AIG 2009 Annual Report Download - page 260

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest income and expense and dividend income on assets and liabilities elected under the fair value option are
recognized and classified in the Consolidated Statement of Income (Loss) depending on the nature of the instrument
and related market conventions. For AIGFP related activity, interest, dividend income, and interest expense are
included in Other income. Otherwise, interest and dividend income are included in Net investment income in the
Consolidated Statement of Income (Loss). See Note 1(a) herein for additional information about AIG’s policies for
recognition, measurement, and disclosure of interest and dividend income and interest expense.
AIG recognized a loss of $2 million and a gain of $84 million in 2009 and 2008, respectively, attributable to the
observable effect of changes in credit spreads on AIG’s own liabilities for which the fair value option was elected. AIG
calculates the effect of these credit spread changes using discounted cash flow techniques that incorporate current
market interest rates, AIG’s observable credit spreads on these liabilities and other factors that mitigate the risk of
nonperformance such as collateral posted.
The following table presents the difference between fair values and the aggregate contractual principal amounts of
mortgage and other loans receivable and long-term borrowings, for which the fair value option was elected:
At December 31, 2009 At December 31, 2008
Fair Outstanding Fair Outstanding
(in millions) Value Principal Amount Difference Value Principal Amount Difference
Assets:
Mortgage and other loans receivable $ 119 $ 253 $ (134) $ 131 $ 244 $ (113)
Liabilities:
Long-term debt $11,308 $10,111 $1,197 $21,285 $16,827 $4,458
At December 31, 2009 and 2008, there were no significant mortgage or other loans receivable for which the fair
value option was elected that were 90 days or more past due and in non-accrual status.
Fair Value Information about Financial Instruments Not Measured at Fair Value
Information regarding the estimation of fair value for financial instruments not carried at fair value (excluding
insurance contracts and lease contracts) is discussed below:
•Mortgage and other loans receivable: Fair values of loans on real estate and collateral loans were estimated for
disclosure purposes using discounted cash flow calculations based upon discount rates that AIG believes market
participants would use in determining the price they would pay for such assets. For certain loans, AIG’s current
incremental lending rates for similar type loans is used as the discount rate, as it is believed that this rate
approximates the rates market participants would use. The fair values of policy loans were not estimated as AIG
believes it would have to expend excessive costs for the benefits derived.
•Finance receivables: Fair values of net finance receivables, less allowance for finance receivable losses, were
estimated for disclosure purposes using projected cash flows, computed by category of finance receivable,
discounted at the weighted average interest rates offered for similar finance receivables at the balance sheet
date. Cash flows were projected based on contractual payment terms adjusted for delinquencies and estimates of
losses. The fair value estimates do not reflect the underlying customer relationships or the related distribution
systems.
•Securities lending payable: The contract values of securities lending payable approximate fair value as these
obligations are short-term in nature.
•Cash, short-term investments, trade receivables, trade payables, securities purchased (sold) under agreements to resell
(repurchase), and commercial paper and other short-term debt: The carrying values of these assets and liabilities
approximate fair values because of the relatively short period of time between origination and expected
realization.
AIG 2009 Form 10-K 252