SHARE-BASED COMPENSATION PLANS

12 Months Ended

Dec. 31, 2018

20. Share-Based Compensation Plans

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

Years Ended December 31,
(in millions)		2018		2017		2016
Share-based compensation expense - pre-tax^(a)	$	337	$	353	$	237
Share-based compensation expense - after tax^(b)		266		229		154

(a) We recognized $48 million, $141 million and $105 million for immediately vested stock-settled awards issued to retirement eligible employees in 2018, 2017 and 2016, on their respective grant dates. It is our policy to reverse compensation expense for forfeited awards when they occur.

(b) We also recognized $9 million of excess tax benefits due to share settlements occurring in 2018.

Employee Plans

The Company sponsors several stock compensation programs under the AIG Long Term Incentive Plan and its predecessor plan, the AIG 2013 Long Term Incentive Plan (each as applicable, the LTIP), which are governed by the AIG 2013 Omnibus Incentive Plan (Omnibus Plan). Our share-settled awards are settled with previously acquired shares held in AIG’s treasury.

AIG 2013 Omnibus Incentive Plan

The Omnibus Plan, which replaced the AIG 2010 Stock Incentive Plan (2010 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 2018, performance share units (PSUs), restricted stock units (RSUs), stock options and deferred stock units (DSUs) (collectively, units) were granted under the Omnibus Plan and 37,211,710 shares are available for future grants as of December 31, 2018. 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 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 that may be comprised of PSUs, RSUs and/or stock options.

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 and 2018 awards or zero to 150 percent of the target for the 2014 through 2016 awards, depending on AIG’s performance relative to a specified peer group or against pre-established financial goals, as applicable.

RSUs and stock options are earned based solely on continued service by the participant.

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 fair value of time-vesting RSUs as well as PSUs that are earned based on certain company-specific metrics was based on the closing price of AIG Common Stock on the grant date; while the fair value of PSUs that are earned based on AIG’s relative total shareholder return (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
Expected dividend yield^(a)	2.37	%	2.17	%
Expected volatility^(b)	17.58	%	24.55	%
Risk-free interest rate^(c)	2.00	%	1.30	%

(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 the LTI awards by issuing time-vesting RSUs and canceling some performance based units. The modification applied to most recipients who participate in the 2015, 2016 and 2017 LTI awards, excluding the Company’s senior executives. The newly granted RSUs 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, $48 million in 2018 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, 2018^(b)	2018 LTI	2017 LTI	2016 LTI	2015 LTI	2014 LTI	2018 LTI		2017 LTI		2016 LTI		2015 LTI		2014 LTI
Unvested, beginning of year	-	2,173,115	1,467,745	1,291,788	823,311	$	-	$	62.78	$	60.90	$	60.02	$	48.81
Granted	4,640,722	43,792	-	-	-		55.47		58.52		-		-		-
Vested^(c)	(1,205,653)	(530,388)	(728,576)	(266,184)	(793,955)		55.85		63.67		60.28		57.87		48.81
Forfeited	(113,041)	(106,524)	(98,509)	(753,272)	(29,356)		55.92		63.13		62.13		54.46		48.84
Unvested, end of year^(d)	3,322,028	1,579,995	640,660	272,332	-	$	55.32	$	62.32	$	61.55	$	60.51	$	-

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

(b) Except for the 2014 LTI and 2015 LTI awards, 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, 2018, the total unrecognized compensation cost for outstanding RSUs and PSUs was $215 million and the weighted-average and expected period of years over which that cost is expected to be recognized are 0.96 year and 2 years.

Stock Options

Stock options were issued in 2018 as part of the 2018 LTI awards and in 2017 and 2018 to certain newly hired senior executives. The fair value of the options was 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

	2018		2017
Expected annual dividend yield^(a)	2.32	%	2.03	%
Expected volatility^(b)	23.29	%	20.96	%
Risk-free interest rate^(c)	2.83	%	1.94	%
Expected term^(d)	4.50 - 6.47	years	4.5	years

(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 implied volatility of 24 months stock option estimated by the Bloomberg Professional service as of the valuation date.

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

(d) The contractual terms are 7 and 10 years.

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, 2018	Units		Exercise Price	Contractual Life		(in millions)
Outstanding, beginning of year	2,500,000	$	62.90		6.48
Granted	2,752,098		55.38
Exercised	-		-
Forfeited or expired	(46,299)		55.94
Outstanding, end of year	5,205,799	$	58.99		7.38	$	-
Exercisable, end of year	486,229	$	59.90		4.07	$	-

The weighted average grant-date fair value of stock options granted during 2018 was $11.08. As of December 31, 2018, we recognized $26.4 million of expense, while $24 million was unrecognized and is expected to be amortized up to 2.75 years.

Other RSU Grants

We granted 1,385,929 off-cycle time-vesting RSUs in 2018 primarily pertaining to replacement awards granted to Validus employees. We recognized $43.3 million of expense related to these RSU grants in 2018. Total unrecognized compensation cost related to these grants was $57 million and the weighted-average and expected period of years over which that cost is expected to be recognized are 1.14 years and 4.25 years at December 31, 2018.

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 2018, 2017 and 2016 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 2018, 2017 and 2016, we granted to non-employee directors 39,092, 32,067 and 41,974 DSUs, respectively, under the 2013 Plan, and recognized expense of $2.1 million, $2.0 million and $2.4 million, respectively.