-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GMd6XZ5b0ayRiQoyMsEqgBUAasn97Vx8DqnflBZd7JxGicCPhfGIsAaHY2eoaoaX grGbMu+cOL+auS1CGmA+vw== 0001193125-06-155788.txt : 20060728 0001193125-06-155788.hdr.sgml : 20060728 20060728131833 ACCESSION NUMBER: 0001193125-06-155788 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20060728 DATE AS OF CHANGE: 20060728 EFFECTIVENESS DATE: 20060728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGL SEPARATE ACCOUNT VA-2 CENTRAL INDEX KEY: 0000038748 IRS NUMBER: 250598210 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 333-102303 FILM NUMBER: 06987047 BUSINESS ADDRESS: STREET 1: 2727-A ALLEN PARKWAY STREET 2: - CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 713-522-1111 MAIL ADDRESS: STREET 1: 2727-A ALLEN PARKWAY STREET 2: - CITY: HOUSTON STATE: TX ZIP: 77019 FORMER COMPANY: FORMER CONFORMED NAME: AGL VA-2 DATE OF NAME CHANGE: 20021226 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN LIFE VARIABLE ANNUITY FUND DATE OF NAME CHANGE: 19990924 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN LIFE VARIABLE ANNUITY FUND A DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGL SEPARATE ACCOUNT VA-2 CENTRAL INDEX KEY: 0000038748 IRS NUMBER: 250598210 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-01990 FILM NUMBER: 06987048 BUSINESS ADDRESS: STREET 1: 2727-A ALLEN PARKWAY STREET 2: - CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 713-522-1111 MAIL ADDRESS: STREET 1: 2727-A ALLEN PARKWAY STREET 2: - CITY: HOUSTON STATE: TX ZIP: 77019 FORMER COMPANY: FORMER CONFORMED NAME: AGL VA-2 DATE OF NAME CHANGE: 20021226 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN LIFE VARIABLE ANNUITY FUND DATE OF NAME CHANGE: 19990924 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN LIFE VARIABLE ANNUITY FUND A DATE OF NAME CHANGE: 19920703 0000038748 S000003282 AGL SEPARATE ACCOUNT VA-2 C000008719 AGL Individual VA Contracts (fka Franklin Life Variable Annuity Fund) (333-102303)(fka FL 002-36394) Contract Nos. 1170-1184 485BPOS 1 d485bpos.txt 485B PEA 1 (FORM N-4) AGL INDIVIDUAL VA CONTRACTS (FKA FLVAF) Registration Nos. 333-102303 811-01990 As filed with the Securities and Exchange Commission on July 28, 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. [ ] [ ] Post-Effective Amendment No. [1] [X] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. [25] [X] AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VA-2 (Exact Name of Registrant) AMERICAN GENERAL LIFE INSURANCE COMPANY (Name of Depositor) 2727-A Allen Parkway Houston, Texas 77019-2191 (Address of Depositor's Principal Executive Offices) (Zip Code) (713) 831-8470 (Depositor's Telephone Number, including Area Code) AMERICAN HOME ASSURANCE COMPANY (Name of Guarantor) 70 Pine Street New York, New York 10270 (212) 770-7000 (Guarantor's Telephone Number, Including Area Code) Lauren W. Jones, Esq. Deputy General Counsel American General Life Companies, LLC 2929 Allen Parkway Houston, Texas 77019-2191 (Name and Address of Agent for Service for Depositor, Registrant and Guarantor) Approximate Date of Proposed Public Offering: Continuous. It is proposed that the filing will become effective (check appropriate box) [X] immediately upon filing pursuant to paragraph (b) [ ] on (date) pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) If appropriate, check the following box: [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. Title of Securities Being Registered: (i)Units of interest in American General Life Insurance Company Separate Account VA-2 under variable annuity contracts and (ii) guarantee related to insurance obligations under the variable annuity contracts. Note Purposes and Content of Amendment The Contracts are no longer offered for sale. Therefore, this Registration Statement is not annually updated. The purposes of this Amendment are to: (i) add information describing recent legal matters of American International Group, Inc., (ii) add information about American Home Assurance Company ("American Home"), the guarantor of insurance obligations under the Contracts, and (iii) add current audited statutory-basis financial statements of American Home. This Amendment contains a supplement to the prospectus, a supplement to the Statement of Additional Information, current audited financial statements of American Home, a Part C, required signature pages and certain exhibits related to the American Home guarantee of insurance obligations. Except for these items and the facing page, Depositor and Registrant do not intend for this Amendment to delete or amend any document or other information included in the Registration Statement, and, to the extent necessary, hereby incorporate any such document or information herein by reference. PART A The Prospectus dated January 2, 2003, as supplemented, is incorporated into Part A of this Post-Effective Amendment No. 1 by reference to the Registrant's Registration Statement, as filed on December 31, 2002 (File No. 333-102303). A supplement dated July 28, 2006 to the Prospectus is included in Part A of this Post-Effective Amendment No. 1. AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VA-2 INDIVIDUAL VARIABLE ANNUITY CONTRACTS SUPPLEMENT DATED JULY 28, 2006 TO PROSPECTUS DATED JANUARY 2, 2003, AS SUPPLEMENTED Effective July 28, 2006, American General Life Insurance Company ("AGL") is amending the individual variable annuity contract prospectus for the purposes of (i) adding information about American Home Assurance Company ("American Home"), the guarantor of insurance obligations under the Contracts, (ii) adding current audited statutory-basis financial statements of American Home, and (iii) adding information about recent legal proceedings of American International Group, Inc. ("AIG"). The following paragraphs are added to the prospectus: (1) American Home Guarantee Insurance obligations under Contracts issued by AGL are guaranteed by American Home, an affiliate of AGL. Insurance obligations include, without limitation, payout options with lifetime guarantees, death benefits and Contract values invested in the fixed account. The guarantee does not guarantee Contract value or the investment performance of the variable investment options available under the Contracts. The guarantee provides that Contract owners can enforce the guarantee directly. AGL expects that the American Home guarantee will be terminated within the next year. However, the insurance obligations on Contracts issued prior to termination of the American Home guarantee would continue to be covered, including obligations arising from premium payments or other payments received after termination, until satisfied in full. American Home is a stock property-casualty insurance company incorporated under the laws of the State of New York on February 7, 1899. American Home's principal executive office is located at 70 Pine Street, New York, New York 10270. American Home is licensed in all 50 states of the United States and the District of Columbia, as well as certain foreign jurisdictions, and engages in a broad range of insurance and reinsurance activities. American Home is a wholly owned subsidiary of AIG and an affiliate of AGL. (2) Financial Statements The Financial Statements of American Home have been added to the Statement of Additional Information ("SAI"). You may obtain a free copy of the current audited financial statements of American Home, AGL or Separate Account VA-2 (the "Separate Account") if you write us at our Administrative Center, which is located at 2727-A Allen Parkway, Houston, Texas 77019, or call us at 1-800-231-0105. (3) Legal Proceedings of AIG On February 9, 2006, AIG, the parent company and an affiliated person of AGL, the Separate Account, its principal underwriter, American General Equity Services Corporation ("AGESC"), and American Home, announced that it had consented to the settlement of an injunctive action instituted by the Securities and Exchange Commission ("SEC"). In its complaint, the SEC alleged that AIG violated Section 17(a) of the Securities Act of 1933, as amended, Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Securities Exchange Act of 1934, as amended, and Rules 10b-5, 12b-20, 13a-1 and 13b2-1 promulgated thereunder, in connection with AIG's accounting and public reporting practices. The conduct described in the complaint did not involve any conduct of AIG or its subsidiaries related to their investment advisory or distribution activities with respect to the variable product in which you are invested. AIG, without admitting or denying the allegations in the complaint (except as to jurisdiction), consented to the entry of an injunction against further violations of the statutes referred to above. Absent exemptive relief granted by the SEC, the entry of such an injunction would prohibit AIG and its affiliated persons from, among other things, serving as an investment adviser of any registered investment management company or principal underwriter for any registered open-end investment company pursuant to Section 9(a) of the Investment Company Act of 1940, as amended ("1940 Act"). Certain affiliated persons of AIG, including AGL, the Separate Account and AGESC, received a temporary order from the SEC pursuant to Section 9(c) of the 1940 Act with respect to the entry of the injunction, granting exemptive relief from the provisions of Section 9(a) of the 1940 Act. The temporary order permits AIG and its affiliated persons, including AIG's investment management subsidiaries, to serve as investment adviser, sub-adviser, principal underwriter or sponsor of variable products. It is expected that a permanent exemptive order will be granted, although there is no assurance the SEC will issue the order. Additionally, AIG reached a resolution of claims and matters under investigation with the United States Department of Justice ("DOJ"), the Attorney General of the State of New York ("NYAG") and the New York State Department of Insurance ("DOI"), regarding 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. As a result of the settlements with the SEC, the DOJ, the NYAG and the DOI, AIG will make payments totaling approximately $1.64 billion. In addition, as part of its 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 AIG's internal controls over financial reporting and the remediation plan that AIG has implemented as a result of its own internal review. Subject to the receipt of permanent relief, AGL, the Separate Account and AGESC believe that the settlements are not likely to have a material adverse effect on their ability to perform services relating to their variable products. PART B The Statement of Additional Information dated January 2, 2003, as supplemented, is incorporated into Part B of this Post-Effective Amendment No. 1 by reference to the Registrant's Registration Statement, as filed on December 31, 2002 (File No. 333-102303). A supplement dated July 28, 2006 to the Statement of Additional Information is included in Part B of this Post-Effective Amendment No. 1. AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VA-2 INDIVIDUAL VARIABLE ANNUITY CONTRACTS SUPPLEMENT DATED JULY 28, 2006 TO STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 2, 2003, AS SUPPLEMENTED Effective July 28, 2006 American General Life Insurance Company ("AGL") is amending the individual variable annuity contract Statement of Additional Information ("SAI") for the purposes of (i) describing the audited statutory financial statements of American Home Assurance Company (American Home"), and (ii) adding the current audited statutory-basis financial statements of American Home. The following paragraphs are added to the SAI: American Home Financial Statements The statutory statement of admitted assets, liabilities, capital and surplus of American Home as of December 31, 2005 and 2004, and the related statutory statements of income and changes in capital and surplus and of cash flow for each of the two years in the period ended December 31, 2005, appear herein, in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in accounting and auditing. INDEX TO AMERICAN HOME FINANCIAL STATEMENTS You should only consider the financial statements of American Home that we include in this SAI as bearing on the ability of American Home, as guarantor, to meet its obligations under a guarantee agreement that guarantees the insurance obligations of the Contracts. American Home Financial Statements (Statutory Basis) Page - ---------------------------------------------------- ---- Report of PricewaterhouseCoopers LLP, Independent Auditors................ 2 Statements of Admitted Assets (Statutory Basis) as of December 31, 2005 and 2004................................................................ 3 Statements of Liabilities, Capital and Surplus (Statutory Basis) as of December 31, 2005 and 2004.............................................. 4 Statements of Income and Changes in Capital and Surplus (Statutory Basis) for the years ended December 31, 2005 and 2004.......................... 5 Statements of Cash Flow (Statutory Basis) for the years ended December 31, 2005 and 2004.............................................. 6 Notes to Statutory Basis Financial Statements............................. 7 AMERICAN HOME ASSURANCE COMPANY NAIC CODE: 19380 STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 AMERICAN HOME ASSURANCE COMPANY STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 TABLE OF CONTENTS Report of Independent Auditors .............................. 2 Statements of Admitted Assets................................ 3 Statements of Liabilities, Capital and Surplus............... 4 Statements of Income and Changes in Capital and Surplus...... 5 Statements of Cash Flow...................................... 6 Notes to Statutory Basis Financial Statements................ 7
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholder of American Home Assurance Company; We have audited the accompanying statutory statements of admitted assets and liabilities, capital and surplus of American Home Assurance Company (the "Company") as of December 31, 2005 and 2004, and the related statutory statements of income and changes in capital and surplus, and of cash flow for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1 to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the Insurance Department of the State of New York, which practices differ from accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between the statutory basis of accounting and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material. In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2005 and 2004, or the results of its operations or its cash flow for the years then ended. In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities and surplus of the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in Notes 1 and 2 to the financial statements. PricewaterhouseCoopers LLP New York, NY April 27, 2006 2 AMERICAN HOME ASSURANCE COMPANY STATEMENTS OF ADMITTED ASSETS STATUTORY BASIS AS OF DECEMBER 31, 2005 AND 2004 (000'S OMITTED)
AS OF DECEMBER 31, 2005 2004 - ------------------ ----------- ----------- Cash and Invested Assets: Bonds, principally at amortized cost (NAIC Market value: 2005 - $9,798,011; 2004 - $8,209,551) $ 9,663,980 $ 7,994,584 Stocks: Common stocks, at NAIC market value (Cost: 2005 - $1,575,107; 2004 - $1,374,734) 3,190,583 2,923,431 Non-redeemable preferred stocks, at NAIC market value (Cost: 2005 - $539,993; 2004 - $436,573) 542,438 457,594 Other invested assets, primarily at equity (Cost: 2005 - $2,109,071; 2004 - $1,755,421) 2,261,269 1,822,492 Securities lending collateral 295,591 125,900 Short-term investments, at amortized cost (approximates NAIC market value) 95,534 18,537 Cash 22,494 70,458 Receivable for securities 164,069 99,399 ----------- ----------- TOTAL CASH AND INVESTED ASSETS 16,235,958 13,512,395 ----------- ----------- Investment income due and accrued 234,067 153,754 Agents' balances or uncollected premiums: Premiums in course of collection 823,180 614,120 Premiums and installments booked but deferred and not yet due 1,383,624 1,152,479 Accrued retrospective premiums 27,758 7,717 Amounts billed and receivable from high deductible policies 315,772 367,174 Reinsurance recoverable on loss payments 399,204 245,992 Funds held by or deposited with reinsurers 23,948 161,437 Deposit accounting assets 1,336,343 1,638,716 Deposit accounting assets - funds held 432,987 424,685 Federal and foreign income taxes recoverable from parent 794,462 575,690 Net deferred tax assets 308,507 322,785 Equities in underwriting pools and associations 577,679 498,433 Electronic data processing equipment, less accumulated depreciation 93,882 90,770 Receivable from parent, subsidiaries and affiliates 1,640,093 430,318 Other admitted assets 178,400 371,907 ----------- ----------- TOTAL ADMITTED ASSETS $24,805,864 $20,568,372 =========== ===========
See Notes to Statutory Basis Financial Statements 3 AMERICAN HOME ASSURANCE COMPANY STATEMENTS OF LIABILITIES, CAPITAL AND SURPLUS STATUTORY BASIS AS OF DECEMBER 31, 2005 AND 2004 (000'S OMITTED EXCEPT SHARE INFORMATION)
AS OF DECEMBER 31, 2005 2004 - ------------------ ----------- ----------- Liabilities Reserves for losses and loss adjustment expenses $11,620,078 $ 9,357,799 Unearned premiums 4,334,485 4,136,808 Commissions, premium taxes, and other expenses payable 118,273 140,332 Reinsurance payable on paid loss and loss adjustment expenses 145,544 259,375 Funds held by company under reinsurance treaties 255,848 261,469 Provision for reinsurance 210,152 376,738 Ceded reinsurance premiums payable, net of ceding commissions 431,565 74,708 Amounts withheld or retained by company for account of others 31,331 41,058 Payable to parent, subsidiaries and affiliates 33,968 346,919 Policyholder funds on deposit 12,578 20,862 Loss clearing 13,610 8,665 Liability for pension and severance pay 4,945 4,882 Retroactive reinsurance reserves - assumed 32,893 10,677 Retroactive reinsurance reserves - ceded (65,044) (81,536) Deposit accounting liabilities 486,910 465,475 Deposit accounting liabilities - funds held 1,006,426 1,089,396 Securities lending payable 295,591 125,900 Collateral deposit liability 505,755 458,938 Other liabilities 281,304 130,566 ----------- ----------- TOTAL LIABILITIES 19,756,213 17,229,032 ----------- ----------- Capital and Surplus Common capital stock, $15.00 par value, 1,758,158 shares authorized, 1,695,054 shares issued and outstanding 25,426 25,426 Capital in excess of par value 2,779,526 702,746 Unassigned surplus 2,176,592 2,529,590 Special surplus funds from retroactive reinsurance 68,107 81,578 ----------- ----------- TOTAL CAPITAL AND SURPLUS 5,049,651 3,339,340 ----------- ----------- TOTAL LIABILITIES, CAPITAL, AND SURPLUS $24,805,864 $20,568,372 =========== ===========
See Notes to Statutory Basis Financial Statements 4 AMERICAN HOME ASSURANCE COMPANY STATEMENTS OF INCOME AND CHANGES IN CAPITAL AND SURPLUS STATUTORY BASIS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (000'S OMITTED)
FOR THE YEARS ENDED DECEMBER 31, 2005 2004 - -------------------------------- ----------- ---------- Statements of Income Underwriting Income: Premiums earned $ 7,045,820 $6,522,744 ----------- ---------- Underwriting Deductions: Losses incurred 5,406,410 4,766,133 Loss adjustment expenses incurred 1,098,644 730,780 Other underwriting expenses incurred 1,584,477 1,424,929 ----------- ---------- Total Underwriting Deductions 8,089,531 6,921,842 ----------- ---------- NET UNDERWRITING LOSS (1,043,711) (399,097) ----------- ---------- Investment Income: Net investment income earned 630,678 419,418 Net realized capital gains (net of capital gains taxes: 2005 - $20,492; 2004- $13,604) 38,055 25,265 ----------- ---------- NET INVESTMENT GAIN 668,733 444,683 ----------- ---------- Net loss from agents' or premium balances charged-off (145,742) (42,783) Other gain 91,947 37,322 ----------- ---------- NET INCOME (LOSS) AFTER CAPITAL GAINS TAXES AND BEFORE FEDERAL INCOME TAXES (428,773) 40,125 Federal income tax (benefit) expense (243,047) 86,311 ----------- ---------- NET LOSS $ (185,726) $ (46,187) =========== ========== Changes in Capital and Surplus Capital and Surplus, as of December 31, Previous Year $ 3,339,340 $3,621,899 Adjustment to beginning surplus (211,984) (588,401) ----------- ---------- CAPITAL AND SURPLUS, AS OF JANUARY 1, 3,127,356 3,033,498 ----------- ---------- Changes in Capital and Surplus: Net loss (185,726) (46,187) Change in net unrealized capital gains [net of capital gains taxes: 2005 - $13,354; 2004 - ($92,280)] 164,444 268,660 Change in net deferred income tax 112,728 455,352 Change in non-admitted assets (322,775) (345,908) Change in provision for reinsurance 166,585 (7,795) Paid in capital and surplus 2,076,780 157,948 Cash dividends to stockholder (31,732) (63,464) Other surplus adjustments - (149,132) Foreign exchange translation (58,009) 36,367 ----------- ---------- TOTAL CHANGES IN CAPITAL AND SURPLUS 1,922,296 305,842 ----------- ---------- CAPITAL AND SURPLUS, DECEMBER 31, $ 5,049,651 $3,339,340 =========== ==========
See Notes to Statutory Basis Financial Statements 5 AMERICAN HOME ASSURANCE COMPANY STATEMENTS OF CASH FLOW STATUTORY BASIS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (000'S OMITTED)
FOR THE YEARS ENDED DECEMBER 31, 2005 2004 - -------------------------------- ----------- ----------- Cash From Operations Premiums collected, net of reinsurance $ 7,143,463 $ 7,080,889 Net investment income 604,156 436,057 Miscellaneous income (53,776) (4,928) ----------- ----------- SUB-TOTAL 7,693,843 7,512,017 ----------- ----------- Benefit and loss related payments 3,809,181 13,777 Commission and other expense paid 2,171,077 1,930,945 Dividends paid to policyholders 878 601 Change in federal and foreign income taxes (3,783) 618,202 ----------- ----------- NET CASH FROM OPERATIONS 1,716,490 4,948,492 ----------- ----------- Cash From Investments Proceeds from investments sold, matured, or repaid Bonds 4,129,223 3,286,111 Stocks 2,795,546 2,427,404 Other 3,042,793 4,128,503 ----------- ----------- TOTAL PROCEEDS FROM INVESTMENTS SOLD, MATURED, OR REPAID 9,967,562 9,842,018 ----------- ----------- Cost of Investments Acquired Bonds 5,803,573 5,267,295 Stocks 3,071,743 2,513,100 Other 3,630,931 4,462,157 ----------- ----------- TOTAL COST OF INVESTMENT ACQUIRED 12,506,247 12,242,551 ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES (2,538,684) (2,400,533) ----------- ----------- Cash From Financing and Miscellaneous Sources Capital and Surplus paid-in, less treasury stock 750,000 157,948 Dividends to stockholder (47,598) (63,464) Net deposit on deposit-type contracts and other insurance (285,727) (641,968) Other 434,553 (2,022,900) ----------- ----------- NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 851,228 (2,570,384) ----------- ----------- NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS 29,034 (22,425) Cash and short-term Investments: Beginning of year 88,995 111,419 ----------- ----------- END OF YEAR $ 118,028 $ 88,995 =========== ===========
See Notes to Statutory Basis Financial Statements 6 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT STATUTORY BASIS ACCOUNTING POLICIES A. ORGANIZATION The American Home Assurance Company ("AHAC" or the "Company") is a direct wholly-owned subsidiary of the American International Group, Inc. (the "Parent" or "AIG"). The Company writes substantially all lines of property and casualty insurance with an emphasis on U.S. commercial business. In addition to writing substantially all classes of business insurance, including large commercial or industrial property insurance, excess liability, inland marine, environmental, workers' compensation and excess and umbrella coverages, the Company offers many specialized forms of insurance such as aviation, accident and health, equipment breakdown, directors and officers liability (D&O), difference in conditions, kidnap-ransom, export credit and political risk, and various types of errors and omissions coverages. Through AIG's risk management operation, the Company provides insurance and risk management programs to large corporate customers, while through AIG's risk finance operation the Company is a leading provider in customized structured products. The accompanying financial statements include the Company's U.S. operation and its Japan branch. The Company accepts business mainly from insurance brokers, enabling selection of specialized markets and retention of underwriting control. Any licensed insurance broker is able to submit business to the Company, but such broker usually has no authority to commit the Company to accept the risk. In addition, the Company utilizes certain managing general agents and third party administrators for policy issuance and administration, underwriting, and claims adjustment services. The Company has significant transactions with the Parent and affiliates. In addition, the Company participates in an intercompany pooling agreement with certain affiliated companies (see Note 5). B. SUMMARY OF SIGNIFICANT STATUTORY BASIS ACCOUNTING POLICIES PRESCRIBED OR PERMITTED STATUTORY ACCOUNTING PRACTICES: The accompanying financial statements of the Company have been prepared in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of New York. The Insurance Department of the State of New York recognizes only statutory accounting practices prescribed or permitted by the State of New York for determining and reporting the financial position and results of operations of an insurance company and for the purpose of determining its solvency under the New York Insurance Law. The National Association of Insurance Commissioners Accounting Practices and Procedures Manual ("NAIC SAP") has been adopted as a component of prescribed practices by the State of New York. The Commissioner of Insurance has the right to permit other specific practices that deviate from prescribed practices. Page 7 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The Insurance Department of the State of New York has adopted the following accounting practices that differ from those found in NAIC SAP; specifically the prescribed practices of (1) discounting workers' compensation reserves on a non-tabular basis; in NAIC SAP, discounting of reserves is not permitted on a non-tabular basis; (2) under NAIC SAP, Electronic Data Processing (EDP) assets are admitted; only applicable software is non-admitted; and, (3) New York regulation 20 reinsurance credits for calculating the provision for unauthorized reinsurance; in NAIC SAP, New York Regulation 20 credits are not permitted. A reconciliation of the Company's net income and capital and surplus between NAIC SAP and practices prescribed and permitted by the State of New York is shown below:
DECEMBER 31, 2005 2004 ------------ ---------- ---------- NET LOSS, NEW YORK INSURANCE DEPARTMENT $ (185,726) $ (46,187) State Practices - (Deduction) Income: Non-Tabular Discounting (31,431) (44,160) ---------- ---------- NET LOSS, NAIC SAP $ (217,157) $ (90,347) ========== ========== STATUTORY SURPLUS, NEW YORK INSURANCE DEPARTMENT $5,049,651 $3,339,340 State Practices - (Charge) Credit: Non-Tabular Discounting (212,605) (181,174) EDP equipment and software (93,881) (90,731) Reinsurance Credits (208,499) (192,015) ---------- ---------- STATUTORY SURPLUS, NAIC SAP $4,534,666 $2,875,420 ========== ==========
In addition to the aforementioned matters, the Commissioner has permitted the Company to utilize the independent audit of the Company's Parent (the consolidated upstream holding company) to support the requirement for audited U.S. GAAP equity of the investments in non insurance and foreign insurance entities. The Commissioner has also permitted the Company to utilize audited financial statements prepared on a basis of accounting other than U.S. GAAP to value investments in joint ventures, limited partnerships and hedge funds. As agreed with the Company's domiciliary state, investments in publicly traded affiliated common stocks are accounted for at the quoted market value less a discount as prescribed by NAIC SAP. STATUTORY ACCOUNTING PRACTICES AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: NAIC SAP is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America ("GAAP"). NAIC SAP varies in certain respects from GAAP. A description of these accounting differences is set forth below: Under GAAP: a. Costs incidental to acquiring business related to premiums written and costs allowed by assuming reinsurers related to premiums ceded are deferred and amortized over the periods covered by the underlying policies or reinsurance agreements; b. Statutory basis reserves, such as non-admitted assets and unauthorized reinsurance are restored to surplus; Page 8 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) c. The equity in earnings of affiliates with ownership between 20.0% and 50.0% is included in net income, and investments in subsidiaries with greater than 50.0% ownership are consolidated; d. Estimated undeclared dividends to policyholders are accrued; e. The reserves for losses and loss adjustment expense (LAE) and unearned premium reserves are presented gross of ceded reinsurance by establishing a reinsurance asset; f. Debt and equity securities deemed to be available for sale and trading securities are reported at fair value. The difference between cost and fair value of securities available for sale is reflected net of related deferred income tax, as a separate component of accumulated other comprehensive income in shareholder's equity. For trading securities, the difference between cost and fair value is included in income, while securities held to maturity are valued at amortized cost; g. Direct written premium contracts that do not have sufficient risk transfer are treated as deposit accounting liabilities; h. Insurance and reinsurance contracts recorded as retroactive retain insurance accounting treatment if they pass the risk transfer test. If risk transfer is not met, no insurance accounting treatment is permitted. All income is then recognized based upon either the interest or recovery method; and i. Deferred federal income taxes are provided for temporary differences for the expected future tax consequences of events that have been recognized in the Company's financial statements. The provision for deferred income taxes is reported in the income statement. Under NAIC SAP: a. Costs incidental to acquiring business related to premiums written and costs allowed by assuming reinsurers related to premiums ceded are immediately expensed; b. Statutory basis reserves, such as non-admitted assets and unauthorized reinsurance are charged directly to surplus; c. Subsidiaries are not consolidated. The equity in earnings of affiliates is included in unrealized appreciation/(depreciation) of investments which is reported directly in surplus. Dividends are reported as investment income; d. Declared dividends to policyholders are accrued; e. The reserve for losses and LAE and unearned premium reserves are presented net of ceded reinsurance; f. NAIC investment grade debt securities are reported at amortized cost, while NAIC non-investment grade debt securities (NAIC rated 4-6) are reported at lower of cost or market; g. Direct written premium contracts are reported as insurance as long as policies are issued in accordance with insurance requirements; h. Insurance and reinsurance contracts deemed to be retroactive receive special accounting treatment. Gains or losses are recognized in the income statement and surplus is segregated by the ceding entity to the extent of gains realized; and Page 9 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) i. Deferred federal income taxes are provided for temporary differences for the expected future tax consequences of events that have been recognized in the Company's financial statements. Changes in deferred income taxes are charged directly to surplus and have no impact on statutory earnings. The admissibility of deferred tax assets is limited by statutory guidance. The effects on the financial statements of the variances between the statutory basis of accounting and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material. SIGNIFICANT STATUTORY ACCOUNTING PRACTICES: A summary of the Company's significant statutory accounting practices are as follows: USE OF ESTIMATES: The preparation of financial statements in conformity with accounting practices prescribed or permitted by the State of New York requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. On an ongoing basis, the Company evaluates all of its estimates and assumptions. It also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from management's estimates. INVESTED ASSETS: The Company's invested assets are accounted for as follows: - Short-term Investments: The Company considers all highly liquid debt securities with maturities of greater than three months but less than twelve months from the date of purchase to be short-term investments. Short-term investments are carried at amortized cost which approximates NAIC market value (as designated by the NAIC Securities Valuation Office). - Bonds: Bonds with an NAIC designation of 1 to 3 are carried at amortized cost using the scientific method. Bonds with an NAIC designation of 4 to 6 are carried at the lower of amortized cost or the NAIC-designated market value. Bonds that are determined to have an other-than-temporary decline in value are written down to fair value as the new cost basis, with the corresponding charge to Net Realized Capital Gains as a realized loss. Mortgage-backed securities are carried at amortized cost and generally are more likely to be prepaid than other fixed maturities. As of December 31, 2005 and 2004, the NAIC market value of the Company's mortgage-backed securities approximated $165,005 and $178,991, respectively. Mortgage-backed securities include prepayment assumptions used at the purchase date and valuation changes caused by changes in estimated cash flows and are valued using the retrospective method. Prepayment assumptions were obtained from broker surveys. - Common and Preferred Stocks: Unaffiliated common stocks are carried principally at market value. Perpetual preferred stocks with an NAIC rating of P1 or P2 are carried at market value. Redeemable preferred stocks with an NAIC rating of RP1 or RP2 that are subject to a 100.0% mandatory sinking fund are carried at amortized cost. All below investment grade preferred stocks are carried at the lower of amortized cost or NAIC designated market values. Page 10 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) Investments in affiliates for which the Company's ownership interest (including ownership interest of the Parent and its subsidiaries) is less than 85.0%, and whose securities are traded on one of the three major U.S. exchanges, are included in common stock at the quoted market value less a discount as prescribed by NAIC SAP. The discount rate is approximately 23.0%. Other investments in affiliates are included in common stocks based on the net worth of the entity. - Other Invested Assets: Other invested assets consist primarily of investments in joint venture and partnerships. Joint venture and partnership investments are accounted for under the equity method, based on the most recent financial statements of the entity. Changes in carrying value are being recorded as unrealized gains or losses. Investments in joint venture and partnerships that are determined to have an other-than-temporary decline in value are written down to fair value as the new cost basis, with the corresponding charge to Net Realized Capital Gains as a realized loss. The intermediate bond mutual fund, owned by AIG, is carried principally at the NAIC designated market value and the unrealized gain or loss reported as unassigned surplus. - Derivatives: Foreign exchange forward contracts are derivatives whereby the Company agrees to exchange a specific amount of one currency for the specific amount of another currency at a date in the future. Foreign exchange contracts are entered into in order to manage exposure to changes in the foreign exchange rates related to long-term foreign denominated bonds held by the Company. The contracts are usually one to three months in duration and are marked to market every month using publicly obtained foreign exchange rates. When the contract expires, realized gains and losses are recorded in investment income. Options purchased are included in Other Invested Assets on the Company's Statements of Admitted Assets. Options are carried at market value. Options written are reported in Other Liabilities on the Statements of Liabilities, Capital and Surplus. Realized gains or losses on the disposition of options are determined on the basis of specific identification and are included in income. Futures are exchange contracts whereby the Company agrees to buy a specific amount of an underlying security (usually an equity index) at a specific price in the future. Throughout the term of the contract, the change in the underlying security's price in the future is calculated each business day, and the gain or loss is transferred in cash to or from the counterparty. When the future position is closed out or expires, a final payment is made. The daily mark-to-market payments are accounted for as realized gains or losses. The Company does not use hedge accounting for its derivatives. Any change in unrealized gains or losses on options purchased or written are credited or charged to unassigned surplus. - Net Investment Gains (Losses): Net investment gains (losses) consists of net investment income earned and realized gains or losses from the disposition of investments. Net investment income earned includes accrued interest, accrued dividends and distributions from partnerships and joint ventures. Investment income is recorded as earned. Realized gains or losses on the disposition of investments are determined on the basis of the specific identification. - Unrealized Gains (Losses): Unrealized gains (losses) on all stocks, bonds carried at NAIC designated values, joint venture, partnerships, derivatives, and foreign currency translation are credited or charged to unassigned surplus. Page 11 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) REVENUE RECOGNITION: Direct written premiums contracts are primarily earned on a pro-rata basis over the terms of the policies to which they relate. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of policies in force. Ceded premiums are amortized into income over the contract period in proportion to the protection received. Premium estimates for retrospectively rated policies are recognized within the periods in which the related losses are incurred. In accordance with NAIC Statement on Statutory Accounting Practices (SSAP) No. 66 entitled Retrospectively Rated Contracts, the Company estimates accrued retrospectively rated premium adjustments by using the application of historical ratios of retrospective rated premium development. The Company records accrued retrospectively rated premiums as an adjustment to earned premiums. In connection therewith, as of December 31, 2005 and 2004, accrued premiums related to the Company's retrospectively rated contracts amounted to $27,758 and $7,717, respectively, net of non-admitted premium balances of $3,084 and $857 respectively. Adjustments to premiums for changes in the level of exposure to insurance risk are generally determined based upon audits conducted after the policy expiration date. In accordance with SSAP No. 53 entitled Property and Casualty Contracts - Premiums, the Company records these estimates [commonly known as Earned But Unbilled (EBUB) Premiums] as an adjustment to written premium, and earns these premiums immediately. For premium adjustments that result in a return of premium to the policyholder, the Company immediately reduces earned premiums. When the EBUB premium exceeds the amount of collateral held, a non-admitted asset (equivalent to 10.0% of this excess amount) is recorded. In accordance with SSAP No. 53, the Company reviews its ultimate losses in respect to its premium reserves. A liability is established if the premium reserves are not sufficient to cover the ultimate loss projection and associated acquisition expenses. Investment income is not considered in the calculation. For certain lines of business for which the insurance policy is issued on a claims-made basis, the Company offers to its insureds the option to purchase an extended reporting endorsement (commonly referred to as Tail Coverage), which permits the extended reporting of insured events after the termination of the claims made contract. Extended reporting endorsements modify the exposure period of the underlying contract and can be for a defined period (e.g., six months, one year, five years) or an indefinite period. For defined reporting periods, premiums are earned over the term of the fixed period. For indefinite reporting periods, premiums are fully earned and loss and LAE liabilities associated with the unreported claims are recognized immediately. REINSURANCE: Ceded premiums, commissions, expense reimbursements and reserves related to ceded business are accounted for on a basis consistent with that used in accounting for the original contracts issued and the terms of the reinsurance contract. Ceded premiums have been reported as a reduction of premium earned. Amounts applicable to ceded reinsurance for unearned premium reserves, and reserves for losses and LAE have been reported as a reduction of these items, and expense allowances received in connection with ceded reinsurance are accounted for as a reduction of the related acquisition cost. Page 12 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) RETROACTIVE REINSURANCE: Retroactive reinsurance reserves are shown separately in the balance sheet. Gains or losses are recognized in the income statement. Surplus gains are reported as segregated unassigned funds (surplus) until the actual retroactive reinsurance recovered exceeds the consideration paid. As agreed with the Company's domiciliary state, the Company analyzed the status of all reinsurance treaties entered into on or after January 1, 1994 for which ceded reserves as of December 31, 2004 (including IBNR) exceeded $100 for compliance with the nine month rule as prescribed in SSAP No. 62, entitled Property and Casualty Reinsurance. Any such treaties for which the documentation required by SSAP No. 62 did not exist were reclassified as retroactive, with appropriate adjustments to underwriting accounts and unassigned surplus. Treaties entered into prior to January 1, 2005 for which such documentation is contained in the Company's files retained prospective treatment, irrespective of whether such documentation was executed within nine months of the treaty's effective date in accordance with agreements reached with the Domiciliary Insurance Department. DEPOSIT ACCOUNTING: All assumed and ceded reinsurance contracts which the Company determines do not transfer a sufficient amount of insurance risk are recorded as deposit accounting transactions in accordance with SSAP No. 62 and SSAP No. 75 entitled Reinsurance Deposit Accounting An Amendment to SSAP No. 62, Property and Casualty Reinsurance. As agreed with the Company's domiciliary state, direct insurance transactions whereby the Company determines there was insufficient risk transfer, other than those where a policy was issued (a) in respect of the insured's requirement for evidence of coverage pursuant to applicable statutes (insurance statutes or otherwise), contractual terms or normal business practices, (b) in respect of an excess insurer's requirement for an underlying primary insurance policy in lieu of self insurance, or (c) in compliance with filed forms, rates and/or rating plans, are recorded as deposit accounting arrangements. FOREIGN PROPERTY CASUALTY BUSINESS: As agreed with the Company's domiciliary state, the Company will continue to follow the current presentation practices relating to its foreign branches and participation in the business of the American International Underwriters Overseas Association (AIUOA). See Note 5 for a description of AIUOA pooling arrangement and related financial statement presentation. COMMISSIONS AND OTHER UNDERWRITING EXPENSES: Commissions, premium taxes, and certain other underwriting expenses related to premiums written are charged to income at the time the premiums are written and are included in Other Underwriting Expenses Incurred. In accordance with SSAP No. 62, the Company records a liability for reinsurance ceding commissions recorded in excess of acquisition costs. The liability is earned over the terms of the underlying policies. RESERVES FOR LOSSES AND LAE: The reserves for losses and LAE, including incurred but not reported (IBNR) losses, are determined on the basis of actuarial specialists' evaluations and other estimates, including historical loss experience. The methods of making such estimates and for establishing the resulting reserves are continually reviewed and updated, and any resulting adjustments are recorded in the current period. Accordingly, losses and LAE are charged to income as incurred. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. The Company discounts its loss reserves on workers' compensation claims. Page 13 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The calculation of the Company's tabular discount is based upon the 1979-81 Decennial Mortality Table, and applying a 3.5% interest rate. Loss reserves (net of reinsurance) subject to the tabular discounting were $1,671,598 and $1,348,754, as of December 31, 2005 and 2004, respectively. As of December 31, 2005 and 2004, the Company's tabular discount amounted to $184,289 and $143,688, respectively, all of which were applied against the Company's case reserves. The calculation of the Company's non-tabular discount is based upon the Company's own payout pattern and a 5.0% interest rate as prescribed by the Insurance Department of the State of New York. Loss and LAE reserves (net of reinsurance) subject to the non-tabular discounting were $1,487,309 and $1,205,066, as of December 31, 2005 and 2004, respectively. As of December 31, 2005 and 2004, the Company's non-tabular discount amounted to $212,605 and $181,174, respectively, all of which were applied against the Company's case reserves. FOREIGN EXCHANGE: Assets and liabilities denominated in foreign currencies are translated at the rate of exchange in effect at the close of the reporting period. Unrealized gains and losses from translating balances from foreign currency into United States currency are recorded as adjustments to surplus. Gains and losses resulting from foreign currency transactions are included in income. STATUTORY BASIS RESERVES: Certain required statutory basis reserves, principally the provision for reinsurance, are charged to surplus and reflected as a liability of the Company. POLICYHOLDERS' DIVIDENDS: Dividends to policyholders are charged to income as declared. CAPITAL AND SURPLUS: Common capital stock and capital in excess of par value represents amounts received by the Company in exchange for shares issued. The common capital stock represents the number of shares issued multiplied by par value per share. Capital in excess of par value represents the value received by the Company in excess of the par value per share. NON-ADMITTED ASSETS: Certain assets, principally leasehold improvements, certain overdue agents' balances, prepaid expenses and certain deferred taxes that exceed statutory guidance are designated as Non-admitted Assets and are directly charged to Unassigned Surplus. Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated useful life of the leasehold improvement. In connection therewith, for the years ended December 31, 2005 and 2004, depreciation and amortization expense amounted to $24,616 and $17,060, respectively. RECLASSIFICATIONS: Certain balances contained in the 2004 financial statements have been reclassified to conform with the current year's presentation. Page 14 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) NOTE 2 - ACCOUNTING ADJUSTMENTS TO STATUTORY BASIS FINANCIAL STATEMENTS A. ACCOUNTING ADJUSTMENTS TO 2005 STATUTORY BASIS FINANCIAL STATEMENTS During 2005, the Company dedicated significant effort to the resolution of previously identified weaknesses in internal controls over balance sheet reconciliations. As a result of these remediation efforts, management concluded that certain adjustments should be made to the assets, liabilities, net income and unassigned surplus as reported in the Company's 2004 amended Annual Statement. The adjustments resulted in an after tax statutory charge of $211,984. In accordance with SSAP No. 3 entitled Accounting Changes and Correction of Errors, the Company reported the impact to its 2004 and prior unassigned surplus as an adjustment to unassigned surplus as of January 1, 2005. CAPITAL AND SURPLUS, AS OF DECEMBER 31, 2004 $3,339,340 Adjustments to Beginning Capital and Surplus: Asset realization (229,448) Revenue recognition (65,075) ---------- TOTAL ADJUSTMENTS TO BEGINNING CAPITAL AND SURPLUS, BEFORE FEDERAL INCOME TAXES (294,523) Current federal income taxes 22,311 Deferred income taxes 60,228 ---------- TOTAL ADJUSTMENTS TO BEGINNING CAPITAL AND SURPLUS, AFTER FEDERAL INCOME TAXES $ (211,984) ---------- CAPITAL AND SURPLUS, AS OF JANUARY 1, 2005 $3,127,356 ==========
An explanation for each of the adjustments for prior period corrections is described below: 1. ASSET REALIZATION: As a result of the remediation of the internal control weaknesses related to the balance sheet reconciliations, a further review was performed of the Company's allowance for doubtful accounts and other accruals. Based on this review, the Company determined that the allowances related to certain premium receivable, reinsurance recoverable and other asset accounts were not sufficient. The adjustment has established additional allowances for these items. 2. REVENUE RECOGNITION: As a result of the remediation of the internal control weaknesses related to the Company's revenue recognition policies, a further review was performed by the Company that resulted in revisions to revenues that were recognized in prior periods related to certain long duration environmental insurance contracts. Page 15 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) B. ACCOUNTING ADJUSTMENTS TO 2004 STATUTORY BASIS FINANCIAL STATEMENTS As a result of regulatory inquiries into certain transactions, AIG conducted an internal review of information and certain transactions from January 2000 to May 2005. As part of the internal review, the Company reviewed the statutory accounting treatment for matters identified during the internal review and concluded that certain transactions required adjustment. An agreement was reached with the Company's domiciliary state to re-file its 2004 annual statement using the methodology prescribed under Statements of Statutory Accounting Principles SSAP No. 3. In applying this methodology, the Company has reflected the impact (in the amount of $588,401) to its 2003 and prior unassigned surplus as a prior period correction adjustment to unassigned surplus as of January 1, 2004. A reconciliation of the Company's unassigned surplus balance from December 31, 2003 to January 1, 2004, taking into consideration these prior period adjustments, is outlined in the table below: TOTAL CAPITAL AND SURPLUS, DECEMBER 31, 2003 $3,621,899 Adjustments to beginning capital and surplus: 1. Risk Transfer (Union Excess, Richmond and other) (431,414) 2. Coventry (15,932) 3. Loss Reserves (74,880) 4. DBG Analysis (53,316) 5. Other Adjustments (12,859) ---------- TOTAL ADJUSTMENTS TO BEGINNING CAPITAL AND SURPLUS (588,401) ---------- TOTAL CAPITAL AND SURPLUS, AS OF JANUARY 1, 2004 $3,033,498 ==========
The above reconciliation of the Company's unassigned surplus at January 1, 2004 is presented net of income taxes. The Company has evaluated any deferred income taxes arising from these adjustments for admissibility in accordance with NAIC SAP. Page 16 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) An explanation of each of the accounting adjustments included in the reconciliation above are discussed below: 1. RISK TRANSFER (UNION EXCESS, RICHMOND AND OTHER): Reinsurance ceded to Union Excess Reinsurance Company, Ltd. (Union Excess), a Barbados-domiciled reinsurer, Richmond Insurance Company, Ltd. (Richmond), a Bermuda-based reinsurance holding company, and some other insurance and reinsurance transactions were adjusted to deposit accounting due to insufficient risk transfer in accordance with SSAP No. 62 and SSAP No. 75. 2. COVENTRY: Life settlements are designed to assist life insurance policyholders to monetize the existing value of life insurance policies. The Company has determined, in light of new information not available to management of the Company at the time the initial accounting determination was made, that the accounting for these transactions as insurance and reinsurance was a misapplication of statutory accounting and such transactions have been reversed in the Company's financial statements. This adjustment results in AIG's entire investment in life settlements being accounted for as a collateral loan in accordance with SSAP No. 21 entitled Other Admitted Assets. 3. LOSS RESERVES: The Company determined that the unsupported changes in reserves independently from the actuarial process constituted errors which have been adjusted accordingly. 4. DOMESTIC BROKERAGE GROUP DBG ANALYSIS: The Company has determined that allowances related to certain premium receivable, reinsurance recoverable and other assets were not sufficient. The adjustment has established additional allowances for these items. 5. OTHER ADJUSTMENTS: The Company has summarized other miscellaneous adjustments that individually did not have a significant impact on the adjustment of its statutory financial statements. Page 17 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) NOTE 3 - INVESTMENTS The amortized cost and NAIC market values* of the Company's bond investments at December 31, 2005 and 2004 are outlined in the table below:
GROSS GROSS NAIC * AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- AS OF DECEMBER 31, 2005 U.S. governments $ 339,230 $ 1,331 $ 4,491 $ 336,070 All other governments 1,030,463 5,491 4,015 1,031,939 States, territories and possessions 1,437,180 25,194 4,641 1,457,733 Political subdivisions of states, territories and possessions 1,971,726 34,761 2,780 2,003,707 Special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities and their political subdivisions 4,242,687 78,602 6,193 4,315,096 Public utilities 46,234 634 226 46,642 Industrial and miscellaneous 596,460 13,179 2,815 606,824 ---------- -------- ------- ---------- TOTAL BONDS, AS OF DECEMBER 31, 2005 $9,663,980 $159,192 $25,161 $9,798,011 ========== ======== ======= ========== AS OF DECEMBER 31, 2004 U.S. governments $ 409,872 $ 2,471 $ 3,542 $ 408,801 All other governments 696,857 4,848 377 701,328 States, territories and possessions 1,495,488 31,687 2,075 1,525,100 Political subdivisions of states, territories and possessions 1,218,335 33,096 1,324 1,250,107 Special revenue and special assessment obligation and all non-guaranteed obligations of agencies and authorities and their political subdivisions 3,642,185 137,274 3,314 3,776,145 Public utilities 33,300 776 46 34,030 Industrial and miscellaneous 498,547 15,663 170 514,040 ---------- -------- ------- ---------- TOTAL BONDS, AS OF DECEMBER 31, 2004 $7,994,584 $225,815 $10,848 $8,209,551 ========== ======== ======= ==========
As of December 31, 2005 and 2004, the actual fair market value principally priced by Interactive Data Corporation, a third party rating source, for the above listed securities amounted to $9,818,483 and $8,233,574, respectively. - ---------- * The NAIC market value was used where available. When not available, market values were obtained from third party pricing sources. Page 18 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The amortized cost and NAIC market values* of bonds at December 31, 2005 and 2004, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
2005 2004 ------------------------- ------------------------- AMORTIZED NAIC * AMORTIZED NAIC * AS OF DECEMBER 31, COST MARKET VALUE COST MARKET VALUE - ------------------ ---------- ------------ ---------- ------------ Due in one year or less $ 957,757 $ 954,751 $ 645,776 $ 699,528 Due after one year through five years 855,048 857,130 548,675 554,970 Due after five years through ten years 6,253,720 6,338,300 1,695,997 1,715,243 Due after ten years 1,435,025 1,482,825 4,931,680 5,060,819 Mortgaged-backed securities 162,430 165,005 172,456 178,991 ---------- ---------- ---------- ---------- TOTAL BONDS $9,663,980 $9,798,011 $7,994,584 $8,209,551 ========== ========== ========== ==========
During 2005 and 2004, proceeds from the sale of the Company's bonds amounted to $3,278,300 and $2,197,876, respectively. During 2005 and 2004, the Company realized gross gains of $31,404 and $15,434, respectively, and gross losses of $17,304 and $20,960, respectively, related to these sales. During 2005 and 2004, proceeds from the sale of the Company's equity investments amounted to $2,703,032 and $2,307,028, respectively. Gross gains of $132,690 and $121,648 and gross losses of $91,050 and $84,827 were realized on those sales in 2005 and 2004, respectively. - ---------- * The NAIC market value was used where available. When not available, market values were obtained from third party pricing sources. Page 19 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The amortized cost and NAIC market values* of the Company's common and preferred stocks at December 31, 2005 and 2004 are set forth in the table below:
DECEMBER 31, 2005 DECEMBER 31, 2004 ------------------------------------------------ ------------------------------------------------- GROSS GROSS NAIC * GROSS GROSS NAIC * AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Common Stocks: Affiliated $ 602,396 $1,521,619 $ 68,346 $2,055,669 $ 638,099 $1,343,104 $ 94,566 $1,886,637 Non-affiliated 972,712 198,989 36,787 1,134,914 736,635 318,732 18,573 1,036,794 ---------- ---------- -------- ---------- ---------- ---------- -------- ---------- TOTAL $1,575,108 $1,720,608 $105,133 $3,190,583 $1,374,734 $1,661,836 $113,139 $2,923,431 ========== ========== ======== ========== ========== ========== ======== ========== Preferred Stocks: Affiliated $ - $ - $ - $ - $ - $ - $ - $ - Non-affiliated 539,993 10,710 8,758 541,945 436,573 30,312 3,696 463,189 ---------- ---------- -------- ---------- ---------- ---------- -------- ---------- TOTAL $ 539,993 $ 10,710 $ 8,758 $ 541,945 $ 436,573 $ 30,312 $ 3,696 $ 463,189 ========== ========== ======== ========== ========== ========== ======== ==========
The NAIC market value column for preferred stocks in the above table does not agree to the carrying amount in the Company's Statements of Admitted Assets due to the Company's redeemable preferred stocks being carried at amortized, while the Company's perpetual preferred stocks being carried at market value. As of December 31, 2005 and 2004, the Company held derivative investments of $(572) and $0, respectively. - ---------- * The NAIC market value was used where available. When not available, market values were obtained from third party pricing sources. Page 20 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The fair market value together with the aging of the pre-tax unrealized losses with respect to the Company's bonds and stocks as of December 31, 2005 and 2004 is set forth in the table below:
GREATER 12 MONTHS OR LESS THAN 12 MONTHS TOTAL ----------------------- --------------------- ----------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES - ------------------------- ---------- ---------- -------- ---------- ---------- ---------- As of December 31, 2005: U. S. Governments $ 263,575 $ 3,780 $ 14,643 $ 711 $ 278,218 $ 4,491 All Other Governments 831,441 3,520 19,830 495 851,271 4,015 States, territories and possessions 368,996 3,419 51,889 1,222 420,885 4,641 Political subdivisions of states, territories and possessions 380,044 2,347 23,929 433 403,973 2,780 Special revenue 549,541 4,212 72,215 1,981 621,756 6,193 Public utilities 16,300 188 1,661 38 17,961 226 Industrial and miscellaneous 115,026 2,247 14,784 568 129,810 2,815 ---------- ------- -------- -------- ---------- -------- TOTAL BONDS 2,524,923 19,713 198,951 5,448 2,723,874 25,161 Common Stock 421,479 31,543 215,755 73,590 637,234 105,133 Preferred Stock 276,755 6,666 40,807 2,092 317,562 8,758 ---------- ------- -------- -------- ---------- -------- TOTAL STOCKS 698,234 38,209 256,562 75,862 954,796 113,891 ---------- ------- -------- -------- ---------- -------- TOTAL BONDS AND STOCKS $3,223,157 $57,922 $455,513 $ 81,130 $3,678,670 $139,052 ========== ======= ======== ======== ========== ======== As of December 31, 2004: U. S. Governments $ 126,772 $ 2,478 $ 31,405 $ 1,064 $ 158,177 $ 3,542 All Other Governments 399,899 350 42,529 27 442,428 377 States, territories and possessions 177,476 951 111,285 1,124 288,761 2,075 Political subdivisions of states, territories and possessions 182,790 980 51,319 344 234,109 1,324 Special revenue 264,313 1,667 154,878 1,647 419,191 3,314 Public utilities 7,840 36 3,562 10 11,402 46 Industrial and miscellaneous 55,323 47 31,706 123 87,029 170 ---------- ------- -------- -------- ---------- -------- TOTAL BONDS 1,214,413 6,509 426,684 4,339 1,641,097 10,848 Common Stock 139,774 12,538 180,178 100,601 319,952 113,139 Preferred Stock 69,075 1,596 22,900 2,100 91,975 3,696 ---------- ------- -------- -------- ---------- -------- TOTAL STOCKS 208,849 14,134 203,078 102,701 411,927 116,835 ---------- ------- -------- -------- ---------- -------- TOTAL BONDS AND STOCKS $1,423,262 $20,643 $629,762 $107,040 $2,053,024 $127,683 ========== ======= ======== ======== ========== ========
Page 21 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) In general, a security is considered a candidate for other-than-temporary impairments if it meets any of the following criteria: a. Trading at a significant (25 percent or more) discount to par or amortized cost (if lower) for an extended period of time (nine months or longer); b. The occurrence of a discrete credit event resulting in (i) the issuer defaulting on a material outstanding obligation; or (ii) the issuer seeking protection from creditors under the bankruptcy laws or any similar laws intended for the court supervised reorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value of their claims; or c. In the opinion of Company's management, it is probable that AIG may not realize a full recovery on its investment, irrespective of the occurrence of one of the foregoing events. As of December 31, 2005, the Company has both the ability and intent to hold these investments to recovery. During 2005 and 2004, the Company reported write-downs on its common and preferred stock investments due to an other-than-temporary decline in fair value of $972 and $2,708, respectively, and reported write-downs on its bond investments due to an other-than-temporary decline in fair value of $2,542 and $53,390, respectively. During 2005 and 2004, the Company reported the following write-downs on its joint venture and partnership investments due to an other-than-temporary decline in fair value:
FOR THE YEARS ENDED DECEMBER 31, 2005 2004 - -------------------------------- ------ ------ Advanced Technology Ventures VI $ - $3,444 Advanced Technology Ventures VII - 2,452 Sprout Capital IX - 3,403 Morgan Stanley III 1,684 - Items less than $1.0 million 11 634 ------ ------ TOTAL $1,695 $9,933 ====== ======
As of December 31, 2005 and 2004, securities with a market value of $289,449 and $122,878, respectively, were on loan. The Company receives as collateral 102.0% of the market value of domestic transactions and 105.0% for cross-border transactions. Securities lent, under the Securities Lending Agreement, are under exclusive control of the Company. Pursuant to the Securities Agency Lending Agreement, AIG Global Securities Lending Corporation, a Delaware registered company, maintains responsibility for the investment and control of such collateral. Securities carried at amortized cost of $2,270,251 and $1,882,606 were deposited with regulatory authorities as required by law at December 31, 2005 and 2004, respectively. Page 22 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) Other invested assets include $966,546 of collateralized loans as of December 31, 2005. As agreed with the Company's domiciliary state, these loans represent AIG's entire investment in life settlements and are being accounted for as a collateral loan in accordance with SSAP No. 21. The admitted value of the loans is not in excess of the cost (including capitalized interest) of acquiring the life settlements and maintaining them in force for so long as the fair value of the underlying life settlements collateralizing such loans is at least equal to the outstanding amount of such loans. During 2005 and 2004, included in Net Investment Income Earned were investment expenses of $7,139 and $5,330, respectively, and interest expense of $77,243 and $53,902, respectively. NOTE 4 - RESERVES FOR LOSSES AND LAE A reconciliation of the Company's reserves for losses and LAE as of December 31, 2005 and 2004 is set forth in the table below:
2005 2004 ----------- ----------- RESERVES FOR LOSSES AND LAE, BEGINNING OF THE PERIOD $ 9,357,799 $ 6,388,455 Adjustments for prior period corrections (165,738) 860,497 Incurred losses and LAE related to: Current accident year 5,111,414 4,654,796 Prior accident years 1,393,640 842,117 ----------- ----------- TOTAL INCURRED LOSSES AND LAE 6,505,054 5,496,913 ----------- ----------- Paid losses and LAE related to: Current accident year (1,284,778) (933,937) Prior accident years (2,792,259) (2,454,129) ----------- ----------- TOTAL PAID LOSSES AND LAE (4,077,037) (3,388,066) ----------- ----------- RESERVES FOR LOSSES AND LAE, AS OF DECEMBER 31, $11,620,078 $ 9,357,799 =========== ===========
During 2005 and 2004 calendar years, estimated ultimate incurred losses and LAE attributable to insured events of prior years increased by $1,393,640 and $842,117, respectively. The Company experienced adverse loss and LAE reserve development primarily related to claims from accident years 2002 and prior. The classes of business accounting for the majority of this adverse development were directors & officers' liability and related management liability classes of business, excess casualty, and excess workers' compensation. In addition, the Company significantly increased its reserves for asbestos based on a ground up review of its asbestos claims exposures conducted for year-end 2005. As of December 31, 2005 and 2004, the Company's reserves for losses and LAE have been reduced by anticipated salvage and subrogation of $188,050 and $161,123, respectively. Page 23 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) As of December 31, 2005 and 2004, the Company's reserves for losses and LAE have been reduced by credits for reinsurance recoverable of $7,425,539 and $6,086,862, respectively (exclusive of intercompany pooling). NOTE 5 - RELATED PARTY TRANSACTIONS A. NATIONAL UNION INTERCOMPANY POOLING AGREEMENT The Company, as well as certain other insurance company subsidiaries of the Parent, is a party to an inter-company reinsurance pooling agreement. In accordance with the terms and conditions of this agreement, the member companies cede all direct and assumed business except business from foreign branches (excluding Canada) to National Union Fire Insurance Company of Pittsburgh, PA (National Union), the lead pooling participant. In turn, each pooling participant receives from National Union their percentage share of the pooled business. In connection therewith, the Company's share of the pool is 36.0%. Accordingly, premiums earned, losses and LAE incurred, and other underwriting expenses, as well as related assets and liabilities, in the accompanying financial statements emanate from the Company's percentage participation in the pool. A list of all pooling participants and their respective participation percentages is set forth in the table below:
NAIC CO. PARTICIPATION MEMBER COMPANY CODE PERCENT -------------- -------- ------------- National Union Fire Insurance Company of Pittsburgh, PA. 19445 38.0% American Home Assurance Company 19380 36.0% Commerce and Industry Insurance Company 19410 10.0% New Hampshire Insurance Company 23481 5.0% The Insurance Company of the State of Pennsylvania 19429 5.0% Birmingham Fire Insurance Company of Pennsylvania 19402 5.0% AIU Insurance Company 19399 1.0% American International Pacific Insurance Company 23795 0.0% American International South Insurance Company 40258 0.0% Granite State Insurance Company 23809 0.0% Illinois National Insurance Company 23817 0.0%
B. AMERICAN INTERNATIONAL UNDERWRITERS OVERSEAS ASSOCIATION POOLING ARRANGEMENT AIG formed American International Underwriters Overseas Association ("AIUOA"), a Bermuda unincorporated association, in 1976, as the pooling mechanism for AIG's international general insurance operations. Page 24 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) A list of all members in AIUOA and their respective participation percentages is set forth in the table below:
NAIC CO. PARTICIPATION MEMBER COMPANY CODE PERCENT -------------- -------- ------------- American International Underwriters Overseas, Limited -- 67.0% New Hampshire Insurance Company (NHIC) 23481 12.0% National Union Fire Insurance Company of Pittsburgh, Pa. (National Union) 19445 11.0% American Home Assurance Company (AHAC) 19380 10.0%
In exchange for membership in AIUOA at the assigned participation, the members contributed capital in the form of cash and other assets, including rights to future business written by international operations owned by the members. The legal ownership and insurance licenses of these international branches remain in the name of NHIC, National Union, and the Company. At the time of forming the AIUOA, the member companies entered into an open-ended reinsurance agreement, cancelable with six months written notice by any member. The reinsurance agreement governs the insurance business pooled in the AIUOA. As discussed in Note 1, the Company continues to follow the current practices relating to its foreign branches and participation in the business of AIUOA by recording: (a) its net (after pooling) liability on such business as direct writings in its statutory financial statements, rather than recording gross direct writings with reinsurance cessions to the other pool members; (b) its corresponding balance sheet position, excluding loss reserves and unearned premium reserves, as a net equity interest in Equities in Underwriting Pools and Associations; and (c) loss reserves and unearned premium reserves are recorded on a gross basis. As of December 31, 2005 and 2004, the Company's interest in AIUOA amounted to $581,410 and $502,165, respectively, gross of $906,874 and $854,307, respectively, in loss reserves and unearned premium reserves, after consideration of the National Union intercompany pooling agreement. Additionally, the Company holds 4.5% of the issued share capital of AIG Europe S.A. for the beneficial interest of the AIUOA. As of December 31, 2005, the Company's interest in AIG Europe S.A. amounted to $64,437. C. GUARANTEE ARRANGEMENTS The Company has issued guarantees whereby the Company unconditionally and irrevocably guarantees all present and future obligations and liabilities of any kind arising from the policies of insurance issued by the guaranteed companies in exchange for an annual guarantee fee. The guarantees are not expected to have a material effect upon the Company's surplus as guaranteed companies have admitted assets in excess of policyholder liabilities. The Company believes that the likelihood of a payment under the guarantee is remote. These guarantees are provided to maintain the guaranteed company's rating status issued by certain rating agencies. In the event of termination of a guarantee, obligations in effect or contracted for on the date of termination would remain covered until extinguished. Page 25 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The Company is party to an agreement with AIG whereby AIG has agreed to make any payments due under the guarantees in the place and stead of the Company. A list of the guarantees that were in effect at December 31, 2005 is outlined in the table below:
GUARANTEE POLICYHOLDER INVESTED ESTIMATED POLICYHOLDER GUARANTEED COMPANY ISSUED OBLIGATIONS ASSETS LOSS SURPLUS ------------------ ---------- ------------ ------------ --------- ------------ AIG Hawaii Insurance Company, Inc. 11/5/1997 $ 98,026 $ 152,274 $- $ 59,829 AIG Czech Republic posjistovna, a.s. 8/1/2003 15,478 18,745 - 18,973* AIG Europe S. A. 9/15/1998 1,060,634 1,049,873 - 703,296* AIG Europe (Netherlands) 9/20/2004 365,491 113,405 - 133,054* AIG Mexico Seguros interamericana, S. A. de C.V. 12/15/1997 60,655 71,646 - 84,469* Landmark Insurance Company, Limited 3/2/1998 361,934 250,272 - 85,855* American General Life and Accident Insurance Company 3/3/2003 7,542,595 8,697,899 - 638,133** American General Life Insurance Company 3/3/2003 21,161,070 23,505,506 - 1,853,471** The United States Life Insurance Company of the City of New York 3/3/2003 3,323,214 3,805,773 - 378,664** The Variable Annuity Life Insurance Company 3/3/2003 29,496,780 33,692,171 - 3,345,667** AIG Edison Life Insurance Company 8/29/2003 18,673,168 19,987,483 - 1,017,274* American International Insurance Company 11/5/1997 338,699 574,093 - 303,593 American International Insurance Company of California 12/15/1997 135,236 51,025 - 19,030 American International Insurance Company of New Jersey 12/15/1997 126,230 43,142 - 26,412 Minnesota Insurance Company 12/15/1997 42,125 50,517 - 17,943 AIG SunAmerica Life Insurance Company + 1/4/1999 4,934,344 6,678,361 - 947,125 Lloyds Syndicate 12/22/2003 904,931 445,345 - 233,920 First SunAmerica Life Insurance Company + 1/4/1999 3,785,855 4,067,962 - 265,572** SunAmerica Insurance Company + 1/4/1999 41,282,892 61,515,532 - 4,404,348** ------------ ------------ --- ----------- TOTAL GUARANTEES $133,709,357 $164,771,024 $- $14,536,628 ============ ============ === ===========
+ The guaranteed company is also backed by a support agreement issued by AIG. * Policyholders' surplus is based on local GAAP financial statements. ** Policyholders' surplus for life companies is increased by the asset valuation reserve (AVR). Page 26 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) D. INVESTMENTS IN AFFILIATES As of December 31, 2005, the Company's common stock investments with its affiliates together with the related change in unrealized appreciation were as follows:
EQUITY AT OWNERSHIP COST DECEMBER 31, CHANGE IN AFFILIATED COMMON STOCK INVESTMENTS PERCENT 2005 2005 EQUITY 2005 ----------------------------------- --------- -------- ------------ ----------- AIG Hawaii Insurance Company, Inc. 100.00% $ 10,000 $ 59,829 $ (2,590) AIG Non Life Holding Company (Japan), Inc. 100.00% 124,477 331,915 63,241 American International Reality Corporation 31.47% 29,581 25,348 (1,932) Eastgreen, Inc. 13.42% 12,804 13,935 355 Pine Street Real Estate Holdings Corporation 31.47% 5,445 21,347 4 AIG Mexico Industrial, I.L.L.C. 49.00% 1,017 1,017 - American International Life Assurance Company 22.48% 70,387 156,529 20,123 American International Insurance Company 25.00% 25,000 75,898 4,380 AIG Claim Service, Inc. 50.00% 48,963 58,879 2,350 Transatlantic Holdings, Inc. 62.00% 34,055 1,134,417 90,652 21st Century Insurance Group 16.69% 240,667 176,555 28,153 -------- ---------- -------- TOTAL COMMON STOCKS - AFFILIATES $602,396 $2,055,669 $204,736 ======== ========== ========
The Company has ownership interests in certain affiliated real estate holding companies. The remaining equity interest in these investments, except for 21st Century Insurance Group and Transatlantic Holdings, Inc., is owned by other affiliated companies, which are wholly owned by the Parent. From time to time, the Company may own investments in partnerships across various other AIG affiliated entities with a combined percentage greater than 10.0%. As of December 31, 2005, the Company's total investments in partnerships with affiliated entities where AIG interest was greater than 10.0% amounted to $912,569. Page 27 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) E. OTHER RELATED PARTY TRANSACTIONS The following table summarizes all transactions (excluding reinsurance and cost allocation transactions) that occurred during 2005 and 2004 between the Company and any affiliated companies that exceeded one-half of one percent of the Company's admitted assets as of December 31, 2005 and 2004:
ASSETS RECEIVED BY ASSETS TRANSFERRED BY THE COMPANY THE COMPANY EXPLANTION ----------------------- ----------------------- DATE OF OF NAME OF STATEMENT STATEMENT TRANSACTION TRANSACTION AFFILIATE VALUE DESCRIPTION VALUE DESCRIPTION ----------- ----------- --------- --------- ----------- --------- ----------- Year Ended December 31, 2005 3/3/2005 Dividend AIG $- n/a $15,866 Cash 6/3/2005 Dividend AIG $- n/a $15,866 Cash 9/3/2005 Dividend AIG $- n/a $15,866 Cash Year Ended December 31, 2004 3/3/2004 Dividend AIG $- n/a $15,866 Cash 6/3/2004 Dividend AIG $- n/a $15,866 Cash 9/3/2004 Dividend AIG $- n/a $15,866 Cash 12/3/2004 Dividend AIG $- n/a $15,866 Cash
The Company also reinsures risks and assumes reinsurance from other affiliates. As agreed upon with the Insurance Department of the State of New York, transactions with Union Excess and Richmond are treated as affiliated. The Company did not change its methods of establishing terms regarding any affiliate transaction during the years ended December 31, 2005 and 2004. In the ordinary course of business, the Company utilizes certain affiliated companies for data center systems, investment services, salvage and subrogation, and claims management. These companies are AIG Technology, Inc., AIG Global Investment Corp., AI Recovery, Inc., and AIG Domestic Claims, Inc., respectively. Page 28 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) In connection with these services, the fees paid by the Company to these affiliates during 2005 and 2004 are outlined in the table below:
FOR THE YEARS ENDED DECEMBER 31, 2005 2004 -------------------------------- -------- -------- AIG Technology, Inc.* $ 26,700 $ 24,421 AIG Global Investment Corporation 4,565 3,668 AI Recovery, Inc. 3,574 3,102 AIG Domestic Claims, Inc. 107,015 114,335 -------- -------- TOTAL $141,854 $145,526 ======== ========
* Formerly AIG Data Center, Inc. As of December 31, 2005 and 2004, short-term investments included amounts invested in the AIG Managed Money Market Fund of $73,379 and $41,452, respectively. Federal and foreign income taxes recoverable from the Parent as of December 31, 2005 and 2004 amounted to $794,462 and $575,690, respectively. During 2005 and 2004, the Company sold $191,606 and $215,564, respectively, of premium receivables without recourse to AI Credit Corporation, and recorded losses of $3,436 and $2,834, respectively, related to these transactions. As of December 31, 2005 and 2004, the Company had the following balances payable/receivable to/from its affiliates (excluding reinsurance transactions):
AS OF DECEMBER 31, 2005 2004 ------------------ ---------- -------- Balances with pool member companies $ - $116,172 Balances with less than 0.5% of admitted assets 33,968 230,747 ---------- -------- PAYABLE TO PARENT, SUBSIDIARIES AND AFFILIATES $ 33,968 $346,919 ========== ======== AIG $1,326,780 $ - Balances with pool member companies 218,275 102,731 Balances with less than 0.5% of admitted assets 95,038 327,586 ---------- -------- RECEIVABLE FROM PARENT, SUBSIDIARIES AND AFFILIATES $1,640,093 $430,317 ========== ========
Page 29 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) NOTE 6 -REINSURANCE In the ordinary course of business, the Company reinsures certain risks with affiliates and other companies. Such arrangements serve to limit the Company's maximum loss on catastrophes, large and unusually hazardous risks. To the extent that any reinsuring company might be unable to meet its obligations, the Company would be liable for its respective participation in such defaulted amounts. The Company purchased catastrophe excess of loss reinsurance covers protecting its net exposures from an excessive loss arising from property insurance losses and excessive losses in the event of a catastrophe under workers' compensation contracts issued without limit of loss. During 2005 and 2004, the Company's net premiums written and net premiums earned were comprised of the following:
2005 2004 ------------------------- ------------------------- FOR THE YEARS ENDED DECEMBER 31, WRITTEN EARNED WRITTEN EARNED - -------------------------------- ----------- ----------- ----------- ----------- Direct premiums $ 6,522,919 $ 6,219,261 $ 6,125,467 $ 5,785,036 Reinsurance premiums assumed: Affiliates 11,104,687 11,235,985 11,048,099 10,535,993 Non-affiliates 23,903 (176,461) 20,449 21,525 ----------- ----------- ----------- ----------- GROSS PREMIUMS 17,651,509 17,278,785 17,194,015 16,342,554 ----------- ----------- ----------- ----------- Reinsurance premiums ceded: Affiliates 9,252,497 9,022,390 8,878,722 8,379,091 Non-affiliates 1,247,759 1,210,575 1,325,462 1,440,719 ----------- ----------- ----------- ----------- NET PREMIUMS $ 7,151,253 $ 7,045,820 $ 6,989,831 $ 6,522,744 =========== =========== =========== ===========
Page 30 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The maximum amount of return commissions which would have been due reinsurers if all of the Company's reinsurance had been cancelled as of December 31, 2005 and 2004 with the return of the unearned premium reserve is as follows:
ASSUMED REINSURANCE CEDED REINSURANCE NET ----------------------- ----------------------- ----------------------- UNEARNED UNEARNED PREMIUM COMMISSION PREMIUM COMMISSION PREMIUM COMMISSION RESERVES EQUITY RESERVES EQUITY RESERVES EQUITY ---------- ---------- ---------- ---------- ---------- ---------- DECEMBER 31, 2005 Affiliated $5,444,204 $663,323 $3,544,901 $413,904 $1,899,303 $249,419 Non Affiliated 6,481 790 504,864 58,948 (498,383) (58,158) ---------- -------- ---------- -------- ---------- -------- TOTALS $5,450,685 $664,113 $4,049,765 $472,852 $1,400,920 $191,261 ========== ======== ========== ======== ========== ======== DECEMBER 31, 2004 Affiliated $5,283,256 $672,080 $3,314,793 $398,922 $1,968,463 $273,158 Non Affiliated 6,117 778 467,677 56,283 (461,560) (55,505) ---------- -------- ---------- -------- ---------- -------- TOTALS $5,289,373 $672,858 $3,782,470 $455,205 $1,506,903 $217,653 ========== ======== ========== ======== ========== ========
As of December 31, 2005 and 2004 and for the years then ended, the Company's unearned premium reserves, paid losses and LAE, and reserves for losses and LAE (including IBNR), have been reduced for reinsurance ceded as follows:
UNEARNED PAID LOSSES RESERVES FOR PREMIUM AND LOSSES AND RESERVES LAE LAE ---------- ----------- ------------ DECEMBER 31, 2005 Affiliates $3,544,901 $ 91,985 $14,577,562 Non-Affiliates 504,864 307,331 3,542,634 ---------- -------- ----------- Total $4,049,765 $399,316 $18,120,196 ========== ======== =========== DECEMBER 31, 2004 Affiliates $3,314,793 $ (4,950) $12,392,072 Non-Affiliates 467,677 250,942 2,844,971 ---------- -------- ----------- TOTAL $3,782,470 $245,992 $15,237,043 ========== ======== ===========
Page 31 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The Company's unsecured reinsurance recoverables as of December 31, 2005 in excess of 3.0% of its Capital and surplus is set forth in the table below:
NAIC CO. REINSURER CODE AMOUNT - --------- -------- ----------- Affilliates: National Union Fire Company of Pittsburgh. Pa. 19445 $13,832,981 American International Insurance Company 32220 485,807 American Home Assurance Company 19380 426,426 Transatlantic Reinsurance Company 19453 299,719 American International Underwriters Overseas, Ltd. - 261,189 New Hampshire Indemnity Company 23833 145,633 AIU Insurance Company 19399 143,588 AIG Global Trade and Political Risk Insurance Co. 10651 126,120 American Internatlional Reinsurance Co. Ltd - 63,082 New Hampshire Insurance Company 23841 59,913 Insurance Company of the State of Pennsylvania 19429 58,964 United Guaranty Insurance Company 11715 46,718 Commerce and Industry Insurance Company 19410 28,644 Birmingham Fire Insurance Company of Pa. 19402 13,225 Landmark Insurance Company 35637 9,178 Audubon Insurance Company 19933 5,789 Starr Excess Liability Insurance Company, Ltd. 10932 4,527 Hartford Steam Boiler Inspection and Insurance Co. 11452 4,064 Euroguard Insurance Company Limited - 3,607 Illinois National Insurance Company 23817 3,474 National Union Fire Ins Company of Vermont - 3,047 AIU Insurance Company (Japan) - 2,823 American International Life Assurance Co. NY (US) 60607 2,567 Granite State Insurance Company 23809 2,413 Ascot Syndicate Lloyds 1414 - 2,112 American General Life Insurance Company 60488 1,981 Arabian American Insurance Company, Ltd. - 1,003 Other affiliates below $1.0 million - 34,646 ----------- TOTAL AFFILIATES 16,073,240 ----------- Munich Re Group - 169,035 Lloyd's - 366,924 Swiss Re Group - 226,368 Berkshire Hathaway Group - 175,328 ----------- TOTAL NON AFFILIATES 937,655 ----------- TOTAL AFFILIATES AND NON AFFILIATES $17,010,895 ===========
Page 32 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) During 2005 and 2004, the Company reported in its Statements of Income $43,140 and $61,923, respectively, of statutory underwriting losses, which were comprised of premiums earned of $(1,710) and $(8,315), respectively, less losses incurred of $41,430 and $53,608 respectively, as a result of commutations with the following reinsurers:
COMPANY 2005 2004 - ------- ------- ------- SCOR Reinsurance Company $42,442 $21,276 Suncorp Metway 522 - Copenhagen Reinsurance 165 - Gulfstream Insurance Company 12 - Aviabel S.A. - 274 AXA Albingia - 5,837 AXA Corporate Solutions - 3,475 Converium Reins. - 7,528 Cottrell Syndicate - (67) CX Reinsurance - 4,274 Farm Bureau Mutual - 634 General Re Corporation - 16,090 National Indemnity Company - 2,671 Providence Washington - (17) Royal and Sun Alliance, PLC - 234 TIG Insurance Company - (870) Trenwick America - 584 ------- ------- TOTAL $43,141 $61,923 ======= =======
As of December 31, 2005 and 2004, the Company had reinsurance recoverables on paid losses in dispute of $141,589 and $76,202, respectively. During 2005 the Company had written off related reinsurance recoverable balances of $65,282. Page 33 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) NOTE 7 - RETROACTIVE REINSURANCE As of December 31, 2005, the Company's reported the following activity and balances with respect to its retroactive reinsurance arrangements:
ASSUMED CEDED --------- -------- Reserves Transferred: Initial Reserves $ 216,347 $453,727 Adjustments - prior year(s) (178,026) (21,800) Adjustments - current year 6,783 (11,763) --------- -------- BALANCE AS OF DECEMBER 31, 2005 45,104 420,164 --------- -------- Paid Losses Recovered: Prior year(s) 3,212 325,959 Current year 8,999 29,161 --------- -------- TOTAL RECOVERED AS OF DECEMBER 31, 2005 12,211 355,120 --------- -------- CARRIED RESERVES AS OF DECEMBER 31, 2005 $ 32,893 $ 65,044 ========= ======== Consideration Paid or Received: Initial Reserves $ 201,597 $276,437 Adjustments - prior year(s) (180,000) (18,038) Adjustments - current year - (830) --------- -------- TOTAL PAID AS OF DECEMBER 31, 2005 $ 21,597 $257,569 ========= ======== Special Surplus from Retroactive Reinsurance: Initial surplus gain or loss realized $ - $ 47,559 Adjustments - prior year(s) - 34,019 Adjustments - current year - (13,471) --------- -------- BALANCE AS OF DECEMBER 31, 2005 $ - $ 68,107 ========= ======== CUMULATIVE FUNDS TRANSFERRED TO UNASSIGNED SURPLUS AS OF DECEMBER 31, 2005 $ - $ 6,279 ========= ========
Page 34 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The Company's retroactive reinsurance balances (by reinsurer) as of December 31,2005, is set forth in the table below: AS OF DECEMBER 31, 2005
REINSURER ASSUMED CEDED - --------- ------- ------- Commerce and Industry Insurance Company of Canada $ 6,897 $ - American International Reins. Co. - 57,331 Guideone Mutual Ins Co. 9,141 - American Internaional Specialty Lines Insurance Company 15,877 - PEG Reinsurance Co. - 1,395 Swiss Re America Corp - 1,078 Upinsco Inc - 1,083 All other reinsurers below $1.0 million 978 4,157 ------- ------- TOTAL $32,893 $65,044 ======= =======
NOTE 8 - DEPOSIT ACCOUNTING ASSETS AND LIABILITIES Certain of the products offered by the Company include funding components or have been structured in a manner such that little or no insurance risk is actually transferred. In addition, the Company has entered into several reinsurance arrangements, both treaty and facultative, which were determined to be deposit agreements. Funds received in connection with these arrangements are recorded as deposit liabilities, rather than premiums and incurred losses. Conversely, funds paid in connection with these arrangements are recorded as deposit assets, rather than as ceded premiums and ceded incurred losses. As of December 31, 2005 and 2004, the Company's deposit assets and liabilities were comprised of the following:
2005 2004 ------------------------ ------------------------ DEPOSIT DEPOSIT DEPOSIT DEPOSIT ASSETS LIABILITIES ASSETS LIABILITIES ---------- ----------- ---------- ----------- Direct $ - $ 56,768 $ - $ 32,990 Assumed - 430,142 - 432,485 Ceded 1,336,343 - 1,638,716 - ---------- -------- ---------- -------- TOTAL $1,336,343 $486,910 $1,638,716 $465,475 ========== ======== ========== ========
Page 35 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) A reconciliation of the Company's deposit asset and deposit liabilities as of December 31, 2005 and 2004(1) is set forth in the table below:
2005 2004 ------------------------ ------------------------ DEPOSIT DEPOSIT DEPOSIT DEPOSIT ASSETS LIABILITIES ASSETS LIABILITIES ---------- ----------- ---------- ----------- BALANCE AT BEGINNING OF PERIOD $1,638,716 $465,475 $2,100,303 $558,125 Deposit activity, including loss recoveries (446,464) (11,942) (435,087) (84,181) Interest income or expense, net of amortization of margin 90,901 33,377 106,939 (8,469) Non-admitted asset portion 53,190 - (133,439) - ---------- -------- ---------- -------- BALANCE AT END OF PERIOD $1,336,343 $486,910 $1,638,716 $465,475 ========== ======== ========== ========
During 2005 the Company received consideration of $275,106 resulting from the commutations of its reinsurance deposit accounting arrangement with the Richmond Insurance Company, Ltd. As of December 31, 2005, the deposit assets with related parties, mostly reinsurance transactions with Union Excess, amounted to $ 1,192,231. During 2005, the Company commuted $258,052 of the deposit assets with Union Excess and Richmond resulting a $3,737 loss. NOTE 9 - FEDERAL INCOME TAXES The Company files a consolidated U.S. federal income tax return with the Parent and its domestic subsidiaries pursuant to a tax sharing agreement. The agreement provides that the Parent will not charge the Company a greater portion of the consolidated tax liability than would have been paid by the Company if it had filed a separate federal income tax return. In addition, the agreement provides that the Company will be reimbursed by the Parent for tax benefits relating to any net losses or any tax credit of the Company utilized in filing the consolidated return. The federal income tax recoverables in the accompanying Statements of Admitted Assets were due from the Parent. As of December 31, 2005 and 2004, the U.S. federal income tax rate applicable to ordinary income was 35.0%. - ---------- (1) The beginning of period for the 2004 year represents the deposit asset and liability balances at the inception date of the underlying agreements. Page 36 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The components of the Company's net deferred tax assets/liabilities at December 31, 2005 and 2004 are as follows:
AS OF DECEMBER 31, 2005 2004 - ------------------ ---------- --------- Gross deferred tax assets $1,147,722 $ 946,890 Gross deferred tax liabilities (149,521) (128,671) Non-admitted deferred tax assets in accordance with SSAP No.10, income taxes (689,694) (495,434) ---------- --------- NET DEFERRED TAX ASSETS ADMITTED $ 308,507 $ 322,785 ========== ========= CHANGE IN DEFERRED TAX ASSETS NON-ADMITTED $ (194,260) $ 225,562 ========== =========
During 2005 and 2004, the Company's current federal income tax expense (benefit) was comprised of the following:
FOR THE YEARS ENDED DECEMBER 31, 2005 2004 - -------------------------------- --------- ------- Income tax (benefit) expense on net underwriting and net investment income $(252,358) $61,549 Federal income tax adjustment - prior year 9,311 24,762 --------- ------- CURRENT INCOME TAX (BENEFIT) EXPENSE $(243,047) $86,311 ========= =======
Page 37 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000's OMITTED) The composition of the Company's net deferred tax assets at December 31, 2005 and 2004, and changes in deferred income taxes for 2005 is set forth in the table below:
AS OF DECEMBER 31, 2005 2004 CHANGE - ------------------ ---------- --------- --------- Deferred Tax Assets Loss reserve discount $ 499,838 $ 402,853 $ 96,985 Non-admitted assets 206,602 186,532 20,070 Unearned premium reserve 303,414 289,576 13,838 Partnership adjustments - 6,494 (6,494) Pension adjustments 7,328 7,327 1 Other temporary difference 130,540 54,108 76,432 ---------- --------- --------- GROSS DEFERRED TAX ASSETS 1,147,722 946,890 200,832 Non-admitted deferred tax assets (689,694) (495,434) (194,260) ---------- --------- --------- ADMITTED DEFERRED TAX ASSETS 458,028 451,456 6,572 ---------- --------- --------- Deferred Tax Liabilities Unrealized capital gains (115,317) (128,671) 13,354 Partnership adjustments (4,047) - (4,047) Other temporary differences (30,157) - (30,157) ---------- --------- --------- GROSS DEFERRED TAX LIABILITIES (149,521) (128,671) (20,850) ---------- --------- --------- NET ADMITTED DEFERRED TAX ASSETS $ 308,507 $ 322,785 $ (14,278) ========== ========= ========= Gross deferred tax assets $1,147,722 $ 946,890 $ 200,832 Gross deferred tax liabilities (149,521) (128,671) (20,850) ---------- --------- --------- NET DEFERRED TAX ASSETS $ 998,201 $ 818,219 $ 179,982 ========== ========= ========= Income tax effect of unrealized capital (gains) / losses (13,354) --------- CHANGE IN DEFERRED INCOME TAXES $ 166,628 =========
Page 38 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000's OMITTED) The actual tax expense (benefit) on income from operations differs from the tax expense (benefit) calculated at the statutory tax rate. A reconciliation of the Company's income tax expense (benefit) together with the significant book to tax adjustments for 2005 is set forth below:
TAX AMOUNT EFFECT --------- --------- Net loss before federal income taxes $(408,280) $(142,898) - ---------------------------------------------------------------- Book to tax adjustments: - ---------------------------------------------------------------- Tax exempt income and dividends received deduction, net of proration (296,930) (103,926) Intercompany dividends (11,240) (3,934) Meals and entertainment 1,802 631 Change in non-admitted assets (54,557) (19,095) Federal income tax adjustment - prior year - (9,311) Remediation adjustments - (36,343) Contingent tax reserves - (21,763) Foreign tax credits - (52,544) --------- --------- TOTAL BOOK TO TAX ADJUSTMENTS (360,925) (246,285) --------- --------- FEDERAL TAXABLE LOSS AND TAX BENEFIT $(769,205) $(389,183) ========= ========= - ---------------------------------------------------------------- Current Federal income tax (benefit) expense $(243,047) Income tax on net realized capital gains 20,492 Change in deferred income taxes (166,628) --------- Total Federal income tax benefit $(389,183) =========
The amount of federal income taxes incurred and available for recoupment in the event of future net operating losses for tax purposes is set forth in the table below: Current year $ - First preceding year $75,153 -------
The Company did not have any unused loss carry forwards or tax credits available to offset against future taxable income as of December 31, 2005. Page 39 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) NOTE 10 - PENSION PLANS AND DEFERRED COMPENSATION ARRANGEMENTS A. GENERAL Employees of AIG, the ultimate holding company, its subsidiaries and certain affiliated companies, including employees in foreign countries, are generally covered under various funded and insured pension plans. Eligibility for participation in the various plans is based on either completion of a specified period of continuous service or date of hire, subject to age limitation. AIG's U.S. retirement plan is a qualified, non-contributory defined benefit retirement plan which is subject to the provisions of the Employee Retirement Income Security Act of 1974. 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 five or more years of service 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. The employees may elect certain options with respect to their receipt of their pension benefits including a joint and survivor annuity. An employee with ten or more years of service 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 service, such employees forfeit their right to receive any pension benefits accumulated thus far. 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. The Company's share of net expense for the qualified pension plan was $6,500 and $9,800 for the years ended December 31, 2005 and 2004, respectively. B. DEFERRED COMPENSATION PLAN Some of the Company's officers and key employees are participants in AIG's stock option plans of 1991 and 1999. Details of these plans are published in AIG's 2005 Annual Report on form 10-K. During 2005 the Parent allocated $2,177 of the cost of these stock options and certain other deferred compensation programs to the Company. POST-RETIREMENT BENEFIT PLANS AIG's US postretirement medical and life insurance benefits are based upon the employee electing immediate retirement and having a minimum of ten years of service. Retirees and their dependents who were 65 by May 1, 1989 participate in the medical plan at no cost. Employees who retired after May 1, 1989 or prior to January 1, 1993 pay the active employee premium if under age 65 and 50 percent of the active employee premium if over age 65. Retiree contributions are subject to adjustment annually. Other cost sharing features of the medical plan include deductibles, coinsurance and Medicare coordination and a lifetime maximum benefit of $2,000. The maximum life insurance benefit prior to age 70 is $32 with a maximum $25 thereafter. Page 40 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) 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 insurance benefit premium reduced by a credit which is based upon years of service at retirement. The life insurance benefit varies by age at retirement from $5 for retirement at ages 55 through 59 and $10 for retirement at ages 60 through 64 and $15 from retirement at ages 65 and over. The postretirement benefit obligations and amounts recognized in AIG's consolidated balance sheet as of December 31, 2005 and 2004 were $140,100 and $243,000, respectively. These obligations are not funded currently. The Company's share of the expense of other postretirement benefit plans was $200 and $0 for 2005 and 2004, respectively. AIG is the Plan Sponsor of the pension, postretirement and benefit plans and is ultimately responsible for the conduct of the plans. The Company is only obligated to the extent of their allocation of expenses from these plans. The Company's weighted average assumptions that were used to determine its pension benefit obligations as of December 31, 2005 and 2004 are set forth in the table below:
AS OF DECEMBER 31, 2005 2004 ------------------ ---------- ---------- Discount rate 5.50% 5.75% Rate of compensation increase (average) 4.25% 4.25% Measurement date 12/31/2005 12/31/2004 Medical cost trend rate N/A N/A
C. POST-EMPLOYMENT BENEFITS AND COMPENSATED ABSENCES 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 expenses include medical and life insurance continuation and COBRA medical subsidies. Page 41 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) NOTE 11 - CAPITAL AND SURPLUS AND DIVIDEND RESTRICTIONS A. CAPITAL AND SURPLUS The issued capital and surplus position of the Company at December 31, 2005 and 2004 was as follows:
2005 2004 ---------- ---------- Common stock, par value $ 25,426 $ 25,426 Common stock in excess of par value 2,779,526 702,746 ---------- ---------- TOTAL CAPITAL 2,804,952 728,172 ---------- ---------- Unassigned surplus 2,176,592 2,529,590 Special surplus from retroactive reinsurance arrangements 68,107 81,578 ---------- ---------- TOTAL SURPLUS 2,244,699 2,611,168 ---------- ---------- TOTAL CAPITAL AND SURPLUS $5,049,651 $3,339,340 ========== ==========
The portion of unassigned funds (surplus) at December 31, 2005 and 2004 represented or reduced by each item below is as follows:
2005 2004 ----------- ----------- Unrealized gains $ 1,725,717 $ 1,570,673 Non-admitted asset values $(1,378,107) $(1,055,332) Provision for reinsurance $ (210,152) $ (376,738)
Page 42 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) B. RISK-BASED CAPITAL REQUIREMENTS The NAIC has adopted a Risk-based Capital ("RBC") formula to be applied to all property and casualty insurance companies. RBC is a method of establishing the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. A company's RBC is calculated by applying different factors to various asset classes, net premiums written and loss and LAE reserves. A company's result from the RBC formula is then compared to certain established minimum capital benchmarks. To the extent a company's RBC result does not either reach or exceed these established benchmarks, certain regulatory actions may be taken in order for the insurer to meet the statutorily-imposed minimum capital and surplus requirements. In connection therewith, the Company has satisfied the capital and surplus requirements of RBC for the 2005 reporting period. C. DIVIDEND RESTRICTIONS Under New York law, the Company may pay cash dividends only from earned surplus determined on a statutory basis. Further, the Company is restricted (on the basis of the lower of 10.0% of the Company's statutory surplus as of December 31, 2005, or 100.0% of the Company's adjusted net investment income for the preceding 36 month period ending December 31, 2005) as to the amount of dividends it may declare or pay in any twelve-month period without the prior approval of the Insurance Department of the State of New York. At December 31, 2005, the maximum dividend payments, which may be made without prior approval during 2006, is approximately $504,965. Within the limitations noted above, there are no restrictions placed on the portion of Company profits that may be paid as ordinary dividends to stockholders. There were no restrictions placed on the Company's surplus including for whom the surplus is being held. There is no stock held by the Company for any special purpose. Page 43 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) NOTE 12 - CONTINGENCIES A. LEGAL PROCEEDINGS The Company is involved in various legal proceedings incident to the operation of its business. Such proceedings include claims litigation in the normal course of business involving disputed interpretations of policy coverage. Other proceedings in the normal course of business include allegations of underwriting errors or omissions, bad faith in the handling of insurance claims, employment claims, regulatory activity, and disputes relating to the Company's business ventures and investments. Other legal proceedings include the following: AIG, National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), and American International Specialty Lines Insurance Company (AISLIC) have been named defendants (the AIG Defendants) in two putative class actions in state court in Alabama that arise out of the 1999 settlement of class and derivative litigation involving Caremark Rx, Inc. (Caremark). An excess policy issued by a subsidiary of AIG with respect to the 1999 litigation was expressly stated to be without limit of liability. In the current actions, plaintiffs allege that the judge approving the 1999 settlement was misled as to the extent of available insurance coverage and would not have approved the settlement had he known of the existence and/or unlimited nature of the excess policy. They further allege that the AIG Defendants 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 $3,200,000, plus punitive damages. The AIG Defendants 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. The AIG Defendants 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. The AIG Defendants and Caremark are seeking appellate relief from the Alabama Supreme Court. The AIG Defendants cannot now estimate either the likelihood of its prevailing in these actions or the potential damages in the event liability is determined. On September 2, 2005, AIG sued Robert Plan Corporation, the agency which services personal auto assigned risk business alleging the misappropriation of funds and other violations of contractual arrangements. On September 27, 2005, Robert Plan Corporation countersued AIG for $370,000 in disgorged profits and $500,000 of punitive damages. Subsequently, American Home Assurance Company (American Home) was named as a counterclaim defendant in this case. American Home believes that the countersuit is without merit and intends to defend it vigorously. Effective February 9, 2006, AIG reached a resolution of claims and matters under investigation with the United States Department of Justice (the DOJ), the United States Securities and Exchange Commission (the SEC), the Office of the Attorney General of the State of New York (the NYAG) and the New York Insurance Department (the NYDOI). The settlements resolve outstanding litigation and allegations by such agencies against AIG in connection with the accounting, financial reporting and insurance brokerage practices of AIG and its subsidiaries, Page 44 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) as well as claims relating to the underpayment of certain workers compensation premium taxes and other assessments. As a result of these settlements, AIG will make payments totaling approximately $1,640,000, including (i) $375,000 to be paid into a fund under the supervision of the NYAG and NYDOI to be available principally to pay certain AIG insurance company subsidiary policyholders who purchased excess casualty policies through Marsh & McLennan Companies, Inc. and Marsh Inc. and (ii) $343,000 to be paid into a fund under the supervision of the NYAG and the NYDOI to be used to compensate various states in connection with the underpayment of certain workers compensation premium taxes and other assessments. Various federal and state regulatory agencies are reviewing certain other transactions and practices of AIG and its subsidiaries, including the Company, in connection with certain industry-wide and other inquiries including, but not limited to, insurance brokerage practices relating to contingent commissions. It is possible that additional civil or regulatory proceedings will be filed. Additionally, various actions have been brought against AIG arising out of the liability of certain AIG subsidiaries, including the Company, for taxes, assessments, and surcharges for policies of workers compensation insurance. As of December 31, 2005, the Company recorded a provision of $54,468 to cover any contingent obligations arising from the potential underpayment of these taxes and assessments. Since October 19, 2004, AIG and certain subsidiaries have been named as defendants in numerous complaints that were filed in federal court and 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 and anti-racketeering laws, various state deceptive and unfair practice laws and certain state laws governing fiduciary duties. The alleged basis of these claims is that there was a conspiracy between insurance companies and insurance brokers with regard to the bidding practices for insurance coverage in certain sectors of the insurance industry. The Judicial Panel on Multidistrict Litigation entered an order consolidating most of these cases and transferring them to the United States District Court for the District of New Jersey. The remainder of these cases 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 names AIG and the following additional AIG subsidiaries as defendants: AIU Insurance Company, American Home, National Union, AISLIC, American International Insurance Company, Birmingham Fire Insurance Company of Pennsylvania, Commerce and Industry Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company of Louisiana, New Hampshire Insurance Company, The Hartford Steam Boiler Inspection and Insurance Company, and The Insurance Company of the State of Pennsylvania. Also on August 15, 2005, AIG, American Home, and AIG Life Insurance Company were named as defendants in a Corrected First Consolidated Amended Employee Benefits Complaint filed in the District of New Jersey that adds claims under ERISA. 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, which defendants will oppose. Both the motion to dismiss and the class certification motions are pending. Page 45 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) On January 18, 2006, American International Aviation Agency, Inc. (AIAA) and Redholm Underwriting Agents Limited (Redholm) commenced two separate arbitration proceedings against New Hampshire Insurance Company (NHIC) in the United States and United Kingdom, respectively, seeking to prevent NHIC from terminating and/or breaching certain agreements with AIAA, Redholm and their affiliates. On the same date, AIAA filed an action in Georgia state court against NHIC, and sought an injunction barring NHIC from terminating and/or breaching these agreements pending the outcome of the arbitration. AIAA and Redholm were, at the time, managing general agents for certain insurance company subsidiaries of AIG, and are wholly owned by C.V. Starr & Co., Inc. (C.V. Starr), a company that is controlled by certain former senior executives of AIG. AIG and its affiliates thereafter terminated their managing general agency relationship with AIAA. They had previously terminated their agency relationship with Redholm. Subsequent to the commencement of these arbitration proceedings, two other managing general agencies owned by C.V. Starr - American International Marine Agency, Inc. (AIMA), and C.V. Starr & Co. (Starr California) - commenced two additional arbitration proceedings against AIG and certain of its affiliates, and Starr Technical Risks Agency, Inc. (Starr Tech), a third C.V. Starr agency (together with AIAA, AIMA and Starr California, the C.V. Starr Agencies), asserted claims in an arbitration that had been commenced by certain AIG subsidiaries. The AIG insurance companies named in claims asserted by the C.V. Starr Agencies are: The Insurance Company of the State of Pennsylvania, Illinois National Insurance Co., American International South Insurance Company, Granite State Insurance Company, AISLIC, National Union, Birmingham Fire Insurance Company of Pennsylvania, American Home, Commerce and Industry Insurance Company, and AIU Insurance Company (the AIG Insurance Company Defendants). The claims asserted by the C.V. Starr Agencies allege that AIG and the AIG Insurance Company Defendants are irreparably harming the C.V. Starr Agencies by, among other things, misappropriating their business relationships and proprietary information, predatorily hiring their employees, and restricting their access to offices, computer systems, documents and other information. They seek damages and injunctive relief: (i) permitting the C.V. Starr Agencies to operate independently from AIG, and to produce business for other companies, and (ii) restraining AIG and its affiliates from competing with the C.V. Starr Agencies for certain business and from using the C.V. Starr Agencies' proprietary information. AIG and certain of the AIG Insurance Company Defendants have also instituted arbitration and litigation in New York and litigation in Georgia seeking damages, equitable and injunctive relief: (i) preventing the C.V. Starr Agencies from denying AIG access to its documents and information; (ii) enjoining the C.V. Starr Agencies from engaging in certain insurance and reinsurance transactions with non-AIG companies; (iii) requiring the C.V. Starr Agencies to relinquish control of certain premium trust funds; and (iv) seeking damages resulting from any improper or illegal conduct of the C.V. Starr Agencies. AIG and its affiliates have also terminated or provided notice of termination of their managing general agency relationships with Starr Tech and Starr California. On March 20, 2006, C.V. Starr filed a lawsuit in the United States District Court for the Southern District of New York against AIG, alleging that the use by certain AIG affiliates of the name "Starr" in commerce infringes trademarks held by C.V. Starr. The Complaint alleges claims for federal trademark infringement, common law unfair competition, service mark infringement and dilution pursuant to New York law. C.V. Starr also alleges that AIG's continued ownership of certain Internet domain names that include the "Starr" name, violates federal law and constitutes conversion of C.V. Starr property. C.V. Starr seeks to enjoin AIG from using the name Starr, to turn over its rights in certain trademark and domain name rights, and also seeks damages as a result of these violations. Page 46 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) AIG and its affiliates involved in the arbitration and litigation proceedings with the C.V. Starr Agencies cannot now estimate either the likelihood of their prevailing in these actions or any potential damages in the event liability is determined. AIG is also subject to various legal proceedings which have been disclosed in AIG's periodic filings under the Securities Exchange Act of 1934, as amended, in which the Company is not named as a party, but whose outcome may nonetheless adversely affect the Company's financial position or results of operation. Except for the provisions the Company recorded related to the contingent liabilities arising out of the potential underpayment of premium taxes and assessments described in the preceding paragraphs, the Company cannot predict the outcome of the matters described above, estimate the potential costs related to these matters, or determine whether other AIG subsidiaries, including the Company, would have exposure to proceedings in which they are not named parties by virtue of their participation in an inter-company pooling arrangement and, accordingly, no reserve is being established in the Company's financial statements at December 31, 2005. In the opinion of management, the Company's ultimate liability for the matters referred to above is not likely to have a material adverse effect on the Company's financial position, although it is possible that the effect would be material to the Company's results of operations for an individual reporting period. B. ASBESTOS AND ENVIRONMENTAL RESERVES The Company continues to receive indemnity claims asserting injuries from toxic waste, hazardous substances, asbestos and other environmental pollutants and alleged damages to cover the clean-up costs of hazardous waste dump sites (environmental claims). Estimation of 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. 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. The Company and other industry members have 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 impact on the Company's future operating results or financial position. The Company's environmental exposure arises from the sale of general liability, product liability or commercial multi peril liability insurance, or by assumption of reinsurance within these lines of business. The Company tries to estimate the full impact of the asbestos and environmental exposure by establishing full case basis reserves on all known losses and establishes bulk reserves for IBNR losses and LAE based on management's judgment after reviewing all the available loss, exposure, and other information. Page 47 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) The Company's asbestos and environmental related loss and LAE reserves (including case & IBNR reserves) as of December 31, 2005 and 2004, gross net of reinsurance credits, are as follows:
ASBESTOS LOSSES ENVIRONMENTAL LOSSES --------------------- -------------------- 2005 2004 2005 2004 ---------- -------- -------- -------- Direct: Loss and LAE reserves, beginning of period $ 693,044 $257,696 $256,889 $185,969 Incurred losses and LAE 489,955 507,688 63,051 111,636 Calendar year paid losses and LAE (95,374) (72,340) (31,264) (40,715) ---------- -------- -------- -------- Loss and LAE reserves, end of period $1,087,625 $693,044 $288,676 $256,890 ========== ======== ======== ======== Assumed: Loss and LAE reserves, beginning of period $ 90,162 $ 32,780 $ 6,626 $ 8,074 Incurred losses and LAE 14,722 62,592 830 (556) Calendar year paid losses and LAE (7,485) (5,209) (895) (892) ---------- -------- -------- -------- Loss and LAE reserves, end of period $ 97,399 $ 90,163 $ 6,561 $ 6,626 ========== ======== ======== ======== Net of Reinsurance: Loss and LAE reserves, beginning of period $ 348,261 $103,262 $142,025 $ 80,833 Incurred losses and LAE 209,273 275,687 16,410 82,751 Calendar year paid losses and LAE (39,288) (30,688) (23,458) (21,559) ---------- -------- -------- -------- LOSS AND LAE RESERVES, END OF PERIOD $ 518,246 $348,261 $134,977 $142,025 ========== ======== ======== ========
Management believes that the reserves carried for the asbestos and environmental claims at December 31, 2005 are adequate as they are based on known facts and current law. 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. C. OTHER CONTINGENCIES In the ordinary course of business, the Company enters into structured settlements to settle certain claims. Structured settlements involve the purchase of an annuity to fund future claim obligations. In the event the life insurers providing the annuity, on certain structured settlements, are not able to meet their obligations, the Company would be liable for the payments of benefits. Page 48 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) As of December 31, 2005, the Company has not incurred a loss and there has been no default by any of the life insurers included in the transactions. Management believes that based on the financial strength of the life insurers involved in these structured settlements, the likelihood of a loss is remote. In connection therewith, as of December 31, 2005, the Company's loss reserves eliminated by annuities and unrecorded loss contingencies amounted to $724,600 and $705,900, respectively. As part of its private equity portfolio investment, as of December 31, 2005, the Company may be called upon for an additional capital investment of up to $293,300. The Company expects only a small portion of this portfolio will be called during 2006. As fully disclosed in Note 5, the Company has guaranteed the policyholder obligations of certain affiliated insurance companies. Each of the guaranteed affiliates has admitted assets in excess of policyholder liabilities. The Company believes that the likelihood of a payment under any of these guarantees is remote. NOTE 13 - OTHER SIGNIFICANT MATTERS A. SEPTEMBER 11, 2001 EVENTS As of December 31, 2005 and 2004, the Company's ultimate losses and LAE as a result of the September 11th events gross, ceded and net of reinsurance, is set forth in the table below:
AS OF DECEMBER 31, 2005 2004 ------------------ --------- --------- Gross of reinsurance $ 448,183 $ 448,183 Ceded reinsurance (386,704) (386,704) --------- --------- NET OF REINSURANCE $ 61,479 $ 61,479 ========= =========
All contingencies and unpaid claims or losses resulting from the September 11th events have been recognized in the financial statements. The Company does not expect any unrecognized contingencies or unpaid claims or losses to impact the financial statements in the near term. Page 49 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) B. PROPERTY CATASTROPHE LOSSES During 2005, the Company incurred significant losses related to certain hurricane events. In connection therewith, the Company's estimate of its potential pre-tax loss exposure, including the cost of reinstatement premiums, related to these events is set forth in the table below:
LOSS OCCURRENCE PRE-TAX LOSS HURRICANE PERIOD CATEGORY AREA / REGION EXPOSURE --------- --------------- -------- -------------------------------- ------------ Katrina August 2005 4 Louisiana / Central Gulf Coast $183,337 Rita September 2005 3 Southwestern Louisiana and Texas 47,890 Wilma October 2005 3 Southern Florida 62,495 -------- TOTAL $293,722 ========
C. OTHER The Company underwrites a significant concentration of its direct business with brokers. As of December 31, 2005 and 2004, the amount of reserve credits recorded for high deductibles on unpaid claims amounted to $3,700,000 and $3,200,000, respectively. As of December 31, 2005 and 2004, the amount billed and recoverable on paid claims amounted to $332,400 and $367,200, respectively, of which $16,600 and $21,000, respectively, were non-admitted. The Company's direct percentage of policyholder dividend participating policies is 0.05 percent. Policyholder dividends are accounted for on an incurred basis. In connection therewith, during 2005 and 2004, policyholder dividends amounted to $19 and $532, respectively. Page 50 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) As of December 31, 2005 and 2004, other admitted assets as reported in the accompanying statements of admitted assets were comprised of the following balances:
AS OF DECEMBER 31, 2005 2004 ------------------ --------- --------- Guaranty funds receivable or on deposit $ 20,098 $ 18,706 Loss funds on deposit 71,016 84,258 Outstanding loss drafts - Suspense Accounts 509,571 277,641 Accrued recoverables 6,780 5,963 Servicing carrier receivable - 6,453 Other 17,681 82,735 Allowance for doubtful accounts (446,746) (103,851) --------- --------- TOTAL OTHER ADMITTED ASSETS $ 178,400 $ 371,905 ========= =========
Guaranty fund receivables represent payments to various state insolvency funds which are recoupable against future premium tax payment in the respective states. Various states allow insurance companies to recoup assessments over a period of five to ten years. The Company routinely assesses the collectibility of its receivable balances for potential uncollectible premiums receivable due from agents and reinsurance recoverable balances. In connection therewith, as of December 31, 2005 and 2004, the Company established an allowance for doubtful accounts of $446,746 and $103,851, respectively, which was reported as a contra asset within Other Admitted Assets in the accompanying Statements of Admitted Assets. During 2005, the Company recorded $145,742 of the increase in the allowance for doubtful accounts to Net Loss from Agents' Balances Charged-off in the accompanying 2005 Statement of Income, and recorded the remaining increase of $197,153 as an adjustment for prior period corrections to the Company's Capital and Surplus balance at January 1, 2005. Page 51 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) NOTE 14 - SUBSEQUENT EVENTS A. CAPITAL MAINTENANCE AGREEMENT In February 2006, the Company entered into a Capital Maintenance Agreement ("CMA") with its Parent. The CMA provides that in the event that the Company's Total Adjusted Capital falls below 200.0% of the Company's Authorized Control Level RBC, as reported in the Company's 2005 Annual Statement, together with any adjustments or modifications required by the Company's domiciliary regulator, the Parent will provide a capital contribution to the Company in an amount equal to the difference between the Company's Total Adjusted Capital and 200.0% of the Company's Authorized Control Level RBC. In lieu of making any capital contribution, with the approval of the domiciliary department, AIG may provide a letter of credit naming the Company as beneficiary. Effective upon the date of filing of the Company's 2005 Annual Statement with its domiciliary regulator, this CMA superseded and replaced a similar agreement that was effective October 15, 2005 related to the Company's December 31, 2004 surplus position. During 2005, the board of directors of the Parent, authorized a resolution where it committed to replenish any surplus lost as a result of the effects of the restatements of the Company's December 31, 2004 financial statements as well as any additional loss and loss adjustment expense strengthening as a result of the reserve review conducted by an independent actuarial consultant. In accordance with that resolution, on February 15, 2006, the Parent contributed $1,326,780 in cash to the Company. In connection therewith, at December 31, 2005, the Company reported a receivable of $1,326,780 with its Parent and increased its Capital in Excess of Par Value, accordingly. The recognition of this surplus contribution has been approved by the New York Insurance Department. With the approval of the Company's domiciliary regulator, AIG provided the Company with a letter of credit for unauthorized reinsurance recoverables at December 31, 2005, authorizing withdrawls of up to $360,000. Additionally, the calculation of the provision for reinsurance at December 31, 2005 reflects the effects of cash collections from affiliates subsequent to December 31, 2005. B. LIFE SETTLEMENTS Subsequent to December 31, 2005, the Company agreed in principle, subject to the execution of acceptable agreements and the approval of the New York State Insurance Department, to a series of simultaneous transactions culminating in the sale to affiliates of the collateral interests underlying all life settlement loans on its books for net cash in an amount equal to the cost, including all capitalized and accrued interest, of the loans prior to such transactions. As a result, the loans will be extinguished with no gain or loss to be realized on these transactions. Effective with the closing of these transactions, the Company will cease granting new life settlements loans. Page 52 AMERICAN HOME ASSURANCE COMPANY NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (000'S OMITTED) Note 15 - Event (Unaudited) Subsequent to the Date of the Independent Auditor's Report AIG Domestic Claims, Inc. (AIGDC), an indirect wholly owned subsidiary of AIG that provides certain claims adjustment services to the Company, has been named as a defendant in a putative class action lawsuit that is currently pending in the 14th Judicial District Court for the State of Louisiana. Plaintiffs are medical providers who allege that AIGDC (as well as other defendants not affiliated with the Company) failed to comply with certain provisions of the Louisiana Any Willing Provider Act (the "Act"). The complaint seeks damages and penalties related to preferred provider organization discounts taken by defendants on bills submitted by Louisiana medical providers and hospitals who provided treatment or services to workers' compensation claimants. These claimants are injured workers whose employers are named insureds under workers compensation policies issued by various insurance companies, including the Company. Plaintiffs' complaint seeks to certify statewide plaintiff and defendant classes, and seeks various monetary damages and penalties, including injunctive relief. On September 23, 2005, certain defendants, including AIGDC filed a motion for summary judgment, seeking dismissal of plaintiffs' claims, and plaintiffs cross-moved for partial summary judgment. On July 20, 2006, the Court both denied AIGDC's motion for summary judgment and granted plaintiffs' partial motion for summary judgment, holding that AIGDC is a "group purchaser" under the Act, and that the Act applies to medical services provided to workers' compensation claimants. The court has scheduled a class certification hearing that is currently set for October 12, 2006. While AIGDC believes that it has meritorious defenses to plaintiffs' claims, it cannot now estimate either the likelihood of its prevailing in these actions or the potential damages that it would face in the event that liability is ultimately determined. The Company is not presently a named party to the lawsuit, and it cannot predict its ultimate liability as an insurer or reinsurer of various workers compensation policies at issue in this matter. In the opinion of management, the Company's ultimate liability for the matter referred to above is not likely to have a material adverse effect on the Company's financial position, although it is possible that the effect would be material to the Company's results of operations for an individual reporting period. Page 53 PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Financial statements. PART A: None PART B: (1) The statutory statement of admitted assets, liabilities, capital and surplus of American Home Assurance Company as of December 31, 2005 and 2004, and the related statutory statements of income and changes in capital and surplus and of cash flow for the two years ended December 31, 2005 are included in Part B of the registration statement. PARTC: None (b) Exhibits. (1)(a) Resolutions of the Board of Directors of The Franklin Life Insurance Company establishing the Separate Account. (2) (1)(b) Resolutions of the Board of Directors of The Franklin Life Insurance Company renaming the Separate Account. (5) (1)(c) Letter dated June 27, 2002 from American General Life Companies to the Commissioner of Insurance of the Texas Department of Insurance describing, among other things, that the registrant will be maintained under Texas law, post merger. (7) (1)(d) Section 5, the "Governing Law and Name of Surviving Corporation," of the Agreement and Plan of Merger among All American Life Insurance Company, The American Franklin Life Insurance Company, The Franklin Life Insurance Company and American General Life Insurance Company, dated as of June 24, 2002, including Section 5.2, the "Governing Law Regarding the Maintenance of Separate Accounts." (7) (2) Not applicable. (3)(a) Distribution Agreement between American General Life Insurance Company and American General Equity Services Corporation, effective October 1, 2002. (10) C-1 (3)(b) Form of Selling Group. (7) (4)(a) Specimen copy of Form 1170, deferred periodic payment variable annuity contract. (2) (4)(b) Specimen copy of Form 1171, single payment deferred variable annuity contract. (2) (4)(c) Specimen copy of Form 1172, single payment immediate life variable annuity contract. (2) (4)(d) Specimen copy of Form 1173, single payment immediate life variable annuity contract with guaranteed period. (2) (4)(e) Specimen copy of Form 1174, single payment immediate joint and last survivor life variable annuity contract. (2) (4)(f) Specimen copy of Forms 1170, 1171, 1172, 1173 and 1174 when such contracts are issued to variable annuitants in the State of Texas. (2) (4)(g) Specimen copy of Form 1180, deferred periodic payment variable annuity contract. (5) (4)(h) Waiver of Minimum Payment Provision in Form 1180. (5) (4)(i) Specimen copy of Form 1181, single payment deferred variable annuity contract. (5) (4)(j) Specimen copy of Form 1182, single payment immediate life variable annuity contract. (5) (4)(k) Specimen copy of Form 1183, single payment immediate life variable annuity contract with guaranteed period. (5) (4)(l) Specimen copy of Form 1184, single payment immediate joint and last survivor life variable annuity contract. (5) (4)(m) Specimen copy of endorsement to Forms 1180, 1181, 1182, 1183, and 1184 when such contracts are issued to variable annuitants in the State of Texas. (5) (4)(n) Specimen copy of Form 1175, periodic payment deferred variable annuity contract. (5) C-2 (4)(o) Specimen copy of Form 1176, single payment deferred variable annuity contract. (5) (4)(p) Specimen copy of Form 1177, single payment immediate life variable annuity contract. (5) (4)(q) Specimen copy of Form 1178, single payment immediate life variable annuity contract with guaranteed period. (5) (4)(r) Specimen copy of Form 1179, single payment immediate joint and last survivor life variable annuity contract. (5) (4)(s) Specimen copy of Form 4840 attached as endorsement to Forms 1175, 1176, 1177, 1178 and 1179. (5) (4)(t) Specimen copy of Form 6012 for use as endorsement to Form 1175. (5) (4)(u) Specimen copy of Form 6275-A attached as endorsement to Forms 1175, 1176, 1177, 1178 and 1179 when such contracts are issued to variable annuitants in the State of Texas. (5) (4)(v) Specimen copy of Form 6296 attached as endorsement to Forms 1175, 1176, 1177, 1178 and 1179 when such contracts are issued to variable annuitants in the State of New Jersey. (5) (4)(w) Assumption Certificate. (7) (5)(a) The applications for the various forms of variable annuity contracts set forth in Exhibit 4 are included as parts of the respective contract forms. (5)(b) Form of Annuity Service Request Form, Form No. L 5858 Rev1202. (11) (5)(c) Form of Annuity Maturity Service Request Form, Form No. L 5539 Rev1202. (11) (5)(d) Form of Annuity IRS Distributions Request Form, Form No. L 8897 Rev1202. (11) (5)(e) Form of Change of Beneficiary Form, Form No. AGLC 8876 Rev1202. (11) (6)(a) Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective December 31, 1991. (1) C-3 (6)(b) By-Laws of American General Life Insurance Company, adopted January 22, 1992. (3) (6)(c) Amendment to the Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective July 13, 1995. (4) (7) Not Applicable. (8)(a) Form of services agreement dated July 31, 1975, (limited to introduction and first two recitals, and sections 1-3) among various affiliates of American General Corporation, including American General Life Insurance Company and American General Life Companies (formerly American General Independent Producer Division). (6) (8)(b)(1) Form of Amended and Restated Participation Agreement by and between Variable Insurance Products Fund, Fidelity Distributors Corporation and American General Life Insurance Company. (8) (8)(b)(2) Form of Amendment No. 3 to Amended and Restated Participation Agreement by and between Variable Insurance Products Fund, Fidelity Distributors Corporation and American General Life Insurance Company. (7) (8)(c)(1) Form of Amended and Restated Participation Agreement by and between Variable Insurance Products Fund II, Fidelity Distributors Corporation and American General Life Insurance Company. (8) (8)(c)(2) Form of Amendment No. 3 to Amended and Restated Participation Agreement by and between Variable Insurance Products Fund II, Fidelity Distributors Corporation and American General Life Insurance Company. (7) (8)(d) Form of Service Contract by and between Fidelity Distributors Corporation and American General Life Insurance Company. (8) (8)(e) Form of Service Agreement by and between Fidelity Investments Institutional Operations Company, Inc. and American General Life Insurance Company. (8) (8)(f)(1) Form of Participation Agreement among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company. (9) (8)(f)(2) Form of Amendment No. 5 to Participation Agreement among MFS Variable Insurance Trust, American General Life Insurance Company. (8) C-4 (8)(f)(3) Form of Amendment No. 8 to Participation Agreement among MFS Variable Insurance Trust, American General Life Insurance Company. (7) (8)(g) General Guarantee Agreement issued by American Home Assurance company in favor of contract owners of American General Life Insurance Company. (Filed herewith) (9)(a) Opinion & Consent of Lauren W. Jones, Esq., Deputy General Counsel of American General Life Companies, LLC. (11) (9)(b) Opinion and Consent of Sullivan & Cromwell LLP, Counsel to American Home Assurance company. (Filed herewith) (10)(a) Consent of Independent Auditors. (11) (10)(b) Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP. (Filed herewith) (11) Not Applicable. (12) Not Applicable. (13) Power of Attorney with respect to Registration Statements and Amendments thereto signed by the directors and, where applicable, officers of American Home Assurance Company. (Filed herewith) - -------- (1) Incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 033-43390) of American General Life Insurance Company Separate Account D filed on October 16, 1991. (2) Incorporated by reference to Registrant's Registration Statement (File No. 333-70813) on Form N-14 filed on January 20, 1999. (3) Incorporated by reference to Post-Effective Amendment No. 1 to Form N-4 Registration Statement (File No. 033-43390) of American General Life Insurance Company Separate Account D filed on April 30, 1992. (4) Incorporated by reference to Pre-Effective Amendment No. 3 to Form S-6 Registration Statement (File No. 333-53909) of American General Life Insurance Company Separate Account VL-R filed on August 19, 1998. C-5 (5) Incorporated by reference to Post-Effective Amendment No. 47 to Form N-4 Registration Statement (File No. 002-36394) of The Franklin Life Insurance Company Annuity Fund A filed on April 30, 1999. (6) Incorporated by reference to Pre-Effective Amendment No. 23 to Form N-4 Registration Statement (File No. 033-44745) of American General Life Insurance Company Separate Account a filed on April 24, 1998. (7) Incorporated by reference to initial filing of Form N-6 Registration Statement (File No. 333-102299) of American General Life Insurance Company Separate Account VUL-2 filed on December 31, 2002. (8) Incorporated by reference to Post-Effective Amendment No. 2 to Form S-6 Registration Statement (File No. 333-80191) of American General Life Insurance Company Separate Account VL-R filed on September 20, 2000. (9) Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-6 Registration Statement (File No. 333-42567) of American General Life Insurance Company Separate Account VL-R filed on March 23, 1998. (10) Incorporated by reference to Post-Effective Amendment No. 7 to Form N-4 Registration Statement (File No. 333-40637) of American General Life Insurance Company Separate Account D filed on November 8, 2001. (11) Incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 333-102303) of American General Life Insurance Company Separate Account VA-2 filed on December 31, 2002. Item 25. Directors and Officers of the Depositor Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Rodney O. Martin, Jr. Director and Chairman of the Board of Directors 2929 Allen Parkway Houston, TX 77019 M. Bernard Aidinoff Director Sullivan and Cromwell 125 Broad Street New York, NY 10004 C-6 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- David J. Dietz Director and Chairman-Global High Net Worth, 830 Third Avenue Corporate Markets & Domestic Institutional New York, NY 10022 Profit Center and Chief Executive Officer-Global High Net Worth, Corporate Markets & Domestic Institutional Profit Center Mary Jane B. Fortin Director, Chief Financial Officer and Executive 2929 Allen Parkway Vice President Houston, TX 77019 David L. Herzog Director 70 Pine Street New York, NY 10270 Richard A. Hollar Director, Chairman-Independent Distribution 750 West Virginia Street Profit Center, President-AIG Life Brokerage Milwaukee, WI 53204 Profit Center and Chief Executive Officer-Independent Distribution Profit Center Royce G. Imhoff, II Director, President-Independent Distribution 2929 Allen Parkway and Affluent Profit Center Houston, TX 77019 Gary D. Reddick Director, Executive Vice President and Chief 2929 Allen Parkway Administrative Officer Houston, TX 77019 Christopher J. Swift Director 2929 Allen Parkway Houston, TX 77019 James W. Weakley Director, President-Group Benefits & Financial 2929 Allen Parkway Institutions and Chief Executive Officer-Group Houston, TX 77019 Benefits & Financial Institutions Matthew E. Winter Director, President and Chief Executive Officer 2929 Allen Parkway Houston, TX 77019 Thomas L. Booker President-Annuity Profit Center 2727 Allen Parkway Houston, TX 77019 C-7 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ------------------------------------------------ Richard C. Schuettner President-AIG Life Brokerage Profit Center 750 West Virginia Street Milwaukee, WI 53204 James P. Steele President-Structured Settlements and Senior 205 E. 10th Street Vice President Amarillo, TX 79101 David R. Armstrong Executive Vice President-Group Benefit & 3600 Route 66 Financial Institutions Neptune, NJ 07754 Rebecca G. Campbell Executive Vice President-Human Resources 2929 Allen Parkway Houston, TX 77019 Dan E. Trudan Executive Vice President-Operations, 750 West Virginia St. Independent Distribution Profit Center Milwaukee, WI 53204 Steven D. Anderson Chief Financial Officer-Independent 2727 Allen Parkway Distribution Profit Center and Senior Vice Houston, TX 77019 President-Independent Distribution Profit Center Stephen A. Appleyard Senior Vice President-Accident & Health 2727 Allen Parkway Houston, TX 77019 Erik A. Baden Senior Vice President 2727 Allen Parkway Houston, TX 77019 Wayne A. Barnard Senior Vice President, Illustration Actuary 2929 Allen Parkway Houston, TX 77019 Robert M. Beuerlein Senior Vice President and Chief Actuary 2727-A Allen Parkway Houston, TX 77019 C-8 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ------------------------------------------------ Jeffrey H. Carlson Senior Vice President and Chief Information 2727 Allen Parkway Officer Houston, TX 77019 James A. Galli Senior Vice President and Chief Business 830 Third Avenue Development Officer New York, NY 10022 Robert M. Goldbloom Senior Vice President-Terminal Funding Annuities 80 Pine Street New York, NY 10005 William F. Guterding Senior Vice President 830 Third Avenue New York, NY 10022 Robert F. Herbert, Jr. Senior Vice President, Treasurer and Controller 2727-A Allen Parkway Houston, TX 77019 S. Douglas Israel Senior Vice President 2929 Allen Parkway Houston, TX 77019 Kyle L. Jennings Senior Vice President and General Counsel 2929 Allen Parkway Houston, TX 77019 Althea R. Johnson Senior Vice President 2929 Allen Parkway Houston, TX 77019 Glen D. Keller Senior Vice President 2727 Allen Parkway Houston, TX 77019 Simon J. Leech Senior Vice President 2727-A Allen Parkway Houston, TX 77019 C-9 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Kent D. Major Senior Vice President 2727-A Allen Parkway Houston, TX 77019 Richard D. McFarland Senior Vice President 2727 Allen Parkway Houston, TX 77019 Mark R. McGuire Senior Vice President 2727-A Allen Parkway Houston, TX 77019 Laura W. Milazzo Senior Vice President 2727 Allen Parkway Houston, TX 77019 Harry R. Miller Senior Vice President 2727 Allen Parkway Houston, TX 77019 John W. Penko Senior Vice President 2727 Allen Parkway Houston, TX 77019 Dennis H. Roberts Senior Vice President 2727 Allen Parkway Houston, TX 77019 Robert E. Steele Senior Vice President 205 E. 10th Street Amarillo, TX 79101 Frederic R. Yopps Senior Vice President 750 West Virginia St. Milwaukee, WI 53204 Steven E. Zimmerman Senior Vice President and Medical 2727 Allen Parkway Director-Houston Houston, TX 77019 C-10 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Edward F. Bacon Vice President 2727-A Allen Parkway Houston, TX 77019 Joan M. Bartel Vice President 2727 Allen Parkway Houston, TX 77019 Paul Bell, III Vice President and Medical Director Walnut Glen Tower 8144 Walnut Hill Lane Dallas, TX 75231 Michael B. Boesen Vice President 2727-A Allen Parkway Houston, TX 77019 Laura J. Borowski Vice President 750 West Virginia St. Milwaukee, WI 53204 James B. Brown Vice President 2727 Allen Parkway Houston, TX 77019 David W. Butterfield Vice President 3600 Route 66 Neptune, NJ 07754 Michael Candy Vice President 2929 Allen Parkway Houston, TX 77019 Robert W. Chesner Vice President 2929 Allen Parkway Houston, TX 77019 C-11 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Valerie A. Childrey Vice President and Medical Director-Milwaukee 750 West Virginia Street Milwaukee, WI 53204 Mark E. Childs Vice President 2727 Allen Parkway Houston, TX 77019 Robert M. Cicchi Vice President 2727 Allen Parkway Houston, TX 77019 Steven A. Dmytrack Vice President 2929 Allen Parkway Houston, TX 77019 Elizabeth Dobbs Vice President 2727 Allen Parkway Houston, TX 77019 Douglas M. Donnenfield Vice President 750 West Virginia Street Milwaukee, WI 53204 Timothy M. Donovan Vice President 2727 Allen Parkway Houston, TX 77019 Farideh N. Farrokhi Vice President and Assistant Secretary 2727-A Allen Parkway Houston, TX 77019 John T. Fieler Vice President and Medical Director 2727-A Allen Parkway Houston, TX 77019 Patrick S. Froze Vice President 750 West Virginia Street Milwaukee, WI 53204 C-12 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Brad J. Gabel Vice President 750 West Virginia Street Milwaukee, WI 53204 Frederick J. Garland, Jr. Vice President 2727 Allen Parkway Houston, TX 77019 Lisa Gerhart Vice President 2727 Allen Parkway Houston, TX 77019 Richard L. Gravette Vice President and Assistant Treasurer 2727-A Allen Parkway Houston, TX 77019 Kenneth J. Griesemer Vice President 6363 Forest Park Road Dallas, TX 75235 Daniel J. Gutenberger Vice President and Medical Director 70 Pine Street New York, NY 10270 Joel H. Hammer Vice President 1 Chase Manhattan Plaza New York, NY 10005 John Harmeling Vice President 2929 Allen Parkway Houston, Texas 77019 Craig H. Harrel Vice President 2929 Allen Parkway Houston, TX 77019 D. Leigh Harrington Vice President 2727 Allen Parkway Houston, TX 77019 C-13 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Bradley Harris Vice President 2727 Allen Parkway Houston, TX 77019 Michael Harrison Vice President 2727 Allen Parkway Houston, TX 77019 Neal C. Hasty Vice President 6363 Forest Park Road Dallas, TX 75235 Keith C. Honig Vice President 1 SunAmerica Center Los Angeles, CA 90067 Stephen D. Howard Vice President 2929 Allen Parkway Houston, TX 77019 Janna M. Hubble Vice President 2929 Allen Parkway Houston, TX 77019 Walter P. Irby Vice President 2727 Allen Parkway Houston, TX 77019 Sharla A. Jackson Vice President 205 E. 10th Street Amarillo, TX 79101 David S. Jorgensen Vice President 2727-A Allen Parkway Houston, TX 77019 Stephen C. Kennedy Vice President 750 West Virginia Street Milwaukee, WI 53204 C-14 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Michael J. Krugel Vice President 750 West Virginia Street Milwaukee, WI 53204 Gary J. Kleinman Vice President and Real Estate Investment 1 Chase Manhattan Plaza Officer New York, NY 10005 Charles L. Levy Vice President and Medical Director 2727 Allen Parkway Houston, TX 77019 Linda Lewis Vice President 6363 Forest Park Road Dallas, TX 75235 Robert J. Ley Vice President 70 Pine Street New York, NY 10270 Jerry L. Livers Vice President 2727 Allen Parkway Houston, TX 77019 Gwendolyn J. Mallett Vice President 2727 Allen Parkway Houston, TX 77019 W. Larry Mask Vice President, Real Estate Investment Officer 2727 Allen Parkway and Assistant Secretary Houston, TX 77019 Gordon S. Massie Vice President 2929 Allen Parkway Houston, TX 77019 Melvin C. McFall Vice President 2727 Allen Parkway Houston, TX 77019 C-15 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Beverly A. Meyer Vice President 750 West Virginia Street Milwaukee, WI 53204 Candace A. Michael Vice President 2727 Allen Parkway Houston, TX 77019 Anne K. Milio Vice President 2727 Allen Parkway Houston, TX 77019 Sylvia A. Miller Vice President #1 Franklin Square Springfield, IL 62713 Alex N. Moral Vice President-Product Design and Development 2727 Allen Parkway Houston, TX 77019 Michael R. Murphy Vice President 750 West Virginia Street Milwaukee, WI 53204 David W. Napoli Vice President 2727 Allen Parkway Houston, TX 77019 Carl T. Nichols Vice President and Medical Director-Amarillo 205 E. 10th Street Amarillo, TX 79101 Deanna D. Osmonson Vice President and Chief Compliance Officer 2727 Allen Parkway Houston, TX 77019 Rembert R. Owen, Jr. Vice President, Real Estate Investment Officer 2929 Allen Parkway and Assistant Secretary Houston, TX 77019 C-16 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Lori J. Payne Vice President 2727 Allen Parkway Houston, TX 77019 Kirsten M. Pedersen Vice President 2929 Allen Parkway Houston, TX 77019 Cathy A. Percival Vice President and Medical Director-Houston 2727 Allen Parkway Houston, TX 77019 Rodney E. Rishel Vice President American General Center 2000 American General Way Brentwood, TN 37027 Terri Robbins Vice President 175 Water Street New York, NY 10038 Walter J. Rucecki, Jr. Vice President 2929 Allen Parkway Houston, TX 77019 John Rugel Vice President 750 West Virginia Street Milwaukee, WI 53204 Dale W. Sachtleben Vice President #1 Franklin Square Springfield, IL 62713 Kristin Sather Vice President 1 Chase Manhattan Plaza New York, NY 10005 C-17 Name and Principal Positions and Offices with Depositor Business Address American General Life Insurance Company - ------------------ ----------------------------------------------- Richard W. Scott Vice President and Chief Investment Officer 70 Pine Street New York, NY 10270 Tom L. Scott Vice President and General Auditor 2929 Allen Parkway Houston, TX 77019 T. Clay Spires Vice President and Tax Officer 2929 Allen Parkway Houston, TX 77019 Gregory R. Thornton Vice President #1 Franklin Square Springfield, IL 62713 Veronica Torralba Vice President 2929 Allen Parkway Houston, TX 77019 J. Alan Vale Vice President 2929 Allen Parkway Houston, TX 77019 Christian D. Weiss Vice President #1 Franklin Square Springfield, IL 62713 Cynthia P. Wieties Vice President 2727 Allen Parkway Houston, TX 77019 Elizabeth M. Tuck Secretary 70 Pine Street New York, NY 10270 Lauren W. Jones Assistant Secretary 2929 Allen Parkway Houston, TX 77019 C-18 Item 26. Persons Controlled by or Under Common Control with the Depositor or the Registrant The Depositor is an indirect wholly-owned subsidiary of American International Group, Inc. ("AIG"). See footnotes to table below at end of Item 26. Table of subsidiaries of AIG can be found as Exhibit 21 in Form 10-K/A, SEC file number 001-08787, accession number 0000950123-06-007835, filed June 19, 2006. SUBSIDIARIES OF AIG
Percentage of Voting Securities Jurisdiction of Owned by its Incorporation Immediate or Organization Parent/(2)/ --------------- ------------ American International Group, Inc./(1)/......................................... Delaware /(3)/ AIG Aviation, Inc............................................................. Georgia 100 AIG Bulgaria Insurance and Reinsurance Company EAD............................ Bulgaria 100 AIG Capital Corporation....................................................... Delaware 100 AIG Consumer Finance Group, Inc.............................................. Delaware 100 AIG Bank Polska S.A........................................................ Poland 99.92 AIG Credit S.A............................................................. Poland 100 Compania Financiera Argentina S.A.......................................... Argentina 100 AIG Equipment Finance Holdings, Inc.......................................... Delaware 100 AIG Commercial Equipment Finance, Inc...................................... Delaware 100 AIG Commercial Equipment Finance Company, Canada......................... Canada 100 AIG Finance Holdings, Inc.................................................... New York 100 AIG Finance (Hong Kong) Limited............................................ Hong Kong 100 AIG Global Asset Management Holdings Corp.................................... Delaware 100 AIG Asset Management Services, Inc......................................... Delaware 100 Brazos Capital Management, L.P........................................... Delaware 92 AIG Capital Partners, Inc.................................................. Delaware 100 AIG Equity Sales Corp...................................................... New York 100 AIG Global Investment Corp................................................. New Jersey 100 AIG Global Securities Lending Corp......................................... Delaware 100 International Lease Finance Corporation...................................... California 67.23/(4)/ AIG Global Real Estate Investment Corp....................................... Delaware 100 AIG Credit Corp............................................................... Delaware 100 A.I. Credit Consumer discount Corp........................................... Pennsylvania 100 A.I. Credit Corp............................................................. New Hampshire 100 AICCO, Inc................................................................... Delaware 100 AICCO, Inc................................................................... California 100 AIG Credit Corp. of Canada................................................... Canada 100 Imperial Premium Funding Inc................................................. Delaware 100 AIG Egypt Insurance Company, S.A.E............................................ Egypt 89.98 AIG Federal Savings Bank...................................................... U.S.A. 100 AIG Financial Advisor Services, Inc........................................... Delaware 100 AIG Financial Advisor Services (Europe), S.A................................. Luxembourg 100 AIG Financial Products Corp................................................... Delaware 100 AIG Matched Funding Corp..................................................... Delaware 100
C-19 SUBSIDIARIES OF AIG
Percentage of Voting Securities Jurisdiction of Owned by its Incorporation Immediate or Organization Parent/(2)/ --------------- ------------ Banque AIG................................................................... France 90/(5)/ AIG Funding, Inc.............................................................. Delaware 100 AIG Global Trade & Political Risk Insurance Company........................... New Jersey 100 A.I.G. Golden Insurance Ltd................................................... Israel 50.01 AIG Life Holdings (International) LLC......................................... Delaware 100 American International Reinsurance Company, Ltd.............................. Bermuda 100 AIG Edison Life Insurance Company.......................................... Japan 90/(6)/ American International Assurance Company, Limited.......................... Hong Kong 100 American International Assurance Company (Australia) Limited............... Australia 100 American International Assurance Company (Bermuda) Limited................. Bermuda 100 American International Assurance Co. (Vietnam) Limited................... Vietnam 100 Tata AIG Life Insurance Company Limited.................................. India 26 Nan Shan Life Insurance Company, Ltd....................................... Taiwan 95 AIG Life Insurance Company.................................................... Delaware 79/(7)/ AIG Life Insurance Company of Puerto Rico..................................... Puerto Rico 100 AIG Liquidity Corp............................................................ Delaware 100 AIG Marketing, Inc............................................................ Delaware 100 AIG Private Bank Ltd.......................................................... Switzerland 100 AIG Retirement Services, Inc.................................................. Delaware 100/(8)/ SunAmerica Life Insurance Company............................................ Arizona 100 SunAmerica Investments, Inc................................................ Georgia 70/(9)/ AIG Advisor Group, Inc................................................... Maryland 100 Advantage Capital Corporation.......................................... New York 100 FSC Securities Corporation............................................. Delaware 100 Royal Alliance Associates, Inc......................................... Delaware 100 Sentra Securities Corporation.......................................... California 100 Spelman & Co., Inc..................................................... California 100 SunAmerica Securities, Inc............................................. Delaware 100 AIG SunAmerica Life Assurance Company.................................... Arizona 100/(10)/ AIG SunAmerica Asset Management Corp................................... Delaware 100 AIG SunAmerica Capital Services. Inc.................................. Delaware 100 First SunAmerica Life Insurance Company.................................. New York 100 AIG Risk Management, Inc...................................................... New York 100 AIG Technologies, Inc......................................................... New Hampshire 100 AIGTI, Inc.................................................................... Delaware 100 AIG Trading Group Inc......................................................... Delaware 100 AIG International, Inc....................................................... Delaware 100 AIU Holdings, LLC............................................................. Delaware 100 AIG Central Europe & CIS Insurance Holdings Corporation...................... Delaware 100 AIG Bulgaria Insurance and Reinsurance Company EAD......................... Bulgaria 100 AIG Czech Republic pojistovna, as.......................................... Czech Republic 100 AIG Kazakhstan Insurance Company, S.A...................................... Kzakhstan 88.87 AIU Africa Holdings, Inc..................................................... Delaware 100 AIG Kenya Insurance Company, Limited....................................... Kenya 100
C-20 SUBSIDIARIES OF AIG
Percentage of Voting Securities Jurisdiction of Owned by its Incorporation Immediate or Organization Parent/(2)/ --------------- ------------ AIG Memsa, Inc............................................................... Delaware 100 AIG Iraq................................................................... Delaware 100 AIG Lebanon, S.A.L......................................................... Lebanon 100 AIG Libya, Inc............................................................. Delaware 100 AIG Hayleys Investment Holdings (Private) Ltd.............................. Sri Lanka 80 Hayleys AIG Insurance Company, Ltd....................................... Sri Lanka 100 AIG Sigorta A.S............................................................ Turkey 100 Tata AIG General Insurance Company Limited................................. India 26 AIU Insurance Company......................................................... New York 52/(11)/ AIU North America, Inc........................................................ New York 100 American General Corporation.................................................. Texas 100 American General Bancassurance Services, Inc................................. Illinois 100 AGC Life Insurance Company................................................... Missouri 100 AIG Life Holdings (Canada), ULC............................................ Canada 100 AIG Assurance Canada..................................................... Canada 100 AIG Life Insurance Company of Canada..................................... Canada 100 AIG Life of Bermuda, Ltd................................................... Bermuda 100 American General Life and Accident Insurance Company....................... Tennessee 100 American General Life Insurance Company.................................... Texas 100 American General Annuity Service Corporation............................. Texas 100 AIG Enterprise Services, LLC............................................. Delaware 100 American General Equity Services Corporation............................. Delaware 100 American General Life Companies, LLC..................................... Delaware 100 The Variable Annuity Life Insurance Company.............................. Texas 100 VALIC Retirement Services Company...................................... Texas 100 VALIC Trust Company.................................................... Texas 100 American General Property Insurance Company................................ Tennessee 51.85/(12)/ American General Property Insurance Company of Florida................... Florida 100 AIG Annuity Insurance Company.............................................. Texas 100 The United States Life Insurance Company in the City of New York........... New York 100 American General Finance, Inc................................................ Indiana 100 American General Auto Finance, Inc......................................... Delaware 100 American General Finance Corporation....................................... Indiana 100 MorEquity, Inc........................................................... Nevada 100 Wilmington Finance, Inc................................................ Delaware 100 Merit Life Insurance Co.................................................. Indiana 100 Yosemite Insurance Company............................................... Indiana 100 CommoLoCo, Inc......................................................... Puerto Rico 100 American General Financial Services of Alabama, Inc........................ Delaware 100 American General Investment Management Corporation........................... Delaware 100 American General Realty Investment Corporation............................... Texas 100 American General Assurance Company........................................... Illinois 100 American General Indemnity Company......................................... Illinois 100 Knickerbocker Corporation.................................................... Texas 100
C-21 SUBSIDIARIES OF AIG
Percentage of Voting Securities Jurisdiction of Owned by its Incorporation Immediate or Organization Parent/(2)/ --------------- ------------ American Home Assurance Company............................................... New York 100 AIG Domestic Claims, Inc..................................................... Delaware 50/(13)/ AIG Hawaii Insurance Company, Inc............................................ Hawaii 100 American Pacific Insurance Company, Inc.................................... Hawaii 100 American International Insurance Company..................................... New York 100 American International Insurance Company of California, Inc................ California 100 American International Insurance Company of New Jersey..................... New Jersey 100 Minnesota Insurance Company................................................ Minnesota 100 American International Realty Corp........................................... Delaware 31.5/(14)/ Pine Street Real Estate Holdings Corp........................................ New Hampshire 31.47/(14)/ Transatlantic Holdings, Inc.................................................. Delaware 33.41/(15)/ Transatlantic Reinsurance Company.......................................... New York 100 Putnam Reinsurance Company............................................... New York 100 Trans Re Zurich.......................................................... Switzerland 100 American International Insurance Company of Delaware.......................... Delaware 100 American International Life Assurance Company of New York..................... New York 77.52/(16)/ American International Reinsurance Company, Ltd............................... Bermuda 100 American International Underwriters Corporation............................... New York 100 American International Underwriters Overseas, Ltd............................. Bermuda 100 AIG Europe (Ireland) Limited................................................. Ireland 100 AIG Europe (U.K.) Limited.................................................... England 100 AIG Brasil Companhia de Seguros.............................................. Brazil 50 AIG General Insurance (Vietnam) Company Limited.............................. Vietnam 100 Universal Insurance Co., Ltd................................................. Thailand 100 La Seguridad de Centroamerica, Compania de Seguros S.A....................... Guatemala 100 La Meridional Compania Argentina de Seguros.................................. Argentina 100 American International Insurance Company of Puerto Rico...................... Puerto Rico 100 A.I.G. Colombia Seguros Generales S.A........................................ Colombia 100 American International Underwriters GmBH..................................... Germany 100 Richmond Insurance Company Limited........................................... Bermuda 100 Underwriters Adjustment Company, Inc......................................... Panama 100 American Life Insurance Company............................................... Delaware 100 AIG Life (Bulgaria) Z.D. A.D................................................. Bulgaria 100 ALICO, S.A................................................................... France 100 First American Polish Life Insurance and Reinsurance Company, S.A............ Poland 100 Inversiones Interamericana S.A. (Chile)...................................... Chile 100 Pharaonic American Life Insurance Company.................................... Egypt 71.63 Unibanco AIG Seguros S.A..................................................... Brazil 47.81/(17)/ AIG Life Insurance Company (Switzerland) Ltd.................................. Switzerland 100 American Security Life Insurance Company, Ltd................................. Lichtenstein 100 Birmingham Fire Insurance Company of Pennsylvania............................. Pennsylvania 100 China America Insurance Company, Ltd.......................................... Delaware 50 Commerce and Industry Insurance Company....................................... New York 100 Commerce and Industry Insurance Company of Canada............................. Ontario 100
C-22 SUBSIDIARIES OF AIG
Percentage of Voting Securities Jurisdiction of Owned by its Incorporation Immediate or Organization Parent/(2)/ --------------- ------------ Delaware American Life Insurance Company....................................... Delaware 100 Hawaii Insurance Consultants, Ltd.............................................. Hawaii 100 HSB Group, Inc................................................................. Delaware 100 The Hartford Steam Boiler Inspection and Insurance Company.................... Connecticut 100 The Hartford Steam Boiler Inspection and Insurance Company of Connecticut... Connecticut 100 HSB Engineering Insurance Limited........................................... England 100 The Boiler Inspection and Insurance Company of Canada..................... Canada 100 The Insurance Company of the State of Pennsylvania............................. Pennsylvania 100 Landmark Insurance Company..................................................... California 100 Mt. Mansfield Company, Inc..................................................... Vermont 100 National Union Fire Insurance Company of Pittsburgh, Pa........................ Pennsylvania 100 American International Specialty Lines Insurance Company...................... Alaska 70/(18)/ Lexington Insurance Company................................................... Delaware 70/(18)/ AIG Centennial Insurance Company............................................ Pennsylvania 100 AIG Premier Insurance Company............................................. Pennsylvania 100 AIG Indemnity Insurance Company......................................... Pennsylvania 100 AIG Preferred Insurance Company........................................... Pennsylvania 100 AIG Auto Insurance Company of New Jersey.................................. New Jersey 100 JI Accident & Fire Insurance Co. Ltd........................................ Japan 50 National Union Fire Insurance Company of Louisiana............................ Louisiana 100 National Union Fire Insurance Company of Vermont.............................. Vermont 100 21st Century Insurance Group.................................................. California 33.03/(19)/ 21st Century Insurance Company.............................................. California 100 21st Century Casualty Company............................................... California 100 21st Century Insurance Company of the Southwest............................. Texas 100 Starr Excess Liability Insurance Company, Ltd................................. Delaware 100 Starr Excess Liability Insurance International Ltd.......................... Ireland 100 NHIG Holding Corp.............................................................. Delaware 100 Audubon Insurance Company..................................................... Louisiana 100 Audubon Indemnity Company................................................... Mississippi 100 Agency Management Corporation............................................... Louisiana 100 The Gulf Agency, Inc...................................................... Alabama 100 New Hampshire Insurance Company............................................... Pennsylvania 100 AIG Europe, S.A............................................................. France 70.48/(20)/ AI Network Corporation...................................................... Delaware 100 American International Pacific Insurance Company............................ Colorado 100 American International South Insurance Company.............................. Pennsylvania 100 Granite State Insurance Company............................................. Pennsylvania 100 New Hampshire Indemnity Company, Inc........................................ Pennsylvania 100 AIG National Insurance Company, Inc....................................... New York 100 Illinois National Insurance Co.............................................. Illinois 100 New Hampshire Insurance Services, Inc....................................... New Hampshire 100 AIG Star Life Insurance Co., Ltd.............................................. Japan 100 The Philippine American Life and General Insurance Company..................... Philippines 99.78
C-23 SUBSIDIARIES OF AIG
Percentage of Voting Securities Jurisdiction of Owned by its Incorporation Immediate or Organization Parent/(2)/ --------------- ------------ Pacific Union Assurance Company.............................................. California 100 Philam Equitable Life Assurance Company, Inc................................. Philippines 95.31 Philam Insurance Company, Inc................................................ Philippines 100 Risk Specialist Companies, Inc................................................ Delaware 100 United Guaranty Corporation................................................... North Carolina 36.3l/(21)/ A.I.G. Mortgage Holdings Israel, Ltd......................................... Israel 82.12 E.M.I.-Ezer Mortgage Insurance Company, Limited............................ Israel 100 AIG United Guaranty Agenzia DI Assicurazione S.R.L........................... Italy 100 AIG United Guraranty Insurance (Asia) Limited................................ Hong Kong 100 AIG United Guaranty Re, Ltd.................................................. Ireland 100 United Guaranty Insurance Company............................................ North Carolina 100 United Guaranty Mortgage Insurance Company................................... North Carolina 100 United Guaranty Mortgage Insurance Company of North Carolina................. North Carolina 100 United Guaranty Partners Insurance Company................................... Vermont 80 United Guaranty Residential Insurance Company of North Carolina.............. North Carolina 100 United Guaranty Residential Insurance Company................................ North Carolina 75.03/(22)/ United Guaranty Commercial Insurance Company of North Carolina............. North Carolina 100 United Guaranty Mortgage Indemnity Company................................. North Carolina 100 United Guaranty Credit Insurance Company................................... North Carolina 100 United Guaranty Services, Inc................................................ North Carolina 100
- -------- (1) All subsidiaries listed are consolidated in the financial statements of AIG as filed in its Form 10-K/A on June 19, 2006. Certain subsidiaries have been omitted from the tabulation. The omitted subsidiaries, when considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. (2) Percentages include directors' qualifying shares. (3) The common stock is owned approximately 12.0 percent by Starr International Company, Inc., 1.8 percent by C.V. Starr & Co., Inc. and 2.0 percent by The Starr Foundation. (4) Also owned 35.15 percent by National Union Fire Insurance Company of Pittsburgh, Pa. (5) Also owned 10 percent by AIG Matched Funding Corp. (6) Also owned 21 percent by Commerce and Industry Insurance Company. (7) Indirect wholly-owned subsidiary. (8) Formerly known as AIG SunAmerica Inc. (9) Also owned 30 percent by AIG Retirement Services, Inc. (10) Formerly known as Anchor National Life Insurance Company. (11) Also owned eight percent by The Insurance Company of the State of Pennsylvania, 32 percent by National Union Fire Insurance Company of Pittsburgh, Pa. and eight percent by Birmingham Fire Insurance Company of Pennsylvania. (12) Also owned 48.15 percent by American General Life and Accident Insurance Company. (13) Also owned 50 percent by The Insurance Company of the State of Pennsylvania. (14) Also owned by 11 other AIG subsidiaries. (15) Also owned 25.95 percent by AIG. (16) Also owned 22.48 percent by American Home Assurance Company. (17) Also owned ten percent by a subsidiary of American Life Insurance Company. C-24 (18) Also owned 1.7 percent by American International Underwriters Overseas, Ltd. and .48 percent by American Home Assurance Company. (19) Also owned 20 percent by The Insurance Company of the State of Pennsylvania and ten percent by Birmingham Fire Insurance Company of Pennsylvania. (20) Also owned 16.85 percent by American Home Assurance Company, 6.34 percent by Commerce and Industry Insurance Company and 6.34 percent by New Hampshire Insurance Company. (21) 100 percent to be held with other AIG companies. (22) Also owned 45.88 percent by National Union Fire Insurance Company of Pittsburgh, Pa., 16.95 percent by New Hampshire Insurance Company and 0.86 percent by The Insurance Company of the State of Pennsylvania. (23) Also owned 24.97 percent by United Guaranty Residential Insurance Company of North Carolina. The Registrant is a separate account of American General Life Insurance Company (Depositor). Item 27. Number of Contract Owners As of June 30, 2006, there were 2,851 owners of contracts of the class covered by this registration statement. Item 28. Indemnification Insofar as indemnification for liability arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. American General Life Insurance Company Except as otherwise required by applicable law: (a) The company shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or on behalf of the company) by reason of the fact that he is or was director, officer, or employee or agent of the company, or is or was serving at the request of the company as director, officer, employee or agent of another company or enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding; provided that he (1) acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the company; and, (2) with respect to any criminal action or C-25 proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, by itself, create a presumption that the person did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was lawful. (b) The company shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by or on behalf of the company to procure a judgement in the company's favor, by reason of the fact that he is or was a director, officer, employee or agent of the company, or is or was serving at the request of the company as a director, officer, employee or agent of another company or enterprise, against expenses (including attorney's fees), judgments and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such action, suit or proceeding; provided that he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the company, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the company unless and only to the extent that the court in which such action, suit or proceeding was brought or any other court of competent jurisdiction shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity. (c) To the extent that a director, officer, or employee or agent of the company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b) above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorney's fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under paragraphs (a) and (b) above (unless ordered by a court or made pursuant to a determination by a court as hereinafter provided) shall be made by the company upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances and he has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made (1) by the Board by a majority of a quorum consisting of directors who were not parties to such action, suit or proceeding (disinterested), or (2) by a committee of disinterested directors designated by majority vote of disinterested directors, even though less than a quorum, or (3) by independent legal counsel in a written opinion, and such legal counsel was selected by a majority vote of a quorum of the disinterested directors, or (4) by the stockholders. In the absence of a determination that indemnification is proper, the director, officer or employee may apply to the court conducting the proceeding or another court of competent jurisdiction which shall determine whether the director, officer, employee or agent has met the applicable standard of conduct set forth in paragraphs (a) and (b). If the court shall so determine, indemnification shall be made under paragraph (a) or (b) as the case may be. C-26 (e) Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the company in advance of the final disposition of such action, suit or proceeding as authorized by the Board in the manner provided in paragraph (d) upon receipt of a written instrument acceptable to the Board by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the company as authorized in this section. (f) The indemnification provided by the company's By-Laws shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any agreement, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit or the heirs, executors and administrators of such a person. (g) The company shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the company, or is or was serving at the request of the company as a director, officer, employee or agent of another company, or enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the company would have the power to indemnify him against such liability under the provisions of the company's By-Laws. Item 29. Principal Underwriters (a) Registrant's principal underwriter, American General Equity Services Corporation, also acts as principal underwriter for American General Life Insurance Company Separate Account A, American General Life Insurance Company Separate Account D and American General Life Insurance Company Separate Account VA-1, which all offer interests in variable annuities. American General Equity Services Corporation also acts as principal underwriter for American General Life Insurance Company Separate Account VUL, American General Life Insurance Company Separate Account VUL-2 and American General Life Insurance Company Separate Account VL-R, which all offer interests in flexible premium variable life insurance policies. American General Equity Services Corporation also acts as principal underwriter for certain other separate accounts of American General Life Insurance Company affiliates. (b) The following information is provided for each director and officer of the principal underwriter: Name and Principal Positions and Offices with Underwriter Business Address American General Equity Services Corporation - ------------------ ----------------------------------------------- Rodney O. Martin, Jr. Director and Chairman of the Board of Directors 2929 Allen Parkway Houston, TX 77019 C-27 Name and Principal Positions and Offices with Underwriter Business Address American General Equity Services Corporation - ------------------ ----------------------------------------------- Mark R. McGuire Director and Senior Vice President 2727 Allen Parkway Houston, TX 77019 Gary D. Reddick Director 2929 Allen Parkway Houston, TX 77019 Royce G. Imhoff, II President and Chief Executive Officer 2929 Allen Parkway Houston, TX 77019 Robert F. Herbert, Jr. Vice President 2727-A Allen Parkway Houston, TX 77019 Rhonda Washington Treasurer and Controller 2727 Allen Parkway Houston, TX 77019 Deanna D. Osmonson Vice President, Chief Compliance Officer and 2727 Allen Parkway Anti-Money Laundering Compliance Officer Houston, TX 77019 T. Clay Spires Tax Officer 2727-A Allen Parkway Houston, TX 77019 Elizabeth M. Tuck Secretary 70 Pine Street New York, NY 10270 Sarah Hosker Assistant Secretary 70 Pine Street New York, NY 10270 Lauren W. Jones Assistant Secretary 2929 Allen Parkway Houston, TX 77019 C-28 Name and Principal Positions and Offices with Underwriter Business Address American General Equity Services Corporation - ------------------ ----------------------------------------------- David M. Robinson Assistant Secretary 2929 Allen Parkway Houston, TX 77019 John D. Fleming Assistant Treasurer 2929 Allen Parkway Houston, TX 77019 Barbara J. Moore Assistant Tax Officer 2919 Allen Parkway Houston, TX 77019 (c) Compensation From the Registrant. Net Underwriting Name of Principal Discounts and Compensation on Brokerage Underwriter Commissions Redemption Commissions Compensation - ----------------- ---------------- --------------- ----------- ------------ American General 0 0 0 0 Equity Services Corporation Item 30. Location of Accounts and Records All records referenced under Section 31(a) of the 1940 Act, and Rules 31a-1 through 31a-3 thereunder, are maintained and in the custody of American General Life Insurance Company at its principal executive office located at 2727-A Allen Parkway, Houston, Texas 77019-2191 or at American General Life Insurance Company's Administrative Office located at #1 Franklin Square, Springfield, Illinois 62713. Item 31. Management Services Not Applicable. Item 32. Undertakings (a) Undertakings of the Registrant The Registrant undertakes: A) to include a toll-free number in the applicable prospectus that the applicant can use to request a Statement of Additional Information; B) to deliver any Statement of Additional Information and any financial statements required to be made available under this form promptly upon written or oral request. C-29 (b) Undertakings of the Depositor During any time there are insurance obligations outstanding and covered by the guarantee issued by American Home Assurance Company ("American Home Guarantee Period"), filed as an exhibit to this Registration Statement (the "American Home Guarantee"), the Depositor hereby undertakes to provide notice to contract owners covered by the American Home Guarantee promptly after the happening of significant events related to the American Home Guarantee. These significant events include: (i) termination of the American Home Guarantee that has a material adverse effect on the contract owner's rights under the American Home Guarantee; (ii) a default under the American Home Guarantee that has a material adverse effect on the contract owner's rights under the American Home Guarantee; or (iii) the insolvency of American Home Assurance Company ("American Home"). During the American Home Guarantee Period, the Depositor hereby undertakes to include in the prospectus to contract owners, an offer to supply the annual audited statutory financial statements of American Home, free of charge upon a contract owner's request. Representation Regarding the Reasonableness of Aggregate Fees and Charges Deducted Under the Contracts Pursuant to Section 26(e)(2)(A) of the Investment Company Act of 1940 American General Life Insurance Company hereby represents that the fees and charges deducted under the Contracts, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and risks assumed by American General Life Insurance Company. C-30 POWERS OF ATTORNEY Each person whose signature appears below hereby appoints Robert F. Herbert, Jr., Gary D. Reddick and Kyle L. Jennings and each of them, any one of whom may act without the joinder of the others, as his/her attorney-in-fact to sign on his/her behalf and in the capacity stated below and to file all amendments to this Registration Statement, which amendment or amendments may make such changes and additions to this Registration Statement as such attorney-in-fact may deem necessary or appropriate. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, American General Life Insurance Company Separate Account VA-2, certifies that it meets the requirements of the Securities Act of 1933 Rule 485(b) for effectiveness of this amended Registration Statement and has caused this amended Registration Statement to be signed on its behalf, in the City of Houston, and State of Texas on this 27th day of July, 2006. AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VA-2 (Registrant) BY: AMERICAN GENERAL LIFE INSURANCE COMPANY (On behalf of the Registrant and itself) BY: ROBERT F. HERBERT, JR. ---------------------------------------- ROBERT F. HERBERT, JR. SENIOR VICE PRESIDENT, TREASURER AND CONTROLLER AGL - 1 As required by the Securities Act of 1933, this amended Registration Statement has been signed below by the following persons, on behalf of the Registrant and Depositor, in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- RODNEY O. MARTIN, JR. Director and Chairman of the July 27, 2006 - ------------------------------- Board of Directors RODNEY O. MARTIN, JR. MATTHEW E. WINTER Director, President and Chief July 27, 2006 - ------------------------------- Executive Officer MATTHEW E. WINTER MARY JANE B. FORTIN Director, Chief Financial July 27, 2006 - ------------------------------- Officer and Executive Vice MARY JANE B. FORTIN President M. BERNARD AIDINOFF Director July 27, 2006 - ------------------------------- M. BERNARD AIDINOFF DAVID J. DIETZ Director July 27, 2006 - ------------------------------- DAVID J. DIETZ DAVID L. HERZOG Director July 27, 2006 - ------------------------------- DAVID L. HERZOG RICHARD A. HOLLAR Director July 27, 2006 - ------------------------------- RICHARD A. HOLLAR AGL - 2 Signature Title Date - --------- ----- ---- ROYCE G. IMHOFF II Director July 27, 2006 - ------------------------------- ROYCE G. IMHOFF II GARY D. REDDICK Director July 27, 2006 - ------------------------------- GARY D. REDDICK CHRISTOPHER J. SWIFT Director July 27, 2006 - ------------------------------- CHRISTOPHER J. SWIFT JAMES W. WEAKLEY Director July 27, 2006 - ------------------------------- JAMES W. WEAKLEY AGL - 3 333-102303 811-01990 SIGNATURES American Home Assurance Company has caused this amended Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of New York, and State of New York on the 27th day of July, 2006. AMERICAN HOME ASSURANCE COMPANY By: ROBERT S. SCHIMEK ----------------------------- ROBERT S. SCHIMEK SENIOR VICE PRESIDENT AND TREASURER AH - 1 This amended Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- *KRISTIAN PHILIP MOOR Director and Chairman July 27, 2006 - ------------------------------- KRISTIAN PHILIP MOOR *JOHN QUINLAN DOYLE Director and President July 27, 2006 - ------------------------------- JOHN QUINLAN DOYLE *ROBERT S. SCHIMEK Director, Senior Vice July 27, 2006 - ------------------------------- President, and Treasurer ROBERT S. SCHIMEK *MERTON BERNARD AIDINOFF Director July 27, 2006 - ------------------------------- MERTON BERNARD AIDINOFF *CHARLES H. DANGELO Director July 27, 2006 - ------------------------------- CHARLES H. DANGELO *NEIL ANTHONY FAULKNER Director July 27, 2006 - ------------------------------- NEIL ANTHONY FAULKNER *DAVID NEIL FIELDS Director July 27, 2006 - ------------------------------- DAVID NEIL FIELDS *KENNETH VINCENT HARKINS Director July 27, 2006 - ------------------------------- KENNETH VINCENT HARKINS *DAVID LAWRENCE HERZOG Director July 27, 2006 - ------------------------------- DAVID LAWRENCE HERZOG *ROBERT EDWARD LEWIS Director July 27, 2006 - ------------------------------- ROBERT EDWARD LEWIS AH - 2 Signature Title Date - --------- ----- ---- *WIN JAY NEUGER Director July 27, 2006 - ------------------------------- WIN JAY NEUGER *NICHOLAS SHAW TYLER Director July 27, 2006 - ------------------------------- NICHOLAS SHAW TYLER *NICHOLAS CHARLES WALSH Director July 27, 2006 - ------------------------------- NICHOLAS CHARLES WALSH *BY: ROBERT S. SCHIMEK ---------------------------------- ROBERT S. SCHIMEK ATTORNEY-IN-FACT (Exhibit (13) to the Registration Statement) AH - 3 EXHIBIT INDEX Exhibits - -------- (8)(g) General Guarantee Agreement from American Home Assurance Company on behalf of American General Life Insurance Company. (9)(b) Opinion and Consent of Sullivan & Cromwell LLP, Counsel to American Home Assurance Company. (10)(b) Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP. (13) Power of Attorney with respect to Registration Statements and Amendments thereto signed by the directors and, where applicable, officers of American Home Assurance Company. E-1 EX-99.(8)(G) 3 dex998g.txt GENERAL GUARANTEE AGREEMENT EXHIBIT (8)(g) GENERAL GUARANTEE AGREEMENT GENERAL GUARANTEE AGREEMENT, dated March 3, 2003 (the "Guarantee"), by American Home Assurance Company, a New York corporation (the "Guarantor") in favor of each party (individually, a "Party" and collectively, "Parties") insured under policies issued by American General Life Insurance Company, a Texas corporation (the "Company"). 1. Guarantee. For value received, and to induce Parties to purchase insurance from the Company, the Guarantor unconditionally and irrevocably guarantees to each Party, its successors, endorsees and assigns, the prompt payment when due of all present and future obligations and liabilities of any kind whatsoever of the Company to such Party arising from policies of insurance (including guaranteed investment contracts and funding agreements) issued by the Company, including but not limited to payments for claims, losses and return premiums whether due or to become due, secured or unsecured, absolute or contingent, joint or several (the "Obligations"). 2. Nature of Guarantee. The Guarantor's obligations hereunder with respect to any Obligation shall not be affected by the existence, validity, enforceability, perfection or extent of any collateral for such Obligation. No Party shall be obligated to file any claim relating to the Obligations owing to it in the event that the Company becomes subject to a bankruptcy, reorganization or similar proceeding, and the failure of any Party to so file shall not affect the Guarantor's obligations hereunder. In the event that any payment to any Party in respect to any Obligations is rescinded or must otherwise be returned for any reason whatsoever, the Guarantor shall remain liable hereunder in respect to such Obligations as if such payment had not been made. The Guarantor reserves the right to assert defenses which the Company may have to payment of any Obligation other than defenses arising from the bankruptcy or insolvency of the Company and other defenses expressly waived hereby. 3. Consents, Waivers and Renewals. The Guarantor agrees that a Party may at any time and from time to time, either before or after the maturity thereof, without notice to or further consent of the Guarantor extend the time of payment of, exchange or surrender any collateral for, or renew any of the Obligations owing to it, and may also make any agreement with the Company or with any other party to or person liable on any of the Obligations, or interested therein, for the extension, renewal, payment, compromise, discharge or release thereof, in whole or in part, or for any modification of the terms thereof or of any agreement between such Party and the Company or any of such other party or person, without in any way impairing or affecting this Guarantee. The Guarantor agrees that a Party may resort to the Guarantor for payment of any of the Obligations, whether or not the Party shall have resorted to any collateral security, or shall have proceeded against any other obligor principally or secondarily obligated with respect to any of the Obligations. 4. Expenses. The Guarantor agrees to pay on demand all out-of-pocket expenses (including the reasonable fees and expenses of its counsel) in any way relating to the enforcement or protection of the rights of a Party hereunder; provided, that the Guarantor shall not be liable for any expenses of a Party if no payment under this Guarantee is due. 5. Subrogation. Upon payment of all the Obligations owing to any Party, the Guarantor shall be subrogated to the rights of such Party against the Company, and such Party agrees to take at the Guarantor's expense such steps as the Guarantor may reasonably request to implement such subrogation. 6. Third-Party Beneficiary Contract. The Guarantor hereby acknowledges that Parties insured under policies issued by the Company prior to the termination of the Guarantee are intended third-party beneficiaries of the Guarantee who may enforce this Guarantee directly against the Guarantor. 7. Termination. This Guarantee may be terminated after 30 days notice given by the Guarantor by publication in The Wall Street Journal; provided, however, that in the event that a Party has requested, by written notice to the Secretary of the Guarantor at 70 Pine Street, New York, New York 10270, prior to the date of such publication, that such Party be given notice of any termination of this Guarantee (specifying the address to which such notice to the Party shall be sent), this Guarantee shall remain in full force and effect with respect to such Party until receipt by such Party of written notice of termination in accordance with such request. Notwithstanding the foregoing sentence, this Guarantee shall remain in full force and effect with respect to Obligations of the Company outstanding or contracted or committed for (whether or not outstanding) prior to the 30th day after publication of notice of such termination in The Wall Street Journal, or, in the event that a Party has requested notice of termination as provided above, prior to receipt by such Party of written notice of termination in accordance with such request, until such Obligations shall be finally and irrevocably paid in full. 8. Governing Law. This Guarantee shall be governed by and construed in accordance with the laws of the State of New York. AMERICAN HOME ASSURANCE COMPANY By /s/ ----------------------------------- By /s/ ----------------------------------- EX-99.(9)(B) 4 dex999b.txt LEGAL OPINION AND CONSENT - SULLIVAN & CROMWELL LLP EXHIBIT (9)(b) [LETTERHEAD OF SULLIVAN & CROMWELL LLP] 125 Broad Street New York, NY 10004-2498 TELEPHONE: 1-212-558-4000 FACSIMILE: 1-212-558-3588 WWW.SULLCROM.COM September 26, 2005 American Home Assurance Company 70 Pine Street, New York, New York 10270 Ladies and Gentlemen: In connection with the registration under the Securities Act of 1933 (the "1933 Act") and the Investment Company Act of 1940 (the "1940 Act") of the guarantees (the "Guarantees") of American Home Assurance Company (the "Guarantor") relating to the insurance obligations of American General Life Insurance Company (the "Company") under variable annuity and variable life insurance products issued by separate accounts (the "Variable Products"), we, as your counsel, have examined such corporate records, certificates and other documents, and such questions of New York law, as we have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, we advise you that, in our opinion, when the registration statement relating to a Guarantee and the related Variable Product (the "Registration Statement") has become effective under the 1933 Act and the 1940 Act and the related Variable Product is duly issued and paid for in the manner contemplated by the Registration Statement so as to be a valid and legally binding obligation of the Company, the Guarantee of such Variable Product will constitute a valid and legally binding obligation of the Guarantor, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. The foregoing opinion is limited to the laws of the State of New York, and we are expressing no opinion as to the effect of the laws of any other jurisdiction. We have relied as to certain factual matters on information obtained from public officials, officers of the Guarantor and the Company and other sources believed by us to be responsible. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the 1933 Act. Very truly yours, SULLIVAN & CROMWELL LLP EX-99.(10)(B) 5 dex9910b.txt PRICEWATERHOUSECOOPERS LLP CONSENT EXHIBIT (10)(b) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the use in this Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 of our report dated April 27, 2006 relating to the statutory basis financial statements of American Home Assurance Company, which appear in such Registration Statement. We also consent to the references to us under the heading "American Home Financial Statements" in such Registration Statement. PRICEWATERHOUSECOOPERS LLP Houston, Texas July 26, 2006 EX-99.(13) 6 dex9913.txt POWER OF ATTORNEY EXHIBIT (13) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below hereby constitutes and appoints ROBERT S. SCHIMEK and RICHARD T. PISANO, or each of them, as his true and lawful attorneys-in fact and agents, to sign any and all amendments to the Registration Statements listed below, for which AMERICAN GENERAL LIFE INSURANCE COMPANY serves as Depositor and AMERICAN HOME ASSURANCE COMPANY serves as Guarantor, and to file the same, with all exhibits thereto, and other documents in connection therewith, as fully to all intents as he might or could do in person, including specifically, but without limiting the generality of the foregoing, to (i) take any action to comply with any rules, regulations or requirements of the Securities and Exchange Commission under the federal securities laws; (ii) make application for and secure any exemptions from the federal securities laws; (iii) register additional annuity contracts under the federal securities laws, if registration is deemed necessary. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents or any of them, or their substitutes, shall do or cause to be done by virtue thereof. REGISTRATION STATEMENTS: Registrant Name File Nos. --------------- --------- AGL SEPARATE ACCOUNT A 033-44745 / 811-01491 033-44744 / 811-01491 AGL SEPARATE ACCOUNT D 033-43390 / 811-02441 002-49805 / 811-02441 333-70667 / 811-02441 333-40637 / 811-02441 033-57730 / 811-02441 AGL SEPARATE ACCOUNT VA-1 333-102302 / 811-07781 AGL SEPARATE ACCOUNT VA-2 333-102303 / 811-01990 AGL SEPARATE ACCOUNT VL-R 333-89897 / 811-08561 333-42567 / 811-08561 333-90787 / 811-08561 AGL SEPARATE ACCOUNT VUL 333-102301 / 811-05794 MERTON BERNARD AIDINOFF Director June 29, 2006 - ----------------------------- MERTON BERNARD AIDINOFF CHARLES H. DANGELO Director June 29, 2006 - ----------------------------- CHARLES H. DANGELO JOHN QUINLAN DOYLE Director and President June 29, 2006 - ----------------------------- JOHN QUINLAN DOYLE NEIL ANTHONY FAULKNER Director June 29, 2006 - ----------------------------- NEIL ANTHONY FAULKNER DAVID NEIL FIELDS Director June 29, 2006 - ----------------------------- DAVID NEIL FIELDS 1 KENNETH VINCENT HARKINS Director June 29, 2006 - ----------------------------- KENNETH VINCENT HARKINS DAVID LAWRENCE HERZOG Director June 29, 2006 - ----------------------------- DAVID LAWRENCE HERZOG ROBERT EDWARD LEWIS Director June 29, 2006 - ----------------------------- ROBERT EDWARD LEWIS KRISTIAN PHILIP MOOR Director and Chairman June 29, 2006 - ----------------------------- KRISTIAN PHILIP MOOR WIN JAY NEUGER Director June 29, 2006 - ----------------------------- WIN JAY NEUGER ROBERT S. SCHIMEK Director, Senior Vice June 29, 2006 - ----------------------------- President and Treasurer ROBERT S. SCHIMEK NICHOLAS SHAW TYLER Director June 29, 2006 - ----------------------------- NICHOLAS SHAW TYLER NICHOLAS CHARLES WALSH Director June 29, 2006 - ----------------------------- NICHOLAS CHARLES WALSH 2 -----END PRIVACY-ENHANCED MESSAGE-----