Life insurance net investment income increased 8.2 percent in 1997 compared to an increase of 18.1 percent in 1996. The slowing of the growth rate was impacted by the redemption of policy loans with respect to some large corporate owned life insurance policies (COLI) beginning in 1996 and continuing into 1997. Such redemptions had an insignificant impact on operating income, financial condition and liquidity. The growth in net investment income in 1997 and 1996 was primarily attributable to foreign new cash flow for investment. The new cash flow was generated from life insurance operations and included the compounding of previously earned and reinvested net investment income. (See also the discussion under "Liquidity" herein.)
rate of 5.87 percent and transferred the equity appreciation exposure to a third party. The proceeds of these notes were used for general corporate purposes.
No notes previously issued by AIG matured during 1997. At December 31, 1997 AIG had $538.8 million in aggregate principal amount of debt securities registered for issuance from time to time.
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, 1997 and 1996:
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
FASB 131 establishes standards for the way AIG is required to disclose certain information about its operating segments in its annual financial statements and certain selected information in its interim financial statements. FASB 131 establishes, where practicable, standards with respect to geographic areas, among other things. Certain descriptive information is also required. FASB 131 is effective for the year ended December 31, 1998.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American International Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Unrealized gains and losses from investments in equity securities and fixed maturities available for sale are reflected in capital funds currently, net of any related deferred income taxes. Unrealized gains and losses from investments in trading securities are reflected in income currently.
The computation of earnings per share for December 31, 1997, 1996 and 1995 was as follows:
Life insurance assumed represented 0.3 percent of gross life insurance in-force at December 31, 1997, 0.2 percent for 1996 and 0.1 percent for 1995, and life insurance premium income assumed represented 0.1 percent of gross premium income for each of the periods ended December 31, 1997, 1996 and 1995.
(iv) Participating life business represented approximately 30 percent of the gross insurance in-force at December 31, 1997 and 49 percent of gross premium income in 1997. 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.
(c) Investment Gains and Losses: The realized capital gains (losses) and increase (decrease) in unrealized appreciation of investments for 1997, 1996 and 1995 were as follows:
which effectively converted its interest expense to a fixed rate of 5.87 percent and transferred the equity appreciation exposure to a third party.
AIG continues to receive 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, 1997 ($2.31 billion gross; $787.3 million net) are believed to be adequate as these reserves are based on known facts and current law.
The following weighted average assumptions were used for grants in 1997, 1996 and 1995, respectively: dividend yields of 0.30 percent, 0.33 percent and 0.32 percent; expected volatilities of 20.0 percent, 20.0 percent and 20.4 percent; risk-free interest rates of 6.03 percent, 6.29 percent and 5.77 percent and expected terms of 7 years.
Assumptions associated with the projected benefit obligation and expected long-term rate of return on plan assets at December 31, 1997 were as follows: