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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1998
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 19, 1999, no common stock of the registrant was held by a
non-affiliate.
At March 19, 1999, 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 . . . . . . . . . . . . . . . . . . . . . . 16
3. Legal Proceedings . . . . . . . . . . . . . . . . . . 16
4. Submission of Matters to a Vote of Security Holders. . *
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 17
6. Selected Financial Data . . . . . . . . . . . . . . . 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 18
7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . 29
8. Financial Statements and Supplementary Data . . . . . 30
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 . . . . . . . . . . . . . . . . . . . . 62
* 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 in this document as
"AGFI" or collectively with its subsidiaries, whether directly or
indirectly owned, as the "Company". 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), the parent company of one of the nation's largest diversified
financial services organizations. American General's operating
subsidiaries are leading providers of retirement services, life insurance,
and consumer loans. American General, a Texas corporation headquartered in
Houston, is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
AGFI is a financial services holding company whose principal subsidiaries
are AGFC and American General Financial Center (AGFC-Utah). AGFC is also a
holding company with subsidiaries engaged primarily in the consumer finance
and credit insurance business. The Company conducts the credit insurance
business as part of the consumer finance business through Merit Life
Insurance Co. (Merit) and Yosemite Insurance Company (Yosemite), which are
both subsidiaries of AGFC. AGFC-Utah, a Utah corporation, is an industrial
loan company which engages in the consumer finance business and partially
funds its operations by accepting public deposits insured by the Federal
Deposit Insurance Corporation.
At December 31, 1998, the Company had 1,343 offices in 41 states, Puerto
Rico, and the U.S. Virgin Islands and approximately 8,100 employees. The
Company's executive offices are located in Evansville, Indiana.
Selected Financial Information
The Company reclassified credit card and certain private label finance
receivables to assets held for sale on December 31, 1996. Because the
reclassification was effective on the last day of the year, it had no
effect on average net receivables; yield; finance receivable loss
experience; and finance receivables originated, renewed, and purchased for
1996. See Consumer Finance Operations for further information on this
reclassification.
The following table shows selected financial information of the Company:
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Average finance receivables net
of unearned finance charges
(average net receivables) $8,518,922 $7,522,841 $8,123,947
Average borrowings $7,806,977 $7,123,397 $7,170,371
4
Item 1. Continued
At or for the
Years Ended December 31,
1998 1997 1996
Yield - finance charges as a
percentage of average net
receivables 15.90% 16.81% 17.85%
Borrowing cost - interest
expense as a percentage of
average borrowings 6.55% 6.80% 6.88%
Interest spread - yield
less borrowing cost 9.35% 10.01% 10.97%
Insurance revenues as a
percentage of average
net receivables 2.07% 2.51% 2.54%
Operating expenses as a
percentage of average
net receivables 5.93% 6.31% 6.31%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 3.96% 4.65% 5.18%
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 2.60% 3.60% 5.47%
Delinquency ratio - finance
receivables 60 days or more
past due as a percentage
of related receivables 3.75% 3.60% 3.83%
Return on average assets 1.88% 1.42% .37%
Return on average equity 13.96% 10.49% 2.63%
Ratio of earnings to fixed charges
(refer to Exhibit 12 for
calculations) 1.56 1.41 1.11
Debt to tangible equity ratio -
debt to equity less goodwill
and net unrealized gains or
losses on investment securities 7.46 7.52 8.40
Debt to equity ratio 5.89 5.75 6.36
5
Item 1. Continued
CONSUMER FINANCE OPERATIONS
The Company makes loans directly to individuals, acquires real estate loans
made by brokers and other real estate lenders, purchases retail sales
contract obligations of individuals, and offers revolving retail and
private label services. The Company conducts its lending and retail
operations through its consumer branch and centralized real estate
segments. See Note 20. of the Notes to Consolidated Financial Statements
in Item 8. for further information on the Company's segments.
In its loan operations, the Company makes home equity loans, originates
secured and unsecured consumer loans, and acquires real estate loans from
mortgage brokers and other real estate lenders. The Company generally
takes a security interest in real property and/or personal property of the
borrower. At December 31, 1998, real estate loans accounted for 60% of the
amount and 8% of the number of net finance receivables outstanding,
compared to 52% of the amount and 7% of the number of net finance
receivables outstanding at December 31, 1997. Real estate loans generally
have maximum original terms of 360 months. Non-real estate loans generally
have maximum original terms of 60 months.
In its retail operations, the Company purchases retail sales contracts
arising from the retail sale of consumer goods and services, and provides
revolving retail and private label services for various business entities.
Retail sales contracts are primarily closed-end accounts which 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 secured by purchase money security interests
in the goods purchased and generally require minimum monthly payments based
on outstanding balances.
In fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. The Company reclassified these finance
receivables and $70.0 million of allowance for finance receivable losses to
assets held for sale on December 31, 1996. In June 1997, the Company sold
all of the assets held for sale (with a remaining balance of $658.1
million) and $81.4 million of other private label finance receivables. See
Note 9. of the Notes to Consolidated Financial Statements in Item 8. for
further information on the reclassification and subsequent sale of non-
strategic assets.
Prior to such sale, the Company issued MasterCard and VISA credit cards to
individuals through branch and direct mail solicitation programs. Credit
cards were unsecured and required minimum monthly payments based on
outstanding balances.
6
Item 1. Continued
Finance Receivables
All finance receivable data in this report (except as otherwise indicated)
is calculated after deducting unearned finance charges but before deducting
allowance for finance receivable losses.
Effective January 1, 1997, certain real estate loans having advances of
less than $10,000 and high loan-to-value ratios were reclassified from real
estate to non-real estate loans. These loans are serviced and collected
more like non-real estate loans than real estate loans. This
reclassification affected $255.0 million of loans at January 1, 1997.
The following table shows the amount, number, and average size of finance
receivables originated and renewed by type of finance receivable (retail
sales contracts, revolving retail, and private label comprise retail sales
finance) and the net purchased amount:
Years Ended December 31,
1998 1997 1996
Amount (in thousands):
Real estate loans $1,766,041 $1,584,101 $1,347,133
Non-real estate loans 2,394,623 2,437,266 2,224,472
Retail sales finance 1,629,258 1,456,352 1,378,684
Credit cards - - 502,379
Total originated and renewed 5,789,922 5,477,719 5,452,668
Net purchased (a) 1,920,701 598,608 946,168
Total originated, renewed,
and purchased $7,710,623 $6,076,327 $6,398,836
Number:
Real estate loans 58,219 59,927 67,583
Non-real estate loans 885,212 906,756 965,384
Retail sales finance 1,010,225 968,881 989,776
Total 1,953,656 1,935,564 2,022,743
Average size (to nearest dollar):
Real estate loans $30,334 $26,434 $19,933
Non-real estate loans 2,705 2,688 2,304
Retail sales finance 1,613 1,503 1,392
(a) See Note 4. of the Notes to Consolidated Financial Statements in
Item 8. for information on purchases of finance receivables from
affiliates.
7
Item 1. Continued
The following table shows the amount, number, and average size of finance
receivables by type of finance receivable:
December 31,
1998 1997 1996
Amount (in thousands):
Real estate loans $5,757,185 $4,155,167 $3,734,195
Non-real estate loans 2,560,565 2,554,888 2,516,009
Retail sales finance 1,339,367 1,301,133 1,375,021
Total $9,657,117 $8,011,188 $7,625,225
Number:
Real estate loans 169,314 163,119 200,420
Non-real estate loans 1,088,584 1,132,039 1,243,204
Retail sales finance 993,233 1,065,280 1,161,740
Total 2,251,131 2,360,438 2,605,364
Average size (to nearest dollar):
Real estate loans $34,003 $25,473 $18,632
Non-real estate loans 2,352 2,257 2,024
Retail sales finance 1,348 1,221 1,184
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,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
California $1,461,438 15% $ 842,690 11% $ 697,734 9%
N. Carolina 728,801 7 696,261 9 672,021 9
Illinois 593,789 6 434,029 5 452,508 6
Florida 574,693 6 518,837 7 534,936 7
Ohio 559,964 6 465,489 6 454,290 6
Indiana 502,653 5 438,369 5 397,698 5
Virginia 367,995 4 356,928 4 350,349 5
Georgia 351,347 4 310,485 4 312,377 4
Other 4,516,437 47 3,948,100 49 3,753,312 49
$9,657,117 100% $8,011,188 100% $7,625,225 100%
8
Item 1. Continued
Average Net Receivables and Yield
Finance charges are recognized as revenue on the accrual basis using the
interest method. The accrual of revenue is suspended when the fourth
contractual payment becomes past due for loans, retail sales contracts, and
revolving retail and when the sixth contractual payment becomes past due
for private label. For credit cards, the accrual of revenue was suspended
when the sixth contractual payment became past due. Extension fees, late
charges, and prepayment penalties are recognized as revenue when received.
The Company defers costs associated with the origination of certain finance
receivables and revenue from nonrefundable points and fees on loans.
Deferred origination costs and nonrefundable points and fees are included
in finance receivables and are amortized 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, any unamortized costs or
points and fees are charged or credited to revenue at the date of
liquidation.
The following table shows average net receivables and yield by type of
finance receivable:
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Real estate loans:
Average net receivables $4,681,038 $3,711,444 $3,129,379
Yield 12.90% 13.71% 14.83%
Non-real estate loans:
Average net receivables $2,532,267 $2,542,651 $2,549,750
Yield 22.02% 21.84% 22.29%
Total loans:
Average net receivables $7,213,305 $6,254,095 $5,679,129
Yield 16.10% 17.02% 18.18%
Retail sales finance:
Average net receivables $1,305,617 $1,268,746 $1,915,718
Yield 14.78% 15.80% 16.16%
Credit cards:
Average net receivables $ - $ - $ 529,100
Yield - % - % 20.41%
Total:
Average net receivables $8,518,922 $7,522,841 $8,123,947
Yield 15.90% 16.81% 17.85%
9
Item 1. Continued
Finance Receivable Credit Quality Information
The Company's policy is to charge off each month non-real estate loans on
which little or no collections were made in the prior six months, retail
sales contracts which are six installments past due, and revolving retail
and private label accounts which are 180 days past due. Credit card
accounts were charged off when 180 days past due. The Company starts
foreclosure proceedings on real estate loans when four monthly installments
are past due. When foreclosure is completed and the Company has obtained
title to the property, the real estate is established as an asset valued at
fair value, and any loan amount in excess of that value is charged off.
The charge-off period is occasionally extended for individual accounts
when, in management's opinion, such treatment is warranted.
The following table shows finance receivable loss experience by type of
finance receivable:
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Real estate loans:
Net charge-offs $ 32,843 $ 32,240 $ 36,997
Charge-off ratio .71% .87% 1.19%
Non-real estate loans:
Net charge-offs $144,382 $182,371 $229,109
Charge-off ratio 5.70% 7.15% 8.95%
Total loans:
Net charge-offs $177,225 $214,611 $266,106
Charge-off ratio 2.48% 3.44% 4.70%
Retail sales finance:
Net charge-offs $ 42,365 $ 55,872 $127,077
Charge-off ratio 3.25% 4.40% 6.57%
Credit cards:
Net charge-offs $ - $ - $ 51,386
Charge-off ratio - % - % 9.68%
Total:
Net charge-offs $219,590 $270,483 $444,569
Charge-off ratio 2.60% 3.60% 5.47%
The following table shows delinquency (finance receivables 60 days or more
past due including unearned finance charges and excluding deferred
origination costs, a fair value adjustment on finance receivables, and
accrued interest) based on contract terms in effect by type of finance
receivable:
10
Item 1. Continued
December 31,
1998 1997 1996
(dollars in thousands)
Real estate loans $189,474 $108,277 $ 84,361
% of related receivables 3.28% 2.56% 2.21%
Non-real estate loans $159,027 $163,942 $184,410
% of related receivables 5.48% 5.72% 6.45%
Total loans $348,501 $272,219 $268,771
% of related receivables 4.02% 3.84% 4.03%
Retail sales finance $ 35,236 $ 37,504 $ 47,961
% of related receivables 2.26% 2.46% 3.01%
Total $383,737 $309,723 $316,732
% of related receivables 3.75% 3.60% 3.83%
The Company maintains the allowance for finance receivable losses at a
level based on periodic evaluation of the finance receivable portfolio
which reflects an amount that, in management's opinion, is adequate to
absorb anticipated losses in the existing portfolio. Management evaluates
the Company's finance receivables as a group and considers numerous factors
in estimating the anticipated finance receivable losses, including current
economic conditions, prior finance receivable loss and delinquency
experience, and the composition of the finance receivable portfolio.
The following table shows changes in the allowance for finance receivable
losses:
At or for the
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Balance at beginning of year $372,653 $395,153 $492,124
Provision for finance receivable
losses 212,090 247,983 417,446
Allowance reclassified to assets
held for sale - - (70,000)
Allowance related to acquired
receivables 17,297 - 152
Charge-offs, net of recoveries (219,590) (270,483) (444,569)
Balance at end of year $382,450 $372,653 $395,153
Allowance ratio 3.96% 4.65% 5.18%
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.
11
Item 1. Continued
Sources of Funds
The Company funds its consumer finance 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.
Average Borrowings and Borrowing Cost
The following table shows average borrowings and interest expense as a
percentage of average borrowings by type of debt:
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Long-term debt:
Average borrowings $4,327,990 $4,100,324 $4,734,633
Borrowing cost 6.95% 7.32% 7.28%
Short-term debt:
Average borrowings $3,476,910 $3,019,808 $2,430,620
Borrowing cost 6.06% 6.10% 6.10%
Investment certificates:
Average borrowings $ 2,077 $ 3,265 $ 5,118
Borrowing cost 5.67% 5.73% 6.27%
Total:
Average borrowings $7,806,977 $7,123,397 $7,170,371
Borrowing cost 6.55% 6.80% 6.88%
The Company's use of interest rate swap agreements, the effect of which is
included in short-term borrowing cost above, is described in Note 13. of
the Notes to Consolidated Financial Statements in Item 8.
Contractual Maturities
Contractual maturities of net finance receivables and debt at December 31,
1998 were as follows:
Net Finance
Receivables Debt
(dollars in thousands)
Due in:
1999 $1,219,222 $4,255,787
2000 1,420,769 1,288,490
2001 1,002,183 946,948
2002 576,986 563,059
2003 341,439 1,038,058
2004 and thereafter 5,096,518 770,145
Total $9,657,117 $8,862,487
12
Item 1. Continued
See Note 5. of the Notes to Consolidated Financial Statements in Item 8.
for further information on principal cash collections of finance
receivables.
INSURANCE OPERATIONS
Merit is a life and health insurance company domiciled in Indiana and
licensed in 43 states, the District of Columbia, and the U.S. Virgin
Islands. Merit writes or assumes (through affiliated and non-affiliated
insurance companies) credit life, credit accident and health, and non-
credit insurance coverages.
Yosemite is a property and casualty insurance company formerly domiciled in
California, redomiciled in Indiana effective December 29, 1998, and
licensed in 42 states. Yosemite principally writes or assumes credit-
related property and casualty coverages.
Both Merit and Yosemite market their products through the consumer branch
and centralized real estate segments of the Company. The 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
death. The credit accident and health insurance policies provide for the
payment to the lender of the installments on the finance receivable coming
due during a period of disability due to illness or injury. The credit-
related property and casualty insurance is written to protect property
pledged as security for the finance receivable and to provide for the
payment to the lender of the installments on the finance receivable coming
due during a period of unemployment. The purchase by the borrower of
credit life, credit accident and health, and credit-related property and
casualty insurance is voluntary with the exception of creditor placed
property damage coverage for automobiles, large equipment, dwellings, and
real estate pledged as collateral. In these instances, property damage
coverage is provided 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. Premiums
for insurance products are most often financed as part of the finance
receivable but may be paid in cash to the insurer.
Merit and Yosemite have entered into reinsurance agreements with other
insurance companies, including certain other American General subsidiaries,
for assumptions of various annuities and non-credit, group, credit life,
credit accident and health, and credit-related property and casualty
insurance on a coinsurance basis. The reserves attributable to this
business fluctuate over time and in certain instances are subject to
recapture by the ceding company. At December 31, 1998, reserves on the
books of Merit and Yosemite attributable to these reinsurance agreements
totaled $114.6 million.
See Note 20. of the Notes to Consolidated Financial Statements in Item 8.
for further information on the Company's insurance business segment.
13
Item 1. Continued
The following table shows information concerning the insurance operations:
At or for the
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Life Insurance in Force
Credit life $2,459,818 $2,387,084 $2,629,019
Non-credit life 3,618,052 3,910,534 3,936,856
Total $6,077,870 $6,297,618 $6,565,875
Premiums Earned
Credit insurance premiums earned:
Credit life $ 32,289 $ 33,269 $ 39,005
Credit accident and health 42,261 45,687 52,379
Property and casualty 49,403 54,292 57,895
Other insurance premiums earned:
Non-credit life 42,981 46,190 47,325
Premiums assumed under
coinsurance agreements 5,057 5,177 4,750
Total $ 171,991 $ 184,615 $ 201,354
Premiums Written
Credit insurance premiums
written:
Credit life $ 35,695 $ 28,057 $ 28,864
Credit accident and health 42,452 39,401 39,217
Property and casualty 47,324 47,029 52,230
Other insurance premiums written:
Non-credit life 42,981 46,190 47,325
Premiums assumed under
coinsurance agreements 5,057 5,177 4,750
Total $ 173,509 $ 165,854 $ 172,386
Losses Incurred
Credit insurance losses incurred:
Credit life $ 14,775 $ 17,465 $ 20,613
Credit accident and health 21,094 20,292 24,666
Property and casualty 20,187 23,009 22,479
Other insurance losses incurred:
Non-credit life 16,999 21,279 22,974
Premiums assumed under
coinsurance agreements 11,632 11,402 12,079
Total $ 84,687 $ 93,447 $ 102,811
14
Item 1. Continued
Investments and Investment Results
The following table shows the investment results of the insurance
operations:
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Net investment revenue (a) $ 74,421 $ 67,837 $ 64,860
Average invested assets (b) $983,439 $924,411 $885,741
Adjusted portfolio yield (c) 7.88% 8.07% 8.07%
Net realized gains (losses)
on investments (d) $ (693) $ 1,071 $ (909)
(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 (SFAS) 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 and also includes an adjustment for tax-exempt investments
in 1996 and 1997.
(d) Includes net realized gains or losses on investment securities and
other invested assets before provision for income taxes.
See Note 7. of the Notes to Consolidated Financial Statements in Item 8.
for information regarding investment securities for all operations of the
Company.
REGULATION
Consumer Finance
Various state laws regulate the consumer lending and retail sales financing
businesses. The degree and nature of such regulation varies from state to
state. The laws under which a substantial amount of the Company's business
is conducted provide for state licensing of lenders; impose maximum term,
amount, interest rate, and other charge limitations; and enumerate whether
and under what circumstances insurance and other ancillary products may be
sold 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.
15
Item 1. Continued
The Company also is subject to various federal regulations, including the
Federal Consumer Credit Protection Act (governing disclosure of applicable
charges and other finance receivable terms), the Equal Credit Opportunity
Act (prohibiting discrimination against credit-worthy applicants), the Fair
Credit Reporting Act (governing the accuracy and use of credit bureau
reports), the Real Estate Settlement Procedures Act (regulating certain
loans secured by real estate), the Federal Fair Debt Collection Practices
Act (regulating debt collection activity in certain instances), and certain
Federal Trade Commission rules. Federal law also preempts state law
restrictions on rates and terms for certain real estate loans. AGFC-Utah,
which engages in the consumer finance business and accepts insured
deposits, is subject to regulation by and reporting requirements of the
Federal Deposit Insurance Corporation and is subject to Utah regulatory
codes.
Insurance
State authorities regulate and supervise the Company's insurance
subsidiaries. The extent of such regulation varies but relates primarily
to conduct of business, types of products offered, standards of solvency,
payment of dividends and other transactions with related parties,
licensing, deposits of securities for the benefit of policyholders,
approval of policy forms and premium rates, periodic examination of the
affairs of insurers, form and content of required financial reports, and
establishment of reserves required to be maintained for unearned premiums,
losses, and other purposes. Substantially all of the states in which the
Company operates regulate the rates of premiums charged for credit life and
credit accident and health insurance. State insurance laws and regulations
also prescribe the nature, quality and percentage of various types of
investments which the Company's insurance subsidiaries may make.
COMPETITION
Consumer Finance
The consumer finance industry is highly competitive due to the large number
of companies offering financial products and services, the sophistication
of those products, technological improvements, and more rapid
communication. The Company competes with other consumer finance companies
and other types of financial institutions that offer similar products and
services, including, but not limited to, industrial banks, industrial loan
companies, mortgage banks, commercial banks, sales finance companies,
savings and loan associations, federal savings banks, and credit unions.
See Competitive Factors in Item 7. for more information.
Insurance
The Company's insurance operations are primarily supplementary to the
consumer finance operations. As such, competition for the insurance
operations is relatively limited.
16
Item 2. Properties.
The Company's investment in real estate and tangible property is not
significant in relation to its total assets due to the nature of its
business. AGFI and certain of its subsidiaries own real estate upon which
AGFI and its subsidiaries conduct business. The Company generally conducts
branch office operations in leased premises. Lease terms ordinarily range
from three to five years.
The Company's exposure to environmental regulation arises from its
ownership of such properties and properties obtained through foreclosure.
The Company monitors properties for compliance with federal and local
environmental guidelines. The Company estimates that potential costs
related to any environmental clean-up are immaterial.
Item 3. Legal Proceedings.
California v. Ochoa
In March 1994, a subsidiary of AGFI and a subsidiary of AGFC were named as
defendants in a lawsuit, The People of the State of California (California)
v. Luis Ochoa, Skeeters Automotive, Morris Plan, Creditway of America,
Inc., and American General Finance, filed in the Superior Court of
California, County of San Joaquin, Case No. 271130. California is seeking
injunctive relief, a civil penalty of not less than $5,000 per day or not
less than $250,000 for violation of its Health and Safety Code in
connection with the failure to register and remove underground storage
tanks on property acquired through a foreclosure proceeding by a subsidiary
of AGFI, and a civil penalty of $2,500 for each act of unfair competition
prohibited by its Business and Professions Code, but not less than
$250,000, plus costs. The Company believes that the total amounts that
would ultimately be paid, if any, arising from this environmental claim
would have no material effect on the Company's consolidated results of
operations and financial position.
Other
AGFI and certain of its subsidiaries are parties to various other lawsuits
and proceedings arising in the ordinary course of business. Many of these
lawsuits and proceedings arise in jurisdictions, such as Alabama and
Mississippi, that permit damage awards disproportionate to the actual
economic damages incurred. Based upon information presently available, the
Company believes that the total amounts that will ultimately be paid, if
any, arising from these lawsuits and proceedings will not have a material
adverse effect on the Company's consolidated results of operations and
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 jurisdictions like
Alabama and Mississippi continues to create the potential for an
unpredictable judgment in any given suit.
17
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 declared the following cash
dividends on its common stock:
Quarter Ended 1998 1997
(dollars in thousands)
March 31 $ 31,600 $ -
June 30 - 106,000
September 30 - 20,500
December 31 - -
$ 31,600 $126,500
See Management's Discussion and Analysis in Item 7., and Note 17. 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 are taken from the Company's
consolidated financial statements. The 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,
1998 1997 1996 1995 1994
(dollars in thousands)
Total revenues $ 1,609,105 $1,524,105 $1,724,948 $1,791,494 $1,491,239
Net income (a) 187,359 129,433 34,146 85,655 244,988
Total assets 11,172,923 9,289,500 9,563,696 9,561,350 8,980,728
Long-term debt 5,176,965 4,011,457 4,498,530 4,979,883 4,312,932
(a) Per share information is not included because all of AGFI's common
stock is owned by American General.
18
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.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's 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 the Company when needed for finance receivable growth or other
circumstances. Management believes that the overall sources of liquidity
available to the Company will continue to be sufficient to satisfy its
foreseeable financial obligations and operational requirements.
Liquidity
The following table shows principal sources and uses of cash flow:
Years Ended December 31,
1998 1997 1996
(dollars in millions)
Principal sources of cash flow:
Operations $ 438.6 $ 516.1 $ 590.1
Net issuance of debt 1,592.7 - 155.3
Capital contributions 79.0 46.5 -
Sale of non-strategic assets - 732.5 -
Net collections on assets held
for sale - 61.3 -
Principal sources of cash flow $2,110.3 $1,356.4 $ 745.4
Principal uses of cash flow:
Net originations and purchases
of finance receivables $1,814.2 $ 692.9 $ 452.5
Increase in premiums on finance
receivables purchased and
deferred charges 122.9 42.1 46.9
Dividends paid 31.6 126.5 138.6
Net repayment of debt - 366.0 -
Repurchase of securitized
finance receivables - 100.0 -
Principal uses of cash flow $1,968.7 $1,327.5 $ 638.0
19
Item 7. Continued
Capital Resources
The Company's capital requirements vary directly with the level of net
finance receivables. The mix of capital between debt and equity is based
primarily upon maintaining leverage that supports cost-effective funding.
At December 31, 1998, the Company's capital totaled $10.4 billion,
consisting of $8.9 billion of debt and $1.5 billion of equity, compared to
$8.5 billion at December 31, 1997, consisting of $7.3 billion of debt and
$1.2 billion of equity.
The Company issues a combination of fixed-rate debt, principally long-term,
and floating-rate debt, principally short-term. The Company's principal
borrowing subsidiary, AGFC, and one of its subsidiaries sell commercial
paper notes with maturities ranging from 1 to 270 days directly to banks,
insurance companies, corporations, and other institutional investors. AGFC
also sells extendible commercial notes with initial maturities of up to 90
days which may be extended by AGFC to 390 days and offers medium-term notes
with original maturities of nine months or longer to institutional
investors. AGFC obtains the remainder of its funds primarily through
underwritten public debt offerings with maturities generally ranging from
three to ten years.
Dividends have been paid (or capital contributions have been received) to
manage the Company's leverage of debt to tangible equity (equity less
goodwill and net unrealized gains or losses on investment securities) to
7.50 to 1. The debt to tangible equity ratio at December 31, 1998 was 7.46
to 1. AGFI's ability to pay dividends is substantially dependent on the
receipt of dividends or other funds from its subsidiaries, primarily AGFC.
Certain AGFC financing agreements have effectively limited the amount of
dividends AGFC may pay. See Note 17. of the Notes to Consolidated
Financial Statements in Item 8. for information on dividend restrictions.
Credit Ratings
AGFC's strong debt and commercial paper ratings enhance its access to
capital markets. On March 19, 1999, AGFC's ratings were as follows:
Long-term Debt Commercial Paper
Duff & Phelps A+ (Strong) D-1+ (Highest)
Fitch - F-1+ (Highest)
Moody's A2 (Strong) P-1 (Highest)
Standard & Poor's A+ (Strong) A-1 (Strong)
20
Item 7. Continued
Liquidity Facilities
The Company participates in credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for operating
requirements. At December 31, 1998, credit facilities, including
facilities shared with American General, totaled $5.5 billion, with
remaining availability of $5.3 billion. See Note 12. of the Notes to
Consolidated Financial Statements in Item 8. for additional information on
credit facilities.
A subsidiary of AGFI arranges interim financing for third-party mortgage
originators through a bank purchase facility. At December 31, 1998, this
facility totaled $563.0 million with remaining availability of $250.3
million.
Securitization
In April 1997, the Company repurchased $100.0 million of private label and
credit card finance receivables that previously had been sold through
securitization. No gain or loss resulted from this transaction. The
repurchased credit card finance receivables were offered for sale along
with the Company's other credit card finance receivables, which increased
the carrying amount of assets held for sale by approximately $70.0 million
in April 1997.
The Company may securitize a portion of its finance receivable portfolio in
the future as an additional source of funds for finance receivable growth.
ANALYSIS OF OPERATING RESULTS
Net Income
Net income increased $57.9 million, or 45%, for 1998 and $95.3 million, or
279%, for 1997 when compared to the respective previous year. See Note 20.
of the Notes to Consolidated Financial Statements for information on the
results of the Company's business segments.
During the past three years, the Company has improved credit quality by
selling under-performing receivable portfolios, raising underwriting
standards, and rebalancing the portfolio to increase the proportion of real
estate loans. At December 31, 1998, real estate loans accounted for 60% of
total net finance receivables outstanding compared to 52% at December 31,
1997 and 49% at December 31, 1996.
Factors which specifically affected the Company's operating results are as
follows:
21
Item 7. Continued
Finance Charges
Finance charges increased $89.4 million, or 7%, for 1998 and decreased
$185.2 million, or 13%, for 1997 when compared to the respective previous
year.
The increase in finance charges for 1998 when compared to 1997 was due to
an increase in average net receivables, partially offset by a decrease in
yield. Average net receivables increased $996.1 million, or 13%, during
1998 when compared to 1997 primarily due to growth in real estate loans,
partially offset by the sale of certain private label receivables in second
quarter 1997. Yield decreased 91 basis points during 1998 when compared to
1997 primarily due to the larger proportion of finance receivables that are
real estate loans, which generally have lower yields.
The decrease in finance charges for 1997 when compared to 1996 was due to
decreases in both average net receivables and yield. Average net
receivables decreased $601.1 million, or 7%, during 1997 when compared to
1996 primarily due to the reclassification and sales of certain finance
receivables and the liquidation of underperforming receivables, partially
offset by growth in real estate loans. The exclusion of finance charges
related to the assets held for sale for 1997 totaled $75.0 million. Yield
decreased 104 basis points during 1997 when compared to 1996 primarily due
to the larger proportion of finance receivables that were real estate
loans, which generally have lower yields.
Insurance Revenues
Insurance revenues decreased $12.6 million, or 7%, for 1998 and $17.6
million, or 9%, for 1997 when compared to the respective previous year.
The decreases in insurance revenues were primarily due to decreases in
earned premiums. Earned premiums decreased primarily due to a decrease in
related loan volume during 1996 and the first three quarters of 1997.
Other Revenues
Other revenues increased $8.2 million, or 12%, for 1998 and $1.9 million,
or 3%, for 1997 when compared to the respective previous year.
The increase in other revenues for 1998 when compared to 1997 was primarily
due to an increase in investment revenue reflecting growth in average
invested assets for the insurance operations of $59.0 million, partially
offset by $.7 million of realized losses on investments in 1998 compared to
$1.1 million of realized gains on investments in 1997 and a decline in
adjusted portfolio yield of 19 basis points.
The increase in other revenues for 1997 when compared to 1996 was primarily
due to an increase in investment revenue reflecting growth in average
invested assets for the insurance operations of $38.7 million and $1.1
million of realized gains on investments in 1997 compared to $.9 million of
realized losses on investments in 1996. Adjusted portfolio yield for 1997
remained substantially the same when compared to 1996.
22
Item 7. Continued
Interest Expense
Interest expense increased $50.3 million, or 11%, for 1998 and decreased
$31.8 million, or 6%, for 1997 when compared to the respective previous
year.
The increase in interest expense for 1998 when compared to 1997 was due to
an increase in average borrowings, partially offset by a decline in
borrowing cost. Average borrowings increased $683.6 million, or 10%, for
1998 when compared to 1997 primarily to support finance receivable growth.
Borrowing cost decreased 25 basis points during 1998 when compared to 1997
due to lower rates on both long-term and short-term debt.
The decrease in interest expense for 1997 when compared to 1996 was due to
the exclusion of interest expense related to the assets held for sale
totaling $23.2 million, a decline in borrowing cost, and a decrease in
average borrowings. Borrowing cost decreased 8 basis points for 1997 when
compared to 1996 primarily due to an increased proportion of short-term
debt at lower rates. Average borrowings decreased $47.0 million, or 1%,
for 1997 when compared to 1996 primarily due to the sales of certain
private label receivables during second quarter 1997, substantially offset
by growth in real estate loans during 1997.
Operating Expenses
Operating expenses increased $30.3 million, or 6%, for 1998 and decreased
$37.9 million, or 7%, for 1997 when compared to the respective previous
year.
The increase in operating expenses for 1998 when compared to 1997 was
primarily due to increases in litigation expenses, salaries and benefits,
and amortization of intangibles, partially offset by an increase in
deferred loan acquisition costs. The increase in litigation expenses was
primarily due to estimated settlements and costs of litigation in various
Alabama and Mississippi cases. See Legal Proceedings in Item 3. for
further information. The increase in salaries and benefits expense
reflects an increase in incentive program expenses, partially offset by a
workforce reduction of approximately 400 positions since December 31, 1997
which includes the effects of cost containment programs and the sale of the
non-strategic assets during second quarter 1997.
The decrease in operating expenses for 1997 when compared to 1996 was
primarily due to the exclusion of expenses to service the assets held for
sale totaling $18.2 million, certain non-recurring operating expenses
associated with discontinued initiatives that negatively impacted the
financial results for 1996 by $8.9 million, and the effects of cost
containment programs.
23
Item 7. Continued
Provision for Finance Receivable Losses
Provision for finance receivable losses decreased $35.9 million, or 14%,
for 1998 and $169.5 million, or 41%, for 1997 when compared to the
respective previous year reflecting decreases in net charge-offs. The
decrease in net charge-offs for 1997 when compared to 1996 included the
exclusion of net charge-offs related to the assets held for sale totaling
$58.6 million.
Net charge-offs from finance receivables for 1998 decreased to $219.6
million from $270.5 million for 1997 and $444.6 million for 1996. The
charge-off ratio for 1998 decreased to 2.60% compared to 3.60% for 1997 and
5.47% for 1996. Excluding the portfolios held for sale, the charge-off
ratio was 4.70% for 1996.
At December 31, 1998, delinquencies were $383.7 million compared to $309.7
million at December 31, 1997 and $316.7 million at December 31, 1996. The
delinquency ratio at December 31, 1998 was 3.75% compared to 3.60% at
December 31, 1997 and 3.83% at December 31, 1996. The increase in the
delinquency ratio for 1998 when compared to 1997 was primarily due to the
maturing of purchased real-estate portfolios which were primarily new
originations when purchased and the effects of general economic conditions.
At December 31, 1998, the allowance for finance receivable losses was
$382.5 million compared to $372.7 million at December 31, 1997 and $395.2
million at December 1996. The allowance ratio at December 31, 1998 was
3.96% compared to 4.65% at December 31, 1997 and 5.18% at December 31,
1996. The Company maintains the allowance for finance receivable losses at
a level based on periodic evaluation of the finance receivable portfolio
which reflects an amount that, in management's opinion, is adequate to
absorb anticipated losses in the existing portfolio.
Loss on Non-strategic Assets
In fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. These receivables and an associated allowance
for finance receivable losses of $70.0 million were reclassified to assets
held for sale at December 31, 1996, and a loss of $145.5 million ($93.5
million aftertax) was recognized to reduce the carrying amount of the
assets held for sale to net realizable value. In June 1997, the Company
sold the assets held for sale and $81.4 million of other private label
finance receivables and recorded an additional loss of $42.2 million ($27.0
million aftertax) primarily to establish a liability for estimated future
payments to the purchaser under a five-year loss sharing agreement. See
Note 9. of the Notes to Consolidated Financial Statements in Item 8. for
further information on the reclassification and subsequent sale of non-
strategic assets.
24
Item 7. Continued
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses decreased $8.8 million, or
9%, for 1998 and $9.4 million, or 9%, for 1997 when compared to the
respective previous year.
The decreases in insurance losses and loss adjustment expenses were due to
decreases in provision for future benefits and in claims paid. Provision
for future benefits decreased $3.9 million for 1998 and $3.7 million for
1997 due to reduced sales of non-credit insurance products. Claims
decreased $4.9 million for 1998 and $5.7 million for 1997 primarily due to
lower earned premiums and favorable loss experience on credit insurance.
Provision for Income Taxes
Provision for income taxes increased $33.3 million, or 44%, for 1998 and
$55.6 million, or 287%, for 1997 when compared to the respective previous
year primarily due to higher taxable income. The effective income tax rate
was 36.62% for 1998, 36.66% for 1997, and 36.16% for 1996.
ANALYSIS OF FINANCIAL CONDITION
At December 31, 1998, the Company's assets were distributed as follows:
83.01% in net finance receivables, less allowance for finance receivable
losses; 8.92% in investment securities; 6.75% in other assets; and 1.32% in
cash and cash equivalents.
Asset Quality
The Company believes that its geographic diversification reduces the risk
associated with a recession in any one region. In addition, 95% of the
finance receivables at December 31, 1998 were secured by real property or
personal property.
The allowance ratio decrease for 1998 reflects the action taken after
management's review of the allowance adequacy. See Analysis of Operating
Results for further information on allowance ratio, delinquency ratio, and
charge-off ratio. While finance receivables have some exposure to further
economic uncertainty, management believes that the allowance for finance
receivable losses is adequate to absorb anticipated losses in the existing
portfolio.
Investment securities principally represent the investment portfolio of the
Company's insurance operations. The investment strategy is to optimize
after-tax returns on invested assets, subject to the constraints of safety,
liquidity, diversification, and regulation.
The largest intangible asset is acquisition-related goodwill which is
charged to expense in equal amounts over 20 to 40 years. See Notes 2. and
8. of the Notes to Consolidated Financial Statements in Item 8. for further
information on goodwill.
25
Item 7. Continued
Operating and Capital Requirements
The overall sources of cash available to the Company are expected to be
more than sufficient to satisfy operating requirements in 1999. See
Liquidity and Capital Resources for information on the Company's operating
and capital requirements.
Asset/Liability Management
The Company manages anticipated cash flows of its assets and liabilities in
an effort to reduce the risk associated with unfavorable changes in
interest rates. Management determines the Company's mix of fixed-rate and
floating-rate debt based, in part, on the nature of the assets being
supported. The Company limits its exposure to market interest rate
increases by fixing interest rates that it pays for term periods. The
primary means by which the Company accomplishes this is through the
issuance of fixed-rate debt. To supplement fixed-rate debt issuances, AGFC
also uses interest rate swap agreements to synthetically create fixed-rate
debt by altering the nature of floating-rate funding, thereby limiting its
exposure to adverse interest rate movements. In addition, AGFC has used
treasury rate lock agreements to hedge against the risk of rising interest
rates on anticipated long-term debt issuances.
BUSINESS ENVIRONMENT FACTORS
The Company operates in a business environment which requires effective and
efficient managerial performance, and a prudent lending and investment
strategy. The three most relevant environmental factors affecting the
Company are economic, regulatory, and competitive.
Economic Factors
The three key economic factors that affect the Company's results are
interest rates, inflation, and the economic cycle.
Interest Rates. Interest rates in the United States decreased in 1998 when
compared to 1997 and were substantially the same in 1997 when compared to
1996. The Company's finance receivables, investment securities, long-term
debt, and short-term debt react over varying periods of time to movements
in interest rates. See Analysis of Operating Results for further
information on the changes in yield, adjusted portfolio yield, and
borrowing cost. See Quantitative and Qualitative Disclosures About Market
Risk in Item 7A. for sensitivity analysis.
Inflation. Inflation and inflationary expectations are factors that to
some extent affect the Company's revenue and expenses and are factors
implicit in interest rates. During each of the last three years, the
Company operated in a low inflation environment.
26
Item 7. Continued
Real estate loans are particularly subject to refinancing when market
interest rates trend lower. However, revenue generated from interest rates
charged on non-real estate loans and retail sales finance receivables are
relatively insensitive to movements in interest rate levels. Net
investment revenue and realized gains or losses on the Company's investment
securities, and borrowing cost on the Company's long-term and short-term
debt, are relatively sensitive over varying periods of time to movements in
general interest rate levels caused by inflation. The Company's operating
expenses are no more or less sensitive to the effects of inflation than
would be experienced by businesses in general.
Economic Cycle. The Company believes that its relatively conservative
lending policies, its conservative insurance underwriting and investment
policies, and its geographic diversification mitigate the potential impact
of defaults on finance receivables and investments in any downturn of the
U.S. economic cycle.
During 1998 and 1997, the rates of increase in U.S. consumer credit
moderated from the rate of increase during 1996. Lenders are exercising
relative restraint in extending credit as a result of the increased
frequency of personal bankruptcy filings, and consumers are apparently
lessening their credit demands. The Company believes that there will be
moderate economic growth for the country in general during 1999. Although
this economic outlook suggests that growth in net receivables from internal
initiatives will also be moderate, management anticipates that improvements
in loan production and portfolio acquisitions will favorably impact net
receivable growth in 1999.
Regulatory Factors
The regulatory environment of the consumer finance and insurance industries
is described in Item 1. Taxation is another regulatory factor affecting
the Company. A risk to any business is that changes in state and federal
tax laws or regulations may affect the way that the business operates.
Since tax laws affect not only the way that the Company is taxed but also
the design of many of its products, these laws and regulations and the way
they are interpreted are of concern to the Company. The Company monitors
federal and state tax legislation and responds with appropriate tax
planning in order to minimize the impact of taxation.
Competitive Factors
Consumer finance companies compete with other types of financial
institutions which offer similar products and services. Competition in
financial services markets continues to intensify due to the increased
number and sophistication of financial products, technological
improvements, and more rapid communication.
The Company has positioned itself to meet the continuing challenge of
competition in three primary ways:
27
Item 7. Continued
Customer Focus. The Company focuses on selling financial service products
to low- to middle-income consumers.
Customer Service. The Company concentrates on delivering quality service
to its customers. This is done through one of the industry's largest
domestic branch networks.
Productivity. The Company continuously monitors performance of its
branches and products and makes organizational and procedural changes as
necessary.
Year 2000 Contingency
Internal Systems. The Company is modifying its internal systems to achieve
Year 2000 readiness. The Company has developed and is implementing a plan
to minimize the risk of a significant negative impact on its operations.
The Company's plan includes the following activities: (1) perform an
inventory of the Company's information technology and non-information
technology systems; (2) assess which items in the inventory may expose the
Company to business interruptions due to Year 2000 issues; (3) reprogram or
replace systems that are not Year 2000 ready; (4) test systems to prove
that they will function into the next century as they do currently; and (5)
return the systems to operations. As of December 31, 1998, these
activities have been completed for substantially all of the Company's
critical systems, making them Year 2000 ready. Vendor upgrades for a small
number of systems are expected in the first half of 1999; therefore,
activities (3) through (5) are ongoing for these systems. The Company will
continue to test its systems throughout 1999 to maintain Year 2000
readiness.
Third Party Relationships. The Company has relationships with various
third parties who must also be Year 2000 ready. These third parties
provide (or receive) resources and services to (or from) the Company and
include organizations with which the Company exchanges information. Third
parties include vendors of hardware, software, and information services;
providers of infrastructure services such as voice and data communications
and utilities for office facilities; and customers. Third parties differ
from internal systems in that the Company exercises less, or no, control
over their Year 2000 readiness. The Company has developed a plan to assess
and attempt to mitigate the risks associated with the potential failure of
third parties to achieve Year 2000 readiness. The plan includes the
following activities: (1) identify and classify third party dependencies;
(2) research, analyze, and document Year 2000 readiness for critical third
parties; and (3) test critical hardware and software products and
electronic interfaces. As of December 31, 1998, the Company has identified
and assessed approximately 100 critical third party dependencies. A more
detailed evaluation will be completed during first quarter 1999 as part of
the Company's contingency planning efforts. Due to the various stages of
third parties' Year 2000 readiness, the Company's testing activities will
extend throughout 1999.
28
Item 7. Continued
Contingency Plan. The Company has commenced contingency planning to reduce
the risk of Year 2000-related business failures. The contingency plan,
which addresses both internal systems and third party relationships,
includes the following activities: (1) evaluate the consequences of failure
of business processes with significant exposure to Year 2000 risk; (2)
determine the probability of a Year 2000-related failure for those
processes that have a high consequence of failure; (3) develop an action
plan to complete contingency plan for those processes that rank high in
consequence and probability of failure; and (4) complete the applicable
action plan. The Company is currently developing a contingency plan and
expects to substantially complete all contingency planning activities by
April 30, 1999.
Risks and Uncertainties. Based on its plan to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, the Company believes that it will experience at most
isolated and minor disruptions of business processes following the turn of
the century. Such disruptions are not expected to have a material effect
on the Company's future results of operations, liquidity, or financial
condition. However, due to the magnitude and complexity of this project,
risks and uncertainties exist and the Company is not able to predict a most
reasonably likely worst case scenario. If Year 2000 readiness is not
achieved due to nonperformance by significant third party vendors, the
Company's failure to maintain critical systems as Year 2000 ready, failure
of critical third parties to achieve Year 2000 readiness on a timely basis,
or other unforeseen circumstances in completing the Company's plans, the
Year 2000 issues could have a material adverse impact on the Company's
operations following the turn of the century.
Costs. Through December 31, 1998, the Company has incurred and expensed
$6.3 million (pretax) related to Year 2000 readiness, including $5.6
million incurred during 1998. The Company currently anticipates that it
will incur future costs of approximately $1.0 million (pretax) to maintain
Year 2000 readiness, complete Year 2000 work on non-critical systems and
third party relationships, and complete contingency planning activities.
In addition, the Company accelerated the planned replacement of certain
systems as part of the Year 2000 plan. Costs of the replacement systems
were capitalized and are being amortized over their useful lives, recorded
as operating leases, or expensed as incurred in accordance with the
Company's normal accounting policies. All anticipated replacement costs
were incurred in 1998 and totaled $2.1 million.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained in this
report relative to trends in the Company's operations or financial results,
as well as other statements including words such as "anticipate,"
"believe," "plan," "estimate," "expect," "intend," and other similar
expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
made based upon management's current expectations and beliefs concerning
future developments and their potential effects upon the Company. There
can be no assurance that future developments affecting the Company will be
those anticipated by management. Actual results may differ materially from
29
Item 7. Continued
those included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties including,
but not limited to, the following: (1) changes in general economic
conditions, including the performance of financial markets, interest rates,
and the level of personal bankruptcies; (2) competitive, regulatory, or tax
changes that affect the cost of, or demand for, the Company's products; (3)
the Company's ability or the ability of third parties to achieve and
maintain Year 2000 readiness for significant systems and operations; and
(4) adverse litigation results or resolution of litigation. Readers are
also directed to other risks and uncertainties discussed in other documents
filed by the Company with the Securities and Exchange Commission. The
Company undertakes no obligation to update or revise any forward-looking
information, whether as a result of new information, future developments,
or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The fair values of certain of the Company's 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 the Company's interest-rate sensitive financial
instruments would not be material to the Company's financial position.
The Company has elected to present the quantitative information using a
sensitivity analysis, as this is the most widely-used method in the
financial services industry. The estimated increases (decreases) in fair
values of interest-rate sensitive financial instruments at December 31,
1998 and 1997, all of which were entered into for purposes other than
trading, were as follows:
December 31, 1998 December 31, 1997
+100 bp -100 bp +100 bp -100 bp
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $(253,623) $ 274,955 $(196,053) $ 210,083
Fixed-maturity securities (52,838) 55,410 (41,433) 43,199
Liabilities
Long-term debt (155,029) 162,993 (108,382) 114,655
Derivatives
Interest rate swaps (34,109) 36,430 (24,066) 25,320
Treasury rate locks - - (18,627) 23,570
30
Item 7A. Continued
The changes in fair values were derived by modeling estimated cash flows of
certain of the Company's assets and liabilities as of December 31, 1998 and
1997. These cash flows do not consider loan originations, debt issuances,
or new investment purchases. The cash flows on investment securities were
adjusted to reflect changes in prepayments and calls.
Care should be exercised in drawing conclusions based on the above
analysis. While these changes in fair values provide a measure of interest
rate sensitivity, they are not representative of management's expectations
about the impact of interest rate changes. This analysis is also based on
the Company's exposure at a particular point in time, without regard to the
impact of certain business decisions or initiatives that management would
likely undertake to mitigate or eliminate some or all of the adverse
effects of the modeled scenarios.
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated financial
statements are presented on the following pages.
31
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, 1998 and 1997, 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, 1998. Our audit 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 generally accepted auditing
standards. 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,
1998 and 1997, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. 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.
ERNST & YOUNG, LLP
Indianapolis, Indiana
February 16, 1999
32
American General Finance, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
1998 1997
(dollars in thousands)
Assets
Finance receivables, net of unearned
finance charges (Note 5.):
Real estate loans $ 5,757,185 $4,155,167
Non-real estate loans 2,560,565 2,554,888
Retail sales finance 1,339,367 1,301,133
Net finance receivables 9,657,117 8,011,188
Allowance for finance receivable
losses (Note 6.) (382,450) (372,653)
Net finance receivables, less allowance
for finance receivable losses 9,274,667 7,638,535
Investment securities (Note 7.) 996,599 929,311
Cash and cash equivalents 148,002 105,695
Other assets (Note 8.) 753,655 615,959
Total assets $11,172,923 $9,289,500
Liabilities and Shareholder's Equity
Long-term debt (Note 10.) $ 5,176,965 $4,011,457
Short-term notes payable:
Commercial paper (Notes 11., 12.
and 13.) 3,485,648 3,157,671
Banks and other (Notes 11. and 14.) 198,000 95,000
Investment certificates 1,874 2,574
Insurance claims and policyholder
liabilities 437,079 436,859
Other liabilities 348,866 300,342
Accrued taxes 21,086 22,272
Total liabilities 9,669,518 8,026,175
Shareholder's equity:
Common stock (Note 16.) 1,000 1,000
Additional paid-in capital 822,497 743,083
Accumulated other comprehensive
income (Note 7.) 39,419 34,512
Retained earnings (Note 17.) 640,489 484,730
Total shareholder's equity 1,503,405 1,263,325
Total liabilities and shareholder's equity $11,172,923 $9,289,500
See Notes to Consolidated Financial Statements.
33
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Revenues
Finance charges $1,354,158 $1,264,798 $1,449,968
Insurance 175,969 188,574 206,170
Other 78,978 70,733 68,810
Total revenues 1,609,105 1,524,105 1,724,948
Expenses
Interest expense 511,587 461,275 493,051
Operating expenses 505,150 474,822 512,698
Provision for finance receivable
losses 212,090 247,983 417,446
Loss on non-strategic assets - 42,225 145,459
Insurance losses and loss
adjustment expenses 84,687 93,447 102,811
Total expenses 1,313,514 1,319,752 1,671,465
Income before provision for income
taxes 295,591 204,353 53,483
Provision for Income Taxes
(Note 15.) 108,232 74,920 19,337
Net Income $ 187,359 $ 129,433 $ 34,146
See Notes to Consolidated Financial Statements.
34
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31,
1998 1997 1996
(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 743,083 696,230 696,128
Capital contributions from parent
and other 79,414 46,853 102
Balance at end of year 822,497 743,083 696,230
Accumulated Other Comprehensive
Income
Balance at beginning of year 34,512 21,454 38,412
Change in net unrealized
gains (losses) on
investment securities 4,907 13,058 (16,958)
Balance at end of year 39,419 34,512 21,454
Retained Earnings
Balance at beginning of year 484,730 481,797 586,241
Net income 187,359 129,433 34,146
Common stock dividends (31,600) (126,500) (138,590)
Balance at end of year 640,489 484,730 481,797
Total Shareholder's Equity $1,503,405 $1,263,325 $1,200,481
See Notes to Consolidated Financial Statements.
35
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 187,359 $ 129,433 $ 34,146
Reconciling adjustments:
Provision for finance receivable losses 212,090 247,983 417,446
Depreciation and amortization 107,946 86,330 98,032
Deferral of finance receivable
origination costs (46,773) (39,134) (50,303)
Deferred income tax charge (benefit) 16,446 62,620 (45,875)
Change in other assets and other liabilities (34,947) (20,862) (33,609)
Change in insurance claims and
policyholder liabilities 220 (19,571) (27,541)
Change in taxes receivable and payable 19,681 (11,073) 34,392
Loss on non-strategic assets - 42,225 145,459
Operations related to assets held for sale - 39,905 -
Other, net (23,444) (1,772) 17,952
Net cash provided by operating activities 438,578 516,084 590,099
Cash Flows from Investing Activities
Finance receivables originated or purchased (6,589,414) (5,035,973) (5,338,928)
Principal collections on finance receivables 4,775,254 4,343,120 4,886,420
Net collections on assets held for sale - 61,266 -
Securitized finance receivables purchased - (100,000) -
Acquisition of HSA Residential Mortgage
Services of Texas, Inc. (25,600) - -
Sale of non-strategic assets - 732,504 -
Investment securities purchased (211,087) (129,468) (188,732)
Investment securities called, matured and sold 158,360 104,801 169,405
Purchase of assets from affiliates - - (62,176)
Change in premiums on finance receivables
purchased and deferred charges (122,879) (42,147) (46,900)
Other, net (20,963) (4,028) (23,642)
Net cash used for investing activities (2,036,329) (69,925) (604,553)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 2,028,405 730,566 124,228
Repayment of long-term debt (866,024) (1,221,070) (609,559)
Change in investment certificates (700) (1,204) (2,419)
Change in short-term notes payable 430,977 125,751 643,049
Capital contribution from parent 79,000 46,500 -
Dividends paid (31,600) (126,500) (138,590)
Net cash provided by (used for)
financing activities 1,640,058 (445,957) 16,709
Increase in cash and cash equivalents 42,307 202 2,255
Cash and cash equivalents at beginning of year 105,695 105,493 103,238
Cash and cash equivalents at end of year $ 148,002 $ 105,695 $ 105,493
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 74,047 $ 30,165 $ 34,167
Interest paid $ 493,356 $ 485,067 $ 497,084
See Notes to Consolidated Financial Statements.
36
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Net Income $187,359 $129,433 $ 34,146
Other comprehensive income:
Net unrealized gains (losses)
on investment securities 6,857 21,161 (27,009)
Income tax effect (2,401) (7,406) 9,460
Net unrealized gains (losses)
on investment securities,
net of tax 4,456 13,755 (17,549)
Reclassification adjustment
for realized (gains) losses
included in net income 693 (1,071) 909
Income tax effect (242) 374 (318)
Realized (gains) losses included
in net income, net of tax 451 (697) 591
Other comprehensive income (loss),
net of tax 4,907 13,058 (16,958)
Comprehensive income $192,266 $142,491 $ 17,188
See Notes to Consolidated Financial Statements.
37
American General Finance, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
Note 1. Nature of Operations
American General Finance, Inc. will be referred to in these Notes to
Consolidated Financial Statements as "AGFI" or collectively with its
subsidiaries, whether directly or indirectly owned, as the "Company". AGFI
is a wholly-owned subsidiary of American General Corporation (American
General). The subsidiaries include American General Finance Corporation
(AGFC) and American General Financial Center (AGFC-Utah). AGFI is a
financial services holding company with subsidiaries engaged primarily in
the consumer finance and credit insurance business. The Company conducts
loan and retail operations and markets insurance products through its
consumer branch and centralized real estate segments. At December 31,
1998, the Company had 1,343 offices in 41 states, Puerto Rico and the U.S.
Virgin Islands and approximately 8,100 employees.
In its loan operations, the Company makes loans directly to individuals and
acquires real estate loans made by brokers and other real estate lenders.
In its retail operations, the Company purchases retail sales contracts and
provides revolving retail services arising from the retail sale of consumer
goods and services by approximately 16,000 retail merchants and provides
private label services for approximately 320 retail merchants. In its
insurance operations, the Company writes and assumes credit life, credit
accident and health, credit-related property and casualty insurance, and
non-credit insurance coverages on its consumer finance customers and
property pledged as collateral. See Note 20. for further information on
the Company's business segments.
The Company funds its 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.
At December 31, 1998, the Company had $9.7 billion of net finance
receivables due from approximately 2.3 million customer accounts and $6.1
billion of credit and non-credit life insurance in force covering
approximately 1.2 million customer accounts.
In fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. The Company reclassified these finance
receivables and $70.0 million of allowance for finance receivable losses to
assets held for sale on December 31, 1996. In June 1997, the Company sold
all of the assets held for sale (with a remaining balance of $658.1
million) and $81.4 million of other private label finance receivables. See
Note 9. for further information on the reclassification and subsequent sale
of non-strategic assets.
Prior to such sale, the Company issued MasterCard and VISA credit cards to
individuals through branch and direct mail solicitation programs.
38
Notes to Consolidated Financial Statements, Continued
Note 2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of AGFI
and its subsidiaries. The subsidiaries are all wholly-owned and all
intercompany items have been eliminated. AGFI is a wholly-owned subsidiary
of American General.
RECLASSIFICATIONS
Effective January 1, 1997, certain real estate loans having advances of
less than $10,000 and high loan-to-value ratios were reclassified from real
estate to non-real estate loans. These loans are serviced and collected
more like non-real estate loans than real estate loans. This
reclassification affected $255.0 million of loans at January 1, 1997.
FINANCE OPERATIONS
Revenue Recognition
Finance charges are recognized as revenue on the accrual basis using the
interest method. The accrual of revenue is suspended when the fourth
contractual payment becomes past due for loans, retail sales contracts, and
revolving retail and when the sixth contractual payment becomes past due
for private label. For credit cards, the accrual of revenue was suspended
when the sixth contractual payment became past due. Extension fees, late
charges, and prepayment penalties are recognized as revenue when received.
The Company defers costs associated with the origination of certain finance
receivables and revenue from nonrefundable points and fees on loans.
Deferred origination costs and nonrefundable points and fees are included
in finance receivables and are amortized 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, any unamortized costs or
points and fees are charged or credited to revenue at the date of
liquidation.
Allowance For Finance Receivable Losses
The Company maintains the allowance for finance receivable losses at a
level based on periodic evaluation of the finance receivable portfolio
which reflects an amount that, in management's opinion, is adequate to
absorb anticipated losses in the existing portfolio. Management evaluates
the Company's finance receivables as a group and considers numerous factors
in estimating the anticipated finance receivable losses, including current
economic conditions, prior finance receivable loss and delinquency
experience, and the composition of the finance receivable portfolio.
39
Notes to Consolidated Financial Statements, Continued
The Company's policy is to charge off each month non-real estate loans on
which little or no collections were made in the prior six months, retail
sales contracts which are six installments past due, and revolving retail
and private label accounts which are 180 days past due. Credit card
accounts were charged off when 180 days past due. The Company starts
foreclosure proceedings on real estate loans when four monthly installments
are past due. When foreclosure is completed and the Company has obtained
title to the property, the real estate is established as an asset valued at
fair value, and any loan amount in excess of that value is charged off.
The charge-off period is occasionally extended for individual accounts
when, in management's opinion, such treatment is warranted.
INSURANCE OPERATIONS
Revenue Recognition
The Company's insurance subsidiaries write and assume credit life and
credit accident and health insurance, credit-related property and casualty
insurance, and non-credit insurance. Premiums on credit life insurance are
recognized as revenue using the sum-of-the-digits or actuarial methods,
except in the case of level-term contracts, which are recognized as revenue
using the straight-line method over the lives of the policies. Premiums
on credit accident and health insurance are recognized as revenue using an
average of the sum-of-the-digits and the straight-line methods. Premiums
on credit-related property and casualty insurance are recognized as revenue
using the straight-line method over the terms of the policies or
appropriate shorter periods. Non-credit life insurance premiums are
recognized when collected but not before their due dates.
Policy Reserves
Policy reserves for credit life and credit accident and health insurance
equal related unearned premiums. Claim reserves are based on Company
experience. Reserves for losses and loss adjustment expenses for credit-
related property and casualty insurance are estimated based upon claims
reported plus estimates of incurred but not reported claims. Liabilities
for future life insurance policy benefits associated with non-credit life
contracts are accrued when premium revenue is recognized and are computed
on the basis of assumptions as to investment yields, mortality, and
surrenders. Annuity reserves are computed on the basis of assumptions as
to investment yields and mortality. Non-credit life, group annuity, and
accident and health insurance reserves assumed under coinsurance agreements
are based on various tabular and unearned premium methods.
Acquisition Costs
Insurance acquisition costs, principally commissions, reinsurance fees, and
premium taxes, are deferred and charged to expense over the terms of the
related policies or reinsurance agreements.
40
Notes to Consolidated Financial Statements, Continued
Reinsurance
The Company's insurance subsidiaries enter into reinsurance agreements
among themselves and other insurers, including other insurance subsidiaries
of American General. The annuity, credit life, and credit accident and
health reserves attributable to this business with the subsidiaries of
American General were $68.9 million at December 31, 1998 and $61.0 million
at December 31, 1997. The Company's insurance subsidiaries assumed
reinsurance premiums from other insurers of $40.1 million during 1998,
$38.6 million during 1997, and $47.5 million during 1996. The Company's
ceded reinsurance activities were not significant during the last three
years.
GAAP vs. Statutory Accounting
Statutory accounting practices differ from generally accepted accounting
principles, primarily in the following respects: credit life insurance
reserves are maintained on the basis of mortality tables; non-credit life
and group annuity insurance reserves are based on statutory requirements;
insurance acquisition costs are expensed when incurred rather than expensed
over the related contract period; deferred income taxes are not recorded on
temporary differences in the recognition of revenue and expense; certain
intangible assets resulting from a purchase and the related amortization
are not reflected in statutory financial statements; investments in fixed-
maturity securities are carried at amortized cost; and an asset valuation
reserve and interest maintenance reserve are required for Merit Life
Insurance Co. (Merit), a wholly-owned subsidiary of AGFC. The following
compares net income and shareholder's equity for the insurance operations
determined under statutory accounting practices with those determined under
generally accepted accounting principles:
Net Income Shareholder's Equity
Years Ended December 31, December 31,
1998 1997 1996 1998 1997
(dollars in thousands)
Statutory accounting
practices $68,537 $58,157 $79,157 $525,450 $457,702
Generally accepted
accounting principles 64,405 62,312 59,625 683,992 614,679
INVESTMENT SECURITIES
Valuation
All investment securities are currently classified as available-for-sale
and recorded at fair value. After adjusting related balance sheet accounts
as if the unrealized gains and losses on investment securities had been
realized, the net adjustment is recorded in accumulated other comprehensive
income within shareholder's equity. If the fair value of an investment
security classified as available-for-sale declines below its cost and this
decline is considered to be other than temporary, the investment security
is reduced to its fair value, and the reduction is recorded as a realized
loss.
41
Notes to Consolidated Financial Statements, Continued
Realized Gains and Losses on Investments
Realized gains and losses on investments are recognized using the specific
identification method and include declines in fair value of investments
below cost that are considered other than temporary. Realized gains and
losses on investments are included in other revenues.
OTHER
Cash Equivalents
The Company considers all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
Goodwill
Acquisition-related goodwill is charged to expense in equal amounts over 20
to 40 years. The carrying value of goodwill is regularly reviewed for
indicators of impairment in value, which in management's view are other
than temporary, including unexpected or adverse changes in the following:
1) the economic or competitive environments in which the Company operates,
2) profitability analyses, and 3) cash flow analyses. If facts and
circumstances suggest that goodwill is impaired, the Company assesses the
fair value of the underlying business and reduces goodwill to an amount
that results in the book value of the Company approximating fair value.
Income Taxes
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities at the enacted tax rates expected to be in effect
when the temporary differences reverse. The effect of a tax rate change is
recognized in income in the period of enactment.
A valuation allowance for deferred tax assets is provided if all or some
portion of the deferred tax asset may not be realized. An increase or
decrease in a valuation allowance that results from a change in
circumstances that causes a change in judgement about the realizability of
the related deferred tax asset is included in income. A change related to
fluctuations in fair value of available-for-sale investment securities is
included in accumulated other comprehensive income in shareholder's equity.
Derivative Financial Instruments
The Company accounts for its derivative financial instruments as hedges.
Hedge accounting requires a high correlation between changes in fair values
or cash flows of the derivative financial instrument and the specific item
being hedged, both at inception and throughout the life of the hedge.
42
Notes to Consolidated Financial Statements, Continued
The difference between amounts payable and receivable on interest rate swap
agreements is recorded on the accrual basis as an adjustment to interest
expense over the life of the agreements. The related amount payable to or
receivable from counterparties is included in other liabilities or other
assets. The fair values of interest rate swap agreements are not
recognized in the consolidated balance sheet, which is consistent with the
treatment of the related debt that is hedged.
Any gain or loss from early termination of an interest rate swap agreement
is deferred and amortized into income over the remaining term of the
related debt. If the underlying debt is extinguished, any related gain or
loss on interest rate swap agreements is recognized in income.
Treasury rate lock agreements are accounted for substantially the same as
interest rate swap agreements.
Use of Estimates
Management makes estimates and assumptions in preparing financial
statements that affect amounts reported in the financial statements and
disclosures of contingent assets and liabilities. Ultimate results could
differ from these estimates.
Fair Value of Financial Instruments
The fair values disclosed in Note 22. are based on estimates using
discounted cash flows when quoted market prices are not available. The
assumptions used, including the discount rate and estimates of future cash
flows, significantly affect the valuation techniques employed. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. The fair value amounts
presented can be misinterpreted, and the reader should exercise care in
drawing conclusions from such data.
Note 3. Accounting Changes
During first quarter 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and
its components in the financial statements. The Company elected to report
comprehensive income and its components in the consolidated statements of
comprehensive income. Adoption of SFAS 130 did not change recognition or
measurement of net income and, therefore, did not impact the Company's
consolidated results of operations or financial position.
Effective December 31, 1998, the Company adopted SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information," which changes the
way companies report segment information. Adoption of this statement
resulted in more detailed disclosures but did not have an impact on the
Company's consolidated results of operations or financial position.
43
Notes to Consolidated Financial Statements, Continued
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which
requires all derivative instruments to be recognized at fair value as
either assets or liabilities in the balance sheet. Changes in the fair
value of a derivative instrument are to be reported as earnings or other
comprehensive income, depending upon the intended use of the derivative
instrument. This statement is effective for years beginning after June 15,
1999. Adoption of SFAS 133 is not expected to have a material impact on
the Company's consolidated results of operations or financial position.
Note 4. Purchase of Assets from Affiliates
Subsidiaries of AGFI purchased assets, primarily finance receivables, from
subsidiaries of American General for $62.2 million during 1996.
Note 5. Finance Receivables
Real estate loans generally have maximum original terms of 360 months.
Non-real estate loans collateralized by consumer goods, automobiles or
other chattel security, or that are unsecured, generally have maximum
original terms of 60 months. Retail sales contracts are collateralized
principally by consumer goods and automobiles, and generally have maximum
original terms of 60 months. Revolving retail and private label are
secured by purchase money security interests in the goods purchased and
generally require minimum monthly payments based on outstanding balances.
Credit card receivables were unsecured and required minimum monthly
payments based on outstanding balances. At December 31, 1998, 95% of the
net finance receivables were secured by the real and/or personal property
of the borrower. At December 31, 1998, real estate loans accounted for 60%
of the amount and 8% of the number of net finance receivables outstanding.
Contractual maturities of net finance receivables at December 31, 1998 were
as follows:
Amount Percent
(dollars in thousands)
1999 $1,219,222 13%
2000 1,420,769 15
2001 1,002,183 10
2002 576,986 6
2003 341,439 3
2004 and thereafter 5,096,518 53
$9,657,117 100%
44
Notes to Consolidated Financial Statements, Continued
Company experience has shown that a substantial portion of finance
receivables will be renewed, converted, or paid in full prior to maturity.
Accordingly, the preceding information as to contractual maturities is not
a forecast of future cash collections.
Principal cash collections and such collections as a percentage of average
net receivables were as follows:
1998 1997 1996
(dollars in thousands)
Loans:
Principal cash collections $3,122,617 $2,859,121 $2,653,457
Percent of average net receivables 43.29% 45.72% 46.72%
Retail sales finance:
Principal cash collections $1,652,637 $1,483,999 $1,776,688
Percent of average net receivables 126.58% 116.97% 92.74%
Credit cards:
Principal cash collections $ - $ - $ 456,275
Percent of average net receivables - % - % 86.24%
Unused credit limits on private label extended by the Company to its
customers were $2.3 billion at December 31, 1998 and $2.7 billion at
December 31, 1997. Unused credit limits on loan and retail revolving lines
of credit extended by the Company to its customers were $466.1 million at
December 31, 1998 and $225.3 million at December 31, 1997. All unused
credit limits, in part or in total, can be cancelled at the discretion of
the Company, and are not indicative of the amounts expected to be funded.
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, 1998 December 31, 1997
Amount Percent Amount Percent
(dollars in thousands)
California $1,461,438 15% $ 842,690 11%
N. Carolina 728,801 7 696,261 9
Illinois 593,789 6 434,029 5
Florida 574,693 6 518,837 7
Ohio 559,964 6 465,489 6
Indiana 502,653 5 438,369 5
Virginia 367,995 4 356,928 4
Georgia 351,347 4 310,485 4
Other 4,516,437 47 3,948,100 49
$9,657,117 100% $8,011,188 100%
45
Notes to Consolidated Financial Statements, Continued
Note 6. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses are detailed below.
At or for the
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Balance at beginning of year $372,653 $395,153 $492,124
Provision for finance receivable
losses 212,090 247,983 417,446
Allowance reclassified to assets
held for sale - - (70,000)
Allowance related to acquired
receivables 17,297 - 152
Charge-offs, net of recoveries (219,590) (270,483) (444,569)
Balance at end of year $382,450 $372,653 $395,153
See Note 2. for information on the determination of the allowance for
finance receivable losses.
Note 7. Investment Securities
At December 31, 1998 and 1997, all investment securities were classified as
available-for-sale and reported at fair value. Investment securities were
as follows at December 31:
Fair Value Amortized Cost
1998 1997 1998 1997
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $575,336 $507,844 $546,135 $482,620
Mortgage-backed securities 175,014 177,727 168,346 170,929
States and political
subdivisions 185,055 173,981 174,308 164,515
Other 42,871 45,222 29,297 34,018
Redeemable preferred stocks 11,194 18,737 10,916 18,400
Total 989,470 923,511 929,002 870,482
Non-redeemable preferred
stocks 2,910 2,332 2,731 2,264
Other long-term investments 4,219 3,468 4,219 3,468
Total investment securities $996,599 $929,311 $935,952 $876,214
46
Notes to Consolidated Financial Statements, Continued
At December 31, the gross unrealized gains and losses on investment
securities were as follows:
Gross Gross
Unrealized Gains Unrealized Losses
1998 1997 1998 1997
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $31,955 $25,730 $ 2,754 $ 506
Mortgage-backed securities 6,683 6,932 15 134
State and political
subdivisions 10,821 9,466 74 -
Other 13,574 11,210 - 6
Redeemable preferred stocks 316 431 38 94
Total 63,349 53,769 2,881 740
Non-redeemable preferred
stocks 179 68 - -
Total investment securities $63,528 $53,837 $ 2,881 $ 740
The fair values of investment securities sold or redeemed and the resulting
gross realized gains and losses were as follows:
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Fair value $157,971 $104,492 $169,350
Gross realized gains 3,930 1,481 1,778
Gross realized losses 1,033 410 3,068
Contractual maturities of fixed-maturity securities at December 31, 1998
were as follows:
Fair Amortized
Value Cost
(dollars in thousands)
Fixed maturities, excluding
mortgage-backed securities:
Due in 1 year or less $ 12,836 $ 12,667
Due after 1 year through 5 years 155,255 147,771
Due after 5 years through 10 years 526,445 494,554
Due after 10 years 119,920 105,664
Mortgage-backed securities 175,014 168,346
Total $989,470 $929,002
Actual maturities may differ from contractual maturities since borrowers
have the right to call or prepay obligations. Company requirements and
investment strategies may result in the sale of investments before
maturity.
47
Notes to Consolidated Financial Statements, Continued
Bonds on deposit with regulatory authorities had carrying values of $7.9
million at December 31, 1998 and $8.4 million at December 31, 1997.
Note 8. Costs In Excess of Net Assets Acquired
Goodwill, resulting from the excess of the purchase price paid over the
fair value of separately identified tangible and intangible net assets
acquired, totaled $276.3 million at December 31, 1998 and $262.0 million at
December 31, 1997. Accumulated amortization totaled $96.2 million at
December 31, 1998 and $86.8 million at December 31, 1997.
Other assets includes a customer base valuation of $91.8 million at
December 31, 1998 and $31.0 million at December 31, 1997, which is being
amortized to operating expenses on a straight-line basis over 6 to 25
years.
Note 9. Assets Held for Sale
During fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. The Company reclassified these finance
receivables and $70.0 million of allowance for finance receivable losses to
assets held for sale on December 31, 1996.
The Company hired an outside advisor to market the portfolios. Based on
negotiations with prospective purchasers subsequent to year end 1996, the
Company determined that a write-down of $145.5 million ($93.5 million
aftertax) at December 31, 1996 was necessary to reduce the carrying amount
of the assets held for sale to net realizable value, after considering
related expenses.
In April 1997, the Company repurchased $100.0 million of private label and
credit card receivables that previously had been sold through
securitization. No gain or loss resulted from this transaction. These
repurchased credit card receivables were offered for sale along with the
Company's other credit card receivables, which increased the carrying
amount of assets held for sale by approximately $70.0 million in April
1997.
In June 1997, the Company sold all of the assets held for sale (with a
remaining balance of $658.1 million) and $81.4 million of other private
label finance receivables. In connection with these sales, the Company
recorded a loss of $42.2 million ($27.0 million aftertax) in second quarter
1997. This loss primarily resulted from establishing a liability for
estimated future payments to the purchaser of the credit card portfolio
under a five-year loss sharing arrangement.
48
Notes to Consolidated Financial Statements, Continued
Note 10. Long-term Debt
Long-term debt consisted of senior debt at December 31, 1998 and 1997. The
carrying value and fair value of the Company's long-term debt at December
31 were as follows:
Carrying Value Fair Value
1998 1997 1998 1997
(dollars in thousands)
Senior debt $5,176,965 $4,011,457 $5,348,086 $4,117,243
Weighted average interest rates on long-term debt were as follows:
Years Ended December 31, December 31,
1998 1997 1996 1998 1997
Senior debt 6.95% 7.32% 7.28% 6.69% 7.18%
Maturities of long-term debt at December 31, 1998 were as follows:
Carrying Value
(dollars in thousands)
1999 $ 570,265
2000 1,288,490
2001 946,948
2002 563,059
2003 1,038,058
2004-2009 770,145
Total $5,176,965
A certain debt issue of AGFC is repayable prior to maturity at par, at the
option of each holder. If this issue was repaid in full, the amounts above
would increase $149.3 million in 1999 and would decrease $149.3 million in
2009.
Certain debt agreements contain restrictions on consolidated retained
earnings for certain purposes (see Note 17.).
Note 11. Short-term Notes Payable
AGFC and one of its subsidiaries issue commercial paper with terms ranging
from 1 to 270 days. Included in commercial paper borrowings are extendible
commercial notes that AGFC sells with initial maturities of up to 90 days
which may be extended by AGFC to 390 days.
49
Notes to Consolidated Financial Statements, Continued
Information concerning short-term notes payable for commercial paper and to
banks under credit facilities was as follows:
1998 1997 1996
(dollars in thousands)
Maximum borrowings at any month end $3,821,177 $3,256,805 $3,126,920
Average borrowings $3,475,728 $3,017,332 $2,426,920
Weighted average interest rate,
at December 31:
Money market yield 5.30% 5.80% 5.57%
Semi-annual bond equivalent yield 5.36% 5.87% 5.63%
Weighted average interest rate,
giving effect to interest
rate swap agreements and
commitment fees at December 31, 5.81% 6.45% 6.03%
Note 12. Liquidity Facilities
The Company participates in credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for operating
requirements. The Company was an eligible borrower under committed credit
facilities extended to American General and certain of its subsidiaries
(the "shared committed facilities"). The annual commitment fees for the
shared committed facilities ranged from .05% to .07%. The Company pays
only an allocated portion of the commitment fees for the shared committed
facilities. The Company also had uncommitted credit facilities and was an
eligible borrower under uncommitted credit facilities extended to American
General and certain of its subsidiaries (the "shared uncommitted
facilities"). Available borrowings under all facilities are reduced by any
outstanding borrowings. Information concerning the credit facilities was
as follows:
December 31,
1998 1997
(dollars in thousands)
Committed credit facilities:
Shared committed facilities $5,000,000 $4,000,000
Borrowings - -
Remaining availability $5,000,000 $4,000,000
Uncommitted credit facilities:
Company uncommitted facilities $ 363,500 $ 321,000
Shared uncommitted facilities 150,000 200,000
Borrowings (198,000) (95,000)
Remaining availability $ 313,500 $ 426,000
A subsidiary of AGFI arranges interim financing for third-party mortgage
originators through a bank purchase facility. At December 31, 1998, this
facility totaled $563.0 million with remaining availability of $250.3
million.
50
Notes to Consolidated Financial Statements, Continued
Note 13. Derivative Financial Instruments
The Company's principal borrowing subsidiary is AGFC. AGFC makes limited
use of derivative financial instruments to manage 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 and treasury rate lock agreements.
AGFC uses interest rate swap agreements to reduce its exposure to adverse
future fluctuations in interest expense rates by effectively converting
short-term and certain long-term floating-rate debt to a fixed-rate basis.
These floating-rate obligations are recorded at amortized cost.
Fixed interest rates contracted to be paid on interest rate swap agreements
approximated the rates on fixed-rate term debt with maturities similar to
the derivative financial instruments at the date of contract. As an
alternative to fixed-rate term debt, AGFC's interest rate swap agreements
did not have a material effect on the Company's weighted-average interest
rate or reported interest expense in any of the three years ended December
31, 1998.
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,
1998 1997 1996
(dollars in thousands)
Notional amount $935,000 $940,000 $540,000
Weighted average receive rate 4.57% 5.69% 5.92%
Weighted average pay rate 6.94% 7.39% 8.05%
These agreements mature at various dates and had the respective fixed rates
at December 31, 1998 as follows:
Notional Weighted Average
Amount Interest Rate
(dollars in
thousands)
1999 $ 50,000 9.39%
2000 225,000 8.80
2001 60,000 5.41
2002 200,000 6.93
2004 200,000 6.16
2008 200,000 5.50
$935,000 6.94%
51
Notes to Consolidated Financial Statements, Continued
The following table shows changes in the notional amounts for interest rate
swap agreements:
Notional Amounts
1998 1997 1996
(dollars in thousands)
Balance at beginning of year $940,000 $540,000 $590,000
New contracts 260,000 425,000 -
Expired contracts (265,000) (25,000) (50,000)
Balance at end of year $935,000 $940,000 $540,000
Treasury rate lock agreements have been used to hedge against the risk of
rising interest rates on anticipated long-term debt issuances. These
agreements provide for future cash settlements that are a function of
specified U.S. Treasury rates. At December 31, 1998, there were no
treasury rate lock agreements in effect. At December 31, 1997, the
notional amount of these agreements was $390.0 million. AGFC's use of
treasury rate lock agreements did not have a material effect on the
Company's weighted-average interest rate or reported interest expense in
1998 or 1997.
AGFC is exposed to credit risk in the event of non-performance by
counterparties to derivative financial instruments. AGFC limits its
exposure to credit risk by entering into agreements with counterparties
having strong credit ratings and by basing the amount and term of an
agreement on these credit ratings. Furthermore, 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. See
Note 22. for the fair values of the interest rate swap and treasury rate
lock agreements. AGFC does not expect any counterparty to fail to meet its
obligation; however, non-performance would not have a material impact on
the consolidated results of operations and financial position of the
Company.
AGFC's exposure to market risk is mitigated by the offsetting effects of
changes in the value of the agreements and of the underlying debt to which
they relate.
Note 14. Short-term Notes Payable - Parent
Borrowings from American General primarily provide overnight operating
liquidity when American General is in a surplus cash position. These
borrowings are due on demand at short-term rates based on overnight bank
investment rates. At December 31, 1998, 1997 and 1996, AGFI had no
borrowings outstanding with American General.
52
Notes to Consolidated Financial Statements, Continued
Information concerning such borrowings was as follows:
1998 1997 1996
(dollars in thousands)
Maximum borrowings at any month end $ - $ - $ -
Average borrowings $1,182 $2,476 $3,700
Weighted average interest rate (total
interest expense divided by average
borrowings) 5.64% 5.24% 5.16%
Note 15. Income Taxes
AGFI and all of its subsidiaries file a consolidated federal income tax
return with American General and the majority of its subsidiaries. The
Company provides for federal income taxes as if filing a separate tax
return, and pays such amounts to American General in accordance with a tax
sharing agreement.
Provision for income taxes is summarized as follows:
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Federal
Current $ 86,813 $ 8,588 $ 61,702
Deferred 13,475 60,860 (43,659)
Total federal 100,288 69,448 18,043
State 7,944 5,472 1,294
Total $108,232 $ 74,920 $ 19,337
The U.S. statutory federal income tax rate differs from the effective
income tax rate as follows:
Years Ended December 31,
1998 1997 1996
Statutory federal income tax rate 35.00% 35.00% 35.00%
State income taxes 1.75 1.74 1.57
Amortization of goodwill 1.07 1.54 5.89
Nontaxable investment income (.94) (1.37) (4.84)
Other, net (.26) (.25) (1.46)
Effective income tax rate 36.62% 36.66% 36.16%
53
Notes to Consolidated Financial Statements, Continued
Net deferred tax assets were as follows:
December 31,
1998 1997
(dollars in thousands)
Deferred tax assets $177,239 $194,837
Deferred tax liabilities (153,384) (150,789)
Net deferred tax assets $ 23,855 $ 44,048
The most significant deferred tax assets relate to the provision for
finance receivable losses, the benefits from state NOL carryforwards and
the loss on the sale of non-strategic assets, and insurance premiums
recorded for financial reporting purposes.
State NOL carryforwards were $630.5 million at December 31, 1998 and $627.9
million at December 31, 1997 and expire in the years 2005 and 2006. These
carryforwards resulted from a 1995 state audit of a return and the state's
acceptance of an amended return. At December 31, 1998 and 1997, the
valuation allowance relating to the state NOL carryforwards totaled $39.5
million.
Note 16. Capital Stock
AGFI has two classes of capital stock: special shares (without par value,
25 million shares authorized) which may be issued in series with such
dividend, liquidation, redemption, conversion, voting and other rights as
the board of directors may determine prior to issuance; and common shares
($.50 par value, 25 million shares authorized). Issued shares were as
follows:
Special Shares - At December 31, 1998 and 1997, there were no shares issued
and outstanding.
Common Shares - At December 31, 1998 and 1997, 2 million shares were issued
and outstanding.
Note 17. 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 the Company's 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, 1998, the maximum amount of
dividends which the Company's insurance subsidiaries may pay in 1999
without prior approval was $71.6 million. At December 31, 1998, the
Company's insurance subsidiaries had statutory capital and surplus of
$525.5 million. Merit had $52.7 million of accumulated earnings at
December 31, 1998 for which no federal income tax provisions have been
54
Notes to Consolidated Financial Statements, Continued
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, 1998, the federal
income tax would approximate $18.4 million.
Certain AGFC financing agreements effectively limit the amount of dividends
AGFC may pay. Under the most restrictive provision of these agreements,
$487.4 million of the retained earnings of AGFC was free from such
restrictions at December 31, 1998. At that same date, $4.9 million of the
retained earnings of AGFI's industrial loan company subsidiaries were
unrestricted as to dividend payments.
Note 18. Benefit Plans
RETIREMENT INCOME PLANS
The Company participates in the American General Retirement Plans (AGRP),
which are noncontributory defined benefit pension plans covering most
employees. Pension benefits are based on the participant's compensation
and length of credited service. American General's funding policy is to
contribute annually no more than the maximum deductible for federal income
tax purposes.
At December 31, 1998, 66% of the plans' assets were invested in equity
securities and 32% were invested in fixed income mutual funds.
Additionally, 1% of plan assets were invested in general investment
accounts of American General subsidiaries through deposit administration
insurance contracts. The pension plans have purchased annuity contracts
from American General subsidiaries to provide benefits to certain retirees.
These contracts are expected to provide future annual benefits to retirees
of approximately $8.9 million.
AGFI accounts for its participation in the AGRP as if it had its own plans.
The following table shows AGFI's portion of the plans' funded status:
December 31,
1998 1997 1996
(dollars in thousands)
Projected benefit obligation $87,882 $70,864 $62,887
Plan assets at fair value 95,653 86,418 71,450
Plan assets in excess of projected
benefit obligation 7,771 15,554 8,563
Other unrecognized items, net (5,086) (10,905) (2,709)
Prepaid pension expense $ 2,685 $ 4,649 $ 5,854
55
Notes to Consolidated Financial Statements, Continued
Pension expense included the following components for the years ended
December 31:
1998 1997 1996
(dollars in thousands)
Service cost $ 3,623 $ 3,150 $ 3,194
Interest cost 5,688 4,800 4,480
Expected return on plan assets (6,950) (6,060) (5,464)
Net amortization and deferral 136 (127) (407)
Pension expense $ 2,497 $ 1,763 $ 1,803
Additional assumptions concerning the determination of pension expense were
as follows:
1998 1997 1996
Weighted average discount rate 7.00% 7.25% 7.50%
Expected long-term rate of
return on plan assets 10.25 10.00 10.00
Rate of increase in
compensation levels 4.25 4.00 4.00
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company participates 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. American General and its
subsidiaries have reserved the right to change or eliminate these benefits
at any time.
American General's life plans are insured through December 31, 1999. The
majority of the retiree medical and dental plans is unfunded and self-
insured.
AGFI accounts for its participation in the plans as if it had its own
plans. The accrued liability for postretirement benefits was $6.9 million
at December 31, 1998 and $7.4 million at December 31, 1997. These
liabilities were discounted at the same rates used for the pension plans.
Postretirement benefit expense totaled $.5 million in 1998, $.7 million in
1997, and $.7 million in 1996.
56
Notes to Consolidated Financial Statements, Continued
Note 19. Lease Commitments, Rent Expense and Contingent Liabilities
The approximate 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, are as
follows:
Lease Commitments
(dollars in thousands)
1999 $ 41,128
2000 34,744
2001 25,821
2002 18,405
2003 11,312
subsequent to 2003 12,498
Total $143,908
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 1998. Rental expense totaled $35.2 million in
1998, $32.4 million in 1997, and $36.0 million in 1996.
AGFI and certain of its subsidiaries are parties to various lawsuits and
proceedings arising in the ordinary course of business. Many of these
lawsuits and proceedings arise in jurisdictions, such as Alabama and
Mississippi, that permit damage awards disproportionate to the actual
economic damages incurred. Based upon information presently available, the
Company believes that the total amounts that will ultimately be paid, if
any, arising from these lawsuits and proceedings will not have a material
adverse effect on the Company's consolidated results of operations and
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 jurisdictions like
Alabama and Mississippi continues to create the potential for an
unpredictable judgment in any given suit.
Note 20. Segment Information
The Company has three segments: consumer branches, centralized real
estate, and insurance. The Company's segments are managed separately
because they offer different financial service products. The consumer
branch operation originates and acquires home equity and consumer loans,
extends lines of credit, offers retail sales financing to merchants, and
sells credit and non-credit insurance products. The centralized real
estate operation acquires individual first and second mortgage loans
originated by real estate brokers and purchases portfolios of mortgage
loans originated by various real estate lenders. The insurance operation
writes and assumes credit and non-credit insurance through products that
are sold principally by the consumer branches.
57
Notes to Consolidated Financial Statements, Continued
The Company evaluates performance of the segments based on income or loss
before income taxes. The accounting policies of the segments are the same
as those disclosed in Note 2., except that segment operating expenses are
not reduced for the deferral of origination costs, the deferred origination
costs are not included in finance receivables, and the amortization of the
deferred origination costs are not included as a reduction of finance
charge revenue. 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 primarily amortization of
deferred origination costs. Reconciling items for assets include deferred
origination costs, other assets, and corporate assets which are not
considered pertinent to determining segment performance. Corporate assets
include cash, prepaid expenses, deferred charges, fixed assets, and
goodwill. Segment information prior to 1997 is not presented because it is
impractical to create comparable information.
At or for the Year Ended December 31, 1998:
Consumer Centralized Total
Branches Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $1,263,391 $ 128,986 $ - $ 1,392,377
Insurance 1,925 - 174,044 175,969
Other - 3,202 74,978 78,180
Intercompany 70,959 561 (68,850) 2,670
Interest expense 384,182 79,612 112 463,906
Provision for finance
receivable losses 209,027 10,404 - 219,431
Pretax income 248,149 24,823 69,110 342,082
Assets 7,344,546 1,911,538 1,077,892 10,333,976
At or for the Year Ended December 31, 1997:
Consumer Centralized Total
Branches Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $1,223,312 $ 79,769 $ - $1,303,081
Insurance 2,069 - 186,147 188,216
Other 534 132 69,243 69,909
Intercompany 74,724 169 (72,740) 2,153
Interest expense 376,263 50,011 - 426,274
Provision for finance
receivable losses 252,942 2,209 - 255,151
Pretax income 202,364 18,508 64,755 285,627
Assets 6,545,245 1,050,335 1,000,176 8,595,756
58
Notes to Consolidated Financial Statements, Continued
Reconciliation of segment totals to consolidated financial statement
amounts is summarized below:
At or for the
Years Ended December 31,
1998 1997
(dollars in thousands)
Revenues
Segments $ 1,649,196 $1,563,359
Corporate 4,971 967
Adjustments (45,062) (40,221)
Total consolidated revenue $ 1,609,105 $1,524,105
Interest Expense
Segments $ 463,906 $ 426,274
Corporate 47,681 35,001
Total consolidated interest
expense $ 511,587 $ 461,275
Provision for finance receivable
losses
Segments $ 219,431 $ 255,151
Corporate (7,341) (7,168)
Total consolidated provision for
finance receivable losses $ 212,090 $ 247,983
Pretax Income
Segments $ 342,082 $ 285,627
Corporate (46,491) (81,274)
Total consolidated pretax income $ 295,591 $ 204,353
Assets
Segments $10,333,976 $8,595,756
Corporate 823,443 678,291
Adjustments 15,504 15,453
Total consolidated assets $11,172,923 $9,289,500
59
Notes to Consolidated Financial Statements, Continued
Note 21. Interim Financial Information (Unaudited)
Unaudited interim information is summarized below:
Total Revenues
Three Months Ended 1998 1997
(dollars in thousands)
March 31 $ 388,665 $ 384,748
June 30 396,094 379,470
September 30 407,585 379,618
December 31 416,761 380,269
Total $1,609,105 $1,524,105
Income Before Provision
for Income Taxes
Three Months Ended 1998 1997
(dollars in thousands)
March 31 $ 71,129 $ 61,697
June 30 72,687 21,641 (a)
September 30 73,978 64,345
December 31 77,797 56,670
Total $ 295,591 $ 204,353
Net Income
Three Months Ended 1998 1997
(dollars in thousands)
March 31 $ 44,222 $ 38,794
June 30 45,181 13,622 (a)
September 30 47,527 40,689
December 31 50,429 36,328
Total $ 187,359 $ 129,433
(a) Includes loss on sale of non-strategic assets of $42.2 million ($27.0
million aftertax).
60
Notes to Consolidated Financial Statements, Continued
Note 22. Fair Value of Financial Instruments
The carrying values and estimated fair values of certain of the Company's
financial instruments are presented below. The reader should exercise care
in drawing conclusions based on fair value, since the fair values presented
below do not include the value associated with all of the Company's assets
and liabilities.
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Value Value Value Value
Assets (dollars in thousands)
Net finance receivables,
less allowance for finance
receivable losses $9,274,667 $9,274,667 $7,638,535 $7,638,535
Investment securities 996,599 996,599 929,311 929,311
Cash and cash equivalents 148,002 148,002 105,695 105,695
Liabilities
Long-term debt (5,176,965) (5,348,086) (4,011,457) (4,117,243)
Short-term notes payable (3,683,648) (3,683,648) (3,252,671) (3,252,671)
Off-Balance Sheet Financial
Instruments
Unused customer credit limits - - - -
Interest rate swap agreements - (36,697) - (29,690)
Treasury rate lock agreements - - - (1,610)
VALUATION METHODOLOGIES AND ASSUMPTIONS
The Company used the following methods and assumptions to estimate the fair
value of the financial instruments.
Finance Receivables
Fair values of net finance receivables (which approximates carrying amount
less allowance for finance receivable losses) were estimated using
projected cash flows, computed by category of finance receivable,
discounted at the weighted-average interest rates currently being offered
for similar finance receivables. Cash flows were based 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 system.
61
Notes to Consolidated Financial Statements, Continued
Investment Securities
When available, quoted market prices are used as fair values of investment
securities. For investment securities not actively traded, the Company
estimates fair values using values obtained from independent pricing
services or, in the case of some private placements, by discounting
expected future cash flows using a current market rate applicable to yield,
credit quality, and average life of the investments.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash
and cash equivalents approximate those assets' fair values.
Long-term Debt
The fair values of the Company's long-term borrowings are estimated using
cash flows discounted at current borrowing rates.
Short-term Notes Payable
The carrying values of short-term notes payable approximate the fair
values.
Unused Customer Credit Limits
The unused credit limits available to the Company's customers have no fair
value. The interest rates charged on these facilities can either be
changed at the Company's discretion, such as for private label, or are
adjustable and reprice frequently, such as for loan and retail revolving
lines of credit. Furthermore, these amounts, in part or in total, can be
cancelled at the discretion of the Company.
Derivative Financial Instruments
Fair values for the Company's interest rate swap and treasury rate lock
agreements are estimated using cash flows discounted at current market
rates.
62
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, 1998 and 1997
Consolidated Statements of Income, years ended December 31, 1998
1997, and 1996
Consolidated Statements of Shareholder's Equity, years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows, years ended December 31,
1998, 1997, and 1996
Consolidated Statements of Comprehensive Income, years ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is included
in Item 14(d).
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have
been omitted, because they are inapplicable, or the required
information is included in the consolidated financial statements or
notes.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 69
herein.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the fourth quarter of
1998.
(c) Exhibits
The exhibits required to be included in this portion of Item 14. are
submitted as a separate section of this report.
63
Item 14(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance, Inc.
Condensed Balance Sheets
December 31,
1998 1997
(dollars in thousands)
Assets
Cash $ 4,670 $ 161
Investments in subsidiaries 1,637,634 1,388,325
Notes receivable from subsidiaries 212,232 183,301
Other assets 46,516 47,311
Total assets $1,901,052 $1,619,098
Liabilities and Shareholder's Equity
Senior long-term debt, 5.85% - 9.75%,
due 1999 - 2002 $ 14,953 $ 69,971
Notes payable to banks 198,000 95,000
Notes payable to subsidiaries 183,018 185,112
Other liabilities 1,676 5,690
Total liabilities 397,647 355,773
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 822,497 743,083
Other equity 39,419 34,512
Retained earnings 640,489 484,730
Total shareholder's equity 1,503,405 1,263,325
Total liabilities and shareholder's equity $1,901,052 $1,619,098
See Notes to Condensed Financial Statements.
64
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Income
Years Ended December 31,
1998 1997 1996
(dollars in thousands)
Revenues
Dividends received from subsidiaries $ 42,875 $147,136 $150,574
Interest and other 19,536 25,560 25,850
Total revenues 62,411 172,696 176,424
Expenses
Interest expense 27,439 26,950 29,802
Operating expenses 3,929 12,130 23,844
Total expenses 31,368 39,080 53,646
Income before income taxes and equity
in undistributed (overdistributed)
net income of subsidiaries 31,043 133,616 122,778
Income Tax Credit 4,135 4,883 9,751
Income before equity in undistributed
(overdistributed) net income of
subsidiaries 35,178 138,499 132,529
Equity in Undistributed (Overdistributed)
Net Income of Subsidiaries 152,181 (9,066) (98,383)
Net Income $187,359 $129,433 $ 34,146
See Notes to Condensed Financial Statements.
65
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Cash Flows
Years ended December 31,
1998 1997 1996
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $187,359 $129,433 $ 34,146
Reconciling adjustments to net cash
provided by operating activities:
Equity in (undistributed)
overdistributed net income
of subsidiaries (152,181) 9,066 98,383
Change in other assets and other
liabilities (153) (11,203) 812
Other, net (1,816) 13,437 8,263
Net cash provided by operating activities 33,209 140,733 141,604
Cash Flows from Investing Activities
Capital contributions to subsidiaries (92,000) (27,000) -
Net additions to fixed assets (522) (7,184) (6,085)
Other, net - - 8,423
Net cash (used for) provided by
investing activities (92,522) (34,184) 2,338
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt - 3,616 46,411
Repayment of long-term debt (55,553) (16,320) (9,299)
Change in notes receivable or payable
with parent and subsidiaries (31,025) 1,715 96
Change in notes payable to banks 103,000 (16,000) (42,400)
Capital contributions from parent 79,000 46,500 -
Dividends paid (31,600) (126,500) (138,590)
Net cash provided by (used for)
financing activities 63,822 (106,989) (143,782)
Increase (decrease) in cash 4,509 (440) 160
Cash at beginning of year 161 601 441
Cash at end of year $ 4,670 $ 161 $ 601
See Notes to Condensed Financial Statements.
66
Schedule I, Continued
American General Finance, Inc.
Notes to Condensed Financial Statements
December 31, 1998
Note 1. Accounting Policies
AGFI's investments in subsidiaries are stated at cost plus the equity in
undistributed 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
Maturities of senior long-term debt at December 31, 1998 were as follows:
1999, $7.8 million; 2000, $4.0 million; 2001, $1.9 million; and 2002, $1.3
million.
67
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
19, 1999.
AMERICAN GENERAL FINANCE, INC.
By: /s/ Robert A. Cole
Robert A. Cole
(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 19, 1999.
/s/ Frederick W. Geissinger
Frederick W. Geissinger James S. D'Agostino Jr.
(President and Chief Executive (Director)
Officer and Director - Principal
Executive Officer)
/s/ Jerry L. Gilpin
Jerry L. Gilpin
/s/ Robert A. Cole (Director)
Robert A. Cole
(Senior Vice President and
Chief Financial Officer and /s/ Philip M. Hanley
Director - Principal Financial Philip M. Hanley
Officer) (Director)
/s/ George W. Schmidt /s/ Bennie D. Hendrix
George W. Schmidt Bennie D. Hendrix
(Controller and Assistant Secretary - (Director)
Principal Accounting Officer)
/s/ W. Tal Bratton Jon P. Newton
W. Tal Bratton (Director)
(Director)
68
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.
69
Exhibit Index
Exhibits Page
(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 long-
term debt of the Company and its 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 total assets of the Company on a consolidated basis.
(1) Indenture dated as of October 1, 1994 from American General
Finance Corporation to The Chase Manhattan Bank.
Incorporated by reference to Exhibit 4(a) filed as a part of
American General Finance Corporation's Registration Statement
on Form S-3 (Registration No. 33-55803).
(2) Indenture dated as of May 1, 1997 from American General
Finance Corporation to The First National Bank of Chicago.
Incorporated by reference to Exhibit 4(a) filed as a part of
American General Finance Corporation's Registration Statement
on Form S-3 (Registration No. 333-28925).
b. In accordance with Item 601(b)(4)(iii) of Regulation S-K,
certain other instruments defining the rights of holders of
long-term debt of the Company and its 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 such instrument does not exceed 10% of
the total assets of the Company on a consolidated basis. The
Company hereby agrees to furnish a copy of each such instrument
to the Securities and Exchange Commission upon request therefor.
(12) Computation of ratio of earnings to fixed charges. 70
(23) Consent of Ernst & Young LLP, Independent Auditors 71
(27) Financial Data Schedule 72