2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Continued 12. Commitments, Contingencies and Guarantees the settlement agreements and continues to deny the allegations. Nevertheless, AIG agreed to settle in order to avoid the expense Continued and uncertainty of protracted litigation. The settlement agreements, which remain subject to court approvals, were reached States Court of Appeals for the Third Circuit on October 10, 2007. with the Attorneys General of the States of Florida, Hawaii, Several similar actions that were consolidated before Chief Judge Maryland, Michigan, Oregon, Texas and West Virginia, the Com- Brown are still pending in the District Court. Those actions are monwealths of Massachusetts and Pennsylvania, and the District currently stayed pending a decision by the court on whether they of Columbia, the Florida Department of Financial Services, and will proceed during the appeal of the dismissal of the Second the Florida Office of Insurance Regulation. The agreement with the Commercial Complaint and the Second Employee Benefits Texas Attorney General also settles allegations of anticompetitive Complaint. conduct relating to AIG’s relationship with Allied World Assurance On August 24, 2007, the Ohio Attorney General filed a Company and includes an additional settlement payment of complaint in the Ohio Court of Common Pleas against AIG and a $500,000 related thereto. number of its subsidiaries, as well as several other broker and Wells Notices. AIG understands that some of its employees insurer defendants, asserting violation of Ohio’s antitrust laws. have received Wells notices in connection with previously dis- The complaint, which is similar to the Second Commercial closed SEC investigations of certain of AIG’s transactions or Complaint, alleges that AIG and the other broker and insurer accounting practices. Under SEC procedures, a Wells notice is an defendants conspired to allocate customers, divide markets, and indication that the SEC staff has made a preliminary decision to restrain competition in commercial lines of casualty insurance recommend enforcement action that provides recipients with an sold through the broker defendant. The complaint seeks treble opportunity to respond to the SEC staff before a formal damages on behalf of Ohio public purchasers of commercial recommendation is finalized. It is possible that additional current casualty insurance, disgorgement on behalf of both public and and former employees could receive similar notices in the future private purchasers of commercial casualty insurance, as well as a as the regulatory investigations proceed. $500 per day penalty for each day of conspiratorial conduct. AIG, along with other co-defendants, moved to dismiss the complaint on November 16, 2007. Discovery is stayed in the case pending Effect on AIG a ruling on the motion to dismiss or until May 15, 2008, In the opinion of AIG management, AIG’s ultimate liability for the whichever occurs first. unresolved litigation and investigation matters referred to above is SICO. In July, 2005, SICO filed a complaint against AIG in the not likely to have a material adverse effect on AIG’s consolidated Southern District of New York, claiming that AIG had refused to financial condition, although it is possible that the effect would be provide SICO access to certain artwork and asked the court to material to AIG’s consolidated results of operations for an order AIG immediately to release the property to SICO. AIG filed individual reporting period. an answer denying SICO’s allegations and setting forth defenses to SICO’s claims. In addition, AIG filed counterclaims asserting (b) Commitments breach of contract, unjust enrichment, conversion, breach of fiduciary duty, a constructive trust and declaratory judgment, Flight Equipment relating to SICO’s breach of its commitment to use its AIG shares At December 31, 2007, ILFC had committed to purchase 234 new only for the benefit of AIG and AIG employees. Fact and expert aircraft deliverable from 2008 through 2017 at an estimated discovery has been concluded and SICO’s motion for summary aggregate purchase price of $20.1 billion. ILFC will be required to judgment is pending. find customers for any aircraft acquired, and it must arrange Regulatory Investigations. Regulators from several states have financing for portions of the purchase price of such equipment. commenced investigations into insurance brokerage practices Minimum future rental income on noncancelable operating related to contingent commissions and other industry wide leases of flight equipment which have been delivered at practices as well as other broker-related conduct, such as alleged December 31, 2007 was as follows: bid-rigging. In addition, various federal, state and foreign regulatory and governmental agencies are reviewing certain transactions (in millions) and practices of AIG and its subsidiaries in connection with 2008 $ 4,142 industry wide and other inquiries. AIG has cooperated, and will 2009 3,783 continue to cooperate, in producing documents and other informa- 2010 3,274 tion in response to subpoenas and other requests. On Janu- 2011 2,726 ary 29, 2008, AIG reached settlement agreements with nine 2012 2,075 states and the District of Columbia. The settlement agreements Remaining years after 2012 4,921 call for AIG to pay a total of $12.5 million to be allocated among Total $20,921 the ten jurisdictions and also require AIG to continue to maintain certain producer compensation disclosure and ongoing compliance initiatives. AIG will also continue to cooperate with these states in their ongoing investigations. AIG has not admitted liability under Flight equipment is leased, under operating leases, with remaining terms ranging from 1 to 12 years. 178 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries 12. Commitments, Contingencies and potential for reserves with respect to a number of years to be Guarantees significantly affected by changes in loss cost trends or loss Continued development factors that were relied upon in setting the reserves. These changes in loss cost trends or loss development factors Lease Commitments could be attributable to changes in inflation, in labor and material costs or in the judicial environment, or in other social or economic AIG and its subsidiaries occupy leased space in many locations phenomena affecting claims. under various long-term leases and have entered into various Synthetic Fuel Tax Credits. AIG generated income tax credits as leases covering the long-term use of data processing equipment. a result of investing in synthetic fuel production. Tax credits At December 31, 2007, the future minimum lease generated from the production and sale of synthetic fuel under the payments under operating leases were as follows: Internal Revenue Code were subject to an annual phase-out (in millions) provision based on the average wellhead price of domestic crude oil. The price range within which the tax credits are phased-out 2008 $ 747 was originally established in 1980 and is adjusted annually for 2009 581 inflation. Depending on the price of domestic crude oil for a 2010 460 particular year, all or a portion of the tax credits generated in that 2011 371 year might be eliminated. AIG evaluated the production levels of 2012 322 its synthetic fuel production facilities in light of the risk of phase- Remaining years after 2012 1,945 out of the associated tax credits. As a result of fluctuating Total $4,426 domestic crude oil prices, AIG evaluated and adjusted production Rent expense approximated $771 million, $657 million, and levels when appropriate in light of this risk. Under current $597 million for the years ended December 31, 2007, 2006, and legislation, the opportunity to generate additional tax credits from 2005, respectively. the production and sale of synthetic fuel expired on December 31, 2007. Other Commitments Lease Transactions. In June and August, 2007, field agents at the Internal Revenue Service (IRS) issued Notices of Proposed In the normal course of business, AIG enters into commitments to Adjustment (NOPAs) relating to a series of lease transactions by invest in limited partnerships, private equities, hedge funds and an AIG subsidiary. In the NOPAs, the field agents asserted that mutual funds and to purchase and develop real estate in the U.S. the leasing transactions were ‘‘lease-in lease-out’’ transactions and abroad. These commitments totaled $9.1 billion at Decemdescribed in Revenue Ruling 2002-69 and proposed adjustments ber 31, 2007. to taxable income of approximately $203 million in the aggregate On June 27, 2005, AIG entered into an agreement pursuant to for the years 1998, 1999, 2001 and 2002. which AIG agrees, subject to certain conditions, to make any payment that is not promptly paid with respect to the benefits (d) Guarantees accrued by certain employees of AIG and its subsidiaries under AIG and certain of its subsidiaries become parties to derivative the SICO Plans (as discussed in Note 19 herein). financial instruments with market risk resulting from both dealer (c) Contingencies and end-user activities and to reduce currency, interest rate, equity and commodity exposures. These instruments are carried Loss Reserves at their estimated fair values in the consolidated balance sheet. Although AIG regularly reviews the adequacy of the established The vast majority of AIG’s derivative activity is transacted by reserve for losses and loss expenses, there can be no assurance AIGFP. See also Note 8 herein. that AIG’s ultimate loss reserves will not develop adversely and AIG has issued unconditional guarantees with respect to the materially exceed AIG’s current loss reserves. Estimation of prompt payment, when due, of all present and future payment ultimate net losses, loss expenses and loss reserves is a obligations and liabilities of AIGFP arising from transactions complex process for long-tail casualty lines of business, which entered into by AIGFP. include excess and umbrella liability, directors and officers liability SAI Deferred Compensation Holdings, Inc., a wholly owned (D&O), professional liability, medical malpractice, workers compen- subsidiary of AIG, has established a deferred compensation plan sation, general liability, products liability and related classes, as for registered representatives of certain AIG subsidiaries, pursuwell as for asbestos and environmental exposures. Generally, ant to which participants have the opportunity to invest deferred actual historical loss development factors are used to project commissions and fees on a notional basis. The value of the future loss development. However, there can be no assurance deferred compensation fluctuates with the value of the deferred that future loss development patterns will be the same as in the investment alternatives chosen. AIG has provided a full and past. Moreover, any deviation in loss cost trends or in loss unconditional guarantee of the obligations of SAI Deferred Comdevelopment factors might not be discernible for an extended pensation Holdings, Inc. to pay the deferred compensation under period of time subsequent to the recording of the initial loss the plan. reserve estimates for any accident year. Thus, there is the AIG 2007 Form 10-K 179
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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 181 and 182: American International Group, Inc.
Page 191 and 192: Index of Notes to Consolidated Fina
Page 231: American International Group, Inc.
Page 275 and 276: SHAREHOLDER INFORMATION Corporate H
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