AIG 2005 Annual Report Download - page 178

Notes to Consolidated Financial Statements Continued
serve as collateral to the conduit’s obligations that are
19. Variable Interest Entities
reflected in AIG’s consolidated balance sheet at Decem-
Continued
ber 31, 2005 were $5.9 billion.
quarter of 2003 and added approximately $4.7 billion of assets mSeveral structured financing transactions in which AIGFP
and liabilities to its consolidated balance sheet at Decem- held the first loss position either by investing in the equity
ber 31, 2003. of the entity or implicitly through a lending or derivative
Of the $4.7 billion, approximately $4.2 billion relates to arrangement. The total assets of these entities that are
assets and liabilities arising from AIG’s real estate partnerships, reflected in AIG’s consolidated balance sheet at Decem-
principally affordable housing transactions involving AIG ber 31, 2005 were $1.6 billion. The obligations of these
SunAmerica subsidiaries, and private equity partnerships man- entities are paid solely from the cash flows of the assets held
aged by AIG Global Investment Group and AIG Capital by the VIEs.
Partners. As of December 31, 2005 and 2004, AIG’s consolidated
SunAmerica Affordable Housing Partners, Inc. (SAAHP) balance sheet included approximately $11.8 billion and
organizes limited partnerships that are considered to be VIEs, $8.1 billion of assets and liabilities connected to entities
and that are consolidated by AIG. The partnerships invest as consolidated under FIN46R.
limited partners in operating partnerships that develop and The following VIE activities are not consolidated by AIG
operate low income housing and a smaller number of market under FIN46R:
rate properties across the United States. The general partners mAIG uses VIEs primarily in connection with certain
in the operating partnerships are almost exclusively unaffiliated guaranteed investment contract programs (GIC Programs)
third-party developers. AIG does not generally consolidate an written by its Life Insurance & Retirement Services
operating partnership if the general partner is an unaffiliated subsidiaries. In the GIC Programs, AIG’s Life Insurance
person. Through approximately 1,000 partnerships, SAAHP subsidiaries (principally SunAmerica Life Insurance Com-
has invested in developments with approximately 147,000 pany) provide guaranteed investment contracts to VIEs
apartment units nationwide, and has syndicated over $5 billion which are not controlled by AIG, and in which AIG does
in partnership equity since 1991 to other investors who will not have a direct variable interest, as defined under
receive, among other benefits, tax credits under certain sections FIN46R, in the entity. The VIE issues notes or bonds which
of the Internal Revenue Code. AIG Retirement Services, Inc. are sold to third-party institutional investors. Neither AIG
functions as the general partner in certain limited partnerships nor the insurance company issuing the GICs has any
and acts as both a credit enhancer in certain transactions, obligation to the investors in the notes or bonds. The
through differing structures with respect to funding develop- proceeds from the securities issued by the VIE are invested
ment costs for the operating partnerships, and as guarantor that by the VIE in the GICs. The insurance company subsidiar-
investors will receive the tax benefits projected at the time of ies use the proceeds to invest in a diversified portfolio of
syndication. As part of their incentive compensation, certain securities, primarily investment grade bonds. Both the assets
key SAAHP employees have been awarded residual cash flow and the liabilities of the insurance companies arising from
interests in the partnerships, subject to certain vesting require- these GIC Programs are presented in AIG’s consolidated
ments. The operating income of SAAHP is reported, along balance sheet. Thus, at December 31, 2005, approximately
with other SunAmerica partnership income, as a component of $37 billion of policyholders’ contract deposits represented
AIG’s Asset Management segment. liabilities from issuances of GICs included in these GIC
The remaining approximately $500 million involves ILFC, Programs, the proceeds of which are used to invest in
and arises principally from a sale-leaseback transaction which insurance invested assets.
expired during 2004. mAIG manages Collateralized Bond and Loan Obligation
AIGFP is involved with various special purpose vehicles in trusts (collectively, Collateralized Debt Obligation trusts or
the ordinary course of business that may be deemed VIEs and CDO trusts). As asset manager, AIG receives fees for
may hold variable interests therein. The variable interests that management of the assets held in the CDO trust, which
AIGFP may hold include debt securities, equity interests, loans, support the issuance of securities sold by the CDO trust.
derivative instruments and other credit support arrangements. AIG may take minority equity and/or fixed-income security
Transactions associated with these entities include an asset- interests in the CDO trust. AIG has entered into such
backed commercial paper conduit, asset securitizations, collater- arrangements to expand its asset management activities.
alized debt obligations, investment vehicles and other struc- Third-party investors have recourse only to the CDO trust
tured financial transactions. AIGFP engages in these and have no recourse to AIG.
transactions to facilitate client needs, for investment purposes mAIG’s insurance operations also invest in obligations of
and to obtain attractive funding. VIEs. These VIEs are established by unrelated third parties.
As of December 31, 2005, AIGFP was the primary Investments include collateralized mortgage backed securities
beneficiary in the following VIEs: and similar securities backed by pools of mortgages, con-
mAn asset-backed commercial paper conduit, with which it sumer receivables, or other assets. The investment in these
entered into several total return swaps covering all the VIEs allows AIG’s insurance entities to purchase assets
conduit’s assets that absorb the majority of the expected permitted by insurance regulations while maximizing their
losses of the entity. The total assets of the conduit that return on these assets.
126 AIG m Form 10-K