2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Continued 16. Fair Value of Financial Instruments Continued The carrying values and fair values of AIG’s financial instruments at December 31, 2007 and 2006 were as follows: 2007 2006 Carrying Fair Carrying Fair (in millions) Value (a) Value Value (a) Value Assets: Fixed maturities $428,935 $429,511 $419,142 $419,859 Equity securities 41,646 41,646 30,650 30,650 Mortgage and other loans receivable 33,727 34,123 28,418 28,655 Securities available for sale 40,305 40,305 47,205 47,205 Trading securities 4,197 4,197 5,031 5,031 Spot commodities 238 238 220 220 Unrealized gain on swaps, options and forward transactions 16,442 16,442 19,252 19,252 Trade receivables 6,467 6,467 4,317 4,317 Securities purchased under agreements to resell 20,950 20,950 30,291 30,291 Finance receivables, net of allowance 31,234 28,693 29,573 26,712 Securities lending invested collateral 75,662 75,662 69,306 69,306 Other invested assets (b) 57,134 57,979 42,111 42,418 Short-term investments 51,351 51,351 27,483 27,483 Cash 2,284 2,284 1,590 1,590 Liabilities: Policyholders’ contract deposits 258,459 259,045 248,264 243,570 Securities sold under agreements to repurchase 8,331 9,048 19,677 19,677 Trade payables 10,568 10,568 6,174 6,174 Securities and spot commodities sold but not yet purchased 4,709 4,709 4,076 4,076 Unrealized loss on swaps, options and forward transactions 20,613 20,613 11,401 11,401 Trust deposits and deposits due to banks and other depositors 4,903 4,986 5,249 5,261 Commercial paper and extendible commercial notes 13,114 13,114 13,363 13,363 Long-term borrowings 162,935 165,064 135,316 135,605 Securities lending payable 81,965 81,965 70,198 70,198 (a) The carrying value of all other financial instruments approximates fair value. (b) Excludes aircraft asset investments held by non-Financial Services subsidiaries. 17. Share-based Employee Compensation Plans During the year ended December 31, 2007, AIG employees had received compensation pursuant to awards under seven different share-based employee compensation plans: (i) AIG 1999 Stock Option Plan, as amended (1999 Plan); (ii) AIG 1996 Employee Stock Purchase Plan, as amended (1996 Plan); (iii) AIG 2002 Stock Incentive Plan, as amended (2002 Plan) under which AIG has issued time-vested restricted stock units (RSUs) and performance restricted stock units (performance RSUs); (iv) AIG 2007 Stock Incentive Plan, as amended (2007 Plan); (v) SICO’s Deferred Compensation Profit Participation Plans (SICO Plans); (vi) AIG’s 2005-2006 Deferred Compensation Profit Participation Plan (AIG DCPPP) and (vii) the AIG Partners Plan. The AIG DCPPP was adopted as a replacement for the SICO Plans for the 2005- 2006 period, and the AIG Partners Plan replaced the AIG DCPPP. Share-based employee compensation earned under the AIG DCPPP was granted as time-vested RSUs under the 2002 Plan. Share- based employee compensation awarded under the AIG Partners Plan was granted as performance-based RSUs under the 2002 Plan, except for the December 2007 grant which was made under the 2007 Plan. All future grants will be made under the 2007 Plan. Although awards granted under all the plans described above remained outstanding at December 31, 2007, future grants of options, RSUs and performance RSUs can be made only under the 2007 Plan. AIG currently settles share option exercises and other share awards to participants by issuing shares it previously acquired and holds in its treasury account, except for share awards made by SICO, which are settled by SICO. In 2006 and for prior years, AIG’s non-employee directors received share-based compensation in the form of options granted pursuant to the 1999 Plan and grants of AIG common stock with delivery deferred until retirement from the Board, pursuant to the AIG Director Stock Plan, which was approved by the shareholders at the 2004 Annual Meeting of Shareholders and which is now a subplan under the 2007 Plan. From and after May 16, 2007, non- employee directors receive deferred stock units (DSUs) under the 2007 Plan with delivery deferred until retirement from the Board. From January 1, 2003 through December 31, 2005, AIG accounted for share-based payment transactions with employees under FAS 123, ‘‘Accounting for Stock-Based Compensation.’’ Share-based employee compensation expense from option awards was not recognized in the consolidated statement of income in prior periods. Effective January 1, 2006, AIG adopted the fair 184 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries 17. Share-based Employee Compensation Plans proved at the 2003 Annual Meeting of Shareholders. The 1999 Continued Plan superseded the 1991 Employee Stock Option Plan (the 1991 Plan), although outstanding options granted under the 1991 Plan value recognition provisions of FAS 123R. FAS 123R requires that continue until exercise or expiration. Options granted under the companies use a fair value method to value share-based pay- 1999 Plan generally vest over four years (25 percent vesting per ments and recognize the related compensation expense in net year) and expire 10 years from the date of grant. The 2007 Plan earnings. AIG adopted FAS 123R using the modified prospective supersedes the 1999 Plan. application method, and accordingly, financial statement amounts At December 31, 2007, there were no shares reserved for for the prior periods presented have not been restated to reflect future grants under the 1999 Plan and 36,363,769 shares the fair value method of expensing share-based compensation reserved for issuance under the 1999 and 1991 Plans. under FAS 123R. The modified prospective application method requires recognition of the fair value of share-based compensation for shares subscribed for or granted on or after January 1, 2006 Deferrals and all previously granted but unvested awards at January 1, At December 31, 2007, AIG was obligated to issue 2006. 12,521,342 shares in connection with previous exercises of The adoption of FAS 123R resulted in share-based compensa- options with delivery deferred. tion expense of approximately $17 million during 2006, related to awards that were accounted for under Accounting Principles Board Valuation Opinion 25, ‘‘Accounting for Stock Issued to Employees.’’ FAS 123R also requires AIG to estimate forfeitures in calculating AIG uses a binomial lattice model to calculate the fair value of the expense relating to share-based compensation, rather than stock option grants. A more detailed description of the valuation recognizing these forfeitures and corresponding reductions in methodology is provided below. expense as they occur. The cumulative effect of adoption of The following weighted-average assumptions were used $46 million was recorded as a cumulative effect of an accounting for stock options granted in 2007, 2006 and 2005: change, net of tax. FAS 123R requires AIG to reflect the cash savings resulting from excess tax benefits in its financial state- 2007 2006 2005 ments as cash flow from financing activities, rather than as cash Expected annual dividend yield (a) 1.39% 0.92% 0.71% flow from operating activities as in prior periods. The amount of Expected volatility (b) 32.82% 23.50% 27.30% this excess tax benefit in 2007 and 2006 was $26.1 million and Risk-free interest rate (c) 4.08% 4.61% 4.17% Expected term (d) 7 years 7 years 7 years $27.9 million, respectively. Included in AIG’s consolidated statement of income for the (a) The dividend yield is determined at the grant date. years ended December 31, 2007 and 2006 was pre-tax shareon (b) In 2007, expected volatility is the average of historical volatility (based based compensation expense of $275 million ($216 million after seven years of daily stock price changes) and the implied volatility of actively traded options on AIG shares. tax), and $353 million ($326 million after tax), respectively. Share- (c) The interest rate curves used in the valuation model were the based compensation expense in 2006 included a one-time U.S. Treasury STRIP rates with terms from 3 months to 10 years. compensation cost of approximately $54 million related to the (d) The contractual term of the option is generally 10 years with an Starr tender offer and various out of period adjustments totaling expected term of 7 years calculated based on an analysis of historical $61 million, primarily relating to stock splits and other miscellanenations). employee exercise behavior and employee turnover (post-vesting termious items for the SICO Plans. See Note 19 herein for a The early exercise rate is a function of time elapsed since the discussion of the Starr tender offer. grant. Fifteen years of historical data were used to estimate the early exercise rate. 1999 Stock Option Plan The 1999 Plan was approved by the shareholders at the 2000 Annual Meeting of Shareholders, with certain amendments ap- AIG 2007 Form 10-K 185
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AMERICAN INTERNATIONAL GROUP, INC.
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FINANCIAL HIGHLIGHTS (in millions,
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overall financial condition, althou
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Group Executive Committee We are ad
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AIG’s life insurance network is t
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We have also begun to address the e
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WHAT WE SEE The ability to see and
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The Major Accounts Practice within
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Around the world, the middle class
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WE SEE GROWTH OPPORTUNITIES IN EMER
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To grow the strength of the AIG glo
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Since 2003, the AIG Disaster Relief
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RESPECT Respect encompasses how we
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Life Insurance & Retirement Service
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Domestic Brokerage Group— Gross P
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In the summer of 2007, widespread f
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in gross premiums written. It launc
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It grew new business premiums from
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emerging markets for its services,
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ILFC—Revenues by Region Total = $
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AIG Investments acquired a 94 perce
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and changing interest rates, as wel
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American International Group, Inc.
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UNITED STATES SECURITIES AND EXCHAN
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Page 187 and 188: American International Group, Inc.
Page 191 and 192: Index of Notes to Consolidated Fina
Page 237: American International Group, Inc.
Page 275 and 276: SHAREHOLDER INFORMATION Corporate H
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