AIG 2009 Annual Report Download - page 218

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investment income. AIG generally obtains and maintains cash collateral from securities borrowers at current market
levels for the securities lent.
During the fourth quarter of 2008, in connection with certain securities lending transactions, AIG failed to obtain or
maintain collateral sufficient to fund substantially all of the cost of purchasing securities lent to various counterparties.
In some cases, this shortfall in collateral has resulted in AIG accounting for individual securities lending transactions
as sales combined with a forward purchase commitment rather than as secured borrowings.
Mortgage and other loans receivable — net: Mortgage and other loans receivable includes mortgage loans on real
estate, policy loans and collateral, commercial loans and guaranteed loans. Mortgage loans on real estate and
collateral, commercial loans and guaranteed loans are carried at unpaid principal balances less credit allowances and
plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on such loans is
accrued as earned.
Impairment of mortgage and other loans receivable is based on certain risk factors and recognized when collection
of all amounts due under the contractual terms is not probable. This impairment is generally measured based on the
present value of expected future cash flows discounted at the loan’s effective interest rate subject to the fair value of
underlying collateral. Interest income on such impaired loans is recognized as cash is received.
Mortgage and other loans receivable also include policy loans which are carried at unpaid principal amount. There
is no allowance for policy loans because these loans serve to reduce the death benefit paid when the death claim is
made and the balances are effectively collateralized by the cash surrender value of the policy.
Finance receivables — net: Finance receivables, which are reported net of unearned finance charges, are held for
both investment purposes and for sale. Finance receivables held for investment purposes are carried at amortized cost,
which includes accrued finance charges on interest bearing finance receivables, unamortized deferred origination
costs, and unamortized net premiums and discounts on purchased finance receivables. The allowance for finance
receivable losses is established through the provision for finance receivable losses charged to expense and is
maintained at a level considered adequate to absorb estimated credit losses in the portfolio. The portfolio is
periodically evaluated on a pooled basis and factors such as economic conditions, portfolio composition, and loss and
delinquency experience are considered in the evaluation of the allowance.
Direct costs of originating finance receivables, net of nonrefundable points and fees, are deferred and included in
the carrying amount of the related receivables. The amount deferred is amortized to income as an adjustment to
finance charge revenues using the interest method.
Finance receivables originated and intended for sale in the secondary market are carried at the lower of cost or fair
value, as determined by aggregate outstanding commitments from investors, current investor yield requirements or
negotiations with prospective purchasers, if any. American General Finance, Inc. (AGF) recognizes net unrealized
losses through a valuation allowance by charges to income.
Flight equipment primarily under operating leases — net: Flight equipment is stated at cost, net of accumulated
depreciation. Major additions, modifications and interest are capitalized. Normal maintenance and repairs, airframe
and engine overhauls and compliance with return conditions of flight equipment on lease are provided by and paid for
by the lessee. Under the provisions of most leases for certain airframe and engine overhauls, the lessee is reimbursed
for certain costs incurred up to but not exceeding contingent rentals paid to International Lease Finance Corporation
(ILFC) by the lessee. ILFC provides a charge to income for such reimbursements based on the expected
reimbursements during the life of the lease. For passenger aircraft, depreciation is generally computed on the
straight-line basis to a residual value of approximately 15 percent of the cost of the asset over its estimated useful life
of 25 years. For freighter aircraft, depreciation is computed on the straight-line basis to a zero residual value over its
useful life of 35 years. At December 31, 2009, ILFC had 10 freighter aircraft in its fleet.
AIG 2009 Form 10-K 210