SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 1-6155
AMERICAN GENERAL FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0416090
(State of incorporation) (I.R.S. Employer Identification No.)
601 N.W. Second Street, Evansville, IN 47708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 424-8031
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
6-3/8% Senior Notes due March 1, 2003 New York Stock Exchange
8.45% Senior Notes due October 15, 2009 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]. Not applicable.
The registrant meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format.
At March 20, 2002, no common stock of the registrant was held by a non-
affiliate.
At March 20, 2002, there were 10,160,012 shares of the registrant's common
stock, $.50 par value, outstanding.
2
TABLE OF CONTENTS
Item Page
Part I 1. Business . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . 19
3. Legal Proceedings . . . . . . . . . . . . . . . . . 19
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . *
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . 20
6. Selected Financial Data . . . . . . . . . . . . . . 20
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 21
7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . 35
8. Financial Statements and Supplementary Data . . . . 36
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . **
Part III 10. Directors and Executive Officers of the Registrant . *
11. Executive Compensation . . . . . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . *
13. Certain Relationships and Related Transactions . . . *
Part IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . 71
* Items 4, 10, 11, 12, and 13 are not included, as per conditions met
by Registrant set forth in General Instructions I(1)(a) and (b) of
Form 10-K.
** Item 9 is not included, as no information was required by Item 304
of Regulation S-K.
3
PART I
Item 1. Business.
GENERAL
American General Finance Corporation will be referred to as "AGFC" or
collectively with its subsidiaries, whether directly or indirectly
owned, as the "Company" or "we". AGFC was incorporated in Indiana
in 1927 as successor to a business started in 1920. All of the common
stock of AGFC is owned by American General Finance, Inc. (AGFI), which
was incorporated in Indiana in 1974. Since 1982, AGFI has been a
direct or indirect wholly owned subsidiary of American General
Corporation (American General).
On August 29, 2001, American International Group, Inc. (AIG) acquired
American General. As a result of this transaction, the Company is a
wholly owned indirect subsidiary of AIG, a Delaware corporation. AIG
is a holding company which through its subsidiaries is engaged in a
broad range of insurance and insurance-related activities and financial
services in the United States and abroad.
AGFC is a financial services holding company with subsidiaries engaged
primarily in the consumer finance and credit insurance businesses. We
conduct the credit insurance business to supplement our consumer
finance business through Merit Life Insurance Co. (Merit) and Yosemite
Insurance Company (Yosemite), which are both subsidiaries of AGFC.
At December 31, 2001, the Company had 1,362 offices in 43 states,
Puerto Rico, and the U.S. Virgin Islands and approximately 7,400
employees. Our executive offices are located in Evansville, Indiana.
Selected Financial Information
Selected financial information of the Company was as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Average net receivables $11,411,464 $11,119,117 $ 9,815,930
Average borrowings $10,373,630 $10,258,474 $ 9,018,168
Yield - finance charges as a
percentage of average net
receivables 14.62% 14.19% 14.50%
Borrowing cost - interest
expense as a percentage
of average borrowings 5.98% 6.60% 6.25%
4
Item 1. Continued
At or for the
Years Ended December 31,
2001 2000 1999
Interest spread - yield
less borrowing cost 8.64% 7.59% 8.25%
Operating expenses as a
percentage of average
net receivables 4.64% 4.73% 5.19%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 3.74% 3.26% 3.58%
Charge-off ratio - net charge-offs
as a percentage of the average
of net finance receivables at
the beginning of each month
during the period 2.27% 1.82% 2.08%
Charge-off coverage - allowance
for finance receivable losses
to net charge-offs 1.70x 1.84x 1.90x
Delinquency ratio - gross finance
receivables 60 days or more
past due as a percentage
of gross finance receivables 3.73% 3.45% 3.50%
Return on average assets 1.91% 2.01% 1.96%
Return on average equity 14.46% 14.81% 13.86%
Ratio of earnings to fixed charges
(refer to Exhibit 12 for
calculations) 1.62x 1.59x 1.61x
Debt to tangible equity ratio -
debt to equity less goodwill
and accumulated other
comprehensive income 7.50x 6.49x 6.47x
Debt to equity ratio 7.04x 5.89x 5.85x
5
Item 1. Continued
CONSUMER FINANCE OPERATIONS
The consumer finance operation makes loans directly to individuals,
offers retail sales financing to merchants, purchases portfolios of
finance receivables originated by others, and offers credit and non-
credit insurance through its 1,362 branch offices and its centralized
operational support.
We make home equity loans, originate secured and unsecured consumer
loans, and extend lines of credit. We generally take a security
interest in the real property and/or personal property of the borrower.
At December 31, 2001, real estate loans accounted for 64% of the amount
and 9% of the number of net finance receivables outstanding, compared
to 62% of the amount and 8% of the number of net finance receivables
outstanding at December 31, 2000. Real estate loans are secured by
first or second mortgages on residential real estate and generally have
maximum original terms of 360 months. Non-real estate loans are
secured by consumer goods, automobiles, or other personal property or
are unsecured and generally have maximum original terms of 60 months.
We purchase retail sales contracts and provide revolving retail
services arising from the retail sale of consumer goods and services by
approximately 17,000 retail merchants. We also purchase private label
receivables originated by AIG Federal Savings Bank, a non-subsidiary
affiliate of ours, arising from the sales by approximately 70 retail
merchants under a participation agreement. Retail sales contracts are
closed-end accounts that consist of a single purchase. Revolving
retail and private label are open-end revolving accounts that can be
used for repeated purchases. Retail sales contracts are secured by the
real property or personal property giving rise to the contract and
generally have maximum original terms of 60 months. Revolving retail
and private label are effectively secured by the goods purchased and
generally require minimum monthly payments based on outstanding
balances.
To supplement our lending and retail sales financing activities, we
purchase portfolios of real estate loans, non-real estate loans, and
retail sales finance receivables with customers that meet our credit
quality standards and profitability objectives.
We also offer credit life, credit accident and health, credit related
property and casualty, and non-credit insurance to our consumer finance
customers which insurance is issued by both affiliated and non-
affiliated insurance companies. The benefits of these insurance
products for both our customers and the consumer finance operations are
described under "Insurance Operations".
Our primary source of new loan customers is retail sales finance
obligations that we purchase from merchants. These customers have
demonstrated an apparent need to finance a retail purchase and a
willingness to use credit. After purchase of the retail sales finance
obligation, we contact the customer using various solicitation methods.
We attempt to have the customer visit one of our branch offices to
discuss their overall financial needs with our consumer lending
specialists. Any resulting loan may pay off the customer's retail
sales finance obligation and consolidate debts with other creditors.
At the time of loan origination, one of our consumer lending
specialists who is licensed to offer insurance products will explain
6
Item 1. Continued
the financial protection provided by our credit and non-credit
insurance products to provide information to the customer who will
determine whether to purchase one or more insurance products.
We also originate loans through our solicitation of current customers
obtained through portfolio acquisitions, as well as former customers
who have recently paid off their loans. In addition, we purchase
customer lists from major list compilers based on our predetermined
selection criteria. We target these potential customers using various
solicitation methods. We also use various Internet loan application
sources, including our own website, to obtain potential customer
contacts. We forward these applications to our branch offices where
consumer lending specialists contact potential customers in an attempt
to initiate a lasting relationship.
Our branch offices are supported by centralized administrative and
operational functions. Our centralized operational support functions
include the following:
* revolving retail and private label processing;
* merchant services;
* retail sales finance approvals;
* real estate loan approvals;
* customer solicitations;
* retail sales finance collections;
* retail sales finance payment processing; and
* charge-off recovery operations.
We continually seek to identify functions that could be better handled
centrally, thereby freeing our consumer lending specialists to
concentrate on providing service to our customers.
See Note 20. of the Notes to Consolidated Financial Statements in Item
8. for further information on the Company's consumer finance business
segment.
Finance Receivables
We carry finance receivables 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. They are net of unamortized finance
charges on precomputed receivables and unamortized points and fees.
Although a significant portion of insurance claims and policyholder
liabilities originate from the finance receivables, our policy is to
report them as liabilities and not net them against finance
receivables. Finance receivables relate to the financing activities of
our consumer finance business segment, and insurance claims and
policyholder liabilities relate to the underwriting activities of our
insurance business segment.
7
Item 1. Continued
Amount, number, and average size of net finance receivables originated
and renewed by type (retail sales contracts, revolving retail, and
private label comprise retail sales finance) and the net purchased
amount by type were as follows:
Years Ended December 31,
2001 2000 1999
Originated and renewed
Amount (in thousands):
Real estate loans $2,129,623 $2,025,581 $1,893,771
Non-real estate loans 2,704,901 2,675,986 2,509,254
Retail sales finance 1,695,115 1,880,360 1,668,519
Total $6,529,639 $6,581,927 $6,071,544
Number:
Real estate loans 55,935 56,479 54,995
Non-real estate loans 765,716 810,030 832,417
Retail sales finance 889,863 1,046,367 976,359
Total 1,711,514 1,912,876 1,863,771
Average size (to nearest dollar):
Real estate loans $38,073 $35,864 $34,435
Non-real estate loans 3,533 3,304 3,014
Retail sales finance 1,905 1,797 1,709
Net purchased
Amount (in thousands):
Real estate loans $ 945,621 $ 355,131 $1,602,525
Non-real estate loans 25,327 442,583 10,727
Retail sales finance 142,875 64,587 36,855
Total $1,113,823 $ 862,301 $1,650,107
Net purchased was net of sales of $27.1 million during 2000 and $21.8
million during 1999. We had no sales in 2001.
8
Item 1. Continued
Amount, number, and average size of net finance receivables by type
were as follows:
December 31,
2001 2000 1999
Amount (in thousands):
Real estate loans $ 7,444,484 $ 7,040,925 $ 6,918,753
Non-real estate loans 2,865,985 2,970,233 2,526,556
Retail sales finance 1,408,111 1,416,667 1,312,169
Total $11,718,580 $11,427,825 $10,757,478
Number:
Real estate loans 183,406 177,429 174,600
Non-real estate loans 932,165 995,000 977,188
Retail sales finance 850,123 923,911 937,239
Total 1,965,694 2,096,340 2,089,027
Average size (to nearest dollar):
Real estate loans $40,590 $39,683 $39,626
Non-real estate loans 3,075 2,985 2,586
Retail sales finance 1,656 1,533 1,400
Geographic Distribution
Geographic diversification of finance receivables reduces the
concentration of credit risk associated with a recession in any one
region. The largest concentrations of net finance receivables were as
follows:
December 31,
2001 2000 1999
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
California $ 1,374,599 12% $ 1,514,878 13% $ 1,537,524 14%
N. Carolina 850,995 7 831,977 7 811,625 8
Florida 772,830 7 740,186 6 671,970 6
Ohio 741,702 7 678,238 6 644,804 6
Illinois 731,238 6 698,181 6 659,674 6
Indiana 586,625 5 597,898 5 560,887 5
Georgia 510,140 4 477,110 4 427,523 4
Virginia 500,138 4 486,607 4 430,687 4
Other 5,650,313 48 5,402,750 49 5,012,784 47
Total $11,718,580 100% $11,427,825 100% $10,757,478 100%
9
Item 1. Continued
Average Net Receivables and Yield
We recognize finance charges as revenue on the accrual basis using the
interest method. We amortize premiums and discounts on purchased
finance receivables as a revenue adjustment. We defer the costs to
originate certain finance receivables and the revenue from
nonrefundable points and fees on loans and amortize them to revenue on
the accrual basis using the interest method over the lesser of the
contractual term or the estimated life based upon prepayment
experience. If a finance receivable liquidates before amortization is
completed, we charge or credit any unamortized premiums, discounts,
origination costs, or points and fees to revenue at the date of
liquidation. We recognize late charges, prepayment penalties, and
extension fees as revenue when received.
We stop accruing revenue when the fourth contractual payment becomes
past due for loans and retail sales contracts and when the sixth
contractual payment becomes past due for revolving retail and private
label. Beginning in third quarter 2001, in conformity with AIG policy,
we reverse amounts previously accrued upon suspension. (Prior to AIG's
acquisition of American General, we did not reverse amounts previously
accrued upon suspension.) After suspension, we recognize revenue for
loans and retail sales contracts only to the extent of any additional
payments we receive.
Average net receivables and yield by type were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Real estate loans:
Average net receivables $ 7,133,476 $ 7,012,439 $6,119,182
Yield 11.88% 11.39% 11.55%
Non-real estate loans:
Average net receivables $ 2,897,617 $ 2,748,663 $2,461,356
Yield 21.57% 21.52% 21.94%
Retail sales finance:
Average net receivables $ 1,380,371 $ 1,358,015 $1,235,392
Yield 14.22% 13.78% 14.29%
Total:
Average net receivables $11,411,464 $11,119,117 $9,815,930
Yield 14.62% 14.19% 14.50%
See Management's Discussion and Analysis in Item 7. for information on
the trends in yield.
10
Item 1. Continued
Finance Receivable Credit Quality Information
A risk in all consumer lending and retail sales financing transactions
is the customer's unwillingness or inability to repay obligations.
Unwillingness to repay is usually evidenced in a consumer's historical
credit repayment record. An inability to repay occurs after our
initial credit evaluation and funding and usually results from lower
income due to unemployment or underemployment, major medical expenses,
or divorce. Occasionally, these types of events are so economically
severe that the customer files for protection under the bankruptcy
laws. We use credit risk scoring models at the time of borrower
application to help minimize the risk of unwillingness or inability to
repay. These models are developed from past customer credit repayment
experience and are periodically revalidated based on current portfolio
performance. We use these models to predict the relative likelihood of
credit applicants repaying their obligation to us. These models also
provide some insight into the credit repayment performance of borrowers
under adverse economic circumstances, whether personal or global. We
extend credit to those consumers who fit our risk guidelines as
determined by these models and, in some cases, manual underwriting.
Price and size of the loan or retail sales finance transaction are in
relation to the estimated credit risk assumed.
Our policy is to charge off each month to the allowance for finance
receivable losses non-real estate loans on which little or no
collections were made in the prior six months and retail sales finance
that are six installments past due. We start foreclosure proceedings
on real estate loans when four monthly installments are past due. When
foreclosure is completed and we have obtained title to the property, we
establish the real estate as an asset valued at fair value, and charge
off any loan amount in excess of that value to the allowance for
finance receivable losses. We occasionally extend the charge-off
period for individual accounts when, in our opinion, such treatment is
warranted. We increase the allowance for finance receivable losses for
recoveries on accounts previously charged off.
Net charge-offs and charge-off ratio by type of finance receivable were
as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Real estate loans:
Net charge-offs $ 49,416 $ 44,814 $ 38,058
Charge-off ratio .69% .64% .63%
Non-real estate loans:
Net charge-offs $170,307 $128,189 $131,942
Charge-off ratio 5.87% 4.66% 5.36%
Retail sales finance:
Net charge-offs $ 39,012 $ 29,458 $ 32,977
Charge-off ratio 2.83% 2.18% 2.67%
Total:
Net charge-offs $258,735 $202,461 $202,977
Charge-off ratio 2.27% 1.82% 2.08%
11
Item 1. Continued
Delinquency (gross finance receivables 60 days or more past due) based
on contract terms in effect and delinquency ratio by type of finance
receivable were as follows:
December 31,
2001 2000 1999
(dollars in thousands)
Real estate loans:
Delinquency $248,266 $237,301 $212,428
Delinquency ratio 3.34% 3.36% 3.08%
Non-real estate loans:
Delinquency $168,001 $145,476 $154,189
Delinquency ratio 5.22% 4.40% 5.39%
Retail sales finance:
Delinquency $ 40,586 $ 31,142 $ 27,716
Delinquency ratio 2.55% 1.92% 1.85%
Total:
Delinquency $456,853 $413,919 $394,333
Delinquency ratio 3.73% 3.45% 3.50%
We establish the allowance for finance receivable losses primarily
through the provision for finance receivable losses charged to expense.
We believe the amount of the allowance for finance receivable losses is
the most significant estimate we make. Our Credit Strategy and Policy
Committee evaluates our finance receivable portfolio monthly. Within
our three main finance receivable types are sub-portfolios, each
consisting of a large number of relatively small, homogenous accounts.
We evaluate these sub-portfolios for impairment as groups. None of our
accounts are large enough to warrant individual evaluation for
impairment. Our Credit Strategy and Policy Committee considers
numerous factors in estimating losses inherent in our finance
receivable portfolio, including the following:
* current economic conditions;
* prior finance receivable loss and delinquency experience; and
* the composition of our finance receivable portfolio.
This review determines any adjustment necessary to maintain the
allowance for finance receivable losses at a level we consider adequate
to absorb future losses in the existing portfolio. We document the
adequacy of the allowance for finance receivable losses and the
analysis of the trends in credit quality considered by the Credit
Strategy and Policy Committee to support their conclusions.
12
Item 1. Continued
Changes in the allowance for finance receivable losses were as follows:
At or for the
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Balance at beginning of year $372,825 $385,327 $372,923
Provision for finance receivable
losses 284,735 202,461 202,977
Allowance related to net
acquired (sold) receivables 15,035 (12,502) 12,404
Charge-offs, net of recoveries (258,735) (202,461) (202,977)
Other charges - additional
provision 25,000 - -
Balance at end of year $438,860 $372,825 $385,327
See Management's Discussion and Analysis in Item 7. for further
information on finance receivable loss and delinquency experience and
the related allowance for finance receivable losses.
Sources of Funds
We fund our consumer finance operations principally through the
following sources:
* net cash flows from operating activities;
* issuances of long-term debt;
* short-term borrowings in the commercial paper market;
* borrowings from banks under credit facilities; and
* capital contributions from AGFI.
Average Borrowings and Borrowing Cost
Average borrowings and borrowing cost by term of debt were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Long-term debt:
Average borrowings $ 6,022,033 $ 5,703,564 $5,420,729
Borrowing cost 6.66% 6.64% 6.61%
Short-term debt:
Average borrowings $ 4,351,597 $ 4,554,910 $3,597,439
Borrowing cost 5.04% 6.54% 5.72%
Total:
Average borrowings $10,373,630 $10,258,474 $9,018,168
Borrowing cost 5.98% 6.60% 6.25%
13
Item 1. Continued
Average borrowings and borrowing cost by rate of debt were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Fixed rate debt:
Average borrowings $ 7,240,971 $ 6,546,966 $6,267,715
Borrowing cost 6.69% 6.67% 6.68%
Floating rate debt:
Average borrowings $ 3,132,659 $ 3,711,508 $2,750,453
Borrowing cost 4.33% 6.47% 5.29%
Total:
Average borrowings $10,373,630 $10,258,474 $9,018,168
Borrowing cost 5.98% 6.60% 6.25%
The Company's use of interest rate swap agreements, the effect of which
is included in the rates above, is described in Note 12. of the Notes
to Consolidated Financial Statements in Item 8.
Contractual Maturities
Contractual maturities of net finance receivables and debt at December
31, 2001 were as follows:
Net Finance
Receivables Debt
(dollars in thousands)
2002 $ 1,277,190 $ 5,966,961
2003 1,541,711 1,573,440
2004 1,147,046 1,006,261
2005 711,641 722,276
2006 452,742 1,272,959
2007 and thereafter 6,588,250 336,911
Total $11,718,580 $10,878,808
See Note 4. of the Notes to Consolidated Financial Statements in Item
8. for contractual maturities and principal cash collections of net
finance receivables by type.
14
Item 1. Continued
INSURANCE OPERATIONS
Merit is a life and health insurance company domiciled in Indiana and
licensed in 45 states, the District of Columbia, and the U.S. Virgin
Islands. Merit principally writes or assumes (through affiliated and
non-affiliated insurance companies) credit life, credit accident and
health, and non-credit insurance.
Yosemite is a property and casualty insurance company domiciled in
Indiana and licensed in 42 states. Yosemite principally writes or
assumes credit-related property and casualty insurance.
Both Merit and Yosemite market their products through our consumer
finance operations. Our credit life insurance policies insure the life
of the borrower in an amount typically equal to the unpaid balance of
the finance receivable and provide for payment in full to the lender of
the finance receivable in the event of the borrower's death. Our
credit accident and health insurance policies provide for payment to
the lender of the installments on the finance receivable coming due
during a period of the borrower's disability due to illness or injury.
Our credit-related property and casualty insurance policies are written
either to protect the lender's interest in property pledged as security
for the finance receivable or to provide for payment to the lender of
the installments on the finance receivable coming due during a period
of the borrower's unemployment. The purchase by the borrower of credit
life, credit accident and health, or credit-related property and
casualty insurance is voluntary with the exception of lender-placed
property damage coverage for automobiles, large equipment, dwellings,
and real estate pledged as collateral. In these instances, we obtain
property damage coverage through Yosemite under the terms of the
lending agreement if the borrower does not provide evidence of coverage
with another insurance carrier. The non-credit insurance policies are
primarily ordinary life level term coverage. The purchase of this
coverage is voluntary. Customers usually either finance premiums for
insurance products as part of the finance receivable or pay premiums on
a monthly basis, but they may pay the premiums in cash to the insurer.
Merit and Yosemite have entered into reinsurance agreements with other
insurance companies, including certain affiliated companies, for
assumption of various non-credit life, individual annuity, group
annuity, credit life, credit accident and health, and credit-related
property and casualty insurance where our insurance subsidiaries assume
the risk of loss. The reserves for this business fluctuate over time
and in certain instances are subject to recapture by the insurer. At
December 31, 2001, reserves on the books of Merit and Yosemite for
these reinsurance agreements totaled $114.0 million.
See Note 20. of the Notes to Consolidated Financial Statements in Item
8. for further information on the Company's insurance business segment.
15
Item 1. Continued
Premiums earned, premiums written, and losses incurred by type of
insurance were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Premiums Earned
Credit insurance premiums earned:
Credit life $ 41,046 $ 38,958 $ 34,760
Credit accident and health 50,405 48,006 43,237
Property and casualty 53,537 50,016 49,026
Other insurance premiums earned:
Non-credit life 39,157 48,539 46,333
Non-credit accident and health 6,136 6,689 4,541
Premiums assumed under
coinsurance agreements 2,725 1,156 3,340
Total $193,006 $193,364 $181,237
Premiums Written
Credit insurance premiums written:
Credit life $ 29,333 $ 45,486 $ 42,114
Credit accident and health 44,570 55,981 52,910
Property and casualty 54,048 58,387 49,846
Other insurance premiums written:
Non-credit life 39,157 48,539 46,333
Non-credit accident and health 6,136 6,689 4,541
Premiums assumed under
coinsurance agreements 2,725 1,156 3,340
Total $175,969 $216,238 $199,084
Losses Incurred
Credit insurance losses incurred:
Credit life $ 21,830 $ 18,409 $ 16,240
Credit accident and health 24,814 24,412 22,370
Property and casualty 15,715 12,397 13,112
Other insurance losses incurred:
Non-credit life 11,102 20,142 20,746
Non-credit accident and health 3,751 4,031 2,724
Losses incurred under
coinsurance agreements 10,899 8,963 11,442
Total $ 88,111 $ 88,354 $ 86,634
16
Item 1. Continued
Life insurance in force by type of insurance was as follows:
December 31,
2001 2000 1999
(dollars in thousands)
Credit life $3,126,473 $3,075,206 $2,709,962
Non-credit life 3,275,199 3,343,066 3,355,547
Total $6,401,672 $6,418,272 $6,065,509
Investments and Investment Results
We invest cash generated by our insurance operations primarily in
bonds. We invest in, but are not limited to, the following:
* bonds;
* commercial mortgage loans;
* short-term investments;
* limited partnerships;
* preferred stock;
* investment real estate;
* policy loans; and
* common stock.
AIG subsidiaries manage the majority of our insurance operations'
investments.
Investment results of our insurance operations were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Net investment revenue (a) $ 81,711 $ 80,807 $ 74,732
Average invested assets (b) $1,231,187 $1,148,950 $1,056,183
Adjusted portfolio yield (c) 7.03% 7.35% 7.35%
Net realized (losses) gains
on investments (d) $ (2,989) $ 2,809 $ (1,564)
(a) Net investment revenue is after deducting investment expense but
before net realized gains or losses on investments and provision
for income taxes.
(b) Average invested assets excludes the effect of Statement of
Financial Accounting Standards 115.
(c) Adjusted portfolio yield is calculated based upon the definitions
of net investment revenue and average invested assets listed in
(a) and (b) above.
(d) Includes net realized gains or losses on investment securities
and other invested assets before provision for income taxes.
17
Item 1. Continued
See Note 6. of the Notes to Consolidated Financial Statements in Item
8. for information regarding investment securities for all operations
of the Company.
REGULATION
Consumer Finance
The Company is subject to various federal laws and regulations,
including the following:
* the Truth in Lending Act (governs disclosure of applicable
charges and other finance receivable terms);
* the Equal Credit Opportunity Act (prohibits discrimination
against credit-worthy applicants);
* the Fair Housing Act (prohibits discrimination in housing
lending);
* the Fair Credit Reporting Act (governs the accuracy and use of
credit bureau reports);
* the Real Estate Settlement Procedures Act (regulates certain
loans secured by real estate);
* the Federal Trade Commission Act; and
* the Federal Reserve Board's Regulations B, C, P, and Z.
In many states, the Company relies on federal law to preempt state law
restrictions on interest rates and points and fees for first lien
residential mortgage loans. The Company also relies on the Federal
Alternative Mortgage Transactions Parity Act in many states to preempt
state restrictions on variable rate loans, balloon payments and
prepayment penalties. The Company makes residential mortgage loans
under the provisions of these and other federal laws. The Company is
also subject to the Federal Privacy Act and the related regulations,
which generally require certain practices and disclosures when dealing
with consumer or customer information.
Various state laws also regulate our consumer lending and retail sales
financing businesses. The degree and nature of such regulation vary
from state to state. The laws under which a substantial amount of our
business is conducted generally:
* provide for state licensing of lenders;
* impose maximum term, amount, interest rate, and other charge
limitations; and
* regulate whether and under what circumstances insurance and
other ancillary products may be offered in connection with a
lending transaction.
Certain of these laws prohibit the taking of liens on real estate for
loans of small dollar amounts, except liens resulting from judgments.
These state laws may require contract disclosures in addition to those
required under federal law and may limit remedies available in the
event of default by an obligor on the credit.
18
Item 1. Continued
Additionally, the federal government is considering, and a number of
states, counties, and cities have enacted or may be considering, laws
or rules that restrict the credit terms or other aspects of certain
loans that are typically described as "high cost mortgage loans".
These requirements may impose specific statutory liabilities in cases
of non-compliance and may also limit or restrict the terms of covered
loan transactions. Additionally, some of these laws may restrict other
business activities or business dealings of affiliates of the Company
under certain conditions.
Insurance
State authorities regulate and supervise our insurance subsidiaries.
The extent of such regulation varies by product and by state but
relates primarily to the following:
* conduct of business;
* types of products offered;
* standards of solvency;
* limitations on the payment of dividends and on other
transactions with related parties;
* licensing;
* deposits of securities for the benefit of policyholders;
* permissible investments;
* approval of policy forms and premium rates;
* periodic examination of the affairs of insurers;
* form and content of required financial reports; and
* reserve requirements for unearned premiums, losses, and other
purposes.
Substantially all of the states in which we operate regulate the rates
of premiums charged for credit insurance and the calculation of premium
refunds.
COMPETITION
Consumer Finance
The consumer finance operations are highly competitive due to the large
number of companies offering financial products and services, the
sophistication of those products, capital market resources of some
competitors, and general acceptance and widespread usage of available
credit. We compete with other consumer finance companies as well as
other types of financial institutions that offer similar products and
services.
Insurance
Our insurance operations supplement our consumer finance operations.
Although the insurance business is competitive in both price and
service, we believe that our insurance companies' abilities to market
insurance products through our distribution systems provide a
competitive advantage over our insurance competitors.
19
Item 2. Properties.
Our investment in real estate and tangible property is not significant
in relation to our total assets due to the nature of our business.
AGFI and certain of its subsidiaries own real estate on which AGFC, its
subsidiaries and affiliates, and third parties conduct business. We
generally conduct branch office operations in leased premises. Lease
terms ordinarily range from three to five years.
Item 3. Legal Proceedings.
AGFC and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain class action claims, arising in the
ordinary course of business. In addition, many of these proceedings
are pending in jurisdictions that permit damage awards disproportionate
to the actual economic damages alleged to have been incurred. Based
upon information presently available, we believe that the total amounts
that will ultimately be paid arising from these lawsuits and
proceedings will not have a material adverse effect on our consolidated
results of operations or financial position. However, the frequency of
large damage awards, including large punitive damage awards that bear
little or no relation to actual economic damages incurred by plaintiffs
in some jurisdictions, continues to create the potential for an
unpredictable judgment in any given suit.
20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
No trading market exists for AGFC's common stock because AGFI owns all
of AGFC's common stock. AGFC paid the following cash dividends on its
common stock:
Quarter Ended 2001 2000
(dollars in thousands)
March 31 $ 75,386 $ 60,960
June 30 63,196 -
September 30 45,208 59,233
December 31 245,065 64,924
Total $428,855 $185,117
At the end of fourth quarter 2001, we increased our leverage target to
7.5 to 1 for debt to tangible equity. Approximately $195.0 million of
the $245.1 million fourth quarter 2001 dividend was due to our change
in targeted leverage. See Management's Discussion and Analysis in Item
7., and Note 15. of the Notes to Consolidated Financial Statements in
Item 8., regarding limitations on the ability of AGFC and its
subsidiaries to pay dividends.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction
with the consolidated financial statements and related notes in Item
8., Management's Discussion and Analysis in Item 7., and other
financial information in Item 1.
At or for the Years Ended December 31,
2001 2000 1999 1998 1997
(dollars in thousands)
Total revenues $ 1,975,536 $ 1,902,826 $ 1,715,869 $ 1,594,239 $1,511,943
Net income (a) 252,791 260,130 224,653 194,396 137,071
Total assets 13,447,626 13,193,153 12,464,102 11,059,601 9,240,605
Long-term debt 6,300,171 5,667,567 5,709,755 5,162,012 3,941,486
(a) Per share information is not included because all of AGFC's common stock
is owned by AGFI.
21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the consolidated
financial statements and related notes in Item 8. and other financial
information in Item 1.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and our other publicly available
documents may include, and the Company's officers and representatives
may from time to time make, statements which may constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are not historical
facts but instead represent only our belief regarding future events,
many of which, by their nature, are inherently uncertain and outside of
our control. These statements may address, among other things, the
Company's strategy for growth, product development, regulatory
approvals, market position, financial results and reserves. It is
possible that the Company's actual results and financial condition may
differ, possibly materially, from the anticipated results and financial
condition indicated in these forward-looking statements. Forward-
looking statements involve risks and uncertainties including, but not
limited to, the following:
* changes in general economic conditions, including the
performance of financial markets, interest rates, and the
level of personal bankruptcies;
* customer responsiveness to both products and distribution
channels or changes in contractual delinquencies, collateral
values, or credit losses;
* competitive, regulatory, accounting, or tax changes that
affect the cost of, or demand for, our products or the manner
in which we conduct business;
* adverse litigation results or resolution of litigation or any
governmental inquiries or investigations;
* the formation of strategic alliances or business combinations
among our competitors or our business partners;
* changes in our ability to attract and retain employees or key
executives; and
* natural events affecting Company facilities.
Readers are also directed to other risks and uncertainties discussed in
other documents we file with the Securities and Exchange Commission.
We are under no obligation to (and expressly disclaim any such
obligation to) update or alter any forward-looking statement, whether
written or oral, that may be made from time to time, whether as a
result of new information, future events or otherwise.
22
Item 7. Continued
CRITICAL ACCOUNTING POLICIES
We prepared our consolidated financial statements using accounting
principles generally accepted in the United States (GAAP). They
include the accounts of AGFC and its subsidiaries, all of which are
wholly owned. We eliminated all intercompany items. We made estimates
and assumptions that affect amounts reported in our financial
statements and disclosures of contingent assets and liabilities.
Ultimate results could differ from our estimates.
Our assets consist primarily of net finance receivables (less allowance
for finance receivable losses) and investment securities. The related
finance charge revenue and investment revenue (included in other
revenues) are determined by principal amounts, interest or dividend
rates, and terms of the related assets. GAAP requires that we account
for finance charge revenue and investment securities interest revenue
on the accrual basis using the interest method. The only discretion we
have in this revenue recognition is the point of suspension of finance
charge revenue and investment securities interest revenue. Our only
other significant revenue is insurance premiums (included in insurance
revenues). The premium amounts and policy terms are known and the
methods of revenue recognition are also determined by GAAP.
We establish the allowance for finance receivable losses primarily
through the provision for finance receivable losses charged to expense.
We periodically evaluate our finance receivable portfolio to determine
the appropriate level of the allowance for finance receivable losses.
We believe the amount of the allowance for finance receivable losses is
the most significant estimate we make. In our opinion, the allowance
is adequate to absorb losses inherent in our existing portfolio.
Our liabilities consist primarily of long-term debt and commercial
paper. The related interest expense is determined by the principal
amounts, interest rates, and terms of the related debt, and include the
effects of interest rate swap agreements that effectively convert
certain floating-rate debt to a fixed-rate basis. GAAP requires that
we account for interest expense on the accrual basis using the interest
method.
See Note 2. of the Notes to Consolidated Financial Statements in Item
8. for further information on these critical accounting policies, as
well as other significant accounting policies.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sources of funds include operations, issuances of long-term debt,
short-term borrowings in the commercial paper market, and borrowings
from banks under credit facilities. AGFI has also contributed capital
to AGFC to support finance receivable growth or maintain targeted
leverage.
23
Item 7. Continued
Principal sources and uses of cash were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Principal sources of cash:
Operations $ 750.1 $ 772.2 $ 441.2
Net issuances of debt 361.0 554.3 1,305.1
Capital contributions - - 66.6
Total $1,111.1 $1,326.5 $1,812.9
Principal uses of cash:
Net originations and purchases
of finance receivables $ 551.2 $ 903.7 $1,462.4
Dividends paid 428.9 185.1 166.5
Total $ 980.1 $1,088.8 $1,628.9
Net cash from operations remained near the same in 2001. Net cash from
operations increased in 2000 due to changes in various components of
other assets, other liabilities, and taxes receivable and payable
resulting from routine operating activities. The increase in net cash
from operations in 2000 also reflected higher finance charges,
partially offset by higher interest expense. Net issuances of debt and
net originations and purchases of finance receivables decreased in both
2001 and 2000 due to a slowing economy in 2001 and fewer portfolios
available for purchase that met our credit quality standards in 2000.
Dividends paid less capital contributions received reflect changes in
net income retained in AGFC to maintain equity and total debt at
predetermined ratios. See "Capital Resources" for the fourth quarter
2001 change in targeted leverage and resulting dividends.
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable financial obligations and
operational requirements. The principal risk factors that could
decrease our sources of liquidity are delinquent payments from our
customers and our inability to access capital markets. The principal
factors that could increase our cash needs are significant increases in
net originations and purchases of finance receivables. We intend to
mitigate liquidity risk factors by continuing to operate the Company
within the following strategies:
* maintain a finance receivable portfolio comprised mostly of
real estate loans, which generally represent a lower risk of
customer non-payment;
* originate and monitor finance receivables with our proprietary
credit risk management system;
* maintain an investment securities portfolio of predominantly
investment grade, liquid securities; and
* maintain a capital structure appropriate to our asset base.
24
Item 7. Continued
Consistent execution of our business strategies should result in
continued profitability, strong credit ratings, and investor
confidence. These results should allow continued access to capital
markets for issuances of our commercial paper and term debt. We
maintain committed bank credit facilities to provide an additional
source of liquidity needs not met through capital markets. See Note
11. of the Notes to Consolidated Financial Statements in Item 8. for
information on our credit facilities.
At December 31, 2001, contractual maturities related to our debt were
as follows:
Less than From 1-3 From 4-5 Over 5
1 year years years years Total
(dollars in millions)
Long-term debt $ 1,388.4 $ 2,579.7 $ 1,995.2 $ 336.9 $ 6,300.2
Commercial paper 4,578.6 - - - 4,578.6
Total $ 5,967.0 $ 2,579.7 $ 1,995.2 $ 336.9 $10,878.8
Based on the strength of our current credit ratings, we expect to
refinance maturities of our debt. Any adverse changes in our operating
performance or credit ratings could limit our access to capital markets
to accomplish these refinancings.
At December 31, 2001, our off-balance sheet commitments were as
follows:
Less than From 1-3 From 4-5 Over 5
1 year years years years Total
(dollars in millions)
Unused credit limits $ 3,576.4 $ - $ - $ - $ 3,576.4
Operating leases 47.5 68.2 25.3 21.2 162.2
Limited partnerships 27.5 - - - 27.5
Total $ 3,651.4 $ 68.2 $ 25.3 $ 21.2 $ 3,766.1
Unused Credit Limits
Unused credit limits extended by a non-subsidiary affiliate (whose
private label finance receivables are fully participated to the
Company) and the Company to their customers totaled $3.6 billion at
December 31, 2001. Company experience has shown that the funded
amounts of customer credit limits have been substantially less than the
credit limits. All unused credit limits, in part or in total, can be
cancelled at the discretion of the affiliate and the Company.
Operating Leases
Operating leases represent annual rental commitments for leased office
space, automobiles, and data processing and related equipment. At
December 31, 2001, our rental commitments totaled $162.2 million.
25
Item 7. Continued
Limited Partnerships
Our investments in limited partnerships are part of our insurance
investment portfolio. See Note 6. of the Notes to Consolidated
Financial Statements in Item 8. for information on these limited
partnerships. At December 31, 2001, our total commitments for these
limited partnerships were $57.5 million, consisting of $30.0 million
funded and $27.5 million unfunded.
Capital Resources
December 31,
2001 2000
(dollars in millions)
Long-term debt $ 6,300.2 $ 5,667.6
Short-term debt 4,578.6 4,846.4
Total debt 10,878.8 10,514.0
Equity 1,545.9 1,786.3
Total capital $12,424.7 $12,300.3
Net finance receivables $11,718.6 $11,427.8
Debt to tangible equity ratio 7.50x 6.49x
Our capital varies with the level of net finance receivables. The
capital mix of debt and equity is based primarily upon maintaining
leverage that supports cost-effective funding.
We issue a combination of fixed-rate debt, principally long-term, and
floating-rate debt, principally short-term. AGFC obtains our fixed-
rate debt through issuances of public long-term debt offerings with
maturities generally ranging from two to ten years. AGFC obtains most
of our floating-rate debt effectively through sales and refinancing of
commercial paper. Commercial paper, with maturities ranging from 1 to
270 days, is sold to banks, insurance companies, corporations, and
other accredited investors. AGFC also sells extendible commercial
notes with initial maturities of up to 90 days, which may be extended
by AGFC to 390 days.
We participate in credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for
operating requirements. At December 31, 2001, credit facilities,
including facilities shared with American General and AGFI, totaled
$5.3 billion (including $5.2 billion of committed credit facilities),
with remaining availability of $5.3 billion. See Note 11. of the Notes
to Consolidated Financial Statements in Item 8. for additional
information on credit facilities.
26
Item 7. Continued
Years of expiration of committed credit facilities at December 31, 2001
were as follows:
Committed Credit Facilities
(dollars in millions)
2002 $2,650.0
2005 1,075.0
2006 1,500.0
Total $5,225.0
Until fourth quarter 2001, AGFC paid dividends to (or received capital
contributions from) AGFI to manage our leverage of debt to tangible
equity (equity less goodwill and accumulated other comprehensive
income) to 6.5 to 1. At the end of fourth quarter 2001, following
discussions with the credit rating agencies, we increased our leverage
target to 7.5 to 1. This increase was based on our success with
managing credit risk and maintaining a lower risk finance receivable
portfolio. We intend to continue these practices. Approximately
$195.0 million of the $245.1 million fourth quarter 2001 dividend was
due to the change in targeted leverage. An AGFC financing agreement
limits the amount of dividends AGFC may pay. This agreement has not
prevented us from managing our capital to targeted leverage. See Note
15. of the Notes to Consolidated Financial Statements in Item 8. for
information on dividend restrictions.
ANALYSIS OF OPERATING RESULTS
Net Income
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Net income $252.8 $260.1 $224.7
Return on average assets 1.91% 2.01% 1.96%
Return on average equity 14.46% 14.81% 13.86%
Ratio of earnings to fixed charges 1.62x 1.59x 1.61x
Net income for 2001 included charges of $58.0 million ($37.7 million
aftertax) resulting from our review of our businesses and the assets
supporting those businesses, as well as the adoption of AIG's
accounting policies and methodologies, in connection with AIG's
acquisition of American General. See Note 16. of the Notes to
Consolidated Financial Statements in Item 8. for further information on
these charges.
27
Item 7. Continued
Including these non-recurring charges, net income for 2001 was $252.8
million, a decrease of $7.3 million, or 3%, when compared to 2000.
Excluding these non-recurring charges, net income for 2001 would have
been $290.5 million, an increase of $30.4 million, or 12%, when
compared to 2000. Net income for 2000 was $260.1 million, an increase
of $35.4 million, or 16%, when compared to 1999. See Note 20. of the
Notes to Consolidated Financial Statements in Item 8. for information
on the results of the Company's business segments.
We manage the components of our revenue and expenses in response to
economic events and to achieve our profitability objectives. In 2001,
a slowing economy resulted in lower borrowing cost but higher net
charge-offs. We invested in business development programs, including
new branch openings, and increased our allowance for finance receivable
losses in response to higher delinquency, charge-offs, unemployment,
and personal bankruptcies. In 2000 and 1999, an accelerating economy
resulted in higher borrowing cost but favorable net charge-off
experience. We increased our finance charge rates on new business,
which is reflected in our yield in 2001. We also controlled operating
expenses in 2000 and 1999.
Our income statement line items as percentages of each year's average
net receivables were as follows:
Years Ended December 31,
2001 2000 1999
Revenues
Finance charges 14.62% 14.19% 14.50%
Insurance 1.71 1.76 1.88
Other 0.98 1.16 1.10
Total revenues 17.31 17.11 17.48
Expenses
Interest expense 5.44 6.09 5.75
Operating expenses 4.64 4.73 5.19
Provision for finance
receivable losses 2.50 1.82 2.07
Insurance losses and loss
adjustment expenses 0.77 0.79 0.88
Other charges 0.51 - -
Total expenses 13.86 13.43 13.89
Income before provision for
income taxes 3.45 3.68 3.59
Provision for income taxes 1.23 1.34 1.30
Net income 2.22% 2.34% 2.29%
28
Item 7. Continued
Factors that specifically affected the Company's operating results were
as follows:
Finance Charges
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Finance charges $ 1,668.6 $ 1,577.6 $ 1,423.4
Average net receivables $11,411.5 $11,119.1 $ 9,815.9
Yield 14.62% 14.19% 14.50%
Finance charges increased $91.0 million, or 6%, for 2001 when compared
to 2000 and $154.2 million, or 11%, for 2000 when compared to 1999.
The increase in finance charges for 2001 when compared to 2000
reflected higher yield and average net receivables. The increase in
average net receivables of $292.4 million, or 3%, was primarily due to
higher average net non-real estate and real estate loans.
The increase in finance charges for 2000 when compared to 1999
reflected higher average net receivables, partially offset by lower
yield. The increase in average net receivables of $1.3 billion, or
13%, was primarily due to higher average net real estate loans.
Yield increased 43 basis points during 2001 when compared to 2000 and
decreased 31 basis points during 2000 when compared to 1999. The
increase in yield during 2001 when compared to 2000 was primarily due
to higher yield on real estate loans originated, renewed, and purchased
during 2000 and the first half of 2001 in response to rising market
interest rates from mid-1999 through mid-2000. Lower market rates
experienced during 2001 may have a downward impact on future yields.
The decrease in yield during 2000 when compared to 1999 reflected a
larger proportion of average net receivables that are real estate
loans, which generally have lower yields, and a decline in real estate
loan yield. The decrease in yield for 2000 when compared to 1999 also
reflected declines in non-real estate loan and retail sales finance
yield.
Insurance Revenues
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Insurance revenues $195.4 $196.2 $184.5
Premiums earned $193.0 $193.4 $181.2
Insurance revenues as a
percentage of average
net receivables 1.71% 1.76% 1.88%
29
Item 7. Continued
Insurance revenues remained near the same for 2001 when compared to
2000 and increased $11.7 million, or 6%, for 2000 when compared to
1999. The increase in insurance revenues for 2000 when compared to
1999 was primarily due to higher earned premiums. Earned premiums
increased due to higher premium volume.
Insurance revenues as a percentage of average net receivables declined
during 2001 and 2000 reflecting higher average net receivables. Our
experience is that we place fewer insurance products on real estate
loans than on non-real estate loans.
Other Revenues
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Other revenues $ 111.5 $ 129.0 $ 107.9
Investment revenue $ 86.7 $ 90.5 $ 78.5
Interest revenue - notes
receivable from AGFI $ 21.0 $ 30.6 $ 21.1
Net realized (losses) gains
on investments $ (3.0) $ 2.8 $ (1.6)
Average invested assets $1,231.2 $1,149.0 $1,056.2
Adjusted portfolio yield 7.03% 7.35% 7.35%
Other revenues decreased $17.5 million, or 14%, for 2001 when compared
to 2000 and increased $21.1 million, or 20%, for 2000 when compared to
1999.
The decrease in other revenues for 2001 when compared to 2000 was
primarily due to lower interest revenue on notes receivable from AGFI,
net losses on foreclosed real estate in 2001 compared to net gains in
2000, and lower investment revenue. The decrease in interest revenue
on notes receivable from AGFI reflected significantly lower interest
rates. These notes support AGFI's funding of finance receivables. The
decrease in investment revenue reflected net realized losses in 2001
compared to net realized gains in 2000 and a decline in adjusted
portfolio yield of 32 basis points, partially offset by growth in
average invested assets for the insurance operations of $82.2 million.
The increase in other revenues for 2000 when compared to 1999 was
primarily due to higher investment revenue and interest revenue on
notes receivable from AGFI. The increase in investment revenue
reflected growth in average invested assets for the insurance
operations of $92.8 million and net realized gains in 2000 compared to
net realized losses in 1999.
The increases in average invested assets in 2001 and 2000 was primarily
due to investment of insurance operations cash flows. The decrease in
adjusted portfolio yield in 2001 reflected market conditions.
30
Item 7. Continued
Interest Expense
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Interest expense $ 620.5 $ 677.4 $ 564.0
Average borrowings $10,373.6 $10,258.5 $ 9,018.2
Borrowing cost 5.98% 6.60% 6.25%
Interest expense decreased $56.9 million, or 8%, for 2001 when compared
to 2000 and increased $113.4 million, or 20%, for 2000 when compared to
1999.
The decrease in interest expense for 2001 when compared to 2000
reflected lower borrowing cost, partially offset by higher average
borrowings. The increase in interest expense for 2000 when compared to
1999 reflected higher average borrowings and borrowing cost.
Borrowing cost decreased 62 basis points during 2001 when compared to
2000 reflecting lower rates on short-term debt. Borrowing cost
increased 35 basis points during 2000 when compared to 1999 reflecting
higher rates on short-term debt. Federal Reserve actions raised the
federal funds rate a total of 175 basis points between June 1999 and
May 2000 and then lowered rates a total of 475 basis points between
December 2000 and December 2001. These actions resulted in large
movements in market rates and in our short-term, floating-rate
borrowing costs.
Average borrowings increased $115.1 million, or 1%, during 2001 when
compared to 2000 and $1.2 billion, or 14%, during 2000 when compared to
1999 primarily to support finance receivable growth.
Operating Expenses
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Operating expenses $530.0 $525.8 $509.5
Operating expenses as a
percentage of average
net receivables 4.64% 4.73% 5.19%
Operating expenses increased $4.2 million, or 1%, for 2001 when
compared to 2000 and $16.3 million, or 3%, for 2000 when compared to
1999.
The increase in operating expenses for 2001 when compared to 2000 was
primarily due to higher salaries, partially offset by higher deferred
loan origination costs.
The increase in operating expenses for 2000 when compared to 1999 was
primarily due to higher salaries and data processing expenses,
partially offset by lower litigation expenses.
31
Item 7. Continued
The increases in salaries for 2001 and 2000 when compared to the
respective previous year reflect higher competitive compensation.
The improvements in operating expenses as a percentage of average net
receivables in 2001 and 2000 when compared to the respective previous
year reflect continued improvement in operating efficiencies.
Provision for Finance Receivable Losses
At or for the
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Provision for finance
receivable losses $284.7 $202.5 $203.0
Net charge-offs $258.7 $202.5 $203.0
Charge-off ratio 2.27% 1.82% 2.08%
Charge-off coverage 1.70x 1.84x 1.90x
60 day+ delinquency $456.9 $413.9 $394.3
Delinquency ratio 3.73% 3.45% 3.50%
Allowance for finance
receivable losses $438.9 $372.8 $385.3
Allowance ratio 3.74% 3.26% 3.58%
Provision for finance receivable losses increased $82.2 million, or
41%, for 2001 when compared to 2000 and remained near the same for 2000
when compared to 1999. The increase in provision for finance
receivable losses for 2001 when compared to 2000 was primarily due to
higher net charge-offs.
The increase in the charge-off ratio for 2001 when compared to 2000 was
primarily due to higher net charge-offs on all finance receivable types
reflecting slowing economic conditions, despite the credit quality
improvement efforts referred to below. The decrease in the charge-off
ratio for 2000 when compared to 1999 reflected the results of credit
quality improvement efforts, including consistent adherence to strict
underwriting guidelines.
The increase in the delinquency ratio at December 31, 2001 when
compared to December 31, 2000 also reflected slowing economic
conditions. The decrease in the delinquency ratio at December 31, 2000
when compared to December 31, 1999 reflected the improvement in credit
quality. The decrease in the delinquency ratio at December 31, 2000
also reflected the sale of fully-reserved delinquent net finance
receivables totaling $27.1 million (gross balances totaling $34.8
million) in 2000, which reduced the delinquency ratio by approximately
30 basis points at the time of sale. The decrease in the delinquency
ratio at December 31, 2000 was partially offset by the maturation of
real estate loan portfolios purchased in fourth quarter 1999 ($726.9
million), which were primarily new originations when purchased.
32
Item 7. Continued
We periodically evaluate our finance receivable portfolio to determine
the appropriate level of the allowance for finance receivable losses.
We believe the amount of the allowance for finance receivable losses is
the most significant estimate we make. In our opinion, the allowance
is adequate to absorb losses inherent in our existing portfolio. The
increase in the allowance ratio at December 31, 2001 when compared to
December 31, 2000 was primarily due to:
* an increase to the allowance for finance receivable losses
through the provision for finance receivable losses in 2001
totaling $26.0 million (this increase was necessary in
response to our increased delinquency and net charge-offs and
the higher levels of both unemployment and personal
bankruptcies in the United States during 2001);
* an increase to the allowance for finance receivable losses
through other charges in third quarter 2001 totaling $25.0
million (see Note 16. of the Notes to Consolidated Financial
Statements in Item 8. for further discussion of the other
charges); and
* an increase to the allowance for finance receivable losses
resulting from applying purchase accounting to net portfolio
acquisitions totaling $15.0 million.
The allowance ratio declined in 2000 when compared to 1999 reflecting
the improvement in credit quality. The decrease in the allowance ratio
for 2000 also reflected the sale of the fully-reserved net finance
receivables in 2000 which reduced the allowance ratio by approximately
24 basis points at the time of sale.
Charge-off coverage, which compares the allowance for finance
receivable losses to net charge-offs, declined in 2001 when compared to
2000 reflecting higher net charge-offs, partially offset by increases
to allowance for finance receivable losses.
Insurance Losses and Loss Adjustment Expenses
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Claims incurred $90.3 $83.0 $82.4
Change in benefit reserves (2.2) 5.4 4.2
Insurance losses and loss
adjustment expenses $88.1 $88.4 $86.6
Insurance losses and loss adjustment expenses remained near the same
for 2001 when compared to 2000 and increased $1.8 million, or 2%, for
2000 when compared to 1999.
The change in insurance losses and loss adjustment expenses for 2001
when compared to 2000 was due to a decrease in provision for future
benefits, offset by higher claims. Provision for future benefits
decreased $7.6 million for 2001 due to decreased sales of non-credit
insurance products. Claims increased $7.3 million for 2001 primarily
due to increased credit insurance loss experience.
33
Item 7. Continued
The increase in insurance losses and loss adjustment expenses for 2000
when compared to 1999 was due to increases in provision for future
benefits and claims. Provision for future benefits increased $1.2
million for 2000 due to increased sales of non-credit insurance
products. Claims increased $.6 million for 2000 primarily due to
increased credit insurance loss experience.
Other Charges
In third quarter 2001, we recorded charges of $58.0 million ($37.7
million aftertax) resulting from our review of our businesses and the
assets supporting those businesses, as well as the adoption of AIG's
accounting policies and methodologies, in connection with AIG's
acquisition of American General. See Note 16. of the Notes to
Consolidated Financial Statements in Item 8. for further information on
these charges.
Provision for Income Taxes
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Provision for income taxes $141.4 $148.7 $128.1
Pretax income $394.2 $408.8 $352.8
Effective income tax rate 35.88% 36.37% 36.31%
Provision for income taxes decreased $7.3 million, or 5%, for 2001 when
compared to 2000 and increased $20.6 million, or 16%, for 2000 when
compared to 1999.
The decrease in provision for income taxes for 2001 when compared to
2000 was primarily due to lower taxable income resulting from the other
charges of $58.0 million in third quarter 2001. The increase in
provision for income taxes for 2000 when compared to 1999 was primarily
due to higher taxable income.
ANALYSIS OF FINANCIAL CONDITION
Asset Quality
We believe that our geographic diversification reduces the risk
associated with a recession in any one region. In addition, 96% of our
finance receivables at December 31, 2001 were secured by real property
or personal property. While finance receivables have some exposure to
further economic uncertainty, we believe that the allowance for finance
receivable losses is adequate to absorb losses inherent in our existing
portfolio. See Analysis of Operating Results for further information
on allowance ratio, delinquency ratio, and charge-off ratio and Note 2.
of the Notes to Consolidated Financial Statements in Item 8. for
further information on how we estimate finance receivable losses.
34
Item 7. Continued
Investment securities principally represent the investment portfolio of
our insurance operations. Our investment strategy is to optimize
aftertax returns on invested assets, subject to the constraints of
safety, liquidity, diversification, and regulation.
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities,
principally our finance receivables and debt, in an effort to reduce
the risk associated with unfavorable changes in interest rates. Real
estate loans have an expected life of 2.9 years (although this can
change in response to interest rate changes), non-real estate loans
have an expected life of 1.6 years and retail sales finance receivables
have an expected life of 9 months. We fund finance receivables with a
combination of fixed-rate and floating-rate debt and equity. The
weighted-average years to maturity for our fixed-rate debt was 2.6
years at December 31, 2001. Management determines the mix of fixed-
rate and floating-rate debt based, in part, on the nature of the
finance receivables being supported.
We limit our exposure to market interest rate increases by fixing
interest rates that we pay for term periods. The primary way we
accomplish this is by issuing fixed-rate debt. To supplement fixed-
rate debt issuances, AGFC also uses interest rate swap agreements to
synthetically create fixed-rate, long-term debt by altering the nature
of certain floating-rate funding, thereby limiting our exposure to
market interest rate increases. Floating-rate debt (principally
commercial paper) represented 30% of our average borrowings for 2001
compared to 36% for 2000. These percentages include the effect of
interest rate swap agreements that effectively converted short-term or
floating-rate debt to a long-term fixed rate. The decrease in the
percentage of floating-rate debt to average borrowings reflected the
issuance of $1.0 billion of fixed-rate, five-year notes on July 16,
2001. The proceeds were used to repay commercial paper.
REGULATION AND OTHER
Regulation
The regulatory environment of the consumer finance and insurance
businesses is described in Item 1.
Taxation
We monitor federal and state tax legislation and respond with
appropriate tax planning.
35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The fair values of certain of our assets and liabilities are sensitive
to changes in market interest rates. The impact of changes in interest
rates would be reduced by the fact that increases (decreases) in fair
values of assets would be partially offset by corresponding changes in
fair values of liabilities. In aggregate, the estimated impact of an
immediate and sustained 100 basis point increase or decrease in
interest rates on the fair values of our interest rate-sensitive
financial instruments would not be material to our financial position.
The estimated increases (decreases) in fair values of interest rate-
sensitive financial instruments were as follows:
December 31, 2001 December 31, 2000
+100 bp -100 bp +100 bp -100 bp
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $(309,671) $ 334,852 $(309,955) $ 335,853
Fixed-maturity securities (54,178) 44,508 (51,571) 45,501
Liabilities
Long-term debt (122,673) 128,185 (123,286) 128,291
Interest rate swap agreements 37,902 (72,169) - -
Off-Balance Sheet Financial
Instruments
Interest rate swap agreements - - 63,445 (66,407)
At each year end, we derived the changes in fair values by modeling
estimated cash flows of certain of our assets and liabilities. The
assumptions we used adjusted cash flows to reflect changes in
prepayments and calls but did not consider loan originations, debt
issuances, or new investment purchases.
As a result of our adoption of Statement of Financial Accounting
Standards 133 in 2001, we record interest rate swap agreements at fair
value in the balance sheet. This changed the classification from off-
balance sheet financial instruments in 2000 to liabilities in 2001.
Readers should exercise care in drawing conclusions based on the above
analysis. While these changes in fair values provide a measure of
interest rate sensitivity, they do not represent our expectations about
the impact of interest rate changes. This analysis is also based on
our exposure at a particular point in time and incorporates numerous
assumptions and estimates. It also assumes an immediate change in
interest rates, without regard to the impact of certain business
decisions or initiatives that we would likely undertake to mitigate or
eliminate some or all of the adverse effects of the modeled scenarios.
36
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated
financial statements are presented on the following pages.
37
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American General Finance Corporation
We have audited the accompanying consolidated balance sheets of
American General Finance Corporation (a wholly-owned subsidiary of
American General Finance, Inc.) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of income,
shareholder's equity, cash flows, and comprehensive income for each of
the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American General Finance Corporation and subsidiaries at
December 31, 2001 and 2000, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 3. to the consolidated financial statements, in
2001 the Company changed its method of accounting for derivative
financial instruments.
Ernst & Young LLP
Indianapolis, Indiana
January 31, 2002
38
American General Finance Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
2001 2000
(dollars in thousands)
Assets
Net finance receivables (Notes 2. and 4.):
Real estate loans $ 7,444,484 $ 7,040,925
Non-real estate loans 2,865,985 2,970,233
Retail sales finance 1,408,111 1,416,667
Net finance receivables 11,718,580 11,427,825
Allowance for finance receivable
losses (Note 5.) (438,860) (372,825)
Net finance receivables, less allowance
for finance receivable losses 11,279,720 11,055,000
Investment securities (Note 6.) 1,142,186 1,105,427
Cash and cash equivalents 175,492 134,539
Notes receivable from parent (Note 7.) 267,656 261,321
Other assets (Note 8.) 582,572 636,866
Total assets $13,447,626 $13,193,153
Liabilities and Shareholder's Equity
Long-term debt (Notes 9. and 12.) $ 6,300,171 $ 5,667,567
Commercial paper (Notes 10. and 12.) 4,578,637 4,846,445
Insurance claims and policyholder
liabilities 495,588 519,447
Other liabilities 441,280 349,413
Accrued taxes 86,023 23,987
Total liabilities 11,901,699 11,406,859
Shareholder's equity:
Common stock (Note 14.) 5,080 5,080
Additional paid-in capital 877,526 877,514
Accumulated other comprehensive
(loss) income (61,687) 2,628
Retained earnings (Note 15.) 725,008 901,072
Total shareholder's equity 1,545,927 1,786,294
Total liabilities and shareholder's equity $13,447,626 $13,193,153
See Notes to Consolidated Financial Statements.
39
American General Finance Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Revenues
Finance charges $1,668,613 $1,577,551 $1,423,416
Insurance 195,393 196,241 184,529
Other 111,530 129,034 107,924
Total revenues 1,975,536 1,902,826 1,715,869
Expenses
Interest expense 620,487 677,372 563,966
Operating expenses 529,966 525,836 509,541
Provision for finance receivable
losses 284,735 202,461 202,977
Insurance losses and loss
adjustment expenses 88,111 88,354 86,634
Other charges (Note 16.) 58,020 - -
Total expenses 1,581,319 1,494,023 1,363,118
Income before provision for income
taxes 394,217 408,803 352,751
Provision for Income Taxes
(Note 17.) 141,426 148,673 128,098
Net Income $ 252,791 $ 260,130 $ 224,653
See Notes to Consolidated Financial Statements.
40
American General Finance Corporation and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Common Stock
Balance at beginning of year $ 5,080 $ 5,080 $ 5,080
Balance at end of year 5,080 5,080 5,080
Additional Paid-in Capital
Balance at beginning of year 877,514 877,514 810,914
Capital contributions from
parent and other 12 - 66,600
Balance at end of year 877,526 877,514 877,514
Accumulated Other Comprehensive
(Loss) Income
Balance at beginning of year 2,628 (6,694) 39,419
Change in net unrealized
gains (losses):
Investment securities 3,546 9,322 (46,113)
Interest rate swaps (67,513) - -
Minimum pension liability (348) - -
Balance at end of year (61,687) 2,628 (6,694)
Retained Earnings
Balance at beginning of year 901,072 826,059 767,929
Net income 252,791 260,130 224,653
Common stock dividends (428,855) (185,117) (166,523)
Balance at end of year 725,008 901,072 826,059
Total Shareholder's Equity $1,545,927 $1,786,294 $1,701,959
See Notes to Consolidated Financial Statements.
41
American General Finance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December
31,
2001 2000 1999
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 252,791 $ 260,130 $ 224,653
Reconciling adjustments:
Provision for finance receivable losses 284,735 202,461 202,977
Depreciation and amortization 143,896 143,919 128,352
Deferral of finance receivable
origination costs (56,940) (52,874) (51,996)
Deferred income tax (benefit) charge (26,211) 10,536 12,560
Change in other assets and other liabilities 50,799 88,890 (106,960)
Change in insurance claims and
policyholder liabilities (23,859) 57,347 25,021
Change in taxes receivable and payable 70,163 69,076 (3,719)
Other charges 58,020 - -
Other, net (3,306) (7,317) 10,267
Net cash provided by operating activities 750,088 772,168 441,155
Cash Flows from Investing Activities
Finance receivables originated or purchased (6,366,214) (6,102,085) (6,467,614)
Principal collections on finance receivables 5,814,968 5,198,382 5,005,238
Investment securities purchased (1,024,553) (644,133) (325,288)
Investment securities called, matured and sold 991,378 534,962 247,015
Change in notes receivable from parent (6,335) (71,438) (6,953)
Transfer of liabilities to parent - - (22,996)
Change in premiums on finance receivables
purchased and deferred charges (35,621) (21,941) (52,301)
Other, net (14,942) (18,664) (34,748)
Net cash used for investing activities (641,319) (1,124,917) (1,657,647)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,892,820 1,240,329 1,107,517
Repayment of long-term debt (1,263,973) (1,286,000) (563,323)
Change in short-term notes payable (267,808) 599,925 760,872
Capital contribution from parent - - 66,600
Dividends paid (428,855) (185,117) (166,523)
Net cash (used for) provided by
financing activities (67,816) 369,137 1,205,143
Increase (decrease) in cash and cash equivalents 40,953 16,388 (11,349)
Cash and cash equivalents at beginning of year 134,539 118,151 129,500
Cash and cash equivalents at end of year $ 175,492 $ 134,539 $ 118,151
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 99,096 $ 68,580 $ 119,773
Interest paid $ 634,439 $ 667,572 $ 542,558
See Notes to Consolidated Financial Statements.
42
American General Finance Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Net Income $252,791 $260,130 $224,653
Other comprehensive (loss) gain:
Net unrealized (losses) gains:
Investment securities 2,446 17,151 (72,509)
Interest rate swaps:
Transition adjustment (42,103) - -
Current period (121,636) - -
Minimum pension liability (535) - -
Income tax effect:
Investment securities (843) (6,003) 25,379
Interest rate swaps:
Transition adjustment 14,736 - -
Current period 42,573 - -
Minimum pension liability 187 - -
Net unrealized (losses) gains,
net of tax (105,175) 11,148 (47,130)
Reclassification adjustments
for realized losses (gains)
included in net income:
Investment securities 2,989 (2,809) 1,564
Interest rate swaps 59,872 - -
Income tax effect:
Investment securities (1,046) 983 (547)
Interest rate swaps (20,955) - -
Realized losses (gains)
included in net income,
net of tax 40,860 (1,826) 1,017
Other comprehensive (loss) gain,
net of tax (64,315) 9,322 (46,113)
Comprehensive income $188,476 $269,452 $178,540
See Notes to Consolidated Financial Statements.
43
American General Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001
Note 1. Nature of Operations
American General Finance Corporation will be referred to as "AGFC" or
collectively with its subsidiaries, whether directly or indirectly
owned, as the "Company" or "we". AGFC is a wholly owned subsidiary
of American General Finance, Inc. (AGFI). AGFI is a wholly owned
subsidiary of American General Corporation (American General).
American General is a wholly owned subsidiary of American International
Group, Inc. (AIG). AGFC is a financial services holding company with
subsidiaries engaged primarily in the consumer finance and credit
insurance businesses. At December 31, 2001, the Company had 1,362
offices in 43 states, Puerto Rico and the U.S. Virgin Islands and
approximately 7,400 employees.
On August 29, 2001, AIG acquired American General. As a result of this
transaction, the Company is a wholly owned indirect subsidiary of AIG.
AIG is a holding company which through its subsidiaries is engaged in a
broad range of insurance and insurance-related activities and financial
services in the United States and abroad.
In our consumer finance operations, we:
* make home equity loans;
* originate secured and unsecured consumer loans;
* extend lines of credit;
* purchase retail sales contracts and provide revolving retail
services arising from the retail sale of consumer goods and
services by approximately 17,000 retail merchants; and
* purchase private label receivables originated by a non-
subsidiary affiliate arising from the sales by approximately
70 retail merchants under a participation agreement.
To supplement our lending and retail sales financing activities, we
purchase portfolios of real estate loans, non-real estate loans, and
retail sales finance receivables. We also offer credit and non-credit
insurance to our consumer finance customers.
In our insurance operations, we principally write and assume credit
life, credit accident and health, credit-related property and casualty,
and non-credit insurance covering our consumer finance customers and
property pledged as collateral. See Note 20. for further information
on the Company's business segments.
We fund our operations principally through net cash flows from
operating activities, issuances of long-term debt, short-term
borrowings in the commercial paper market, borrowings from banks under
credit facilities, and capital contributions from AGFI.
At December 31, 2001, the Company had $11.7 billion of net finance
receivables due from approximately 2.0 million customer accounts and
$6.4 billion of credit and non-credit life insurance in force covering
approximately 1.1 million customer accounts.
44
Notes to Consolidated Financial Statements, Continued
Note 2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
We prepared our consolidated financial statements using accounting
principles generally accepted in the United States (GAAP). They
include the accounts of AGFC and its subsidiaries, all of which are
wholly owned. We eliminated all intercompany items. We made estimates
and assumptions that affect amounts reported in our financial
statements and disclosures of contingent assets and liabilities.
Ultimate results could differ from our estimates. To conform to the
2001 presentation, we reclassified certain items in prior periods.
FINANCE OPERATIONS
Finance Receivables
We carry finance receivables 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. They are net of unamortized finance
charges on precomputed receivables and unamortized points and fees. We
determine delinquency on finance receivables contractually.
Although a significant portion of insurance claims and policyholder
liabilities originate from the finance receivables, our policy is to
report them as liabilities and not net them against finance
receivables. Finance receivables relate to the financing activities of
our consumer finance business segment, and insurance claims and
policyholder liabilities relate to the underwriting activities of our
insurance business segment.
Revenue Recognition
We recognize finance charges as revenue on the accrual basis using the
interest method. We amortize premiums and discounts on purchased
finance receivables as a revenue adjustment. We defer the costs to
originate certain finance receivables and the revenue from
nonrefundable points and fees on loans and amortize them to revenue on
the accrual basis using the interest method over the lesser of the
contractual term or the estimated life based upon prepayment
experience. If a finance receivable liquidates before amortization is
completed, we charge or credit any unamortized premiums, discounts,
origination costs, or points and fees to revenue at the date of
liquidation. We recognize late charges, prepayment penalties, and
extension fees as revenue when received.
We stop accruing revenue when the fourth contractual payment becomes
past due for loans and retail sales contracts and when the sixth
contractual payment becomes past due for revolving retail and private
label. Beginning in third quarter 2001, in conformity with AIG policy,
we reverse amounts previously accrued upon suspension. (Prior to AIG's
acquisition of American General, we did not reverse amounts previously
accrued upon suspension.) After suspension, we recognize revenue for
loans and retail sales contracts only to the extent of any additional
payments we receive.
45
Notes to Consolidated Financial Statements, Continued
Allowance for Finance Receivable Losses
We establish the allowance for finance receivable losses primarily
through the provision for finance receivable losses charged to expense.
We believe the amount of the allowance for finance receivable losses is
the most significant estimate we make. Our Credit Strategy and Policy
Committee evaluates our finance receivable portfolio monthly. Within
our three main finance receivable types are sub-portfolios, each
consisting of a large number of relatively small, homogenous accounts.
We evaluate these sub-portfolios for impairment as groups. None of our
accounts are large enough to warrant individual evaluation for
impairment. Our Credit Strategy and Policy Committee considers
numerous factors in estimating losses inherent in our finance
receivable portfolio, including the following:
* current economic conditions;
* prior finance receivable loss and delinquency experience; and
* the composition of our finance receivable portfolio.
Our policy is to charge off each month to the allowance for finance
receivable losses non-real estate loans on which little or no
collections were made in the prior six months and retail sales finance
that are six installments past due. We start foreclosure proceedings
on real estate loans when four monthly installments are past due. When
foreclosure is completed and we have obtained title to the property, we
establish the real estate as an asset valued at fair value, and charge
off any loan amount in excess of that value to the allowance for
finance receivable losses. We occasionally extend the charge-off
period for individual accounts when, in our opinion, such treatment is
warranted. We increase the allowance for finance receivable losses for
recoveries on accounts previously charged off.
INSURANCE OPERATIONS
Revenue Recognition
We recognize credit insurance premiums on closed-end real estate loans
and revolving finance receivables as revenue when billed monthly. We
defer credit insurance premiums collected in advance in unearned
premium reserves which are included in insurance claims and
policyholder liabilities. We recognize unearned premiums on credit
life insurance as revenue using the sum-of-the-digits or actuarial
methods, except in the case of level-term contracts, which we recognize
as revenue using the straight-line method over the terms of the
policies. We recognize unearned premiums on credit accident and health
insurance as revenue using an average of the sum-of-the-digits and the
straight-line methods. We recognize unearned premiums on credit-
related property and casualty insurance as revenue using the straight-
line method over the terms of the policies or appropriate shorter
periods. We recognize non-credit life insurance premiums as revenue
when collected but not before their due dates.
46
Notes to Consolidated Financial Statements, Continued
Policy Reserves
Policy reserves for credit life, credit accident and health, and
credit-related property and casualty insurance equal related unearned
premiums. We base claim reserves on Company experience. We estimate
reserves for losses and loss adjustment expenses for credit-related
property and casualty insurance based upon claims reported plus
estimates of incurred but not reported claims. We accrue liabilities
for future life insurance policy benefits associated with non-credit
life contracts when we recognize premium revenue and base the amounts
on assumptions as to investment yields, mortality, and surrenders. We
base annuity reserves on assumptions as to investment yields and
mortality. We base non-credit life, individual annuity, group annuity,
credit life, credit accident and health, and credit-related property
and casualty insurance reserves assumed under coinsurance agreements
where we assume the risk of loss on various tabular and unearned
premium methods.
Acquisition Costs
We defer insurance policy acquisition costs, principally commissions,
reinsurance fees, and premium taxes, and charge them to expense over
the terms of the related policies or reinsurance agreements.
INVESTMENT SECURITIES
Valuation
We currently classify all investment securities as available-for-sale
and record them at fair value. We adjust related balance sheet
accounts as if the unrealized gains and losses on investment securities
had been realized, and record the net adjustment in accumulated other
comprehensive income (loss) in shareholder's equity. If the fair value
of an investment security classified as available-for-sale declines
below its cost and we consider the decline to be other than temporary,
we reduce the investment security to its fair value, and recognize a
realized loss.
Revenue Recognition
We recognize interest on interest bearing fixed maturity investment
securities as revenue on the accrual basis. We amortize any premiums
or discounts as a revenue adjustment using the interest method. We
stop accruing interest revenue when the collection of interest becomes
uncertain. We record dividends as revenue on ex-dividend dates. We
recognize income on mortgage-backed securities as revenue using a
constant effective yield based on estimated prepayment of the
underlying mortgages. If actual prepayments differ from estimated
prepayments, we calculate a new effective yield and adjust the net
investment in the security accordingly. We record the adjustment in
other revenues.
47
Notes to Consolidated Financial Statements, Continued
Realized Gains and Losses on Investments
We specifically identify realized gains and losses on investments and
include them in other revenues.
OTHER
Cash Equivalents
We consider all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
Goodwill
Prior to our adoption of Statement of Financial Accounting Standards
(SFAS) 142, "Goodwill and Other Intangible Assets" on January 1,
2002, we charged goodwill to expense in equal amounts over 20 to 40
years. We regularly reviewed goodwill for indicators of impairment in
value which we believed were not temporary, including unexpected or
adverse changes in the following:
* the economic or competitive environments in which we operate;
* profitability analyses; and
* cash flow analyses.
If facts and circumstances suggested that goodwill was impaired, we
assessed the fair value of the underlying business and reduced goodwill
to an amount that resulted in the book value of the Company
approximating fair value. See Note 3. for information on the adoption
of SFAS 142.
Customer Base Valuations
We charge customer base valuations to expense in equal amounts
generally over 6 years.
Income Taxes
We establish deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, using the tax rates expected to be in effect
when the temporary differences reverse.
We provide a valuation allowance for deferred tax assets if it is
likely that some portion of the deferred tax asset will not be
realized. We include an increase or decrease in a valuation allowance
resulting from a change in the realizability of the related deferred
tax asset in income.
48
Notes to Consolidated Financial Statements, Continued
Derivative Financial Instruments
We accrue the differences between amounts payable and receivable on
interest rate swap agreements as adjustments to interest expense over
the lives of the agreements. We include the related amounts payable to
and receivable from counterparties in other liabilities and other
assets.
Prior to January 1, 2001, we deferred any gain or loss resulting from
the early termination of an interest rate swap agreement and amortized
it into income over the remaining term of the related debt. If the
underlying debt was extinguished, we recognized any related gain or
loss on the interest rate swap agreement in income.
Effective with our adoption of SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" on January 1, 2001, we recognize
the fair values of interest rate swap agreements in the consolidated
balance sheet. Our interest rate swap agreements are designated and
qualify as cash flow hedges. We report the effective portion of the
gain or loss on the instruments as a component of comprehensive income.
We report any ineffectiveness in other revenues.
Fair Value of Financial Instruments
We estimate the fair values disclosed in Note 22. using discounted cash
flows when quoted market prices or values obtained from independent
pricing services are not available. The assumptions used, including
the discount rate and estimates of future cash flows, significantly
affect the valuation techniques employed. In certain cases, we cannot
verify the estimated fair values by comparison to independent markets
or realize the estimated fair values in immediate settlement of the
instruments.
Note 3. Accounting Changes
In 2001, we adopted SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires all derivative instruments to
be recognized at fair value in the balance sheet. Changes in the fair
value of a derivative instrument are reported in net income or
comprehensive income, depending upon the intended use of the derivative
instrument. Upon adoption of SFAS 133, we recorded cumulative
adjustments of $42.1 million to recognize the fair value of interest
rate swap agreements related to debt in the balance sheet, which
reduced accumulated other comprehensive income in shareholder's equity
by $27.4 million. During 2001, we reclassified into earnings $13.6
million of net realized losses which related to the cumulative
adjustment. At December 31, 2001, we expect to reclassify $98.5
million of net realized losses on interest rate swap agreements from
accumulated other comprehensive income to income during the next twelve
months.
In 2001, we conformed to Emerging Issues Task Force (EITF) Issue 99-20,
"Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets." As a
result of applying the impairment provisions of EITF 99-20, we recorded
49
Notes to Consolidated Financial Statements, Continued
a $1.0 million ($.6 million aftertax) write-down of the carrying value
of certain collateralized debt obligations in other revenues.
On January 1, 2002, we adopted SFAS 142, "Goodwill and Other
Intangible Assets." SFAS 142 provides that goodwill and other
intangible assets with indefinite lives are no longer to be amortized.
These assets are to be reviewed for impairment annually, or more
frequently if impairment indicators are present. Separable intangible
assets that have finite lives will continue to be amortized over their
useful lives. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001.
Amortization of goodwill and intangible assets acquired prior to July
1, 2001 continued through December 31, 2001. Initial impairment
losses, if any, will be reported as the cumulative effect of an
accounting change. We have not yet determined if the required
impairment testing related to the Company's goodwill and other
intangible assets will require a write-down of any such assets.
Note 4. Finance Receivables
Components of net finance receivables by type were as follows:
December 31, 2001
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $7,433,025 $3,218,884 $1,593,357 $12,245,266
Unearned finance charges
and points and fees (148,722) (443,591) (201,875) (794,188)
Accrued finance charges 67,745 41,948 15,658 125,351
Deferred origination costs 10,410 36,807 - 47,217
Premiums, net of discounts 82,026 11,937 971 94,934
Total $7,444,484 $2,865,985 $1,408,111 $11,718,580
December 31, 2000
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $7,058,816 $3,309,263 $1,621,841 $11,989,920
Unearned finance charges
and points and fees (163,547) (439,480) (228,326) (831,353)
Accrued finance charges 65,000 46,689 22,368 134,057
Deferred origination costs 8,724 36,976 - 45,700
Premiums, net of discounts 71,932 16,785 784 89,501
Total $7,040,925 $2,970,233 $1,416,667 $11,427,825
50
Notes to Consolidated Financial Statements, Continued
Real estate loans are secured by first or second mortgages on
residential real estate and generally have maximum original terms of
360 months. Non-real estate loans are secured by consumer goods,
automobiles or other personal property, or are unsecured and generally
have maximum original terms of 60 months. Retail sales contracts are
secured principally by consumer goods and automobiles and generally
have maximum original terms of 60 months. Revolving retail and private
label are effectively secured by the goods purchased and generally
require minimum monthly payments based on outstanding balances. At
December 31, 2001 and 2000, 96% of our net finance receivables were
secured by the real and/or personal property of the borrower. At
December 31, 2001, real estate loans accounted for 64% of the amount
and 9% of the number of net finance receivables outstanding, compared
to 62% of the amount and 8% of the number of net finance receivables
outstanding at December 31, 2000.
Contractual maturities of net finance receivables by type at December
31, 2001 were as follows:
Real Non-Real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
2002 $ 200,594 $ 706,090 $ 370,506 $ 1,277,190
2003 283,693 948,928 309,090 1,541,711
2004 298,692 697,937 150,417 1,147,046
2005 307,351 331,271 73,019 711,641
2006 303,169 112,525 37,048 452,742
2007+ 6,050,985 69,234 468,031 6,588,250
Total $ 7,444,484 $ 2,865,985 $ 1,408,111 $11,718,580
Company experience has shown that customers will renew, convert or pay
in full a substantial portion of finance receivables prior to maturity.
Contractual maturities are not a forecast of future cash collections.
Principal cash collections and such collections as a percentage of
average net receivables by type were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Real estate loans:
Principal cash collections $2,391,674 $1,809,767 $1,856,908
% of average net receivables 33.53% 25.81% 30.35%
Non-real estate loans:
Principal cash collections $1,622,283 $1,578,034 $1,489,110
% of average net receivables 55.99% 57.41% 60.50%
Retail sales finance:
Principal cash collections $1,801,011 $1,810,581 $1,659,220
% of average net receivables 130.47% 133.33% 134.31%
51
Notes to Consolidated Financial Statements, Continued
Unused credit limits extended by a non-subsidiary affiliate (whose
private label finance receivables are fully participated to the
Company) and the Company to their customers were as follows:
December 31,
2001 2000
(dollars in thousands)
Unused credit limits $3,576,371 $3,685,710
Company experience has shown that the funded amounts have been
substantially less than the credit limits. All unused credit limits,
in part or in total, can be cancelled at the discretion of the
affiliate and the Company.
Geographic diversification of finance receivables reduces the
concentration of credit risk associated with a recession in any one
region. The largest concentrations of net finance receivables were as
follows:
December 31, 2001 December 31, 2000
Amount Percent Amount Percent
(dollars in thousands)
California $ 1,374,599 12% $ 1,514,878 13%
N. Carolina 850,995 7 831,977 7
Florida 772,830 7 740,186 6
Ohio 741,702 7 678,238 6
Illinois 731,238 6 698,181 6
Indiana 586,625 5 597,898 5
Georgia 510,140 4 477,110 4
Virginia 500,138 4 486,607 4
Other 5,650,313 48 5,402,750 49
Total $11,718,580 100% $11,427,825 100%
Finance receivables on which we stopped accruing revenue totaled $334.8
million at December 31, 2001 and $328.2 million at December 31, 2000.
Our accounting policy for revenue recognition on revolving retail and
private label finance receivables provides for the accrual of revenue
up to the date of charge-off at six months past due. We accrued
revenue on revolving retail and private label finance receivables
greater than 90 days contractually delinquent of $.6 million at
December 31, 2001 and $.3 million at December 31, 2000.
52
Notes to Consolidated Financial Statements, Continued
Note 5. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Balance at beginning of year $372,825 $385,327 $372,923
Provision for finance receivable
losses 284,735 202,461 202,977
Allowance related to net
acquired (sold) receivables 15,035 (12,502) 12,404
Charge-offs, net of recoveries (258,735) (202,461) (202,977)
Other charges - additional
provision 25,000 - -
Balance at end of year $438,860 $372,825 $385,327
See Note 2. for information on the determination of the allowance for
finance receivable losses and Note 16. for discussion of other charges.
Note 6. Investment Securities
Fair value and amortized cost of investment securities by type at
December 31 were as follows:
Fair Value Amortized Cost
2001 2000 2001 2000
(dollars in thousands)
Fixed maturity investment
securities:
Bonds:
Corporate securities $ 532,295 $ 601,588 $ 528,551 $ 609,552
Mortgage-backed securities 209,128 180,531 207,119 177,101
State and political
subdivisions 315,640 279,751 314,263 271,974
Other 47,146 4,240 45,436 4,110
Redeemable preferred stocks 9,063 11,426 8,329 10,764
Total 1,113,272 1,077,536 1,103,698 1,073,501
Non-redeemable preferred
stocks 4,225 3,635 4,251 3,596
Other long-term investments 24,133 23,680 24,152 23,680
Common stocks 556 576 606 606
Total $1,142,186 $1,105,427 $1,132,707 $1,101,383
53
Notes to Consolidated Financial Statements, Continued
Gross unrealized gains and losses on investment securities by type at
December 31 were as follows:
Gross Gross
Unrealized Gains Unrealized Losses
2001 2000 2001 2000
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $19,660 $15,802 $15,916 $23,766
Mortgage-backed securities 3,543 3,698 1,534 268
State and political
subdivisions 5,409 8,278 4,032 501
Other 1,710 130 - -
Redeemable preferred stocks 738 799 4 137
Total 31,060 28,707 21,486 24,672
Non-redeemable preferred
stocks - 39 26 -
Other long-term investments - - 19 -
Common stocks - 7 50 37
Total $31,060 $28,753 $21,581 $24,709
The fair values of investment securities sold or redeemed and the
resulting gross realized gains and losses were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Fair value $991,378 $534,962 $247,015
Gross realized gains 16,441 14,166 3,003
Gross realized losses 19,430 11,357 4,567
Contractual maturities of fixed-maturity investment securities at
December 31, 2001 were as follows:
Fair Amortized
Value Cost
(dollars in thousands)
Fixed maturities, excluding
mortgage-backed securities:
Due in 1 year or less $ 45,264 $ 44,052
Due after 1 year through 5 years 183,178 178,213
Due after 5 years through 10 years 345,321 343,421
Due after 10 years 330,381 330,893
Mortgage-backed securities 209,128 207,119
Total $1,113,272 $1,103,698
Actual maturities may differ from contractual maturities since
borrowers may have the right to call or prepay obligations. The
Company may sell investment securities before maturity to achieve
corporate requirements and investment strategies.
54
Notes to Consolidated Financial Statements, Continued
Other long-term investments consist of six limited partnerships. These
limited partnerships provide diversification and have high yielding,
long-term financial objectives. These limited partnerships invest
primarily in private equity investments within a variety of industries,
high yielding securities, and mezzanine investments. At December 31,
2001, our total commitments for these six limited partnerships were
$57.5 million, consisting of $30.0 million funded and $27.5 million
unfunded.
Bonds on deposit with insurance regulatory authorities had carrying
values of $7.9 million at December 31, 2001 and $7.3 million at
December 31, 2000.
Note 7. Notes Receivable from Parent
Notes receivable from AGFI totaled $267.7 million at December 31, 2001
and $261.3 million at December 31, 2000. Interest revenue on notes
receivable from parent totaled $21.0 million in 2001, $30.6 million in
2000, and $21.1 million in 1999. These notes primarily support AGFI's
funding of finance receivables.
Note 8. Other Assets
Components of other assets were as follows:
December 31,
2001 2000
(dollars in thousands)
Goodwill $157,595 $164,000
Income tax assets 83,176 30,466
Fixed assets 83,014 89,541
Other insurance investments 78,813 90,495
Customer base valuations 63,552 84,020
Real estate owned 48,359 45,033
Prepaid expenses and deferred
charges 35,635 38,970
Other 32,428 94,341
Total $582,572 $636,866
Goodwill is net of accumulated amortization of $113.3 million at
December 31, 2001 and $106.9 million at December 31, 2000.
55
Notes to Consolidated Financial Statements, Continued
Note 9. Long-term Debt
Carrying value and fair value of long-term debt at December 31 were as
follows:
Carrying Value Fair Value
2001 2000 2001 2000
(dollars in thousands)
Senior debt $6,300,171 $5,667,567 $6,468,550 $5,732,530
Weighted average interest rates on long-term debt were as follows:
Years Ended December 31, December 31,
2001 2000 1999 2001 2000
Senior debt 6.66% 6.64% 6.61% 6.41% 6.72%
Contractual maturities of long-term debt at December 31, 2001 were as
follows:
Carrying Value
(dollars in thousands)
2002 $1,388,324
2003 1,573,440
2004 1,006,261
2005 722,276
2006 1,272,959
2007-2009 336,911
Total $6,300,171
A debt agreement contains restrictions on consolidated retained
earnings for certain purposes (see Note 15.).
Note 10. Short-term Notes Payable
AGFC issues commercial paper with terms ranging from 1 to 270 days.
Included in commercial paper are extendible commercial notes that AGFC
sells with initial maturities of up to 90 days which may be extended by
AGFC to 390 days.
56
Notes to Consolidated Financial Statements, Continued
Information concerning short-term notes payable for commercial paper
and to banks under credit facilities was as follows:
At or for the
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Average borrowings $4,351,397 $4,554,409 $3,596,916
Weighted average interest
rate, at year end:
Money market yield 1.96% 6.58% 5.94%
Semi-annual bond
equivalent yield 1.96% 6.67% 6.01%
Note 11. Liquidity Facilities
We participate in credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for
operating requirements. AGFC is an eligible borrower under committed
credit facilities extended to American General and certain of its
subsidiaries (the "shared committed facilities"). At December 31,
2001, the annual commitment fees for the shared committed facilities
ranged from .04% to .06%. We pay only an allocated portion of the
commitment fees for the shared committed facilities. AGFC and certain
subsidiaries also have uncommitted credit facilities. In addition,
AGFC is an eligible borrower under uncommitted credit facilities
extended to American General and certain of its subsidiaries (the
"shared uncommitted facilities"). Available borrowings under all
facilities are reduced by any outstanding borrowings.
Information concerning the credit facilities was as follows:
December 31,
2001 2000
(dollars in thousands)
Committed credit facilities:
Shared committed facilities $5,225,000 $6,200,000
Borrowings - -
Remaining availability $5,225,000 $6,200,000
Uncommitted credit facilities:
Company uncommitted facilities $ 1,000 $ 1,000
Shared uncommitted facilities 100,000 50,000
Borrowings - -
Remaining availability $ 101,000 $ 51,000
57
Notes to Consoliated Financial Statements, Continued
Note 12. Derivative Financial Instruments
AGFC uses derivative financial instruments in managing the cost of its
debt and is neither a dealer nor a trader in derivative financial
instruments. AGFC has generally limited its use of derivative
financial instruments to interest rate swap agreements. These interest
rate swap agreements are designated and qualify as cash flow hedges.
AGFC uses interest rate swap agreements to reduce its exposure to
market interest rate increases by synthetically converting certain
short-term or floating-rate debt to a long-term fixed-rate. The
synthetic long-term fixed rates achieved through interest rate swap
agreements are slightly lower than could have been achieved by issuing
comparable long-term fixed-rate debt. As an alternative to fixed-rate
term debt, AGFC's interest rate swap agreements did not have a material
effect on the Company's other revenues, interest expense, or net income
in any of the three years ended December 31, 2001.
AGFC contracted to pay interest at fixed rates and receive interest at
floating rates on the interest rate swap agreements. Notional amounts
and weighted average receive and pay rates were as follows:
December 31,
2001 2000 1999
(dollars in thousands)
Notional amount $2,500,000 $2,450,000 $1,295,000
Weighted average receive rate 2.06% 6.72% 5.40%
Weighted average pay rate 6.58% 6.71% 6.70%
Notional amount maturities and the respective weighted average interest
rates at December 31, 2001 were as follows:
Notional Weighted Average
Amount Interest Rate
(dollars in
thousands)
2002 $ 610,000 6.85%
2003 445,000 7.86
2004 920,000 6.05
2005 225,000 6.24
2006 100,000 7.03
2008 200,000 5.50
Total $2,500,000 6.58%
58
Notes to Consolidated Financial Statements, Continued
Changes in the notional amounts of interest rate swap agreements were
as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Balance at beginning of year $2,450,000 $1,295,000 $ 935,000
New contracts 320,000 1,380,000 410,000
Expired contracts (270,000) (225,000) (50,000)
Balance at end of year $2,500,000 $2,450,000 $1,295,000
AGFC is exposed to credit risk in the event of non-performance by
counterparties to derivative financial instruments. AGFC limits this
exposure by entering into agreements with counterparties having high
credit ratings and by basing the amounts and terms of these agreements
on their credit ratings. AGFC regularly monitors counterparty credit
ratings throughout the term of the agreements.
AGFC's credit exposure on derivative financial instruments is limited
to the fair value of the agreements that are favorable to the Company.
At December 31, 2001, the interest rate swap agreements were recorded
at fair value of $103.9 million in other liabilities. AGFC does not
expect any counterparty to fail to meet its obligation; however, non-
performance would not have a material impact on the Company's
consolidated results of operations and financial position.
AGFC's exposure to market risk is mitigated by the offsetting effects
of changes in the value of the agreements and of the related debt being
hedged.
Note 13. Insurance
Our insurance subsidiaries enter into reinsurance agreements among
themselves and with other insurers, including affiliated insurance
companies. Insurance claims and policyholder liabilities included the
following amounts with affiliated insurance companies:
December 31,
2001 2000
(dollars in thousands)
Individual annuity, group annuity,
credit life, and credit accident
and health reserves $73,446 $80,871
Policy and claim reserves assumed by our insurance subsidiaries from
other insurers were as follows:
December 31,
2001 2000 1999
(dollars in thousands)
Assumed policy and claim reserves $114,005 $151,169 $142,917
59
Notes to Consolidated Financial Statements, Continued
Our insurance subsidiaries' business reinsured to others was not
significant during the last three years.
Reconciliations of statutory net income to GAAP net income were as
follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Statutory net income $87,632 $58,027 $48,754
Change in deferred policy
acquisition costs (7,561) 12,650 7,405
Reserve changes (669) 19,298 5,848
Deferred income tax benefit (charge) 1,512 (6,599) (1,870)
Amortization of interest
maintenance reserve (2,322) (710) (711)
Goodwill amortization (458) (458) (458)
Other, net (5,500) (2,263) 7,744
GAAP net income $72,634 $79,945 $66,712
Reconciliations of statutory equity to GAAP equity were as follows:
December 31,
2001 2000
(dollars in thousands)
Statutory equity $664,461 $626,572
Deferred policy acquisition costs 76,043 83,712
Reserve changes 83,001 73,943
Net unrealized gains 9,479 4,044
Goodwill 13,794 14,252
Decrease in carrying value
of affiliates (20,708) (14,992)
Asset valuation reserve 15,685 13,650
Deferred income taxes (28,670) (22,519)
Interest maintenance reserve 6,766 349
Other, net 7,186 14,843
GAAP equity $827,037 $793,854
60
Notes to Consolidated Financial Statements, Continued
Note 14. Capital Stock
AGFC has two classes of authorized capital stock: special shares and
common shares. AGFC may issue special shares in series. The board of
directors determines the dividend, liquidation, redemption, conversion,
voting and other rights prior to issuance. Par value, shares
authorized, and shares issued and outstanding at December 31, 2001 and
2000 were as follows:
Shares
Issued and Outstanding
Par Shares December 31,
Value Authorized 2001 2000
Special Shares - 25,000,000 - -
Common Shares $0.50 25,000,000 10,160,012 10,160,012
Note 15. Retained Earnings
State laws restrict the amounts our insurance subsidiaries may pay as
dividends without prior notice to, or in some cases prior approval
from, their respective state insurance departments. At December 31,
2001, the maximum amount of dividends which our insurance subsidiaries
may pay in 2002 without prior approval was $90.6 million. At December
31, 2001, our insurance subsidiaries had statutory capital and surplus
of $664.5 million. Merit Life Insurance Co. (Merit), a wholly owned
subsidiary of AGFC, had $52.7 million of accumulated earnings at
December 31, 2001 for which no federal income tax provisions have been
required. Merit would be liable for federal income taxes on such
earnings if they were distributed as dividends or exceeded limits
prescribed by tax laws. No distributions are presently contemplated
from these earnings. If such earnings were to become taxable at
December 31, 2001, the federal income tax would approximate $18.4
million.
An AGFC financing agreement limits the amount of dividends AGFC may
pay. Under the restrictive provision contained in this agreement,
$444.5 million of the retained earnings of AGFC was free from such
restriction at December 31, 2001.
Note 16. Other Charges
In September 2001, we recorded one-time charges totaling $58.0 million
($37.7 million aftertax), resulting from AIG's and the Company's joint
assessment of the current business environment and post-business
combination plans. These charges recognize that certain assets will
have no future economic benefit or ability to generate future revenues.
These costs include an asset impairment charge related to customer base
intangibles that resulted from a previous business acquisition. Also
included are certain adjustments associated with conforming the
Company's balances to AIG's accounting policies and methodologies, as
well as an increase in the allowance for finance receivable losses to
reflect AIG's assumptions about the current business environment.
61
Notes to Consolidated Financial Statements, Continued
Note 17. Income Taxes
For the years 1999 and 2000, and the period January 1, 2001 to August
29, 2001, AGFC and all of its subsidiaries are included in a federal
income tax return with American General and the majority of its
subsidiaries. Federal taxes were provided as if AGFC were filing a
separate tax return, with payments being made to American General under
a tax sharing agreement.
For the period August 30, 2001 to December 31, 2001, the life insurance
subsidiaries of AGFC file separate federal income tax returns. AGFC
and all other AGFC subsidiaries file a consolidated federal income tax
return with AIG. Federal taxes were provided as if AGFC and the other
AGFC subsidiaries were filing a separate tax return, with payments
being made to AIG under a tax sharing agreement.
Components of provision for income taxes were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Federal:
Current $163,940 $133,277 $110,872
Deferred (28,436) 5,828 10,427
Total federal 135,504 139,105 121,299
State 5,922 9,568 6,799
Total $141,426 $148,673 $128,098
Reconciliations of the statutory federal income tax rate to the
effective tax rate were as follows:
Years Ended December 31,
2001 2000 1999
Statutory federal income tax rate 35.00% 35.00% 35.00%
State income taxes .98 1.52 1.25
Amortization of goodwill .57 .55 .70
Nontaxable investment income (.89) (.81) (.79)
Other, net .22 .11 .15
Effective income tax rate 35.88% 36.37% 36.31%
62
Notes to Consolidated Financial Statements, Continued
Components of deferred tax assets and liabilities were as follows:
December 31,
2001 2000
(dollars in thousands)
Deferred tax assets:
Allowance for finance receivable
losses $ 99,900 $ 82,725
Interest rate swap agreements 36,354 -
Deferred insurance commissions 8,254 9,973
Other 11,645 27,742
Total 156,153 120,440
Deferred tax liabilities:
Loan origination costs 16,039 15,529
Insurance reserves 8,582 5,312
Fixed assets 5,281 2,527
Other 43,075 71,837
Total 72,977 95,205
Net deferred tax assets $ 83,176 $ 25,235
State net operating loss (NOL) carryforwards were $593.8 million at
December 31, 2001 and $603.8 million at December 31, 2000 and expire in
2002. These carryforwards resulted from a 1995 state audit of a return
and the state's acceptance of an amended return. The valuation
allowance relating to the state NOL carryforwards totaled $43.5 million
at December 31, 2001 and 2000.
Note 18. Lease Commitments, Rent Expense and Contingent Liabilities
Annual rental commitments for leased office space, automobiles and data
processing and related equipment accounted for as operating leases,
excluding leases on a month-to-month basis, were as follows:
Lease Commitments
(dollars in thousands)
2002 $ 47,485
2003 39,784
2004 28,449
2005 18,285
2006 6,972
subsequent to 2006 21,204
Total $162,179
63
Notes to Consolidated Financial Statements, Continued
Taxes, insurance and maintenance expenses are obligations of the
Company under certain leases. In the normal course of business, leases
that expire will be renewed or replaced by leases on other properties.
Future minimum annual rental commitments will probably not be less than
the amount of rental expense incurred in 2001. Rental expense totaled
$50.6 million in 2001, $48.9 million in 2000, and $46.9 million in
1999.
AGFC and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain class action claims, arising in the
ordinary course of business. In addition, many of these proceedings
are pending in jurisdictions that permit damage awards disproportionate
to the actual economic damages alleged to have been incurred. Based
upon information presently available, we believe that the total amounts
that will ultimately be paid arising from these lawsuits and
proceedings will not have a material adverse effect on our consolidated
results of operations or financial position. However, the frequency of
large damage awards, including large punitive damage awards that bear
little or no relation to actual economic damages incurred by plaintiffs
in some jurisdictions, continues to create the potential for an
unpredictable judgment in any given suit.
Note 19. Benefit Plans
RETIREMENT INCOME PLANS
We participated in the American General Retirement Plans (AGRP), which
were non-contributory defined benefit pension plans covering most
employees. Pension benefits were based on the participant's
compensation and length of credited service. American General's
funding policy was to contribute annually no more than the maximum
amount deductible for federal income tax purposes.
At December 31, 2001, the plans' assets were invested as follows: (1)
63% in equity mutual funds managed outside American General; (2) 30% in
fixed income mutual funds managed by an American General subsidiary;
and (3) 7% in AIG common stock. The pension plans had purchased
annuity contracts from American General subsidiaries to provide
approximately $7.8 million of future annual benefits to certain
retirees.
Because net plan assets were not calculated separately for the Company,
the remaining information was for AGFI.
64
Notes to Consolidated Financial Statements, Continued
AGFI accounted for its participation in the AGRP as if it had its own
plans. AGFI's portion of the plans' funded status was as follows:
December 31,
2001 2000 1999
(dollars in thousands)
Projected benefit obligation $123,648 $ 99,622 $ 85,757
Plan assets at fair value 95,030 112,194 109,371
Plan assets (less than) in excess
of projected benefit obligation (28,618) 12,572 23,614
Other unrecognized items, net 27,660 (10,615) (20,208)
(Accrued) prepaid pension expense $ (958) $ 1,957 $ 3,406
Components of pension expense were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Service cost $ 3,849 $ 3,914 $ 3,927
Interest cost 8,245 7,488 6,412
Expected return on plan assets (10,283) (10,061) (8,713)
Net amortization and deferral 260 199 119
Pension expense $ 2,071 $ 1,540 $ 1,745
Additional assumptions concerning the determination of pension expense
were as follows:
Years Ended December 31,
2001 2000 1999
Weighted average discount rate 7.25% 8.00% 7.75%
Expected long-term rate of
return on plan assets 10.35 10.35 10.35
Rate of increase in
compensation levels 4.25 4.50 4.25
Effective January 1, 2002, the American General retirement plans were
merged into the AIG plans.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
We participate in American General's life, medical, supplemental major
medical, and dental plans for certain retired employees. Most plans
are contributory, with retiree contributions adjusted annually to limit
employer contributions to predetermined amounts. The majority of the
retiree medical and dental plans are unfunded and self-insured.
American General and its subsidiaries reserve the right to change or
eliminate these benefits at any time.
65
Notes to Consolidated Financial Statements, Continued
Because plan information is not calculated separately for the Company,
the remaining information is for AGFI.
AGFI accounts for its participation in the plans as if it had its own
plans. The accrued liability for postretirement benefits was $6.2
million at December 31, 2001 and $6.5 million at December 31, 2000.
These liabilities were discounted at the same rates used for the
pension plans. Postretirement benefit expense totaled $.8 million in
2001, $.8 million in 2000, and $.7 million in 1999.
As of January 31, 2002, the American General postretirement benefit
plans had not been merged into the AIG plans.
Note 20. Segment Information
We have two business segments: consumer finance and insurance. Our
segments are defined by the type of financial service product offered.
The consumer finance segment makes home equity loans, originates
secured and unsecured consumer loans, extends lines of credit, and
purchases retail sales contracts from, and provides revolving retail
services for, retail merchants. We also purchase private label
receivables originated by an affiliate of ours, under a participation
agreement. To supplement our lending and retail sales financing
activities, we purchase portfolios of real estate loans, non-real
estate loans, and retail sales finance receivables. We also offer
credit and non-credit insurance to our consumer finance customers. The
insurance segment writes and assumes credit and non-credit insurance
through products that are offered principally by the consumer finance
segment.
We evaluate the performance of the segments based on pretax operating
earnings. The accounting policies of the segments are the same as
those disclosed in Note 2., except for the following:
* segment finance charge revenues are not reduced for the
amortization of the deferred origination costs;
* segment operating expenses are not reduced for the deferral of
origination costs and exclude the amortization of goodwill;
* segment finance receivables exclude deferred origination
costs; and
* segment investment revenues exclude realized gains and losses
and certain investment expenses.
Intersegment sales and transfers are intended to approximate the
amounts segments would earn if dealing with independent third parties.
The following tables display information about the Company's segments
as well as reconciliations of the segment totals to the consolidated
financial statement amounts. Adjustments for revenues are amortization
of deferred origination costs, realized gains (losses) on investments,
and certain investment expenses. Adjustments for pretax income include
the amortization of goodwill, realized gains (losses) on investments,
and certain investment expenses. Adjustments for assets include
goodwill, deferred origination costs, other assets, and corporate
assets that are not considered pertinent to determining segment
66
Notes to Consolidated Financial Statements, Continued
performance. Corporate assets include cash, prepaid expenses, deferred
charges, and fixed assets.
Because segment information is not calculated separately for the
Company, the remaining information is for AGFI.
At or for the year ended December 31, 2001:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,788,875 $ - $ 1,788,875
Insurance 1,111 194,282 195,393
Other (5,465) 91,134 85,669
Intercompany 80,064 (77,000) 3,064
Interest expense 591,024 - 591,024
Provision for finance
receivable losses 288,709 - 288,709
Pretax income 347,222 86,418 433,640
Assets 11,645,931 1,261,589 12,907,520
At or for the year ended December 31, 2000:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,692,881 $ - $ 1,692,881
Insurance 1,129 195,112 196,241
Other (8,512) 89,086 80,574
Intercompany 76,622 (73,641) 2,981
Interest expense 640,504 - 640,504
Provision for finance
receivable losses 206,846 - 206,846
Pretax income 327,761 90,524 418,285
Assets 11,337,094 1,220,235 12,557,329
At or for the year ended December 31, 1999:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,515,761 $ - $ 1,515,761
Insurance 1,573 182,956 184,529
Other 3,058 81,620 84,678
Intercompany 74,616 (72,195) 2,421
Interest expense 529,515 - 529,515
Provision for finance
receivable losses 209,832 - 209,832
Pretax income 335,762 74,759 410,521
Assets 10,456,698 1,095,150 11,551,848
67
Notes to Consolidated Financial Statements, Continued
Reconciliations of segment totals to consolidated financial statement
amounts were as follows:
At or for the
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Revenues
Segments $ 2,073,001 $ 1,972,677 $ 1,787,389
Corporate (13,499) (11,176) (751)
Adjustments (61,004) (51,585) (55,036)
Consolidated revenue $ 1,998,498 $ 1,909,916 $ 1,731,602
Interest Expense
Segments $ 591,024 $ 640,504 $ 529,515
Corporate 44,459 53,747 44,319
Consolidated interest
expense $ 635,483 $ 694,251 $ 573,834
Provision for Finance
Receivable Losses
Segments $ 288,709 $ 206,846 $ 209,832
Corporate 593 (571) (3,200)
Consolidated provision for
finance receivable losses $ 289,302 $ 206,275 $ 206,632
Pretax Income
Segments $ 433,640 $ 418,285 $ 410,521
Corporate (65,247) (83,599) (116,711)
Adjustments (11,875) (6,062) (11,151)
Consolidated pretax income $ 356,518 $ 328,624 $ 282,659
Assets
Segments $12,907,520 $12,557,329 $11,551,848
Corporate 443,318 624,556 869,614
Adjustments 180,816 226,510 213,845
Consolidated assets $13,531,654 $13,408,395 $12,635,307
68
Notes to Consolidated Financial Statements, Continued
Note 21. Interim Financial Information (Unaudited)
Selected interim information was as follows:
Total Revenues
Three Months Ended 2001 2000
(dollars in thousands)
March 31 $ 487,843 $ 464,694
June 30 494,246 467,976
September 30 496,173 484,892
December 31 497,274 485,264
Total $1,975,536 $1,902,826
Income Before Provision
for Income Taxes
Three Months Ended 2001 2000
(dollars in thousands)
March 31 $ 106,736 $ 98,393
June 30 112,852 99,190
September 30 62,041 (a) 105,638
December 31 112,588 105,582
Total $ 394,217 $ 408,803
Net Income
Three Months Ended 2001 2000
(dollars in thousands)
March 31 $ 68,175 $ 62,773
June 30 72,154 63,032
September 30 40,076 (a) 67,284
December 31 72,386 67,041
Total $ 252,791 $ 260,130
(a) Includes charges of $58.0 million ($37.7 million aftertax)
resulting from post-business combination plans in connection with
AIG's acquisition of American General. See Note 16. for further
information on these charges.
69
Notes to Consolidated Financial Statements, Continued
Note 22. Fair Value of Financial Instruments
The carrying values and estimated fair values of certain of the
Company's financial instruments are presented below. The reader should
exercise care in drawing conclusions based on fair value, since the
fair values presented below can be misinterpreted and do not include
the value associated with all of the Company's assets and liabilities.
December 31, 2001 December 31, 2000
Carrying Fair Carrying Fair
Value Value Value Value
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $11,279,720 $10,904,950 $11,055,000 $10,584,349
Investment securities 1,142,186 1,142,186 1,105,427 1,105,427
Cash and cash equivalents 175,492 175,492 134,539 134,539
Liabilities
Long-term debt 6,300,171 6,468,550 5,667,567 5,732,530
Commercial paper 4,578,637 4,578,637 4,846,445 4,846,445
Interest rate swap
agreements 103,867 103,867 - -
Off-Balance Sheet Financial
Instruments
Unused customer credit
limits - - - -
Interest rate swap
agreements - - - (42,103)
As a result of our adoption of SFAS 133 in 2001, we record interest
rate swap agreements at fair value in the balance sheet. This changed
the classification from off-balance sheet financial instruments in 2000
to liabilities in 2001.
VALUATION METHODOLOGIES AND ASSUMPTIONS
We used the following methods and assumptions to estimate the fair
value of our financial instruments.
Finance Receivables
We estimated fair values of net finance receivables, less allowance for
finance receivable losses using projected cash flows, computed by
category of finance receivable, discounted at the weighted-average
70
Notes to Consolidated Financial Statements, Continued
interest rates offered for similar finance receivables at December 31
of each year. We based cash flows on contractual payment terms
adjusted for delinquencies and finance receivable losses. The fair
value estimates do not reflect the value of the underlying customer
relationships or the related distribution systems.
Investment Securities
When available, we used quoted market prices as fair values of
investment securities. For investment securities not actively traded,
we estimated fair values using values obtained from independent pricing
services or, in the case of some private placements, by discounting
expected future cash flows using each year's December 31 market rate
applicable to yield, credit quality, and average life of the
investments.
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximated the carrying
values.
Long-term Debt
We estimated the fair values of long-term debt using cash flows
discounted at each year's December 31 borrowing rates.
Commercial Paper
The fair values of commercial paper approximated the carrying values.
Unused Customer Credit Limits
The unused credit limits available to the customers of the affiliate
that sells private label receivables to the Company under a
participation agreement and to the Company's customers have no fair
value. The interest rates charged on these facilities can be changed
at the affiliate's discretion for private label, or are adjustable and
reprice frequently for loan and retail revolving lines of credit.
These amounts, in part or in total, can be cancelled at the discretion
of the affiliate and the Company.
Interest Rate Swap Agreements
We estimated the fair values of interest rate swap agreements using
market recognized valuation systems at each year's December 31 market
rates.
71
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) (1) and (2) The following consolidated financial statements of
American General Finance Corporation and subsidiaries are
included in Item 8:
Consolidated Balance Sheets, December 31, 2001 and 2000
Consolidated Statements of Income, years ended December 31,
2001, 2000, and 1999
Consolidated Statements of Shareholder's Equity, years ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows, years ended December
31, 2001, 2000, and 1999
Consolidated Statements of Comprehensive Income, years ended
December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is
included in Item 14(d).
All other financial statement schedules have been omitted because
they are inapplicable.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page
77 herein.
(b) Reports on Form 8-K
Current Report on Form 8-K dated December 13, 2001 with respect
to the issuance from time to time of up to $3.5 billion aggregate
principal amount of the Company's Medium-Term Notes, Series G.
(c) Exhibits
The exhibits required to be included in this portion of Item 14.
are submitted as a separate section of this report.
72
Item 14(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance Corporation
Condensed Balance Sheets
December 31,
2001 2000
(dollars in thousands)
Assets
Net finance receivables:
Loans $ 1,179,043 $ 1,158,491
Retail sales finance 120,589 110,265
Net finance receivables 1,299,632 1,268,756
Allowance for finance receivable losses (22,594) (17,231)
Net finance receivables, less allowance
for finance receivable losses 1,277,038 1,251,525
Cash and cash equivalents 111,300 83,376
Investment in subsidiaries 1,565,638 1,572,071
Receivable from parent and affiliates 10,465,283 9,998,721
Notes receivable from parent and
subsidiaries 267,656 261,321
Other assets 119,233 103,863
Total assets $13,806,148 $13,270,877
Liabilities and Shareholder's Equity
Long-term debt, 2.27% - 8.45%
due 2002 - 2009 $ 6,295,715 $ 5,662,463
Short-term notes payable:
Commercial paper 4,439,367 4,691,767
Notes payable to subsidiaries 1,152,052 890,527
Other liabilities 373,087 239,826
Total liabilities 12,260,221 11,484,583
Shareholder's equity:
Common stock 5,080 5,080
Additional paid-in capital 877,526 877,514
Other equity (61,687) 2,628
Retained earnings 725,008 901,072
Total shareholder's equity 1,545,927 1,786,294
Total liabilities and shareholder's equity $13,806,148 $13,270,877
See Notes to Condensed Financial Statements.
73
Schedule I, Continued
American General Finance Corporation
Condensed Statements of Income
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Revenues
Interest received from affiliates $1,005,246 $1,036,734 $ 874,292
Dividends received from subsidiaries 104,896 57,116 67,515
Finance charges 18,583 17,135 15,628
Other 285 298 257
Total revenues 1,129,010 1,111,283 957,692
Expenses
Interest expense 685,899 753,627 623,570
Operating expenses 2,555 5,517 4,535
Other charges 13,020 - -
Total expenses 701,474 759,144 628,105
Income before income taxes and equity
in (overdistributed) undistributed
net income of subsidiaries 427,536 352,139 329,587
Provision for Income Taxes 113,042 103,376 91,843
Income before equity in (overdistributed)
undistributed net income of
subsidiaries 314,494 248,763 237,744
Equity in (Overdistributed) Undistributed
Net Income of Subsidiaries (61,703) 11,367 (13,091)
Net Income $ 252,791 $ 260,130 $ 224,653
See Notes to Condensed Financial Statements.
74
Schedule I, Continued
American General Finance Corporation
Condensed Statements of Cash Flows
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 252,791 $ 260,130 $ 224,653
Reconciling adjustments:
Equity in overdistributed (undistributed)
net income of subsidiaries 61,703 (11,367) 13,091
Change in other assets and other liabilities 24,709 6,503 12,835
Change in taxes receivable and payable 22,111 66,036 (57,326)
Other charges 13,020 - -
Other, net (4,788) (5,150) (5,216)
Net cash provided by operating activities 369,546 316,152 188,037
Cash Flows from Investing Activities
Finance receivables originated or purchased
from subsidiaries (1,359,156) (1,111,099) (878,163)
Principal collections on finance receivables 93,176 75,116 76,325
Finance receivables sold to subsidiaries 1,251,525 796,651 693,706
Capital contributions to subsidiaries,
net of return of capital (51,725) (9,709) (11,672)
Change in receivable from parent
and affiliates (478,562) (424,410) (1,374,346)
Transfer of liabilities to parent - - (22,996)
Other, net (310) (49) 640
Net cash used for investing activities (545,052) (673,500) (1,516,506)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,892,820 1,240,329 1,107,517
Repayment of long-term debt (1,263,325) (1,285,517) (562,815)
Change in commercial paper (252,400) 636,176 809,363
Change in notes receivable or payable
with parent and subsidiaries 255,190 (40,403) 78,353
Capital contributions from parent - - 66,600
Dividends paid (428,855) (185,117) (166,523)
Net cash provided by financing activities 203,430 365,468 1,332,495
Increase in cash and cash equivalents 27,924 8,120 4,026
Cash and cash equivalents at beginning of year 83,376 75,256 71,230
Cash and cash equivalents at end of year $ 111,300 $ 83,376 $ 75,256
See Notes to Condensed Financial Statements.
75
Schedule I, Continued
American General Finance Corporation
Notes to Condensed Financial Statements
December 31, 2001
Note 1. Accounting Policies
AGFC's investments in subsidiaries are stated at cost plus the equity
in undistributed (overdistributed) net income of subsidiaries since the
date of the acquisition. The condensed financial statements of the
registrant should be read in conjunction with AGFC's consolidated
financial statements.
Note 2. Receivable from Subsidiaries
AGFC provides funding to most of its finance subsidiaries for lending
activities. Such funding is made at 215 basis points over the
borrowing cost rate.
Note 3. Long-Term Debt
Long-term debt maturities for the five years after December 31, 2001,
were as follows: 2002, $1.4 billion; 2003, $1.6 billion; 2004, $1.0
billion; 2005, $722.3 million; and 2006, $1.3 billion.
Note 4. Other Charges
In September 2001, we recorded one-time charges totaling $13.0 million
($8.5 million aftertax), resulting from AIG's and the Company's joint
assessment of the current business environment and post-business
combination plans. These charges recognize that certain assets will
have no future economic benefit or ability to generate future revenues.
These costs include an asset impairment charge related to customer base
intangibles that resulted from a previous business acquisition.
76
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 20, 2002.
AMERICAN GENERAL FINANCE CORPORATION
By: /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
(Senior Vice President and Chief
Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 20, 2002.
Frederick W. Geissinger* Robert A. Cole*
Frederick W. Geissinger Robert A. Cole
(President and Chief Executive (Director)
Officer and Director -
Principal Executive Officer)
Jerry L. Gilpin*
Jerry L. Gilpin
/s/ Donald R. Breivogel, Jr. (Director)
Donald R. Breivogel, Jr.
(Senior Vice President and
Chief Financial Officer - Philip M. Hanley*
Principal Financial Officer) Philip M. Hanley
(Director)
George W. Schmidt*
George W. Schmidt Ben D. Hendrix*
(Controller and Assistant Ben D. Hendrix
Secretary - Principal (Director)
Accounting Officer)
*By: /s/ Donald R. Breivogel, Jr.
Stephen L. Blake* Donald R. Breivogel, Jr.
Stephen L. Blake (Attorney-in-fact)
(Director)
77
Exhibit Index
Exhibit
Number
(3) a. Restated Articles of Incorporation of American General Finance
Corporation (formerly Credithrift Financial Corporation) dated
July 22, 1988 and amendments thereto dated August 25, 1988 and
March 20, 1989. Incorporated by reference to Exhibit (3)a.
filed as a part of the Company's Annual Report on Form 10-K
for the year ended December 31, 1988 (File No. 1-6155).
b. By-laws of American General Finance Corporation. Incorporated
by reference to Exhibit (3)b. filed as a part of the Company's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-6155).
(4) a. The following instruments are filed pursuant to Item
601(b)(4)(ii) of Regulation S-K, which requires with certain
exceptions that all instruments be filed which define the
rights of holders of the Company's long-term debt and our
consolidated subsidiaries. In the aggregate, the outstanding
issuances of debt under each of the Indentures referred to
under items (1) and (2) below exceed 10% of the Company's
total assets on a consolidated basis.
(1) Indenture dated as of May 1, 1999 from American General
Finance Corporation to CitiBank, N.A. Incorporated by
reference to Exhibit (4)a.(1) filed as a part of our
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 1-6155).
(2) Indenture dated as of May 1, 1997 from American General
Finance Corporation to Bank One, National Association
(formerly known as The First National Bank of Chicago).
Incorporated by reference to Exhibit (4)a.(2) filed as
part of our Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 1-6155).
b. In accordance with Item 601(b)(4)(iii) of Regulation S-K,
certain other instruments defining the rights of holders of
the Company's long-term debt and our subsidiaries have not
been filed as exhibits to this Annual Report on Form 10-K
because the total amount of securities authorized and
outstanding under each instrument does not exceed 10% of the
total assets of the Company on a consolidated basis. We
hereby agree to furnish a copy of each instrument to the
Securities and Exchange Commission upon request.
(12) Computation of ratio of earnings to fixed charges.
(23) Consent of Ernst & Young LLP, Independent Auditors.
(24) Power of Attorney.