AIG 2007 Annual Report Download - page 75

American International Group, Inc. and Subsidiaries
plaintiffs’ claims and expects that the ultimate resolution of this The National Association of Insurance Commissioners has
matter will not have a material adverse effect on AIG’s consoli- formed a Market Analysis Working Group directed by the State of
dated financial condition or results of operations for any period. Indiana, which has commenced its own investigation into the
underreporting of workers compensation premiums. In early 2008,
2006 Regulatory Settlements. In February 2006, AIG reached a AIG was informed that the Market Analysis Working Group had
resolution of claims and matters under investigation with the been disbanded in favor of a multi-state targeted market conduct
United States Department of Justice (DOJ), the Securities and exam focusing on worker’s compensation insurance.
Exchange Commission (SEC), the Office of the New York Attorney The remaining escrowed funds, which amounted to $17 million
General (NYAG) and the New York State Department of Insurance at December 31, 2007, are set aside for settlements for certain
(DOI). AIG recorded an after-tax charge of $1.15 billion relating to specified AIG policyholders. As of February 20, 2008, eligible
these settlements in the fourth quarter of 2005. policyholders entitled to receive approximately $359 million (or
The settlements resolved investigations conducted by the SEC, 95 percent) of the excess casualty fund had opted to receive
NYAG and DOI in connection with the accounting, financial settlement payments in exchange for releasing AIG and its
reporting and insurance brokerage practices of AIG and its subsidiaries from liability relating to certain insurance brokerage
subsidiaries, as well as claims relating to the underpayment of practices. Amounts remaining in the excess casualty fund may be
certain workers compensation premium taxes and other assess- used by AIG to settle claims from other policyholders relating to
ments. These settlements did not, however, resolve investigations such practices through February 29, 2008 (originally set for
by regulators from other states into insurance brokerage practices January 31, 2008 and later extended), after which they will be
related to contingent commissions and other broker-related con- distributed pro rata to participating policyholders.
duct, such as alleged bid rigging. Nor did the settlements resolve In addition to the escrowed funds, $800 million was deposited
any obligations that AIG may have to state guarantee funds in into a fund under the supervision of the SEC as part of the
connection with any of these matters. settlements to be available to resolve claims asserted against AIG
As a result of these settlements, AIG made payments or by investors, including the shareholder lawsuits described herein.
placed amounts in escrow in 2006 totaling approximately Also, as part of the settlements, AIG agreed to retain, for a
$1.64 billion, $225 million of which represented fines and period of three years, an independent consultant to conduct a
penalties. Amounts held in escrow totaling $347 million, including review that will include, among other things, the adequacy of AIG’s
interest thereon, are included in other assets at December 31, internal control over financial reporting, the policies, procedures
2007. At that date, approximately $330 million of the funds were and effectiveness of AIG’s regulatory, compliance and legal
escrowed for settlement of claims resulting from the underpay- functions and the remediation plan that AIG has implemented as
ment by AIG of its residual market assessments for workers a result of its own internal review.
compensation. On May 24, 2007, The National Workers Compen- Other than as described above, at the current time, AIG cannot
sation Reinsurance Pool, on behalf of its participant members, predict the outcome of the matters described above, or estimate
filed a lawsuit against AIG with respect to the underpayment of any potential additional costs related to these matters.
such assessments. On August 6, 2007, the court denied AIG’s
motion seeking to dismiss or stay the complaint or in the Private Litigation
alternative, to transfer to the Southern District of New York. On
December 26, 2007, the court denied AIG’s motion to dismiss Securities Actions. Beginning in October 2004, a number of
the complaint. AIG filed its answer on January 22, 2008. On putative securities fraud class action suits were filed against AIG
February 5, 2008, following agreement of the parties, the court and consolidated as In re American International Group, Inc.
entered an order staying all proceedings through March 3, 2008. Securities Litigation. Subsequently, a separate, though similar,
In addition, a similar lawsuit filed by the Minnesota Workers securities fraud action was also brought against AIG by certain
Compensation Reinsurance Association and the Minnesota Work- Florida pension funds. The lead plaintiff in the class action is a
ers Compensation Insurers Association is pending. On August 6, group of public retirement systems and pension funds benefiting
2007, AIG moved to dismiss the complaint and that motion is Ohio state employees, suing on behalf of themselves and all
under review. A purported class action was filed in South Carolina purchasers of AIG’s publicly traded securities between Octo-
Federal Court on January 25, 2008 against AIG and certain of its ber 28, 1999 and April 1, 2005. The named defendants are AIG
subsidiaries, on behalf of a class of employers that obtained and a number of present and former AIG officers and directors, as
workers compensation insurance from AIG companies and alleg- well as C.V. Starr & Co., Inc. (Starr), Starr International Company,
edly paid inflated premiums as a result of AIG’s alleged underre- Inc. (SICO), General Reinsurance Corporation, and Price-
porting of workers compensation premiums. AIG cannot currently waterhouseCoopers LLP (PwC), among others. The lead plaintiff
estimate whether the amount ultimately required to settle these alleges, among other things, that AIG: (1) concealed that it
claims will exceed the funds escrowed or otherwise accrued for engaged in anti-competitive conduct through alleged payment of
this purpose. contingent commissions to brokers and participation in illegal bid-
AIG has settled litigation that was filed by the Minnesota rigging; (2) concealed that it used ‘‘income smoothing’’ products
Attorney General with respect to claims by the Minnesota and other techniques to inflate its earnings; (3) concealed that it
Department of Revenue and the Minnesota Special Compensation marketed and sold ‘‘income smoothing’’ insurance products to
Fund. other companies; and (4) misled investors about the scope of
AIG 2007 Form 10-K 21