UNITED STATES
Form 10-Q/A
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(Mark One)
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QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended June 30, 2004 | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to | ||
Commission File Number 1-8787
American International Group, Inc.
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Delaware
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13-2592361 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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70 Pine Street, New York, New York (Address of principal executive offices) |
10270 (Zip Code) |
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Registrant’s telephone number, including area code: (212) 770-7000
Former name, former address and former fiscal year, if changed since last report: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ü No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of June 30, 2004: 2,605,397,546.
Explanatory Note
This Form 10-Q/A for the quarterly period ended June 30, 2004 is being filed for the purpose of amending Items 1, 2, 3 and 4 of Part I and Item 6 of Part II of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 of American International Group, Inc. (AIG) to reflect the restatement of AIG’s financial results described herein for the quarterly and six month periods ended June 30, 2004 and 2003. All other Items of the original filing on Form 10-Q for the quarterly period ended June 30, 2004, made on August 9, 2004, are unaffected by the changes described above and such items have not been included in this Amendment.
Information in this Form 10-Q/A is generally stated as of June 30, 2004 and generally does not reflect any subsequent information or events other than the restatement and the fourth quarter 2004 changes in estimates, except that in certain cases forward looking statements have been revised to reflect events and developments subsequent to June 30, 2004. Current information with respect to AIG is contained in its Form 10-K for the year ended December 31, 2004 (2004 Form 10-K) and other filings with the Securities and Exchange Commission (SEC) with respect to subsequent periods including the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 (June 30, 2005 Form 10-Q).
Restatement of Previously Issued Financial Statements
Subpoenas. In February 2005, AIG received subpoenas from the Office of the Attorney General for the State of New York (NYAG) and the SEC relating to investigations into the use of non-traditional insurance products and certain assumed reinsurance transactions and AIG’s accounting for such transactions. The United States Department of Justice and various state regulators are also investigating related issues. During these investigations, in March 2005, AIG’s then Chairman and Chief Executive Officer retired. In addition, AIG’s then Chief Financial Officer was terminated for failure to cooperate in the investigations. Subsequently, certain other AIG executives, including its former comptroller, were terminated for similar reasons. On May 26, 2005, the NYAG and the New York Superintendent of Insurance filed a civil complaint against AIG relating to these investigations. For more information on these investigations, see Item 3. Legal Proceedings in AIG’s 2004 Form 10-K.
Internal Review. In connection with the preparation of AIG’s consolidated financial statements included in AIG’s 2004 Form 10-K, AIG’s current management initiated an internal review of AIG’s books and records, which was substantially expanded in mid-March 2005. The internal review, conducted under the direction of current senior management, with the oversight of the Audit Committee of the Board of Directors, spanned AIG’s major business units globally, and included a review of information and a number of transactions from 2000 to the present. In certain cases, items in periods prior to 2000 were examined due to the nature of the transactions under review. The business units subject to review were Domestic General Insurance, Foreign General Insurance, Reinsurance, Financial Services, Domestic and Foreign Life Insurance & Retirement Services and Asset Management. The internal review encompassed AIG’s books and records, thousands of files and e-mails and interviews with current and former employees and members of management. Management believes that the scope and process of its internal review was sufficient to identify issues of a material nature that could affect AIG’s financial statements.
AIG’s internal review was complemented by investigations by outside counsel for AIG and for the Audit Committee of the Board of Directors. PricewaterhouseCoopers LLP, an independent registered public accounting firm (PwC or independent auditors), was consulted on the scope of the internal review for certain matters and reviewed the results of the internal review.
As a result of the findings of the internal review, together with the results of investigations conducted by outside counsel at the request of AIG’s Audit Committee and in consultation with AIG’s independent auditors, AIG concluded that the accounting for certain transactions and certain relationships needed to be restated or adjusted.
Restatement. AIG has restated its financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, the quarters ended March 31, June 30 and September 30, 2004 and 2003 and the quarter ended December 31, 2003. See Selected Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of Notes to Financial Statements in the 2004 Form 10-K and Note 2 of Notes to Financial Statements included herein for a discussion of the restatement and a reconciliation of previously reported amounts to the restated amounts.
As part of its internal review, AIG evaluated the financial reporting consolidation process and the resulting financial statements as well as the appropriateness of AIG’s prior accounting and reporting decisions. Based on this evaluation, the restatement includes corrections of errors in current or prior accounting periods for improper or inappropriate transactions or entries identified by the review. In many cases these transactions or entries appear to have had the purpose of achieving an accounting result that would enhance measures believed to be important to the financial community and may have involved documentation that did not accurately reflect the true nature of the arrangements. In certain instances, these transactions or entries may also have involved misrepresentations to members of management, regulators and AIG’s independent auditors. The restatement includes adjustments, some of which had been previously identified but considered not to be sufficiently material to require correction.
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Fourth Quarter 2004 Changes in Estimates
In addition, AIG has determined that certain accounts should be adjusted for the year ended December 31, 2004 to reflect changes in estimates made in the fourth quarter of 2004. The aggregate effect of these changes in estimates resulted in an after tax charge of approximately $1.19 billion. Most significant of the changes in estimates was a pre-tax charge of $850 million representing an increase in reserve for asbestos and environmental losses and loss expenses. See “Fourth Quarter 2004 Changes in Estimates” and Note 1(cc) of Notes to Financial Statements in AIG’s 2004 Form 10-K.
Recent Developments
AIG’s Credit Ratings
The recent downgrades in AIG’s credit ratings will increase AIG’s borrowing costs, may lessen AIG’s ability to compete in certain businesses and will require AIG to post additional collateral.
From March through June of 2005, the major rating agencies downgraded AIG’s ratings in a series of actions. Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P), lowered the long-term senior debt and counterparty ratings of AIG from ‘AAA’ to ‘AA’ and changed the ratings outlook to negative. Moody’s Investors Service (Moody’s) lowered AIG’s long-term senior debt rating from ‘Aaa’ to ‘Aa2’. Fitch Ratings (Fitch) downgraded the long-term senior debt ratings of AIG from ‘AAA’ to ‘AA’ and placed the ratings on Ratings Watch Negative.
The agencies also took rating actions on AIG’s insurance subsidiaries. S&P and Fitch lowered to ‘AA+’ the insurance financial strength ratings of most of AIG’s insurance companies. Moody’s lowered the insurance financial strength ratings generally to either ‘Aa1’ or ‘Aa2’. A.M. Best downgraded the financial strength ratings for most of AIG’s insurance subsidiaries from ‘A++’ to ‘A+’ and the issuer credit ratings from ‘aa+’ to ‘aa-’. Many of these companies’ ratings remain on a negative watch.
In addition, S&P changed the outlook on ILFC’s ‘AA-’ long-term senior debt rating to negative. Moody’s affirmed ILFC’s long-term and short-term senior debt ratings (‘A1’/‘P-1’). Fitch downgraded ILFC’s long-term senior debt rating from ‘AA-’ to ‘A+’ and placed the rating on Rating Watch Negative and downgraded ILFC’s short-term debt rating from ‘F1+’ to ‘F1’. Fitch also placed the ‘A+’ long-term senior debt ratings of American General Finance Corporation and American General Finance, Inc. (AGF) on Rating Watch Negative. S&P and Moody’s affirmed the long-term and short-term senior debt ratings of American General Financial Corporation at the ‘A+’/‘A-1’ and ‘A1’/‘P-1’, respectively.
These debt and financial strength ratings are current opinions of the rating agencies. As such, they may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at AIG management’s request. This discussion of ratings is not a complete list of ratings of AIG and its subsidiaries.
These ratings actions have affected and will continue to affect AIG’s business and results of operations in a number of ways.
| • | Downgrades in AIG’s debt ratings will adversely affect AIG’s results of operations. AIG relies on external sources of financing to fund several of its operations. The cost and availability of unsecured financing are generally dependent on the issuer’s long-term and short-term debt ratings. These downgrades and any future downgrades in AIG’s debt ratings will increase AIG’s borrowing costs and therefore adversely affect AIG’s results of operations. |
| • | The downgrade in AIG’s long-term senior debt ratings will adversely affect the ability of AIG Financial Products Corp. (AIGFP) to compete for certain businesses. Credit ratings are very important to the ability of financial institutions to compete in the derivative and structured transaction marketplaces. Historically, AIG’s triple-A ratings provided AIGFP a competitive advantage. The downgrades have reduced this advantage and, for specialized financial transactions that generally are conducted only by triple-A rated financial institutions, counterparties may be unwilling to transact business with AIGFP except on a secured basis. This could require AIGFP to post more collateral to counterparties in the future. See below for a further discussion of the effect that posting collateral may have on AIG’s liquidity. |
| • | Although the financial strength ratings of AIG’s insurance company subsidiaries remain high compared to many of their competitors, the downgrades have reduced the previous ratings differential. The competitive advantage of the ratings to AIG’s insurance company subsidiaries may be lessened accordingly. The recent regulatory inquiries, internal investigations, and delay in the filing of AIG’s 2004 Form 10-K, as well as negative publicity, had caused independent producers and distributors of AIG’s domestic life and retirement services products to be more cautious in placing business with AIG subsidiaries. AIG is unable to predict the effect of these issues on AIG’s business, including any increase in associated surrender or replacement activity. |
| • | As a result of the downgrades of AIG’s long-term senior debt ratings, AIG has been required to post approximately $1.16 billion of collateral with counterparties to municipal guaranteed investment agreements and financial derivatives transactions. In the event of a further |
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| downgrade, AIG will be required to post additional collateral. It is estimated that, as of the close of business on July 15, 2005, based on AIG’s outstanding municipal guaranteed investment agreements and financial derivatives transactions as of such date, a further downgrade of AIG’s long-term senior debt ratings to ‘Aa3’ by Moody’s or ‘AA-’ by S&P would permit counterparties to call for approximately $1.98 billion of additional collateral. Further, additional downgrades could result in requirements for substantial additional collateral, which could have a material effect on how AIG manages its liquidity. The actual amount of additional collateral that AIG would be required to post to counterparties in the event of such downgrades depends on market conditions, the market value of the outstanding affected transactions and other factors prevailing at the time of the downgrade. The requirement to post additional collateral may increase if additional counterparties begin to require credit support from AIG through collateralization agreements. Additional obligations to post collateral will increase the demand on AIG’s liquidity. |
Regulatory Investigations
AIG’s ability to engage in certain businesses may be impaired by the regulatory investigations. The regulatory investigations and civil actions pending against AIG may reduce the willingness of counterparties to engage in business with AIG. Uncertainty concerning the ultimate outcome of these actions and proceedings may also make AIG products and services less attractive in the marketplace. Further, these matters may affect the manner in which certain AIG subsidiaries conduct business and AIG’s ability to obtain regulatory approvals for new lines of business or for further acquisitions.
Significant legal proceedings could adversely affect AIG’s results of operations. AIG is party to numerous legal and regulatory proceedings, including matters relating to insurance brokerage practices and non-traditional insurance products.
Significant investigations into AIG’s business are continuing and the commencement of additional investigations is possible. Broad-ranging investigations into AIG’s business practices continue in respect of structured transactions, transactions involving insurance brokers, non-traditional insurance products, workers compensation lines and other matters. These investigations are being conducted by a large number of regulators and governmental authorities, and related actions by regulators both within and outside the United States may be undertaken in response. The review of large amounts of information by various regulatory authorities may result in the commencement of new areas of inquiry and, possibly, new legal proceedings. Gathering, reviewing and supplying such large amounts of information and documents to so many regulatory authorities imposes significant demands upon management and may involve significant expense.
See also Item 3. Legal Proceedings in AIG’s 2004 Form 10-K, Item 1 Legal Proceedings of Part II of AIG’s June 30, 2005 Form 10-Q and Note 7 of the Notes to Financial Statements included herein.
The Relationships Between AIG and Starr and SICO
The relationships between AIG and The Starr Foundation, C.V. Starr & Co., Inc. (Starr) and Starr International Company, Inc. (SICO) may take an extended period of time to unwind and/or resolve. Although AIG is currently working on unwinding and resolving its relationships with Starr and SICO, AIG cannot predict what its future relationship with Starr and SICO will be.
AIG will need to provide compensation programs that recognize the plans and programs previously provided to AIG executives by Starr and SICO.
Certain Material Weaknesses
Management has identified a number of material weaknesses in AIG’s internal control over financial reporting. A discussion of these material weaknesses can be found in Item 9A of Part II of AIG’s 2004 Form 10-K. Although remediation of these weaknesses has begun, the process is not yet complete. Delay in the implementation of remedial actions could affect the accuracy or timing of future filings with the SEC and other regulatory authorities.
Access to Capital Markets
AIG does not expect to be able to access the U.S. public capital markets in the near future. Although AIG is able to access the Rule 144A and Euromarkets, AIG will be unable to access the U.S. public securities markets until it has filed and the SEC has declared effective a new registration statement or post-effective amendments to its existing registration statements under the Securities Act of 1933. Depending upon the SEC’s review of these filings, this process may take several months or more.
PNC Settlement
In November 2004, AIG and AIGFP reached a final settlement with the Securities and Exchange Commission (SEC), the Fraud Section of the United States Department of Justice (DOJ) and the United States Attorney for the Southern District of Indiana with respect to issues arising from certain structured transactions entered into with Brightpoint, Inc. and The PNC Financial Services Group, Inc. (PNC), the marketing of transactions similar to the PNC transactions and related matters.
As part of the settlement, the SEC filed a civil complaint against AIG, alleging violations of certain antifraud provisions of the federal securities laws and for aiding and abetting violations of reporting and record keeping provisions of those
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AIG, without admitting or denying the allegations in the SEC complaint, consented to the issuance of a final judgment: (a) permanently enjoining it and its employees and related persons from violating section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), Exchange Act Rule 10b-5, and section 17(a) of the Securities Act of 1933 (Securities Act) and from aiding and abetting violations of sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13; (b) ordering it to disgorge the $39,821,000 in fees that it received from the PNC transactions, plus prejudgment interest of $6,545,000; and (c) providing for AIG to establish a transaction review committee to review the appropriateness of certain future transactions and to retain an independent consultant to examine certain transactions entered into between 2000 and 2004 and review the policies and procedures of the transaction review committee. The independent consultant has a broad mandate to review transactions entered into by AIG during this period. The review of the independent consultant is now ongoing and AIG cannot at this time predict the outcome of this review.
The DOJ filed a criminal complaint against AIGFP PAGIC Equity Holding Corp. (AIGFP PAGIC), a wholly-owned subsidiary of AIGFP. The complaint alleged that AIGFP PAGIC violated federal securities laws by aiding and abetting securities law violations by PNC, in connection with a transaction entered into in 2001 with PNC that was intended to enable PNC to remove certain assets from its balance sheet. The complaint alleges that AIGFP PAGIC knew, or was deliberately ignorant in not knowing, that the PNC transaction did not satisfy the requirements of GAAP for non-consolidation of special purpose entities. The AIGFP PAGIC transaction was the last of three similar transactions developed, marketed and entered into by AIGFP and its subsidiaries with PNC during 2001. The DOJ had notified AIGFP that, in its view, AIGFP acting through certain of its employees may have violated federal criminal law in connection with the PNC transactions and the marketing of similar transaction structures to other potential counterparties.
The settlement with the DOJ consists of separate agreements with AIG and AIGFP and a complaint filed against, and deferred prosecution agreement with, AIGFP PAGIC. Under the terms of the settlement, AIGFP paid a monetary penalty of $80 million and, provided that AIG, AIGFP and AIGFP PAGIC satisfy their obligations under the DOJ agreements, the DOJ will seek a dismissal with prejudice of the AIGFP PAGIC complaint after 13 months (by December 30, 2005) and will not prosecute AIG or AIGFP in connection with the PNC transactions or the Brightpoint transaction that was settled by AIG with the SEC in 2003. The obligations of AIG, AIGFP and AIGFP PAGIC under the DOJ agreements relate principally to cooperating with the DOJ and other federal agencies in connection with their related investigations.
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INDEX OF AMENDED ITEMS
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PART I – FINANCIAL
INFORMATION:
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ITEM 1 – FINANCIAL STATEMENTS
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| 6 | ||||||||
| 8 | ||||||||
| 9 | ||||||||
| 12 | ||||||||
| 47 | ||||||||
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ITEM 3 – QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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| 82 | ||||||||
| 81 | ||||||||
| EX-12: STATEMENT RE COMPUTATION OF RATIOS | ||||||||
| EX-31: CERTIFICATIONS | ||||||||
| EX-32: CERTIFICATIONS | ||||||||
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CONSOLIDATED BALANCE SHEET
(in millions) (unaudited)
| June 30, | December 31, | ||||||||||
| 2004 | 2003 | ||||||||||
| (Restated) | (Restated) | ||||||||||
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Assets:
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| Investments, financial services assets and cash: | |||||||||||
| Fixed maturities: | |||||||||||
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Bonds available for sale, at market value
(amortized cost: 2004 – $308,428;
2003 – $287,810) |
$ | 314,926 | $ | 300,935 | |||||||
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Bonds held to maturity, at amortized cost (market
value: 2004 – $12,686; 2003 – $8,173)
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12,877 | 8,037 | |||||||||
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Bond trading securities, at market value
(cost: 2004 – $1,813; 2003 – $252)
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1,793 | 282 | |||||||||
| Equity securities: | |||||||||||
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Common stocks available for sale, at market value
(cost: 2004 – $6,932; 2003 – $6,759)
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7,786 | 7,522 | |||||||||
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Common stocks trading, at market value
(cost: 2004 – $4,687; 2003 - $125)
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4,780 | 156 | |||||||||
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Preferred stocks, at market value
(cost: 2004 – $1,760; 2003 – $1,743)
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1,813 | 1,906 | |||||||||
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Mortgage loans on real estate, net of allowance
(2004 – $67; 2003 – $68)
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12,488 | 12,328 | |||||||||
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Policy loans
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6,747 | 6,658 | |||||||||
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Collateral and guaranteed loans, net of allowance
(2004 – $16; 2003 – $15)
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2,226 | 2,241 | |||||||||
| Financial services assets: | |||||||||||
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Flight equipment primarily under operating
leases, net of accumulated depreciation
(2004 – $5,783; 2003 – $5,458) |
31,970 | 30,343 | |||||||||
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Securities available for sale, at market value
(cost: 2004 – $24,422; 2003 – $22,587)
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25,159 | 24,042 | |||||||||
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Trading securities, at market value
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4,096 | 4,418 | |||||||||
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Spot commodities, at market value
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687 | 250 | |||||||||
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Unrealized gain on swaps, options and forward
transactions
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18,852 | 21,459 | |||||||||
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Trading assets
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1,136 | 2,277 | |||||||||
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Securities purchased under agreements to resell,
at contract value
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23,335 | 20,845 | |||||||||
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Finance receivables, net of allowance
(2004 – $553; 2003 – $562)
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20,239 | 17,500 | |||||||||
| Securities lending collateral, at cost (approximates market value) | 46,893 | 30,195 | |||||||||
| Other invested assets | 21,730 | 18,484 | |||||||||
| Short-term investments, at cost (approximates market value) | 16,142 | 8,908 | |||||||||
| Cash | 2,033 | 922 | |||||||||
| Total investments, financial services assets and cash | 577,708 | 519,708 | |||||||||
| Investment income due and accrued | 5,041 | 4,612 | |||||||||
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Premiums and insurance balances receivable, net
of allowance (2004 – $263; 2003 – $235)
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15,103 | 13,189 | |||||||||
| Reinsurance assets, net | 20,757 | 20,948 | |||||||||
| Deferred policy acquisition costs | 28,422 | 25,920 | |||||||||
| Investments in partially owned companies | 1,557 | 1,420 | |||||||||
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Real estate and other fixed assets, net of
accumulated depreciation (2004 – $4,529;
2003 – $4,282)
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5,920 | 5,966 | |||||||||
| Separate and variable accounts | 52,981 | 60,536 | |||||||||
| Goodwill | 8,164 | 7,664 | |||||||||
| Other assets | 14,079 | 14,190 | |||||||||
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Total assets
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$ | 729,732 | $ | 674,153 | |||||||
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CONSOLIDATED BALANCE SHEET (continued)
(in millions, except share amounts) (unaudited)
| June 30, | December 31, | |||||||||
| 2004 | 2003 | |||||||||
| (Restated) | (Restated) | |||||||||
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Liabilities:
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Reserve for losses and loss expenses
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$ | 55,640 | $ | 52,381 | ||||||
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Reserve for unearned premiums
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22,956 | 20,910 | ||||||||
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Future policy benefits for life and accident and
health insurance contracts
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94,867 | 92,912 | ||||||||
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Policyholders’ contract deposits
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200,954 | 171,917 | ||||||||
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Other policyholders’ funds
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9,540 | 9,124 | ||||||||
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Reserve for commissions, expenses and taxes
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4,137 | 4,588 | ||||||||
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Insurance balances payable
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3,591 | 2,915 | ||||||||
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Funds held by companies under reinsurance treaties
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3,419 | 3,043 | ||||||||
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Income taxes payable:
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Current
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1,540 | 366 | ||||||||
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Deferred
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2,469 | 4,633 | ||||||||
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Financial services liabilities:
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Borrowings under obligations of guaranteed
investment agreements
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16,484 | 15,337 | ||||||||
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Securities sold under agreements to repurchase,
at contract value
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18,129 | 15,813 | ||||||||
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Trading liabilities
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4,534 | 6,153 | ||||||||
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Securities and spot commodities sold but not yet
purchased, at market value
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5,140 | 5,458 | ||||||||
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Unrealized loss on swaps, options and forward
transactions
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12,770 | 14,658 | ||||||||
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Trust deposits and deposits due to banks and
other depositors
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3,819 | 3,627 | ||||||||
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Commercial paper
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5,704 | 4,715 | ||||||||
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Notes, bonds, loans and mortgages payable
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54,587 | 51,389 | ||||||||
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Commercial paper
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2,946 | 1,223 | ||||||||
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Notes, bonds, loans and mortgages payable
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5,821 | 5,863 | ||||||||
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Liabilities connected to trust preferred stock
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1,681 | 1,682 | ||||||||
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Separate and variable accounts
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52,981 | 60,536 | ||||||||
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Minority interest
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3,961 | 3,302 | ||||||||
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Securities lending payable
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46,893 | 30,195 | ||||||||
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Other liabilities
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23,687 | 21,191 | ||||||||
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Total liabilities
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658,250 | 603,931 | ||||||||
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Preferred shareholders’ equity in
subsidiary companies
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192 | 192 | ||||||||
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Shareholders’ equity:
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||||||||||
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Common stock, $2.50 par value;
5,000,000,000 shares authorized; shares issued
2004 – 2,751,327,476; 2003 – 2,751,327,476
|
6,878 | 6,878 | ||||||||
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Additional paid-in capital
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1,938 | 1,913 | ||||||||
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Retained earnings
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60,259 | 55,392 | ||||||||
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Accumulated other comprehensive income (loss)
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3,859 | 7,244 | ||||||||
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Treasury stock, at cost; 2004 –
145,929,930; 2003 – 142,880,430 shares of common
stock
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(1,644 | ) | (1,397 | ) | ||||||
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Total shareholders’ equity
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71,290 | 70,030 | ||||||||
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Total liabilities, preferred
shareholders’ equity in subsidiary companies and
shareholders’ equity
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$ | 729,732 | $ | 674,153 | ||||||
7
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts) (unaudited)
| Six Months | Three Months | |||||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||
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Revenues:
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Premiums and other considerations
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$ | 32,178 | $ | 26,070 | $ | 16,196 | $ | 13,186 | ||||||||||
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Net investment income
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9,066 | 7,434 | 4,491 | 3,919 | ||||||||||||||
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Realized capital gains (losses)
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(26 | ) | 73 | (141 | ) | (84 | ) | |||||||||||
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Other revenues
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5,662 | 3,820 | 2,959 | 2,184 | ||||||||||||||
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Total revenues
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46,880 | 37,397 | 23,505 | 19,205 | ||||||||||||||
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Benefits and expenses:
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Incurred policy losses and benefits
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27,101 | 22,150 | 13,504 | 11,208 | ||||||||||||||
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Insurance acquisition and other operating expenses
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11,867 | 10,305 | 6,028 | 5,261 | ||||||||||||||
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Total benefits and expenses
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38,968 | 32,455 | 19,532 | 16,469 | ||||||||||||||
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Income before income taxes, minority interest
and cumulative effect of an accounting change
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7,912 | 4,942 | 3,973 | 2,736 | ||||||||||||||
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Income taxes (benefits):
|
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Current
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2,273 | 1,224 | 951 | 654 | ||||||||||||||
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Deferred
|
114 | 174 | 267 | 124 | ||||||||||||||
| 2,387 | 1,398 | 1,218 | 778 | |||||||||||||||
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Income before minority interest and cumulative
effect of an accounting change
|
5,525 | 3,544 | 2,755 | 1,958 | ||||||||||||||
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Minority interest
|
(175 | ) | (124 | ) | (105 | ) | (63 | ) | ||||||||||
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Income before cumulative effect of an
accounting change
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5,350 | 3,420 | 2,650 | 1,895 | ||||||||||||||
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Cumulative effect of an accounting change, net
of tax
|
(144 | ) | – | – | – | |||||||||||||
|
Net income
|
$ | 5,206 | $ | 3,420 | $ | 2,650 | $ | 1,895 | ||||||||||
|
Earnings per common share:
|
||||||||||||||||||
|
Basic
|
||||||||||||||||||
|
Income before cumulative effect of an accounting
change
|
$ | 2.06 | $ | 1.31 | $ | 1.02 | $ | 0.73 | ||||||||||
|
Cumulative effect of an accounting change, net of
tax
|
(0.06 | ) | – | – | – | |||||||||||||
|
Net income
|
$ | 2.00 | $ | 1.31 | $ | 1.02 | $ | 0.73 | ||||||||||
|
Diluted
|
||||||||||||||||||
|
Income before cumulative effect of an accounting
change
|
$ | 2.04 | $ | 1.30 | $ | 1.01 | $ | 0.72 | ||||||||||
|
Cumulative effect of an accounting change, net of
tax
|
(0.06 | ) | – | – | – | |||||||||||||
|
Net income
|
$ | 1.98 | $ | 1.30 | $ | 1.01 | $ | 0.72 | ||||||||||
|
Cash dividends per common share
|
$ | 0.130 | $ | 0.094 | $ | 0.065 | $ | 0.047 | ||||||||||
|
Average shares outstanding:
|
||||||||||||||||||
|
Basic
|
2,609 | 2,610 | 2,608 | 2,610 | ||||||||||||||
|
Diluted
|
2,641 | 2,637 | 2,640 | 2,637 | ||||||||||||||
8
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions) (unaudited)
| 2004 | 2003 | ||||||||||
| Six Months Ended June 30, | (Restated) | (Restated) | |||||||||
|
Summary:
|
|||||||||||
|
Net cash provided by operating
activities
|
$ | 13,945 | $ | 10,578 | |||||||
|
Net cash used in investing
activities
|
(35,437 | ) | (24,226 | ) | |||||||
|
Net cash provided by financing
activities
|
22,643 | 12,906 | |||||||||
|
Change in cumulative translation
adjustments
|
(40 | ) | 412 | ||||||||
|
Change in cash
|
1,111 | (330 | ) | ||||||||
|
Cash at beginning of period
|
922 | 1,165 | |||||||||
|
Cash at end of period
|
$ | 2,033 | $ | 835 | |||||||
|
Cash flows from operating
activities:
|
|||||||||||
|
Net income
|
$ | 5,206 | $ | 3,420 | |||||||
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|||||||||||
|
Noncash revenues, expenses, gains and losses
included in income:
|
|||||||||||
|
Change in:
|
|||||||||||
|
General and life insurance reserves
|
10,355 | 9,299 | |||||||||
|
Premiums and insurance balances receivable and
payable – net
|
(1,238 | ) | (1,816 | ) | |||||||
|
Reinsurance assets
|
191 | 606 | |||||||||
|
Deferred policy acquisition costs
|
(1,501 | ) | (1,387 | ) | |||||||
|
Investment income due and accrued
|
(382 | ) | (210 | ) | |||||||
|
Funds held under reinsurance treaties
|
376 | 498 | |||||||||
|
Other policyholders’ funds
|
415 | 134 | |||||||||
|
Current and deferred income taxes – net
|
1,008 | 724 | |||||||||
|
Reserve for commissions, expenses and taxes
|
(452 | ) | 73 | ||||||||
|
Other assets and liabilities – net
|
(16 | ) | (112 | ) | |||||||
|
Trading assets and liabilities – net
|
(479 | ) | 853 | ||||||||
|
Trading securities, at market value
|
323 | (2,898 | ) | ||||||||
|
Spot commodities, at market value
|
(437 | ) | (124 | ) | |||||||
|
Net unrealized (gain) loss on swaps, options and
forward transactions
|
719 | 559 | |||||||||
|
Securities purchased under agreements to resell
|
(2,490 | ) | (2,109 | ) | |||||||
|
Securities sold under agreements to repurchase
|
2,316 | 1,457 | |||||||||
|
Securities and spot commodities sold but not yet
purchased, at market value
|
(318 | ) | 1,244 | ||||||||
|
Realized capital (gains) losses
|
26 | (72 | ) | ||||||||
|
Equity in income of partially owned companies and
other invested assets
|
(646 | ) | (257 | ) | |||||||
|
Amortization of premium and discount on securities
|
105 | (4 | ) | ||||||||
|
Depreciation expenses, principally flight
equipment
|
997 | 906 | |||||||||
|
Provision for finance receivable losses
|
186 | 183 | |||||||||
|
Other – net
|
(319 | ) | (389 | ) | |||||||
|
Total adjustments
|
8,739 | 7,158 | |||||||||
|
Net cash provided by operating
activities
|
$ | 13,945 | $ | 10,578 | |||||||
9
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(in millions) (unaudited)
| 2004 | 2003 | |||||||
| Six Months Ended June 30, | (Restated) | (Restated) | ||||||
|
Cash flows from investing
activities:
|
||||||||
|
Cost of bonds, at market
sold
|
$ | 66,702 | $ | 54,747 | ||||
|
Cost of bonds, at market
matured or redeemed
|
7,128 | 7,655 | ||||||
|
Cost of equity securities
sold
|
7,464 | 4,057 | ||||||
|
Realized capital gains
(losses)
|
(26 | ) | 72 | |||||
|
Purchases of fixed
maturities
|
(98,883 | ) | (82,232 | ) | ||||
|
Purchases of equity
securities
|
(8,615 | ) | (3,610 | ) | ||||
|
Mortgage, policy and
collateral loans granted
|
(1,246 | ) | (1,110 | ) | ||||
|
Repayments of mortgage,
policy and collateral loans
|
1,074 | 872 | ||||||
|
Sales of securities
available for sale
|
1,058 | 1,554 | ||||||
|
Maturities of securities
available for sale
|
2,097 | 1,439 | ||||||
|
Purchases of securities
available for sale
|
(4,890 | ) | (2,749 | ) | ||||
|
Sales of flight equipment
|
1,127 | 14 | ||||||
|
Purchases of flight
equipment
|
(3,369 | ) | (3,478 | ) | ||||
|
Net additions to real
estate and other fixed assets
|
(337 | ) | (562 | ) | ||||
|
Sales or distributions of
other invested assets
|
4,581 | 2,765 | ||||||
|
Investments in other
invested assets
|
(6,376 | ) | (4,305 | ) | ||||
|
Change in short-term
investments
|
1 | 681 | ||||||
|
Investments in partially
owned companies
|
(1 | ) | 221 | |||||
|
Finance receivable
originations and purchases
|
(11,756 | ) | (5,358 | ) | ||||
|
Finance receivable
principal payments received
|
8,830 | 5,101 | ||||||
|
Net cash used in investing
activities
|
$ | (35,437 | ) | $ | (24,226 | ) | ||
|
Cash flows from financing
activities:
|
||||||||
|
Receipts from
policyholders’ contract deposits
|
$ | 27,109 | $ | 15,967 | ||||
|
Withdrawals from
policyholders’ contract deposits
|
(11,026 | ) | (8,096 | ) | ||||
|
Change in trust deposits
and deposits due to banks and other depositors
|
210 | 397 | ||||||
|
Change in commercial paper
|
2,712 | 228 | ||||||
|
Proceeds from notes,
bonds, loans and mortgages payable
|
14,444 | 12,883 | ||||||
|
Repayments on notes,
bonds, loans and mortgages payable
|
(11,325 | ) | (7,591 | ) | ||||
|
Proceeds from guaranteed
investment agreements
|
4,318 | 2,672 | ||||||
|
Maturities of guaranteed
investment agreements
|
(3,171 | ) | (2,886 | ) | ||||
|
Redemption of subsidiary
company preferred stock
|
– | (371 | ) | |||||
|
Proceeds from common
stock issued
|
90 | 23 | ||||||
|
Cash dividends to
shareholders
|
(339 | ) | (245 | ) | ||||
|
Acquisition of treasury
stock
|
(380 | ) | (76 | ) | ||||
|
Other – net
|
1 | 1 | ||||||
|
Net cash provided by financing
activities
|
$ | 22,643 | $ | 12,906 | ||||
|
Supplementary information:
|
||||||||
|
Taxes paid
|
$ | 1,657 | $ | 1,181 | ||||
|
Interest paid
|
$ | 2,139 | $ | 1,901 | ||||
10
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions) (unaudited)
| Six Months | Three Months | |||||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||
|
Net income
|
$ | 5,206 | $ | 3,420 | $ | 2,650 | $ | 1,895 | ||||||||||
|
Other comprehensive income (loss):
|
||||||||||||||||||
|
Unrealized (depreciation) appreciation of
investments – net of reclassification adjustments
|
(5,661 | ) | 8,104 | (10,330 | ) | 6,114 | ||||||||||||
|
Deferred income tax benefit (expense) on above
changes
|
1,990 | (2,517 | ) | 3,484 | (2,024 | ) | ||||||||||||
|
Foreign currency translation adjustments
|
(45 | ) | 407 | (247 | ) | 392 | ||||||||||||
|
Applicable income tax benefit (expense) on above
changes
|
46 | (53 | ) | 44 | (69 | ) | ||||||||||||
|
Net derivative gains (losses) arising from cash
flow hedging activities
|
390 | (126 | ) | 447 | (171 | ) | ||||||||||||
|
Deferred income tax (expense) benefit on above
changes
|
(96 | ) | 59 | (145 | ) | 62 | ||||||||||||
|
Retirement plan liabilities adjustment, net of tax
|
(9 | ) | (66 | ) | 18 | (26 | ) | |||||||||||
|
Other comprehensive income (loss)
|
(3,385 | ) | 5,808 | (6,729 | ) | 4,278 | ||||||||||||
|
Comprehensive income
|
$ | 1,821 | $ | 9,228 | $ | (4,079 | ) | $ | 6,173 | |||||||||
11
NOTES TO FINANCIAL STATEMENTS
| 1. | Financial Statement Presentation |
These statements are unaudited. In the opinion of management, all adjustments consisting only of normal recurring accruals have been made for a fair statement of the results presented herein. All material intercompany accounts and transactions have been eliminated. Certain accounts have been reclassified in the 2003 financial statements to conform to their 2004 presentation. For further information, refer to the Annual Report on Form 10-K of American International Group, Inc. (AIG) for the year ended December 31, 2004 (2004 Form 10-K).
| 2. |
Restatement of Previously Issued Financial Statements |
The following provides a description of the internal review process and details of the accounting adjustments included in the restatement of AIG’s consolidated financial statements and the effect of the adjustments on AIG’s Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 and its Consolidated Statement of Income for the three and six month periods ended June 30, 2004 and 2003 and Consolidated Statement of Cash Flows for the six months ended June 30, 2004 and 2003.
Internal Review. In connection with the preparation of AIG’s consolidated financial statements included in the 2004 Form 10-K, AIG’s current management initiated an internal review of AIG’s books and records, which was substantially expanded in mid-March 2005. The internal review, conducted under the direction of current senior management, with the oversight of the Audit Committee of the Board of Directors, spanned AIG’s major business units globally, and included a review of information and a number of transactions from 2000 to the present. In certain cases, items in periods prior to 2000 were examined due to the nature of the transactions under review. The business units subject to review were Domestic General Insurance, Foreign General Insurance, Reinsurance, Financial Services, Domestic and Foreign Life Insurance & Retirement Services and Asset Management. The internal review encompassed AIG’s books and records, thousands of files and e-mails and interviews with current and former employees and members of management. Management believes that the scope and process of its internal review was sufficient to identify issues of a material nature that could affect AIG’s financial statements.
AIG’s internal review was complemented by investigations by outside counsel for AIG and for the Audit Committee of the Board of Directors. PricewaterhouseCoopers LLP, an independent registered public accounting firm (PwC or independent auditors), was consulted on the scope of the internal review for certain matters and reviewed the results of the internal review.
As a result of the findings of the internal review, together with the results of investigations conducted by outside counsel at the request of AIG’s Audit Committee and in consultation with AIG’s independent auditors, AIG has concluded that the accounting for certain transactions and certain relationships needed to be restated.
Restatement. AIG has restated its financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, the quarters ended March 31, June 30 and September 30, 2004 and 2003 and the quarter ended December 31, 2003. See Selected Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of Notes to Financial Statements in the 2004 Form 10-K for a discussion of the restatement and a reconciliation of previously reported amounts to the restated amounts for the years ended December 31, 2003, 2002, 2001 and 2000, and see below for reconciliation of such amounts for the three and six month periods ended June 30, 2004 and 2003.
As part of its internal review, AIG evaluated the financial reporting consolidation process and the resulting financial statements as well as the appropriateness of AIG’s prior accounting and reporting decisions. Based on this evaluation, the restatement includes corrections of errors in current or prior accounting periods for improper or inappropriate transactions or entries identified by the review. In many cases these transactions or entries appear to have had the purpose of achieving an accounting result that would enhance measures believed to be important to the financial community and may have involved documentation that did not accurately reflect the true nature of the arrangements. In certain instances, these transactions or entries may also have involved misrepresentations to members of management, regulators and AIG’s independent auditors. The restatement includes adjustments, some of which had been previously identified but considered not to be sufficiently material to require correction.
Details of Accounting Adjustments included in the Restatement. The accounting adjustments relate primarily to the categories described below. Many of the adjustments that do not affect previously reported net income or consolidated shareholders’ equity do, however, change both the consolidated and business segment reporting of premiums, underwriting results, net investment income, realized capital gains and losses and operating income, as well as other items. Adjustments that affect reported net income and consolidated shareholders’ equity relate to both the timing and recognition of revenues and expenses and affect the comparison of period-to-period results.
| • | Risk Transfer. To recognize the cash flows under an insurance contract as premium and losses, generally accepted accounting principles (GAAP) requires the transfer of risk. If risk transfer requirements are not met, an insurance contract is accounted for as a deposit, result- |
12
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| ing in the recognition of cash flows under the contract as deposit assets or liabilities and not as revenues or expense. AIG has concluded, based upon its internal review, that there was insufficient risk transfer to qualify for insurance accounting for certain transactions where AIG subsidiaries either wrote direct insurance or assumed or ceded reinsurance. These transactions are now recorded using deposit accounting. The changes resulting from the change to deposit accounting affect both the consolidated balance sheet and statement of income. |
| – | Union Excess: AIG has concluded, based on documents and information identified during the course of the internal review, that reinsurance ceded to Union Excess Reinsurance Company, Ltd., a Barbados-domiciled reinsurer (Union Excess), did not result in risk transfer because of AIG’s control over certain transactions undertaken directly or indirectly with Union Excess, including the timing and nature of certain commutations. Eliminating the cessions reduces reinsurance assets, effectively eliminates the inherent discount related to the loss reserves ceded under the contracts, and increases net premiums and losses. |
| In addition, as a result of certain facts and circumstances related to the formation of Union Excess, as well as certain relationships with Starr International Company, Inc. (SICO), Union Excess is now included in AIG’s consolidated financial statements. The facts and circumstances surrounding SICO’s involvement with Union Excess were not properly reflected in AIG’s books and records, were not known to all relevant AIG financial reporting personnel and, AIG now believes, were not known to AIG’s independent auditors. For example, a significant portion of the ownership interests of Union Excess shareholders are protected against loss under financial arrangements with SICO. Additionally, from its formation in 1991, Union Excess has reinsured risks emanating primarily or solely from AIG subsidiaries, both directly and indirectly. Further, it appears that the employees responsible for the reinsurance related to Union Excess managed that relationship to prevent significant losses or gains to Union Excess so that substantially all of the risks and rewards of the underlying reinsurance inured to AIG. This relationship allowed AIG to absorb substantially all the economic returns, which in turn caused Union Excess to be deemed a variable interest entity (VIE). | |
| As a result of the restatement relating to Union Excess, as of June 30, 2004 and December 31, 2003, total assets decreased by approximately $1.4 billion and $1.3 billion, respectively, and shareholders’ equity decreased by approximately $912 million and $873 million, respectively. Net income decreased by approximately $19 million and $39 million for the three and six month periods ended June 30, 2004 and increased by $40 million and $80 million for the three and six month periods ended June 30, 2003. |
| – | Gen Re: In December 2000 and March 2001, an AIG subsidiary entered into an assumed reinsurance transaction with a subsidiary of General Re Corporation (Gen Re) involving two tranches of $250 million each. In connection with each tranche, consolidated net premiums written and consolidated incurred policy losses and benefits increased by $250 million in the fourth quarter of 2000 (with respect to the first tranche) and the first quarter of 2001 (with respect to the second tranche). The first tranche of the transaction was commuted in November 2004, reducing premiums and reserves for losses and loss expenses by approximately $250 million in the fourth quarter 2004. AIG has concluded that the transaction was done to accomplish a desired accounting result and did not entail sufficient qualifying risk transfer. As a result, AIG has determined that the transaction should not have been recorded as insurance. AIG’s restated financial statements recharacterize this transaction as a deposit rather than as insurance. Such recharacterization had virtually no effect on net income or consolidated shareholders’ equity, but increased other liabilities by $500 million and $500 million at June 30, 2004 and December 31, 2003, respectively, and reduced reserves for loss and loss expenses by $500 million and $500 million at June 30, 2004 and December 31, 2003, respectively. |
| – | Other Risk Transfer: AIG has concluded that Richmond Insurance Company, Ltd., a Bermuda-based reinsurance holding company (Richmond) in which AIG held a 19.9 percent ownership interest at June 30, 2004, should be treated as a consolidated entity in AIG’s financial statements due to AIG’s ability to exert control over that entity. Such determination was based, in part, on arrangements and documents, including put agreements requiring an AIG subsidiary to purchase the Richmond shares, that appear not to have been previously disclosed to appropriate AIG financial personnel or AIG’s independent auditors. A review of the operations of Richmond and its subsidiaries has shown significant previously undisclosed evidence of AIG control causing Richmond to be deemed a VIE. The consolidation of Richmond had virtually no effect on net income or consolidated shareholders’ equity. On June 30, 2005, AIG acquired an additional 49.9 percent of Richmond shares by exercise of the put arrangement discussed above. |
| As a result of its internal review of AIG Re, AIG Risk Finance and AIG Risk Management and certain of their transactions, AIG determined that adjustments were required because certain transactions lacked sufficient risk transfer to qualify for insurance accounting under GAAP. |
13
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| As a result of the restatement for Richmond, AIG Re, AIG Risk Finance, AIG Risk Management and these other transactions, as of June 30, 2004 and December 31, 2003, total assets decreased by approximately $463 million and $456 million, respectively, total liabilities decreased by approximately $387 million and $406 million, respectively, and shareholders’ equity decreased by approximately $76 million and $51 million, respectively. Net income decreased by approximately $33 million and $25 million for the three and six month periods ended June 30, 2004, and increased by approximately $11 million and $2 million for the three and six month periods ended June 30, 2003. |
| • | Loss Reserves: Estimation of ultimate net losses and loss expenses is a complex process requiring the use of assumptions which may be highly uncertain at the time of estimation. As a result of its internal review, AIG has determined that the IBNR included in the General Insurance reserve for losses and loss expenses was adjusted on a regular basis without appropriate support for the changes requested to be made. Although AIG does not believe that any change materially affected the integrity of AIG’s loss reserve position because in each instance IBNR as adjusted was determined to be within an appropriate tolerance of the applicable actuarial point estimate, AIG has determined that the unsupported decreases in reserves generated independently from the actuarial process constituted errors which should be corrected and has restated the amounts of carried reserves accordingly. |
| The effect of the restatement is a decrease in consolidated shareholders’ equity of approximately $434 million and $375 million at June 30, 2004 and December 31, 2003, respectively, an increase in the reserve for losses and loss expenses of approximately $668 million and $578 million at June 30, 2004 and December 31, 2003, respectively, and an increase in incurred policy losses and benefits of approximately $30 million and $90 million and $65 million and $140 million for the three and six month periods ended June 30, 2004 and 2003, respectively. |
| • | Net Investment Income. As a result of the internal review, AIG determined that the accounting for certain transactions had the effect of improperly converting capital gains into net investment income and was not consistent with GAAP. The most significant of these transactions are: |
| – | Covered Calls: From 2001 through 2003, certain AIG subsidiaries entered into a series of transactions with third parties whereby these subsidiaries sold in-the-money calls, principally on municipal bonds in their investment portfolios that had unrealized appreciation associated with them. Upon exercise of a call, the related bonds were delivered to the purchaser of the call and subsequently reacquired by the subsidiaries pursuant to contingent forward agreements which permitted the AIG subsidiaries to repurchase the bonds at the prevailing market value. In connection with selling the calls, the AIG subsidiaries also entered into interest rate swaps to protect them against the effects of changes in value of the applicable bonds as a result of movements in interest rates during the transaction period. These transactions were accounted for as sales and subsequent purchases and appear to have been initiated to increase net investment income. AIG has determined that, because AIG was able to cause the bonds to be returned from the third parties even after the third parties exercised the call options, AIG did not cede control over the bonds and therefore the transactions should not have been accounted for as sales and subsequent purchases but rather as financings. Net investment income increased over previously reported amounts by $9 million and $19 million for the three and six month periods ended June 30, 2004 and decreased by $46 million and $149 million for the three and six month periods ended June 30, 2003, and realized capital gains increased by $23 million and $41 million and by $48 million and $76 million for the three and six month periods ended June 30, 2004 and 2003, respectively. The restatement had no net effect on consolidated shareholders’ equity at June 30, 2004 and December 31, 2003. |
| – | Synthetic Fuel Investment: AIG subsidiaries invest in certain limited liability companies that invest in synthetic fuel production facilities as a means of generating income tax credits. As a result of a misapplication of GAAP, AIG recorded net investment income or, in some cases, other revenues, on a pretax basis rather than reflecting the tax credit as a reduction of income tax expense, thereby increasing net investment income for AIG’s life insurance and retirement services segment and other revenues for the financial services segment. Certain of these entries were previously identified but not corrected as the amounts were viewed as not sufficiently material to require correction. In the fourth quarter of 2004, AIG changed its accounting to present these tax credits as a component of income taxes. AIG has now determined that it is necessary to record these adjustments for the periods prior to the fourth quarter of 2004. The restatement had the effect of decreasing net investment income by approximately $74 million and $135 million and by approximately $56 million and $96 million for the three and six month periods ending June 30, 2004 and 2003, respectively, decreasing other revenues by approximately $44 million and $98 million and by approximately $54 million and $99 million for the three and six month periods ended June 30, 2004 and 2003, respectively, and reflecting an income tax benefit of approximately $118 million and $233 million and of approximately $110 million and |
14
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
$195 million for the three and six month periods ended June 30, 2004 and 2003, respectively. There was no effect on consolidated net income or shareholders’ equity.
| – | Hedge Fund Accounting: AIG subsidiaries invest in a variety of alternative asset classes, including hedge fund limited partnerships, that are accounted for as available for sale securities. As part of the underlying partnership agreements, such AIG subsidiaries have the right to redeem their interests at defined times. A redemption previously allowed AIG to record net investment income to the extent there were gains in the underlying funds at the time. However, as a result of its internal review, AIG has determined that, in certain cases, the redemption resulted in inappropriate gain recognition because the proceeds were required to be immediately reinvested in the funds. In addition, the cost bases of certain funds were misallocated in determining gains. The restated consolidated financial statements correct these errors. These corrections had virtually no effect on consolidated shareholders’ equity at June 30, 2004 and December 31, 2003. |
| – | Muni Tender Option Bond Program: From 2000 through early 2003, AIG subsidiaries participated in a program in which they transferred highly rated municipal bonds at market value to a third-party broker, which in turn transferred these securities to a trust that the broker had established. The trust then issued two sets of beneficial interests. Half of the beneficial interests were floating interest rate certificates. The remaining beneficial interests were “inverse” floating interest rate certificates. Third parties invested in the floating interest rate certificates, and AIG subsidiaries invested in the inverse floating interest rate certificates. AIG did not consolidate the trust into AIG’s balance sheet. |
| The AIG subsidiaries, as the holders of the residual interest inverse floating rate certificates, had the right to unilaterally liquidate the trust and cause the municipal bonds to be returned to AIG on short notice. Accordingly, the AIG subsidiaries did not cede control over the bonds. As a result, AIG now believes that the conclusion not to consolidate was an error in the application of GAAP. Therefore, AIG has now consolidated the trusts into its balance sheets at December 31, 2002. Because the program was discontinued in early 2003, there was no effect on the consolidated balance sheets as of June 30, 2004 or December 31, 2003. However, net investment income increased over previously reported amounts by $19 million and $40 million and by $15 million and $27 million for the three and six month periods ended June 30, 2004 and 2003, respectively, and realized capital gains increased by $11 million and $19 million for the three and six month periods ended June 30, 2004, and decreased by $8 million and $8 million for the three and six month periods ended June 30, 2003. |
| – | DBG/AIG Capital Corporation Intercompany Dividend: In 2002, AIG Capital Corporation issued shares of its preferred stock to National Union in exchange for shares of ILFC’s common stock. AIG did not eliminate the preferred stock investment in consolidation, instead recording the dividend as income in net investment income and as corresponding expense in other operating expenses. AIG has now determined that this accounting is a misapplication of GAAP. Accordingly, AIG has eliminated this intercompany investment and reversed the accounting entries in its consolidated statement of income. The restatement had no effect on consolidated net income or shareholders’ equity but net investment income decreased by approximately $25 million and $50 million and insurance acquisition and other operating expenses decreased by approximately $25 million and $50 million for the three and six month periods ended June 30, 2004 and 2003, respectively. |
| • | “Top Level” Adjustments and Other Directed Entries (other than loss reserves). Certain accounting entries originated at the parent company level had the effect of reclassifying realized capital gains to net investment income, as well as adjusting other line item reclassifications and other segment financial information. In some cases, expense deferrals were increased or reserves decreased, both having the effect of increasing reported earnings. In other cases, the adjustments affected revenue and expense recognition between reporting periods or among business segments. Certain of these entries were previously identified but considered not to be sufficiently material to require correction. As part of its internal review, AIG analyzed and assessed “top level” adjustments since 2000 and determined that certain entries appear to have been made at the direction of certain former members of senior management without appropriate documentation or support. |
| – | Foreign Life Insurance Net Investment Income Reclassification: In addition to the matters described above, certain accounting entries, now determined to be errors, had the effect of reclassifying capital gains realized from investments made to match liabilities relating to policies in Japan and Southeast Asia. Due to the limited availability of long-duration bonds or bonds with sufficient yield to meet the policyholder liability requirements in Japan and Southeast Asia, AIG subsidiaries made alternative investments, including investments in equities. Until the fourth quarter of 2003, a portion of the capital gains realized on these alternative investments, including substantial amounts related to the sale of fixed income securities, was reclassified to net investment income in the consolidated statement of income to match these revenues against the incurred policy benefit expense of the underlying policies. Amounts so reflected, which were previously identified but not cor- |
15
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| rected as they were viewed as immaterial, are treated as corrections of errors in the restated financial statements. |
| Beginning in the first quarter of 2004, a process was implemented to identify only certain equity-related gains in Southeast Asia and a limited amount of fixed income and equity gains in Japan and to segregate and treat such realized capital gains separately for segment reporting purposes only. The new process and limits were applied retroactively for 2003, 2002, 2001 and 2000 as part of the restatement. | |
| The restatement reverses all such unsupported “top level” and other directed entries, including the Foreign Life Insurance Net Investment Income Reclassification, and as a result, as of June 30, 2004 and December 31, 2003, total assets decreased by approximately $348 million and $413 million and shareholders’ equity decreased by approximately $368 million and $401 million, respectively. Net income increased by approximately $27 million and $40 million, and $22 million and $12 million for the three and six month periods ended June 30, 2004 and 2003, respectively. |
| • | Conversion of Underwriting Losses to Capital Losses. This category includes transactions and entries that had the principal effect of improperly recharacterizing underwriting losses as capital losses. This category also includes insurance and reinsurance transactions where AIG’s accounting resulted in errors relating to the timing and classification of income recognition as well as errors relating to the timing of premium recognition. The most significant transactions in this category are the following: |
| – | Capco: AIG has determined that a series of transactions with Capco Reinsurance Company, Ltd. (Capco), a Barbados-domiciled reinsurer, involved an improper structure created to recharacterize underwriting losses relating to auto warranty business as capital losses. That structure, which appears to have not been properly disclosed to appropriate AIG personnel or its independent auditors, consisted primarily of arrangements between subsidiaries of AIG and Capco that require Capco to be treated as a consolidated entity in AIG’s financial statements. The result of such consolidation is to reverse capital losses for the years 2000 through 2003 and recognize a corresponding amount of underwriting losses in 2000. |
| – | The Robert Plan: AIG has restated the accounting for surplus notes purchased as part of a litigation settlement in 2002 with The Robert Plan Corporation (The Robert Plan). Pursuant to the settlement agreement, the surplus notes were to be repaid through profits received from a managing general agency relationship with The Robert Plan. When AIG deemed that repayment under the surplus notes was unlikely, AIG recorded the impairment charge as realized capital losses rather than underwriting losses. AIG now believes that this accounting treatment was an error and has restated the impairment charges as underwriting losses. |
| – | AIRCO Reinsurance: In each of 1999 and 2000, AIRCO entered into stop loss reinsurance agreements with Union Excess relating to accident and health business of Nan Shan. Concurrently with each reinsurance agreement, AIRCO entered into a swap agreement with Union Excess, under which the payments were linked to payments under the reinsurance agreement. The transaction had the effect of converting incurred policy losses into capital losses. AIG has determined that its prior accounting was a misapplication of GAAP and has reversed both the cessions under the reinsurance agreement and the corresponding swaps. |
| Together the effect of the restatement for Capco, The Robert Plan and AIRCO was to decrease total assets by approximately $97 million and $62 million and decrease total shareholders’ equity by approximately $48 million and $109 million as of June 30, 2004 and December 31, 2003, respectively. Net income increased by approximately $13 million and $61 million, and by approximately $5 million and $10 million for the three and six month periods ended June 30, 2004 and 2003, respectively. |
| • | Asset Realization. As a result of the internal review, AIG concluded that adjustments should be made to the value of certain assets included in its consolidated balance sheet. The most significant of these items are: |
| – | Domestic Brokerage Group (DBG) Issues: A review of allowances for doubtful accounts and other accruals recorded by certain DBG member companies has led AIG to conclude that the allowances related to certain premiums receivable, reinsurance recoverables and other assets were not properly analyzed in prior periods and that appropriate allowances were not properly recorded in AIG’s consolidated financial statements. Certain relevant information was known by certain members of senior management but, AIG now understands, not previously disclosed to the independent auditors. In addition, various accounts were not properly reconciled. AIG’s restated financial statements reflect the recording of appropriate amounts for these reserves and allowances for doubtful accounts for the appropriate time period, resulting in an after-tax reduction in consolidated shareholders’ equity at December 31, 1999 of $514 million. The effect of the restatement resulting from DBG issues was to decrease total assets by approximately $903 million and $872 million and to decrease total shareholders’ equity by approximately $355 million and $324 million as of June 30, 2004 and December 31, 2003, respectively. Net income increased |
16
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| by approximately $21 million and decreased by approximately $31 million for the three month and six month periods ended June 30, 2004, and increased by approximately $24 million and $23 million for the three and six month periods ended June 30, 2003. | |
| – | Other Than Temporary Declines: AIG’s investment accounting policies require that an investment that has been identified as impaired should be written down in the period in which such impairment is determined, and recorded as a realized capital loss. AIG has determined that realized capital losses with respect to certain impaired investments were not recorded in the appropriate periods, and the restatement will thus affect the timing of previously reported realized capital losses. The restatement resulting from other than temporary declines had only a minor effect on consolidated shareholders’ equity but net income increased by approximately $26 million and $327 million for the six month periods ended June 30, 2004 and 2003, respectively. |
| • | Other GAAP Corrections. As part of its internal review, AIG has considered the application of certain accounting principles to specific businesses and transactions, and has determined that certain misapplications of GAAP are errors that require restatement of its financial statements. These adjustments include the following: |
| – | Accounting for Derivatives (FAS 133 Hedge Accounting): AIG and its subsidiaries, including AIGFP, engage in hedging activities for their own accounts, which AIG believes have been and remain economically effective. AIG and its subsidiaries enter into derivative contracts principally to hedge interest rate risk and foreign currency risk associated with their assets, liabilities and forecasted cash flows. Such derivative transactions include interest rate swaps, cross currency swaps and forwards, which are generally executed through AIGFP. Statement of Financial Accounting Standards No. 133 — “Accounting for Derivative Instruments and Hedging Activities” (FAS 133) requires that third-party derivatives used for hedging must be specifically matched with the underlying exposures to an outside third party and documented contemporaneously to qualify for hedge accounting treatment. The internal review determined that in many cases AIG did not meet these hedging requirements with respect to certain hedging transactions. |
| AIG has historically reported the changes in the fair value of certain derivatives used for hedging activities through other comprehensive income in consolidated shareholders’ equity or in net income with a corresponding adjustment to the hedged item, depending on the nature of the hedging relationship. In order to comply with FAS 133, the restated consolidated financial statements include the changes in fair value for certain derivatives, previously recorded through other comprehensive income, in current period income and reverse the previous adjustments on certain assets and liabilities recorded in income in connection with hedge accounting. Because these activities did not qualify for hedge accounting, Statement of Financial Accounting Standards No. 115 — “Accounting for Certain Investments in Debt and Equity Securities” requires AIG to recognize the corresponding changes in fair value, including foreign exchange gains and losses resulting from exchange rate fluctuations, relating to available-for-sale investments through accumulated other comprehensive income. These restatement adjustments with respect to FAS 133 do not result in any changes in AIG’s liquidity or its overall financial condition even though inter-period volatility of earnings increases. | |
| AIG is assessing the cost and benefits of modifying its hedging activities to obtain hedge accounting under the requirements of FAS 133. The restatement to reflect appropriate GAAP accounting for these derivatives, which also included reclassifications between the accounts securities available for sale, at market value and securities purchased under agreements to resell, at contract value, increased total assets by approximately $0.3 billion and $2.0 billion and decreased total shareholders’ equity by approximately $42 million and increased total shareholders’ equity by approximately $0.8 billion as of June 30, 2004 and December 31, 2003, respectively. Net income decreased by approximately $122 million and $214 million and by approximately $319 million and $867 million for the three and six month periods ended June 30, 2004 and 2003, respectively. |
| – | Accounting for Deferred Taxes: AIG identified certain misapplications of GAAP in its provision for deferred income taxes as follows: |
| For certain foreign subsidiaries for which AIG has plans to permanently reinvest undistributed earnings, AIG incorrectly provided U.S. deferred taxes on the unrealized appreciation associated with investment securities in accumulated other comprehensive income. | |
| For certain foreign subsidiaries for which AIG does not have plans for permanent reinvestment of undistributed earnings, U.S. deferred taxes were incorrectly omitted on certain components of other comprehensive income. | |
| The restatement increased total shareholders’ equity by $675 million and $761 million as of June 30, 2004 and December 31, 2003, respectively. |
| – | Foreign Currency Translation (FAS 52): FAS 52 is used to determine the timing of the recognition of income or expense resulting from foreign exchange rate changes for transactions denominated in other than a functional currency. |
17
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| AIG has determined that, in certain cases, its application of FAS 52 in its consolidated financial statements did not comply with the functional currency determination requirements of the standard. As a result, AIG has recorded accounting adjustments to reclassify currency transaction gains and losses from accumulated other comprehensive income to net income. These corrections affected consolidated net income in certain periods but had no effect on consolidated shareholders’ equity at June 30, 2004 or for prior periods. | |
| AIG adopted a practice in the 1990s of recording adjustments to general insurance reserves to offset increases or decreases in such reserves through other comprehensive income, net of tax, resulting from translation of reserves denominated in foreign currencies. AIG now believes that this accounting practice was a misapplication of GAAP. As a result of this adjustment, general insurance reserves denominated in foreign currencies have been restated to restore the translation effect back to reserve for losses and loss expenses. | |
| Together, these restatements increased total assets by approximately $101 million and $143 million and increased total shareholders’ equity by approximately $287 million and $358 million as of June 30, 2004 and December 31, 2003, respectively. Net income increased by approximately $40 million and $3 million for the three month periods ended June 30, 2004 and 2003, respectively, and decreased by approximately $11 million and $35 million for the six month periods ended June 30, 2004 and 2003, respectively. |
| – | Life Settlements. Life settlements are designed to assist life insurance policyholders to monetize the existing value of life insurance policies. AIG, through an insurance subsidiary and non-consolidated trusts, which are deemed to be a qualifying special purpose entity and a VIE, engages in this business. The non-consolidated trusts purchase life insurance policies from policyholders at an initial price and pay additional premiums to keep the policies in force until the insured dies. AIG’s proportionate share of the net death benefits from the purchased contracts, net of reinsurance to a third party reinsurer, was recorded as premium. The costs incurred by the trusts to acquire the contracts and keep them in force were recorded as paid losses by AIG, net of reinsurance. AIG’s accounting resulted in upfront gain recognition of expected profits and premium recognition for amounts loaned to the trusts by other AIG subsidiaries. |
| AIG has determined, in light of new information which was not available to management or AIG’s independent auditors at the time the initial accounting determination was made, that the accounting for these transactions as insurance and reinsurance is a misapplication of GAAP that should be corrected through restatement. This restatement results in life settlements being accounted for using an investment method of accounting under FASB Technical Bulletin (FTB) 85-4 “Accounting for Purchases of Life Insurance.” Under FTB 85-4, the carrying value of each contract at purchase and at the end of each reporting period is equal to the cash surrender value of the contract. Cash paid to purchase these contracts that is in excess of the cash surrender value at the date of purchase is recognized as a loss immediately and periodic maintenance costs, such as premiums necessary to keep the underlying contract in force, are charged to earnings immediately. The life insurance benefits at the insured’s death are payable to the AIG subsidiary and reflected in income at that time. The effect of the restatement was to decrease total assets by approximately $2.5 billion and $1.9 billion, decrease total liabilities by approximately $2.1 billion and $1.6 billion and decrease total shareholders’ equity by approximately $331 million and $270 million as of June 30, 2004 and December 31, 2003, respectively. Net income decreased by approximately $30 million and $66 million and by approximately $45 million and $67 million for the three and six month periods ended June 30, 2004 and 2003, respectively. |
| – | Deferred Acquisition Costs (DAC): The internal review identified a misapplication of GAAP with respect to General Insurance DAC. As a result of “top-level” entries, substantially all costs associated with underwriting and marketing operations were deferred. The internal review determined that certain of these costs did not vary sufficiently with the production of business and should not have been deferred. These costs have been allocated to the periods in which they were incurred and the corresponding DAC asset has been adjusted accordingly. In addition, AIG determined that the amortization period for certain DAC was longer than the typical life of the underlying policies and needed to be shortened, and that certain deferrals associated with an inter-company reinsurance treaty were in error and required correction. This adjustment includes the recharacterization of certain incurred policy losses and benefits to insurance acquisition and other operating expenses. The effect of the restatement was to decrease total assets by approximately $515 million and $495 million and to decrease total shareholders’ equity by approximately $324 million and $311 million as of June 30, 2004 and December 31, 2003, respectively. |
| – | SICO Deferred Compensation: AIG has included in this restatement, expense amounts attributable to deferred compensation granted to certain AIG employees by SICO (pursuant to the SICO Plan described under Item 11. Executive Compensation in AIG’s 2004 Form 10-K), a private holding company that owns approximately 12 percent of AIG’s common stock. The amount of deferred compensation granted by SICO has previously been disclosed in the notes to AIG’s consolidated financial statements but was not included as an |
18
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| expense in the calculation of AIG’s consolidated net income because the amounts had been determined not to be material to AIG’s consolidated results of operations in any individual period. The expense related to SICO deferred compensation is recorded as a charge to reported earnings in the periods restated, with an offsetting entry to additional paid-in capital reflecting amounts deemed contributed by SICO. For periods prior to January 1, 2000, AIG has recorded a reduction of $905 million in retained earnings on its December 31, 1999 consolidated balance sheet and a corresponding increase to additional paid-in capital. The volatility in the expense is attributable to the variable accounting as well as the fact that shares are allocated only in alternate years. The inclusion of the expense attributable to the SICO Plans in AIG’s consolidated financial statements had no effect on consolidated shareholders’ equity but decreased net income by approximately $14 million and $28 million and by $69 million and $138 million for the three and six month periods ended June 30, 2004 and 2003, respectively. | |
| – | Commutations: Certain direct insurance, and ceded and assumed reinsurance contracts, were commuted prior to their natural expiration. For certain commutations, the cash received was recorded through negative paid losses in accordance with statutory guidance, while for others it was recorded as written premiums. Despite the lack of guidance under GAAP with respect to this issue, AIG has determined that the accounting for certain commutations was in error due to the inconsistency in AIG’s accounting for commutations and the fact that certain commutations were recorded through the written premium line when there was no unearned premium balance outstanding. As part of this restatement any commutations that were originally recorded through written premium are reclassified to paid losses in the period in which they occurred. The restatement had no effect on consolidated net income or shareholders’ equity but did increase premiums and other considerations and incurred policy losses and benefits each by approximately $43 million and $3 million for the three and six month periods ended June 30, 2004 and increased premiums and other considerations and incurred policy losses and benefits each by approximately $35 million for the six month period ended June 30, 2003. |
| – | Dollar Roll Transactions: Certain AIG subsidiaries entered into dollar roll transactions with third parties designed to enhance the return on AIG’s mortgage backed securities (MBS) portfolio. In a dollar roll transaction, AIG subsidiaries agree to sell a pool of MBSs and simultaneously agree to repurchase substantially the same securities at a later date, typically in one month. AIG accounted for these transactions as collateralized financings under SFAS 140. Even though it had received collateral sufficient to fund substantially all of the cost of purchasing identical replacement securities at the time of transfer, AIG was not fully protected during the term of the contract to replace the asset in the event that the transferee defaulted. Accordingly, AIG should not have accounted for these transactions as financings, but rather as derivatives with mark-to-market changes reflected in earnings. Net income decreased by approximately $105 million and $67 million for the three and six month periods ended June 30, 2004 and increased by approximately $13 million and decreased by approximately $1 million for the three and six month periods ended June 30, 2003. |
| – | Affordable Housing: Through an investment limited partnership, an AIG subsidiary, as the general partner, syndicates the tax benefits (including both tax credits and tax losses) generated by affordable housing real estate properties. AIG guarantees the return of the tax benefits to the limited partner investors. Prior to the second quarter of 2003, these syndication transactions were accounted for as sales and the gain was recorded on a straight-line basis over ten years. Beginning in the third quarter of 2003, because of the guarantees, AIG changed its accounting for these partnerships to record all new syndications as financings, rather than sales. At the same time, AIG adjusted its consolidated balance sheet to reflect previous syndications as financings, but did not record the cumulative impact to earnings because the amounts were viewed as immaterial. AIG has now determined that it is necessary to record these adjustments for the periods prior to the third quarter of 2003, and the restatement decreased total assets by approximately $681 million and $611 million and decreased total shareholders’ equity by approximately $310 million and $297 million as of June 30, 2004 and December 31, 2003, respectively. |
| – | SunAmerica Partnerships: As part of the restatement, management has reclassified the earnings of the SunAmerica partnerships out of other operations, where previously reported, into the Asset Management segment. This revised presentation characterizes the partnership earnings as revenues rather than as a component of insurance acquisition and operating expenses in AIG’s consolidated statement of income. Within the Asset Management segment, this presentation divides the partnership earnings into those of SunAmerica Life, whose equity supports the GIC business, and those of AIG SunAmerica, which are now classified as other asset management revenues. The restatement had no effect on consolidated net income or total shareholders’ equity, but increased other revenues by approximately $166 million and $321 million and by approximately $47 million and $98 million for the three and six month periods ended June 30, 2004 and 2003, respectively, and increased insurance and other operating expenses by approximately $166 million and $321 million and by approximately $47 million and $128 million for the three and six month periods ended June 30, 2004 and 2003, respectively. |
19
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
The following tables present the previously reported and the restated Consolidated Balance Sheet, Consolidated Statement of Income, and Condensed Consolidated Statement of Cash Flows:
CONSOLIDATED BALANCE SHEET
| June 30, 2004 | December 31, 2003 | ||||||||||||||||||
| As Previously | As | As Previously | As | ||||||||||||||||
| (in millions) | Reported | Restated | Reported | Restated | |||||||||||||||
|
Assets:
|
|||||||||||||||||||
| Investments, financial services assets and cash: | |||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||
|
Bonds available for sale, at market value
|
$ | 314,926 | $ | 314,926 | $ | 300,935 | $ | 300,935 | |||||||||||
|
Bonds held to maturity, at amortized cost
|
12,877 | 12,877 | 8,037 | 8,037 | |||||||||||||||
|
Bond trading securities, at market value
|
1,793 | 1,793 | 282 | 282 | |||||||||||||||
| Equity securities: | |||||||||||||||||||
|
Common stocks available for sale, at market value
|
7,786 | 7,786 | 7,522 | 7,522 | |||||||||||||||
|
Common stocks trading, at market value
|
4,780 | 4,780 | 156 | 156 | |||||||||||||||
|
Preferred stocks, at market value
|
1,813 | 1,813 | 1,906 | 1,906 | |||||||||||||||
|
Mortgage loans on real estate, net of allowance
|
12,455 | 12,488 | 12,295 | 12,328 | |||||||||||||||
|
Policy loans
|
6,747 | 6,747 | 6,658 | 6,658 | |||||||||||||||
|
Collateral and guaranteed loans, net of allowance
|
2,318 | 2,226 | 2,296 | 2,241 | |||||||||||||||
| Financial services assets: | |||||||||||||||||||
|
Flight equipment primarily under operating
leases, net of accumulated depreciation
|
31,970 | 31,970 | 30,343 | 30,343 | |||||||||||||||
|
Securities available for sale, at market value
|
17,876 | 25,159 | 15,714 | 24,042 | |||||||||||||||
|
Trading securities, at market value
|
3,616 | 4,096 | 3,300 | 4,418 | |||||||||||||||
|
Spot commodities, at market value
|
687 | 687 | 250 | 250 | |||||||||||||||
|
Unrealized gain on swaps, options and forward
transactions
|
18,994 | 18,852 | 21,599 | 21,459 | |||||||||||||||
|
Trading assets
|
1,411 | 1,136 | 2,548 | 2,277 | |||||||||||||||
|
Securities purchased under agreements to resell,
at contract value
|
30,660 | 23,335 | 28,170 | 20,845 | |||||||||||||||
|
Finance receivables, net of allowance
|
20,339 | 20,239 | 17,609 | 17,500 | |||||||||||||||
| Securities lending collateral, at cost | 46,893 | 46,893 | 30,195 | 30,195 | |||||||||||||||
| Other invested assets | 20,320 | 21,730 | 16,787 | 18,484 | |||||||||||||||
| Short-term investments, at cost | 16,129 | 16,142 | 8,914 | 8,908 | |||||||||||||||
| Cash | 2,033 | 2,033 | 922 | 922 | |||||||||||||||
| Total investments, financial services assets and cash | 576,423 | 577,708 | 516,438 | 519,708 | |||||||||||||||
| Investment income due and accrued | 5,434 | 5,041 | 4,959 | 4,612 | |||||||||||||||
|
Premiums and insurance balances receivable, net
of allowance
|
16,447 | 15,103 | 14,166 | 13,189 | |||||||||||||||
| Reinsurance assets, net | 27,359 | 20,757 | 27,962 | 20,948 | |||||||||||||||
| Deferred policy acquisition costs | 28,902 | 28,422 | 26,398 | 25,920 | |||||||||||||||
| Investments in partially owned companies | 1,551 | 1,557 | 1,428 | 1,420 | |||||||||||||||
|
Real estate and other fixed assets, net of
accumulated depreciation
|
5,958 | 5,920 | 6,006 | 5,966 | |||||||||||||||
| Separate and variable accounts | 52,981 | 52,981 | 60,536 | 60,536 | |||||||||||||||
| Goodwill | 8,133 | 8,164 | 7,633 | 7,664 | |||||||||||||||
| Other assets | 12,794 | 14,079 | 12,820 | 14,190 | |||||||||||||||
|
Total assets
|
$ | 735,982 | $ | 729,732 | $ | 678,346 | $ | 674,153 | |||||||||||
20
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
CONSOLIDATED BALANCE SHEET (continued)
| June 30, 2004 | December 31, 2003 | |||||||||||||||||
| As Previously | As | As Previously | As | |||||||||||||||
| (in millions) | Reported | Restated | Reported | Restated | ||||||||||||||
|
Liabilities:
|
||||||||||||||||||
|
Reserve for losses and loss expenses
|
$ | 59,251 | $ | 55,640 | $ | 56,118 | $ | 52,381 | ||||||||||
|
Reserve for unearned premiums
|
22,837 | 22,956 | 20,762 | 20,910 | ||||||||||||||
|
Future policy benefits for life and accident and
health insurance contracts
|
95,023 | 94,867 | 92,970 | 92,912 | ||||||||||||||
|
Policyholders’ contract deposits
|
201,011 | 200,954 | 171,989 | 171,917 | ||||||||||||||
|
Other policyholders’ funds
|
9,532 | 9,540 | 9,100 | 9,124 | ||||||||||||||
|
Reserve for commissions, expenses and taxes
|
4,134 | 4,137 | 4,487 | 4,588 | ||||||||||||||
|
Insurance balances payable
|
3,277 | 3,591 | 2,592 | 2,915 | ||||||||||||||
|
Funds held by companies under reinsurance treaties
|
5,323 | 3,419 | 4,664 | 3,043 | ||||||||||||||
|
Income taxes payable:
|
||||||||||||||||||
|
Current
|
2,641 | 1,540 | 1,977 | 366 | ||||||||||||||
|
Deferred
|
3,957 | 2,469 | 5,778 | 4,633 | ||||||||||||||
|
Financial services liabilities:
|
||||||||||||||||||
|
Borrowings under obligations of guaranteed
investment agreements
|
16,484 | 16,484 | 15,337 | 15,337 | ||||||||||||||
|
Securities sold under agreements to repurchase,
at contract value
|
17,003 | 18,129 | 14,810 | 15,813 | ||||||||||||||
|
Trading liabilities
|
4,534 | 4,534 | 6,153 | 6,153 | ||||||||||||||
|
Securities and spot commodities sold but not yet
purchased, at market value
|
5,140 | 5,140 | 5,458 | 5,458 | ||||||||||||||
|
Unrealized loss on swaps, options and forward
transactions
|
13,455 | 12,770 | 15,268 | 14,658 | ||||||||||||||
|
Trust deposits and deposits due to banks and
other depositors
|
3,695 | 3,819 | 3,491 | 3,627 | ||||||||||||||
|
Commercial paper
|
5,704 | 5,704 | 4,715 | 4,715 | ||||||||||||||
|
Notes, bonds, loans and mortgages payable
|
53,688 | 54,587 | 50,138 | 51,389 | ||||||||||||||
|
Commercial paper
|
2,946 | 2,946 | 1,223 | 1,223 | ||||||||||||||
|
Notes, bonds, loans and mortgages payable
|
5,821 | 5,821 | 5,865 | 5,863 | ||||||||||||||
|
Liabilities connected to trust preferred stock
|
1,681 | 1,681 | 1,682 | 1,682 | ||||||||||||||
|
Separate and variable accounts
|
52,981 | 52,981 | 60,536 | 60,536 | ||||||||||||||
|
Minority interest
|
3,958 | 3,961 | 3,311 | 3,302 | ||||||||||||||
|
Securities lending payable
|
46,893 | 46,893 | 30,195 | 30,195 | ||||||||||||||
|
Other liabilities
|
21,244 | 23,687 | 18,282 | 21,191 | ||||||||||||||
|
Total liabilities
|
662,213 | 658,250 | 606,901 | 603,931 | ||||||||||||||
|
Preferred shareholders’ equity in
subsidiary companies
|
192 | 192 | 192 | 192 | ||||||||||||||
|
Shareholders’ equity:
|
||||||||||||||||||
|
Common stock
|
6,878 | 6,878 | 6,878 | 6,878 | ||||||||||||||
|
Additional paid-in capital
|
565 | 1,938 | 568 | 1,913 | ||||||||||||||
|
Retained earnings
|
66,138 | 60,259 | 60,960 | 55,392 | ||||||||||||||
|
Accumulated other comprehensive income (loss)
|
1,640 | 3,859 | 4,244 | 7,244 | ||||||||||||||
|
Treasury stock, at cost
|
(1,644 | ) | (1,644 | ) | (1,397 | ) | (1,397 | ) | ||||||||||
|
Total shareholders’ equity
|
73,577 | 71,290 | 71,253 | 70,030 | ||||||||||||||
|
Total liabilities, preferred
shareholders’ equity in subsidiary companies and
shareholders’ equity
|
$ | 735,982 | $ | 729,732 | $ | 678,346 | $ | 674,153 | ||||||||||
21
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
CONSOLIDATED STATEMENT OF INCOME
| For the | For the | For the | For the | |||||||||||||||||||||||||||||||
| Six Months Ended | Six Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
| June 30, 2004 | June 30, 2003 | June 30, 2004 | June 30, 2003 | |||||||||||||||||||||||||||||||
| (in millions, except per share | As Previously | As | As Previously | As | As Previously | As | As Previously | As | ||||||||||||||||||||||||||
| amounts) | Reported | Restated | Reported | Restated | Reported | Restated | Reported | Restated | ||||||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||||||||||||
|
Premiums and other considerations
|
$ | 32,460 | $ | 32,178 | $ | 26,447 | $ | 26,070 | $ | 16,321 | $ | 16,196 | $ | 13,375 | $ | 13,186 | ||||||||||||||||||
|
Net investment income
|
9,376 | 9,066 | 8,115 | 7,434 | 4,656 | 4,491 | 4,149 | 3,919 | ||||||||||||||||||||||||||
|
Realized capital gains (losses)
|
(60 | ) | (26 | ) | (989 | ) | 73 | (143 | ) | (141 | ) | (357 | ) | (84 | ) | |||||||||||||||||||
|
Other revenues
|
5,670 | 5,662 | 5,245 | 3,820 | 2,975 | 2,959 | 2,724 | 2,184 | ||||||||||||||||||||||||||
|
Total revenues
|
47,446 | 46,880 | 38,818 | 37,397 | 23,809 | 23,505 | 19,891 | 19,205 | ||||||||||||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||||||||||||||||||||
|
Incurred policy losses and benefits
|
27,275 | 27,101 | 22,466 | 22,150 | 13,541 | 13,504 | 11,326 | 11,208 | ||||||||||||||||||||||||||
|
Insurance acquisition and other operating expenses
|
11,491 | 11,867 | 9,998 | 10,305 | 5,879 | 6,028 | 5,135 | 5,261 | ||||||||||||||||||||||||||
|
Total benefits and expenses
|
38,766 | 38,968 | 32,464 | 32,455 | 19,420 | 19,532 | 16,461 | 16,469 | ||||||||||||||||||||||||||
|
Income before income taxes, minority interest
and cumulative effect of an accounting change
|
8,680 | 7,912 | 6,354 | 4,942 | 4,389 | 3,973 | 3,430 | 2,736 | ||||||||||||||||||||||||||
|
Income taxes (benefits):
|
||||||||||||||||||||||||||||||||||
|
Current
|
2,600 | 2,273 | 1,511 | 1,224 | 1,127 | 951 | 822 | 654 | ||||||||||||||||||||||||||
|
Deferred
|
157 | 114 | 425 | 174 | 274 | 267 | 238 | 124 | ||||||||||||||||||||||||||
| 2,757 | 2,387 | 1,936 | 1,398 | 1,401 | 1,218 | 1,060 | 778 | |||||||||||||||||||||||||||
|
Income before minority interest and cumulative
effect of an accounting change
|
5,923 | 5,525 | 4,418 | 3,544 | 2,988 | 2,755 | 2,370 | 1,958 | ||||||||||||||||||||||||||
|
Minority interest
|
(224 | ) | (175 | ) | (188 | ) | (124 | ) | (126 | ) | (105 | ) | (94 | ) | (63 | ) | ||||||||||||||||||
|
Income before cumulative effect of an
accounting change
|
5,699 | 5,350 | 4,230 | 3,420 | 2,862 | 2,650 | 2,276 | 1,895 | ||||||||||||||||||||||||||
|
Cumulative effect of an accounting change, net
of tax
|
(181 | ) | (144 | ) | – | – | – | – | – | – | ||||||||||||||||||||||||
|
Net income
|
$ | 5,518 | $ | 5,206 | $ | 4,230 | $ | 3,420 | $ | 2,862 | $ | 2,650 | $ | 2,276 | $ | 1,895 | ||||||||||||||||||
|
Earnings per common share:
|
||||||||||||||||||||||||||||||||||
|
Basic
|
||||||||||||||||||||||||||||||||||
|
Income before cumulative effect of an accounting
change
|
$ | 2.18 | $ | 2.06 | $ | 1.62 | $ | 1.31 | $ | 1.09 | $ | 1.02 | $ | 0.87 | $ | 0.73 | ||||||||||||||||||
|
Cumulative effect of an accounting change, net of
tax
|
(0.07 | ) | (0.06 | ) | – | – | – | – | – | – | ||||||||||||||||||||||||
|
Net income
|
$ | 2.11 | $ | 2.00 | $ | 1.62 | $ | 1.31 | $ | 1.09 | $ | 1.02 | $ | 0.87 | $ | 0.73 | ||||||||||||||||||
|
Diluted
|
||||||||||||||||||||||||||||||||||
|
Income before cumulative effect of an accounting
change
|
$ | 2.17 | $ | 2.04 | $ | 1.61 | $ | 1.30 | $ | 1.09 | $ | 1.01 | $ | 0.87 | $ | 0.72 | ||||||||||||||||||
|
Cumulative effect of an accounting change, net of
tax
|
(0.07 | ) | (0.06 | ) | – | – | – | – | – | – | ||||||||||||||||||||||||
|
Net income
|
$ | 2.10 | $ | 1.98 | $ | 1.61 | $ | 1.30 | $ | 1.09 | $ | 1.01 | $ | 0.87 | $ | 0.72 | ||||||||||||||||||
|
Cash dividends per common share
|
$ | 0.130 | $ | 0.130 | $ | 0.094 | $ | 0.094 | $ | 0.065 | $ | 0.065 | $ | 0.047 | $ | 0.047 | ||||||||||||||||||
|
Average shares outstanding:
|
||||||||||||||||||||||||||||||||||
|
Basic
|
2,609 | 2,609 | 2,610 | 2,610 | 2,608 | 2,608 | 2,610 | 2,610 | ||||||||||||||||||||||||||
|
Diluted
|
2,632 | 2,641 | 2,628 | 2,637 | 2,631 | 2,640 | 2,627 | 2,637 | ||||||||||||||||||||||||||
22
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
| Six Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2004 | June 30, 2003 | |||||||||||||||
| As Previously | As | As Previously | As | |||||||||||||
| (in millions) | Reported | Restated | Reported | Restated | ||||||||||||
|
Net cash provided by operating
activities
|
$ | 14,291 | $ | 13,945 | $ | 12,652 | $ | 10,578 | ||||||||
|
Net cash used in investing
activities
|
(36,058 | ) | (35,437 | ) | (25,979 | ) | (24,226 | ) | ||||||||
|
Net cash provided by financing
activities
|
22,990 | 22,643 | 12,538 | 12,906 | ||||||||||||
|
Change in cumulative translation
adjustments
|
(112 | ) | (40 | ) | 459 | 412 | ||||||||||
|
Change in cash
|
1,111 | 1,111 | (330 | ) | (330 | ) | ||||||||||
|
Cash at beginning of period
|
922 | 922 | 1,165 | 1,165 | ||||||||||||
|
Cash at end of period
|
$ | 2,033 | $ | 2,033 | $ | 835 | $ | 835 | ||||||||
The following table reflects the effect of the aforementioned adjustments on each component of net income:
| For the Six Months Ended June 30, | ||||||||
| (in millions) | 2004 | 2003 | ||||||
|
Net Income as Previously Reported
|
$ | 5,518 | $ | 4,230 | ||||
|
Revenues
|
(566 | ) | (1,421 | ) | ||||
|
Benefits and expenses
|
202 | (9 | ) | |||||
|
Income taxes
|
(370 | ) | (538 | ) | ||||
|
Minority interest
|
(49 | ) | (64 | ) | ||||
|
Cumulative effect of an accounting change, net of
tax
|
37 | – | ||||||
|
Net Income as restated
|
$ | 5,206 | $ | 3,420 | ||||
The following two tables reflect the effect of the aforementioned adjustments on each component of revenue:
| For the Six Months Ended June 30, | ||||||||||||||||||||||
| 2004 | Premiums and | Net Investment | Realized Capital | Other | Total | |||||||||||||||||
| (in millions) | Other Considerations | Income | Gains (Losses) | Revenues | Revenues | |||||||||||||||||
|
As Previously Reported
|
$ | 32,460 | $ | 9,376 | $ | (60 | ) | $ | 5,670 | $ | 47,446 | |||||||||||
|
Adjustments:
|
||||||||||||||||||||||
|
Risk Transfer:
|
||||||||||||||||||||||
|
Union Excess
|
193 | 130 | (24 | ) | – | 299 | ||||||||||||||||
|
Other Risk Transfer
|
(126 | ) | (4 | ) | – | – | (130 | ) | ||||||||||||||
|
Net Investment Income:
|
||||||||||||||||||||||
|
Covered Calls
|
– | 19 | 41 | – | 60 | |||||||||||||||||
|
Synthetic Fuel Investment
|
– | (135 | ) | – | (98 | ) | (233 | ) | ||||||||||||||
|
Hedge Fund Accounting
|
– | 24 | – | (17 | ) | 7 | ||||||||||||||||
|
Muni Tender Option Bond Program
|
– | 40 | 19 | – | 59 | |||||||||||||||||
|
DBG/AIG Capital Corporation Intercompany Dividend
|
– | (50 | ) | – | – | (50 | ) | |||||||||||||||
|
“Top Level” Adjustments and Other
Directed Entries (other than loss reserves)
|
69 | (190 | ) | 43 | 38 | (40 | ) | |||||||||||||||
|
Conversion of Underwriting Losses to Capital
Losses
|
– | – | 92 | – | 92 | |||||||||||||||||
|
Asset Realization:
|
||||||||||||||||||||||
|
Other Than Temporary Declines
|
– | – | 40 | – | 40 | |||||||||||||||||
|
Other GAAP Corrections:
|
||||||||||||||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
– | – | (83 | ) | (234 | ) | (317 | ) | ||||||||||||||
|
Foreign Currency Translation (FAS 52)
|
– | – | (27 | ) | – | (27 | ) | |||||||||||||||
|
Life Settlements
|
(375 | ) | (72 | ) | – | – | (447 | ) | ||||||||||||||
|
Commutations
|
3 | – | – | – | 3 | |||||||||||||||||
|
Dollar Roll Transactions
|
– | – | (67 | ) | – | (67 | ) | |||||||||||||||
|
All Other Adjustments — Net
|
(46 | ) | (72 | ) | – | 303 | 185 | |||||||||||||||
|
Total adjustments
|
(282 | ) | (310 | ) | 34 | (8 | ) | (566 | ) | |||||||||||||
|
As Restated
|
$ | 32,178 | $ | 9,066 | $ | (26 | ) | $ | 5,662 | $ | 46,880 | |||||||||||
23
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| For the Six Months Ended June 30, 2003 | Premiums and | Net Investment | Realized Capital | Other | Total | |||||||||||||||||
| (in millions) | Other Considerations | Income | Gains (Losses) | Revenues | Revenues | |||||||||||||||||
|
As Previously Reported
|
$ | 26,447 | $ | 8,115 | $ | (989 | ) | $ | 5,245 | $ | 38,818 | |||||||||||
|
Adjustments:
|
||||||||||||||||||||||
|
Risk Transfer:
|
||||||||||||||||||||||
|
Union Excess
|
220 | 152 | (8 | ) | – | 364 | ||||||||||||||||
|
Other Risk Transfer
|
(248 | ) | 8 | – | – | (240 | ) | |||||||||||||||
|
Net Investment Income:
|
||||||||||||||||||||||
|
Covered Calls
|
– | (149 | ) | 76 | – | (73 | ) | |||||||||||||||
|
Synthetic Fuel Investment
|
– | (96 | ) | – | (99 | ) | (195 | ) | ||||||||||||||
|
Muni Tender Option Bond Program
|
– | 27 | (8 | ) | – | 19 | ||||||||||||||||
|
DBG/AIG Capital Corporation Intercompany Dividend
|
– | (50 | ) | – | – | (50 | ) | |||||||||||||||
|
“Top Level” Adjustments and Other
Directed Entries (other than loss reserves)
|
– | (488 | ) | 415 | 23 | (50 | ) | |||||||||||||||
|
Conversion of Underwriting Losses to Capital
Losses
|
– | – | 10 | – | 10 | |||||||||||||||||
|
Asset Realization:
|
||||||||||||||||||||||
|
Other Than Temporary Declines
|
– | – | 503 | – | 503 | |||||||||||||||||
|
Other GAAP Corrections:
|
||||||||||||||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
– | – | 63 | (1,415 | ) | (1,352 | ) | |||||||||||||||
|
Foreign Currency Translation (FAS 52)
|
– | – | (34 | ) | – | (34 | ) | |||||||||||||||
|
Life Settlements
|
(408 | ) | (69 | ) | – | – | (477 | ) | ||||||||||||||
|
Commutations
|
35 | – | – | – | 35 | |||||||||||||||||
|
Dollar Roll Transactions
|
– | – | (1 | ) | – | (1 | ) | |||||||||||||||
|
All Other Adjustments — Net
|
24 | (16 | ) | 46 | 66 | 120 | ||||||||||||||||
|
Total adjustments
|
(377 | ) | (681 | ) | 1,062 | (1,425 | ) | (1,421 | ) | |||||||||||||
|
As Restated
|
$ | 26,070 | $ | 7,434 | $ | 73 | $ | 3,820 | $ | 37,397 | ||||||||||||
The following two tables reflect the effect of the aforementioned adjustments on each component of Benefits and Expenses:
| For the Six Months Ended June 30, 2004 | Incurred Policy | Insurance Acquisition and | Total Benefits | |||||||||||
| (in millions) | Losses and Benefits | Other Operating Expenses | and Expenses | |||||||||||
|
As Previously Reported
|
$ | 27,275 | $ | 11,491 | $ | 38,766 | ||||||||
|
Adjustments:
|
||||||||||||||
|
Risk Transfer:
|
||||||||||||||
|
Union Excess
|
335 | 24 | 359 | |||||||||||
|
Other Risk Transfer
|
(68 | ) | (24 | ) | (92 | ) | ||||||||
|
Loss Reserves
|
90 | – | 90 | |||||||||||
|
Net Investment Income:
|
||||||||||||||
|
DBG/AIG Capital Corporation Intercompany Dividend
|
– | (50 | ) | (50 | ) | |||||||||
|
“Top Level” Adjustments and Other
Directed
Entries (other than loss reserves) |
30 | (133 | ) | (103 | ) | |||||||||
|
Conversion of Underwriting Losses to Capital
Losses
|
– | (2 | ) | (2 | ) | |||||||||
|
Asset Realization:
|
||||||||||||||
|
Domestic Brokerage Group (DBG) Issues
|
– | 14 | 14 | |||||||||||
|
Other GAAP Corrections:
|
||||||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
– | 11 | 11 | |||||||||||
|
Foreign Currency Translation (FAS 52)
|
– | (6 | ) | (6 | ) | |||||||||
|
Life Settlements
|
(345 | ) | – | (345 | ) | |||||||||
|
Deferred Acquisition Costs (DAC)
|
(130 | ) | 155 | 25 | ||||||||||
|
SICO Deferred Compensation
|
– | 28 | 28 | |||||||||||
|
Commutations
|
3 | – | 3 | |||||||||||
|
All Other Adjustments — Net
|
(89 | ) | 359 | 270 | ||||||||||
|
Total adjustments
|
(174 | ) | 376 | 202 | ||||||||||
|
As Restated
|
$ | 27,101 | $ | 11,867 | $ | 38,968 | ||||||||
24
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| For the Six Months Ended June 30, 2003 | Incurred Policy | Insurance Acquisition and | Total Benefits | |||||||||||
| (in millions) | Losses and Benefits | Other Operating Expenses | and Expenses | |||||||||||
|
As Previously Reported
|
$ | 22,466 | $ | 9,998 | $ | 32,464 | ||||||||
|
Adjustments:
|
||||||||||||||
|
Risk Transfer:
|
||||||||||||||
|
Union Excess
|
216 | 24 | 240 | |||||||||||
|
Other Risk Transfer
|
(214 | ) | (28 | ) | (242 | ) | ||||||||
|
Loss Reserves
|
140 | – | 140 | |||||||||||
|
Net Investment Income:
|
||||||||||||||
|
DBG/AIG Capital Corporation Intercompany Dividend
|
– | (50 | ) | (50 | ) | |||||||||
|
“Top Level” Adjustments and Other
Directed
Entries (other than loss reserves) |
(32 | ) | (31 | ) | (63 | ) | ||||||||
|
Asset Realization:
|
||||||||||||||
|
Domestic Brokerage Group (DBG) Issues
|
– | (47 | ) | (47 | ) | |||||||||
|
Other GAAP Corrections:
|
||||||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
– | (18 | ) | (18 | ) | |||||||||
|
Foreign Currency Translation (FAS 52)
|
– | 13 | 13 | |||||||||||
|
Life Settlements
|
(374 | ) | – | (374 | ) | |||||||||
|
Deferred Acquisition Costs (DAC)
|
(95 | ) | 123 | 28 | ||||||||||
|
SICO Deferred Compensation
|
– | 138 | 138 | |||||||||||
|
Commutations
|
35 | – | 35 | |||||||||||
|
All Other Adjustments — Net
|
8 | 183 | 191 | |||||||||||
|
Total adjustments
|
(316 | ) | 307 | (9 | ) | |||||||||
|
As Restated
|
$ | 22,150 | $ | 10,305 | $ | 32,455 | ||||||||
The following table reflects the effect of the aforementioned adjustments on income taxes:
| For the Six Months Ended June 30, | ||||||||||
| (in millions) | 2004 | 2003 | ||||||||
|
Income Taxes, as Previously Reported
|
$ | 2,757 | $ | 1,936 | ||||||
|
Adjustments:
|
||||||||||
|
Risk Transfer:
|
||||||||||
|
Union Excess
|
(21 | ) | 43 | |||||||
|
Other Risk Transfer
|
(15 | ) | (3 | ) | ||||||
|
Loss Reserves
|
(32 | ) | (49 | ) | ||||||
|
Net Investment Income:
|
||||||||||
|
Covered Calls
|
21 | (26 | ) | |||||||
|
Synthetic Fuel Investment
|
(233 | ) | (195 | ) | ||||||
|
“Top Level” Adjustments and Other
Directed Entries (other than loss reserves)
|
22 | 3 | ||||||||
|
Asset Realization:
|
||||||||||
|
Domestic Brokerage Group (DBG) Issues
|
17 | 24 | ||||||||
|
Other Than Temporary Declines
|
14 | 176 | ||||||||
|
Other GAAP Corrections:
|
||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
(115 | ) | (467 | ) | ||||||
|
Accounting for Deferred Taxes
|
(14 | ) | 11 | |||||||
|
Foreign Currency Translation (FAS 52)
|
(9 | ) | (12 | ) | ||||||
|
Life Settlements
|
(36 | ) | (36 | ) | ||||||
|
Deferred Acquisition Costs (DAC)
|
(7 | ) | – | |||||||
|
All Other Adjustments — Net
|
38 | (7 | ) | |||||||
|
Total adjustments
|
(370 | ) | (538 | ) | ||||||
|
Income Taxes, as Restated
|
$ | 2,387 | $ | 1,398 | ||||||
25
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
The following table reflects the effect of the aforementioned adjustments on each component of net income:
| For the Three Months Ended June 30, | ||||||||
| (in millions) | 2004 | 2003 | ||||||
|
Net Income as Previously Reported
|
$ | 2,862 | $ | 2,276 | ||||
|
Revenues
|
(304 | ) | (686 | ) | ||||
|
Benefits and expenses
|
112 | 8 | ||||||
|
Income taxes
|
(183 | ) | (282 | ) | ||||
|
Minority interest
|
(21 | ) | (31 | ) | ||||
|
Net Income as restated
|
$ | 2,650 | $ | 1,895 | ||||
The following two tables reflect the effect of the aforementioned adjustments on each component of revenue:
| For the Three Months Ended June 30, | ||||||||||||||||||||||
| 2004 | Premiums and | Net Investment | Realized Capital | Other | Total | |||||||||||||||||
| (in millions) | Other Considerations | Income | Gains (Losses) | Revenues | Revenues | |||||||||||||||||
|
As Previously Reported
|
$ | 16,321 | $ | 4,656 | $ | (143 | ) | $ | 2,975 | $ | 23,809 | |||||||||||
|
Adjustments:
|
||||||||||||||||||||||
|
Risk Transfer:
|
||||||||||||||||||||||
|
Union Excess
|
96 | 65 | (12 | ) | – | 149 | ||||||||||||||||
|
Other Risk Transfer
|
(77 | ) | (2 | ) | – | – | (79 | ) | ||||||||||||||
|
Net Investment Income:
|
||||||||||||||||||||||
|
Covered Calls
|
– | 9 | 23 | – | 32 | |||||||||||||||||
|
Synthetic Fuel Investment
|
– | (74 | ) | – | (44 | ) | (118 | ) | ||||||||||||||
|
Hedge Fund Accounting
|
– | 11 | – | – | 11 | |||||||||||||||||
|
Muni Tender Option Bond Program
|
– | 19 | 11 | – | 30 | |||||||||||||||||
|
DBG/AIG Capital Corporation Intercompany Dividend
|
– | (25 | ) | – | – | (25 | ) | |||||||||||||||
|
“Top Level” Adjustments and Other
Directed Entries (other than loss reserves)
|
25 | (91 | ) | 21 | 26 | (19 | ) | |||||||||||||||
|
Conversion of Underwriting Losses to Capital
Losses
|
– | – | 19 | – | 19 | |||||||||||||||||
|
Other GAAP Corrections:
|
||||||||||||||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
– | – | (2 | ) | (154 | ) | (156 | ) | ||||||||||||||
|
Foreign Currency Translation (FAS 52)
|
– | – | 47 | – | 47 | |||||||||||||||||
|
Life Settlements
|
(179 | ) | (33 | ) | – | – | (212 | ) | ||||||||||||||
|
Commutations
|
43 | – | – | – | 43 | |||||||||||||||||
|
Dollar Roll Transactions
|
– | – | (105 | ) | – | (105 | ) | |||||||||||||||
|
All Other Adjustments — Net
|
(33 | ) | (44 | ) | – | 156 | 79 | |||||||||||||||
|
Total adjustments
|
(125 | ) | (165 | ) | 2 | (16 | ) | (304 | ) | |||||||||||||
|
As Restated
|
$ | 16,196 | $ | 4,491 | $ | (141 | ) | $ | 2,959 | $ | 23,505 | |||||||||||
26
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| For the Three Months Ended June 30, | ||||||||||||||||||||||
| 2003 | Premiums and | Net Investment | Realized Capital | Other | Total | |||||||||||||||||
| (in millions) | Other Considerations | Income | Gains (Losses) | Revenues | Revenues | |||||||||||||||||
|
As Previously Reported
|
$ | 13,375 | $ | 4,149 | $ | (357 | ) | $ | 2,724 | $ | 19,891 | |||||||||||
|
Adjustments:
|
||||||||||||||||||||||
|
Risk Transfer:
|
||||||||||||||||||||||
|
Union Excess
|
110 | 76 | (4 | ) | – | 182 | ||||||||||||||||
|
Other Risk Transfer
|
(83 | ) | 5 | – | – | (78 | ) | |||||||||||||||
|
Net Investment Income:
|
||||||||||||||||||||||
|
Covered Calls
|
– | (46 | ) | 48 | – | 2 | ||||||||||||||||
|
Synthetic Fuel Investment
|
– | (56 | ) | – | (54 | ) | (110 | ) | ||||||||||||||
|
Muni Tender Option Bond Program
|
– | 15 | (8 | ) | – | 7 | ||||||||||||||||
|
DBG/AIG Capital Corporation Intercompany Dividend
|
– | (25 | ) | – | – | (25 | ) | |||||||||||||||
|
“Top Level” Adjustments and Other
Directed Entries (other than loss reserves)
|
– | (191 | ) | 212 | 22 | 43 | ||||||||||||||||
|
Conversion of Underwriting Losses to Capital
Losses
|
– | – | 5 | – | 5 | |||||||||||||||||
|
Other GAAP Corrections:
|
||||||||||||||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
– | – | 57 | (539 | ) | (482 | ) | |||||||||||||||
|
Foreign Currency Translation (FAS 52)
|
– | – | (3 | ) | – | (3 | ) | |||||||||||||||
|
Life Settlements
|
(218 | ) | (50 | ) | – | – | (268 | ) | ||||||||||||||
|
Commutations
|
– | – | – | – | – | |||||||||||||||||
|
Dollar Roll Transactions
|
– | – | 13 | – | 13 | |||||||||||||||||
|
All Other Adjustments — Net
|
2 | 42 | (47 | ) | 31 | 28 | ||||||||||||||||
|
Total adjustments
|
(189 | ) | (230 | ) | 273 | (540 | ) | (686 | ) | |||||||||||||
|
As Restated
|
$ | 13,186 | $ | 3,919 | $ | (84 | ) | $ | 2,184 | $ | 19,205 | |||||||||||
The following two tables reflect the effect of the aforementioned adjustments on each component of Benefits and Expenses:
| For the Three Months Ended June 30, 2004 | Incurred Policy | Insurance Acquisition and | Total Benefits | |||||||||||
| (in millions) | Losses and Benefits | Other Operating Expenses | and Expenses | |||||||||||
|
As Previously Reported
|
$ | 13,541 | $ | 5,879 | $ | 19,420 | ||||||||
|
Adjustments:
|
||||||||||||||
|
Risk Transfer:
|
||||||||||||||
|
Union Excess
|
167 | 12 | 179 | |||||||||||
|
Other Risk Transfer
|
(21 | ) | (8 | ) | (29 | ) | ||||||||
|
Loss Reserves
|
30 | – | 30 | |||||||||||
|
Net Investment Income:
|
||||||||||||||
|
DBG/AIG Capital Corporation Intercompany Dividend
|
– | (25 | ) | (25 | ) | |||||||||
|
“Top Level” Adjustments and Other
Directed
Entries (other than loss reserves) |
5 | (65 | ) | (60 | ) | |||||||||
|
Conversion of Underwriting Losses to Capital
Losses
|
– | (1 | ) | (1 | ) | |||||||||
|
Asset Realization:
|
||||||||||||||
|
Domestic Brokerage Group (DBG) Issues
|
– | (33 | ) | (33 | ) | |||||||||
|
Other GAAP Corrections:
|
||||||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
– | 31 | 31 | |||||||||||
|
Foreign Currency Translation (FAS 52)
|
– | (8 | ) | (8 | ) | |||||||||
|
Life Settlements
|
(165 | ) | – | (165 | ) | |||||||||
|
Deferred Acquisition Costs (DAC)
|
(56 | ) | 50 | (6 | ) | |||||||||
|
SICO Deferred Compensation
|
– | 14 | 14 | |||||||||||
|
Commutations
|
43 | – | 43 | |||||||||||
|
All Other Adjustments — Net
|
(40 | ) | 182 | 142 | ||||||||||
|
Total adjustments
|
(37 | ) | 149 | 112 | ||||||||||
|
As Restated
|
$ | 13,504 | $ | 6,028 | $ | 19,532 | ||||||||
27
| 2. |
Restatement of Previously Issued Financial Statements (continued) |
| Total Benefits | ||||||||||||||
| For the Three Months Ended June 30, 2003 | Incurred Policy | Insurance Acquisition and | and | |||||||||||
| (in millions) | Losses and Benefits | Other Operating Expenses | Expenses | |||||||||||
|
As Previously Reported
|
$ | 11,326 | $ | 5,135 | $ | 16,461 | ||||||||
|
Adjustments:
|
||||||||||||||
|
Risk Transfer:
|
||||||||||||||
|
Union Excess
|
108 | 12 | 120 | |||||||||||
|
Other Risk Transfer
|
(67 | ) | (26 | ) | (93 | ) | ||||||||
|
Loss Reserves
|
65 | – | 65 | |||||||||||
|
Net Investment Income:
|
||||||||||||||
|
DBG/AIG Capital Corporation Intercompany Dividend
|
– | (25 | ) | (25 | ) | |||||||||
|
“Top Level” Adjustments and Other
Directed
Entries (other than loss reserves) |
19 | (6 | ) | 13 | ||||||||||
|
Asset Realization:
|
||||||||||||||
|
Domestic Brokerage Group (DBG) Issues
|
– | (36 | ) | (36 | ) | |||||||||
|
Other GAAP Corrections:
|
||||||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
– | 8 | 8 | |||||||||||
|
Foreign Currency Translation (FAS 52)
|
– | (4 | ) | (4 | ) | |||||||||
|
Life Settlements
|
(199 | ) | – | (199 | ) | |||||||||
|
Deferred Acquisition Costs (DAC)
|
(51 | ) | 65 | 14 | ||||||||||
|
SICO Deferred Compensation
|
– | 69 | 69 | |||||||||||
|
Commutations
|
– | – | – | |||||||||||
|
All Other Adjustments — Net
|
7 | 69 | 76 | |||||||||||
|
Total adjustments
|
(118 | ) | 126 | 8 | ||||||||||
|
As Restated
|
$ | 11,208 | $ | 5,261 | $ | 16,469 | ||||||||
The following table reflects the effect of the aforementioned adjustments on income taxes:
| For the Three Months Ended June 30, | ||||||||||
| (in millions) | 2004 | 2003 | ||||||||
|
Income Taxes, as Previously Reported
|
$ | 1,401 | $ | 1,060 | ||||||
|
Adjustments:
|
||||||||||
|
Risk Transfer:
|
||||||||||
|
Union Excess
|
(10 | ) | 21 | |||||||
|
Other Risk Transfer
|
(17 | ) | 2 | |||||||
|
Loss Reserves
|
(11 | ) | (23 | ) | ||||||
|
Net Investment Income:
|
||||||||||
|
Covered Calls
|
11 | – | ||||||||
|
Synthetic Fuel Investment
|
(118 | ) | (110 | ) | ||||||
|
“Top Level” Adjustments and Other
Directed Entries (other than loss reserves)
|
14 | 11 | ||||||||
|
Asset Realization:
|
||||||||||
|
Domestic Brokerage Group (DBG) Issues
|
12 | 13 | ||||||||
|
Other GAAP Corrections:
|
||||||||||
|
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
(66 | ) | (172 | ) | ||||||
|
Accounting for Deferred Taxes
|
(10 | ) | 11 | |||||||
|
Foreign Currency Translation (FAS 52)
|
17 | (1 | ) | |||||||
|
Life Settlements
|
(16 | ) | (24 | ) | ||||||
|
Deferred Acquisition Costs (DAC)
|
2 | – | ||||||||
|
All Other Adjustments — Net
|
9 | (10 | ) | |||||||
|
Total adjustments
|
(183 | ) | (282 | ) | ||||||
|
Income Taxes, as Restated
|
$ | 1,218 | $ | 778 | ||||||
28
| 3. | Segment Information |
The following table summarizes the operations by major operating segment for the six months and quarter ended June 30, 2004 and 2003:
| Six Months | Three Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| Operating Segments | 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (in millions) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
|
Revenues(a):
|
|||||||||||||||||
|
General Insurance(b)
|
$ | 20,280 | $ | 15,883 | $ | 10,205 | $ | 8,254 | |||||||||
|
Life Insurance & Retirement
Services(c)
|
21,295 | 17,702 | 10,772 | 8,656 | |||||||||||||
|
Financial Services(d)
|
3,153 | 2,233 | 1,365 | 1,446 | |||||||||||||
|
Asset Management(e)
|
2,226 | 1,701 | 1,194 | 837 | |||||||||||||
|
Other
|
(74 | ) | (122 | ) | (31 | ) | 12 | ||||||||||
|
Consolidated
|
$ | 46,880 | $ | 37,397 | $ | 23,505 | $ | 19,205 | |||||||||
|
Operating income (loss)(a)(f):
|
|||||||||||||||||
|
General Insurance
|
$ | 2,885 | $ | 2,171 | $ | 1,444 | $ | 1,185 | |||||||||
|
Life Insurance & Retirement Services
|
4,083 | 3,167 | 2,298 | 1,445 | |||||||||||||
|
Financial Services
|
554 | (248 | ) | 9 | 128 | ||||||||||||
|
Asset Management
|
785 | 421 | 432 | 219 | |||||||||||||
|
Other(g)
|
(395 | ) | (569 | ) | (210 | ) | (241 | ) | |||||||||
|
Consolidated
|
$ | 7,912 | $ | 4,942 | $ | 3,973 | $ | 2,736 | |||||||||
| (a) | Revenues and operating income reflect the adjustments necessary pursuant to FAS 133. See Restatement of Previously Issued Financial Statements – Accounting for Derivatives (FAS 133 Hedge Accounting). |
| (b) | Represents the sum of General Insurance net premiums earned, net investment income and realized capital gains (losses). |
| (c) | Represents the sum of Life Insurance & Retirement Services GAAP premiums, net investment income and realized capital gains (losses). |
| (d) | Represents interest, lease and finance charges. |
| (e) | Represents management and advisory fees, and net investment income with respect to guaranteed investment contracts (GICs). |
| (f) | Represents income before income taxes, minority interest and cumulative effect of an accounting change. |
| (g) | Represents other income (deductions) – net and other realized capital gains (losses). |
The following table summarizes AIG’s General Insurance operations by major operating unit for the six months and quarter ended June 30, 2004 and 2003:
| Six Months | Three Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| General Insurance | 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (in millions) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
|
Revenues:
|
|||||||||||||||||
|
Domestic Brokerage Group
|
$ | 11,064 | $ | 8,531 | $ | 5,550 | $ | 4,503 | |||||||||
|
Transatlantic
|
1,943 | 1,589 | 971 | 831 | |||||||||||||
|
Personal Lines
|
2,201 | 1,828 | 1,112 | 925 | |||||||||||||
|
Mortgage Guaranty
|
320 | 334 | 158 | 156 | |||||||||||||
|
Foreign General
|
4,736 | 3,638 | 2,405 | 1,866 | |||||||||||||
|
Reclassifications and Eliminations
|
16 | (37 | ) | 9 | (27 | ) | |||||||||||
|
Total General Insurance
|
$ | 20,280 | $ | 15,883 | $ | 10,205 | $ | 8,254 | |||||||||
| Six Months | Three Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| General Insurance | 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (in millions) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
|
Operating Income:
|
|||||||||||||||||
|
Domestic Brokerage Group
|
$ | 1,098 | $ | 1,079 | $ | 542 | $ | 661 | |||||||||
|
Transatlantic
|
231 | 177 | 114 | 96 | |||||||||||||
|
Personal Lines
|
199 | 157 | 101 | 60 | |||||||||||||
|
Mortgage Guaranty
|
212 | 222 | 116 | 111 | |||||||||||||
|
Foreign General
|
1,129 | 573 | 561 | 284 | |||||||||||||
|
Reclassifications and Eliminations
|
16 | (37 | ) | 10 | (27 | ) | |||||||||||
|
Total General Insurance
|
$ | 2,885 | $ | 2,171 | $ | 1,444 | $ | 1,185 | |||||||||
The following table summarizes AIG’s Life Insurance & Retirement Services operations by major operating unit for the six months and quarter ended June 30, 2004 and 2003:
| Six Months | Three Months | |||||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||||
| Life Insurance & | ||||||||||||||||||
| Retirement Services | 2004 | 2003 | 2004 | 2003 | ||||||||||||||
| (in millions) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||
|
Revenues(a):
|
||||||||||||||||||
|
Foreign:
|
||||||||||||||||||
|
AIA, AIRCO and Nan Shan
|
$ | 7,421 | $ | 6,624 | $ | 3,680 | $ | 3,286 | ||||||||||
|
ALICO, AIG Star Life and AIG Edison Life
|
6,100 | 3,992 | 3,235 | 2,053 | ||||||||||||||
|
Philamlife and Other
|
229 | 219 | 112 | 64 | ||||||||||||||
|
Domestic:
|
||||||||||||||||||
|
AGLA and AG Life(b)
|
4,376 | 4,083 | 2,282 | 1,889 | ||||||||||||||
|
VALIC, AIG Annuity and AIG
SunAmerica(c)
|
3,169 | 2,784 | 1,463 | 1,364 | ||||||||||||||
|
Total Life Insurance & Retirement
Services
|
$ | 21,295 | $ | 17,702 | $ | 10,772 | $ | 8,656 | ||||||||||
|
Operating Income (loss):
|
||||||||||||||||||
|
Foreign:
|
||||||||||||||||||
|
AIA, AIRCO and Nan Shan
|
$ | 1,130 | $ | 986 | $ | 639 | $ | 542 | ||||||||||
|
ALICO, AIG Star Life and AIG Edison Life
|
1,249 | 816 | 872 | 426 | ||||||||||||||
|
Other
|
43 | 46 | 15 | (24 | ) | |||||||||||||
|
Domestic:
|
||||||||||||||||||
|
AGLA and AG Life(b)
|
681 | 573 | 424 | 174 | ||||||||||||||
|
VALIC, AIG Annuity and AIG
SunAmerica(c)
|
980 | 746 | 348 | 327 | ||||||||||||||
|
Total Life Insurance & Retirement
Services
|
$ | 4,083 | $ | 3,167 | $ | 2,298 | $ | 1,445 | ||||||||||
| (a) | Represents the sum of Life Insurance & Retirement Services GAAP premiums, net investment income, and realized capital gains (losses). |
| (b) | Includes the life operations of AIG Life Insurance Company and American International Life Assurance Company of New York. |
| (c) | “AIG SunAmerica” represents the annuity operations of AIG SunAmerica Life Assurance Company, as well as those of First SunAmerica Life Insurance Company and SunAmerica Life Insurance Company. |
29
| 3. | Segment Information (continued) |
The following table summarizes AIG’s Financial Services operations by major operating unit for the six months and quarter ended June 30, 2004 and 2003:
| Three Months | |||||||||||||||||
| Six Months Ended | Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| Financial Services | 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (in millions) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
|
Revenues(a):
|
|||||||||||||||||
|
Aircraft Finance(b)
|
$ | 1,562 | $ | 1,487 | $ | 810 | $ | 765 | |||||||||
|
Capital Markets(c)(d)
|
122 | (609 | ) | (195 | ) | (8 | ) | ||||||||||
|
Consumer Finance(e)
|
1,416 | 1,293 | 723 | 654 | |||||||||||||
|
Other
|
53 | 62 | 27 | 35 | |||||||||||||
|
Total Financial Services
|
$ | 3,153 | $ | 2,233 | $ | 1,365 | $ | 1,446 | |||||||||
|
Operating income (loss)(a):
|
|||||||||||||||||
|
Aircraft Finance
|
$ | 331 | $ | 376 | $ | 151 | $ | 175 | |||||||||
|
Capital Markets(d)
|
(196 | ) | (952 | ) | (363 | ) | (216 | ) | |||||||||
|
Consumer Finance
|
385 | 296 | 202 | 154 | |||||||||||||
|
Other
|
34 | 32 | 19 | 15 | |||||||||||||
|
Total Financial Services
|
$ | 554 | $ | (248 | ) | $ | 9 | $ | 128 | ||||||||
| (a) | Includes the unrealized gain (loss) attributable to economic hedges not qualifying for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. For the first six months and second quarter ended June 30, 2004 and 2003, the effect was $(11) million and $(31) million, and $18 million and $(8) million, respectively, in operating income for Aircraft Finance and $(516) million and $(553) million, and $(1.30) billion and $(439) million, respectively, in both revenues and operating income for Capital Markets. |
| (b) | Revenues were primarily from ILFC aircraft lease rentals. |
| (c) | Revenues, shown net of interest expense, were primarily from AIGFP hedged proprietary positions entered into in connection with counterparty transactions and the effect of not qualifying for hedge accounting as described in (a) above. |
| (d) | Certain transactions entered into by AIGFP generate tax credits and benefits which are shown in the income tax line on the consolidated statement of income. Thus, this source of income is not reflected in the revenues and operating income categories. The amount of tax credits and benefits for the first six months and second quarter ended June 30, 2004 and 2003 are $64 million and $29 million, and $64 million and $35 million, respectively. |
| (e) | Revenues were primarily finance charges. |
The following table summarizes AIG’s Asset Management revenues and operating income for the six months and quarter ended June 30, 2004 and 2003:
| Six Months | Three Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| Asset Management | 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (in millions) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
|
Revenues:
|
|||||||||||||||||
|
Guaranteed Investment Contracts
|
$ | 1,504 | $ | 1,275 | $ | 774 | $ | 628 | |||||||||
|
Institutional Asset
Management(a)
|
475 | 290 | 292 | 139 | |||||||||||||
|
Brokerage Services and Mutual Funds
|
123 | 98 | 62 | 50 | |||||||||||||
|
Other
|
124 | 38 | 66 | 20 | |||||||||||||
|
Total Asset Management
|
$ | 2,226 | $ | 1,701 | $ | 1,194 | $ | 837 | |||||||||
|
Operating income:
|
|||||||||||||||||
|
Guaranteed Investment Contracts
|
$ | 490 | $ | 289 | $ | 267 | $ | 152 | |||||||||
|
Institutional Asset
Management(a)(b)
|
141 | 74 | 86 | 37 | |||||||||||||
|
Brokerage Services and Mutual Funds
|
37 | 24 | 17 | 12 | |||||||||||||
|
Other
|
117 | 34 | 62 | 18 | |||||||||||||
|
Total Asset Management
|
$ | 785 | $ | 421 | $ | 432 | $ | 219 | |||||||||
| (a) | Includes AIG Global Investment Group and certain smaller asset management operations. |
| (b) | Includes the results of certain AIG managed private equity and real estate funds that are consolidated effective December 31, 2003 pursuant to FIN46R, “Consolidation of Variable Interest Entities”. For the first six months and second quarter of 2004, operating income includes $32 million and $28 million, respectively, of third-party limited partner earnings offset as an expense in Minority interest. |
| 4. | Earnings Per Share |
Earnings per share of AIG are based on the weighted average number of common shares outstanding during the period.
Computation of Earnings Per Share:
| Six Months | Three Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (in millions, except per share amounts) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||
|
Numerator for basic earnings per
share:
|
||||||||||||||||
|
Income before cumulative effect of an accounting
change
|
$5,350 | $3,420 | $2,650 | $1,895 | ||||||||||||
|
Cumulative effect of an accounting change, net of
tax
|
(144 | ) | – | – | – | |||||||||||
|
Net income applicable to common stock
|
$5,206 | $3,420 | $2,650 | $1,895 | ||||||||||||
30
| 4. | Earnings Per Share (continued) |
| Six Months | Three Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||||||||||
| (in millions, except per share amounts) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
|
Denominator for basic earnings per
share:
|
|||||||||||||||||
|
Average shares outstanding used in the
computation of per share earnings:
|
|||||||||||||||||
|
Common stock issued
|
2,752 | 2,752 | 2,752 | 2,752 | |||||||||||||
|
Common stock in treasury
|
(143 | ) | (142 | ) | (144 | ) | (142 | ) | |||||||||
|
Average shares outstanding – basic
|
2,609 | 2,610 | 2,608 | 2,610 | |||||||||||||
|
Numerator for diluted earnings per
share:
|
|||||||||||||||||
|
Income before cumulative effect of an accounting
change
|
$5,350 | $3,420 | $2,650 | $1,895 | |||||||||||||
|
Cumulative effect of an accounting change, net of
tax
|
(144 | ) | – | – | – | ||||||||||||
|
Net income applicable to common stock
|
5,206 | 3,420 | 2,650 | 1,895 | |||||||||||||
|
Interest on contingently convertible bonds, net
of tax(a)
|
6 | 5 | 3 | 2 | |||||||||||||
|
Adjusted net income applicable to common
stock(a)
|
$5,212 | $3,425 | $2,653 | $1,897 | |||||||||||||
|
Denominator for diluted earnings per
share:
|
|||||||||||||||||
|
Average shares outstanding
|
2,609 | 2,610 | 2,608 | 2,610 | |||||||||||||
|
Incremental shares from potential common stock:
|
|||||||||||||||||
|
Average number of shares arising from outstanding
employee stock plans (treasury stock method)(b)
|
23 | 18 | 23 | 18 | |||||||||||||
|
Contingently convertible
bonds(a)
|
9 | 9 | 9 | 9 | |||||||||||||
|
Adjusted average shares outstanding –
diluted
|
2,641 | 2,637 | 2,640 | 2,637 | |||||||||||||
|
Earnings per share:
|
|||||||||||||||||
|
Basic
|
|||||||||||||||||
|
Income before cumulative effect of an accounting
change
|
$2.06 | $1.31 | $1.02 | $0.73 | |||||||||||||
|
Cumulative effect of an accounting change, net of
tax
|
(0.06 | ) | – | – | – | ||||||||||||
|
Net income
|
$2.00 | $1.31 | $1.02 | $0.73 | |||||||||||||
|
Diluted:
|
|||||||||||||||||
|
Income before cumulative effect of an accounting
change
|
$2.04 | $1.30 | $1.01 | $0.72 | |||||||||||||
|
Cumulative effect of an accounting change, net of
tax
|
(0.06 | ) | – | – | – | ||||||||||||
|
Net income
|
$1.98 | $1.30 | $1.01 | $0.72 | |||||||||||||
| (a) | Assumes conversion of contingently convertible bonds due to the adoption of EITF Issue No. 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.” |
| (b) | Certain shares issuable pursuant to employee stock plans were not included in the computation of diluted earnings per share where the exercise price of the options exceeded the average market price and would have been antidilutive. The number of shares excluded were 7.9 million and 25.3 million for the first six months of 2004 and 2003, respectively. |
Pursuant to Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment to FASB Statement No. 123” (FAS 148), AIG adopted the “Prospective Method” of accounting for stock-based employee compensation effective January 1, 2003. FAS 148 also requires that AIG disclose the effect of stock-based compensation expense that would have been recognized if the fair value based method had been applied to all the awards vesting in the current period.
The effect with respect to stock-based compensation pursuant to Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment to FASB Statement No. 123”, was approximately $0.01 per share for the first six months of 2004, and less than $0.005 per share for the second quarter of 2004.
The quarterly dividend rate per common share, commencing with the dividend payable September 17, 2004 is $0.075.
31
| 5. | Benefits Provided by Starr International Company, Inc. |
Starr International Company, Inc. (SICO) has provided a series of two-year Deferred Compensation Profit Participation Plans (SICO Plans) to certain AIG employees. The SICO Plans came into being in 1975 when the voting shareholders and Board of Directors of SICO, a private holding company whose principal asset is AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including AIG.
In the past, participation in the SICO Plans by any person, and the amount of such participation, was at the sole discretion of SICO’s Board of Directors. None of the costs of the various benefits provided under the SICO Plans have been paid by AIG, although in its restated financial statements, AIG has recorded a charge to reported earnings in the periods restated for the deferred compensation amounts paid to AIG employees by SICO, with an offsetting entry to additional paid-in capital reflecting amounts deemed contributed by SICO. The SICO Plans provide that shares currently owned by SICO may be set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors may permit an early payout under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant’s voluntary termination of employment with AIG prior to normal retirement age. In addition, SICO’s Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock.
SICO has also provided certain personal benefits to AIG employees. The cost of such benefits, primarily attributable to personal use of corporate aircraft, has not been included in compensation expense.
Compensation expense with respect to the SICO Plans aggregated $28 million and $138 million for the six months ended June 30, 2004 and 2003, respectively.
| 6. | Ownership and Transactions With Related Parties |
(a) Ownership: The directors and officers of AIG, together with C.V. Starr & Co., Inc. (Starr), a private holding company, The Starr Foundation and SICO, a private holding company, owned or otherwise controlled approximately 19 percent of the voting stock of AIG at December 31, 2003.
Five directors of AIG served as directors of Starr and SICO as of June 30, 2004 and December 31, 2003. Since June 8, 2005, no director of AIG has served as a director of Starr or SICO.
(b) Transactions with Related Parties: During the ordinary course of business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries for the production and management of insurance business. There are no significant receivables from/payables to related parties at June 30, 2004.
| 7. | Commitments and Contingent Liabilities |
In the normal course of business, various commitments and contingent liabilities are entered into by AIG and certain of its subsidiaries. In addition, AIG guarantees various obligations of certain subsidiaries.
(a) AIG and certain of its subsidiaries become parties to derivative financial instruments with market risk resulting from both dealer and end user activities and to reduce currency, interest rate, equity and commodity exposures. These instruments are carried at their estimated fair values in the consolidated balance sheet. The vast majority of AIG’s derivative activity is transacted by AIGFP. See also Note 20 in AIG’s 2004 Form 10-K.
(b) Securities sold, but not yet purchased and spot commodities sold but not yet purchased represent obligations of Capital Markets operations to deliver specified securities and spot commodities at their contracted prices. Capital Markets records a liability to repurchase the securities and spot commodities in the market at prevailing prices.
AIG has issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIGFP arising from transactions entered into by AIGFP. Revenues for the six months ended June 30, 2004 and 2003 from Capital Markets operations were $122 million and $(609) million, respectively.
(c) At June 30, 2004, ILFC had committed to purchase 398 new and used aircraft deliverable from 2004 through 2010 at an estimated aggregate purchase price of $22.7 billion and had options to purchase 10 new aircraft at an estimated aggregate purchase price of $689 million. ILFC will be required to find customers for any aircraft acquired, and it must arrange financing for portions of the purchase price of such equipment.
(d) AIG and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims for punitive damages, in the normal course of their business. The recent trend of increasing jury awards and settlements makes it somewhat more difficult to assess the ultimate outcome of such litigation.
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
32
| 7. | Commitments and Contingent Liabilities (continued) |
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, together with other industry members, has 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 effect on AIG’s future operating results. The reserves carried for these claims at June 30, 2004 were $1.91 billion gross; $621 million net. In the fourth quarter of 2004 AIG increased its estimates for asbestos and environmental reserves by $1.45 billion gross and $850 million net of reinsurance. See footnote 1(cc) to Notes to Financial Statements in AIG’s 2004 Form 10-K.
(e) SAI Deferred Compensation Holdings, Inc., a wholly-owned subsidiary of AIG, has established a deferred compensation plan for registered representatives of certain AIG subsidiaries, pursuant to which participants have the opportunity to invest deferred commissions and fees on a notional basis. The value of the deferred compensation fluctuates with the value of the deferred investment alternatives chosen. AIG has provided a full and unconditional guarantee of the obligations of SAI Deferred Compensation Holdings, Inc. to pay the deferred compensation under the plan.
(f) On June 27, 2005, AIG entered into agreements pursuant to which AIG agrees, subject to certain conditions, to (i) make any payment that is not promptly paid with respect to the benefits accrued by certain employees of AIG and its subsidiaries under the SICO Plans (as defined in Note 5 herein) and (ii) make any payment to the extent not promptly paid by Starr with respect to amounts that become payable to certain employees of AIG and its subsidiaries who are also stockholders of Starr after the giving of a notice of repurchase or redemption under Starr’s organizational documents.
(g) AIG and certain of its subsidiaries have been named defendants in two putative class actions in state court in Alabama that arise out of the 1999 settlement of class and derivative litigation involving Caremark Rx, Inc. (Caremark). An excess policy issued by a subsidiary of AIG with respect to the 1999 litigation was expressly stated to be without limit of liability. In the current actions, plaintiffs allege that the judge approving the 1999 settlement was misled as to the extent of available insurance coverage and would not have approved the settlement had he known of the existence and/or unlimited nature of the excess policy. They further allege that AIG, its subsidiaries, and Caremark are liable for fraud and suppression for misrepresenting and/or concealing the nature and extent of coverage. In their complaint, plaintiffs request compensatory damages for the 1999 class in the amount of $3.2 billion, plus punitive damages. AIG and its subsidiaries deny the allegations of fraud and suppression and have asserted, inter alia, that information concerning the excess policy was publicly disclosed months prior to the approval of the settlement. AIG and its subsidiaries further assert that the current claims are barred by the statute of limitations and that plaintiffs’ assertions that the statute was tolled cannot stand against the public disclosure of the excess coverage. Plaintiffs, in turn, have asserted that the disclosure was insufficient to inform them of the nature of the coverage and did not start the running of the statute of limitations. On January 28, 2005, the Alabama trial court determined that one of the current actions may proceed as a class action on behalf of the 1999 classes that were allegedly defrauded by the settlement. AIG, its subsidiaries, and Caremark are seeking appellate relief from the Alabama Supreme Court. AIG cannot now estimate either the likelihood of its prevailing in these actions or the potential damages in the event liability is determined.
(h) On December 30, 2004, an arbitration panel issued its ruling in connection with a 1998 workers compensation quota share reinsurance agreement under which Superior National Insurance Company, among others, was reinsured by The United States Life Insurance Company in the City of New York (USLIFE), a subsidiary of American General Corporation. In its 2-1 ruling the arbitration panel refused to rescind the contract as requested by USLIFE. Instead, the panel reformed the contract to reduce USLIFE’s participation by ten percent. USLIFE disagrees with the ruling and is pursuing all appropriate legal remedies. USLIFE has certain reinsurance recoverables in connection with the contract and the arbitration ruling established a second phase of arbitration in which USLIFE will present its challenges to cessions to the contract.
AIG recorded approximately a $178 million pre-tax charge in the fourth quarter of 2004 related to this matter and holds a reserve of approximately $370 million as of December 31, 2004.
(i) On October 14, 2004, the Office of the Attorney General of the State of New York (NYAG) brought a lawsuit challenging certain insurance brokerage practices related to contingent commissions. Neither AIG nor any of its subsidiaries is a defendant in that action, although two employees of an AIG subsidiary pleaded guilty in connection with the Attorney General’s investigation in October 2004, and two additional employees of the same subsidiary pleaded guilty in February 2005. AIG has cooperated, and will continue to cooperate, in the investigation. Regulators from several addi-
33
7. Commitments and Contingent Liabilities (continued)
tional states have commenced investigations into the same matters, and AIG expects there will be additional investigations as well. Various parties, including insureds and shareholders, have also asserted putative class action and other claims against AIG or its subsidiaries alleging, among other things, violations of the antitrust and federal securities laws, and AIG expects that additional claims may be made.
In February 2005, AIG received subpoenas from the NYAG and the SEC relating to investigations into the use of non-traditional insurance products and certain assumed reinsurance transactions and AIG’s accounting for such transactions. The United States Department of Justice and various state regulators are also investigating related issues. AIG has cooperated, and will continue to cooperate, in producing documents and other information in response to the subpoenas. As more fully described in Note 2 herein, AIG has concluded that the accounting for certain transactions and certain relationships needed to be restated or adjusted.
A number of lawsuits have been filed regarding the subject matter of the investigations of insurance brokerage practices, including derivative actions, individual actions and class actions under the federal securities laws, Racketeer Influenced and Corrupt Organizations Act (RICO), Employee Retirement Income Security Act (ERISA) and state common and corporate laws in both federal and state courts, including the federal district court in the Southern District of New York, in the Commonwealth of Massachusetts Superior Court and in Delaware Chancery Court. All of these actions generally allege that AIG and its subsidiaries violated the law by allegedly concealing a scheme to “rig bids” and “steer” business between insurance companies and insurance brokers as described above.
Between October 19, 2004 and August 1, 2005, AIG or its subsidiaries were named as a defendant in thirteen complaints that were filed in federal court and two that were originally filed in state court (Massachusetts and Florida) and removed to federal court. These cases generally allege that AIG and its subsidiaries violated federal and various state antitrust laws, as well as federal RICO laws, various state deceptive and unfair practice laws and certain state laws governing fiduciary duties. The alleged basis of these claims is that there was a conspiracy between insurance companies and insurance brokers with regard to the bidding practices for insurance coverage in certain sectors of the insurance industry. The Judicial Panel on Multidistrict Litigation entered an order consolidating most of these cases and transferring them to the United States District Court for the District of New Jersey. The remainder of these cases are in the process of being transferred to the District of New Jersey. On August 1, 2005, the plaintiffs in the multidistrict litigation filed a First Consolidated Amended Commercial Class Action Complaint, which, in addition to the previously named AIG defendants, names new AIG subsidiaries as defendants. Also on August 1, 2005, AIG and a subsidiary were named as defendants in a First Consolidated Amended Employee Benefits Complaint filed in the District of New Jersey that adds claims under ERISA. In addition, one complaint was filed in Massachusetts state court and one complaint was filed in Florida state court making claims similar to those in the federal cases above.
In April and May, amended complaints were filed in the consolidated derivative and securities cases, as well as in one of the ERISA lawsuits, pending in the federal district court in the Southern District of New York adding allegations concerning AIG’s accounting treatment for non-traditional insurance products that have been the subject of AIG’s press releases and are described more fully in Note 2 herein and in AIG’s 2004 Form 10-K. Also in April, new derivative actions were filed in the Delaware Chancery Court, and in July a new derivative action was filed in the Southern District of New York, asserting claims premised on the same allegations concerning AIG’s accounting treatment for non-traditional insurance products. In June, the derivative cases in Delaware were consolidated. AIG’s Board of Directors has appointed a special committee of independent directors to review certain of the matters asserted in the derivative complaints.
In late 2002, an unrelated derivative action was filed in Delaware Chancery Court in connection with AIG’s transactions with certain entities affiliated with Starr. AIG’s Board of Directors appointed a special committee of independent directors to review the complaint; the special committee has issued a report concluding that it was not in the best interest of AIG or its shareholders to pursue the litigation and moved the Delaware Chancery Court to terminate the litigation. In May 2005, the plaintiff filed an amended complaint which adds additional claims premised on allegations relating to insurance brokerage practices and AIG’s non-traditional insurance products. Plaintiffs in that case have agreed to dismiss newly added allegations unrelated to transactions with entities affiliated with Starr.
On May 26, 2005, the NYAG and the New York Superintendent of Insurance filed a civil complaint against AIG as well as its former Chairman and Chief Executive Officer M.R. Greenberg, and former Vice Chairman and Chief Financial Officer Howard Smith, in the Supreme Court of the State of New York. The complaint asserts claims under New York’s Martin Act and Insurance Law, among others, and makes allegations concerning certain of the transactions discussed more fully in AIG’s 2004 Form 10-K, including, among others, Gen Re, Capco, AIRCO Reinsurance, Life Settlements, Richmond and Union Excess. The complaint seeks disgorgement, injunctive relief, punitive damages and costs, among other things.
34
| 7. | Commitments and Contingent Liabilities (continued) |
Various federal and state regulatory agencies are reviewing certain other transactions and practices of AIG and its subsidiaries in connection with industry-wide and other inquiries.
AIG cannot predict the outcome of the matters described above or estimate the potential costs related to these matters and, accordingly, no reserve is being established in AIG’s financial statements at this time. In the opinion of AIG management, AIG’s ultimate liability for the matters referred to above is not likely to have a material adverse effect on AIG’s consolidated financial condition, although it is possible that the effect would be material to AIG’s consolidated results of operations for an individual reporting period.
(j) On July 8, 2005, Starr International Company, Inc. (SICO) filed a complaint against American International Group, Inc. in the United States District Court for the Southern District of New York. The complaint alleges that AIG is in the possession of items, including artwork, which SICO claims it owns, and seeks an ordered release of those items as well as actual, consequential, punitive and exemplary damages.
(k) AIG subsidiaries own interests in certain limited liability companies (LLCs) which invest in coal synthetic fuel production facilities. The sale of coal synthetic fuel produced by these facilities generates income tax credits. One of the conditions a taxpayer must meet to qualify for coal synfuel tax credits is that the synfuel production facility must have been “placed in service” before July 1, 1998. On July 1, 2005 Internal Revenue Service (IRS) field agents issued notices of proposed adjustment to the LLCs proposing to disallow all of the credits taken by the LLCs during the years 2001 through 2003. The IRS contends that none of the underlying production facilities were placed in service by the statutory deadline. AIG strongly believes that all the facilities did in fact meet the placed-in-service requirement and, accordingly, no reserve is being established in AIG’s financial statements at this time. Although AIG believes that this issue will be resolved without a material charge to AIG, AIG cannot assure the ultimate outcome of this matter. If this matter were ultimately resolved in a manner unfavorable to AIG, AIG could be prevented from realizing projected future tax credits and could be required to reverse previously utilized tax credits, which could entail payment of substantial additional taxes. Since acquiring the facilities, AIG has recognized approximately $875 million of synfuel tax credits through June 30, 2005.
Tax credits generated from the production and sale of synthetic fuel under section 29 of the Internal Revenue Code are subject to an annual phase-out provision that is based on the average wellhead price of domestic crude oil. The price range within which the tax credits are phased-out was originally established in 1980 and is adjusted annually for inflation. Depending on the price of domestic crude oil for a particular year, all or a portion of the tax credits generated in that year might be eliminated. Although AIG cannot predict the future price of domestic crude oil for the remainder of 2005 or for years 2006 and 2007 (the final year the tax credits are available), AIG believes that the phase-out provision is unlikely to affect tax credits generated in 2005. AIG has also entered into hedges designed to mitigate a portion of its future exposure to a sustained high price of oil. However, no assurance can be given as to the effectiveness of the hedging in actually reducing such exposure or whether such hedging will continue.
(l) As a result of pending actions against AIG arising out of the liability of certain DBG companies for taxes, assessments, and surcharges for policies of workers compensation insurance written between 1985 and 1996, AIG has established a reserve in the second quarter of 2005 of $100 million (including interest) to cover estimated liabilities to various states, guarantee funds, and residual market facilities (and the members thereof) relating to these actions.
| 8. | Employee Benefits |
The following table presents the components of the net periodic benefit costs with respect to pensions and other benefits for the six months and quarter ended June 30, 2004 and 2003:
| Pensions | Postretirement | ||||||||||||||||||||||||
| Non-U.S. | U.S. | Non-U.S. | U.S. | ||||||||||||||||||||||
| (In millions) | Plans | Plans | Total | Plans | Plans | Total | |||||||||||||||||||
|
Six Months Ended June 30, 2004
|
|||||||||||||||||||||||||
|
Components of net period benefit cost:
|
|||||||||||||||||||||||||
|
Service cost
|
$ | 30 | $ | 46 | $ | 76 | $ | – | $ | 2 | $ | 2 | |||||||||||||
|
Interest cost
|
16 | 80 | 96 | – | 8 | 8 | |||||||||||||||||||
|
Expected return on assets
|
(10 | ) | (86 | ) | (96 | ) | – | – | – | ||||||||||||||||
|
Amortization of prior service cost
|
(1 | ) | 2 | 1 | – | (3 | ) | (3 | ) | ||||||||||||||||
|
Amortization of transitional liability
|
1 | – | 1 | – | – | – | |||||||||||||||||||
|
Recognized actuarial loss
|
10 | 28 | 38 | – | 1 | 1 | |||||||||||||||||||
|
Net period benefit cost
|
$ | 46 | $ | 70 | $ | 116 | $ | – | $ | 8 | $ | 8 | |||||||||||||
35
| 8. | Employee Benefit (continued) |
| Pensions | Postretirement | ||||||||||||||||||||||||
| Non-U.S. | U.S. | Non-U.S. | U.S. | ||||||||||||||||||||||
| (In millions) | Plans | Plans | Total | Plans | Plans | Total | |||||||||||||||||||
|
Three Months Ended June 30,
2004
|
|||||||||||||||||||||||||
|
Components of net period benefit cost:
|
|||||||||||||||||||||||||
|
Service cost
|
$ | 15 | $ | 23 | $ | 38 | $ | – | $ | 1 | $ | 1 | |||||||||||||
|
Interest cost
|
8 | 40 | 48 | – | 4 | 4 | |||||||||||||||||||
|
Expected return on assets
|
(5 | ) | (43 | ) | (48 | ) | – | – | – | ||||||||||||||||
|
Amortization of prior service cost
|
– | 1 | 1 | – | (2 | ) | (2 | ) | |||||||||||||||||
|
Amortization of transitional liability
|
– | – | – | – | – | – | |||||||||||||||||||
|
Recognized actuarial loss
|
5 | 14 | 19 | – | 1 | 1 | |||||||||||||||||||
|
Net period benefit cost
|
$ | 23 | $ | 35 | $ | 58 | $ | – | $ | 4 | $ | 4 | |||||||||||||
|
Six Months Ended June 30, 2003
|
|||||||||||||||||||||||||
|
Components of net period benefit cost:
|
|||||||||||||||||||||||||
|
Service cost
|
$ | 26 | $ | 40 | $ | 66 | $ | – | $ | 2 | $ | 2 | |||||||||||||
|
Interest cost
|
16 | 75 | 91 | – | 8 | 8 | |||||||||||||||||||
|
Expected return on assets
|
(9 | ) | (72 | ) | (81 | ) | – | – | – | ||||||||||||||||
|
Amortization of prior service cost
|
(1 | ) | 1 | – | – | (3 | ) | (3 | ) | ||||||||||||||||
|
Amortization of transitional liability
|
1 | 1 | 2 | – | – | – | |||||||||||||||||||
|
Recognized actuarial loss
|
10 | 31 | 41 | – | 1 | 1 | |||||||||||||||||||
|
Other
|
(13 | ) | – | (13 | ) | – | – | – | |||||||||||||||||
|
Net period benefit cost
|
$ | 30 | $ | 76 | $ | 106 | $ | – | $ | 8 | $ | 8 | |||||||||||||
|
Three Months Ended June 30, 2003
|
|||||||||||||||||||||||||
|
Components of net period benefit cost:
|
|||||||||||||||||||||||||
|
Service cost
|
$ | 13 | $ | 20 | $ | 33 | |||||||||||||||||||