American International Specialty Lines

Insurance Co.

c/o American International Surplus Lines Agency Inc.

Harborside Financial Center

401 Plaza 3, Jersey City,

N.J. 07311; 201-309-1100

fax: 201-309-1886

1996 1995

Gross premiums $811,765,737 $812,142,074

Non-admitted $780,243,287 $793,130,552

Commercial risks 100% 100%

Net premiums $111,203,436 $100,765,105

Paid-in capital $5,002,500 $5,002,500

Capital & surplus $192,349,335 $170,437,802

Employees 0 0

Combined ratio 94.8% 89.6%

Rating agency 94.8% 89.7%

Net income $22,157,671 $22,992,624

Best's rating A++ A++

S&P rating AAA AAA

Environmental coverages continue to be the primary focus of American International Specialty Lines Insurance Co.

"The environmental area has really been the area of growth for the last several years. That's true of 1997 as well," said Kevin H. Kelley, who became president of AI Specialty late last year. Mr. Kelley also is president of Boston-based Lexington Insurance Co., another unit of American International Group. Mr. Kelley stresses, however, that there is no relationship between the two insurers.

They are "two separate, totally different operating subsidiaries of AIG," he said.

After years of rapid premium growth, AI Specialty saw a slight decline in premium volume in 1996. Gross premiums fell to $811.8 million from $812.1 million in 1995. Premiums written on a non-admitted basis fell 1.6% to $780.2 million in 1996.

Policyholder surplus, however, continued to grow. Surplus rose to $192.3 million last year, a 12.9% increase over 1995.

The insurer's net income dropped about 3.6% to $22.2 million in 1996.

"Some large accounts are sometimes a little more difficult to renew. In addition to that, generally soft market conditions" played a role in suppressing premium growth, said Mr. Kelley. He noted that American Surplus will walk away from business if it believes rates are too low.

During the first six months of this year, premium volume continued to shrink, but net income rebounded. AI Specialty wrote $271.4 million in direct non-admitted premiums, a drop of about 10.7% compared with the same period of 1996.

Net income for the first six months of 1997 grew to $14.7 million, a growth of about 37.4% compared with the first half of 1996.

"The environmental business is really becoming the core of the company," he said.

Among the centerpieces of that business are its so-called Eagle and Seal policies.

The 2-year-old Eagle policy, short for Environmental and General Liability Exposures program, combines pollution and general liability coverages, and carries limits of up to $10 million. The general liability portion covers claims for bodily injury, property damage or personal injury stemming from the policyholder's operations, products or premises. The pollution legal liability responds to losses from pollution coming from scheduled locations causing third-party bodily injury, third party property damage and third-party cleanup costs.

While the general liability portion is available on a claims-made and occurrence basis, the pollution liability is available only on a claims-made basis.

Seal, which stands for Supplemental Environmental Automobile Liability program, is intended to fill gaps in business automobile and trucking policies. The policy, which first became available in March 1996, provides coverage against claims of bodily injury, property damage or cleanup costs caused by pollution releases from cargo carried by a covered vehicle. It carries limits of up to $10 million.

Mr. Kelley pointed out that most of the business AI Specialty writes can "be essentially broken down into five main categories: Health care excess, financial products, environmental, primary casualty, and unusual coverages that really combine finite and risk transfer accounts."

As an example of the last category, the "unusual coverages," Mr. Kelley said a multiproduct policy could be manuscripted for a client.

"The client might assume a significant amount of risk, but there would be limits to that risk. And we would in some cases provide a direct excess over and above that," he said.

Such a product could be written on a multiyear basis, he said. Mr. Kelley added, however, that clients' appetite for multiyear policies is not as great as it was a year ago, though he did not know why that is the case.

Mr. Kelley said AI Specialty is not limited to the five broad categories of coverage.

"I think we'd look at anything provided we thought we could make an underwriting profit on it," he said.

AI Specialty also writes various forms of professional liability coverage, errors and omissions, directors and officers liability, pension fiduciary ERISA liability as well as other fiduciary liability, and primary and excess commercial property coverages.

Capacity for most casualty lines is now $50 million with facultative reinsurance, said Mr. Kelley, a doubling of the previous $25 million limits.

He said the increase came as a result of market conditions and customer demand.

Mr. Kelley pointed out, however, that "there's very little property written in American Specialty now."

American Specialty launched several new products during the past year, he said. These included Corporate I, which he described as a tailored policy that can combine several lines of coverage, including several different forms of E&O coverages, for clients in targeted industry groups.

"What we're trying to do is design products that meet specific industry needs," he said.

AISLIC also introduced Secured Creditor Impaired Property Policy and Professional Package, or Pro Pac, during the past year. A Secured Creditor Impaired Property Policy protects financial institutions against loss arising from a default by a borrower on a commercial real estate loan by providing recovery for the lesser of the outstanding loan balance or the cleanup costs. The policy also can provide coverage for third-party bodily injury, property damage and cleanup costs resulting from on- and off-site pollution at insured properties.

Pro Pac is a package policy that includes general liability, environmental and professional liability for environmental consultants, contractors and engineers. In addition to standard general liability coverages, the policy includes coverage for claims that result from a pollution release arising from the client's contracting operations and professional services.

Looking ahead, Mr. Kelley said "I think there will be growth probably in the health care business, growth in the environmental business, growth in the middle market business and growth in selected financial lines."

AI Specialty writes as a non-admitted insurer in all states except Alaska and New Jersey.

It has operated as an admitted insurer in Alaska since its incorporation under that state's laws in 1973.

The company has no employees of its own. Its staff is employed by its parent, AIG.

In addition to Mr. Kelley, American Specialty's principal officers include: Elizabeth M. Tuck, secretary; Armand Pepin, treasurer; David J. Walsh, senior vp; and James M. Kilkenny, vp. Thomas Tizzio, whom Mr. Kelley succeeded as American Specialty's president, is the insurer's chairman.