AIG 2006 Annual Report Download - page 66

American International Group, Inc. and Subsidiaries
operations, including by exposing AIG’s businesses to the the United States may be affected by regional economic down-
following: turns, changes in foreign currency exchange rates, political
)widespread claim costs associated with property, workers upheaval, nationalization and other restrictive government actions,
compensation, mortality and morbidity claims; which could also affect other AIG operations.
)loss resulting from the cash flows from invested assets The degree of regulation and supervision in foreign jurisdic-
being less than the cash flows required to meet the policy tions varies. Generally, AIG, as well as the underwriting compa-
and contract liabilities; or nies operating in such jurisdictions, must satisfy local regulatory
)loss resulting from the actual policy experience adversely requirements. Licenses issued by foreign authorities to AIG
emerging in comparison to the assumptions made in the subsidiaries are subject to modification and revocation. Thus,
product pricing associated with mortality, morbidity, termina- AIG’s insurance subsidiaries could be prevented from conducting
tion and expenses. future business in certain of the jurisdictions where they currently
operate. AIG’s international operations include operations in
various developing nations. Both current and future foreign
Legal Proceedings
operations could be adversely affected by unfavorable political
Significant legal proceedings adversely affected AIG’s results of developments including tax changes, regulatory restrictions and
operations in 2005. As a result of the settlements discussed nationalization of AIG’s operations without compensation. Adverse
below under Item 3. Legal Proceedings, AIG recorded an after-tax actions from any one country may adversely affect AIG’s results of
charge of approximately $1.15 billion in the fourth quarter of operations, liquidity and financial condition depending on the
2005. AIG is party to numerous other legal proceedings and magnitude of the event and AIG’s net financial exposure at that
regulatory investigations. It is possible that the effect of the time in that country.
unresolved matters could be material to AIG’s consolidated
results of operations for an individual reporting period. For a Information Technology
discussion of these unresolved matters, see Item 3. Legal
Proceedings. A failure in AIG’s operational systems or infrastructure or those
of third parties could disrupt business, damage AIG’s reputation
and cause losses. AIG’s operations rely on the secure processing,
Regulation
storage and transmission of confidential and other information in
AIG is subject to extensive regulation in the jurisdictions in its computer systems and networks. AIG’s business depends on
which it conducts its businesses. AIG’s operations around the effective information systems and the integrity and timeliness of
world are subject to regulation by different types of regulatory the data it uses to run its business. AIG’s ability to adequately
authorities, including insurance, securities, investment advisory, price its products and services, establish reserves, provide
banking and thrift regulators in the United States and abroad. effective and efficient service to its customers, and to timely and
AIG’s operations have become more diverse and consumer- accurately report its financial results also depends significantly on
oriented, increasing the scope of regulatory supervision and the the integrity of the data in its information systems. Although AIG
possibility of intervention. In particular, AIG’s consumer lending takes protective measures and endeavors to modify them as
business is subject to a broad array of laws and regulations circumstances warrant, its computer systems, software and
governing lending practices and permissible loan terms, and AIG networks may be vulnerable to unauthorized access, computer
would expect increased regulatory oversight relating to this viruses or other malicious code and other events that could have
business. security consequences. If one or more of such events occur, this
The regulatory environment could have a significant effect on potentially could jeopardize AIG’s or its clients’ or counterparties’
AIG and its businesses. Among other things, AIG could be fined, confidential and other information processed and stored in, and
prohibited from engaging in some of its business activities or transmitted through, its computer systems and networks, or
subject to limitations or conditions on its business activities. otherwise cause interruptions or malfunctions in AIG’s, its
Significant regulatory action against AIG could have material clients’, its counterparties’ or third parties’ operations, which
adverse financial effects, cause significant reputational harm, or could result in significant losses or reputational damage. AIG may
harm business prospects. New laws or regulations or changes in be required to expend significant additional resources to modify
the enforcement of existing laws or regulations applicable to its protective measures or to investigate and remediate vulnerabil-
clients may also adversely affect AIG and its businesses. ities or other exposures, and AIG may be subject to litigation and
financial losses that are either not insured against or not fully
Foreign Operations covered by insurance maintained.
Foreign operations expose AIG to risks that may affect its Despite the contingency plans and facilities AIG has in place, its
operations, liquidity and financial condition. AIG provides insur- ability to conduct business may be adversely affected by a disruption
ance and investment products and services to both businesses of the infrastructure that supports AIG’s business in the communities
and individuals in more than 130 countries and jurisdictions. A in which it is located. This may include a disruption involving
substantial portion of AIG’s General Insurance business and a electrical, communications, transportation or other services used by
majority of its Life Insurance & Retirement Services businesses AIG. These disruptions may occur, for example, as a result of events
are conducted outside the United States. Operations outside of that affect only the buildings occupied by AIG or as a result of events
16 AIG 2006 Form 10-K