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AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE CO.

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c/o American International Surplus Lines Agency Inc., Harborside

Financial Center, 401 Plaza 3,

Jersey City, N.J. 07311;

201-309-1100; fax: 201-309-1186

1997 1996

Gross premiums $695,086,205 $811,765,737

Non-admitted $663,033,822 $780,243,287

Commercial risks 100% 100%

Net premiums $101,994,745 $111,203,436

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

Capital & surplus $212,200,853 $192,349,336

Employees 0 0

Combined ratio 97.3% 94.8%

Net income $24,297,358 $22,157,671

Best's rating A++ A++

S&P rating AAA AAA

If the price isn't right, American International Specialty Lines Insurance Co. won't underwrite the business.

As a result, AISLIC has sharpened its underwriting focus to assure the business it does write is profitable. That approach paid off last year, as net income increased against sharply lower premium volume.

As part of its strategy, the insurer, a subsidiary of American International Group Inc., is narrowing its focus to a handful of key business areas.

"The key areas are financial lines products, environmental and alternative risk or risk finance," said Kevin H. Kelley, AISLIC's president. Mr. Kelley also is president of Boston-based Lexington Insurance Co., which ranked as the No. 1 surplus lines insurer.

What had been a fourth key area for AISLIC -- health care excess liability insurance -- now exists as a "shrinking" business, because of inadequate pricing in the competitive market, he said.

"Rates in some areas are not what we'd like to see, so we're letting the business go," Mr. Kelley said. The lower rates are due to "a combination of new entrants becoming more aggressive, some very mature competitors becoming very aggressive. There are certain classes of business that we like and certain classes of business that we can't get the rate for, so we're going to let that business go," he added.

Letting go of underpriced risks hasn't hurt the surplus lines insurer's profitability.

AISLIC's 1997 net income increased 9.7% to $24.3 million compared with 1996 earnings.

That gain came despite significant declines in both gross premiums and premiums written on a non-admitted basis. Gross premiums last year reached $695.1 million, which was 14.4% lower than 1996.

Premiums written on a non-admitted basis fell 15% to $663 million last year compared with a year earlier.

Policyholder surplus grew more than 10.3% to $212.2 million.

Despite the premium drop, AISLIC maintained its longtime position as No. 2 on Business Insurance's list of the top surplus lines insurers.

Premium showed a rebound during the first half of this year, noted Mr. Kelley.

AISLIC wrote an estimated $366.6 million in direct non-admitted premium during the first six months of 1998, a 28.6% increase over the same period in 1997.

Net income reached $13 million in the first half, an 11.6% decline compared with the year earlier.

Mr. Kelley said AISLIC provides its customers with a "pretty tight product focus" and the expertise that comes with specializing in a few key areas.

"We're involved in areas that most traditional surplus lines insurers are not, such as environmental, risk finance and other financial lines products," he noted.

"What AISLIC brings to the table is its product focus and product expertise, and its retail distribution is pretty strong," said Mr. Kelley.

AISLIC's chief producers include the major insurance brokers.

Environmental business has been a strong performer for AISLIC, especially its EAGLE and SEAL programs.

EAGLE, introduced three years ago, stands for Environmental And General Liability Exposures. The program combines pollution and general liability coverages and is available with 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 portion responds to losses from pollution coming from scheduled locations causing third-party bodily injury, third-party property damage and third-party cleanup costs.

SEAL, which stands for Supplemental Environmental Automobile Liability, is a program designed to fill gaps in commercial automobile and trucking policies by providing coverage against claims of bodily injury, property damage or cleanup costs caused by pollution releases from cargo carried by a covered vehicle. Like EAGLE, the SEAL program provides limits of up to $10 million.

A third environmental product -- the Professional Package, or Pro Pac -- also has done well in terms of sales, he said. This package includes general liability, environmental and professional liability for environmental consultants, engineers and contractors.

The Pro Pac policy goes beyond general liability coverage to provide coverage for claims that result from a pollution release arising from a client's professional services and contracting operations. Pro Pac offers primary limits of $1 million per occurrence and $2 million aggregate, with up to $30 million in umbrella limits.

Another casualty product launched within the past two years -- Corporate I -- "has probably not taken off as well," even though AISLIC's primary casualty rates are up, he said. Corporate I is a specially tailored policy that can combine several forms of coverage, such as various E&O policies, for clients in specific industries. The policy provides $5 million in primary limits and up to $20 million in excess limits.

Mr. Kelley said AISLIC's capacity for most casualty lines is $50 million, unchanged from a year ago, though the insurer can provide higher limits through reinsurance if necessary.

Mr. Kelley said there are no risks the company absolutely won't write.

"We'd take a look at any type of risk and attempt to offer a solution," he said.

Among the risks the insurer writes in addition to environmental liability are commercial general excess and umbrella liability, medical malpractice, miscellaneous professional liability and fiduciary liability. Mr. Kelley said AISLIC is not heavily involved in commercial excess property coverage.

AISLIC did not launch any major new products recently. "In terms of the product array, it's pretty much the same as last year," he said.

Mr. Kelley says the alternative risk financing area could become increasingly important for the insurer, pointing to the results of the first half of this year.

"We're up about 28%, 29% over the prior first half," said Mr. Kelley, referring to non-admitted premium volume. "A lot of that growth is coming from the risk finance/alternative risk area," he said.

Despite continued competitive pressures, the surplus lines segment will have a definite place in the insurance marketplace of the future, said Mr. Kelley.

"The surplus lines market's role is very clear: We're kind of the pressure release valve for the industry. When you have a market that has ample surplus, it's tougher to see opportunity. But I think the fact that AISLIC's been able to grow by almost 30% indicates that we've been able to see opportunity where others haven't," he said.

AISLIC writes on a non-admitted basis in every state except Alaska and New Jersey. It operates as an admitted insurer in Alaska, where it was incorporated in 1973.

AISLIC has no employees of its own. It is staffed by employees of its parent, AIG.

The surplus lines insurer's only major management change in recent months was the replacement of David M. Walsh as senior vp and general counsel by Peg Birk. Mr. Walsh, a former Alaska insurance commissioner, left AIG earlier this year.

In addition to Mr. Kelley, principal officers include Thomas R. Tizzio, chairman; Elizabeth M. Tuck, secretary; Armand G. Pepin, treasurer; Peg Birk, senior vp and general counsel; and James M. Kilkenny, vp and assistant general counsel.