AIG 2008 Annual Report Download - page 299

SAI Deferred Compensation Holdings, Inc., a wholly owned subsidiary of AIG, has established a deferred
compensation plan for registered representatives of certain AIG subsidiaries, pursuant to which participants have
the opportunity to invest deferred commissions and fees on a notional basis. The value of the deferred compensation
fluctuates with the value of the deferred investment alternatives chosen. AIG has provided a full and unconditional
guarantee of the obligations of SAI Deferred Compensation Holdings, Inc. to pay the deferred compensation under
the plan. In December 2008, AIG terminated the plan for current employees and ceased to permit new deferrals into
the plan.
15. Shareholders’ Equity and Earnings (Loss) Per Share
AIG parent depends on its subsidiaries for cash flow in the form of loans, advances, reimbursement for shared
expenses, and dividends. AIG’s insurance subsidiaries are subject to regulatory restrictions on the amount of
dividends that can be remitted to AIG parent. These restrictions vary by jurisdiction. For example, unless permitted
by the New York Superintendent of Insurance, general insurance companies domiciled in New York may not pay
dividends to shareholders that, in any twelve-month period, exceed the lesser of ten percent of such company’s
statutory policyholders’ surplus or 100 percent of its “adjusted net investment income,” as defined. Generally, less
severe restrictions applicable to both general and life insurance companies exist in most of the other states in which
AIG’s insurance subsidiaries are domiciled. Certain foreign jurisdictions have restrictions that could delay or limit
the remittance of dividends. There are also various local restrictions limiting cash loans and advances to AIG by its
subsidiaries. Largely as a result of these restrictions, a significant majority of the aggregate equity of AIG’s
consolidated subsidiaries was restricted from immediate transfer to AIG parent at December 31, 2008.
Series C Perpetual, Convertible, Participating Preferred Stock
As partial consideration for the Fed Credit Agreement, AIG agreed to issue 100,000 shares of Series C
Preferred Stock to the Trust. AIG recorded the $23 billion fair value of the Series C Preferred Stock not yet issued as
a prepaid commitment fee asset and an increase to additional paid-in capital. The Trust Agreement governing the
operations of the Trust was executed in January 2009. On March 1, 2009, AIG entered into the Series C Preferred
Stock Purchase Agreement with the Trust, and AIG expects to issue the Series C Preferred Stock to the Trust in early
March 2009.
The Series C Preferred Stock will have voting rights commensurate with an approximately 77.9 percent
holding of all outstanding shares of common stock, treating the Series C Preferred Stock as converted. Holders of
the Series C Preferred Stock will be entitled to participate in dividends paid on the common stock, receiving
approximately 77.9 percent of the aggregate amount of dividends paid on the shares of common stock then
outstanding, treating the Series C Preferred Stock as converted. After the Series C Preferred Stock is issued and
following notice from the Trust, AIG will be required to hold a special shareholders’ meeting to amend its Restated
Certificate of Incorporation to increase the number of authorized shares of common stock to 19 billion and to reduce
the par value per share. The holders of the common stock will be entitled to vote as a class separate from the holders
of the Series C Preferred Stock on these changes to AIG’s Restated Certificate of Incorporation. If the increase in the
number of authorized shares and change in par value of the common stock is approved, the Series C Preferred Stock
will become convertible into common stock. The number of shares into which the Series C Preferred Stock will be
convertible is that which will result in an approximately 77.9 percent holding, after conversion, based upon the
number of shares of common stock outstanding on the issue date of the Series C Preferred Stock, plus the number of
shares of common stock that are subsequently issued in settlement of Equity Units. Subject to certain exceptions,
while the Trust owns for the sole benefit of the United States Treasury at least 50 percent of the Series C Preferred
Stock (or the shares into which the Series C Preferred Stock is convertible), AIG will be prohibited from issuing any
capital stock, or any securities or instruments convertible or exchangeable into, or exercisable for, capital stock,
without the Trust’s consent. In addition, AIG has provided demand registration rights for the Series C Preferred
Stock.
The $23 billion initial fair value of the Series C Preferred Stock was determined by AIG primarily based on the
implied value of the common stock into which the Series C Preferred Stock will be convertible as indicated by
AIG 2008 Form 10-K 293
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)