How did AIG's profitability trend in 1998?

Net income grew to $3.77 billion from $3.33 billion, and diluted EPS rose to $3.57 from $3.15. Growth came from all three major segments: general insurance operating income rose 18.4%, life insurance operating income rose 13.3%, and financial services operating income rose 30.2%. Results were partly offset by a higher effective tax rate of 28.8% and increased minority interest, which was driven by the consolidation of Transatlantic and 20th Century.

How exposed is AIG to foreign markets and Asian economic conditions?

Exposure is substantial. About 39% of consolidated assets were located outside the U.S. and Canada at year-end 1998, and foreign operations generated about 53% of revenues. Life insurance is especially concentrated abroad, with 92.8% of premium income from foreign operations, mostly in Japan and Southeast Asia. The filing notes that economic turmoil, particularly in Southeast Asia, lowered credit quality in parts of the foreign fixed-income portfolio, with about 15% rated below investment grade or unrated. Currency restrictions and political risk could also delay repatriation of profits.

What are the main risks in AIG's reserves and insurance liabilities?

General insurance net loss reserves were $24.6 billion at year-end 1998. Most of the book is casualty business with long claim tails, which adds uncertainty. Reserve development was favorable in 1998, with a $281 million net redundancy on prior-year reserves. However, AIG has significantly strengthened asbestos and environmental reserves over several years. Those reserves totaled $865 million net and $2.5 billion gross, and management says future court decisions broadening policy coverage could create liabilities above current reserves that could be material.

How is AIG financed, and what leverage and derivative exposures should investors understand?

Total borrowings were $30.7 billion, of which $27.8 billion was either not guaranteed by AIG or matched against guaranteed investment agreements or matched AIGFP notes, leaving about $2.9 billion of AIG's own remaining borrowings. AIG guarantees AIGFP's debt and provides support for some subsidiary commercial paper. Derivative activity is large: AIGFP reported interest rate, currency and equity swap notional amounts of about $345 billion, and AIGTG reported contractual amounts of roughly $124 billion. Net replacement values, which best represent credit exposure, were about $9.2 billion at AIGFP and $3.8 billion at AIGTG, after netting and collateral.

What will the SunAmerica acquisition change for investors?

The merger with SunAmerica Inc. took effect January 1, 1999, as a pooling of interests, with AIG issuing about 187.5 million shares at 0.855 AIG shares per SunAmerica share. Because the merger occurred after year-end, the reported 1998 figures do not include SunAmerica. Pro forma unaudited results combining both companies show 1998 revenues of $35.9 billion and net income of $4.28 billion, with pro forma diluted EPS of $3.44 compared with $3.57 as reported. Investors should expect higher share count and a broader business mix, including retirement savings and asset accumulation, in future periods.

AIG 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.

American International Group's 1998 10-K shows a company at scale: total assets of $194.4 billion^a (up 18.6% from $164.0 billion), total revenues of $33.3 billion (up 8.8%), and net income of $3.77 billion (up 13.0%), with diluted EPS of $3.57 versus $3.15 in 1997.

Results were driven by strong growth in life insurance, where foreign operations (notably ALICO, AIA and Nan Shan) generated 92.8% of premium income, and by financial services operating income, which rose 30.2% to $913 million^b on ILFC aircraft leasing. General insurance was consistently profitable, with a 96.4% combined ratio, and a sizable catastrophe loss ($110 million net) did not disturb that result. Reserve development was favorable overall in 1998, with a net redundancy of $281 million on prior-year reserves.

The main investor considerations are balance-sheet complexity and concentration risk. Financial services liabilities and borrowings of $30.7 billion^c are largely non-recourse or matched, but AIG guarantees AIGFP's debt, and derivative notional exposure reached roughly $345 billion in swaps at AIGFP and $124 billion at AIGTG. Roughly 39% of consolidated assets sit outside the United States, and asbestos and environmental reserves of $865 million net remain subject to litigation uncertainty that management acknowledges could be material.

Asian economic stress also pushed down credit quality in parts of the foreign fixed-income portfolio, with about 15% of foreign fixed income rated below investment grade or unrated. Looking ahead, the pending January 1, 1999 merger with SunAmerica (a pooling of interests, with about 187.5 million AIG shares issued) and the full consolidation of Transatlantic and 20th Century will reshape the company's scale and mix. The filing's pro forma figures place combined 1998 revenues at $35.9 billion^d and net income at $4.28 billion, with the Year 2000 remediation cost reported at about $115 million.

02—Key points

Key Highlights

Net income rose 13.0% to $3.77 billion in 1998 (from $3.33 billion), and diluted EPS increased to $3.57 from $3.15.
Total revenues grew 8.8% to $33.3 billion; total assets reached $194.4 billion, up 18.6% year over year.
Life insurance operating income rose 13.3% to $1.78 billion, with foreign operations producing 92.8% of life premium income.
General insurance combined ratio of 96.4% (versus 96.2% in 1997) reflects consistent underwriting discipline, with a foreign combined ratio of 88.6% versus a domestic ratio near 100%.
Financial services operating income increased 30.2% to $913 million, led by ILFC aircraft leasing ($496 million operating income).
Shareholders' equity (capital funds) grew 13% to $27.1 billion, and the company's dividend was raised to $0.21 per share from $0.19.
Pending SunAmerica merger (effective January 1, 1999, pooling of interests) adds about 187.5 million AIG shares and will materially change the company's scale.

03—Questions

Frequently Asked Questions

How did AIG's profitability trend in 1998?
Net income grew to $3.77 billion from $3.33 billion, and diluted EPS rose to $3.57 from $3.15. Growth came from all three major segments: general insurance operating income rose 18.4%, life insurance operating income rose 13.3%, and financial services operating income rose 30.2%. Results were partly offset by a higher effective tax rate of 28.8% and increased minority interest, which was driven by the consolidation of Transatlantic and 20th Century.
How exposed is AIG to foreign markets and Asian economic conditions?
Exposure is substantial. About 39% of consolidated assets were located outside the U.S. and Canada at year-end 1998, and foreign operations generated about 53% of revenues. Life insurance is especially concentrated abroad, with 92.8% of premium income from foreign operations, mostly in Japan and Southeast Asia. The filing notes that economic turmoil, particularly in Southeast Asia, lowered credit quality in parts of the foreign fixed-income portfolio, with about 15% rated below investment grade or unrated. Currency restrictions and political risk could also delay repatriation of profits.
What are the main risks in AIG's reserves and insurance liabilities?
General insurance net loss reserves were $24.6 billion at year-end 1998. Most of the book is casualty business with long claim tails, which adds uncertainty. Reserve development was favorable in 1998, with a $281 million net redundancy on prior-year reserves. However, AIG has significantly strengthened asbestos and environmental reserves over several years. Those reserves totaled $865 million net and $2.5 billion gross, and management says future court decisions broadening policy coverage could create liabilities above current reserves that could be material.
How is AIG financed, and what leverage and derivative exposures should investors understand?
Total borrowings were $30.7 billion, of which $27.8 billion was either not guaranteed by AIG or matched against guaranteed investment agreements or matched AIGFP notes, leaving about $2.9 billion of AIG's own remaining borrowings. AIG guarantees AIGFP's debt and provides support for some subsidiary commercial paper. Derivative activity is large: AIGFP reported interest rate, currency and equity swap notional amounts of about $345 billion, and AIGTG reported contractual amounts of roughly $124 billion. Net replacement values, which best represent credit exposure, were about $9.2 billion at AIGFP and $3.8 billion at AIGTG, after netting and collateral.
What will the SunAmerica acquisition change for investors?
The merger with SunAmerica Inc. took effect January 1, 1999, as a pooling of interests, with AIG issuing about 187.5 million shares at 0.855 AIG shares per SunAmerica share. Because the merger occurred after year-end, the reported 1998 figures do not include SunAmerica. Pro forma unaudited results combining both companies show 1998 revenues of $35.9 billion and net income of $4.28 billion, with pro forma diluted EPS of $3.44 compared with $3.57 as reported. Investors should expect higher share count and a broader business mix, including retirement savings and asset accumulation, in future periods.

04—Continue

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