SHARE-BASED AND OTHER COMPENSATION PLANS

12 Months Ended

Dec. 31, 2017

SHARE-BASED AND OTHER COMPENSATION PLANS

SHARE-BASED AND OTHER COMPENSATION PLANS

20. Share-Based Compensation Plans

The following table presents our total share-based compensation expense:

Years Ended December 31,
(in millions)		2017		2016		2015
Share-based compensation expense - pre-tax^*	$	353	$	237	$	365
Share-based compensation expense - after tax		229		154		237

* We recognized $141 million, $105 million and $147 million for immediately vested stock-settled awards issued to retirement eligible employees in 2017, 2016 and 2015, respectively. We also recognized $40 million of excess tax benefits due to share settlements occurring in 2017.

Employee Plans

The Company sponsors several Long Term Incentive (LTI) programs under the AIG 2013 Long Term Incentive Plan and its successor plan, the AIG Long Term Incentive Plan (each as applicable, the LTIP), which are governed by the AIG 2013 Omnibus Incentive Plan (Omnibus Plan). The Omnibus Plan replaced the AIG 2010 Stock Incentive Plan (2010 Plan) as of May 15, 2013 but does not affect the terms and conditions of any award issued under the 2010 Plan. The Omnibus Plan is currently the only plan under which share-settled awards can be made. Our share-settled awards are settled with previously acquired shares held in AIG’s treasury.

AIG 2013 Omnibus Incentive Plan

The Omnibus Plan was adopted at the 2013 Annual Meeting of Shareholders and provides for the grants of share-based awards to our employees and non-employee directors. The total number of shares that may be granted under the Omnibus Plan (the reserve) is the sum of 1) 45 million shares of AIG Common Stock, plus 2) the number of authorized shares that remained available for issuance under the 2010 Plan when the Omnibus Plan became effective, plus 3) the number of shares of AIG Common Stock relating to outstanding awards under the 2010 Plan at the time the Omnibus Plan became effective that subsequently are forfeited, expired, terminated or otherwise lapse or are settled in cash. Each share-based unit granted under the Omnibus Plan reduces the number of shares available for future grants by one share. However, shares with respect to awards that are forfeited, expired or settled for cash, and shares withheld for taxes on awards (other than options and stock appreciation rights awards) are returned to the reserve.

During 2017, performance share units (PSUs), restricted stock units (RSUs), stock options and deferred stock units (DSUs) (collectively, units) were granted under the Omnibus Plan and 42,780,716 shares are available for future grants as of December 31, 2017. Units are issued to employees as part of our long-term incentive program, generally in March of any given year, and are also issued for off-cycle grants, which are made from time to time during the year generally as sign-on awards to new hires or as a result of a change in employee status.

AIG 2010 Stock Incentive Plan

The 2010 Plan was adopted at the 2010 Annual Meeting of Shareholders. The total number of shares of AIG Common Stock that could be granted under the 2010 Plan was 60 million. During 2013, we granted PSUs, DSUs and RSUs under the 2010 Plan. Each PSU, DSU and RSU awarded reduced the number of shares available for future grants by one share. Subsequent to the adoption of the Omnibus Plan in May 2013, no additional grants were made under the 2010 Plan.

AIG Long Term Incentive Plan

LTI Awards

The LTIP provides for an annual award to certain employees, including our senior executive officers and other highly compensated employees. In 2017, each award recipient was granted PSUs and/or RSUs, and in 2013 through 2016, each award recipient was granted PSUs.

The number of PSUs issued on the grant date (the target) provides the opportunity for the LTIP participant to receive shares of AIG Common Stock based on AIG achieving specified performance goals at the end of a three-year performance period. These performance goals are pre-established by AIG’s Compensation and Management Resources Committee (CMRC) for each annual grant and may differ from year to year. The actual number of PSUs earned can vary from zero to 200 percent of the target for the 2017 awards, or zero to 150 percent of the target for the 2013 through 2016 awards, depending on AIG’s performance relative to a specified peer group. RSUs are earned based on continued service by the participant. For the 2017 awards, vesting occurs on January 1 of the year immediately following the end of the three-year performance period. For awards granted prior to 2017, vesting occurs in three equal installments beginning on January 1 of the year immediately following the end of a performance period and January 1 of each of the next two years. Recipients must be employed at each vesting date to be entitled to share delivery, except upon the occurrence of an accelerated vesting event, such as an involuntary termination without cause, disability, retirement eligibility or death during the vesting period.

LTI awards granted in 2015 and thereafter accrue dividend equivalent units (DEUs) in the form of additional PSUs and/or RSUs whenever a cash dividend is declared on shares of AIG Common Stock; the DEUs are subject to the same vesting terms and conditions as the underlying unit.

Unit Valuation

The value of each award is based on the nature of the performance goals and the price per unit is fixed as of the grant date. PSUs granted in 2017 and 2016 are measured based on AIG’s relative total shareholder return (TSR). PSUs granted in 2015 and 2014 are measured based on AIG’s relative TSR and credit default swap (CDS) spread, weighted 75 percent and 25 percent, respectively. PSUs granted in 2013 are measured based on AIG’s relative TSR and relative growth in tangible book value per common share (TBVPS) (excluding accumulated other comprehensive income) weighted 50 percent each.

The fair value of RSUs as well as PSUs earned based on AIG’s CDS spreads and relative TBVPS was based on the closing price of AIG Common Stock on the grant date. However, PSUs granted in 2014 and 2013 that vest based on these goals were discounted by the present value of estimated dividends to be paid during the respective vesting periods as these awards do not accrue dividends or DEUs. The fair value of PSUs to be earned based on AIG’s relative TSR was determined on the grant date using a Monte Carlo simulation.

The following table presents the assumptions used to estimate the fair value of PSUs that vest based on AIG’s TSR:

	2017		2016		2015
Expected dividend yield^(a)	2.37	%	2.17	%	1.78	%
Expected volatility^(b)	17.58	%	24.55	%	22.71	%
Risk-free interest rate^(c)	2.00	%	1.30	%	1.01	%

(a) The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.

(b) The expected volatility is based on the historical volatility of the stock price for the 360 most recent trading days prior to the valuation date estimated by Bloomberg Professional service.

(c) The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and the end of the performance period that is assumed to be constant and equal to the interpolated value between the closest data points on the U.S. dollar LIBOR-swap curve as of the valuation date

Modification of LTI awards

During the fourth quarter of 2017, the Company modified certain outstanding LTI awards by concurrently issuing service-based RSUs and canceling some previously granted PSUs. The change applied to most recipients who participate in the 2015, 2016 and 2017 LTI awards, excluding certain of the Company’s most senior executives. In addition, the Company also issued supplemental RSU grants to certain active employees, which vest in installments over a period of up to three years. We incurred incremental compensation expense of $142 million as a result of these actions. We recognized $71 million in 2017 and the remainder will be recognized through December 2020.

The following table summarizes outstanding share-settled LTI awards^(a):

						Weighted Average
As of or for the Year	Number of Units					Grant-Date Fair Value
Ended December 31, 2017^(b)	2017 LTI	2016 LTI	2015 LTI	2014 LTI	2013 LTI	2017 LTI		2016 LTI		2015 LTI		2014 LTI		2013 LTI
Unvested, beginning of year	-	2,588,598	2,176,555	1,732,616	1,581,904	$	-	$	51.12	$	55.52	$	48.88	$	38.03
Granted	3,996,978	2,806	-	122,378	-		64.83		36.49		-		48.57		-
Vested^(c)	(971,945)	(182,938)	(201,256)	(957,045)	(968,930)		64.09		60.29		59.04		48.89		37.98
Forfeited	(84,987)	(138,263)	(121,456)	(74,638)	(36,764)		65.24		51.10		55.01		49.02		39.14
Unvested, at modification date	2,940,046	2,270,203	1,853,843	823,311	576,210	$	65.07	$	50.37	$	55.17	$	48.81	$	38.04
Cancelled at modification date	(1,082,417)	(2,951,417)	(2,229,873)	-	-		67.47		52.00		54.56		-		-
Granted at modification date	1,082,417	2,646,866	2,094,629	-	-		62.13		62.13		62.13		-		-
Sub-total, net impact of modification	-	(304,551)	(135,244)	-	-		-		55.01		56.33		-		-
Vested - post-modification^(c)	(766,931)	(495,222)	(424,788)	-	-		64.01		62.13		61.82		-		-
Forfeited - post-modification	-	(2,685)	(2,023)	-	-		-		62.13		62.13		-		-
Unvested, end of year^(d)	2,173,115	1,467,745	1,291,788	823,311	576,210	$	62.78	$	60.90	$	60.02	$	48.81	$	38.04

(a) Excludes stock options and DSUs, which are discussed under Stock Options and Non-Employee Plan, respectively.

(b) Except for the 2013 and 2014 LTI award, PSUs represent target amount granted, and does not reflect potential increases or decreases that could result from the final outcome of the performance goals for the respective awards, which is determined in the quarter after the applicable performance period ends.

(c) Also reflects units that vest as a result of an accelerated vesting event that occurred prior to the specified vesting date.

(d) At December 31, 2017, the total unrecognized compensation cost for outstanding LTI awards was $237 million and the weighted-average and expected period of years over which that cost is expected to be recognized are 1.02 years and 3 years.

Stock Option Awards

The Company issued 2.5 million stock options to two senior executives who joined the Company in 2017. The options vest in installments based on a combination of service requirements of up to three years and/or AIG stock price achieving specified hurdles, and will expire in 2024. The fair value of the options were estimated on the grant date using the Black Scholes model for the time-vesting options, and a Monte Carlo simulation for the hurdle-vesting options using the assumptions noted in the following table.

The following weighted-average assumptions were used for stock options granted

	2017
Expected annual dividend yield^(a)	2.03	%
Expected volatility^(b)	20.96	%
Risk-free interest rate^(c)	1.94	%
Expected term^(d)	4.5	years

(a) The dividend yield is based on the current quarterly dividend payment of $0.32 and the Valuation Date stock price.

(b) The expected volatility is the 1080-day implied volatility as seen in the open marketplace on the Valuation Date.

(d) The contractual term of the option is 7 years from the grant date.

The following table provides a rollforward of stock option activity:

				Weighted Average			Aggregate
As of or for the Year		Weighted Average			Remaining		Intrinsic Values
Ended December 31, 2017	Units	Exercise Price		Contractual Life		(in millions)

Outstanding, beginning of year	-	$	-
Granted	2,500,000		62.90
Exercised	-		-
Forfeited or expired	-		-
Outstanding, end of year	2,500,000	$	62.90		6.48	$	-
Exercisable, end of year	-	$	-		-	$	-

The weighted average grant-date fair value of stock options granted during 2017 was $10.54. As of December 31, 2017, we recognized $7.3 million of expense, while $19 million was unrecognized and is expected to be amortized up to 2.75 years.

Non-Employee Plan

Our non-employee directors, who serve on our Board of Directors, receive share-based compensation in the form of fully vested DSUs with delivery deferred until retirement from the Board. DSUs granted in 2017, 2016 and 2015 accrue DEUs equal to the amount of any regular quarterly dividend that would have been paid by AIG if the shares of AIG Common Stock underlying the DSUs had been outstanding. In 2017, 2016 and 2015, we granted to non-employee directors 32,067, 41,974 and 32,342 DSUs, respectively, under the 2013 Plan, and recognized expense of $2.0 million, $2.4 million and $1.9 million, respectively.