11. VARIABLE INTEREST ENTITIES

A variable interest entity (VIE) is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity's operations through voting rights and do not substantively participate in the gains and losses of the entity. Consolidation of a VIE by its primary beneficiary is not based on majority voting interest, but is based on other criteria discussed below.

While we enter into various arrangements with VIEs in the normal course of business, our involvement with VIEs is primarily via our insurance companies as a passive investor in debt securities (rated and unrated) and equity interests issued by VIEs. In all instances, we consolidate the VIE when we determine we are the primary beneficiary. This analysis includes a review of the VIE's capital structure, contractual relationships and terms, nature of the VIE's operations and purpose, nature of the VIE's interests issued and our involvement with the entity. When assessing the need to consolidate a VIE, we evaluate the design of the VIE as well as the related risks the entity was designed to expose the variable interest holders to.

For VIEs with attributes consistent with that of an investment company or a money market fund, the primary beneficiary is the party or group of related parties that absorbs a majority of the expected losses of the VIE, receives the majority of the expected residual returns of the VIE, or both.

For all other variable interest entities, the primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity's economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of our decision-making ability and our ability to influence activities that significantly affect the economic performance of the VIE.

Exposure to Loss

Our total off-balance sheet exposure associated with VIEs, primarily consisting of financial guarantees and commitments to real estate and investment funds, was $0.2 billion and $0.4 billion at December 31, 2012 and 2011, respectively.

The following table presents our total assets, total liabilities and off-balance sheet exposure associated with our variable interests in consolidated VIEs:




	VIE Assets^(a)					VIE Liabilities
(in billions)	December 31, 2012			December 31, 2011		December 31, 2012		December 31, 2011

AIA/ALICO SPVs	$	0.6	^(b)	$	14.2	$	0.1	$	0.1
Real estate and investment funds^(c)		1.0			1.5		0.2		0.4
Securitization Vehicles		2.4			–		–		–
Structured investment vehicles		1.7			1.0		0.1		–
Affordable housing partnerships		2.3			2.5		0.2		0.1
Other		3.3			3.6		1.3		2.0

Total	$	11.3		$	22.8	$	1.9	$	2.6

(a) The assets of each VIE can be used only to settle specific obligations of that VIE.

(b) Decrease primarily due to the retirement of the AIA SPV Preferred Interests held by the Department of the Treasury. As a result, the AIA SPV no longer qualified as a VIE. Assets include $567 million of cash held in escrow pursuant to the terms of the ALICO stock purchase agreement between AIG and MetLife. See Note 16 herein for further discussion of the escrow arrangement.

(c) At December 31, 2012 and December 31, 2011, off-balance sheet exposure with respect to real estate and investments funds was $48.7 million and $85.7 million, respectively.

We calculate our maximum exposure to loss to be (i) the amount invested in the debt or equity of the VIE, (ii) the notional amount of VIE assets or liabilities where we have also provided credit protection to the VIE with the VIE as the referenced obligation, and (iii) other commitments and guarantees to the VIE. Interest holders in VIEs sponsored by us generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to us, except in limited circumstances when we have provided a guarantee to the VIE's interest holders.

The following table presents total assets of unconsolidated VIEs in which we hold a variable interest, as well as our maximum exposure to loss associated with these VIEs:

			Maximum Exposure to Loss


(in billions)	Total VIE Assets		On-Balance Sheet		Off-Balance Sheet		Total

December 31, 2012
Real estate and investment funds	$	16.7	$	1.8	$	0.2	$	2.0
Affordable housing partnerships		0.5		0.5		–		0.5
Other		1.0		0.1		–		0.1

Total	$	18.2	$	2.4	$	0.2	$	2.6

December 31, 2011
Real estate and investment funds	$	18.3	$	2.1	$	0.3	$	2.4
Affordable housing partnerships		0.6		0.6		–		0.6
Maiden Lane II and III interests		27.1		7.0		–		7.0
Other		1.5		–		–		–

Total	$	47.5	$	9.7	$	0.3	$	10.0

Balance Sheet Classification

Our interests in the assets and liabilities of consolidated and unconsolidated VIEs were classified in the Consolidated Balance Sheet as follows:




	Consolidated VIEs				Unconsolidated VIEs
(in billions)	December 31, 2012		December 31, 2011		December 31, 2012		December 31, 2011

Assets:
Available for sale securities	$	2.9	$	0.4	$	–	$	–
Trading securities		1.0		1.3		0.1		7.1
Mortgage and other loans receivable		0.4		0.5		–		–
Other invested assets^*		4.0		17.2		2.3		2.6
Other asset accounts		3.0		3.4		–		–

Total	$	11.3	$	22.8	$	2.4	$	9.7

Liabilities:
Long-term debt	$	0.7	$	1.7	$	–	$	–
Other liability accounts		1.2		0.9		–		–

Total	$	1.9	$	2.6	$	–	$	–

* Decrease from prior year was due to the repayment of the FRBNY Credit Facility from the AIA and ALICO SPVs pursuant to the Recapitalization.

Real Estate and Investment Funds

AIG, through AIG Global Real Estate, is an investor in various real estate investments, some of which are VIEs. These investments are typically with unaffiliated third-party developers via a partnership or limited liability company structure. The VIE's activities consist of the development or redevelopment of commercial and residential real estate. Our involvement varies from being a passive equity investor or finance provider to actively managing the activities of the VIE.

Our insurance operations participate as passive investors in the equity issued primarily by third-party-managed hedge and private equity funds. Our insurance operations typically are not involved in the design or establishment of VIEs, nor do they actively participate in the management of VIEs.

Securitization Vehicles

During 2012, we created VIEs that hold investments, primarily in investment-grade debt securities, and issued beneficial interests in these investments. The majority of these beneficial interests are owned by AIG entities and we maintain the power to direct the activities of the VIEs that most significantly impacts their economic performance and bear the obligation to absorb losses or receive benefits from the entities that could potentially be significant to the entities. Accordingly, we consolidate these entities and those beneficial interests issued to third-parties are reported as Long-term debt.

Structured Investment Vehicle

Through the DIB, we sponsor Nightingale Finance Ltd, a structured investment vehicle (SIV), which meets the definition of a VIE. Nightingale Finance Ltd. invests in variable rate, investment-grade debt securities, the majority of which are ABS. We have no equity interest in the SIV, but we maintain the power to direct the activities of the SIV that most significantly impact the entity's economic performance and bear the obligation to absorb economic losses that could potentially be significant to the SIV. We are the primary beneficiary and consolidate the assets of the SIV, which totaled over $1.7 billion as of December 31, 2012. Related liabilities were not significant.

Affordable Housing Partnerships

SunAmerica Affordable Housing Partners, Inc. (SAAHP) organizes and invests in limited partnerships that develop and operate affordable housing qualifying for federal tax credits, in addition to a few market rate properties across the United States. The general partners in the operating partnerships are almost exclusively unaffiliated third-party developers. We do not consolidate an operating partnership if the general partner is an unaffiliated person. Through approximately 1,000 partnerships, SAAHP has investments in developments with approximately 130,000 apartment units nationwide, and as of December 31, 2012, has syndicated approximately $7.7 billion in partnership equity to other investors who will receive, among other benefits, tax credits under certain sections of the Internal Revenue Code. The pre-tax income of SAAHP is reported, along with other AIG Life and Retirement partnership income, as a component of the AIG Life and Retirement segment.

Maiden Lane Interests

In 2008, certain of our wholly-owned life insurance companies sold all of their undivided interests in a pool of $39.3 billion face amount of RMBS to ML II, whose sole member is the FRBNY. AIG has a significant variable economic interest in ML II, which is a VIE.

In 2008, AIG entered into an agreement with the FRBNY, ML III and The Bank of New York Mellon, which established arrangements, through ML III, to fund the purchase of multi-sector CDOs underlying or related to CDS written by AIGFP. Concurrently, AIGFP's counterparties to such CDS transactions agreed to terminate those CDS transactions relating to the multi-sector CDOs purchased from them. AIG had a significant variable interest in ML III, which was a VIE. In 2012, we received final distributions from ML II and ML III.

Other Asset Accounts

Aircraft Trusts

We have created two VIEs for the purpose of acquiring, owning, leasing, maintaining, operating and selling aircraft. Our subsidiaries hold beneficial interests, including all the equity interests in these entities. These beneficial interests include passive investments by our insurance operations in non-voting preferred equity interests and in the majority of the debt issued by these entities. We maintain the power to direct the activities of the VIEs that most significantly impact the entities' economic performance, and bear the obligation to absorb economic losses or receive economic benefits that could potentially be significant to the VIEs. As a result, we have determined that we are the primary beneficiary and we fully consolidate the assets and liabilities of these entities, which totaled $1.2 billion and $0.3 billion, respectively at December 31, 2012. The debt of these entities is not an obligation of, or guaranteed by, us or any of our subsidiaries. Under a servicing agreement, ILFC acts as servicer for the aircraft owned by these entities.

Commercial Loans Vehicles

We sponsor one VIE that has issued a variable funding note backed by a commercial loan collateralized by individual life insurance assets. As of December 31, 2012, total consolidated assets and liabilities for this entity were $412 million and $188 million, respectively; our maximum exposure, representing the carrying value of the consumer loan, was $389 million.

Commercial Paper Conduit

AIGFP is the primary beneficiary of Curzon Funding LLC, an asset-backed commercial paper conduit, the assets of which serve as collateral for the conduit's obligations.

RMBS, CMBS, Other ABS and CDOS

Through our insurance company subsidiaries, we are a passive investor in RMBS, CMBS, other ABS and CDOs primarily issued by domestic special-purpose entities. We generally do not sponsor or transfer assets to, or act as the servicer to these asset-backed structures, and were not involved in the design of these entities.

Through our DIB, we also invest in CDOs and similar structures, which can be cash-based or synthetic and are managed by third parties. The role of DIB is generally limited to that of a passive investor in structures we do not manage.

Our maximum exposure in these types of structures is limited to our investment in securities issued by these entities. Based on the nature of our investments and our passive involvement in these types of structures, we have determined that we are not the primary beneficiary of these entities. We have not included these entities in the above tables; however, the fair values of our investments in these structures are reported in Notes 6 and 7 herein.

Variable Interest Entities of Business Held for Sale

Financing Vehicles

ILFC has created wholly-owned subsidiaries for the purpose of purchasing aircraft and obtaining financing secured by such aircraft. A portion of the secured debt has been guaranteed by the European Export Credit Agencies and the Export-Import Bank of the United States. These entities meet the definition of a VIE because they do not have sufficient equity to operate without ILFC's subordinated financial support in the form of intercompany notes which serve as equity. ILFC fully consolidates the entities, controls all the activities of the entities and guarantees the activities of the entities. AIG has not included these entities in the above table as they are wholly-owned and there are no other variable interests other than those of ILFC and the lenders. See Note 15 herein for further information.

Leasing Entities

ILFC has created wholly-owned subsidiaries for the purpose of facilitating aircraft leases with airlines. The entities meet the definition of a VIE because they do not have sufficient equity to operate without ILFC's subordinated financial support in the form of intercompany notes which serve as equity. ILFC fully consolidates the entities, controls all the activities of the entities and fully guarantees the activities of the entities. AIG has not included these entities in the above table as they are wholly owned and there are no other variable interests in the entities other than those of ILFC.