AIG 2005 Annual Report Download - page 69

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Casualty Insurance Underwriting and Reserves ITEM 1B.
Unresolved Staff Comments
Casualty insurance liabilities are difficult to predict and may
exceed the related reserves for losses and loss expenses. There are no material unresolved written comments that were
Although AIG annually reviews the adequacy of the estab- received from the SEC staff 180 days or more before the end of
lished reserve for losses and loss expenses, there can be no AIG’s fiscal year relating to AIG’s periodic or current reports
assurance that AIG’s ultimate loss reserves will not develop under the Securities Exchange Act of 1934 (Exchange Act).
adversely and materially exceed AIG’s current loss reserves.
Estimation of ultimate net losses, loss expenses and loss ITEM 2.
reserves is a complex process for long-tail casualty lines of Properties
business, which include excess and umbrella liability, D&O, AIG and its subsidiaries operate from approximately 2,200
professional liability, medical malpractice, workers compensa- offices in the United States, 8 offices in Canada and numerous
tion, general liability, products liability and related classes, as offices in approximately 100 foreign countries. The offices in
well as for asbestos and environmental exposures. Generally, Montgomery, Alabama; Greensboro, North Carolina; Spring-
actual historical loss development factors are used to project field, Illinois; Amarillo, Ft. Worth and Houston, Texas;
future loss development. However, there can be no assurance Wilmington, Delaware; San Juan, Puerto Rico; Tampa, Florida;
that future loss development patterns will be the same as in Livingston, New Jersey; Evansville, Indiana; Nashville, Tennes-
the past. Moreover, any deviation in loss cost trends or in loss see; 70 Pine Street, 72 Wall Street and 175 Water Street in
development factors might not be discernible for an extended New York City; and offices in more than 30 foreign countries
period of time subsequent to the recording of the initial loss and jurisdictions including Bermuda, Chile, Hong Kong, the
reserve estimates for any accident year. Thus, there is the Philippines, Japan, United Kingdom, Singapore, Switzerland,
potential for reserves with respect to a number of years to be Taiwan and Thailand are located in buildings owned by AIG
significantly affected by changes in loss cost trends or loss and its subsidiaries. The remainder of the office space utilized
development factors that were relied upon in setting the by AIG subsidiaries is leased.
reserves. These changes in loss trends or loss development
factors could be attributable to changes in inflation in labor ITEM 3.
and material costs or in the judicial environment, or in other Legal Proceedings
social or economic phenomena affecting claims. See ‘‘Manage-
ment’s Discussion and Analysis of Financial Condition and General
Results of Operations — Operating Review — Reserve for
AIG and its subsidiaries, in common with the insurance
Losses and Loss Expenses.’’
industry in general, are subject to litigation, including claims
Natural Disasters and Pandemic Diseases for punitive damages, in the normal course of their business.
See Notes 12(d), 12(g), 12(h) and 12(i) of Notes to
Natural disasters and pandemic disease could adversely affect Consolidated Financial Statements, as well as the Discussion
AIG’s operating results. Natural disasters such as hurricanes, and Analysis of Consolidated Net Losses and Loss Expense
earthquakes and other catastrophes have the potential to Reserve Development and Management’s Discussion and Anal-
adversely affect AIG’s operating results. Other risks, such as an ysis of Financial Condition and Results of Operations.
outbreak of a pandemic disease, such as the Avian Influenza A
Virus (H5N1), could adversely affect AIG’s business and 2006 Regulatory Settlements
operating results to an extent that may be only minimally
offset by reinsurance programs. In February 2006, AIG reached a final settlement with the
While to date outbreaks of the Avian Flu continue to occur SEC, the United States Department of Justice (DOJ), the
among poultry or wild birds in a number of countries in Asia, Office of the New York Attorney General (NYAG) and the
parts of Europe, and recently in Africa, transmission to humans New York State Department of Insurance (DOI). The settle-
has been rare. If the virus mutates to a form that can be ments resolved outstanding litigation filed by the SEC, NYAG
transmitted from human to human, it has the potential to and DOI against AIG and concluded negotiations with these
spread rapidly worldwide. If such an outbreak were to take authorities and the DOJ in connection with the accounting,
place, early quarantine and vaccination could be critical to financial reporting and insurance brokerage practices of AIG
containment. and its subsidiaries, as well as claims relating to the underpay-
Both the contagion and mortality rate of any mutated ment of certain workers compensation premium taxes and
H5N1 virus that can be transmitted from human to human are other assessments. The 2005 financial statements included in
highly speculative. AIG continues to monitor the developing this Annual Report on Form 10-K include a fourth quarter
facts. A significant global outbreak could have a material after-tax charge of $1.15 billion recording the settlements.
adverse effect on AIG’s life insurance business operating results As part of the settlement with the SEC, the SEC filed a
and liquidity from increased mortality and morbidity rates. civil complaint, alleging that from 2000 until 2005, AIG
materially falsified its financial statements through a variety of
transactions and entities in order to strengthen the appearance
of its financial results to analysts and investors.
AIG m Form 10-K 17