AIG 2007 Annual Report Download - page 215

American International Group, Inc. and Subsidiaries
addition, AIG reviews all changes in such VIEs’ governing documen-
7. Variable Interest Entities
tation or capitalization structures as part of the determination of
Continued
whether there is a change in the VIEs’ primary beneficiaries.
syndicated over $7 billion in partnership equity since 1991 to AIGFP is the primary beneficiary of an asset-backed commercial
other investors who will receive, among other benefits, tax credits paper conduit with which it entered into several total return swaps
under certain sections of the Internal Revenue Code. AIG covering all the conduit’s assets that absorb the majority of the
Retirement Services, Inc. functions as the general partner in expected losses of the entity. The assets of the conduit serve as
certain investment partnerships and acts both as a credit collateral for the conduit’s obligations. AIGFP is also the primary
enhancer in certain transactions, through differing structures with beneficiary of several structured financing transactions in which
respect to funding development costs for the operating partner- AIGFP holds the first loss position either by investing in the equity
ships, and as guarantor that investors will receive the tax benefits of the VIE or implicitly through a lending or derivative arrangement.
projected at the time of syndication. AIG Retirement Services, Inc. These VIEs are subject to the reconsideration event reviews noted
consolidates these investment partnerships as a result of the above.
guarantee provided to the investors. As part of their incentive In certain instances, AIGFP enters into liquidity facilities with
compensation, certain key SAAHP employees have been awarded various SPEs when AIGFP provides liquidity to the SPE in the form
residual cash flow interests in the partnerships, subject to certain of a guarantee, derivative, or a letter of credit and does not
vesting requirements. The operating income of SAAHP is reported, consolidate the VIE. AIGFP also executes various swap and option
along with other SunAmerica partnership income, as a component transactions with VIEs. Such contractual arrangements are done in
of AIG’s Asset Management segment. the ordinary course of business. Typically, interest rate derivatives
such as interest rate swaps and options executed with VIEs are
Insurance Investments not deemed to be variable interests or significant variable
interests because the underlying is an observable market interest
As part of its investment activities, AIG’s insurance operations
rate and AIGFP as the derivative counterparty to the VIE is senior
invest in obligations which include debt and equity securities and
to the debt and equity holders.
interests issued by VIEs. These investments include investments
In 2007, AIGFP sponsored its only structured investment
in AIG sponsored and non-sponsored investment funds, hedge
vehicle (SIV) which invests in variable rate, investment-grade debt
funds, private equity funds, and structured financing arrange-
securities. The SIV is a VIE because is does not have sufficient
ments. The investments in these VIEs allow AIG’s insurance
equity to operate without subordinated capital notes which serve
entities to purchase assets permitted by insurance regulations
as equity though they are legally debt instruments. The capital
while maximizing their return on these assets. AIG’s insurance
notes absorb losses prior to the senior debt. Based on the sale of
operations typically are not involved in the design or establish-
more than 88 percent of its capital notes to unrelated third-party
ment of the VIE, nor do they actively participate in the manage-
investors and the continued holding by those investors of their
ment of the VIE.
capital notes, AIGFP is not the primary beneficiary of the SIV.
In addition to changes in a VIE’s governing documentation or AIGFP reviews its primary beneficiary position when the governing
capitalization structure, AIG reconsiders its position as to whether document or capital structure changes or the amount of senior or
it is the primary beneficiary as the result of investments in these capital note holdings change. Based on a change in the governing
VIEs when AIG purchases or sells VIE issued debt and equity documents under which AIGFP committed to provide short-term
interests to other unrelated parties. funding to the SIV, as necessary, a quantitative analysis per-
formed under FIN 46R as of December 31, 2007 showed that
AIGFP AIGFP is not the primary beneficiary. This outcome is a result of
the high credit quality of the assets and the fact that 85 percent
The variable interests that AIGFP may hold in VIEs include debt
of credit losses, if any, would be shared by other capital note
securities, equity interests, loans, derivative instruments and
holders. At December 31, 2007 assets of this unconsolidated SIV
other credit support arrangements. Transactions associated with
totaled $2.4 billion. AIGFP’s invested assets at December 31,
VIEs include an asset-backed commercial paper conduit, asset
2007 included $1.7 billion of securities purchased under agree-
securitizations, collateralized debt obligations, investment vehicles
ments to resell and commercial paper and medium-term and
and other structured financial transactions. AIGFP engages in
capital notes issued by this entity.
these transactions to facilitate client needs for investment
AIGFP has entered into transactions with VIEs that are used, in
purposes and to obtain funding.
part, to provide tax planning strategies to investors and/or AIGFP
AIGFP invests in preferred securities issued by VIEs. Additionally,
through an enhanced yield investment security. These structures
AIGFP establishes VIEs that issue preferred interests to third
typically provide financing to AIGFP and/or the investor at
parties and uses the proceeds to provide financing to AIGFP
enhanced rates. AIGFP may be either the primary beneficiary of
subsidiaries. In certain instances, AIGFP consolidates these VIEs.
and consolidate the VIE, or may be a significant variable interest
Consistent with FIN 46R requirements, AIGFP reviews any changes
holder in the VIE.
in its holdings of a VIEs preferred stock investment as part of its
reconsideration review to determine a VIE’s primary beneficiary. In
AIG 2007 Form 10-K 161