AIG 2006 Annual Report Download - page 214

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
AIGFP is the primary beneficiary of an asset-backed commer-
18. Variable Interest Entities
cial paper conduit with which it entered into several total return
Continued
swaps covering all the conduit’s assets that absorb the majority
tion (CDO), collateralized loan obligation (CLO), private equity fund of the expected losses of the entity. The assets of the conduit
or hedge fund. Such entities are typically registered investment serve as collateral for the conduit’s obligations. AIGFP is also the
companies or qualify for the specialized investment company primary beneficiary of several structured financing transactions in
accounting in accordance with the AICPA Investment Company which AIGFP holds the first loss position either by investing in the
Audit and Accounting Guide. In CDO and CLO transactions, AIG equity of the VIE or implicitly through a lending or derivative
establishes a trust or other special purpose entity that purchases arrangement.
a portfolio of assets such as bank loans, corporate debt, or non- In certain instances, AIGFP enters into liquidity facilities with
performing credits and issues trust certificates or debt securities various SPEs where AIGFP provides liquidity to the SPE in the form
that represent interests in the portfolio of assets. These transac- of a guarantee, derivative, or a letter of credit and does not
tions can be cash-based or synthetic and are actively or passively consolidate the VIE. AIGFP also executes various swap and option
managed. For investment partnerships, hedge funds and private transactions with VIEs. Such contractual arrangements are done in
equity funds, AIG acts as the general partner or manager of the the ordinary course of business. Typically, interest rate derivatives
fund and is responsible for carrying out the investment mandate such as interest rate swaps and options executed with VIEs are
of the VIE. Often, AIG’s insurance operations participate in these not deemed to be variable interests or significant variable
AIG managed structures as a passive investor in the debt or interests because the underlying is an observable market interest
equity issued by the VIE. Typically, AIG does not provide any rate and AIGFP as the derivative counterparty to the VIE is senior
guarantees to the investors in the VIE. to the debt and equity holders.
AIGGIC is an investor in various real estate investments. These
investments are typically with unaffiliated third-party developers Asset Management and Insurance Activities
via a partnership or limited liability company structure. Some of
these entities are VIEs. The activities of these VIEs principally AIG uses VIEs in connection with certain guaranteed investment
consists of the development or redevelopment of all major types contract programs written by its Life Insurance & Retirement
of commercial (retail, office, industrial, logistics parks, mixed use, Services subsidiaries (GIC Programs). In the GIC Programs, AIG’s
etc.) and residential real estate. AIG’s involvement varies from Life Insurance subsidiaries (principally SunAmerica Life) provide
being a passive equity investor to actively managing the activities guaranteed investment contracts to VIEs in which AIG does not
of the VIE. have a direct variable interest, as defined under FIN 46R, in the
entity. The VIE issues notes or bonds which are sold to third-party
Investment Activities institutional investors. Neither AIG nor the insurance company
issuing the GICs has any direct obligation to the investors in the
As part of its investment activities, AIG’s insurance operations notes or bonds. The proceeds from the securities issued by the
invest in obligations which include debt and equity securities and VIE are invested by the VIE in the GICs. The insurance company
interests issued by VIEs. These investments include investments subsidiaries use the proceeds to invest in a diversified portfolio of
in AIG sponsored and non-sponsored investment funds, hedge securities, primarily investment grade bonds. Both the assets and
funds, private equity funds, and structured financing arrange- the liabilities of the insurance companies arising from these GIC
ments. The investments in these VIEs allow AIG’s insurance Programs are presented in AIG’s consolidated balance sheet.
entities to purchase assets permitted by insurance regulations Thus, at December 31, 2006, approximately $32 billion of
while maximizing their return on these assets. AIG’s insurance policyholders’ contract deposits represented liabilities from issu-
operations typically are not involved in the design or establish- ances of GICs included in these GIC Programs.
ment of the VIE, nor do they actively participate in the manage- Assets held by VIEs which are currently consolidated because
ment of the VIE. AIG is the primary beneficiary (except for those VIEs where AIG
also owns a majority voting interest), approximated $9.1 billion at
AIGFP December 31, 2006. These consolidated assets are reflected in
AIG’s consolidated balance sheet as Investments and Financial
The variable interests that AIGFP may hold in VIEs include debt
services assets.
securities, equity interests, loans, derivative instruments and
Assets of VIEs where AIG has a significant variable interest
other credit support arrangements. Transactions associated with
and does not consolidate the VIE because AIG is not the primary
VIEs include an asset-backed commercial paper conduit, asset
beneficiary, approximated at $130.1 billion December 31, 2006.
securitizations, collateralized debt obligations, investment vehicles
Although expected losses are not expected to be material, AIG’s
and other structured financial transactions. AIGFP engages in
maximum exposure to loss from its involvement with these
these transactions to facilitate client needs for investment
unconsolidated VIEs approximates $38.7 billion at December 31,
purposes and to obtain funding.
2006. For this purpose, maximum loss is considered to be the
AIGFP invests in preferred securities issued by VIEs. Addition-
notional amount of credit lines, guarantees and other credit
ally, AIGFP establishes VIEs that issue preferred interests to third
support, and liquidity facilities, the notional amounts of credit
parties and uses the proceeds to provide financing to AIGFP
subsidiaries. In certain instances, AIGFP consolidates these VIEs.
164 AIG 2006 Form 10-K