At December 31, 2006, there were units representing 4,590,622 shares granted to participants.
On June 26, 2006, AIG’s Compensation Committee approved two grants under the AIG Partners Plan. The first grant has a performance period which runs from January 1, 2006 through December 31, 2007. The second grant has a performance period which runs from January 1, 2007 through December 31, 2008. Both grants vest 50 percent on the fourth and sixth anniversaries of the first day of the related performance period. In addition, the Compensation Committee approved the performance metrics for the two grants prior to the date of grant. The measurement of the grants is deemed to have occurred on June 26, 2006 when there was mutual understanding of the key terms and conditions of the grants. Consistent with this treatment: a) 1,068,605 performance RSUs for the first grant and 2,488,865 performance RSUs for the second grant and b) unrecognized compensation of $49 million for the first grant and $137 million for the second grant are included in the related disclosure tables. Performance RSUs related to the first grant are excluded from AIG’s diluted shares calculation because an insufficient amount of time has elapsed to conclusively determine that the performance metric will be achieved at the end of the related performance period. Because the performance period for the second grant does not begin until January 1, 2007, compensation expense for the second grant is not included in AIG’s 2006 results and diluted shares calculation.
The fair value of each award granted under the 2002 Plan, the AIG DCPPP, the AIG Partners Plan, and the SICO Plans is based on the closing price of AIG stock on the date of grant.
The total cost for awards outstanding as of December 31, 2006 under the 2002 Plan, the AIG DCPPP, the AIG Partners Plan, and the SICO Plans is expected to be recognized over approximately 4 years, 11 years, 6 years and 23 years, respectively.
AIG’s U.S. retirement plan is a qualified, noncontributory defined benefit plan which is subject to the provisions of ERISA. All employees of AIG and most of its subsidiaries and affiliates who are regularly employed in the United States, including certain U.S. citizens employed abroad on a U.S. dollar payroll, and who have attained age 21 and completed twelve months of continuous service are eligible to participate in this plan. An employee with 5 or more years of plan participation is entitled to pension benefits beginning at normal retirement at age 65. Benefits are based upon a percentage of average final compensation multiplied by years of credited service limited to 44 years of credited service. The average final compensation is subject to certain limitations. Employees may elect certain options with respect to receipt of their pension benefits including a joint and survivor annuity. An employee with 10 or more years of plan participation may retire early from age 55 to 64. An early retirement factor is applied resulting in a reduced benefit. If an employee terminates with less than five years of continuous service, the employee forfeits the right to receive any pension benefits accumulated to that time. Annual funding requirements are determined based on the “projected unit credit” cost method, which attributes a pro rata portion of the total projected benefit payable at normal retirement to each year of credited service.
21st Century sponsors its own benefit plans for its eligible employees. Assets, obligations and costs with respect to 21st Century’s plans are included herein. The assumptions used in its plans were not significantly different from those used by AIG in AIG’s U.S. plans.
AIG’s U.S. postretirement medical and life insurance benefits are based upon the employee electing immediate retirement and having a minimum of ten years of service. Retirees who reached
Effective January 1, 1993, both plans’ provisions were amended. Employees who retire after January 1, 1993 are required to pay the actual cost of the medical benefits premium reduced by a credit of a certain amount, based on years of service at retirement. The life insurance benefit varies by age at retirement from $5,000 for retirement at ages 55 through 59; $10,000 for retirement at ages 60 through 64; and $15,000 for retirement at ages 65 and over.
(d) Postemployment Benefits: AIG provides certain benefits to inactive employees who are not retirees. Certain of these benefits are insured and expensed currently; other expenses are provided for currently. Such uninsured expenses include long-term disability benefits, medical and life insurance continuation, and COBRA medical subsidies.
As of November 30, 2006 for non-U.S. plans of sponsoring companies with a fiscal year-end date of November 30, 2006.
The weighted average assumptions used to determine the benefit obligations at December 31, 2006 and 2005 are as follows:
The benefit obligations for non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of each of the subsidiaries providing such benefits.
To measure the obligations at December 31, 2006 for AIG’s U.S. plans, an 8.0 percent annual rate of increase in the per capita cost of covered medical benefits for pre-age-65 retirees, a 6.7 percent annual rate of increase in the per capita cost of covered medical benefits for post-age-65 retirees and a 10.0 percent annual rate of increase in the per capita cost of retiree prescription drug coverage were used for 2007. These rates were assumed to decrease gradually to 5.0 percent in 2013 and remain at that level thereafter.
The assumed range for 2007 with respect to the annual rates of increase in the per capita cost of covered healthcare benefits of AIG’s non-U.S. plans is 6.0 to 8.0 percent. These rates are assumed to decrease gradually to 4.0 to 6.0 percent over the next three years and remain at that level thereafter.
At November 30, 2006, for non-U.S. plans with a fiscal year-end date of November 30, 2006.
The projected benefit cash flows under the AIG Retirement Plan were discounted using the spot rates derived from the Citigroup Pension Discount Curve as of December 31, 2006 and December 31, 2005 and an equivalent single discount rate was derived resulting in the same liability. This single discount rate was rounded to the nearest 25 basis points, namely 6.0 percent and 5.5 percent as of December 31, 2006 and December 31, 2005, respectively. The rates applied to other U.S. plans were not significantly different from those discussed above.
Japan represents over 62 percent of the liabilities of the non-U.S. pension plans. The discount rate for Japan was selected by reference to the published Moody’s/S&P AA Corporate Bond Universe at the measurement date having regard to the duration of the plans’ liabilities.
(f) Funded Status: The funded status of the AIG defined benefit plans is a comparison of the projected benefit obligations to the assets related to the respective plan, if any. Effective December 31, 2006, AIG has adopted FAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” - an amendment of FASB Statements No. 87, 88, 106 and 132(R). All amounts shown are pre-tax, unless noted otherwise.
Actuarial (gains)/losses are amounts included in the projected benefit obligations but not yet recognized in the financial statements.
Defined benefit pension plan obligations where the projected benefit obligation was in excess of the related plan assets at December 31, 2006 and 2005 were as follows:
At November 30, 2006 for non-U.S. plans of sponsoring companies with fiscal year-end date of November 30, 2006.
The following table sets forth the change in plan assets as of December 31, 2006 and 2005:
As of November 30, 2006 for non-U.S. plans of sponsoring companies with fiscal year-end date of November 30, 2006.
At November 30, 2006 for non-U.S. plans of sponsoring companies with fiscal year-end of November 30, 2006.
Included in equity securities for the U.S. plans at December 31, 2006 and 2005 were 55,680 and 602,680 shares of AIG common stock, with values of $4.0 million and $41.1 million, respectively.
The following table presents the components of net periodic benefit cost recognized in income and other amounts recognized in other comprehensive income with respect to the defined benefit pension plans and other postretirement benefit plans for the year ended December 31, 2006 (no amounts were recognized in other comprehensive income for the years ended 2005 and 2004):
The weighted average assumptions used to determine the net periodic benefit costs for the years ended December 31, 2006, 2005 and 2004 were as follows:
16. Benefits Provided by Starr International Company, Inc. and C.V. Starr & Co., 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.
Compensation expense in 2006 included various out of period adjustments totaling $61 million, primarily relating to stock-splits and other miscellaneous items for the SICO plans. See also Note 14 herein.
voting stock of AIG. Although these reporting persons have made filings under Section 16 of the Exchange Act, reporting sales of shares of common stock, no amendment to the Schedule 13D has been filed to report a change in ownership subsequent to November 20, 2006.
(b) Transactions with Related Parties: Prior to the termination of their agency relationships with Starr during 2006, AIG and its subsidiaries paid commissions to Starr and its subsidiaries for the production and management of insurance business in the ordinary course of business. Payment for the production of insurance business to Starr aggregated approximately $47 million in 2006, $214 million in 2005, and $205 million in 2004. AIG also received approximately $4 million in 2006, $23 million in 2005, and $24 million in 2004 from Starr and paid none in 2006, approximately $20,000 in 2005, and $39,000 in 2004 to Starr in rental fees and none in 2006 and 2005 and $262,000 in 2004 for services. AIG also received none in 2006, approximately $2 million in 2005, and $1 million in 2004, respectively, from SICO and paid none in 2006 and approximately $1 million in each of the years 2005 and 2004 to SICO as reimbursement for services rendered at cost. AIG also paid to SICO $2 million in 2006, $3 million in 2005, and $4 million in 2004 in rental fees. There are no significant receivables from/payables to related parties at December 31, 2006.
FIN 46R clarifies the consolidation accounting for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity that is at risk which would allow the entity to finance its activities without additional subordinated financial support. FIN 46R recognizes that consolidation based on majority voting interest should not apply to certain types of entities that are defined as VIEs. A VIE is consolidated by its primary beneficiary, which is the party that absorbs a majority of the expected losses or a majority of the expected residual returns of the VIE, or both.
AIG determines whether an entity is a VIE, who the variable interest holders are, and which party is the primary beneficiary of the VIE by performing an analysis of the design of the VIE that includes a review of, among other factors, its capital structure, contractual relationships and terms, nature of the entity’s operations and purpose, nature of the entity’s interests issued, AIG’s interests in the entity which either create or absorb variability and related party relationships. AIG consolidates a VIE in situations where all of AIG’s interests in the VIE, when combined, absorb a majority of the expected losses or a majority of the expected residual returns of the VIE.
In addition to the VIEs that are consolidated in accordance with FIN 46R, the Company has significant variable interests in certain other VIEs that are not consolidated because the Company is not the primary beneficiary. AIG applies quantitative and qualitative measures in identifying significant variable interests.
SunAmerica Affordable Housing Partners, Inc. (SAAHP) organizes limited partnerships (investment partnerships) that are considered to be VIEs, and that are consolidated by AIG. The investment partnerships invest as limited partners in operating partnerships that develop and operate affordable housing qualifying for federal tax credits and a few market rate properties across the United States. The general partners in the operating partnerships are almost exclusively unaffiliated third-party developers. AIG does not normally consolidate an operating partnership if the general partner is an unaffiliated person. Through approximately 1,150 partnerships, SAAHP has invested in developments with approximately 155,000 apartment units nationwide, and has syndicated over $6 billion in partnership equity since 1991 to other investors who will receive, among other benefits, tax credits under certain sections of the Internal Revenue Code. AIG Retirement Services, Inc. functions as the general partner in certain investment partnerships and acts both as a credit enhancer in certain transactions, through differing structures with respect to funding development costs for the operating partnerships, and as guarantor that investors will receive the tax benefits projected at the time of syndication. AIG Retirement Services, Inc. consolidates these investment partnerships as a result of the guarantee provided to the investors. As part of their incentive compensation, certain key SAAHP employees have been awarded residual cash flow interests in the partnerships, subject to certain vesting requirements. The operating income of SAAHP is reported, along with other SunAmerica partnership income, as a component of AIG’s Asset Management segment.
In certain instances, AIGGIC acts as the collateral manager or general partner of an investment fund, collateralized debt obliga-
AIGGIC is an investor in various real estate investments. These investments are typically with unaffiliated third-party developers via a partnership or limited liability company structure. Some of these entities are VIEs. The activities of these VIEs principally consists of the development or redevelopment of all major types of commercial (retail, office, industrial, logistics parks, mixed use, etc.) and residential real estate. AIG’s involvement varies from being a passive equity investor to actively managing the activities of the VIE.
AIGFP is the primary beneficiary of an asset-backed commercial paper conduit with which it entered into several total return swaps covering all the conduit’s assets that absorb the majority of the expected losses of the entity. The assets of the conduit serve as collateral for the conduit’s obligations. AIGFP is also the primary beneficiary of several structured financing transactions in which AIGFP holds the first loss position either by investing in the equity of the VIE or implicitly through a lending or derivative arrangement.
Derivatives are financial arrangements among two or more parties with returns linked to or “derived” from some underlying equity, debt, commodity or other asset, liability, or index. Derivative payments may be based on interest rates and exchange rates and/or prices of certain securities, commodities, or financial or commodity indices or other variables. Collateral is required, at the discretion of AIG, on certain transactions based on the creditworthiness of the counterparty.
For derivatives designated as hedges, on the date the derivative contract is entered into, AIG designates the derivative as: (i) a hedge of the subsequent changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge); (ii) a hedge of a forecasted transaction, or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); or (iii) a hedge of a net investment in a foreign operation. Fair value and cash flow hedges may involve foreign currencies (“foreign currency hedges”). The gain or loss in the fair value of a derivative that is appropriately and contemporaneously documented, designated and is highly effective as a fair value hedge is recorded in current period earnings, along with the loss or gain on the hedged item attributable to the hedged risk. The gain or loss in the fair value of a derivative that is appropriately and contemporaneously documented, designated and is highly effective as a cash flow hedge is recorded in other comprehensive income, until earnings are affected by the variability of cash flows in the hedged item. Of the amount deferred in Other comprehensive income at December 31, 2006, AIG does not expect a material amount to be reclassified into earnings over the next twelve months. The portion of the gain or loss in the fair value of a derivative in a cash flow hedge that represents hedge ineffectiveness is recognized immediately in current period earnings. The amount of ineffectiveness was not material for 2006, 2005 and 2004. The gain or loss in the fair value of a derivative that is appropriately and contemporaneously documented, designated and is highly effective as a hedge of a net investment in a foreign operation is recorded in the foreign currency translation adjustments account within other comprehensive income. Changes in the fair value of derivatives used for other than hedging activities are reported in current period earnings (principally in realized capital gains and losses for AIG’s insurance operations). AIG had no hedges that were considered fair value hedges or net investment hedges at December 31, 2006. At December 31, 2006, AIG’s hedge accounting was limited to cash flow hedge accounting primarily related to the hedge of forecasted transactions.
AIG assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
The overwhelming majority of AIG’s derivatives activities are conducted by AIGFP. AIGFP becomes a party to derivative financial instruments in the normal course of business and to reduce currency, interest rate, commodity, and equity exposures. Such instruments are reflected in the consolidated financial statements and are carried at a market or a fair value, whichever is appropriate. The recorded estimated fair values of such instruments may be different from the values that might be realized if AIGFP was required to sell or close out the transactions prior to maturity.
AIGFP, in the ordinary course of operations and as principal, structures and enters into derivative transactions to meet the needs of counterparties who may be seeking to hedge certain aspects of such counterparties’ operations or obtain a desired financial exposure. AIGFP also enters into derivative transactions to hedge the financial exposures arising from its counterparty transactions. Such derivative transactions include interest rate, currency, commodity, credit and equity swaps, swaptions, and forward commitments. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying notional amounts. AIGFP typically becomes a principal in the exchange of interest payments between the parties and, therefore, is exposed to counterparty credit risk and may be exposed to loss, if counterparties default. Currency, commodity, and equity swaps are similar to interest rate swaps, but involve the exchange of specific currencies or cashflows based on the underlying commodity, equity securities or indices. Also, they may involve the exchange of notional amounts at the beginning and end
of the transaction. Swaptions are options where the holder has the right but not the obligation to enter into a swap transaction or cancel an existing swap transaction. At December 31, 2006, the aggregate notional amount of AIGFP’s outstanding swap transactions approximated $1,456 billion, primarily related to interest rate swaps of approximately $1,058 billion.
AIG reports variable contracts through separate and variable accounts when investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities), and the separate account qualifies for separate account treatment under SOP 03-1. In some foreign jurisdictions, separate accounts are not legally insulated from general account creditors and therefore do not qualify for separate account treatment under SOP 03-1. In such cases, the variable contracts are reported as general account contracts. AIG also reports variable annuity and life contracts through separate and variable accounts, or general accounts when not qualified for separate account reporting, where AIG contractually guarantees to the contract holder (variable contracts with guarantees) either (a) total deposits made to the contract less any partial withdrawals plus a minimum return (and in minor instances, no minimum returns) (Net Deposits Plus a Minimum Return) or (b) the highest contract value attained, typically on any anniversary date minus any subsequent withdrawals following the contract anniversary (Highest Contract Value Attained). These guarantees include benefits that are payable in the event of death, annuitization, or, in other instances, at specified dates during the accumulation period. Such benefits are referred to as guaranteed minimum death benefits (GMDB), guaranteed minimum income benefits (GMIB), and guaranteed minimum withdrawal benefit (GMWB), or guaranteed minimum account value benefits (GMAV), respectively. For AIG, GMDB is by far the most widely offered benefit.
Represents the amount of death benefit currently in excess of Account value.
expense, if actual experience or other evidence suggests that earlier assumptions should be revised.
The following assumptions and methodology were used to determine the domestic and foreign GMDB liability as of December 31, 2006:
Mean investment performance assumptions ranged from 0 percent to approximately ten percent depending on the block of business.
Volatility assumptions ranged from 10 percent to 30 percent depending on the block of business.
The third quarter of 2005 included catastrophe losses of approximately $2.4 billion.
Diluted earnings per common share were $1.216 for the quarter ended June 30, 2006, and $0.666 for the quarter ended September 30, 2005 using the discrete period weighted average shares outstanding for the respective periods.
The following condensed consolidating financial statements are provided in compliance with Regulation S-X of the SEC.