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 1-7422
AMERICAN GENERAL FINANCE, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1313922
(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:
None
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 2,000,000 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 . . . . . . . . . . . . . . . . . . . 36
8. Financial Statements and Supplementary Data . . . . 37
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 . . . . . . . . . . . . . . . 74
* 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, Inc. will be referred to as "AGFI" or
collectively with its subsidiaries, whether directly or indirectly
owned, as the "Company" or "we". AGFI was incorporated in Indiana
in 1974 to become the parent holding company of American General
Finance Corporation (AGFC). AGFC was incorporated in Indiana in 1927
as successor to a business started in 1920. 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.
AGFI is a financial services holding company whose principal subsidiary
is AGFC. AGFC is also 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.
In May 1999, AGFI acquired Standard Pacific Savings, F.A. from Standard
Pacific Corporation and renamed the institution American General Bank,
FSB (AG Bank). AG Bank operated as a traditional thrift, whose
products included deposit and savings accounts, residential mortgage
and home equity loans, and private label services. Concurrent with
AIG's acquisition of American General in August 2001, AG Bank was
merged into AIG Federal Savings Bank, a non-subsidiary affiliate of
AGFI, with AIG Federal Savings Bank being the surviving entity.
At December 31, 2001, the Company had 1,398 offices in 44 states,
Puerto Rico, and the U.S. Virgin Islands and approximately 7,600
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 $11,726,436 $11,408,913 $10,008,809
Average borrowings $10,704,644 $10,518,190 $ 9,205,119
Yield - finance charges as a
percentage of average net
receivables 14.60% 14.19% 14.54%
4
Item 1. Continued
At or for the
Years Ended December 31,
2001 2000 1999
Borrowing cost - interest
expense as a percentage
of average borrowings 5.93% 6.59% 6.23%
Interest spread - yield
less borrowing cost 8.67% 7.60% 8.31%
Operating expenses as a
percentage of average
net receivables 4.70% 4.75% 5.24%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 3.74% 3.26% 3.59%
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 2.26% 1.81% 2.08%
Charge-off coverage - allowance
for finance receivable losses
to net charge-offs 1.70x 1.86x 1.91x
Delinquency ratio - gross finance
receivables 60 days or more
past due as a percentage
of gross finance receivables 3.71% 3.41% 3.46%
Return on average assets 1.70% 1.59% 1.56%
Return on average equity 14.34% 13.03% 12.03%
Ratio of earnings to fixed charges
(refer to Exhibit 12 for
calculations) 1.55x 1.46x 1.48x
Debt to tangible equity ratio -
debt to equity less goodwill
and accumulated other
comprehensive income 8.89x 7.50x 7.64x
Debt to equity ratio 8.24x 6.61x 6.68x
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 1,398 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 9% 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 19. 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 $2,193,452 $2,086,721 $1,945,181
Non-real estate loans 2,759,478 2,728,318 2,557,486
Retail sales finance 1,728,061 1,917,128 1,705,635
Total $6,680,991 $6,732,167 $6,208,302
Number:
Real estate loans 58,066 58,540 56,933
Non-real estate loans 784,953 829,852 851,798
Retail sales finance 905,801 1,064,865 995,152
Total 1,748,820 1,953,257 1,903,883
Average size (to nearest dollar):
Real estate loans $37,775 $35,646 $34,166
Non-real estate loans 3,515 3,288 3,002
Retail sales finance 1,908 1,800 1,714
Net purchased
Amount (in thousands):
Real estate loans $ 904,629 $ 405,848 $1,678,860
Non-real estate loans 27,085 450,655 10,758
Retail sales finance 143,065 66,748 37,764
Total $1,074,779 $ 923,251 $1,727,382
Net purchased was net of sales of $68.7 million during 2001, $27.1
million during 2000, and $21.8 million during 1999.
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 $ 7,624,824 $ 7,280,234 $ 7,104,227
Non-real estate loans 2,922,557 3,027,989 2,576,081
Retail sales finance 1,440,908 1,453,588 1,349,689
Total $11,988,289 $11,761,811 $11,029,997
Number:
Real estate loans 189,907 184,591 181,484
Non-real estate loans 953,600 1,017,127 998,150
Retail sales finance 868,064 944,923 957,841
Total 2,011,571 2,146,641 2,137,475
Average size (to nearest dollar):
Real estate loans $40,150 $39,440 $39,145
Non-real estate loans 3,065 2,977 2,581
Retail sales finance 1,660 1,538 1,409
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% $ 1,582,130 13% $ 1,562,183 14%
N. Carolina 850,995 7 831,977 7 811,625 7
Florida 772,830 7 740,186 6 671,970 6
Ohio 741,702 6 678,238 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 500,137 4 486,607 4 430,687 4
Other 5,920,023 49 5,669,484 49 5,260,644 48
Total $11,988,289 100% $11,761,811 100% $11,029,997 100%
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 $ 7,356,898 $ 7,211,254 $ 6,227,580
Yield 11.87% 11.41% 11.59%
Non-real estate loans:
Average net receivables $ 2,954,690 $ 2,801,815 $ 2,509,412
Yield 21.59% 21.54% 21.96%
Retail sales finance:
Average net receivables $ 1,414,848 $ 1,395,844 $ 1,271,817
Yield 14.25% 13.83% 14.35%
Total:
Average net receivables $11,726,436 $11,408,913 $10,008,809
Yield 14.60% 14.19% 14.54%
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 $ 50,075 $ 45,234 $ 38,364
Charge-off ratio .68% .63% .62%
Non-real estate loans:
Net charge-offs $173,846 $130,586 $134,070
Charge-off ratio 5.87% 4.66% 5.34%
Retail sales finance:
Net charge-offs $ 40,381 $ 30,455 $ 34,198
Charge-off ratio 2.85% 2.19% 2.69%
Total:
Net charge-offs $264,302 $206,275 $206,632
Charge-off ratio 2.26% 1.81% 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 $251,759 $239,462 $214,013
Delinquency ratio 3.31% 3.28% 3.02%
Non-real estate loans:
Delinquency $171,514 $148,621 $156,325
Delinquency ratio 5.24% 4.42% 5.37%
Retail sales finance:
Delinquency $ 41,798 $ 32,493 $ 28,672
Delinquency ratio 2.56% 1.95% 1.85%
Total:
Delinquency $465,071 $420,576 $399,010
Delinquency ratio 3.71% 3.41% 3.46%
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 $383,415 $395,626 $382,450
Provision for finance receivable
losses 289,302 206,275 206,632
Allowance related to net
acquired (sold) receivables 14,836 (12,211) 13,176
Charge-offs, net of recoveries (264,302) (206,275) (206,632)
Other charges - additional
provision 25,000 - -
Balance at end of year $448,251 $383,415 $395,626
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 American General.
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 $ 6,024,311 $ 5,708,732 $5,431,257
Borrowing cost 6.66% 6.64% 6.61%
Short-term debt:
Average borrowings $ 4,617,152 $ 4,765,923 $3,749,160
Borrowing cost 4.99% 6.54% 5.70%
Deposits:
Average borrowings $ 63,181 $ 43,535 $ 24,702
Borrowing cost 5.90% 5.94% 5.19%
Total:
Average borrowings $10,704,644 $10,518,190 $9,205,119
Borrowing cost 5.93% 6.59% 6.23%
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 $ 7,306,430 $ 6,595,668 $6,302,946
Borrowing cost 6.69% 6.67% 6.68%
Floating rate debt:
Average borrowings $ 3,398,214 $ 3,922,522 $2,902,173
Borrowing cost 4.31% 6.47% 5.28%
Total:
Average borrowings $10,704,644 $10,518,190 $9,205,119
Borrowing cost 5.93% 6.59% 6.23%
The Company's use of interest rate swap agreements, the effect of which
is included in the rates above, is described in Note 11. 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 $ 1,311,557 $ 6,243,106
2003 1,583,572 1,573,440
2004 1,176,225 1,006,261
2005 729,491 722,276
2006 465,143 1,272,959
2007 and thereafter 6,722,301 336,911
Total $11,988,289 $11,154,953
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 19. 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 AGFI, 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.
Satellite Dish Operations Bankruptcy
In August 1999, a subsidiary of the Company, A.G. Financial Service
Center, Inc. (Financial Service Center), formerly named American
General Financial Center, filed a voluntary petition to reorganize
under Chapter 11 of the United States Bankruptcy Code with the United
States Bankruptcy Court for the Southern District of Indiana. The
decision to reorganize was necessitated by the judgment rendered
against Financial Service Center by a Mississippi state court in May
1999 in the amount of $167 million. The filing for reorganization
under Chapter 11 was limited to Financial Service Center and was
intended to provide a fair and orderly process for managing the claims
against Financial Service Center. Prior to the bankruptcy filing,
Financial Service Center had assets of approximately $7 million.
The plan of reorganization was confirmed by the bankruptcy court in
February 2001 and distribution under the plan is substantially
complete. Certain creditors have appealed the confirmation of the
plan, but we do not expect their appeal to prevail. We expect our
remaining recorded liability related to this matter to be sufficient to
cover the costs of the plan of reorganization.
Other
AGFI and certain of its subsidiaries are also parties to various other
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 AGFI's common stock because American
General owns all of AGFI's common stock. AGFI paid the following cash
dividends on its common stock:
Quarter Ended 2001 2000
(dollars in thousands)
March 31 $ 67,801 $ 27,000
June 30 59,996 -
September 30 50,500 15,700
December 31 260,006 64,401
Total $438,303 $107,101
At the end of fourth quarter 2001, we increased our leverage target to
9.0 to 1 for debt to tangible equity. Approximately $210.0 million of
the $260.0 million fourth quarter 2001 dividend was due to our change
in targeted leverage. See Management's Discussion and Analysis in Item
7., and Note 14. of the Notes to Consolidated Financial Statements in
Item 8., regarding limitations on the ability of AGFI 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 $ 1,998,498 $ 1,909,916 $ 1,731,602 $ 1,609,105 $1,524,105
Net income (a) 228,257 207,938 179,734 187,359 129,433
Total assets 13,531,654 13,408,395 12,635,307 11,172,923 9,289,500
Long-term debt 6,301,433 5,670,670 5,716,991 5,176,965 4,011,457
(a) Per share information is not included because all of AGFI's common stock
is owned by American General.
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 AGFI 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. American General has also
contributed capital to AGFI 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 $ 720.1 $ 620.0 $ 493.8
Net issuances of debt 420.9 622.9 1,294.4
Capital contributions - - 54.0
Total $1,141.0 $1,242.9 $1,842.2
Principal uses of cash:
Net originations and purchases
of finance receivables $ 562.0 $ 968.1 $1,551.4
Dividends paid 438.3 107.1 164.0
Total $1,000.3 $1,075.2 $1,715.4
Net cash from operations increased in 2001 due to higher finance
charges and lower interest expense. Net cash from operations increased
in 2000 due to changes in various components of 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 AGFI 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
10. 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 $ 1,389.6 $ 2,579.7 $ 1,995.2 $ 336.9 $ 6,301.4
Commercial paper 4,853.5 - - - 4,853.5
Total $ 6,243.1 $ 2,579.7 $ 1,995.2 $ 336.9 $11,154.9
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 $ 3,617.1 $ - $ - $ - $ 3,617.1
Purchase facility 250.0 - - - 250.0
Operating leases 48.5 69.7 25.7 21.2 165.1
Limited partnerships 27.5 - - - 27.5
Total $ 3,943.1 $ 69.7 $ 25.7 $ 21.2 $ 4,059.7
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.
25
Item 7. Continued
Purchase Facility
Our mortgage warehouse lending subsidiary arranges interim financing
for third-party mortgage originators through a purchase facility.
During first quarter 2002, this subsidiary stopped accepting new
business and discontinued this facility. At December 31, 2001, this
facility totaled $250.0 million with remaining availability of $40.0
million.
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 $165.1 million.
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 $ 6,301.4 $ 5,670.6
Short-term debt 4,853.5 5,088.5
Deposits - 74.0
Total debt 11,154.9 10,833.1
Equity 1,354.6 1,638.3
Total capital $12,509.5 $12,471.4
Net finance receivables $11,988.3 $11,761.8
Debt to tangible equity ratio 8.89x 7.50x
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.
26
Item 7. Continued
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. AGFI and AGFC
obtain 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, totaled $5.4 billion
(including $5.2 billion of committed credit facilities), with remaining
availability of $5.4 billion. See Note 10. of the Notes to
Consolidated Financial Statements in Item 8. for additional information
on credit facilities.
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
In addition, our mortgage warehouse lending subsidiary arranges interim
financing for third-party mortgage originators through a purchase
facility. At December 31, 2001, this facility totaled $250.0 million
with remaining availability of $40.0 million.
Until fourth quarter 2001, AGFI paid dividends to (or received capital
contributions from) American General to manage our leverage of debt to
tangible equity (equity less goodwill and accumulated other
comprehensive income) to 7.5 to 1. At the end of fourth quarter 2001,
following discussions with the credit rating agencies, we increased our
leverage target to 9.0 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 $210.0 million of the $260.0 million fourth quarter 2001
dividend was due to the change in targeted leverage. AGFI's ability to
pay dividends is substantially dependent on the receipt of dividends or
other funds from its subsidiaries, primarily AGFC. 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 14. of the Notes to Consolidated Financial Statements in Item
8. for information on dividend restrictions.
27
Item 7. Continued
ANALYSIS OF OPERATING RESULTS
Net Income
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Net income $228.3 $207.9 $179.7
Return on average assets 1.70% 1.59% 1.56%
Return on average equity 14.34% 13.03% 12.03%
Ratio of earnings to fixed charges 1.55x 1.46x 1.48x
Net income for 2001 included charges of $78.3 million ($50.9 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 15. of the Notes to
Consolidated Financial Statements in Item 8. for further information on
these charges.
Net income for 2000 included a charge of $50.0 million ($32.5 million
aftertax) for the estimated loss on an alleged fraud against our
mortgage warehouse lending subsidiary that was discovered in late June
2000. See Note 15. of the Notes to Consolidated Financial Statements
in Item 8. for further information on this loss.
Net income for 1999 included a charge of $57.0 million ($36.2 million
aftertax) for the settlement of satellite dish and other related
litigation. See Legal Proceedings in Item 3. and Note 15. of the Notes
to Consolidated Financial Statements in Item 8. for further information
on the satellite dish litigation.
Including these non-recurring charges, net income for 2001 was $228.3
million, an increase of $20.4 million, or 10%, when compared to 2000.
Similarly, net income for 2000 was $207.9 million, an increase of $28.2
million, or 16%, when compared to 1999. Excluding these non-recurring
charges, net income for 2001 would have been $279.2 million, an
increase of $38.8 million, or 16%, when compared to 2000. Similarly,
net income for 2000 would have been $240.4 million, an increase of
$24.5 million, or 11%, when compared to 1999. See Note 19. 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.
28
Item 7. Continued
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 14.60% 14.19% 14.54%
Insurance 1.67 1.72 1.84
Other 0.77 0.83 0.92
Total revenues 17.04 16.74 17.30
Expenses
Interest expense 5.42 6.09 5.73
Operating expenses 4.70 4.75 5.24
Provision for finance
receivable losses 2.47 1.81 2.06
Insurance losses and loss
adjustment expenses 0.75 0.77 0.87
Other charges 0.66 0.44 0.57
Total expenses 14.00 13.86 14.47
Income before provision for
income taxes 3.04 2.88 2.83
Provision for income taxes 1.09 1.06 1.03
Net income 1.95% 1.82% 1.80%
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 $ 1,712.5 $ 1,619.0 $ 1,455.5
Average net receivables $11,726.4 $11,408.9 $10,008.8
Yield 14.60% 14.19% 14.54%
Finance charges increased $93.5 million, or 6%, for 2001 when compared
to 2000 and $163.5 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 $317.5 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 $1.4 billion, or
14%, was primarily due to higher average net real estate loans.
29
Item 7. Continued
Yield increased 41 basis points during 2001 when compared to 2000 and
decreased 35 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 1.67% 1.72% 1.84%
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 $ 90.6 $ 94.7 $ 91.6
Investment revenue $ 87.9 $ 92.4 $ 80.3
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 $4.1 million, or 4%, for 2001 when compared to
2000 and increased $3.1 million, or 3%, for 2000 when compared to 1999.
30
Item 7. Continued
The decrease in other revenues for 2001 when compared to 2000 was
primarily due to net losses on foreclosed real estate in 2001 compared
to net gains in 2000 and lower investment revenue, partially offset by
mark-to-market and portfolio servicing adjustments recorded in 2000.
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.
As a result of the higher interest rate levels in the last half of 1999
and the first half of 2000, we made mark-to-market and portfolio
servicing adjustments to write-down mortgage loans generated by outside
originators and serviced by our warehouse lending subsidiary that were
not sold in the normal course of business to secondary mortgage
investors. These mark-to-market and portfolio servicing adjustments
reduced other revenues by approximately $8.0 million during 2000.
The increase in other revenues for 2000 when compared to 1999 was
primarily due to higher investment revenue, partially offset by mark-
to-market and portfolio servicing adjustments recorded in 2000. 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.
Interest Expense
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Interest expense $ 635.5 $ 694.3 $ 573.8
Average borrowings $10,704.6 $10,518.2 $ 9,205.1
Borrowing cost 5.93% 6.59% 6.23%
Interest expense decreased $58.8 million, or 8%, for 2001 when compared
to 2000 and increased $120.5 million, or 21%, 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 66 basis points during 2001 when compared to
2000 reflecting lower rates on short-term debt. Borrowing cost
increased 36 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.
31
Item 7. Continued
Average borrowings increased $186.4 million, or 2%, during 2001 when
compared to 2000 and $1.3 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 $550.8 $542.4 $524.8
Operating expenses as a
percentage of average
net receivables 4.70% 4.75% 5.24%
Operating expenses increased $8.4 million, or 2%, for 2001 when
compared to 2000 and $17.6 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 and litigation expenses, 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.
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 $289.3 $206.3 $206.6
Net charge-offs $264.3 $206.3 $206.6
Charge-off ratio 2.26% 1.81% 2.08%
Charge-off coverage 1.70x 1.86x 1.91x
60 day+ delinquency $465.1 $420.6 $399.0
Delinquency ratio 3.71% 3.41% 3.46%
Allowance for finance
receivable losses $448.3 $383.4 $395.6
Allowance ratio 3.74% 3.26% 3.59%
32
Item 7. Continued
Provision for finance receivable losses increased $83.0 million, or
40%, 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
29 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 ($792.7
million), which were primarily new originations when purchased.
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 $25.0 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 15. 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 $14.8 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
23 basis points at the time of sale.
33
Item 7. Continued
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.
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 $78.3 million ($50.9
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 15. of the Notes to
Consolidated Financial Statements in Item 8. for further information on
these charges.
In second quarter 2000, we recorded a charge of $50.0 million ($32.5
million aftertax) for the estimated loss on the alleged fraud against
our mortgage warehouse lending subsidiary that was discovered in late
June 2000. See Note 15. of the Notes to Consolidated Financial
Statements in Item 8. for information on this loss.
34
Item 7. Continued
In fourth quarter 1999, we recorded a charge of $57.0 million ($36.2
million aftertax) for the settlement of satellite dish and other
related litigation. See Legal Proceedings in Item 3. and Note 15. of
the Notes to Consolidated Financial Statements in Item 8. for further
information on the satellite dish litigation.
Provision for Income Taxes
Years Ended December 31,
2001 2000 1999
(dollars in millions)
Provision for income taxes $128.3 $120.7 $102.9
Pretax income $356.5 $328.6 $282.7
Effective income tax rate 35.98% 36.72% 36.41%
Provision for income taxes increased $7.6 million, or 6%, for 2001 when
compared to 2000 and $17.8 million, or 17%, for 2000 when compared to
1999 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, 97% 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.
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.
35
Item 7. Continued
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 32% of our average borrowings for 2001
compared to 37% 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.
36
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 $(319,469) $ 344,436 $(322,055) $ 348,798
Fixed-maturity securities (54,178) 44,508 (51,658) 45,578
Liabilities
Long-term debt (122,677) 128,189 (123,311) 128,317
Deposits - - (1,125) 1,159
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.
37
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated
financial statements are presented on the following pages.
38
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American General Finance, Inc.
We have audited the accompanying consolidated balance sheets of
American General Finance, Inc. (a wholly-owned subsidiary of American
General Corporation) 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, Inc. 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
39
American General Finance, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2001 2000
(dollars in thousands)
Assets
Net finance receivables (Notes 2. and 4.):
Real estate loans $ 7,624,824 $ 7,280,234
Non-real estate loans 2,922,557 3,027,989
Retail sales finance 1,440,908 1,453,588
Net finance receivables 11,988,289 11,761,811
Allowance for finance receivable
losses (Note 5.) (448,251) (383,415)
Net finance receivables, less allowance
for finance receivable losses 11,540,038 11,378,396
Investment securities (Note 6.) 1,142,186 1,107,533
Cash and cash equivalents 179,002 163,895
Other assets (Note 7.) 670,428 758,571
Total assets $13,531,654 $13,408,395
Liabilities and Shareholder's Equity
Long-term debt (Notes 8. and 11.) $ 6,301,433 $ 5,670,670
Commercial paper (Notes 9. and 11.) 4,853,520 5,088,513
Deposits - 73,971
Insurance claims and policyholder
liabilities 495,588 519,447
Other liabilities 452,354 391,895
Accrued taxes 74,200 25,632
Total liabilities 12,177,095 11,770,128
Shareholder's equity:
Common stock (Note 13.) 1,000 1,000
Additional paid-in capital 880,594 877,576
Accumulated other comprehensive
(loss) income (61,687) 2,631
Retained earnings (Note 14.) 534,652 757,060
Total shareholder's equity 1,354,559 1,638,267
Total liabilities and shareholder's equity $13,531,654 $13,408,395
See Notes to Consolidated Financial Statements.
40
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Revenues
Finance charges $1,712,485 $1,618,969 $1,455,485
Insurance 195,393 196,241 184,529
Other 90,620 94,706 91,588
Total revenues 1,998,498 1,909,916 1,731,602
Expenses
Interest expense 635,483 694,251 573,834
Operating expenses 550,787 542,412 524,843
Provision for finance receivable
losses 289,302 206,275 206,632
Insurance losses and loss
adjustment expenses 88,111 88,354 86,634
Other charges (Note 15.) 78,297 50,000 57,000
Total expenses 1,641,980 1,581,292 1,448,943
Income before provision for income
taxes 356,518 328,624 282,659
Provision for Income Taxes
(Note 16.) 128,261 120,686 102,925
Net Income $ 228,257 $ 207,938 $ 179,734
See Notes to Consolidated Financial Statements.
41
American General Finance, Inc. 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 $ 1,000 $ 1,000 $ 1,000
Balance at end of year 1,000 1,000 1,000
Additional Paid-in Capital
Balance at beginning of year 877,576 876,708 822,497
Capital contributions from
parent and other 3,018 868 54,211
Balance at end of year 880,594 877,576 876,708
Accumulated Other Comprehensive
(Loss) Income
Balance at beginning of year 2,631 (6,696) 39,419
Change in net unrealized
gains (losses):
Investment securities 3,543 9,327 (46,115)
Interest rate swaps (67,513) - -
Minimum pension liability (348) - -
Balance at end of year (61,687) 2,631 (6,696)
Retained Earnings
Balance at beginning of year 757,060 656,223 640,489
Net income 228,257 207,938 179,734
Common stock dividends (438,303) (107,101) (164,000)
Disposition of American General
Bank, FSB (12,362) - -
Balance at end of year 534,652 757,060 656,223
Total Shareholder's Equity $1,354,559 $1,638,267 $1,527,235
See Notes to Consolidated Financial Statements.
42
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December
31,
2001 2000 1999
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 228,257 $ 207,938 $ 179,734
Reconciling adjustments:
Provision for finance receivable losses 289,302 206,275 206,632
Depreciation and amortization 149,262 149,405 132,552
Deferral of finance receivable
origination costs (58,488) (54,254) (53,291)
Deferred income tax (benefit) charge (27,827) 21,728 (8,020)
Change in other assets and other liabilities 24,499 (74,750) (57,210)
Change in insurance claims and
policyholder liabilities (23,859) 57,347 25,021
Change in taxes receivable and payable 63,738 64,040 1,422
Other charges 78,297 50,000 57,000
Other, net (3,042) (7,714) 9,932
Net cash provided by operating activities 720,139 620,015 493,772
Cash Flows from Investing Activities
Finance receivables originated or purchased (6,516,578) (6,281,876) (6,653,665)
Principal collections on finance receivables 5,954,613 5,313,806 5,102,250
Acquisition of Standard Pacific Savings, F.A. - - 44,516
Disposition of American General Bank, FSB (39,998) - -
Investment securities purchased (1,024,964) (644,246) (328,442)
Investment securities called, matured and sold 992,437 536,058 247,886
Change in premiums on finance receivables
purchased and deferred charges (36,628) (22,528) (54,609)
Other, net (16,495) (19,884) (37,420)
Net cash used for investing activities (687,613) (1,118,670) (1,679,484)
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 (1,265,867) (1,290,234) (571,286)
Change in deposits 28,924 41,853 (15,683)
Change in short-term notes payable (234,993) 630,993 773,872
Capital contribution from parent - - 54,000
Dividends paid (438,303) (107,101) (164,000)
Net cash (used for) provided by
financing activities (17,419) 515,840 1,184,420
Increase (decrease) in cash and cash equivalents 15,107 17,185 (1,292)
Cash and cash equivalents at beginning of year 163,895 146,710 148,002
Cash and cash equivalents at end of year $ 179,002 $ 163,895 $ 146,710
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 95,975 $ 34,385 $ 111,127
Interest paid $ 649,737 $ 685,059 $ 552,702
See Notes to Consolidated Financial Statements.
43
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Net Income $228,257 $207,938 $179,734
Other comprehensive (loss) gain:
Net unrealized (losses) gains:
Investment securities 2,396 17,204 (72,512)
Interest rate swaps:
Transition adjustment (42,103) - -
Current period (121,636) - -
Minimum pension liability (535) - -
Income tax effect:
Investment securities (796) (6,051) 25,380
Interest rate swaps:
Transition adjustment 14,736 - -
Current period 42,573 - -
Minimum pension liability 187 - -
Net unrealized (losses) gains,
net of tax (105,178) 11,153 (47,132)
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 (64,318) 9,327 (46,115)
Comprehensive income $163,939 $217,265 $133,619
See Notes to Consolidated Financial Statements
44
American General Finance, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001
Note 1. Nature of Operations
American General Finance, Inc. will be referred to as "AGFI" or
collectively with its subsidiaries, whether directly or indirectly
owned, as the "Company" or "we". 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). AGFI is a financial services holding company whose principal
subsidiary is American General Finance Corporation (AGFC). AGFC is
also a financial services holding company with subsidiaries engaged
primarily in the consumer finance and credit insurance businesses. At
December 31, 2001, the Company had 1,398 offices in 44 states, Puerto
Rico and the U.S. Virgin Islands and approximately 7,600 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 19. 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 American General.
45
Notes to Consolidated Financial Statements, Continued
In May 1999, AGFI acquired Standard Pacific Savings, F.A. from Standard
Pacific Corporation and renamed the institution American General Bank,
FSB (AG Bank). AG Bank operated as a traditional thrift, whose
products included deposit and savings accounts, residential mortgage
and home equity loans, and private label services. Concurrent with
AIG's acquisition of American General in August 2001, AG Bank was
merged into AIG Federal Savings Bank, a non-subsidiary affiliate of
AGFI, with AIG Federal Savings Bank being the surviving entity.
At December 31, 2001, the Company had $12.0 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.
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 AGFI 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.
46
Notes to Consolidated Financial Statements, Continued
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.
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.
47
Notes to Consolidated Financial Statements, Continued
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.
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,
48
Notes to Consolidated Financial Statements, Continued
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.
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.
49
Notes to Consolidated Financial Statements, Continued
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.
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 21. 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.
50
Notes to Consolidated Financial Statements, Continued
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
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.
51
Notes to Consolidated Financial Statements, Continued
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 $7,613,988 $3,274,716 $1,634,686 $12,523,390
Unearned finance charges
and points and fees (152,301) (444,604) (210,658) (807,563)
Accrued finance charges 69,296 42,760 15,910 127,966
Deferred origination costs 10,787 37,645 - 48,432
Premiums, net of discounts 83,054 12,040 970 96,064
Total $7,624,824 $2,922,557 $1,440,908 $11,988,289
December 31, 2000
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $7,297,571 $3,366,084 $1,667,235 $12,330,890
Unearned finance charges
and points and fees (166,983) (440,567) (237,141) (844,691)
Accrued finance charges 66,936 47,652 22,715 137,303
Deferred origination costs 9,035 37,817 - 46,852
Premiums, net of discounts 73,675 17,003 779 91,457
Total $7,280,234 $3,027,989 $1,453,588 $11,761,811
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, 97% 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 9% of the number of net finance receivables
outstanding at December 31, 2000.
52
Notes to Consolidated Financial Statements, Continued
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 $ 207,552 $ 722,220 $ 381,785 $ 1,311,557
2003 294,060 969,767 319,745 1,583,572
2004 309,392 710,713 156,120 1,176,225
2005 318,022 335,716 75,753 729,491
2006 313,364 113,728 38,051 465,143
2007+ 6,182,434 70,413 469,454 6,722,301
Total $ 7,624,824 $ 2,922,557 $ 1,440,908 $11,988,289
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 $2,462,318 $1,854,554 $1,886,041
% of average net receivables 33.47% 25.72% 30.29%
Non-real estate loans:
Principal cash collections $1,655,484 $1,610,183 $1,519,531
% of average net receivables 56.03% 57.47% 60.55%
Retail sales finance:
Principal cash collections $1,836,811 $1,849,069 $1,696,678
% of average net receivables 129.82% 132.47% 133.41%
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 $3,617,060 $3,718,568
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.
53
Notes to Consolidated Financial Statements, Continued
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% $ 1,582,130 13%
N. Carolina 850,995 7 831,977 7
Florida 772,830 7 740,186 6
Ohio 741,702 6 678,238 6
Illinois 731,238 6 698,181 6
Indiana 586,625 5 597,898 5
Georgia 510,140 4 477,110 4
Virginia 500,137 4 486,607 4
Other 5,920,023 49 5,669,484 49
Total $11,988,289 100% $11,761,811 100%
Finance receivables on which we stopped accruing revenue totaled $341.1
million at December 31, 2001 and $333.5 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.
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 $383,415 $395,626 $382,450
Provision for finance receivable
losses 289,302 206,275 206,632
Allowance related to net
acquired (sold) receivables 14,836 (12,211) 13,176
Charge-offs, net of recoveries (264,302) (206,275) (206,632)
Other charges - additional
provision 25,000 - -
Balance at end of year $448,251 $383,415 $395,626
See Note 2. for information on the determination of the allowance for
finance receivable losses and Note 15. for discussion of other charges.
54
Notes to Consolidated Financial Statements, Continued
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 209,128 182,185 207,119 178,706
State and political
subdivisions 315,640 279,922 314,263 272,144
Other 47,146 4,240 45,436 4,110
Redeemable preferred stocks 9,063 11,426 8,329 10,764
Total 1,113,272 1,079,361 1,103,698 1,075,276
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 556 857 606 887
Total $1,142,186 $1,107,533 $1,132,707 $1,103,439
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 3,747 1,534 268
State and political
subdivisions 5,409 8,279 4,032 501
Other 1,710 130 - -
Redeemable preferred stocks 738 799 4 137
Total 31,060 28,757 21,486 24,672
Non-redeemable preferred
stocks - 39 26 -
Other long-term investments - - 19 -
Common stocks - 7 50 37
Total $31,060 $28,803 $21,581 $24,709
55
Notes to Consolidated Financial Statements, Continued
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 $992,437 $536,058 $247,886
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.
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.
56
Notes to Consolidated Financial Statements, Continued
Note 7. Other Assets
Components of other assets were as follows:
December 31,
2001 2000
(dollars in thousands)
Goodwill $161,885 $190,817
Fixed assets 102,704 109,729
Income tax assets 94,326 44,045
Other insurance investments 78,813 90,495
Customer base valuations 64,712 85,519
Real estate owned 49,985 45,864
Prepaid expenses and deferred
charges 35,755 39,214
Other 82,248 152,888
Total $670,428 $758,571
Goodwill is net of accumulated amortization of $120.3 million at
December 31, 2001 and $112.5 million at December 31, 2000. In addition
to goodwill amortization in 2001, we reduced goodwill by $21.1 million
resulting from post-business combination plans in connection with AIG's
acquisition of American General.
Note 8. 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 $6,301,433 $5,670,670 $6,469,832 $5,735,653
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%
57
Notes to Consolidated Financial Statements, Continued
Contractual maturities of long-term debt at December 31, 2001 were as
follows:
Carrying Value
(dollars in thousands)
2002 $1,389,586
2003 1,573,440
2004 1,006,261
2005 722,276
2006 1,272,959
2007-2009 336,911
Total $6,301,433
A debt agreement contains restrictions on consolidated retained
earnings for certain purposes (see Note 14.).
Note 9. Short-term Notes Payable
AGFI and AGFC issue 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.
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 $4,603,669 $4,765,422 $3,748,637
Weighted average interest
rate, at year end:
Money market yield 1.95% 6.58% 5.95%
Semi-annual bond
equivalent yield 1.96% 6.67% 6.02%
58
Notes to Consolidated Financial Statements, Continued
Note 10. 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. AGFI and AGFC are eligible borrowers 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. AGFI and
certain subsidiaries also have uncommitted credit facilities. In
addition, AGFI and AGFC are eligible borrowers 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 $ 121,000 $ 171,000
Shared uncommitted facilities 100,000 -
Borrowings - -
Remaining availability $ 221,000 $ 171,000
In addition, our mortgage warehouse lending subsidiary arranges interim
financing for third-party mortgage originators through a purchase
facility. At December 31, 2001, this facility totaled $250.0 million
with remaining availability of $40.0 million.
Note 11. Derivative Financial Instruments
Our principal borrowing subsidiary is AGFC. 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.
59
Notes to Consolidated Financial Statements, Continued
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%
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
60
Notes to Consolidated Financial Statements, Continued
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 12. 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
Our insurance subsidiaries' business reinsured to others was not
significant during the last three years.
61
Notes to Consolidated Financial Statements, Continued
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
62
Notes to Consolidated Financial Statements, Continued
Note 13. Capital Stock
AGFI has two classes of authorized capital stock: special shares and
common shares. AGFI 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 2,000,000 2,000,000
Note 14. Retained Earnings
AGFI's ability to pay dividends is substantially dependent on the
receipt of dividends or other funds from its subsidiaries. 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 15. Other Charges
AIG ACQUISITION
In September 2001, we recorded one-time charges totaling $78.3 million
($50.9 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 asset impairment charges related to goodwill and
customer base intangibles that resulted from previous business
acquisitions. Also included are certain adjustments associated with
conforming the Company's balances to AIG's accounting policies and
63
Notes to Consolidated Financial Statements, Continued
methodologies, as well as an increase in the allowance for finance
receivable losses to reflect AIG's assumptions about the current
business environment.
MORTGAGE WAREHOUSE LENDING
In June 2000, we discovered a potential fraud committed against a
subsidiary that conducts mortgage warehouse lending activities in our
consumer finance operation. Mortgages processed by one originator
allegedly had been funded based on fraudulent information. In July
2000, the originator's license was suspended and the originator and its
parent company filed for bankruptcy. Based on the available
information, we recorded a charge of $50.0 million ($32.5 million
aftertax) in second quarter 2000 for our loss related to this alleged
fraud. We are pursuing all appropriate remedies and believe our
recorded liability is sufficient to cover this loss.
SATELLITE DISH OPERATIONS BANKRUPTCY
In August 1999, a subsidiary of the Company, A.G. Financial Service
Center, Inc. (Financial Service Center), formerly named American
General Financial Center filed a voluntary petition to reorganize under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Southern District of Indiana. The decision to
reorganize was necessitated by the judgment rendered against Financial
Service Center by a Mississippi state court in May 1999. The filing
for reorganization under Chapter 11 was limited to Financial Service
Center and was intended to provide a fair and orderly process for
managing the claims against Financial Service Center. As a result, we
recorded a charge of $57.0 million ($36.2 million aftertax) for the
settlement of satellite dish and other related litigation. Prior to
the bankruptcy filing, Financial Service Center had assets of
approximately $7 million. See Legal Proceedings in Item 3. for further
information on the satellite dish litigation.
Note 16. Income Taxes
For the years 1999 and 2000, and the period January 1, 2001 to August
29, 2001, AGFI 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 AGFI 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. AGFI
and all other AGFI subsidiaries file a consolidated federal income tax
return with AIG. Federal taxes were provided as if AGFI and the other
AGFI subsidiaries were filing a separate tax return, with payments
being made to AIG under a tax sharing agreement.
64
Notes to Consolidated Financial Statements, Continued
Components of provision for income taxes were as follows:
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Federal:
Current $152,218 $ 94,085 $106,189
Deferred (30,051) 17,021 (8,917)
Total federal 122,167 111,106 97,272
State 6,094 9,580 5,653
Total $128,261 $120,686 $102,925
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 1.11 1.89 1.30
Amortization of goodwill .60 .71 .90
Nontaxable investment income (.98) (1.01) (.99)
Other, net .25 .13 .20
Effective income tax rate 35.98% 36.72% 36.41%
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 $103,426 $ 86,309
Interest rate swap agreements 36,354 -
Deferred insurance commissions 8,254 9,973
Goodwill 8,057 -
Other 12,646 37,698
Total 168,737 133,980
Deferred tax liabilities:
Loan origination costs 16,309 15,777
Insurance reserves 8,582 5,312
Fixed assets 6,055 3,367
Other 43,465 74,650
Total 74,411 99,106
Net deferred tax assets $ 94,326 $ 34,874
65
Notes to Consolidated Financial Statements, Continued
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 17. 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 $ 48,533
2003 40,699
2004 29,002
2005 18,587
2006 7,072
subsequent to 2006 21,204
Total $165,097
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
$49.4 million in 2001, $47.9 million in 2000, and $45.6 million in
1999.
AGFI 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.
66
Notes to Consolidated Financial Statements, Continued
Note 18. 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.
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
67
Notes to Consolidated Financial Statements, Continued
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.
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 19. 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.
68
Notes to Consolidated Financial Statements, Continued
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
performance. Corporate assets include cash, prepaid expenses, deferred
charges, and fixed assets.
69
Notes to Consolidated Financial Statements, Continued
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
70
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
71
Notes to Consolidated Financial Statements, Continued
Note 20. Interim Financial Information (Unaudited)
Selected interim information was as follows:
Total Revenues
Three Months Ended 2001 2000
(dollars in thousands)
March 31 $ 493,237 $ 467,257
June 30 501,712 469,257
September 30 502,777 486,216
December 31 500,772 487,186
Total $1,998,498 $1,909,916
Income Before Provision
for Income Taxes
Three Months Ended 2001 2000
(dollars in thousands)
March 31 $ 102,247 $ 93,651
June 30 109,051 43,093 (b)
September 30 37,522 (a) 96,213
December 31 107,698 95,667
Total $ 356,518 $ 328,624
Net Income
Three Months Ended 2001 2000
(dollars in thousands)
March 31 $ 65,135 $ 59,524
June 30 69,632 26,675 (b)
September 30 24,168 (a) 61,133
December 31 69,322 60,606
Total $ 228,257 $ 207,938
(a) Includes charges of $78.3 million ($50.9 million aftertax)
resulting from post-business combination plans in connection with
AIG's acquisition of American General.
(b) Includes a charge of $50.0 million ($32.5 million aftertax) for
the estimated loss on an alleged fraud against our mortgage
warehouse lending subsidiary.
See Note 15. for further information on these charges.
72
Notes to Consolidated Financial Statements, Continued
Note 21. 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 $11,540,038 $11,286,604 $11,378,396 $10,896,639
Investment securities 1,142,186 1,142,186 1,107,533 1,107,533
Cash and cash equivalents 179,002 179,002 163,895 163,895
Liabilities
Long-term debt 6,301,433 6,469,832 5,670,670 5,735,653
Commercial paper 4,853,520 4,853,520 5,088,513 5,088,513
Deposits - - 73,971 74,160
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
73
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.
74
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, Inc. 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
81 herein.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during fourth quarter
2001.
(c) Exhibits
The exhibits required to be included in this portion of Item 14.
are submitted as a separate section of this report.
75
Item 14(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance, Inc.
Condensed Balance Sheets
December 31,
2001 2000
(dollars in thousands)
Assets
Cash $ 61 $ 337
Investment in subsidiaries 1,556,995 1,812,345
Notes receivable from subsidiaries 325,562 314,534
Other assets 39,136 65,099
Total assets $1,921,754 $2,192,315
Liabilities and Shareholder's Equity
Long-term debt, 6.75%
due 2002 $ 1,262 $ 3,103
Short-term notes payable:
Commercial paper 282,068 242,068
Notes payable to subsidiaries 267,765 261,416
Other liabilities 16,100 47,461
Total liabilities 567,195 554,048
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 880,594 877,576
Other equity (61,687) 2,631
Retained earnings 534,652 757,060
Total shareholder's equity 1,354,559 1,638,267
Total liabilities and shareholder's equity $1,921,754 $2,192,315
See Notes to Condensed Financial Statements.
76
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Income
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
Revenues
Dividends received from subsidiaries $431,234 $185,115 $166,524
Interest and other 24,626 29,557 21,331
Total revenues 455,860 214,672 187,855
Expenses
Interest expense 32,280 44,861 29,651
Operating expenses 12,929 6,349 1,434
Other charges 20,277 - 57,000
Total expenses 65,486 51,210 88,085
Income before income taxes and equity
in (overdistributed) undistributed
net income of subsidiaries 390,374 163,462 99,770
Income Tax Credit 14,455 7,573 24,080
Income before equity in (overdistributed)
undistributed net income of subsidiaries 404,829 171,035 123,850
Equity in (Overdistributed) Undistributed
Net Income of Subsidiaries (176,572) 36,903 55,884
Net Income $228,257 $207,938 $179,734
See Notes to Condensed Financial Statements.
77
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Cash Flows
Years Ended December
31,
2001 2000 1999
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 228,257 $ 207,938 $ 179,734
Reconciling adjustments:
Equity in overdistributed (undistributed)
net income of subsidiaries 176,572 (36,903) (55,884)
Change in other assets and other liabilities (28,862) (34,840) (28,519)
Other charges 20,277 - 57,000
Other, net 9,484 (24,841) 4,065
Net cash provided by operating activities 405,728 111,354 156,396
Cash Flows from Investing Activities
Capital contributions to subsidiaries - - (82,598)
Transfer of liabilities from subsidiary - - 22,996
Net additions to fixed assets (1,128) (958) (2,389)
Net cash used for investing activities (1,128) (958) (61,991)
Cash Flows from Financing Activities
Repayment of long-term debt (1,894) (4,234) (7,963)
Change in commercial paper 40,000 242,068 -
Change in notes payable to banks - (211,000) 13,000
Change in notes receivable or payable
with subsidiaries (4,679) (30,104) 6,200
Capital contributions from parent - - 54,000
Dividends paid (438,303) (107,101) (164,000)
Net cash used for financing activities (404,876) (110,371) (98,763)
(Decrease) increase in cash (276) 25 (4,358)
Cash at beginning of year 337 312 4,670
Cash at end of year $ 61 $ 337 $ 312
See Notes to Condensed Financial Statements.
78
Schedule I, Continued
American General Finance, Inc.
Notes to Condensed Financial Statements
December 31, 2001
Note 1. Accounting Policies
AGFI'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 AGFI's consolidated
financial statements.
Note 2. Long-Term Debt
The long-term debt at December 31, 2001 matures in 2002.
Note 3. Other Charges
AIG ACQUISITION
In September 2001, we recorded one-time charges totaling $20.3 million
($13.2 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 goodwill that
resulted from a previous business acquisition.
SATELLITE DISH OPERATIONS BANKRUPTCY
In August 1999, a subsidiary of the Company, A.G. Financial Service
Center, Inc. (Financial Service Center), formerly named American
General Financial Center filed a voluntary petition to reorganize under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Southern District of Indiana. The decision to
reorganize was necessitated by the judgment rendered against Financial
Service Center by a Mississippi state court in May 1999. The filing
for reorganization under Chapter 11 was limited to Financial Service
Center and was intended to provide a fair and orderly process for
managing the claims against Financial Service Center. As a result, we
recorded a charge of $57.0 million ($36.2 million aftertax) for the
settlement of satellite dish and other related litigation. Prior to
the bankruptcy filing, Financial Service Center had assets of
approximately $7 million. See Legal Proceedings in Item 3. for further
information on the satellite dish litigation.
79
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, INC.
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)
80
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS
WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934.
No annual report to security-holders or proxy material has been sent to
security-holders.
81
Exhibit Index
Exhibit
Number
(3) a. Restated Articles of Incorporation of American General
Finance, Inc. (formerly Credithrift Financial, Inc.) dated May
27, 1988 and amendments thereto dated September 7, 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. 1-7422).
b. By-laws of American General Finance, Inc. 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. 1-7422).
(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. 1-7422).
(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. 1-7422).
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.