AIG 2013 Annual Report Download - page 282

Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractual
terms is not probable. For commercial mortgage loans in particular, the impairment is measured based on the fair
value of underlying collateral, which is determined based on the present value of expected net future cash flows of
the collateral, less estimated costs to sell. For other loans, the impairment may be measured based on the present
value of expected future cash flows discounted at the loan’s effective interest rate or based on the loan’s observable
market price, where available. An allowance is typically established for the difference between the impaired value of
the loan and its current carrying amount. Additional allowance amounts are established for incurred but not
specifically identified impairments, based on the analysis of internal risk ratings and current loan values. Internal risk
ratings are assigned based on the consideration of risk factors including past due status, debt service coverage,
loan-to-value ratio or the ratio of the loan balance to the estimated value of the property, property occupancy, profile
of the borrower and of the major property tenants, economic trends in the market where the property is located, and
condition of the property. These factors and the resulting risk ratings also provide a basis for determining the level of
monitoring performed at both the individual loan and the portfolio level. When all or a portion of a commercial
mortgage loan is deemed uncollectible, the uncollectible portion of the carrying value of the loan is charged off
against the allowance. Interest income on impaired loans is recognized as cash is received.
A significant majority of commercial mortgage loans in the portfolio are non-recourse loans and, accordingly, the only
guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for
us to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan.
The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other
loans receivable:
Allowance, beginning of year $ 305 $ 435 $ 740 $ 470 $ 408 $ 878
Loans charged off (23) (21) (44) (78) (47) (125)
Recoveries of loans previously charged off 13 4 17 37 1 38
Net charge-offs (10) (17) (27) (41) (46) (87)
Provision for loan losses (136) 33 (103) (69) 51 (18)
Other – – – (55) – (55)
Activity of discontinued operations – (205) (205) – 22 22
Allowance, end of year $ 159*$ 246 $ 405 $ 305*$ 435 $ 740
* Of the total allowance at the end of the year, $93 million and $47 million relates to individually assessed credit losses on $264 million and
$286 million of commercial mortgage loans as of December 31, 2013 and 2012, respectively.
We modify loans to optimize their returns and improve their collectability, among other things. When we undertake
such a modification with a borrower that is experiencing financial difficulty and the modification involves us granting a
concession to the troubled debtor, the modification is a troubled debt restructuring (TDR). We assess whether a
borrower is experiencing financial difficulty based on a variety of factors, including the borrower’s current default on
any of its outstanding debt, the probability of a default on any of its debt in the foreseeable future without the
modification, the insufficiency of the borrower’s forecasted cash flows to service any of its outstanding debt (including
both principal and interest), and the borrower’s inability to access alternative third-party financing at an interest rate
that would be reflective of current market conditions for a non-troubled debtor. Concessions granted may include
extended maturity dates, interest rate changes, principal forgiveness, payment deferrals and easing of loan
covenants.
As of December 31, 2013 and 2012, we held no significant loans that had been modified in a TDR during those
respective years.
Methodology Used to Estimate the Allowance for Losses
Troubled Debt Restructurings
..................................................................................................................................................................................................................................
AIG 2013 Form 10-K264
ITEM 8 / NOTE 7. LENDING ACTIVITIES
2013 2012 2011
Commercial Other Commercial Other Commercial Other
Years Ended December 31,
(in millions) Mortgages Loans Total Mortgages Loans Total Mortgages Loans Total
$ 159 $ 246 $ 405
(12) (104) (116)
36 9
(9) (98) (107)
52 (32) 20
(1) (5) (6)
–– –
$ 201*$ 111 $ 312
..................................................................................................................................................................................
............................................................................................................................................................................................
............................................................................................................................................................................................