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ITEM 8 / NOTE 8. LENDING ACTIVITIES.....................................................................................................................................................................................8. LENDING ACTIVITIES..............................................................................................................................................................................................Mortgage and other loans receivable include commercial mortgages, life insurance policy loans, commercial loans,other loans and notes receivable. Commercial mortgages, commercial loans, and other loans and notes receivableare carried at unpaid principal balances less credit allowances and plus or minus adjustments for the accretion oramortization of discount or premium. Interest income on such loans is accrued as earned.Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net ofnonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. Theamount deferred is amortized to income as an adjustment to earnings using the interest method.Life insurance policy loans are carried at unpaid principal amount. There is no allowance for policy loans becausethese loans serve to reduce the death benefit paid when the death claim is made and the balances are effectivelycollateralized by the cash surrender value of the policy.The following table presents the composition of Mortgages and other loans receivable:(in millions) December 31, 2012 December 31, 2011Commercial mortgages * $ 13,788 $ 13,554Life insurance policy loans 2,9523,049Commercial loans, other loans and notes receivable 3,1473,626Total mortgage and other loans receivable 19,88720,229Allowance for losses (405)(740)Mortgage and other loans receivable, net $ 19,482 $ 19,489* Commercial mortgages primarily represent loans for office, retail and industrial properties, with exposures in California and New York representingthe largest geographic concentrations (22 percent and 15 percent, respectively, at December 31, 2012). Over 99 percent and 98 percent of thecommercial mortgages were current as to payments of principal and interest at December 31, 2012 and 2011, respectively.The following table presents the credit quality indicators for commercial mortgage loans:December 31, 2012 NumberClassPercent(dollars in millions) of Loans Apartments Offices Retail Industrial Hotel Others Total of Total $Credit Quality Indicator:In good standingRestructured (a)90 days or less delinquent>90 days delinquent or inprocess of foreclosureTotal (b)Valuation allowance(a)998 $ 1,549 $ 4,698 $ 2,640 $ 1,654 $ 1,153 $ 1,671 $ 13,365 97%8 50 207 7 2 – 22 288 24 – 17 – – – – 17 –6 – 13 26 – – 79 118 11,016 $ 1,599 $ 4,935 $ 2,673 $ 1,656 $ 1,153 $ 1,772 $ 13,788 100%$ 5 $ 74 $ 19 $ 19 $ 1 $ 41 $ 159 1%Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. Seediscussion of troubled debt restructurings below.(b)Does not reflect valuation allowances.Methodology Used to Estimate the Allowance for Credit Losses..............................................................................................................................................................................................Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractualterms is not probable. For commercial mortgage loans in particular, the impairment is measured based on the fairvalue of underlying collateral, which is determined based on the present value of expected net future cash flows ofthe collateral, less estimated costs to sell. For other loans, the impairment may be measured based on the presentvalue of expected future cash flows discounted at the loan’s effective interest rate or based on the loan’s observablemarket price, where available. An allowance is typically established for the difference between the impaired value ofthe loan and its current carrying amount. Additional allowance amounts are established for incurred but not..................................................................................................................................................................................................................................AIG 2012 Form 10-K 265