UNITED STATES
Form 10-Q/A
(Mark One)
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þ
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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, 2005 | ||
or | ||
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.
Delaware
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13-2592361 | |
(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) |
Registrants 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large accelerated filer ü Accelerated filer Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes No ü
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of June 30, 2005: 2,595,079,838.
Explanatory Note
Overview. This amendment to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 (Second Quarter Form 10-Q/A) is being filed for purposes 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, 2005 (Second Quarter Form 10-Q) of American International Group, Inc. (AIG), which was originally filed on August 9, 2005, and provides information about the financial results for the three and six month periods ended June 30, 2005 and 2004 as restated for the restatements described in AIGs Annual Report on Form 10-K for the year ended December 31, 2005 (2005 Annual Report on Form 10-K). Information in this Second Quarter Form 10-Q/A is generally stated as of June 30, 2005 and generally does not reflect any subsequent information or events other than the restatements, except that certain forward looking statements throughout this Second Quarter Form 10-Q/A have been revised to reflect events and developments subsequent to June 30, 2005. Information regarding subsequent periods with respect to AIG is contained in the 2005 Annual Report on Form 10-K and other filings with the Securities and Exchange Commission (SEC). This filing should be considered, and read, in conjunction with such filings.
First Restatement. In connection with the preparation of AIGs consolidated financial statements included in AIGs Annual Report on Form 10-K for the year ended December 31, 2004 (2004 Annual Report on Form 10-K), AIGs management initiated an internal review of its books and records, which was substantially expanded in mid-March 2005 with the oversight of the Audit Committee of the Board of Directors of AIG. The review spanned AIGs major business units globally, and included a number of transactions from 2000 to 2004. As disclosed in the 2004 Annual Report on Form 10-K, as a result of the findings of the internal review, together with the results of investigations by outside counsel at the request of AIGs Audit Committee and in consultation with PricewaterhouseCoopers LLP, AIGs independent registered public accounting firm, AIG restated its consolidated 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 (the First Restatement).
Second Restatement. As announced on November 9, 2005, AIG identified certain errors, the preponderance of which were identified during the remediation of the material weaknesses in internal control over financial reporting, principally relating to internal controls surrounding accounting for derivatives and related assets and liabilities under Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133), reconciliation of certain balance sheet accounts and income tax accounting. AIG also announced it was correcting errors that were identified since the First Restatement, including those relating to the accounting for certain payments received from aircraft and engine manufacturers by International Lease Finance Corporation (ILFC), which were originally corrected in AIGs Form 10-Q for the quarter ended June 30, 2005 (Second Quarter Form 10-Q). The adjustments to correct the foregoing errors are referred to in this Second Quarter Form 10-Q/A as the Initial Adjustments.
In connection with the remediation of material weaknesses in internal control over financial reporting referred to above, AIG identified certain additional errors, principally relating to internal control over reconciliation of certain balance sheet accounts in the Domestic Brokerage Group (DBG). As a result, AIG included further adjustments (the Additional Adjustments) in its restatement of the consolidated financial statements and financial statement schedules for the years ended December 31, 2004, 2003 and 2002, along with 2001 and 2000 for purposes of preparation of the Selected Consolidated Financial Data for 2001 and 2000, and quarterly financial information for 2004 and 2003 and in the restated consolidated financial statements included in this Second Quarter Form 10-Q/A. The Initial Adjustments and the Additional Adjustments are referred to herein as the Second Restatement. AIGs quarterly report on Form 10-Q for the quarter ended September 30, 2005 (September 2005 Form 10-Q) will not be amended because the Additional Adjustments to the financial statements included therein are not material to those financial statements.
The financial information that is included in this Second Quarter Form 10-Q/A has been restated as part of the First Restatement and the Second Restatement (the Restatements). Only restated financial information that is being presented for the first time in this Second Quarter Form 10-Q/A is identified herein as Restated. All previously presented, restated financial information is identified as such in the respective SEC filing in which the information was restated.
1
CONSOLIDATED BALANCE SHEET
(in millions) (unaudited)
June 30, | |||||||||||
2005 | December 31, | ||||||||||
(Restated) | 2004 | ||||||||||
Assets:
|
|||||||||||
Investments and financial services assets: | |||||||||||
Fixed maturities: | |||||||||||
Bonds available for sale, at market value
(amortized cost: 2005 $342,520; 2004
$329,838)
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$ | 361,100 | $ | 344,399 | |||||||
Bonds held to maturity, at amortized cost (market
value: 2005 $22,350; 2004 $18,791)
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21,472 | 18,294 | |||||||||
Bond trading securities, at market value
(cost: 2005 $3,557; 2004 $2,973)
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3,579 | 2,984 | |||||||||
Equity securities: | |||||||||||
Common stocks available for sale, at market value
(cost: 2005 $9,419; 2004 $8,424)
|
11,003 | 9,772 | |||||||||
Common stocks trading, at market value
(cost: 2005 $6,671; 2004 $5,651)
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7,074 | 5,894 | |||||||||
Preferred stocks, at market value
(cost: 2005 $2,335; 2004 $2,017)
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2,444 | 2,040 | |||||||||
Mortgage loans on real estate, net of allowance
(2005 $57; 2004 $65)
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14,251 | 13,146 | |||||||||
Policy loans
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7,100 | 7,035 | |||||||||
Collateral and guaranteed loans, net of allowance
(2005 $16; 2004 $18)
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3,295 | 3,303 | |||||||||
Financial services assets: | |||||||||||
Flight equipment primarily under operating
leases, net of accumulated depreciation (2005
$6,790; 2004 $6,390)
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35,690 | 32,130 | |||||||||
Securities available for sale, at market value
(cost: 2005 $32,527; 2004 $29,171)
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33,120 | 31,225 | |||||||||
Trading securities, at market value
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3,927 | 2,746 | |||||||||
Spot commodities
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454 | 534 | |||||||||
Unrealized gain on swaps, options and forward
transactions
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21,388 | 22,670 | |||||||||
Trading assets
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2,055 | 3,433 | |||||||||
Securities purchased under agreements to resell,
at contract value
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12,576 | 26,272 | |||||||||
Finance receivables, net of allowance
(2005 $584; 2004 $571)
|
26,763 | 23,574 | |||||||||
Securities lending collateral, at market value (which approximates cost) | 56,325 | 49,169 | |||||||||
Other invested assets | 26,311 | 23,559 | |||||||||
Short-term investments, at cost (approximates market value) | 17,465 | 16,102 | |||||||||
Total investments and financial services assets | 667,392 | 638,281 | |||||||||
Cash | 1,738 | 2,009 | |||||||||
Investment income due and accrued | 5,647 | 5,556 | |||||||||
Premiums and insurance balances receivable, net
of allowance (2005 $748; 2004 $690)
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15,806 | 15,622 | |||||||||
Reinsurance assets, net of allowance (2005 $840; 2004 $832) | 19,476 | 19,613 | |||||||||
Deferred policy acquisition costs | 30,909 | 29,817 | |||||||||
Investments in partially owned companies | 1,389 | 1,495 | |||||||||
Real estate and other fixed assets, net of
accumulated depreciation (2005 $4,801;
2004 $4,650)
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6,225 | 6,192 | |||||||||
Separate and variable accounts | 58,463 | 57,741 | |||||||||
Goodwill | 8,378 | 8,556 | |||||||||
Income taxes receivable current | 772 | 138 | |||||||||
Other assets | 14,972 | 16,125 | |||||||||
Total assets
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$ | 831,167 | $ | 801,145 | |||||||
2
CONSOLIDATED BALANCE SHEET (continued)
(in millions, except share
data) (unaudited)
June 30, | ||||||||||
2005 | December 31, | |||||||||
(Restated) | 2004 | |||||||||
Liabilities:
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||||||||||
Reserve for losses and loss expenses
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$ | 64,829 | $ | 61,878 | ||||||
Reserve for unearned premiums
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24,435 | 23,400 | ||||||||
Future policy benefits for life and accident and
health insurance contracts
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108,192 | 104,740 | ||||||||
Policyholders contract deposits
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225,619 | 216,474 | ||||||||
Other policyholders funds
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10,332 | 10,280 | ||||||||
Reserve for commissions, expenses and taxes
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4,748 | 4,629 | ||||||||
Insurance balances payable
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3,932 | 3,661 | ||||||||
Funds held by companies under reinsurance treaties
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3,780 | 3,404 | ||||||||
Deferred income taxes payable
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9,259 | 6,588 | ||||||||
Financial services liabilities:
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||||||||||
Borrowings under obligations of guaranteed
investment agreements
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20,799 | 18,919 | ||||||||
Securities sold under agreements to repurchase,
at contract value
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10,497 | 23,581 | ||||||||
Trading liabilities
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2,236 | 2,503 | ||||||||
Securities and spot commodities sold but not yet
purchased, at market value
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4,870 | 5,404 | ||||||||
Unrealized loss on swaps, options and forward
transactions
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13,915 | 15,985 | ||||||||
Trust deposits and deposits due to banks and
other depositors
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4,154 | 4,248 | ||||||||
Commercial paper
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8,980 | 6,724 | ||||||||
Notes, bonds, loans and mortgages payable
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63,077 | 61,296 | ||||||||
Commercial paper
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3,884 | 2,969 | ||||||||
Notes, bonds, loans and mortgages payable
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5,274 | 5,502 | ||||||||
Liabilities connected to trust preferred stock
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1,489 | 1,489 | ||||||||
Separate and variable accounts
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58,463 | 57,741 | ||||||||
Minority interest
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5,368 | 4,831 | ||||||||
Securities lending payable
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57,128 | 49,972 | ||||||||
Other liabilities
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27,098 | 25,055 | ||||||||
Total liabilities
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742,358 | 721,273 | ||||||||
Preferred shareholders equity in
subsidiary companies
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196 | 199 | ||||||||
Commitments and Contingent Liabilities (See Note
7)
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||||||||||
Shareholders equity:
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||||||||||
Common stock, $2.50 par value;
5,000,000,000 shares authorized; shares issued
2005 2,751,327,476; 2004 2,751,327,476
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6,878 | 6,878 | ||||||||
Additional paid-in capital
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2,182 | 2,094 | ||||||||
Retained earnings
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70,985 | 63,468 | ||||||||
Accumulated other comprehensive income (loss)
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10,869 | 9,444 | ||||||||
Treasury stock, at cost; 2005
156,247,638; 2004 154,904,286 shares of common
stock
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(2,301 | ) | (2,211 | ) | ||||||
Total shareholders equity
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88,613 | 79,673 | ||||||||
Total liabilities, preferred
shareholders equity in subsidiary companies and
shareholders equity
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831,167 | $ | 801,145 | |||||||
3
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data) (unaudited) | ||||||||||||||||||
Six Months | Three Months | |||||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
(Restated) | (Restated) | |||||||||||||||||
Revenues:
|
||||||||||||||||||
Premiums and other considerations
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$ | 35,216 | $ | 32,154 | $ | 17,536 | $ | 16,175 | ||||||||||
Net investment income
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10,559 | 9,141 | 5,227 | 4,541 | ||||||||||||||
Realized capital gains (losses)
|
12 | 3 | (125 | ) | 89 | |||||||||||||
Other revenues
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9,318 | 6,013 | 5,265 | 3,284 | ||||||||||||||
Total revenues
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55,105 | 47,311 | 27,903 | 24,089 | ||||||||||||||
Benefits and expenses:
|
||||||||||||||||||
Incurred policy losses and benefits
|
29,156 | 27,070 | 14,283 | 13,480 | ||||||||||||||
Insurance acquisition and other operating expenses
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13,599 | 11,750 | 6,919 | 5,960 | ||||||||||||||
Total benefits and expenses
|
42,755 | 38,820 | 21,202 | 19,440 | ||||||||||||||
Income before income taxes, minority interest
and cumulative effect of an accounting change
|
12,350 | 8,491 | 6,701 | 4,649 | ||||||||||||||
Income taxes (benefits):
|
||||||||||||||||||
Current
|
1,983 | 2,437 | 1,015 | 1,092 | ||||||||||||||
Deferred
|
1,806 | 157 | 1,068 | 372 | ||||||||||||||
3,789 | 2,594 | 2,083 | 1,464 | |||||||||||||||
Income before minority interest and cumulative
effect of an accounting change
|
8,561 | 5,897 | 4,618 | 3,185 | ||||||||||||||
Minority interest
|
(273 | ) | (175 | ) | (129 | ) | (105 | ) | ||||||||||
Income before cumulative effect of an
accounting change
|
8,288 | 5,722 | 4,489 | 3,080 | ||||||||||||||
Cumulative effect of an accounting change, net
of tax
|
| (144 | ) | | | |||||||||||||
Net income
|
$ | 8,288 | $ | 5,578 | $ | 4,489 | $ | 3,080 | ||||||||||
Earnings per common share:
|
||||||||||||||||||
Basic
|
||||||||||||||||||
Income before cumulative effect of an accounting
change
|
$ | 3.19 | $ | 2.20 | $ | 1.73 | $ | 1.19 | ||||||||||
Cumulative effect of an accounting change, net of
tax
|
| (0.06 | ) | | | |||||||||||||
Net income
|
$ | 3.19 | $ | 2.14 | $ | 1.73 | $ | 1.19 | ||||||||||
Diluted
|
||||||||||||||||||
Income before cumulative effect of an accounting
change
|
$ | 3.16 | $ | 2.17 | $ | 1.71 | $ | 1.17 | ||||||||||
Cumulative effect of an accounting change, net of
tax
|
| (0.06 | ) | | | |||||||||||||
Net income
|
$ | 3.16 | $ | 2.11 | $ | 1.71 | $ | 1.17 | ||||||||||
Dividends declared per common share
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$ | 0.300 | $ | 0.140 | $ | 0.125 | $ | 0.075 | ||||||||||
Average shares outstanding:
|
||||||||||||||||||
Basic
|
2,596 | 2,609 | 2,596 | 2,608 | ||||||||||||||
Diluted
|
2,623 | 2,641 | 2,623 | 2,640 | ||||||||||||||
4
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions) (unaudited) | |||||||||||
2005 | 2004 | ||||||||||
Six Months Ended June 30, | (Restated) | (Restated) | |||||||||
Summary:
|
|||||||||||
Net cash provided by operating
activities
|
$ | 13,817 | $ | 11,886 | |||||||
Net cash used in investing
activities
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(35,358 | ) | (50,707 | ) | |||||||
Net cash provided by financing
activities
|
22,097 | 39,807 | |||||||||
Effect of exchange rate changes on
cash
|
(827 | ) | 125 | ||||||||
Change in cash
|
(271 | ) | 1,111 | ||||||||
Cash at beginning of period
|
2,009 | 922 | |||||||||
Cash at end of period
|
$ | 1,738 | $ | 2,033 | |||||||
Cash flows from operating
activities:
|
|||||||||||
Net income
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$ | 8,288 | $ | 5,578 | |||||||
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
|
7,562 | 10,357 | |||||||||
Premiums and insurance balances receivable and
payable net
|
87 | (1,159 | ) | ||||||||
Reinsurance assets
|
137 | 213 | |||||||||
Deferred policy acquisition costs
|
(1,267 | ) | (1,504 | ) | |||||||
Investment income due and accrued
|
(91 | ) | (378 | ) | |||||||
Funds held under reinsurance treaties
|
376 | 376 | |||||||||
Other policyholders funds
|
52 | 415 | |||||||||
Current and deferred income taxes net
|
1,170 | 1,256 | |||||||||
Reserve for commissions, expenses and taxes
|
119 | (503 | ) | ||||||||
Other assets and liabilities net
|
(476 | ) | (456 | ) | |||||||
Bonds and common stocks trading, at market value
|
(1,775 | ) | (1,277 | ) | |||||||
Trading assets and liabilities net
|
1,111 | (341 | ) | ||||||||
Trading securities, at market value
|
(1,181 | ) | (156 | ) | |||||||
Spot commodities
|
80 | (440 | ) | ||||||||
Net unrealized (gain) loss on swaps, options and
forward transactions
|
(788 | ) | 529 | ||||||||
Securities purchased under agreements to resell
|
13,696 | (2,490 | ) | ||||||||
Securities sold under agreements to repurchase
|
(13,084 | ) | 1,974 | ||||||||
Securities and spot commodities sold but not yet
purchased, at market value
|
(534 | ) | (434 | ) | |||||||
Realized capital (gains) losses
|
(12 | ) | (3 | ) | |||||||
Equity in income of partially owned companies and
other invested assets
|
(899 | ) | (637 | ) | |||||||
Amortization of premium and discount on securities
|
187 | 115 | |||||||||
Depreciation expenses, principally flight
equipment
|
836 | 997 | |||||||||
Provision for finance receivable losses
|
175 | 186 | |||||||||
Other net
|
48 | (332 | ) | ||||||||
Total adjustments
|
5,529 | 6,308 | |||||||||
Net cash provided by operating
activities
|
$ | 13,817 | $ | 11,886 | |||||||
5
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(in millions) (unaudited) | ||||||||
2005 | 2004 | |||||||
Six Months Ended June 30, | (Restated) | (Restated) | ||||||
Cash flows from investing
activities:
|
||||||||
Cost of bonds, at market
sold
|
$ | 62,719 | $ | 63,968 | ||||
Cost of bonds, at market
matured or redeemed
|
7,717 | 6,867 | ||||||
Cost of equity securities
sold
|
5,896 | 6,648 | ||||||
Realized capital gains
(losses)
|
12 | 3 | ||||||
Purchases of fixed
maturities
|
(86,153 | ) | (95,829 | ) | ||||
Purchases of equity
securities
|
(7,151 | ) | (6,788 | ) | ||||
Mortgage, policy and
collateral loans granted
|
(2,702 | ) | (875 | ) | ||||
Repayments of mortgage,
policy and collateral loans
|
1,520 | 1,074 | ||||||
Sales of securities
available for sale
|
1,949 | 1,058 | ||||||
Maturities of securities
available for sale
|
2,451 | 2,097 | ||||||
Purchases of securities
available for sale
|
(7,350 | ) | (5,003 | ) | ||||
Sales of flight equipment
|
243 | 1,127 | ||||||
Purchases of flight
equipment
|
(4,243 | ) | (3,299 | ) | ||||
Change in securities
lending collateral
|
(7,156 | ) | (16,698 | ) | ||||
Net additions to real
estate and other fixed assets
|
(400 | ) | (337 | ) | ||||
Sales or distributions of
other invested assets
|
5,835 | 4,581 | ||||||
Investments in other
invested assets
|
(7,169 | ) | (6,375 | ) | ||||
Change in short-term
investments
|
1,992 | 1 | ||||||
Investments in partially
owned companies
|
(3 | ) | (1 | ) | ||||
Finance receivable
originations and purchases
|
(23,778 | ) | (11,756 | ) | ||||
Finance receivable
principal payments received
|
20,413 | 8,830 | ||||||
Net cash used in investing
activities
|
$ | (35,358 | ) | $ | (50,707 | ) | ||
Cash flows from financing
activities:
|
||||||||
Receipts from
policyholders contract deposits
|
$ | 26,038 | $ | 27,129 | ||||
Withdrawals from
policyholders contract deposits
|
(17,032 | ) | (11,026 | ) | ||||
Change in trust deposits
and deposits due to banks and other depositors
|
(94 | ) | 210 | |||||
Change in commercial paper
|
3,171 | 2,712 | ||||||
Proceeds from notes,
bonds, loans and mortgages payable
|
25,645 | 14,837 | ||||||
Repayments on notes,
bonds, loans and mortgages payable
|
(23,903 | ) | (11,272 | ) | ||||
Proceeds from guaranteed
investment agreements
|
6,760 | 4,318 | ||||||
Maturities of guaranteed
investment agreements
|
(4,880 | ) | (3,171 | ) | ||||
Change in securities
lending payable
|
7,156 | 16,698 | ||||||
Proceeds from common
stock issued
|
36 | 90 | ||||||
Cash dividends to
shareholders
|
(641 | ) | (339 | ) | ||||
Acquisition of treasury
stock
|
(168 | ) | (380 | ) | ||||
Other net
|
9 | 1 | ||||||
Net cash provided by financing
activities
|
$ | 22,097 | $ | 39,807 | ||||
Supplementary information:
|
||||||||
Taxes paid
|
$ | 1,466 | $ | 1,657 | ||||
Interest paid
|
$ | 2,649 | $ | 2,139 | ||||
6
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions) (unaudited) | ||||||||||||||||||
Six Months | Three Months | |||||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||||
2005 | 2005 | |||||||||||||||||
(Restated) | 2004 | (Restated) | 2004 | |||||||||||||||
Comprehensive income (loss):
|
||||||||||||||||||
Net income
|
$ | 8,288 | $ | 5,578 | $ | 4,489 | $ | 3,080 | ||||||||||
Other comprehensive income (loss):
|
||||||||||||||||||
Unrealized appreciation (depreciation) of
investments net of reclassification adjustments
|
2,282 | (5,865 | ) | 4,817 | (10,411 | ) | ||||||||||||
Deferred income tax (expense) benefit on above
changes
|
(503 | ) | 2,033 | (1,759 | ) | 3,469 | ||||||||||||
Foreign currency translation adjustments
|
(826 | ) | 120 | (773 | ) | (182 | ) | |||||||||||
Applicable income tax benefit (expense) on above
changes
|
501 | (17 | ) | 497 | 17 | |||||||||||||
Net derivative gains (losses) arising from cash
flow hedging activities
|
70 | 64 | (80 | ) | 43 | |||||||||||||
Deferred income tax (expense) benefit on above
changes
|
(71 | ) | (13 | ) | 40 | (16 | ) | |||||||||||
Retirement plan liabilities adjustment, net of tax
|
(28 | ) | (9 | ) | 2 | 18 | ||||||||||||
Other comprehensive income (loss)
|
1,425 | (3,687 | ) | 2,744 | (7,062 | ) | ||||||||||||
Comprehensive income (loss)
|
$ | 9,713 | $ | 1,891 | $ | 7,233 | $ | (3,982 | ) | |||||||||
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Financial Statement Presentation |
These statements are unaudited. In the opinion of management, adjustments including normal recurring accruals have been made for a fair statement of the results presented herein. Intercompany accounts and transactions have been eliminated. Certain accounts have been reclassified in the 2004 financial statements to conform to their 2005 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, 2005 (2005 Annual Report on Form 10-K).
As more fully described in AIGs 2004 Annual Report on Form 10-K for the year ended December 31, 2004, which was originally filed May 31, 2005 (2004 Annual Report on Form 10-K), and AIGs Forms 10-Q/A for the quarterly periods ended March 31, 2004 and June 30, 2004, AIG restated the accounting for certain transactions and certain relationships for the quarters ended March 31, 2004 and June 30, 2004, as part of the restatement of 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 (the First Restatement).
As announced on November 9, 2005, AIG identified certain errors, the preponderance of which were identified during the remediation of the material weaknesses in internal control over financial reporting, principally relating to internal controls surrounding accounting for derivatives and related assets and liabilities under FAS 133, reconciliation of certain balance sheet accounts and income tax accounting. Due to the significance of these corrections, AIG restated its consolidated financial statements for the years ended December 31, 2004, 2003 and 2002, along with 2001 and 2000 for purposes of preparation of the Selected Consolidated Financial Data for 2001 and 2000, and quarterly financial information for 2004 and 2003 and the first three quarters of 2005 (the Second Restatement, and together with the First Restatement, the Restatements). As part of the Second Restatement, AIG also corrected errors that have been identified since the First Restatement, including those relating to the accounting for certain payments received from aircraft and engine manufacturers by International Lease Finance Corporation (ILFC), which were originally corrected as an out-of-period item in AIGs Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (Second Quarter Form 10-Q).
2. |
Restatements of Previously Issued Financial Statements |
The following provides a description of the accounting adjustments included in the Restatements of AIGs consolidated financial statements and the effect of the adjustments on AIGs Consolidated Balance Sheet at June 30, 2005 and December 31, 2004 and its Consolidated Statement of Income for the three and six month periods ended June 30, 2005 and 2004 and Consolidated Statement of Cash Flows for the six months ended June 30, 2005 and 2004. All prior period amounts included in this report affected by the Restatements are presented on a restated basis.
(a) First Restatement
In connection with the preparation of AIGs consolidated financial statements included in AIGs 2004 Annual Report on Form 10-K, AIGs management initiated an internal review of its books and records, which was substantially expanded in mid-March 2005 with the oversight of the Audit Committee of the Board of Directors of AIG. The review spanned AIGs major business units globally, and included a number of transactions from 2000 to 2004. As disclosed in the 2004 Annual Report on Form 10-K, as a result of the findings of the internal review, together with the results of investigations by outside counsel at the request of AIGs Audit Committee and in consultation with PricewaterhouseCoopers LLP, AIGs independent registered public accounting firm, AIG restated its consolidated financial statements and financial statement schedules 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 (the First Restatement).
AIG disclosed in its 2004 Annual Report on Form 10-K that it had identified a number of material weaknesses in internal control over financial reporting, including controls over certain balance sheet reconciliations, controls over the accounting for certain derivative transactions and controls over income tax accounting. AIG has been and continues to be actively engaged in the implementation of remediation efforts to address all of these material weaknesses in internal control over financial reporting.
See Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of Notes to Consolidated Financial Statements in the 2004 Annual Report on Form 10-K for a discussion of the First 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.
(b) Second Restatement
As announced on November 9, 2005, AIG identified certain additional errors, the preponderance of which were identified during the remediation of the material weaknesses in internal control over financial reporting, principally relating to internal controls surrounding accounting for derivatives and related assets and liabilities under FAS 133, reconciliation of certain balance sheet accounts and income tax accounting.
8
2. |
Restatement of Previously Issued Financial Statements (continued) |
AIG also announced it was correcting errors that were identified since the First Restatement, including those relating to the accounting for certain payments received from aircraft and engine manufacturers by ILFC, which were originally corrected in AIGs Second Quarter Form 10-Q. The adjustments to correct the foregoing errors are referred to in this Second Quarter Form 10-Q/A as the Initial Adjustments.
In connection with the remediation of material weaknesses in internal control over financial reporting referred to above, AIG identified certain additional errors, principally relating to internal controls over reconciliation of certain balance sheet accounts in DBG. As a result, AIG included further adjustments (the Additional Adjustments) in its restatement of the consolidated financial statements and financial statement schedules for the years ended December 31, 2004, 2003 and 2002, along with 2001 and 2000 for purposes of preparation of the Selected Consolidated Financial Data for 2001 and 2000, and quarterly financial information for 2004 and 2003 and is restating the first three quarters of 2005. The Initial Adjustments and the Additional Adjustments are referred to herein as the Second Restatement. AIGs Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 will not be amended because the Additional Adjustments to the financial statements included therein are not material to those financial statements.
Details of the Initial Adjustments in the Second Restatement. The accounting adjustments relate primarily to the categories described below.
| Accounting for Derivatives (FAS 133 Hedge Accounting). During the third quarter of 2005, AIG identified and corrected additional errors identified during the remediation of the previously disclosed material weakness in internal controls surrounding accounting for derivatives and related assets and liabilities under FAS 133. |
Included in the Initial Adjustments to correct AIGs accounting for derivatives are adjustments correcting the errors in accounting for certain secured financings where AIGFP had sold an available-for-sale security and concurrently entered into a total return swap with a repurchase obligation. The Initial Adjustments for these errors increased both securities available for sale, at market value, and securities sold under agreements to repurchase, by approximately $2 billion as of December 31, 2004. | |
The Initial Adjustments to reflect appropriate GAAP accounting for these derivatives and related assets and liabilities, including related currency translation gains and losses, increased net income by approximately $241 million and $311 million and by approximately $465 million and $437 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and increased total shareholders equity by approximately $367 million as of December 31, 2004. |
| Asset Realization Domestic Brokerage Group (DBG) Issues. During the third quarter of 2005, AIG concluded that additional adjustments should be made to the value of certain DBG reserves and allowances for doubtful accounts for time periods prior to January 1, 2003, resulting in an after-tax reduction in total shareholders equity at December 31, 2004 of approximately $205 million. The adjustments had no effect on net income for the three and six month periods ended June 30, 2005 and 2004. |
| Income Tax Accounting. During the third quarter of 2005, AIG identified and corrected additional errors in its income tax accounting. The most significant adjustment resulted from AIG incorrectly recording the income tax benefit resulting from employee exercises of stock options as a reduction in income tax expense rather than as an increase in additional paid-in capital as required by GAAP. This adjustment has no effect on total shareholders equity. The effect of the income tax adjustments was to increase total tax expense by approximately $99 million and $135 million and by approximately $5 million and $10 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and to increase total shareholders equity as of December 31, 2004 by approximately $131 million. |
| Manufacturers Payments Received by ILFC. In the course of the ILFC review of its application of FAS 133 in connection with AIGs internal review, ILFC, in consultation with its independent registered public accounting firm, identified an error in its accounting for certain payments received from aircraft and engine manufacturers. Under arrangements with these manufacturers, in certain circumstances, the manufacturers established notional accounts for the benefit of ILFC to which amounts were credited by the manufacturers in connection with the purchase by and delivery to ILFC and the lease of aircraft. Amounts credited to the notional accounts were used at ILFCs direction to protect ILFC from certain events, including loss when airline customers of ILFC defaulted on lease payment obligations, to provide lease subsidies and other incentives to ILFCs airline customers in connection with leases of certain aircraft, and to reduce ILFCs cost of aircraft purchased. |
Historically, ILFC recorded as revenues gross lease receipts from lessees who had received lease subsidies from the notional accounts and amounts paid directly to ILFC from the notional accounts in connection with |
9
2. |
Restatement of Previously Issued Financial Statements (continued) |
lessee defaults. Amounts recorded as revenue at the time they were disbursed to ILFC or its lessees should have been recorded as a reduction of the purchase price of the aircraft at the time of delivery. |
Although ILFC restated its financial statements for the years 2000 through 2004 and for the quarter ended March 31, 2005 to correct its accounting for the payments from aircraft and engine manufacturers described above, AIG had previously considered these adjustments not to be sufficiently material to require correction by restatement in AIGs consolidated financial statements. The effect of the adjustments included in the Second Restatement relating to the manufacturers payments was to increase other revenues and net income by approximately $755 million and $334 million and by approximately $724 million and $322 million for the three and six month periods ended June 30, 2005, respectively, and decrease other revenues and net income by approximately $32 million and $14 million and by approximately $50 million and $18 million for the three and six month periods ended June 30, 2004, respectively.
Details of Additional Adjustments in the Second Restatement. The accounting adjustments relate primarily to the categories described below.
| Asset Realization and Revenue Recognition Domestic Brokerage Group (DBG) Issues. During the remediation of material weaknesses in internal controls, AIG concluded that additional adjustments should be made to the value of certain DBG reserves and allowances for doubtful accounts, and revisions were necessary to the revenues previously recognized for certain long-tail environmental policies. |
The Additional Adjustments to reflect the asset realization and revenue recognition revisions increased net income by approximately $14 million and $13 million and by approximately $18 million and $18 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and decreased total shareholders equity by approximately $543 million and $534 million as of June 30, 2005 and December 31, 2004, respectively. |
| Accounting for Derivatives and Related Assets and Liabilities (FAS 133 Hedge Accounting). During the fourth quarter of 2005, AIG identified and corrected additional errors identified during the remediation of the previously disclosed material weaknesses in internal controls surrounding accounting for derivatives and related assets and liabilities under FAS 133. |
The Additional Adjustments to reflect appropriate GAAP accounting for these derivatives which also included related currency translation gains and losses, decreased other revenue by approximately $13 million and increased other revenue by approximately $66 million and decreased other revenue by approximately $47 million and $73 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and decreased net income by approximately $31 million and $20 million and by approximately $28 million and $42 million for the three and six month periods ended June 30, 2005 and 2004, respectively. The additional adjustments also decreased total shareholders equity by approximately $19 million and $65 million as of June 30, 2005 and December 31, 2004, respectively. |
| Income Tax Accounting. During the fourth quarter of 2005, AIG identified and corrected additional errors in its income tax accounting. The income tax adjustments decreased income tax expense and increased net income by approximately $22 million and $46 million and increased income tax expense and decreased net income by approximately $15 million and $28 million for the three and six month periods ended June 30, 2005 and 2004, respectively, and increased total shareholders equity by approximately $6 million and decreased total shareholders equity by approximately $98 million as of June 30, 2005 and December 31, 2004, respectively. |
| Statement of Cash Flows Classification of Certain Trading Securities. AIG identified and corrected the classification of certain trading securities activity from investing activities to operating activities. |
10
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, 2005 | |||||||||||||||
As Previously | As | ||||||||||||||
(in millions) (unaudited) | Reported | Restated | December 31, 2004 | ||||||||||||
Assets:
|
|||||||||||||||
Investments and financial services assets: | |||||||||||||||
Fixed maturities: | |||||||||||||||
Bonds available for sale, at market value
|
$ | 361,100 | $ | 361,100 | $ | 344,399 | |||||||||
Bonds held to maturity, at amortized cost
|
21,472 | 21,472 | 18,294 | ||||||||||||
Bond trading securities, at market value
|
3,579 | 3,579 | 2,984 | ||||||||||||
Equity securities: | |||||||||||||||
Common stocks available for sale, at market value
|
11,148 | 11,003 | 9,772 | ||||||||||||
Common stocks trading, at market value
|
7,074 | 7,074 | 5,894 | ||||||||||||
Preferred stocks, at market value
|
2,444 | 2,444 | 2,040 | ||||||||||||
Mortgage loans on real estate, net of allowance
|
14,251 | 14,251 | 13,146 | ||||||||||||
Policy loans
|
7,100 | 7,100 | 7,035 | ||||||||||||
Collateral and guaranteed loans, net of allowance
|
2,215 | 3,295 | 3,303 | ||||||||||||
Financial services assets: | |||||||||||||||
Flight equipment primarily under operating
leases, net of accumulated depreciation
|
35,689 | 35,690 | 32,130 | ||||||||||||
Securities available for sale, at market value
|
33,056 | 33,120 | 31,225 | ||||||||||||
Trading securities, at market value
|
4,318 | 3,927 | 2,746 | ||||||||||||
Spot commodities
|
31 | 454 | 534 | ||||||||||||
Unrealized gain on swaps, options and forward
transactions
|
21,388 | 21,388 | 22,670 | ||||||||||||
Trading assets
|
1,931 | 2,055 | 3,433 | ||||||||||||
Securities purchased under agreements to resell,
at contract value
|
12,576 | 12,576 | 26,272 | ||||||||||||
Finance receivables, net of allowance
|
26,763 | 26,763 | 23,574 | ||||||||||||
Securities lending collateral, at market value
(which approximates cost)
|
57,128 | 56,325 | 49,169 | ||||||||||||
Other invested assets | 25,001 | 26,311 | 23,559 | ||||||||||||
Short-term investments, at cost | 17,465 | 17,465 | 16,102 | ||||||||||||
Total investments and financial services assets | 665,729 | 667,392 | 638,281 | ||||||||||||
Cash | 1,738 | 1,738 | 2,009 | ||||||||||||
Investment income due and accrued | 5,676 | 5,647 | 5,556 | ||||||||||||
Premiums and insurance balances receivable, net
of allowance
|
15,313 | 15,806 | 15,622 | ||||||||||||
Reinsurance assets, net of allowance | 19,824 | 19,476 | 19,613 | ||||||||||||
Deferred policy acquisition costs | 30,812 | 30,909 | 29,817 | ||||||||||||
Investments in partially owned companies | 1,310 | 1,389 | 1,495 | ||||||||||||
Real estate and other fixed assets, net of
accumulated depreciation
|
6,225 | 6,225 | 6,192 | ||||||||||||
Separate and variable accounts | 58,463 | 58,463 | 57,741 | ||||||||||||
Goodwill | 8,423 | 8,378 | 8,556 | ||||||||||||
Income taxes receivable - current | 924 | 772 | 138 | ||||||||||||
Other assets | 14,205 | 14,972 | 16,125 | ||||||||||||
Total assets
|
$ | 828,642 | $ | 831,167 | $ | 801,145 | |||||||||
11
2. |
Restatement of Previously Issued Financial Statements (continued) |
CONSOLIDATED BALANCE SHEET (continued)
June 30, 2005 | ||||||||||||||
As Previously | As | |||||||||||||
(in millions) (unaudited) | Reported | Restated | December 31, 2004 | |||||||||||
Liabilities:
|
||||||||||||||
Reserve for losses and loss expenses
|
$ | 65,327 | $ | 64,829 | $ | 61,878 | ||||||||
Reserve for unearned premiums
|
24,077 | 24,435 | 23,400 | |||||||||||
Future policy benefits for life and accident and
health insurance contracts
|
108,208 | 108,192 | 104,740 | |||||||||||
Policyholders contract deposits
|
225,839 | 225,619 | 216,474 | |||||||||||
Other policyholders funds
|
10,332 | 10,332 | 10,280 | |||||||||||
Reserve for commissions, expenses and taxes
|
4,754 | 4,748 | 4,629 | |||||||||||
Insurance balances payable
|
3,968 | 3,932 | 3,661 | |||||||||||
Funds held by companies under reinsurance treaties
|
3,780 | 3,780 | 3,404 | |||||||||||
Deferred income taxes payable
|
9,657 | 9,259 | 6,588 | |||||||||||
Financial services liabilities:
|
||||||||||||||
Borrowings under obligations of guaranteed
investment agreements
|
20,799 | 20,799 | 18,919 | |||||||||||
Securities sold under agreements to repurchase,
at contract value
|
8,303 | 10,497 | 23,581 | |||||||||||
Trading liabilities
|
2,037 | 2,236 | 2,503 | |||||||||||
Securities and spot commodities sold but not yet
purchased, at market value
|
4,343 | 4,870 | 5,404 | |||||||||||
Unrealized loss on swaps, options and forward
transactions
|
15,447 | 13,915 | 15,985 | |||||||||||
Trust deposits and deposits due to banks and
other depositors
|
4,154 | 4,154 | 4,248 | |||||||||||
Commercial paper
|
8,980 | 8,980 | 6,724 | |||||||||||
Notes, bonds, loans and mortgages payable
|
62,673 | 63,077 | 61,296 | |||||||||||
Commercial paper
|
3,884 | 3,884 | 2,969 | |||||||||||
Notes, bonds, loans and mortgages payable
|
5,274 | 5,274 | 5,502 | |||||||||||
Liabilities connected to trust preferred stock
|
1,489 | 1,489 | 1,489 | |||||||||||
Separate and variable accounts
|
58,463 | 58,463 | 57,741 | |||||||||||
Minority interest
|
5,119 | 5,368 | 4,831 | |||||||||||
Securities lending payable
|
57,128 | 57,128 | 49,972 | |||||||||||
Other liabilities
|
25,532 | 27,098 | 25,055 | |||||||||||
Total liabilities
|
739,567 | 742,358 | 721,273 | |||||||||||
Preferred shareholders equity in
subsidiary companies
|
196 | 196 | 199 | |||||||||||
Shareholders equity:
|
||||||||||||||
Common stock
|
6,878 | 6,878 | 6,878 | |||||||||||
Additional paid-in capital
|
2,069 | 2,182 | 2,094 | |||||||||||
Retained earnings
|
71,428 | 70,985 | 63,468 | |||||||||||
Accumulated other comprehensive income (loss)
|
10,805 | 10,869 | 9,444 | |||||||||||
Treasury stock, at cost
|
(2,301 | ) | (2,301 | ) | (2,211 | ) | ||||||||
Total shareholders equity
|
88,879 | 88,613 | 79,673 | |||||||||||
Total liabilities, preferred
shareholders equity in subsidiary companies and
shareholders equity
|
$ | 828,642 | $ | 831,167 | $ | 801,145 | ||||||||
12
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, 2005 | June 30, 2004 | June 30, 2005 | June 30, 2004 | |||||||||||||||||||||||||||||||
(in millions, except per share data) | As Previously | As | As Previously | As | ||||||||||||||||||||||||||||||
(unaudited) | Reported | Restated | Reported | Restated | ||||||||||||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||||||||||||
Premiums and other considerations
|
$ | 35,223 | $ | 35,216 | $ | 32,154 | $ | 17,541 | $ | 17,536 | $ | 16,175 | ||||||||||||||||||||||
Net investment income
|
10,490 | 10,559 | 9,141 | 5,198 | 5,227 | 4,541 | ||||||||||||||||||||||||||||
Realized capital gains (losses)
|
333 | 12 | 3 | 245 | (125 | ) | 89 | |||||||||||||||||||||||||||
Other revenues
|
7,927 | 9,318 | 6,013 | 3,877 | 5,265 | 3,284 | ||||||||||||||||||||||||||||
Total revenues
|
53,973 | 55,105 | 47,311 | 26,861 | 27,903 | 24,089 | ||||||||||||||||||||||||||||
Benefits and expenses:
|
||||||||||||||||||||||||||||||||||
Incurred policy losses and benefits
|
29,201 | 29,156 | 27,070 | 14,336 | 14,283 | 13,480 | ||||||||||||||||||||||||||||
Insurance acquisition and other operating expenses
|
13,534 | 13,599 | 11,750 | 6,730 | 6,919 | 5,960 | ||||||||||||||||||||||||||||
Total benefits and expenses
|
42,735 | 42,755 | 38,820 | 21,066 | 21,202 | 19,440 | ||||||||||||||||||||||||||||
Income before income taxes, minority interest
and cumulative effect of an accounting change
|
11,238 | 12,350 | 8,491 | 5,795 | 6,701 | 4,649 | ||||||||||||||||||||||||||||
Income taxes (benefits):
|
||||||||||||||||||||||||||||||||||
Current
|
1,777 | 1,983 | 2,437 | 790 | 1,015 | 1,092 | ||||||||||||||||||||||||||||
Deferred
|
1,510 | 1,806 | 157 | 884 | 1,068 | 372 | ||||||||||||||||||||||||||||
3,287 | 3,789 | 2,594 | 1,674 | 2,083 | 1,464 | |||||||||||||||||||||||||||||
Income before minority interest and cumulative
effect of an accounting change
|
7,951 | 8,561 | 5,897 | 4,121 | 4,618 | 3,185 | ||||||||||||||||||||||||||||
Minority interest
|
(275 | ) | (273 | ) | (175 | ) | (129 | ) | (129 | ) | (105 | ) | ||||||||||||||||||||||
Income before cumulative effect of an
accounting change
|
7,676 | 8,288 | 5,722 | 3,992 | 4,489 | 3,080 | ||||||||||||||||||||||||||||
Cumulative effect of an accounting change, net
of tax
|
| | (144 | ) | | | | |||||||||||||||||||||||||||
Net income
|
$ | 7,676 | $ | 8,288 | $ | 5,578 | $ | 3,992 | $ | 4,489 | $ | 3,080 | ||||||||||||||||||||||
Earnings per common share:
|
||||||||||||||||||||||||||||||||||
Basic
|
||||||||||||||||||||||||||||||||||
Income before cumulative effect of an accounting
change
|
$ | 2.96 | $ | 3.19 | $ | 2.20 | $ | 1.54 | $ | 1.73 | $ | 1.19 | ||||||||||||||||||||||
Cumulative effect of an accounting change, net of
tax
|
| | (0.06 | ) | | | | |||||||||||||||||||||||||||
Net income
|
$ | 2.96 | $ | 3.19 | $ | 2.14 | $ | 1.54 | $ | 1.73 | $ | 1.19 | ||||||||||||||||||||||
Diluted
|
||||||||||||||||||||||||||||||||||
Income before cumulative effect of an accounting
change
|
$ | 2.93 | $ | 3.16 | $ | 2.17 | $ | 1.53 | $ | 1.71 | $ | 1.17 | ||||||||||||||||||||||
Cumulative effect of an accounting change, net of
tax
|
| | (0.06 | ) | | | | |||||||||||||||||||||||||||
Net income
|
$ | 2.93 | $ | 3.16 | $ | 2.11 | $ | 1.53 | $ | 1.71 | $ | 1.17 | ||||||||||||||||||||||
Dividends declared per common share
|
$ | 0.300 | $ | 0.300 | $ | 0.140 | $ | 0.125 | $ | 0.125 | $ | 0.075 | ||||||||||||||||||||||
Average shares outstanding:
|
||||||||||||||||||||||||||||||||||
Basic
|
2,596 | 2,596 | 2,609 | 2,596 | 2,596 | 2,608 | ||||||||||||||||||||||||||||
Diluted
|
2,623 | 2,623 | 2,641 | 2,623 | 2,623 | 2,640 | ||||||||||||||||||||||||||||
13
2. |
Restatement of Previously Issued Financial Statements (continued) |
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended | Six | |||||||||||
June 30, 2005 | Months | |||||||||||
Ended | ||||||||||||
As Previously | As | June 30, | ||||||||||
(in millions) (unaudited) | Reported | Restated | 2004 | |||||||||
Net cash provided by operating
activities
|
$ | 13,605 | $ | 13,817 | $ | 11,886 | ||||||
Net cash used in investing
activities
|
(29,244 | ) | (35,358 | ) | (50,707 | ) | ||||||
Net cash provided by financing
activities
|
16,212 | 22,097 | 39,807 | |||||||||
Effect of exchange rate changes on
cash
|
(844 | ) | (827 | ) | 125 | |||||||
Change in cash
|
(271 | ) | (271 | ) | 1,111 | |||||||
Cash at beginning of period
|
2,009 | 2,009 | 922 | |||||||||
Cash at end of period
|
$ | 1,738 | $ | 1,738 | $ | 2,033 | ||||||
The following two tables reflect the effect of the aforementioned adjustments on each component of revenue:
For the Six Months Ended June 30, 2005 | Premiums and | Net Investment | Realized Capital | Other | Total | ||||||||||||||||||
(in millions) (unaudited) | Other Considerations | Income | Gains (Losses) | Revenues | Revenues | ||||||||||||||||||
As Previously Reported
|
$ | 35,223 | $ | 10,490 | $ | 333 | $ | 7,927 | $ | 53,973 | |||||||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||||||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| 9 | (202 | ) | 597 | 404 | |||||||||||||||||
Manufacturers Payment Received by ILFC
|
| | | 724 | 724 | ||||||||||||||||||
All Other Adjustments Net
|
3 | 68 | 6 | 3 | 80 | ||||||||||||||||||
Total Initial Adjustments in the Second
Restatement
|
3 | 77 | (196 | ) | 1,324 | 1,208 | |||||||||||||||||
Revenues, as Restated in the Initial Adjustments
|
35,226 | 10,567 | 137 | 9,251 | 55,181 | ||||||||||||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||||||||||||||
Asset Realization:
|
|||||||||||||||||||||||
Domestic Brokerage Group (DBG) Issues
|
(8 | ) | 36 | | | 28 | |||||||||||||||||
All Other Adjustments Net
|
(2 | ) | (44 | ) | (125 | ) | 67 | (104 | ) | ||||||||||||||
Total Additional Adjustments in the Second
Restatement
|
(10 | ) | (8 | ) | (125 | ) | 67 | (76 | ) | ||||||||||||||
Revenues, as Restated in the Second Restatement
|
$ | 35,216 | $ | 10,559 | $ | 12 | $ | 9,318 | $ | 55,105 | |||||||||||||
14
2. |
Restatement of Previously Issued Financial Statements (continued) |
For the Six Months Ended June 30, 2004 | Premiums and | Net Investment | Realized Capital | Other | Total | ||||||||||||||||||
(in millions) (unaudited) | Other Considerations | Income | Gains (Losses) | Revenues | Revenues | ||||||||||||||||||
As Previously Reported
|
$ | 32,460 | $ | 9,376 | $ | (60 | ) | $ | 5,670 | $ | 47,446 | ||||||||||||
Adjustments in the First Restatement:
|
|||||||||||||||||||||||
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 in the First Restatement
|
(282 | ) | (310 | ) | 34 | (8 | ) | (566 | ) | ||||||||||||||
As Adjusted in the First Restatement
|
32,178 | 9,066 | (26 | ) | 5,662 | 46,880 | |||||||||||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||||||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| | 27 | 443 | 470 | ||||||||||||||||||
Manufacturers Payments Received by ILFC
|
| | | (50 | ) | (50 | ) | ||||||||||||||||
All Other Adjustments Net
|
3 | (4 | ) | | 5 | 4 | |||||||||||||||||
Total Initial Adjustments in the Second
Restatement
|
3 | (4 | ) | 27 | 398 | 424 | |||||||||||||||||
Revenues, as Restated in the Initial Adjustments
|
32,181 | 9,062 | 1 | 6,060 | 47,304 | ||||||||||||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||||||||||||||
Asset Realization:
|
|||||||||||||||||||||||
Domestic Brokerage Group (DBG) Issues
|
(34 | ) | 77 | | | 43 | |||||||||||||||||
All Other Adjustments Net
|
7 | 2 | 2 | (47 | ) | (36 | ) | ||||||||||||||||
Total Additional Adjustments in the Second
Restatement
|
(27 | ) | 79 | 2 | (47 | ) | 7 | ||||||||||||||||
Revenues, as Restated in the Second Restatement
|
$ | 32,154 | $ | 9,141 | $ | 3 | $ | 6,013 | $ | 47,311 | |||||||||||||
15
2. |
Restatement of Previously Issued Financial Statements (continued) |
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, 2005 | Incurred Policy | Insurance Acquisition and | Total Benefits | ||||||||||||
(in millions) (unaudited) | Losses and Benefits | Other Operating Expenses | and Expenses | ||||||||||||
As Previously Reported
|
$ | 29,201 | $ | 13,534 | $ | 42,735 | |||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| (116 | ) | (116 | ) | ||||||||||
Manufacturers Payments Received by ILFC
|
| 228 | 228 | ||||||||||||
All Other Adjustments Net
|
(39 | ) | (61 | ) | (100 | ) | |||||||||
Total Initial Adjustments in the Second
Restatement
|
(39 | ) | 51 | 12 | |||||||||||
Revenues, as Restated in the Initial Adjustments
|
29,162 | 13,585 | 42,747 | ||||||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||||||
Asset Realization:
|
|||||||||||||||
Domestic Brokerage Group (DBG) Issues
|
(6 | ) | 12 | 6 | |||||||||||
All Other Adjustments Net
|
| 2 | 2 | ||||||||||||
Total Additional Adjustments in the Second
Restatement
|
(6 | ) | 14 | 8 | |||||||||||
Revenues, as Restated in the Second Restatement
|
$ | 29,156 | $ | 13,599 | $ | 42,755 | |||||||||
16
2. |
Restatement of Previously Issued Financial Statements (continued) |
For the Six Months Ended June 30, 2004 | Incurred Policy | Insurance Acquisition and | Total Benefits | ||||||||||||
(in millions) (unaudited) | Losses and Benefits | Other Operating Expenses | and Expenses | ||||||||||||
As Previously Reported
|
$ | 27,275 | $ | 11,491 | $ | 38,766 | |||||||||
Adjustments in the First Restatement:
|
|||||||||||||||
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 in the First Restatement
|
(174 | ) | 376 | 202 | |||||||||||
As Adjusted in the First Restatement
|
27,101 | 11,867 | 38,968 | ||||||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| (155 | ) | (155 | ) | ||||||||||
Manufacturers Payments Received by ILFC
|
| (22 | ) | (22 | ) | ||||||||||
All Other Adjustments Net
|
6 | 6 | 12 | ||||||||||||
Total Initial Adjustments in the Second
Restatement
|
6 | (171 | ) | (165 | ) | ||||||||||
Benefits and Expenses, as Restated in the Initial
Adjustments
|
27,107 | 11,696 | 38,803 | ||||||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||||||
Asset Realization:
|
|||||||||||||||
Domestic Brokerage Group (DBG) Issues
|
(36 | ) | 51 | 15 | |||||||||||
All Other Adjustments Net
|
(1 | ) | 3 | 2 | |||||||||||
Total Additional Adjustments in the Second
Restatement
|
(37 | ) | 54 | 17 | |||||||||||
Benefits and Expenses, as Restated in the Second
Restatement
|
$ | 27,070 | $ | 11,750 | $ | 38,820 | |||||||||
17
2. |
Restatement of Previously Issued Financial Statements (continued) |
The following table reflects the effect of the aforementioned adjustments on income taxes:
For the Six Months Ended June 30, | |||||||||||
(in millions) (unaudited) | 2005 | 2004 | |||||||||
Income Taxes, as Previously Reported
|
$ | 3,287 | $ | 2,757 | |||||||
Adjustments in the First Restatement:
|
|||||||||||
Risk Transfer:
|
|||||||||||
Union Excess
|
| (21 | ) | ||||||||
Other Risk Transfer
|
| (15 | ) | ||||||||
Loss Reserves
|
| (32 | ) | ||||||||
Net Investment Income:
|
|||||||||||
Covered Calls
|
| 21 | |||||||||
Synthetic Fuel Investment
|
| (233 | ) | ||||||||
Top Level Adjustments and Other
Directed Entries (other than loss reserves)
|
| 22 | |||||||||
Asset Realization:
|
|||||||||||
Domestic Brokerage Group (DBG) Issues
|
| 17 | |||||||||
Other Than Temporary Declines
|
| 14 | |||||||||
Other GAAP Corrections:
|
|||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| (115 | ) | ||||||||
Accounting for Deferred Taxes
|
| (14 | ) | ||||||||
Foreign Currency Translation (FAS 52)
|
| (9 | ) | ||||||||
Life Settlements
|
| (36 | ) | ||||||||
Deferred Acquisition Costs (DAC)
|
| (7 | ) | ||||||||
All Other Adjustments Net
|
| 38 | |||||||||
Total Adjustments in the First Restatement
|
| (370 | ) | ||||||||
Income Taxes, as Adjusted in the First Restatement
|
3,287 | 2,387 | |||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||
Income Tax Accounting
|
135 | 10 | |||||||||
All Other Adjustments Net
|
431 | 176 | |||||||||
Total Initial Adjustments in the Second
Restatement
|
566 | 186 | |||||||||
Income Taxes, as Restated in the Initial
Adjustments
|
3,853 | 2,573 | |||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||
Income Tax Accounting
|
(46 | ) | 28 | ||||||||
All Other Adjustments Net
|
(18 | ) | (7 | ) | |||||||
Total Additional Adjustments in the Second
Restatement
|
(64 | ) | 21 | ||||||||
Income Taxes, as Restated in the Second
Restatement
|
$ | 3,789 | $ | 2,594 | |||||||
18
2. |
Restatement of Previously Issued Financial Statements (continued) |
The following two tables reflect the effect of the aforementioned adjustments on each component of revenue:
For the Three Months Ended June 30, 2005 | Premiums and | Net Investment | Realized Capital | Other | Total | ||||||||||||||||||
(in millions) (unaudited) | Other Considerations | Income | Gains (Losses) | Revenues | Revenues | ||||||||||||||||||
As Previously Reported
|
$ | 17,541 | $ | 5,198 | $ | 245 | $ | 3,877 | $ | 26,861 | |||||||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||||||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| 5 | (305 | ) | 645 | 345 | |||||||||||||||||
Manufacturers Payments Received by ILFC
|
| | | 755 | 755 | ||||||||||||||||||
All Other Adjustments Net
|
3 | 15 | 6 | | 24 | ||||||||||||||||||
Total Initial Adjustments in the Second
Restatement
|
3 | 20 | (299 | ) | 1,400 | 1,124 | |||||||||||||||||
Revenues, as Restated in the Initial Adjustments
|
17,544 | 5,218 | (54 | ) | 5,277 | 27,985 | |||||||||||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||||||||||||||
Asset Realization:
|
|||||||||||||||||||||||
Domestic Brokerage Group (DBG) Issues
|
(7 | ) | 34 | | | 27 | |||||||||||||||||
All Other Adjustments Net
|
(1 | ) | (25 | ) | (71 | ) | (12 | ) | (109 | ) | |||||||||||||
Total Additional Adjustments in the Second
Restatement
|
(8 | ) | 9 | (71 | ) | (12 | ) | (82 | ) | ||||||||||||||
Revenues, as Restated in the Second Restatement
|
$ | 17,536 | $ | 5,227 | $ | (125 | ) | $ | 5,265 | $ | 27,903 | ||||||||||||
19
2. |
Restatement of Previously Issued Financial Statements (continued) |
Premiums and | Net | Realized | |||||||||||||||||||||
For the Three Months Ended June 30, 2004 | Other | Investment | Capital | Other | Total | ||||||||||||||||||
(in millions) (unaudited) | Considerations | Income | Gains (Losses) | Revenues | Revenues | ||||||||||||||||||
As Previously Reported
|
$ | 16,321 | $ | 4,656 | $ | (143 | ) | $ | 2,975 | $ | 23,809 | ||||||||||||
Adjustments in the First Restatement:
|
|||||||||||||||||||||||
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 in the First Restatement
|
(125 | ) | (165 | ) | 2 | (16 | ) | (304 | ) | ||||||||||||||
As Adjusted in the First Restatement
|
16,196 | 4,491 | (141 | ) | 2,959 | 23,505 | |||||||||||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||||||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| | 222 | 390 | 612 | ||||||||||||||||||
Manufacturers Payments Received by ILFC
|
| | | (32 | ) | (32 | ) | ||||||||||||||||
All Other Adjustments Net
|
1 | (2 | ) | | 2 | 1 | |||||||||||||||||
Total Initial Adjustments in the Second
Restatement
|
1 | (2 | ) | 222 | 360 | 581 | |||||||||||||||||
Revenues, as Restated in the Initial Adjustments
|
16,197 | 4,489 | 81 | 3,319 | 24,086 | ||||||||||||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||||||||||||||
Asset Realization:
|
|||||||||||||||||||||||
Domestic Brokerage Group (DBG) Issues
|
(27 | ) | 51 | | | 24 | |||||||||||||||||
All Other Adjustments Net
|
5 | 1 | 8 | (35 | ) | (21 | ) | ||||||||||||||||
Total Additional Adjustments in the Second
Restatement
|
(22 | ) | 52 | 8 | (35 | ) | 3 | ||||||||||||||||
Revenues, as Restated in the Second Restatement
|
$ | 16,175 | $ | 4,541 | $ | 89 | $ | 3,284 | $ | 24,089 | |||||||||||||
20
2. |
Restatement of Previously Issued Financial Statements (continued) |
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, 2005 | Incurred Policy | Insurance Acquisition and | Total Benefits | ||||||||||||
(in millions) (unaudited) | Losses and Benefits | Other Operating Expenses | and Expenses | ||||||||||||
As Previously Reported
|
$ | 14,336 | $ | 6,730 | $ | 21,066 | |||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| (51 | ) | (51 | ) | ||||||||||
Manufacturers Payments Received by ILFC
|
| 240 | 240 | ||||||||||||
All Other Adjustments Net
|
(42 | ) | (12 | ) | (54 | ) | |||||||||
Total Initial Adjustments in the Second
Restatement
|
(42 | ) | 177 | 135 | |||||||||||
Benefits and Expenses, as Restated in the Initial
Adjustments
|
14,294 | 6,907 | 21,201 | ||||||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||||||
Asset Realization:
|
|||||||||||||||
Domestic Brokerage Group (DBG) Issues
|
(7 | ) | 11 | 4 | |||||||||||
All Other Adjustments Net
|
(4 | ) | 1 | (3 | ) | ||||||||||
Total Additional Adjustments in the Second
Restatement
|
(11 | ) | 12 | 1 | |||||||||||
Benefits and Expenses, as Restated in the Second
Restatement
|
$ | 14,283 | $ | 6,919 | $ | 21,202 | |||||||||
For the Three Months Ended June 30, 2004 | Incurred Policy | Insurance Acquisition and | Total Benefits | ||||||||||||
(in millions) (unaudited) | Losses and Benefits | Other Operating Expenses | and Expenses | ||||||||||||
As Previously Reported
|
$ | 13,541 | $ | 5,879 | $ | 19,420 | |||||||||
Adjustments in the First Restatement:
|
|||||||||||||||
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 in the First Restatement
|
(37 | ) | 149 | 112 | |||||||||||
As Adjusted in the First Restatement
|
13,504 | 6,028 | 19,532 | ||||||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| (89 | ) | (89 | ) | ||||||||||
Manufacturers Payments Received by ILFC
|
| (11 | ) | (11 | ) | ||||||||||
All Other Adjustments Net
|
4 | 5 | 9 | ||||||||||||
Total Initial Adjustments in the Second
Restatement
|
4 | (95 | ) | (91 | ) | ||||||||||
Benefits and Expenses, as Restated in the Initial
Adjustments
|
13,508 | 5,933 | 19,441 | ||||||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||||||
Asset Realization:
|
|||||||||||||||
Domestic Brokerage Group (DBG) Issues
|
(29 | ) | 25 | (4 | ) | ||||||||||
All Other Adjustments Net
|
1 | 2 | 3 | ||||||||||||
Total Additional Adjustments in the Second
Restatement
|
(28 | ) | 27 | (1 | ) | ||||||||||
Benefits and Expenses, as Restated in the Second
Restatement
|
$ | 13,480 | $ | 5,960 | $ | 19,440 | |||||||||
21
2. |
Restatement of Previously Issued Financial Statements (continued) |
The following table reflects the effect of the aforementioned adjustments on income taxes:
For the Three Months Ended June 30, | |||||||||||
(in millions) (unaudited) | 2005 | 2004 | |||||||||
Income Taxes, as Previously Reported
|
$ | 1,674 | $ | 1,401 | |||||||
Adjustments in the First Restatement:
|
|||||||||||
Risk Transfer:
|
|||||||||||
Union Excess
|
| (10 | ) | ||||||||
Other Risk Transfer
|
| (17 | ) | ||||||||
Loss Reserves
|
| (11 | ) | ||||||||
Net Investment Income:
|
|||||||||||
Covered Calls
|
| 11 | |||||||||
Synthetic Fuel Investment
|
| (118 | ) | ||||||||
Top Level Adjustments and Other
Directed Entries (other than loss reserves)
|
| 14 | |||||||||
Asset Realization:
|
|||||||||||
Domestic Brokerage Group (DBG) Issues
|
| 12 | |||||||||
Other GAAP Corrections:
|
|||||||||||
Accounting for Derivatives (FAS 133 Hedge
Accounting)
|
| (66 | ) | ||||||||
Accounting for Deferred Taxes
|
| (10 | ) | ||||||||
Foreign Currency Translation (FAS 52)
|
| 17 | |||||||||
Life Settlements
|
| (16 | ) | ||||||||
Deferred Acquisition Costs (DAC)
|
| 2 | |||||||||
All Other Adjustments Net
|
| 9 | |||||||||
Total Adjustments in the First Restatement
|
| (183 | ) | ||||||||
Income Taxes, as Adjusted in the First Restatement
|
1,674 | 1,218 | |||||||||
Initial Adjustments in the Second Restatement:
|
|||||||||||
Income Tax Accounting
|
99 | 5 | |||||||||
All Other Adjustments Net
|
366 | 227 | |||||||||
Total Initial Adjustments in the Second
Restatement
|
465 | 232 | |||||||||
Income Taxes, as Restated in the Initial
Adjustments
|
2,139 | 1,450 | |||||||||
Additional Adjustments in the Second Restatement:
|
|||||||||||
Income Tax Accounting
|
(22 | ) | 15 | ||||||||
All Other Adjustments Net
|
(34 | ) | (1 | ) | |||||||
Total Additional Adjustments in the Second
Restatement
|
(56 | ) | 14 | ||||||||
Income Taxes, as Restated in the Second
Restatement
|
$ | 2,083 | $ | 1,464 | |||||||
22
3. | Segment Information |
The following table summarizes the operations by major operating segment for the six months and quarter ended June 30, 2005 and 2004:
Six Months | Three Months | ||||||||||||||||
Ended June 30, | Ended June 30, | ||||||||||||||||
Operating Segments | 2005 | 2004 | 2005 | 2004 | |||||||||||||
(in millions) (unaudited) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
Revenues(a):
|
|||||||||||||||||
General Insurance(b)
|
$ | 22,624 | $ | 20,331 | $ | 11,405 | $ | 10,234 | |||||||||
Life Insurance & Retirement
Services(c)
|
23,292 | 21,280 | 11,517 | 10,795 | |||||||||||||
Financial Services(d)
|
6,214 | 3,473 | 3,778 | 1,659 | |||||||||||||
Asset Management(e)
|
2,596 | 2,254 | 1,219 | 1,204 | |||||||||||||
Other
|
379 | (27 | ) | (16 | ) | 197 | |||||||||||
Consolidated
|
$ | 55,105 | $ | 47,311 | $ | 27,903 | $ | 24,089 | |||||||||
Operating income(a)(f):
|
|||||||||||||||||
General Insurance
|
$ | 3,527 | $ | 2,914 | $ | 1,885 | $ | 1,472 | |||||||||
Life Insurance & Retirement Services
|
4,505 | 4,068 | 2,324 | 2,319 | |||||||||||||
Financial Services
|
3,259 | 899 | 2,214 | 315 | |||||||||||||
Asset Management
|
1,114 | 965 | 524 | 529 | |||||||||||||
Other(g)
|
(55 | ) | (355 | ) | (246 | ) | 14 | ||||||||||
Consolidated
|
$ | 12,350 | $ | 8,491 | $ | 6,701 | $ | 4,649 | |||||||||
(a) | Revenues and operating income reflect changes in market or estimated fair value associated with hedging activities that do not qualify for hedge accounting pursuant to FAS 133. |
(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 AIGs General Insurance operations by major internal reporting unit for the six months and quarter ended June 30, 2005 and 2004:
Six Months | Three Months | ||||||||||||||||
Ended June 30, | Ended June 30, | ||||||||||||||||
General Insurance | 2005 | 2004 | 2005 | 2004 | |||||||||||||
(in millions) (unaudited) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
Revenues:
|
|||||||||||||||||
Domestic Brokerage Group
|
$ | 12,530 | $ | 11,108 | $ | 6,241 | $ | 5,577 | |||||||||
Transatlantic
|
1,930 | 1,944 | 948 | 971 | |||||||||||||
Personal Lines
|
2,380 | 2,197 | 1,209 | 1,109 | |||||||||||||
Mortgage Guaranty
|
342 | 319 | 173 | 157 | |||||||||||||
Foreign General
|
5,437 | 4,747 | 2,835 | 2,410 | |||||||||||||
Reclassifications, Eliminations and Other
|
5 | 16 | (1 | ) | 10 | ||||||||||||
Total General Insurance
|
$ | 22,624 | $ | 20,331 | $ | 11,405 | $ | 10,234 | |||||||||
Operating Income:
|
|||||||||||||||||
Domestic Brokerage
Group
|
$ | 1,518 | (a)(b) | $ | 1,126 | $ | 805 | (b) | $ | 570 | |||||||
Transatlantic
|
213 | 231 | 99 | 114 | |||||||||||||
Personal Lines
|
211 | 195 | 102 | 99 | |||||||||||||
Mortgage Guaranty
|
213 | 212 | 109 | 116 | |||||||||||||
Foreign General
|
1,367 | 1,134 | 771 | 563 | |||||||||||||
Reclassifications, Eliminations and Other
|
5 | 16 | (1 | ) | 10 | ||||||||||||
Total General Insurance
|
$ | 3,527 | $ | 2,914 | $ | 1,885 | $ | 1,472 | |||||||||
(a) | Includes $118 million of additional losses incurred resulting from increased labor and material costs related to the 2004 Florida hurricanes. |
(b) | Includes $100 million accrual in the second quarter of 2005 to cover current estimate of the liability relating to policies of workers compensation insurance written between 1985 and 1996. |
23
3. | Segment Information (continued) |
The following table summarizes AIGs Life Insurance & Retirement Services operations by major internal reporting unit for the six months and quarter ended June 30, 2005 and 2004:
Six Months | Three Months | |||||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||||
Life Insurance & Retirement Services | 2005 | 2004 | 2005 | 2004 | ||||||||||||||
(in millions) (unaudited) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||
Revenues(a):
|
||||||||||||||||||
Foreign:
|
||||||||||||||||||
AIA, AIRCO and Nan Shan(b)
|
$ | 7,924 | $ | 7,526 | $ | 3,858 | $ | 3,751 | ||||||||||
ALICO, AIG Star Life and AIG Edison
Life(c)
|
7,128 | 5,925 | 3,609 | 3,160 | ||||||||||||||
Philamlife and Other
|
257 | 229 | 127 | 112 | ||||||||||||||
Domestic:
|
||||||||||||||||||
AGLA and AG Life(d)
|
4,502 | 4,431 | 2,114 | 2,309 | ||||||||||||||
VALIC, AIG Annuity and AIG
SunAmerica(e)
|
3,481 | 3,169 | 1,809 | 1,463 | ||||||||||||||
Total Life Insurance & Retirement
Services
|
$ | 23,292 | $ | 21,280 | $ | 11,517 | $ | 10,795 | ||||||||||
Operating Income:
|
||||||||||||||||||
Foreign:
|
||||||||||||||||||
AIA, AIRCO and Nan Shan(b)
|
$ | 1,237 | $ | 1,239 | $ | 649 | $ | 712 | ||||||||||
ALICO, AIG Star Life and AIG Edison
Life(c)
|
1,394 | 1,073 | 798 | 793 | ||||||||||||||
Philamlife and Other
|
33 | 43 | 17 | 15 | ||||||||||||||
Domestic:
|
||||||||||||||||||
AGLA and AG Life(d)
|
706 | 733 | 240 | 450 | ||||||||||||||
VALIC, AIG Annuity and AIG
SunAmerica(e)
|
1,135 | 980 | 620 | 349 | ||||||||||||||
Total Life Insurance & Retirement
Services
|
$ | 4,505 | $ | 4,068 | $ | 2,324 | $ | 2,319 | ||||||||||
(a) | Represents the sum of Life Insurance & Retirement Services GAAP premiums, net investment income and realized capital gains (losses). |
(b) | Represents the operations of American International Assurance Company, Limited together with American International Assurance Company (Bermuda) Limited (AIA), American International Reinsurance Company, Ltd. (AIRCO), and Nan Shan Life Insurance Company, Ltd. (Nan Shan). |
(c) | Represents the operations of American Life Insurance Company (ALICO), AIG Star Life Insurance Co., Ltd. (AIG Star Life), and AIG Edison Life Insurance Company (AIG Edison Life). |
(d) | AG Life includes the life operations of AIG Life Insurance Company and American International Life Assurance Company of New York. Also includes the operations of American General Life and Accident Insurance Company (AGLA). |
(e) | 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. Also includes the operations of The Variable Annuity Life Insurance Company (VALIC) and AIG Annuity Insurance Company (AIG Annuity). |
24
3. | Segment Information (continued) |
The following table summarizes AIGs Financial Services operations by major internal reporting unit for the six months and quarter ended June 30, 2005 and 2004:
Six Months | Three Months | ||||||||||||||||
Ended June 30, | Ended June 30, | ||||||||||||||||
Financial Services | |||||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | |||||||||||||
(unaudited) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
Revenues(a):
|
|||||||||||||||||
Aircraft Finance(b)
|
$ | 1,718 | $ | 1,512 | $ | 891 | $ | 778 | |||||||||
Capital Markets(c)(d)
|
2,731 | 492 | 1,975 | 131 | |||||||||||||
Consumer Finance(e)
|
1,724 | 1,416 | 891 | 723 | |||||||||||||
Other
|
41 | 53 | 21 | 27 | |||||||||||||
Total Financial Services
|
$ | 6,214 | $ | 3,473 | $ | 3,778 | $ | 1,659 | |||||||||
Operating income(loss)(a): | |||||||||||||||||
Aircraft Finance
|
$ | 311 | $ | 303 | $ | 124 | $ | 131 | |||||||||
Capital Markets(d)
|
2,456 | 177 | 1,836 | (37 | ) | ||||||||||||
Consumer Finance
|
479 | 385 | 248 | 202 | |||||||||||||
Other
|
13 | 34 | 6 | 19 | |||||||||||||
Total Financial Services
|
$ | 3,259 | $ | 899 | $ | 2,214 | $ | 315 | |||||||||
(a) | Includes the effect of hedging activities that do not qualify 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, 2005 and 2004, the effect was $(49) million and $(64) million, and $(11) million and $(31) million, respectively, in operating income for Aircraft Finance and $2.16 billion and $1.70 billion, and $(151) million and $(234) million in both revenues and operating income, respectively, for Capital Markets (AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries). |
(b) | Revenues were primarily from ILFC aircraft lease rentals. |
(c) | Revenues, shown net of interest expense, are primarily from hedging activities that do not qualify for hedge accounting treatment under FAS 133 described in (a) above. |
(d) | Certain transactions entered into by AIGFP generate tax credits and benefits which are included in income taxes on the consolidated statement of income. The amount of such tax credits and benefits for the first six months and second quarter ended June 30, 2005 and 2004 are $40 million and $21 million, and $64 million and $29 million, respectively. |
(e) | Revenues were primarily finance charges. |
The following table summarizes AIGs Asset Management revenues and operating income for the six months and quarter ended June 30, 2005 and 2004:
Six Months | Three Months | ||||||||||||||||
Ended June 30, | Ended June 30, | ||||||||||||||||
Asset Management | |||||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | |||||||||||||
(unaudited) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
Revenues:
|
|||||||||||||||||
Guaranteed investment contracts
|
$ | 1,799 | $ | 1,517 | $ | 903 | $ | 780 | |||||||||
Institutional Asset Management
|
497 | 481 | 178 | 294 | |||||||||||||
Brokerage Services and Mutual Funds
|
125 | 123 | 62 | 62 | |||||||||||||
Other
|
175 | 133 | 76 | 68 | |||||||||||||
Total Asset Management
|
$ | 2,596 | $ | 2,254 | $ | 1,219 | $ | 1,204 | |||||||||
Operating income:
|
|||||||||||||||||
Guaranteed investment
contracts(a)
|
$ | 645 | $ | 654 | $ | 326 | $ | 359 | |||||||||
Institutional Asset
Management(b)
|
269 | 146 | 108 | 87 | |||||||||||||
Brokerage Services and Mutual Funds
|
30 | 37 | 17 | 17 | |||||||||||||
Other
|
170 | 128 | 73 | 66 | |||||||||||||
Total Asset Management
|
$ | 1,114 | $ | 965 | $ | 524 | $ | 529 | |||||||||
(a) | The effect of hedging activities that do not qualify for hedge accounting treatment under FAS 133 was $109 million and $151 million for the first six months of 2005 and 2004, respectively, and $47 million and $87 million for the second quarter of 2005 and 2004, respectively. |
(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 ended June 30, 2005 and 2004, operating income includes $112 million and $37 million, and $32 million and $28 million, respectively, of third-party limited partner earnings offset as an expense in Minority interest. |
25
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, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(in millions, except per share data) (unaudited) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
Numerator for basic earnings per
share:
|
|||||||||||||||||
Income before cumulative effect of an accounting
change
|
$ | 8,288 | $ | 5,722 | $ | 4,489 | $ | 3,080 | |||||||||
Cumulative effect of an accounting change, net of
tax
|
| (144 | ) | | | ||||||||||||
Net income applicable to common stock
|
$ | 8,288 | $ | 5,578 | $ | 4,489 | $ | 3,080 | |||||||||
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
|
(156 | ) | (143 | ) | (156 | ) | (144 | ) | |||||||||
Average shares outstanding basic
|
2,596 | 2,609 | 2,596 | 2,608 | |||||||||||||
Numerator for diluted earnings per
share:
|
|||||||||||||||||
Income before cumulative effect of an accounting
change
|
$ | 8,288 | $ | 5,722 | $ | 4,489 | $ | 3,080 | |||||||||
Cumulative effect of an accounting change, net of
tax
|
| (144 | ) | | | ||||||||||||
Net income applicable to common stock
|
8,288 | 5,578 | 4,489 | 3,080 | |||||||||||||
Interest on contingently convertible bonds, net
of tax(a)
|
5 | 6 | 2 | 3 | |||||||||||||
Adjusted net income applicable to common
stock(a)
|
$ | 8,293 | $ | 5,584 | $ | 4,491 | $ | 3,083 | |||||||||
Denominator for diluted earnings per
share:
|
|||||||||||||||||
Average shares outstanding
|
2,596 | 2,609 | 2,596 | 2,608 | |||||||||||||
Incremental shares from potential common stock:
|
|||||||||||||||||
Average number of shares arising from outstanding
employee stock plans (treasury stock method)(b)
|
18 | 23 | 18 | 23 | |||||||||||||
Contingently convertible
bonds(a)
|
9 | 9 | 9 | 9 | |||||||||||||
Adjusted average shares outstanding
diluted(a)
|
2,623 | 2,641 | 2,623 | 2,640 | |||||||||||||
26
4. | Earnings Per Share (continued) |
Six Months | Three Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(in millions, except per share data) (unaudited) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||
Earnings per share:
|
||||||||||||||||
Basic:
|
||||||||||||||||
Income before cumulative effect of an accounting
change
|
$ | 3.19 | $ | 2.20 | $ | 1.73 | $ | 1.19 | ||||||||
Cumulative effect of an accounting change, net of
tax
|
| (0.06 | ) | | | |||||||||||
Net income
|
$ | 3.19 | $ | 2.14 | $ | 1.73 | $ | 1.19 | ||||||||
Diluted:
|
||||||||||||||||
Income before cumulative effect of an accounting
change
|
$ | 3.16 | $ | 2.17 | $ | 1.71 | $ | 1.17 | ||||||||
Cumulative effect of an accounting change, net of
tax
|
| (0.06 | ) | | | |||||||||||
Net income
|
$ | 3.16 | $ | 2.11 | $ | 1.71 | $ | 1.17 | ||||||||
(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 23 million and 8 million for the first six months of 2005 and 2004, 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 expense that would have been recognized if the fair value based method had been applied to all the awards vesting was approximately $0.01 per share for the first six months of 2005 and 2004, and less than $0.005 per share for the second quarter of 2005 and 2004.
The quarterly dividend rate per common share, commencing with the dividend paid March 18, 2005 is $0.125.
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.
Participation in the SICO Plans by any person, and the amount of such participation, was at the sole discretion of SICOs Board of Directors. None of the costs of the various benefits provided under the SICO Plans have been paid by AIG, although AIG has recorded a charge to reported earnings 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 participants voluntary termination of employment with AIG prior to normal retirement age. In addition, SICOs Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock. See also Note 7(f) herein.
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 $67 million and $28 million for the six months ended June 30, 2005 and 2004, respectively.
6. | Ownership and Transactions With Related Parties |
(a) Ownership: C.V. Starr & Co., Inc. (Starr), a private holding company, The Starr Foundation, and SICO, a private holding company, owned in the aggregate approximately 16 percent of the voting stock of AIG at June 30, 2005. Five directors of AIG served as directors of Starr and SICO as of December 31, 2004. Since June 8, 2005, no director of AIG has served as a director of Starr or SICO.
27
6. | Ownership and Transactions With Related Parties (continued) |
(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, 2005.
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 AIGs derivative activity is transacted by AIGs Capital Markets operations, comprised of AIG Financial Products Corp. and AIG Trading Group Inc. and their subsidiaries (AIGFP). See also Note 20 in AIGs 2005 Annual Report on Form 10-K.
(b) Securities sold, but not yet purchased and spot commodities sold but not yet purchased represent obligations of AIGFP to deliver specified securities and spot commodities at their contracted prices. AIGFP 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, 2005 and 2004 from Capital Markets operations were $2.73 billion and $492 million, respectively.
(c) At June 30, 2005, ILFC had committed to purchase 310 new and used aircraft deliverable from 2005 through 2010 at an estimated aggregate purchase price of $20.2 billion and had options to purchase 12 new aircraft deliverable through 2009 at an estimated aggregate purchase price of $988 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 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 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 AIGs future operating results. The reserves carried for these claims at June 30, 2005 ($3.41 billion gross; $1.45 billion net) are believed to be adequate as these reserves are based on known facts and current law.
(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) 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 Starrs organizational documents. In January 2006, Starr announced that it had completed its tender offer to purchase interests in Starr and that all eligible shareholders had tendered their shares. As a result of completion of the tender offer, no executive currently holds any Starr interests.
(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 deriva-
28
7. | Commitments and Contingent Liabilities (continued) |
tive 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 USLIFEs 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 $353 million as of June 30, 2005.
(i) Regulators from several states have commenced investigations into insurance brokerage practices related to contingent commissions and other broker-related conduct, such as alleged bid rigging. 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 2006, AIG reached a resolution of claims and matters under investigation with the United States Department of Justice (DOJ), the Securities and Exchange Commission (SEC), the Office of the New York Attorney General (NYAG) and the New York State Department of Insurance (DOI). The settlements resolved outstanding litigation filed by the SEC, NYAG and DOI against AIG and concluded negotiations with these authorities and the DOJ in connection with the accounting, financial reporting and insurance brokerage practices of AIG and its subsidiaries, as well as claims relating to the underpayment of certain workers compensation premium taxes and other assessments. The 2005 financial statements include a fourth quarter after-tax charge of $1.15 billion to record the settlements.
As a result of these settlements, AIG made payments totaling approximately $1.64 billion, $225 million of which represented fines and penalties. A substantial portion of the money will be available to resolve claims asserted in various regulatory and civil proceedings, including shareholder lawsuits.
Also, as part of the settlements, AIG has agreed to retain for a period of three years an independent consultant who will conduct a review that will include the adequacy of AIGs internal control over financial reporting and the remediation plan that AIG has implemented as a result of its own internal review.
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 has cooperated, and will continue to cooperate, in producing documents and other information in response to the subpoenas.
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 United States District Court for the Southern District of New York (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
29
7. | Commitments and Contingent Liabilities (continued) |
scheme to rig bids and steer business between insurance companies and insurance brokers.
Since October 19, 2004, AIG or its subsidiaries have been named as a defendant in fifteen 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 use of contingent commission agreements, bidding practices, and other broker-related conduct concerning coverage in certain sectors of the insurance industry. The Judicial Panel on Multidistrict Litigation entered an order on February 17, 2005, consolidating most of these cases and transferring them to the United States District Court for the District of New Jersey (District of New Jersey). The remainder of these cases have been transferred to the District of New Jersey. On August 15, 2005, the plaintiffs in the multidistrict litigation filed a Corrected 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 15, 2005, AIG and two subsidiaries were named as defendants in a Corrected First Consolidated Amended Employee Benefits Class Action Complaint filed in the District of New Jersey, which asserts similar claims with respect to employee benefits insurance and a claim under ERISA on behalf of putative classes of employers and employees. On November 29, 2005, the AIG defendants, along with other insurer defendants and the broker defendants filed motions to dismiss both the Commercial and Employee Benefits Complaints. Plaintiffs have filed a motion for class certification in the consolidated action. In addition, complaints were filed against AIG and several of its subsidiaries in Massachusetts and Florida state courts, which have both been stayed. In the Florida action, the plaintiff has filed a petition for a writ of certiorari with the District Court of Appeals of the State of Florida, Fourth District with respect to the stay order. On February 9, 2006, a complaint against AIG and several of its subsidiaries was filed in Texas state court, making claims similar to those in the federal cases above.
In April and May 2005, amended complaints were filed in the consolidated derivative and securities cases, as well as in one of the ERISA lawsuits, pending in the Southern District of New York adding allegations concerning AIGs accounting treatment for non-traditional insurance products. In September 2005, a second amended complaint was filed in the consolidated securities cases adding allegations concerning AIGs First Restatement. Also in September 2005, a new securities action complaint was filed in the Southern District of New York, asserting claims premised on the same allegations made in the consolidated cases. Motions to dismiss have been filed in the securities actions. In September 2005, a consolidated complaint was filed in the ERISA case pending in the Southern District of New York. Motions to dismiss have been filed in that ERISA case. Also in April 2005, new derivative actions were filed in Delaware Chancery Court, and in July and August 2005, two new derivative actions were filed in the Southern District of New York asserting claims duplicative of the claims made in the consolidated derivative action.
In July 2005, a second amended complaint was filed in the consolidated derivative case in the Southern District of New York, expanding upon accounting-related allegations, based upon the First Restatement and, in August 2005, an amended consolidated complaint was filed. In June 2005, the derivative cases in Delaware were consolidated. AIGs Board of Directors has appointed a special committee of independent directors to review the matters asserted in the derivative complaints. The courts have approved agreements staying the derivative cases pending in the Southern District of New York and in Delaware Chancery Court while the special committee of independent directors performs its work. In September 2005, a shareholder filed suit in Delaware Chancery Court seeking documents relating to some of the allegations made in the derivative suits. AIG filed a motion to dismiss in October 2005.
In late 2002, a derivative action was filed in Delaware Chancery Court in connection with AIGs transactions with certain entities affiliated with Starr and SICO. In May 2005, the plaintiff filed an amended complaint which adds additional claims premised on allegations relating to insurance brokerage practices and AIGs non-traditional insurance products. Plaintiffs in that case have agreed to dismiss newly added allegations unrelated to transactions with entities affiliated with Starr and SICO without prejudice to pursuit of these claims in the separate derivative actions described above. On February 16, 2006, the Delaware Chancery Court entered an order dismissing the litigation with prejudice with respect to AIGs outside directors and dismissing the claims against the remaining AIG defendants without prejudice.
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 AIGs financial statements at this time. In the opinion of AIG management, AIGs ultimate liability for the matters referred to above is not likely to have a material adverse effect on AIGs consolidated financial condition, although it is possible that the effect would be material to AIGs consolidated results of operations for an individual reporting period.
30
7. | Commitments and Contingent Liabilities (continued) |
(j) On July 8, 2005, SICO filed a complaint against AIG 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 order causing AIG to release those items as well as actual, consequential, punitive and exemplary damages. On September 27, 2005, AIG filed its answer to SICOs complaint denying SICOs allegations and asserting counter-claims for breach of contract, unjust enrichment, conversion and breach of fiduciary duty relating to SICOs breach of its commitment to use its AIG shares for the benefit of AIG and its employees. On October 17, 2005, SICO replied to AIGs counter-claims and additionally sought a judgment declaring that SICO is neither a control person nor an affiliate of AIG for purposes of Schedule 13D under the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 144 under the Securities Act of 1933, as amended (the Securities Act), respectively. AIG responded to the SICO claims and sought a dismissal of SICOs claims on November 7, 2005.
(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 field agents subsequently conceded that one of the facilities was timely placed in service, but they contend that none of the other underlying production facilities were placed in service by the statutory deadline. On October 3, 2005, IRS field agents issued 60-day letters to the LLCs proposing to disallow the tax credits taken with respect to synfuel sales by the remaining five production facilities. By letters dated February 17, 2006, the IRS field agents have advised the LLCs that they have, after further review, concluded that all six production facilities were placed in service before July 1, 1998 and that they will withdraw the 60-day letters issued to the LLCs.
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 years 2006 and 2007 (the final year the tax credits are available), AIG does not expect the phase-out provision 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) AIG understands that some of its employees have received Wells notices in connection with previously disclosed SEC investigations of certain of AIGs transactions or accounting practices. Under SEC procedures, a Wells notice is an indication that the SEC staff has made a preliminary decision to recommend enforcement action that provides recipients with an opportunity to respond to the SEC staff before a formal recommendation is finalized. AIG anticipates that additional current and former employees could receive similar notices in the future as the regulatory investigations proceed.
(m) As a result of pending actions against AIG arising out of the liability of certain Domestic Brokerage Group (DBG) companies for taxes, assessments, and surcharges for policies of workers compensation insurance written between 1985 and 1996, AIG 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.
(n) In August 2005, the Bureau of Labor Insurance in Taiwan began to levy a monthly administrative penalty against Nan Shan for not providing its agency leaders a choice between alternative government pension plans. Nan Shan has reached an agreement with the agency union and the ultimate liability is not material to AIGs consolidated financial condition or results of operations.
31
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 second quarter ended June 30, 2005 and 2004:
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, 2005
|
|||||||||||||||||||||||||
Components of net period benefit cost:
|
|||||||||||||||||||||||||
Service cost
|
$ | 37 | $ | 52 | $ | 89 | $ | 2 | $ | 3 | $ | 5 | |||||||||||||
Interest cost
|
16 | 74 | 90 | 1 | 7 | 8 | |||||||||||||||||||
Expected return on assets
|
(11 | ) | (82 | ) | (93 | ) | | | | ||||||||||||||||
Amortization of prior service cost
|
(5 | ) | (2 | ) | (7 | ) | | (3 | ) | (3 | ) | ||||||||||||||
FAS 88 loss due to settlements
|
3 | | 3 | | | | |||||||||||||||||||
Amortization of transition liability
|
1 | | 1 | | | | |||||||||||||||||||
Recognized actuarial loss
|
11 | 33 | 44 | | 1 | 1 | |||||||||||||||||||
Net period benefit cost
|
$ | 52 | $ | 75 | $ | 127 | $ | 3 | $ | 8 | $ | 11 | |||||||||||||
Three Months Ended June 30,
2005
|
|||||||||||||||||||||||||
Components of net period benefit cost:
|
|||||||||||||||||||||||||
Service cost
|
$ | 19 | $ | 26 | $ | 45 | $ | 1 | $ | 2 | $ | 3 | |||||||||||||
Interest cost
|
8 | 37 | 45 | | 4 | 4 | |||||||||||||||||||
Expected return on assets
|
(5 | ) | (41 | ) | (46 | ) | | | | ||||||||||||||||
Amortization of prior service cost
|
(3 | ) | | (3 | ) | | (2 | ) | (2 | ) | |||||||||||||||
FAS 88 loss due to settlements
|
1 | | 1 | | | | |||||||||||||||||||
Recognized actuarial loss
|
6 | 16 | 22 | | 1 | 1 | |||||||||||||||||||
Net period benefit cost
|
$ | 26 | $ | 38 | $ | 64 | $ | 1 | $ | 5 | $ | 6 | |||||||||||||
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 | |||||||||||||
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 | |||||||||||||
9. | Recent Accounting Standards |
At the March 2004 meeting, the Emerging Issue Task Force (EITF) reached a consensus with respect to Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. On September 30, 2004, the FASB issued FASB Staff Position (FSP) EITF No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments delaying the effective date of this guidance until the FASB has resolved certain implementation issues with respect to this guidance, but the disclosures remain effective. This FSP, retitled FSP FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, replaces the measurement and recognition guidance set forth in Issue No. 03-1 and codifies certain existing guidance on impairment. Adoption of FSP FAS 115-1 is not expected to have a material effect on AIGs financial condition or results of operations.
At the September 2004 meeting, the EITF reached a consensus with respect to Issue No. 04-8, Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share. This Issue addresses when the dilutive effect of contingently convertible debt (Co-Cos) with a market price trigger should be included in diluted earnings per share (EPS). The adoption of Issue No. 04-8 did not have a material effect on AIGs diluted EPS.
In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment (FAS 123R). FAS 123R and its related interpretive guidance replaces FAS No. 123, Accounting for Stock-Based Compensation (FAS 123), and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. FAS 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. On January 1, 2003, AIG adopted the recognition provisions of FAS 123. In April 2005, the Securities
32
9. | Recent Accounting Standards (continued) |
and Exchange Commission (SEC) delayed the effective date for FAS 123R until the first fiscal year beginning after June 15, 2005. As a result, AIG expects to adopt the provisions of the revised FAS 123R and its related interpretive guidance in the first quarter of 2006. For its service-based awards (1999 Stock Option Plan, 2002 Stock Incentive Plan, and 1999 Employee Stock Purchase Plan), AIG recognizes compensation on a straight-line basis over the scheduled vesting period. Upon adoption of FAS 123R, AIG will recognize compensation expense to the scheduled retirement date for employees near retirement. AIG does not expect the effect of this change to be material to AIGs results of operations. Consistent with the requirements of FAS 123R, AIG will recognize the unvested portion of its APB 25 awards as compensation expense over the remaining vesting period.
In December 2005 and January 2006, Starr made tender offers to AIG employees holding Starr common and preferred stock. In conjunction with AIGs adoption of FAS 123R, Starr is considered to be an economic interest holder in AIG. As a result, AIG expects to include the compensation expense related to the 2006 tender offer in its consolidated financial statements for the first quarter of 2006.
AIG is currently assessing the effect of FAS 123R and believes the effect will not be material to AIGs financial condition or results of operations.
On December 16, 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets An Amendment of APB Opinion No. 29 (FAS 153). FAS 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by FAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, APB Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in FAS 153 are effective for nonmonetary asset exchanges beginning July 1, 2005. The adoption of FAS 153 did not have a material effect on AIGs financial condition or results of operations.
In March 2005, the FASB issued FSP FIN46R-5 Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FSP FIN46R-5) to address whether a reporting enterprise has an implicit variable interest in a variable interest entity (VIE) or potential VIE when specific conditions exist. Although implicit variable interests are mentioned in FIN46(R), the term is not defined and only one example is provided. This FSP FIN46R-5 offers additional guidance, stating that implicit variable interests are implied financial interests in an entity that change with changes in the fair value of the entitys net assets exclusive of variable interests. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing and/or receiving of variability indirectly from the entity (rather than directly). The identification of an implicit variable interest is a matter of judgment that depends on the relevant facts and circumstances. FSP FIN46R-5 is effective for the second quarter of 2005. The adoption of FSP FIN 46R-5 did not have a material effect on AIGs financial condition or results of operations.
On June 1, 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (FAS 154). FAS 154 replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. FAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. FAS 154 also provides that a correction of errors in previously issued financial statements should be termed a restatement. The new standard is effective for accounting changes and correction of errors beginning January 1, 2006.
At the June 2005 meeting, the Emerging Issues Task Force (EITF) reached a consensus with respect to Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights The Issue addresses what rights held by the limited partner(s) preclude consolidation in circumstances in which the sole general partner would consolidate the limited partnership in accordance with generally accepted accounting principles absent the existence of the rights held by the limited partner(s). Based on that consensus, the EITF also agreed to amend the consensus in Issue No. 96-16, Investors Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholders Have Certain Approval or Veto Rights. The guidance in this Issue is effective after June 29, 2005 for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified. For general partners in all other limited partnerships, the guidance in this Issue is effective beginning January 1, 2006. The effect of the adoption of this EITF Issue on existing partnerships that were modified and new partnerships entered into after June 29, 2005, was not material to AIGs financial condition or results of operations. For all other partnerships, AIG is currently assessing the effect of adopting this EITF Issue.
On June 29, 2005, FASB issued Statement 133 Implementation Issue No. B38, Embedded Derivatives: Evalua-
33
9. | Recent Accounting Standards (continued) |
tion of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option. This implementation guidance relates to the potential settlement of the debtors obligation to the creditor that would occur upon exercise of the put option or call option, which meets the net settlement criterion in FAS 133 paragraph 9(a). The effective date of the implementation guidance is January 1, 2006. AIG is currently assessing the effect of implementing this guidance.
On June 29, 2005, FASB issued Statement 133 Implementation Issue No. B39, Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor. The conditions in FAS 133 paragraph 13(b) do not apply to an embedded call option in a hybrid instrument containing a debt host contract if the right to accelerate the settlement of the debt can be exercised only by the debtor (issuer/borrower). This guidance does not apply to other embedded derivative features that may be present in the same hybrid instrument. The effective date of the implementation guidance is January 1, 2006. AIG is currently assessing the effect of implementing this guidance.
On September 19, 2005, FASB issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts. SOP 05-1 provides guidance on accounting for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. The SOP defines an internal replacement as a modification in product benefits, features, rights, or coverage that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. The effective date of the implementation guidance is January 1, 2007. AIG is currently assessing the effect of implementing this guidance.
On February 16, 2006, the FASB issued FAS No. 155, Accounting for Certain Hybrid Financial Instruments (FAS 155), an amendment of FAS 140 and FAS 133. FAS 155 permits the Company to elect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irrevocable. FAS 155 will be effective for all instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of AIGs fiscal year that begins after September 15, 2006, with earlier adoption permitted as of the beginning of 2006, provided that financial statements for any interim period of that fiscal year have not been issued. AIG has elected to early adopt FAS 155 as of January 1, 2006. This change in accounting will not have a material effect on AIGs results of operations or financial condition.
34
10. | Information Provided in Connection with Outstanding Debt |
The following condensed consolidating financial statements are provided in compliance with Regulation S-X of the Securities and Exchange Commission.
(a) American General Corporation (AGC) is a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all outstanding debt of AGC.
American General Corporation:
Condensed Consolidating Balance Sheet
American | |||||||||||||||||||||
International | |||||||||||||||||||||
June 30, 2005 (Restated) | Group, Inc. | AGC | Other | Consolidated | |||||||||||||||||
(in millions) (unaudited) | Guarantor | Issuer | Subsidiaries | Eliminations | AIG | ||||||||||||||||
Assets:
|
|||||||||||||||||||||
Invested assets
|
$ | 863 | $ | | $ | 679,841 | $ | (13,312 | ) | $ | 667,392 | ||||||||||
Cash
|
71 | | 1,667 | | 1,738 | ||||||||||||||||
Carrying value of subsidiaries and partially
owned companies, at equity
|
91,285 | 27,755 | 5,912 | (123,563 | ) | 1,389 | |||||||||||||||
Other assets
|
2,949 | 2,817 | 155,351 | (469 | ) | 160,648 | |||||||||||||||
Total assets
|
$ | 95,168 | $ | 30,572 | $ | 842,771 | $ | (137,344 | ) | $ | 831,167 | ||||||||||
Liabilities:
|
|||||||||||||||||||||
Insurance liabilities
|
$ | 384 | $ | | $ | 445,547 | $ | (64 | ) | $ | 445,867 | ||||||||||
Debt
|
3,655 | 2,184 | 110,381 | (12,717 | ) | 103,503 | |||||||||||||||
Other liabilities
|
2,516 | 4,629 | 186,993 | (1,150 | ) | 192,988 | |||||||||||||||
Total liabilities
|
6,555 | 6,813 | 742,921 | (13,931 | ) | 742,358 | |||||||||||||||
Preferred shareholders equity in subsidiary
companies
|
| | 196 | | 196 | ||||||||||||||||
Total shareholders equity
|
88,613 | 23,759 | 99,654 | (123,413 | ) | 88,613 | |||||||||||||||
Total liabilities, preferred shareholders
equity in subsidiary companies and shareholders equity
|
$ | 95,168 | $ | 30,572 | $ | 842,771 | $ | (137,344 | ) | $ | 831,167 | ||||||||||
American | |||||||||||||||||||||
International | |||||||||||||||||||||
December 31, 2004 | Group, Inc. | AGC | Other | Consolidated | |||||||||||||||||
(in millions) (unaudited) | Guarantor | Issuer | Subsidiaries | Eliminations | AIG | ||||||||||||||||
Assets:
|
|||||||||||||||||||||
Invested assets
|
$ | 1,027 | $ | | $ | 650,238 | $ | (12,984 | ) | $ | 638,281 | ||||||||||
Cash
|
17 | | 1,992 | | 2,009 | ||||||||||||||||
Carrying value of subsidiaries and partially
owned companies, at equity
|
80,966 | 26,179 | 12,763 | (118,413 | ) | 1,495 | |||||||||||||||
Other assets
|
2,786 | 2,546 | 154,417 | (389 | ) | 159,360 | |||||||||||||||
Total assets
|
$ | 84,796 | $ | 28,725 | $ | 819,410 | $ | (131,786 | ) | $ | 801,145 | ||||||||||
Liabilities:
|
|||||||||||||||||||||
Insurance liabilities
|
$ | 405 | $ | | $ | 428,130 | $ | (69 | ) | $ | 428,466 | ||||||||||
Debt
|
3,647 | 2,482 | 103,027 | (12,257 | ) | 96,899 | |||||||||||||||
Other liabilities
|
1,071 | 4,076 | 191,967 | (1,206 | ) | 195,908 | |||||||||||||||
Total liabilities
|
5,123 | 6,558 | 723,124 | (13,532 | ) | 721,273 | |||||||||||||||
Preferred shareholders equity in subsidiary
companies
|
| | 199 | | 199 | ||||||||||||||||
Total shareholders equity
|
79,673 | 22,167 | 96,087 | (118,254 | ) | 79,673 | |||||||||||||||
Total liabilities, preferred shareholders
equity in subsidiary companies and shareholders equity
|
$ | 84,796 | $ | 28,725 | $ | 819,410 | $ | (131,786 | ) | $ | 801,145 | ||||||||||
35
10. | Information Provided in Connection with Outstanding Debt (continued) |
Condensed Consolidating Statement of Income
American | ||||||||||||||||||||
International | ||||||||||||||||||||
Six Months Ended June 30, 2005 (Restated) | Group, Inc. | AGC | Other | Consolidated | ||||||||||||||||
(in millions) (unaudited) | Guarantor | Issuer | Subsidiaries | Eliminations | AIG | |||||||||||||||
Operating income (loss)
|
$ | 140 | (a) | $ | (76 | ) (b) | $ | 12,286 | (c) | $ | | $ | 12,350 | (d) | ||||||
Equity in undistributed net income of
consolidated subsidiaries
|
7,430 | 1,291 | | (8,721 | ) | | ||||||||||||||
Dividend income from consolidated subsidiaries
|
928 | | | (928 | ) | | ||||||||||||||
Income taxes (benefits)
|
210 | (26 | ) | 3,605 | | 3,789 | ||||||||||||||
Minority interest
|
| | (273 | ) | |