AIG 2007 Annual Report Download - page 214

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
Entities for which AIG is the primary beneficiary and consoli-
7. Variable Interest Entities
dates or in which AIG has a significant variable interest are
Continued
described below.
and cash flows of the VIEs and do not have recourse to AIG,
except when AIG has provided a guarantee to the VIE’s interest Asset Management
holders.
AIG determines whether an entity is a VIE, who the variable In certain instances, AIG Investments acts as the collateral
interest holders are, and which party is the primary beneficiary of manager or general partner of an investment fund, collateralized
the VIE by performing an analysis of the design of the VIE that debt obligation (CDO), collateralized loan obligation (CLO), private
includes a review of, among other factors, its capital structure, equity fund or hedge fund. Such entities are typically registered
contractual relationships and terms, nature of the entity’s opera- investment companies or qualify for the specialized investment
tions and purpose, nature of the entity’s interests issued, AIG’s company accounting in accordance with the AICPA Audit and
interests in the entity which either create or absorb variability and Accounting Guide - Investment Companies. In CDO and CLO trans-
related party relationships. AIG consolidates a VIE when all of actions, AIG establishes a trust or other special purpose entity
AIG’s interests in the VIE, when combined, absorb a majority of that purchases a portfolio of assets such as bank loans,
the expected losses or a majority of the expected residual returns corporate debt, or non-performing credits and issues trust
of the VIE, or both. Assets held by VIEs which are currently certificates or debt securities that represent interests in the
consolidated because AIG is primary beneficiary (except for those portfolio of assets. These transactions can be cash-based or
VIEs where AIG also owns a majority voting interest), approxi- synthetic and are actively or passively managed. For investment
mated $27.0 billion and $9.1 billion at December 31, 2007 and partnerships, hedge funds and private equity funds, AIG acts as
2006, respectively. These consolidated assets are reflected in the general partner or manager of the fund and is responsible for
AIG’s consolidated balance sheet as Investments and financial carrying out the investment mandate of the VIE. Often, AIG’s
services assets. insurance operations participate in these AIG managed structures
In addition to the VIEs that are consolidated in accordance with as a passive investor in the debt or equity issued by the VIE.
FIN 46R, the Company has significant variable interests in certain Typically, AIG does not provide any guarantees to the investors in
other VIEs that are not consolidated because the Company is not the VIE.
the primary beneficiary. AIG applies quantitative and qualitative AIG Investments is an investor in various real estate invest-
measures in identifying whether it is a primary beneficiary of a VIE ments. These investments are typically with unaffiliated third-party
and whether it holds a significant variable interest in a VIE. developers via a partnership or limited liability company structure.
For all VIEs in which it has a significant variable interest, Some of these entities are VIEs. The activities of these VIEs
including those in which it is the primary beneficiary, AIG principally consist of the development or redevelopment of all
reconsiders if it is the current primary beneficiary whenever a major types of commercial (retail, office, industrial, logistics
VIE’s governing documents or contractual arrangements are parks, mixed use, etc.) and residential real estate. AIG’s involve-
changed in a manner that reallocates between the primary ment varies from being a passive equity investor to actively
beneficiary and other unrelated parties, the obligation to absorb managing the activities of the VIE.
expected losses or right to receive expected residual returns. It In addition to changes in a VIE’s governing documentation or
also reconsiders its role as primary beneficiary when it sells or capitalization structure, AIG reconsiders its decision with respect
otherwise disposes of all or part of its variable interests in a VIE to whether it is the primary beneficiary for these VIEs, when AIG
or when it acquires additional variable interests in a VIE. AIG does purchases, or when a VIE sells or otherwise disposes of, variable
not reconsider whether it is a primary beneficiary solely as the interests in the CDO, CLO, investment, partnership, hedge fund or
result of operating losses incurred by an entity. Assets of VIEs private equity fund to other unrelated parties.
where AIG has a significant variable interest and does not
consolidate the VIE because AIG is not the primary beneficiary, SunAmerica Affordable Housing Partnerships
approximated $275.1 billion at December 31, 2007. AIG’s SunAmerica Affordable Housing Partners, Inc. (SAAHP) organizes
maximum exposure to loss from its involvement with these limited partnerships (investment partnerships) that are considered
consolidated VIEs approximated $44.6 billion at December 31, to be VIEs, and that are consolidated by AIG when AIG has
2007. For this purpose, maximum loss is considered to be the determined that it is the primary beneficiary. The investment
notional amount of credit lines, guarantees and other credit partnerships invest as limited partners in operating partnerships
support, and liquidity facilities, the notional amounts of credit that develop and operate affordable housing qualifying for federal
default swaps and certain total return swaps, and the amount tax credits and a few market rate properties across the United
invested in the debt or equity issued by the VIEs. States. The general partners in the operating partnerships are
almost exclusively unaffiliated third-party developers. AIG does not
normally consolidate an operating partnership if the general
partner is an unaffiliated person. Through approximately
1,200 partnerships, SAAHP has invested in developments with
approximately 157,000 apartment units nationwide, and has
160 AIG 2007 Form 10-K