The consolidated general reinsurance assets of $16.29 billion include reinsurance recoverables for (i) paid losses and loss expenses of $1.44 billion and (ii) the ceded reserve for losses and loss expenses, including losses and loss expenses incurred but not reported (ceded reserves) of $13.02 billion. The ceded reserves represent the accumulation of estimates of ultimate ceded losses including provisions for ceded IBNR and loss expenses. The methods used to determine such estimates and to establish the resulting ceded reserves are continually reviewed and updated. Any adjustments therefrom are reflected in income currently. It is AIG's belief that the ceded reserves at December 31, 1994 were representative of the ultimate losses recoverable. In the future, as the ceded reserves continue to develop to ultimate amounts, the ultimate loss recoverable may be greater or less than the reserves currently ceded.
The growth in the premium income of the domestic life segment resulted primarily from the risk bearing premium related to corporate-owned life insurance products. Additionally, the interest income earned on the policy loans associated with these products has significantly increased domestic investment income.
gas. AIGTG's operating income declined as a result of reduced volatility in 1994 relative to 1993 in the markets in which AIGTG participates. (See also the discussions under "Capital Resources," "Liquidity" and "Derivatives" herein.)
In 1994, AIG's equity in income of minority-owned insurance operations was $56.0 million compared to $39.6 million in 1993 and $27.9 million in 1992. The equity interest in insurance companies, which includes two equity operations which commenced business during 1993, represented 1.9 percent of income before income taxes and the cumulative effect of accounting changes in 1994, compared to 1.5 percent in 1993 and 1.3 percent in 1992.
During 1994, AIG did not issue any medium term notes and $140.0 million of previously issued notes matured. At December 31, 1994, AIG had $247.0 million in aggregate principal amount of debt securities registered for issuance from time to time. (See also the discussion under "Derivatives" herein and Note 9 of Notes to Financial Statements.)
AIGTG increased its short-term borrowings by $772.9 million to finance its commodities inventory, futures exchange margin requirements and timing differences in operating cash flows. (See also the discussion under "Operational Review," "Liquidity" and "Derivatives" herein and Notes 1, 9 and 11 of Notes to Financial Statements.)
(a) See also the discussion under "Accounting Standards: Standards Adopted in 1994" herein.
The significant majority of AIGFP's transactions are contracted and documented under master netting agreements that provide for set-off and close out netting in the event of default. Excluding regulated exchange transactions, AIGTG, whenever possible, enters into netting agreements with its counter-parties which are similar in effect to those discussed above.
Standards for the life RBC formula and a model act have been approved by regulators and were effective with the 1993 statutory financial statements. At December 31, 1994, the adjusted capital of each of AIG's four domestic life companies exceeded each of their RBC standards by considerable margins.
In December 1994, AIG acquired $200 million in a new issue of 9 percent cumulative convertible preferred stock of 20th Century Industries (20th Century), a low-cost provider of mass marketed auto insurance in California. Dividends on the preferred stock will be paid in cash or in kind for the first three years at 20th Century's option, and in cash thereafter. Additionally, AIG invested $16 million in warrants for 16 million common shares of 20th Century at a per share exercise price of $13.50. AIG expects to enter a strategic alliance with 20th Century to extend the direct marketing of personal automobile insurance to certain western states. Pursuant to its agreement with 20th Century, by March 31, 1995, AIG will invest an additional $20 million in the preferred stock of 20th Century.
In October 1994, FASB issued Statement of Financial Accounting Standards No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" (FASB 118). FASB 118 amends FASB 114 to allow a creditor to use existing methods to recognize interest income on an impaired loan. FASB 118 also amends certain disclosure requirements of FASB 114. This statement is effective at the same time as FASB 114. AIG adopted FASB 118 effective December 31, 1994. The adoption of these statements did not cause any significant impact on AIG's results of operations, financial condition or liquidity.
AIG, as principal, engages in certain foreign exchange, interest rates, precious and base metals, petroleum and natural gas trading activities. AIG 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.
(k) SECURITIES PURCHASED (SOLD) UNDER AGREEMENTS TO RESELL (REPURCHASE), AT CONTRACT VALUE: Purchases of securities under agreements to resell and sales of securities under agreements to repurchase are accounted for as collateralized transactions and are recorded at their contracted resale or repurchase amounts, plus accrued interest. Generally, it is AIG's policy to take possession of securities purchased under agreements to resell.
At December 31, 1994, the market value of securities pledged as collateral with respect to these obligations approximated $1,057,319,000.
(iv) Notes and Bonds Payable Issued by AIGFP:During 1992, AIGFP's foreign banking subsidiary issued Netherland guilder denominated bonds. The bonds mature on June 30, 1997 and have a Netherland guilder interest rate of 8.4 percent. Interest is payable annually. At December 31, 1994, these bonds had a U.S. dollar carrying value of $110.1 million.
(e) LOANS AND MORTGAGES PAYABLE: Loans and mortgages payable at December 31, 1994 consisted of the following:
The notional amounts used to express the extent of AIGTG's involvement in derivatives transactions represent a standard of measurement of the volume of AIGTG's swaps business. Notional amount is not a quantification of the market or credit risks of the positions and is not necessarily 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.
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, 1994, AIGTG did not have a significant concentration of credit risk from either an individual counterparty or group of counterparties.