AIG 2011 Annual Report Download - page 340

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liability for unpaid claims and claims adjustment expense
Although AIG regularly reviews the adequacy of the established Liability for unpaid claims and claims
adjustment expense, there can be no assurance that AIG’s loss reserves will not develop adversely and have a
material adverse effect on its results of operations. Estimation of ultimate net losses, loss expenses and loss
reserves is a complex process for long-tail casualty lines of business, which include general liability, commercial
automobile liability, workers’ compensation, excess casualty and crisis management coverages, insurance and risk
management programs for large corporate customers and other customized structured insurance products, as well
as excess and umbrella liability, D&O and products liability. Generally, actual historical loss development factors
are used to project future loss development. However, there can be no assurance that future loss development
patterns will be the same as in the past. Moreover, any deviation in loss cost trends or in loss development factors
might not be discernible for an extended period of time subsequent to the recording of the initial loss reserve
estimates for any accident year. There is the potential for reserves with respect to a number of years to be
significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the
reserves. These changes in loss cost trends or loss development factors could be attributable to changes in
inflation or in the judicial environment, or in other social or economic phenomena affecting claims, such as the
effects that the recent disruption in the credit markets could have on reported claims under professional liability
coverages.
Benefits Provided by Starr International Company, Inc.
SICO has provided a series of two-year Deferred Compensation Profit Participation Plans (SICO Plans) to
certain AIG employees. The SICO Plans were created in 1975 when the voting shareholders and Board of
Directors of SICO, a private holding company whose principal asset was AIG Common Stock, decided that a
portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding
managements of all American International companies, including AIG.
None of the costs of the various benefits provided under the SICO Plans has been paid by AIG, although AIG
has recorded a charge to reported earnings for the deferred compensation amounts paid to AIG employees by
SICO, with an offsetting amount credited to Additional paid-in capital reflecting amounts considered to be
contributed by SICO. The SICO Plans provide that shares currently owned by SICO are set aside by SICO for the
benefit of the participant and distributed upon retirement. The SICO Board of Directors currently may permit an
early payout of units under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose
of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions,
including but not limited to the participant’s voluntary termination of employment with AIG prior to normal
retirement age. Under the SICO Plans, SICO’s Board of Directors may elect to pay a participant cash in lieu of
shares of AIG Common Stock. Following notification from SICO to participants in the SICO Plans that it will
settle specific future awards under the SICO Plans with shares rather than cash, AIG modified its accounting for
the SICO Plans from variable to fixed measurement accounting. AIG gave effect to this change in settlement
method beginning on December 9, 2005, the date of SICO’s notice to participants in the SICO Plans.
Under the Starr International Company, Inc. Assurance Agreement, dated as of June 27, 2005 (SICO Assurance
Agreement), AIG has agreed that, in the event that SICO does not promptly deliver the shares as required under
the express terms of the SICO Plans to participants who were employees of AIG and its subsidiaries as of May 18,
2005, AIG will pay the benefits due under the SICO Plans. At December 31, 2011, the maximum number of
shares of AIG Common Stock that AIG could be required to deliver under the SICO Assurance Agreement was
195,908.
326 AIG 2011 Form 10-K
(C) CONTINGENCIES