2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Continued 7. Variable Interest Entities Entities for which AIG is the primary beneficiary and consoli- Continued dates or in which AIG has a significant variable interest are and cash flows of the VIEs and do not have recourse to AIG, described below. except when AIG has provided a guarantee to the VIE’s interest holders. Asset Management 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 transrelated 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 investmeasures 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 involvechanged 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 maximum exposure to loss from its involvement with these SunAmerica Affordable Housing Partners, Inc. (SAAHP) organizes consolidated VIEs approximated $44.6 billion at December 31, limited partnerships (investment partnerships) that are considered 2007. For this purpose, maximum loss is considered to be the to be VIEs, and that are consolidated by AIG when AIG has notional amount of credit lines, guarantees and other credit determined that it is the primary beneficiary. The investment support, and liquidity facilities, the notional amounts of credit partnerships invest as limited partners in operating partnerships default swaps and certain total return swaps, and the amount that develop and operate affordable housing qualifying for federal invested in the debt or equity issued by the VIEs. tax credits and a few market rate properties across the United 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
American International Group, Inc. and Subsidiaries 7. Variable Interest Entities Continued syndicated over $7 billion in partnership equity since 1991 to other investors who will receive, among other benefits, tax credits under certain sections of the Internal Revenue Code. AIG Retirement Services, Inc. functions as the general partner in certain investment partnerships and acts both as a credit enhancer in certain transactions, through differing structures with respect to funding development costs for the operating partnerships, and as guarantor that investors will receive the tax benefits projected at the time of syndication. AIG Retirement Services, Inc. consolidates these investment partnerships as a result of the guarantee provided to the investors. As part of their incentive compensation, certain key SAAHP employees have been awarded residual cash flow interests in the partnerships, subject to certain vesting requirements. The operating income of SAAHP is reported, along with other SunAmerica partnership income, as a component of AIG’s Asset Management segment. Insurance Investments As part of its investment activities, AIG’s insurance operations invest in obligations which include debt and equity securities and interests issued by VIEs. These investments include investments in AIG sponsored and non-sponsored investment funds, hedge funds, private equity funds, and structured financing arrangements. The investments in these VIEs allow AIG’s insurance entities to purchase assets permitted by insurance regulations while maximizing their return on these assets. AIG’s insurance operations typically are not involved in the design or establish- ment of the VIE, nor do they actively participate in the management of the VIE. In addition to changes in a VIE’s governing documentation or capitalization structure, AIG reconsiders its position as to whether it is the primary beneficiary as the result of investments in these VIEs when AIG purchases or sells VIE issued debt and equity interests to other unrelated parties. AIGFP The variable interests that AIGFP may hold in VIEs include debt securities, equity interests, loans, derivative instruments and other credit support arrangements. Transactions associated with VIEs include an asset-backed commercial paper conduit, asset securitizations, collateralized debt obligations, investment vehicles and other structured financial transactions. AIGFP engages in these transactions to facilitate client needs for investment purposes and to obtain funding. AIGFP invests in preferred securities issued by VIEs. Additionally, AIGFP establishes VIEs that issue preferred interests to third parties and uses the proceeds to provide financing to AIGFP subsidiaries. In certain instances, AIGFP consolidates these VIEs. Consistent with FIN 46R requirements, AIGFP reviews any changes in its holdings of a VIEs preferred stock investment as part of its reconsideration review to determine a VIE’s primary beneficiary. In addition, AIG reviews all changes in such VIEs’ governing documentation or capitalization structures as part of the determination of whether there is a change in the VIEs’ primary beneficiaries. AIGFP is the primary beneficiary of an asset-backed commercial paper conduit with which it entered into several total return swaps covering all the conduit’s assets that absorb the majority of the expected losses of the entity. The assets of the conduit serve as collateral for the conduit’s obligations. AIGFP is also the primary beneficiary of several structured financing transactions in which AIGFP holds the first loss position either by investing in the equity of the VIE or implicitly through a lending or derivative arrangement. These VIEs are subject to the reconsideration event reviews noted above. In certain instances, AIGFP enters into liquidity facilities with various SPEs when AIGFP provides liquidity to the SPE in the form of a guarantee, derivative, or a letter of credit and does not consolidate the VIE. AIGFP also executes various swap and option transactions with VIEs. Such contractual arrangements are done in the ordinary course of business. Typically, interest rate derivatives such as interest rate swaps and options executed with VIEs are not deemed to be variable interests or significant variable interests because the underlying is an observable market interest rate and AIGFP as the derivative counterparty to the VIE is senior to the debt and equity holders. In 2007, AIGFP sponsored its only structured investment vehicle (SIV) which invests in variable rate, investment-grade debt securities. The SIV is a VIE because is does not have sufficient equity to operate without subordinated capital notes which serve as equity though they are legally debt instruments. The capital notes absorb losses prior to the senior debt. Based on the sale of more than 88 percent of its capital notes to unrelated third-party investors and the continued holding by those investors of their capital notes, AIGFP is not the primary beneficiary of the SIV. AIGFP reviews its primary beneficiary position when the governing document or capital structure changes or the amount of senior or capital note holdings change. Based on a change in the governing documents under which AIGFP committed to provide short-term funding to the SIV, as necessary, a quantitative analysis performed under FIN 46R as of December 31, 2007 showed that 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 of credit losses, if any, would be shared by other capital note holders. At December 31, 2007 assets of this unconsolidated SIV totaled $2.4 billion. AIGFP’s invested assets at December 31, 2007 included $1.7 billion of securities purchased under agree- ments to resell and commercial paper and medium-term and capital notes issued by this entity. AIGFP has entered into transactions with VIEs that are used, in part, to provide tax planning strategies to investors and/or AIGFP through an enhanced yield investment security. These structures typically provide financing to AIGFP and/or the investor at enhanced rates. AIGFP may be either the primary beneficiary of and consolidate the VIE, or may be a significant variable interest holder in the VIE. AIG 2007 Form 10-K 161
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AMERICAN INTERNATIONAL GROUP, INC.
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FINANCIAL HIGHLIGHTS (in millions,
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overall financial condition, althou
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Group Executive Committee We are ad
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AIG’s life insurance network is t
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We have also begun to address the e
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WHAT WE SEE The ability to see and
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The Major Accounts Practice within
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Around the world, the middle class
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WE SEE GROWTH OPPORTUNITIES IN EMER
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To grow the strength of the AIG glo
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Since 2003, the AIG Disaster Relief
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RESPECT Respect encompasses how we
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Life Insurance & Retirement Service
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Domestic Brokerage Group— Gross P
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In the summer of 2007, widespread f
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in gross premiums written. It launc
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It grew new business premiums from
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emerging markets for its services,
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ILFC—Revenues by Region Total = $
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AIG Investments acquired a 94 perce
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and changing interest rates, as wel
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American International Group, Inc.
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UNITED STATES SECURITIES AND EXCHAN
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Page 163 and 164: American International Group, Inc.
Page 191 and 192: Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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