US dollar assets. In life insurance, AIG uses swaps to reduce the mismatch between long dated life insurance liabilities and shorter dated local currency assets. Swaps also enable AIG to balance its asset and liability durations in consumer finance operations.
Supplemental information for gross loss and benefit reserves net of ceded reinsurance at December 31, 2001 and 2000 follows:
(b) Includes $598 million increase, $51 million increase and $264 million decrease in unrealized appreciation attributable to participating policyholders at December 31, 2001, 2000 and 1999, respectively.
(e) LOANS AND MORTGAGES PAYABLE: Loans and mortgages payable at December 31, 2001, consisted of the following:
(b) At December 31, 2001, there were 6,000,000 shares of AIG's $5 par value serial preferred stock authorized, issuable in series.
The carrying values and fair values of AIG's financial instruments at December 31, 2001 and December 31, 2000 and the average fair values with respect to derivative positions during 2001 and 2000 were as follows:
During 1999, AIG issued 1,009,968 shares of AIG common stock which vested on the effectiveness of the merger with SunAmerica Inc., and an additional 993,031 shares were issued pursuant to deferred share and share unit obligations. During 2000, deferred share and share unit obligations with respect to an additional 1,224,214 shares of AIG common stock vested, 142,105 shares were issued pursuant to deferred share and share unit obligations and an additional 1,082,109 shares were delivered into a trust in connection with a deferred compensation plan. During 2001, deferred share and share unit obligations with respect to an additional 19,930 shares of AIG Common Stock vested and were issued. No additional deferred share or share unit obligations may be granted under the SunAmerica plans. As of December 31, 2001, deferred share and share unit obligations with respect to 153,685 shares remained outstanding under the SunAmerica plans.
As a result of the acquisition of HSB in November 2000, HSB options outstanding at the acquisition date were fully vested and were converted into options to purchase AIG common stock at the exchange ratio of 0.4178 shares of AIG common stock for each share of HSB common stock. No further options can be granted under the HSB option plans, but outstanding options so converted continue in force until exercise or expiration. At December 31, 2001, there were 1,413,268 shares of AIG common stock reserved for issuance under the HSB option plans, none of which qualified for ISO Treatment.
Information about stock options outstanding at December 31, 2001, is summarized as follows:
(b) The following are disclosures with respect to the stock compensation plans of AGC prior to its acquisition by AIG. Both share information and exercise price information have been recalculated to reflect the exchange ratio of 0.5790 shares of AIG common stock for each outstanding share of AGC's common stock. All of AGC's options vested immediately prior to the closing date of the acquisition.
AIG's Consumer Finance operations include AGF as well as AIG Consumer Finance Group, Inc. AGF and CFG provide a wide variety of consumer finance products, including mortgages, consumer loans, retail sales finance and credit related insurance to customers both domestically and overseas, particularly emerging markets.
(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 and loan 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.