485BPOS 1 d485bpos.txt PEA #13 (FORM N-4) AIG LIFE GROUP IVA-VANGUARD Registration Nos. 333-108725 811-05301 As filed with the Securities and Exchange Commission on April 30, 2008 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. [13] [X] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. [124] [X] VARIABLE ACCOUNT I OF AIG LIFE INSURANCE COMPANY (Exact Name of Registrant) AIG LIFE INSURANCE COMPANY (Name of Depositor) One ALICO Plaza 600 King Street Wilmington, DE 19801 (Address of Depositor's Principal Executive Offices) (Zip Code) (713) 831-8470 (Depositor's Telephone Number, Including Area Code) NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (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) [_] immediately upon filing pursuant to paragraph (b) [X] on April 30, 2008 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 Variable Account I of AIG Life Insurance Company under variable annuity contracts and (ii) a guarantee related to insurance obligations under the variable annuity contracts. VANGUARD(R) LIFETIME INCOME PROGRAM >PROSPECTUS APRIL 30, 2008 [LOGO OF VANGUARD] GROUP IMMEDIATE VARIABLE ANNUITY Prospectus April 30, 2008 Issued by AIG Life Insurance Company Through Its Variable Account I This prospectus describes information you should know before you purchase a Group Immediate Variable Annuity (the "Group IVA"). On page 2 you will find definitions of certain capitalized terms used in this prospectus. Please read this prospectus carefully and keep it for future reference. For information on how to contact us, please see page 7. The Group IVA is a single premium immediate variable annuity Contract (the "Contract" or "Contracts") between you and AIG Life Insurance Company, ("AIG Life"), where you agree to make one Premium Payment to AIG Life and AIG Life agrees to make a stream of Income (annuity) Payments at a later date. The Contract is a single premium, immediate, variable annuity offered to individuals within groups. It is immediate because we start making Income Payments within 12 months from the Contract Date. The description of the Contract in this prospectus is fully applicable to your certificate and the word "Contract" includes any such certificate. THE CONTRACT IS DESIGNED TO MEET LONG-TERM FINANCIAL GOALS. DUE TO CERTAIN RESTRICTIONS ON WITHDRAWALS AND SURRENDERS, THE CONTRACT IS NOT SUITABLE AS A SHORT-TERM INVESTMENT. THE CONTRACT IS AVAILABLE AS A QUALIFIED CONTRACT, SUCH AS AN INDIVIDUAL RETIREMENT ANNUITY CONTRACT FUNDED WITH ROLLOVERS FROM TAX-QUALIFIED PLANS, AND AS A NON-QUALIFIED CONTRACT FUNDED WITH MONEY FROM ANY SOURCE. The Contract has 23 investment options to which you can allocate your money--22 variable investment options and one fixed investment option. If your Contract is a tax-deferred non-qualified annuity that is not part of your retirement plan, those variable investment options that are invested in Mutual Funds available to the public outside of annuity Contracts, life insurance Contracts, or certain employer-sponsored retirement plans (Vanguard Public Mutual Funds), will not be available for you to allocate your money within your Contract. The fixed investment option is part of our general account and, if chosen, each of your annuity payments will generally be the same amount. If you allocate your money to the variable investment options, the periodic annuity payments will change depending on the investment performance of the funds you select. You bear the investment risk. Currently, the variable investment options are funds of: 1 Vanguard(R) Variable Insurance Fund ("Vanguard VIF Portfolios") 2 Vanguard Public Mutual Funds ("Vanguard Funds") See "Investment Options" on page 11 for a complete list of the variable investment options. You should be sure you also read the prospectuses of the Funds underlying the variable investment options that may interest you. You can request free copies of any or all of the Funds' prospectuses by contacting us as set out on page 7. In addition, the Securities and Exchange Commission ("SEC") maintains a website at http://www.see.gov that contains the prospectus, SAI, materials incorporated by reference, and other information that we have filed electronically with the SEC. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE CONTRACTS ARE NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY SIMILAR AGENCY. THEY ARE NOT A DEPOSIT OR OTHER OBLIGATION OF, NOR ARE THEY GUARANTEED OR ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION. AN INVESTMENT IN A VARIABLE ANNUITY IS SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTED. THE CONTRACTS ARE NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT OFFER THE CONTRACTS IN ANY JURISDICTION WHERE THEY CANNOT BE LAWFULLY SOLD. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS, SALES MATERIALS WE HAVE APPROVED OR THAT WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. TABLE OF CONTENTS DEFINITIONS 2 SUMMARY OF THE CONTRACT 3 FEE TABLES 8 CONDENSED FINANCIAL INFORMATION 9 INVESTMENT OPTIONS 11 EXPENSES 17 THE CONTRACT 19 ANNUITY PAYMENTS 28 ACCESS TO YOUR MONEY 33 DEATH BENEFIT 33 PERFORMANCE 35 TAXES 36 OTHER INFORMATION 41 FINANCIAL STATEMENTS 43 APPENDIX 44 TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION 53 1 DEFINITIONS We have defined certain terms used in this prospectus to help you understand these terms. We have defined them in this glossary. ANNUITANT The person you designate to receive annuity payments and whose life determines the duration of annuity payments involving life contingencies. The Annuitant is usually the owner of the Contract, but in some circumstances the owner may not be the Annuitant. In addition, certain annuity options under the Contract permit a Joint Annuitant. ANNUITY PAYMENT OPTION The method in which you choose to receive your stream of annuity payment(s). ANNUITY UNIT An accounting unit of measure used to calculate annuity payments after the Contract Date. ASSUMED INVESTMENT RETURN The net investment return that will cause variable annuity payments to remain level. The Assumed Investment Return is used in calculating the initial and subsequent variable annuity payments. COMPANY AIG Life Insurance Company, 600 King Street (DPEN), Wilmington, Delaware 19801. CONTRACT ANNIVERSARY An anniversary of the date we issued your Contract. CONTRACT DATE The date your Contract is issued and becomes effective. CONTRACT OWNER The person (or persons) shown as the Owner under the Contract schedule. Unless otherwise noted, all references to "you" or "your" in this prospectus, refer to the Contract Owner. CONTRACT YEAR Each twelve-month period beginning on the Contract Date. INCOME CHANGE DATE The date on which the amount of your next variable annuity payment is calculated based in part on the performance of the subaccounts you have chosen, your selected Assumed Investment Return and certain other factors. The Income Change Date occurs on the same frequency as your variable annuity payments (monthly, quarterly, semi-annual or annual basis), which is specified in your Contract. 2 INCOME START DATE The date on which annuity payments begin. You choose this date when you purchase the Contract. Because the Contract is an immediate annuity, rather than a deferred annuity, the Income Start Date cannot be later than 12 months after the Contract Date. (Deferred annuities generally permit you to defer the date that annuity payments begin for an indefinite period of time.) NON-QUALIFIED CONTRACT An annuity purchased with dollars already subject to taxation. PREMIUM PAYMENT Money sent to us to be invested in your Contract. Because the Contract is a single premium Contract, you are permitted to make only one Premium Payment to us. All references, in this prospectus, to "net Premium Payment" mean your Premium Payment minus taxes and one-time charges. QUALIFIED CONTRACT An annuity purchased with premium dollars protected from current taxation by some type of employer retirement plan, such as a 403(b), or 401(k), or by a deductible IRA. RIGHT TO EXAMINE PERIOD Time period immediately following the Contract Date, when you may return your Contract to the Company. STATUTORY PREMIUM TAX A tax charged by a state or municipality on Premium Payments. VALUATION DATE (ALSO CALLED A "BUSINESS DAY") Each day that the New York Stock Exchange ("NYSE") is open for trading. We compute Contract values as of the time the NYSE closes on each Valuation Date, which usually is 4:00 p.m. Eastern Time. VALUATION PERIOD The period between the close of business on any Valuation Date and the close of business for the next succeeding Valuation Date. SUMMARY OF THE CONTRACT The summary provides a brief overview of the significant features of the Contract. You can find additional information later in this prospectus, in the SAI, and in the Contract. This prospectus applies principally to the variable investment options and related aspects of the Contract. The fixed investment option is discussed under the heading "Fixed Investment Option." PURPOSE OF THE ANNUITY CONTRACT The single premium immediate variable annuity Contract described in this prospectus provides annuity payments to the Annuitant for his or her life, and, under particular options, the life of a Joint Annuitant or for a certain period of years. You may select from a number of annuity payment options. Certain 3 options provide a guaranteed minimum number of years of annuity income. You may choose annuity payments that are fixed, variable, or a combination of fixed and variable. You may choose annuity payments on a monthly, quarterly, semi-annual, or annual basis. The Contract is intended for people who want to receive a stream of income payments, generally for retirement but also for other long-term purposes. TYPE OF CONTRACT If you are eligible, you may purchase the Contract as an individual retirement annuity ("IRA") with contributions rolled-over from tax-qualified plans such as 401(k) Plans, 403(b) Plans, governmental 457 Plans, or IRAs. You may also purchase the Contract as a non-qualified retirement plan for an individual. PURCHASE OF THE CONTRACT The minimum amount to purchase a Contract is $20,000. We reserve the right to accept a Premium Payment below that amount or reject a Premium Payment in excess of limits we establish from time to time. In general, we will not issue a Contract to anyone who is over age 90, but reserve the right to increase or decrease that age. THE INVESTMENT OPTIONS When you purchase the Contract, you may allocate your Premium Payment to our Variable Account to provide a variable annuity. Our Variable Account is divided into subaccounts, 22 of which are offered under the Contract. Each of the 22 subaccounts invest exclusively in shares of a specific Vanguard Fund or Vanguard VIF Portfolio. The investment performance of each subaccount is linked to the investment performance of one of the Funds. Assets in each of the subaccounts belong to the Company, but are accounted for separately from the Company's other assets and can be used only to satisfy its obligations under the Contracts. The Vanguard Funds are only available if your Contract has been issued on a qualified basis. The Vanguard VIF Portfolios are available for both qualified and non-qualified Contracts. You can allocate your Premium Payment to one or more subaccounts that invest exclusively in shares of the following variable investment options described in the Funds' prospectuses: VANGUARD FUNDS (and their investment advisors) Managed by Vanguard's Fixed Income Group Vanguard Inflation-Protected Securities Fund Managed by Wellington Management Company, LLP Vanguard Dividend Growth Fund Vanguard GNMA Fund Also included in Vanguard Funds are: Vanguard LifeStrategy(R) Conservative Growth Fund Vanguard LifeStrategy(R) Growth Fund Vanguard LifeStrategy(R) Income Fund Vanguard LifeStrategy(R) Moderate Growth Fund These Funds receive advisory services indirectly, by investing in other Vanguard funds. 4 Beginning January 3, 2005, Vanguard Health Care Fund and Vanguard Total International Stock Index Fund are no longer offered as investment options under Contracts issued on or after January 3, 2005. The two Funds are not available for any transfers, automatic rebalancing or dollar cost averaging into either of the Funds by any Contract Owner beginning January 3, 2005. If you wish to transfer Annuity Units currently invested in either of the Funds to other available investment options in your Contract, there is no transfer fee charged for the transfer, nor will a transfer count against the free transfers which you are allowed each Contract year. Your right to transfer from the two Funds will remain unaffected. Please note, however, that other fees may be applicable to transfers from the two Funds. VANGUARD VIF PORTFOLIOS (and their investment advisors) Managed by Vanguard's Fixed Income Group Vanguard VIF Money Market Portfolio Vanguard VIF Short-Term Investment-Grade Portfolio Vanguard VIF Total Bond Market Index Portfolio Managed by Barrow, Hanley, Mewhinney & Strauss, Inc. Vanguard VIF Diversified Value Portfolio Managed by Vanguard's Quantitative Equity Group Vanguard VIF Equity Index Portfolio Vanguard VIF Mid-Cap Index Portfolio Vanguard VIF REIT Index Portfolio Managed by AllianceBernstein L.P. and William Blair & Company, L.L.C. Vanguard VIF Growth Portfolio Managed by Wellington Management Company, LLP Vanguard VIF Balanced Portfolio Vanguard VIF High Yield Bond Portfolio Managed by Granahan Investment Management, Inc. and Vanguard's Quantitative Equity Group Vanguard VIF Small Company Growth Portfolio Managed by Wellington Management Company, LLP and Vanguard's Quantitative Equity Group Vanguard VIF Equity Income Portfolio Managed by Schroder Investment Management North America Inc., M&G Investment Management Limited, and Baillie Gifford Overseas Ltd Vanguard VIF International Portfolio Managed by PRIMECAP Management Company Vanguard VIF Capital Growth Portfolio 5 Also included in Vanguard VIF Portfolios is: Vanguard VIF Total Stock Market Index Portfolio Vanguard VIF Total Stock Market Index Portfolio receives advisory services indirectly, by investing in other Vanguard funds and Vanguard VIF Portfolios. Each Vanguard Fund's board of trustees and each Vanguard VIF Portfolio's board of trustees may, without prior approval from Contract Owners, change the terms of an advisory agreement or hire a new investment advisor--either as a replacement for an existing advisor or as an additional advisor. Any significant change in a Vanguard Fund's or Vanguard VIF Portfolio's advisory arrangements will be communicated to Contract Owners in writing. In addition, as each Vanguard Fund's and each Vanguard VIF Portfolio's overall manager, The Vanguard Group, Inc. (Vanguard) may provide investment advisory services to any Vanguard Fund or Vanguard VIF Portfolio, on an at-cost basis, at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced, or that the terms of an existing investment advisory agreement be revised. ALLOCATING PART OR ALL OF YOUR PREMIUM PAYMENT TO A SUBACCOUNT MEANS YOU HAVE ELECTED, AT LEAST IN PART, A VARIABLE ANNUITY PAYMENT. THE AMOUNT OF YOUR VARIABLE ANNUITY PAYMENT WILL INCREASE OR DECREASE DEPENDING ON THE INVESTMENT PERFORMANCE OF THE SUBACCOUNTS YOU SELECTED. YOU BEAR THE INVESTMENT RISK FOR AMOUNTS ALLOCATED TO A SUBACCOUNT. You can also allocate all or part of your Premium Payment to the general account and elect a fixed annuity payment. Under this option, the periodic amount you receive will not change once it is established. Each new allocation from the Variable Account I to the general account will establish a new periodic payment amount for that allocation. EXPENSES The company does not deduct a sales load from your Premium Payment, but does deduct the following charges in connection with the Contract. For additional information, see "EXPENSES" further on in this prospectus. MORTALITY AND EXPENSE RISK CHARGE. We deduct a daily charge from the assets of each subaccount for mortality and expense risks. The maximum charge is 0.52% per annum based on each subaccount's average daily net assets. STATUTORY PREMIUM TAX CHARGE. Certain states assess a premium tax charge for Premium Payments made under the Contract. If applicable, the premium tax will be deducted from your single Premium Payment upon its receipt by the Company. See "Statutory Premium Taxes" further on in this prospectus for more information. OTHER EXPENSES. The management fees and other expenses of the funds are paid by the funds and are reflected in the net asset values of the funds' shares. RIGHT TO EXAMINE You may cancel your Contract within ten days after receiving it (or longer if your state requires). We will refund your Premium Payment, adjusted as required by your Contract. See "Right to Return" further on in this prospectus. 6 PARTIAL WITHDRAWAL RIGHTS If you choose an annuity payment option with a Guaranteed Number of Years, you will have the right to make a partial withdrawal from your Contract subject to certain provisions. See "Partial Withdrawal Rights with Variable Payments for a Guaranteed Number of Years" further on in this prospectus. CANCELLATION RIGHTS You may choose to have the right to cancel your Contract subject to certain provisions. See "Cancellation Rights" further on in this prospectus. INQUIRIES AND CONTRACT OWNER AND ANNUITANT INFORMATION For more information about a Contract, call 1-800-522-5555 or write: REGULAR MAIL: OVERNIGHT OR CERTIFIED MAIL: ------------- --------------------------------------- Vanguard Annuity and Insurance Services Vanguard Annuity and Insurance Services P.O. Box 1105 455 Devon Park Drive Valley Forge, PA 19482-1105 Wayne, PA 19087-1815 If you have questions about your Contract, please telephone Vanguard Annuity and Insurance Services at 1-800-462-2391. Please have ready the Contract number and the Contract Owner's name, address, last four digits of the Social Security number, and zip code when you call. You will receive periodic statements confirming any transactions that take place as well as other required periodic reports if you choose a variable payout option. You may also contact AIG Life Insurance Company, the issuer of the Contracts. You can contact AIG Life Insurance Company at its Group Annuity Administration Department, 600 King Street (DPEN), Wilmington, Delaware 19801. You can also call AIG Life Insurance Company at 1-877-299-1724. 7 FEE TABLES The following tables describe the fees and expenses that you will pay when buying and owning the Contract. The first table describes the fees and expenses that you will pay at the time that you buy the Contract or transfer cash value between investment options. Statutory state premium taxes may also be deducted. MAXIMUM OWNER TRANSACTION EXPENSES ---------------------------------- CHARGE AMOUNT ------ ------ Sales Load Imposed on Purchases (as a None percentage of purchase payments) Transfer Fee $10 per transfer (There is no charge for the first 12 transfers each Contract year; thereafter, we reserve the right to charge a fee of $10 per transfer.) Partial Withdrawal Transaction Charge The lesser of 2% of the amount withdrawn or $25 Statutory Premium Taxes--qualified 01% of Premium Contracts Statutory Premium Taxes--non-qualified 03.5% of Premium Contracts The next table describes the fees and expenses that you will pay periodically during the time that you own the Contract, not including fund fees and expenses. VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average account value) CHARGE AMOUNT ------ ------ Maximum Mortality and Expense Risk Fees 0.52% TOTAL VARIABLE ACCOUNT ANNUAL EXPENSES 0.52% The next table describes the Fund fees and expenses that you will pay periodically during the time that you own the Contract. Total Annual Fund Operating Expenses vary for each Fund. The range in the table shows the minimum and maximum for the Funds as of each Fund's most recent fiscal year end. Current and future expenses for the Funds may be higher or lower than those shown. ANNUAL FUND FEES AND EXPENSES (as a percentage of average daily Variable Account value) CHARGE MAXIMUM MINIMUM ------ ------- ------- Total Annual Fund Operating Expenses (expenses that are deducted from fund assets include management fees, distribution (12b-1) fees, and other expenses) 0.45% 0.14% Details concerning each Fund's specific fees and expenses are contained in the Funds' prospectuses. 8 CONDENSED FINANCIAL INFORMATION ACCUMULATION UNIT VALUES
12/31/04 12/31/05 12/31/06 12/31/07 -------- -------- -------- -------- VANGUARD(R) FUNDS: VANGUARD DIVIDEND GROWTH FUND Accumulation Unit value at beginning of year N/A N/A $ 12.68 $ 15.08 Accumulation Unit value at end of year N/A $ 12.68 $ 15.08 $ 16.06 Number of Accumulation Units outstanding at end of year N/A 2,014 1,909 2,382 VANGUARD GNMA FUND Accumulation Unit value at beginning of year $ 10.13 $ 10.50 $ 10.79 $ 11.20 Accumulation Unit value at end of year $ 10.50 $ 10.79 $ 11.20 $ 11.93 Number of Accumulation Units outstanding at end of year 3,152 1,358 1,170 1,752 VANGUARD HEALTH CARE FUND Accumulation Unit value at beginning of year N/A $ 11.90 $ 13.67 $ 15.07 Accumulation Unit value at end of year $ 11.90 $ 13.67 $ 15.07 $ 15.66 Number of Accumulation Units outstanding at end of year 5,698 4,777 4,234 3,727 VANGUARD INFLATION-PROTECTED SECURITIES FUND Accumulation Unit value at beginning of year N/A $ 11.16 $ 11.39 $ 11.38 Accumulation Unit value at end of year $ 11.16 $ 11.39 $ 11.38 $ 12.63 Number of Accumulation Units outstanding at end of year 2,150 12,379 13,802 14,641 VANGUARD LIFESTRATEGY CONSERVATIVE GROWTH FUND Accumulation Unit value at beginning of year N/A N/A N/A N/A Accumulation Unit value at end of year N/A N/A N/A $ 13.77 Number of Accumulation Units outstanding at end of year N/A N/A N/A 11,638 VANGUARD LIFESTRATEGY GROWTH FUND Accumulation Unit value at beginning of year $ 10.90 $ 12.21 $ 12.98 $ 15.00 Accumulation Unit value at end of year $ 12.21 $ 12.98 $ 15.00 $ 16.03 Number of Accumulation Units outstanding at end of year 6,749 9,068 10,239 20,385 VANGUARD LIFESTRATEGY INCOME FUND Accumulation Unit value at beginning of year N/A $ 10.89 $ 11.18 $ 12.01 Accumulation Unit value at end of year $ 10.89 $ 11.18 $ 12.01 $ 12.75 Number of Accumulation Units outstanding at end of year 11,770 14,069 17,095 13,931 VANGUARD LIFESTRATEGY MODERATE GROWTH FUND Accumulation Unit value at beginning of year $ 10.71 $ 11.78 $ 12.39 $ 13.97 Accumulation Unit value at end of year $ 11.78 $ 12.39 $ 13.97 $ 14.92 Number of Accumulation Units outstanding at end of year 24,811 23,059 31,779 39,773 VANGUARD TOTAL INTERNATIONAL STOCK INDEX FUND Accumulation Unit value at beginning of year N/A $ 13.82 $ 15.89 $ 20.02 Accumulation Unit value at end of year $ 13.82 $ 15.89 $ 20.02 $ 23.01 Number of Accumulation Units outstanding at end of year 19,656 17,451 15,348 13,349
9 VANGUARD(R) VIF PORTFOLIOS: VANGUARD VIF BALANCED PORTFOLIO Accumulation Unit value at beginning of year $ 10.82 $ 11.98 $ 12.74 $ 14.57 Accumulation Unit value at end of year $ 11.98 $ 12.74 $ 14.57 $ 15.70 Number of Accumulation Units outstanding at end of year 154,249 268,437 313,608 353,982 VANGUARD VIF CAPITAL GROWTH PORTFOLIO Accumulation Unit value at beginning of year N/A $ 12.64 $ 13.54 $ 15.03 Accumulation Unit value at end of year $ 12.64 $ 13.54 $ 15.03 $ 16.82 Number of Accumulation Units outstanding at end of year 5,319 8,428 11,822 31,095 VANGUARD VIF DIVERSIFIED VALUE PORTFOLIO Accumulation Unit value at beginning of year $ 11.26 $ 13.50 $ 14.45 $ 17.09 Accumulation Unit value at end of year $ 13.50 $ 14.45 $ 17.09 $ 17.67 Number of Accumulation Units outstanding at end of year 13,666 25,311 24,806 42,468 VANGUARD VIF EQUITY INCOME PORTFOLIO Accumulation Unit value at beginning of year N/A $ 12.63 $ 13.08 $ 15.71 Accumulation Unit value at end of year $ 12.63 $ 13.08 $ 15.71 $ 16.33 Number of Accumulation Units outstanding at end of year 14,769 22,489 38,422 38,057 VANGUARD VIF EQUITY INDEX PORTFOLIO Accumulation Unit value at beginning of year N/A $ 12.02 $ 12.53 $ 14.43 Accumulation Unit value at end of year $ 12.02 $ 12.53 $ 14.43 $ 15.12 Number of Accumulation Units outstanding at end of year 8,591 15,968 29,863 41,395 VANGUARD VIF GROWTH PORTFOLIO Accumulation Unit value at beginning of year N/A $ 11.41 $ 12.65 $ 12.83 Accumulation Unit value at end of year $ 11.41 $ 12.65 $ 12.83 $ 14.06 Number of Accumulation Units outstanding at end of year 1,294 4,943 4,700 7,320 VANGUARD VIF HIGH YIELD BOND PORTFOLIO Accumulation Unit value at beginning of year N/A $ 11.31 $ 11.56 $ 12.45 Accumulation Unit value at end of year $ 11.31 $ 11.56 $ 12.45 $ 12.63 Number of Accumulation Units outstanding at end of year 1,510 4,896 19,323 18,752 VANGUARD VIF INTERNATIONAL PORTFOLIO Accumulation Unit value at beginning of year $ 11.23 $ 13.34 $ 15.43 $ 19.46 Accumulation Unit value at end of year $ 13.34 $ 15.43 $ 19.46 $ 22.73 Number of Accumulation Units outstanding at end of year 5,881 20,403 68,625 90,426 VANGUARD VIF MID-CAP INDEX PORTFOLIO Accumulation Unit value at beginning of year $ 11.06 $ 13.23 $ 15.00 $ 16.98 Accumulation Unit value at end of year $ 13.23 $ 15.00 $ 16.98 $ 17.93 Number of Accumulation Units outstanding at end of year 4,431 17,020 19,094 26,583
10 VANGUARD(R) VIF PORTFOLIOS: VANGUARD VIF MONEY MARKET PORTFOLIO Accumulation Unit value at beginning of year $ 10.01 $ 10.09 $ 10.35 $ 10.82 Accumulation Unit value at end of year $ 10.09 $ 10.35 $ 10.82 $ 11.33 Number of Accumulation Units outstanding at end of year 439 3,266 397 148,678 VANGUARD VIF REIT INDEX PORTFOLIO Accumulation Unit value at beginning of year $ 11.03 $ 14.32 $ 15.93 $ 21.38 Accumulation Unit value at end of year $ 14.32 $ 15.93 $ 21.38 $ 17.74 Number of Accumulation Units outstanding at end of year 3,950 12,188 19,538 17,478 VANGUARD VIF SHORT-TERM INVESTMENT-GRADE PORTFOLIO Accumulation Unit value at beginning of year $ 10.07 $ 10.22 $ 10.40 $ 10.86 Accumulation Unit value at end of year $ 10.22 $ 10.40 $ 10.86 $ 11.45 Number of Accumulation Units outstanding at end of year 4,814 6,221 13,435 17,860 VANGUARD VIF SMALL COMPANY GROWTH PORTFOLIO Accumulation Unit value at beginning of year $ 10.64 $ 12.20 $ 12.90 $ 14.15 Accumulation Unit value at end of year $ 12.20 $ 12.90 $ 14.15 $ 14.60 Number of Accumulation Units outstanding at end of year 3,888 5,544 12,166 15,989 VANGUARD VIF TOTAL BOND MARKET INDEX PORTFOLIO Accumulation Unit value at beginning of year N/A $ 10.51 $ 10.71 $ 11.11 Accumulation Unit value at end of year $ 10.51 $ 10.71 $ 11.11 $ 11.83 Number of Accumulation Units outstanding at end of year 19,451 33,465 38,527 56,843 VANGUARD VIF TOTAL STOCK MARKET INDEX PORTFOLIO Accumulation Unit value at beginning of year $ 10.91 $ 12.22 $ 12.90 $ 14.83 Accumulation Unit value at end of year $ 12.22 $ 12.90 $ 14.83 $ 15.51 Number of Accumulation Units outstanding at end of year 55,746 85,167 148,502 164,644
INVESTMENT OPTIONS VARIABLE INVESTMENT OPTIONS VARIABLE ACCOUNT I Our board of directors authorized the organization of the Variable Account in 1986. The Variable Account is maintained pursuant to Delaware insurance law and is registered with the SEC as a unit investment trust under the Investment Company Act of 1940, as amended (the "1940 Act"). However, the SEC does not supervise the management or the investment practices of the Variable Account. We own the assets in the Variable Account and use them to support the variable portion of your Contract and other variable annuity Contracts described in other prospectuses. The Variable Account's assets are separate from our other assets and are not chargeable with liabilities arising out of any other businesses we conduct. Income, gains or losses, whether or not realized, are credited to or charged against the subaccounts of the Variable Account without regard to income, gains or losses arising out of any of our other businesses. As a result, the investment performance of each subaccount of the Variable Account is entirely independent of the investment performance of our general account and of any other of our Variable Accounts. 11 The Variable Account is divided into subaccounts, each of which invests in shares of a different portfolio of a mutual fund. The Variable Account maintains subaccounts that are not available under the Contract. We may, from time to time, and in our sole discretion, add, remove or close subaccounts to transfers if marketing needs, tax or regulatory considerations or investment conditions warrant. No substitution of shares of one fund for another will be made until you have been notified and we have complied with legal requirements. If deemed to be in the best interest of persons having voting rights under the Contract, the Variable Account may be operated as a management company under the 1940 Act, may be deregistered under that Act in the event such registration is no longer required, or may be combined with one or more other Variable Accounts. VANGUARD FUNDS Each of the Vanguard Funds is a mutual fund registered with the SEC. As the Funds' sponsor and overall manager, Vanguard may compensate us for providing administrative services in connection with the Funds offered under the Contract. Such compensation will be paid from its assets. You should carefully read the prospectus for each of the Vanguard Funds before investing. They contain detailed information regarding management of the Vanguard Funds, investment objectives, investment advisory fees and expenses, and other charges. The prospectuses also discuss the risks involved in investing in the Vanguard Funds. Below is a summary of the investment objective and strategies of each Fund available under the Contract. THERE IS NO ASSURANCE THAT ANY OF THESE FUNDS WILL ACHIEVE ITS STATED OBJECTIVE. . Vanguard LifeStrategy Income Fund seeks to provide current income and some capital appreciation. The Fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of approximately 60% of the Fund's assets to bonds, 20% to short-term fixed income investments, and 20% to common stocks. . Vanguard LifeStrategy Conservative Growth Fund seeks to provide current income and low to moderate capital appreciation. The Fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of approximately 40% of the Fund's assets to bonds, 20% to short-term fixed income investments, and 40% to common stocks. . Vanguard LifeStrategy Moderate Growth Fund seeks to provide capital appreciation and a low to moderate level of current income. The Fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of approximately 60% of the Fund's assets to common stocks and 40% to bonds. . Vanguard LifeStrategy Growth Fund seeks to provide capital appreciation and some current income. The Fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of approximately 80% of the Fund's assets to common stocks and 20% to bonds. . Vanguard Dividend Growth Fund seeks to provide, primarily, a growing stream of income over time and, secondarily, long-term capital appreciation and current income. The Fund invests primarily in stocks that tend to offer current dividends. The Fund focuses on high-quality companies that have prospects for long-term total returns as a result of their ability to grow earnings and their willingness to increase dividends over time. These stocks typically--but not always--will be undervalued relative to the market and will show potential for increasing dividends. The Fund will be diversified across industry sectors. 12 . Vanguard GNMA Fund seeks to provide a moderate level of current income. The Fund invests at least 80% of its assets in Government National Mortgage Association (GNMA) pass-through certificates, which are fixed income securities representing part ownership in a pool of mortgage loans supported by the full faith and credit of the U.S. government. The balance of the Fund's assets may be invested in U.S. Treasury or other U.S. government agency securities, as well as in repurchase agreements collateralized by such securities. Securities issued by most other U.S. government agencies, other than the U.S. Treasury and GNMA, are neither guaranteed by the U.S. Treasury nor supported by the full faith and credit of the U.S. government. The Fund's dollar-weighted average maturity depends on homeowner prepayments of the underlying mortgages. While the Fund does not observe specific maturity guidelines, the Fund's dollar- weighted average maturity will normally fall within an intermediate-term range (3 to 10 years). . Vanguard Inflation-Protected Securities Fund seeks to provide inflation protection and income consistent with investment in inflation-indexed securities. The Fund invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government, its agencies and instrumentalities, and corporations. The Fund may invest in bonds of any maturity; however, its dollar-weighted average maturity is expected to be in a range of 7 to 20 years. At a minimum, all bonds purchased by the Fund will be rated "investment-grade." Each Fund is part of Vanguard, a family of 37 investment companies with more than 150 investment portfolios holding assets in excess of $1 trillion. Vanguard serves as the investment advisor to VANGUARD INFLATION-PROTECTED SECURITIES FUND. Vanguard manages the Inflation-Protected Securities Fund on an at- cost basis, subject to the supervision and oversight of the trustees and officers of the funds. Certain funds employ external advisors. Wellington Management Company, LLP serves as advisor to VANGUARD DIVIDEND GROWTH FUND and VANGUARD GNMA FUND. The LifeStrategy Funds do not employ an investment advisor. The LifeStrategy Funds' board of trustees decides how to allocate their assets among the underlying funds. VANGUARD VIF PORTFOLIOS Each of the Vanguard VIF Portfolios is a mutual fund registered with the SEC. As the funds' distributor, Vanguard may compensate us for providing administrative services in connection with the funds offered under the Contract. Such compensation will be paid from its assets. You should carefully read the prospectus for the Vanguard VIF Portfolios before investing. It contains detailed information regarding management of the Vanguard VIF Portfolios, investment objectives, investment advisory fees and expenses, and other charges. The prospectus also discusses the risks involved in investing in the Vanguard VIF Portfolios. Below is a summary of the investment objective and strategies of each Portfolio available under the Contract. THERE IS NO ASSURANCE THAT ANY OF THESE PORTFOLIOS WILL ACHIEVE ITS STATED OBJECTIVE. . Vanguard VIF Money Market Portfolio seeks to provide current income while maintaining liquidity and a stable share price of $1. The Portfolio invests primarily in high-quality, short-term money market instruments, including certificates of deposit, banker's acceptances, commercial paper, and other money market securities. To be considered high-quality, a security generally must be rated in one of the two highest credit-quality categories for short-term securities by at least two nationally recognized rating services (or by one, if only one rating service has rated the security). If unrated, the security must be determined by Vanguard to be of quality equivalent to securities in the two highest credit-quality categories. The Portfolio invests more than 25% of its assets in securities issued by companies in the financial services industry. The Portfolio maintains a dollar-weighted average maturity of 90 days or less. . Vanguard VIF Short-Term Investment-Grade Portfolio seeks to provide current income while maintaining limited price volatility. The Portfolio invests in a variety of high-quality and, to a lesser 13 extent, medium-quality fixed income securities, at least 80% of which will be short- and intermediate-term investment-grade securities. High-quality fixed income securities are those rated the equivalent of A3 or better by Moody's Investor Services, Inc., or by another independent rating agency; medium-quality fixed income securities are those rated the equivalent of Baa1, Baa2, or Baa3 by Moody's or another independent rating agency. (Investment-grade fixed income securities are those rated the equivalent of Baa3 and above by Moody's.) The Portfolio is expected to maintain a dollar-weighted average maturity of 1 to 4 years. . Vanguard VIF Total Bond Market Index Portfolio seeks to track the performance of a broad, market-weighted bond index. The Portfolio employs a "passive management"--or indexing--investment approach designed to track the performance of the Lehman Brothers U.S. Aggregate Bond Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States--including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year. The Portfolio invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. All of the Portfolio's investments will be selected through the sampling process, and at least 80% of the Portfolio's assets will be invested in bonds held in the Index. The Portfolio maintains a dollar-weighted average maturity consistent with that of the Index, which generally ranges between 5 and 10 years. . Vanguard VIF High Yield Bond Portfolio seeks to provide a high level of current income. The Portfolio invests mainly in a diversified group of high-yielding, higher-risk corporate bonds--commonly known as "junk bonds"--with medium- and lower-range credit-quality ratings. The Portfolio invests at least 80% of its assets in corporate bonds that are rated below Baa by Moody's Investors Service, Inc., have an equivalent rating by any other independent bond-rating agency; or, if unrated, are determined to be of comparable quality by the Portfolio's advisor. The Portfolio's 80% policy may be changed only upon 60 days' notice to shareholders. The Portfolio may not invest more than 20% of its assets in any of the following, taken as a whole: bonds with credit ratings lower than B or the equivalent, convertible securities, and preferred stocks. High-yield bonds mostly have short- and intermediate-term maturities. . Vanguard VIF Balanced Portfolio seeks to provide long-term capital appreciation and reasonable current income. The Portfolio invests 60% to 70% of its assets in dividend-paying and, to a lesser extent, non-dividend-paying common stocks of established, medium-size and large companies. In choosing these companies, the advisor seeks those that appear to be undervalued but have prospects for improvement. These stocks are commonly referred to as value stocks. The remaining 30% to 40% of Portfolio assets are invested mainly in fixed income securities that the advisor believes will generate a reasonable level of current income. These securities include investment-grade corporate bonds, with some exposure to U.S. Treasury and government agency bonds, and mortgage-backed securities. . Vanguard VIF Equity Income Portfolio seeks to provide an above-average level of current income and reasonable long-term capital appreciation. The Portfolio invests mainly in common stocks of medium-size and large companies whose stocks pay above-average levels of dividend income and are considered to have the potential for capital appreciation. In addition, the advisors generally look for companies that they believe are committed to paying dividends consistently. Under normal circumstances, the Portfolio will invest at least 80% of its assets in stocks, also known as equity securities. The Portfolio's 80% policy may be changed only upon 60 days' notice to shareholders. The Portfolio uses multiple investment advisors. 14 . Vanguard VIF Diversified Value Portfolio seeks to provide long-term capital appreciation and income. The Portfolio invests mainly in large- and mid-capitalization companies whose stocks are considered by the advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. . Vanguard VIF Total Stock Market Index Portfolio seeks to track the performance of a benchmark index that measures the investment return of the overall stock market. The Portfolio employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's (S&P) Total Market Index by investing all, or substantially all, of its assets in two Vanguard funds, Vanguard Variable Insurance Fund-Equity Index Portfolio and Vanguard Extended Market Index Fund. The S&P Total Market Index consists of substantially all of the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. . Vanguard VIF Equity Index Portfolio seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The Portfolio employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The Portfolio attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index. . Vanguard VIF Mid-Cap Index Portfolio seeks to track the performance of a benchmark index that measures the investment return of mid-capitalization stocks. The Portfolio employs a "passive management"--or indexing--investment approach designed to track the performance of the Morgan Stanley Capital International(R) (MSCI(R)) US Mid Cap 450 Index, a broadly diversified index of stocks of medium-size U.S. companies. The Portfolio attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index. . Vanguard VIF Growth Portfolio seeks to provide long-term capital appreciation. The Portfolio invests mainly in large-capitalization stocks of U.S. companies considered to have above-average earnings growth potential and reasonable stock prices in comparison with expected earnings. The Portfolio uses multiple investment advisors. . Vanguard VIF Capital Growth Portfolio seeks to provide long-term capital appreciation. The Portfolio invests in stocks considered to have above-average earnings growth potential that is not reflected in their current market prices. The Portfolio consists predominantly of mid- and large-capitalization stocks. . Vanguard VIF Small Company Growth Portfolio seeks to provide long-term capital appreciation. The Portfolio invests at least 80% of its assets primarily in common stocks of smaller companies. These companies tend to be unseasoned but are considered by the Portfolio's advisors to have superior growth potential. Also, these companies often provide little or no dividend income. The Portfolio's 80% policy may be changed only upon 60 days' notice to shareholders. The Portfolio uses multiple investment advisors. . Vanguard VIF International Portfolio seeks to provide long-term capital appreciation. The Portfolio invests predominantly in the stocks of companies located outside the United States. In selecting stocks, the Portfolio's advisors evaluate foreign markets around the world and choose companies considered to have above-average growth potential. The Portfolio uses multiple investment advisors. 15 . Vanguard VIF REIT Index Portfolio seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of a benchmark index that measures the performance of publicly traded equity REITs. The Portfolio normally invests approximately 98% of its assets in stocks issued by equity real estate investment trusts (known as REITs) in an attempt to parallel the investment performance of the Morgan Stanley Capital International (MSCI) US REIT Index. The Portfolio invests in stocks that make up the Index; the remaining assets are allocated to cash investments. Vanguard serves as the investment advisor to VANGUARD VIF EQUITY INDEX PORTFOLIO, VANGUARD VIF MID-CAP INDEX PORTFOLIO, VANGUARD VIF MONEY MARKET PORTFOLIO, VANGUARD VIF REIT INDEX PORTFOLIO, VANGUARD VIF SHORT-TERM INVESTMENT-GRADE PORTFOLIO, and VANGUARD VIF TOTAL BOND MARKET INDEX PORTFOLIO. VANGUARD VIF TOTAL STOCK MARKET INDEX PORTFOLIO receives advisory services indirectly, by investing in other Vanguard funds and Vanguard VIF Portfolios. Vanguard manages these funds on an at-cost basis, subject to the control of the trustees and officers of the funds. Certain funds employ external advisors. PRIMECAP Management Company serves as advisor to VANGUARD VIF CAPITAL GROWTH PORTFOLIO. AllianceBernstein, L.P. and William Blair & Company, L.L.C. serve as advisors to VANGUARD VIF GROWTH PORTFOLIO. Wellington Management Company, LLP serves as advisor to VANGUARD VIF HIGH YIELD BOND PORTFOLIO and VANGUARD VIF BALANCED PORTFOLIO. Granahan Investment Management, Inc. and Vanguard's Quantitative Equity Group serve as advisors to VANGUARD VIF SMALL COMPANY GROWTH PORTFOLIO. Schroder Investment Management North America Inc., Baillie Gifford Overseas Ltd, and M&G Investment Management Limited serve as advisors to VANGUARD VIF INTERNATIONAL PORTFOLIO. Barrow, Hanley, Mewhinney & Strauss, Inc. serves as advisor to VANGUARD VIF DIVERSIFIED VALUE PORTFOLIO. Wellington Management Company, LLP and Vanguard's Quantitative Equity Group serve as advisors to VANGUARD VIF EQUITY INCOME PORTFOLIO. NAME CHANGES From time to time, certain Fund names are changed. When we are notified of a name change, we will make changes so that the new name is properly shown. However, until we complete the changes, we may provide you with various forms, reports, and confirmations that reflect a Fund's prior name. FIXED INVESTMENT OPTION Premium you allocate to the fixed investment option goes into our general account. The general account is not registered with the SEC. The general account is invested in assets permitted by state insurance law. It is made up of all of our assets other than assets attributable to our Variable Accounts. Unlike our Variable Account assets, assets in the general account are subject to claims of Contract Owners like you, as well as claims made by our other creditors. To the extent that you allocate premium or transfer amounts into the fixed investment option, we guarantee that the amount of the annuity payments you receive will be unaffected by investment performance. 16 EXPENSES A CLOSER LOOK AT THE COSTS OF INVESTING IN A VARIABLE ANNUITY Costs are an important consideration in choosing a variable annuity. That's because you, as a Contract Owner, pay the costs of operating the underlying mutual funds, plus any transaction costs incurred when the fund buys and sells securities, as well as the costs associated with the annuity Contract itself. These combined costs can have a significant effect on the investment performance of the annuity Contract. Even seemingly small differences in mutual fund and annuity Contract expenses can, over time, have a dramatic effect on performance. SUMMARY OF COSTS OF INVESTING IN THE CONTRACTS . No sales load or sales charge . No annual Contract maintenance charge . No current fee to exchange money among the Subaccounts (we reserve the right to charge afee of $10.00 per transfer after the first 12 per Contract year) . Maximum Annual Mortality and Expense Risk Charge: 0.52% . Partial Withdrawal Transaction Charge: The lesser of 2% of the amount with drawn or $25 . Fees and expenses paid by the funds ranged from 0.14% to 0.45% at the end of each fund's most recent fiscal year. MORTALITY AND EXPENSE RISK CHARGE As part of our calculation of the value of Annuity Units, we deduct the mortality and expense risk charge on a daily basis. The mortality and expense risk charge is equal, on an annual basis, to a percentage of the daily value of the variable portion of your Contract. We may offer different rates to different groups, based upon our assessment of the risks that are involved. Once the charge is established it will not change for the group. The maximum rate we will charge any group is 0.52%. The charge compensates us for the expenses of administering the Contract, for assuming the risk that we will have to make annuity payments for longer than we anticipate, and for assuming the risk that current charges will be insufficient in the future to cover the costs associated with the Contract. If the charges under the Contract are not sufficient, we will bear the loss. If the charges are sufficient, we will keep the balance of this charge as profit. 17 A CLOSER LOOK AT THE MORTALITY AND EXPENSE RISK CHARGE The Company assumes mortality risk where Contract Owners elect an Annuity Payment Option under which the Company guarantees a number of payments over a life or joint lives. The Company assumes the risk of making monthly annuity payments regardless of how long all Annuitants may live. The Company also assumes charges for administrative expenses, which are guaranteed not to increase beyond the rates shown for the life of the Contract, but may not be enough to cover the actual costs of issuing and administering the Contract. STATUTORY PREMIUM TAXES We will deduct from your Premium Payment any premium tax imposed on us by the state or locality where you reside. Statutory Premium Taxes currently imposed on the Contract by various states range from 0% to 1% of premium for qualified Contracts and from 0% to 3.5% of premium for non-qualified Contracts. In addition, some local governments may also levy a premium tax. These taxes are deducted from your Premium Payment upon its receipt by the Company. A CLOSER LOOK AT STATUTORY PREMIUM TAX A Statutory Premium Tax is a regulatory tax some states assess on the Premium Payment made into a Contract. If the Company should have to pay any Statutory Premium Tax, it will be deducted from the Premium Payment. As of the date of this Prospectus, the following states assesses a Statutory Premium Tax. QUALIFIED NON-Q UALIFIED --------- -------------- California 0.50% 2.35% Maine 0.00 2.00 Nevada 0.00 3.50 South Dakota 0.00 1.25* West Virginia 1.00 1.00 Wyoming 0.00 1.00 This Statutory Premium Tax information is being provided to the best of AIG Life Insurance Company's knowledge. AIG Life Insurance Company makes no representation as to the current accuracy of this information. * The South Dakota premium tax rate is 1.25% for the first $500,000 and 0.08% for any amount over $500,000. INCOME TAXES Although we do not currently deduct any charge for income taxes attributable to your Contract, we reserve the right to do so in the future. 18 FUND EXPENSES There are deductions from and expenses paid out of the assets of the various funds. These charges are described in the prospectuses for the Vanguard Funds and the Vanguard VIF Portfolios. The maximum fund expenses are described in the fee table contained in the prospectus. REDUCTION OF CERTAIN CHARGES AND ADDITIONAL AMOUNTS CREDITED We may charge a mortality and expense risk charge that is lower than the maximum charge, reduce or eliminate transaction charges, or lower the minimum single premium requirement when the Contract is sold to groups of individuals under circumstances that reduce our sales, administrative, or any other expenses or mortality risks. Any variation in charges under the Contract will reflect differences in costs, services or risks, and will not be unfairly discriminatory. We will determine the eligibility of such groups by considering factors such as: (1) the size and nature of the group; (2) the total amount of premium we expect to receive from the group; (3) any other circumstances which we believe to be relevant in determining whether reduced sales, administrative or any other expenses or mortality risks may be expected. Any reduction or elimination may be withdrawn or modified by us. THE CONTRACT GENERAL DESCRIPTION An annuity is a Contract between you, as the owner, and a life insurance company. The Contract provides income in the form of annuity payments beginning on the Income Start Date you select, which must be within 12 months after the Contract Date. You may purchase the Contract using after- tax dollars (a non-qualified Contract), transferring assets from another IRA, or by "rolling over" assets from a qualified plan (a qualified Contract). The Contract is called a variable annuity because you can allocate your money among variable investment options. Each subaccount of our Variable Account invests in shares of a corresponding mutual fund. Depending on market conditions, the various funds may increase or decrease in value. If you allocate money to the funds, the amount of the variable annuity payments will depend on the investment performance of the funds you select. The Contract also has a fixed investment option that is part of our general account. Each annuity payment from the fixed portion of your Contract will generally be for the same amount and will not vary with investment performance. WHO SHOULD PURCHASE A CONTRACT The Contract is designed for people who want to receive a stream of income payments, generally for retirement. We call this stream of income payments "Annuity Payments." You can purchase the Contract as a non-qualified Contract, with money generally from any source. Or, you may purchase the Contract as a qualified Contract such as an individual retirement annuity Contract funded with rollovers from tax-qualified plans. 19 A FEW THINGS TO KEEP IN MIND REGARDING WHO SHOULD PURCHASE A CONTRACT Under the Contract, you will have access to your investment only through annuity payments, or certain other Contract provisions discussed in your Contract (and any applicable endorsements thereto). The Contract should only be purchased by individuals who will not need full access to their Premium Payment on an immediate basis. ABOUT THE CONTRACT This prospectus describes a Contract between you and the Company, the issuer of the Contract. The Contract may provide income payments for the life of one or two persons, or for a designated period, or both. PURCHASING A CONTRACT The minimum investment for both qualified and non-qualified Contracts is $20,000. We reserve the right to refuse your Premium Payment. In general, we will not issue a Contract to anyone who is over age 90, but we reserve the right to lower or increase this age for new Contracts. ALLOCATION OF PREMIUM When you purchase a Contract, you will tell us how to allocate your Premium Payment among the investment options. At the time of application, we must receive your Premium Payment before the Contract will be effective. We will issue your Contract and allocate your Premium Payment to Vanguard VIF Money Market Portfolio within two business days. If you do not give us all the necessary information we need to issue the Contract, we will contact you to obtain it. If we are unable to complete this process within five business days, we will refund your money unless you authorize us to keep it until all the necessary information is obtained. RIGHT TO RETURN If for any reason you are not satisfied with your Contract, you may return it to us and we will refund your Premium Payment received by us, less any applicable charges that have been deducted, adjusted by any investment experience in states where permitted. Because you have this right, we will direct the portion of your initial net Premium Payment that is to be allocated to a variable investment option, to Vanguard VIF Money Market Portfolio for the greater of 15 days or the Right to Return period for your state, starting on the date your investment performance begins. Then we will automatically allocate your investment among the available variable investment options in the ratios you have chosen. The allocation of your investment out of Vanguard VIF Money Market Portfolio into the investment options you have chosen, generally utilizes investment option prices as of the date of the allocation. However, if the allocation is scheduled to occur on a non-business day, it will be processed as of the preceding business day. As with all of the subaccounts, you bear any risk associated with investment in Vanguard VIF Money Market Portfolio during the right to return period. To exercise your right to return your Contract, you must mail it directly to Vanguard Annuity and Insurance Services, P.O. Box 1105, Valley Forge, PA 19482-1105, or return it to us at AIG Life Insurance Company, Attention: Group Annuity Administration, One ALICO Plaza, 600 King Street, 20 Wilmington, Delaware 19801, within 10 days after you receive it. In a few states, if your Contract is replacing an existing annuity or life policy, this period may be longer. Any portion of your initial net premium that is to be allocated to the fixed investment option will be so allocated upon receipt. MARKET TIMING The Contracts are not designed for professional market timing organizations or other entities or individuals using programmed and frequent transfers involving large amounts. Market timing carries risks with it, including: . dilution in the value of Fund shares underlying investment options of other Contract Owners; . interference with the efficient management of the Fund's portfolio; and . increased administrative costs. We have policies and procedures affecting your ability to make exchanges within your Contract. We use the term "exchange" to mean a transfer of your account value in one investment option (all or a portion of the value) to another investment option. We are not referring to the exchange of one variable annuity contract for another annuity contract or life insurance policy. We are required to monitor the Contracts to determine if a Contract Owner requests: . an exchange out of a variable investment option, other than the Vanguard VIF Money Market Portfolio investment option, within two calendar weeks of an earlier exchange into that same variable investment option; or . an exchange into a variable investment option, other than the Vanguard VIF Money Market Portfolio investment option, within two calendar weeks of an earlier exchange out of that same variable investment option; or . an exchange out of a variable investment option, other than the Vanguard VIF Money Market Portfolio investment option, followed by an exchange into that same variable investment option, more than twice in any one calendar quarter; or . an exchange into a variable investment option, other than the Vanguard VIF Money Market Portfolio investment option, followed by an exchange out of that same variable investment option, more than twice in any one calendar quarter. If any of the above transactions occurs, we will suspend such Contract Owner's same day or overnight delivery transfer privileges (including website, e-mail and facsimile communications) with notice to prevent market timing efforts that could be harmful to other Contract Owners or beneficiaries. Such notice of suspension will take the form of either a letter mailed to your last known address, or a telephone call from our Administrative Center to inform you that effective immediately, your same day or overnight delivery transfer privileges have been suspended. A Contract Owner's first violation of this policy will result in the suspension of Contract transfer privileges for ninety days. A Contract Owner's subsequent violations of this policy will result in the suspension of Contract transfer privileges for six months. Transfers under dollar cost averaging, automatic rebalancing or any other automatic transfer arrangements to which we have agreed are not affected by these procedures. 21 The procedures above will be followed in all circumstances and we will treat all Contract Owners the same. In addition, Contract Owners incur a $10 charge for each transfer in excess of 12 each Contract year. RESTRICTIONS INITIATED BY THE FUNDS AND INFORMATION SHARING OBLIGATIONS The Funds have policies and procedures restricting transfers into the Fund. For this reason or for any other reason the Fund deems necessary, a Fund may instruct us to reject a Contract Owner's transfer request. Additionally, a Fund may instruct us to restrict all purchases or transfers into the Fund by a particular Contract Owner. We will follow the Fund's instructions. The availability of transfers from any investment option offered under the Contract is unaffected by the Fund's policies and procedures. Please read the Funds' prospectuses and supplements for information about restrictions that may be initiated by the Funds. In order to prevent market timing, the Funds have the right to request information regarding Contract Owner transaction activity. If a Fund requests, we will provide mutually agreed upon information regarding Contract Owner transactions in the Fund. TRANSFERS AMONG INVESTMENT OPTIONS The initial allocation of premium among investment options to provide variable annuity payments can be changed by transfers of fund values among the investment options made by written request or by telephone. We reserve the right to charge $10 per transfer after the first 12 transfers in a Contract year. We consider your instructions to transfer from or to more than one investment option at the same time to be one transfer. No transfers can be made from the fixed investment option to a variable investment option, but transfers can be made from the variable investment options to the fixed investment option or to other variable investment options. The company may offer certain features, such as dollar cost averaging and/or automatic rebalancing, that provide for automatic and scheduled transfers between variable investment options. Under these features, transactions are generally priced as of the date of the transfer. However, if the scheduled date of the transfer falls on a non-business day, it will be processed as of the preceding business day. Dollar cost averaging and automatic rebalancing transfers do not count against the "free transfers" you are permitted to make each Contract year. 22 A CLOSER LOOK AT TRANSFERS AMONG VARIABLE INVESTMENT OPTIONS HOW TRANSFERS AMONG VARIABLE INVESTMENT OPTIONS ARE EFFECTED: (A) The number of Annuity Units in the subaccount from which Annuity Units will be withdrawn is multiplied by the current Annuity Unit Value of that subaccount. (B) The final value from (A) is divided by the current Annuity Unit Value of the subaccount into which the transfer is going. (C) The result of (B) is the number of Annuity Units allocated to the new subaccount. MINIMUM TRANSFER AMOUNT. The minimum amount that can be transferred in any one transfer is $50 per month of income. This means that however many Annuity Units would produce $50 of monthly income, calculated at the current Annuity Unit Value, is the minimum number of Annuity Units that may be transferred. FOR EXAMPLE, let's say that you owned 500 Annuity Units in subaccount one ("s1"), valued at $2 per Annuity Unit, for a total of $1,000 in monthly income. You decide to transfer the entire amount in s1 to subaccount two ("s2"). Annuity Units in s2 are currently valued at $5 per Annuity Unit. Upon completion of the transfer, you will own 200 Annuity Units in s2 valued at $5 per Annuity Unit, for a total of $1,000 in monthly income. The transfer request must clearly state which investment options are involved and the amount of the transfer. We will accept transfers by telephone after required authorization forms are received at our office. Neither we nor any of the fund managers will be liable for following telephone instructions we reasonably believe to be genuine or for any loss, damage, cost or expense in acting on such instructions. We have in place procedures to provide reasonable assurance that telephone instructions are genuine. TRANSACTION REQUESTS IN GOOD ORDER We will accept the Contract Owner's instructions to withdraw value from the Contract or to transfer values in the Contract Owner's investment options, contingent upon the Contract Owner providing us with withdrawal or transfer requests in good order. This means that the Contract Owners' requests must be accompanied by sufficient detail to enable us to withdraw or transfer assets properly. If we receive a transfer request and it is not in good order, the transfer will not be completed until we receive all necessary information. If we receive a withdrawal request and it is not in good order, the withdrawal will not be completed until we receive all necessary information. We will attempt to make a Contract Owner's request in good order for up to five business days following its receipt. For instance, one of our representatives may telephone the Contract Owner to determine the intent of a request. If a Contract Owner's request is still not in good order after five business days, we will cancel the request and and notify the Contract Owner when the request is cancelled. 23 PARTIAL WITHDRAWAL RIGHTS WITH VARIABLE PAYMENTS FOR A GUARANTEED NUMBER OF YEARS If you choose an annuity payment option where you will continuously receive annuity payments for "A Guaranteed Number of Years" (referred to as the "Guaranteed Period"), then you will have the right to make one partial withdrawal per Contract Year from the present value of your remaining variable annuity payments subject to the following provisions: . PARTIAL WITHDRAWAL TRANSACTION CHARGE. We will assess a partial withdrawal transaction charge for each partial withdrawal. The partial withdrawal transaction charge is the lesser of 2% of the amount withdrawn or $25. This charge will be deducted from the net proceeds of the partial withdrawal. . DETERMINATION OF SUBSEQUENT VARIABLE ANNUITY PAYMENTS. This prospectus describes how we determine variable annuity payments subsequent to the initial annuity payment. While the number of Annuity Units for each subaccount will generally remain constant, this prospectus lists two exceptions to that rule on page 30. Another exception exists if you make a partial withdrawal, as permitted in this prospectus. A partial withdrawal involves a transfer of assets out of a subaccount. As actual assets decrease in a subaccount, the number of Annuity Units in such subaccount must also be decreased to reflect the loss of those assets. . ACCESS TO YOUR MONEY. You may elect a partial withdrawal of a portion of the present value of the variable annuity payments remaining in the Guaranteed Period as long as at least five (5) years of variable guaranteed periodic payments remain in your annuity after the partial withdrawal has been completed. A partial withdrawal will reduce all remaining variable annuity payments, both guaranteed and life contingent, by an equal amount and will also reduce the length of the Guaranteed Period for variable annuity payments. See the section on "Computing the Partial Withdrawal Amount" on the next page of this prospectus. . PARTIAL WITHDRAWAL LIMITATIONS. In determining the value available for a partial withdrawal, only the present value of the variable annuity payments will be used. No fixed Annuity Payments will be used in determining partial withdrawal values, and neither the amount of fixed annuity payments nor the length of the Guaranteed Period for such fixed annuity payments will be affected by a partial withdrawal. At any time after the Right to Examine period has ended, you may request a partial withdrawal from your Contract as long as more than five (5) years remain in the Guaranteed Period. Partial withdrawals are only available under annuity options which are either a single or joint life annuity with payments guaranteed for a minimum number of years. The Guaranteed Period can never exceed the life expectancy of the Annuitant or Joint Annuitant and cannot be less than five (5) years. To effect a partial withdrawal, the Contract must be in force. Only one partial withdrawal is permitted during any Contract Year. The minimum partial withdrawal amount is $2,500. The partial withdrawal is restricted to an amount that allows at least five (5) years of guaranteed period variable Annuity Payments to remain in the Contract after the withdrawal. . PARTIAL WITHDRAWALS REDUCE YOUR FUTURE VARIABLE ANNUITY PAYMENTS. If you make a partial withdrawal you will still receive annuity payments, but the partial withdrawal will result in a reduction in the amount of each remaining variable annuity payment as well as a decrease in the guaranteed period that will apply to such variable annuity payments. In addition, if you transfer values from one or more subaccounts which support those variable annuity payments to the fixed investment option which supports the fixed annuity payments at any time after a partial withdrawal has been taken, the Guaranteed Period related to those recently transferred values that are now supporting fixed annuity payments will remain shortened. The Guaranteed Period applicable to any pre-existing fixed annuity payments would not be affected. See "Partial Withdrawal Rights With Variable Payments For A Guaranteed Number of Years" above for the definition of the term "Guaranteed Period." 24 When you request a partial withdrawal, we will take it from the subaccounts in which the annuity is then invested in the same proportion as the value invested in each subaccount on the date of the partial withdrawal. We charge a fee for each partial withdrawal, which will be deducted from the lump sum payment at the time a partial withdrawal is effected. Since the amount of annuity payments changes on the next Income Change Date, the reduction in annuity payments due to the partial withdrawal (but not the payment of the partial withdrawal amount) will be delayed until that time. . COMPUTING THE PARTIAL WITHDRAWAL AMOUNT. If you make a partial withdrawal, we will calculate the present value of future variable annuity payments during the guaranteed period by discounting the payments at the assumed investment return, and with consideration to any fees charged for a partial withdrawal. The future variable income payment amount we use in this calculation is determined by multiplying the Annuity Unit value next computed after we receive the withdrawal request by the current number of Annuity Units for each subaccount, and summing for all subaccounts. A partial withdrawal will reduce all future variable annuity payments by an equal amount, and the remaining length of the guaranteed period will also be reduced. The following four factors will determine the specific amount by which the remaining variable annuity payments will be reduced and by which the remaining length of the Guaranteed Period will be shortened: (1) the amount of the partial withdrawal request; (2) the length of time remaining in the Guaranteed Period at the time that the partial withdrawal is requested; (3) the age and sex of the Annuitant or Joint Annuitants; and (4) the Annuity Income Option chosen. In other words, the more you withdraw will result in lower future variable annuity payments and more of a reduction in the length of time in the guaranteed period. Any fixed income payments remaining under the Contract and their guaranteed period will remain unchanged. EXAMPLE OF COMPUTING A PARTIAL WITHDRAWAL: Individual A is age 65 when he begins to receive variable annuity payments of $1,000. He receives payments in monthly installments from a Life Annuity with a Guaranteed Number of Years (20 years). In annuity payment year one, A requests the maximum partial withdrawal amount possible from his variable annuity. By taking this partial withdrawal, A's monthly variable annuity payments are reduced from $1,000 to $210 after the withdrawal, because the number of annuity units has been permanently reduced. A's guaranteed period for variable annuity payments is also reduced from 20 years to 5 years. Any portion of your Vanguard Lifetime Income Program that is allocated to fixed annuity income will not be changed, the monthly fixed payments will remain the same and the guaranteed period for such payments will not be reduced. 25 . TAXES. Please read the tax discussion in your prospectus for information relating to partial withdrawals from your Contract, as well as other taxable events. This information is general in nature and is not intended as tax advice. It is based on current law and interpretations, which may change. No attempt is made to consider any applicable state or other tax laws. We do not guarantee the tax status of your Contract. CANCELLATION RIGHTS If you elect to include the cancellation option with your contract, you may have the right to cancel your contract. Otherwise, the cancellation option described in this section does not apply to you. The cancellation option is available with both the variable and the fixed payouts under all annuity options. If you choose the cancellation endorsement, the amount of each annuity payment will be lower than without the cancellation option. The Contract is designed to meet long-term financial goals and is not suitable as a short-term investment. If you are concerned that you may need to cancel the Contract within six months, you should consider selecting the Cancellation Endorsement for your Contract. However, since selecting the Cancellation Endorsement will lower your Annuity Payments, if you do not anticipate a need to cancel your Contract, you should not select the Cancellation Endorsement. ACCESS TO YOUR MONEY/CANCELLATION OF THE CONTRACT. If you are the Annuitant, you may access your money by receiving your scheduled annuity payments. Also, you, as the Contract Owner may cancel your Contract for its cancellation value within six (6) months after the contract date if the following conditions are met: . At the time of Contract issue, the Annuitant has not reached the attained age of 75 and the Joint Annuitant, if any, has not reached the attained age of 80; . Your Contract includes a Cancellation Endorsement; . Your Contract is in force; and . A Vanguard Lifetime Income Program Voluntary Cancellation Form is received by us, in good order, no later than six (6) months after the Annuity Contract date. If you cancel your Contract, we will pay you a lump sum amount. No residual benefit under the Contract will remain once a cancellation has been requested and paid during the six month period, which means that the annuitant(s) will receive no more payments under the Contract. COMPUTING THE CANCELLATION VALUE. If you cancel, the amount of the lump sum benefit will be determined by calculating the actuarial present value, if any, of future variable and fixed annuity payments, to be determined as follows. (1) The value of future variable annuity payments is calculated by applying the Assumed Investment Return factor, and the mortality rates used to initially determine annuity payments, to the future variable annuity payments which are to be paid in accordance with the Annuity Income Option in effect when cancellation is requested. The amount of future variable annuity payments used in this calculation is determined by multiplying the Annuity Unit value next computed after we receive the request by the current number of Annuity Units for each subaccount, and summing for all subaccounts. 26 (2) Fixed annuity payments will be determined by applying the then current annuity purchase rates, established in accordance with the Fixed Account section of the Contract, to the remaining value of fixed annuity payments which is to be paid in accordance with the Annuity Income Option in effect on the date the request is received. We use investments in the fixed income market in part to support our obligations under the Contracts. We constantly monitor the rate of return we can derive in the fixed income markets. We may change the annuity purchase rate under the Contracts on account of variations in the rate of return on such investments. The current annuity purchase rates we use in calculating the benefit will be no more than three percent (3%) greater than or less than the interest rate used in originally calculating the stream of annuity payments at the Contract Date. For example, if the current annuity purchase rates for fixed annuity payments is seven percent (7%) then the annuity purchase rate that we will use in calculating the lump sum cancellation amount related to the fixed annuity payments portion of your Contract will be no less than four percent (4%) and no greater than ten percent (10%). TAXES. Please read the discussion under "Taxes" further on in this prospectus for information relating to the cancellation of your Contract, as well as other taxable events. This information is general in nature and is not intended as tax advice. We do not guarantee the tax status of your Contract. ADDITIONAL RIGHTS THAT WE HAVE We have the right at any time to: (1) transfer the entire balance in an investment option in accordance with any transfer request you make that would reduce your Annuity Unit value for that option to below $500; (2) transfer the entire balance in proportion to any other investment options you then are using, if the Annuity Unit value in an investment option is below $500 for any other reason; (3) end the automatic rebalancing feature if your Annuity Unit value falls below $5,000; (4) replace the underlying Fund that any investment option uses with another Fund, subject to SEC and other required regulatory approvals; (5) add, delete or limit investment options, combine two or more investment options, or withdraw assets relating to the Contracts from one investment option and put them into another, subject to SEC and other required regulatory approvals; (6) operate the Variable Account under the direction of a committee or discharge such a committee at any time; (7) operate the Variable Account, or one or more investment options, in any other form the law allows, including a form that allows us to make direct investments. The Variable Account may be charged an advisory fee if its investments are made directly rather than through another investment company. In that case, we may make any legal investments we wish; or (8) make other changes in the Contract that in our judgment are necessary or appropriate to ensure that the Contract continues to qualify for tax treatment as an annuity. 27 ANNUITY PAYMENTS GENERALLY Beginning on the Income Start Date, the Annuitant will receive periodic annuity payments. You may choose annuity payments that are fixed, variable, or a combination of fixed and variable. You may choose annuity payments on a monthly, quarterly, semi-annual, or annual basis. You select the Income Start Date, which must be within 12 months after the Contract Date, and can start as early as 1 month after we receive your Premium Payment. In addition, annuity payments must begin by the Annuitant's 91/st/ birthday. If a state requires that annuity payments begin prior to such date, we must comply with those requirements. We will make annuity payments to you as the Annuitant unless, in the case of non-qualified Contracts only, you designate another person as Annuitant to receive them. A FEW THINGS TO KEEP IN MIND REGARDING ANNUITY PAYMENTS . From time to time, the Company may require proof that the Annuitant or Joint Annuitant is living. . Once Annuity Payments begin, you may not select a different Annuity Payment Option. . You may select an Annuity Payment Option and allocate your Premium Payment to either fixed or variable income choices, or both. You may not select more than one Annuity Payment Option. . If you choose both a fixed and a variable payment option, premium that you allo cate to the fixed account may not be reallocated to another subaccount. . If you choose to include the Cancellation Endorsement with your Contract, the amount of each annuity payment will be lower than without the Cancellation Endorsement. . If the postal or other delivery service is unable to deliver checks to the payee's address of record, or if direct deposits to a bank account are returned because the account is closed, no interest will accrue on amounts represented by uncashed Annuity Payment checks or undeliverable direct deposits. It is the payee's responsibility to keep the Company informed of their current address or active bank account location. ANNUITY PAYMENT OPTIONS The Contract currently offers the four annuity options described below. We may make other annuity options available subject to our discretion. Please refer to your Contract specific materials for the annuity options available in your Contract. If your annuity payments would be less than $100 per payment period, we have the right to change the frequency of your payment so that the payments are at least $100. . Option 1-LIFE ANNUITY Under this option, we will make annuity payments as long as the Annuitant is alive. Annuity payments stop when the Annuitant dies. 28 . Option 2-LIFE ANNUITY WITH A GUARANTEED NUMBER OF YEARS Under this option, we will make annuity payments as long as the Annuitant is alive with the additional guarantee that payments will be made for a particular number of years. If the Annuitant dies before all guaranteed payments have been made, payments will continue to the beneficiary for the remainder of the guaranteed period. . Option 3-JOINT AND SURVIVOR ANNUITY Under this option, we will make annuity payments as long as either the Annuitant or Joint Annuitant is alive. Upon the death of the Annuitant, we will continue to make annuity payments so long as the Joint Annuitant is alive. However, the amount of the remaining annuity payments will be either equal to or less than the amount that was payable while the Annuitant was alive. The amount to be paid to the Joint Annuitant is determined by the Contract Owner at the time that this Option 3 is selected. Any reduction in the annuity payment amount will be achieved through a reduction in the number of Annuity Units. . Option 4-JOINT AND SURVIVOR ANNUITY WITH A GUARANTEED NUMBER OF YEARS Under this option, we will make annuity payments as long as either the Annuitant or Joint Annuitant is alive with the additional guarantee that payments will be made for a minimum number of years. If both the Annuitant and the Joint Annuitant die before all guaranteed payments have been made, payments will continue to the beneficiary for the remainder of the guaranteed period. After the guaranteed period ends, we will continue to make annuity payments for the life of the Annuitant and for as long thereafter as the Joint Annuitant is alive. However, the amount of the annuity payments made to the Joint Annuitant will be either equal to or lower than the amount that was payable while the Annuitant was alive. The amount to be paid to the Joint Annuitant is determined by the Contract Owner at the time that this Option 4 is selected. Any reduction in the annuity payment amount will be achieved through a reduction in the number of Annuity Units. SOMETHING TO KEEP IN MIND REGARDING ANNUITY PAYMENT OPTIONS 3 OR 4 Under Annuity Payment Options 3 or 4, you have the right to determine whether or not the annuity payments to be made to the Joint Annuitant, upon the Annuitant's death, will be: (A) equal to the annuity payments the Annuitant was receiving while both the Annuitant and the Joint Annuitant were alive; or (B) lower than the annuity payments the Annuitant was receiving while both the Annuitant and the Joint Annuitant were alive. All things being equal, annuity payments to the Annuitant while both the Annuitant and the Joint Annuitant are alive will be higher if you choose lower payments to the Joint Annuitant. ANNUITY UNITS Upon receiving your single Premium Payment, we calculate the number of Annuity Units associated with each annuity payment as determined by our currently used annuity rate factors. The Annuity Unit value for each fund will vary from one Valuation Period to the next based on the investment experience of the assets in the fund and the deduction of certain charges and expenses. The SAI contains an explanation of how Annuity Units are valued. 29 DETERMINATION OF THE INITIAL ANNUITY PAYMENT The following factors determine the amount of the first annuity payment: . the portion of the premium allocated to provide variable annuity payments and the performance of the investment options you chose after the investment performance is adjusted by the Assumed Investment Return; . the portion of the premium allocated to provide fixed annuity payments and prevailing fixed interest rates; . the age and gender of the Annuitant (and Joint Annuitant, if any); . the annuity option selected; . the frequency of annuity payments; . the deduction of applicable premium taxes; and . the time period from the Contract Date to the Income Start Date. IMPACT OF ANNUITANT'S AGE ON ANNUITY PAYMENTS For either fixed or variable Annuity Payments involving life income, the actual ages of the Annuitant and Joint Annuitant will affect the amount of each payment. Since payments based on the lives of older Annuitants and Joint Annuitants are expected to be fewer in number, the amount of each Annuity Payment will be greater. IMPACT OF ANNUITANT'S GENDER ON ANNUITY PAYMENTS Congress and the legislatures of various states have from time to time considered legislation that would require annuity benefits to be the same for males and females of the same age. In addition, employers and employee organizations should consider, in consultation with counsel, the impact of Title VII of the Civil Rights Act of 1964 on the purchase of annuity Contracts in connection will an employment-related insurance or benefit plan. In a 1983 decision, the United States Supreme Court held that, under Title VII, optional annuity benefits under a deferred compensation plan could not vary on the basis of gender. In most cases, other than those mentioned above, the amount of fixed and variable Annuity Payments involving life income will be affected by the gender of the Annuitant and Joint Annuitant. However, we reserve the right to offer Contracts to certain groups in situations which, under current law, may require gender-neutral benefits. Since payments based on the lives of male Annuitants and Joint Annuitants are expected to be fewer in number, in most states the amount of each Annuity Payment will be greater than for female Annuitants and Joint Annuitants. IMPACT OF LENGTH OF PAYMENT PERIODS ON ANNUITY PAYMENTS The value of all payments, both fixed and variable, will be greater for shorter guaranteed periods than for longer guaranteed periods, and greater for single-life annuities than for joint and survivor annuities, because they are expected to be made for a shorter period. 30 IMPACT OF OPTIONAL CANCELLATION ENDORSEMENT ON ANNUITY PAYMENTS If you choose to include the Cancellation Endorsement with your Contract, the amount of each annuity payment will be lower than without the Cancellation Endorsement. The reduction per annuity payment will vary by Contract, based on the age of the Annuitant(s) and the Annuity Payment Option selected. DETERMINATION OF SUBSEQUENT VARIABLE ANNUITY PAYMENTS On each Income Change Date, we will recalculate the variable annuity payments to reflect the performance of the investment options you chose after the investment performance is adjusted by the Assumed Investment Return. We determine the dollar amount of the variable annuity payment as follows. The portion of the first annuity payment funded by a particular subaccount is divided by the Annuity Unit value for that subaccount as of the Contract Date. This establishes the number of Annuity Units provided by each subaccount for each subsequent variable annuity payment. The number of Annuity Units for each subaccount will generally remain constant, subject to the following exceptions: . If value is transferred from one investment option to another. See the example under "A Closer Look At Transfers Among Variable Investment Options" in this prospectus. . Upon the death of the primary Annuitant after the guaranteed period ends if the Contract Owner selects a joint and survivor annuity option (either Annuity Option 4 or Annuity Option 3) with a lower percentage of payments elected for the Joint Annuitant. Any reduction in the annuity payment amount will be achieved through a reduction in the number of Annuity Units. The number of Annuity Units for each subaccount is multiplied by the Annuity Unit value for that subaccount for the Valuation Date for which the payment is being calculated. The sum of these figures for all the subaccounts in which you invest establishes the dollar amount of the variable annuity payment. On the Income Start Date and each Income Change Date thereafter, we will calculate the amount of money necessary to make expected payments until the next Income Change Date. We will transfer that amount to our general account. The variable annuity payments will remain level until the next Income Change Date. Subsequent variable annuity payments may be more or less than the previously calculated variable annuity payments depending on whether the net investment performance of the selected investment options is greater than or less than the Assumed Investment Return. ASSUMED INVESTMENT RETURN The amount of the annuity payments provided by the portion of the Premium Payment allocated to provide variable income depends on the assumption made about future investment performance after the deduction of the mortality and expense risk charge and the fund expenses. This assumption is called the Assumed Investment Return ("AIR"). The AIR not only determines the initial level of income, but also how future investment performance affects annuity payments. Generally, the AIR used is 5%, but on occasion another AIR, for example 3.5%, may be offered. 31 A higher AIR will result in a larger initial payment, but future increases in the annuity payment will be smaller than with a lower AIR. If net performance for a year (that is, after deducting all charges) is exactly equal to the AIR, the level of the variable annuity payment will not change. If net performance is less than the AIR, annuity payments will decrease. If net performance is more than the AIR, annuity payments will increase. For example, payments based on a 5% AIR would mean a higher initial payment, but payments would increase more slowly in a rising market and decline more rapidly in a falling market. Payments based on a 3.5% AIR would mean a lower initial payment, but payments would increase more rapidly in a rising market and decline more slowly in a falling market. PLAIN TALK ABOUT ASSUMED INVESTMENT RETURN OR AIR . If you allocate a portion of your premium to variable annuity income then you invest this premium into the annuity investment options available and select an Assumed Investment Return (AIR). Currently, we offer an AIR of 5% or an AIR of 3.5%. In the future we may make additional AIRs available. . We use the AIR to help us calculate your current and future variable annuity ben efits. In order to calculate the benefit amounts we need a rate of return for the annuity investment options you selected. Since we cannot know what the per formance of the investment options will be in the future, we make an assump tion, and this assumption is called the Assumed Investment Return. . For future variable annuity benefits, the AIR represents the total return after expenses of the investment options needed to keep your payments from increasing or decreasing. If the rate of return after expenses earned by your annuity investment options is higher than the AIR, then your benefit payment will increase. Similarly, if the rate of return after expenses earned by your annu ity investment options is less than the AIR, then your benefit payment will decrease. SELECTING AN AIRPROS AND CONS . If more than one AIR is offered you will need to decide between a higher or lower AIR, for example, 3.5% and 5%. . With a 5% AIR you will receive a higher initial benefit amount than with a 3.5% AIR. However, benefits based on a 5% AIR will increase more slowly in a rising market and decline more rapidly in a falling market than benefits based on a 3.5% AIR. . With a 3.5% AIR, you will receive a lower initial benefit amount than with a 5% AIR. However, benefits based on a 3.5% AIR will increase more quickly in a ris ing market and decline more slowly in a falling market than benefits based on a 5% AIR. 32 ACCESS TO YOUR MONEY GENERALLY Depending on the annuity option you select and whether you are the Annuitant, you may receive annuity payments according to the annuity option you select. Under certain annuity options, surrender or partial withdrawals are permitted. DEFERMENT OF PAYMENTS We may delay making fixed payments from your Contract for up to 12 months subject to state law. We will credit interest to you during that period. We may suspend or postpone making variable payments from your Contract or processing transfer requests for an undetermined period of time when: . the NYSE is closed other than weekend and holiday closings; . trading on the NYSE is restricted; . an emergency exists, as determined by a regulatory authority, such that disposal of or determination of the value of shares of the funds is not reasonably practicable; . the SEC by order so permits for the protection of investors. DEATH BENEFIT DEATH WITHIN SIX MONTHS OF THE CONTRACT DATE In the event that the Annuitant and Joint Annuitant, if any, die within six (6) months of the Contract Date, and your contract includes a Cancellation Endorsement, we may pay a lump sum death benefit to the Contract Owner, if living, or if not, to the Beneficiary, if the following conditions are met. . At the time of Contract issue, the Annuitant has not reached the attained age of 75 and the Joint Annuitant, if any, has not reached the attained age of 80; and . Your Contract includes a Cancellation Endorsement. . Note: If you choose the Cancellation Endorsement, the amount of each annuity payment will be lower than without the cancellation option. The amount of the lump sum death benefit will be determined by: . Calculating the actuarial present value of future variable annuity payments as described under Computing the Cancellation Value earlier in this prospectus; and . Adding to that, the amount of premium allocated to pay fixed annuity payments, if any, minus any fixed annuity payments already made. No residual benefit under the Contract will remain once a cancellation or a death benefit has been requested and paid during this six-month period. If you do not elect the Cancellation Endorsement, we shall pay the annuity payments, if any, according to the annuity payment option you selected. 33 DEATH PRIOR TO INCOME START DATE Subject to the above provision, if no Annuitant or Joint Annuitant is alive on the Income Start Date, the Contract will be canceled and we will pay you a refund equal to your Premium Payment adjusted for any investment performance and any accumulated interest. DEATH OF OWNER AFTER THE INCOME START DATE If you are not the Annuitant, and if your death occurs on or after the Income Start Date, no death benefit will be payable under the Contract. Payments will continue to be paid to the Annuitant pursuant to the annuity option in force at the date of your death. DEATH OF ANNUITANT AFTER THE INCOME START DATE If an Annuitant dies after the Income Start Date, the remaining payments, if any, will be as specified in the annuity option in effect when the Annuitant died. We will require proof of the Annuitant's death. The remaining benefit, if any, will be paid to the beneficiary according to the annuity option in effect at the Annuitant's death. If no beneficiary survives the Annuitant we will pay any remaining benefit to the Annuitant's estate. A WORD ABOUT JOINT ANNUITANTS The Contract permits you as Contract Owner to name a Joint Annuitant. However, choosing a Joint Annuitant will only impact your Contract if you have also designated the Joint Annuitant as a controlling life and chosen one of the following two Joint and Survivor Annuity Options. . Annuity Payment Option 3--Joint and Survivor Annuity; or . Annuity Payment Option 4--Joint and Survivor Annuity With A Guaranteed Num ber of Years. If you have chosen one of the single life Annuity Options listed below, your naming of a Joint Annuitant under the Contract will have no effect on the benefits due under the Contract. . Annuity Payment Option 1--Life Annuity; or . Annuity Payment Option 2--Life Annuity With A Guaranteed Number of Years. See "Annuity Payment Options" in this prospectus. DESIGNATION OF BENEFICIARY The Contract Owner may select one or more Beneficiaries for the Annuitant and name them on the Client Information Form if the Annuity Payment Option selected provides for a beneficiary. Thereafter, while the Annuitant or Joint Annuitant is living, the Annuitant may change the Beneficiary by written notice. The change will take effect as of the date the Annuitant signs the notice, but it will not affect any payment made or any other action taken before the Company acknowledges the notice. The Contract Owner may make the designation of Beneficiary irrevocable. Changes in the Beneficiary may then be made only with the consent of the designated irrevocable Beneficiary. The Annuitant may also make the designation of Beneficiary irrevocable by sending written notice to the Company and obtaining approval from the Company. 34 PERFORMANCE Occasionally, we may advertise certain performance information concerning one or more of the subaccounts, including average annual total return and yield information. A subaccount's performance information is based on its past performance only and is not intended as an indication of future performance. Average annual total return is based on the overall dollar or percentage change in value of a hypothetical investment. When we advertise the average annual total return of a subaccount, it reflects changes in the fund share price, the automatic reinvestment by the subaccount of all distributions, and the deduction of Contract charges. Average annual total return is the hypothetical annually compounded return that would have produced the same cumulative total return if the performance had been constant over the entire period. When we advertise the yield of a subaccount, we will calculate it based upon a given thirty-day period. The yield is determined by dividing the net investment income earned by the subaccount during the period by the value of the subaccount on the last day of the period. When we advertise the performance of the money market subaccount, we may advertise the yield or the effective yield in addition to the average annual total return. The yield of the money market subaccount refers to the income generated by an investment in that subaccount over a seven-day period. The income is then annualized (i.e., the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment). The effective yield is calculated similarly but when annualized the income earned by an investment in the money market subaccount is assumed to be reinvested. The effective yield will be slightly higher than the yield because of the compounding effect of this assumed reinvestment during a 52-week period. Average annual total return at the Variable Account level is lower than at the underlying fund level because it is reduced by the mortality and expense risk charge. Similarly, yield and effective yield at the Variable Account level are lower than at the fund level because they are reduced by the mortality and expense risk charge. Performance information for a subaccount may be compared in reports and advertising to: (1) the MSCI Mid Cap 450 Index, the Standard & Poor's 500 Stock Index, Dow Jones Industrial Average, Donoghue Money Market Institutional Averages, indices measuring corporate bond and government security prices as prepared by Lehman Brothers, Inc. and Salomon Brothers, or other indices measuring performance of a pertinent group of securities so that investors may compare a fund's results with those of a group of securities widely regarded by investors as representative of the securities markets in general; (2) other variable annuity separate accounts or other investment products tracked by Lipper Analytical Services (a widely used independent research firm which ranks mutual funds and other investment companies by overall performance, investment objectives, and assets), or tracked by other ratings services, companies, publications, or persons who rank separate accounts or other investment products on overall performance or other criteria; (3) the Consumer Price Index (measure for inflation) to assess the real rate of return from an investment in the Contract; and (4) indices or averages of alternative financial products available to prospective investors, including the Bank Rate Monitor which monitors average returns of various bank instruments. 35 TAXES INTRODUCTION The following discussion of federal income tax treatment is general in nature and is not intended as tax advice. You should consult with a competent tax advisor to determine the specific federal tax treatment of your Contract based on your individual factual situation. Not all of the information we have included may be applicable to your Contract (for example, information relating to partial withdrawals and surrenders). This discussion is based on current law and interpretations, which may change. For a discussion of federal income taxes as they relate to the funds, please see the fund prospectuses. No attempt is made to consider any applicable state or other tax laws. We do not guarantee the tax status of your Contract. ANNUITY CONTRACTS IN GENERAL The Internal Revenue Code (the "Code") provides special rules regarding the tax treatment of annuity Contracts. Generally, you will not be taxed on the earnings in an annuity Contract until you take the money out. Different rules apply depending on how you take the money out and whether your Contract is qualified or non-qualified as explained below. TAX TREATMENT OF DISTRIBUTIONS QUALIFIED CONTRACTS If you purchase your Contract under a tax-favored retirement plan or account, your Contract is referred to as a qualified Contract. Examples of qualified plans or accounts are: . Individual Retirement Annuities ("IRA"); . Tax Deferred Annuities (governed by Code Section 403(b) and referred to as "403(b) Plans"); . Keogh Plans; and . Employer-sponsored pension and profit sharing arrangements such as 401(k) plans. 36 DISTRIBUTIONS IN GENERAL Generally, you have not paid any taxes on the premium used to buy a qualified Contract or on any earnings. Therefore, any amount you take out as annuity payments, as a withdrawal, or upon surrender will be taxable income. In addition, a 10% tax penalty may apply to the taxable income. This additional 10% tax does not apply: . in general, where the payment is a part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of such taxpayer and a designated joint annuitant; . where the taxpayer is age 59 1/2 or older; . where payment is made on account of death; . where the payment is made on account of the taxpayer's disability; . where the payment is made to pay certain medical expenses, certain health insurance premiums, certain higher education expenses or qualified first home purchases; . in some cases, upon separation from service on or after age 55; or . certain other limited circumstances. WITHDRAWALS WHERE INCOME START DATE IS BEFORE AGE 59 1/2-A PARTIAL WITHDRAWAL OR SURRENDER MAY TRIGGER A 10% TAX PENALTY UNLESS AN EXCEPTION APPLIES If the Income Start Date is before age 59 1/2 and you relied on the exception for substantially equal payments to avoid the 10% penalty, it should be noted that a partial withdrawal from or full surrender of the Contract after the Income Start Date but before the later of the taxpayer's reaching age 59 1/2 or 5 years after the Income Start Date would be treated as changing the substantially equal payments. In that event, payments excepted from the 10% penalty tax by reason of the exception for substantially equal payments would be subject to recapture. The recaptured tax is imposed in the year of the withdrawal or surrender (or other modification) and is equal to the tax that would have been imposed had the exception not applied. Interest is also due for the period between when the tax would have been imposed and when the tax is recaptured. The possible application of this recapture tax should be considered before making a partial withdrawal from or full surrender of the Contract. You should also contact your tax advisor before taking partial withdrawals or surrenders. EXAMPLE: Individual A is age 57 1/2 when he begins to receive annual annuity payments of $10,000 from a traditional individual retirement annuity. Since this is a qualified Contract with no tax basis, each payment of $10,000 is subject to tax. He receives payments in 2000, 2001 and 2002 when he is 57 1/2, 58 1/2 and 59 1/2, respectively. The amounts are not subject to the 10% penalty tax because the payments are substantially equal payments. In 2003, when A is age 60 1/2, he takes a partial withdrawal. In 2003, A must pay the 10% penalty tax on the annuity payments received in 2000 and 2001, and interest thereon. Therefore, A would owe the IRS a recapture tax of $2,000 (10% of 10,000 each year for 2years) plus interest. 37 INDIVIDUAL RETIREMENT ANNUITIES ("IRA") Code Sections 408 and 408A permit eligible individuals to contribute to a traditional IRA or to a Roth IRA. By attachment of an endorsement that reflects the requirements of Code Section 408(b), the Contracts may be issued as a traditional IRA. By attachment of an endorsement that reflects the requirements of Code Section 408A, the contracts may be issued as a Roth IRA. Contracts issued in connection with an IRA are subject to limitations on eligibility, maximum contributions, and time of distribution. Most IRAs cannot accept additional contributions after the owner reaches 70 1/2, and must also begin required distributions at that age-these rules do not apply to a Roth IRA. Distributions from certain retirement plans qualifying for federal tax advantages may be rolled over into a traditional IRA. In addition, distributions from a traditional IRA may be rolled over to another IRA or qualified plan, or converted into a Roth IRA, provided certain conditions are met. Purchases of the Contract for use with IRAs are subject to special requirements, including the requirement that informational disclosure be given to each person desiring to establish an IRA. That person must be given the opportunity to affirm or reverse a decision to purchase the Contract. ROLLOVERS Distributions from Code Section 401 qualified plans or 403(b) Plans (other than non-taxable distributions representing a return of capital, distributions meeting the minimum distribution requirement, distributions for the life or life expectancy of the recipient(s) or distributions that are made over a period of more than 10 years) are eligible for tax-free rollover within 60 days of the date of distribution, but are also subject to federal income tax withholding at a 20% rate unless paid directly to another qualified plan, 403(b) Plan, or traditional IRA. A prospective owner considering use of the Contract in this manner should consult a competent tax advisor with regard to the suitability of the Contract for this purpose and for information concerning the tax law provisions applicable to qualified plans, 403(b) Plans, and IRAs. Rollovers may also occur between one Roth IRA and another Roth IRA. Beginning in 2006, employers are permitted to offer a separate Roth account as part of their 401(k) or 403(b) employer pension plan, and employees may designate a portion of their plan contributions for deposit to a Roth account. Under Code Section 402A, distributions from such Roth 401(k) or Roth 403(b) accounts can be directly or indirectly rolled into a Roth IRA. Such rollovers are not subject to tax or penalty and are exempt from both the annual contribution and the conversion limitations. CONVERSIONS In years prior to 2010, if you have modified adjusted gross income of $100,000 or less for the tax year, not including the conversion, you can convert previously untaxed funds from a traditional IRA to a Roth IRA. The funds removed from the traditional IRA are taxable in the year of the conversion, but no penalty tax applies. If you had established any Roth IRA at least 5 years prior to taking a Roth withdrawal, or have had a conversion IRA for at least 5 years, distributions are tax free as long as you have the attained age of 59 1/2, your distributions are made on account of disability or death, or you withdraw up to $10,000 in conjunction with a first-time home purchase. TAX TREATMENT OF DISTRIBUTIONS-NON-QUALIFIED CONTRACTS GENERAL For annuity payments, generally a portion of each payment will be considered a return of your Premium Payment and will not be taxed. The remaining portion of each payment is taxed at ordinary income rates. The nontaxable portion of variable annuity payments is generally determined by a formula that establishes a specific dollar amount of each payment that is not taxed. 38 After the full amount of your Premium Payment has been recovered tax-free, the full amount of subsequent annuity payments will be taxable. If annuity payments stop due to the death of the annuitant before the full amount of your purchase payment has been recovered, a tax deduction is allowed for the unrecovered amount. COMPLETE SURRENDERS For payments made upon complete surrender of the annuity Contract, the taxable portion is the amount received in excess of the remaining investment in the Contract. PARTIAL WITHDRAWAL-100% TAXABLE As a general rule, partial withdrawals will be 100% taxable and will not reduce investment in the Contract. A PARTIAL WITHDRAWAL OR SURRENDER MAY TRIGGER AN ADDITIONAL 10% TAX PENALTY UNLESS AN EXCEPTION APPLIES If a taxable distribution is made under the Contract, an additional tax of 10% of the amount of the taxable distribution may apply. This additional tax does not apply where: . the payment is made under an immediate annuity Contract, defined for these purposes as an annuity (1) purchased with a single premium, (2) the annuity starting date of which commences within one year from the date of the pur chase of the annuity, and (3) which provides for a series of substantially equal periodic payments (to be made not less frequently than annually) during the annuity period; . the payment is a part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the tax payer or the joint lives (or joint life expectancies) of such taxpayer and a desig nated joint annuitant; . the taxpayer is age 59 1/2 or older; . the payment is made on account of the taxpayer's disability; . the payment is made on account of death; . or in certain other circumstances. It should be noted that a partial withdrawal or full surrender of the Contract after the Income Start Date but before the later of the taxpayer's reaching age 59 1/2 or 5 years after the Income Start Date would be treated as changing substantially equal payments. In that event, payments excepted from the 10% penalty tax because they were considered part of substantially equal payments would be subject to recapture. The recaptured tax is imposed in the year of the withdrawal or surrender (or other modification) and is equal to the tax that would have been imposed (plus interest) had the exception not applied. The possible application of this recapture tax should be considered before making a partial withdrawal or full surrender of the Contract. You should also seek the advice of your tax advisor. 39 EXAMPLE: Individual A is age 57 1/2 when he begins to receive annual annuity payments of $10,000. Of each annuity payment, $3,000 is subject to tax. He receives payments in 2000, 2001 and 2002 when he is 57 1/2, 58 1/2 and 59 1/2 respectively. The amounts are not subject to the 10% penalty tax because the payments are substantially equal payments. In 2003, when A is age 60 1/2, he takes a partial withdrawal. In 2003, A must pay the 10% penalty tax on the annuity payments received in 2000 and 2001, and interest thereon. Therefore, A would owe the IRS a recapture tax of $600 (10% of 3,000 each year for 2 years) plus interest. NON-QUALIFIED CONTRACTS OWNED BY NON-NATURAL PERSONS As a general rule, non-qualified annuity Contracts held by a corporation, trust or other similar entity, as opposed to a natural person, are not treated as annuity Contracts for federal tax purposes. This rule does not apply where the non-natural person is only the nominal owner, such as a trust or other entity acting as an agent for a natural person. There is also an exception to this general rule for immediate annuity Contracts as defined in the prior section. Corporations, trusts and other similar entities, other than natural persons, seeking to take advantage of this exception for immediate annuity Contracts should consult with a tax advisor. SECTION 1035 EXCHANGES Code Section 1035 generally provides that no gain or loss shall be recognized on the exchange of an annuity Contract for another annuity Contract unless money or other property is distributed as part of the exchange. Special rules and procedures apply to Section 1035 transactions. Prospective owners wishing to take advantage of Section 1035 of the Code should consult their tax advisors. DIVERSIFICATION AND INVESTOR CONTROL The Code imposes certain diversification requirements on the underlying investments for a variable annuity to be treated as a variable annuity for tax purposes. We believe that the funds are being managed so as to comply with these requirements. There is limited guidance as to the circumstances under which you, because of the degree of control you exercise over the underlying investments, would be considered the owner of the shares of the funds. If any guidance on this point is provided which is considered a new position, then the guidance would generally be applied prospectively. However, if such guidance is considered not to be a new position, it may be applied retroactively. This would mean you, as the owner of the Contract, could be treated as the owner of assets in the funds. We reserve the right to make changes to the Contract we think necessary to see that it qualifies as a variable annuity Contract for tax purposes. WITHHOLDING We are required to withhold federal income taxes on annuity payments, partial withdrawals, and complete surrenders that include taxable income unless the payee elects not to have any withholding or in certain other circumstances. If you do not provide a social security number or other taxpayer identification number, you will not be permitted to elect out of withholding. Special withholding rules apply to payments made to non-resident aliens. 40 For complete surrenders or partial withdrawals, we are required to withhold 10% of the taxable portion of any withdrawal or lump sum distribution unless you elect out of withholding. For annuity payments, we will withhold on the taxable portion of annuity payments based on a withholding certificate you file with us. If you do not file a certificate, you will be treated, for purposes of determining your withholding rates, as a married person with three exemptions. You are liable for payment of federal income taxes on the taxable portion of any withdrawal, distribution, or annuity payment. You may be subject to penalties under the estimated tax rules if your withholding and estimated tax payments are not sufficient. OTHER INFORMATION AIG LIFE INSURANCE COMPANY We are a stock life insurance company initially organized under the laws of Pennsylvania and reorganized under the laws of Delaware. We were incorporated in 1962. Our principal business address is 600 King Street (DPEN), Wilmington DE 19801. AIG Life is a wholly owned subsidiary of American International Group, Inc. ("AIG"). AIG, a Delaware corporation, is a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services and asset management in the United States and internationally. AIG American General is a marketing name of AIG Life and its affiliates. We may occasionally publish in advertisements, sales literature and reports the ratings and other information assigned to the company by one or more independent rating organizations such as A.M. Best Company, Moody's, and Standard & Poor's. The purpose of the ratings is to reflect the rating organization's opinion of our financial strength and our ability to meet our contractual obligations to Contract Owners and should not be considered as bearing on the investment performance of assets held in the Variable Account. The ratings are not recommendations to purchase our life insurance or annuity products or to hold or sell these products, and the ratings do not comment on the suitability of such products for a particular investor. There can be no assurance that any rating will remain in effect for any given period of time or that any rating will not be lowered or withdrawn entirely by a rating organization if, in such organization's judgment, future circumstances so warrant. The ratings do not reflect the investment performance of the Variable Account or the degree of risk associated with an investment in the variable account. AIG Life is a member of the Insurance Marketplace Standards Association ("IMSA"). IMSA is a voluntary membership organization created by the life insurance industry to promote ethical market conduct for life insurance and annuity products. AIG Life's membership in IMSA applies only to AIG Life and not its products. GUARANTEE OF INSURANCE OBLIGATIONS Certain insurance obligations under the Contracts are guaranteed (the "Guarantee") by National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union"), an affiliate of AIG Life. Insurance obligations include, without limitation, payout options with lifetime guarantees, death benefits and Contract values invested in the fixed investment option. 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. 41 As of December 29, 2006 at 4:00 p.m. Eastern Time (the "Point of Termination"), the Guarantee was terminated for prospectively issued Contracts. The Guarantee will not cover any Contracts with a date of issue later than the Point of Termination. The Guarantee will continue to cover Contracts with a date of issue earlier than the Point of Termination until all insurance obligations under such Contracts are satisfied in full. National Union is a stock property-casualty insurance company incorporated under the laws of the Commonwealth of Pennsylvania on February 14, 1901. National Union's principal executive office is located at 70 Pine Street, New York, New York 10270. National Union 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. National Union is an indirect wholly owned subsidiary of AIG and an affiliate of AIG Life. OWNERSHIP This prospectus describes a group single premium immediate variable annuity Contract. A group Contract is issued to a Contract holder for the benefit of the participants in the group. If you are a participant in the group you will receive a certificate evidencing your ownership. You, as the owner of a certificate, are entitled to all the rights and privileges of ownership. As used in this prospectus, the term Contract is equally applicable to a certificate. VOTING PRIVILEGES We are the legal owner of the Funds' shares held in the Variable Account. However, you may be asked to instruct us how to vote the Fund shares held in the various Funds that are attributable to your contract at meetings of shareholders of the Funds. The number of votes for which you may give directions will be determined as of the record date for the meeting. The number of votes that you may direct related to a particular Fund is equal to (a) the corresponding value invested in that Fund divided by (b) the net asset value of one share of that fund. Fractional votes will be recognized. We will vote all shares of each Fund that we hold of record, including any shares we own on our own behalf, in the same proportions as those shares for which we have received instructions from owners participating in that Fund through the Variable Account. Even if Contract Owners participating in that Fund choose not to provide voting instructions, we will vote the Fund's shares in the same proportions as the voting instructions which we actually receive. As a result, the instructions of a small number of Contract Owners could determine the outcome of matters subject to shareholder vote. If you are asked to give us voting instructions, we will send you the proxy material and a form for providing such instructions. Should we determine that we are no longer required to send the owner such materials, we will vote the shares as we determine in our sole discretion. The voting rights relate only to amounts invested in the Variable Account. There are no voting rights with respect to Funds allocated to the fixed investment option. We believe that these voting instruction procedures comply with current federal securities laws and their interpretations. We reserve the right to change these procedures with any changes in the law. 42 DISTRIBUTION OF THE CONTRACT American General Equity Services Corporation ("AGESC") is the distributor and principal underwriter of the Contracts. AGESC (formerly known as Franklin Financial Services Corporation) is located at 2727-A Allen Parkway 2-G7, Houston, Texas 77019. AGESC is a Delaware corporation and an affiliate of AIG Life Insurance Company (AGESC is an indirect wholly-owned subsidiary of AIG). AGESC also acts as principal underwriter for AIG Life Insurance Company's other separate accounts and for the separate accounts of certain AIG Life Insurance Company affiliates. AGESC is a registered broker- dealer under the Securities Exchange Act of 1934, as amended and a member of the Financial Industry Regulatory Authority ("FINRA"). AGESC, as the principal underwriter and distributor, is not paid any fees on the Contracts. AIG Life Insurance Company will not pay any commission to entities that sell the Contracts. Payments may be made for services not directly related to the sale of the Contract, including the establishment of administrative arrangements, recruitment and training of personnel, the distribution and production of promotional literature, and similar services. LEGAL PROCEEDINGS AIG Life is a party to various lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings arise in jurisdictions that permit damage awards disproportionate to the actual damages incurred. Based upon information presently available, AIG Life believes that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on AIG Life's results of operations, cash flows and financial position. FINANCIAL STATEMENTS The Financial Statements of AIG Life, the Variable Account and National Union can be found in the Statement of Additional Information ("SAI"), which may be obtained without charge by calling Vanguard Annuity and Insurance Services at (800) 522-5555 (between 8 a.m. and 8 p.m. Eastern time) or write to Vanguard Annuity and Insurance Services at P.O. Box 1105, Valley Forge, PA 19482-1105. You may also call or write to AIG Life Insurance Company, Attention: Group Annuity Administration Department, 600 King Street (DPEN), Wilmington, Delaware 19801 (telephone 877-299-1724). The financial statements have also filed electronically with the SEC and can be obtained through its website at http://www.sec.gov. 43 APPENDIX HYPOTHETICAL ILLUSTRATIONS OF ANNUITY PAYMENTS We have prepared the following tables to show how variable annuity payments under the Contract change with investment performance over an extended period of time. The tables illustrate how monthly annuity payments would vary over time if the return on assets in the selected subaccounts were a uniform gross annual rate of 0%, 5.78%, 6%, 8%, or 10%. The values would be different from those shown if the returns averaged 0%, 5.78%, 6%, 8%, or 10%, but fluctuated over and under those averages throughout the years. The tables reflect the daily mortality and expense risk charge, which is equivalent to an annual charge of 0.52%. The amounts shown in the tables also take into account the arithmetic average of the funds' management fees and operating expenses at an annual rate of approximately 0.26% of the average daily net assets of the funds. Actual fees and expenses of the funds associated with your Contract may be more or less than 0.26%, will vary from year to year, and will depend on your allocation. See the section in this prospectus entitled "Fee Tables" for more complete details. The monthly annuity payments are illustrated on a pre-tax basis. The federal income tax treatment of annuity income considerations is generally described in the section of this prospectus entitled "Taxes." The tables show both the gross rate and the net rate. The difference between gross and net rates represents the 0.52% for mortality and expense risk and the assumed 0.26% for investment management and operating expenses. Since these charges are deducted daily from assets, the difference between the gross and net rate is not exactly 0.78%. The following tables include one set of illustrations showing Annuity Payments without the optional Cancellation Endorsement and one set of illustrations showing Annuity Payments with the optional Cancellation Endorsement. Two sets of tables follow--one set for a male age 65 and the other for a female age 65. The first table in each set assumes that 100% of the single Premium Payment is allocated to a variable annuity option. The second assumes that 50% of the single Premium Payment is allocated to a fixed annuity option using the fixed crediting rate we offered on the fixed annuity option at the time this illustration was prepared. Both sets of tables assume that a life annuity with ten years guaranteed was purchased. When part of the single Premium Payment has been allocated to the fixed annuity option, the guaranteed minimum annuity payment resulting from this allocation is also shown, and is based on the fixed crediting rate we offered on the fixed annuity option at the time this illustration was prepared. The illustrated variable annuity payments use an assumed investment return of 5% per year. Thus, actual performance greater than 5% per year will result in increasing annuity payments and actual performance less than 5% per year will result in decreasing annuity payments. We may offer alternative assumed investment returns. Fixed annuity payments remain constant. These tables show the monthly annuity payments for several hypothetical constant assumed investment returns. Of course, actual investment performance will not be constant and may be volatile. Actual monthly annuity payments would differ from those shown if the actual rate of return averaged the rate shown over a period of years, but also fluctuated above or below those averages from year to year. Upon request, and when you are considering an annuity option, we will furnish a comparable illustration based on your individual circumstances, including purchase rates and the mortality and expense risk charge that would apply. 44 ANNUITY PAYMENT ILLUSTRATION WITHOUT CANCELLATION (100% VARIABLE) SINGLE PREMIUM PAYMENT: $100,000 SEX: MALE AGE: 65 PAYOUT OPTION SELECTED: LIFE ANNUITY WITH 10 YEARS GUARANTEED FREQUENCY OF INCOME PAY: MONTHLY Fixed monthly annuity payments based on current rates, if 100% fixed for annuity payment option selected: $688.58 Variable monthly annuity payment on the date of the illustration: $655.31 Illustrative amounts below assume 100% of the single premium is allocated to a variable annuity payment option. Assumed investment return at which monthly variable payments remain constant: 5% Monthly annuity payments will vary with investment performance. No minimum dollar amount is guaranteed.
MONTHLY PAYMENTS WITH AN ASSUMED RATE OF: -------------------------------------------------------------------------------- PAYMENT CALENDAR ATTAINED GROSS RETURN 0.00% 5.78% 6.00% 8.00% 10.00% YEAR YEAR YEAR NET RETURN -0.78% 5.00% 5.22% 7.22% 9.22% ------- -------- -------- ------------ ------- ------- ------- ------- --------- 1 2008 65 $655.31 $655.31 $655.31 $655.31 $ 655.31 2 2009 66 $619.22 $655.31 $656.66 $669.15 $ 681.63 3 2010 67 $585.11 $655.31 $658.02 $683.27 $ 709.00 4 2011 68 $552.88 $655.31 $659.38 $697.70 $ 737.48 5 2012 69 $522.43 $655.31 $660.74 $712.43 $ 767.09 10 2017 74 $393.56 $655.31 $667.59 $790.88 $ 934.00 15 2022 79 $296.48 $655.31 $674.51 $877.97 $1,137.23 20 2027 84 $223.34 $655.31 $681.50 $974.64 $1,384.69
THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE ONLY AND ARE NOT A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE FUNDS SELECTED. THE AMOUNT OF THE ANNUITY PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FROM YEAR TO YEAR. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY ANNUITY PAYMENTS (BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. NOTES: Annuity payments are made during the Annuitant's lifetime. Benefits vary depending on the annuity option selected. The hypothetical performance above illustrates a life annuity with 10 years of payments guaranteed. If the Annuitant dies before payments have been made for the guaranteed period, payments will continue to be paid to the beneficiary for the remainder of the period.The cumulative amount of annuity payments received depends on how long the Annuitant lives after the guaranteed period The illustrated net assumed rates of return reflect the deduction of average fund expenses and the mortality and expense risk charge from the gross rates of return. 45 ANNUITY PAYMENT ILLUSTRATION WITHOUT CANCELLATION (50% VARIABLE/50% FIXED) SINGLE PREMIUM PAYMENT: $100,000 SEX: MALE AGE: 65 PAYOUT OPTION SELECTED: LIFE ANNUITY WITH 10 YEARS GUARANTEED FREQUENCY OF INCOME PAY: MONTHLY Fixed monthly annuity payment based on current rates, if 50% fixed for annuity option selected: $344.29 Variable monthly Income Payment based on current rates, if 50% variable for annuity option selected: $327.66 Illustrative amounts below assume 50% of the single premium is allocated to a variable Payout Option. Assumed investment return at which monthly variable payments remain constant: 5% Monthly Income Payments will vary with investment performance, but will never be less than $344.29. The monthly guaranteed payment of $344.29 is being provided by the $50,000 applied under the fixed annuity option.
MONTHLY PAYMENTS WITH AN ASSUMED RATE OF: -------------------------------------------------------------------------------- PAYMENT CALENDAR ATTAINED GROSS RETURN 0.00% 5.78% 6.00% 8.00% 10.00% YEAR YEAR YEAR NET RETURN -0.78% 5.00% 5.22% 7.22% 9.22% ------- -------- -------- ------------ ------- ------- ------- ------- --------- 1 2008 65 $671.95 $671.95 $671.95 $671.95 $ 671.95 2 2009 66 $653.90 $671.95 $672.62 $678.86 $ 685.10 3 2010 67 $636.85 $671.95 $673.30 $685.93 $ 698.79 4 2011 68 $620.73 $671.95 $673.98 $693.14 $ 713.03 5 2012 69 $605.51 $671.95 $674.66 $700.50 $ 727.84 10 2017 74 $541.07 $671.95 $678.08 $739.73 $ 811.29 15 2022 79 $492.53 $671.95 $681.55 $783.27 $ 912.91 20 2027 84 $455.96 $671.95 $685.04 $831.61 $1,036.63
THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE ONLY AND ARE NOT A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE FUNDS SELECTED. THE AMOUNT OF THE ANNUITY PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FROM YEAR TO YEAR. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY ANNUITY PAYMENTS (BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. NOTES: Annuity payments are made during the Annuitant's lifetime. Benefits vary depending on the annuity option selected. The hypothetical performance above illustrates a life annuity with 10 years of payments guaranteed. If the Annuitant dies before payments have been made for the guaranteed period, payments will continue to be paid to the beneficiary for the remainder of the period. The cumulative amount of annuity payments received depends on how long the Annuitant lives after the guaranteed period The illustrated net assumed rates of return reflect the deduction of average fund expenses and the mortality and expense risk charge from the gross rates of return. 46 ANNUITY PAYMENT ILLUSTRATION WITHOUT CANCELLATION (100% VARIABLE) SINGLE PREMIUM PAYMENT: $100,000 SEX: FEMALE AGE: 65 PAYOUT OPTION SELECTED: LIFE ANNUITY WITH 10 YEARS GUARANTEED FREQUENCY OF INCOME PAY: MONTHLY Fixed monthly annuity payment based on current rates, if 100% fixed for annuity option selected: $648.10 Variable monthly annuity payment on the date of the illustration: $613.64 Illustrative amounts below assume 100% of the single premium is allocated to a variable annuity option. Assumed investment return at which monthly variable payments remain constant: 5% Monthly annuity payments will vary with investment performance. No minimum dollar amount is guaranteed.
MONTHLY PAYMENTS WITH AN ASSUMED RATE OF: -------------------------------------------------------------------------------- PAYMENT CALENDAR ATTAINED GROSS RETURN 0.00% 5.78% 6.00% 8.00% 10.00% YEAR YEAR YEAR NET RETURN -0.78% 5.00% 5.22% 7.22% 9.22% ------- -------- -------- ------------ ------- ------- ------- ------- --------- 1 2008 65 $613.64 $613.64 $613.64 $613.64 $ 613.64 2 2009 66 $579.84 $613.64 $614.91 $626.60 $ 638.28 3 2010 67 $547.91 $613.64 $616.18 $639.82 $ 663.92 4 2011 68 $517.73 $613.64 $617.45 $653.33 $ 690.58 5 2012 69 $489.21 $613.64 $618.72 $667.13 $ 718.31 10 2017 74 $368.53 $613.64 $625.14 $740.59 $ 874.61 15 2022 79 $277.62 $613.64 $631.62 $822.14 $1,064.92 20 2027 84 $209.14 $613.64 $638.17 $912.67 $1,296.64
THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE ONLY AND ARE NOT A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE FUNDS SELECTED. THE AMOUNT OF THE ANNUITY PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FROM YEAR TO YEAR. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY ANNUITY PAYMENTS (BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. NOTES: Annuity payments are made during the Annuitant's lifetime. Benefits vary depending on the annuity option selected. The hypothetical performance above illustrates a life annuity with 10 years of payments guaranteed. If the Annuitant dies before payments have been made for the guaranteed period, payments will continue to be paid to the beneficiary for the remainder of the period. The cumulative amount of annuity payments received depends on how long the Annuitant lives after the guaranteed period The illustrated net assumed rates of return reflect the deduction of average fund expenses and the mortality and expense risk charge from the gross rates of return. 47 ANNUITY PAYMENT ILLUSTRATION WITHOUT CANCELLATION (50% VARIABLE/50% FIXED) SINGLE PREMIUM PAYMENT: $100,000 SEX: FEMALE AGE: 65 PAYOUT OPTION SELECTED: LIFE ANNUITY WITH 10 YEARS GUARANTEED FREQUENCY OF INCOME PAY: MONTHLY Fixed monthly annuity payment based on current rates, if 50% fixed for annuity option selected: $324.05 Variable monthly annuity payment based on current rates, if 50% variable for annuity option selected: $306.82 Illustrative amounts below assume 50% of the single premium is allocated to a variable annuity option. Assumed investment return at which monthly variable payments remain constant: 5% Monthly annuity payments will vary with investment performance, but will never be less than $324.05. The monthly guaranteed payment of $324.05 is being provided by the $50,000 applied under the fixed annuity option.
MONTHLY PAYMENTS WITH AN ASSUMED RATE OF: ------------------------------------------------------------------------------ PAYMENT CALENDAR ATTAINED GROSS RETURN 0.00% 5.78% 6.00% 8.00% 10.00% YEAR YEAR YEAR NET RETURN -0.78% 5.00% 5.22% 7.22% 9.22% ------- -------- -------- ------------ ------- ------- ------- ------- ------- 1 2008 65 $630.87 $630.87 $630.87 $630.87 $630.87 2 2009 66 $613.97 $630.87 $631.50 $637.35 $643.19 3 2010 67 $598.00 $630.87 $632.14 $643.96 $656.01 4 2011 68 $582.91 $630.87 $632.77 $650.72 $669.34 5 2012 69 $568.66 $630.87 $633.41 $657.61 $683.21 10 2017 74 $508.32 $630.87 $636.62 $694.34 $761.36 15 2022 79 $462.86 $630.87 $639.86 $735.12 $856.51 20 2027 84 $428.62 $630.87 $643.13 $780.38 $972.37
THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE ONLY AND ARE NOT A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE FUNDS SELECTED. THE AMOUNT OF THE ANNUITY PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FROM YEAR TO YEAR. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY ANNUITY PAYMENTS (BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. NOTES: Annuity payments are made during the Annuitant's lifetime. Benefits vary depending on the annuity option selected. The hypothetical performance above illustrates a life annuity with 10 years of payments guaranteed. If the Annuitant dies before payments have been made for the guaranteed period, payments will continue to be paid to the beneficiary for the remainder of the period. The cumulative amount of annuity payments received depends on how long the Annuitant lives after the guaranteed period The illustrated net assumed rates of return reflect the deduction of average fund expenses and the mortality and expense risk charge from the gross rates of return. 48 ANNUITY PAYMENT ILLUSTRATION WITH CANCELLATION (100% VARIABLE) SINGLE PREMIUM PAYMENT: $100,000 SEX: MALE AGE: 65 PAYOUT OPTION SELECTED: LIFE ANNUITY WITH 10 YEARS GUARANTEED FREQUENCY OF INCOME PAY: MONTHLY Fixed monthly annuity payments based on current rates, if 100% fixed for annuity payment option selected: $686.24 Variable monthly annuity payment on the date of the illustration: $653.12 Illustrative amounts below assume 100% of the single premium is allocated to a variable annuity payment option. Assumed investment return at which monthly variable payments remain constant: 5% Monthly annuity payments will vary with investment performance. No minimum dollar amount is guaranteed.
MONTHLY PAYMENTS WITH AN ASSUMED RATE OF: -------------------------------------------------------------------------------- PAYMENT CALENDAR ATTAINED GROSS RETURN 0.00% 5.78% 6.00% 8.00% 10.00% YEAR YEAR YEAR NET RETURN -0.78% 5.00% 5.22% 7.22% 9.22% ------- -------- -------- ------------ ------- ------- ------- ------- --------- 1 2008 65 $653.12 $653.12 $653.12 $653.12 $ 653.12 2 2009 66 $617.15 $653.12 $654.47 $666.91 $ 679.35 3 2010 67 $583.16 $653.12 $655.82 $680.99 $ 706.63 4 2011 68 $551.04 $653.12 $657.17 $695.37 $ 735.01 5 2012 69 $520.69 $653.12 $658.53 $710.05 $ 764.53 10 2017 74 $392.24 $653.12 $665.36 $788.23 $ 930.88 15 2022 79 $295.49 $653.12 $672.26 $875.03 $1,133.43 20 2027 84 $222.60 $653.12 $679.23 $971.39 $1,380.06
THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE ONLY AND ARE NOT A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE FUNDS SELECTED. THE AMOUNT OF THE ANNUITY PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FROM YEAR TO YEAR. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY ANNUITY PAYMENTS (BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. NOTES: Annuity payments are made during the Annuitant's lifetime. Benefits vary depending on the annuity option selected. The hypothetical performance above illustrates a life annuity with 10 years of payments guaranteed. If the Annuitant dies before payments have been made for the guaranteed period, payments will continue to be paid to the beneficiary for the remainder of the period. The cumulative amount of annuity payments received depends on how long the Annuitant lives after the guaranteed period The illustrated net assumed rates of return reflect the deduction of average fund expenses and the mortality and expense risk charge from the gross rates of return. 49 ANNUITY PAYMENT ILLUSTRATION WITH CANCELLATION (50% VARIABLE/50% FIXED) SINGLE PREMIUM PAYMENT: $100,000 SEX: MALE AGE: 65 PAYOUT OPTION SELECTED: LIFE ANNUITY WITH 10 YEARS GUARANTEED FREQUENCY OF INCOME PAY: MONTHLY Fixed monthly Income Payment based on current rates, if 50% fixed for annuity option selected: $343.12 Variable monthly Income Payment based on current rates, if 50% variable for annuity option selected: $326.56 Illustrative amounts below assume 50% of the single premium is allocated to a variable annuity option. Assumed investment return at which monthly variable payments remain constant: 5% Monthly annuity payments will vary with investment performance, but will never be less than $343.12. The monthly guaranteed payment of $343.12 is being provided by the $50,000 applied under the fixed annuity option.
MONTHLY PAYMENTS WITH AN ASSUMED RATE OF: -------------------------------------------------------------------------------- PAYMENT CALENDAR ATTAINED GROSS RETURN 0.00% 5.78% 6.00% 8.00% 10.00% YEAR YEAR YEAR NET RETURN -0.78% 5.00% 5.22% 7.22% 9.22% ------- -------- -------- ------------ ------- ------- ------- ------- --------- 1 2008 65 $669.68 $669.68 $669.68 $669.68 $ 669.68 2 2009 66 $651.69 $669.68 $670.35 $676.57 $ 682.79 3 2010 67 $634.70 $669.68 $671.03 $683.61 $ 696.44 4 2011 68 $618.64 $669.68 $671.71 $690.80 $ 710.63 5 2012 69 $603.46 $669.68 $672.39 $698.14 $ 725.38 10 2017 74 $539.24 $669.68 $675.80 $737.24 $ 808.56 15 2022 79 $490.86 $669.68 $679.25 $780.64 $ 909.84 20 2027 84 $454.42 $669.68 $682.73 $828.81 $1,033.15
THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE ONLY AND ARE NOT A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE FUNDS SELECTED. THE AMOUNT OF THE ANNUITY PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FROM YEAR TO YEAR. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY ANNUITY PAYMENTS (BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. NOTES: Annuity payments are made during the Annuitant's lifetime. Benefits vary depending on the annuity option selected. The hypothetical performance above illustrates a life annuity with 10 years of payments guaranteed. If the Annuitant dies before payments have been made for the guaranteed period, payments will continue to be paid to the beneficiary for the remainder of the period. The cumulative amount of annuity payments received depends on how long the Annuitant lives after the guaranteed period The illustrated net assumed rates of return reflect the deduction of average fund expenses and the mortality and expense risk charge from the gross rates of return. 50 ANNUITY PAYMENT ILLUSTRATION WITH CANCELLATION (100% VARIABLE) SINGLE PREMIUM PAYMENT: $100,000 SEX: FEMALE AGE: 65 PAYOUT OPTION SELECTED: LIFE ANNUITY WITH 10 YEARS GUARANTEED FREQUENCY OF INCOME PAY: MONTHLY Fixed monthly annuity payment based on current rates, if 100% fixed for annuity option selected: $646.19 Variable monthly annuity payments based on current rates, if 100% variable for annuity option selected: $611.87 Illustrative amounts below assume 100% of the single premium is allocated to a variable annuity option. Assumed investment return at which monthly variable payments remain constant: 5% Monthly annuity payments will vary with investment performance. No minimum dollar amount is guaranteed.
MONTHLY PAYMENTS WITH AN ASSUMED RATE OF: -------------------------------------------------------------------------------- PAYMENT CALENDAR ATTAINED GROSS RETURN 0.00% 5.78% 6.00% 8.00% 10.00% YEAR YEAR YEAR NET RETURN -0.78% 5.00% 5.22% 7.22% 9.22% ------- -------- -------- ------------ ------- ------- ------- ------- --------- 1 2008 65 $611.87 $611.87 $611.87 $611.87 $ 611.87 2 2009 66 $578.17 $611.87 $613.13 $624.79 $ 636.44 3 2010 67 $546.33 $611.87 $614.40 $637.98 $ 662.00 4 2011 68 $516.23 $611.87 $615.67 $651.45 $ 688.59 5 2012 69 $487.80 $611.87 $616.94 $665.20 $ 716.24 10 2017 74 $367.47 $611.87 $623.34 $738.45 $ 872.09 15 2022 79 $276.82 $611.87 $629.80 $819.77 $1,061.85 20 2027 84 $208.54 $611.87 $636.33 $910.03 $1,292.90
THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE ONLY AND ARE NOT A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE FUNDS SELECTED. THE AMOUNT OF THE ANNUITY PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FROM YEAR TO YEAR. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY ANNUITY PAYMENTS (BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. NOTES: Annuity payments are made during the Annuitant's lifetime. Benefits vary depending on the annuity option selected. The hypothetical performance above illustrates a life annuity with 10 years of payments guaranteed. If the Annuitant dies before payments have been made for the guaranteed period, payments will continue to be paid to the beneficiary for the remainder of the period. The cumulative amount of annuity payments received depends on how long the Annuitant lives after the guaranteed period The illustrated net assumed rates of return reflect the deduction of average fund expenses and the mortality and expense risk charge from the gross rates of return. 51 ANNUITY PAYMENT ILLUSTRATION WITH CANCELLATION (50% VARIABLE/50% FIXED) SINGLE PREMIUM PAYMENT: $100,000 SEX: FEMALE AGE: 65 PAYOUT OPTION SELECTED: LIFE ANNUITY WITH 10 YEARS GUARANTEED FREQUENCY OF INCOME PAY: MONTHLY Fixed monthly Income Payment based on current rates, if 50% fixed for annuity option selected: $323.10 Variable monthly Income Payment based on current rates, if 50% variable for annuity option selected: $305.94 Illustrative amounts below assume 50% of the single premium is allocated to a variable annuity option. Assumed investment return at which monthly variable payments remain constant: 5% Monthly annuity payments will vary with investment performance, but will never be less than $323.10. The monthly guaranteed payment of $323.10 is being provided by the $50,000 applied under the fixed annuity option.
MONTHLY PAYMENTS WITH AN ASSUMED RATE OF: ------------------------------------------------------------------------------ PAYMENT CALENDAR ATTAINED GROSS RETURN 0.00% 5.78% 6.00% 8.00% 10.00% YEAR YEAR YEAR NET RETURN -0.78% 5.00% 5.22% 7.22% 9.22% ------- -------- -------- ------------ ------- ------- ------- ------- ------- 1 2008 65 $629.03 $629.03 $629.03 $629.03 $629.03 2 2009 66 $612.18 $629.03 $629.66 $635.49 $641.32 3 2010 67 $596.26 $629.03 $630.29 $642.08 $654.10 4 2011 68 $581.21 $629.03 $630.93 $648.82 $667.39 5 2012 69 $567.00 $629.03 $631.56 $655.70 $681.22 10 2017 74 $506.83 $629.03 $634.76 $692.32 $759.14 15 2022 79 $461.51 $629.03 $637.99 $732.98 $854.02 20 2027 84 $427.36 $629.03 $641.26 $778.11 $969.54
THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE ONLY AND ARE NOT A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE FUNDS SELECTED. THE AMOUNT OF THE ANNUITY PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FROM YEAR TO YEAR. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY ANNUITY PAYMENTS (BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. NOTES: Annuity payments are made during the Annuitant's lifetime. Benefits vary depending on the annuity option selected. The hypothetical performance above illustrates a life annuity with 10 years of payments guaranteed. If the Annuitant dies before payments have been made for the guaranteed period, payments will continue to be paid to the beneficiary for the remainder of the period. The cumulative amount of annuity payments received depends on how long the Annuitant lives after the guaranteed period The illustrated net assumed rates of return reflect the deduction of average fund expenses and the mortality and expense risk charge from the gross rates of return. 52 TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION GENERAL INFORMATION 3 AIG Life 3 Variable Account I 3 National Union Fire Insurance Company of Pittsburgh, Pa. 3 SERVICES 4 DISTRIBUTION OF THE CONTRACTS 4 PERFORMANCE INFORMATION 5 Performance Data 5 Average Annual Total Return Calculations 6 Fund Performance Calculations 7 Vanguard VIF Money Market Investment Option Yield and Effective Yield Calculations 8 CONTRACT PROVISIONS 9 Variable Income Payments 9 Annuity Unit Value 9 Net Investment Factor 10 Misstatement of Age or Gender 10 Evidence of Survival 11 ADDITIONAL INFORMATION ABOUT THE CONTRACTS 11 Gender neutral policies 11 Our General Account 11 MATERIAL CONFLICTS 11 FINANCIAL STATEMENTS 12 Separate Account Financial Statements 12 AIG Life Financial Statements 12 National Union Financial Statements 12 Incorporation of AIG Financial Information 13 INDEX TO FINANCIAL STATEMENTS 13 53 Issued by AIG LIFE INSURANCE COMPANY, Form Number 11GVIA1000 Distributed by AMERICAN GENERAL EQUITY SERVICES CORPORATION, Member FINRA, and subsidiary of American International Group, Inc. CONTACT INFORMATION For additional information about the Group Immediate Variable Annuity Contracts and the Variable Account, you may request a copy of the Statement of Additional Information (the "SAI"), dated April 30, 2008. We have filed the SAI with the SEC and have incorporated it by reference into this prospectus. You may obtain a free copy of the SAI and the Contract or Fund prospectuses if you write us at Vanguard Annuity and Insurance Services, P.O. Box 1105, Valley Forge, PA 19482-1105 or call us at 1-800-522-5555. You can also contact AIG Life Insurance Company, Attention: Group Annuity Administration Department, 600 King Street (DPEN), Wilmington DE 19801, telephone 1-877-299-1724. You may also obtain the SAI from an insurance representative through which the Contracts may be purchased. Information about the Variable Account, including the SAI, can also be reviewed and copied at the SEC's Office of Investor Education and Advocacy in Washington, D.C. Inquiries on the operations of the Office of Investor Education and Advocacy may be made by calling the SEC at 1-202-942-8090. Reports and other information about the Variable Account are available on the SEC's Internet site at HTTP://WWW.SEC.GOV and copies of this information may be obtained, upon payment of a duplicating fee, by writing the Office of Investor Education and Advocacy of the SEC, 100 F Street NE, Washington, D.C. 20549. The Vanguard Group, Vanguard, and the ship logo are trademarks of The Vanguard Group, Inc. Standard & Poor's 500 is a trademark of The McGraw-Hill Companies, Inc., and has been licensed for use by Vanguard Variable Insurance Fund and The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the portfolios. The funds or securities referred to herein that are offered by The Vanguard Group and track an MSCI Index are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group. All other marks are the exclusive property of their respective owners. Not available in the state of New York. The underwriting risks, financial obligations and support functions associated with the products are the responsibility of the issuing insurance company. The issuing insurance company is responsible for its own financial condition and contractual obligations. AIG Life Insurance Company does not solicit business in the state of New York. Contracts not available in all states. 54 [LOGO OF VANGUARD] AIG Life Insurance Company PAIGM 042008 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I GROUP IMMEDIATE VARIABLE ANNUITY CONTRACT ISSUED BY AIG LIFE INSURANCE COMPANY GROUP ANNUITY ADMINISTRATION DEPARTMENT 600 KING STREET (DPEN) WILMINGTON, DE 19801 TELEPHONE: 1-877-299-1724 STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 2008 This Statement of Additional Information ("SAI") is not a prospectus. It should be read in conjunction with the prospectus for AIG Life Insurance Company Variable Account I (the "Separate Account" or "Variable Account I") dated April 30, 2008, describing the group immediate variable annuity contract (the "Contract" or "Contracts"). The description of the Contract or Contracts in the related prospectus is fully applicable to your certificate and the use of the word "Contract" or "Contracts" in this SAI includes such certificate. The prospectus sets forth information that a prospective investor should know before investing. For a copy of the prospectus, and any prospectus supplements, contact AIG Life Insurance Company ("AIG Life") at the address or telephone number given above. Each term used in this SAI that is defined in the related prospectus has the same meaning as the prospectus' definition. TABLE OF CONTENTS GENERAL INFORMATION........................................................ 3 AIG Life................................................................ 3 Variable Account I...................................................... 3 National Union Fire Insurance Company of Pittsburgh, Pa................. 3 SERVICES................................................................... 4 DISTRIBUTION OF THE CONTRACTS.............................................. 4 PERFORMANCE INFORMATION.................................................... 5 Performance Data........................................................ 5 Average Annual Total Return Calculations............................ 6 Fund Performance Calculations....................................... 7 Vanguard VIF Money Market Portfolio Investment Option Yield and Effective Yield Calculations...................................... 8 CONTRACT PROVISIONS........................................................ 9 Variable Income Payments................................................ 9 Annuity Unit Value...................................................... 9 Net Investment Factor................................................... 10 Misstatement of Age or Gender........................................... 10 Evidence of Survival.................................................... 11 ADDITIONAL INFORMATION ABOUT THE CONTRACTS................................. 11 Gender neutral policies................................................. 11 Our General Account..................................................... 11 MATERIAL CONFLICTS......................................................... 11 FINANCIAL STATEMENTS....................................................... 12 Separate Account Financial Statements................................... 12 AIG Life Financial Statements........................................... 12 National Union Financial Statements..................................... 12 Incorporation of AIG Financial Information.............................. 13 INDEX TO FINANCIAL STATEMENTS.............................................. 13 2 GENERAL INFORMATION AIG LIFE We are AIG Life Insurance Company ("AIG Life"). AIG Life is a stock life insurance company initially organized under the laws of Pennsylvania and reorganized under the laws of Delaware. We were incorporated in 1962. AIG Life is an indirect wholly-owned subsidiary of American International Group, Inc. ("AIG"). AIG, a Delaware corporation, is a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services and asset management in the United States and internationally. AIG American General is a marketing name of AIG Life and its affiliates. AIG Life is a member of the Insurance Marketplace Standards Association ("IMSA"). IMSA is a voluntary membership organization created by the life insurance industry to promote ethical market conduct for life insurance and annuity products. AIG Life's membership in IMSA applies only to AIG Life and not its products. VARIABLE ACCOUNT I We hold the Fund shares in the subaccounts of Variable Account I in which any of your single premium payment is invested. Variable Account I is registered as a unit investment trust with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940. We created the Separate Account on June 5, 1986. For record keeping and financial reporting purposes, Variable Account I is divided into 119 separate subaccounts, 24 of which are available under the Contracts offered by the prospectus as variable investment options. Two of these 24 subaccounts are not available to all Contract owners. All of these 24 subaccounts, and the remaining 95 subaccounts, are offered under other AIG Life contracts. We hold the Fund shares in which we invest your single premium payment for an investment option in the subaccount that corresponds to that investment option. The assets in Variable Account I are our property. The assets in the Separate Account may not be used to pay any liabilities of AIG Life other than those arising from the Contracts. AIG Life is obligated to pay all amounts under the Contracts due the Contract Owners. We act as custodian for the Separate Account's assets. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. All references in this SAI to National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union") apply only to Contracts with a date of issue of December 29, 2006 or earlier. National Union is a stock property-casualty insurance company incorporated under the laws of the Commonwealth of Pennsylvania on February 14, 1901. National Union's principal executive office is located at 70 Pine Street, New York, New York 10270. National Union is licensed in all 50 states of the United States and the District of Columbia, as well as certain 3 foreign jurisdictions, and engages in a broad range of insurance and reinsurance activities. National Union is an indirect wholly-owned subsidiary of AIG and an affiliate of AIG Life. SERVICES AIG Life and AIG are parties to a service and expense agreement. Under the service and expense agreement, AIG provides services to AIG Life and certain other life insurance companies under the AIG holding company system at cost. Those services include data processing systems, customer services, product development, actuarial, internal auditing, accounting and legal services. During 2007, 2006 and 2005, AIG Life paid AIG for these services $609,011, $766,851 and $831,348, respectively. In 2003, American General Life Companies, LLC ("AGLC") started paying for almost all of AIG Life's expenses and allocating these charges back to AIG Life. Previously, most of these expenses, such as payroll expenses, were paid by AIG Life directly. AIG Life, AGLC and AIG are parties to a services agreement. AIG Life and AGLC are both wholly-owned subsidiaries of AIG and therefore affiliates of one another. AGLC is a Delaware limited liability company established on August 30, 2002. Prior to that date, AGLC was a Delaware business trust. Its address is 2727-A Allen Parkway, Houston, Texas 77019-2191. Under the services agreement, AGLC provides shared services to AIG Life and certain other life insurance companies under the AIG holding company system at cost. Those services include data processing systems, customer services, product development, actuarial, internal auditing, accounting and legal services. During 2007, 2006 and 2005, AIG Life paid AGLC for these services $44,931,348, $40,362,369 and $30,831,012, respectively. In 2003, AIG Life entered into a services agreement with The Vanguard Group, Inc. ("Vanguard"), a Pennsylvania corporation. Vanguard is an affiliate of the Vanguard Variable Insurance Fund and the Vanguard Public Mutual Funds. Under the services agreement, Vanguard provides administrative services to AIG Life. Those services include, but are not limited to, processing of applications, processing of client service requests, and printing and delivery of contract prospectuses and other marketing materials. During 2007, 2006 and 2005, AIG Life paid Vanguard for these services $1,893,740.89, $1,717,694.51 and $912,215.09, respectively. These payments to Vanguard do not result in any additional charges under the Contracts that are not described in the prospectus. We have not designed the Contracts for professional market timing organizations or other entities or individuals using programmed and frequent transfers involving large amounts. We currently have no contractual agreements or any other formal or informal arrangements with any entity or individual permitting such transfers and receive no compensation for any such contract or arrangement. DISTRIBUTION OF THE CONTRACTS American General Equity Services Corporation ("AGESC"), 2727-A Allen Parkway, 2-G7, Houston, Texas 77019, a Delaware corporation and an affiliate of AIG Life, is the principal underwriter and distributor of the Contracts for the Separate Account under a 4 Distribution Agreement between AGESC and AIG Life. AGESC also acts as principal underwriter for AIG Life's other separate accounts and for the separate accounts of certain AIG Life affiliates. AGESC is a registered broker-dealer under the Securities Exchange Act of 1934, as amended and a member of the Financial Industry Regulatory Authority ("FINRA"). AGESC, as the principal underwriter and distributor, is not paid any fees on the Contracts. The Contracts are offered on a continuous basis. AIG Life will not pay any commission to entities that sell the Contracts. Payments may be made for services not directly related to the sale of the Contract, including the establishment of administrative arrangements, recruitment and training of personnel, the distribution and production of promotional literature, and similar services. PERFORMANCE INFORMATION From time to time, we may quote performance information for the subaccounts of Variable Account I in advertisements, sales literature, or reports to Contract Owners or prospective investors. We may quote performance information in any manner permitted under applicable law. We also may present the yield or total return of the subaccount based on a hypothetical investment in a Contract. The performance information shown may cover various periods of time, including periods beginning with the commencement of the operations of the subaccount or the Fund in which it invests. The performance information shown may reflect the deduction of one or more charges. We also may present the yield or total return of the Fund in which a subaccount invests. We may compare a subaccount's performance to that of other variable annuity separate accounts or investment products, as well as to generally accepted indices or analyses, such as those provided by research firms and rating services. In addition, we may use performance ratings that may be reported periodically in financial publications, such as Money Magazine, Forbes, Business Week, Fortune, Financial Planning and The Wall Street Journal. We also may advertise ratings of AIG Life's financial strength or claims-paying ability as determined by firms that analyze and rate insurance companies and by nationally recognized statistical rating organizations. Performance information for any subaccount reflects the performance of a hypothetical contract and is not illustrative of how actual investment performance would affect the benefits under your Contract. You should not consider such performance information to be an estimate or guarantee of future performance. PERFORMANCE DATA The following tables show the past performance data for the Contracts. The first table shows the average annual total return calculations of the variable investment options. The first 5 table includes the applicable Separate Account or Contract charges: mortality and expense risk charge, premium tax charge and withdrawal charge at the end of the period. The second table shows the average annual total returns of the Funds underlying the variable investment options. The second table does not reflect any charges of the Separate Account or of the Contracts. If these charges were reflected, then the Fund average annual total return calculations would be lower than what is currently shown. Average Annual Total Return Calculations. Each variable investment option may advertise its average annual total return. We calculate each variable investment option's average annual total return quotation under the following standard method: . We take a hypothetical $10,000 investment in each variable investment option on the first day of the period at the maximum offering price ("Initial Investment"). . We calculate the ending redeemable value ("Redeemable Value") of that investment at the end of the 1, 3, 5 and 10 year period. If the Average Annual Total Return for a variable investment option is not available for a stated period, we may show the Average Annual Total Return since the variable investment option inception. The Redeemable Value reflects the effect of the mortality and expense risk charge, premium tax charge and the withdrawal charge. . We divide the Redeemable Value by the Initial Investment. . We take this quotient to the Nth root (N representing the number of years in the period), subtract 1 from the result, and express the result as a percentage. Average annual total return quotations for the variable investment options for the period ended December 31, 2007 are shown in the table below. VARIABLE INVESTMENT OPTION AVERAGE ANNUAL TOTAL RETURNS WITH DEDUCTION OF ANY APPLICABLE SEPARATE ACCOUNT OR CONTRACT CHARGES (THROUGH DECEMBER 31, 2007)
SINCE INVESTMENT INVESTMENT OPTION OPTION INCEPTION INVESTMENT OPTION* 1 YEAR/1/ 3 YEARS/1/ 5 YEARS/2/ 10 YEARS/2/ INCEPTION/1/ DATE ------------------ -------- --------- --------- ---------- ----------- ---------- Vanguard Dividend Growth Fund 2.65% 8.16% n/a n/a 10.75% 9/22/2003 Vanguard GNMA Fund 2.67% 3.05% n/a n/a 3.29% 9/22/2003 Vanguard Health Care Fund 0.18% 8.22% n/a n/a 10.10% 9/22/2003 Vanguard Inflation-Protected Securities Fund 7.06% 2.93% n/a n/a 4.69% 9/22/2003 Vanguard LifeStrategy Conservative Growth Fund 2.64% 5.45% n/a n/a 6.82% 9/22/2003 Vanguard LifeStrategy Growth Fund 3.09% 8.16% n/a n/a 10.71% 9/22/2003 Vanguard LifeStrategy Income Fund 2.37% 4.09% n/a n/a 4.91% 9/22/2003 Vanguard LifeStrategy Moderate Growth Fund 3.00% 6.84% n/a n/a 8.85% 9/22/2003 Vanguard Total International Stock Index Fund 10.84% 17.07% n/a n/a 20.49% 9/22/2003 Vanguard VIF Balanced Portfolio 3.96% 8.08% n/a n/a 10.17% 9/22/2003 Vanguard VIF Capital Growth Portfolio 7.91% 8.65% n/a n/a 11.96% 9/22/2003 Vanguard VIF Diversified Value Portfolio -0.29% 8.05% n/a n/a 13.26% 9/22/2003 Vanguard VIF Equity Income Portfolio 0.29% 7.62% n/a n/a 11.19% 9/22/2003
6 VARIABLE INVESTMENT OPTION AVERAGE ANNUAL TOTAL RETURNS WITH DEDUCTION OF ANY APPLICABLE SEPARATE ACCOUNT OR CONTRACT CHARGES (THROUGH DECEMBER 31, 2007)
SINCE INVESTMENT INVESTMENT OPTION OPTION INCEPTION INVESTMENT OPTION* 1 YEAR/1/ 3 YEARS/1/ 5 YEARS/2/ 10 YEARS/2/ INCEPTION/1/ DATE ------------------ -------- --------- --------- ---------- ----------- ---------- Vanguard VIF Equity Index Portfolio 1.10% 6.62% n/a n/a 9.20% 9/22/2003 Vanguard VIF Growth Portfolio 5.74% 5.91% n/a n/a 7.36% 9/22/2003 Vanguard VIF High Yield Bond Portfolio -2.19% 2.46% n/a n/a 4.69% 9/22/2003 Vanguard VIF International Portfolio 12.65% 17.99% n/a n/a 20.15% 9/22/2003 Vanguard VIF Mid-Cap Index Portfolio 1.83% 9.29% n/a n/a 13.65% 9/22/2003 Vanguard VIF Money Market Portfolio 0.98% 2.66% n/a n/a 2.05% 9/22/2003 Vanguard VIF REIT Index Portfolio -20.00% 6.08% n/a n/a 13.37% 9/22/2003 Vanguard VIF Short-Term Investment-Grade Portfolio 1.72% 2.56% n/a n/a 2.30% 9/22/2003 Vanguard VIF Small Company Growth Portfolio -0.45% 4.85% n/a n/a 8.31% 9/22/2003 Vanguard VIF Total Bond Market Index Portfolio 2.64% 2.72% n/a n/a 3.09% 9/22/2003 Vanguard VIF Total Stock Market Index Portfolio 0.89% 6.94% n/a n/a 9.86% 9/22/2003
-------- * The performance figures in the table reflect the investment performance for the Division for the stated periods and should not be used to infer that future performance will be the same. /1./ The Contracts are sold in jurisdictions where the highest premium tax is 3.5%. The effect of this charge is included in the table. We currently charge Contracts issued in Texas a .026% maintenance fee. No separate "Texas-only" table is shown. /2./ "N/A" indicates data is not available for the stated period. None of the investment options has an inception date earlier than September 22, 2003. Fund Performance Calculations. Each variable investment option may advertise the performance for the corresponding Fund in which it invests, based on the calculations described above, where all or a portion of the actual historical performance of the corresponding Fund in which the variable investment option invests may pre-date the effective date of the variable investment option being offered in the Contract. The table below provides the actual historical performance of the corresponding Fund in which each of these variable investment options invest. Unlike the previous table of variable investment option average annual total return calculations, the information in the table below does not reflect the mortality and expense risk charge or any other deductions of the Separate Account or of the Contracts. If these charges had been reflected, then the Fund average annual total return quotations would have been lower than what is currently shown. FUND AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION OF ANY APPLICABLE SEPARATE ACCOUNT OR CONTRACT CHARGES (THROUGH DECEMBER 31, 2007)
SINCE FUND FUND INCEPTION FUND 1 YEAR 3 YEARS 5 YEARS/1/ 10 YEARS/1/ INCEPTION/2/ DATE ---- ------ ------- --------- ---------- ----------- --------- Vanguard Dividend Growth Fund 7.00 10.07 13.85 5.22 * 5/15/1992 Vanguard GNMA Fund 7.01 4.88 4.25 5.76 * 6/27/1980 Vanguard Health Care Fund 4.42% 10.14% 13.12% 13.98% * 5/23/1984
7 FUND AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION OF ANY APPLICABLE SEPARATE ACCOUNT OR CONTRACT CHARGES (THROUGH DECEMBER 31, 2007)
SINCE FUND FUND INCEPTION FUND 1 YEAR 3 YEARS 5 YEARS/1/ 10 YEARS/1/ INCEPTION/2/ DATE ---- ------ ------- --------- ---------- ----------- --------- Vanguard Inflation-Protected Securities Fund 11.59% 4.76% 6.10% n/a 8.06% 6/29/2000 Vanguard LifeStrategy Conservative Growth Fund 6.99% 7.33% 9.26% 6.61% * 9/30/1994 Vanguard LifeStrategy Growth Fund 7.46% 10.08% 14.05% 7.14% * 9/30/1994 Vanguard LifeStrategy Income Fund 6.70% 5.94% 6.90% 6.22% * 9/30/1994 Vanguard LifeStrategy Moderate Growth Fund 7.36% 8.74% 11.71% 7.01% * 9/30/1994 Vanguard Total International Stock Index Fund 15.52% 19.13% 23.45% 9.44% * 4/29/1996 Vanguard VIF Balanced Portfolio 8.36% 9.99% 12.27% 8.41% * 5/23/1991 Vanguard VIF Capital Growth Portfolio 12.48% 10.58% 16.89% n/a 15.18% 12/3/2002 Vanguard VIF Diversified Value Portfolio 3.93% 9.96% 16.00% n/a 8.03% 2/8/1999 Vanguard VIF Equity Income Portfolio 4.53% 9.53% 13.13% 7.01% * 6/7/1993 Vanguard VIF Equity Index Portfolio 5.38% 8.51% 12.71% 5.85% * 4/29/1991 Vanguard VIF Growth Portfolio 10.22% 7.79% 11.12% 0.20% * 6/7/1993 Vanguard VIF High Yield Bond Portfolio 1.95% 4.29% 7.54% 4.69% * 6/3/1996 Vanguard VIF International Portfolio 17.41% 20.07% 22.76% 10.07% * 6/3/1994 Vanguard VIF Mid-Cap Index Portfolio 6.14% 11.23% 17.29% n/a 12.18% 2/9/1999 Vanguard VIF Money Market Portfolio 5.25% 4.48% 3.13% 3.88% * 5/2/1991 Vanguard VIF REIT Index Portfolio -16.60% 7.96% 17.35% n/a 13.93% 2/9/1999 Vanguard VIF Short-Term Investment-Grade Portfolio 5.93% 4.38% 3.75% n/a 4.84% 2/8/1999 Vanguard VIF Small Company Growth Portfolio 3.77% 6.71% 14.60% 12.33% * 6/3/1996 Vanguard VIF Total Bond Market Index Portfolio 6.89% 4.55% 4.37% 5.71% * 4/29/1991 Vanguard VIF Total Stock Market Index Portfolio 5.16% 8.84% n/a n/a 13.25% 1/8/2003
-------- /1./ "N/A" indicates data is not available for the stated period. /2./ "*" indicates SEC rules that require us to show return information for no more than 10 years. Vanguard VIF Money Market Investment Portfolio Option Yield and Effective Yield Calculations. We calculate the Vanguard VIF Money Market Portfolio Investment Option's yield by a standard method that the SEC prescribes. Under that method, we base the current yield quotation on a seven day period and calculate that yield as follows: . We take the net change in the value of your single premium payment during the period. . We divide that net change by the value of your single premium payment at the beginning of the period to obtain the base period return. . We multiply the base period return by the fraction 365/7 to obtain the current yield figure. . We carry the current yield figure to the nearest one-hundredth of one percent. We do not include realized capital gains or losses and unrealized appreciation or depreciation of the investment option's division in the calculation. The Vanguard VIF Money Market Portfolio Investment Option's historical yield for the seven day period ended December 31, 2007 was 4.19%. 8 We determine the Vanguard VIF Money Market Portfolio Investment Option's effective yield by taking the base period return (computed as described above) and calculating the effect of assumed compounding. The formula for the effective yield is: (base period return +1) raised to the power of (365/7) - 1. The Vanguard VIF Money Market Portfolio Investment Option's historical effective yield for the seven day period ended December 31, 2007 was 4.28%. Yield and effective yield do not reflect the deduction of any charges that we may impose when you redeem Annuity Units. The yield and effective yield calculations above do not reflect any Contract or Contract-related charges and deductions of the Separate Account. If these charges had been reflected, then the yield and effective yield calculations would have been lower than what is currently shown. CONTRACT PROVISIONS VARIABLE INCOME PAYMENTS A variable annuity is an annuity whose payments are not predetermined as to dollar amount and will vary in amount with the net investment results of the applicable subaccounts. When you pay your single premium, we calculate the number of Annuity Units associated with each Variable Annuity Income payment determined by our currently used rate factor and the Annuity Unit Values. ANNUITY UNIT VALUE The value of an Annuity Unit for each subaccount was arbitrarily set initially at $100 for the Contracts. This was done when the first underlying Fund shares were purchased for the Contracts. The Annuity Unit Value at the end of any subsequent Valuation Period is determined by multiplying the subaccount's Annuity Unit Value for the immediately preceding Valuation Period by the quotient of (a) and (b) where: (a) is the net investment factor (described below) for the Valuation Period for which the Annuity Unit Value is being determined; and (b) is the Assumed Investment Return for such Valuation Period. The Assumed Investment Return adjusts for the rate of return assumed in determining the first variable Income Payment. Such factor for any Valuation Period shall be the accumulated value, at the end of such period, of $1.00 deposited at the beginning of such period at the Assumed Investment Return rate. 9 NET INVESTMENT FACTOR The net investment factor is used to determine how investment results of a Fund and Contract fees and charges affect the Annuity Unit value of the subaccount from one Valuation Period to the next. The net investment factor for each subaccount for any Valuation Period is determined by dividing (a) by (b) and subtracting (c) from the result, where: (a) is equal to: (i) the net asset value per share of the underlying Fund held in the subaccount determined at the end of that Valuation Period, plus (ii) the per share amount of any dividend or capital gain distribution made by the underlying Fund held in the subaccount if the "ex-dividend" date occurs during that same Valuation Period, plus or minus (iii) a per share charge or credit, which we determine, for changes in tax reserves resulting from investment operations of the subaccount. (b) is equal to: (i) the net asset value per share of the underlying Fund held in the subaccount determined as of the end of the prior Valuation Period, plus or minus (ii) the per share charge or credit for any change in tax reserves for the prior Valuation Period. (c) is equal to the mortality and expense risk charge rate for the Valuation Period. The net investment factor may be greater or less than the Assumed Investment Return. Therefore, the Annuity Unit value may increase or decrease from Valuation Period to Valuation Period. MISSTATEMENT OF AGE OR GENDER We will require proof of the age and gender of the Annuitant before making any annuity payment provided for by the Contract. If the age or gender of the Annuitant has been misstated, we will compute the amount payable based on the correct age and gender. If Income Payments have begun, any underpayment that may have been made will be paid in full with the next Income Payments, including interest at the annual rate of 3%. Any overpayments, including interest at the annual rate of 3% will be deducted from future annuity payments until we are repaid in full. 10 EVIDENCE OF SURVIVAL If a Contract provision requires that a person be alive, we may require due proof that the person is alive before we act under that provision. ADDITIONAL INFORMATION ABOUT THE CONTRACTS Gender neutral policies. Congress and the legislatures of various states have from time to time considered legislation that would require insurance rates to be the same for males and females of the same age. In addition, employers and employee organizations should consider, in consultation with counsel, the impact of Title VII of the Civil Rights Act of 1964 on the purchase of life insurance policies in connection with an employment-related insurance or benefit plan. In a 1983 decision, the United States Supreme Court held that, under Title VII, optional annuity benefits under a deferred compensation plan could not vary on the basis of gender. In general, we do not offer Contracts for sale in situations which, under current law, require gender-neutral premiums or benefits. However, we reserve the right to offer the Contracts on both a gender-neutral and a sex-distinct basis subject to state and other regulatory approval. Our General Account. Our general account assets are all of our assets that we do not hold in legally segregated separate accounts. Our general account supports our obligations to you under your Contract's Fixed Account. Because of applicable exemptions, no interest in this option has been registered under the Securities Act of 1933, as amended. Neither our general account nor our Fixed Account is an investment company under the Investment Company Act of 1940. We have been advised that the staff of the SEC have not reviewed the disclosures that are included in the prospectus for your information about our general account or our Fixed Account. Those disclosures, however, may be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. MATERIAL CONFLICTS We are required to track events to identify any material conflicts from using underlying Funds for both variable life and variable annuity separate accounts. The boards of the Funds, AIG Life, and other insurance companies participating in the Funds have this same duty. There may be a material conflict if: . state insurance law or federal income tax law changes; . investment management of an underlying Fund changes; or . voting instructions given by owners of variable life insurance policies and variable annuity contracts differ. 11 The investment portfolios may sell shares to certain qualified pension and retirement plans qualifying under Code Section 401. These include cash or deferred arrangements under Code Section 401(k). Therefore, there is a possibility that a material conflict may arise between the interests of owners in general, or certain classes of owners, and these retirement plans or participants in these retirement plans. If there is a material conflict, we have the duty to determine appropriate action, including removing the underlying Funds involved from investment by our variable investment options. We may take other action to protect Contract Owners. This could mean delays or interruptions of the variable operations. When state insurance regulatory authorities require us, we may ignore instructions relating to changes in an underlying Fund's adviser or its investment in the Contracts. If we do ignore voting instructions, we give you a summary of our actions in the next semi-annual report to Contract Owners. FINANCIAL STATEMENTS PricewaterhouseCoopers LLP ("PwC"), located at 1201 Louisiana Street, Suite 2900, Houston, Texas 77002, is the independent registered public accounting firm for AIG Life. AIG uses PwC as its corporate-wide auditing firm. SEPARATE ACCOUNT FINANCIAL STATEMENTS The statement of net assets as of December 31, 2007 and the related statement of operations for the year then ended and statements of changes in net assets for the two years then ended December 31, 2007 of the Separate Account, included in this Statement of Additional Information, have been so included in reliance on the report of PwC, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. AIG LIFE FINANCIAL STATEMENTS The balance sheets of AIG Life at December 31, 2007 and 2006 (restated) and the related statements of income, shareholders' equity, cash flows and comprehensive income for each of the three years in the period ended December 31, 2007, included in this Statement of Additional Information, have been so included in reliance on the report of PwC, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. NATIONAL UNION FINANCIAL STATEMENTS The statutory statements of admitted assets, liabilities, capital and surplus of National Union as of December 31, 2007 and 2006, and the related statutory statements of income and changes in capital and surplus and of cash flow for each of the three years in the period ended December 31, 2007, included in this Statement of Additional Information, have been so included in reliance on the report of PwC, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. 12 INCORPORATION OF AIG FINANCIAL INFORMATION We incorporate by reference the consolidated financial statements (including notes and financial statement schedules thereto) included in AIG's Annual Report on Form 10-K for the year ended December 31, 2007, in reliance on the report (which contains an adverse opinion on the effectiveness of internal control over financial reporting) of PwC, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. AIG does not underwrite any insurance contract referenced herein. INDEX TO FINANCIAL STATEMENTS You should consider the financial statements of AIG Life that we include in this SAI as bearing on the ability of AIG Life to meet its obligations under the Contracts. You should only consider the financial statements of National Union that we include in this SAI as bearing on the ability of National Union, as guarantor under a guarantee agreement, to meet its obligations under Contracts with a date of issue of December 29, 2006 or earlier. I. Variable Account I Financial Statements Page --------- Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.................................................... VA I - 1 Statement of Net Assets as of December 31, 2007...................... VA I - 2 Statement of Operations for the year ended December 31, 2007......... VA I - 4 Statement of Changes in Net Assets for the years ended December 31, 2007 and 2006...................................................... VA I - 6 Notes to Financial Statements........................................ VA I - 30 II. AIG Life Financial Statements Page --------- Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.................................................... 2 Balance Sheets as of December 31, 2007 and 2006 (restated)........... 3 Statements of Income for the years ended December 31, 2007, 2006 (restated) and 2005 (restated)..................................... 5 Statements of Shareholder's Equity for the years ended December 31, 2007, 2006 (restated) and 2005 (restated).......................... 6 Statements of Cash Flows for the years ended December 31, 2007, 2006 (restated) and 2005 (restated)..................................... 7 Statements of Comprehensive Income for the years ended December 31, 2007, 2006 (restated) and 2005 (restated).......................... 9 Notes to Financial Statements........................................ 10 13 III. National Union Financial Statements Page ---- Report of PricewaterhouseCoopers LLP, Independent Auditors................ 2 Statements of Admitted Assets (Statutory Basis) as of December 31, 2007 and 2006................................................................ 3 Statements of Liabilities, Capital and Surplus (Statutory Basis) as of December 31, 2007 and 2006.............................................. 4 Statements of Income and Changes in Capital and Surplus (Statutory Basis) for the years ended December 31, 2007, 2006 and 2005.................... 5 Statements of Cash Flow (Statutory Basis) for the years ended December 31, 2007, 2006 and 2005........................................ 6 Notes to Statutory Basis Financial Statements............................. 7 14 [LOGO OF AIG(R)AMERICAN GENERAL] Variable Account I Variable Annuity 2007 Annual Report December 31, 2007 AIG Life Insurance Company A subsidiary of American International Group, Inc. [LOGO] PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP 1201 Louisiana Suite 2900 Houston, TX 77002-5678 Telephone (713) 356 4000 Facsimile (713) 356 4717 Report of Independent Registered Public Accounting Firm To the Board of Directors of AIG Life Insurance Company and Contract Owners of AIG Life Insurance Company Variable Account I In our opinion, the accompanying statement of net assets, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of each of the Sub-accounts of AIG Life Insurance Company Variable Account I (the "Separate Account") listed in Note A at December 31, 2007, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Separate Account's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2007 by correspondence with the investment companies, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP April 4, 2008 VA I-1 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF NET ASSETS December 31, 2007
Net assets Investment Due from (to) AIG Contract owners Contract owners attributable to securities - at Life Insurance - annuity - accumulation contract owner Sub-accounts fair value Company Net Assets reserves reserves reserves ---------------------------------- --------------- ----------------- ------------ --------------- --------------- --------------- AIM V.I. Capital Appreciation Fund - Series I $ 660,935 $ -- $ 660,935 $ 18,281 $ 642,654 $ 660,935 AIM V.I. International Growth Fund - Series I 881,109 -- 881,109 -- 881,109 881,109 AllianceBernstein Americas Government Income Portfolio - Class A 28,261,406 -- 28,261,406 35,856 28,225,550 28,261,406 AllianceBernstein Balanced Shares Portfolio - Class A 121,018,084 (1) 121,018,083 86,483 120,931,600 121,018,083 AllianceBernstein Global Bond Portfolio - Class A 15,070,695 -- 15,070,695 12,181 15,058,514 15,070,695 AllianceBernstein Global Dollar Government Portfolio - Class A 17,708,566 -- 17,708,566 9,328 17,699,238 17,708,566 AllianceBernstein Global Technology Portfolio - Class A 40,568,116 -- 40,568,116 103,231 40,464,885 40,568,116 AllianceBernstein Global Technology Portfolio - Class B 20,227,318 (1) 20,227,317 14,009 20,213,308 20,227,317 AllianceBernstein Growth and Income Portfolio - Class A 137,389,038 (1) 137,389,037 340,995 137,048,042 137,389,037 AllianceBernstein Growth and Income Portfolio - Class B 159,139,620 1 159,139,621 199,068 158,940,553 159,139,621 AllianceBernstein Growth Portfolio - Class A 52,027,341 -- 52,027,341 38,041 51,989,300 52,027,341 AllianceBernstein Growth Portfolio - Class B 40,947,070 -- 40,947,070 1,214 40,945,856 40,947,070 AllianceBernstein High Yield Portfolio - Class A 21,664,144 -- 21,664,144 7,776 21,656,368 21,664,144 AllianceBernstein International Growth Portfolio - Class A 103,864,837 -- 103,864,837 163,986 103,700,851 103,864,837 AllianceBernstein International Research Growth Portfolio - Class A -- -- -- -- -- -- AllianceBernstein International Value Portfolio - Class A 51,596,743 1 51,596,744 10,566 51,586,178 51,596,744 AllianceBernstein Large Cap Growth Portfolio - Class A 91,499,883 (1) 91,499,882 344,527 91,155,355 91,499,882 AllianceBernstein Large Cap Growth Portfolio - Class B 61,870,746 1 61,870,747 142,156 61,728,591 61,870,747 AllianceBernstein Money Market Portfolio - Class A 14,808,846 44,983 14,853,829 2,160 14,851,669 14,853,829 AllianceBernstein Money Market Portfolio - Class B 14,218,286 39,952 14,258,238 19,321 14,238,917 14,258,238 AllianceBernstein Real Estate Investment Portfolio - Class A 30,577,768 1 30,577,769 165,566 30,412,203 30,577,769 AllianceBernstein Small Cap Growth Portfolio - Class A 33,771,641 1 33,771,642 76,020 33,695,622 33,771,642 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 45,928,910 1 45,928,911 172,971 45,755,940 45,928,911 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 58,431,189 -- 58,431,189 127,674 58,303,515 58,431,189 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 1,670,140 -- 1,670,140 -- 1,670,140 1,670,140 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 3,256,136 -- 3,256,136 26,310 3,229,826 3,256,136 AllianceBernstein Utility Income Portfolio - Class A 49,059,488 -- 49,059,488 15,774 49,043,714 49,059,488 AllianceBernstein Value Portfolio - Class B 59,686,694 (1) 59,686,693 278,457 59,408,236 59,686,693 BlackRock Basic Value V.I. Fund - Class I 5,107,201 -- 5,107,201 4,865 5,102,336 5,107,201 BlackRock Global Allocation V.I. Fund - Class I 1,935,800 -- 1,935,800 -- 1,935,800 1,935,800 BlackRock Global Growth V.I. Fund - Class I 698,074 -- 698,074 -- 698,074 698,074 BlackRock High Income V.I. Fund - Class I 345,911 2,544 348,455 -- 348,455 348,455 BlackRock International Value V.I. Fund - Class I 2,153,299 -- 2,153,299 -- 2,153,299 2,153,299 BlackRock Large Cap Core V.I. Fund - Class I 2,013,552 -- 2,013,552 4,884 2,008,668 2,013,552 BlackRock Large Cap Growth V.I. Fund - Class I 984,001 -- 984,001 -- 984,001 984,001 BlackRock Money Market V.I. Fund - Class I 305,422 -- 305,422 -- 305,422 305,422 BlackRock Total Return V.I. Fund - Class I 259,202 1,241 260,443 -- 260,443 260,443 BlackRock Utilities and Telecommunications V.I. Fund - Class I 621,760 -- 621,760 -- 621,760 621,760 BlackRock Value Opportunities V.I. Fund - Class I 1,618,733 -- 1,618,733 -- 1,618,733 1,618,733 Delaware VIP Balanced Series - Standard Class 637,255 -- 637,255 -- 637,255 637,255 Delaware VIP Capital Reserves Series - Standard Class 159,876 213 160,089 -- 160,089 160,089 Delaware VIP Cash Reserve Series - Standard Class 235,934 395 236,329 -- 236,329 236,329 Delaware VIP Growth Opportunities Series - Standard Class 1,043,486 -- 1,043,486 -- 1,043,486 1,043,486 Delaware VIP High Yield Series - Standard Class 461,737 (1) 461,736 -- 461,736 461,736 Delaware VIP Value Series - Standard Class 3,629,178 -- 3,629,178 15,985 3,613,193 3,629,178 Dreyfus Stock Index Fund, Inc. - Initial Shares 4,038,124 1 4,038,125 47,184 3,990,941 4,038,125 Dreyfus VIF Small Company Stock Portfolio - Initial Shares -- -- -- -- -- -- Fidelity VIP Asset Manager Portfolio - Initial Class 2,995,184 -- 2,995,184 19,219 2,975,965 2,995,184 Fidelity VIP Contrafund Portfolio - Initial Class 2,173,101 -- 2,173,101 29,584 2,143,517 2,173,101 Fidelity VIP Growth Portfolio - Initial Class 2,922,475 -- 2,922,475 27,061 2,895,414 2,922,475 Fidelity VIP High Income Portfolio - Initial Class 569,642 -- 569,642 -- 569,642 569,642
See accompanying notes. VA I-2 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF NET ASSETS - CONTINUED December 31, 2007
Net assets Investment Due from (to) AIG Contract owners Contract owners attributable to securities - at Life Insurance - annuity - accumulation contract owner Sub-accounts fair value Company Net Assets reserves reserves reserves ----------------------------------- --------------- ----------------- ----------- --------------- --------------- --------------- Fidelity VIP Investment Grade Bond Portfolio - Initial Class $ 1,365,286 $-- $ 1,365,286 $ 48,778 $ 1,316,508 $ 1,365,286 Fidelity VIP Money Market Portfolio - Initial Class 2,376,947 -- 2,376,947 34,286 2,342,661 2,376,947 Fidelity VIP Overseas Portfolio - Initial Class 193,552 (1) 193,551 -- 193,551 193,551 UBS U.S. Allocation Portfolio 11,369,073 -- 11,369,073 -- 11,369,073 11,369,073 UIF Core Plus Fixed Income Portfolio - Class I Shares -- -- -- -- -- -- UIF Equity Growth Portfolio - Class I Shares -- -- -- -- -- -- UIF Technology Portfolio - Class I Shares -- -- -- -- -- -- Van Eck Worldwide Emerging Markets Fund - Initial Class 649,649 (1) 649,648 -- 649,648 649,648 Van Eck Worldwide Hard Assets Fund - Initial Class 631,511 -- 631,511 -- 631,511 631,511 Vanguard 500 Index Fund 28,065 -- 28,065 28,065 -- 28,065 Vanguard Dividend Growth Fund 38,253 (1) 38,252 38,252 -- 38,252 Vanguard GNMA Fund 20,892 -- 20,892 20,892 -- 20,892 Vanguard Health Care Fund 58,367 (1) 58,366 58,366 -- 58,366 Vanguard Inflation-Protected Securities Fund 184,930 -- 184,930 184,930 -- 184,930 Vanguard International Growth Fund 14,025 -- 14,025 14,025 -- 14,025 Vanguard LifeStrategy Conservative Growth Fund 191,781 (1) 191,780 191,780 -- 191,780 Vanguard LifeStrategy Growth Fund 340,885 (1) 340,884 340,884 -- 340,884 Vanguard LifeStrategy Income Fund 192,615 (1) 192,614 192,614 -- 192,614 Vanguard LifeStrategy Moderate Growth Fund 1,042,983 -- 1,042,983 1,042,983 -- 1,042,983 Vanguard Prime Money Market Fund 4,271 -- 4,271 4,271 -- 4,271 Vanguard PRIMECAP Fund 3,180 -- 3,180 3,180 -- 3,180 Vanguard Small-Cap Growth Index Fund 19,622 -- 19,622 19,622 -- 19,622 Vanguard Small-Cap Value Index Fund 24,575 -- 24,575 24,575 -- 24,575 Vanguard Total Bond Market Index Fund -- -- -- -- -- -- Vanguard Total International Stock Index Fund 307,107 (1) 307,106 307,106 -- 307,106 Vanguard U.S. Growth Fund 4,582 (1) 4,581 4,581 -- 4,581 Vanguard VIF Balanced Portfolio 5,558,044 -- 5,558,044 5,558,044 -- 5,558,044 Vanguard VIF Capital Growth Portfolio 523,023 (1) 523,022 523,022 -- 523,022 Vanguard VIF Diversified Value Portfolio 771,942 -- 771,942 771,942 -- 771,942 Vanguard VIF Equity Income Portfolio 642,454 -- 642,454 642,454 -- 642,454 Vanguard VIF Equity Index Portfolio 633,812 1 633,813 633,813 -- 633,813 Vanguard VIF Growth Portfolio 102,946 -- 102,946 102,946 -- 102,946 Vanguard VIF High Yield Bond Portfolio 370,955 -- 370,955 370,955 -- 370,955 Vanguard VIF International Portfolio 2,197,232 (1) 2,197,231 2,197,231 -- 2,197,231 Vanguard VIF Mid-Cap Index Portfolio 476,574 (1) 476,573 476,573 -- 476,573 Vanguard VIF Money Market Portfolio 1,684,459 -- 1,684,459 1,684,459 -- 1,684,459 Vanguard VIF REIT Index Portfolio 330,910 (1) 330,909 330,909 -- 330,909 Vanguard VIF Short-Term Investment-Grade Portfolio 204,495 -- 204,495 204,495 -- 204,495 Vanguard VIF Small Company Growth Portfolio 233,452 -- 233,452 233,452 -- 233,452 Vanguard VIF Total Bond Market Index Portfolio 688,705 (1) 688,704 688,704 -- 688,704 Vanguard VIF Total Stock Market Index Portfolio 2,554,031 -- 2,554,031 2,554,031 -- 2,554,031 Vanguard Wellington Fund 125,818 -- 125,818 125,818 -- 125,818 Vanguard Windsor Fund 2,738 -- 2,738 2,738 -- 2,738
See accompanying notes. VA I-3 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF OPERATIONS For the Year Ended December 31, 2007
A B A+B=C D E F C+D+E+F Mortality and Net Change expense risk Capital gain in unrealized Increase Dividends and Net Net realized distributions appreciation (decrease)in net from mutual administrative investment gain (loss) on from mutual (depreciation) assets resulting Sub-accounts funds charges income (loss) investments funds of investments from operations ------------------------- ----------- -------------- ------------- -------------- ------------- -------------- ---------------- AIM V.I. Capital Appreciation Fund - Series I $ -- $ (10,274) $ (10,274) $ (41,438) $ -- $ 123,027 $ 71,315 AIM V.I. International Growth Fund - Series I 3,749 (14,858) (11,109) 241,943 -- (98,700) 132,134 AllianceBernstein Americas Government Income Portfolio - Class A 1,779,016 (409,410) 1,369,606 (266,179) 252,832 500,807 1,857,066 AllianceBernstein Balanced Shares Portfolio - Class A 3,776,896 (1,924,952) 1,851,944 4,561,138 3,128,062 (6,990,694) 2,550,450 AllianceBernstein Global Bond Portfolio - Class A 450,787 (201,434) 249,353 (407,246) -- 1,378,851 1,220,958 AllianceBernstein Global Dollar Government Portfolio - Class A 1,198,671 (277,446) 921,225 (220,247) 784,018 (919,532) 565,464 AllianceBernstein Global Technology Portfolio - Class A -- (595,328) (595,328) (9,074,198) -- 16,794,572 7,125,046 AllianceBernstein Global Technology Portfolio - Class B -- (284,124) (284,124) 1,278,711 -- 2,362,172 3,356,759 AllianceBernstein Growth and Income Portfolio - Class A 2,354,738 (2,273,219) 81,519 11,691,209 7,992,189 (13,171,824) 6,593,093 AllianceBernstein Growth and Income Portfolio - Class B 2,101,090 (2,451,201) (350,111) 5,582,594 8,642,692 (7,716,122) 6,159,053 AllianceBernstein Growth Portfolio - Class A -- (831,852) (831,852) (3,912,582) -- 11,274,254 6,529,820 AllianceBernstein Growth Portfolio - Class B -- (609,634) (609,634) 425,684 -- 4,774,031 4,590,081 AllianceBernstein High Yield Portfolio - Class A 2,020,158 (358,002) 1,662,156 (256,693) -- (1,482,431) (76,968) AllianceBernstein International Growth Portfolio - Class A 832,868 (721,663) 111,205 8,911,789 15,312,845 (19,140,137) 5,195,702 AllianceBernstein International Research Growth Portfolio - Class A 797,062 (746,132) 50,930 22,220,139 16,274,126 (26,249,282) 12,295,913 AllianceBernstein International Value Portfolio - Class A 673,474 (804,071) (130,597) 9,543,681 2,227,306 (8,992,014) 2,648,376 AllianceBernstein Large Cap Growth Portfolio - Class A -- (1,412,185) (1,412,185) (6,071,967) -- 19,123,782 11,639,630 AllianceBernstein Large Cap Growth Portfolio - Class B -- (894,539) (894,539) (283,405) -- 8,422,501 7,244,557 AllianceBernstein Money Market Portfolio - Class A 771,929 (255,278) 516,651 -- -- -- 516,651 AllianceBernstein Money Market Portfolio - Class B 584,265 (206,551) 377,714 -- -- -- 377,714 AllianceBernstein Real Estate Investment Portfolio - Class A 579,533 (590,853) (11,320) 5,516,473 6,919,851 (18,482,955) (6,057,951) AllianceBernstein Small Cap Growth Portfolio - Class A -- (533,740) (533,740) 6,648,650 -- (1,491,435) 4,623,475 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 487,573 (766,021) (278,448) 5,865,119 3,605,775 (8,519,278) 673,168 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 2,830,332 (864,475) 1,965,857 (632,883) -- 685,493 2,018,467 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 102,097 (32,560) 69,537 (110,725) -- 112,341 71,153 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 6,008 (45,959) (39,951) 167,435 157,754 (206,971) 78,267 AllianceBernstein Utility Income Portfolio - Class A 1,102,019 (697,876) 404,143 4,973,310 37,043 3,760,060 9,174,556 AllianceBernstein Value Portfolio - Class B 871,236 (1,003,206) (131,970) 5,936,604 1,990,035 (11,106,007) (3,311,338) BlackRock Basic Value V.I. Fund - Class I 80,144 (86,157) (6,013) 262,548 662,310 (845,246) 73,599 BlackRock Global Allocation V.I. Fund - Class I 53,126 (27,891) 25,235 166,916 88,855 1,921 282,927 BlackRock Global Growth V.I. Fund - Class I 6,633 (9,502) (2,869) 22,903 -- 184,276 204,310 BlackRock High Income V.I. Fund - Class I 33,447 (6,018) 27,429 156 -- (25,671) 1,914 BlackRock International Value V.I. Fund - Class I 58,186 (34,800) 23,386 262,013 427,433 (492,342) 220,490 BlackRock Large Cap Core V.I. Fund - Class I 19,695 (28,209) (8,514) 9,158 277,466 (148,024) 130,086 BlackRock Large Cap Growth V.I. Fund - Class I 2,820 (13,803) (10,983) 27,220 -- 47,261 63,498 BlackRock Money Market V.I. Fund - Class I 14,680 (4,398) 10,282 -- -- -- 10,282 BlackRock Total Return V.I. Fund - Class I 14,314 (4,255) 10,059 (297) -- (3,524) 6,238 BlackRock Utilities and Telecommunications V.I. Fund - Class I 10,862 (9,010) 1,852 9,168 97,016 34,623 142,659 BlackRock Value Opportunities V.I. Fund - Class I 5,139 (28,489) (23,350) 103,944 281,087 (367,980) (6,299) Delaware VIP Balanced Series - Standard Class 29,111 (10,954) 18,157 (18,464) -- (2,292) (2,599) Delaware VIP Capital Reserves Series - Standard Class 7,529 (1,980) 5,549 (23) -- (622) 4,904 Delaware VIP Cash Reserve Series - Standard Class 12,610 (3,439) 9,171 (1) -- 1 9,171 Delaware VIP Growth Opportunities Series - Standard Class -- (13,096) (13,096) 19,799 -- 99,487 106,190 Delaware VIP High Yield Series - Standard Class 32,511 (6,030) 26,481 (9,634) -- (9,147) 7,700 Delaware VIP Value Series - Standard Class 74,569 (56,848) 17,721 267,306 117,699 (528,082) (125,356) Dreyfus Stock Index Fund, Inc. - Initial Shares 76,470 (65,129) 11,341 209,240 -- (26,510) 194,071 Dreyfus VIF Small Company Stock Portfolio - Initial Shares -- (3,661) (3,661) (127,307) 182,912 10,696 62,640 Fidelity VIP Asset Manager Portfolio - Initial Class 214,865 (51,478) 163,387 23,035 115,015 175,041 476,478 Fidelity VIP Contrafund Portfolio - Initial Class 19,810 (34,336) (14,526) 315,475 532,252 (480,516) 352,685
See accompanying notes. VA I-4 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF OPERATIONS - CONTINUED For the Year Ended December 31, 2007
A B A+B=C D E F C+D+E+F Mortality and Net Change Dividends expense risk Capital gain in unrealized Increase from and Net Net realized distributions appreciation (decrease) in net mutual administrative investment gain (loss) on from mutual (depreciation) assets resulting Sub-accounts funds charges income (loss) investments funds of investments from operations --------------------------- --------- -------------- ------------- -------------- ------------- -------------- ----------------- Fidelity VIP Growth Portfolio - Initial Class $ 26,214 $ (41,888) $(15,674) $151,784 $ 2,391 $ 519,072 $657,573 Fidelity VIP High Income Portfolio - Initial Class 47,710 (9,274) 38,436 (10,667) -- (15,159) 12,610 Fidelity VIP Investment Grade Bond Portfolio - Initial Class 65,931 (21,038) 44,893 (34,287) -- 31,069 41,675 Fidelity VIP Money Market Portfolio - Initial Class 112,133 (31,084) 81,049 -- -- -- 81,049 Fidelity VIP Overseas Portfolio - Initial Class 6,373 (2,695) 3,678 12,363 12,828 (939) 27,930 UBS U.S. Allocation Portfolio 337,902 (189,385) 148,517 (62,825) -- 92,165 177,857 UIF Core Plus Fixed Income Portfolio - Class I Shares -- -- -- -- -- -- -- UIF Equity Growth Portfolio - Class I Shares -- -- -- -- -- -- -- UIF Technology Portfolio - Class I Shares -- -- -- -- -- -- -- Van Eck Worldwide Emerging Markets Fund - Initial Class 3,661 (9,419) (5,758) 133,987 144,619 (67,032) 205,816 Van Eck Worldwide Hard Assets Fund - Initial Class 846 (9,455) (8,609) 180,137 82,506 (14,495) 239,539 Vanguard 500 Index Fund 533 (222) 311 763 -- 278 1,352 Vanguard Dividend Growth Fund 615 (159) 456 372 248 936 2,012 Vanguard GNMA Fund 977 (98) 879 (61) -- 398 1,216 Vanguard Health Care Fund 1,087 (330) 757 1,517 4,246 (3,952) 2,568 Vanguard Inflation-Protected Securities Fund 9,575 (895) 8,680 (1,948) -- 10,781 17,513 Vanguard International Growth Fund 270 (105) 165 98 1,130 540 1,933 Vanguard LifeStrategy Conservative Growth Fund 4,357 (551) 3,806 667 110 1,617 6,200 Vanguard LifeStrategy Growth Fund 8,462 (1,355) 7,107 39,604 -- (32,127) 14,584 Vanguard LifeStrategy Income Fund 7,752 (1,025) 6,727 4,802 387 (298) 11,618 Vanguard LifeStrategy Moderate Growth Fund 28,724 (6,086) 22,638 17,323 1,159 19,883 61,003 Vanguard Prime Money Market Fund 221 (33) 188 -- -- -- 188 Vanguard PRIMECAP Fund 20 (25) (5) 107 176 47 325 Vanguard Small-Cap Growth Index Fund 93 (156) (63) 395 -- 1,411 1,743 Vanguard Small-Cap Value Index Fund 554 (212) 342 347 -- (2,755) (2,066) Vanguard Total Bond Market Index Fund 145 (22) 123 (252) -- 244 115 Vanguard Total International Stock Index Fund 7,856 (1,657) 6,199 20,233 -- 17,147 43,579 Vanguard U.S. Growth Fund 27 (35) (8) 90 -- 334 416 Vanguard VIF Balanced Portfolio 134,106 (26,674) 107,432 81,529 202,295 (21,095) 370,161 Vanguard VIF Capital Growth Portfolio 1,349 (1,801) (452) 16,138 4,476 5,114 25,276 Vanguard VIF Diversified Value Portfolio 12,974 (3,953) 9,021 25,799 22,182 (43,256) 13,746 Vanguard VIF Equity Income Portfolio 16,706 (3,607) 13,099 13,017 44,655 (42,408) 28,363 Vanguard VIF Equity Index Portfolio 7,684 (2,835) 4,849 8,208 19,129 (5,944) 26,242 Vanguard VIF Growth Portfolio 489 (370) 119 365 -- 6,439 6,923 Vanguard VIF High Yield Bond Portfolio 26,266 (2,304) 23,962 (228) -- (18,585) 5,149 Vanguard VIF International Portfolio 29,937 (9,881) 20,056 76,182 67,358 103,499 267,095 Vanguard VIF Mid-Cap Index Portfolio 4,905 (2,323) 2,582 20,092 41,316 (45,288) 18,702 Vanguard VIF Money Market Portfolio 19,828 (1,992) 17,836 -- -- -- 17,836 Vanguard VIF REIT Index Portfolio 10,034 (2,511) 7,523 (3,286) 41,010 (134,896) (89,649) Vanguard VIF Short-Term Investment-Grade Portfolio 6,558 (830) 5,728 198 -- 2,707 8,633 Vanguard VIF Small Company Growth Portfolio 969 (1,001) (32) 3,863 17,110 (12,571) 8,370 Vanguard VIF Total Bond Market Index Portfolio 24,120 (3,225) 20,895 (3,246) -- 21,001 38,650 Vanguard VIF Total Stock Market Index Portfolio 24,906 (12,556) 12,350 61,806 101,823 (73,230) 102,749 Vanguard Wellington Fund 4,096 (977) 3,119 1,835 5,213 (673) 9,494 Vanguard Windsor Fund 46 (24) 22 59 311 (500) (108)
See accompanying notes. VA I-5 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS For the Years Ended December 31, 2007 and 2006
Sub-accounts -------------------------------------------------------------------- AllianceBernstein AIM V.I. Americas AIM V.I. Capital International Government AllianceBernstein Appreciation Growth Fund - Income Portfolio - Balanced Shares Fund - Series I Series I Class A Portfolio - Class A ---------------- ------------- ------------------ ------------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ (10,274) $ (11,109) $ 1,369,606 $ 1,851,944 Net realized gain (loss) on investments (41,438) 241,943 (266,179) 4,561,138 Capital gain distributions from mutual funds -- -- 252,832 3,128,062 Net change in unrealized appreciation (depreciation) of investments 123,027 (98,700) 500,807 (6,990,694) ---------- ---------- ----------- ------------ Increase (decrease) in net assets resulting from operations 71,315 132,134 1,857,066 2,550,450 ---------- ---------- ----------- ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments 2,540 2,100 140,054 517,242 Administrative charges (588) (1,113) (62,201) (277,106) Net transfers from (to) other Sub-accounts or fixed rate option 11,595 73,654 (346,272) (1,292,845) Mortality reserve transfers -- -- -- -- Contract withdrawals (246,747) (358,001) (4,472,334) (24,769,689) Surrender charges (1,562) (1,403) (24,554) (122,060) Death benefits (3,167) (32,365) (805,606) (3,457,717) Annuity payments (201) (1,060) (7,087) (26,832) ---------- ---------- ----------- ------------ Increase (decrease) in net assets resulting from principal transactions (238,130) (318,188) (5,578,000) (29,429,007) ---------- ---------- ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (166,815) (186,054) (3,720,934) (26,878,557) NET ASSETS: Beginning of year 827,750 1,067,163 31,982,340 147,896,640 ---------- ---------- ----------- ------------ End of year $ 660,935 $ 881,109 $28,261,406 $121,018,083 ========== ========== =========== ============ For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ (12,717) $ (6,340) $ 1,964,944 $ 1,658,940 Net realized gain (loss) on investments (83,954) 336,111 102,844 2,453,899 Capital gain distributions from mutual funds -- -- 109,036 4,067,342 Net change in unrealized appreciation (depreciation) of investments 137,945 (54,278) (1,763,091) 6,099,128 ---------- ---------- ----------- ------------ Increase (decrease) in net assets resulting from operations 41,274 275,493 413,733 14,279,309 ---------- ---------- ----------- ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments 3,270 6,050 55,946 439,450 Administrative charges (854) (1,197) (71,146) (292,392) Net transfers from (to) other Sub-accounts or fixed rate option (38,365) 52,294 (1,822,204) (365,980) Mortality reserve transfers 104 -- 464 1,841 Contract withdrawals (268,565) (609,791) (5,498,892) (20,477,021) Surrender charges (2,354) (1,581) (51,074) (166,839) Death benefits (2,767) (2,506) (943,131) (3,579,775) Annuity payments (1,178) -- (7,963) (26,811) ---------- ---------- ----------- ------------ Increase (decrease) in net assets resulting from principal transactions (310,709) (556,731) (8,338,000) (24,467,527) ---------- ---------- ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (269,435) (281,238) (7,924,267) (10,188,218) NET ASSETS: Beginning of year 1,097,185 1,348,401 39,906,607 158,084,858 ---------- ---------- ----------- ------------ End of year $ 827,750 $1,067,163 $31,982,340 $147,896,640 ========== ========== =========== ============
See accompanying notes. VA I-6 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ------------------------------------------------------------------------------ AllianceBernstein AllianceBernstein Global Dollar AllianceBernstein AllianceBernstein Global Bond Government Global Technology Global Technology Portfolio - Class A Portfolio - Class A Portfolio - Class A Portfolio - Class B ------------------- ------------------- ------------------- ------------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 249,353 $ 921,225 $ (595,328) $ (284,124) Net realized gain (loss) on investments (407,246) (220,247) (9,074,198) 1,278,711 Capital gain distributions from mutual funds -- 784,018 -- -- Net change in unrealized appreciation (depreciation) of investments 1,378,851 (919,532) 16,794,572 2,362,172 ----------- ----------- ------------ ----------- Increase (decrease) in net assets resulting from operations 1,220,958 565,464 7,125,046 3,356,759 ----------- ----------- ------------ ----------- PRINCIPAL TRANSACTIONS: Contract purchase payments 41,728 35,887 166,708 18,216 Administrative charges (27,735) (36,293) (67,313) (60,241) Net transfers from (to) other Sub-accounts or fixed rate option 2,222,285 433,398 (1,634,812) (852,580) Mortality reserve transfers -- -- -- -- Contract withdrawals (2,646,210) (4,083,736) (8,779,802) (2,118,602) Surrender charges (12,987) (15,656) (8,892) (25,856) Death benefits (267,609) (262,319) (942,479) (549,121) Annuity payments (5,452) (2,165) (13,167) (1,863) ----------- ----------- ------------ ----------- Increase (decrease) in net assets resulting from principal transactions (695,980) (3,930,884) (11,279,757) (3,590,047) ----------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 524,978 (3,365,420) (4,154,711) (233,288) NET ASSETS: Beginning of year 14,545,717 21,073,986 44,722,827 20,460,605 ----------- ----------- ------------ ----------- End of year $15,070,695 $17,708,566 $ 40,568,116 $20,227,317 =========== =========== ============ =========== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 25,428 $ 906,855 $ (708,259) $ (310,864) Net realized gain (loss) on investments (374,883) 588,144 (16,747,748) (2,539,385) Capital gain distributions from mutual funds 129,692 941,948 -- -- Net change in unrealized appreciation (depreciation) of investments 731,570 (793,166) 20,610,359 4,127,244 ----------- ----------- ------------ ----------- Increase (decrease) in net assets resulting from operations 511,807 1,643,781 3,154,352 1,276,995 ----------- ----------- ------------ ----------- PRINCIPAL TRANSACTIONS: Contract purchase payments 8,890 50,278 135,785 31,340 Administrative charges (26,098) (35,035) (78,979) (66,595) Net transfers from (to) other Sub-accounts or fixed rate option 273,769 2,324,350 (4,487,681) (2,447,991) Mortality reserve transfers 3,052 (3,164) (1,553) -- Contract withdrawals (1,971,411) (2,727,701) (10,533,469) (1,794,650) Surrender charges (20,699) (19,312) (48,054) (40,731) Death benefits (251,579) (571,437) (1,079,332) (445,617) Annuity payments (5,524) (2,679) (28,679) (435) ----------- ----------- ------------ ----------- Increase (decrease) in net assets resulting from principal transactions (1,989,600) (984,700) (16,121,962) (4,764,679) ----------- ----------- ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,477,793) 659,081 (12,967,610) (3,487,684) NET ASSETS: Beginning of year 16,023,510 20,414,905 57,690,437 23,948,289 ----------- ----------- ------------ ----------- End of year $14,545,717 $21,073,986 $ 44,722,827 $20,460,605 =========== =========== ============ ===========
See accompanying notes. VA I-7 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts -------------------------------------------------------------------------- AllianceBernstein AllianceBernstein Growth and Growth and AllianceBernstein AllianceBernstein Income Portfolio - Income Portfolio - Growth Portfolio - Growth Portfolio - Class A Class B Class A Class B ------------------ ------------------ ------------------ ------------------ For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 81,519 $ (350,111) $ (831,852) $ (609,634) Net realized gain (loss) on investments 11,691,209 5,582,594 (3,912,582) 425,684 Capital gain distributions from mutual funds 7,992,189 8,642,692 -- -- Net change in unrealized appreciation (depreciation) of investments (13,171,824) (7,716,122) 11,274,254 4,774,031 ------------ ------------ ------------ ------------ Increase (decrease) in net assets resulting from operations 6,593,093 6,159,053 6,529,820 4,590,081 ------------ ------------ ------------ ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments 367,008 375,288 85,202 42,602 Administrative charges (209,421) (461,720) (77,106) (117,273) Net transfers from (to) other Sub-accounts or fixed rate option (7,922,356) (5,287,371) (3,869,055) (1,845,633) Mortality reserve transfers -- -- -- -- Contract withdrawals (41,027,889) (21,118,294) (13,848,862) (5,273,840) Surrender charges (32,287) (255,200) (26,616) (56,223) Death benefits (5,419,488) (2,878,427) (2,229,738) (1,012,282) Annuity payments (49,427) (27,394) (8,435) (511) ------------ ------------ ------------ ------------ Increase (decrease) in net assets resulting from principal transactions (54,293,860) (29,653,118) (19,974,610) (8,263,160) ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (47,700,767) (23,494,065) (13,444,790) (3,673,079) NET ASSETS: Beginning of year 185,089,804 182,633,686 65,472,131 44,620,149 ------------ ------------ ------------ ------------ End of year $137,389,037 $159,139,621 $ 52,027,341 $ 40,947,070 ============ ============ ============ ============ For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 66,733 $ (425,947) $ (1,054,429) $ (686,110) Net realized gain (loss) on investments 8,560,166 3,090,722 (7,776,835) (994,505) Capital gain distributions from mutual funds 10,280,124 9,321,641 -- -- Net change in unrealized appreciation (depreciation) of investments 8,974,165 13,576,582 6,140,650 (150,364) ------------ ------------ ------------ ------------ Increase (decrease) in net assets resulting from operations 27,881,188 25,562,998 (2,690,614) (1,830,979) ------------ ------------ ------------ ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments 590,269 486,351 106,805 206,381 Administrative charges (249,519) (469,050) (97,609) (134,242) Net transfers from (to) other Sub-accounts or fixed rate option (9,854,882) (8,642,025) (5,598,783) (3,209,146) Mortality reserve transfers (136) 383 886 13 Contract withdrawals (45,235,839) (13,974,750) (14,258,572) (4,562,297) Surrender charges (153,304) (251,855) (61,030) (96,223) Death benefits (6,274,407) (4,469,939) (2,294,620) (1,027,198) Annuity payments (85,686) (10,354) (33,278) (492) ------------ ------------ ------------ ------------ Increase (decrease) in net assets resulting from principal transactions (61,263,504) (27,331,239) (22,236,201) (8,823,204) ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (33,382,316) (1,768,241) (24,926,815) (10,654,183) NET ASSETS: Beginning of year 218,472,120 184,401,927 90,398,946 55,274,332 ------------ ------------ ------------ ------------ End of year $185,089,804 $182,633,686 $ 65,472,131 $ 44,620,149 ============ ============ ============ ============
See accompanying notes. VA I-8 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts --------------------------------------------------------------------------- AllianceBernstein AllianceBernstein AllianceBernstein AllianceBernstein International International International High Yield Growth Portfolio - Research Growth Value Portfolio - Portfolio - Class A Class A Portfolio - Class A Class A ------------------- ------------------ ------------------- ----------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 1,662,156 $ 111,205 $ 50,930 $ (130,597) Net realized gain (loss) on investments (256,693) 8,911,789 22,220,139 9,543,681 Capital gain distributions from mutual funds -- 15,312,845 16,274,126 2,227,306 Net change in unrealized appreciation (depreciation) of investments (1,482,431) (19,140,137) (26,249,282) (8,992,014) ----------- ------------ ------------ ------------ Increase (decrease) in net assets resulting from operations (76,968) 5,195,702 12,295,913 2,648,376 ----------- ------------ ------------ ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments 23,703 165,450 24,972 255,844 Administrative charges (53,734) (102,747) (109,968) (139,045) Net transfers from (to) other Sub-accounts or fixed rate option (1,864,262) 64,962,009 (57,838,731) 603,600 Mortality reserve transfers -- -- -- -- Contract withdrawals (4,382,092) (10,563,911) (9,387,198) (10,648,339) Surrender charges (16,971) (31,444) (36,941) (58,851) Death benefits (600,820) (1,029,806) (900,983) (406,966) Annuity payments (2,107) (8,475) (13,068) (2,903) ----------- ------------ ------------ ------------ Increase (decrease) in net assets resulting from principal transactions (6,896,283) 53,391,076 (68,261,917) (10,396,660) ----------- ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (6,973,251) 58,586,778 (55,966,004) (7,748,284) NET ASSETS: Beginning of year 28,637,395 45,278,059 55,966,004 59,345,028 ----------- ------------ ------------ ------------ End of year $21,664,144 $103,864,837 $ -- $ 51,596,744 =========== ============ ============ ============ For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 2,190,899 $ (223,753) $ (542,163) $ (24,901) Net realized gain (loss) on investments 554,650 8,042,674 7,740,802 5,637,821 Capital gain distributions from mutual funds -- 254,934 -- 898,912 Net change in unrealized appreciation (depreciation) of investments (648,268) 1,282,503 4,581,286 8,089,891 ----------- ------------ ------------ ------------ Increase (decrease) in net assets resulting from operations 2,097,281 9,356,358 11,779,925 14,601,723 ----------- ------------ ------------ ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments 90,970 89,036 34,589 267,868 Administrative charges (59,306) (83,160) (107,004) (116,529) Net transfers from (to) other Sub-accounts or fixed rate option (219,381) 3,027,426 (973,330) 10,076,603 Mortality reserve transfers -- (1,390) 1,500 -- Contract withdrawals (4,233,875) (6,184,096) (7,368,449) (7,269,313) Surrender charges (30,956) (35,876) (61,070) (59,494) Death benefits (705,629) (710,230) (899,147) (668,787) Annuity payments -- (45,512) (16,822) -- ----------- ------------ ------------ ------------ Increase (decrease) in net assets resulting from principal transactions (5,158,177) (3,943,802) (9,389,733) 2,230,348 ----------- ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (3,060,896) 5,412,556 2,390,192 16,832,071 NET ASSETS: Beginning of year 31,698,291 39,865,503 53,575,812 42,512,957 ----------- ------------ ------------ ------------ End of year $28,637,395 $ 45,278,059 $ 55,966,004 $ 59,345,028 =========== ============ ============ ============
See accompanying notes. VA I-9 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ------------------------------------------------------------------------------ AllianceBernstein AllianceBernstein AllianceBernstein AllianceBernstein Large Cap Growth Large Cap Growth Money Market Money Market Portfolio - Class A Portfolio - Class B Portfolio - Class A Portfolio - Class B ------------------- ------------------- ------------------- ------------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ (1,412,185) $ (894,539) $ 516,651 $ 377,714 Net realized gain (loss) on investments (6,071,967) (283,405) -- -- Capital gain distributions from mutual funds -- -- -- -- Net change in unrealized appreciation (depreciation) of investments 19,123,782 8,422,501 -- -- ------------ ------------ ------------ ----------- Increase (decrease) in net assets resulting from operations 11,639,630 7,244,557 516,651 377,714 ------------ ------------ ------------ ----------- PRINCIPAL TRANSACTIONS: Contract purchase payments 256,438 207,285 17,000 130,205 Administrative charges (150,451) (186,051) (19,343) (36,072) Net transfers from (to) other Sub-accounts or fixed rate option (4,284,646) (2,376,816) 14,183,129 9,706,482 Mortality reserve transfers -- -- -- -- Contract withdrawals (24,701,569) (7,000,467) (16,404,993) (9,018,332) Surrender charges (23,614) (74,264) (15,937) (70,511) Death benefits (2,865,544) (1,180,686) (1,568,970) (995,710) Annuity payments (41,311) (36,717) (15,380) (1,776) ------------ ------------ ------------ ----------- Increase (decrease) in net assets resulting from principal transactions (31,810,697) (10,647,716) (3,824,494) (285,714) ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (20,171,067) (3,403,159) (3,307,843) 92,000 NET ASSETS: Beginning of year 111,670,949 65,273,906 18,161,672 14,166,238 ------------ ------------ ------------ ----------- End of year $ 91,499,882 $ 61,870,747 $ 14,853,829 $14,258,238 ============ ============ ============ =========== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ (1,773,047) $ (965,993) $ 607,414 $ 388,969 Net realized gain (loss) on investments (11,115,168) (1,880,001) -- -- Capital gain distributions from mutual funds -- -- -- -- Net change in unrealized appreciation (depreciation) of investments 9,390,951 1,060,916 -- -- ------------ ------------ ------------ ----------- Increase (decrease) in net assets resulting from operations (3,497,264) (1,785,078) 607,414 388,969 ------------ ------------ ------------ ----------- PRINCIPAL TRANSACTIONS: Contract purchase payments 291,867 210,124 298,069 115,912 Administrative charges (186,817) (199,485) (25,264) (32,797) Net transfers from (to) other Sub-accounts or fixed rate option (6,755,419) (780,818) 14,074,026 6,220,754 Mortality reserve transfers 6,593 98 78 -- Contract withdrawals (24,623,770) (6,465,888) (15,628,176) (7,472,849) Surrender charges (89,474) (124,968) (24,007) (150,799) Death benefits (3,463,563) (1,459,623) (408,693) (953,539) Annuity payments (66,016) (7,316) (1,238) -- ------------ ------------ ------------ ----------- Increase (decrease) in net assets resulting from principal transactions (34,886,599) (8,827,876) (1,715,205) (2,273,318) ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (38,383,863) (10,612,954) (1,107,791) (1,884,349) NET ASSETS: Beginning of year 150,054,812 75,886,860 19,269,463 16,050,587 ------------ ------------ ------------ ----------- End of year $111,670,949 $ 65,273,906 $ 18,161,672 $14,166,238 ============ ============ ============ ===========
See accompanying notes. VA I-10 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ---------------------------------------------------------------------------- AllianceBernstein AllianceBernstein AllianceBernstein U.S. Real Estate AllianceBernstein Small/Mid Cap Government/High Investment Small Cap Growth Value Portfolio - Grade Securities Portfolio - Class A Portfolio - Class A Class A Portfolio - Class A ------------------- ------------------- ----------------- ------------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ (11,320) $ (533,740) $ (278,448) $ 1,965,857 Net realized gain (loss) on investments 5,516,473 6,648,650 5,865,119 (632,883) Capital gain distributions from mutual funds 6,919,851 -- 3,605,775 -- Net change in unrealized appreciation (depreciation) of investments (18,482,955) (1,491,435) (8,519,278) 685,493 ------------ ------------ ------------ ------------ Increase (decrease) in net assets resulting from operations (6,057,951) 4,623,475 673,168 2,018,467 ------------ ------------ ------------ ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments 248,665 72,042 194,437 104,465 Administrative charges (92,560) (85,639) (135,064) (125,836) Net transfers from (to) other Sub-accounts or fixed rate option (4,591,214) (5,102,906) (1,123,599) 5,040,397 Mortality reserve transfers -- -- -- -- Contract withdrawals (8,488,213) (5,948,180) (8,279,086) (9,434,860) Surrender charges (43,246) (22,753) (43,573) (39,910) Death benefits (573,791) (1,048,381) (730,767) (1,281,518) Annuity payments (22,422) (12,545) (49,826) (23,291) ------------ ------------ ------------ ------------ Increase (decrease) in net assets resulting from principal transactions (13,562,781) (12,148,362) (10,167,478) (5,760,553) ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (19,620,732) (7,524,887) (9,494,310) (3,742,086) NET ASSETS: Beginning of year 50,198,501 41,296,529 55,423,221 62,173,275 ------------ ------------ ------------ ------------ End of year $ 30,577,769 $ 33,771,642 $ 45,928,911 $ 58,431,189 ============ ============ ============ ============ For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 280,003 $ (606,442) $ (566,143) $ 1,742,329 Net realized gain (loss) on investments 6,175,843 3,557,001 4,291,401 (420,566) Capital gain distributions from mutual funds 6,059,370 -- 3,961,655 -- Net change in unrealized appreciation (depreciation) of investments 1,209,447 816,747 (730,659) 183,101 ------------ ------------ ------------ ------------ Increase (decrease) in net assets resulting from operations 13,724,663 3,767,306 6,956,254 1,504,864 ------------ ------------ ------------ ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments 66,273 66,044 232,656 98,141 Administrative charges (100,558) (95,388) (137,532) (130,764) Net transfers from (to) other Sub-accounts or fixed rate option (322,893) 2,210,189 (1,180,107) 687,391 Mortality reserve transfers (175) 7 -- 4,090 Contract withdrawals (7,872,159) (6,419,777) (8,271,779) (10,434,810) Surrender charges (53,372) (46,130) (115,948) (44,751) Death benefits (651,139) (826,542) (968,907) (1,446,519) Annuity payments (21,332) (13,236) (12,148) (21,384) ------------ ------------ ------------ ------------ Increase (decrease) in net assets resulting from principal transactions (8,955,355) (5,124,833) (10,453,765) (11,288,606) ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 4,769,308 (1,357,527) (3,497,511) (9,783,742) NET ASSETS: Beginning of year 45,429,193 42,654,056 58,920,732 71,957,017 ------------ ------------ ------------ ------------ End of year $ 50,198,501 $ 41,296,529 $ 55,423,221 $ 62,173,275 ============ ============ ============ ============
See accompanying notes. VA I-11 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ---------------------------------------------------------------------------- AllianceBernstein U.S. AllianceBernstein Government/High U.S. Large Cap AllianceBernstein AllianceBernstein Grade Securities Blended Style Utility Income Value Portfolio - Portfolio - Class B Portfolio - Class B Portfolio - Class A Class B ------------------- ------------------- ------------------- ----------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 69,537 $ (39,951) $ 404,143 $ (131,970) Net realized gain (loss) on investments (110,725) 167,435 4,973,310 5,936,604 Capital gain distributions from mutual funds -- 157,754 37,043 1,990,035 Net change in unrealized appreciation (depreciation) of investments 112,341 (206,971) 3,760,060 (11,106,007) ----------- ---------- ----------- ------------ Increase (decrease) in net assets resulting from operations 71,153 78,267 9,174,556 (3,311,338) ----------- ---------- ----------- ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- 131,036 111,655 Administrative charges (3,843) (4,497) (107,673) (177,326) Net transfers from (to) other Sub-accounts or fixed rate option (418,198) 748,037 872,559 (2,369,629) Mortality reserve transfers -- -- -- -- Contract withdrawals (773,093) (656,412) (9,307,838) (10,402,888) Surrender charges (1,675) (1,233) (56,847) (80,072) Death benefits (23,635) 1,216 (836,459) (767,647) Annuity payments -- (3,021) (5,694) (72,220) ----------- ---------- ----------- ------------ Increase (decrease) in net assets resulting from principal transactions (1,220,444) 84,090 (9,310,916) (13,758,127) ----------- ---------- ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (1,149,291) 162,357 (136,360) (17,069,465) NET ASSETS: Beginning of year 2,819,431 3,093,779 49,195,848 76,756,158 ----------- ---------- ----------- ------------ End of year $ 1,670,140 $3,256,136 $49,059,488 $ 59,686,693 =========== ========== =========== ============ For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 72,922 $ (39,114) $ 520,517 $ (334,676) Net realized gain (loss) on investments (27,927) 174,307 1,227,577 3,672,672 Capital gain distributions from mutual funds -- 120,293 -- 1,974,765 Net change in unrealized appreciation (depreciation) of investments 15,168 (25,894) 7,288,426 7,759,529 ----------- ---------- ----------- ------------ Increase (decrease) in net assets resulting from operations 60,163 229,592 9,036,520 13,072,290 ----------- ---------- ----------- ------------ PRINCIPAL TRANSACTIONS: Contract purchase payments -- 121 26,006 274,348 Administrative charges (4,168) (3,539) (93,326) (179,514) Net transfers from (to) other Sub-accounts or fixed rate option (51,489) 714,936 3,066,986 777,526 Mortality reserve transfers -- 159 (2,115) (33) Contract withdrawals (239,043) (556,667) (6,227,518) (8,341,459) Surrender charges (2,168) (6,211) (59,866) (106,858) Death benefits (36,609) (70,932) (1,311,247) (2,471,729) Annuity payments -- (2,839) (4,614) (10,925) ----------- ---------- ----------- ------------ Increase (decrease) in net assets resulting from principal transactions (333,477) 75,028 (4,605,694) (10,058,644) ----------- ---------- ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (273,314) 304,620 4,430,826 3,013,646 NET ASSETS: Beginning of year 3,092,745 2,789,159 44,765,022 73,742,512 ----------- ---------- ----------- ------------ End of year $ 2,819,431 $3,093,779 $49,195,848 $ 76,756,158 =========== ========== =========== ============
See accompanying notes. VA I-12 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ----------------------------------------------------------------------- BlackRock Basic BlackRock Global BlackRock Global BlackRock High Value V.I. Fund - Allocation V.I. Growth V.I. Fund - Income V.I. Fund - Class I Fund - Class I Class I Class I ----------------- ---------------- ------------------ ------------------ For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ (6,013) $ 25,235 $ (2,869) $ 27,429 Net realized gain (loss) on investments 262,548 166,916 22,903 156 Capital gain distributions from mutual funds 662,310 88,855 -- -- Net change in unrealized appreciation (depreciation) of investments (845,246) 1,921 184,276 (25,671) ----------- ---------- --------- -------- Increase (decrease) in net assets resulting from operations 73,599 282,927 204,310 1,914 ----------- ---------- --------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments 480 480 -- -- Administrative charges (12,621) (3,882) (1,223) (859) Net transfers from (to) other Sub-accounts or fixed rate option (96,010) 137,462 (15,560) 12,248 Mortality reserve transfers -- -- -- -- Contract withdrawals (1,083,289) (509,999) (108,144) (58,299) Surrender charges (268) (239) (1) -- Death benefits (148,441) (32,183) (31,012) (28,109) Annuity payments (855) -- -- -- ----------- ---------- --------- -------- Increase (decrease) in net assets resulting from principal transactions (1,341,004) (408,361) (155,940) (75,019) ----------- ---------- --------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,267,405) (125,434) 48,370 (73,105) NET ASSETS: Beginning of year 6,374,606 2,061,234 649,704 421,560 ----------- ---------- --------- -------- End of year $ 5,107,201 $1,935,800 $ 698,074 $348,455 =========== ========== ========= ======== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 12,931 $ 28,955 $ (2,668) $ 26,386 Net realized gain (loss) on investments 154,740 86,740 (19,669) 3,807 Capital gain distributions from mutual funds 646,392 77,352 -- -- Net change in unrealized appreciation (depreciation) of investments 303,044 58,919 135,704 2,923 ----------- ---------- --------- -------- Increase (decrease) in net assets resulting from operations 1,117,107 251,966 113,367 33,116 ----------- ---------- --------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments 480 480 -- -- Administrative charges (12,159) (3,337) (1,028) (932) Net transfers from (to) other Sub-accounts or fixed rate option (524,177) 515,896 (77,613) (30,618) Mortality reserve transfers 74 -- -- -- Contract withdrawals (543,371) (62,861) (17,439) (55,942) Surrender charges (2,125) (106) (192) (246) Death benefits (64,244) (132,162) -- -- Annuity payments (774) -- -- -- ----------- ---------- --------- -------- Increase (decrease) in net assets resulting from principal transactions (1,146,296) 317,910 (96,272) (87,738) ----------- ---------- --------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS (29,189) 569,876 17,095 (54,622) NET ASSETS: Beginning of year 6,403,795 1,491,358 632,609 476,182 ----------- ---------- --------- -------- End of year $ 6,374,606 $2,061,234 $ 649,704 $421,560 =========== ========== ========= ========
See accompanying notes. VA I-13 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ------------------------------------------------------------------ BlackRock BlackRock Large BlackRock Large BlackRock Money International Value Cap Core V.I. Cap Growth V.I. Market V.I. V.I. Fund - Class I Fund - Class I Fund - Class I Fund - Class I ------------------- --------------- --------------- --------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 23,386 $ (8,514) $(10,983) $ 10,282 Net realized gain (loss) on investments 262,013 9,158 27,220 -- Capital gain distributions from mutual funds 427,433 277,466 -- -- Net change in unrealized appreciation (depreciation) of investments (492,342) (148,024) 47,261 -- ---------- ---------- -------- --------- Increase (decrease) in net assets resulting from operations 220,490 130,086 63,498 10,282 ---------- ---------- -------- --------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- 480 -- -- Administrative charges (4,644) (4,523) (1,848) (500) Net transfers from (to) other Sub-accounts or fixed rate option (32,250) 165,116 61,896 460,155 Mortality reserve transfers -- -- -- -- Contract withdrawals (506,976) (229,246) (80,445) (602,941) Surrender charges -- (1,491) -- (2,510) Death benefits (23,542) -- -- -- Annuity payments -- (815) -- -- ---------- ---------- -------- --------- Increase (decrease) in net assets resulting from principal transactions (567,412) (70,479) (20,397) (145,796) ---------- ---------- -------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (346,922) 59,607 43,101 (135,514) NET ASSETS: Beginning of year 2,500,221 1,953,945 940,900 440,936 ---------- ---------- -------- --------- End of year $2,153,299 $2,013,552 $984,001 $ 305,422 ========== ========== ======== ========= For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 44,876 $ (7,498) $ (9,404) $ 10,546 Net realized gain (loss) on investments 209,515 4,245 12,654 -- Capital gain distributions from mutual funds 212,005 208,590 -- -- Net change in unrealized appreciation (depreciation) of investments 94,432 27,165 47,797 -- ---------- ---------- -------- --------- Increase (decrease) in net assets resulting from operations 560,828 232,502 51,047 10,546 ---------- ---------- -------- --------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- 480 -- 297 Administrative charges (5,429) (3,791) (1,643) (635) Net transfers from (to) other Sub-accounts or fixed rate option (85,134) 196,830 49,819 153,290 Mortality reserve transfers -- 65 -- -- Contract withdrawals (189,672) (258,563) (16,868) (72,926) Surrender charges -- (340) -- (128) Death benefits (74,531) (36,568) -- -- Annuity payments -- (761) -- -- ---------- ---------- -------- --------- Increase (decrease) in net assets resulting from principal transactions (354,766) (102,648) 31,308 79,898 ---------- ---------- -------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 206,062 129,854 82,355 90,444 NET ASSETS: Beginning of year 2,294,159 1,824,091 858,545 350,492 ---------- ---------- -------- --------- End of year $2,500,221 $1,953,945 $940,900 $ 440,936 ========== ========== ======== =========
See accompanying notes. VA I-14 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts -------------------------------------------------------------------------- BlackRock Utilities BlackRock Total and BlackRock Value Delaware VIP Return V.I. Fund - Telecommunications Opportunities V.I. Balanced Series - Class I V.I. Fund - Class I Fund - Class I Standard Class ------------------ ------------------- ------------------ ----------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 10,059 $ 1,852 $ (23,350) $ 18,157 Net realized gain (loss) on investments (297) 9,168 103,944 (18,464) Capital gain distributions from mutual funds -- 97,016 281,087 -- Net change in unrealized appreciation (depreciation) of investments (3,524) 34,623 (367,980) (2,292) -------- --------- ---------- --------- Increase (decrease) in net assets resulting from operations 6,238 142,659 (6,299) (2,599) -------- --------- ---------- --------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- 81,049 -- -- Administrative charges (354) (1,171) (4,732) (405) Net transfers from (to) other Sub-accounts or fixed rate option 2,092 (54,068) (224,079) (13,192) Mortality reserve transfers -- -- -- -- Contract withdrawals (46,975) (142,849) (389,535) (260,714) Surrender charges -- -- (36) -- Death benefits -- -- (21,054) -- Annuity payments -- -- -- -- -------- --------- ---------- --------- Increase (decrease) in net assets resulting from principal transactions (45,237) (117,039) (639,436) (274,311) -------- --------- ---------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (38,999) 25,620 (645,735) (276,910) NET ASSETS: Beginning of year 299,442 596,140 2,264,468 914,165 -------- --------- ---------- --------- End of year $260,443 $ 621,760 $1,618,733 $ 637,255 ======== ========= ========== ========= For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 9,491 $ 8,725 $ (28,151) $ 14,650 Net realized gain (loss) on investments 5 (16,343) 67,035 (8,819) Capital gain distributions from mutual funds -- 14,918 394,243 -- Net change in unrealized appreciation (depreciation) of investments (989) 116,148 (181,337) 115,952 -------- --------- ---------- --------- Increase (decrease) in net assets resulting from operations 8,507 123,448 251,790 121,783 -------- --------- ---------- --------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges (348) (1,077) (5,321) (431) Net transfers from (to) other Sub-accounts or fixed rate option 3,291 28,732 (170,173) (3) Mortality reserve transfers -- -- -- -- Contract withdrawals (5,962) (97,552) (341,303) (58,305) Surrender charges -- -- -- -- Death benefits -- -- (49,258) -- Annuity payments -- -- -- -- -------- --------- ---------- --------- Increase (decrease) in net assets resulting from principal transactions (3,019) (69,897) (566,055) (58,739) -------- --------- ---------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 5,488 53,551 (314,265) 63,044 NET ASSETS: Beginning of year 293,954 542,589 2,578,733 851,121 -------- --------- ---------- --------- End of year $299,442 $ 596,140 $2,264,468 $ 914,165 ======== ========= ========== =========
See accompanying notes. VA I-15 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ---------------------------------------------------------------------- Delaware VIP Delaware VIP Delaware VIP Growth Capital Reserves Cash Reserve Opportunities Delaware VIP High Series - Standard Series - Standard Series - Standard Yield Series - Class Class Class Standard Class ----------------- ----------------- ----------------- ----------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 5,549 $ 9,171 $ (13,096) $ 26,481 Net realized gain (loss) on investments (23) (1) 19,799 (9,634) Capital gain distributions from mutual funds -- -- -- -- Net change in unrealized appreciation (depreciation) of investments (622) 1 99,487 (9,147) -------- -------- ---------- -------- Increase (decrease) in net assets resulting from operations 4,904 9,171 106,190 7,700 -------- -------- ---------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges (67) (164) (116) (306) Net transfers from (to) other Sub-accounts or fixed rate option (1) 364 (364) (1) Mortality reserve transfers -- -- -- -- Contract withdrawals -- (23,132) (18,133) (23,861) Surrender charges -- -- -- -- Death benefits -- -- (24,507) (5,402) Annuity payments -- -- -- -- -------- -------- ---------- -------- Increase (decrease) in net assets resulting from principal transactions (68) (22,932) (43,120) (29,570) -------- -------- ---------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 4,836 (13,761) 63,070 (21,870) NET ASSETS: Beginning of year 155,253 250,090 980,416 483,606 -------- -------- ---------- -------- End of year $160,089 $236,329 $1,043,486 $461,736 ======== ======== ========== ======== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 6,051 $ 8,449 $ (12,058) $ 25,098 Net realized gain (loss) on investments (404) -- (3,386) (9,379) Capital gain distributions from mutual funds -- -- -- -- Net change in unrealized appreciation (depreciation) of investments 372 (1) 62,817 35,380 -------- -------- ---------- -------- Increase (decrease) in net assets resulting from operations 6,019 8,448 47,373 51,099 -------- -------- ---------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges (129) (174) (207) (369) Net transfers from (to) other Sub-accounts or fixed rate option 21 710 1,222 (1,940) Mortality reserve transfers -- -- -- -- Contract withdrawals (44,598) (20,608) (79,348) (30,535) Surrender charges -- -- -- -- Death benefits -- (33,550) -- -- Annuity payments -- -- -- -- -------- -------- ---------- -------- Increase (decrease) in net assets resulting from principal transactions (44,706) (53,622) (78,333) (32,844) -------- -------- ---------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS (38,687) (45,174) (30,960) 18,255 NET ASSETS: Beginning of year 193,940 295,264 1,011,376 465,351 -------- -------- ---------- -------- End of year $155,253 $250,090 $ 980,416 $483,606 ======== ======== ========== ========
See accompanying notes. VA I-16 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ---------------------------------------------------------------------- Dreyfus VIF Small Delaware VIP Dreyfus Stock Company Stock Fidelity VIP Asset Value Series - Index Fund, Inc. Portfolio - Initial Manager Portfolio - Standard Class - Initial Shares Shares Initial Class -------------- ---------------- ------------------- ------------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 17,721 $ 11,341 $ (3,661) $ 163,387 Net realized gain (loss) on investments 267,306 209,240 (127,307) 23,035 Capital gain distributions from mutual funds 117,699 -- 182,912 115,015 Net change in unrealized appreciation (depreciation) of investments (528,082) (26,510) 10,696 175,041 ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from operations (125,356) 194,071 62,640 476,478 ----------- ----------- ---------- ----------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- 13,030 960 -- Administrative charges (1,701) (4,509) (340) (2,148) Net transfers from (to) other Sub-accounts or fixed rate option 13,166 (66,599) (794,018) (487,247) Mortality reserve transfers -- -- -- -- Contract withdrawals (845,307) (1,328,629) (92,512) (1,222,505) Surrender charges -- (3,469) (792) (5,593) Death benefits (101,138) (39,536) (8,738) (27,403) Annuity payments (6,315) (5,259) -- (2,565) ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from principal transactions (941,295) (1,434,971) (895,440) (1,747,461) ----------- ----------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,066,651) (1,240,900) (832,800) (1,270,983) NET ASSETS: Beginning of year 4,695,829 5,279,025 832,800 4,266,167 ----------- ----------- ---------- ----------- End of year $ 3,629,178 $ 4,038,125 $ -- $ 2,995,184 =========== =========== ========== =========== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 14,904 $ 11,539 $ (18,363) $ 78,876 Net realized gain (loss) on investments 95,082 80,211 124,931 (145,847) Capital gain distributions from mutual funds 92,583 -- 190,891 -- Net change in unrealized appreciation (depreciation) of investments 699,962 677,305 (174,214) 336,757 ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from operations 902,531 769,055 123,245 269,786 ----------- ----------- ---------- ----------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- 16,690 5,230 5,000 Administrative charges (1,883) (5,758) (1,224) (2,741) Net transfers from (to) other Sub-accounts or fixed rate option (5) (386,158) (245,216) (31,080) Mortality reserve transfers 109 263 -- 94 Contract withdrawals (431,778) (1,826,800) (581,025) (1,603,641) Surrender charges -- (8,943) (4,461) (7,304) Death benefits (37,575) (61,857) (1,928) (20,202) Annuity payments (5,238) (5,945) -- (2,430) ----------- ----------- ---------- ----------- Increase (decrease) in net assets resulting from principal transactions (476,370) (2,278,508) (828,624) (1,662,304) ----------- ----------- ---------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 426,161 (1,509,453) (705,379) (1,392,518) NET ASSETS: Beginning of year 4,269,668 6,788,478 1,538,179 5,658,685 ----------- ----------- ---------- ----------- End of year $ 4,695,829 $ 5,279,025 $ 832,800 $ 4,266,167 =========== =========== ========== ===========
See accompanying notes. VA I-17 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ------------------------------------------------------------------------- Fidelity VIP Fidelity VIP Contrafund Fidelity VIP Fidelity VIP High Investment Grade Portfolio - Initial Growth Portfolio - Income Portfolio - Bond Portfolio - Class Initial Class Initial Class Initial Class ------------------- ------------------ ------------------ ---------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ (14,526) $ (15,674) $ 38,436 $ 44,893 Net realized gain (loss) on investments 315,475 151,784 (10,667) (34,287) Capital gain distributions from mutual funds 532,252 2,391 -- -- Net change in unrealized appreciation (depreciation) of investments (480,516) 519,072 (15,159) 31,069 ----------- ----------- ---------- ---------- Increase (decrease) in net assets resulting from operations 352,685 657,573 12,610 41,675 ----------- ----------- ---------- ---------- PRINCIPAL TRANSACTIONS: Contract purchase payments 8,490 9,119 2,860 2,000 Administrative charges (2,348) (3,591) (459) (1,203) Net transfers from (to) other Sub-accounts or fixed rate option (209,335) (129,515) (37,073) 24,164 Mortality reserve transfers -- -- -- -- Contract withdrawals (800,942) (835,952) (136,949) (331,303) Surrender charges (1,284) (608) (577) (187) Death benefits (10,024) (29,027) -- -- Annuity payments (2,051) (3,825) -- (5,363) ----------- ----------- ---------- ---------- Increase (decrease) in net assets resulting from principal transactions (1,017,494) (993,399) (172,198) (311,892) ----------- ----------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (664,809) (335,826) (159,588) (270,217) NET ASSETS: Beginning of year 2,837,910 3,258,301 729,230 1,635,503 ----------- ----------- ---------- ---------- End of year $ 2,173,101 $ 2,922,475 $ 569,642 $1,365,286 =========== =========== ========== ========== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ (7,668) $ (36,629) $ 49,204 $ 65,850 Net realized gain (loss) on investments 323,293 (149,983) 60,390 (75,478) Capital gain distributions from mutual funds 240,401 -- -- 5,677 Net change in unrealized appreciation (depreciation) of investments (237,104) 376,679 (15,287) 51,746 ----------- ----------- ---------- ---------- Increase (decrease) in net assets resulting from operations 318,922 190,067 94,307 47,795 ----------- ----------- ---------- ---------- PRINCIPAL TRANSACTIONS: Contract purchase payments 11,490 10,360 240 -- Administrative charges (2,809) (4,108) (699) (1,434) Net transfers from (to) other Sub-accounts or fixed rate option (163,729) (328,093) (115,355) (145,615) Mortality reserve transfers 48 202 -- 111 Contract withdrawals (1,026,733) (782,637) (428,612) (730,625) Surrender charges (3,013) (2,271) (3,716) (2,430) Death benefits (11,844) (78,100) -- (32,171) Annuity payments (1,879) (3,456) -- (5,447) ----------- ----------- ---------- ---------- Increase (decrease) in net assets resulting from principal transactions (1,198,469) (1,188,103) (548,142) (917,611) ----------- ----------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (879,547) (998,036) (453,835) (869,816) NET ASSETS: Beginning of year 3,717,457 4,256,337 1,183,065 2,505,319 ----------- ----------- ---------- ---------- End of year $ 2,837,910 $ 3,258,301 $ 729,230 $1,635,503 =========== =========== ========== ==========
See accompanying notes. VA I-18 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ----------------------------------------------------------------------- UIF Core Plus Fidelity VIP Money Fidelity VIP UBS U.S. Fixed Income Market Portfolio - Overseas Portfolio - Allocation Portfolio - Class I Initial Class Initial Class Portfolio Shares ------------------ -------------------- ----------- ------------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 81,049 $ 3,678 $ 148,517 $ -- Net realized gain (loss) on investments -- 12,363 (62,825) -- Capital gain distributions from mutual funds -- 12,828 -- -- Net change in unrealized appreciation (depreciation) of investments -- (939) 92,165 -- ----------- -------- ----------- -------- Increase (decrease) in net assets resulting from operations 81,049 27,930 177,857 -- ----------- -------- ----------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments 13,520 360 6,838 -- Administrative charges (1,805) (181) (30,021) -- Net transfers from (to) other Sub-accounts or fixed rate option 1,909,806 (4,544) (37,527) -- Mortality reserve transfers -- -- -- -- Contract withdrawals (1,755,696) (17,636) (3,180,233) -- Surrender charges (896) -- (7,808) -- Death benefits (14,864) -- (228,018) -- Annuity payments (5,186) -- -- -- ----------- -------- ----------- -------- Increase (decrease) in net assets resulting from principal transactions 144,879 (22,001) (3,476,769) -- ----------- -------- ----------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 225,928 5,929 (3,298,912) -- NET ASSETS: Beginning of year 2,151,019 187,622 14,667,985 -- ----------- -------- ----------- -------- End of year $ 2,376,947 $193,551 $11,369,073 $ -- =========== ======== =========== ======== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 70,458 $ (744) $ 217,997 $ (79) Net realized gain (loss) on investments -- 9,196 (378,886) (34) Capital gain distributions from mutual funds -- 1,406 -- -- Net change in unrealized appreciation (depreciation) of investments -- 21,284 1,558,377 (301) ----------- -------- ----------- -------- Increase (decrease) in net assets resulting from operations 70,458 31,142 1,397,488 (414) ----------- -------- ----------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments 13,200 360 9,889 -- Administrative charges (1,699) (225) (32,666) -- Net transfers from (to) other Sub-accounts or fixed rate option 1,712,820 (8,426) (328,166) (34,676) Mortality reserve transfers (840) -- -- -- Contract withdrawals (1,461,722) (63,143) (2,185,649) -- Surrender charges (6,779) -- (7,543) -- Death benefits (257,742) -- (659,507) -- Annuity payments (5,250) -- -- (654) ----------- -------- ----------- -------- Increase (decrease) in net assets resulting from principal transactions (8,012) (71,434) (3,203,642) (35,330) ----------- -------- ----------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 62,446 (40,292) (1,806,154) (35,744) NET ASSETS: Beginning of year 2,088,573 227,914 16,474,139 35,744 ----------- -------- ----------- -------- End of year $ 2,151,019 $187,622 $14,667,985 $ -- =========== ======== =========== ========
See accompanying notes. VA I-19 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ---------------------------------------------------------------------- Van Eck Worldwide Van Eck UIF Equity Growth UIF Technology Emerging Markets Worldwide Hard Portfolio - Class I Portfolio - Class I Fund - Initial Assets Fund - Shares Shares Class Initial Class ------------------- ------------------- ---------------- -------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ -- $ -- $ (5,758) $ (8,609) Net realized gain (loss) on investments -- -- 133,987 180,137 Capital gain distributions from mutual funds -- -- 144,619 82,506 Net change in unrealized appreciation (depreciation) of investments -- -- (67,032) (14,495) -------- -------- --------- --------- Increase (decrease) in net assets resulting from operations -- -- 205,816 239,539 -------- -------- --------- --------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- 1,980 2,260 Administrative charges -- -- (769) (818) Net transfers from (to) other Sub-accounts or fixed rate option -- -- (85,065) (14,420) Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- (194,379) (235,693) Surrender charges -- -- (325) (194) Death benefits -- -- -- (37,851) Annuity payments -- -- -- (1,319) -------- -------- --------- --------- Increase (decrease) in net assets resulting from principal transactions -- -- (278,558) (288,035) -------- -------- --------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS -- -- (72,742) (48,496) NET ASSETS: Beginning of year -- -- 722,390 680,007 -------- -------- --------- --------- End of year $ -- $ -- $ 649,648 $ 631,511 ======== ======== ========= ========= For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ (79) $ (28) $ (5,437) $ (9,921) Net realized gain (loss) on investments 6,840 (1,190) 202,096 125,187 Capital gain distributions from mutual funds -- -- 76,334 42,272 Net change in unrealized appreciation (depreciation) of investments (5,965) 2,036 (38,375) (22,394) -------- -------- --------- --------- Increase (decrease) in net assets resulting from operations 796 818 234,618 135,144 -------- -------- --------- --------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- 8,390 6,999 Administrative charges -- -- (701) (960) Net transfers from (to) other Sub-accounts or fixed rate option (35,239) (12,794) (34,609) 16,906 Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- (170,543) (156,360) Surrender charges -- -- (1,044) (410) Death benefits -- -- (41,170) (3,172) Annuity payments (648) (233) -- -- -------- -------- --------- --------- Increase (decrease) in net assets resulting from principal transactions (35,887) (13,027) (239,677) (136,997) -------- -------- --------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (35,091) (12,209) (5,059) (1,853) NET ASSETS: Beginning of year 35,091 12,209 727,449 681,860 -------- -------- --------- --------- End of year $ -- $ -- $ 722,390 $ 680,007 ======== ======== ========= =========
See accompanying notes. VA I-20 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts --------------------------------------------------------- Vanguard Vanguard 500 Dividend Growth Vanguard GNMA Vanguard Health Index Fund Fund Fund Care Fund ------------ --------------- ------------- --------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 311 $ 456 $ 879 $ 757 Net realized gain (loss) on investments 763 372 (61) 1,517 Capital gain distributions from mutual funds -- 248 -- 4,246 Net change in unrealized appreciation (depreciation) of investments 278 936 398 (3,952) ------- ------- ------- ------- Increase (decrease) in net assets resulting from operations 1,352 2,012 1,216 2,568 ------- ------- ------- ------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option (4) 9,036 8,668 (6) Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (2,659) (1,591) (2,097) (8,027) ------- ------- ------- ------- Increase (decrease) in net assets resulting from principal transactions (2,663) 7,445 6,571 (8,033) ------- ------- ------- ------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,311) 9,457 7,787 (5,465) NET ASSETS: Beginning of year 29,376 28,795 13,105 63,831 ------- ------- ------- ------- End of year $28,065 $38,252 $20,892 $58,366 ======= ======= ======= ======= For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 285 $ 376 $ 705 $ 574 Net realized gain (loss) on investments 461 159 (411) 991 Capital gain distributions from mutual funds -- -- -- 2,952 Net change in unrealized appreciation (depreciation) of investments 3,171 4,151 165 1,811 ------- ------- ------- ------- Increase (decrease) in net assets resulting from operations 3,917 4,686 459 6,328 ------- ------- ------- ------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option (1) (1) (132) 2 Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (2,461) (1,423) (1,876) (7,793) ------- ------- ------- ------- Increase (decrease) in net assets resulting from principal transactions (2,462) (1,424) (2,008) (7,791) ------- ------- ------- ------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,455 3,262 (1,549) (1,463) NET ASSETS: Beginning of year 27,921 25,533 14,654 65,294 ------- ------- ------- ------- End of year $29,376 $28,795 $13,105 $63,831 ======= ======= ======= =======
See accompanying notes. VA I-21 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ---------------------------------------------------------- Vanguard Vanguard Inflation- Vanguard LifeStrategy Vanguard Protected International Conservative LifeStrategy Securities Fund Growth Fund Growth Fund Growth Fund ------------------- ------------- ------------ ------------ For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 8,680 $ 165 $ 3,806 $ 7,107 Net realized gain (loss) on investments (1,948) 98 667 39,604 Capital gain distributions from mutual funds -- 1,130 110 -- Net change in unrealized appreciation (depreciation) of investments 10,781 540 1,617 (32,127) -------- ------- -------- -------- Increase (decrease) in net assets resulting from operations 17,513 1,933 6,200 14,584 -------- ------- -------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option 22,909 (3) 159,002 175,963 Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (12,537) (1,048) (6,132) (17,728) -------- ------- -------- -------- Increase (decrease) in net assets resulting from principal transactions 10,372 (1,051) 152,870 158,235 -------- ------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 27,885 882 159,070 172,819 NET ASSETS: Beginning of year 157,045 13,143 32,710 168,065 -------- ------- -------- -------- End of year $184,930 $14,025 $191,780 $340,884 ======== ======= ======== ======== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 3,724 $ 201 $ 799 $ 2,440 Net realized gain (loss) on investments (2,222) (6) 445 2,586 Capital gain distributions from mutual funds -- 1,018 -- -- Net change in unrealized appreciation (depreciation) of investments (2,539) 51 1,784 17,431 -------- ------- -------- -------- Increase (decrease) in net assets resulting from operations (1,037) 1,264 3,028 22,457 -------- ------- -------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option 27,498 12,559 (1) 25,382 Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (10,396) (680) (2,960) (11,272) -------- ------- -------- -------- Increase (decrease) in net assets resulting from principal transactions 17,102 11,879 (2,961) 14,110 -------- ------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 16,065 13,143 67 36,567 NET ASSETS: Beginning of year 140,980 -- 32,643 131,498 -------- ------- -------- -------- End of year $157,045 $13,143 $ 32,710 $168,065 ======== ======= ======== ========
See accompanying notes. VA I-22 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts -------------------------------------------------------- Vanguard Vanguard LifeStrategy Vanguard Prime LifeStrategy Moderate Growth Money Market Vanguard Income Fund Fund Fund PRIMECAP Fund ------------ --------------- -------------- ------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 6,727 $ 22,638 $ 188 $ (5) Net realized gain (loss) on investments 4,802 17,323 -- 107 Capital gain distributions from mutual funds 387 1,159 -- 176 Net change in unrealized appreciation (depreciation) of investments (298) 19,883 -- 47 -------- ---------- ------ ------ Increase (decrease) in net assets resulting from operations 11,618 61,003 188 325 -------- ---------- ------ ------ PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option (27,642) 155,454 -- -- Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (13,409) (80,427) (394) (289) -------- ---------- ------ ------ Increase (decrease) in net assets resulting from principal transactions (41,051) 75,027 (394) (289) -------- ---------- ------ ------ TOTAL INCREASE (DECREASE) IN NET ASSETS (29,433) 136,030 (206) 36 NET ASSETS: Beginning of year 222,047 906,953 4,477 3,144 -------- ---------- ------ ------ End of year $192,614 $1,042,983 $4,271 $3,180 ======== ========== ====== ====== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 6,747 $ 18,020 $ 185 $ (4) Net realized gain (loss) on investments 468 8,673 -- 88 Capital gain distributions from mutual funds 1,067 -- -- 173 Net change in unrealized appreciation (depreciation) of investments 5,950 74,510 -- 83 -------- ---------- ------ ------ Increase (decrease) in net assets resulting from operations 14,232 101,203 185 340 -------- ---------- ------ ------ PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option 47,212 146,909 (1) (1) Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (14,889) (69,517) (396) (270) -------- ---------- ------ ------ Increase (decrease) in net assets resulting from principal transactions 32,323 77,392 (397) (271) -------- ---------- ------ ------ TOTAL INCREASE (DECREASE) IN NET ASSETS 46,555 178,595 (212) 69 NET ASSETS: Beginning of year 175,492 728,358 4,689 3,075 -------- ---------- ------ ------ End of year $222,047 $ 906,953 $4,477 $3,144 ======== ========== ====== ======
See accompanying notes. VA I-23 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts --------------------------------------------------------------- Vanguard Small- Vanguard Small- Vanguard Total Vanguard Total Cap Growth Index Cap Value Index Bond Market International Fund Fund Index Fund Stock Index Fund ---------------- --------------- -------------- ---------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ (63) $ 342 $ 123 $ 6,199 Net realized gain (loss) on investments 395 347 (252) 20,233 Capital gain distributions from mutual funds -- -- -- -- Net change in unrealized appreciation (depreciation) of investments 1,411 (2,755) 244 17,147 ------- ------- ------- -------- Increase (decrease) in net assets resulting from operations 1,743 (2,066) 115 43,579 ------- ------- ------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option (4) (4) (8,351) (11) Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (1,867) (2,406) (191) (43,711) ------- ------- ------- -------- Increase (decrease) in net assets resulting from principal transactions (1,871) (2,410) (8,542) (43,722) ------- ------- ------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS (128) (4,476) (8,427) (143) NET ASSETS: Beginning of year 19,750 29,051 8,427 307,249 ------- ------- ------- -------- End of year $19,622 $24,575 $ -- $307,106 ======= ======= ======= ======== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ (92) $ 327 $ 355 $ 5,320 Net realized gain (loss) on investments 150 173 (38) 12,477 Capital gain distributions from mutual funds -- -- -- -- Net change in unrealized appreciation (depreciation) of investments 2,023 3,381 (26) 49,188 ------- ------- ------- -------- Increase (decrease) in net assets resulting from operations 2,081 3,881 291 66,985 ------- ------- ------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option -- 8,371 (2) (5) Mortality reserve transfers -- -- -- -- Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (1,727) (2,190) (760) (37,032) ------- ------- ------- -------- Increase (decrease) in net assets resulting from principal transactions (1,727) 6,181 (762) (37,037) ------- ------- ------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 354 10,062 (471) 29,948 NET ASSETS: Beginning of year 19,396 18,989 8,898 277,301 ------- ------- ------- -------- End of year $19,750 $29,051 $ 8,427 $307,249 ======= ======= ======= ========
See accompanying notes. VA I-24 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ---------------------------------------------------------------- Vanguard VIF Vanguard VIF Vanguard U.S. Vanguard VIF Capital Growth Diversified Value Growth Fund Balanced Portfolio Portfolio Portfolio ------------- ------------------ -------------- ----------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ (8) $ 107,432 $ (452) $ 9,021 Net realized gain (loss) on investments 90 81,529 16,138 25,799 Capital gain distributions from mutual funds -- 202,295 4,476 22,182 Net change in unrealized appreciation (depreciation) of investments 334 (21,095) 5,114 (43,256) ------ ---------- -------- -------- Increase (decrease) in net assets resulting from operations 416 370,161 25,276 13,746 ------ ---------- -------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option -- 995,423 345,897 370,303 Mortality reserve transfers -- -- (366) (2,938) Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (419) (375,590) (25,504) (55,635) ------ ---------- -------- -------- Increase (decrease) in net assets resulting from principal transactions (419) 619,833 320,027 311,730 ------ ---------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS (3) 989,994 345,303 325,476 NET ASSETS: Beginning of year 4,584 4,568,050 177,719 446,466 ------ ---------- -------- -------- End of year $4,581 $5,558,044 $523,022 $771,942 ====== ========== ======== ======== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ (13) $ 66,768 $ 86 $ 4,479 Net realized gain (loss) on investments 52 56,248 1,968 24,671 Capital gain distributions from mutual funds -- 105,934 5,001 4,156 Net change in unrealized appreciation (depreciation) of investments -- 289,088 7,392 27,932 ------ ---------- -------- -------- Increase (decrease) in net assets resulting from operations 39 518,038 14,447 61,238 ------ ---------- -------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option (1) 903,940 59,969 49,433 Mortality reserve transfers -- -- -- -- Contract withdrawals -- (5,104) (2,573) -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (402) (267,719) (8,209) (29,973) ------ ---------- -------- -------- Increase (decrease) in net assets resulting from principal transactions (403) 631,117 49,187 19,460 ------ ---------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS (364) 1,149,155 63,634 80,698 NET ASSETS: Beginning of year 4,948 3,418,895 114,085 365,768 ------ ---------- -------- -------- End of year $4,584 $4,568,050 $177,719 $446,466 ====== ========== ======== ========
See accompanying notes. VA I-25 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ---------------------------------------------------------- Vanguard VIF Vanguard VIF Vanguard VIF Equity Income Equity Index Vanguard VIF High Yield Bond Portfolio Portfolio Growth Portfolio Portfolio ------------- ------------ ---------------- --------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 13,099 $ 4,849 $ 119 $ 23,962 Net realized gain (loss) on investments 13,017 8,208 365 (228) Capital gain distributions from mutual funds 44,655 19,129 -- -- Net change in unrealized appreciation (depreciation) of investments (42,408) (5,944) 6,439 (18,585) -------- -------- -------- -------- Increase (decrease) in net assets resulting from operations 28,363 26,242 6,923 5,149 -------- -------- -------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option 40,795 232,029 41,267 26,218 Mortality reserve transfers (4,123) -- -- (1,712) Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (46,807) (55,252) (5,528) (35,601) -------- -------- -------- -------- Increase (decrease) in net assets resulting from principal transactions (10,135) 176,777 35,739 (11,095) -------- -------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 18,228 203,019 42,662 (5,946) NET ASSETS: Beginning of year 624,226 430,794 60,284 376,901 -------- -------- -------- -------- End of year $642,454 $633,813 $102,946 $370,955 ======== ======== ======== ======== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 6,752 $ 3,591 $ (125) $ 14,761 Net realized gain (loss) on investments 1,848 1,982 3,061 (91) Capital gain distributions from mutual funds 14,681 20,165 -- -- Net change in unrealized appreciation (depreciation) of investments 57,312 15,875 (3,110) 1,555 -------- -------- -------- -------- Increase (decrease) in net assets resulting from operations 80,593 41,613 (174) 16,225 -------- -------- -------- -------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option 262,872 223,153 4,680 208,048 Mortality reserve transfers -- -- -- -- Contract withdrawals (5,100) -- (2,613) -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (26,176) (34,080) (4,145) (22,841) -------- -------- -------- -------- Increase (decrease) in net assets resulting from principal transactions 231,596 189,073 (2,078) 185,207 -------- -------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 312,189 230,686 (2,252) 201,432 NET ASSETS: Beginning of year 312,037 200,108 62,536 175,469 -------- -------- -------- -------- End of year $624,226 $430,794 $ 60,284 $376,901 ======== ======== ======== ========
See accompanying notes. VA I-26 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ---------------------------------------------------------- Vanguard VIF Vanguard VIF Vanguard VIF International Vanguard VIF Mid- Money Market REIT Index Portfolio Cap Index Portfolio Portfolio Portfolio ------------- ------------------- ------------ ------------ For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 20,056 $ 2,582 $ 17,836 $ 7,523 Net realized gain (loss) on investments 76,182 20,092 -- (3,286) Capital gain distributions from mutual funds 67,358 41,316 -- 41,010 Net change in unrealized appreciation (depreciation) of investments 103,499 (45,288) -- (134,896) ---------- -------- ----------- --------- Increase (decrease) in net assets resulting from operations 267,095 18,702 17,836 (89,649) ---------- -------- ----------- --------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- 5,843,510 -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option 585,674 165,358 (4,172,055) 15,479 Mortality reserve transfers (2,944) -- (3,079) (5,122) Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (130,843) (31,686) (6,052) (34,647) ---------- -------- ----------- --------- Increase (decrease) in net assets resulting from principal transactions 451,887 133,672 1,662,324 (24,290) ---------- -------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 718,982 152,374 1,680,160 (113,939) NET ASSETS: Beginning of year 1,478,249 324,199 4,299 444,848 ---------- -------- ----------- --------- End of year $2,197,231 $476,573 $ 1,684,459 $ 330,909 ========== ======== =========== ========= For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 1,908 $ 1,309 $ 9,495 $ 4,335 Net realized gain (loss) on investments 29,714 5,133 233 20,500 Capital gain distributions from mutual funds 4,201 10,869 -- 19,337 Net change in unrealized appreciation (depreciation) of investments 102,413 20,689 -- 56,722 ---------- -------- ----------- --------- Increase (decrease) in net assets resulting from operations 138,236 38,000 9,728 100,894 ---------- -------- ----------- --------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- 4,553,790 -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option 949,901 48,844 (4,592,329) 153,921 Mortality reserve transfers -- -- -- -- Contract withdrawals (10,630) -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (41,626) (18,012) (713) (25,812) ---------- -------- ----------- --------- Increase (decrease) in net assets resulting from principal transactions 897,645 30,832 (39,252) 128,109 ---------- -------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,035,881 68,832 (29,524) 229,003 NET ASSETS: Beginning of year 442,368 255,367 33,823 215,845 ---------- -------- ----------- --------- End of year $1,478,249 $324,199 $ 4,299 $ 444,848 ========== ======== =========== =========
See accompanying notes. VA I-27 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts --------------------------------------------------------------- Vanguard VIF Vanguard VIF Short-Term Vanguard VIF Vanguard VIF Total Stock Investment-Grade Small Company Total Bond Market Market Index Portfolio Growth Portfolio Index Portfolio Portfolio ---------------- ---------------- ----------------- ------------ For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 5,728 $ (32) $ 20,895 $ 12,350 Net realized gain (loss) on investments 198 3,863 (3,246) 61,806 Capital gain distributions from mutual funds -- 17,110 -- 101,823 Net change in unrealized appreciation (depreciation) of investments 2,707 (12,571) 21,001 (73,230) -------- -------- -------- ---------- Increase (decrease) in net assets resulting from operations 8,633 8,370 38,650 102,749 -------- -------- -------- ---------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option 71,425 68,027 267,535 460,763 Mortality reserve transfers (7,223) -- (10,341) (1,973) Contract withdrawals -- -- -- -- Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (14,182) (15,038) (51,920) (209,521) -------- -------- -------- ---------- Increase (decrease) in net assets resulting from principal transactions 50,020 52,989 205,274 249,269 -------- -------- -------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 58,653 61,359 243,924 352,018 NET ASSETS: Beginning of year 145,842 172,093 444,780 2,202,013 -------- -------- -------- ---------- End of year $204,495 $233,452 $688,704 $2,554,031 ======== ======== ======== ========== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 2,192 $ (289) $ 13,170 $ 5,473 Net realized gain (loss) on investments (79) 1,162 (3,029) 28,941 Capital gain distributions from mutual funds -- 8,216 -- 99,647 Net change in unrealized appreciation (depreciation) of investments 2,425 (305) 4,656 59,498 -------- -------- -------- ---------- Increase (decrease) in net assets resulting from operations 4,538 8,784 14,797 193,559 -------- -------- -------- ---------- PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- -- -- Administrative charges -- -- -- -- Net transfers from (to) other Sub-accounts or fixed rate option 90,978 103,853 105,626 1,062,152 Mortality reserve transfers -- -- -- -- Contract withdrawals (5,047) (2,539) -- (17,926) Surrender charges -- -- -- -- Death benefits -- -- -- -- Annuity payments (9,333) (9,532) (34,083) (134,634) -------- -------- -------- ---------- Increase (decrease) in net assets resulting from principal transactions 76,598 91,782 71,543 909,592 -------- -------- -------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 81,136 100,566 86,340 1,103,151 NET ASSETS: Beginning of year 64,706 71,527 358,440 1,098,862 -------- -------- -------- ---------- End of year $145,842 $172,093 $444,780 $2,202,013 ======== ======== ======== ==========
See accompanying notes. VA I-28 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I STATEMENT OF CHANGES IN NET ASSETS - CONTINUED For the Years Ended December 31, 2007 and 2006
Sub-accounts ------------------------------- Vanguard Vanguard Windsor Wellington Fund Fund --------------- ---------------- For the Year Ended December 31, 2007 OPERATIONS: Net investment income (loss) $ 3,119 $ 22 Net realized gain (loss) on investments 1,835 59 Capital gain distributions from mutual funds 5,213 311 Net change in unrealized appreciation (depreciation) of investments (673) (500) -------- ------ Increase (decrease) in net assets resulting from operations 9,494 (108) -------- ------ PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- Administrative charges -- -- Net transfers from (to) other Sub-accounts or fixed rate option (189) (1) Mortality reserve transfers -- -- Contract withdrawals -- -- Surrender charges -- -- Death benefits -- -- Annuity payments (12,228) (274) -------- ------ Increase (decrease) in net assets resulting from principal transactions (12,417) (275) -------- ------ TOTAL INCREASE (DECREASE) IN NET ASSETS (2,923) (383) NET ASSETS: Beginning of year 128,741 3,121 -------- ------ End of year $125,818 $2,738 ======== ====== For the Year Ended December 31, 2006 OPERATIONS: Net investment income (loss) $ 2,904 $ 22 Net realized gain (loss) on investments 1,026 48 Capital gain distributions from mutual funds 5,332 237 Net change in unrealized appreciation (depreciation) of investments 7,338 197 -------- ------ Increase (decrease) in net assets resulting from operations 16,600 504 -------- ------ PRINCIPAL TRANSACTIONS: Contract purchase payments -- -- Administrative charges -- -- Net transfers from (to) other Sub-accounts or fixed rate option 334 (1) Mortality reserve transfers -- -- Contract withdrawals -- -- Surrender charges -- -- Death benefits -- -- Annuity payments (11,408) (254) -------- ------ Increase (decrease) in net assets resulting from principal transactions (11,074) (255) -------- ------ TOTAL INCREASE (DECREASE) IN NET ASSETS 5,526 249 NET ASSETS: Beginning of year 123,215 2,872 -------- ------ End of year $128,741 $3,121 ======== ======
See accompanying notes. VA I-29 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS Note A - Organization Variable Account I (the "Account") was established by AIG Life Insurance Company (the "Company") on June 5, 1986, to fund individual single purchase payment deferred variable annuity contracts, individual flexible premium deferred variable annuity contracts and group flexible premium deferred variable annuity contracts (the "contracts") issued by the Company. New contracts for the following products are available for sale by the Account: Group and Individual Immediate Variable Annuity ("GIVA") and Vanguard Lifetime Income Program Group and Individual Immediate Variable Annuity ("Vanguard SPIA"). New contracts for the following products are no longer available for sale by the Account: Ovation, Ovation Plus, Ovation Advisor, Gallery, Variable Annuity, Paradigm, Trilogy, and Profile. The Company is an indirect, wholly-owned subsidiary of American International Group, Inc. The Account is registered with the Securities and Exchange Commission as a unit investment trust pursuant to the provisions of the Investment Company Act of 1940, as amended. The Account is divided into "Sub-accounts", which invest in independently managed mutual fund portfolios ("Funds"). The Funds available to contract owners through the various Sub-accounts are as follows: AIM Variable Insurance Funds ("AIM V.I."): AIM V.I. Capital Appreciation Fund - Series I AIM V.I. International Growth Fund - Series I AllianceBernstein Variable Products Series Fund, Inc. ("AllianceBernstein"): AllianceBernstein Americas Government Income Portfolio - Class A AllianceBernstein Balanced Shares Portfolio - Class A (3) AllianceBernstein Global Bond Portfolio - Class A AllianceBernstein Global Dollar Government Portfolio - Class A AllianceBernstein Global Technology Portfolio - Class A AllianceBernstein Global Technology Portfolio - Class B AllianceBernstein Growth and Income Portfolio - Class A AllianceBernstein Growth and Income Portfolio - Class B AllianceBernstein Growth Portfolio - Class A AllianceBernstein Growth Portfolio - Class B AllianceBernstein High Yield Portfolio - Class A AllianceBernstein International Growth Portfolio - Class A (4) (13) AllianceBernstein International Research Growth Portfolio - Class A (5) (13) AllianceBernstein International Value Portfolio - Class A AllianceBernstein Large Cap Growth Portfolio - Class A AllianceBernstein Large Cap Growth Portfolio - Class B AllianceBernstein Money Market Portfolio - Class A AllianceBernstein Money Market Portfolio - Class B AllianceBernstein Real Estate Investment Portfolio - Class A AllianceBernstein Small Cap Growth Portfolio - Class A AllianceBernstein Small/Mid Cap Value Portfolio - Class A AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B AllianceBernstein Utility Income Portfolio - Class A AllianceBernstein Value Portfolio - Class B American Funds(R): American Funds(R) AMCAP Fund(R) (1) American Funds(R) The Bond Fund of America(SM) (1) American Funds(R) Capital World Growth and Income Fund(SM) (1) American Funds(R) EuroPacific Growth Fund(R) (1) American Funds(R) The Investment Company of America(R) (1) American Funds(R) The New Economy Fund(R) (1) American Funds(R) SMALLCAP World Fund(R) (1) American Funds(R) Washington Mutual Investors Fund(SM) (1) VA I-30 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note A - Organization - Continued BlackRock Variable Series Funds, Inc. ("BlackRock"): (8) BlackRock Basic Value V.I. Fund - Class I (8) BlackRock Global Allocation V.I. Fund - Class I (8) BlackRock Global Growth V.I. Fund - Class I (8) BlackRock High Income V.I. Fund - Class I (8) (10) BlackRock International Value V.I. Fund - Class I (8) BlackRock Large Cap Core V.I. Fund - Class I (8) BlackRock Large Cap Growth V.I. Fund - Class I (8) BlackRock Money Market V.I. Fund - Class I (8) (11) BlackRock Total Return V.I. Fund - Class I (8) (9) (14) BlackRock Utilities and Telecommunications V.I. Fund - Class I (8) BlackRock Value Opportunities V.I. Fund - Class I (8) Delaware VIP Trust ("Delaware VIP"): Delaware VIP Balanced Series - Standard Class Delaware VIP Capital Reserves Series - Standard Class Delaware VIP Cash Reserve Series - Standard Class Delaware VIP Growth Opportunities Series - Standard Class Delaware VIP High Yield Series - Standard Class Delaware VIP Value Series - Standard Class Dreyfus Stock Index Fund, Inc. - Initial Shares Dreyfus Variable Investment Fund ("Dreyfus VIF"): Dreyfus VIF Small Company Stock Portfolio - Initial Shares (12) Fidelity(R) Variable Insurance Products ("Fidelity(R) VIP"): Fidelity(R) VIP Asset Manager(SM) Portfolio - Initial Class Fidelity(R) VIP Contrafund(R) Portfolio - Initial Class Fidelity(R) VIP Growth Portfolio - Initial Class Fidelity(R) VIP High Income Portfolio - Initial Class Fidelity(R) VIP Investment Grade Bond Portfolio - Initial Class Fidelity(R) VIP Money Market Portfolio - Initial Class Fidelity(R) VIP Overseas Portfolio - Initial Class Franklin(R) Templeton(R) Investments ("Franklin"): Franklin Gold and Precious Metals Fund - Class A (1) Franklin Mutual Financial Services Fund - Class A (1) Franklin Templeton Foreign Fund - Class A (1) MFS(R) Mutual Funds ("MFS(R)"): MFS(R) Emerging Growth Fund - Class A (1) MFS(R) New Discovery Fund - Class A (1) MFS(R) Research Fund - Class A (1) OppenheimerFunds(R) ("Oppenheimer"): Oppenheimer International Bond Fund - Class A (1) Oppenheimer Strategic Income Fund - Class A (1) Putnam Investments: Putnam Discovery Growth Fund - Class A (1) Putnam Health Sciences Trust - Class A (1) Putnam International Capital Opportunities Fund - Class A (1) Putnam Voyager Fund - Class A (1) The Putnam Fund for Growth and Income - Class A (1) VA I-31 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note A - Organization - Continued UBS Series Trust ("UBS"): UBS U.S. Allocation Portfolio The Universal Institutional Funds, Inc. ("UIF"): UIF Core Plus Fixed Income Portfolio - Class I Shares (1) UIF Equity Growth Portfolio - Class I Shares (1) UIF International Magnum Portfolio - Class I Shares (1) UIF Mid Cap Growth Portfolio - Class I Shares (1) UIF Money Market Portfolio - Class I Shares (1) (6) UIF Technology Portfolio - Class I Shares (1) (7) UIF Value Portfolio - Class I Shares (1) Van Eck Worldwide Insurance Trust ("Van Eck"): Van Eck Worldwide Emerging Markets Fund - Initial Class Van Eck Worldwide Hard Assets Fund - Initial Class The Vanguard Group(R) ("Vanguard(R)"): Vanguard(R) 500 Index Fund Vanguard(R) Dividend Growth Fund Vanguard(R) GNMA Fund Vanguard(R) Health Care Fund Vanguard(R) Inflation-Protected Securities Fund Vanguard(R) International Growth Fund (2) Vanguard(R) LifeStrategy(R) Conservative Growth Fund Vanguard(R) LifeStrategy(R) Growth Fund Vanguard(R) LifeStrategy(R) Income Fund Vanguard(R) LifeStrategy(R) Moderate Growth Fund Vanguard(R) Prime Money Market Fund Vanguard(R) PRIMECAP Fund Vanguard(R) Small-Cap Growth Index Fund Vanguard(R) Small-Cap Value Index Fund Vanguard(R) Total Bond Market Index Fund Vanguard(R) Total International Stock Index Fund Vanguard(R) U.S. Growth Fund Vanguard(R) Wellington(TM) Fund Vanguard(R) Windsor(TM) Fund Vanguard(R) Variable Insurance Fund ("Vanguard(R) VIF"): Vanguard(R) VIF Balanced Portfolio Vanguard(R) VIF Capital Growth Portfolio Vanguard(R) VIF Diversified Value Portfolio Vanguard(R) VIF Equity Income Portfolio Vanguard(R) VIF Equity Index Portfolio Vanguard(R) VIF Growth Portfolio Vanguard(R) VIF High Yield Bond Portfolio Vanguard(R) VIF International Portfolio Vanguard(R) VIF Mid-Cap Index Portfolio Vanguard(R) VIF Money Market Portfolio Vanguard(R) VIF REIT Index Portfolio Vanguard(R) VIF Short-Term Investment-Grade Portfolio Vanguard(R) VIF Small Company Growth Portfolio Vanguard(R) VIF Total Bond Market Index Portfolio Vanguard(R) VIF Total Stock Market Index Portfolio VA I-32 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note A - Organization - Continued (1) Sub-accounts had no activity in the current year. (2) Effective May 2, 2005, Vanguard International Growth Fund is no longer offered as an investment option. (3) Effective February 1, 2006, AllianceBernstein Total Return Portfolio - Class A changed its name to AllianceBernstein Balanced Shares Portfolio - Class A. (4) Effective February 1, 2006, AllianceBernstein Worldwide Privatization Portfolio - Class A changed its name to AllianceBernstein International Growth Portfolio - Class A. (5) Effective February 1, 2006, AllianceBernstein International Portfolio - Class A changed its name to AllianceBernstein International Research Growth Portfolio - Class A. (6) Effective April 28, 2006, UIF Money Market Portfolio - Class I Shares was closed and liquidated. (7) Effective April 28, 2006, UIF Technology Portfolio - Class I Shares was closed and liquidated. (8) Effective October 2, 2006, Merrill Lynch & Co., Inc.'s investment management business combined with that of BlackRock, Inc., the FAM Variable Series Funds, Inc. changed its name to BlackRock Variable Series Funds, Inc. and the Mercury funds changed their names to BlackRock funds. (9) Effective October 2, 2006, Mercury Core Bond V.I. Fund - Class I changed its name to BlackRock Bond V.I. Fund - Class I. (10) Effective October 2, 2006, Mercury High Current Income V.I. Fund - Class I changed its name to BlackRock High Income V.I. Fund - Class I. (11) Effective October 2, 2006, Mercury Domestic Money Market V.I. Fund - Class I changed its name to BlackRock Money Market V.I. Fund - Class I. (12) Effective May 1, 2007, Dreyfus VIF Small Company Stock Portfolio - Initial Shares was closed and liquidated. (13) Effective December 7, 2007, AllianceBernstein International Research Growth Portfolio was acquired by AllianceBernstein International Growth Portfolio. (14) Effective December 10, 2007, BlackRock Bond V.I. Fund - Class I changed its name to BlackRock Total Return V.I. Fund - Class I. In addition to the Sub-accounts above, contract owners may allocate contract funds to a fixed account that is part of the Company's general account. Contract owners should refer to the prospectus and prospectus supplements for a complete description of the available Funds and the fixed account. The assets of the Account are segregated from the Company's other assets. The operations of the Account are part of the Company. Net purchases from the contracts are allocated to the Sub-accounts and invested in the Funds in accordance with contract owner instructions. The purchases are recorded as principal transactions in the Statement of Changes in Net Assets. Note B - Summary of Significant Accounting Policies and Basis of Presentation The accompanying financial statements of the Account have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The accounting principles followed by the Account and the methods of applying those principles are presented below. Use of estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the year. Actual results could differ from those estimates. Security valuation - The investments in shares of the Funds are stated at the net asset value of the respective portfolio as determined by the Funds, which value their securities at fair value. Security transactions and related investment income - Security transactions which represent purchases and sales of investments are accounted for on the trade date at fair value. Realized gains and losses from security transactions are determined on the basis of first-in first-out. Dividend income and distributions of capital gains are recorded on the ex-dividend date and reinvested upon receipt. VA I-33 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note B - Summary of Significant Accounting Policies and Basis of Presentation - Continued Annuity reserves - For contract owners who select a variable payout option, reserves are initially established based on estimated mortality (where applicable) and other assumptions, including provisions for the risk of adverse deviation from assumptions. The assumed interest rate used to determine annuity payments is 3.5% or 5.0% for all contracts except "deferred load" contracts and contracts issued prior to January 1, 1982, which have an assumed interest rate of 3.0%. At each reporting period, the assumptions must be evaluated based on current experience, and the reserves must be adjusted accordingly. To the extent additional reserves are established due to mortality risk experience, the Company makes payments to the Account. If there are excess reserves remaining at the time annuity payments cease, the assets supporting those reserves are transferred from the Account to the Company. If there are transfers between the Company and the Account they will be disclosed as mortality reserve transfers in the Statement of Changes in Net Assets under principle transactions. Annuity reserves are calculated according to either the 1983(a) Individual Mortality Table or the Annuity 2000 Mortality Table, depending on the calendar year of annuitization. Federal income taxes - The Company is taxed as a life insurance company under the Internal Revenue Code and includes the operations of the Account in determining its federal income tax liability. As a result, the Account is not taxed as a "Regulated Investment Company" under subchapter M of the Internal Revenue Code. Under existing federal income tax law, the investment income and capital gains from sales of investments realized by the Account are not taxable. Therefore, no federal income tax provision has been made. Accumulation unit - This is a measuring unit used to calculate the contract owner's interest. Such units are valued on each day that the New York Stock Exchange ("NYSE") is open for business to reflect investment performance and the prorated daily deduction for mortality and expense risk charges. Note C - Contract Charges Premium taxes - The Company will deduct premium taxes imposed by certain states from purchase payments when received; from the owner's account value at the time annuity payments begin; from the amount of any partial withdrawal; or from proceeds payable upon termination of the certificate for any other reason, including death of the owner or annuitant, or surrender of the certificate. The applicable rates currently range from 0% to 3.5%. The rates are subject to change. Mortality and expense risk and administrative charges - Deductions for administrative expenses and mortality and expense risks assumed by the Company are assessed through the daily unit value calculation and paid to the Company from the daily net asset value of the Sub-accounts. A summary of the charges by contract follows:
Mortality & Expense Risk and Administrative Charges Contracts Maximum Annual Rate ------------------------------------------------- ---------------------------- Gallery 1.40% Ovation 1.40% Ovation Advisor 1.40% Ovation Plus 1.40% Paradigm 1.40% Profile 1.40% GIVA 1.25% Trilogy 1.40% Vanguard SPIA 0.52% Variable Annuity 1.40%
Accidental death benefit charges - Daily charges for the Accidental Death Benefit (ADB) option are assessed through the daily unit value calculation on all contracts that have elected this option and are equivalent, on an annual basis, to 0.05% of the value of the contracts. These charges are included as part of the mortality and expense risk and administrative charges line of the Statement of Operations. VA I-34 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note C - Contract Charges - Continued Annual administrative fee - An annual administrative expense charge of $30 may be assessed against each contract on its anniversary date. The annual administrative expense is paid by redemption of units outstanding. Contracts under the Vanguard SPIA and GIVA products are not subject to the annual administrative expense charge. Annual fees are included with administrative charges in the Statement of Changes in Net Assets under principal transactions. Distribution charges - Daily charges for distribution expenses are assessed on all contracts issued under the Ovation Plus product and are equivalent, on an annual basis, to 0.20% of the value of the contracts. These charges are paid to the Company by redemption of units outstanding. These charges are included as part of the administrative charges line of the Statement of Changes in Net Assets under principal transactions. Death benefit rider charges - The Annual Ratchet Plan is a death benefit rider. Daily charges for the Annual Ratchet Plan option are assessed on all contracts that have elected this option and are equivalent, on an annual basis, to 0.10% of the value of the contracts. These charges are paid to the Company by redemption of units outstanding. These charges are included as part of the administrative charges line of the Statement of Changes in Net Assets under principal transactions. The Equity Assurance Plan is a death benefit rider. Daily charges for the Equity Assurance Plan option are assessed on all contracts that have elected this option and are equivalent, on an annual basis, to a maximum 0.20% of the value of the contracts. These charges are paid to the Company by redemption of units outstanding. These charges are included as part of the administrative charges line of the Statement of Changes in Net Assets under principal transactions. The Estate Benefit Payment is a death benefit rider. Daily charges for the Estate Benefit Payment option are assessed on all contracts that have elected this option and are equivalent, on an annual basis, to 0.20% of the value of the contracts. These charges are paid to the Company by redemption of units outstanding. These charges are included as part of the administrative charges line of the Statement of Changes in Net Assets under principal transactions. Transfer charges - A $10 transfer fee for each transfer in excess of 12 during the contract year may be assessed on all contracts issued under the Vanguard SPIA and GIVA products. Transfer requests are subject to the Company's published rules concerning market timing. A contract owner who violates these rules will for a period of time (typically six months), have certain restrictions placed on transfers. The transfer charges are paid by redemption of units outstanding. Transfer charges are included with net transfers from (to) other sub-accounts or fixed rate option in the Statement of Changes in Net Assets under principal transactions. Surrender charge - In the event that a contract owner withdraws all or a portion of the contract value within the surrender charge period, the contracts provide that they will be assessed a surrender charge. The surrender charge is based on a table of charges, of which the maximum charge is 6% of the contract value subject to a maximum of 8.5% of premiums paid for single premium contracts and a maximum charge of 6% of premiums paid for flexible premium contracts. Contracts under the Ovation Advisor, Vanguard SPIA and GIVA products are not subjected to surrender charges. For the Vanguard SPIA product, a partial withdrawal transaction charge may be assessed for each partial withdrawal. The partial withdrawal transaction charge is the lesser of 2% of the amount withdrawn or $25. The surrender charges and partial withdrawals are paid by redemption of units outstanding. The surrender charges and partial withdrawals are included with surrender charges in the Statement of Changes in Net Assets under principal transactions. VA I-35 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note D - Security Purchases and Sales For the year ended December 31, 2007, the aggregate cost of purchases and proceeds from the sales of investments were:
Cost of Proceeds Sub-accounts Purchases from Sales --------------------------------------------------------------------------- ----------- ----------- AIM V.I. Capital Appreciation Fund - Series I $ 33,884 $ 282,288 AIM V.I. International Growth Fund - Series I 153,788 483,085 AllianceBernstein Americas Government Income Portfolio - Class A 3,272,602 7,228,163 AllianceBernstein Balanced Shares Portfolio - Class A 10,857,672 35,306,673 AllianceBernstein Global Bond Portfolio - Class A 3,596,913 4,043,539 AllianceBernstein Global Dollar Government Portfolio - Class A 4,927,674 7,153,315 AllianceBernstein Global Technology Portfolio - Class A 873,577 12,748,662 AllianceBernstein Global Technology Portfolio - Class B 1,856,684 5,730,856 AllianceBernstein Growth and Income Portfolio - Class A 11,347,917 57,568,069 AllianceBernstein Growth and Income Portfolio - Class B 11,268,347 32,628,884 AllianceBernstein Growth Portfolio - Class A 283,589 21,090,051 AllianceBernstein Growth Portfolio - Class B 522,644 9,395,439 AllianceBernstein High Yield Portfolio - Class A 2,832,930 8,067,057 AllianceBernstein International Growth Portfolio - Class A 85,348,724 16,533,597 AllianceBernstein International Research Growth Portfolio - Class A 21,697,206 73,634,068 AllianceBernstein International Value Portfolio - Class A 8,155,744 16,455,696 AllianceBernstein Large Cap Growth Portfolio - Class A 700,385 33,923,267 AllianceBernstein Large Cap Growth Portfolio - Class B 1,338,325 12,880,580 AllianceBernstein Money Market Portfolio - Class A 16,620,674 19,910,831 AllianceBernstein Money Market Portfolio - Class B 18,245,318 18,147,869 AllianceBernstein Real Estate Investment Portfolio - Class A 11,461,921 18,116,170 AllianceBernstein Small Cap Growth Portfolio - Class A 1,574,831 14,256,933 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 8,030,399 14,870,551 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 11,068,963 14,863,659 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 257,976 1,408,884 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 1,330,253 1,128,360 AllianceBernstein Utility Income Portfolio - Class A 6,433,818 15,303,548 AllianceBernstein Value Portfolio - Class B 4,279,062 16,179,124 BlackRock Basic Value V.I. Fund - Class I 784,591 1,469,299 BlackRock Global Allocation V.I. Fund - Class I 317,890 612,161 BlackRock Global Growth V.I. Fund - Class I 21,706 180,515 BlackRock High Income V.I. Fund - Class I 79,844 127,219 BlackRock International Value V.I. Fund - Class I 501,953 618,547 BlackRock Large Cap Core V.I. Fund - Class I 469,743 271,269 BlackRock Large Cap Growth V.I. Fund - Class I 64,478 95,858 BlackRock Money Market V.I. Fund - Class I 550,059 685,573 BlackRock Total Return V.I. Fund - Class I 17,021 52,308 BlackRock Utilities and Telecommunications V.I. Fund - Class I 244,061 262,233 BlackRock Value Opportunities V.I. Fund - Class I 319,171 700,870 Delaware VIP Balanced Series - Standard Class 29,111 285,265 Delaware VIP Capital Reserves Series - Standard Class 7,508 2,048 Delaware VIP Cash Reserve Series - Standard Class 147,158 160,983 Delaware VIP Growth Opportunities Series - Standard Class 134,118 190,334 Delaware VIP High Yield Series - Standard Class 32,511 35,601 Delaware VIP Value Series - Standard Class 210,927 1,016,803 Dreyfus Stock Index Fund, Inc. - Initial Shares 183,991 1,607,623 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 183,648 899,837 Fidelity VIP Asset Manager Portfolio - Initial Class 340,291 1,809,349 Fidelity VIP Contrafund Portfolio - Initial Class 650,133 1,149,901 Fidelity VIP Growth Portfolio - Initial Class 62,401 1,069,083 Fidelity VIP High Income Portfolio - Initial Class 177,123 310,886
VA I-36 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note D - Security Purchases and Sales - Continued For the year ended December 31, 2007, the aggregate cost of purchases and proceeds from the sales of investments were:
Cost of Proceeds Sub-accounts Purchases from Sales ------------------------------------------------------------ ---------- ---------- Fidelity VIP Investment Grade Bond Portfolio - Initial Class $ 297,119 $ 564,118 Fidelity VIP Money Market Portfolio - Initial Class 2,616,077 2,390,149 Fidelity VIP Overseas Portfolio - Initial Class 19,200 24,695 UBS U.S. Allocation Portfolio 491,633 3,819,884 Van Eck Worldwide Emerging Markets Fund - Initial Class 292,985 432,682 Van Eck Worldwide Hard Assets Fund - Initial Class 188,253 402,392 Vanguard 500 Index Fund 533 2,886 Vanguard Dividend Growth Fund 9,896 1,747 Vanguard GNMA Fund 9,642 2,192 Vanguard Health Care Fund 5,333 8,363 Vanguard Inflation-Protected Securities Fund 120,039 100,987 Vanguard International Growth Fund 1,400 1,158 Vanguard LifeStrategy Conservative Growth Fund 163,455 6,668 Vanguard LifeStrategy Growth Fund 371,742 206,401 Vanguard LifeStrategy Income Fund 41,434 75,371 Vanguard LifeStrategy Moderate Growth Fund 185,245 86,424 Vanguard Prime Money Market Fund 221 428 Vanguard PRIMECAP Fund 196 314 Vanguard Small-Cap Growth Index Fund 93 2,027 Vanguard Small-Cap Value Index Fund 554 2,622 Vanguard Total Bond Market Index Fund 8,487 16,906 Vanguard Total International Stock Index Fund 7,856 45,379 Vanguard U.S. Growth Fund 27 455 Vanguard VIF Balanced Portfolio 1,451,513 521,954 Vanguard VIF Capital Growth Portfolio 397,790 73,739 Vanguard VIF Diversified Value Portfolio 459,571 116,638 Vanguard VIF Equity Income Portfolio 207,538 159,919 Vanguard VIF Equity Index Portfolio 309,902 109,148 Vanguard VIF Growth Portfolio 41,769 5,912 Vanguard VIF High Yield Bond Portfolio 52,541 39,673 Vanguard VIF International Portfolio 770,284 230,983 Vanguard VIF Mid-Cap Index Portfolio 292,120 114,548 Vanguard VIF Money Market Portfolio 6,487,582 4,807,422 Vanguard VIF REIT Index Portfolio 345,323 321,078 Vanguard VIF Short-Term Investment-Grade Portfolio 77,832 22,084 Vanguard VIF Small Company Growth Portfolio 105,396 35,329 Vanguard VIF Total Bond Market Index Portfolio 398,080 171,911 Vanguard VIF Total Stock Market Index Portfolio 680,477 317,035 Vanguard Wellington Fund 10,427 14,511 Vanguard Windsor Fund 357 298
VA I-37 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note E - Investments The following is a summary of fund shares owned as of December 31, 2007.
Net Asset Value of Value Per Shares at Cost of Sub-accounts Shares Share Fair Value Shares Held ------------------------------------------------------------------- ---------- --------- ------------ ------------ AIM V.I. Capital Appreciation Fund - Series I 22,504 $29.37 $ 660,935 $ 611,033 AIM V.I. International Growth Fund - Series I 26,200 33.63 881,109 612,174 AllianceBernstein Americas Government Income Portfolio - Class A 2,246,535 12.58 28,261,406 28,196,714 AllianceBernstein Balanced Shares Portfolio - Class A 6,072,157 19.93 121,018,084 105,350,350 AllianceBernstein Global Bond Portfolio - Class A 1,218,326 12.37 15,070,695 14,812,911 AllianceBernstein Global Dollar Government Portfolio - Class A 1,318,583 13.43 17,708,566 18,118,122 AllianceBernstein Global Technology Portfolio - Class A 1,958,866 20.71 40,568,116 53,609,016 AllianceBernstein Global Technology Portfolio - Class B 995,929 20.31 20,227,318 13,544,145 AllianceBernstein Growth and Income Portfolio - Class A 5,122,634 26.82 137,389,038 112,448,995 AllianceBernstein Growth and Income Portfolio - Class B 5,993,959 26.55 159,139,620 123,260,436 AllianceBernstein Growth Portfolio - Class A 2,270,945 22.91 52,027,341 53,143,816 AllianceBernstein Growth Portfolio - Class B 1,826,364 22.42 40,947,070 27,668,134 AllianceBernstein High Yield Portfolio - Class A 3,139,731 6.90 21,664,144 23,094,652 AllianceBernstein International Growth Portfolio - Class A 4,172,954 24.89 103,864,837 106,832,480 AllianceBernstein International Value Portfolio - Class A 2,052,376 25.14 51,596,743 38,587,708 AllianceBernstein Large Cap Growth Portfolio - Class A 2,989,215 30.61 91,499,883 94,981,267 AllianceBernstein Large Cap Growth Portfolio - Class B 2,065,112 29.96 61,870,746 45,043,936 AllianceBernstein Money Market Portfolio - Class A 14,808,846 1.00 14,808,846 14,808,846 AllianceBernstein Money Market Portfolio - Class B 14,218,286 1.00 14,218,286 14,218,286 AllianceBernstein Real Estate Investment Portfolio - Class A 1,884,028 16.23 30,577,768 36,527,204 AllianceBernstein Small Cap Growth Portfolio - Class A 2,181,631 15.48 33,771,641 24,522,433 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 2,684,331 17.11 45,928,910 39,978,303 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 4,960,203 11.78 58,431,189 59,955,766 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 143,114 11.67 1,670,140 1,692,059 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 241,553 13.48 3,256,136 3,140,728 AllianceBernstein Utility Income Portfolio - Class A 1,650,168 29.73 49,059,488 31,007,731 AllianceBernstein Value Portfolio - Class B 4,328,259 13.79 59,686,694 47,295,749 BlackRock Basic Value V.I. Fund - Class I 368,485 13.86 5,107,201 5,165,916 BlackRock Global Allocation V.I. Fund - Class I 120,761 16.03 1,935,800 1,674,206 BlackRock Global Growth V.I. Fund - Class I 38,739 18.02 698,074 414,436 BlackRock High Income V.I. Fund - Class I 47,646 7.26 345,911 370,801 BlackRock International Value V.I. Fund - Class I 149,743 14.38 2,153,299 2,006,526 BlackRock Large Cap Core V.I. Fund - Class I 67,682 29.75 2,013,552 1,908,288 BlackRock Large Cap Growth V.I. Fund - Class I 77,419 12.71 984,001 734,859 BlackRock Money Market V.I. Fund - Class I 305,422 1.00 305,422 305,422 BlackRock Total Return V.I. Fund - Class I 22,022 11.77 259,202 260,356 BlackRock Utilities and Telecommunications V.I. Fund - Class I 49,346 12.60 621,760 516,113 BlackRock Value Opportunities V.I. Fund - Class I 84,706 19.11 1,618,733 2,052,411 Delaware VIP Balanced Series - Standard Class 43,000 14.82 637,255 645,045 Delaware VIP Capital Reserves Series - Standard Class 16,533 9.67 159,876 162,268 Delaware VIP Cash Reserve Series - Standard Class 235,934 1.00 235,934 235,934 Delaware VIP Growth Opportunities Series - Standard Class 48,852 21.36 1,043,486 1,012,654 Delaware VIP High Yield Series - Standard Class 77,603 5.95 461,737 483,516 Delaware VIP Value Series - Standard Class 169,271 21.44 3,629,178 2,763,844 Dreyfus Stock Index Fund, Inc. - Initial Shares 107,971 37.40 4,038,124 3,249,964 Fidelity VIP Asset Manager Portfolio - Initial Class 180,759 16.57 2,995,184 2,478,876 Fidelity VIP Contrafund Portfolio - Initial Class 77,889 27.90 2,173,101 2,055,363 Fidelity VIP Growth Portfolio - Initial Class 64,771 45.12 2,922,475 2,010,134 Fidelity VIP High Income Portfolio - Initial Class 95,258 5.98 569,642 605,376 Fidelity VIP Investment Grade Bond Portfolio - Initial Class 106,997 12.76 1,365,286 1,341,518
VA I-38 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note E - Investments - Continued The following is a summary of fund shares owned as of December 31, 2007.
Net Asset Value of Value Per Shares at Cost of Sub-accounts Shares Share Fair Value Shares Held ------------------------------------------------------- --------- --------- ----------- ----------- Fidelity VIP Money Market Portfolio - Initial Class 2,376,947 $ 1.00 $ 2,376,947 $ 2,376,947 Fidelity VIP Overseas Portfolio - Initial Class 7,644 25.32 193,552 100,802 UBS U.S. Allocation Portfolio 742,107 15.32 11,369,073 10,604,951 Van Eck Worldwide Emerging Markets Fund - Initial Class 23,436 27.72 649,649 506,020 Van Eck Worldwide Hard Assets Fund - Initial Class 15,332 41.19 631,511 453,437 Vanguard 500 Index Fund 208 135.15 28,065 23,489 Vanguard Dividend Growth Fund 2,515 15.21 38,253 32,191 Vanguard GNMA Fund 2,015 10.37 20,892 20,555 Vanguard Health Care Fund 421 138.63 58,367 53,324 Vanguard Inflation-Protected Securities Fund 14,854 12.45 184,930 181,656 Vanguard International Growth Fund 565 24.82 14,025 13,435 Vanguard LifeStrategy Conservative Growth Fund 11,189 17.14 191,781 183,832 Vanguard LifeStrategy Growth Fund 13,597 25.07 340,885 338,529 Vanguard LifeStrategy Income Fund 13,526 14.24 192,615 184,022 Vanguard LifeStrategy Moderate Growth Fund 49,174 21.21 1,042,983 896,753 Vanguard Prime Money Market Fund 4,271 1.00 4,271 4,271 Vanguard PRIMECAP Fund 44 72.05 3,180 2,292 Vanguard Small-Cap Growth Index Fund 981 20.01 19,622 15,871 Vanguard Small-Cap Value Index Fund 1,587 15.49 24,575 24,326 Vanguard Total International Stock Index Fund 15,440 19.89 307,107 174,162 Vanguard U.S. Growth Fund 230 19.91 4,582 3,593 Vanguard VIF Balanced Portfolio 267,729 20.76 5,558,044 5,097,707 Vanguard VIF Capital Growth Portfolio 28,195 18.55 523,023 500,362 Vanguard VIF Diversified Value Portfolio 47,271 16.33 771,942 750,812 Vanguard VIF Equity Income Portfolio 32,464 19.79 642,454 622,753 Vanguard VIF Equity Index Portfolio 21,456 29.54 633,812 616,824 Vanguard VIF Growth Portfolio 7,154 14.39 102,946 95,676 Vanguard VIF High Yield Bond Portfolio 45,183 8.21 370,955 382,404 Vanguard VIF International Portfolio 92,166 23.84 2,197,232 1,933,195 Vanguard VIF Mid-Cap Index Portfolio 25,650 18.58 476,574 474,108 Vanguard VIF Money Market Portfolio 1,684,459 1.00 1,684,459 1,684,459 Vanguard VIF REIT Index Portfolio 17,490 18.92 330,910 386,837 Vanguard VIF Short-Term Investment-Grade Portfolio 18,987 10.77 204,495 198,613 Vanguard VIF Small Company Growth Portfolio 12,862 18.15 233,452 236,707 Vanguard VIF Total Bond Market Index Portfolio 59,680 11.54 688,705 668,277 Vanguard VIF Total Stock Market Index Portfolio 82,150 31.09 2,554,031 2,458,106 Vanguard Wellington Fund 3,857 32.62 125,818 115,919 Vanguard Windsor Fund 174 15.71 2,738 2,740
VA I-39 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note F - Summary of Changes in Units Summary of Changes in Units for the year ended December 31, 2007.
Accumulation Accumulation Annuity Units Annuity Units Net Increase Sub-accounts Units Issued Units Redeemed Issued Redeemed (Decrease) ------------------------------------------------------------ ------------ -------------- ------------- ------------- ------------ 2 AIM V.I. Capital Appreciation Fund - Series I 1,252 (54) -- -- 1,198 3 AIM V.I. Capital Appreciation Fund - Series I 197 (20,346) -- (24) (20,173) 2 AIM V.I. International Growth Fund - Series I -- (90) -- -- (90) 3 AIM V.I. International Growth Fund - Series I 3,961 (19,604) 5 (5) (15,643) 1 AllianceBernstein Americas Government Income Portfolio - Class A 6,484 (256,255) -- (313) (250,084) 2 AllianceBernstein Americas Government Income Portfolio - Class A -- (4,502) -- -- (4,502) 1 AllianceBernstein Balanced Shares Portfolio - Class A 18,767 (1,008,868) -- (953) (991,054) 2 AllianceBernstein Balanced Shares Portfolio - Class A -- (65,393) -- -- (65,393) 3 AllianceBernstein Balanced Shares Portfolio - Class A 102 (2,303) -- -- (2,201) 1 AllianceBernstein Global Bond Portfolio - Class A 117,686 (156,932) 819 (208) (38,635) 2 AllianceBernstein Global Bond Portfolio - Class A 3,861 (4,608) -- -- (747) 3 AllianceBernstein Global Bond Portfolio - Class A -- (62) -- -- (62) 1 AllianceBernstein Global Dollar Government Portfolio - Class A 15,046 (116,847) -- (54) (101,855) 2 AllianceBernstein Global Dollar Government Portfolio - Class A -- (5,377) -- -- (5,377) 1 AllianceBernstein Global Technology Portfolio - Class A 3,928 (589,313) -- (688) (586,073) 2 AllianceBernstein Global Technology Portfolio - Class A 5,130 (23,389) -- -- (18,259) 3 AllianceBernstein Global Technology Portfolio - Class A 403 (13,274) -- -- (12,871) 4 AllianceBernstein Global Technology Portfolio - Class B 1,044 (198,845) -- (102) (197,903) 5 AllianceBernstein Global Technology Portfolio - Class B 6,719 (8,883) -- -- (2,164) 1 AllianceBernstein Growth and Income Portfolio - Class A 5,733 (1,046,258) -- (924) (1,041,449) 2 AllianceBernstein Growth and Income Portfolio - Class A 1,857 (67,906) -- -- (66,049) 3 AllianceBernstein Growth and Income Portfolio - Class A 98 (31,325) -- (179) (31,406) 4 AllianceBernstein Growth and Income Portfolio - Class B 7,685 (616,497) -- (576) (609,388) 5 AllianceBernstein Growth and Income Portfolio - Class B 258 (18,291) -- -- (18,033) 1 AllianceBernstein Growth Portfolio - Class A 2,924 (659,696) -- (268) (657,040) 2 AllianceBernstein Growth Portfolio - Class A -- (19,651) -- -- (19,651) 3 AllianceBernstein Growth Portfolio - Class A 18 (28,069) -- -- (28,051) 4 AllianceBernstein Growth Portfolio - Class B 1,496 (286,903) -- (18) (285,425) 5 AllianceBernstein Growth Portfolio - Class B -- (7,432) -- -- (7,432) 1 AllianceBernstein High Yield Portfolio - Class A 2,002 (540,563) 851 (191) (537,901) 2 AllianceBernstein High Yield Portfolio - Class A -- (41,176) -- -- (41,176) 1 AllianceBernstein International Growth Portfolio - Class A 1,453,849 (284,739) 3,223 (224) 1,172,109 2 AllianceBernstein International Growth Portfolio - Class A 46,728 (10,712) -- -- 36,016 1 AllianceBernstein International Research Growth Portfolio - Class A 1,053 (2,497,593) 209 (5,171) (2,501,502) 2 AllianceBernstein International Research Growth Portfolio - Class A -- (105,524) -- -- (105,524) 1 AllianceBernstein International Value Portfolio - Class A 36,308 (417,194) 528 (119) (380,477) 2 AllianceBernstein International Value Portfolio - Class A 90 (20,265) -- -- (20,175) 1 AllianceBernstein Large Cap Growth Portfolio - Class A 5,378 (965,349) -- (1,238) (961,209) 2 AllianceBernstein Large Cap Growth Portfolio - Class A 2,942 (60,267) -- -- (57,325) 3 AllianceBernstein Large Cap Growth Portfolio - Class A -- (7,312) 8 (159) (7,463) 4 AllianceBernstein Large Cap Growth Portfolio - Class B 6,516 (330,417) 1,340 (1,197) (323,758) 5 AllianceBernstein Large Cap Growth Portfolio - Class B 216 (21,895) -- -- (21,679) 1 AllianceBernstein Money Market Portfolio - Class A 1,023,342 (1,305,978) 119 (1,145) (283,662) 2 AllianceBernstein Money Market Portfolio - Class A 47,693 (46,292) -- -- 1,401 4 AllianceBernstein Money Market Portfolio - Class B 731,773 (747,955) 1,588 (135) (14,729) 5 AllianceBernstein Money Market Portfolio - Class B 16,326 (22,697) -- -- (6,371) 1 AllianceBernstein Real Estate Investment Portfolio - Class A 5,135 (400,544) 326 (675) (395,758) 2 AllianceBernstein Real Estate Investment Portfolio - Class A 2,358 (17,704) -- -- (15,346) 1 AllianceBernstein Small Cap Growth Portfolio - Class A 4,821 (817,226) 678 (845) (812,572) 2 AllianceBernstein Small Cap Growth Portfolio - Class A -- (20,530) -- -- (20,530) 3 AllianceBernstein Small Cap Growth Portfolio - Class A 1,830 (783) -- -- 1,047
VA I-40 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note F - Summary of Changes in Units - Continued Summary of Changes in Units for the year ended December 31, 2007.
Accumulation Accumulation Annuity Units Annuity Units Net Increase Sub-accounts Units Issued Units Redeemed Issued Redeemed (Decrease) ---------------------------------------------------------- ------------ -------------- ------------- ------------- ------------ 1 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 9,126 (470,316) 1,135 (2,357) (462,412) 2 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 87 (19,536) -- -- (19,449) 1 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 312,950 (642,409) 1,610 (1,419) (329,268) 2 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 156 (14,050) -- -- (13,894) 4 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B -- (72,272) -- -- (72,272) 5 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 123 (2,098) -- -- (1,975) 1 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 54,333 (46,518) -- (210) 7,605 2 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B -- (2,178) -- -- (2,178) 1 AllianceBernstein Utility Income Portfolio - Class A 41,966 (313,480) -- (176) (271,690) 2 AllianceBernstein Utility Income Portfolio - Class A 83 (19,904) -- -- (19,821) 4 AllianceBernstein Value Portfolio - Class B 7,112 (868,027) 2,589 (4,760) (863,086) 5 AllianceBernstein Value Portfolio - Class B 259 (40,048) -- -- (39,789) 1 BlackRock Basic Value V.I. Fund - Class I 22 (59,079) -- (40) (59,097) 2 BlackRock Basic Value V.I. Fund - Class I 176 (3,359) -- -- (3,183) 1 BlackRock Global Allocation V.I. Fund - Class I 7,096 (23,551) -- -- (16,455) 2 BlackRock Global Allocation V.I. Fund - Class I -- (5,511) -- -- (5,511) 1 BlackRock Global Growth V.I. Fund - Class I -- (10,968) -- -- (10,968) 2 BlackRock Global Growth V.I. Fund - Class I -- (49) -- -- (49) 1 BlackRock High Income V.I. Fund - Class I 718 (6,306) -- -- (5,588) 2 BlackRock High Income V.I. Fund - Class I -- (40) -- -- (40) 1 BlackRock International Value V.I. Fund - Class I -- (22,961) -- -- (22,961) 2 BlackRock International Value V.I. Fund - Class I -- (3,742) -- -- (3,742) 1 BlackRock Large Cap Core V.I. Fund - Class I 8,405 (11,390) -- (41) (3,026) 2 BlackRock Large Cap Core V.I. Fund - Class I -- (653) -- -- (653) 1 BlackRock Large Cap Growth V.I. Fund - Class I 5,349 (7,204) -- -- (1,855) 1 BlackRock Money Market V.I. Fund - Class I 37,684 (49,872) -- -- (12,188) 2 BlackRock Money Market V.I. Fund - Class I -- (6) -- -- (6) 1 BlackRock Total Return V.I. Fund - Class I 152 (3,338) -- -- (3,186) 2 BlackRock Total Return V.I. Fund - Class I -- (4) -- -- (4) 1 BlackRock Utilities and Telecommunications V.I. Fund - Class I 3,627 (8,384) -- -- (4,757) 2 BlackRock Utilities and Telecommunications V.I. Fund - Class I -- (9) -- -- (9) 1 BlackRock Value Opportunities V.I. Fund - Class I -- (21,305) -- -- (21,305) 2 BlackRock Value Opportunities V.I. Fund - Class I 122 (3,803) -- -- (3,681) 7 Delaware VIP Balanced Series - Standard Class -- (8,027) -- -- (8,027) 7 Delaware VIP Capital Reserves Series - Standard Class -- (2) -- -- (2) 7 Delaware VIP Cash Reserve Series - Standard Class 83 (83) -- -- -- 7 Delaware VIP Cash Reserve Series - Standard Class -- (1,272) -- -- (1,272) 7 Delaware VIP Growth Opportunities Series - Standard Class -- (167) -- -- (167) 7 Delaware VIP Growth Opportunities Series - Standard Class -- (1,097) -- -- (1,097) 7 Delaware VIP High Yield Series - Standard Class -- (27) -- -- (27) 7 Delaware VIP High Yield Series - Standard Class -- (1,022) -- -- (1,022) 7 Delaware VIP Value Series - Standard Class -- (1) -- -- (1) 7 Delaware VIP Value Series - Standard Class 278 (19,573) 124 (247) (19,418) 2 Dreyfus Stock Index Fund, Inc. - Initial Shares -- (120) -- -- (120) 3 Dreyfus Stock Index Fund, Inc. - Initial Shares 562 (62,510) -- (232) (62,180) 2 Dreyfus VIF Small Company Stock Portfolio - Initial Shares -- (1,040) -- -- (1,040) 3 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 59 (51,902) -- -- (51,843) 3 Fidelity VIP Asset Manager Portfolio - Initial Class -- (93,786) -- (138) (93,924) 2 Fidelity VIP Contrafund Portfolio - Initial Class -- (1) -- -- (1)
VA I-41 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note F - Summary of Changes in Units - Continued Summary of Changes in Units for the year ended December 31, 2007.
Accumulation Accumulation Annuity Units Annuity Units Net Increase Sub-accounts Units Issued Units Redeemed Issued Redeemed (Decrease) -------------------------------------------------------- ------------ -------------- ------------- ------------- ------------ 3 Fidelity VIP Contrafund Portfolio - Initial Class 391 (46,596) -- (91) (46,296) 2 Fidelity VIP Growth Portfolio - Initial Class -- -- -- -- -- 3 Fidelity VIP Growth Portfolio - Initial Class 467 (51,937) -- (191) (51,661) 2 Fidelity VIP High Income Portfolio - Initial Class 55 -- -- -- 55 3 Fidelity VIP High Income Portfolio - Initial Class 216 (13,114) -- -- (12,898) 3 Fidelity VIP Investment Grade Bond Portfolio - Initial Class 1,838 (19,992) -- (318) (18,472) 3 Fidelity VIP Money Market Portfolio - Initial Class 144,831 (133,666) -- (391) 10,774 3 Fidelity VIP Overseas Portfolio - Initial Class 17 (1,055) -- -- (1,038) 1 UBS U.S. Allocation Portfolio 371 (173,228) -- -- (172,857) 2 UBS U.S. Allocation Portfolio -- (19,022) -- -- (19,022) 3 Van Eck Worldwide Emerging Markets Fund - Initial Class 87 (11,485) -- -- (11,398) 2 Van Eck Worldwide Hard Assets Fund - Initial Class -- (2) -- -- (2) 3 Van Eck Worldwide Hard Assets Fund - Initial Class 90 (10,096) 5 (5) (10,006) 1 Vanguard 500 Index Fund -- -- -- (193) (193) 6 Vanguard Dividend Growth Fund -- -- 575 (102) 473 6 Vanguard GNMA Fund -- -- 765 (183) 582 6 Vanguard Health Care Fund -- -- -- (507) (507) 6 Vanguard Inflation-Protected Securities Fund -- -- 1,899 (1,060) 839 1 Vanguard International Growth Fund -- -- -- (53) (53) 1 Vanguard LifeStrategy Conservative Growth Fund -- -- -- (226) (226) 6 Vanguard LifeStrategy Conservative Growth Fund -- -- 11,860 (222) 11,638 1 Vanguard LifeStrategy Growth Fund -- -- -- (91) (91) 6 Vanguard LifeStrategy Growth Fund -- -- 11,177 (1,031) 10,146 1 Vanguard LifeStrategy Income Fund -- -- -- (203) (203) 6 Vanguard LifeStrategy Income Fund -- -- -- (3,164) (3,164) 1 Vanguard LifeStrategy Moderate Growth Fund -- -- 62 (3,003) (2,941) 6 Vanguard LifeStrategy Moderate Growth Fund -- -- 10,496 (2,502) 7,994 1 Vanguard Prime Money Market Fund -- -- -- (36) (36) 1 Vanguard PRIMECAP Fund -- -- -- (19) (19) 1 Vanguard Small-Cap Growth Index Fund -- -- -- (110) (110) 1 Vanguard Small-Cap Value Index Fund -- -- -- (157) (157) 1 Vanguard Total Bond Market Index Fund -- -- -- (705) (705) 6 Vanguard Total International Stock Index Fund -- -- -- (1,999) (1,999) 1 Vanguard U.S. Growth Fund -- -- -- (38) (38) 6 Vanguard VIF Balanced Portfolio -- -- 64,936 (24,562) 40,374 6 Vanguard VIF Capital Growth Portfolio -- -- 20,943 (1,670) 19,273 1 Vanguard VIF Diversified Value Portfolio -- -- -- (116) (116) 6 Vanguard VIF Diversified Value Portfolio -- -- 20,936 (3,274) 17,662 1 Vanguard VIF Equity Income Portfolio -- -- -- (48) (48) 6 Vanguard VIF Equity Income Portfolio -- -- 2,695 (3,060) (365) 1 Vanguard VIF Equity Index Portfolio -- -- 635 (43) 592 6 Vanguard VIF Equity Index Portfolio -- -- 15,149 (3,617) 11,532 6 Vanguard VIF Growth Portfolio -- -- 3,027 (407) 2,620 1 Vanguard VIF High Yield Bond Portfolio -- -- 743 (1,062) (319) 6 Vanguard VIF High Yield Bond Portfolio -- -- 1,381 (1,952) (571) 1 Vanguard VIF International Portfolio -- -- -- (1,295) (1,295) 6 Vanguard VIF International Portfolio -- -- 27,455 (5,654) 21,801 6 Vanguard VIF Mid-Cap Index Portfolio -- -- 9,233 (1,744) 7,489 6 Vanguard VIF Money Market Portfolio -- -- 525,960 (377,679) 148,281 1 Vanguard VIF REIT Index Portfolio -- -- -- (105) (105) 6 Vanguard VIF REIT Index Portfolio -- -- -- (2,060) (2,060) 6 Vanguard VIF Short-Term Investment-Grade Portfolio -- -- 6,734 (2,309) 4,425
VA I-42 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note F - Summary of Changes in Units - Continued Summary of Changes in Units for the year ended December 31, 2007.
Accumulation Accumulation Annuity Units Annuity Units Net Increase Sub-accounts Units Issued Units Redeemed Issued Redeemed (Decrease) ------------------------------------------------- ------------ -------------- ------------- ------------- ------------ 6 Vanguard VIF Small Company Growth Portfolio -- -- 4,830 (1,007) 3,823 1 Vanguard VIF Total Bond Market Index Portfolio -- -- -- (113) (113) 6 Vanguard VIF Total Bond Market Index Portfolio -- -- 24,059 (5,743) 18,316 6 Vanguard VIF Total Stock Market Index Portfolio -- -- 29,751 (13,609) 16,142 1 Vanguard Wellington Fund -- -- -- (821) (821) 1 Vanguard Windsor Fund -- -- -- (18) (18)
VA I-43 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note F - Summary of Changes in Units - Continued Summary of Changes in Units for the year ended December 31, 2006.
Accumulation Accumulation Annuity Units Annuity Units Net Increase Sub-accounts Units Issued Units Redeemed Issued Redeemed (Decrease) ----------------------------------------------------------- ------------ -------------- ------------- ------------- ------------ 2 AIM V.I. Capital Appreciation Fund - Series I -- (2) -- -- (2) 3 AIM V.I. Capital Appreciation Fund - Series I 277 (26,866) 57 (150) (26,682) 2 AIM V.I. International Growth Fund - Series I -- (1) -- -- (1) 3 AIM V.I. International Growth Fund - Series I 3,585 (38,407) -- -- (34,822) 1 AllianceBernstein Americas Government Income Portfolio - Class A 1,944 (400,774) 43 (398) (399,185) 2 AllianceBernstein Americas Government Income Portfolio - Class A 3,014 (2,643) -- -- 371 1 AllianceBernstein Balanced Shares Portfolio - Class A 17,351 (957,378) 1,021 (1,347) (940,353) 2 AllianceBernstein Balanced Shares Portfolio - Class A 145 (25,194) -- -- (25,049) 3 AllianceBernstein Balanced Shares Portfolio - Class A -- (6,037) -- -- (6,037) 1 AllianceBernstein Global Bond Portfolio - Class A 20,159 (127,307) 202 (315) (107,261) 2 AllianceBernstein Global Bond Portfolio - Class A 292 (8,851) -- -- (8,559) 3 AllianceBernstein Global Bond Portfolio - Class A -- (1) -- -- (1) 1 AllianceBernstein Global Dollar Government Portfolio - Class A 69,618 (96,671) 23 (197) (27,227) 2 AllianceBernstein Global Dollar Government Portfolio - Class A -- (2,330) -- -- (2,330) 1 AllianceBernstein Global Technology Portfolio - Class A 7,865 (943,528) 376 (2,019) (937,306) 2 AllianceBernstein Global Technology Portfolio - Class A 122 (50,380) -- -- (50,258) 3 AllianceBernstein Global Technology Portfolio - Class A 128 (17,264) -- -- (17,136) 4 AllianceBernstein Global Technology Portfolio - Class B 2,003 (290,288) 1,115 (305) (287,475) 5 AllianceBernstein Global Technology Portfolio - Class B 2 (19,229) -- -- (19,227) 1 AllianceBernstein Growth and Income Portfolio - Class A 12,601 (1,398,245) 1,067 (2,120) (1,386,697) 2 AllianceBernstein Growth and Income Portfolio - Class A 1,262 (42,050) -- -- (40,788) 3 AllianceBernstein Growth and Income Portfolio - Class A 183 (35,904) 55 (234) (35,900) 4 AllianceBernstein Growth and Income Portfolio - Class B 11,345 (650,683) 3,013 (295) (636,620) 5 AllianceBernstein Growth and Income Portfolio - Class B 519 (21,409) -- -- (20,890) 1 AllianceBernstein Growth Portfolio - Class A 4,007 (800,623) 278 (1,300) (797,638) 2 AllianceBernstein Growth Portfolio - Class A -- (32,662) -- -- (32,662) 3 AllianceBernstein Growth Portfolio - Class A 120 (16,520) -- -- (16,400) 4 AllianceBernstein Growth Portfolio - Class B 7,758 (354,726) 3 (22) (346,987) 5 AllianceBernstein Growth Portfolio - Class B 1,364 (1,945) -- -- (581) 1 AllianceBernstein High Yield Portfolio - Class A 5,716 (459,276) -- -- (453,560) 2 AllianceBernstein High Yield Portfolio - Class A 6,963 (13,400) -- -- (6,437) 1 AllianceBernstein International Growth Portfolio - Class A 97,868 (208,639) 77 (1,346) (112,040) 2 AllianceBernstein International Growth Portfolio - Class A 168 (16,542) -- -- (16,374) 1 AllianceBernstein International Research Growth Portfolio - Class A 1,874 (503,081) 494 (1,113) (501,826) 2 AllianceBernstein International Research Growth Portfolio - Class A 5,473 (8,673) -- -- (3,200) 1 AllianceBernstein International Value Portfolio - Class A 470,653 (368,257) -- -- 102,396 2 AllianceBernstein International Value Portfolio - Class A 8,685 (7,242) -- -- 1,443 1 AllianceBernstein Large Cap Growth Portfolio - Class A 7,928 (1,148,895) 1,005 (2,593) (1,142,555) 2 AllianceBernstein Large Cap Growth Portfolio - Class A 1,974 (61,500) -- -- (59,526) 3 AllianceBernstein Large Cap Growth Portfolio - Class A -- (7,548) 59 (204) (7,693) 4 AllianceBernstein Large Cap Growth Portfolio - Class B 6,785 (306,895) 4,004 (271) (296,377) 5 AllianceBernstein Large Cap Growth Portfolio - Class B 592 (16,458) -- -- (15,866) 1 AllianceBernstein Money Market Portfolio - Class A 984,876 (1,084,714) 6 (95) (99,927) 2 AllianceBernstein Money Market Portfolio - Class A 125,879 (150,511) -- -- (24,632) 4 AllianceBernstein Money Market Portfolio - Class B 460,276 (667,517) -- -- (207,241) 5 AllianceBernstein Money Market Portfolio - Class B 36,586 (5,906) -- -- 30,680 1 AllianceBernstein Real Estate Investment Portfolio - Class A 2,084 (296,227) 2,517 (1,412) (293,038) 2 AllianceBernstein Real Estate Investment Portfolio - Class A 200 (13,895) -- -- (13,695) 1 AllianceBernstein Small Cap Growth Portfolio - Class A 210,143 (527,478) 654 (1,208) (317,889) 2 AllianceBernstein Small Cap Growth Portfolio - Class A 860 (61,680) -- -- (60,820) 3 AllianceBernstein Small Cap Growth Portfolio - Class A 65 (10,124) -- -- (10,059)
VA I-44 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note F - Summary of Changes in Units - Continued Summary of Changes in Units for the year ended December 31, 2006.
Accumulation Accumulation Annuity Units Annuity Units Net Increase Sub-accounts Units Issued Units Redeemed Issued Redeemed (Decrease) ---------------------------------------------------------- ------------ -------------- ------------- ------------- ------------ 1 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 12,252 (561,924) 10,406 (548) (539,814) 2 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 567 (14,460) -- -- (13,893) 1 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 118,235 (789,775) 1,648 (1,693) (671,585) 2 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 1,261 (32,182) -- -- (30,921) 4 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B -- (20,572) -- -- (20,572) 5 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B -- (450) -- -- (450) 1 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 55,028 (49,181) 85 (297) 5,635 2 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B -- (377) -- -- (377) 1 AllianceBernstein Utility Income Portfolio - Class A 114,917 (291,165) 190 (260) (176,318) 2 AllianceBernstein Utility Income Portfolio - Class A -- (9,498) -- -- (9,498) 4 AllianceBernstein Value Portfolio - Class B 47,518 (797,733) 22,792 (1,050) (728,473) 5 AllianceBernstein Value Portfolio - Class B -- (19,159) -- -- (19,159) 1 BlackRock Basic Value V.I. Fund - Class I 26 (58,624) 8 (46) (58,636) 2 BlackRock Basic Value V.I. Fund - Class I -- (5,276) -- -- (5,276) 1 BlackRock Bond V.I. Fund - Class I 239 (461) -- -- (222) 2 BlackRock Bond V.I. Fund - Class I -- (3) -- -- (3) 1 BlackRock Global Allocation V.I. Fund - Class I 30,297 (12,207) -- -- 18,090 2 BlackRock Global Allocation V.I. Fund - Class I 1,938 (132) -- -- 1,806 1 BlackRock Global Growth V.I. Fund - Class I -- (9,212) -- -- (9,212) 2 BlackRock Global Growth V.I. Fund - Class I -- (54) -- -- (54) 1 BlackRock High Income V.I. Fund - Class I -- (6,758) -- -- (6,758) 2 BlackRock High Income V.I. Fund - Class I -- (45) -- -- (45) 1 BlackRock International Value V.I. Fund - Class I -- (22,133) -- -- (22,133) 2 BlackRock International Value V.I. Fund - Class I 3,081 (1,099) -- -- 1,982 1 BlackRock Large Cap Core V.I. Fund - Class I 12,337 (17,323) 8 (48) (5,026) 2 BlackRock Large Cap Core V.I. Fund - Class I -- (842) -- -- (842) 1 BlackRock Large Cap Growth V.I. Fund - Class I 4,813 (1,758) -- -- 3,055 1 BlackRock Money Market V.I. Fund - Class I 12,954 (6,270) -- -- 6,684 2 BlackRock Money Market V.I. Fund - Class I -- (7) -- -- (7) 1 BlackRock Utilities and Telecommunications V.I. Fund - Class I 1,565 (5,180) -- -- (3,615) 2 BlackRock Utilities and Telecommunications V.I. Fund - Class I -- (10) -- -- (10) 1 BlackRock Value Opportunities V.I. Fund - Class I -- (22,558) -- -- (22,558) 2 BlackRock Value Opportunities V.I. Fund - Class I -- (2,276) -- -- (2,276) 7 Delaware VIP Balanced Series - Standard Class -- (1,853) -- -- (1,853) 7 Delaware VIP Capital Reserves Series - Standard Class -- (1,939) -- -- (1,939) 7 Delaware VIP Cash Reserve Series - Standard Class 89 (89) -- -- -- 7 Delaware VIP Cash Reserve Series - Standard Class -- (3,204) -- -- (3,204) 7 Delaware VIP Growth Opportunities Series - Standard Class -- (70) -- -- (70) 7 Delaware VIP Growth Opportunities Series - Standard Class -- (2,213) -- -- (2,213) 7 Delaware VIP High Yield Series - Standard Class -- (1) -- -- (1) 7 Delaware VIP High Yield Series - Standard Class -- (1,202) -- -- (1,202) 7 Delaware VIP Value Series - Standard Class -- -- -- -- -- 7 Delaware VIP Value Series - Standard Class -- (11,235) 15 (142) (11,362) 2 Dreyfus Stock Index Fund, Inc. - Initial Shares -- -- -- -- -- 3 Dreyfus Stock Index Fund, Inc. - Initial Shares 809 (110,612) 75 (355) (110,083) 2 Dreyfus VIF Small Company Stock Portfolio - Initial Shares -- -- -- -- -- 3 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 350 (54,346) -- -- (53,996) 3 Fidelity VIP Asset Manager Portfolio - Initial Class 296 (99,023) 26 (166) (98,867) 2 Fidelity VIP Contrafund Portfolio - Initial Class -- (305) -- -- (305)
VA I-45 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note F - Summary of Changes in Units - Continued Summary of Changes in Units for the year ended December 31, 2006.
Accumulation Accumulation Annuity Units Annuity Units Net Increase Sub-accounts Units Issued Units Redeemed Issued Redeemed (Decrease) -------------------------------------------------------- ------------ -------------- ------------- ------------- ------------ 3 Fidelity VIP Contrafund Portfolio - Initial Class 581 (60,593) 47 (141) (60,106) 2 Fidelity VIP Growth Portfolio - Initial Class -- -- -- -- -- 3 Fidelity VIP Growth Portfolio - Initial Class 588 (68,983) 52 (242) (68,585) 2 Fidelity VIP High Income Portfolio - Initial Class -- -- -- -- -- 3 Fidelity VIP High Income Portfolio - Initial Class 20 (43,704) -- -- (43,684) 3 Fidelity VIP Investment Grade Bond Portfolio - Initial Class -- (56,099) 25 (353) (56,427) 3 Fidelity VIP Money Market Portfolio - Initial Class 130,672 (134,293) 3,408 (477) (690) 3 Fidelity VIP Overseas Portfolio - Initial Class 21 (3,998) -- -- (3,977) 1 UBS U.S. Allocation Portfolio 3,833 (162,993) -- -- (159,160) 2 UBS U.S. Allocation Portfolio -- (34,276) -- -- (34,276) 1 UIF Core Plus Fixed Income Portfolio - Class I Shares -- -- -- (3,047) (3,047) 1 UIF Equity Growth Portfolio - Class I Shares -- -- -- (3,066) (3,066) 1 UIF Technology Portfolio - Class I Shares -- -- -- (1,520) (1,520) 3 Van Eck Worldwide Emerging Markets Fund - Initial Class 478 (13,497) -- -- (13,019) 2 Van Eck Worldwide Hard Assets Fund - Initial Class 253 (1) -- -- 252 3 Van Eck Worldwide Hard Assets Fund - Initial Class 645 (7,464) -- -- (6,819) 1 Vanguard 500 Index Fund -- -- 644 (847) (203) 6 Vanguard Dividend Growth Fund -- -- -- (105) (105) 6 Vanguard GNMA Fund -- -- -- (188) (188) 6 Vanguard Health Care Fund -- -- -- (543) (543) 6 Vanguard Inflation-Protected Securities Fund -- -- 2,339 (916) 1,423 1 Vanguard International Growth Fund -- -- 1,496 (773) 723 1 Vanguard LifeStrategy Conservative Growth Fund -- -- 2,515 (2,751) (236) 1 Vanguard LifeStrategy Growth Fund -- -- 1,012 (1,108) (96) 6 Vanguard LifeStrategy Growth Fund -- -- 1,893 (722) 1,171 1 Vanguard LifeStrategy Income Fund -- -- 1,356 (1,569) (213) 6 Vanguard LifeStrategy Income Fund -- -- 4,115 (1,089) 3,026 1 Vanguard LifeStrategy Moderate Growth Fund -- -- 638 (3,125) (2,487) 6 Vanguard LifeStrategy Moderate Growth Fund -- -- 10,928 (2,208) 8,720 1 Vanguard Prime Money Market Fund -- -- 422 (460) (38) 1 Vanguard PRIMECAP Fund -- -- 220 (239) (19) 1 Vanguard Small-Cap Growth Index Fund -- -- -- (115) (115) 1 Vanguard Small-Cap Value Index Fund -- -- 1,137 (709) 428 1 Vanguard Total Bond Market Index Fund -- -- 716 (782) (66) 6 Vanguard Total International Stock Index Fund -- -- -- (2,103) (2,103) 1 Vanguard U.S. Growth Fund -- -- 440 (479) (39) 6 Vanguard VIF Balanced Portfolio -- -- 65,286 (20,115) 45,171 6 Vanguard VIF Capital Growth Portfolio -- -- 4,146 (752) 3,394 1 Vanguard VIF Diversified Value Portfolio -- -- 3,291 (1,701) 1,590 6 Vanguard VIF Diversified Value Portfolio -- -- 1,325 (1,830) (505) 1 Vanguard VIF Equity Income Portfolio -- -- 1,552 (1,601) (49) 6 Vanguard VIF Equity Income Portfolio -- -- 18,061 (2,128) 15,933 6 Vanguard VIF Equity Index Portfolio -- -- 16,454 (2,559) 13,895 6 Vanguard VIF Growth Portfolio -- -- 311 (554) (243) 1 Vanguard VIF High Yield Bond Portfolio -- -- 2,869 (2,140) 729 6 Vanguard VIF High Yield Bond Portfolio -- -- 15,362 (935) 14,427 1 Vanguard VIF International Portfolio -- -- 854 (1,937) (1,083) 6 Vanguard VIF International Portfolio -- -- 50,510 (2,288) 48,222 6 Vanguard VIF Mid-Cap Index Portfolio -- -- 3,202 (1,128) 2,074 6 Vanguard VIF Money Market Portfolio -- -- 427,134 (430,003) (2,869) 1 Vanguard VIF REIT Index Portfolio -- -- 1,523 (1,634) (111) 6 Vanguard VIF REIT Index Portfolio -- -- 8,629 (1,279) 7,350
VA I-46 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note F - Summary of Changes in Units - Continued Summary of Changes in Units for the year ended December 31, 2006.
Accumulation Accumulation Annuity Units Annuity Units Net Increase Sub-accounts Units Issued Units Redeemed Issued Redeemed (Decrease) ---------------------------------------------------- ------------ -------------- ------------- ------------- ------------ 6 Vanguard VIF Short-Term Investment-Grade Portfolio -- -- 8,566 (1,352) 7,214 6 Vanguard VIF Small Company Growth Portfolio -- -- 7,513 (891) 6,622 1 Vanguard VIF Total Bond Market Index Portfolio -- -- 3,205 (1,657) 1,548 6 Vanguard VIF Total Bond Market Index Portfolio -- -- 8,132 (3,070) 5,062 6 Vanguard VIF Total Stock Market Index Portfolio -- -- 74,513 (11,178) 63,335 1 Vanguard Wellington Fund -- -- 245 (1,070) (825) 1 Vanguard Windsor Fund -- -- 218 (238) (20)
Footnotes 1 Ovation, Ovation Plus, Ovation Advisor, Trilogy, Paradigm, Gallery and GIVA products. 2 Ovation, Ovation Plus, Ovation Advisor, Trilogy, Paradigm and Profile products that have elected the Accidental Death Benefit option. 3 Profile product. 4 Ovation Plus, Ovation Advisor, Trilogy, Paradigm and Profile products that are subject to 12B-1 fees. 5 Ovation Plus, Ovation Advisor, Trilogy, Paradigm, and Profile products that have elected the Accidental Death Benefit option and are subject to 12B-1 fees. 6 Vanguard SPIA product. 7 Variable Annuity product. VA I-47 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2007 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- --------- ------ ------------ ---------- --------- ---------- 2 AIM V.I. Capital Appreciation Fund - Series I 2,186 $13.28 $ 29,016 0.00% 1.45% 10.39% 3 AIM V.I. Capital Appreciation Fund - Series I 47,357 13.34 631,919 0.00% 1.40% 10.45% 2 AIM V.I. International Growth Fund - Series I 889 20.62 18,330 0.38% 1.45% 13.06% 3 AIM V.I. International Growth Fund - Series I 41,634 20.72 862,779 0.38% 1.40% 13.12% 1 AllianceBernstein Americas Government Income Portfolio - Class A 1,203,921 23.24 27,976,251 5.90% 1.40% 6.86% 2 AllianceBernstein Americas Government Income Portfolio - Class A 12,335 23.12 285,155 6.45% 1.45% 6.81% 1 AllianceBernstein Balanced Shares Portfolio - Class A 4,288,450 27.67 118,680,116 2.80% 1.40% 1.61% 2 AllianceBernstein Balanced Shares Portfolio - Class A 72,012 27.53 1,982,538 3.42% 1.45% 1.56% 3 AllianceBernstein Balanced Shares Portfolio - Class A 25,679 13.84 355,429 2.69% 1.40% 1.61% 1 AllianceBernstein Global Bond Portfolio - Class A 764,071 19.18 14,653,344 3.06% 1.40% 8.81% 2 AllianceBernstein Global Bond Portfolio - Class A 21,876 19.08 417,351 2.60% 1.45% 8.75% 3 AllianceBernstein Global Bond Portfolio - Class A -- 14.39 -- 6.09% 1.40% 8.81% 1 AllianceBernstein Global Dollar Government Portfolio - Class A 464,285 37.42 17,374,779 6.18% 1.40% 3.07% 2 AllianceBernstein Global Dollar Government Portfolio - Class A 8,966 37.23 333,787 6.19% 1.45% 3.02% 1 AllianceBernstein Global Technology Portfolio - Class A 1,907,223 20.16 38,458,522 0.00% 1.40% 18.52% 2 AllianceBernstein Global Technology Portfolio - Class A 91,910 20.06 1,843,688 0.00% 1.45% 18.46% 3 AllianceBernstein Global Technology Portfolio - Class A 13,627 19.51 265,906 0.00% 1.40% 18.52% 4 AllianceBernstein Global Technology Portfolio - Class B 946,958 19.80 18,745,540 0.00% 1.40% 18.22% 5 AllianceBernstein Global Technology Portfolio - Class B 75,245 19.69 1,481,777 0.00% 1.45% 18.16% 1 AllianceBernstein Growth and Income Portfolio - Class A 2,721,929 48.33 131,554,552 1.46% 1.40% 3.65% 2 AllianceBernstein Growth and Income Portfolio - Class A 69,620 48.08 3,347,352 1.43% 1.45% 3.60% 3 AllianceBernstein Growth and Income Portfolio - Class A 82,962 29.98 2,487,133 1.37% 1.40% 3.65% 4 AllianceBernstein Growth and Income Portfolio - Class B 3,280,496 47.33 155,265,465 1.23% 1.40% 3.39% 5 AllianceBernstein Growth and Income Portfolio - Class B 82,282 47.08 3,874,156 1.22% 1.45% 3.34% 1 AllianceBernstein Growth Portfolio - Class A 1,649,024 30.08 49,606,492 0.00% 1.40% 11.44% 2 AllianceBernstein Growth Portfolio - Class A 54,138 29.93 1,620,119 0.00% 1.45% 11.39% 3 AllianceBernstein Growth Portfolio - Class A 38,503 20.80 800,730 0.00% 1.40% 11.44% 4 AllianceBernstein Growth Portfolio - Class B 1,340,840 29.44 39,472,052 0.00% 1.40% 11.09% 5 AllianceBernstein Growth Portfolio - Class B 50,367 29.29 1,475,018 0.00% 1.45% 11.03% 1 AllianceBernstein High Yield Portfolio - Class A 1,787,041 11.79 21,064,916 8.06% 1.40% -0.52% 2 AllianceBernstein High Yield Portfolio - Class A 51,096 11.73 599,228 7.37% 1.45% -0.57% 1 AllianceBernstein International Growth Portfolio - Class A 2,366,389 42.33 100,159,419 1.11% 1.40% 16.48% 2 AllianceBernstein International Growth Portfolio - Class A 88,003 42.11 3,705,418 1.19% 1.45% 16.42% 1 AllianceBernstein International Research Growth Portfolio - Class A -- -- -- 2.87% 1.40% 24.41% 2 AllianceBernstein International Research Growth Portfolio - Class A -- -- -- 2.42% 1.45% 24.35% 1 AllianceBernstein International Value Portfolio - Class A 1,939,560 25.80 50,042,096 1.22% 1.40% 4.36% 2 AllianceBernstein International Value Portfolio - Class A 60,457 25.71 1,554,648 1.17% 1.45% 4.31% 1 AllianceBernstein Large Cap Growth Portfolio - Class A 2,649,036 33.22 87,991,317 0.00% 1.40% 12.33% 2 AllianceBernstein Large Cap Growth Portfolio - Class A 102,270 33.04 3,379,379 0.00% 1.45% 12.27% 3 AllianceBernstein Large Cap Growth Portfolio - Class A 8,622 14.98 129,186 0.00% 1.40% 12.33% 4 AllianceBernstein Large Cap Growth Portfolio - Class B 1,854,536 32.58 60,428,287 0.00% 1.40% 12.03% 5 AllianceBernstein Large Cap Growth Portfolio - Class B 44,500 32.41 1,442,460 0.00% 1.45% 11.97% 1 AllianceBernstein Money Market Portfolio - Class A 1,059,929 13.58 14,388,649 4.67% 1.40% 2.89% 2 AllianceBernstein Money Market Portfolio - Class A 34,446 13.50 465,180 5.00% 1.45% 2.83% 4 AllianceBernstein Money Market Portfolio - Class B 1,027,110 13.29 13,650,521 4.10% 1.40% 2.63% 5 AllianceBernstein Money Market Portfolio - Class B 45,966 13.22 607,717 4.29% 1.45% 2.58% 1 AllianceBernstein Real Estate Investment Portfolio - Class A 1,025,122 28.53 29,246,048 1.44% 1.40% -15.72% 2 AllianceBernstein Real Estate Investment Portfolio - Class A 46,923 28.38 1,331,721 1.23% 1.45% -15.77% 1 AllianceBernstein Small Cap Growth Portfolio - Class A 2,119,855 15.24 32,303,525 0.00% 1.40% 12.48%
VA I-48 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2007 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) ------------------------------------------------------------ --------- ------ ----------- ---------- --------- ---------- 2 AllianceBernstein Small Cap Growth Portfolio - Class A 89,648 $15.16 $ 1,358,997 0.00% 1.45% 12.42% 3 AllianceBernstein Small Cap Growth Portfolio - Class A 7,368 14.81 109,120 0.00% 1.40% 12.48% 1 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 2,230,269 20.03 44,671,243 0.96% 1.40% 0.28% 2 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 63,000 19.96 1,257,668 1.02% 1.45% 0.23% 1 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 3,359,323 17.04 57,240,408 4.71% 1.40% 3.39% 2 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 70,250 16.95 1,190,781 3.98% 1.45% 3.33% 4 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 97,447 16.67 1,624,565 4.55% 1.40% 3.13% 5 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 2,748 16.58 45,575 4.59% 1.45% 3.08% 1 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 225,383 14.14 3,186,725 0.19% 1.40% 2.77% 2 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 4,920 14.11 69,411 0.21% 1.45% 2.72% 1 AllianceBernstein Utility Income Portfolio - Class A 1,358,104 35.32 47,961,692 2.24% 1.40% 20.64% 2 AllianceBernstein Utility Income Portfolio - Class A 31,248 35.13 1,097,796 2.24% 1.45% 20.58% 4 AllianceBernstein Value Portfolio - Class B 4,105,699 14.23 58,413,949 1.28% 1.40% -5.50% 5 AllianceBernstein Value Portfolio - Class B 89,755 14.18 1,272,744 1.32% 1.45% -5.55% 1 BlackRock Basic Value V.I. Fund - Class I 226,732 20.76 4,706,248 1.39% 1.40% 0.40% 2 BlackRock Basic Value V.I. Fund - Class I 19,415 20.65 400,953 1.45% 1.45% 0.35% 1 BlackRock Global Allocation V.I. Fund - Class I 92,675 20.16 1,868,216 2.72% 1.40% 15.37% 2 BlackRock Global Allocation V.I. Fund - Class I 3,370 20.06 67,584 1.67% 1.45% 15.32% 1 BlackRock Global Growth V.I. Fund - Class I 42,382 16.23 687,985 0.98% 1.40% 34.97% 2 BlackRock Global Growth V.I. Fund - Class I 624 16.16 10,089 1.06% 1.45% 34.90% 1 BlackRock High Income V.I. Fund - Class I 24,897 13.71 341,367 8.70% 1.40% 0.96% 2 BlackRock High Income V.I. Fund - Class I 520 13.64 7,088 7.97% 1.45% 0.91% 1 BlackRock International Value V.I. Fund - Class I 95,687 21.23 2,031,785 2.53% 1.40% 8.79% 2 BlackRock International Value V.I. Fund - Class I 5,748 21.14 121,514 2.15% 1.45% 8.74% 1 BlackRock Large Cap Core V.I. Fund - Class I 98,398 20.05 1,972,886 1.00% 1.40% 6.83% 2 BlackRock Large Cap Core V.I. Fund - Class I 2,039 19.95 40,666 0.88% 1.45% 6.77% 1 BlackRock Large Cap Growth V.I. Fund - Class I 84,709 11.62 984,001 0.29% 1.40% 6.87% 1 BlackRock Money Market V.I. Fund - Class I 21,174 12.33 261,160 3.83% 1.40% 3.38% 2 BlackRock Money Market V.I. Fund - Class I 3,607 12.27 44,262 4.74% 1.45% 3.33% 1 BlackRock Total Return V.I. Fund - Class I * 14,961 14.28 213,629 5.19% 1.40% 2.19% 2 BlackRock Total Return V.I. Fund - Class I * 3,295 14.21 46,814 4.74% 1.45% 2.14% 1 BlackRock Utilities and Telecommunications V.I. Fund - Class I 22,132 25.42 562,498 1.78% 1.40% 24.62% 2 BlackRock Utilities and Telecommunications V.I. Fund - Class I 2,344 25.29 59,262 1.78% 1.45% 24.56% 1 BlackRock Value Opportunities V.I. Fund - Class I 59,042 23.79 1,404,490 0.27% 1.40% -2.28% 2 BlackRock Value Opportunities V.I. Fund - Class I 9,052 23.67 214,243 0.26% 1.45% -2.33% 7 Delaware VIP Balanced Series - Standard Class 19,050 33.45 637,255 3.75% 1.25% -0.92% 7 Delaware VIP Capital Reserves Series - Standard Class 6,683 23.96 160,089 4.78% 1.25% 3.16% 7 Delaware VIP Cash Reserve Series - Standard Class -- 14.22 -- 0.00% 1.40% 3.31% 7 Delaware VIP Cash Reserve Series - Standard Class 13,404 17.63 236,329 4.71% 1.25% 3.46% 7 Delaware VIP Growth Opportunities Series - Standard Class 6,390 35.41 226,245 0.00% 1.40% 11.38% 7 Delaware VIP Growth Opportunities Series - Standard Class 20,427 40.01 817,241 0.00% 1.25% 11.55% 7 Delaware VIP High Yield Series - Standard Class 641 19.63 12,581 6.92% 1.40% 1.36% 7 Delaware VIP High Yield Series - Standard Class 16,047 27.99 449,155 6.88% 1.25% 1.51% 7 Delaware VIP Value Series - Standard Class 4,749 38.11 181,015 1.64% 1.40% -4.08% 7 Delaware VIP Value Series - Standard Class 75,960 45.39 3,448,163 1.80% 1.25% -3.94% 2 Dreyfus Stock Index Fund, Inc. - Initial Shares 694 23.00 15,956 1.69% 1.45% 3.73% 3 Dreyfus Stock Index Fund, Inc. - Initial Shares 173,935 23.12 4,022,169 1.64% 1.40% 3.78%
VA I-49 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2007 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- ------- ------ ----------- ---------- --------- ---------- 2 Dreyfus VIF Small Company Stock Portfolio - Initial Shares -- $ -- $ -- 0.00% 1.45% 8.42% 3 Dreyfus VIF Small Company Stock Portfolio - Initial Shares -- -- -- 0.00% 1.40% 8.44% 3 Fidelity VIP Asset Manager Portfolio - Initial Class 150,961 19.84 2,995,184 5.92% 1.40% 13.89% 2 Fidelity VIP Contrafund Portfolio - Initial Class 121 24.01 2,914 0.79% 1.45% 15.89% 3 Fidelity VIP Contrafund Portfolio - Initial Class 89,912 24.14 2,170,187 0.79% 1.40% 15.95% 2 Fidelity VIP Growth Portfolio - Initial Class 77 22.27 1,706 0.85% 1.45% 25.13% 3 Fidelity VIP Growth Portfolio - Initial Class 130,459 22.39 2,920,769 0.85% 1.40% 25.19% 2 Fidelity VIP High Income Portfolio - Initial Class 1,223 13.12 16,048 7.35% 1.45% 1.30% 3 Fidelity VIP High Income Portfolio - Initial Class 41,970 13.19 553,594 7.35% 1.40% 1.35% 3 Fidelity VIP Investment Grade Bond Portfolio - Initial Class 79,441 17.19 1,365,286 4.39% 1.40% 2.89% 3 Fidelity VIP Money Market Portfolio - Initial Class 176,005 13.51 2,376,947 4.95% 1.40% 3.74% 3 Fidelity VIP Overseas Portfolio - Initial Class 8,558 22.62 193,551 3.34% 1.40% 15.67% 1 UBS U.S. Allocation Portfolio 574,539 17.78 10,214,943 2.60% 1.40% 0.76% 2 UBS U.S. Allocation Portfolio 65,218 17.70 1,154,130 2.55% 1.45% 0.71% 3 Van Eck Worldwide Emerging Markets Fund - Initial Class 22,399 29.00 649,648 0.53% 1.40% 35.69% 2 Van Eck Worldwide Hard Assets Fund - Initial Class 250 34.10 8,536 0.11% 1.45% 43.25% 3 Van Eck Worldwide Hard Assets Fund - Initial Class 18,173 34.28 622,975 0.13% 1.40% 43.33% 1 Vanguard 500 Index Fund 2,039 13.77 28,065 1.86% 0.75% 4.59% 6 Vanguard Dividend Growth Fund 2,382 16.06 38,252 1.84% 0.52% 6.44% 6 Vanguard GNMA Fund 1,752 11.93 20,892 5.75% 0.52% 6.46% 6 Vanguard Health Care Fund 3,727 15.66 58,366 1.78% 0.52% 3.88% 6 Vanguard Inflation-Protected Securities Fund 14,641 12.63 184,930 5.60% 0.52% 11.01% 1 Vanguard International Growth Fund 670 20.92 14,025 1.98% 0.75% 15.11% 1 Vanguard LifeStrategy Conservative Growth Fund 2,250 14.03 31,568 3.43% 0.75% 6.19% 6 Vanguard LifeStrategy Conservative Growth Fund 11,638 13.77 160,212 4.06% 0.52% 1.96% 1 Vanguard LifeStrategy Growth Fund 905 15.51 14,044 2.29% 0.75% 6.65% 6 Vanguard LifeStrategy Growth Fund 20,385 16.03 326,840 3.39% 0.52% 6.90% 1 Vanguard LifeStrategy Income Fund 1,130 13.30 15,034 4.04% 0.75% 5.90% 6 Vanguard LifeStrategy Income Fund 13,931 12.75 177,580 3.71% 0.52% 6.15% 1 Vanguard LifeStrategy Moderate Growth Fund 30,250 14.87 449,750 2.88% 0.75% 6.55% 6 Vanguard LifeStrategy Moderate Growth Fund 39,773 14.92 593,233 3.00% 0.52% 6.80% 1 Vanguard Prime Money Market Fund 380 11.23 4,271 5.05% 0.75% 4.37% 1 Vanguard PRIMECAP Fund 198 16.06 3,180 0.63% 0.75% 10.64% 1 Vanguard Small-Cap Growth Index Fund 1,158 16.95 19,622 0.47% 0.75% 8.80% 1 Vanguard Small-Cap Value Index Fund 1,730 14.20 24,575 2.07% 0.75% -7.77% 1 Vanguard Total Bond Market Index Fund -- 12.68 -- 3.44% 0.75% 6.13% 6 Vanguard Total International Stock Index Fund 13,349 23.01 307,106 2.56% 0.52% 14.92% 1 Vanguard U.S. Growth Fund 396 11.56 4,581 0.58% 0.75% 9.32% 6 Vanguard VIF Balanced Portfolio 353,982 15.70 5,558,044 2.65% 0.52% 7.79% 6 Vanguard VIF Capital Growth Portfolio 31,095 16.82 523,022 0.38% 0.52% 11.89% 1 Vanguard VIF Diversified Value Portfolio 1,474 14.62 21,548 1.88% 0.75% 3.15% 6 Vanguard VIF Diversified Value Portfolio 42,468 17.67 750,394 2.14% 0.52% 3.39% 1 Vanguard VIF Equity Income Portfolio 1,496 13.92 20,835 2.48% 0.75% 3.75% 6 Vanguard VIF Equity Income Portfolio 38,057 16.33 621,619 2.64% 0.52% 3.99% 1 Vanguard VIF Equity Index Portfolio 592 13.20 7,813 0.00% 0.75% -0.98% 6 Vanguard VIF Equity Index Portfolio 41,395 15.12 626,000 1.45% 0.52% 4.83% 6 Vanguard VIF Growth Portfolio 7,320 14.06 102,946 0.60% 0.52% 9.64% 1 Vanguard VIF High Yield Bond Portfolio 11,349 11.82 134,094 6.76% 0.75% 1.19% 6 Vanguard VIF High Yield Bond Portfolio 18,752 12.63 236,861 7.17% 0.52% 1.42% 1 Vanguard VIF International Portfolio 7,493 18.93 141,877 1.78% 0.75% 16.53% 6 Vanguard VIF International Portfolio 90,426 22.73 2,055,354 1.62% 0.52% 16.80%
VA I-50 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2007 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) ---------------------------------------------------- ------- ------ ---------- ---------- --------- ---------- 6 Vanguard VIF Mid-Cap Index Portfolio 26,583 $17.93 $ 476,573 1.23% 0.52% 5.59% 6 Vanguard VIF Money Market Portfolio 148,678 11.33 1,684,459 2.35% 0.52% 4.71% 1 Vanguard VIF REIT Index Portfolio 1,400 14.89 20,847 2.04% 0.75% -17.23% 6 Vanguard VIF REIT Index Portfolio 17,478 17.74 310,062 2.62% 0.52% -17.04% 6 Vanguard VIF Short-Term Investment-Grade Portfolio 17,860 11.45 204,495 3.74% 0.52% 5.47% 6 Vanguard VIF Small Company Growth Portfolio 15,989 14.60 233,452 0.48% 0.52% 3.22% 1 Vanguard VIF Total Bond Market Index Portfolio 1,435 11.36 16,311 3.87% 0.75% 6.18% 6 Vanguard VIF Total Bond Market Index Portfolio 56,843 11.83 672,393 4.27% 0.52% 6.43% 6 Vanguard VIF Total Stock Market Index Portfolio 164,644 15.51 2,554,031 1.05% 0.52% 4.62% 1 Vanguard Wellington Fund 8,163 15.41 125,818 3.22% 0.75% 7.56% 1 Vanguard Windsor Fund 197 13.92 2,738 1.56% 0.75% -4.02%
VA I-51 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2006 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- --------- ------ ------------ ---------- --------- ---------- 2 AIM V.I. Capital Appreciation Fund - Series I 988 $12.03 $ 11,883 0.05% 1.45% 4.77% 3 AIM V.I. Capital Appreciation Fund - Series I 67,530 12.08 815,867 0.05% 1.40% 4.83% 2 AIM V.I. International Growth Fund - Series I 979 18.24 17,848 0.84% 1.45% 26.39% 3 AIM V.I. International Growth Fund - Series I 57,277 18.32 1,049,315 0.84% 1.40% 26.46% 1 AllianceBernstein Americas Government Income Portfolio - Class A 1,454,005 21.75 31,617,925 6.83% 1.40% 1.88% 2 AllianceBernstein Americas Government Income Portfolio - Class A 16,837 21.64 364,415 7.07% 1.45% 1.82% 1 AllianceBernstein Balanced Shares Portfolio - Class A * 5,279,504 27.24 143,792,108 2.45% 1.40% 10.24% 2 AllianceBernstein Balanced Shares Portfolio - Class A * 137,405 27.11 3,724,756 2.55% 1.45% 10.18% 3 AllianceBernstein Balanced Shares Portfolio - Class A * 27,880 13.62 379,776 2.38% 1.40% 10.24% 1 AllianceBernstein Global Bond Portfolio - Class A 802,706 17.63 14,148,021 1.52% 1.40% 3.51% 2 AllianceBernstein Global Bond Portfolio - Class A 22,623 17.54 396,871 1.75% 1.45% 3.46% 3 AllianceBernstein Global Bond Portfolio - Class A 62 13.23 825 1.60% 1.40% 3.51% 1 AllianceBernstein Global Dollar Government Portfolio - Class A 566,140 36.31 20,555,661 5.76% 1.40% 8.48% 2 AllianceBernstein Global Dollar Government Portfolio - Class A 14,343 36.14 518,325 5.66% 1.45% 8.43% 1 AllianceBernstein Global Technology Portfolio - Class A 2,493,296 17.01 42,420,930 0.00% 1.40% 7.13% 2 AllianceBernstein Global Technology Portfolio - Class A 110,169 16.93 1,865,609 0.00% 1.45% 7.08% 3 AllianceBernstein Global Technology Portfolio - Class A 26,498 16.46 436,288 0.00% 1.40% 7.13% 4 AllianceBernstein Global Technology Portfolio - Class B 1,144,861 16.74 19,170,499 0.00% 1.40% 6.88% 5 AllianceBernstein Global Technology Portfolio - Class B 77,409 16.67 1,290,106 0.00% 1.45% 6.83% 1 AllianceBernstein Growth and Income Portfolio - Class A 3,763,378 46.63 175,485,398 1.40% 1.40% 15.66% 2 AllianceBernstein Growth and Income Portfolio - Class A 135,669 46.41 6,296,484 1.38% 1.45% 15.60% 3 AllianceBernstein Growth and Income Portfolio - Class A 114,368 28.92 3,307,922 1.44% 1.40% 15.66% 4 AllianceBernstein Growth and Income Portfolio - Class B 3,889,884 45.78 178,063,243 1.13% 1.40% 15.36% 5 AllianceBernstein Growth and Income Portfolio - Class B 100,315 45.56 4,570,443 1.12% 1.45% 15.30% 1 AllianceBernstein Growth Portfolio - Class A 2,306,064 26.99 62,247,748 0.00% 1.40% -2.45% 2 AllianceBernstein Growth Portfolio - Class A 73,789 26.87 1,982,439 0.00% 1.45% -2.49% 3 AllianceBernstein Growth Portfolio - Class A 66,554 18.66 1,241,944 0.00% 1.40% -2.45% 4 AllianceBernstein Growth Portfolio - Class B 1,626,265 26.50 43,095,678 0.00% 1.40% -2.61% 5 AllianceBernstein Growth Portfolio - Class B 57,799 26.38 1,524,471 0.00% 1.45% -2.66% 1 AllianceBernstein High Yield Portfolio - Class A 2,324,942 11.85 27,549,052 8.66% 1.40% 7.54% 2 AllianceBernstein High Yield Portfolio - Class A 92,272 11.79 1,088,343 7.88% 1.45% 7.49% 1 AllianceBernstein International Growth Portfolio - Class A * 1,194,280 36.34 43,397,843 0.90% 1.40% 25.28% 2 AllianceBernstein International Growth Portfolio - Class A * 51,987 36.17 1,880,216 0.89% 1.45% 25.22% 1 AllianceBernstein International Research Growth Portfolio - Class A * 2,501,502 21.47 53,710,897 0.41% 1.40% 24.70% 2 AllianceBernstein International Research Growth Portfolio - Class A * 105,524 21.37 2,255,107 0.42% 1.45% 24.64% 1 AllianceBernstein International Value Portfolio - Class A 2,320,037 24.72 57,357,239 1.34% 1.40% 33.56% 2 AllianceBernstein International Value Portfolio - Class A 80,632 24.65 1,987,789 1.37% 1.45% 33.49% 1 AllianceBernstein Large Cap Growth Portfolio - Class A 3,610,245 29.57 106,759,154 0.00% 1.40% -1.83% 2 AllianceBernstein Large Cap Growth Portfolio - Class A 159,595 29.43 4,697,244 0.00% 1.45% -1.87% 3 AllianceBernstein Large Cap Growth Portfolio - Class A 16,085 13.34 214,551 0.00% 1.40% -1.83% 4 AllianceBernstein Large Cap Growth Portfolio - Class B 2,178,294 29.09 63,358,074 0.00% 1.40% -2.02% 5 AllianceBernstein Large Cap Growth Portfolio - Class B 66,179 28.95 1,915,832 0.00% 1.45% -2.07% 1 AllianceBernstein Money Market Portfolio - Class A 1,343,591 13.19 17,727,719 4.89% 1.40% 2.77% 2 AllianceBernstein Money Market Portfolio - Class A 33,045 13.13 433,953 5.02% 1.45% 2.72% 4 AllianceBernstein Money Market Portfolio - Class B 1,041,839 12.95 13,491,667 4.05% 1.40% 2.52% 5 AllianceBernstein Money Market Portfolio - Class B 52,337 12.89 674,571 3.03% 1.45% 2.47% 1 AllianceBernstein Real Estate Investment Portfolio - Class A 1,420,880 33.85 48,100,426 1.99% 1.40% 33.35% 2 AllianceBernstein Real Estate Investment Portfolio - Class A 62,269 33.69 2,098,075 1.93% 1.45% 33.29% 1 AllianceBernstein Small Cap Growth Portfolio - Class A 2,932,427 13.55 39,727,655 0.00% 1.40% 9.15%
VA I-52 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2006 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) ------------------------------------------------------------ --------- ------ ----------- ---------- --------- ---------- 2 AllianceBernstein Small Cap Growth Portfolio - Class A 110,178 $13.48 $ 1,485,647 0.00% 1.45% 9.10% 3 AllianceBernstein Small Cap Growth Portfolio - Class A 6,321 13.17 83,227 0.00% 1.40% 9.15% 1 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 2,692,681 19.97 53,781,113 0.42% 1.40% 12.83% 2 AllianceBernstein Small/Mid Cap Value Portfolio - Class A 82,449 19.92 1,642,108 0.42% 1.45% 12.78% 1 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 3,688,591 16.48 60,792,990 3.97% 1.40% 2.49% 2 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 84,144 16.40 1,380,285 4.07% 1.45% 2.44% 4 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 169,719 16.16 2,743,447 3.86% 1.40% 2.15% 5 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 4,723 16.09 75,984 3.94% 1.45% 2.10% 1 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 217,778 13.76 2,996,290 0.00% 1.40% 8.33% 2 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 7,098 13.73 97,489 0.00% 1.45% 8.28% 1 AllianceBernstein Utility Income Portfolio - Class A 1,629,794 29.27 47,707,964 2.46% 1.40% 22.05% 2 AllianceBernstein Utility Income Portfolio - Class A 51,069 29.13 1,487,884 2.35% 1.45% 21.99% 4 AllianceBernstein Value Portfolio - Class B 4,968,785 15.06 74,811,220 0.92% 1.40% 19.35% 5 AllianceBernstein Value Portfolio - Class B 129,544 15.01 1,944,938 0.97% 1.45% 19.29% 1 BlackRock Basic Value V.I. Fund - Class I * 285,829 20.68 5,909,515 1.53% 1.40% 20.18% 2 BlackRock Basic Value V.I. Fund - Class I * 22,598 20.58 465,091 1.52% 1.45% 20.12% 1 BlackRock Bond V.I. Fund - Class I * 18,147 13.97 253,563 4.59% 1.40% 2.95% 2 BlackRock Bond V.I. Fund - Class I * 3,299 13.91 45,879 4.59% 1.45% 2.89% 1 BlackRock Global Allocation V.I. Fund - Class I * 109,130 17.47 1,906,769 2.99% 1.40% 14.92% 2 BlackRock Global Allocation V.I. Fund - Class I * 8,881 17.39 154,465 3.04% 1.45% 14.86% 1 BlackRock Global Growth V.I. Fund - Class I * 53,350 12.03 641,644 0.90% 1.40% 20.32% 2 BlackRock Global Growth V.I. Fund - Class I * 673 11.98 8,060 0.94% 1.45% 20.26% 1 BlackRock High Income V.I. Fund - Class I * 30,485 13.58 413,990 7.23% 1.40% 7.93% 2 BlackRock High Income V.I. Fund - Class I * 560 13.52 7,570 7.46% 1.45% 7.88% 1 BlackRock International Value V.I. Fund - Class I * 118,648 19.52 2,315,708 3.27% 1.40% 26.14% 2 BlackRock International Value V.I. Fund - Class I * 9,490 19.44 184,513 3.79% 1.45% 26.07% 1 BlackRock Large Cap Core V.I. Fund - Class I * 101,424 18.77 1,903,644 0.93% 1.40% 13.15% 2 BlackRock Large Cap Core V.I. Fund - Class I * 2,692 18.68 50,301 0.83% 1.45% 13.10% 1 BlackRock Large Cap Growth V.I. Fund - Class I * 86,564 10.87 940,900 0.29% 1.40% 5.72% 1 BlackRock Money Market V.I. Fund - Class I * 33,362 11.93 398,024 3.83% 1.40% 3.08% 2 BlackRock Money Market V.I. Fund - Class I * 3,613 11.88 42,912 4.43% 1.45% 3.03% 1 BlackRock Utilities and Telecommunications V.I. Fund - Class I * 26,889 20.39 548,372 2.95% 1.40% 23.50% 2 BlackRock Utilities and Telecommunications V.I. Fund - Class I * 2,353 20.30 47,768 2.88% 1.45% 23.44% 1 BlackRock Value Opportunities V.I. Fund - Class I * 80,347 24.34 1,955,910 0.26% 1.40% 11.25% 2 BlackRock Value Opportunities V.I. Fund - Class I * 12,733 24.23 308,558 0.27% 1.45% 11.20% 7 Delaware VIP Balanced Series - Standard Class 27,077 33.76 914,165 2.90% 1.25% 14.76% 7 Delaware VIP Capital Reserves Series - Standard Class 6,685 23.22 155,253 4.81% 1.25% 3.27% 7 Delaware VIP Cash Reserve Series - Standard Class -- 13.77 -- 0.00% 1.40% 3.04% 7 Delaware VIP Cash Reserve Series - Standard Class 14,676 17.04 250,090 4.09% 1.25% 3.19% 7 Delaware VIP Growth Opportunities Series - Standard Class 6,557 31.79 208,440 0.00% 1.40% 4.88% 7 Delaware VIP Growth Opportunities Series - Standard Class 21,524 35.87 771,976 0.00% 1.25% 5.04% 7 Delaware VIP High Yield Series - Standard Class 668 19.36 12,932 6.56% 1.40% 10.89% 7 Delaware VIP High Yield Series - Standard Class 17,069 27.57 470,674 6.56% 1.25% 11.06% 7 Delaware VIP Value Series - Standard Class 4,750 39.74 188,739 1.53% 1.40% 22.38% 7 Delaware VIP Value Series - Standard Class 95,378 47.26 4,507,090 1.56% 1.25% 22.56% 2 Dreyfus Stock Index Fund, Inc. - Initial Shares 814 22.18 18,045 1.64% 1.45% 13.84% 3 Dreyfus Stock Index Fund, Inc. - Initial Shares 236,115 22.28 5,260,980 1.59% 1.40% 13.90%
VA I-53 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2006 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- ------- ------ ----------- ---------- --------- ---------- 2 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 1,040 $15.68 $ 16,300 0.00% 1.45% 9.37% 3 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 51,843 15.75 816,500 0.00% 1.40% 9.43% 3 Fidelity VIP Asset Manager Portfolio - Initial Class 244,885 17.42 4,266,167 3.01% 1.40% 5.83% 2 Fidelity VIP Contrafund Portfolio - Initial Class 122 20.72 2,525 1.26% 1.45% 10.11% 3 Fidelity VIP Contrafund Portfolio - Initial Class 136,208 20.82 2,835,385 1.26% 1.40% 10.17% 2 Fidelity VIP Growth Portfolio - Initial Class 77 17.80 1,369 0.43% 1.45% 5.32% 3 Fidelity VIP Growth Portfolio - Initial Class 182,120 17.88 3,256,932 0.43% 1.40% 5.37% 2 Fidelity VIP High Income Portfolio - Initial Class 1,168 12.95 15,136 6.68% 1.45% 9.64% 3 Fidelity VIP High Income Portfolio - Initial Class 54,868 13.01 714,094 6.68% 1.40% 9.69% 3 Fidelity VIP Investment Grade Bond Portfolio - Initial Class 97,913 16.70 1,635,503 4.58% 1.40% 2.90% 3 Fidelity VIP Money Market Portfolio - Initial Class 165,231 13.02 2,151,019 4.70% 1.40% 3.42% 3 Fidelity VIP Overseas Portfolio - Initial Class 9,596 19.55 187,622 0.97% 1.40% 16.44% 1 UBS U.S. Allocation Portfolio 747,396 17.64 13,187,756 2.74% 1.40% 9.75% 2 UBS U.S. Allocation Portfolio 84,240 17.57 1,480,229 3.09% 1.45% 9.69% 1 UIF Core Plus Fixed Income Portfolio - Class I Shares -- 12.08 -- 0.00% 0.75% 2.96% 1 UIF Equity Growth Portfolio - Class I Shares -- 11.83 -- 0.00% 0.75% 3.33% 1 UIF Technology Portfolio - Class I Shares -- -- -- 0.00% 0.75% 4.77% 3 Van Eck Worldwide Emerging Markets Fund - Initial Class 33,797 21.37 722,390 0.67% 1.40% 37.56% 2 Van Eck Worldwide Hard Assets Fund - Initial Class 252 23.81 6,007 0.00% 1.45% -2.11% 3 Van Eck Worldwide Hard Assets Fund - Initial Class 28,179 23.92 674,000 0.07% 1.40% 22.77% 1 Vanguard 500 Index Fund 2,232 13.16 29,376 1.73% 0.75% 14.78% 6 Vanguard Dividend Growth Fund 1,909 15.08 28,795 1.89% 0.52% 18.96% 6 Vanguard GNMA Fund 1,170 11.20 13,105 5.65% 0.52% 3.78% 6 Vanguard Health Care Fund 4,234 15.07 63,831 1.41% 0.52% 10.29% 6 Vanguard Inflation-Protected Securities Fund 13,802 11.38 157,045 2.94% 0.52% -0.09% 1 Vanguard International Growth Fund 723 18.18 13,143 4.03% 0.75% 10.63% 1 Vanguard LifeStrategy Conservative Growth Fund 2,476 13.21 32,710 3.19% 0.75% 9.80% 1 Vanguard LifeStrategy Growth Fund 996 14.54 14,489 2.12% 0.75% 15.26% 6 Vanguard LifeStrategy Growth Fund 10,239 15.00 153,576 2.16% 0.52% 15.53% 1 Vanguard LifeStrategy Income Fund 1,333 12.56 16,748 3.87% 0.75% 7.13% 6 Vanguard LifeStrategy Income Fund 17,095 12.01 205,299 3.91% 0.52% 7.37% 1 Vanguard LifeStrategy Moderate Growth Fund 33,191 13.95 463,121 2.71% 0.75% 12.46% 6 Vanguard LifeStrategy Moderate Growth Fund 31,779 13.97 443,832 3.04% 0.52% 12.72% 1 Vanguard Prime Money Market Fund 416 10.76 4,477 4.78% 0.75% 4.10% 1 Vanguard PRIMECAP Fund 217 14.52 3,144 0.61% 0.75% 11.48% 1 Vanguard Small-Cap Growth Index Fund 1,268 15.58 19,750 0.29% 0.75% 11.11% 1 Vanguard Small-Cap Value Index Fund 1,887 15.40 29,051 2.16% 0.75% 18.36% 1 Vanguard Total Bond Market Index Fund 705 11.95 8,427 4.84% 0.75% 3.49% 6 Vanguard Total International Stock Index Fund 15,348 20.02 307,249 2.34% 0.52% 25.98% 1 Vanguard U.S. Growth Fund 434 10.57 4,584 0.46% 0.75% 1.01% 6 Vanguard VIF Balanced Portfolio 313,608 14.57 4,568,050 2.15% 0.52% 14.37% 6 Vanguard VIF Capital Growth Portfolio 11,822 15.03 177,719 0.56% 0.52% 11.05% 1 Vanguard VIF Diversified Value Portfolio 1,590 14.17 22,533 0.00% 0.75% 13.80% 6 Vanguard VIF Diversified Value Portfolio 24,806 17.09 423,933 1.61% 0.52% 18.26% 1 Vanguard VIF Equity Income Portfolio 1,544 13.42 20,718 2.67% 0.75% 19.80% 6 Vanguard VIF Equity Income Portfolio 38,422 15.71 603,508 1.87% 0.52% 20.07% 6 Vanguard VIF Equity Index Portfolio 29,863 14.43 430,794 1.65% 0.52% 15.11% 6 Vanguard VIF Growth Portfolio 4,700 12.83 60,284 0.42% 0.52% 1.39% 1 Vanguard VIF High Yield Bond Portfolio 11,668 11.68 136,242 6.95% 0.75% 7.46% 6 Vanguard VIF High Yield Bond Portfolio 19,323 12.45 240,659 4.94% 0.52% 7.71% 1 Vanguard VIF International Portfolio 8,788 16.25 142,797 1.07% 0.75% 25.80%
VA I-54 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2006 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) ---------------------------------------------------- ------- ------ ---------- ---------- --------- ---------- 6 Vanguard VIF International Portfolio 68,625 $19.46 $1,335,452 0.45% 0.52% 26.09% 6 Vanguard VIF Mid-Cap Index Portfolio 19,094 16.98 324,199 0.97% 0.52% 13.16% 6 Vanguard VIF Money Market Portfolio 397 10.82 4,299 55.16% 0.52% 4.49% 1 Vanguard VIF REIT Index Portfolio 1,505 17.98 27,073 2.07% 0.75% 33.92% 6 Vanguard VIF REIT Index Portfolio 19,538 21.38 417,775 1.83% 0.52% 34.23% 6 Vanguard VIF Short-Term Investment-Grade Portfolio 13,435 10.86 145,842 2.57% 0.52% 4.38% 6 Vanguard VIF Small Company Growth Portfolio 12,166 14.15 172,093 0.22% 0.52% 9.64% 1 Vanguard VIF Total Bond Market Index Portfolio 1,548 10.70 16,571 0.00% 0.75% 4.61% 6 Vanguard VIF Total Bond Market Index Portfolio 38,527 11.11 428,209 3.87% 0.52% 3.77% 6 Vanguard VIF Total Stock Market Index Portfolio 148,502 14.83 2,202,013 0.76% 0.52% 14.93% 1 Vanguard Wellington Fund 8,984 14.33 128,741 3.05% 0.75% 14.08% 1 Vanguard Windsor Fund 215 14.51 3,121 1.48% 0.75% 18.46%
VA I-55 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2005 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- --------- ------ ------------ ---------- --------- ---------- 2 AIM V.I. Capital Appreciation Fund - Series I 990 $11.48 $ 11,364 0.05% 1.45% 7.27% 3 AIM V.I. Capital Appreciation Fund - Series I 94,212 11.53 1,085,821 0.05% 1.40% 7.33% 2 AIM V.I. International Growth Fund - Series I 980 14.43 14,139 0.60% 1.45% 16.24% 3 AIM V.I. International Growth Fund - Series I 92,099 14.49 1,334,262 0.60% 1.40% 16.29% 1 AllianceBernstein Americas Government Income Portfolio - Class A 1,853,190 21.35 39,556,609 6.86% 1.40% 7.16% 2 AllianceBernstein Americas Government Income Portfolio - Class A 16,466 21.26 349,998 6.40% 1.45% 7.11% 1 AllianceBernstein Global Bond Portfolio - Class A 909,967 17.03 15,494,005 9.39% 1.40% -8.94% 2 AllianceBernstein Global Bond Portfolio - Class A 31,182 16.96 528,704 7.55% 1.45% -8.98% 3 AllianceBernstein Global Bond Portfolio - Class A 63 12.78 801 9.06% 1.40% -8.94% 1 AllianceBernstein Global Dollar Government Portfolio - Class A 593,367 33.47 19,859,233 5.90% 1.40% 8.10% 2 AllianceBernstein Global Dollar Government Portfolio - Class A 16,673 33.33 555,672 6.02% 1.45% 8.05% 1 AllianceBernstein Global Technology Portfolio - Class A * 3,430,602 15.88 54,482,738 0.00% 1.40% 2.42% 2 AllianceBernstein Global Technology Portfolio - Class A * 160,427 15.81 2,537,089 0.00% 1.45% 2.37% 3 AllianceBernstein Global Technology Portfolio - Class A * 43,634 15.37 670,610 0.00% 1.40% 2.42% 4 AllianceBernstein Global Technology Portfolio - Class B * 1,432,336 15.67 22,440,649 0.00% 1.40% 2.21% 5 AllianceBernstein Global Technology Portfolio - Class B * 96,636 15.60 1,507,640 0.00% 1.45% 2.16% 1 AllianceBernstein Growth and Income Portfolio - Class A 5,150,075 40.32 207,630,186 1.47% 1.40% 3.41% 2 AllianceBernstein Growth and Income Portfolio - Class A 176,457 40.15 7,084,149 1.54% 1.45% 3.36% 3 AllianceBernstein Growth and Income Portfolio - Class A 150,268 25.01 3,757,785 1.21% 1.40% 3.41% 4 AllianceBernstein Growth and Income Portfolio - Class B 4,526,504 39.68 179,612,690 1.25% 1.40% 3.15% 5 AllianceBernstein Growth and Income Portfolio - Class B 121,205 39.51 4,789,237 1.17% 1.45% 3.09% 1 AllianceBernstein Growth Portfolio - Class A 3,103,702 27.67 85,879,047 0.00% 1.40% 10.42% 2 AllianceBernstein Growth Portfolio - Class A 106,451 27.55 2,933,097 0.00% 1.45% 10.36% 3 AllianceBernstein Growth Portfolio - Class A 82,954 19.13 1,586,802 0.00% 1.40% 10.42% 4 AllianceBernstein Growth Portfolio - Class B 1,973,252 27.21 53,692,489 0.00% 1.40% 10.09% 5 AllianceBernstein Growth Portfolio - Class B 58,380 27.10 1,581,843 0.00% 1.45% 10.03% 1 AllianceBernstein High Yield Portfolio - Class A 2,778,502 11.02 30,615,117 8.24% 1.40% 0.37% 2 AllianceBernstein High Yield Portfolio - Class A 98,709 10.97 1,083,174 8.63% 1.45% 0.32% 1 AllianceBernstein International Portfolio - Class A 3,003,328 17.22 51,711,655 0.47% 1.40% 17.51% 2 AllianceBernstein International Portfolio - Class A 108,724 17.15 1,864,157 0.49% 1.45% 17.45% 1 AllianceBernstein International Value Portfolio - Class A 2,217,641 18.51 41,050,514 0.58% 1.40% 15.17% 2 AllianceBernstein International Value Portfolio - Class A 79,189 18.47 1,462,443 0.65% 1.45% 15.11% 1 AllianceBernstein Large Cap Growth Portfolio - Class A * 4,752,800 30.12 143,159,333 0.00% 1.40% 13.55% 2 AllianceBernstein Large Cap Growth Portfolio - Class A * 219,121 29.99 6,572,420 0.00% 1.45% 13.49% 3 AllianceBernstein Large Cap Growth Portfolio - Class A * 23,778 13.59 323,059 0.00% 1.40% 13.55% 4 AllianceBernstein Large Cap Growth Portfolio - Class B * 2,474,671 29.69 73,461,562 0.00% 1.40% 13.25% 5 AllianceBernstein Large Cap Growth Portfolio - Class B * 82,045 29.56 2,425,298 0.00% 1.45% 13.19% 1 AllianceBernstein Money Market Portfolio - Class A 1,443,518 12.84 18,532,109 2.61% 1.40% 0.94% 2 AllianceBernstein Money Market Portfolio - Class A 57,677 12.78 737,354 3.00% 1.45% 0.88% 4 AllianceBernstein Money Market Portfolio - Class B 1,249,080 12.63 15,778,165 2.07% 1.40% 0.68% 5 AllianceBernstein Money Market Portfolio - Class B 21,657 12.58 272,422 1.82% 1.45% 0.63% 1 AllianceBernstein Real Estate Investment Portfolio - Class A 1,713,918 25.39 43,508,901 3.15% 1.40% 10.12% 2 AllianceBernstein Real Estate Investment Portfolio - Class A 75,964 25.28 1,920,292 3.08% 1.45% 10.07% 1 AllianceBernstein Small Cap Growth Portfolio - Class A 3,250,316 12.41 40,342,954 0.00% 1.40% 3.78% 2 AllianceBernstein Small Cap Growth Portfolio - Class A 170,998 12.36 2,113,508 0.00% 1.45% 3.73% 3 AllianceBernstein Small Cap Growth Portfolio - Class A 16,380 12.06 197,594 0.00% 1.40% 3.78% 1 AllianceBernstein Small/Mid Cap Value Portfolio - Class A * 3,232,495 17.70 57,219,329 0.73% 1.40% 5.43% 2 AllianceBernstein Small/Mid Cap Value Portfolio - Class A * 96,342 17.66 1,701,403 0.77% 1.45% 5.38% 1 AllianceBernstein Total Return Portfolio - Class A 6,219,857 24.71 153,669,013 2.56% 1.40% 2.47%
VA I-56 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2005 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- --------- ------ ----------- ---------- --------- ---------- 2 AllianceBernstein Total Return Portfolio - Class A 162,454 $24.60 $ 3,996,746 2.59% 1.45% 2.41% 3 AllianceBernstein Total Return Portfolio - Class A 33,917 12.36 419,099 2.66% 1.40% 2.47% 1 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 4,360,176 16.08 70,114,479 2.97% 1.40% 0.56% 2 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 115,065 16.01 1,842,538 2.83% 1.45% 0.51% 4 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 190,291 15.82 3,011,226 2.66% 1.40% 0.34% 5 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 5,173 15.76 81,519 3.44% 1.45% 0.29% 1 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 212,143 12.70 2,694,338 0.28% 1.40% 8.13% 2 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 7,475 12.68 94,821 0.25% 1.45% 8.08% 1 AllianceBernstein Utility Income Portfolio - Class A 1,806,112 23.98 43,318,452 2.17% 1.40% 14.45% 2 AllianceBernstein Utility Income Portfolio - Class A 60,567 23.88 1,446,570 2.47% 1.45% 14.39% 4 AllianceBernstein Value Portfolio - Class B 5,697,258 12.62 71,870,996 1.23% 1.40% 4.02% 5 AllianceBernstein Value Portfolio - Class B 148,703 12.59 1,871,516 1.14% 1.45% 3.97% 1 AllianceBernstein Worldwide Privatization Portfolio - Class A 1,306,320 29.01 37,890,962 0.43% 1.40% 19.16% 2 AllianceBernstein Worldwide Privatization Portfolio - Class A 68,361 28.88 1,974,541 0.46% 1.45% 19.10% 7 Delaware VIP Balanced Series - Standard Class 28,930 29.42 851,121 2.13% 1.25% 2.40% 7 Delaware VIP Capital Reserves Series - Standard Class 8,624 22.49 193,940 4.12% 1.25% 0.54% 7 Delaware VIP Capital Reserves Series - Standard Class -- 16.80 -- 6.68% 1.40% 0.39% 7 Delaware VIP Cash Reserve Series - Standard Class -- 13.36 -- 0.00% 1.40% 1.29% 7 Delaware VIP Cash Reserve Series - Standard Class 17,880 16.51 295,264 2.30% 1.25% 1.44% 7 Delaware VIP Growth Opportunities Series - Standard Class 6,627 30.31 200,850 0.00% 1.40% 9.86% 7 Delaware VIP Growth Opportunities Series - Standard Class 23,737 34.15 810,526 0.00% 1.25% 10.02% 7 Delaware VIP High Yield Series - Standard Class 669 17.46 11,690 6.58% 1.40% 2.15% 7 Delaware VIP High Yield Series - Standard Class 18,271 24.83 453,661 6.69% 1.25% 2.30% 7 Delaware VIP Value Series - Standard Class 4,750 32.47 154,241 1.87% 1.40% 4.56% 7 Delaware VIP Value Series - Standard Class 106,740 38.56 4,115,427 1.74% 1.25% 4.71% 2 Dreyfus Stock Index Fund, Inc. - Initial Shares 814 19.48 15,851 1.60% 1.45% 3.19% 3 Dreyfus Stock Index Fund, Inc. - Initial Shares 346,198 19.56 6,772,627 1.54% 1.40% 3.24% 2 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 1,040 14.33 14,903 0.00% 1.45% -0.54% 3 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 105,839 14.39 1,523,276 0.00% 1.40% -0.49% 3 Fidelity VIP Asset Manager Portfolio - Initial Class 343,752 16.46 5,658,685 2.84% 1.40% 2.60% 2 Fidelity VIP Contrafund Portfolio - Initial Class 427 18.82 8,039 0.29% 1.45% 15.26% 3 Fidelity VIP Contrafund Portfolio - Initial Class 196,314 18.90 3,709,418 0.29% 1.40% 15.32% 2 Fidelity VIP Growth Portfolio - Initial Class 77 16.90 1,306 0.53% 1.45% 4.28% 3 Fidelity VIP Growth Portfolio - Initial Class 250,705 16.97 4,255,031 0.53% 1.40% 4.33% 2 Fidelity VIP High Income Portfolio - Initial Class 1,168 11.81 13,805 14.91% 1.45% 1.23% 3 Fidelity VIP High Income Portfolio - Initial Class 98,552 11.86 1,169,260 14.91% 1.40% 1.28% 3 Fidelity VIP Investment Grade Bond Portfolio - Initial Class 154,340 16.23 2,505,319 3.94% 1.40% 0.77% 3 Fidelity VIP Money Market Portfolio - Initial Class 165,921 12.59 2,088,573 2.78% 1.40% 1.60% 3 Fidelity VIP Overseas Portfolio - Initial Class 13,573 16.79 227,914 0.71% 1.40% 17.40% 1 Mercury Basic Value V.I. Fund - Class I * 344,465 17.20 5,926,198 1.20% 1.40% 1.51% 2 Mercury Basic Value V.I. Fund - Class I * 27,874 17.13 477,597 1.00% 1.45% 1.46% 1 Mercury Core Bond V.I. Fund - Class I * 18,369 13.57 249,321 5.12% 1.40% 0.60% 2 Mercury Core Bond V.I. Fund - Class I * 3,302 13.52 44,633 4.95% 1.45% 0.55% 1 Mercury Domestic Money Market V.I. Fund - Class I * 26,678 11.57 308,767 2.69% 1.40% 1.27% 2 Mercury Domestic Money Market V.I. Fund - Class I * 3,620 11.53 41,725 2.00% 1.45% 1.22% 1 Mercury Global Allocation V.I. Fund - Class I * 91,040 15.20 1,384,223 2.55% 1.40% 8.98% 2 Mercury Global Allocation V.I. Fund - Class I * 7,075 15.14 107,135 2.27% 1.45% 8.93%
VA I-57 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2005 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) ---------------------------------------------------------------- ------- ------ ----------- ---------- --------- ---------- 1 Mercury Global Growth V.I. Fund - Class I * 62,562 $10.00 $ 625,364 0.99% 1.40% 13.47% 2 Mercury Global Growth V.I. Fund - Class I * 727 9.96 7,245 1.16% 1.45% 13.42% 1 Mercury High Current Income V.I. Fund - Class I * 37,243 12.58 468,597 8.83% 1.40% 0.13% 2 Mercury High Current Income V.I. Fund - Class I * 605 12.53 7,585 16.58% 1.45% 0.08% 1 Mercury International Value V.I. Fund - Class I * 140,781 15.47 2,178,364 2.74% 1.40% 10.13% 2 Mercury International Value V.I. Fund - Class I * 7,508 15.42 115,795 2.61% 1.45% 10.08% 1 Mercury Large Cap Core V.I. Fund - Class I * 106,450 16.59 1,765,715 0.61% 1.40% 11.63% 2 Mercury Large Cap Core V.I. Fund - Class I * 3,534 16.52 58,376 0.66% 1.45% 11.57% 1 Mercury Large Cap Growth V.I. Fund - Class I * 83,509 10.28 858,545 0.17% 1.40% 9.11% 1 Mercury Utilities and Telecommunications V.I. Fund - Class I * 30,504 16.51 503,728 2.65% 1.40% 12.55% 2 Mercury Utilities and Telecommunications V.I. Fund - Class I * 2,363 16.45 38,861 4.19% 1.45% 12.50% 1 Mercury Value Opportunities V.I. Fund - Class I * 102,905 21.88 2,251,650 0.25% 1.40% 8.85% 2 Mercury Value Opportunities V.I. Fund - Class I * 15,009 21.79 327,083 0.24% 1.45% 8.80% 1 UBS U.S. Allocation Portfolio 906,556 16.08 14,575,620 1.60% 1.40% 5.31% 2 UBS U.S. Allocation Portfolio 118,516 16.02 1,898,519 1.59% 1.45% 5.26% 1 UIF Core Plus Fixed Income Portfolio - Class I Shares 3,047 11.73 35,744 3.58% 0.75% 3.44% 1 UIF Equity Growth Portfolio - Class I Shares 3,066 11.44 35,091 0.47% 0.75% 14.85% 1 UIF Technology Portfolio - Class I Shares 1,520 8.03 12,209 0.00% 0.75% -1.02% 1 UIF Value Portfolio - Class I Shares -- 13.40 -- 0.00% 0.75% 3.78% 3 Van Eck Worldwide Emerging Markets Fund - Initial Class 46,816 15.54 727,449 0.72% 1.40% 30.17% 3 Van Eck Worldwide Hard Assets Fund - Initial Class 34,998 19.48 681,860 0.27% 1.40% 49.57% 1 Vanguard 500 Index Fund 2,435 11.47 27,921 1.87% 0.75% 3.99% 6 Vanguard Dividend Growth Fund 2,014 12.68 25,533 1.91% 0.52% 3.70% 6 Vanguard GNMA Fund 1,358 10.79 14,654 5.11% 0.52% 2.80% 6 Vanguard Health Care Fund 4,777 13.67 65,294 1.07% 0.52% 14.81% 6 Vanguard Inflation-Protected Securities Fund 12,379 11.39 140,980 9.38% 0.52% 2.06% 1 Vanguard LifeStrategy Conservative Growth Fund 2,712 12.03 32,643 2.81% 0.75% 3.68% 1 Vanguard LifeStrategy Growth Fund 1,092 12.62 13,773 1.94% 0.75% 6.09% 6 Vanguard LifeStrategy Growth Fund 9,068 12.98 117,725 2.30% 0.52% 6.33% 1 Vanguard LifeStrategy Income Fund 1,546 11.73 18,135 3.42% 0.75% 2.46% 6 Vanguard LifeStrategy Income Fund 14,069 11.18 157,357 3.50% 0.52% 2.70% 1 Vanguard LifeStrategy Moderate Growth Fund 35,678 12.41 442,657 4.88% 0.75% 4.90% 6 Vanguard LifeStrategy Moderate Growth Fund 23,059 12.39 285,701 2.41% 0.52% 5.14% 1 Vanguard Prime Money Market Fund 454 10.34 4,689 2.96% 0.75% 2.24% 1 Vanguard PRIMECAP Fund 236 13.02 3,075 0.57% 0.75% 7.69% 1 Vanguard Small-Cap Growth Index Fund 1,383 14.02 19,396 0.49% 0.75% 7.83% 1 Vanguard Small-Cap Value Index Fund 1,459 13.01 18,989 3.54% 0.75% 5.28% 1 Vanguard Total Bond Market Index Fund 771 11.54 8,898 4.43% 0.75% 1.63% 6 Vanguard Total International Stock Index Fund 17,451 15.89 277,301 2.04% 0.52% 14.97% 1 Vanguard U.S. Growth Fund 473 10.47 4,948 0.20% 0.75% 10.33% 6 Vanguard VIF Balanced Portfolio 268,437 12.74 3,418,895 1.90% 0.52% 6.28% 6 Vanguard VIF Capital Growth Portfolio 8,428 13.54 114,085 0.45% 0.52% 7.12% 6 Vanguard VIF Diversified Value Portfolio 25,311 14.45 365,768 1.26% 0.52% 7.06% 1 Vanguard VIF Equity Income Portfolio 1,593 11.20 17,851 2.45% 0.75% 3.36% 6 Vanguard VIF Equity Income Portfolio 22,489 13.08 294,186 1.89% 0.52% 3.60% 6 Vanguard VIF Equity Index Portfolio 15,968 12.53 200,108 1.18% 0.52% 4.25% 6 Vanguard VIF Growth Portfolio 4,943 12.65 62,536 0.17% 0.52% 10.92% 1 Vanguard VIF High Yield Bond Portfolio 10,939 10.87 118,854 0.00% 0.75% 1.99% 6 Vanguard VIF High Yield Bond Portfolio 4,896 11.56 56,615 3.33% 0.52% 2.22% 1 Vanguard VIF International Portfolio 9,871 12.92 127,493 0.00% 0.75% 15.44% 6 Vanguard VIF International Portfolio 20,403 15.43 314,875 0.77% 0.52% 15.71%
VA I-58 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2005 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) ---------------------------------------------------- ------ ------ ---------- ---------- --------- ---------- 6 Vanguard VIF Mid-Cap Index Portfolio 17,020 $15.00 $ 255,367 0.38% 0.52% 13.39% 1 Vanguard VIF Money Market Portfolio -- 10.29 -- 0.00% 0.75% 2.40% 6 Vanguard VIF Money Market Portfolio 3,266 10.35 33,823 25.89% 0.52% 2.64% 1 Vanguard VIF REIT Index Portfolio 1,616 13.43 21,696 2.80% 0.75% 11.00% 6 Vanguard VIF REIT Index Portfolio 12,188 15.93 194,149 1.39% 0.52% 11.26% 6 Vanguard VIF Short-Term Investment-Grade Portfolio 6,221 10.40 64,706 2.70% 0.52% 1.72% 6 Vanguard VIF Small Company Growth Portfolio 5,544 12.90 71,527 0.00% 0.52% 5.71% 6 Vanguard VIF Total Bond Market Index Portfolio 33,465 10.71 358,440 4.01% 0.52% 1.87% 6 Vanguard VIF Total Stock Market Index Portfolio 85,167 12.90 1,098,862 0.93% 0.52% 5.58% 1 Vanguard Wellington Fund 9,809 12.56 123,215 4.45% 0.75% 6.03% 1 Vanguard Windsor Fund 235 12.25 2,872 1.42% 0.75% 4.21%
VA I-59 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2004 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- --------- ------ ------------ ---------- --------- ---------- 2 AIM V.I. Capital Appreciation Fund - Series I 1,051 $10.70 $ 11,241 0.00% 1.45% 5.09% 3 AIM V.I. Capital Appreciation Fund - Series I 122,811 10.74 1,318,801 0.00% 1.40% 5.14% 2 AIM V.I. International Growth Fund - Series I 1,081 12.41 13,418 0.64% 1.45% 22.22% 3 AIM V.I. International Growth Fund - Series I 109,923 12.46 1,369,365 0.64% 1.40% 22.28% 1 AllianceBernstein Americas Government Income Portfolio - Class A 2,111,933 19.92 42,065,862 5.08% 1.40% 3.43% 2 AllianceBernstein Americas Government Income Portfolio - Class A 29,475 19.84 584,908 4.80% 1.45% 3.37% 1 AllianceBernstein Global Bond Portfolio - Class A 899,807 18.70 16,824,355 5.47% 1.40% 8.11% 2 AllianceBernstein Global Bond Portfolio - Class A 31,162 18.63 580,507 5.51% 1.45% 8.05% 3 AllianceBernstein Global Bond Portfolio - Class A 63 14.03 885 11.06% 1.40% 8.11% 1 AllianceBernstein Global Dollar Government Portfolio - Class A 628,197 30.96 19,449,691 6.45% 1.40% 8.59% 2 AllianceBernstein Global Dollar Government Portfolio - Class A 19,026 30.85 586,878 6.72% 1.45% 8.53% 1 AllianceBernstein Growth and Income Portfolio - Class A 6,262,902 38.99 244,161,672 0.88% 1.40% 9.91% 2 AllianceBernstein Growth and Income Portfolio - Class A 219,804 38.84 8,537,408 0.90% 1.45% 9.86% 3 AllianceBernstein Growth and Income Portfolio - Class A 282,480 24.18 6,830,906 0.97% 1.40% 9.91% 4 AllianceBernstein Growth and Income Portfolio - Class B 5,229,899 38.47 201,194,063 0.72% 1.40% 9.68% 5 AllianceBernstein Growth and Income Portfolio - Class B 147,272 38.33 5,644,554 0.74% 1.45% 9.62% 1 AllianceBernstein Growth Portfolio - Class A 3,853,315 25.06 96,562,814 0.00% 1.40% 13.14% 2 AllianceBernstein Growth Portfolio - Class A 144,062 24.97 3,596,773 0.00% 1.45% 13.08% 3 AllianceBernstein Growth Portfolio - Class A 163,582 17.32 2,833,937 0.00% 1.40% 13.14% 4 AllianceBernstein Growth Portfolio - Class B 2,217,887 24.72 54,819,089 0.00% 1.40% 12.94% 5 AllianceBernstein Growth Portfolio - Class B 64,240 24.63 1,581,914 0.00% 1.45% 12.88% 1 AllianceBernstein High Yield Portfolio - Class A 3,418,232 10.98 37,525,351 6.23% 1.40% 6.48% 2 AllianceBernstein High Yield Portfolio - Class A 134,790 10.94 1,474,402 6.65% 1.45% 6.43% 1 AllianceBernstein International Portfolio - Class A 3,066,419 14.65 44,929,430 0.26% 1.40% 15.98% 2 AllianceBernstein International Portfolio - Class A 111,264 14.60 1,624,203 0.28% 1.45% 15.93% 1 AllianceBernstein International Value Portfolio - Class A 2,082,813 16.07 33,477,137 0.49% 1.40% 23.46% 2 AllianceBernstein International Value Portfolio - Class A 74,829 16.04 1,200,523 0.48% 1.45% 23.39% 1 AllianceBernstein Money Market Portfolio - Class A 1,820,045 12.72 23,149,556 0.74% 1.40% -0.68% 2 AllianceBernstein Money Market Portfolio - Class A 59,980 12.67 760,067 0.85% 1.45% -0.73% 4 AllianceBernstein Money Market Portfolio - Class B 1,230,662 12.55 15,440,025 0.43% 1.40% -0.93% 5 AllianceBernstein Money Market Portfolio - Class B 29,141 12.50 364,257 0.57% 1.45% -0.98% 1 AllianceBernstein Premier Growth Portfolio - Class A 5,888,313 26.53 156,197,494 0.00% 1.40% 7.11% 2 AllianceBernstein Premier Growth Portfolio - Class A 272,974 26.43 7,214,251 0.00% 1.45% 7.06% 3 AllianceBernstein Premier Growth Portfolio - Class A 34,289 11.97 410,278 0.00% 1.40% 7.11% 4 AllianceBernstein Premier Growth Portfolio - Class B 2,859,284 26.21 74,947,558 0.00% 1.40% 6.84% 5 AllianceBernstein Premier Growth Portfolio - Class B 96,497 26.11 2,519,997 0.00% 1.45% 6.79% 1 AllianceBernstein Real Estate Investment Portfolio - Class A 2,141,527 23.05 49,367,234 2.08% 1.40% 33.74% 2 AllianceBernstein Real Estate Investment Portfolio - Class A 101,876 22.97 2,339,783 2.09% 1.45% 33.68% 1 AllianceBernstein Small Cap Growth Portfolio - Class A * 3,886,852 11.96 46,487,482 0.00% 1.40% 12.96% 2 AllianceBernstein Small Cap Growth Portfolio - Class A * 201,863 11.92 2,405,361 0.00% 1.45% 12.90% 3 AllianceBernstein Small Cap Growth Portfolio - Class A * 23,121 11.62 268,757 0.00% 1.40% 12.96% 1 AllianceBernstein Small Cap Value Portfolio - Class A 3,582,738 16.79 60,151,686 0.18% 1.40% 17.64% 2 AllianceBernstein Small Cap Value Portfolio - Class A 112,220 16.76 1,880,641 0.17% 1.45% 17.59% 1 AllianceBernstein Technology Portfolio - Class A 4,429,336 15.51 68,679,065 0.00% 1.40% 3.99% 2 AllianceBernstein Technology Portfolio - Class A 224,723 15.45 3,471,517 0.00% 1.45% 3.94% 3 AllianceBernstein Technology Portfolio - Class A 68,612 15.01 1,029,525 0.00% 1.40% 3.99% 4 AllianceBernstein Technology Portfolio - Class B 1,734,688 15.33 26,589,834 0.00% 1.40% 3.63% 5 AllianceBernstein Technology Portfolio - Class B 106,350 15.27 1,624,124 0.00% 1.45% 3.57% 1 AllianceBernstein Total Return Portfolio - Class A 7,047,539 24.11 169,927,969 2.15% 1.40% 7.56%
VA I-60 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2004 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- --------- ------ ----------- ---------- --------- ---------- 2 AllianceBernstein Total Return Portfolio - Class A 197,367 $24.02 $ 4,741,220 2.23% 1.45% 7.50% 3 AllianceBernstein Total Return Portfolio - Class A 52,718 12.06 635,751 2.03% 1.40% 7.56% 1 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 5,440,970 15.99 87,002,900 2.70% 1.40% 2.32% 2 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 164,077 15.93 2,613,917 2.72% 1.45% 2.27% 4 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 193,600 15.77 3,053,168 2.55% 1.40% 2.08% 5 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 9,338 15.71 146,715 2.74% 1.45% 2.03% 1 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 196,331 11.75 2,305,973 0.08% 1.40% 7.65% 2 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 9,219 11.74 108,201 0.02% 1.45% 7.59% 1 AllianceBernstein Utility Income Portfolio - Class A 1,964,056 20.96 41,160,680 2.04% 1.40% 22.60% 2 AllianceBernstein Utility Income Portfolio - Class A 58,184 20.88 1,214,854 1.95% 1.45% 22.54% 4 AllianceBernstein Value Portfolio - Class B 6,361,377 12.13 77,148,234 0.85% 1.40% 11.80% 5 AllianceBernstein Value Portfolio - Class B 173,133 12.11 2,095,841 0.77% 1.45% 11.74% 1 AllianceBernstein Worldwide Privatization Portfolio - Class A 1,405,001 24.34 34,199,304 0.21% 1.40% 22.54% 2 AllianceBernstein Worldwide Privatization Portfolio - Class A 69,774 24.25 1,692,095 0.22% 1.45% 22.48% 7 Delaware VIP Balanced Series - Standard Class -- 18.94 -- 3.89% 1.40% 4.37% 7 Delaware VIP Balanced Series - Standard Class 32,787 28.73 941,999 2.16% 1.25% 4.53% 7 Delaware VIP Capital Reserves Series - Standard Class 8,628 22.37 193,003 4.53% 1.25% 2.40% 7 Delaware VIP Capital Reserves Series - Standard Class 2,937 16.73 49,155 4.24% 1.40% 2.25% 7 Delaware VIP Cash Reserve Series - Standard Class 28,886 16.28 470,237 0.87% 1.25% -0.38% 7 Delaware VIP Growth Opportunities Series - Standard Class 6,786 27.59 187,228 0.00% 1.40% 10.91% 7 Delaware VIP Growth Opportunities Series - Standard Class 34,408 31.03 1,067,847 0.00% 1.25% 11.08% 7 Delaware VIP High Yield Series - Standard Class 671 17.09 11,474 8.91% 1.40% 12.66% 7 Delaware VIP High Yield Series - Standard Class 19,508 24.27 473,458 6.78% 1.25% 12.83% 7 Delaware VIP Value Series - Standard Class * 5,813 31.05 180,506 1.65% 1.40% 13.33% 7 Delaware VIP Value Series - Standard Class * 116,612 36.82 4,293,595 1.67% 1.25% 13.50% 2 Dreyfus Stock Index Fund, Inc. - Initial Shares 814 18.88 15,362 1.30% 1.45% 9.05% 3 Dreyfus Stock Index Fund, Inc. - Initial Shares 439,255 18.95 8,323,390 1.68% 1.40% 9.10% 2 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 1,040 14.41 14,984 0.00% 1.45% 16.81% 3 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 140,927 14.46 2,038,341 0.00% 1.40% 16.87% 2 Fidelity VIP Asset Manager Portfolio - Initial Class -- 15.98 -- 2.87% 1.45% 3.95% 3 Fidelity VIP Asset Manager Portfolio - Initial Class 434,692 16.04 6,974,219 2.87% 1.40% 4.00% 2 Fidelity VIP Contrafund Portfolio - Initial Class 430 16.33 7,023 0.34% 1.45% 13.81% 3 Fidelity VIP Contrafund Portfolio - Initial Class 222,855 16.39 3,651,633 0.34% 1.40% 13.87% 2 Fidelity VIP Growth Portfolio - Initial Class 78 16.21 1,259 0.29% 1.45% 1.89% 3 Fidelity VIP Growth Portfolio - Initial Class 368,999 16.27 6,002,705 0.29% 1.40% 1.94% 2 Fidelity VIP High Income Portfolio - Initial Class 1,168 11.67 13,637 8.52% 1.45% 8.02% 3 Fidelity VIP High Income Portfolio - Initial Class 141,135 11.71 1,653,374 8.52% 1.40% 8.07% 3 Fidelity VIP Investment Grade Bond Portfolio - Initial Class 209,298 16.11 3,371,298 4.45% 1.40% 3.00% 3 Fidelity VIP Money Market Portfolio - Initial Class 250,164 12.39 3,099,313 1.05% 1.40% -0.20% 3 Fidelity VIP Overseas Portfolio - Initial Class 20,004 14.30 286,116 1.14% 1.40% 12.06% 1 Merrill Lynch Basic Value V.I. Fund - Class I 443,366 16.95 7,514,169 1.08% 1.40% 9.53% 2 Merrill Lynch Basic Value V.I. Fund - Class I 48,297 16.89 815,621 1.09% 1.45% 9.47% 1 Merrill Lynch Core Bond V.I. Fund - Class I 34,210 13.49 461,570 3.57% 1.40% 3.06% 2 Merrill Lynch Core Bond V.I. Fund - Class I 3,305 13.44 44,435 3.57% 1.45% 3.01% 1 Merrill Lynch Domestic Money Market V.I. Fund - Class I 51,563 11.43 589,305 0.71% 1.40% -0.48% 2 Merrill Lynch Domestic Money Market V.I. Fund - Class I 201 11.39 2,292 0.92% 1.45% -0.53% 1 Merrill Lynch Global Allocation V.I. Fund - Class I 85,853 13.95 1,197,753 3.66% 1.40% 12.79%
VA I-61 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2004 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) ------------------------------------------------------------ --------- ------ ----------- ---------- --------- ---------- 2 Merrill Lynch Global Allocation V.I. Fund - Class I 9,693 $13.90 $ 134,749 2.05% 1.45% 12.73% 1 Merrill Lynch Global Growth V.I. Fund - Class I 90,917 8.81 800,893 1.47% 1.40% 13.62% 2 Merrill Lynch Global Growth V.I. Fund - Class I 787 8.78 6,916 1.53% 1.45% 13.56% 1 Merrill Lynch High Current Income V.I. Fund - Class I 69,402 12.57 872,051 7.60% 1.40% 10.27% 2 Merrill Lynch High Current Income V.I. Fund - Class I 1,766 12.52 22,111 8.81% 1.45% 10.21% 1 Merrill Lynch International Value V.I. Fund - Class I 145,441 14.05 2,043,390 2.38% 1.40% 20.83% 2 Merrill Lynch International Value V.I. Fund - Class I 8,769 14.01 122,846 2.38% 1.45% 20.77% 1 Merrill Lynch Large Cap Core V.I. Fund - Class I 120,062 14.86 1,784,069 0.84% 1.40% 15.17% 2 Merrill Lynch Large Cap Core V.I. Fund - Class I 3,420 14.81 50,639 0.94% 1.45% 15.11% 1 Merrill Lynch Large Cap Growth V.I. Fund - Class I 99,634 9.42 938,811 0.24% 1.40% 6.30% 1 Merrill Lynch Utilities and Telecommunications V.I. Fund - Class I 30,233 14.67 443,567 2.41% 1.40% 23.97% 2 Merrill Lynch Utilities and Telecommunications V.I. Fund - Class I 36 14.62 520 2.57% 1.45% 23.91% 1 Merrill Lynch Value Opportunities V.I. Fund - Class I * 127,681 20.10 2,566,605 0.00% 1.40% 13.38% 2 Merrill Lynch Value Opportunities V.I. Fund - Class I * 18,950 20.03 379,573 0.00% 1.45% 13.32% 1 UBS U.S. Allocation Portfolio * 1,101,176 15.27 16,811,976 0.94% 1.40% 9.14% 2 UBS U.S. Allocation Portfolio * 136,940 15.22 2,084,072 0.93% 1.45% 9.08% 1 UIF Core Plus Fixed Income Portfolio - Class I Shares 3,278 11.34 37,169 3.75% 0.75% 3.59% 1 UIF Equity Growth Portfolio - Class I Shares 3,298 9.96 32,865 0.16% 0.75% 6.97% 1 UIF Technology Portfolio - Class I Shares 1,635 8.12 13,268 0.00% 0.75% -2.38% 1 UIF Value Portfolio - Class I Shares -- 12.91 -- 2.09% 0.75% 16.95% 3 Van Eck Worldwide Emerging Markets Fund - Initial Class 42,737 11.94 510,162 0.62% 1.40% 24.14% 3 Van Eck Worldwide Hard Assets Fund - Initial Class 27,975 13.03 364,401 0.19% 1.40% 22.26% 1 Vanguard 500 Index Fund 753 11.03 8,300 1.79% 0.75% 9.91% 6 Vanguard GNMA Fund 3,152 10.50 33,095 2.57% 0.52% 3.59% 6 Vanguard Health Care Fund 5,698 11.90 67,830 1.71% 0.52% 8.94% 6 Vanguard Inflation-Protected Securities Fund 2,150 11.16 23,992 6.93% 0.52% 7.71% 1 Vanguard LifeStrategy Conservative Growth Fund 2,961 11.61 34,374 2.82% 0.75% 7.22% 1 Vanguard LifeStrategy Growth Fund 1,192 11.89 14,173 1.97% 0.75% 11.73% 6 Vanguard LifeStrategy Growth Fund 6,749 12.21 82,401 2.38% 0.52% 11.99% 1 Vanguard LifeStrategy Income Fund 1,771 11.44 20,264 3.21% 0.75% 5.22% 6 Vanguard LifeStrategy Income Fund 11,770 10.89 128,188 5.74% 0.52% 5.46% 6 Vanguard LifeStrategy Moderate Growth Fund 24,811 11.78 292,373 2.90% 0.52% 9.99% 1 Vanguard Prime Money Market Fund 493 10.11 4,985 1.10% 0.75% 0.35% 1 Vanguard PRIMECAP Fund 257 12.09 3,104 0.74% 0.75% 17.43% 1 Vanguard Total Bond Market Index Fund 840 11.36 9,535 2.93% 0.75% 3.47% 6 Vanguard Total International Stock Index Fund 19,656 13.82 271,666 3.97% 0.52% 20.21% 1 Vanguard U.S. Growth Fund 514 9.49 4,875 0.28% 0.75% 6.23% 6 Vanguard VIF Balanced Portfolio 154,249 11.98 1,848,551 1.42% 0.52% 10.71% 6 Vanguard VIF Capital Growth Portfolio 5,319 12.64 67,211 0.00% 0.52% 17.02% 6 Vanguard VIF Diversified Value Portfolio 13,666 13.50 184,457 0.37% 0.52% 19.84% 1 Vanguard VIF Equity Income Portfolio 1,646 10.84 17,836 0.00% 0.75% 12.65% 6 Vanguard VIF Equity Income Portfolio 14,769 12.63 186,491 0.12% 0.52% 12.73% 6 Vanguard VIF Equity Index Portfolio 8,591 12.02 103,269 0.88% 0.52% 10.23% 6 Vanguard VIF Growth Portfolio 1,294 11.41 14,759 0.15% 0.52% 6.70% 6 Vanguard VIF High Yield Bond Portfolio 1,510 11.31 17,083 2.10% 0.52% 7.96% 6 Vanguard VIF International Portfolio 5,881 13.34 78,446 1.26% 0.52% 18.80% 6 Vanguard VIF Mid-Cap Index Portfolio 4,431 13.23 58,639 0.87% 0.52% 19.69% 6 Vanguard VIF Money Market Portfolio 439 10.09 4,433 4.61% 0.52% 0.78% 1 Vanguard VIF REIT Index Portfolio 1,731 12.10 20,946 0.00% 0.75% 20.74% 6 Vanguard VIF REIT Index Portfolio 3,950 14.32 56,551 2.54% 0.52% 29.84% 6 Vanguard VIF Short-Term Investment-Grade Portfolio * 4,814 10.22 49,219 3.89% 0.52% 1.54%
VA I-62 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2004 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) ------------------------------------------------- ------ ------ ---------- ---------- --------- ---------- 6 Vanguard VIF Small Company Growth Portfolio 3,888 $12.20 $ 47,445 0.06% 0.52% 14.70% 6 Vanguard VIF Total Bond Market Index Portfolio 19,451 10.51 204,510 8.25% 0.52% 3.66% 6 Vanguard VIF Total Stock Market Index Portfolio 55,746 12.22 681,258 0.02% 0.52% 11.96% 1 Vanguard Wellington Fund 249 11.85 2,951 2.88% 0.75% 10.34% 1 Vanguard Windsor Fund 255 11.75 2,996 1.47% 0.75% 12.53%
VA I-63 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2003 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- --------- ------ ------------ ---------- --------- ---------- 2 AIM V.I. Capital Appreciation Fund - Series I 1,865 $10.18 $ 18,987 0.00% 1.45% 27.59% 3 AIM V.I. Capital Appreciation Fund - Series I 156,769 10.21 1,601,103 0.00% 1.40% 27.66% 2 AIM V.I. International Growth Fund - Series I 1,248 10.16 12,672 0.45% 1.45% 27.27% 3 AIM V.I. International Growth Fund - Series I 103,232 10.19 1,051,681 0.45% 1.40% 27.34% 1 AllianceBernstein Americas Government Income Portfolio - Class A 2,760,409 19.26 53,161,067 4.83% 1.40% 5.87% 2 AllianceBernstein Americas Government Income Portfolio - Class A 47,706 19.20 915,798 4.62% 1.45% 5.82% 1 AllianceBernstein Global Bond Portfolio - Class A 1,027,281 17.30 17,767,141 6.29% 1.40% 11.65% 2 AllianceBernstein Global Bond Portfolio - Class A 41,873 17.24 721,878 5.93% 1.45% 11.66% 3 AllianceBernstein Global Bond Portfolio - Class A 2,110 12.98 27,382 11.20% 1.40% 11.69% 1 AllianceBernstein Global Dollar Government Portfolio - Class A 763,719 28.51 21,775,961 5.72% 1.40% 31.58% 2 AllianceBernstein Global Dollar Government Portfolio - Class A 30,193 28.42 858,145 5.64% 1.45% 31.46% 1 AllianceBernstein Growth and Income Portfolio - Class A 7,494,776 35.47 265,834,782 1.03% 1.40% 30.64% 2 AllianceBernstein Growth and Income Portfolio - Class A 250,936 35.36 8,871,978 1.02% 1.45% 30.61% 3 AllianceBernstein Growth and Income Portfolio - Class A 456,946 22.00 10,053,264 1.29% 1.40% 30.65% 4 AllianceBernstein Growth and Income Portfolio - Class B 5,529,170 35.08 193,941,609 0.83% 1.40% 30.35% 5 AllianceBernstein Growth and Income Portfolio - Class B 179,523 34.96 6,276,776 0.81% 1.45% 30.27% 1 AllianceBernstein Growth Portfolio - Class A 4,596,623 22.15 101,813,109 0.00% 1.40% 33.19% 2 AllianceBernstein Growth Portfolio - Class A 146,012 22.08 3,223,723 0.00% 1.45% 33.08% 3 AllianceBernstein Growth Portfolio - Class A 262,464 15.31 4,018,958 0.00% 1.40% 33.15% 4 AllianceBernstein Growth Portfolio - Class B 2,435,912 21.89 53,310,512 0.00% 1.40% 32.80% 5 AllianceBernstein Growth Portfolio - Class B 72,978 21.82 1,592,020 0.00% 1.45% 32.78% 1 AllianceBernstein High Yield Portfolio - Class A 4,045,676 10.31 41,711,274 5.98% 1.40% 20.73% 2 AllianceBernstein High Yield Portfolio - Class A 165,236 10.28 1,698,315 5.65% 1.45% 20.64% 1 AllianceBernstein International Portfolio - Class A 3,249,996 12.63 41,056,823 0.13% 1.40% 29.70% 2 AllianceBernstein International Portfolio - Class A 112,558 12.59 1,417,363 0.13% 1.45% 29.68% 1 AllianceBernstein International Value Portfolio - Class A 1,630,940 13.02 21,233,604 0.34% 1.40% 42.29% 2 AllianceBernstein International Value Portfolio - Class A 68,529 13.00 891,010 0.34% 1.45% 42.25% 1 AllianceBernstein Money Market Portfolio - Class A 2,740,288 12.81 35,092,595 0.56% 1.40% -0.88% 2 AllianceBernstein Money Market Portfolio - Class A 76,963 12.77 982,435 0.58% 1.45% -0.89% 4 AllianceBernstein Money Market Portfolio - Class B 2,676,391 12.66 33,893,717 0.31% 1.40% -1.14% 5 AllianceBernstein Money Market Portfolio - Class B 11,111 12.62 140,257 0.38% 1.45% -1.15% 1 AllianceBernstein Premier Growth Portfolio - Class A 7,476,698 24.77 185,168,151 0.00% 1.40% 21.94% 2 AllianceBernstein Premier Growth Portfolio - Class A 322,146 24.69 7,952,684 0.00% 1.45% 21.91% 3 AllianceBernstein Premier Growth Portfolio - Class A 45,912 11.17 512,889 0.00% 1.40% 21.96% 4 AllianceBernstein Premier Growth Portfolio - Class B 3,351,175 24.53 82,218,177 0.00% 1.40% 21.64% 5 AllianceBernstein Premier Growth Portfolio - Class B 115,298 24.46 2,819,674 0.00% 1.45% 21.61% 1 AllianceBernstein Real Estate Investment Portfolio - Class A 2,186,223 17.24 37,682,357 2.50% 1.40% 37.34% 2 AllianceBernstein Real Estate Investment Portfolio - Class A 134,029 17.18 2,302,754 2.44% 1.45% 37.34% 1 AllianceBernstein Small Cap Growth Portfolio - Class A 4,473,127 10.59 47,361,193 0.00% 1.40% 46.85% 2 AllianceBernstein Small Cap Growth Portfolio - Class A 225,643 10.55 2,381,429 0.00% 1.45% 46.79% 3 AllianceBernstein Small Cap Growth Portfolio - Class A 33,671 10.29 346,487 0.00% 1.40% 46.79% 1 AllianceBernstein Small Cap Value Portfolio - Class A 3,759,335 14.27 53,650,298 0.53% 1.40% 39.37% 2 AllianceBernstein Small Cap Value Portfolio - Class A 115,011 14.25 1,639,166 0.54% 1.45% 39.18% 1 AllianceBernstein Technology Portfolio - Class A 5,436,959 14.91 81,068,515 0.00% 1.40% 42.14% 2 AllianceBernstein Technology Portfolio - Class A 261,058 14.86 3,880,050 0.00% 1.45% 41.96% 3 AllianceBernstein Technology Portfolio - Class A 97,035 14.43 1,400,165 0.00% 1.40% 42.02% 4 AllianceBernstein Technology Portfolio - Class B 2,155,845 14.79 31,889,169 0.00% 1.40% 41.82% 5 AllianceBernstein Technology Portfolio - Class B 116,855 14.74 1,722,967 0.00% 1.45% 41.77% 1 AllianceBernstein Total Return Portfolio - Class A 7,627,169 22.42 170,980,771 2.56% 1.40% 17.43%
VA I-64 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2003 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- --------- ------ ------------ ---------- --------- ---------- 2 AllianceBernstein Total Return Portfolio - Class A 222,481 $22.35 $ 4,971,440 2.58% 1.45% 17.36% 3 AllianceBernstein Total Return Portfolio - Class A 71,988 11.21 807,131 2.65% 1.40% 17.40% 1 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 7,066,944 15.63 110,437,430 3.25% 1.40% 2.41% 2 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class A 221,174 15.58 3,445,273 3.00% 1.45% 2.41% 4 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 228,781 15.45 3,534,444 3.07% 1.40% 2.18% 5 AllianceBernstein U.S. Government/High Grade Securities Portfolio - Class B 17,729 15.40 273,019 3.35% 1.45% 2.12% 1 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 106,799 10.91 1,165,304 0.00% 1.40% 9.11% 2 AllianceBernstein U.S. Large Cap Blended Style Portfolio - Class B 2,571 10.91 28,051 0.00% 1.45% 9.08% 1 AllianceBernstein Utility Income Portfolio - Class A 2,151,498 17.09 36,777,006 3.05% 1.40% 18.21% 2 AllianceBernstein Utility Income Portfolio - Class A 67,909 17.04 1,157,094 3.10% 1.45% 18.16% 4 AllianceBernstein Value Portfolio - Class B 6,157,155 10.85 66,790,897 0.72% 1.40% 26.73% 5 AllianceBernstein Value Portfolio - Class B 181,726 10.83 1,968,674 0.72% 1.45% 26.56% 1 AllianceBernstein Worldwide Privatization Portfolio - Class A 1,425,468 19.86 28,314,242 1.02% 1.40% 41.48% 2 AllianceBernstein Worldwide Privatization Portfolio - Class A 75,660 19.80 1,498,021 0.97% 1.45% 41.42% 7 Delaware VIP Balanced Series - Standard Class 9,072 18.15 164,662 3.34% 1.40% 17.55% 7 Delaware VIP Balanced Series - Standard Class 37,216 27.49 1,022,931 3.16% 1.25% 17.71% 7 Delaware VIP Capital Reserves Series - Standard Class 8,633 21.84 188,580 4.14% 1.25% 3.33% 7 Delaware VIP Capital Reserves Series - Standard Class 3,533 16.37 57,831 3.72% 1.40% 3.19% 7 Delaware VIP Cash Reserve Series - Standard Class 30,049 16.34 491,028 0.52% 1.25% -0.66% 7 Delaware VIP Growth Opportunities Series - Standard Class 5,175 24.87 128,720 0.00% 1.40% 39.12% 7 Delaware VIP Growth Opportunities Series - Standard Class 35,683 27.94 996,985 0.00% 1.25% 39.28% 7 Delaware VIP High Yield Series - Standard Class 3,970 15.17 60,232 8.09% 1.40% 26.98% 7 Delaware VIP High Yield Series - Standard Class 28,042 21.51 603,222 7.42% 1.25% 27.14% 7 Delaware VIP Value Series - Standard Class 6,816 27.40 186,762 1.50% 1.40% 26.50% 7 Delaware VIP Value Series - Standard Class 141,218 32.44 4,580,983 2.01% 1.25% 26.71% 2 Dreyfus Stock Index Fund, Inc. - Initial Shares 2,090 17.31 36,185 1.47% 1.45% 26.55% 3 Dreyfus Stock Index Fund, Inc. - Initial Shares 561,568 17.37 9,753,283 1.44% 1.40% 26.59% 2 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 1,040 12.34 12,835 0.11% 1.45% 40.82% 3 Dreyfus VIF Small Company Stock Portfolio - Initial Shares 155,609 12.38 1,925,779 0.10% 1.40% 40.95% 2 Fidelity VIP Asset Manager Portfolio - Initial Class 1,570 15.38 24,145 3.66% 1.45% 16.32% 3 Fidelity VIP Asset Manager Portfolio - Initial Class 556,586 15.43 8,586,200 3.66% 1.40% 16.34% 2 Fidelity VIP Contrafund Portfolio - Initial Class 433 14.35 6,217 0.45% 1.45% 26.61% 3 Fidelity VIP Contrafund Portfolio - Initial Class 243,907 14.39 3,509,725 0.45% 1.40% 26.67% 2 Fidelity VIP Growth Portfolio - Initial Class 78 15.91 1,242 0.28% 1.45% 30.92% 3 Fidelity VIP Growth Portfolio - Initial Class 475,603 15.96 7,589,575 0.28% 1.40% 31.02% 2 Fidelity VIP High Income Portfolio - Initial Class 1,169 10.81 12,633 7.55% 1.45% 25.50% 3 Fidelity VIP High Income Portfolio - Initial Class 169,855 10.84 1,841,237 7.55% 1.40% 25.46% 3 Fidelity VIP Investment Grade Bond Portfolio - Initial Class 271,530 15.64 4,246,199 3.87% 1.40% 3.77% 2 Fidelity VIP Money Market Portfolio - Initial Class -- 12.37 -- 0.96% 1.45% -0.45% 3 Fidelity VIP Money Market Portfolio - Initial Class 407,606 12.41 5,059,895 0.96% 1.40% -0.37% 3 Fidelity VIP Overseas Portfolio - Initial Class 31,728 12.76 404,990 0.97% 1.40% 41.35% 1 Mercury HW International VIP Portfolio -- 10.53 -- 0.19% 1.40% 27.01% 2 Mercury HW International VIP Portfolio -- 10.50 -- 0.22% 1.45% 27.03% 1 Merrill Lynch American Balanced V.I. Fund - Class I -- 9.26 -- 0.00% 1.40% 12.34% 1 Merrill Lynch Basic Value V.I. Fund - Class I 478,230 15.47 7,400,091 1.12% 1.40% 31.36% 2 Merrill Lynch Basic Value V.I. Fund - Class I 50,913 15.43 785,406 1.12% 1.45% 31.29% 1 Merrill Lynch Core Bond V.I. Fund - Class I 37,323 13.09 488,622 3.70% 1.40% 3.33%
VA I-65 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued A summary of units outstanding, unit values, and net assets for the variable annuity contracts and the investment income ratios, expense ratios (excluding expenses of the underlying Sub-accounts) and total returns for the year ended December 31, 2003 are as follows:
Investment Unit Income Expense Total Sub-accounts Units Value Net Assets Ratio (a) Ratio (b) Return (c) -------------------------------------------------------------- --------- ------ ----------- ---------- --------- ---------- 2 Merrill Lynch Core Bond V.I. Fund - Class I 3,308 $13.05 $ 43,180 3.86% 1.45% 3.26% 1 Merrill Lynch Developing Capital Markets V.I. Fund - Class I -- 9.63 -- 4.64% 1.40% 39.03% 2 Merrill Lynch Developing Capital Markets V.I. Fund - Class I -- 9.61 -- 4.45% 1.45% 38.81% 1 Merrill Lynch Domestic Money Market V.I. Fund - Class I 71,985 11.48 826,687 0.73% 1.40% -0.66% 2 Merrill Lynch Domestic Money Market V.I. Fund - Class I 202 11.45 2,311 0.73% 1.45% -0.70% 1 Merrill Lynch Global Allocation V.I. Fund - Class I 56,689 12.37 701,203 3.32% 1.40% 32.86% 2 Merrill Lynch Global Allocation V.I. Fund - Class I 20,049 12.33 247,231 3.93% 1.45% 32.74% 1 Merrill Lynch Global Growth V.I. Fund - Class I 104,442 7.75 809,736 1.05% 1.40% 31.63% 2 Merrill Lynch Global Growth V.I. Fund - Class I 853 7.73 6,601 1.82% 1.45% 31.64% 1 Merrill Lynch High Current Income V.I. Fund - Class I 70,479 11.40 803,134 9.31% 1.40% 26.33% 2 Merrill Lynch High Current Income V.I. Fund - Class I 710 11.36 8,069 10.77% 1.45% 26.27% 1 Merrill Lynch International Value V.I. Fund - Class I 154,644 11.63 1,798,097 5.56% 1.40% 10.43% 2 Merrill Lynch International Value V.I. Fund - Class I 9,274 11.60 107,577 5.57% 1.45% 10.43% 1 Merrill Lynch Large Cap Core V.I. Fund - Class I 127,041 12.90 1,639,153 0.40% 1.40% 29.67% 2 Merrill Lynch Large Cap Core V.I. Fund - Class I 2,839 12.86 36,521 0.38% 1.45% 29.67% 1 Merrill Lynch Large Cap Growth V.I. Fund - Class I -- 8.53 -- 0.00% 1.40% 27.12% 1 Merrill Lynch Large Cap Growth V.I. Fund - Class I 93,216 8.86 826,256 0.00% 1.40% 3.88% 1 Merrill Lynch Utilities and Telecommunications V.I. Fund - Class I 35,886 11.83 424,708 2.87% 1.40% 18.47% 2 Merrill Lynch Utilities and Telecommunications V.I. Fund - Class I 36 11.80 426 3.05% 1.45% 18.46% 1 Merrill Lynch Value Opportunities V.I. Fund - Class I 126,884 17.73 2,249,553 0.07% 1.40% 40.93% 2 Merrill Lynch Value Opportunities V.I. Fund - Class I 20,573 17.67 363,615 0.07% 1.45% 40.83% 1 UBS U.S. Allocation Portfolio 1,332,747 13.99 18,643,595 1.16% 1.40% 25.80% 2 UBS U.S. Allocation Portfolio 150,601 13.95 2,101,108 1.32% 1.45% 25.80% 1 UIF Core Plus Fixed Income Portfolio - Class I Shares 3,504 10.95 38,362 0.06% 0.75% 3.87% 1 UIF Equity Growth Portfolio - Class I Shares 3,526 9.32 32,847 0.00% 0.75% 24.05% 1 UIF Technology Portfolio - Class I Shares 1,748 8.31 14,529 0.00% 0.75% 46.62% 1 UIF Value Portfolio - Class I Shares 211 11.04 2,334 0.00% 0.75% 33.00% 3 Van Eck Worldwide Emerging Markets Fund - Initial Class 61,448 9.62 590,871 0.12% 1.40% 52.15% 3 Van Eck Worldwide Hard Assets Fund - Initial Class 9,422 10.65 100,391 0.64% 1.40% 43.01% 1 Vanguard 500 Index Fund 809 10.03 8,115 1.60% 0.75% 27.47% 6 Vanguard GNMA Fund 170 10.13 1,720 0.76% 0.52% 1.35% 1 Vanguard LifeStrategy Conservative Growth Fund 3,189 10.83 34,527 2.57% 0.75% 15.67% 1 Vanguard LifeStrategy Growth Fund 1,283 10.64 13,661 1.71% 0.75% 27.48% 6 Vanguard LifeStrategy Growth Fund 3,788 10.90 41,300 1.97% 0.52% 9.02% 1 Vanguard LifeStrategy Income Fund 1,907 10.88 20,741 3.38% 0.75% 9.98% 6 Vanguard LifeStrategy Moderate Growth Fund 18,999 10.71 203,546 2.39% 0.52% 7.13% 1 Vanguard Prime Money Market Fund 530 10.08 5,337 0.98% 0.75% 0.16% 1 Vanguard PRIMECAP Fund 276 10.30 2,842 0.44% 0.75% 36.78% 1 Vanguard Total Bond Market Index Fund 481 10.98 5,275 8.79% 0.75% 3.20% 1 Vanguard U.S. Growth Fund 552 8.93 4,932 0.33% 0.75% 25.08% 6 Vanguard VIF Balanced Portfolio 35,384 10.82 383,027 0.00% 0.52% 8.25% 6 Vanguard VIF Diversified Value Portfolio 1,544 11.26 17,388 0.00% 0.52% 12.64% 6 Vanguard VIF International Portfolio 5,328 11.23 59,819 0.00% 0.52% 12.27% 6 Vanguard VIF Mid-Cap Index Portfolio 2,196 11.06 24,277 0.00% 0.52% 10.56% 6 Vanguard VIF Money Market Portfolio 8,192 10.01 82,004 0.73% 0.52% 0.10% 6 Vanguard VIF REIT Index Portfolio 2,429 11.03 26,788 0.00% 0.52% 10.28% 6 Vanguard VIF Short-Term Investment-Grade Portfolio 1,532 10.07 15,426 0.00% 0.52% 0.70% 6 Vanguard VIF Small Company Growth Portfolio 1,554 10.64 16,537 0.00% 0.52% 6.40% 6 Vanguard VIF Total Stock Market Index Portfolio 1,555 10.91 16,976 0.00% 0.52% 9.15% 1 Vanguard Wellington Fund 268 10.74 2,874 3.09% 0.75% 19.83% 1 Vanguard Windsor Fund 274 10.44 2,861 1.22% 0.75% 35.97%
VA I-66 AIG LIFE INSURANCE COMPANY VARIABLE ACCOUNT I NOTES TO FINANCIAL STATEMENTS - CONTINUED Note G - Financial Highlights - Continued Footnotes 1 Ovation, Ovation Plus, Ovation Advisor, Trilogy, Paradigm, Gallery and GIVA products. 2 Ovation, Ovation Plus, Ovation Advisor, Trilogy, Paradigm and Profile products that have elected the Accidental Death Benefit option. 3 Profile product. 4 Ovation Plus, Ovation Advisor, Trilogy, Paradigm and Profile products that are subject to 12B-1 fees. 5 Ovation Plus, Ovation Advisor, Trilogy, Paradigm, and Profile products that have elected the Accidental Death Benefit option and are subject to 12B-1 fees. 6 Vanguard SPIA product. 7 Variable Annuity product. (a) These amounts represent the dividends, excluding capital gain distributions from mutual funds, received by the Sub-account from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense risk charges, that result in direct reduction in the unit value. The recognition of investment income by the Sub-account is affected by the timing of the declaration of dividends by the underlying fund in which the Sub-account invest. (b) These amounts represent the annualized contract expenses of the Account, consisting primarily of mortality and expense risk charges, for each year indicated. These ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund have been excluded. (c) These amounts represent the total return for the years indicated, including changes in the value of the underlying Sub-account, and reflect deductions for those expenses that result in a direct reduction to unit values. The total return does not include contract charges deducted directly from account values. For the years ended December 31, 2007, 2006, 2005, 2004 and 2003, a total return was calculated using the initial unit value for the Sub-account if the Sub-account became an available investment option during the year and the underlying Fund was not available at the beginning of the year. * Fund name changes. 2004 - Effective April 29, 2004, UBS Series Trust Tactical Allocation Portfolio changed its name to UBS U.S. Allocation Portfolio. - Effective May 1, 2004, AllianceBernstein Quasar Portfolio - Class A changed its name to AllianceBernstein Small Cap Growth Portfolio - Class A. - Effective July 26, 2004, Merrill Lynch Small Cap Value V.I. Fund - Class I changed its name to Merrill Lynch Value Opportunities V.I. Fund - Class I. - Effective July 30, 2004, Delaware VIP Large Cap Value Series - Standard Class changed its name to Delaware VIP Value Series - Standard Class. - Effective August 19, 2004, Vanguard VIF Short-Term Corporate Portfolio changed its name to Vanguard VIF Short-Term Investment-Grade Portfolio. 2005 - Effective May 1, 2005, Merrill Lynch funds were rebranded as Mercury funds. - Effective May 2, 2005, AllianceBernstein Premier Growth Portfolio - Class A and AllianceBernstein Premier Growth Portfolio - Class B changed its name to AllianceBernstein Large Cap Growth Portfolio - Class A and AllianceBernstein Large Cap Growth Portfolio - Class B, respectively. - Effective May 2, 2005, AllianceBernstein Small Cap Value Portfolio - Class A changed its name to AllianceBernstein Small/Mid Cap Value Portfolio - Class A. - Effective May 2, 2005, AllianceBernstein Technology Portfolio - Class A and AllianceBernstein Technology Portfolio - Class B changed its name to AllianceBernstein Global Technology Portfolio - Class A and AllianceBernstein Global Technology Portfolio - Class B, respectively. 2006 - Effective February 1, 2006, AllianceBernstein International Portfolio - Class A changed its name to AllianceBernstein International Research Growth Portfolio - Class A. - Effective February 1, 2006, AllianceBernstein Total Return Portfolio - Class A changed its name to AllianceBernstein Balanced Shares Portfolio - Class A. - Effective February 1, 2006, AllianceBernstein Worldwide Privatization Portfolio - Class A changed its name to AllianceBernstein International Growth Portfolio - Class A. - Effective October 2, 2006, Mercury funds changed their names to BlackRock funds. - Effective October 2, 2006, Mercury Core Bond V.I. Fund - Class I changed its name to BlackRock Bond V.I. Fund - Class I. - Effective October 2, 2006, Mercury Domestic Money Market V.I. Fund - Class I changed its name to BlackRock Money Market V.I. Fund - Class I. - Effective October 2, 2006, Mercury High Current Income V.I. Fund - Class I changed its name to BlackRock High Income V.I. Fund - Class I. 2007 - Effective December 10, 2007, BlackRock Bond V.I. Fund - Class I changed its name to BlackRock Total Return V.I. Fund - Class I. VA I-67 AIG LIFE INSURANCE COMPANY (an indirect, wholly-owned subsidiary of American International Group, Inc.) FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 (Restated) AND 2005 (Restated) Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholder of AIG Life Insurance Company: In our opinion, the accompanying balance sheet and the related statements of income, of shareholder's equity, of cash flows and of comprehensive income present fairly, in all material respects, the financial position of AIG Life Insurance Company (the "Company"), an indirect, wholly owned subsidiary of American International Group, Inc., at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP Houston, Texas April 29, 2008 2 AIG LIFE INSURANCE COMPANY BALANCE SHEET (in thousands)
December 31, December 31, 2007 2006 ------------ ------------ (Restated) Assets Investments: Fixed maturities available for sale, at fair value (cost: 2007 - $6,554,997; 2006 - $6,935,212) $ 6,741,702 $ 7,219,295 Equity securities available for sale, at fair value (cost: 2007 - $16,004; 2006 - $5,894) 17,044 6,847 Mortgage loans on real estate 531,619 521,781 Policy loans 179,640 189,739 Derivative asset, at fair value 40,128 27,945 Investment real estate 21,504 21,067 Other invested assets 75,787 51,232 Short-term investments 66,802 54,316 Securities lending collateral 2,384,556 1,763,624 ----------- ----------- Total investments 10,058,782 9,855,846 Cash and cash equivalents 16,257 176 Accrued investment income 93,904 99,165 Reinsurance assets 104,087 126,374 Deferred acquisition costs 166,057 205,679 Premiums and insurance balances receivable 3,654 28,564 Income taxes receivable 27,381 -- Amounts due from related parties 193 9,305 Other assets 31,346 11,369 Assets held in separate accounts 3,103,731 3,132,390 ----------- ----------- Total assets $13,605,392 $13,468,868 =========== ===========
See accompanying notes to financial statements. 3 AIG LIFE INSURANCE COMPANY BALANCE SHEET (Continued) (in thousands, except share amounts)
December 31, December 31, 2007 2006 ------------ ------------ (Restated) Liabilities Policyholders' contract deposits $ 4,161,974 $ 4,635,855 Future policy benefits for life and accident and health insurance contracts 2,636,077 2,452,912 Reserve for unearned premiums 27,736 26,301 Policy claims and benefits payable 120,310 125,700 Other policyholders' fund 36,066 32,140 Income taxes payable -- 56,408 Derivative liabilities, at fair value 24,620 15,977 Amounts due to related parties 51,238 89,491 Other liabilities 56,024 44,453 Liabilities related to separate accounts 3,103,731 3,132,390 Securities lending payable 2,594,426 1,763,624 ----------- ----------- Total liabilities 12,812,202 12,375,251 Shareholder's equity Common stock, $5 par value; 1,000,000 shares authorized, 976,703 issued and outstanding 4,884 4,884 Additional paid-in capital 308,585 302,283 Accumulated other comprehensive income 7,418 181,947 Retained earnings 472,303 604,503 ----------- ----------- Total shareholder's equity 793,190 1,093,617 ----------- ----------- Total liabilities and shareholder's equity $13,605,392 $13,468,868 =========== ===========
See accompanying notes to financial statements. 4 AIG LIFE INSURANCE COMPANY STATEMENT OF INCOME (in thousands)
Years Ended December 31, ---------------------------------- 2007 2006 2005 -------- ---------- ---------- (Restated) (Restated) Revenues: Premiums and other considerations $267,304 $222,433 $ 164,634 Net investment income 558,477 585,793 731,241 Net realized investment losses (97,580) (20,854) (9,099) Other 148,209 152,793 152,007 -------- -------- ---------- Total revenues 876,410 940,165 1,038,783 -------- -------- ---------- Benefits and expenses: Policyholders' benefits 530,659 406,486 429,691 Interest credited on policyholder contract deposits 192,553 271,267 278,748 Insurance acquisition and other operating expenses 131,302 152,568 131,667 -------- -------- ---------- Total benefits and expenses 854,514 830,321 840,106 -------- -------- ---------- Income before income taxes 21,896 109,844 198,677 Income taxes: Current 23,694 14,286 83,956 Deferred (22,132) 13,456 (17,510) -------- -------- ---------- Total income tax expense 1,562 27,742 66,446 -------- -------- ---------- Net income $ 20,334 $ 82,102 $ 132,231 ======== ======== ==========
See accompanying notes to financial statements. 5 AIG LIFE INSURANCE COMPANY STATEMENT OF SHAREHOLDER'S EQUITY (in thousands)
Years Ended December 31, ----------------------------------- 2007 2006 2005 --------- ---------- ---------- (Restated) (Restated) Series A Preferred stock Balance at beginning of year $ -- $ 100,000 $ 250,000 Shares redeemed -- (100,000) (150,000) --------- ---------- ---------- Balance at end of year -- -- 100,000 Common stock Balance at beginning and end of year 4,884 4,884 4,884 Additional paid-in capital Balance at beginning of year 302,283 302,283 302,283 Capital contribution from AIG 6,302 -- -- --------- ---------- ---------- Balance at end of year 308,585 302,283 302,283 --------- ---------- ---------- Accumulated other comprehensive income (loss) Balance at beginning of year 181,947 253,676 388,716 Other comprehensive loss (174,529) (71,729) (135,040) --------- ---------- ---------- Balance at end of year 7,418 181,947 253,676 --------- ---------- ---------- Retained earnings Balance at beginning of year 604,503 576,115 504,952 Net income 20,334 82,102 132,231 Cumulative effect of accounting change, net of tax (Note 2.l) (2,534) -- -- Dividends to shareholders (150,000) (53,714) (61,068) --------- ---------- ---------- Balance at end of year 472,303 604,503 576,115 --------- ---------- ---------- Total shareholder's equity $ 793,190 $1,093,617 $1,236,958 ========= ========== ==========
See accompanying notes to financial statements. 6 AIG LIFE INSURANCE COMPANY STATEMENT OF CASH FLOWS (in thousands)
Years Ended December 31, --------------------------------------- 2007 2006 2005 ----------- ----------- ----------- (Restated) (Restated) Cash flows from operating activities: Net income $ 20,334 $ 82,102 $ 132,231 Adjustments to reconcile net income to net cash provided by operating activities: Change in insurance reserves 179,210 22,511 46,482 Interest credited to policyholder contracts 192,553 271,267 278,748 Realized capital losses 97,580 20,854 9,099 Amortization of premiums and discounts on securities (17,941) (15,367) (12,977) Change in: Premiums and insurance balances receivable and payable - net 24,910 8,447 36,128 Other policyholders' contracts 117,018 153,774 239,123 Reinsurance assets 22,287 9,995 (17,400) Deferred acquisition costs 43,790 60,019 56,583 Investment income due and accrued 5,261 24,029 19,243 Income taxes - net 10,187 (38,541) (15,507) Reserves for commissions, expense and taxes 675 2,478 (4,820) Other assets and liabilities - net (40,756) 22,249 (32,593) ----------- ----------- ----------- Net cash provided by operating activities 655,108 623,817 734,340 ----------- ----------- ----------- Cash flows from investing activities: Sale of fixed maturities 2,055,727 3,665,292 4,741,528 Redemptions and maturities of fixed maturities 671,479 676,033 863,269 Purchase of fixed maturities (2,394,540) (2,855,656) (4,792,066) Sale of equity securities 64,762 113,037 38,079 Purchase of equity securities (75,373) (112,911) (59,147) Sale of real estate 7,017 2,621 -- Purchase of real estate (2,586) (6,053) (2,925) Repayments of mortgage loans 67,115 52,593 92,172 Mortgage loans funded (76,891) (59,592) (121,088) Repayments of policy loans 36,549 20,481 63,559 Policy loans funded (26,450) (8,652) (10,679) Change in short-term investments (12,486) (22,853) 9,203 Sales or distributions of other long-term investments 38,064 11,024 93,083 Purchases of other long-term investments (36,690) (33,348) (1,497) Change in securities lending collateral (837,104) (97,423) (358,862) Other - net (25,198) 6,874 (77,858) ----------- ----------- ----------- Net cash (used in) provided by investing activities (546,605) 1,351,467 476,771 ----------- ----------- -----------
See accompanying notes to financial statements. 7 AIG LIFE INSURANCE COMPANY STATEMENT OF CASH FLOWS (Continued) (in thousands)
Years Ended December 31, ------------------------------------- 2007 2006 2005 --------- ----------- ----------- (Restated) (Restated) Cash flows from financing activities: Deposits on policyholder contracts $ 206,492 $ 124,188 $ 123,760 Withdrawals on policyholder contracts (986,018) (2,052,561) (1,485,371) Change in securities lending payable 830,802 97,423 358,862 Capital contribution from AIG 6,302 -- -- Dividends to shareholders (150,000) (53,714) (61,068) Redemption of preferred stock -- (100,000) (150,000) --------- ----------- ----------- Net cash used in financing activities (92,422) (1,984,664) (1,213,817) --------- ----------- ----------- Increase (decrease) in cash and cash equivalents 16,081 (9,380) (2,706) Cash and cash equivalents at beginning of year 176 9,556 12,262 --------- ----------- ----------- Cash and cash equivalents at end of year $ 16,257 $ 176 $ 9,556 ========= =========== =========== Supplemental cash flow information Income taxes (received) paid $ (10,041) $ 68,064 $ 81,990 ========= =========== ===========
See accompanying notes to financial statements. 8 AIG LIFE INSURANCE COMPANY STATEMENT OF COMPREHENSIVE INCOME (in thousands)
Years Ended December 31, ----------------------------------- 2007 2006 2005 --------- ---------- ---------- (Restated) (Restated) Net income $ 20,334 $ 82,102 $ 132,231 Other comprehensive income (loss) Net unrealized losses on invested assets (375,813) (163,378) (250,148) Deferred income tax benefit on above change 131,534 60,103 88,515 Reclassification adjustment for net realized losses in net income 103,090 28,433 (5,886) Deferred income tax benefit on above change (36,099) (10,457) 2,083 Adjustment to deferred acquisition costs 4,218 21,465 47,042 Deferred income tax expense on above change (1,459) (7,895) (16,646) --------- --------- --------- Other comprehensive loss (174,529) (71,729) (135,040) --------- --------- --------- Comprehensive (loss) income $(154,195) $ 10,373 $ (2,809) ========= ========= =========
See accompanying notes to financial statements. 9 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations: AIG Life Insurance Company (the "Company"), is a wholly owned subsidiary of AGC Life Insurance Company ("Parent Company"), and its ultimate parent is American International Group, Inc. ("AIG"). The Company, domiciled in Delaware, has been doing business since 1962 as a provider of individual and group life insurance, fixed and variable annuities, terminal funding annuities, immediate annuities, variable universal life insurance policies, and structured settlement contracts. The Company is currently licensed to write and reinsure life, annuity and accident and health business in the District of Columbia, Puerto Rico and all states except New York. Prior to December 18, 2007, 79% of the outstanding stock of the Company was held by AIG. The remaining 21% of the Company's outstanding common stock was held by another AIG subsidiary, Commerce and Industry Insurance Company ("Commerce and Industry"), which is domiciled in New York. On December 18, 2007, the shares of the Company owned by Commerce and Industry were sold to AIG and on December 31, 2007, 100% of the shares owned by AIG were contributed by AIG to AIG Life Holdings and upon receipt of these shares, AIG Life Holdings contributed the same to AGC Life Insurance Company, which is domiciled in Missouri. As a result of these transactions, 100% of the Company's outstanding common stock is owned by AGC Life Insurance Company as of December 31, 2007. 2. Summary of Significant Accounting Policies: a) Basis of Presentation: The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ, possibly materially, from those estimates. The Company considers its most critical accounting estimates to be those with respect to future policy benefits for life and accident and health contracts, estimated gross profits for investment-oriented products, recoverability of deferred policy acquisition costs ("DAC"), fair value measurements of certain assets and liabilities, and other-than-temporary impairments in the value of investments. The operations of the Company are influenced by many factors, including general economic conditions, monetary and fiscal policies of the federal government and policies of state and other regulatory authorities. The level of sales of the Company's insurance products is influenced by many factors, including general market rates of interest, the strength, weakness and volatility of equity markets and terms and conditions of competing insurance products. The Company is exposed to the risks normally associated with a portfolio of fixed income securities, namely interest rate, option, liquidity and credit risks. Continuing volatility with the credit markets may result in additional other-than-temporary impairments relating to the Company's fixed income investments and securities lending collateral. The Company controls its exposure to these risks by, among other things, closely monitoring and matching the duration and cash flows of its assets and liabilities; monitoring and limiting prepayments an monitoring credit risk. The Company also is exposed to market risk, as market volatility may result in reduced fee income on variable assets held in separate accounts. 10 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): a) Basis of Presentation - (continued): During the second half of 2007, disruption in the global credit markets, coupled with the repricing of credit risk, and the U.S. housing market deterioration, particularly in the fourth quarter, created increasingly difficult conditions in the financial markets. These conditions have resulted in greater volatility, less liquidity, widening of credit spreads and a lack of price transparency in certain markets and have made it more difficult to value certain of the Company's invested assets and the obligations and collateral relating to certain financial instruments issued or held by the Company. Certain prior period items have been reclassified to conform to the current period's presentation. During 2007, management identified and corrected an error discovered in its historical reserving for future policy benefits for life and accident and health insurance contracts. The effect of this error was not material to the statement of operations for any individual prior period, but had an accumulated impact to beginning retained earnings as of December 31, 2005 of a decrease of $25.1 million (pre-tax). The Company has restated its December 31, 2006 and 2005 financial statements to adjust for this correction. Additionally, the Company has included in the restatement adjustments, other items which had been previously identified and corrected but considered to not be sufficiently material to require restatement. Of these adjustments, there were 10 items, the largest of which was $2.4 million, which all netted to a reduction of $2.2 million on a pre-tax basis. In aggregate, the effect of the restatement adjustments to shareholder's equity and net income as of and for the years ended December 31, 2006 and 2005 were as follows: 2006 ---------------------------------------- As previously reported Adjustment As restated ------------- ---------- ----------- Shareholder's equity $1,110,832 $(17,215) $1,093,617 ========== ======== ========== Income before income taxes $ 112,458 $ (2,614) $ 109,844 Income tax expense 28,657 (915) 27,742 ---------- -------- ---------- Net income $ 83,801 $ (1,699) $ 82,102 ========== ======== ========== 2005 ---------------------------------------- As previously reported Adjustment As restated ------------- ---------- ----------- Shareholder's equity $1,252,980 $(16,022) $1,236,958 ========== ======== ========== Income before income taxes $ 200,313 $ (1,636) $ 198,677 Income tax expense 67,019 (573) 66,446 ---------- -------- ---------- Net income $ 133,294 $ (1,063) $ 132,231 ========== ======== ========== 11 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): b) Statutory Accounting: The Company is required to file financial statements with various state regulatory authorities. State insurance laws and regulations prescribe accounting practices for calculating statutory net income and equity. In addition, state regulators may permit statutory accounting practices that differ from prescribed practices. The use of such permitted practices by the Company did not have a material effect on statutory capital and surplus at December 31, 2007. Statutory net income and capital and surplus of the Company are as follows (in thousands): 2007 2006 2005 -------- -------- -------- Statutory net income $ 48,662 $108,706 $151,166 Statutory capital and surplus $444,806 $569,988 $635,980 The more significant differences between GAAP and statutory accounting principles are that under GAAP: (a) acquisition costs related to acquiring new business are deferred and amortized (generally in proportion to the present value of expected gross profits from surrender charges and investment, mortality and expense margins), rather than being charged to operations as incurred; (b) future policy benefits are based on management's best estimates of mortality, interest and withdrawals generally representing the Company's experience, which may differ from those based on statutory mortality and interest requirements without consideration of withdrawals; (c) certain assets (principally furniture and equipment, agents' debit balances, computer software and certain other receivables) are reported as assets rather than being charged to retained earnings; (d) acquisitions are accounted for using the purchase method of accounting rather than being accounted for as equity investments; and (e) fixed maturity investments are carried at fair value rather than amortized cost. In addition, statutory accounting principles require life insurance companies to establish an asset valuation reserve ("AVR") and an interest maintenance reserve ("IMR"). The AVR is designed to address the credit-related risk for bonds, preferred stocks, derivative instruments and mortgages and market risk for common stocks, real estate and other invested assets. The IMR is composed of realized gains and losses that result from interest rate fluctuations. These realized gains and losses, net of tax, are amortized into income over the expected remaining life of the asset sold or the liability released. c) Insurance Contracts: The insurance contracts accounted for in these financial statements include primarily long-duration contracts. Long-duration contracts include limited payment, endowment, guaranteed renewable term life, universal life and investment contracts. Long-duration contracts generally require the performance of various functions and services over a period of more than one year. The contract provisions generally cannot be changed or canceled by the insurer during the contract period; however, most new contracts written by the Company allow the insurer to revise certain elements used in determining premium rates or policy benefits, subject to guarantees stated in the contracts. 12 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): d) Investments: (i) Cash and Short-Term Investments Cash and short-term investments primarily include interest bearing cash accounts, commercial paper and money market investments. All short-term investments are carried at cost plus accrued interest, which approximates fair value and have maturities of greater than three months and less than one year at the date of acquisition. Such highly liquid investments with original maturities of three months or less are classified as cash equivalents. Investments with original maturities of greater than three months are classified as short-term. (ii) Fixed Maturity and Equity Securities Fixed maturity and equity securities classified as available-for-sale are recorded at fair value. Unrealized gains and losses, net of deferred taxes and amortization of deferred acquisition costs, are recorded as a separate component of other comprehensive income or loss within shareholder's equity. Realized gains and losses on the sale of investments are recognized in income at the date of sale and are determined by using the specific cost identification method. Interest on fixed maturity securities is recorded as income when earned and is adjusted for any amortization of premium or accretion of discount. Premiums and discounts on investments are amortized to investment income by using the interest method over the contractual lives or expected payment period of the investments. Dividend income on equity securities is generally recognized as income on the ex-dividend date. The Company regularly evaluates its investments for impairment. As a matter of policy, the determination that a security has incurred an other-than-temporary impairment ("OTTI") and the amount of any loss recognition requires the judgment of the Company's management and a continual review of its investment. In general, a security is considered a candidate for impairment if it meets any of the following criteria: . 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); . 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 . In the opinion of the Company's management, it is probable that the Company may not realize a full recovery on its investments, irrespective of the occurrence of one of the foregoing events. 13 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): d) Investments - (continued): (ii) Fixed Maturity and Equity Securities - (continued) The above criteria also consider circumstances of a rapid and severe market valuation decline, such as that experienced in current credit markets, in which the company could not reasonably assert that recovery period would be temporary. Once a security has been identified as impaired, the amount of such impairment is determined by reference to that security's contemporaneous market price, and recorded as a realized capital loss. At each balance sheet date, the Company evaluates its securities holdings in an unrealized loss position. Where the Company does not intend to hold such securities until they have fully recovered their carrying value, based on the circumstances present at the date of evaluation, the Company records the unrealized loss in income. If events or circumstances change, such as unexpected changes in the creditworthiness of the obligor, unanticipated changes in interest rates, tax laws, statutory capital positions and liquidity events, among others, the Company revisits its intent. Further, if a loss is recognized from a sale subsequent to a balance sheet date pursuant to these unexpected changes in circumstances, the loss is recognized in the period in which the intent to hold the securities to recovery no longer existed. In periods subsequent to the recognition of an OTTI, or impairment loss for debt securities, the Company generally amortizes the discount or reduced premium over the remaining life of the security in a prospective manner based on the amount and timing of future estimated cash flows. Once a security has been identified as impaired, the amount of such impairment is determined by reference to that security's contemporaneous market price, and recorded as a realized capital loss. (iii) Mortgage Loans Mortgage loans are reported at the unpaid principal balance, net of any allowance for losses. The allowance for losses covers estimated losses based on our assessment of risk factors such as potential non-payment or non-monetary default. The allowance is based on a loan-specific review. Loans for which the Company determines that collection of all amounts due under the contractual terms is not probable are considered to be impaired. The Company generally looks to the underlying collateral for repayment of impaired loans. Therefore, impaired loans are reported at the lower of amortized cost or fair value of the underlying collateral, less estimated cost to sell. There was no allowance for uncollectible loans at December 31, 2007 and 2006. Interest on performing mortgage loans is recorded as income when earned and is adjusted for any amortization of premium or accrual of discount. Interest on non-performing mortgage loans is recorded as income when received. 14 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): d) Investments - (continued): (iv) Policy Loans Policy loans are reported at the aggregate unpaid principal balance. There is no allowance for policy loans, as these loans serve to reduce the death benefits paid when the death claim is made and the balances are effectively collateralized by the cash surrender value of the policy. (v) Real Estate Real estate is classified as held for investment or available for sale, based on management's intent. Real estate held for investment is carried at cost, less accumulated depreciation and impairment write-downs. Real estate available for sale is carried at the lower of cost (less accumulated depreciation, if applicable) or fair value less cost to sell. (vi) Other Invested Assets Other invested assets consist primarily of limited partnerships and other investments not classified elsewhere herein. Included in partnerships are preferred equity investments in partially owned companies. Partnerships in which the Company holds less than a five percent interest are carried at fair value and the change in fair value is recognized as a component of other comprehensive income. With respect to partnerships in which the Company holds in the aggregate a five percent or greater interest, or less than five percent interest but the Company has more than a minor influence over the operations of the investee, the Company's carrying value is the net asset value. The changes in such net asset values accounted for under the equity method are recorded in earnings through net investment income. (vii) Securities Lending Collateral and Securities Lending Payable The Company lends securities through a securities lending agreement with an affiliated lending agent, which authorizes the agent to lend securities held in the Company's portfolio to a list of authorized borrowers. The Company receives primarily cash collateral in an amount in excess of the market value of securities loaned. The affiliated lending agent monitors the daily market value of securities loaned with respect to the collateral value and obtains additional collateral when necessary to ensure that collateral is obtained at a minimum of 102% of the value of the loaned securities. The collateral is held in a separate custodial account for the beneficial interest of the Company and other affiliated lenders, and is not available for the general use of the Company. The collateral is reinvested in interest-bearing cash equivalents and fixed maturity securities, primarily floating-rate bonds. Securities lending collateral investments in fixed maturity securities are carried at fair value and accounted for in a manner consistent with other available-for-sale fixed maturity securities. 15 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): d) Investments - (continued): (vii) Securities Lending Collateral and Securities Lending Payable - (continued): Unrealized gains and losses on these collateral investments are reflected within accumulated other comprehensive income, net of deferred taxes, in shareholder's equity. Securities lending collateral investments are subject to review for OTTI using the same policy applied to other invested assets. The Company's allocated portion of income earned on the collateral investments, net of interest repaid to the borrowers under the securities lending agreements and the related management fees paid to administer the program, is recorded as investment income in the statement of income. The Company's allocated portion of any realized investment gains or losses on the collateral investments are recorded in the statement of income. The fair values of securities subject to securities lending agreements were $2,545.4 million and $1,717.6 million as of December 31, 2007 and 2006, respectively, which represents securities included in bonds, notes, and redeemable preferred stocks available for sale in the consolidated balance sheet at the respective balance sheet dates. The collateral is held by the lending agent for the benefit of the Company and is not available for the general use of the Company (restricted). Income earned on the collateral, net of interest paid on the securities lending agreements and the related management fees paid to administer the program, is recorded as investment income in the statement of income. (viii) Dollar Roll Agreements Throughout the year, the Company may enter into dollar roll agreements. These are agreements to sell mortgage-backed securities ("MBS") and to repurchase substantially similar securities at a specific price and date in the future. Dollar roll agreements are accounted for as sales of financial assets and forward repurchase commitments. Assets are removed from the balance sheet at the time of sale. The difference between sales proceeds and carrying values are recorded as realized gains or losses. The forward repurchase commitments are accounted for at fair value, and the changes in fair value are recorded as realized gains or losses. Assets are recorded at the time of purchase at fair value. Unsettled amounts on the purchase contracts are reflected in the balance sheet in other liabilities. At December 31, 2007 and 2006, the Company had no dollar roll agreements outstanding. (ix) Derivative Financial Instruments The Company recognizes all derivatives in the balance sheet at fair value. 16 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): d) Investments - (continued): (ix) Derivative Financial Instruments - (continued) The Company takes positions from time to time in certain derivative financial instruments in order to mitigate the impact of changes in interest rates, equity markets on cash flows from investment income, or certain policyholder liabilities and equity. Financial instruments used by the Company for such purposes include interest rate swaps and foreign currency swaps, S&P 500 index options (long and short positions) and futures contracts (short positions on U.S. treasury notes and U.S. long bonds). The Company does not engage in the use of derivative instruments for speculative purposes and is neither a dealer or trader in derivative instruments. Statement of Financial Accounting Standards No. 133 - "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") requires that third-party derivatives used for hedging must be specifically matched with the underlying exposures to an outside third party and documented contemporaneously to qualify for hedge accounting treatment. The Company believes its hedging activities have been and remain economically effective, but do not currently qualify for hedge accounting. The impact of fair value adjustments on derivatives which do not qualify for hedge accounting have been recorded in net realized capital gains (losses). e) Deferred Acquisition Costs ("DAC"): DAC consists of commissions and other costs that vary with and are primarily related to the acquisition of new business. Policy acquisition costs for traditional life insurance products are generally deferred and amortized over the premium paying period of the policy. Policy acquisition costs related to universal life and investment-type products (non-traditional products) are deferred and amortized, with interest, in relation to estimated gross profits to be realized over the estimated lives of the contracts. The Company reviews for recoverability the carrying amounts of DAC on at least an annual basis. Management considers estimated future gross profits or future premiums, expected mortality, interest earned and credited rates, persistency, and expenses in determining whether the carrying amount is recoverable. Any amounts deemed unrecoverable are immediately charged to expense in the period such determination is made. 17 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): e) Deferred Acquisition Costs - (continued): With respect to the Company's variable universal life and variable annuity contracts, the assumption for the long-term annual net growth of the separate and variable account assets used by the Company in the determination of DAC amortization is approximately 10% (the "long-term growth rate assumption"). The Company uses a "reversion to the mean" methodology which allows the Company to maintain this 10% long-term growth rate assumption, while also giving consideration to the effect of short-term swings in the equity markets. For example, if performance were 15% during the first year following the introduction of a product, the DAC model would assume that market returns for the following five years (the "short-term growth rate assumption") would approximate 9%, resulting in an average annual growth rate of 10% during the life of the product. Similarly, following periods of below 10% performance, the model will assume a short-term growth rate higher than 10%. A DAC adjustment will occur if man unachievable. The use of a reversion to the mean assumption is common within the industry, however, the parameters used in the methodology are subject to judgment and vary among companies. For the years ended December 31, 2006 and 2005, DAC is adjusted with respect to non-traditional products as a result of changes in the net unrealized gains or losses on debt and equity securities available for sale. That is, as fixed maturity and equity securities available for sale are carried at aggregate fair value, an adjustment is made to deferred policy acquisition costs equal to the change in amortization that would have been recorded if such securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The adjustment, net of tax, is included with the change in net unrealized gains or losses on fixed maturity and equity securities available for sale that is recorded directly to other comprehensive income. In 2007, management changed its policy for allocating realized and unrealized losses to DAC and no longer adjusts for unrealized gains and losses. f) Income Taxes: Deferred federal income taxes are provided for temporary differences related to the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns, at the enacted tax rates expected to be in effect when the temporary differences reverse. The effect of a tax rate change is recognized in income in the period of enactment. State income taxes are included in income tax expense. A valuation allowance for deferred tax assets is provided if it is more likely than not that some portion of the deferred tax asset will not be realized. An increase or decrease in a valuation allowance that results from a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset is included in income. 18 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): g) Premium Recognition and Related Benefits and Expenses: Most receipts for annuities and interest-sensitive life insurance policies are classified as deposits instead of revenue. Revenues for these contracts consist of mortality, expense, and surrender charges and are included in premiums and other considerations. Policy charges that compensate the Company for future services are deferred and recognized in income over the period earned, using the same assumptions used to amortize DAC. Premiums for traditional, whole and term life insurance products are recognized when due. A liability for future policy benefits is recorded using the net level premium method. For limited payment contracts, primarily the Company's life contingent annuities and terminal funding contracts, net premiums are recorded as revenue when due and the difference between the gross premium and the net premium is deferred and recognized in income in a constant relationship to the amount of expected future benefit payments. Reserves for these contracts are based on estimates of the cost of future policy benefits. Premiums on accident and health policies are reported as earned over the contract term. The portion of accident and health premiums which is not earned at the end of a reporting period is recorded as reserves for unearned premiums. h) Policy and Contract Claims: Policy and contract claims include amounts representing: (1) the actual in-force amounts for reported life claims and an estimate of incurred but unreported claims; and, (2) an estimate, based upon prior experience, for accident and health reported and incurred but unreported losses. The methods of making such estimates and establishing the resulting reserves are continually reviewed and updated and any adjustments resulting therefore are reflected in income currently. i) Separate Accounts: Separate accounts represent funds for which investment income and investment gains and losses accrue directly to the policyholders who bear the investment risk, except to the extent of minimum guarantees made by the Company with respect to certain policies. Each separate account has specific investment objectives, and the assets are carried at fair value. The assets of each separate account are legally segregated and are not subject to claims which arise out of any other business of the Company. Investment income, realized investment gains (losses) and policyholder account deposits and withdrawals related to separate accounts are excluded from the statements of income, comprehensive income and cash flows. The Company receives administrative fees and other fees for assuming mortality and certain expense risks. Such fees are included in premiums and other considerations in the statement of income. 19 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): j) Guaranteed Minimum Death Benefits: A majority of the Company's variable annuity products are issued with a death benefit feature which provides that, upon the death of a policyholder, the contractholder's beneficiary will receive the greater of (1) the contractholder's account value, or (2) a guaranteed minimum death benefit ("GMDB") that varies by product. Depending on the product, the GMDB may equal the principal invested, adjusted for withdrawals; or the principal invested, adjusted for withdrawals, accumulated with interest at rates up to 3 percent per annum (subject to certain caps). The GMDB has issue age and other restrictions to reduce mortality risk exposure. The Company bears the risk that death claims following a decline in the financial markets may exceed contractholder account balances, and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. The Company provides reserves for future GMDB-related benefits. The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. Changes in liabilities for minimum guarantees are included in policyholders' benefits in the statements of income. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to policyholders' benefits, if actual experience or other evidence suggests that earlier assumptions should be revised. k) Reinsurance: The Company generally limits its exposure to loss on any single insured to $10 million by ceding additional risks through reinsurance contracts with other insurers. On an exception basis, the Company can increase its exposure to loss on any single insured up to $15 million. The Company diversifies its risk of reinsurance loss by using a number of reinsurers that generally have strong claims-paying ability ratings. If the reinsurer could not meet its obligations, the Company would reassume the liability, as the Company remains primarily liable to the policyholder. Reinsurance assets include the balances due from both reinsurance and insurance companies under the terms of the Company's reinsurance arrangements for ceded unearned premiums, future policy benefits for life and accident and health insurance contracts, policyholder contract deposits and policy and contract claims. l) Recently Issued Accounting Standards: In September 2005, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"). SOP 05-1 provides guidance on accounting for internal replacements of insurance and investment contracts other than those specifically described in Financial Accounting Standard No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investment" ("FAS 97"). SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverage that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 became effective on January 1, 2007 and generally affects the accounting for internal replacements occurring after that date. 20 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): l) Recently Issued Accounting Standards - (continued): In the first quarter of 2007, the Company recorded a cumulative effect reduction of $2.5 million, net of tax, to the opening balance of retained earnings on the date of adoption of SOP 05-1. This adoption effect represented changes in unamortized DAC, unearned revenue liabilities and future policy benefits for life and accident and health insurance contracts resulting from a shorter expected life related to certain group life and health insurance contracts and the effect on the gross profits of investment-oriented products related to previously anticipated future internal replacements. In February 2006, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FAS 140 and FAS 133" ("FAS 155"). FAS 155 allows the Company to include changes in fair value in earnings on an instrument-by-instrument basis for any hybrid financial instrument that contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS 133. The election to measure the hybrid instrument at fair value is irrevocable at the acquisition or issuance date. The Company elected to early adopt FAS 155 effective January 1, 2006. The adoption of this guidance did not have a material effect on the Company's financial condition or results of operations. In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and additional disclosures. The Company adopted FIN 48 on January 1, 2007. The adoption of this guidance did not have a material effect on the Company's financial condition or results of operations. In July 2006, the FASB issued FASB Staff Position No. FAS 13-2, "Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction" ("FSP 13-2"). FSP 13-2 addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting for the lease by the lessor, and directs that the tax assumptions be consistent with any FIN 48 uncertain tax position related to the lease. The Company adopted FSP 13-2 on January 1, 2007. The adoption of this guidance did not have a material effect on the Company's financial condition or results of operations. 21 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): m) Future Application of Accounting Standards: In September 2006, the FASB issued Financial Accounting Standard No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements but does not change existing guidance about whether an instrument is carried at fair value. FAS 157 nullifies the guidance in Emerging Issues Task Force 02-3 ("EITF 02-3") that precluded the recognition of a trading profit at the inception of a derivative contract unless the fair value of such contract was obtained from a quoted market price or other valuation technique incorporating observable market data. FAS 157 also clarifies that an issuer's credit standing should be considered when measuring liabilities at fair value. The Company adopted FAS 157 on January 1, 2008, its required effective date. FAS 157 must be applied prospectively, except that the difference between the carrying amount and fair value of a stand-alone derivative or hybrid instrument measured using the guidance in EITF 02-3 on recognition of a trading profit at the inception of a derivative, is to be applied as a cumulative-effect adjustment to opening retained earnings on January 1, 2008. The adoption of FAS 157 did not have a material effect on the Company's financial condition or results of operations. In February 2007, the FASB issued Financial Accounting Standard No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159"). FAS 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not required to be measured at fair value. Subsequent changes in fair value for designated items are required to be reported in income. FAS 159, also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. FAS 159, permits the fair value option election on an instrument-by-instrument basis for eligible items existing at the adoption date and at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company adopted FAS 159 on January 1, 2008, its required effective date. The company did not make any fair value measurement elections upon initial adoption of FAS 159. The effect of FAS 159 on the Company's financial condition or results of operations prospectively directly depends on the nature and extent of eligible items elected to be measured at fair value. In June 2007, the AICPA issued SOP No. 07-1 ("SOP 07-1"), "Clarification of the Scope of the Audit and Accounting Guide 'Audits of Investment Companies' and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies." SOP 07-1 amends the guidance for whether an entity may apply the Audit and Accounting Guide, "Audits of Investment Companies" (the Guide). In February 2008, the FASB issued an FSP indefinitely deferring the effective date of SOP 07-1. 22 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 2. Summary of Significant Accounting Policies - (continued): m) Future Application of Accounting Standards - (continued): In December 2007, the FASB issued Financial Accounting Standard No. 141 (revised 2007), "Business Combinations" ("FAS 141(R)"). FAS 141(R) changes the accounting for business combinations in a number of ways, including broadening the transactions or events that are considered business combinations, requiring an acquirer to recognize 100 percent of the fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions of less than a 100 percent controlling interest when the acquisition constitutes a change in control of the acquired entity, recognizing contingent consideration arrangements at their acquisition-date fair values with subsequent changes in fair value generally reflected in income, and recognizing preacquisition loss and gain contingencies at their acquisition-date fair values, among other changes. FAS 141(R) is required to be adopted for business combinations for which the acquisition date is on or after the beginning of the first annual reporting peri effect FAS 141(R) will have on its financial condition or results of operations. In December 2007, the FASB issued Financial Accounting Standard No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51" ("FAS 160"). FAS 160 requires noncontrolling (i.e., minority) interests in partially owned subsidiaries to be classified in the consolidated balance sheet as a separate component of shareholders' equity. FAS 160, also establishes accounting rules for subsequent acquisitions and sales of noncontrolling interests and how noncontrolling interests should be presented in the statement of income. The noncontrolling interests' share of subsidiary income should be reported as a part of net income with disclosure of the attribution of net income to the controlling and noncontrolling interests on the face of the statement of income. FAS 160 is required to be adopted in the first annual reporting period beginning on or after December 15, 2008 (January 1, 2009 for the Company) and earlier application is prohibited. FAS 160 must be adopted prospectively, except that noncontrolling interests should be reclassified from liabilities to a separate component of shareholders' equity and net income should be recast to include net income attributable to both the controlling and noncontrolling interests retrospectively. The Company is currently evaluating the effect FAS 160 will have on its financial condition or results of operations. In March 2008, the FASB issued Financial Accounting Standard No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("FAS 161"). FAS 161 changes the disclosures requirements for derivative instruments and hedging activities. The new standard is effective for fiscal periods beginning after November 15, 2008. 23 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 3. Investments: a) Net Investment Income: An analysis of net investment income is as follows (in thousands): Years ended December 31, -------------------------------- 2007 2006 2005 -------- --------- --------- (Restated) (Restated) Fixed maturities $476,371 $525,548 $624,093 Equity securities 1,323 1,023 662 Mortgage loans 37,067 29,559 33,524 Policy loans 14,554 14,146 16,485 Cash and short-term investments 4,440 2,633 3,368 Other long-term investments 33,664 18,663 58,278 -------- -------- -------- Total investment income 567,419 591,572 736,410 Investment expenses (8,942) (5,779) (5,169) -------- -------- -------- Net investment income $558,477 $585,793 $731,241 ======== ======== ======== b) Net Realized Investment Gains (Losses:) Net realized capital gains (losses) of investments for 2007, 2006 and 2005 are summarized below (in thousands): Years ended December 31, ---------------------------------- 2007 2006 2005 -------- ---------- ---------- (Restated) (Restated) Fixed maturities available for sale Realized gains $ 26,289 $ 47,633 $ 67,166 Realized losses (30,347) (50,997) (47,172) Equity securities Realized gains 1,162 2,974 1,947 Realized losses -- (356) (3,907) Derivatives Realized gains 8,177 4,330 -- Realized losses (4,386) -- (10,466) Other long-term investments Realized gains 7,517 80 -- Realized losses (1,313) -- (1,378) Securities lending Realized losses (39,151) -- -- Other than temporary impairments (65,528) (24,518) (15,289) -------- -------- -------- Total net realized investment losses before taxes $(97,580) $(20,854) $ (9,099) ======== ======== ======== 24 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 3. Investments - (continued): c) Unrealized Gains (Losses) on Fixed Maturities and Equity Securities: Net unrealized gains (losses) on fixed maturities and equity securities included in accumulated other comprehensive income at December 31 are as follows (in thousands): 2007 2006 2005 --------- ---------- ---------- (Restated) (Restated) Gross unrealized gains $ 295,735 $355,339 $ 491,267 Gross unrealized losses (107,990) (70,303) (72,237) Other invested assets 688 (951) -- Other - securities lending collateral (177,021) -- -- Deferred policy acquisition costs -- (4,168) (25,633) Deferred income tax expense (3,994) (97,970) (139,721) --------- -------- --------- Net unrealized gains on securities $ 7,418 $181,947 $ 253,676 ========= ======== ========= The following table summarizes the Company's gross unrealized losses and estimated fair values on fixed maturity securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2007 and 2006 (in thousands).
Less than 12 months 12 Months or More Total ----------------------- --------------------- ----------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ---------- ---------- -------- ---------- ---------- ---------- At December 31, 2007 U.S. Government & government agencies $ -- $ -- $ -- $ -- $ -- $ -- Foreign governments 29,896 678 -- -- 29,896 678 States, municipalities and political subdivisions -- -- -- -- -- -- Mortgage backed securities 316,747 15,913 359,323 22,429 676,070 38,342 All other corporate 1,061,792 40,362 460,462 27,873 1,522,254 68,235 Equity securities 6,469 735 -- -- 6,469 735 ---------- -------- -------- ------- ---------- -------- Total $1,414,904 $ 57,688 $819,785 $50,302 $2,234,689 $107,990 ========== ======== ======== ======= ========== ======== Securities lending collateral $1,769,525 $160,919 $152,105 $16,261 $1,921,630 $177,180 ========== ======== ======== ======= ========== ========
Less than 12 months 12 Months or More Total ----------------------- --------------------- ----------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ---------- ---------- -------- ---------- ---------- ---------- At December 31, 2006 (restated) U.S. Government & government agencies $ 5,469 $ 77 $ 1,163 $ 5 $ 6,632 $ 82 Foreign governments 1,977 233 -- -- 1,977 233 States, municipalities and political subdivisions 12,378 122 745 8 13,123 130 Mortgage backed securities 306,971 5,693 379,778 15,819 686,749 21,512 All other corporate 849,437 18,510 606,131 29,355 1,455,568 47,865 Equity securities 701 481 -- -- 701 481 ---------- ------- -------- ------- ---------- ------- Total $1,176,933 $25,116 $987,817 $45,187 $2,164,750 $70,303 ========== ======= ======== ======= ========== =======
25 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 3. Investments - (continued): c) Unrealized Investment Gains (Losses) on Fixed Maturities and Equity Securities - (continued): As of December 31, 2007, the Company held 552 individual bonds and no stock investments that were in an unrealized loss position, of which 148 individual bonds and no stock investments were in an unrealized loss position continuously for more than 12 months. The Company regularly reviews its investments for possible impairments based on the criteria discussed in Note 2. The determination that a security has incurred an OTTI in value and the amount of any loss recognition requires the judgment of the Company's management and a continual review of its investments. As of December 31, 2007, all of the unrealized losses in the table shown above were considered to be temporary based on the results of this review. d) Amortized Cost and Fair Value of Fixed Maturities and Equity Securities: The amortized cost and fair value of investments in fixed maturities and equity securities at December 31, 2007 and 2006 are as follows (in thousands):
2007 ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Fixed maturities: U.S. Government and government agencies and authorities $ 49,400 $ 10,382 $ -- $ 59,782 Foreign Governments 119,988 7,269 678 126,579 States, municipalities and political subdivision 12,177 32 -- 12,209 Mortgage-backed securities 1,295,773 20,321 38,342 1,277,752 All other corporate 5,077,659 255,956 68,235 5,265,380 ---------- -------- -------- ---------- Total fixed maturities $6,554,997 $293,960 $107,255 $6,741,702 ========== ======== ======== ========== Equity securities $ 16,004 $ 1,775 $ 735 $ 17,044 ========== ======== ======== ========== Securities lending collateral $2,561,577 $ 159 $177,180 $2,384,556 ========== ======== ======== ==========
26 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 3. Investments - (continued): d) Amortized Cost and Fair Value of Fixed Maturities and Equity Securities - (continued):
2006 (Restated) ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Fixed maturities: U.S. Government and government agencies and authorities $ 52,214 $ 9,049 $ 82 $ 61,181 Foreign Governments 111,134 10,645 233 121,546 States, municipalities and political subdivision 13,555 10 130 13,435 Mortgage-backed securities 1,240,417 16,959 21,512 1,235,864 All other corporate 5,517,892 317,242 47,865 5,787,269 ---------- ---------- ---------- ---------- Total fixed maturities $6,935,212 $353,905 $69,822 $7,219,295 ========== ======== ======= ========== Equity securities $ 5,894 $ 1,434 $ 481 $ 6,847 ========== ======== ======= ========== Securities lending collateral $1,763,624 $ -- $ -- $1,763,624 ========== ======== ======= ==========
The amortized cost and fair value of fixed maturities available for sale at December 31, 2007, by contractual maturity, are shown below (in thousands). Actual maturities could differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value Fixed maturity securities, excluding mortgage- backed securities: Due in one year or less $ 169,553 $ 170,718 Due in one year through 5 years 877,697 915,271 Due after five years through ten years 1,350,720 1,385,820 Due after ten years 2,861,254 2,992,141 Mortgage-backed securities 1,295,773 1,277,752 ---------- ---------- Total fixed maturity securities $6,554,997 $6,741,702 ========== ==========
27 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 3. Investments - (continued): e) Fixed Maturities Below Investment Grade: At December 31, 2007 and 2006, the fixed maturities held by the Company that were below investment grade had an aggregate amortized cost, in thousands, of $633,025 and $547,145, respectively, and an aggregate market value, in thousands, of $643,820 and $589,938, respectively. f) Non-income Producing Assets: Non-income producing assets were insignificant to the Company's Statement of Income. g) Investments Greater than 10% of Equity: There were individual investment securities in the amount, in thousands, of $183,873 in which the market value exceeded 10% of the Company's total shareholders' equity at December 31, 2007. h) Statutory Deposits: Securities with a carrying value, in thousands, of $3,379 and $3,347 were deposited by the Company under requirements of regulatory authorities as of December 31, 2007 and 2006, respectively. i) Mortgage Loans: At December 31, 2007, mortgage loans were collateralized by properties primarily located in nine geographic areas, with loans totaling approximately 33% of the aggregate carrying value of the portfolio secured by properties located in the Mid-Atlantic region, 25% in the Pacific region and 17% in the South Atlantic region, 6% in the E. South Central region, 6% in the W. North Central region, 5% in the E. North Central region, 4% in W. South Central region, and 4% in the New England region. At December 31, 2007, the type of property collateralizing the mortgage loan portfolio was approximately 40% for office, 16% for apartments, 14% for retail, 12% for hotel/motel, 10% for industrial, and 8% for other. 4. Deferred Acquisition Costs: The following reflects deferred policy acquisition costs which will be amortized against future income and the related current amortization charged to income, excluding certain amounts deferred and amortized in the same period (in thousands). Years ended December 31, ----------------------------------- 2007 2006 2005 --------- ---------- ---------- (Restated) (Restated) Balance at beginning of year $ 205,679 $244,233 $253,774 Acquisition costs deferred 5,671 10,935 8,961 Amortization charged to income (51,067) (75,509) (56,173) Effect of realized gains (losses) 1,556 4,555 (9,371) Effect of unrealized gains (losses) 4,218 21,465 47,042 --------- -------- -------- Balance at end of year $ 166,057 $205,679 $244,233 ========= ======== ======== 28 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 4. Deferred Acquisition Costs - (continued): The Company revises future DAC assumptions, referred to herein as an unlocking, when estimates of future gross profits to be realized on its annuity policies are revised. In 2007, DAC amortization was decreased by $1.8 million due to a DAC unlocking of deferred annuities products. 5. Policyholder Contract Deposits and Future Policy Benefits: a) The analysis of the policyholder contract deposit liabilities and future policy benefits at December 31, 2007 and 2006 are as follows (in thousands): 2007 2006 ---------- ---------- (Restated) Policyholder contract deposits: Annuities $1,647,584 $2,166,929 Guaranteed investment contracts 321,032 310,564 Universal life 503,303 481,745 Corporate-owned life insurance 1,663,281 1,648,947 Other investment contracts 26,774 27,670 ---------- ---------- $4,161,974 $4,635,855 ========== ========== 2007 2006 ---------- ---------- (Restated) Future policy benefits: Ordinary life $ 46,351 $ 53,588 Group life 19,413 17,347 Life contingent annuities 1,330,436 1,279,603 Terminal funding 1,097,434 969,448 Accident and health 142,443 132,926 ---------- ---------- $2,636,077 $2,452,912 ========== ========== b) The liability for policyholder contract deposits has been established based on the following assumptions: (i) Interest rates credited on deferred annuities, which vary by territory and year of issuance, range from 3.0 percent to 6.5 percent. Current declared interest rates are generally guaranteed to remain in effect for a period of one year though some are guaranteed for longer periods. Withdrawal charges generally range from 6 percent grading to zero over a period of zero to 7 years. (ii) Domestically, guaranteed investment contracts ("GICs") have market value withdrawal provisions for any funds withdrawn other than benefit responsive payments. Interest rates credited generally range from 2.8 percent to 6.5 percent and maturities range from 2 to 6 years. The average maturity of these GICs is 3 years. 29 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 5. Policyholder Contract Deposits and Future Policy Benefits - (continued): (iii) Interest rates on corporate-owned life insurance business are guaranteed at 4.0 percent and the weighted average rate credited in 2007 was 5.3 percent. (iv) The universal life funds, exclusive of corporate-owned life insurance business, have credited interest rates of 4.0 percent to 7.1 percent and guarantees ranging from 3.0 percent to 5.5 percent depending on the year of issue. Additionally, universal life funds are subject to surrender charges that amount to 3.0 percent of the fund balance and grade to zero over a period not longer than 20 years. c) The liability for future policy benefits has been established based upon the following assumptions: (i) Interest rates (exclusive of immediate/terminal funding annuities), which vary by year of issuance and products, range from 3.0 percent to 8.0 percent within the first 20 years. Interest rates on immediate/terminal funding annuities are at a maximum of 9.6 percent and grade to not less than 1.6 percent. (ii) Mortality and surrender rates are based upon actual experience modified to allow for variations in policy form. The weighted average lapse rate for individual life, including surrenders, approximated 5.3 percent. 6. Reserves for Guaranteed Benefits: Details concerning the Company's GMDB exposure as of December 31, 2007 and 2006 were as follows: Return of Net Deposits Plus a Minimum Return (dollars in millions) ------------------------- 2007 2006 ----------- ----------- (Restated) Account value $ 1,461 $ 1,754 Net amount at risk /(a)/ $ 40 $ 62 Average attained age of contract holders 72 69 Range of GMDB increase rates /(b)/ 0.00%-10.00% 0.00%-10.00% /(a)/ Net amount at risk represents the guaranteed benefit exposure in excess of the current account value if all contract holders died at the same balance sheet date. /(b)/ Reinsured with top rated carriers. 30 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 6. Reserves for Guaranteed Benefits - (continued): The following summarizes the reserve for guaranteed benefits on variable contracts, which is reflected in the general account and reported on the balance sheet: (in thousands) 2007 2006 ------- ---------- (Restated) Balance at January 1 $ 400 $ 400 Guaranteed benefits incurred 1,670 4,425 Guaranteed benefits paid (1,670) (4,425) ------- ------- Balance at December 31 $ 400 $ 400 ======= ======= The following assumptions and methodology were used to determine the reserve for guaranteed benefits at December 31, 2007 and 2006: . Data used was 1,000 stochastically generated investment performance scenarios. . Mean investment performance assumption was 10%. . Volatility assumption was 16%. . Mortality was assumed to be 87.5% of the 75-80 VIE M table. . Lapse rates vary by contract type and duration and range from 5% to 25% with an average of 16%. . The discount rate was 8%. 7. Income Taxes: a) Income tax asset (liability): (in thousands) Years ended December 31, ------------------------ 2007 2006 -------- --------- (Restated) Current taxes receivable $34,322 $ 57,653 Deferred tax liability (6,941) (114,061) ------- --------- Income taxes receivable (payable) $27,381 $ (56,408) ======= ========= 31 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 7. Income Taxes - (continued): The components of deferred tax assets and liabilities were as follows: (in thousands) Years ended December 31, ------------------------ 2007 2006 -------- ---------- (Restated) Deferred tax assets: Policy reserves 23,406 34,760 Basis differential of investments 37,423 23,352 Other 3,058 4,071 ------- --------- Total deferred tax assets $63,887 $ 62,183 ------- --------- Deferred tax liabilities: Deferred policy acquisition costs 58,120 73,447 Net unrealized gains on debt and equity and equity securities available for sale 3,994 97,698 Basic differential of investments 8,625 -- State deferred tax liabilities 89 1,649 Other -- 3,450 ------- --------- Total deferred tax liabilities $70,828 $ 176,244 ------- --------- Net deferred tax liabilities $(6,941) $(114,061) ======= ========= b) The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal tax rate to pretax income (loss) as a result of the following differences (in thousands): Years ended December 31, --------------------------------- 2007 2006 2005 ------- ---------- ---------- (Restated) (Restated) Income tax expense at statutory percentage of GAAP pretax income $ 7,664 $38,445 $69,537 State income tax (981) 1,905 385 Dividends received deduction (2,750) (2,752) (1,785) Prior year correction 8 (4,862) (1,722) IRS audit settlements (2,379) (4,994) -- Other -- -- 31 ------- ------- ------- Income tax expense $ 1,562 $27,742 $66,446 ======= ======= ======= 32 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 7. Income Taxes - (continued): c) A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows: Gross unrecognized tax benefits at December 31, 2006 $ 23 Agreed audit adjustments with taxing authorities included in opening balance (23) Increases in tax positions for prior years -- Decreases in tax positions for prior years -- Increases in tax positions for current years -- Lapse in statute of limitations -- Settlements -- -- ---- Gross unrecognized tax benefits at December 31, 2007 $ -- ==== d) Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At January 1, 2007 and December 31, 2007 the Company had accrued $4 million and $0 million, respectively, for the payment of interest and penalties. For the year ended December 31, 2007, the Company recognized no movement for interest and penalties in the statement of income. e) The Internal Revenue Service ("IRS") is currently examining the Company's tax return for the tax years 2000 to 2002. Although the final outcome of any issues raised in examination is uncertain, the Company believes that the ultimate liability, including interest, will not materially exceed amounts recorded in the consolidated financial statements. f) The Company has a written agreement with AIG under which each subsidiary agrees to pay AIG an amount equal to the consolidated federal income tax expense, multiplied by the ratio that the subsidiary's separate return tax liability bears to the consolidated tax liability, plus one hundred percent of the excess of the subsidiary's separate return tax liability over the allocated consolidated tax liability. AIG agrees to pay each subsidiary for the tax benefits, if any, of net operating losses and tax credits which are not usable by the subsidiary but which are used by other members of the consolidated group. 8. Commitments and Contingencies: The Company is party to various lawsuits and proceedings arising in the ordinary course of business. Based upon information presently available, the Company believes that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the Company's results of operations, cash flows and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards, that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions continues to create the potential for an unpredictable judgment in any given suit. The Company had $81.6 million and $75.6 million of unfunded commitments for its investments in limited partnerships at December 31, 2007 and 2006, respectively. 33 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 8. Commitments and Contingencies - (continued): Various federal, state and other regulatory agencies may from time to time review, examine or inquire into the operations, practices and procedures of the Company, such as through financial examinations, market conduct exams or regulatory inquiries. Based on the current status of pending regulatory examinations and inquiries involving the Company, the Company believes it is not likely that these regulatory examinations or inquiries will have a material adverse effect on the financial position, results of operations or cash flows of the Company. In February 2006, AIG reached a resolution of claims and matters under investigation with the United States Department of Justice ("DOJ"), the Securities and Exchange Commission ("SEC"), the Office of the New York Attorney General ("NYAG") and the New York State Department of Insurance ("DOI"). The settlements resolved outstanding investigations conducted by the SEC, NYAG and DOI in connection with the 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 settlement, the Company obtained temporary permission from the SEC to continue to serve as a depositor for separate accounts. The Company received permanent permission from the SEC in September 2007. All fifty states have laws requiring solvent life insurance companies to pay assessments to protect the interests of policyholders of insolvent life insurance and annuity companies. The Company recognizes a liability for insurance-related assessments when all of the following three conditions have been met: (i) an assessment has been imposed or information available prior to the issuance of financial statements indicates it is probable that an assessment will be imposed, (ii) the event obligating the Company to pay an imposed or probable assessment occurred on or before the date of the financial statements and (iii) the amount of the assessment can be reasonably estimated. The December 31, 2007 liability was estimated by the Company using the latest information available from the National Organization of Life and Health Insurance Guaranty Associations. While it is not possible to exactly estimate the portion of the industry assessments for which the Company will be responsible, it is expected that the Company's results of operations and financial position. 9. Derivative Financial Instruments: a) Use of Derivative Financial Instruments: The Company's use of derivative financial instruments is generally limited to interest rate and currency swap agreements, and, at times, options to enter into interest rate swap agreements (call and put options). The Company is neither a dealer nor a trader in derivative financial instruments. b) Interest Rate and Currency Swap Agreements: The Company uses interest rate swap agreements to convert specific investment securities from a floating to a fixed rate basis, or vice versa, and to hedge against the risk of declining interest rates on anticipated security purchases. 34 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 9. Derivative Financial Instruments - (continued): b) Interest Rate and Currency Swap Agreements - (continued): Currency swap agreements are used to convert cash flow from specific investment securities denominated in foreign currencies into U.S. dollars at specific exchange rates and to hedge against currency rate fluctuation on anticipated security purchases. Swap agreements generally have terms of two to ten years. The difference between amounts paid and received on swap agreements involved in qualifying hedging relationships is recorded on an accrual basis as an adjustment to realized gains/losses over the periods covered by the agreements. The related amount payable to or receivable from counterparties is included in derivative liabilities or assets. The Company believes its hedging activities have been and remain economically effective, but do not currently qualify for hedge accounting. The impact of fair value adjustments on derivatives which do not qualify for hedge accounting have been recorded in net realized capital gains (losses). Interest rate and currency swap agreements at December 31 were as follows (in thousands):
2007 2006 -------- ---------- (Restated) Asset swaps Currency swap agreements (receive Koruna dollars/pay U.S. dollars): Notional amounts (in U.S. dollars) $ 52,414 $ 52,414 Fair Value 40,128 27,945 Liability swaps Interest rate swap agreements to receive floating rate: Notional amounts 204,535 204,535 Fair value (6,704) (35) Currency swap agreements (receive Koruna dollars/pay U.S. dollars): Notional amounts (in U.S. dollars) 52,414 52,414 Fair value (672) (248) Currency swap agreements (receive U.S. dollars/pay Euro dollars): Notional amounts (in U.S. dollars) 15,810 15,810 Fair value (6,464) (4,712) Currency swap agreements (receive U.S. dollars/pay British pounds): Notional amounts (in U.S. dollars) 40,000 40,000 Fair value (4,914) (5,225) Currency swap agreements (receive U.S. dollars/pay Canadian dollars): Notional amounts (in U.S. dollars) 7,273 7,273 Fair value (3,147) (1,905) Currency swap agreements (receive U.S. dollars/pay Australian dollars): Notional amounts (in U.S. dollars) 15,000 35,000 Fair value (2,719) (3,852)
35 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 9. Derivative Financial Instruments - (continued): c) Risks Inherent In the Use of Derivatives: Risks inherent in the use of derivatives include market risk, credit risk in the event of non-performance by counterparties, and mismatch risk. Exposure to market risk is mitigated by the fact that all derivatives contracts are executed as effective economic hedges the financial effects of which are offset by another financial instrument (investment securities or index-based policy liabilities.) Counterparty credit exposure is limited by entering into agreements with affiliated counterparties or unaffiliated counterparties having high credit ratings. Affiliated counterparties are guaranteed by AIG and unaffiliated counterparty credit ratings are monitored on a regular basis. Mismatch risk is the risk that hedges are executed improperly or become ineffective over the term of the contracts. Procedures have been implemented at AIG Global Investment Corp., the Company's affiliated investment advisor, and within the Company to prevent and detect such mismatches. 10. Fair Value of Financial Instruments: a) Financial Accounting Standard No. 107 "Disclosures about Fair Value of Financial Instruments" ("FAS 107") requires disclosure of fair value information about financial instruments for which it is practicable to estimate such fair value. In the measurement of the fair value of certain of the financial instruments, where quoted market prices were not available, other valuation techniques were utilized. These fair value estimates are derived using internally developed valuation methodologies based on available and observable market information. The fair value and carrying amounts of financial instruments are as follows (in thousands): 2007 ----------------------- Fair Carrying Value Value ---------- ---------- Assets Fixed maturities $6,741,702 $6,741,702 Equity securities 17,044 17,044 Mortgage and policy loans 702,883 711,259 Derivative assets 40,128 40,128 Investment real estate 21,504 21,504 Other invested assets 75,787 75,787 Cash and short-term investments 83,059 83,059 Assets held in separate accounts 3,103,731 3,103,731 Securities lending collateral 2,384,556 2,384,556 Liabilities Investment contracts 1,974,162 1,968,216 Derivative liabilities 24,620 24,620 Liabilities related to separate accounts 3,103,731 3,103,731 Securities lending payable 2,594,426 2,594,426 36 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 10. Fair Value of Financial Instruments - (continued): 2006 (Restated) ----------------------- Fair Carrying Value Value ---------- ---------- Assets Fixed maturities $7,219,295 $7,219,295 Equity securities 6,847 6,847 Mortgage and policy loans 713,877 711,520 Derivative assets 27,945 27,945 Investment real estate 21,067 21,067 Other invested assets 51,232 51,232 Cash and short-term investments 54,492 54,492 Assets held in separate accounts 3,132,390 3,132,390 Securities lending collateral 1,763,624 1,763,624 Liabilities Investment contracts 2,431,806 2,505,162 Derivative liabilities 15,977 15,977 Liabilities related to separate accounts 3,132,390 3,132,390 Securities lending payable 1,763,624 1,763,624 b) The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments presented: Fixed maturity and equity securities: The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company obtains market price data to value financial instruments whenever such information is available. Market price data generally is obtained from market exchanges or dealer quotations. The types of instruments valued based on market price data include G-7 government and agency securities, equities listed in active markets, and investments in publicly traded mutual funds with quoted market prices. The Company estimates the fair value of fixed income instruments not traded in active markets by referring to traded securities with similar attributes and using a matrix pricing methodology. This methodology considers such factors as the issuer's industry, the security's rating and tenor, its coupon rate, its position in the capital structure of the issuer, and other relevant factors. The types of fixed income instruments not traded in active markets include non-G-7 government securities, municipal bonds, certain hybrid financial instruments, most investment-grade and high-yield corporate bonds, and most mortgage- and asset-backed products. The Company initially estimates the fair value of equity instruments not traded in active markets by reference to the transaction price. This valuation is adjusted only when changes to inputs and assumptions are corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity capital markets, and changes in financial ratios or cash flows. 37 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 10. Fair Value of Financial Instruments - (continued): For equity and fixed income instruments that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments generally are based on available market evidence. In the absence of such evidence, management's best estimate is used. Mortgage and policy loans: Where practical, the fair values of loans on real estate were estimated using discounted cash flow calculations based upon the Company's current incremental lending rates for similar type loans. Fair value for collateral, commercial and guaranteed loans is based principally on independent pricing services, broker quotes and other independent information. The fair value of policy loans were estimated to approximate carrying value. Derivatives: Fair value of derivative assets and liabilities were based on the use of valuation models that utilize, among other things, current interest, foreign exchange and volatility rates, as applicable. Other invested assets: Fair value of other invested assets is based upon the fair value of the net assets of these investments as determined by the general partners. Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate fair value. Assets and liabilities related to separate accounts: Separate and variable accounts are carried at the quoted market value of the underlying securities. The liabilities for these accounts are equal to the account assets. Securities lending collateral: Securities lending collateral is invested in short-term investments and fixed maturity securities, primarily floating-rate bonds. The carrying value of short-term investments is considered to be a reasonable estimate of fair value. Securities lending collateral investments in fixed maturity securities are carried at fair value, which is based principally on independent pricing services, broker quotes and other independent information, consistent with the valuation of other fixed maturity securities. Securities lending payable: The contract values of securities lending payable approximate fair value as these obligations are short-term in nature. Investment contracts: For GICs, income annuities and other similar contracts without life contingencies, estimated fair values are derived using discounted cash flow calculations based upon interest rates currently being offered for similar contracts consistent with those remaining for the contracts being valued. 38 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 11. Shareholder's Equity: a) The Board of Directors is authorized to issue up to 1 million shares of preferred stock that may be issued in one or more series and with such stated value and terms as may be determined by the Board of Directors. There were 1,000 Series A preferred shares with a par value of $100,000 issued and outstanding at December 31, 2005. The holder of Series A preferred stock is entitled to cumulative dividends at a rate which is recalculated on a quarterly basis. Common stock dividends may not be paid unless provision has been made for payment of Series A preferred dividends. The Series A preferred stock has no additional voting rights. The terms of the Series A preferred stock include the right of the Company to redeem all shares at par value any time at the option of the Company. On September 26, 2006, the Company redeemed the remaining 1,000 shares of preferred stock. The redemption of $100 million was paid to National Union Fire Insurance Company of Pittsburgh, an affiliate. b) The Company may not distribute dividends to its Parent Company without prior approval of regulatory agencies. Generally, this limits the payment of such dividends to an amount which, in the opinion of the regulatory agencies, is warranted by the financial condition of the Company. The maximum shareholder dividend, which can be paid without prior regulatory approval, is limited to an amount that is based on restrictions relating to statutory surplus. The Company paid dividends in the amount of $150.0 million, $53.7 million and $61.1 million, in 2007, 2006 and 2005, respectively. 12. Employee Benefits: Currently all the Company's employees participate in various benefit plans sponsored by AIG, including a noncontributory qualified defined benefit retirement plan, various stock option and purchase plans, a 401(k) plan and a post retirement benefit program for medical care and life insurance. AIG's U.S. plans do not separately identify projected benefit obligations and plan assets attributable to employees of participating affiliates. 13. Reinsurance: a) The Company reinsures portions of its life, accident and health insurance and annuity risks with unaffiliated companies. Life insurance risks are reinsured primarily under coinsurance and yearly renewable term treaties. Accident and health insurance risks are reinsured primarily under coinsurance, excess of loss and quota share treaties. Amounts recoverable from reinsurers are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented as a component of reinsurance assets. A contingent liability exists with respect to reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements. The Company also reinsures portions of its life and accident and health insurance risks with affiliated companies (see Note 14). The effect of all reinsurance contracts, including reinsurance assumed, is as follows (in thousands): 39 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 13. Reinsurance - (continued):
2007 --------------------------------------------------------- Premiums and Other Considerations ---------------------------------------- Accident Life Insurance and in Force Life Health Annuity Total -------------- ------- -------- -------- -------- Direct $46,585,927 $70,849 $331,267 $189,637 $591,753 Ceded - Nonaffiliated 9,331,277 52,949 3,274 4,026 60,249 Ceded - Affiliated 58,396 498 263,702 -- 264,200 ----------- ------- -------- -------- -------- Total Ceded 9,389,673 53,447 266,976 4,026 324,449 ----------- ------- -------- -------- -------- Net $37,196,254 $17,402 $ 64,291 $185,611 $267,304 =========== ======= ======== ======== ========
2006 (Restated) --------------------------------------------------------- Premiums and Other Considerations ---------------------------------------- Accident Life Insurance and in Force Life Health Annuity Total -------------- ------- -------- -------- -------- Direct $44,604,113 $68,069 $314,575 $146,038 $528,682 Assumed - Affiliated 593,193 (227) -- -- (227) ----------- ------- -------- -------- -------- Total Assumed 593,193 (227) -- -- (227) Ceded - Nonaffiliated 9,558,353 46,540 2,367 4,619 53,526 Ceded - Affiliated 64,526 88 252,408 -- 252,496 ----------- ------- -------- -------- -------- Total Ceded 9,622,879 46,628 254,775 4,619 306,022 ----------- ------- -------- -------- -------- Net $35,574,427 $21,214 $ 59,800 $141,419 $222,433 =========== ======= ======== ======== ========
40 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 13. Reinsurance - (continued):
2005 (Restated) --------------------------------------------------------- Premiums and Other Considerations ---------------------------------------- Accident Life Insurance and in Force Life Health Annuity Total -------------- ------- -------- -------- -------- Direct $36,797,482 $66,707 $324,970 $88,184 $479,861 Assumed - Affiliated 5,111 -- -- -- -- ----------- ------- -------- ------- -------- Total Assumed 5,111 -- -- -- -- Ceded - Nonaffiliated 10,107,158 38,010 2,622 5,098 45,730 Ceded - Affiliated 71,551 47 269,450 -- 269,497 ----------- ------- -------- ------- -------- Total Ceded 10,178,709 38,057 272,072 5,098 315,227 ----------- ------- -------- ------- -------- Net $26,623,884 $28,650 $ 52,898 $83,086 $164,634 =========== ======= ======== ======= ========
b) Reinsurance recoveries, which reduced death and other benefits, approximated, in thousands, $209,798 and $212,487, respectively, for each of the years ended December 31, 2007 and 2006. The Company's reinsurance arrangements do not relieve it from its direct obligation to its insured. Thus, a credit exposure exists with respect to reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements. c) In 2003, the Company entered into a coinsurance/modified coinsurance agreement with AIG Life of Bermuda ("ALB"), an affiliate. The agreement has an effective date of January 1, 2003. Under the agreement, ALB reinsures a 100% quota share of the Company's liability on selective level term products and universal life products issued by the Company. The agreement is unlimited in duration but either party may terminate the agreement as to new business with thirty days written notice to the other party. The agreement also provides for an experience refund of all profits, less a reinsurance risk charge. This agreement does not meet the criteria for reinsurance accounting under GAAP, therefore, deposit accounting is applied. 14. Transactions with Related Parties: a) The Company is party to several reinsurance agreements with its affiliates covering certain life and accident and health insurance risks. Premium income and commission ceded for 2007 was, in thousands, $263,702 and $17,889 respectively. Premium income and commission ceded for 2006, in thousands, amounted to $252,496 and $19,935, respectively. Premium income and commission ceded to affiliates, in thousands, amounted to $269,497 and $18,815, respectively, for the year ended December 31, 2005. 41 AIG LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued): 14. Transactions with Related Parties - (continued): b) The Company is party to several cost sharing agreements with its affiliates. Generally, these agreements provide for the allocation of costs upon either the specific identification basis or a proportional cost allocation basis which management believes to be reasonable. For the years ended December 31, 2007, 2006 and 2005, the Company was charged, in thousands, $45,069, $39,569 and $30,578, respectively, for expenses attributed to the Company but incurred by affiliates. c) National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union"), an indirect wholly owned subsidiary of AIG, has provided notice of termination of the General Guarantee Agreement dated July 13, 1998 (the "Guarantee") with respect to prospectively issued policies and contracts issued by the Company. The Guarantee terminated on December 29, 2006 at 4:00 p.m. Eastern Time ("Point of Termination"). Pursuant to its terms, the Guarantee does not apply to any group or individual policy, contract or certificate issued after the Point of Termination. The Guarantee will remain in effect for any policy, contract or certificate issued prior to the Point of Termination until all insurance obligations under such contracts are satisfied in full. National Union's audited statutory financial statements are filed with the SEC as part of the Company's registration statements for its variable products that were issued prior to the Point of Termination. d) AIG has provided a Support Agreement to the Company to maintain a certain financial condition in order to enable the Company to issue its policies. The Support Agreement is for the benefit of the Company rather than its policyholders. 42 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NAIC CODE: 19445 STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 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 National Union Fire Insurance Company of Pittsburgh, Pa.: We have audited the accompanying statutory statements of admitted assets and liabilities, capital and surplus of National Union Fire Insurance Company of Pittsburgh, Pa. (the Company) as of December 31, 2007 and 2006, and the related statutory statements of income and changes in capital and surplus, and of cash flow for each of the three years in the period ended December 31, 2007. 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 Commonwealth of Pennsylvania, 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, 2007 and 2006, or the results of its operations or its cash flows for each of the three years in the period ended December 31, 2007. 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, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, on the basis of accounting described in Note 1 to the financial statements. PRICEWATERHOUSECOOPERS LLP New York, NY April 25, 2008 2 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. STATEMENTS OF ADMITTED ASSETS STATUTORY BASIS AS OF DECEMBER 31, 2007 AND 2006 (000'S OMITTED)
------------------------------------------------------------------------------------------------------------ As of December 31, 2007 2006 ------------------------------------------------------------------------------------------------------------ Cash and invested assets: Bonds, at amortized cost (NAIC market value: 2007 - $14,451,338; 2006 - $13,761,650) $14,170,023 $13,457,046 Stocks: Common stocks, at NAIC market value adjusted for non admitted assets (cost: 2007 - $3,016,442; 2006 - $2,867,897) 8,981,169 7,659,381 Preferred stocks, primarily at NAIC market value (cost: 2007 - $2,020,851; 2006 - $2,024,367) 2,020,851 2,024,527 Other invested assets, primarily at equity (cost: 2007 - $1,828,359; 2006 - $1,149,519) 2,578,384 1,722,869 Short-term investments, at amortized cost (approximates NAIC market value) 166,698 149,788 Securities lending collateral 11,710 9,759 Receivable for securities 8,727 -- Overdraft (227,495) (189,073) ------------------------------------------------------------------------------------------------------------ Total cash and invested assets 27,710,067 24,834,297 ------------------------------------------------------------------------------------------------------------ Investment income due and accrued 188,178 184,751 Agents' balances or uncollected premiums: Premiums in course of collection 636,384 797,259 Premiums and installments booked but deferred and not yet due 942,542 392,636 Accrued retrospective premiums 1,305,787 1,695,633 Amounts billed and receivable from high deductible policies 168,248 80,613 Reinsurance recoverable on loss payments 632,449 514,198 Funds held by or deposited with reinsurers 11,428 14,456 Deposit accounting assets 793,216 854,511 Deposit accounting assets - funds held 104,412 99,516 Net deferred tax assets 371,196 385,629 Receivable from parent, subsidiaries and affiliates 265,849 695,535 Equities in underwriting pools and associations 1,279,140 906,315 Other admitted assets 191,925 171,621 ------------------------------------------------------------------------------------------------------------ Total admitted assets $34,600,821 $31,626,970 ============================================================================================================
See Notes to Statutory Basis Financial Statements 3 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. STATEMENTS OF LIABILITIES, CAPITAL AND SURPLUS STATUTORY BASIS AS OF DECEMBER 31, 2007 AND 2006 (000'S OMITTED EXCEPT SHARE INFORMATION)
----------------------------------------------------------------------------------------------- As of December 31, 2007 2006 ----------------------------------------------------------------------------------------------- Liabilities ----------- Reserves for losses and loss adjustment expenses $13,852,252 $12,901,979 Unearned premium reserves 4,513,703 4,403,870 Commissions, premium taxes, and other expenses payable 241,277 188,909 Reinsurance payable on paid loss and loss adjustment expenses 278,579 325,207 Funds held by company under reinsurance treaties 246,532 239,612 Provision for reinsurance 121,714 134,981 Ceded reinsurance premiums payable, net of ceding commissions 517,741 418,513 Retroactive reinsurance reserves - assumed 32,180 24,533 Retroactive reinsurance reserves - ceded (68,937) (64,687) Deposit accounting liabilities 200,040 181,868 Deposit accounting liabilities - funds held 734,590 742,591 Securities lending payable 12,741 9,759 Collateral deposit liability 374,712 647,179 Payable to parent, subsidiaries and affiliates 472,165 295,246 Current federal and foreign income taxes payable to parent 315,659 214,453 Payable for securities 226,874 247,111 Other liabilities 372,006 295,634 ----------------------------------------------------------------------------------------------- Total liabilities 22,443,828 21,206,758 ----------------------------------------------------------------------------------------------- Capital and Surplus ------------------- Common capital stock, $5.00 par value, 1,000,000 shares authorized; 895,750 shares issued and outstanding 4,479 4,479 Capital in excess of par value 2,925,224 2,694,092 Unassigned surplus 9,175,217 7,669,024 Special surplus funds from retroactive reinsurance 52,073 52,617 ----------------------------------------------------------------------------------------------- Total capital and surplus 12,156,993 10,420,212 ----------------------------------------------------------------------------------------------- Total liabilities, capital, and surplus $34,600,821 $31,626,970 ===============================================================================================
See Notes to Statutory Basis Financial Statements 4 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. STATEMENTS OF INCOME AND CHANGES IN CAPITAL AND SURPLUS STATUTORY BASIS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED)
--------------------------------------------------------------------------------------------------------------------------- For the years ended December 31, 2007 2006 2005 --------------------------------------------------------------------------------------------------------------------------- Statements of Income -------------------- Underwriting income: Premiums earned $ 7,666,749 $ 7,701,201 $ 7,035,963 --------------------------------------------------------------------------------------------------------------------------- Underwriting deductions: Losses incurred 4,470,750 4,645,657 5,207,675 Loss adjustment expenses incurred 861,826 827,234 1,138,284 Other underwriting expenses incurred 1,685,858 1,747,380 1,401,165 --------------------------------------------------------------------------------------------------------------------------- Total underwriting deductions 7,018,434 7,220,271 7,747,124 --------------------------------------------------------------------------------------------------------------------------- Net underwriting income (loss) 648,315 480,930 (711,161) --------------------------------------------------------------------------------------------------------------------------- Investment income: Net investment income earned 1,182,291 757,517 747,551 Net realized capital (loss) gains (net of capital gains taxes: 2007 - $3,076; 2006 - $12,835; 2005 - $24,064) (40,847) 40,370 44,691 --------------------------------------------------------------------------------------------------------------------------- Net investment gain 1,141,444 797,887 792,242 --------------------------------------------------------------------------------------------------------------------------- Net loss from agents' or premium balances charged-off (94,880) (52,526) (153,838) Finance and service charges non included in premiums 17,362 15,081 17,311 Other gain, net of dividends to policyholders 83,284 53,056 79,444 --------------------------------------------------------------------------------------------------------------------------- Net income after capital gains taxes and before federal income taxes 1,795,525 1,294,428 23,998 Federal income tax expense (benefit) 510,618 173,573 (107,916) --------------------------------------------------------------------------------------------------------------------------- Net income $ 1,284,907 $ 1,120,855 $ 131,914 =========================================================================================================================== Changes in Capital and Surplus ------------------------------ Capital and surplus, as of December 31, previous year $10,420,212 $ 8,120,163 $ 7,376,821 Adjustment to beginning surplus (87,263) (157,094) (205,585) --------------------------------------------------------------------------------------------------------------------------- Capital and surplus, as of January 1, 10,332,949 7,963,069 7,171,236 --------------------------------------------------------------------------------------------------------------------------- Changes in capital and surplus: Net income 1,284,907 1,120,855 131,914 Change in net unrealized capital gains (net of capital gains taxes: 2007 - $81,239; 2006 - $86,349; 2005 - $(18,068)) 1,299,705 1,381,471 697,684 Change in net deferred income taxes 92,036 33,752 46,237 Change in non-admitted assets (3,270) (158,503) (88,388) Change in provision for reinsurance 13,267 66,780 132,935 Paid in surplus 231,132 -- 199,830 Cash dividends to stockholder (1,120,000) -- (97,750) Foreign exchange translation 26,267 12,788 (73,535) --------------------------------------------------------------------------------------------------------------------------- Total changes in capital and surplus 1,824,044 2,457,143 948,927 --------------------------------------------------------------------------------------------------------------------------- Capital and surplus, as of December 31, $12,156,993 $10,420,212 $ 8,120,163 ===========================================================================================================================
See Notes to Statutory Basis Financial Statements 5 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. STATEMENTS OF CASH FLOW STATUTORY BASIS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED)
--------------------------------------------------------------------------------------------------------- For the years ended December 31, 2007 2006 2005 --------------------------------------------------------------------------------------------------------- Cash From Operations -------------------- Premiums collected, net of reinsurance $ 7,891,160 $ 6,857,942 $ 7,217,780 Net investment income 1,227,721 809,958 720,255 Miscellaneous income (expense) 8,924 69,085 (57,062) --------------------------------------------------------------------------------------------------------- Sub-total 9,127,805 7,736,985 7,880,973 --------------------------------------------------------------------------------------------------------- Benefit and loss related payments 3,878,095 3,479,755 3,931,978 Commission and other expense paid 2,302,839 2,335,839 2,113,308 Dividends paid to policyholders 130 1,419 927 Change in federal income taxes 330,776 (790,391) 47,537 --------------------------------------------------------------------------------------------------------- Net cash provided from operations 2,615,965 2,710,363 1,787,223 --------------------------------------------------------------------------------------------------------- Cash From Investments --------------------- Proceeds from investments sold, matured, or repaid Bonds 5,184,469 2,023,652 2,374,908 Stocks 773,650 637,187 677,784 Other 621,387 511,071 3,296,328 --------------------------------------------------------------------------------------------------------- Total proceeds from investments sold, matured, or repaid 6,579,506 3,171,910 6,349,020 --------------------------------------------------------------------------------------------------------- Cost of investments acquired Bonds 5,997,221 4,733,252 3,915,482 Stocks 837,600 633,747 521,240 Other 1,350,766 563,291 3,256,822 --------------------------------------------------------------------------------------------------------- Total cost of investments acquired 8,185,587 5,930,290 7,693,544 --------------------------------------------------------------------------------------------------------- Net cash (used in) investing activities (1,606,081) (2,758,380) (1,344,524) --------------------------------------------------------------------------------------------------------- Cash From Financing and Miscellaneous Sources --------------------------------------------- Capital and surplus paid-in -- 199,830 -- Dividends to stockholder (1,120,000) -- (146,977) Net deposit on deposit-type contracts and other insurance 75,242 276,990 45,455 Equities in underwriting pools and associations (380,888) (258,959) (137,050) Collateral deposit liability (272,467) 113,328 49,416 Intercompany receivable and payable, net 589,241 (675,777) (559,414) Other 77,476 223,678 210,212 --------------------------------------------------------------------------------------------------------- Net cash (used in) financing and miscellaneous activities (1,031,396) (120,910) (538,358) --------------------------------------------------------------------------------------------------------- Net change in cash and short-term investments (21,512) (168,927) (95,659) Overdraft and short-term investments: Beginning of year (39,285) 129,642 225,301 --------------------------------------------------------------------------------------------------------- End of year $ (60,797) $ (39,285) $ 129,642 =========================================================================================================
See Notes to Statutory Basis Financial Statements 6 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT STATUTORY BASIS ACCOUNTING --------------------------------------------------------------------------- POLICIES -------- A. Organization ------------ National Union Fire Insurance Company of Pittsburgh, PA. (the Company or National Union) is a direct wholly-owned subsidiary of the AIG Commercial Insurance Group, Inc. (AIGCIG), a Delaware corporation, formerly known as NHIG Holding Corp. On December 29, 2006, as part of a reorganization of the American International Group, Inc.'s (the Ultimate Parent or AIG) domestic property-casualty insurance operations, AIG contributed its 100% ownership of the Company's common stock to AIGCIG, an indirect wholly-owned subsidiary of AIG. Prior to the reorganization, the Company was a direct wholly-owned subsidiary of AIG. The ownership change had no effect on the Company's operations. 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, 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, and through AIG's risk finance operation, the Company provides its customized structured products. 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 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 AIG and affiliates. In addition, the Company participates in an inter-company 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 Commonwealth of Pennsylvania (PA SAP). The Insurance Department of the Commonwealth of Pennsylvania recognizes only statutory accounting practices prescribed or permitted by the Commonwealth of Pennsylvania 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 Pennsylvania 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 7 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- Commonwealth of Pennsylvania. The Commissioner of Insurance has the right to permit other specific practices that deviate from prescribed practices. The Insurance Department of the Commonwealth of Pennsylvania has adopted the following accounting practices that differ from those found in NAIC SAP. Specifically, the prescribed practice of discounting of workers' compensation reserves on a non-tabular basis (in NAIC SAP, discounting of reserves is not permitted on a non tabular basis) and the permitted practice that Schedule F is prepared on a New York basis, including New York State Insurance Department Regulation 20 (New York Regulation 20) reinsurance credits for calculating the provision for unauthorized reinsurance (in NAIC SAP, New York Regulation 20 reinsurance credits are not permitted). New York Regulation 20 allows certain offsets to the provision for reinsurance, including parental letters of credits. A reconciliation of the Company's net income and capital and surplus between NAIC SAP and practices prescribed or permitted by PA SAP is shown below:
----------------------------------------------------------------------------------- December 31, 2007 2006 2005 ----------------------------------------------------------------------------------- Net income, PA SAP $ 1,284,907 $ 1,120,855 $ 131,914 State prescribed practices - (deduction): Non-tabular discounting (89,223) (97,907) (403,719) ----------------------------------------------------------------------------------- Net income (loss), NAIC SAP $ 1,195,684 $ 1,022,948 $ (271,805) =================================================================================== Statutory surplus, PA SAP $12,156,993 $10,420,212 $ 8,120,163 State prescribed practices - (charge): Non-tabular discounting (782,088) (692,865) (594,958) Regulation 20 - parental letter of credit (366,724) (404,966) (422,706) Regulation 20 - other reinsurance credits (112,389) (140,227) (212,192) ----------------------------------------------------------------------------------- Total state prescribed practices (1,261,201) (1,238,058) (1,229,856) ----------------------------------------------------------------------------------- Statutory surplus, NAIC SAP $10,895,792 $ 9,182,154 $ 6,890,307 ===================================================================================
In 2006 and 2005, the Commissioner of the Insurance Department of the Commonwealth of Pennsylvania (the Commissioner) permitted the Company to utilize the independent audit of AIG to support the requirement for audited U.S. GAAP equity of the investments in non-insurance and foreign insurance entities. As of December 31, 2006, the aggregate value of equity investments to which this permitted practice applies amounted to was $6,244. 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 limited partnerships and joint ventures. As of December 2007 and 2006, the aggregate value of limited partnerships and joint ventures to which this permitted practice applies was $71,600 and $142,000, respectively. In 2007 the foreign property and casualty division of AIG announced the restructuring of its United Kingdom (UK) general insurance operations designed to simplify the organization, provide an enhanced regulatory and legal platform and improve transparency and efficiency. In December 2007, New Hampshire Insurance Company 8 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) --------------------------------------------------------------------------- transferred substantially all of the business written by its United Kingdom branch (the UK Branch) to AIG UK Ltd., a UK affiliate formerly known as Landmark Insurance Company Limited. This transaction was accomplished pursuant to an application made to the High Court of Justice in England and Wales for an order under Part VII of the Financial Services and Markets Act 2000 of the UK to transfer the aforementioned business. Additionally, as part of the transaction, management (i) entered into several intercompany reinsurance agreements (both commutations and new contracts) with subsidiaries of AIG; and, (ii) intent to make capital contributions and distributions involving subsidiaries of AIG. Some of these transactions are still not fully executed. The proposed transactions are intended in aggregate to have minimal effect (i.e.: less than 1%) individually and in aggregate on the surplus of the National Union Pool Companies (See listing of companies in Note 5A). The results of the UK branch are reported through the Company's participation in American International Underwriters Overseas Association (AIUOA or the Association) (see Footnote 5). AIUOA reports on a fiscal year ending on November 30th. Although the Company's year ends on December 31st, the Company's annual financial statements have historically and consistently reported the results of its participation in AIUOA based on AIUOA's fiscal year close of November 30th. In order to achieve consistency in its financial reporting, the Company, with the permission of the New York and Pennsylvania Insurance Departments, will record the effects described in the preceding paragraph of this transaction in its 2008 statutory financial statements. The use of all of the aforementioned prescribed and permitted practices has not adversely affected the Company's ability to comply with the NAIC's risk based capital and surplus requirements for the 2007 reporting period. 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 and PA SAP vary in certain respects from GAAP. A description of certain 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; 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 expenses (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 the cost and the fair value for securities available-for-sale is reflected net of related 9 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) ---------------------------------------------------------------------- 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 statement of income. 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 3 to 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 statement of income and surplus is segregated by the ceding entity to the extent of gains realized; 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. 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. 10 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- 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 PA SAP 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: . Cash and 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). The Company maximizes its investment return by investing in a significant amount of cash in hand in short-term investments. Short-term investments are recorded separately from cash in the accompanying financial statements. The Company funds cash accounts daily using funds from short-term investments. Cash is in a negative position when outstanding checks exceed cash-in-hand in operating bank accounts. As described in Note 5, the Company is party to an inter-company reinsurance pooling agreement. As the Company is the lead participant in the pool, the Company makes disbursements on behalf of the pool which is also a cause for the Company's negative cash position. . Bonds: Bonds with an NAIC designation of 1 and 2 are carried at amortized cost using the scientific method. Bonds with an NAIC designation of 3 to 6 are carried at the lower of amortized cost or the NAIC-designated market value. If a bond is determined to have an other-than-temporary decline in value the cost basis is written-down to fair value as a new cost basis, with the corresponding charge to Net Realized Capital Gains as a realized loss. In periods subsequent to the recognition of an other-than-temporary impairment loss for fixed maturity securities, the Company accretes the discount or amortizes the premium over the remaining life of the security based on the amount and timing of future estimated cash flows. Mortgage-backed securities are carried at amortized cost and generally are more likely to be prepaid than other fixed maturities. As of December 31, 2007 and 2006, the NAIC market value of the Company's mortgage-backed securities approximated $992,697 and $70,681, respectively. Mortgage-backed securities include prepayment assumptions used at the purchase date and valuation changes caused by changes in estimated cash flow, and are valued using the retrospective method. Prepayment assumptions were obtained from third party vendors. . 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 11 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) ---------------------------------------------------------------------------- preferred stocks with an NAIC rating of RP1 or RP2 that are subject to a 100.0% mandatory sinking fund or paid-in-kind are carried at amortized cost. All below investment grade, NAIC 3 to 6 preferred stocks, are carried at the lower of amortized cost or NAIC designated market values. Investments in affiliates for which the Company's ownership interest (including ownership interest of the Ultimate 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 average discount rate was approximately 24.2% in 2006. No investments in affiliates were valued using this methodology in 2007. See note 5 for changes in valuation of affiliates. 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 ventures and partnerships. Joint ventures 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 recorded as unrealized gains or losses. For investments in joint ventures and partnerships that are determined to have an other-than-temporary decline in value, the costs are written-down to fair value as the new cost basis, with the corresponding charge to Net Realized Capital Gains as a realized loss. . Derivatives: Foreign exchange forward contracts are derivatives whereby the Company agrees to exchange a specific amount of one currency for a 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 between one and 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 sale 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. Any change in unrealized gains or losses on derivatives purchased or written are credited or charged to unassigned surplus. The Company does not use hedge accounting for its derivatives. . Net Investment Gains (Losses): Net investment gains (losses) consist of net investment income earned and realized gains or losses from the disposition or impairment 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 specific identification. 12 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) --------------------------------------------------------------------------- Investment income due and accrued is assessed for collectibility. The Company writes off investment income due and accrued when it is probable that the amount is uncollectible by recording a charge against investment income in the period such determination is made. Any amounts over 90 days past due which have not been written-off are non-admitted by the Company. As of December 31, 2007 and 2006, no investment income due and accrued was determined to be uncollectible or non-admitted. . Unrealized Gains (Losses): Unrealized gains (losses) on all stocks, bonds carried at NAIC designated values, joint ventures, partnerships, derivatives and foreign currency translation are credited or charged to unassigned surplus. Revenue Recognition: Direct written premiums 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 of Statutory Accounting Principles (SSAP) No. 66, entitled Retrospectively Rated Contracts, the Company estimates accrued retrospectively rated premium adjustments 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, 2007 and 2006, accrued premiums related to the Company's retrospectively rated contracts amounted to $1,305,787 and $1,695,633, respectively, net of non-admitted premium balances of $55,852 and $58,270, respectively. Net written premiums that were subject to retrospective rating features were as follows: ------------------------------------------------------------------------- For the years ended December 31, 2007 2006 2005 ------------------------------------------------------------------------- Net written premiums subject to retrospectively rated premiums $856,074 $722,690 $538,983 Percentage of total net written premiums 11.0% 9.2% 7.6% ------------------------------------------------------------------------- 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 (SSAP 53), the Company records the audit premium estimates as an adjustment to written premium, and earns these premiums immediately. For premium estimates that result in a return of premium to the policyholder, the Company immediately reduces earned premiums. When the 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 53, the Company reviews its ultimate losses with respect to its premium reserves. A liability is established if the premium reserves are not sufficient to cover the ultimate loss projections and associated acquisition expenses. Investment income is not considered in the calculation. For certain lines of business for which an insurance policy is issued on a claims-made basis, the Company offers to its insureds the option to purchase an extended reporting endorsement which permits the extended reporting of insured events after the termination of the claims-made contract. Extended reporting endorsements modify the discovery period of the underlying contract and can be for a defined period (e.g., six months, one year, five years) 13 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) --------------------------------------------------------------------------- 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. Retroactive Reinsurance: Retroactive reinsurance reserves are shown separately in the balance sheet. Gains or losses are recognized in the statement of income. Surplus gains are reported as segregated unassigned surplus until the actual retroactive reinsurance recovered exceeds the consideration paid. As agreed with the Company's domiciliary state, the Company analyzed the current status of all reinsurance treaties entered into on or after January 1, 1994 for which ceded reserves as of December 31, 2004 (including incurred but not reported (IBNR)) exceeded $100 for compliance with the nine month rule as described in SSAP No. 62, entitled Property and Casualty Reinsurance (SSAP 62). Any such treaties for which the documentation required by SSAP 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. In early 2007, the Company discovered that certain foreign reinsurance treaties for the period January 1, 2005 to November 30, 2006 were not in compliance with the nine month rule as described in SSAP 62. As agreed with the Company's domiciliary state, the Company recorded these reinsurance treaties as prospective. The Company is unable to quantify the impact on policyholders' surplus or net income from the aforementioned practices regarding the nine month rule. Deposit Accounting: 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 62, and SSAP No. 75, entitled Reinsurance Deposit Accounting An Amendment to SSAP No. 62, Property and Casualty Reinsurance, the Company records the net consideration paid or received as a deposit asset or liability, respectively. The deposit asset is reported as admitted if i) the assuming company is licensed, credited or qualified by the Insurance Department of the Commonwealth of Pennsylvania; or ii) the collateral (i.e: funds withheld, letters of credit or trusts) meets all the requirements of the Insurance Department of the Commonwealth of Pennsylvania. The deposit asset or liability is adjusted by calculating the effective yield on the deposit to reflect the actual payments made or received to date and the expected future payments with a corresponding credit or charge to other gain in the statement of income. 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 14 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) --------------------------------------------------------------------------- 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 AIUOA. See Note 5 for a description of the AIUOA pooling agreement and related financial statement presentation. Commissions and Underwriting Expenses: Commissions, premium taxes, and certain 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 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 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. The calculation of the Company's tabular discount is based upon the 1979-81 Decennial Mortality Table, and applying a 3.5% interest rate. As of December 31, 2007 and 2006, the reserves for losses (net of reinsurance) subject to tabular discounting were $5,036,294 and $4,362,967, respectively. As of December 31, 2007 and 2006, the Company's tabular discount amounted to $301,856 and $251,412, respectively, all of which were applied against the Company's case reserves. As prescribed by the Pennsylvania Insurance statutes, the calculation of the Company's non-tabular discount is determined as follows: . For accident years 2001 and prior - based upon the industry payout pattern and a 6.0% interest rate. . For accident years 2002 and subsequent - based upon the yield of U.S. Treasury securities between one and twenty years and the Company's own payout pattern. As of December 31, 2007 and 2006, the reserves for losses (net of reinsurance) subject to non-tabular discounting were $5,036,294 and $4,362,967, respectively. As of December 31, 2007, the Company's non-tabular discount amounted to $782,088, of which $269,981 and $512,106 were applied to case reserves and IBNR, respectively. As of December 31, 2006, the Company's non-tabular discount amounted to $692,865, of which $247,498 and $445,367 were applied to case reserves and IBNR, respectively. 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. Revenues, expenses, gains, losses and surplus adjustments are 15 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- translated using weighted average exchange rates. Unrealized gains and losses from translating balances from foreign currency into United States currency are recorded as adjustments to surplus. Realized 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 represent 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 electronic data processing (EDP) equipment, software, leasehold improvements, certain overdue agents' balances, accrued retrospective premiums, certain deposit accounting assets that do not meet all of the Commonwealth of Pennsylvania requirements, prepaid expenses, certain deferred taxes that exceed statutory guidance and unsupported current taxes are designated as non-admitted assets and are directly charged to Unassigned Surplus. EDP equipment primarily consists of non-operating software and is depreciated over its useful life, generally not exceeding 5 years. 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, 2007 and 2006, depreciation and amortization expense amounted to $25,902 and $22,205, respectively, and accumulated depreciation as of December 31, 2007 and 2006 amounted to $132,361 and $157,343, respectively. Reclassifications: Certain balances contained in the 2006 and 2005 financial statements have been reclassified to conform with the current year's presentation. During 2006 the Company recorded a pre-tax charge of $127,714, respectively, relating to the reconciliations and substantiation of certain balance sheet accounts. As agreed with the Company's domiciliary state, the Company has recorded all amounts as changes in estimate for 2006. NOTE 2 - ACCOUNTING ADJUSTMENTS TO STATUTORY BASIS FINANCIAL STATEMENTS ----------------------------------------------------------------------- During 2007, 2006 and 2005, the Company dedicated significant effort to the resolution of the weaknesses in internal controls. As a result of these remediation efforts, management concluded that adjustments should be made to the assets, liabilities, and surplus to policyholders as reported in the Company's 2006, 2005 and 2004 annual statements. The correction of these errors resulted in an after income tax statutory charge of $87,263, $157,094 and $205,585 as of January 1, 2007, 2006, and 2005, respectively. Accounting Adjustments to 2006 and 2005 Statutory Basis Financial Statements ---------------------------------------------------------------------------- In accordance with SSAP No. 3, entitled Accounting Changes and Corrections of Errors, the correction of errors has been reported as an adjustment to unassigned surplus as of January 1, 2007, 2006 and 2005. 16 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The impact of these corrections on surplus to policyholders as of January 1, 2007, 2006 and 2005 are as follows: ----------------------------------------------------------------------- Policyholders Surplus ----------------------------------------------------------------------- Balance at December 31, 2006 $10,420,212 Adjustment to beginning Capital and Surplus: Federal income taxes (87,263) ----------------------------------------------------------------------- Total adjustment to beginning Capital and Surplus (87,263) ----------------------------------------------------------------------- Balance at January 1, 2007, as adjusted $10,332,949 ======================================================================= ----------------------------------------------------------------------- Policyholders Surplus ----------------------------------------------------------------------- Balance at December 31, 2005 $8,120,163 Adjustments to beginning Capital and Surplus: Asset admissibility (108,676) Federal income taxes (48,418) ----------------------------------------------------------------------- Total adjustment to beginning Capital and Surplus (157,094) ----------------------------------------------------------------------- Balance at January 1, 2006, as adjusted $7,963,069 ======================================================================= ----------------------------------------------------------------------- Policyholders Surplus ----------------------------------------------------------------------- Balance at December 31, 2004 $7,376,821 Adjustments to beginning Capital and Surplus: Asset realization (242,195) Revenue recognition (68,690) Federal income taxes 105,300 ----------------------------------------------------------------------- Total adjustment to beginning Capital and Surplus (205,585) ----------------------------------------------------------------------- Balance at January 1, 2005, as adjusted $7,171,236 ======================================================================= An explanation for each of the adjustments for prior period corrections is described below: Asset Admissibility: The Company determined that certain assets should have been non-admitted relating to: (i) custodian agreements that did not comply with state statutes; (ii) securities deposited in a trust account not available to pay policyholder claims and (iii) receivables for high deductible policies. 17 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- Asset Realization: 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. Revenue Recognition: The Company determined that certain revisions to revenues that were recognized in prior periods related to certain long-duration environmental insurance contracts were needed. Federal Income Taxes (Current and Deferred): The change in federal income taxes is primarily related to an increase in provisions for potential tax exposures, and corrections to the deferred income tax inventory and the current tax receivable. Certain corrections to gross deferred tax assets were non-admitted by the Company, resulting in no impact in the table above (see Note 9). NOTE 3 - INVESTMENTS -------------------- Statutory Fair Value of Financial Instruments: ---------------------------------------------- The following table presents the carrying amount and statutory fair values of the Company's financial instruments as of December 31, 2007 and 2006:
------------------------------------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------------------------------------- Carrying Statutory Carrying Statutory Amount Fair Value Amount Fair Value ----------------------------------------------- ------------------------- ------------------------- Assets: Bonds $14,170,023 $14,451,338 $13,457,046 $13,761,650 Common stocks 8,981,169 8,981,169 7,659,381 7,779,918 Preferred stocks 2,020,851 2,020,860 2,024,527 2,025,128 Other invested assets 2,578,384 2,578,384 1,722,869 1,722,869 Cash and short-term investments (60,797) (60,797) (39,285) (39,285) Receivable for securities 8,727 8,727 -- -- Equities and deposits in pool & associations 1,279,140 1,279,140 906,315 906,315 Securities lending collateral 11,710 11,710 9,759 9,759 Liabilities: Securities lending payable $ 12,741 $ 12,741 $ 9,759 $ 9,759 Collateral deposit liability 374,712 374,712 647,179 647,179 Payable for securities 226,874 226,874 247,111 247,111 =======================================================================================================
The methods and assumptions used in estimating the statutory fair values of financial instruments are as follows: . The statutory fair values of bonds, unaffiliated common stocks and preferred stocks are based on NAIC market value*. ---------- * The NAIC market value was used where available. When not available, market values were obtained from third party pricing sources. 18 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- . The statutory fair values of affiliated common stock are based on the underlying equity of the respective entity's financial statements, except for publicly traded affiliates which are based on quoted market values. . Other invested assets include primarily partnerships and joint ventures. Fair values are based on the net asset value of the respective entity's financial statements. . The carrying value of all other financial instruments approximates fair value. The amortized cost and NAIC market values* of the Company's bond investments as of December 31, 2007 and 2006 are outlined in the table below:
---------------------------------------------------------------------------------------------------------------------- Gross Gross NAIC * Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------------------------------------------------------------------------------------------------------------------- As of December 31, 2007: U.S. governments $ 22,935 $ 812 $ 3 $ 23,744 All other governments 395,812 2,977 780 398,009 States, territories and possessions 2,458,221 59,667 2,969 2,514,919 Political subdivisions of states, territories and possessions 3,188,227 122,115 2,540 3,307,802 Special revenue and special assessment obligations and all 6,948,195 139,498 19,929 7,067,764 non-guaranteed obligations of agencies and authorities and their political subdivisions Public utilities 58,961 1,473 -- 60,434 Industrial and miscellaneous 1,097,672 3,649 22,655 1,078,666 ---------------------------------------------------------------------------------------------------------------------- Total bonds, as of December 31, 2007 $14,170,023 $330,191 $48,876 $14,451,338 ====================================================================================================================== As of December 31, 2006: U.S. governments $ 14,226 $ 509 $ 8 $ 14,727 All other governments 387,569 553 11,040 377,082 States, territories and possessions 2,228,746 57,510 3,089 2,283,167 Political subdivisions of states, territories and possessions 3,181,116 92,097 587 3,272,626 Special revenue and special assessment obligations and all 7,462,464 175,485 2,193 7,635,756 non-guaranteed obligations of agencies and authorities and their political subdivisions Public utilities 59,898 886 1,473 59,311 Industrial and miscellaneous 123,027 2,610 6,656 118,981 ---------------------------------------------------------------------------------------------------------------------- Total bonds, as of December 31, 2006 $13,457,046 $329,650 $25,046 $13,761,650 ======================================================================================================================
As of December 31, 2007 and 2006, the actual fair market value, principally priced by Interactive Data Corporation, a third party rating source, for the above listed securities amounted to $14,452,377 and $13,761,136, respectively. ---------- * The NAIC market value was used where available. When not available, market values were obtained from third party pricing sources. 19 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The Company had non-admitted assets of $27,755 and $26,613 relating to bonds as of December 31, 2007 and 2006, respectively. 20 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The amortized cost and NAIC market values* of bonds at December 31, 2007, 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. --------------------------------------------------------------------- Amortized NAIC Cost Market Value* -------------------------------------- ---------------------------- Due in one year or less $ 118,473 $ 118,908 Due after one year through five years 509,002 517,091 Due after five years through ten years 1,921,897 1,958,726 Due after ten years 10,635,297 10,863,916 Mortgaged-backed securities 1,013,109 992,697 Non-Admitted Assets (27,755) -- -------------------------------------- --------------------------- Total bonds $14,170,023 $14,451,338 ====================================== =========================== Proceeds from sales and gross realized gain and gross realized losses were as follows:
For the years ended December 31, 2007 2006 2005 -------------------------------------------------------------------------------------------------------------- Equity Equity Equity Bonds Securities Bonds Securities Bonds Securities ---------------------------------------------------------- ----------------------- ----------------------- Proceeds from sales $4,680,678 $245,854 $1,389,565 $153,541 $2,114,173 $585,696 Gross realized gains 1,071 33,315 14,274 24,525 52,643 43,085 Gross realized losses 40,525 9,273 15,247 9,235 21,356 8,592 --------------------------------------------------------------------------------------------------------------
---------- * The NAIC market value was used where available. When not available, market values were obtained from third party pricing sources. 21 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The cost or amortized cost and market values* of the Company's common and preferred stocks, as of December 31, 2007 and 2006, are set forth in the table below:
December 31, 2007 ------------------------------------------------------------------------------------------------- Cost or Gross Gross NAIC * Amortized Unrealized Unrealized Market Non-Admitted Carrying Cost Gains Losses Value Asset Value ------------------------------------------------------------------------------------------------- Common stocks: ------------- Affiliated $2,427,849 $6,240,605 $311,247 $8,357,207 $ 3,489 $8,353,718 Non-affiliated 588,593 90,400 4,683 674,310 46,859 627,451 ------------------------------------------------------------------------------------------------- Total $3,016,442 $6,331,005 $315,930 $9,031,517 $50,348 $8,981,169 ================================================================================================= Preferred stocks: ---------------- Affiliated $2,010,247 $ -- $ -- $2,010,247 $ -- $2,010,247 Non-affiliated 10,604 9 -- 10,613 -- 10,604 ------------------------------------------------------------------------------------------------- Total $2,020,851 $ 9 $ -- $2,020,860 $ -- $2,020,851 =================================================================================================
December 31, 2006 ------------------------------------------------------------------------------------------------- Cost or Gross Gross NAIC * Amortized Unrealized Unrealized Market Non-Admitted Carrying Cost Gains Losses Value Asset Value ------------------------------------------------------------------------------------------------- Common stocks: ------------- Affiliated $2,171,678 $4,871,859 $91,334 $6,952,203 $ -- $6,952,203 Non-affiliated 696,219 91,418 5,678 781,959 74,781 707,178 ------------------------------------------------------------------------------------------------- Total $2,867,897 $4,963,277 $97,012 $7,734,162 $74,781 $7,659,381 ================================================================================================= Preferred stocks: ---------------- Affiliated $2,014,000 $ 601 $ -- $2,014,601 $ -- $2,014,000 Non-affiliated 10,367 160 -- 10,527 -- 10,527 ------------------------------------------------------------------------------------------------- Total $2,024,367 $ 761 $ -- $2,025,128 $ -- $2,024,527 =================================================================================================
As of December 31, 2007 and 2006, the Company held derivative investments of $93,517 and $69,803, respectively. ---------- * The NAIC market value was used where available. When not available, market values were obtained from third party pricing sources. 22 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The fair market value together with the aging of the gross pre-tax unrealized losses with respect to the Company's bonds and stocks as of December 31, 2007 and 2006 is set forth in the table below:
12 Months or Less Greater than 12 Months Total -------------------------------------------------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses ---------------------------------------------------------------- ----------------------- ----------------------- As of December 31, 2007: U. S. governments $ 9,977 $ 3 $ -- $ -- $ 9,977 $ 3 All other governments -- -- 32,805 780 32,805 780 States, territories and possessions 116,613 468 96,308 2,501 212,921 2,969 Political subdivisions of states, 369,718 2,521 9,309 19 379,027 2,540 territories and possessions Special revenue 1,314,924 19,046 42,568 883 1,357,492 19,929 Public utilities -- -- -- -- -- -- Industrial and miscellaneous 731,326 22,631 1,701 24 733,027 22,655 ------------------------------------------------------------ ---------------------- ---------------------- Total bonds 2,542,558 44,669 182,691 4,207 2,725,249 48,876 ------------------------------------------------------------ ---------------------- ---------------------- Affiliated 104,072 50,211 213,576 261,036 317,648 311,247 Non-affiliated 47,460 4,683 -- -- 47,460 4,683 ------------------------------------------------------------ ---------------------- ---------------------- Total common stocks 151,532 54,894 213,576 261,036 365,108 315,930 ------------------------------------------------------------ ---------------------- ---------------------- Preferred stock -- -- -- -- -- -- ------------------------------------------------------------ ---------------------- ---------------------- Total stocks 151,532 54,894 213,576 261,036 365,108 315,930 ------------------------------------------------------------ ---------------------- ---------------------- Total bonds and stocks $2,694,090 $99,563 $ 396,267 $265,243 $3,090,357 $364,806 ============================================================ ====================== ====================== As of December 31, 2006: U. S. governments $ 3,019 $ 8 $ -- $ -- $ 3,019 $ 8 All other governments 25,045 524 315,647 10,516 340,692 11,040 States, territories and possessions 115,790 402 104,817 2,687 220,607 3,089 Political subdivisions of states, 206,240 495 16,671 92 222,911 587 territories and possessions Special revenue 363,838 840 131,702 1,353 495,540 2,193 Public utilities -- -- 52,749 1,473 52,749 1,473 Industrial and miscellaneous -- -- 7,808 6,656 7,808 6,656 ------------------------------------------------------------ ---------------------- ---------------------- Total bonds 713,932 2,269 629,394 22,777 1,343,326 25,046 ------------------------------------------------------------ ---------------------- ---------------------- Affiliated 5,849 1,165 377,551 90,169 383,400 91,334 Non-affiliated 5,055 4,373 99,444 1,305 104,499 5,678 ------------------------------------------------------------ ---------------------- ---------------------- Total common stocks 10,904 5,538 476,995 91,474 487,899 97,012 ------------------------------------------------------------ ---------------------- ---------------------- Preferred stock -- -- -- -- -- -- ------------------------------------------------------------ ---------------------- ---------------------- Total stocks 10,904 5,538 476,995 91,474 487,899 97,012 ------------------------------------------------------------ ---------------------- ---------------------- Total bonds and stocks $ 724,836 $ 7,807 $1,106,389 $114,251 $1,831,225 $122,058 ============================================================ ====================== ======================
23 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (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); or 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 the Company's management, it is probable that the Company may not realize a full recovery on its investment, irrespective of the occurrence of one of the foregoing events. As of December 31, 2007, the Company has both the ability and intent to hold these investments to recovery. The Company reported write-downs on its common and preferred stock investments due to an other-than-temporary decline in fair value of $10,659, $7,664 and $2,652 during 2007, 2006 and 2005, respectively, and reported write-downs on its bond investments due to an other-than-temporary decline in fair value of $5,664, $561 and $0 in 2007, 2006 and 2005, respectively. During 2007, 2006 and 2005, the Company reported the following write-downs on its joint ventures and partnership investments due to an other-than-temporary decline in fair value: --------------------------------------------------------------------------- For the years ended December 31, 2007 2006 2005 --------------------------------------------------------------------------- Matlin Patterson Global Opportunities Partners $ -- $1,143 $ -- DLJ Merchant Banking Partners 3,454 -- 2,923 North Castle II 4,162 -- -- Peake Joint Venture 2,773 -- -- Exponent Private Equity Partners, LP 1,990 -- -- Warburg Equity LP 1,656 -- -- 21st Century LP 1,030 -- -- Castleriggs Partners -- -- 2,412 Healthcare Partners III -- -- 1,491 Sandler Capital IV -- -- 1,353 RCBA Strategic Partners -- -- 1,242 Polyventures II -- -- 1,184 Items less than $1.0 million 5,616 1,747 661 --------------------------------------------------------------------------- Total $20,681 $2,890 $11,266 =========================================================================== As of December 31, 2007 and 2006, securities with a market value of $12,333 and $9,223, respectively, were on loan. The Company receives cash collateral in an amount in excess of the fair value of the securities lent. The affiliated lending agent monitors the daily fair value of securities lent with respect to the collateral value and obtains additional collateral as necessary to ensure that collateral is maintained at a minimum of 102% for domestic transactions and 24 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- 105% for cross-border transactions of the value of the securities lent. The collateral is held by the lending agent for the benefit of the Company and is not available for the general use of the Company (restricted). 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. The securities lending transactions are accounted for as secured borrowings as required by SSAP No. 91. The decline in the fair value of the investments in the securities lending collateral account has been reported as a non-admitted asset in the financial statements presented herein. In response to the lack of liquidity for certain investments in the current market environment, new securities lending collateral cash flow is being directed into short-term investments, and the level of liquidity in the securities lending collateral program has been increased significantly by repositioning to short-term investments (predominantly overnight commercial paper and time deposits). This repositioning resulted in the sale of certain long-term investments, primarily mortgage-backed bonds, in the third quarter of 2007, which generated the pretax realized losses. While these mortgage-backed bonds generally continued to be performing and highly rated, their liquidity and fair value was adversely affected by recent events in the mortgage-backed securities market. The Company's ultimate parent, AIG, deposited funds in the collateral custodial account equal to the pretax realized losses due to sales incurred between August 1 and December 31, 2007, and the Company recorded their allocated portion of such funds as capital contributions totaling $142. AIG has agreed to make additional contributions up to an aggregate limit of $500,000 to offset losses incurred by its insurance subsidiaries from securities lending collateral investments. Management expects that the higher level of liquidity currently maintained in the collateral will allow the Company to hold investments that are currently in an unrealized loss position until they can reasonably be expected to recover their value. Securities carried at an amortized cost of $2,562,483 and $2,569,672 were deposited with regulatory authorities as required by law as of December 31, 2007 and 2006, respectively. During 2007, 2006 and 2005, included in Net Investment Income Earned were investment expenses of $8,689, $6,699 and $6,226, respectively, and interest expense of $116,601, $109,876 and $88,991, respectively. In the course of the Company's asset management, securities are sold and reacquired within 30 days of the sale date to enhance the Company's total return on its investment portfolio. The details by NAIC designation 3 or below of securities sold during the year ended December 31, 2006 and reacquired within 30 days of the sale date are: -------------------------------------------------------------------------------- Number of Book Value of Cost of Securities Transactions Securities Sold Repurchsed Gain (Loss) -------------------------------------------------------------------------------- Bonds: NAIC 3 23 $12,359 $13,017 $663 NAIC 4 1 $ 736 $ 726 $ 14 NAIC 5 -- $ -- $ -- $ -- NAIC 6 -- $ -- $ -- $ -- ================================================================================ There were no such sales during 2007. 25 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 4 - RESERVES FOR LOSSES AND LAE ------------------------------------- A reconciliation of the Company's reserves for losses and LAE as of December 31, 2007, 2006 and 2005 is set forth in the table below: --------------------------------------------------------------------------------
----------------------------------------------------------------------------------------- 2007 2006 2005 ----------------------------------------------------------------------------------------- Reserves for losses and LAE, beginning of year $12,901,979 $11,786,300 $ 9,811,368 Adjustments for prior period corrections -- -- (174,946) Incurred losses and LAE related to: Current accident year 5,280,665 5,295,026 5,005,099 Prior accident years 51,911 177,865 1,340,860 ----------------------------------------------------------------------------------------- Total incurred losses and LAE 5,332,576 5,472,891 6,345,959 ----------------------------------------------------------------------------------------- Paid losses and LAE related to: Current accident year (1,426,309) (1,251,773) (1,274,795) Prior accident years (2,955,994) (3,105,439) (2,921,286) ----------------------------------------------------------------------------------------- Total paid losses and LAE (4,382,303) (4,357,212) (4,196,081) ----------------------------------------------------------------------------------------- Reserves for losses and LAE, as of December 31, $13,852,252 $12,901,979 $11,786,300 =========================================================================================
Estimated ultimate incurred losses and LAE attributable to insured events of prior years increased by $51,911, $177,865 and $1,340,860 during 2007, 2006 and 2005, respectively. For all three years the Company experienced adverse loss and LAE reserve development. For 2007, the adverse development primarily related to accident years 2003 and prior, partially offset by favorable development from accident years 2004 through 2006. The favorable developments for accident year 2004 through 2006 were spread across many classes of business, primarily related to directors and officers' liability and related management liability classes of business. The adverse developments from accident years 2003 and prior related primarily to the Company's excess casualty and primary workers compensation classes of business. For 2006 and 2005, the 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 and 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 (see Note 12B for further information concerning the Company's asbestos and environmental reserves). As of December 31, 2007, 2006 and 2005, the Company's reserves for losses and LAE have been reduced by anticipated salvage and subrogation of $211,061, $209,953 and $198,497, respectively. As of December 31, 2007, 2006 and 2005, the Company's reserves for losses and LAE have been reduced by credits for reinsurance recoverable of $6,206,161, $6,572,917 and $7,743,937, respectively (exclusive of inter-company pooling). 26 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 5 - RELATED PARTY TRANSACTIONS ------------------------------------ A. National Union Inter-company Pooling Agreement ----------------------------------------------- The Company, as well as certain insurance affiliates, 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 the Company (the lead pooling participant). In turn, each pooling participant receives from the Company their percentage share of the pooled business. In connection therewith, the Company's share of the pool is 38.0%. 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 19445 38.0% American Home Assurance Company (AHAC) 19380 36.0% Commerce and Industry Insurance Company (C&I) 19410 10.0% New Hampshire Insurance Company (NHIC) 23841 5.0% The Insurance Company of the State of Pennsylvania (ISOP) 19429 5.0% AIG Casualty Company (formerly Birmingham Fire Insurance Company of Pennsylvania) (AIG Casualty) 19402 5.0% AIU Insurance Company (AIUI) 19399 1.0% American International South Insurance Company 40258 0.0% Granite State Insurance Company 23809 0.0% Illinois National Insurance Company 23817 0.0% ==============================================================================================
American International Pacific Insurance Company (AIP) terminated its zero percentage participation in the National Union Inter-Company Pooling Agreement (the Commercial Pool) effective July 1, 2007. Commercial risks ceded to the Commercial Pool by AIP prior to its exit will remain in that pool until their natural expiry. AIP's cessions of personal lines risks to the Commercial Pool were commuted and 100% ceded to AIG's Personal Lines Pool, which AIP joined effective July 1, 2007, also with a zero percentage participation. Effective January 1, 2008 AIUI will cease to be a member of the Commercial Pool. Cessions from AIUI to the Commercial Pool will be run off and AIUI's 1% participation will be retroactively reduced to zero. The pooling participation of C&I will be retroactively increased to 11%. 27 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- B. American International Underwriters Overseas Association Pooling ----------------------------------------------------------------- Arrangement ------------ AIG formed the AIUOA, a Bermuda unincorporated association, in 1976, as the pooling mechanism for AIG's international general insurance operations. A list of all members in the 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) 23841 12.0% National Union Fire Insurance Company of Pittsburgh, PA. 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, AHAC, 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, unearned premium reserves, funds withheld, reinsurance recoverable, ceded balances payable and retroactive reinsurance as a net equity interest in Equities in Underwriting Pools and Associations; and (c) loss reserves, unearned premium reserves, funds withheld, reinsurance recoverable, ceded balances payable and retroactive reinsurance are recorded on a gross basis. As of December 31, 2007 and 2006, the Company's interest in the AIUOA amounted to $1,279,140 and $906,315, respectively, gross of the following amounts and after consideration of the National Union inter-company pooling agreement: ------------------------------------------------------------------------------- As of December 31, 2007 2006 ------------------------------------------------------------------------------- Loss and LAE reserves $924,962 $821,515 Unearned premium reserves $374,974 $356,699 Funds held $ 25,212 $ 18,696 Ceded balances payable $109,151 + Reinsurance recoverable $(42,037) + Retroactive reinsurance $ (1,020) + =============================================================================== + Beginning December 31, 2007, the Company increased the accounts recorded in connection with AIUOA to facilitate the detailed reporting in Schedule F. 28 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- Additionally, the Company holds 16.9% of the issued share capital of AIG Europe S.A. for the beneficial interest of the AIUOA. As of December 31, 2007 and 2006, the Company's interest in AIG Europe S.A. amounted to $110,946 and $122,464, respectively. 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 the 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. 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. 29 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The guarantees that were in effect as of December 31, 2007 are included in the table below: --------------------------------------------------------------------------------
Policyholder Invested Estimated Policyholders' Guaranteed Company Date Issued Obligations Assets Loss Surplus ----------------------------------------------------------------------------------------------------------------------------- AIG Global Trade and Political Risk Insurance Company (++) 11/5/97 $ -- $ 327,013 $ -- $ 164,274 American International Insurance Company of Puerto Rico 11/5/97 246,973 183,887 -- 128,034 Audubon Insurance Company 11/5/97 63,846 77,927 -- 42,386 AIG Europe (Ireland) Ltd. 12/15/97 715,788 627,093 -- 221,497 ** New Hampshire Indemnity Company, Inc. 12/15/97 151,669 211,611 -- 102,267 La Meridional Compania Argentina de Seguros S.A. 1/6/98 186,071 49,600 -- 65,991 ** Landmark Insurance Company 3/2/98 89,837 351,941 -- 146,008 AIG Excess Liability Insurance Company Ltd. (formerly known as Starr Excess Liability Insurance International Ltd.) 7/29/98 491,479 3,096,453 -- 1,248,076 AIG Excess Liability Insurance International Ltd.(formerly known as Starr Excess Liability Insurance International Ltd.) 5/28/98 2,605,333 692,798 -- 320,999 AIG Life Insurance Company (+) 7/13/98 7,112,194 7,509,262 -- 537,684 * American International Life Assurance Company of New York 7/13/98 6,166,077 6,794,902 -- 662,416 AIG Poland Insurance Company, S.A. 9/15/98 14,354 41,217 -- 41,046 ** AIG Bulgaria Insurance and Reinsurance Company 12/23/98 6,313 6,923 -- 10,930 ** AIG Romania Insurance Company 12/23/98 15,208 5,723 -- 8,887 ** AIG Slovakia Insurance Company A.S. 12/23/98 -- -- -- 9,050 ** American International Assurance Co (Bermuda) Ltd. 8/23/99 13,805,116 18,729,253 -- 4,221,961 ** American International Assurance Co (Australia) Ltd. 11/1/02 546,115 532,051 -- 227,222 ** First American Czech Insurance Company, Rt. 9/15/98 442,815 532,293 -- 86,236 ** AIG Life Insurance Company (Russia) ZAO (w/d 2/13/03) 12/23/98 215,100 254,679 -- 36,586 ** First American-Hungarian Insurance Company, Rt. 9/15/98 165,025 185,840 -- 44,226 ** AIG Ukraine Insurance Company 10/1/00 7,087 -- -- 5,039 ** ------------------------------------------------------------------------------------------------------------------------------- Total guarantees $33,046,400 $40,210,466 $ -- $8,330,815 ===============================================================================================================================
* The guaranteed company is also backed by a support agreement issued by AIG. ** Policyholders' surplus is based on local GAAP financial statements. + This guarantee was terminated as to policies written after December 29, 2006. ++ This guarantee was terminated as to policies written after November 30, 2007. 30 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- D. Investments in Affiliates ------------------------- As of December 31, 2007 and 2006, the Company's preferred and common stock investments with its affiliates together with the related change in unrealized appreciation, net of $3,489 of non-admitted balances were as follows:
------------------------------------------------------------------------------------------------------- Actual Carrying Value Ownership Cost at December 31 Change in Affiliated Investment Percent 2007 2007 Equity 2007 ------------------------------------------------------------------------------------------------------- Preferred stocks: Everest Broadband Inc 100.0% $ 10,247 $ 10,247 $ (4,354) AIG Capital Corporation 100.0% 2,000,000 2,000,000 -- ------------------------------------------------------------------------------------------------------- Total preferred stocks - affiliates 2,010,247 2,010,247 (4,354) ------------------------------------------------------------------------------------------------------- Common stocks: International Lease Finance Corporation 32.8% 793,240 2,203,737 46,549 Lexington Insurance Company 70.0% 258,046 3,185,721 727,569 United Guaranty Corporation 45.9% 97,833 454,556 224,087 AIU Insurance Company 32.0% 101,990 446,078 54,901 American International Specialty Lines Insurance Company 70.0% 154,297 450,072 148,340 Starr Excess Liability Insurance Company Ltd. 100.0% 385,453 1,248,076 298,531 Pine Street Real Estate Holding Corp. 22.1% 3,139 -- (1,974)(a) 21st Century Insurance Group 32.0% 467,720 211,957 (165,594) American International Realty, Inc. 22.1% 26,456 35,346 4,472 Eastgreen, Inc. 9.4% 8,975 7,004 (2,966) Everest Broadband Inc. 15.2% 7,629 -- (3,875)(a) AIG Lodging Opportunities, Inc. 100.0% 1,570 -- (6,250)(a) AIG Domestic Claims 100.0% 118,000 73,635 73,635 National Union Fire Ins. Company of Vt. 100.0% 1,000 31,444 4,315 National Union Fire Ins. Company of La. 100.0% 2,501 6,092 (225) ------------------------------------------------------------------------------------------------------- Total common stocks - affiliates 2,427,849 8,353,718 1,401,515 ------------------------------------------------------------------------------------------------------- Total common and preferred stock - affiliates $4,438,096 $ 10,363,965 $1,397,161 =======================================================================================================
(a) Balance not admitted 31 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) --------------------------------------------------------------------------------
Actual Carrying Value Ownership Cost at December 31 Change in Affiliated Investment Percent 2006 2006 Equity 2006 ------------------------------------------------------------------------------------------------------- Preferred stocks: Everest Broadband Inc 100.0% $ 14,000 $ 14,601 $ 14,601 AIG Life Insurance Company 100.0% -- -- (100,000) AIG Capital Corporation 100.0% 2,000,000 2,000,000 ------------------------------------------------------------------------------------------------------- Total preferred stocks - affiliates 2,014,000 2,014,601 (85,399) ------------------------------------------------------------------------------------------------------- Common stocks: International Lease Finance Corporation 32.8% 793,240 2,157,188 199,333 Lexington Insurance Company 70.0% 257,973 2,458,152 662,757 United Guaranty Corporation 45.9% 74,893 230,469 (42,150) AIU Insurance Company 32.0% 40,000 391,177 42,324 American International Specialty Lines Insurance Company 70.0% 109,497 301,732 33,278 Starr Excess Liability Insurance Company Ltd. 100.0% 385,453 949,545 235,344 Pine Street Real Estate Holding Corp. 22.1% 3,139 1,974 (12,990) 21st Century Insurance Group 32.0% 467,720 377,551 31,445 American International Realty, Inc. 22.1% 20,736 30,874 13,105 Eastgreen, Inc. 9.4% 8,975 9,970 202 Everest Broadband Inc 15.2% 3,876 3,875 3,875 AIG Lodging Opportunities, Inc. 100.0% 2,676 6,250 5,908 National Union Fire Ins. Company of Vt. 100.0% 1,000 27,129 8,607 National Union Fire Ins. Company of La. 100.0% 2,500 6,317 263 ------------------------------------------------------------------------------------------------------ Total common stocks - affiliates 2,171,678 6,952,203 1,181,301 ------------------------------------------------------------------------------------------------------ Total common and preferred stock - affiliates $4,185,678 $8,966,804 $1,095,902 ======================================================================================================
Investments in affiliates are included in common stocks based on the net worth of the entity except for the Company's 2006 investment in 21st Century Insurance Group, which was a publicly traded affiliate as of December 31, 2006. This investment was valued as of December 31, 2006 based on the quoted market value, less a discount as prescribed by NAIC SAP (see Note 2). The remaining equity interest in these investments, except for Everest Broadband Inc., is owned by other affiliated companies, which are wholly- owned by the Ultimate Parent. On May 15, 2007, the Company's Ultimate Parent entered into a definitive merger agreement with 21st Century Insurance Group (21st Century) to acquire the outstanding 39.3% publicly held shares of 21st Century for $22.00 per share in cash. On that date, the Ultimate Parent and its subsidiaries owned approximately 60.7% of the outstanding shares of 21st Century, including approximately 32.0% of the outstanding shares that are owned by the Company. On September 27, 2007, the Company's Ultimate Parent completed the merger, the Ultimate Parent and its subsidiaries owned 100% of 21st Century, and 21st Century requested that the New York Stock Exchange delist its shares. At December 31, 2007, the Ultimate Parent contributed its 39.3% interest in 21st Century to certain of its subsidiaries; however, the Company's ownership percentage did not change. Under applicable 32 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- statutory accounting principles, the Company's carrying value of its investment in 21st Century was revalued from quoted market value less a discount to a statutory net worth basis, resulting in a decrease of approximately $226,238 to the Company's June 30, 2007 policyholder's surplus. The Company has ownership interests in certain affiliated real estate holding companies. 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, 2007 and 2006, the Company's total investments in partnerships with affiliated entities where AIG's interest was greater than 10.0% amounted to $941,485 and $664,669, respectively. E. Other Related Party Transactions -------------------------------- The following table summarizes transactions (excluding reinsurance and cost allocation transactions) that occurred during 2007 and 2006 between the Company and any affiliated companies that exceeded half of one percent of the Company's admitted assets as of December 31, 2007 and 2006 and all capital contributions and dividends:
Assets Received by Assets Transferred by the Company the Company ---------------------------------------------------------------------------------------------------------- Date of Name of Statement Statement Transaction Explanation of Transaction Affiliate Value Description Value Description ---------------------------------------------------------------------------------------------------------- 03/30/07 Dividend AIGCIG $ -- -- $ 500,000 Cash 05/31/07 Dividend AIGCIG -- -- 75,000 Cash 09/12/07 Dividend AIGCIG -- -- 175,000 Cash 12/03/07 Dividend AIGCIG -- -- 370,000 Cash 12/03/07 Dividend LEX 280,000 Cash -- -- 09/30/07 Purchase of investment AIGSL 1,009,286 Bonds 1,009,286 Cash 12/17/07 Purchase of investment (1) ISOP 59,000 Investment 59,000 Cash 12/17/07 Purchase of investment (1) AHAC 59,000 Investment 59,000 Cash 12/31/07 Capital contribution AIG 170,440 In kind -- -- 08/16/07 Capital contribution AIG 60,550 In kind -- -- 10/24/07 Capital contribution AIGCIG 133 In kind -- -- 12/31/07 Capital contribution AIGCIG 9 In kind -- -- 12/26/06 Bond purchase NUF VT 291,883 Bond 291,883 Cash ==========================================================================================================
LEX: Lexington Insurance Company NUF VT: National Union Fire Insurance Company of Vermont AIGSL: AIG Security Lending (1) Purchase of AIG Domestic Claims from ISOP and AHAC ================================================================================ 33 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The Company also reinsures risks and assumes reinsurance from other affiliates. As agreed upon with the Insurance Department of the Commonwealth of Pennsylvania, transactions with Union Excess Reinsurance Company Ltd. (Union Excess) and Richmond Insurance Company (Barbados) Limited (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, 2007, 2006 and 2005. In the ordinary course of business, the Company utilizes AIG Technology, Inc., AIG Global Investment Corp., AIG Global Trust Services, Limited, and AIG Domestic Claims, Inc., for data center systems, investment services, salvage and subrogation, and claims management. In connection with these services, the fees incurred by the Company to these affiliates during 2007, 2006 and 2005 are outlined in the table below: ------------------------------------------------------------------- For the years ended December 31, 2007 2006 2005 ------------------------------------------------------------------- AIG Technology, Inc. $ 30,148 $ 25,926 $ 28,183 AIG Global Investment Corporation 7,139 5,663 5,188 AIG Global Trust Services, Limited -- 65 143 AIG Domestic Claims, Inc. 116,032 123,744 116,732 ------------------------------------------------------------------- Total $153,319 $155,398 $150,246 =================================================================== As of December 31, 2007 and 2006, short-term investments included amounts invested in the AIG Managed Money Market Fund of $91,555 and $35,903, respectively. As of December 31, 2007, other invested assets included $241,558 of loans with an affiliate. The proceeds from the loans were used by the affiliate for the acquisition of life settlements. Federal and foreign income taxes payable to AIG as of December 31, 2007 and 2006 amounted to $315,659 and $214,453, respectively. During 2007 and 2005, the Company sold premium receivables without recourse to AI Credit Corporation and recorded losses on these transactions in the table that follows: ---------------------------------------------------- As of December 31, 2007 2006 2005 ---------------------------------------------------- Accounts receivable sold $56,857 $-- $202,251 Losses recorded 1,694 -- 3,627 ---------------------------------------------------- There were no premium receivable sales in 2006. 34 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- As of December 31, 2007 and 2006, the Company had the following balances receivable/payable from/to its affiliates (excluding reinsurance transactions). These balances are net of non-admitted amounts of $75,216 and $57,852, respectively, at December 31, 2007 and 2006. ------------------------------------------------------------------------- As of December 31, 2007 2006 ------------------------------------------------------------------------- Balances with pool member companies $ 32,362 $502,595 Balances with less than 0.5% of admitted assets 233,487 192,940 ------------------------------------------------------------------------- Receivable from parent, subsidiaries and affiliates $265,849 $695,535 ========================================================================= Balances with pool member companies $104,239 $ -- Balances with less than 0.5% of admitted assets 367,926 295,246 ------------------------------------------------------------------------- Payable to parent, subsidiaries and affiliates $472,165 $295,246 ========================================================================= The Company contributed capital of $44,800 to American International Lines Insurance Company (AISLIC) subsequent to December 31, 2007 but prior to the filing of its Annual Statement as a result of events relating to AISLIC's December 31, 2007 financial position. This capital contribution has been reflected in affiliated common stocks and payable to affiliates at December 31, 2007. On March 31, 2005 the Company and certain of its affiliates entered into a settlement agreement with an insured to release all the asbestos claims and other products coverage potentially available under the applicable insurance policies by making specified payments to the insured on a quarterly basis from March 2005 to December 2016. On March 31, 2006 the insured entered into a receivable sale agreement with A.I. Credit Corporation. (a wholly owned AIG subsidiary) to purchase the insured's March 2006 to March 2010 receivables of $117,000 for $100,000. On June 8, 2008 the insured entered into a further receivable sale agreement with A.I. Credit Corporation to purchase the insured's June 2010 to March 2013 receivables of $130,000 for $97,321. 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. 35 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- During 2007, 2006 and 2005, the Company's net premiums written and net premiums earned were comprised of the following:
For the years ended December 31, 2007 2006 2005 -------------------------------------------------------------------------------------------------------------------- Written Earned Written Earned Written Earned -------------------------------------------------------------------------------------------------------------------- Direct premiums $ 5,450,523 $ 5,319,330 $ 5,405,358 $ 5,504,457 $ 5,588,284 $ 5,838,904 Reinsurance premiums assumed: Affiliates 22,972,380 22,951,382 23,265,173 22,521,061 22,153,164 21,595,324 Non-affiliates 528,953 493,411 420,462 478,011 494,482 548,499 -------------------------------------------------------------------------------------------------------------------- Gross premiums 28,951,856 28,764,123 29,090,993 28,503,529 28,235,930 27,982,727 -------------------------------------------------------------------------------------------------------------------- Reinsurance premiums ceded: Affiliates 19,911,172 19,869,772 20,068,406 19,568,693 19,860,111 19,676,550 Non-affiliates 1,264,103 1,227,602 1,208,740 1,233,635 1,288,840 1,270,214 -------------------------------------------------------------------------------------------------------------------- Net premiums $ 7,776,581 $ 7,666,749 $ 7,813,847 $ 7,701,201 $ 7,086,979 $ 7,035,963 =====================================================================================================================
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, 2007 and 2006 with the return of the unearned premium reserve is as follows:
Assumed Reinsurance Ceded Reinsurance Net --------------------------------------------------------------------------------------------------- Unearned Unearned Unearned Premium Commission Premium Commission Premium Commission Reserves Equity Reserves Equity Reserves Equity --------------------------------------------------------------------------------------------------- December 31, 2007: Affiliates $11,427,780 $1,307,472 $ 9,978,773 $1,198,833 $1,449,007 $ 108,639 Non affiliates 869,926 99,530 518,666 $ 62,312 351,260 37,218 --------------------------------------------------------------------------------------------------- Totals $12,297,706 $1,407,002 $10,497,439 $1,261,145 $1,800,267 $ 145,857 =================================================================================================== December 31, 2006: Affiliates $11,406,782 $1,252,193 $ 9,937,373 $1,155,238 $1,469,409 $ 96,955 Non affiliates 834,384 91,595 482,165 56,052 352,219 35,543 --------------------------------------------------------------------------------------------------- Totals $12,241,166 $1,343,788 $10,419,538 $1,211,290 $1,821,628 $ 132,498 ===================================================================================================
36 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- As of December 31, 2007 and 2006, 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, 2007: Affiliates $ 9,978,773 $ 206,186 $36,527,584 Non-affiliates 518,669 426,263 2,798,160 ------------------------------------------------------------- Total $10,497,442 $ 632,449 $39,325,744 ============================================================= December 31, 2006: Affiliates $ 9,937,373 $ 86,964 $35,619,288 Non-affiliates 482,165 427,234 3,022,524 ------------------------------------------------------------- Total $10,419,538 $ 514,198 $38,641,812 ============================================================= The Company's unsecured reinsurance recoverables as of December 31, 2007 in excess of 3.0% of its capital and surplus is set forth in the table below:
----------------------------------------------------------------------------------- NAIC Co. Reinsurer Code Amount ----------------------------------------------------------------------------------- Affiliates: National Union Pool -- $43,392,370 American International Insurance Company 32220 417,286 American International Underwriters Overseas, Ltd. -- 385,925 New Hampshire Indemnity Company 23833 174,268 AIG Global Trade And Political Risk Ins Company 10651 157,721 American International Life Assurance Co. of NY (US) 60607 26,806 Transatlantic Reinsurance Company 19453 290,273 United Guaranty Insurance Company 11715 12,040 Hartford Steam Boiler Inspection And Insurance Co. 11452 9,834 Audubon Insurance Company 19933 6,928 AIG Excess Liability Insurance Company, Ltd. 10932 2,775 Ascot Syndicate Lloyds 1414 -- 1,604 AIUOA -- 1,387 AIG General Ins Co (Thailand) (F/Universal) -- 1,342 Other affiliates less than $1.0 million -- 4,308 ----------------------------------------------------------------------------------- Total affiliates $44,884,867 Non-Affilliates: -- ----------------------------------------------------------------------------------- Total affiliates and non-affiliates $44,884,867 ===================================================================================
37 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- During 2007, 2006 and 2005, the Company reported in its Statements of Income $152, $13,003 and $45,537, respectively, of statutory underwriting losses, which were comprised of premiums earned of $0, $0 and $(1,805), respectively, less losses incurred of $152, $13,003 and $43,732, respectively, as a result of commutations with the following reinsurers: -------------------------------------------------------------------- Company 2007 2006 2005 -------------------------------------------------------------------- Trenwick America $ -- $ 8,740 $ -- Alea Group -- 2,567 -- SCOR Reinsurance Company -- -- 44,800 Other reinsurers less than $1.0 million 152 1,696 737 -------------------------------------------------------------------- Total $152 $13,003 $45,537 ==================================================================== As of December 31, 2007 and 2006, the Company had reinsurance recoverables on paid losses in dispute of $86,207 and $82,832, respectively. During 2007, 2006 and 2005, the Company wrote-off reinsurance recoverable balances of $14,497, $32,562 and $68,909, respectively. 38 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 7 - RETROACTIVE REINSURANCE -------------------------------- As of December 31, 2007 and 2006, the Company reported the following activity and balances with respect to its retroactive reinsurance arrangements:
2007 2006 ---------------------------------------------------------------------------------------------- Assumed Ceded Assumed Ceded --------------------------------------------------------------------- --------------------- Reserves transferred: Initial reserves $ 228,366 $478,934 $ 228,366 $478,934 Adjustments - prior year(s) (183,349) (26,545) (180,756) (35,428) Adjustments - current year 16,465 17,390 (2,592) 8,883 --------------------------------------------------------------------- --------------------- Balance as of December 31, 61,482 469,779 45,018 452,389 --------------------------------------------------------------------- --------------------- Paid losses recovered: Prior year(s) 20,485 387,702 12,890 374,849 Current year 8,817 13,140 7,595 12,853 --------------------------------------------------------------------- --------------------- Total recovered as of December 31, 29,302 400,842 20,485 387,702 --------------------------------------------------------------------- --------------------- Carried reserves as of December 31, $ 32,180 $ 68,937 $ 24,533 $ 64,687 ===================================================================== ===================== Consideration paid or received: Initial reserves $ 212,797 $291,795 $ 212,797 $291,795 Adjustments - prior year(s) (190,016) (15,127) (190,000) (19,917) Adjustments - current year 140 455 (15) 4,789 --------------------------------------------------------------------- --------------------- Total paid as of December 31, $ 22,921 $277,123 $ 22,782 $276,667 ===================================================================== ===================== Special surplus from retroactive reinsurance: Initial surplus gain or loss realized $ -- $ 50,201 $ -- $ 50,201 Adjustments - prior year(s) -- 2,416 -- 21,689 Adjustments - current year -- (544) -- (19,273) --------------------------------------------------------------------- --------------------- Balance as of December 31, $ -- $ 52,073 $ -- $ 52,617 ===================================================================== =====================
39 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The Company's retroactive reinsurance balances (by reinsurer) as of December 31, 2007 and 2006, are set forth in the table below:
2007 2006 ----------------------------------------------------------------------------------------------- Reinsurer Assumed Ceded Assumed Ceded ----------------------------------------------------------------------------------------------- American International Reinsurance Co. $ -- $46,592 $ -- $48,201 American International Specialty Lines Insurance Co. 27,735 -- 18,206 -- AXA Corporate Solutions -- 1,429 -- -- PEG Reinsurance Co. -- 14,755 -- 9,320 Commerce and Industry Insurance Company of Canada 4,405 -- 6,259 -- Lyndon Property Ins. Co. -- 1,206 -- 1,878 All other reinsurers less than $1.0 million 40 4,955 68 5,288 ----------------------------------------------------------------------------------------------- Total $32,180 $68,937 $24,533 $64,687 ===============================================================================================
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 transferred. Funds received in connection with these arrangements are recorded as deposit liabilities, rather than premiums and incurred losses. In addition, the Company has entered into several reinsurance arrangements, both treaty and facultative, which were determined to be deposit agreements. 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, 2007 and 2006, the Company's deposit assets and liabilities were comprised of the following: ---------------------------------------------------------------------- Deposit Deposit Funds Held Funds Held Assets Liabilities Assets Liabilities ------------------------------------------- ------------------------ December 31, 2007: Direct $ -- $100,407 $ -- $ -- Assumed -- 99,633 104,412 -- Ceded 793,216 -- -- 734,590 ------------------------------------------ ---------------------- Total $793,216 $200,040 $104,412 $734,590 ========================================== ====================== Deposit Deposit Funds Held Funds Held Assets Liabilities Assets Liabilities ------------------------------------------- ------------------------ December 31, 2006: Direct $ -- $ 82,285 $ -- $ -- Assumed -- 99,583 99,516 -- Ceded 854,511 -- -- 742,591 ------------------------------------------ --------------------- Total $854,511 $181,868 $99,516 $742,591 ========================================== ===================== 40 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- A reconciliation of the Company's deposit assets and deposit liabilities as of December 31, 2007 and 2006 is set forth in the table below:
2007 2006 -------------------------------------------------------- ------------------------ Deposit Deposit Deposit Deposit Assets Liabilities Assets Liabilities -------------------------------------------------------- ------------------------ Balance at January 1 $ 854,511 $181,868 $1,410,584 $ 513,961 Deposit activity, including loss recoveries (112,157) 18,932 (691,043) (362,699) Interest income or expense, net of amortization of margin 41,323 (760) 119,740 30,606 Non-admitted asset portion 9,539 -- 15,230 -- ------------------------------------------------------ ----------------------- Balance at December 31 $ 793,216 $200,040 $ 854,511 $ 181,868 ====================================================== =======================
2007 2006 -------------------------------------------------------- ------------------------ Funds Held Funds Held Funds Held Funds Held Assets Liabilities Assets Liabilities -------------------------------------------------------- ------------------------ Balance at January 1 $ 99,516 $742,591 $ 457,042 $1,062,338 Contributions 4,923 1,072 -- 64,299 Withdrawals (27) (57,101) (374,792) (446,200) Interest -- 48,028 17,266 62,154 ------------------------------------------------------ ------------------------ Balance at December 31 $104,412 $734,590 $ 99,516 $ 742,591 ====================================================== ========================
As of December 31, 2007 and 2006, the deposit assets with related parties, mostly reinsurance transactions with Union Excess, amounted to $644,985 and $665,391, respectively. During 2007 and 2006, loss recoveries from Union Excess resulted in a decrease in deposit accounting assets of $53,404 and $429,315, respectively, and funds held on deposit accounting liability of $1,422 and $288,474, respectively. During 2006, the Company commuted $42,505 of the deposit assets and $42,505 of the funds held on deposit accounting liability with Union Excess with no impact to net income. During 2006, the Company commuted contracts that were accounted for as deposit accounting. The largest commutations resulted in a decline in the following: deposit accounting assets - $102,399, funds held on deposit accounting - $350,522, deposit accounting liability - $332,220, and funds held on deposit accounting liability - $86,613. NOTE 9 - FEDERAL INCOME TAXES ----------------------------- The Company files a consolidated U.S. federal income tax return with the Ultimate Parent and its domestic subsidiaries pursuant to a tax sharing agreement. The agreement provides that the Ultimate 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 Ultimate 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 payables in the accompanying Statements of Liabilities, Capital and Surplus were due to the Ultimate Parent. As of December 31, 2007 and 2006, the U.S. federal income tax rate applicable to ordinary income was 35.0%. 41 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The components of the Company's net deferred tax assets/liabilities as of December 31, 2007 and 2006 are as follows:
As of December 31, 2007 2006 ----------------------------------------------------------------------------------- Gross deferred tax assets $1,270,713 $1,221,399 Gross deferred tax liabilities (664,295) (625,778) Non-admitted deferred tax assets in accordance with SSAP No. 10, income taxes (235,222) (209,992) ----------------------------------------------------------------------------------- Net admitted deferred tax assets $ 371,196 $ 385,629 =================================================================================== Decrease (Increase) in non admitted deferred tax assets Adjustment to December 31, 2006 Surplus $ 20,328 Change in non-admitted deferred tax assets - current year $ (45,558) ----------------------------------------------------------------------- Change in non admitted deferred tax assets $ (25,230) =======================================================================
-------------------------------------------------------------------------------- During 2007, 2006 and 2005, the Company's current federal income tax expense (benefit) was comprised of the following: For the years ended December 31, 2007 2006 2005 ----------------------------------------------------------------------------- Income tax expense (benefit) on net underwriting and net investment income $424,726 $217,553 $(106,539) Federal income tax adjustment - prior years 85,892 (43,980) (1,377) ----------------------------------------------------------------------------- Current income tax expense (benefit) $510,618 $173,573 $(107,916) ============================================================================= Income tax on realized capital gains $ 3,076 $ 12,835 $ 24,064 ============================================================================= 42 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The composition of the Company's net deferred tax assets as of December 31, 2007 and 2006, along with the changes in deferred income taxes for 2006, is set forth in the table below:
------------------------------------------------------------------------------------------------------------------ As of December 31, 2007 2006 Change ------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Loss reserve discount $ 405,802 $ 346,399 $ 59,403 Non-admitted assets 230,398 219,959 10,439 Unearned premium reserve 315,959 308,271 7,688 Partnerships 121,188 117,123 4,065 Bad debt 155,992 194,119 (38,127) Deferred tax remediation adjustments to December 31, 2006 surplus -- 20,328 (20,328) Other temporary differences 41,374 15,200 26,174 --------------------------------------------------------------------------------------------------------------- Gross deferred tax assets 1,270,713 1,221,399 49,314 Non-admitted deferred tax assets (235,222) (189,664) (45,558) Non-admitted deferred tax assets adjustments to December 31 2006 surplus (20,328) 20,328 --------------------------------------------------------------------------------------------------------------- Admitted deferred tax assets 1,035,491 1,011,407 24,084 --------------------------------------------------------------------------------------------------------------- Unrealized capital gains (310,305) (272,004) (38,301) Investments (311,198) (311,367) 169 Other temporary differences (42,792) (42,407) (385) --------------------------------------------------------------------------------------------------------------- Gross deferred tax liabilities (664,295) (625,778) (38,517) --------------------------------------------------------------------------------------------------------------- Net admitted deferred tax assets $ 371,196 $ 385,629 $(14,433) =============================================================================================================== Gross deferred tax assets $1,270,713 $1,221,399 $ 49,314 Gross deferred tax liabilities (664,295) (625,778) (38,517) --------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 606,418 $ 595,621 10,797 =================================================================================================== Income tax effect of unrealized capital gains 38,301 --------------------------------------------------------------------------------------------------------------- Income tax effect of unrealized capital gains - remediation adjustments 42,938 --------------------------------------------------------------------------------------------------------------- Change in net deferred income taxes $ 92,036 ===============================================================================================================
43 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The actual tax expense on income from operations differs from the tax expense calculated at the statutory tax rate. A reconciliation of the Company's income tax expense and the significant items causing this difference for the years ended December 31, 2007, 2006 and 2005 are as follows:
2007 2006 2005 -------------------------------------------------------------------------------------------------------------------------------- Amount Tax Effect Amount Tax Effect Amount Tax Effect -------------------------------------------------------------- ---------- ---------- ---------- --------- ---------- Net income before federal income taxes and $1,798,601 $ 629,510 $1,307,263 $ 457,542 $ 48,062 $ 16,822 capital gains taxes Book to tax adjustments: Tax exempt income and dividends received (766,259) (268,191) (422,522) (147,883) (358,917) (125,621) deduction Intercompany dividends (139,912) (48,969) (164,797) (57,679) (149,147) (52,202) Meals and entertainment 1,846 646 1,174 411 -- -- Non-deductible penalties 1,592 557 1,620 567 -- -- Change in non-admitted assets (29,824) (10,439) (247,883) (86,759) -- -- Federal income tax adjustments - prior year -- 80,466 -- (3,019) -- (1,377) Remediation adjustments -- -- -- -- -- (41,254) Change in tax reserves -- 38,078 -- -- -- Foreign tax credits -- -- -- -- -- (15,200) Other -- -- -- (10,524) -- 2,102 -------------------------------------------------------------- --------- ---------- --------- --------- --------- Total book to tax adjustments (932,557) (207,852) (832,408) (304,886) (508,064) (233,552) -------------------------------------------------------------- --------- ---------- --------- --------- --------- Total federal taxable income and tax $ 866,044 $ 421,658 $ 474,855 $ 152,656 $(460,002) $(216,730) ============================================================== ========= ========== ========= ========= ========= Current federal income tax $ 510,618 $ 173,573 $(107,916) Income tax on net realized capital gains 3,076 12,835 24,064 Change in net deferred income taxes (92,036) (33,752) (132,878) --------- --------- --------- Total federal income tax $ 421,658 $ 152,656 $(216,730) ========= ========= =========
The amount of federal income tax incurred and available for recoupment in the event of future net operating losses for tax purposes for 2007 is set forth in the table below: ------------------------------------------------------------------------- Current year $358,368 First preceding year $210,160 ------------------------------------------------------------------------- The Company had no unused net operating loss carry forwards or tax credits available to offset against future taxable income as of December 31, 2007, 2006 and 2005. Federal income taxes paid to (recovered from) the Ultimate Parent amounted to $304,501 during 2007, $764,410 during 2006 and $(1,207) during 2005. 44 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows: -------------------------------------------------------------- Gross unrecognized tax benefits at January 1, 2007 -------------------------------------------------------------- Increases in tax positions for prior years $ 5,455 Decreases in tax positions for prior years 35,014 Increases in tax positions for current years -- Lapse in statute of limitations -- Settlements -- -------------------------------------------------------------- Gross unrecognized tax benefits at December 31, 2007 $40,469 ============================================================== At December 31, 2007, the Company's unrecognized tax benefits, excluding interest and penalties, were $40,469. The amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $40,469. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At January 1, 2007 and December 31, 2007, NUFIC had accrued $861 and $7,445 respectively, for the payment of interest and penalties. For the year ended December 31, 2007, the Company recognized $6,584 of interest and penalties in the Consolidated Statement of Income. The Company does not believe that there will be a material change to balance of unrecognized tax benefits within the next twelve months. Listed below are the tax years that remain subject to examination by major tax jurisdictions: Major Tax Jurisdictions Open Tax Years ------------------------------------------------------------------------------- United States 1997-2006 NOTE 10 - PENSION PLANS AND DEFERRED COMPENSATION ARRANGEMENTS -------------------------------------------------------------- A. Pension Plan ------------ 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 45 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) --------------------------------------------------------------------------- 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 following table sets forth the funded status of the AIG US retirement plan, valued in accordance with NAIC Statement of Statutory Accounting Principles (SSAP) No. 89, entitled Accounting for Pensions. ----------------------------------------------------------- As of December 31, 2007 2006 ----------------------------------------------------------- Fair value of plan assets $3,004,869 $2,637,415 Less projected benefit obligation 2,719,971 2,673,615 ----------------------------------------------------------- Funded status $ 284,898 $ (36,200) =========================================================== The Company's share of net expense for the qualified pension plan was to $5,279, $9,500 and $6,900 for the years ended December 31, 2007, 2006 and 2005, respectively. B. Postretirement Benefit Plans ---------------------------- AIG's U.S. postretirement medical and life insurance benefits are based upon the employee electing immediate retirement and having a minimum of ten years of service. Retirees 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. 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. AIG's U.S. postretirement medical and life insurance benefits obligations, valued in accordance with NAIC Statement of Statutory Accounting Principles (SSAP) No. 11, entitled Postemployment Benefits and Compensated Absences, as of December 31, 2007, 2006 were $190,417 and $184,884 respectively. These obligations are not funded currently. The Company's share of other postretirement benefit plans was $328, $300 and $200 for the years ended December 31, 2007, 2006 and 2005, 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. 46 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The weighted average assumptions that were used to determine its pension benefit obligations as of December 31, 2007, 2006 and 2005 are set forth in the table below:
------------------------------------------------------------------------------------------------------ As of December 31, 2007 2006 2005 ------------------------------------------------------------------------------------------------------ Discount rate 6.50% 6.00% 5.50% Rate of compensation increase (average) 4.25% 4.25% 4.25% Measurement date December 31, 2007 December 31, 2006 December 31, 2005 Medical cost trend rate N/A N/A N/A ======================================================================================================
C. Stock Options and Deferred Compensation Plan -------------------------------------------- Some of the Company's officers and key employees could receive compensation pursuant to awards under several share-based employee compensation plans; AIG 1999 Stock Option Plan, as amended; AIG 1996 Employee Stock Purchase Plan, as amended; AIG 2002 Stock Incentive Plan, as amended under which AIG has issued time-vested restricted stock units and performance restricted stock units; AIG 2007 Stock Incentive Plan, as amended, and the AIG 2005-2006 Deferred Compensation Profit Participation Plan. AIG currently settles share option exercises and other share awards to participants by issuing shares it previously acquired and holds in its treasury account. During 2007, 2006 and 2005, AIG allocated $14,808, $6,588 and $2,298, respectively, of these stock options and certain other deferred compensation programs to the Company. D. 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 long-term disability benefits, medical and life insurance continuation and COBRA medical subsidies. The costs of these plans are borne by AIG. E. Impact of Medicare Modernization Act on Post Retirement Benefits ---------------------------------------------------------------- On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law. The postretirement medical plan benefits provided by the plan are actuarially equivalent to Medicare Part D under the 2003 Medicare Act and eligible for the federal subsidy. Effective January 1, 2007, this subsidy is passed on to the participants through reduced contributions. The expected amount of subsidy that AIG will receive for 2007 is $3,677. 47 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 11 - CAPITAL AND SURPLUS AND DIVIDEND RESTRICTIONS ------------------------------------------------------- A. Capital and Surplus ------------------- The portion of unassigned surplus as of December 31, 2007 and 2006 represented by each item below is as follows: ------------------------------------------------------- 2007 2006 ------------------------------------------------------- Unrealized gains and losses $6,793,943 $5,412,999 Non-admitted asset values $ (983,843) $(980,573) Provision for reinsurance $ (121,714) $(134,981) ======================================================= During 2006, the Company settled a previously established tax recoverable with AIG as part of its tax allocation agreement. The settlement occurred prior to the filing of its tax return. Upon completion of its tax filing which was subsequent to December 31, 2007, the Company determined that the settled amount exceeded the actual recoverable by $170,440 resulting in a payable due to AIG by the Company. AIG agreed to forgive this payable resulting in the treatment of this amount as a capital contribution to the Company. This capital contribution has been reflected in the Company's financial position as of December 31, 2007. During 2005, the board of directors of AIG 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 LAE reserve strengthening as a result of the reserve review conducted by an independent actuarial consultant. In accordance with that resolution, on February 15, 2006, the Ultimate Parent contributed $199,830 in cash to the Company. In connection therewith, as of December 31, 2005, the Company reported a receivable of $199,830 with its Ultimate Parent and increased its Capital in Excess of Par Value accordingly. The recognition of this surplus contribution has been approved by the Insurance Department of the Commonwealth of Pennsylvania. 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 2007 reporting period. 48 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- C. Dividend Restrictions --------------------- Under Pennsylvania 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 greater of 10% of the Company's statutory surplus as of December 31, 2007, or 100% of the Company's net income, for the year then ended) 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 Commonwealth of Pennsylvania. In connection therewith, at December 31, 2007, the maximum dividend payments, which may be made without prior approval during 2008, is approximately $1,284,907. 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. During 2007, the Company paid $1,120,000 in ordinary dividends to AIGCIG. Refer to Note 5E for additional information. 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). The plaintiffs in the second-filed action have intervened in the first-filed action, and the second-filed action has been dismissed. 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. The trial court has stayed all proceedings pending an appeal by the 49 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) --------------------------------------------------------------------------- intervening plaintiffs of an order dismissing certain lawyers and law firms who represented parties in the underlying class and derivative actions. On September 2, 2005, certain AIG companies including American Home Assurance Company, AIU Insurance Company and New Hampshire Insurance Company (collectively, the AIG Plaintiffs) sued (i) The Robert Plan Corporation (RPC), an agency that formerly serviced assigned risk automobile insurance business for the AIG Plaintiffs; (ii) certain affiliates of RPC; and (iii) two of RPC's senior executives. This suit was brought in New York Supreme Court and alleges the misappropriation of funds and other violations of contractual arrangements. On September 26, 2005, RPC countersued the AIG Plaintiffs and AIG itself for, among other things, $370,000 in disgorged profits and $500,000 of punitive damages under a claim of fraud. On March 10, 2006, RPC moved to dismiss its fraud claim without prejudice for the purposes of bringing that claim in New Jersey. On that date, RPC also amended its counterclaim, setting forth a number of causes of action for breach of contract. The parties filed cross motions to dismiss various counts of the complaint and counterclaims. These motions were granted in part and denied in part by the court. RPC appealed certain aspects of the court's ruling. That appeal remains pending. In July 2007, RPC (along with Eagle Insurance Company (Eagle) and Newark Insurance Corporation (Newark), two of RPC's subsidiary insurance companies) filed a separate complaint in New Jersey alleging claims for fraud and negligent misrepresentation against AIG and the AIG Plaintiffs in connection with certain 2002 contracts. That complaint seeks damages of at least $100,000 unspecified punitive damages, declaratory relief, and imposition of a constructive trust. Because Eagle and Newark are in rehabilitation with the Commissioner of the New Jersey Department of Banking and Insurance as rehabilitator, the AIG Parties believe that only the Commissioner -- and not RPC -- has the authority to direct Eagle and Newark to bring the claims asserted in this action. On December 7, 2007, this action was stayed pending judicial determination of this issue in the Eagle/Newark rehabilitation/liquidation proceeding. The AIG Plaintiffs believe RPC's counterclaims, as well as the claims asserted by RPC, Eagle and Newark in the New Jersey action, are without merit and intend to defend them vigorously, but cannot now estimate either the likelihood of prevailing in these actions or the potential damages in the event liability is determined. 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, as well as claims relating to the underpayment of certain workers compensation premium taxes and other assessments. As a result of these settlements, AIG recorded an after-tax-charge of $1,150,000 in the fourth quarter of 2005, and made payments or placed in escrow approximately $1,640,000 including (i) $375,000 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. (the Excess Casualty Fund) and (ii) $343,000 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. As of February 29, 2008, eligible policyholders entitled to receive approximately $358,700 (or 95%) of the Excess Casualty Fund had opted to receive settlement payments in exchange for releasing AIG and its subsidiaries from liability relating to certain insurance brokerage practices. 50 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) --------------------------------------------------------------------------- In accordance with the settlement agreements, all amounts remaining in the Excess Casualty Fund were used by AIG to settle claims from other policyholders relating to such practices. Various state regulatory agencies have reviewed 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 and the liability of certain AIG subsidiaries, including the Company, for taxes, assessments and surcharges relating to the underreporting or misreporting of workers compensation premium. On January 29, 2008 AIG reached settlements in connection with these state reviews, subject to court approval, with the Attorneys General of the States of Florida, Hawaii, Maryland, Michigan, Oregon, Texas and West Virginia, the Commonwealths of Massachusetts and Pennsylvania, and the District of Columbia; the Florida Department of Financial Services; and the Florida Office of Insurance Regulation. The settlement agreements call for AIG to pay a total of $12,500 to be allocated among the ten jurisdictions and also require AIG to continue to maintain certain producer compensation disclosure and ongoing compliance initiatives. On March 13, 2008, AIG also reached a settlement with the Pennsylvania Insurance Department, which calls for AIG to provide annual reinsurance reports and maintain certain producer compensation disclosure and ongoing compliance initiatives, and to pay a total of $13,500, $4,400 of which was previously paid to Pennsylvania in connection with prior settlement agreements. It is possible that additional civil or regulatory proceedings will be filed by other state regulators. On February 16, 2006, the Attorney General of the State of Minnesota filed a complaint against AIG and certain of its subsidiaries, including the Company, alleging that, beginning no later than 1985, AIG made false statements and reports to Minnesota agencies and regulators, unlawfully reduced AIG's contributions and payments to Minnesota's workers' compensation funds, misreported the character of workers' compensation premiums as general or auto liability premiums, and unlawfully reduced its Minnesota tax obligations. The State of Minnesota sought injunctive relief, damages, penalties and interest. In December 2007, the parties settled the matter, which resolved claims asserted on behalf of the Minnesota Department of Revenue through tax year 2003, the Minnesota Special Compensation Fund through fiscal year 2003 and the Minnesota Attorney General through 2003, without compromising any of the claims of the Minnesota Insurance Guaranty Association, Minnesota Assigned Risk Plan or Minnesota Department of Commerce. On May 24, 2007, the National Workers Compensation Reinsurance Pool (the Pool), on behalf of its participant members, filed a lawsuit against AIG and certain of its subsidiaries, including the Company, with respect to the underpayment of residual market assessments for workers compensation insurance. On August 6, 2007, the court denied AIG's motion seeking to dismiss or stay the complaints or in the alternative, to transfer to the Southern District of New York. On December 26, 2007, the court denied AIG's motion to dismiss the complaint. AIG filed its answer on January 22, 2008. On February 5, 2008, following agreement of the parties, the court entered an order staying all proceedings; that stay was lifted on March 14, 2008. On March 17, 2008, AIG filed an amended answer, counterclaims, and third-party complaint against the Pool, its board members, and certain of the workers compensation carriers that are members of the Pool. The third-party complaint alleges claims under the Racketeering Influenced and Corrupt Organizations Act, in addition to conspiracy, fraud, and other state law claims. Discovery in this case has been stayed through June 17, 2008. A lawsuit filed by the Minnesota Workers Compensation Reinsurance Association and the Minnesota Workers Compensation Insurers Association against AIG and certain of its subsidiaries, including the Company, was dismissed on March 28, 2008. The deadline for the plaintiffs to file a Notice of Appeal from this ruling is April 28, 2008. 51 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) --------------------------------------------------------------------------- A purported class action was filed in South Carolina federal court on January 25, 2008 against AIG and certain of its subsidiaries on behalf of a class of employers that obtained workers compensation insurance from AIG companies and allegedly paid inflated premiums as a result of AIG's alleged underreporting of workers compensation premiums. The complaint in the action was amended on March 24, 2008, and AIG's deadline to respond is April 14, 2008. In April 2007, the National Association of Insurance Commissioners (the NAIC) formed a Settlement Review Working Group, directed by the State of Indiana, to review the Workers Compensation Residual Market Assessment portion of the settlement between AIG, the NYAG, and the NYDOI. In early 2008, AIG was informed that the Settlement Review Working Group had been disbanded in favor of a multi-state targeted market conduct exam focusing on workers compensation insurance, which is in progress. After the NYAG filed its complaint against insurance broker Marsh, policyholders brought multiple federal antitrust and Racketeer Influenced and Corrupt Organizations Act (RICO) class actions in jurisdictions across the nation against insurers and brokers, including AIG and a number of its subsidiaries, alleging that the insurers and brokers engaged in a broad conspiracy to allocate customers, steer business, and rig bids. These actions, including 24 complaints filed in different federal courts naming AIG or an AIG subsidiary as a defendant, were consolidated by the judicial panel on multi-district litigation and transferred to the United States District Court for the District of New Jersey for coordinated pretrial proceedings. The consolidated actions have proceeded in that court in two parallel actions, In re Insurance Brokerage Antitrust Litigation (the First Commercial Complaint) and In re Employee Benefit Insurance Brokerage Antitrust Litigation (the First Employee Benefits Complaint, and, together with the First Commercial Complaint, the multi-district litigation). The plaintiffs in the First Commercial Complaint were nineteen corporations, individuals and public entities that contracted with the broker defendants for the provision of insurance brokerage services for a variety of insurance needs. The broker defendants were alleged to have placed insurance coverage on the plaintiffs' behalf with a number of insurance companies named as defendants, including certain AIG subsidiaries, including American Home Assurance Company (American Home), AIU Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., American International Specialty Lines Insurance Company, Birmingham Fire Insurance Company of Pennsylvania (now known as AIG Casualty Company), Commerce and Industry Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company of Louisiana, New Hampshire Insurance Company, The Insurance Company of the State of Pennsylvania, American International Insurance Company and The Hartford Steam Boiler Inspection and Insurance Company. The First Commercial Complaint also named ten brokers and fourteen other insurers as defendants (two of which have since settled). The First Commercial Complaint alleged that defendants engaged in a widespread conspiracy to allocate customers through "bid-rigging" and "steering" practices. The First Commercial Complaint also alleged that the insurer defendants permitted brokers to place business with AIG subsidiaries through wholesale intermediaries affiliated with or owned by those same brokers rather than placing the business with AIG subsidiaries directly. Finally, the First Commercial Complaint alleged that the insurer defendants entered into agreements with broker defendants that tied insurance placements to reinsurance placements in order to provide additional compensation to each broker. Plaintiffs asserted that the defendants violated the Sherman Antitrust Act, RICO, the antitrust laws of 48 states and the District of Columbia, and were liable under common law breach of fiduciary duty and unjust enrichment theories. Plaintiffs sought treble damages plus interest and attorneys' fees as a result of the alleged RICO and the Sherman Antitrust Act violations. 52 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The plaintiffs in the First Employee Benefits Complaint were nine individual employees and corporate and municipal employees alleging claims on behalf of two separate nationwide purported classes: an employee class and an employer class that acquired insurance products from the defendants from August 26, 1994 to the date of any class certification. The First Employee Benefits Complaint named AIG, and certain of its subsidiaries, including American Home, as well as eleven brokers and five other insurers, as defendants. The activities alleged in the First Employee Benefits Complaint, with certain exceptions, tracked the allegations of contingent commissions, bid-rigging and tying made in the First Commercial Complaint. On October 3, 2006, Judge Hochberg of the District of New Jersey reserved in part and denied in part motions filed by the insurer defendants and broker defendants to dismiss the multi-district litigation. The Court also ordered the plaintiffs in both actions to file supplemental statements of particularity to elaborate on the allegations in their complaints. Plaintiffs filed their supplemental statements on October 25, 2006, and the AIG defendants, along with other insurer and broker defendants in the two consolidated actions, filed renewed motions to dismiss on November 30, 2006. On February 16, 2007, the case was transferred to Judge Garrett E. Brown, Chief Judge of the District of New Jersey. On April 5, 2007, Chief Judge Brown granted the defendants' renewed motions to dismiss the First Commercial Complaint and First Employee Benefits Complaint with respect to the antitrust and RICO claims. The claims were dismissed without prejudice and the plaintiffs were given 30 days, later extended to 45 days, to file amended complaints. On April 11, 2007, the Court stayed all proceedings, including all discovery, that were part of the multi-district litigation until any renewed motions to dismiss the amended complaints were resolved. A number of complaints making allegations similar to those in the First Commercial Complaint have been filed against AIG and other defendants in state and federal courts around the country. The defendants have thus far been successful in having the federal actions transferred to the District of New Jersey and consolidated into the multi-district litigation. The AIG defendants have sought to have state court actions making similar allegations stayed pending resolution of the multi-district litigation proceeding. These efforts have generally been successful, although plaintiffs in one case pending in Texas state court have moved to re-open discovery; a hearing on that motion is scheduled for April 9, 2008. Notably, AIG has recently settled several of the various federal and state actions alleging claims similar to those in the multi-district litigation. Plaintiffs filed amended complaints in both In re Insurance Brokerage Antitrust Litigation (the Second Commercial Complaint) and In re Employee Benefit Insurance Brokerage Antitrust Litigation (the Second Employee Benefits Complaint) along with revised particularized statements in both actions on May 22, 2007. The allegations in the Second Commercial Complaint and the Second Employee Benefits Complaint were substantially similar to the allegations in the First Commercial Complaint and First Employee Benefits Complaint, respectively. The complaints also attempted to add several new parties and delete others; the Second Commercial Complaint added two new plaintiffs and twenty seven new defendants (including three new AIG defendants), and the Second Employee Benefits Complaint added eight new plaintiffs and nine new defendants (including two new AIG defendants). The defendants filed motions to dismiss the amended complaints and to strike the newly added parties. The Court granted (without leave to amend) defendants' motions to dismiss the federal antitrust and RICO claims on August 31, 2007 and September 28, 2007, respectively. The Court declined to exercise supplemental jurisdiction over the state law claims in the Second Commercial Complaint and therefore dismissed it in its entirety. On January 14, 2008, the court granted defendants' motion for summary judgment on the ERISA claims in the Second Employee Benefits Complaint and subsequently dismissed the remaining state law claims without prejudice, thereby dismissing the Second Employee Benefits Complaint in its entirety. On February 12, 2008 plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit with respect to 53 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- the dismissal of the Second Employee Benefits Complaint. Plaintiffs previously appealed the dismissal of the Second Commercial Complaint to the United States Court of Appeals for the Third Circuit on October 10, 2007. Several tag-along actions that were consolidated before Chief Judge Brown are still pending in the District Court. Those actions are currently stayed pending a decision by the court on whether they will proceed during the appeal of the dismissal of the Second Commercial Complaint and the Second Employee Benefits Complaint. On February 19, 2008, Appellants filed their appeal brief with the Third Circuit with respect to the Second Commercial Complaint, and Appellees filed their brief on April 7, 2008. Oral argument has not yet been scheduled in that appeal. On August 24, 2007, the Ohio Attorney General filed a complaint in the Ohio Court of Common Pleas against AIG and a number of its subsidiaries, and several other broker and insurer defendants, asserting violation of Ohio's antitrust laws. The complaint, which is similar to the Second Commercial Complaint, alleges that AIG and the other broker and insurer defendants conspired to allocate customers, divide markets, and restrain competition in commercial lines of casualty insurance sold through the broker defendant. The complaint seeks treble damages on behalf of Ohio public purchasers of commercial casualty insurance, disgorgement on behalf of both public and private purchasers of commercial casualty insurance, as well as a $0.5 per day penalty for each day of conspiratorial conduct. AIG, along with other co-defendants, moved to dismiss the complaint on November 16, 2007, and a hearing on the motion to dismiss is currently scheduled for April 29, 2008. Discovery is stayed in the case pending a ruling on the motion to dismiss or until May 15, 2008, whichever occurs first. On December 4, 2006, AIG and certain subsidiaries, including the Company, settled numerous arbitrations and litigations between them and the agencies owned by C.V. Starr & Co., Inc. (C.V. Starr), including those relating to the termination of the managing general agency relationships between AIG's subsidiaries and the agencies owned by C.V. Starr, and the use of the "Starr" and "American International" trademarks. The financial terms of the confidential settlement will not have a material adverse effect on the Company's financial position. 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 monetary penalties and injunctive relief 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 occupationally ill or injured workers whose employers are named insureds under workers compensation policies issued by various insurance companies, including the Company. 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. On November 28, 2006, the Court issued an order certifying a class of providers and hospitals. In an unrelated action also arising under the Act, a Louisiana appellate court ruled that the Court lacked jurisdiction to adjudicate the claims at issue. In response, AIGDC along with its co-defendants filed an exception for lack of subject matter jurisdiction. On January 19, 2007, the Court denied the motion, holding that it has jurisdiction over the putative 54 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- class claims. AIGDC, along with the other defendants in the action, appealed the Court's class certification and jurisdictional ruling. On January 25, 2008, plaintiffs and AIGDC agreed to resolve this action on a classwide basis for $28,750. The Court has preliminarily approved the settlement and payment of the settlement funds was made into an escrow account on February 8, 2008. The court will hold a final approval hearing on May 29, 2008. In the meantime, the appeal as to the other defendants remains pending. In the event that the settlement is not finally approved, AIGDC believes that it has meritorious defenses to plaintiffs' claims. The Company is not currently 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. 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 as may have been otherwise noted above with respect to specific matters, the Company cannot predict the outcome of the matters described above, reasonably 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 intercompany pooling arrangement. In the opinion of management, except as may have been otherwise noted above with respect to specific matters, 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 claim 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 claim 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. 55 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- The Company's asbestos and environmental related loss and LAE reserves (including case & IBNR reserves) for the years ended December 31, 2007, 2006 and 2005, gross and net of reinsurance credits, are as follows:
Asbestos Losses Environmental Losses ----------------------------------------------------------------------------------------------------------------- 2007 2006 2005 2007 2006 2005 -------------------------------------------------------------------------------- ------------------------------ Direct: Loss and LAE reserves, beginning of year $1,159,145 $1,148,049 $ 731,546 $188,294 $304,714 $271,161 Incurred losses and LAE 36,688 168,760 517,176 (494) (80,032) 66,554 Calendar year paid losses and LAE (158,189) (157,664) (100,673) (43,047) (36,388) (33,001) -------------------------------------------------------------------------------- ------------------------------ Loss and LAE Reserves, end of year $1,037,644 $1,159,145 $1,148,049 $144,753 $188,294 $304,714 ================================================================================ ============================== Assumed: Loss and LAE reserves, beginning of year $ 102,751 $ 102,810 $ 95,171 $ 5,223 $ 6,926 $ 6,994 Incurred losses and LAE 5,447 15,128 15,540 1,463 (1,543) 876 Calendar year paid losses and LAE (13,563) (15,187) (7,901) (424) (160) (944) -------------------------------------------------------------------------------- ------------------------------ Loss and LAE reserves, end of year $ 94,635 $ 102,751 $ 102,810 $ 6,262 $ 5,223 $ 6,926 ================================================================================ ============================== Net of reinsurance: Loss and LAE reserves, beginning of year $ 562,722 $ 547,037 $ 367,609 $ 97,333 $142,476 $149,915 Incurred losses and LAE 10,719 88,346 220,900 1,785 (23,564) 17,322 Calendar year paid losses and LAE (83,569) (72,661) (41,472) (23,510) (21,579) (24,761) -------------------------------------------------------------------------------- ------------------------------ Loss and LAE reserves, end of year $ 489,872 $ 562,722 $ 547,037 $ 75,608 $ 97,333 $142,476 ================================================================================ ===============================
The amount of ending reserves for Bulk and IBNR included in the table above for Asbestos and Environmental losses is as follows:
Asbestos Losses Environmental Losses -------------------------------------------------------------------------------- ----------------------------- 2007 2006 2005 2007 2006 2005 -------------------------------------------------------------------------------- ----------------------------- Direct basis $653,522 $777,367 $823,535 $59,210 $74,353 $133,323 Assumed reinsurance basis 47,441 65,323 64,449 1,257 648 1,460 Net of ceded reinsurance basis 331,405 399,766 394,423 27,383 39,609 64,576 -----------------------------------------------------------------------------------------------------------------
The amount of ending reserves for loss adjustment expenses included in the table above for Asbestos and Environmental losses is as follows:
Asbestos Losses Environmental Losses -------------------------------------------------------------------------------- ---------------------------- 2007 2006 2005 2007 2006 2005 -------------------------------------------------------------------------------- ---------------------------- Direct basis $72,614 $86,374 $91,504 $25,376 $31,866 $57,138 Assumed reinsurance basis 6,935 7,258 7,161 370 278 626 Net of ceded reinsurance basis 36,486 44,418 43,825 11,567 16,975 27,675 ----------------------------------------------------------------------------------------------------------------
Management believes that the reserves carried for the asbestos and environmental claims at December 31, 2007 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 56 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- 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. Leases ------ The Company is the lessee for the office space occupied by it and several affiliates under various non-cancelable operating lease agreements that expire through July 14, 2014. Rental expense under these leases is allocated to each affiliate based upon the percentage of space occupied. The total lease expense was $42,333, $42,200 and $30,200 in 2007, 2006 and 2005, respectively. At January 1, 2008, the minimum aggregate annual rental commitments are as follows: 2008 $ 48,712 2009 46,283 2010 47,921 2011 47,364 2012 45,411 Thereafter 156,372 ---------------------------------------- Total minimum lease payments $392,063 ======================================== Certain rental commitments have renewal options extending through the year 2035. Some of these renewals are subject to adjustments in future periods. D. 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. As of December 31, 2007, 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, 2007, the Company's loss reserves eliminated by annuities mostly from affiliates amounted to $873,000, and included unrecorded loss contingencies of $847,400. The Company has entered into a credit agreement with its Ultimate Parent, whereby the Company may loan, subject to contractually agreed interest rates, up to a maximum of $1,500,000. As of December 31, 2007, the Company had no outstanding loan balances due from its Ultimate Parent related to this credit arrangement. The Company has committed to make loans to its affiliate, National Union Fire Insurance of Vermont, up to but not exceeding $120,000. The commitment will terminate on December 31, 2008. 57 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- During 2006, the Company terminated its commitment to make loans to its affiliate, Audubon Insurance Company, up to but not exceeding $100,000. As part of its private equity portfolio investment, as of December 31, 2007 the Company may be called upon for an additional capital investment of up to $444,051. The Company expects only a small portion of this additional capital will be called upon during 2008. The Company has committed to provide (pound)50,000 pounds sterling in capital to a Lloyd's Syndicate. The Company accrued a loss of (pound)10,783 pounds sterling ($21,349) at December 31, 2007. 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 ----------------------------------- The Company underwrites a significant concentration of its direct business with brokers. As of December 31, 2007 and 2006, the amount of reserve credits recorded for high deductibles on unpaid claims amounted to $3,821,635 and $4,046,600, respectively. As of December 31, 2007 and 2006, the amount billed and recoverable on paid claims was $305,720 and $351,408, respectively, of which $17,176 and $20,800, 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 2007, 2006 and 2005, policyholder dividends amounted to $130, $1,419 and $20, respectively, and were reported as Other Gains in the accompanying statements of income. As of December 31, 2007 and 2006, other admitted assets as reported in the accompanying statements of Admitted assets were comprised of the following balances: ------------------------------------------------------------------- Other Admitted Assets 2007 2006 ------------------------------------------------------------------- Guaranty funds receivable or on deposit $ 19,495 $ 19,232 Loss funds on deposit 101,440 88,957 Outstanding loss drafts - suspense accounts 454,210 517,019 Accrued recoverables and other assets 16,717 4,952 Retroactive reinsurance recoverable 14,159 (5,469) Allowance for doubtful accounts (414,096) (453,070) ------------------------------------------------------------------- Total other admitted assets $ 191,925 $ 171,621 =================================================================== Guaranty funds receivable represent payments to various state insolvency funds which are recoupable against future premium tax payments in the respective states. Various states allow insurance companies to recoup assessments over a 58 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- period of five to ten years. As of December 31, 2007 and 2006, the Company's liability for insolvency assessments amounted to $41,195 and $32,700, respectively, with related assets for premium tax credits of $19,495 and $19,200, respectively. Of the amount accrued, the Company expects to pay approximately $21,701 for insolvency assessments during the next year. In addition, the Company anticipates it will realize $12,710 of premium tax offset credits and the associated liability in years two through five. The remaining $6,784 will be realized between years five and ten. The Company routinely assesses the collectibility of its receivable balances for potentially uncollectible premiums receivable due from agents and reinsurance recoverable balances. In connection therewith, as of December 31, 2007 and 2006, the Company had established an allowance for doubtful accounts of $414,096 and $453,070, respectively, which was reported as a contra asset within Other Admitted Assets in the accompanying Statements of Admitted Assets. During 2007, 2006 and 2005, the Company recorded $94,880, $52,526 and $153,838, respectively, for allowance for doubtful accounts to Net Loss from Agents' Balances Charged-off in the accompanying Statement of Income. In 2005, an additional amount of $208,106 was reported as an adjustment for prior period corrections to the Company's Capital and Surplus balance at January 1, 2005. As of December 31, 2007 and 2006, other liabilities as reported in the accompanying Statements of Liabilities, Capital and Surplus were comprised of the following balances: ------------------------------------------------------------------------- Other Liabilities 2007 2006 ------------------------------------------------------------------------- Accrued retrospective premiums $ 43,897 $ 81,279 Remittances not allocated 41,289 39,309 Loss clearing 16,177 12,841 Deferred commission earnings 12,550 10,596 Amounts withheld or retained by company for 14,947 4,434 account of others Retroactive reserve payable 17,205 (15,684) Other liabilities, includes suspense accounts, 225,941 162,859 experience account balances and certain accruals ------------------------------------------------------------------------- Total other liabilities $372,006 $295,634 ========================================================================= 59 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. NOTES TO STATUTORY BASIS FINANCIAL STATEMENTS DECEMBER 31, 2007, 2006 AND 2005 (000'S OMITTED) -------------------------------------------------------------------------------- NOTE 14 - SUBSEQUENT EVENT -------------------------- In January 2008, the Company entered into a Capital Maintenance Agreement (CMA) with its Ultimate Parent, AIG. The CMA provides that in the event that the Company's Total Adjusted Capital falls below 200% of the Company's Authorized Control Level RBC, as shown in the Company's 2007 Annual Statement, together with any adjustments or modifications required by the Company's domiciliary regulator, AIG will within thirty days of written notice thereof provide a capital contribution to the Company in an amount that equals the difference between the Company's Total Adjusted Capital and 200% of the Company's Authorized Control Level RBC. In lieu of making any such capital contribution, with the approval of the domiciliary insurance department, AIG may provide a letter of credit naming the Company as beneficiary. Effective upon the date of filing of the Company's 2007 Annual Statement with its domiciliary regulator, this current CMA supersedes and replaces a similar agreement that related to the Company's December 31, 2006 surplus position. Refer to other subsequent events in Notes 5 and 11. 60 PART C: OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements. The following financial statements are incorporated by reference or included herein, as indicated below, to this Registration Statement: (1) Audited Financial Statements of Variable Account I of AIG Life Insurance Company for the year ended December 31, 2007 are included in Part B of the registration statement. (2) Audited Financial Statements of AIG Life Insurance Company for the years ended December 31, 2007, 2006 (restated) and 2005 (restated) are included in Part B of the registration statement. (3) The statutory statement of admitted assets, liabilities, capital and surplus of National Union Fire Insurance Company of Pittsburgh, Pa. as of December 31, 2007 and 2006, and the related statutory statements of income and changes in capital and surplus and of cash flow for each of the three years in the period ended December 31, 2007 are included in Part B of the registration statement. (b) Exhibits. (1)(a) Certificate of Resolution for AIG Life Insurance Company pursuant to the Board of Directors' meeting dated June 5, 1986, authorizing the establishment of separate accounts for the issuance and sale of variable and fixed annuity contracts. (1) (1)(b) Certificate of Resolution for AIG Life Insurance Company pursuant to the Board of Directors' meeting dated September 12, 1995, amending in its entirety the resolution previously passed by the Board of Directors on June 5, 1986, authorizing the establishment of separate accounts for the issuance and sale of variable life insurance contracts, as well as for variable and fixed annuity contracts. (3) (2) N/A (3) Distribution Agreement between AIG Life Insurance Company and American General Equity Services Corporation, effective May 1, 2003. (4) (4)(a) Form of Single Premium Group Immediate Variable Annuity Nonparticipating Contract, Form No. 11GVIA1000. (5) C-1 (4)(b) Form of Single Premium Immediate Variable Annuity Nonparticipating Certificate of Coverage, Form No. 16GVIA1000. (5) (4)(c) Form of Certificate Schedule, Form No. 16GVIA1000. (5) (4)(d) Form of Endorsement - Partial Withdrawal Option, Form No. 16GVPW0403. (5) (4)(e) Form of Endorsement - Initial Allocation of Net Single Premium, Form No. 16GVMM403. (5) (4)(f) Form of Endorsement Cancellation Option, Form No. 14GVCO403-Rev(11/05). (13) (5) Form of Variable Annuity Enrollment Form, Form No. 14GVIA1000 rev041906. (11) (6)(a) By-Laws of AIG Life Insurance Company, restated as of April 27, 2005. (8) (6)(b) Certificate of Incorporation of AIG Life Insurance Company dated December 31, 1991. (1) (6)(c) Restated Certificate of Incorporation of AIG Life Insurance Company dated December 31, 1991. (1) (6)(d) Certificate of Amendment of Certificate of Incorporation of AIG Life Insurance Company, dated December 3, 2001. (4) (6)(e) Certificate of Change of Location of Registered Office and of Registered Agent, AIG Life Insurance Company, dated July 24, 2002. (6) (7) Reinsurance Agreement between AIG Life & AXA Corporate Solutions Life Reinsurance Company. (15) (8)(a)(i) Form of Service and Expense Agreement dated February 1, 1974, between American International Group, Inc. and various affiliate subsidiaries, including AIG Life Insurance Company. (4) (8)(a)(ii) Form of Addendum No. 1 to Service and Expense Agreement dated February 1, 1974, between American International Group, Inc. and various affiliate subsidiaries, including AIG Life Insurance Company, dated May 21, 1975. (4) C-2 (8)(a)(iii) Form of Addendum No. 2 to Service and Expense Agreement dated February 1, 1974, between American International Group, Inc. and various affiliate subsidiaries, including AIG Life Insurance Company, dated September 23, 1975. (4) (8)(a)(iv) Form of Addendum No. 24 to Service and Expense Agreement dated February 1, 1974, between American International Group, Inc. and various affiliate subsidiaries, including AIG Life Insurance Company, dated December 30, 1998. (4) (8)(a)(v) Form of Addendum No. 28 to Service and Expense Agreement dated February 1, 1974, among American International Group, Inc. and various affiliate subsidiaries, including AIG Life Insurance Company and American General Life Companies, LLC, effective January 1, 2002. (4) (8)(a)(vi) Form of Addendum No. 30 to Service and Expense Agreement dated February 1, 1974, among American International Group, Inc. and various affiliate subsidiaries, including AIG Life Insurance Company and American General Life Companies, LLC, effective January 1, 2002. (6) (8)(a)(vii) Form of Addendum No. 32 to Service and Expense Agreement dated February 1, 1974, among American International Group, Inc. and various affiliate subsidiaries, including AIG Life Insurance Company and American General Life Companies, LLC, effective May 1, 2004. (7) (8)(b)(i) Form of Fund Participation Agreement between AIG Life Insurance Company and The Vanguard Group, Inc. dated December 27, 2001. (2) (8)(b)(ii) Form of Addendum to Fund Participation Agreement between AIG Life Insurance Company and The Vanguard Group, Inc. (4) (8)(c) Form of Participation Agreement among Vanguard Variable Insurance Fund, The Vanguard Group, Inc., Vanguard Marketing Corporation and AIG Life Insurance Company. (4) (8)(d) Form of SEC Rule 22c-2 Information Sharing Agreement between Vanguard and AIG Life Insurance Company. (15) (8)(e) General Guarantee Agreement from National Union Fire Insurance Company of Pittsburgh, Pa. on behalf of AIG Life Insurance Company. (8) (8)(f) AIG Support Agreement between AIG Life Insurance Company and American International Group, Inc. (8) C-3 (8)(g) Notice of Termination of Guarantee as Published in the Wall Street Journal on November 24, 2006. (14) (9)(a) Opinion and Consent of Lauren W. Jones, Esq., Deputy General Counsel of American General Life Companies, LLC. (5) (9)(b) Opinion and Consent of Saul Ewing LLP, Counsel to National Union Fire Insurance Company of Pittsburgh, Pa. (9) (9)(c) Opinion and Consent of Sullivan & Cromwell LLP, Counsel to National Union Fire Insurance Company of Pittsburgh, Pa. (9) (10) Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP. (Filed herewith) (11) N/A (12) N/A (13)(a) Power of Attorney with respect to Registration Statements and Amendments thereto signed by the directors and, where applicable, officers of National Union Fire Insurance Company of Pittsburgh, Pa. (11) (13)(b) Power of Attorney with respect to Registration Statements and Amendments thereto signed by John Quinlan Doyle, Director and President, and Neil Anthony Faulkner, Director, and David Neil Fields, Director, of National Union Fire Insurance Company of Pittsburgh, Pa. (13) (13)(c) Power of Attorney with respect to Registration Statements and Amendments thereto removing Neil Anthony Faulkner, Director, and adding Mark Timothy Willis, Director, of National Union Fire Insurance Company of Pittsburgh, Pa. (16) -------------------------------------------------------------------------------- (1) Incorporated by reference to Post-Effective Amendment No. 12 to Form N-4 Registration Statement (File No. 033-39171) of Variable Account I of AIG Life Insurance Company filed on October 27, 1998. (2) Incorporated by reference to Post-Effective Amendment No. 2 to Form N-4 Registration Statement (File No. 333-36260) of Variable Account I of AIG Life Insurance Company filed on December 28, 2001. C-4 (3) Incorporated by reference to Post-Effective Amendment No. 9 to Form N-6 Registration Statement (File No. 333-34199) of Variable Account II of AIG Life Insurance Company filed on February 7, 2003. (4) Incorporated by reference to Post-Effective Amendment No. 10 to Form N-6 Registration Statement (File No. 333-34199) of Variable Account II of AIG Life Insurance Company filed on April 25, 2003. (5) Incorporated by reference to initial filing of Form N-4 Registration Statement (File No. 333-108725) of Variable Account I of AIG Life Insurance Company filed on September 12, 2003. (6) Incorporated by reference to Post-Effective Amendment No. 9 to Form N-4 Registration Statement (File No. 333-36260) of Variable Account I of AIG Life Insurance Company filed on April 28, 2004. (7) Incorporated by reference to Post-Effective Amendment No. 13 to Form N-6 Registration Statement (File No. 333-34199) of Variable Account II of AIG Life Insurance Company filed on May 2, 2005. (8) Incorporated by reference to Post-Effective Amendment No. 14 to Form N-6 Registration Statement (File No. 333-34199) of Variable Account II of AIG Life Insurance Company filed on August 12, 2005. (9) Incorporated by reference to Post-Effective Amendment No. 5 to Form N-4 Registration Statement (File No. 333-108725) of Variable Account I of AIG Life Insurance Company filed on October 25, 2005. (10) Incorporated by reference to Post-Effective Amendment No. 6 to Form N-4 Registration Statement (File No. 333-108725) of Variable Account I of AIG Life Insurance Company filed on March 24, 2006. (11) Incorporated by reference to Post-Effective Amendment No. 7 to Form N-4 Registration Statement (File No. 333-108725) of Variable Account I of AIG Life Insurance Company filed on May 1, 2006. (12) Incorporated by reference to Post-Effective Amendment No. 8 to Form N-4 Registration Statement (File No. 333-108725) of Variable Account I of AIG Life Insurance Company filed on June 22, 2006. (13) Incorporated by reference to Post-Effective Amendment No. 9 to Form N-4 Registration Statement (File No. 333-108725) of Variable Account I of AIG Life Insurance Company filed on July 13, 2006. C-5 (14) Incorporated by reference to Post-Effective Amendment No. 19 to Form N-6 Registration Statement (File No. 333-34199) of Variable Account II of AIG Life Insurance Company filed on December 12, 2006. (15) Incorporated by reference to Post-Effective Amendment No. 20 to Form N-6 Registration Statement (File No. 333-34199) of Variable Account II of AIG Life Insurance Company filed on May 1, 2007. (16) Incorporated by reference to Post-Effective Amendment No. 21 to Form N-6 Registration Statement (File No. 333-34199) of Variable Account II of AIG Life Insurance Company filed on April 30, 2008. ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG 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 David R. Armstrong Director, President - AIG Benefit Solutions Profit 3600 Route 66 Center and Chief Executive Officer - AIG Benefit Neptune, NJ 07754-1580 Solutions Profit Center Mary Jane B. Fortin Director, Executive Vice President and Chief 2929 Allen Parkway Financial Officer Houston, TX 77019 David L. Herzog Director 70 Pine Street New York, NY 10270 Richard A. Hollar Director, President-Life Profit Center and Chief 750 West Virginia Street Executive Officer-Life Profit Center Milwaukee, WI 53204 Royce G. Imhoff, II Director, President-Independent Distribution 2929 Allen Parkway Houston, TX 77019 C-6 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- David W. O'Leary Director, President-Specialty Markets Group and 2929 Allen Parkway Chief Executive Officer-Specialty Markets Group Houston, TX 77019 Gary D. Reddick Director and Executive Vice President 2929 Allen Parkway Houston, TX 77019 Christopher J. Swift Director 2929 Allen Parkway Houston, TX 77019 James W. Weakley Director, President-AIG Benefit Solutions Profit 2929 Allen Parkway Center, Chief Executive Officer-AIG Benefit Houston, TX 77019 Solutions Profit Center and Chairman AIG Benefit Solutions Profit Center Matthew Winter Director, President and Chief Executive 2929 Allen Parkway Officer Houston, TX 77019 John Gatesman President-Affluent and Corporate Markets Group 2727-A Allen Parkway Houston, TX 77019 Dennis Roberts President-Independent Agency Group 2929 Allen Parkway Houston, TX 77019 Richard D. Schuettner President-AIG Life Brokerage Profit Center 750 West Virginia Street Milwaukee, WI 53204 Durr Sexton President-Annuity Profit Center 2929 Allen Parkway Houston, TX 77019 Robert E. Steele President-Structured Settlements 205 E. 10th Avenue Amarillo, TX 79101 Don Ward President - Financial Institution Marketing Group 2929 Allen Parkway Houston, TX 77019 C-7 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- Rebecca G. Campbell Executive Vice President-Human Resources 2929 Allen Parkway Houston, TX 77019 Jeffrey H. Carlson Executive Vice President and Chief Information 2929 Allen Parkway Officer Houston, TX 77019 Rodney N. Hook Executive Vice President-AIG Benefit Solutions 3600 Route 66 Profit Center and Chief Risk Officer-AIG Benefit Neptune, NJ 07754 Solutions Profit Center Gary Parker Executive Vice President and Chief Product Officer 2929 Allen Parkway Houston, TX 77019 Dan E. Trudan Executive Vice President and Chief Operations 2929 Allen Parkway Officer Houston, TX 77019 Steven D. Anderson Senior Vice President-Life Profit Center and Chief 2929 Allen Parkway Financial Officer-Life Profit Center Houston, TX 77019 Erik A. Baden Senior Vice President-Strategic Marketing and 2929 Allen Parkway Business Development Houston, TX 77019 Wayne A. Barnard Senior Vice President and Illustration Actuary 2929 Allen Parkway Houston, TX 77019 Robert M. Beuerlein Senior Vice President and Chief and Appointed 2727-A Allen Parkway Actuary Houston, TX 77019 Patricia A. Bosi Senior Vice President 3600 Route 66 Neptune, NJ 07754-1580 Don Cummings Senior Vice President and Chief Accounting Officer 2727-A Allen Parkway Houston, TX 77019 C-8 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- James A. Galli Senior Vice President and Chief Business Development 70 Pine Street Officer New York, NY 10270 Robert M. Goldbloom Senior Vice President-Terminal Funding Annuities 70 Pine Street New York, NY 10270 William F. Guterding Senior Vice President 70 Pine Street New York, NY 10270 Robert F. Herbert, Jr. Senior Vice President, Treasurer and Controller 2727-A 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 2727-A Allen Parkway Houston, TX 77019 Glen D. Keller Senior Vice President 2727-A Allen Parkway Houston, TX 77019 Stephen Kennedy Senior Vice President 750 West Virginia Street Milwaukee, WI 53204 Frank A. Kophamel Senior Vice President 2727-A Allen Parkway Houston, TX 77019 Simon J. Leech Senior Vice President 2727-A Allen Parkway Houston, TX 77019 Charles L. Levy Vice President and Medical Director 2727-A Allen Parkway Houston, TX 77019 C-9 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- Kent D. Major Senior Vice President 2727-A 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-A Allen Parkway Houston, TX 77019 Lawrence J. O'Brien Senior Vice President, Chief Marketing 2929 Allen Parkway Officer-Independent Agency Group Houston, TX 77019 William J. Packer Senior Vice President 3600 Route 66 Neptune, NJ 07754 Barry Pelletteri Senior Vice President 3600 Route 66 Neptune, NJ 07754 John W. Penko Senior Vice President 2727-A Allen Parkway Houston, TX 77019 Michael W. Witwer Senior Vice President 3600 Route 66 Neptune, NJ 07754 Frederic R. Yopps Senior Vice President 750 West Virginia St. Milwaukee, WI 53204 Chris Ayers Vice President 2727-A Allen Parkway Houston, TX 77019 Edward F. Bacon Vice President 2727-A Allen Parkway Houston, TX 77019 C-10 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- Joan M. Bartel Vice President 2727-A Allen Parkway Houston, TX 77019 Walter E. Bednarski Vice President 3600 Route 66 Neptune, NJ 07754-1580 Michael B. Boesen Vice President 2727-A Allen Parkway Houston, TX 77019 Timothy H. Bolden Vice President and Chief Compliance Officer 2727-A Allen Parkway Houston, TX 77019 David R. Brady Vice President 70 Pine Street New York, NY 10270 Stephen J. Brenneman Vice President 1 ALICO Plaza 600 King Street Wilmington, DE 19801 James B. Brown Vice President 2727 Allen Parkway Houston, TX 77019 David W. Butterfield Vice President 3600 Route 66 Neptune, NJ 07754 Valerie A. Childrey Vice President and Medical Director 750 West Virginia Street Milwaukee, WI 53204 Mark E. Childs Vice President 2727-A Allen Parkway Houston, TX 77019 C-11 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- Robert M. Cicchi Vice President 2727-A Allen Parkway Houston, TX 77019 James Cortiglia Vice President 3600 Route 66 Neptune, NJ 07754 Steven A. Dmytrack Vice President 2929 Allen Parkway Houston, TX 77019 Douglas M. Donnenfield Vice President 750 West Virginia Street Milwaukee, WI 53204 Timothy M. Donovan Vice President 2929 Allen Parkway Houston, TX 77019 Donna F. Fahey Vice President 3600 Route 66 Neptune, NJ 07754-1580 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 1200 N. Mayfair Road Milwaukee, WI 53226 Frederick J. Garland, Jr. Vice President 2727-A Allen Parkway Houston, TX 77019 Liza Glass Vice President 2727-A Allen Parkway Houston, TX 77019 C-12 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- Leo W. Grace Vice President and Assistant Secretary 2929 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 3051 Hollis Drive Springfield, IL 62704 Daniel J. Gutenberger Vice President and Medical Director 750 West Virginia Street Milwaukee, WI 53204 Joel H. Hammer Vice President 70 Pine Street New York, NY 10270 D. Leigh Harrington Vice President 2929 Allen Parkway Houston, TX 77019 Keith C. Honig Vice President 1999 Avenue of the Stars Los Angeles, CA 90067 Donald E. Huffner Vice President and Real Estate Investment Officer 70 Pine Street New York, NY 10270 Walter P. Irby Vice President 2929 Allen Parkway Houston, TX 77019 Karen M. Isaacs Vice President 3600 Route 66 Neptune, NJ 07754 Robert J. Ley Vice President 1200 N. Mayfair Road Milwaukee, WI 53226 C-13 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- Gwendolyn J. Mallett Vice President 2727-A Allen Parkway Houston, TX 77019 Randy J. Marash Vice President 3600 Route 66 Neptune, NJ 07754 David S. Martin Vice President 2929 Allen Parkway Houston, TX 77019 W. Larry Mask Vice President, Real Estate Investment Officer and 2929 Allen Parkway Assistant Secretary Houston, TX 77019 Melvin C. McFall Vice President 2727-A Allen Parkway Houston, TX 77019 Richard D. McFarland Vice President 2727-A Allen Parkway Houston, TX 77019 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 3051 Hollis Drive Springfield, IL 62704 Michael R. Murphy Vice President 750 West Virginia Street Milwaukee, WI 53204 C-14 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- Carl T. Nichols Vice President and Medical Director 205 E. 10th Avenue Amarillo, TX 79101 Deanna Osmonson Vice President and Chief Privacy Officer 2727-A Allen Parkway Houston, TX 77019 Rembert R. Owen, Jr. Vice President, Real Estate Investment Officer and 2929 Allen Parkway Assistant Secretary Houston, TX 77019 Lori J. Payne Vice President 2929 Allen Parkway Houston, TX 77019 Cathy A. Percival Vice President and Medical Director 2727-A 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. Rudecki, Jr. Vice President 2929 Allen Parkway Houston, TX 77019 Dale W. Sachtleben Vice President 3051 Hollis Drive Springfield, IL 62704 Richard W. Scott Vice President and Chief Investment Officer 70 Pine Street New York, NY 10270 C-15 NAME AND PRINCIPAL POSITIONS AND OFFICES WITH DEPOSITOR BUSINESS ADDRESS AIG LIFE INSURANCE COMPANY ------------------------- ---------------------------------------------------- Michael Sibley Vice President Walnut Glen Tower 8144 Walnut Hill Lane Dallas, TX 75231 Brian Smith