AIG 2008 Annual Report Download - page 194

Consumer Finance
AIG’s Consumer Finance operations in North America are principally conducted through AGF. AGF derives
most of its revenues from finance charges assessed on real estate loans, secured and unsecured non-real estate loans
and retail sales finance receivables. In the second quarter of 2008, AGF ceased its wholesale origination activities
(originations through mortgage brokers).
AIG’s foreign consumer finance operations are principally conducted through AIGCFG. AIGCFG operates
primarily in emerging and developing markets. AIGCFG has operations in Argentina, China, Brazil, Hong Kong,
Mexico, the Philippines, Poland, Taiwan, Thailand, India and Colombia. AIGCFG is currently considering the sale
of all or a portion of its operations.
Many of AGF’s borrowers are non-prime or subprime. The real estate loans are comprised principally of first-
lien mortgages on residential real estate generally having a maximum term of 360 months, and are considered non-
conforming. The real estate loans are principally closed-end accounts and fixed rate products. AGF does not offer
mortgage products with borrower payment options that allow for negative amortization of the principal balance.
The majority of AGF’s non-real estate loans are secured by consumer goods, automobiles or other personal
property. Both secured and unsecured non-real estate loans and retail sales finance receivables generally have a
maximum term of 60 months.
Current economic conditions, such as interest rate and employment levels, can have a direct effect on the
borrowers’ ability to repay these loans. AGF manages the credit risk inherent in its portfolio by using credit scoring
models at the time of credit applications, established underwriting criteria and review procedures. AGF system-
atically monitors the quality of the finance receivables portfolio and determines the appropriate level of the
allowance for losses through its Credit Strategy and Policy Committee. This Committee bases its conclusions on
quantitative analyses, qualitative factors, current economic conditions and trends, and each Committee member’s
experience in the consumer finance industry.
The overall credit quality of AGF’s finance receivable portfolio deteriorated during 2008 due to negative
economic fundamentals and the aging of the real estate loan portfolio. Based upon anticipated difficult economic
conditions for the U.S. consumer, AGF expects credit quality to remain under pressure in the remainder of 2009.
At December 31, 2008, the 60-day delinquency rate for the entire portfolio increased by 215 basis points to
4.99 percent compared to December 31, 2007, while the 60-day delinquency rate for real estate loans increased by
247 basis points to 5.11 percent. For 2008, AGF’s net charge-off rate increased to 2.08 percent compared to
1.16 percent in 2007.
AGF’s allowance for finance receivable losses as a percentage of outstanding receivables was 4.61 percent at
December 31, 2008 compared to 2.36 percent at December 31, 2007.
AIGCFG monitors the quality of its finance receivable portfolio and determines the appropriate level of the
allowance for losses through several internal committees. These committees base their conclusions on quantitative
analysis, qualitative factors, current economic conditions and trends, political and regulatory implications,
competition and the judgment of the committees’ members.
AIG’s Consumer Finance operations are exposed to credit risk and risk of loss resulting from adverse
fluctuations in interest rates and payment defaults. Credit loss exposure is managed through a combination of
underwriting controls, mix of finance receivables, collateral and collection efficiency. Large product programs and
exposures to certain high risk products are subject to CRC approval.
Over half of the finance receivables are real estate loans which are collateralized by the related properties. With
respect to credit losses, the allowance for losses is maintained at a level considered adequate to absorb anticipated
credit losses existing in that portfolio as of the balance sheet date.
Asset Management
AIG’s Asset Management operations are exposed to various forms of credit, market and operational risks.
Asset Management complies with AIG’s corporate risk management guidelines and framework and is subject to
188 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries