2007 Annual Report - AIG.com

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