AIG 2005 Annual Report Download - page 163

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Shan for not providing its agency leaders a choice between
12. Commitments and Contingent Liabilities
alternative government pension plans. Nan Shan has reached
Continued
an agreement with the agency union and the ultimate liability
amended (the Securities Act), respectively. AIG responded to is not material to AIG’s consolidated financial condition or
the SICO claims on November 7, 2005. results of operations.
(k) AIG subsidiaries own interests in certain limited liability
companies (LLCs) which invested in six coal synthetic fuel 13. Fair Value of Financial Instruments
production facilities. The sale of coal synthetic fuel produced Statement of Financial Accounting Standards No. 107, ‘‘Dis-
by these six facilities generates income tax credits. Since closures about Fair Value of Financial Instruments’’ (FAS 107),
acquiring the facilities, AIG has recognized approximately requires disclosure of fair value information about financial
$1.0 billion of synfuel tax credits through December 31, 2005. instruments, as defined therein, for which it is practicable to
One of the conditions a taxpayer must meet to qualify for coal estimate such fair value. In the measurement of the fair value
synfuel tax credits is that the synfuel production facility must of certain financial instruments, where quoted market prices
have been ‘‘placed in service’’ before July 1, 1998. On July 1, are not available, other valuation techniques are utilized. These
2005 IRS field agents issued notices of proposed adjustment to fair value estimates are derived using internally developed
the LLCs proposing to disallow all of the credits taken by the valuation methodologies based on available and observable
LLCs during the years 2001 through 2003. The IRS field market information. FAS 107 excludes certain financial instru-
agents subsequently conceded that one of the facilities was ments, including those related to insurance contracts.
timely placed in service, but contended that none of the other The following methods and assumptions were used by AIG
underlying production facilities were placed in service by the in estimating the fair value of the financial instruments
statutory deadline. On October 3, 2005, IRS field agents issued presented:
60-day letters to the LLCs proposing to disallow the tax credits
taken with respect to synfuel sales by the remaining five Cash and short-term investments: The carrying amounts approxi-
production facilities. By letters dated February 17, 2006, the mate fair values.
IRS field agents have advised the LLCs that they have, after Fixed maturity securities: Fair values were generally based upon
further review, concluded that all six production facilities were quoted market prices. For certain fixed maturity securities for
placed in service before July 1, 1998 and that they will which market prices were not readily available, fair values were
withdraw the 60-day letters issued to the LLCs. estimated using values obtained from independent pricing
Tax credits generated from the production and sale of services.
synthetic fuel under section 29 of the Internal Revenue Code
are subject to an annual phase-out provision that is based on Equity securities: Fair values were based upon quoted market
the average wellhead price of domestic crude oil. The price prices.
range within which the tax credits are phased-out was Mortgage loans on real estate, policy and collateral loans: Where
originally established in 1980 and is adjusted annually for practical, the fair values of loans on real estate and collateral
inflation. Depending on the price of domestic crude oil for a loans were estimated using discounted cash flow calculations
particular year, all or a portion of the tax credits generated in based upon AIG’s current incremental lending rates for similar
that year might be eliminated. Although AIG cannot predict type loans. The fair values of the policy loans were not
the future price of domestic crude oil for the years 2006 and calculated as AIG believes it would have to expend excessive
2007 (the final year the tax credits are available), AIG does costs for the benefits derived.
not expect the phase-out provision to affect tax credits
generated in 2005. AIG has also entered into hedges designed Trading assets and trading liabilities: Fair values approximate the
to mitigate a portion of its future exposure to a sustained high carrying values.
price of oil. However, no assurance can be given as to the Finance receivables: Fair values were estimated using discounted
effectiveness of the hedging in actually reducing such exposure cash flow calculations based upon the weighted average rates
or whether such hedging will continue. currently being offered for similar finance receivables.
(l) AIG understands that some of its employees have received Securities available for sale: Fair values were based on quoted
Wells notices in connection with previously disclosed SEC market prices. Where market prices were not readily available,
investigations of certain of AIG’s transactions or accounting fair values were estimated using quoted market prices of
practices. Under SEC procedures, a Wells notice is an comparable investments.
indication that the SEC staff has made a preliminary decision
to recommend enforcement action that provides recipients Securities lending collateral and securities lending payable: The
with an opportunity to respond to the SEC staff before a contract values of these financial instruments approximate fair
formal recommendation is finalized. AIG anticipates that value.
additional current and former employees could receive similar Trading securities: Fair values were based on current market
notices in the future as the regulatory investigations proceed. value where available. For securities for which market values
(m) In August 2005, the Bureau of Labor Insurance in Taiwan
began to levy a monthly administrative penalty against Nan
AIG m Form 10-K 111