2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Continued 11. Debt Outstanding $969 million at December 31, 2007 and $733 million at Decem- Continued ber 31, 2006. ILFC has substantially eliminated the currency exposure arising from foreign currency denominated notes by would be required to be accounted for separately under FAS 133. economically hedging the portion of the note exposure not already Upon AIG’s early adoption of FAS 155, AIGFP elected the fair offset by Euro-denominated operating lease payments. value option for these notes. The notes that are accounted for using the fair value option are reported separately under hybrid (ii) Junior subordinated debt: In December 2005, ILFC issued two financial instrument liabilities at fair value. tranches of junior subordinated debt totaling $1.0 billion to underlie trust preferred securities issued by a trust sponsored by ILFC. Both (d) AIGLH Borrowings: At December 31, 2007, AIGLH notes tranches mature on December 21, 2065, but each tranche has a aggregating $797 million were outstanding with maturity dates different call option. The $600 million tranche has a call date of ranging from 2010 to 2029 at interest rates from 6.625 percent December 21, 2010 and the $400 million tranche has a call date to 7.50 percent. AIG guarantees the notes and bonds of AIGLH. of December 21, 2015. The note with the 2010 call date has a (e) Liabilities Connected to Trust Preferred Stock: AIGLH fixed interest rate of 5.90 percent for the first five years. The note issued Junior Subordinated Debentures (liabilities) to certain with the 2015 call date has a fixed interest rate of 6.25 percent for trusts established by AIGLH, which represent the sole assets of the first ten years. Both tranches have interest rate adjustments if the trusts. The trusts have no independent operations. The trusts the call option is not exercised. The new interest rate is a floating issued mandatory redeemable preferred stock to investors. The quarterly reset rate based on the initial credit spread plus the interest terms and payment dates of the liabilities correspond to highest of (i) 3 month LIBOR, (ii) 10-year constant maturity treasury those of the preferred stock. AIGLH’s obligations with respect to and (iii) 30-year constant maturity treasury. the liabilities and related agreements, when taken together, (iii) Export credit facility: ILFC had a $4.3 billion Export Credit constitute a full and unconditional guarantee by AIGLH of Facility (ECA) for use in connection with the purchase of payments due on the preferred securities. AIG guarantees the approximately 75 aircraft delivered through 2001. This facility was obligations of AIGLH with respect to these liabilities and related guaranteed by various European Export Credit Agencies. The agreements. The liabilities are redeemable, under certain condi- interest rate varies from 5.75 percent to 5.90 percent on these tions, at the option of AIGLH on a proportionate basis. amortizing ten-year borrowings depending on the delivery date of At December 31, 2007, the preferred stock outstanding the aircraft. At December 31, 2007, ILFC had $664 million consisted of $300 million liquidation value of 8.5 percent outstanding under this facility. The debt is collateralized by a preferred stock issued by American General Capital II in June pledge of the shares of a subsidiary of ILFC, which holds title to 2000, $500 million liquidation value of 8.125 percent preferred the aircraft financed under the facility. stock issued by American General Institutional Capital B in March In May 2004, ILFC entered into a similarly structured ECA for 1997, and $500 million liquidation value of 7.57 percent up to a maximum of $2.6 billion for Airbus aircraft to be delivered preferred stock issued by American General Institutional Capital A through May 31, 2005. The facility was subsequently increased to in December 1996. $3.6 billion and extended to include aircraft to be delivered (f) ILFC Borrowings: through May 31, 2008. The facility becomes available as the (i) Notes and Bonds issued by ILFC: At December 31, 2007, various European Export Credit Agencies provide their guarantees notes aggregating $23.1 billion were outstanding, consisting of for aircraft based on a six-month forward-looking calendar, and the $10.8 billion of term notes, $11.3 billion of medium-term notes interest rate is determined through a bid process. At Decemwith maturities ranging from 2008 to 2014 and interest rates ber 31, 2007, ILFC had $1.9 billion outstanding under this facility. ranging from 2.75 percent to 5.75 percent and $1.0 billion of (iv) Bank Financings: From time to time, ILFC enters into various junior subordinated debt as discussed below. Notes aggregating bank financings. At December 31, 2007, the total funded amount $5.3 billion are at floating interest rates and the remainder are at was $1.1 billion. The financings mature through 2012. AIG does fixed rates. To the extent deemed appropriate, ILFC may enter into not guarantee any of the debt obligations of ILFC. swap transactions to manage its effective borrowing rates with respect to these notes. (g) AGF Borrowings: As a well-known seasoned issuer, ILFC has filed an automatic (i) Notes and bonds issued by AGF: At December 31, 2007, shelf registration statement with the SEC allowing ILFC immediate notes and bonds aggregating $22.4 billion were outstanding with access to the U.S. public debt markets. At December 31, 2007, maturity dates ranging from 2008 to 2031 at interest rates $4.7 billion of debt securities had been issued under this registration ranging from 1.94 percent to 8.45 percent. To the extent deemed statement and $5.9 billion had been issued under a prior registration appropriate, AGF may enter into swap transactions to manage its statement. In addition, ILFC has a Euro medium term note program effective borrowing rates with respect to these notes. for $7.0 billion, under which $3.8 billion in notes were outstanding at As a well-known seasoned issuer, AGF has filed an automatic December 31, 2007. Notes issued under the Euro medium-term note shelf registration statement with the SEC allowing AGF immediate program are included in ILFC notes and bonds payable in the access to the U.S. public debt markets. preceding table of borrowings. The cumulative foreign exchange AGF uses the proceeds from the issuance of notes and bonds adjustment loss for the foreign currency denominated debt was for the funding of its finance receivables. 172 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries 11. Debt Outstanding of the 1999 settlement of class and derivative litigation involving Continued Caremark Rx, Inc. (Caremark). The plaintiffs in the second-filed action have intervened in the first-filed action, and the second-filed (ii) Junior subordinated debt: In January 2007, AGF issued junior action has been dismissed. An excess policy issued by a subordinated debentures in an aggregate principal amount of subsidiary of AIG with respect to the 1999 litigation was expressly $350 million that mature in January 2067. The debentures stated to be without limit of liability. In the current actions, underlie a series of trust preferred securities sold by a trust plaintiffs allege that the judge approving the 1999 settlement was sponsored by AGF in a Rule 144A/Regulation S offering. AGF can misled as to the extent of available insurance coverage and would redeem the debentures at par beginning in January 2017. not have approved the settlement had he known of the existence AIG does not guarantee any of the debt obligations of AGF. and/or unlimited nature of the excess policy. They further allege that AIG, its subsidiaries, and Caremark are liable for fraud and (h) Other Notes, Bonds, Loans and Mortgages Payable at suppression for misrepresenting and/or concealing the nature and December 31, 2007, consisted of the following: extent of coverage. In addition, the intervenor-plaintiffs allege that Uncollateralized Collateralized various lawyers and law firms who represented parties in the Notes/Bonds/Loans Loans and underlying class and derivative litigation (the ‘‘Lawyer Defend- (in millions) Payable Mortgages Payable ants’’) are also liable for fraud and suppression, misrepresenta- AIGCFG $1,839 $ — tion, and breach of fiduciary duty. The complaints filed by the AIG 729 — plaintiffs and the intervenor-plaintiffs request compensatory dam- Other subsidiaries 600 175 ages for the 1999 class in the amount of $3.2 billion, plus Total $3,168 $175 punitive damages. AIG and its subsidiaries deny the allegations of (i) Interest Expense for All Indebtedness: Total interest fraud and suppression and have asserted that information expense for all indebtedness, net of capitalized interest, aggreto concerning the excess policy was publicly disclosed months prior gated $9.69 billion in 2007, $6.95 billion in 2006 and $5.7 bilassert the approval of the settlement. AIG and its subsidiaries further lion in 2005. Capitalized interest was $37 million in 2007, that the current claims are barred by the statute of $59 million in 2006 and $64 million in 2005. Cash distributions limitations and that plaintiffs’ assertions that the statute was on the preferred shareholders’ equity in subsidiary companies of tolled cannot stand against the public disclosure of the excess ILFC and liabilities connected to trust preferred stock of AIGLH coverage. The plaintiffs and intervenor-plaintiffs, in turn, have subsidiaries are accounted for as interest expense in the asserted that the disclosure was insufficient to inform them of consolidated statement of income. The cash distributions for ILFC the nature of the coverage and did not start the running of the were approximately $5 million for each of the years ended statute of limitations. On November 26, 2007, the trial court December 31, 2007, 2006 and 2005. The cash distributions for issued an order that dismissed the intervenors’ complaint against AIGLH subsidiaries were approximately $107 million, $107 million the Lawyer Defendants and entered a final judgment in favor of and $112 million for the years ended December 31, 2007, 2006 the Lawyer Defendants. The intervenors are appealing the dismis- and 2005, respectively. sal of the Lawyer Defendants and have requested a stay of all trial court proceedings pending the appeal. If the motion to stay is 12. Commitments, Contingencies and granted, no further proceedings at the trial court level will occur Guarantees until the appeal is resolved. If the motion to stay is denied, the next step will be to proceed with class discovery so that the trial In the normal course of business, various commitments and court can determine, under standards mandated by the Alabama contingent liabilities are entered into by AIG and certain of its Supreme Court, whether the action should proceed as a class subsidiaries. In addition, AIG guarantees various obligations of action. AIG cannot reasonably estimate either the likelihood of its certain subsidiaries. prevailing in these actions or the potential damages in the event liability is determined. (a) Litigation and Investigations Litigation Arising from Insurance Operations — Gunderson. A Litigation Arising from Operations. AIG and its subsidiaries, in subsidiary of AIG has been named as a defendant in a putative common with the insurance and financial services industries in class action lawsuit in the 14th Judicial District Court for the general, are subject to litigation, including claims for punitive State of Louisiana. The Gunderson complaint alleges failure to damages, in the normal course of their business. In AIG’s comply with certain provisions of the Louisiana Any Willing insurance operations, litigation arising from claims settlement Provider Act (the Act) relating to discounts taken by defendants on activities is generally considered in the establishment of AIG’s bills submitted by Louisiana medical providers and hospitals that reserve for losses and loss expenses. However, the potential for provided treatment or services to workers compensation claimincreasing jury awards and settlements makes it difficult to ants and seeks monetary penalties and injunctive relief. On assess the ultimate outcome of such litigation. July 20, 2006, the court denied defendants’ motion for summary Litigation Arising from Insurance Operations — Caremark. AIG judgment and granted plaintiffs’ partial motion for summary and certain of its subsidiaries have been named defendants in judgment, holding that the AIG subsidiary was a ‘‘group purtwo putative class actions in state court in Alabama that arise out chaser’’ and, therefore, potentially subject to liability under the AIG 2007 Form 10-K 173
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AMERICAN INTERNATIONAL GROUP, INC.
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FINANCIAL HIGHLIGHTS (in millions,
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overall financial condition, althou
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Group Executive Committee We are ad
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AIG’s life insurance network is t
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We have also begun to address the e
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WHAT WE SEE The ability to see and
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The Major Accounts Practice within
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Around the world, the middle class
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WE SEE GROWTH OPPORTUNITIES IN EMER
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To grow the strength of the AIG glo
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Since 2003, the AIG Disaster Relief
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RESPECT Respect encompasses how we
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Life Insurance & Retirement Service
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Domestic Brokerage Group— Gross P
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In the summer of 2007, widespread f
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in gross premiums written. It launc
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It grew new business premiums from
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emerging markets for its services,
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ILFC—Revenues by Region Total = $
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AIG Investments acquired a 94 perce
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and changing interest rates, as wel
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American International Group, Inc.
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UNITED STATES SECURITIES AND EXCHAN
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Page 175 and 176: American International Group, Inc.
Page 191 and 192: Index of Notes to Consolidated Fina
Page 225: American International Group, Inc.
Page 275 and 276: SHAREHOLDER INFORMATION Corporate H
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