AIG 2014 Annual Report Download - page 279

ITEM 8 / NOTE 7. LENDING ACTIVITIES
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impairment of other loans is typically determined using the present value of cash flows or the loan’s observable market price.
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, 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 loan is deemed uncollectible, the uncollectible portion of the
carrying amount of the loan is charged off against the allowance. Interest income on impaired loans is recognized as cash is
received. For impaired loans where it has been determined that not all of the contractual principal due will be collected, any
cash received is recorded as a reduction of the current carrying amount of the loan.
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:
2014 2013 2012
Years Ended December 31, Commercial Other Commercial Other Commercial Other
(in millions) Mortgages Loans Total Mortgages Loans Total Mortgages Loans Total
Allowance, beginning of year $ 201 $111 $312 $ 159 $ 246 $ 405 $ 305 $ 435 $ 740
Loans charged off (29) (39) (68) (12) (104) (116) (23) (21) (44)
Recoveries of loans previously
charged off 18 16 34 3 6 9 13 4 17
Net charge-offs (11) (23) (34) (9) (98) (107) (10) (17) (27)
Provision for loan losses (31) 23 (8) 52 (32) 20 (136) 33 (103)
Other - 1 1 (1) (5) (6) - - -
Activity of discontinued operations - - - - - - - (205) (205)
Allowance, end of year $ 159 *$112 $271 $ 201 *$ 111 $ 312 $ 159 *$ 246 $ 405
* Of the total allowance at the end of the year, $55 million and $93 million relates to individually assessed credit losses on $192 million and $264 million of
commercial mortgage loans as of December 31, 2014 and 2013, respectively.
Troubled Debt Restructurings
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 or interest
forgiveness, payment deferrals and easing of loan covenants.
During 2014 and 2013, loans with a carrying value of $218 million and $91 million were modified in TDRs, respectively.
8. REINSURANCE
In the ordinary course of business, our insurance companies may use both treaty and facultative reinsurance to minimize their
net loss exposure to any single catastrophic loss event or to an accumulation of losses from a number of smaller events or to
provide greater diversification of our businesses. In addition, our general insurance subsidiaries assume reinsurance from
other insurance companies. We determine the portion of the incurred but not reported (IBNR) loss that will be recoverable