AIG 2008 Annual Report Download - page 298

(c) Contingencies
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 ultimate liability for unpaid claims and claims adjustment
expense will not develop adversely and materially exceed AIG’s current liability for unpaid claims and claims
adjustment expense. Estimation of ultimate net claims, claims adjustment expenses and liability for unpaid claims
and claims adjustment expense is a complex process for long-tail casualty lines of business, which include excess
and umbrella liability, directors and officers liability (D&O), professional liability, medical malpractice, workers’
compensation, general liability, products liability and related classes, as well as for asbestos and environmental
exposures. 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. Thus, 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, in labor and material costs or in the judicial
environment, or in other social or economic phenomena affecting claims.
Deferred Tax Assets
AIG’s determination of the realizability of deferred tax assets requires estimates of future taxable income.
Such estimates could change in the near term, perhaps materially, which may require AIG to adjust its valuation
allowance. Such adjustment, either positive or negative, could be material to AIG’s consolidated financial condition
or its results of operations. See Note 20 herein.
Benefits Provided by Starr International Company, Inc. and C.V. Starr & Co., 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 is 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.
(d) Guarantees
AIG has issued unconditional guarantees with respect to the prompt payment, when due, of all present and
future payment obligations and liabilities of AIGFP arising from transactions entered into by AIGFP.
292 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)