AIG 2005 Annual Report Download - page 67

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
These ratings actions have affected and will continue to discussed below under Item 3. Legal Proceedings, AIG recorded
affect AIG’s business and results of operations in a number of an after-tax charge of approximately $1.15 billion in the fourth
ways. quarter of 2005. AIG is party to numerous other legal
mDowngrades in AIG’s debt ratings will adversely affect proceedings and regulatory investigations. It is possible that the
AIG’s results of operations. AIG relies on external sources effect of the unresolved matters could be material to AIG’s
of financing to fund several of its operations. The cost and consolidated results of operations for an individual reporting
availability of unsecured financing are generally dependent period. For a discussion of these unresolved matters, see
on the issuer’s long-term and short-term debt ratings. These Item 3. Legal Proceedings.
downgrades and any future downgrades in AIG’s debt Significant investigations into AIG’s business are continuing
ratings may adversely affect AIG’s borrowing costs and and the commencement of additional investigations is possi-
therefore adversely affect AIG’s results of operations. ble. Broad-ranging investigations into AIG’s business practices
mThe downgrade in AIG’s long-term senior debt ratings will continue. These investigations are being conducted by a
adversely affect AIGFP’s ability to compete for certain number of regulators, and related actions by regulators both
businesses. Credit ratings are very important to the ability within and outside the United States may be undertaken in
of financial institutions to compete in the derivative and response. The review of large amounts of information by
structured transaction marketplaces. Historically, AIG’s various regulatory authorities may result in the commencement
triple-A ratings provided AIGFP a competitive advantage. of new areas of inquiry and, possibly, new significant legal
The downgrades have reduced this advantage and, for proceedings.
specialized financial transactions that generally are con-
ducted only by triple-A rated financial institutions, The Relationships Between AIG and Starr and SICO
counterparties may be unwilling to transact business with
The relationships between AIG and Starr and SICO may
AIGFP except on a secured basis. This could require AIGFP
take an extended period of time to unwind and/or resolve,
to post more collateral to counterparties in the future. See
and the consequences of such resolution are uncertain.
below for a further discussion of the effect that posting
Although AIG is currently working on unwinding and
collateral may have on AIG’s liquidity.
resolving its relationships with C.V. Starr & Co, Inc. (Starr)
mAlthough the financial strength ratings of AIG’s insurance
and Starr International Company, Inc. (SICO), AIG cannot
company subsidiaries remain high compared to many of
predict what its future relationship with Starr and SICO will
their competitors, the downgrades have reduced the previ-
be. AIG subsidiaries are in the process of terminating their
ous ratings differential. The competitive advantage of the
agency relationships with the Starr agencies and are beginning
ratings to AIG’s insurance company subsidiaries may be
to write the business previously produced by those agencies on
lessened accordingly.
a direct basis. AIG also continues to address the issues posed
mAs a result of the downgrades of AIG’s long-term senior
by compensation plans and programs previously provided to
debt ratings, AIG was required to post approximately
AIG executives by Starr and SICO, as AIG is providing
$1.16 billion of collateral with counterparties to municipal
compensation programs that recognize those plans and pro-
guaranteed investment contracts and financial derivatives
grams. In January 2006, Starr announced that it had completed
transactions. In the event of a further downgrade, AIG will
its tender offers to purchase interests in Starr and that all
be required to post additional collateral. It is estimated that,
eligible shareholders had tendered their shares. As a result of
as of the close of business on February 28, 2006 based on
completion of the tender offers, no AIG executive currently
AIG’s outstanding municipal guaranteed investment agree-
holds any Starr interest. AIG has entered into agreements
ments and financial derivatives transactions as of such date,
pursuant to which AIG agrees, subject to certain conditions, to
a further downgrade of AIG’s long-term senior debt ratings
assure AIG’s current employees that all payments are made
to ‘Aa3’ by Moody’s or ‘AA–’ by S&P would permit
under a series of two-year Deferred Compensation Profit
counterparties to call for approximately $962 million of
Participation Plans provided by SICO (SICO Plans). See
additional collateral. Further, additional downgrades could
Note 12(f) and Note 16 of Notes to Consolidated Financial
result in requirements for substantial additional collateral,
Statements. Nevertheless, there can be no assurance that AIG
which could have a material effect on how AIG manages its
will be able to effectively address the consequences for its
liquidity. The actual amount of additional collateral that
executives of the unwinding of their participation in the Starr
AIG would be required to post to counterparties in the
and SICO plans and programs. Nor can there be any assurance
event of such downgrades depends on market conditions,
that AIG will compete successfully for the business previously
the market value of the outstanding affected transactions
produced by the Starr agencies.
and other factors prevailing at the time of the downgrade.
Finally, litigation between AIG and Starr and SICO remains
Any additional obligations to post collateral will increase
pending, and the timing and terms of any resolution cannot
the demand on AIG’s liquidity.
currently be predicted. As a result of the foregoing, there can be
no assurance that the ultimate resolution of AIG’s relationships
Regulatory Investigations with Starr and SICO will not be adverse to AIG. For further
Significant legal proceedings have adversely affected AIG’s information about litigation between AIG and Starr and SICO,
results of operations for 2005. As a result of the settlements see Item 3. Legal Proceedings.
AIG m Form 10-K 15