UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ      No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  

Yes ¨      No þ

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ      No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨      No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer ¨             Accelerated filer ¨             Non-accelerated filer þ             Smaller reporting company ¨

(Do not check if a smaller

reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes ¨      No þ

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.

As the registrant is an indirect wholly owned subsidiary of American International Group, Inc., none of the registrant’s common stock is held by non-affiliates of the registrant.

At March 4, 2010, there were 10,160,012 shares of the registrant’s common stock, $.50 par value, outstanding.

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TABLE OF CONTENTS

*

Items 10, 11, 12, and 13 are not included in this report, as the registrant meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K.

**

Item 9 is not included in this report, as no information was required by Item 304 of Regulation S-K.

***

Item 9B is not included in this report because it is inapplicable.

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AVAILABLE INFORMATION

American General Finance Corporation (AGFC) files annual, quarterly, and current reports and other information with the Securities and Exchange Commission (the SEC). The SEC’s website, www.sec.gov, contains these reports and other information that registrants (including AGFC) file electronically with the SEC.

The following reports are available free of charge through our website, www.agfinance.com, as soon as reasonably practicable after we file them with or furnish them to the SEC:

·

Annual Reports on Form 10-K;

·

Quarterly Reports on Form 10-Q;

·

Current Reports on Form 8-K; and

·

amendments to those reports.

The information on our website is not incorporated by reference into this report. The website addresses listed above are provided for the information of the reader and are not intended to be active links.

 

PART I

Item 1.  Business.

GENERAL

American General Finance Corporation (AGFC, or collectively with its subsidiaries, whether directly or indirectly owned, the Company, we, or our) was incorporated in Indiana in 1927 as successor to a business started in 1920. All of the common stock of AGFC is owned by American General Finance, Inc. (AGFI), which was incorporated in Indiana in 1974. Since August 29, 2001, AGFI has been an indirect wholly owned subsidiary of American International Group, Inc. (AIG), a Delaware corporation. AIG is a holding company which, through its subsidiaries, is engaged primarily in a broad range of insurance and insurance-related activities in the United States and abroad. Effective June 29, 2007, AGFI became a direct wholly owned subsidiary of AIG Capital Corporation, a direct wholly owned subsidiary of AIG. AIG Capital Corporation also holds full or majority interests in other AIG financial services affiliates.

AGFC is a financial services holding company with subsidiaries engaged in the consumer finance and credit insurance businesses. We conduct the credit insurance business to supplement our consumer finance business through Merit Life Insurance Co. (Merit) and Yosemite Insurance Company (Yosemite), which are both wholly owned subsidiaries of AGFC.

Effective January 2, 2007, we acquired Ocean Finance and Mortgages Limited (Ocean), which is headquartered in Staffordshire, England. As a finance broker in the United Kingdom, Ocean offers primarily home owner loans, mortgages, refinancings, and consumer loans. We accounted for this acquisition using purchase accounting, which dictates that the total consideration for a business must be allocated among the fair values of all the underlying assets and liabilities acquired.

Effective February 29, 2008, we purchased a substantial portion of Equity One, Inc.’s consumer branch finance receivable portfolio consisting of $1.0 billion of real estate loans, $289.8 million of non-real estate loans, and $156.0 million of retail sales finance receivables.

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Item 1.  Continued

Effective June 17, 2008, Wilmington Finance, Inc. (WFI), a wholly owned subsidiary of AGFC, ceased its wholesale originations (originations through mortgage brokers) but continued its retail originations (originations directly with consumers) at a substantially reduced level as a result of our decision to significantly reduce our mortgage banking operations primarily due to the slower U.S. housing market. Currently, WFI’s limited loan origination activity relates to the financial remediation program discussed in Note 3 of the Notes to Consolidated Financial Statements in Item 8.

In September 2008, AIG and the Company experienced a severe strain on their liquidity. Since September 2008, management has implemented measures to preserve our liquidity, including an on-balance sheet securitization, portfolio sales, expense reductions, branch closures, reductions in finance receivable originations, and suspension of our centralized real estate originations and purchases. For further information, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Going Concern Consideration in Item 7 and Going Concern Consideration in Note 1 of the Notes to Consolidated Financial Statements in Item 8.

At December 31, 2009, the Company had 1,178 branch offices in 39 states, Puerto Rico, and the U.S. Virgin Islands; foreign operations in the United Kingdom; and approximately 6,500 employees. Our executive offices are located in Evansville, Indiana.

SEGMENTS

We have three business segments:  branch, centralized real estate, and insurance. We define our segments by types of financial service products we offer, nature of our production processes, and methods we use to distribute our products and to provide our services, as well as our management reporting structure.

Revenues, pretax (loss) income, and assets for our three business segments and consolidated totals were as follows:

At or for the Years Ended December 31,
(dollars in thousands)	2009	2008	2007
Branch: Revenues	$  1,745,670	$  2,016,749	$  1,927,377
Pretax (loss) income	(335,521)	(231,394)	369,740
Assets	10,996,168	14,063,143	13,311,154
Centralized real estate: Revenues	$     363,837	$     649,379	$     553,811
Pretax loss	(405,535)	(293,830)	(275,358)
Assets	6,463,774	9,695,656	11,201,192
Insurance: Revenues	$     140,819	$     191,076	$     196,830
Pretax income	55,720	82,334	101,524
Assets	937,684	1,034,474	1,613,176
Consolidated: Revenues	$  2,216,836	$  2,734,266	$  2,737,435
Pretax (loss) income	(888,647)	(924,693)	106,512
Assets	22,587,597	26,078,492	30,124,244

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Item 1.  Continued

See Note 27 of the Notes to Consolidated Financial Statements in Item 8 for reconciliations of segment totals to consolidated financial statement amounts.

Branch Business Segment

The branch business segment is the core of the Company’s operations. Through its 1,178 branch offices and its centralized support operations, the 5,400 employees of the branch business segment serviced 1.4 million real estate loans, non-real estate loans, and retail sales finance accounts totaling $12.0 billion at December 31, 2009.

Our branch customers encompass a wide range of borrowers. In the consumer finance industry, they are described as prime or near-prime at one extreme and non-prime or sub-prime at the other. These customers’ incomes are generally near the national median but vary, as do their debt-to-income ratios, employment and residency stability, and credit repayment histories. In general, branch customers have lower credit quality than our centralized real estate customers and require significant levels of servicing and, as a result, we charge them interest rates higher than our centralized real estate customers to compensate us for such services and related credit risks.

Structure and Responsibilities. Branch personnel originate real estate loans and non-real estate loans, purchase retail sales finance contracts from retail merchants, offer credit and non-credit insurance and ancillary products to the loan customers, and service these receivables. Branch managers establish retail merchant relationships, identify portfolio acquisition opportunities, manage finance receivable credit quality, and are responsible for branch profitability. Branch managers also hire and train the branch staff and supervise their work. The Company coordinates branch staff training through centrally developed training programs to maintain quality customer service.

We continuously review the performance of our individual branches and the markets they serve, as well as economic conditions. During 2009, we closed 196 branch offices. Customers of closed branch offices are primarily serviced by our other nearby offices.

Products and Services. Real estate loans are secured by first or second mortgages on residential real estate (including manufactured housing), generally have maximum original terms of 360 months, and are usually considered non-conforming. At December 31, 2009, 14% of our branch real estate loans were second mortgages. Real estate loans may be closed-end accounts or open-end home equity lines of credit and are primarily fixed-rate products. Our real estate loans do not contain any borrower payment options that allow the loan principal balance to increase through negative loan amortization. The home equity lines of credit generally have a predetermined period during which the borrower may take advances. After this draw period, all advances outstanding under the line of credit convert to a fixed-term repayment period, usually over an agreed upon period between 15 and 30 years. At December 31, 2009, 8% of our branch real estate loans were adjustable-rate mortgages, some of which contain a fixed-rate for the first 24, 36, or 48 months and then convert to an adjustable-rate for the remainder of the term. At December 31, 2009, $15.2 million (less than 1%) of our branch business segment real estate loans had this conversion feature and had not yet converted to an adjustable rate.

Non-real estate loans are secured by consumer goods, automobiles, or other personal property or are unsecured, and are generally fixed-rate, fixed-term loans with maximum original terms of 60 months. We also offer unsecured lines of credit to customers that meet the criteria in our credit risk policies.

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Item 1.  Continued

We purchase retail sales contracts and provide revolving retail sales financing services arising from the retail sale of consumer goods and services by retail merchants. We also purchase private label receivables originated by AIG Federal Savings Bank (AIG Bank), a non-subsidiary affiliate, under a participation agreement. Retail sales contracts are closed-end accounts that represent a single purchase transaction. Revolving retail and private label are open-end accounts that can be used for financing repeated purchases from the same merchant. Retail sales contracts are secured by the real property or personal property designated in the contract and generally have maximum original terms of 60 months. Revolving retail and private label are secured by the goods purchased and generally require minimum monthly payments based on the amount financed calculated after the most recent purchase or outstanding balances. We refer to retail sales contracts, revolving retail, and private label collectively as “retail sales finance”.

We offer credit life, credit accident and health, credit related property and casualty, credit involuntary unemployment, and non-credit insurance and ancillary products to all eligible branch customers. Affiliated, as well as non-affiliated, insurance and/or financial services companies issue these products which we describe under “Insurance Business Segment”.

Customer Development. We solicit finance receivable customers through a variety of channels including mail, E-commerce, and telephone calls.

We solicit new prospects, as well as current and former customers, through a variety of mail offers. Our data warehouse is a central, proprietary source of information regarding current and former customers. We use this information to tailor offers to specific customer segments. In addition to internal data, we purchase prospect lists from major list vendors based on predetermined selection criteria. Mail solicitations include invitations to apply and guaranteed loan offers.

E-commerce provides another source of new customers. Our website includes a brief, user-friendly credit application that, upon completion, is automatically routed to the branch office nearest the consumer. We have established E-commerce relationships with a variety of search engines to bring prospects to our website. Our website also has a branch office locator feature so potential customers can readily find the branch office nearest to them and can contact branch personnel directly.

New customer relationships also begin through our alliances with approximately 300 retail merchants across the United States. After a customer utilizes the merchant’s retail sales financing option, we may purchase that retail sales finance obligation. We then contact the customer using various marketing methods to invite the customer to discuss his or her overall credit needs with our consumer lending specialists. Any resulting loan may pay off the customer’s retail sales finance obligation and consolidate his or her debts with other creditors, if permitted. During 2009, our active retail merchant relationships declined from 21,500 to 300, reflecting the suspension of dealer operating agreements, which may be reactivated in the future.

Our consumer lending specialists, who, where required, are licensed to offer insurance and ancillary products, explain our credit and non-credit insurance and ancillary products to the customer. The customer then determines whether to purchase any of these products.

Traditionally, our growth strategy has been to supplement our solicitation of customers through mail, E-commerce, and retail sales financing activities with portfolio acquisitions. These acquisitions included real estate loans, non-real estate loans, and retail sales finance receivables originated by other lenders whose customers met our credit quality standards and profitability objectives. Our branch and field operations management also sought sources of potential portfolio acquisitions. However, with our current limited funding sources, we are not pursuing acquisition opportunities.

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Item 1.  Continued

Account Servicing. Establishing and maintaining customer relationships is very important to us. Branch personnel contact our real estate loan, non-real estate loan, and retail sales finance customers through solicitation or collection phone calls to assess customers’ current financial situations to determine if they desire additional funds. Centralized support operations personnel contact our retail sales finance customers through solicitation or collection calls. Solicitation and collection efforts are opportunities to help our customers solve their temporary financial problems and to maintain our customer relationships.

See Note 2 of the Notes to Consolidated Financial Statements in Item 8 for our Troubled Debt Restructuring (TDR) policy, charge-off policy, and policies regarding delinquent accounts. If recovery efforts are feasible, we transfer charged-off accounts to our centralized charge-off recovery operation for ultimate disposition.

Selected Financial Information. Amount, number, and average size of total net finance receivables originated and renewed and amount and number of total net finance receivables (transferred/sold) purchased, in each case, by type for the branch business segment were as follows:

Years Ended December 31,	2009	2008	2007
Branch originated and renewed Amount (in thousands): Real estate loans	$   273,239	$1,508,566	$2,848,430
Non-real estate loans	1,994,731	3,225,709	3,789,230
Retail sales finance	670,273	2,157,251	2,420,126
Total	$2,938,243	$6,891,526	$9,057,786
Number: Real estate loans	3,814	23,763	43,091
Non-real estate loans	507,231	709,820	821,846
Retail sales finance	208,916	751,815	890,157
Total	719,961	1,485,398	1,755,094
Average size (to nearest dollar): Real estate loans	$71,641	$63,484	$66,103
Non-real estate loans	3,933	4,544	4,611
Retail sales finance	3,208	2,869	2,719
Branch net (transferred/sold) purchased Amount (in thousands): Real estate loans	$(268,723)	$1,018,888	$25,153
Non-real estate loans	-	289,771	3,968
Retail sales finance	424	167,076	3,641
Total	$(268,299)	$1,475,735	$32,762
Number: Real estate loans	(3,462)	17,886	484
Non-real estate loans	-	80,951	416
Retail sales finance	65	29,892	1,785
Total	(3,397)	128,729	2,685

During 2009, we transferred $269.7 million of branch segment real estate loans from finance receivables to finance receivables held for sale due to management’s intent to no longer hold these finance

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Item 1.  Continued

receivables for the foreseeable future. In 2009, we sold $58.6 million of branch segment finance receivables held for sale.

Amount, number, and average size of net finance receivables by type for the branch business segment were as follows:

December 31,	2009	2008	2007
Branch net finance receivables Amount (in thousands): Real estate loans	$  7,769,879	$  9,000,803	$  8,175,867
Non-real estate loans	3,125,405	3,964,865	3,830,246
Retail sales finance	1,085,516	2,146,975	2,112,296
Total	$11,980,800	$15,112,643	$14,118,409
Number: Real estate loans	144,509	164,976	154,496
Non-real estate loans	823,942	957,931	912,337
Retail sales finance	426,644	883,425	934,505
Total	1,395,095	2,006,332	2,001,338
Average size (to nearest dollar): Real estate loans	$53,767	$54,558	$52,920
Non-real estate loans	3,793	4,139	4,198
Retail sales finance	2,544	2,430	2,260

Selected financial data for the branch business segment were as follows:

At or for the Years Ended December 31,	2009	2008	2007
Branch yield: Real estate loans	9.39%	10.18%	11.07%
Non-real estate loans	20.42	20.19	20.73
Retail sales finance	12.05	11.02	11.40
Total	12.55	12.96	13.71
Branch charge-off ratio: Real estate loans	3.40%	1.74%	0.81%
Non-real estate loans	8.36	5.96	4.20
Retail sales finance	5.71	3.41	2.23
Total	4.96	3.10	1.92
Branch delinquency ratio: Real estate loans	7.62%	5.34%	3.57%
Non-real estate loans	5.06	5.49	4.12
Retail sales finance	5.65	3.13	2.20
Total	6.73	5.05	3.51

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Item 1.  Continued

See Note 27 of the Notes to Consolidated Financial Statements in Item 8 for further information on the Company’s branch business segment.

Centralized Real Estate Business Segment

The centralized real estate business segment services generally non-conforming residential real estate loans that were originated or purchased through distribution channels other than our branches. MorEquity, Inc. (MorEquity) and WFI are included in this segment. Real estate loans in our centralized real estate business segment have typically had higher credit quality than the real estate loans originated by our branch business segment and are thereby cost-effectively serviced centrally. Our centralized real estate customers are generally described as either prime or near-prime, but for reasons such as elevated debt-to-income ratios, lack of income stability, the level of income disclosure and verification required for a conforming mortgage, as well as credit repayment history or similar measurements, or convenience, they have applied for a non-conforming mortgage. The distribution channels include direct lending to customers and portfolio acquisitions from third party lenders. However, with our current limited funding sources, we are not pursuing originations or acquisitions. At December 31, 2009, the centralized real estate business segment had approximately 100 employees, compared to approximately 200 employees at December 31, 2008, as a result of our decision to significantly reduce our mortgage banking operations, including ceasing WFI’s wholesale originations effective June 17, 2008.

Structure and Responsibilities. During 2009, our centralized real estate business segment originated $7.5 million of real estate loans, compared to $100.8 million in 2008. This decrease was primarily due to our limiting of lending activities while focusing on liquidity. Historically, WFI originated non-conforming residential real estate loans and sold those loans to investors with servicing released to the purchaser. Effective June 17, 2008, WFI ceased its wholesale originations (originations through mortgage brokers) but continued its retail originations (originations directly with consumers) at a substantially reduced level. Currently, WFI’s limited loan origination activity relates only to the financial remediation program discussed in Note 3 of the Notes to Consolidated Financial Statements in Item 8.

Products and Services. Real estate loans are secured by first or second mortgages on residential real estate and are generally considered non-conforming. At December 31, 2009, less than 1% of our centralized real estate loans were second mortgages. We offer a broad range of fixed and adjustable-rate loans that meet our customers’ needs. Real estate loans generally have maximum original terms of 360 months but we also offer loans with maximum original terms of 480 months and 600 months, some of which require a balloon payment at the end of 360 months. Our real estate loans do not contain any borrower payment options that allow the loan principal balance to increase through negative loan amortization. At December 31, 2009, 5% of our centralized real estate loans were adjustable-rate mortgages, some of which contain a fixed-rate for the first 24, 36, 48, or 60 months and then convert to an adjustable-rate for the remainder of the 360 months. At December 31, 2009, $85.5 million, or 1%, of our total centralized real estate business segment loans outstanding had this conversion feature and had not yet converted to an adjustable rate.

Historically, MorEquity originated non-conforming residential real estate loans primarily through refinancing loans with existing customers and, to a lesser extent, through mail solicitations.

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Item 1.  Continued

From a centralized location, MorEquity serviced approximately 23,000 real estate loans totaling $4.5 billion at December 31, 2009, compared to approximately 47,000 real estate loans totaling $9.0 billion at December 31, 2008. At December 31, 2009, approximately 10,000 of MorEquity’s loans totaling $1.9 billion were serviced by a third party in conjunction with the 2009 securitization of these real estate loans. These real estate loans were generated through:

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portfolio acquisitions from third party lenders;

·

our mortgage origination subsidiaries;

·

refinancing existing mortgages;

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advances on home equity lines of credit; or

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correspondent relationships.

At December 31, 2009, MorEquity had $761.1 million of interest only real estate loans. Our underwriting criteria for interest only loans included borrower qualification on a fully amortizing payment basis and excluded investment properties. At December 31, 2009, MorEquity also had $530.2 million of real estate loans that amortize over 480 months or 600 months, some of which require a balloon payment at the end of 360 months.

Selected Financial Information. Selected financial data for the centralized real estate business segment’s real estate loans were as follows:

At or for the Years Ended December 31,	2009	2008	2007
Centralized real estate net finance receivables originated and renewed: Amount (in thousands)	$        7,455	$   100,785	$  1,425,913
Number	37	458	6,094
Average size (to nearest dollar)	$    201,486	$   220,055	$     233,986
Centralized real estate net finance receivables net (transferred/sold) purchased: Amount (in thousands)	$(1,555,805)	$  (887,323)	$     100,929
Number	(8,338)	(4,290)	661
Centralized real estate net finance receivables: Amount (in thousands)	$ 6,414,674	$9,020,042	$10,909,376
Number	33,471	46,734	56,194
Average size (to nearest dollar)	$    191,649	$   193,008	$     194,138
Centralized real estate yield	5.78%	6.14%	6.21%
Centralized real estate charge-off ratio	2.16%	0.64%	0.19%
Centralized real estate delinquency ratio	8.40%	4.93%	1.93%

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Item 1.  Continued

Selected financial data for the centralized real estate business segment’s finance receivables held for sale were as follows:

At or for the Years Ended December 31,
(dollars in thousands)	2009	2008	2007
Finance receivables held for sale	$   491,058	$960,432	$   232,667
Origination of finance receivables held for sale	4,864	140,211	4,494,235
Sales and principal collections of finance receivables held for sale	1,933,423	352,455	5,386,970

During 2009, we transferred $1.6 billion of centralized real estate segment real estate loans from finance receivables to finance receivables held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future. In 2009, we sold $1.9 billion of centralized real estate segment finance receivables held for sale.

In December 2008, we transferred $972.5 million of real estate loans from finance receivables to finance receivables held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future.

See Note 2 of the Notes to Consolidated Financial Statements in Item 8 for our TDR policy, charge-off policy, and policies regarding delinquent accounts. If recovery efforts are feasible, we transfer charged-off accounts to our centralized charge-off recovery operation for ultimate disposition.

See Note 27 of the Notes to Consolidated Financial Statements in Item 8 for further information on the Company’s centralized real estate business segment.

Insurance Business Segment

The insurance business segment markets its products to eligible branch customers. We invest cash generated from operations in investment securities, commercial mortgage loans, investment real estate, and policy loans and also use it to pay dividends. The 90 employees of the insurance business segment have numerous underwriting, compliance, and service responsibilities for the insurance companies and also provide services to the branch and centralized real estate business segments.

Structure and Responsibilities. Merit is a life and health insurance company domiciled in Indiana and licensed in 46 states, the District of Columbia, and the U.S. Virgin Islands. Merit writes or reinsures credit life, credit accident and health, and non-credit insurance.

Yosemite is a property and casualty insurance company domiciled in Indiana and licensed in 46 states. Yosemite writes or reinsures credit-related property and casualty and credit involuntary unemployment insurance.

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Item 1.  Continued

Products and Services. Our credit life insurance policies insure the life of the borrower in an amount typically equal to the unpaid balance of the finance receivable and provide for payment in full to the lender of the finance receivable in the event of the borrower’s death. Our credit accident and health insurance policies provide, to the lender, payment of the installments on the finance receivable coming due during a period of the borrower’s disability due to illness or injury. Our credit-related property and casualty insurance policies are written to protect the lender’s interest in property pledged as collateral for the finance receivable. Our credit involuntary unemployment insurance policies provide, to the lender, payment of the installments on the finance receivable coming due during a period of the borrower’s involuntary unemployment. The borrower’s purchase of credit life, credit accident and health, credit-related property and casualty, or credit involuntary unemployment insurance is voluntary with the exception of lender-placed property damage coverage for property pledged as collateral. In these instances, our branch or centralized real estate business segment personnel obtain property damage coverage through Yosemite either on a direct or reinsured basis under the terms of the lending agreement if the borrower does not provide evidence of coverage with another insurance carrier. Non-credit insurance policies are primarily traditional life level term policies. The purchase of this coverage is also voluntary.

The ancillary products we offer are home security and auto security membership plans and home warranty service contracts of unaffiliated companies. These products are generally not considered to be insurance policies. Our insurance business segment has no risk of loss on these products. The unaffiliated companies providing these membership plans and service contracts are responsible for any required reimbursement to the customer on these products.

Customers usually either pay premiums for insurance products monthly with their finance receivable payment or finance the premiums and contract fees for ancillary products as part of the finance receivable, but they may pay the premiums and contract fees in cash to the insurer or financial services company. We do not offer single premium credit insurance products to our real estate loan customers.

Reinsurance. Merit and Yosemite enter into reinsurance agreements with other insurers, including non-subsidiary affiliated companies, for reinsurance of various non-credit life, group annuity, credit life, credit accident and health, credit-related property and casualty, and credit involuntary unemployment insurance where our insurance subsidiaries reinsure the risk of loss. The reserves for this business fluctuate over time and in some instances are subject to recapture by the insurer. Yosemite also reinsures risks associated with a closed block of excess and surplus lines dating back to the 1970s. At December 31, 2009, reserves on the books of Merit and Yosemite for reinsurance agreements totaled $84.1 million.

Investments. We invest cash generated by our insurance business segment primarily in bonds. We invest in, but are not limited to, the following:

·

bonds;

·

commercial mortgage loans;

·

short-term investments;

·

limited partnerships;

·

preferred stock;

·

investment real estate;

·

policy loans; and

·

common stock.

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Item 1.  Continued

Other AIG subsidiaries manage substantially all of our insurance business segment’s investments on our behalf, under the supervision and control of our investment committees.

Selected Financial Information. Selected financial data for the insurance business segment were as follows:

At or for the Years Ended December 31,
(dollars in thousands)	2009	2008	2007
Life insurance in force: Credit	$2,166,654	$2,666,569	$2,718,538
Non-credit	1,591,660	1,884,892	2,040,015
Total	$3,758,314	$4,551,461	$4,758,553
Investments: Investment securities	$   733,263	$   696,338	$1,422,004
Commercial mortgage loans	139,284	143,874	137,290
Policy loans	1,612	1,593	1,711
Investment real estate	48	58	69
Total	$   874,207	$   841,863	$1,561,074
Premiums earned	$   136,281	$   155,484	$   159,965
Premiums written	$   108,556	$   150,004	$   165,541
Insurance losses and loss adjustment expenses	$     61,410	$     69,992	$     65,878

See Note 27 of the Notes to Consolidated Financial Statements in Item 8 for further information on the Company’s insurance business segment.

CREDIT RISK MANAGEMENT

A risk in all consumer lending and retail sales financing transactions is the customer’s unwillingness or inability to repay obligations. Unwillingness to repay is usually evidenced in a consumer’s historical credit repayment record. Declines in residential real estate values also may reduce a customer’s willingness to repay his or her mortgage. An inability to repay usually results from lower income due to unemployment or underemployment, major medical expenses, or divorce. The risk of inability to repay intensifies when economic conditions deteriorate. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview and Outlook in Item 7 for significant economic conditions relevant to the Company. Occasionally, these events can be so economically severe that the customer files for bankruptcy. Because we evaluate credit applications with a view toward ability to repay, our customer’s inability to repay occurs after our initial credit evaluation and funding of an outstanding finance receivable.

In our branch business segment, we use credit risk scoring models at the time of credit application to assess our risk of the applicant’s unwillingness or inability to repay. We develop these models using numerous factors, including past customer credit repayment experience, and periodically revalidate them based on recent portfolio performance. We use different credit risk scoring models for different types of real estate loan, non-real estate loan, and retail sales finance products. We extend credit to those customers who fit our risk guidelines as determined by these models or, in some cases, manual

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Item 1.  Continued

underwriting. Price and size of the loan or retail sales finance transaction are in relation to the estimated credit risk we assume.

In our centralized real estate business segment, MorEquity originated real estate loans according to established underwriting criteria. We performed due diligence investigations on all portfolio acquisitions, including re-underwriting of the individual real estate loans by our own personnel.

See Note 17 of the Notes to Consolidated Financial Statements in Item 8 for a discussion of derivative counterparty credit risk management.

OPERATIONAL CONTROLS

We control and monitor our branch and centralized real estate business segments through a variety of methods including the following:

·

Our operational policies and procedures standardize various aspects of lending, collections, and business development processes.

·

Our branch finance receivable systems control amounts, rates, terms, and fees of our customers’ accounts; create loan documents specific to the state in which the branch operates; and control cash receipts and disbursements.

·

Our headquarters accounting personnel reconcile bank accounts, investigate discrepancies, and resolve differences.

·

Our credit risk management system reports are used by various personnel to compare branch lending and collection activities with predetermined parameters.

·

Our executive information system is available to headquarters and field operations management to review the status of activity through the close of business of the prior day.

·

Our branch field operations management structure is designed to control a large, decentralized organization with succeeding levels of supervision staffed with more experienced personnel.

·

Our field operations compensation plan aligns the operating activities and goals with corporate strategies by basing the incentive portion of field personnel compensation on profitability and credit quality.

·

AIG’s internal audit department audits the Company for operational policy and procedure and state law and regulation compliance.

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Item 1.  Continued

CENTRALIZED SUPPORT

We continually seek to identify functions that could be more effective if centralized to achieve reduced costs or free our branch lending specialists to service our customers and market our products. Our centralized operational functions support the following:

·

mail and telephone solicitations;

·

payment processing;

·

real estate loan approvals;

·

foreclosure and real estate owned processing;

·

collateral protection insurance tracking;

·

retail sales finance approvals;

·

revolving retail and private label processing and collections;

·

merchant services; and

·

charge-off recovery operations.

SOURCES OF FUNDS

We have funded our branch and centralized real estate business segments using the following sources:

·

cash flows from operations;

·

issuances of long-term debt in domestic and foreign markets;

·

short-term borrowings in the commercial paper market;

·

borrowings from banks under credit facilities;

·

sales of finance receivables;

·

securitizations; and

·

capital contributions from our parent.

Due to the significant disruption in the U.S. residential mortgage and credit markets, AIG’s liquidity issues, and our reduced liquidity, we borrowed all available commitments under our primary credit facilities during September 2008. In addition, AGFC borrowed funds from AIG Funding, Inc. (AIG Funding) under a demand note agreement. Until we have access to other reliable funding sources, we anticipate that our primary sources of funds to support operations and repay obligations will be finance receivable collections from operations and additional on-balance sheet securitizations and portfolio sales, while we continue to significantly limit our lending activities and focus on expense reductions.

As part of our efforts to support our liquidity from sources other than our traditional capital market sources, we completed an on-balance sheet securitization on July 30, 2009. The securitization included the sale of approximately $1.9 billion of our centralized real estate loans to a wholly-owned consolidated special purpose vehicle, Third Street Funding LLC (Third Street), that concurrently formed a trust to issue tranches of notes totaling $1.6 billion in initial principal balance of trust certificates to Third Street in exchange for the loans. In connection with the securitization, Third Street sold at a discount $1.2 billion of senior certificates with a 5.75% coupon to a third party. Third Street received cash proceeds, including accrued interest after the sales discount but before expenses, of $967.3 million, and retained subordinated and residual interest trust certificates.

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Item 1.  Continued

We have also sold certain finance receivables as an alternative funding source. During 2009, we transferred $1.8 billion of real estate loans from finance receivables to finance receivables held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future. In 2009, we sold $1.9 billion of finance receivables held for sale.

During March 2009, AIG caused AGFC to receive a $600.0 million capital contribution. Subject to insurance regulations, we also have the ability to receive dividends from our insurance subsidiaries. AGFC received $466.0 million of dividends from its insurance subsidiaries during 2008 and $200.0 million during first quarter 2009. The majority of these insurance subsidiary dividends exceeded insurance company ordinary dividend levels and required regulatory approval before they could be paid. There can be no assurance that any regulatory approvals for future dividends exceeding ordinary dividend levels will be obtained.

REGULATION

Branch and Centralized Real Estate

Various federal laws regulate our branch and centralized real estate business segments including:

·

the Equal Credit Opportunity Act (prohibits discrimination against creditworthy applicants);

·

the Fair Credit Reporting Act (governs the accuracy and use of credit bureau reports);

·

the Truth in Lending Act (governs disclosure of applicable charges and other finance receivable terms);

·

the Fair Housing Act (prohibits discrimination in housing lending);

·

the Real Estate Settlement Procedures Act and the Department of Housing and Urban Development’s Regulation X (regulate certain loans secured by real estate);

·

the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act);

·

the Federal Trade Commission Act; and

·

the Federal Reserve Board’s Regulations B, C, P, and Z.

In many states, federal law preempts state law restrictions on interest rates and points and fees for first lien residential mortgage loans. The federal Alternative Mortgage Transactions Parity Act preempts certain state law restrictions on variable rate loans in many states. We make residential mortgage loans under these and other federal laws. Federal laws also govern our practices and disclosures when dealing with consumer or customer information.

Various state laws also regulate our branch and centralized real estate segments. The degree and nature of such regulation vary from state to state. The laws under which we conduct a substantial amount of our business generally:

·

provide for state licensing of lenders and loan originators, including state laws adopted or amended to comply with licensing requirements of the federal SAFE Act;

·

impose maximum term, amount, interest rate, and other charge limitations;

·

regulate whether and under what circumstances we may offer insurance and other ancillary products in connection with a lending transaction; and

·

provide for consumer protection.

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Item 1.  Continued

On March 4, 2009, the United States Department of the Treasury issued uniform guidance for loan modifications to be utilized by the mortgage industry in connection with the Home Affordable Modification Program (HAMP). The HAMP is designed to assist certain eligible homeowners who are at risk of foreclosure by applying loan modification requirements in a stated order of succession until their monthly payments are lowered to a specified percentage target of their monthly gross income. The modification guidelines require the servicer to use a uniform loan modification process to provide a borrower with sustainable monthly payments. Effective April 5, 2010, a new program under the HAMP will provide certain incentives to borrowers, servicers, and investors to encourage short sales and deeds in lieu of foreclosure as a way to avoid the foreclosure process. The HAMP guidelines are likely to be subject to additional changes and requirements as the United States Department of the Treasury makes adjustments to the program.

As part of a Securities Purchase Agreement and a Securities Exchange Agreement between AIG and the United States Department of the Treasury dated April 17, 2009, AIG agreed that its subsidiaries that were eligible would join the HAMP and would comply with the HAMP guidelines. In third quarter 2009, MorEquity entered into a Commitment to Purchase Financial Instrument and Servicer Participation Agreement (the Agreement) with the Federal National Mortgage Association as financial agent for the United States Treasury, which provides for participation in the HAMP. MorEquity entered into the Agreement as the servicer with respect to our centralized real estate finance receivables, with an effective date of September 1, 2009, in order for MorEquity to prepare its systems to implement the HAMP. As of December 31, 2009, no HAMP modifications had been completed due to MorEquity’s recent entry into the HAMP and the mandatory three-month trial period. Our branch operations currently are planning to join the HAMP during the second quarter of 2010, after systems changes necessary to accommodate the HAMP modifications are implemented.

The U.S. government and a number of states, counties, and cities have enacted or may be considering, laws or rules that restrict the credit terms or other aspects of residential mortgage loans that are typically described as “high cost mortgage loans” or “higher-priced mortgage loans”. These laws or regulations, if adopted, may limit or restrict the terms of covered loan transactions and may also impose specific statutory liabilities in cases of non-compliance. Additionally, some of these laws may restrict other business activities of the Company and its affiliates.

Insurance

State authorities regulate and supervise our insurance business segment. The extent of such regulation varies by product and by state, but relates primarily to the following:

·

licensing;

·

conduct of business, including marketing practices;

·

periodic examination of the affairs of insurers;

·

form and content of required financial reports;

·

standards of solvency;

·

limitations on dividend payments and other related party transactions;

·

types of products offered;

·

approval of policy forms and premium rates;

·

permissible investments;

·

deposits of securities for the benefit of policyholders;

·

reserve requirements for unearned premiums, losses, and other purposes; and

·

claims processing.

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Item 1.  Continued

We operate in states which regulate credit insurance premium rates and premium refund calculations.

International Regulation

In the United Kingdom, the Financial Services Authority (FSA) regulates first mortgage residential real estate loans and insurance products. The FSA is an independent non-governmental body given statutory powers by the Financial Services and Markets Act 2000. The Consumer Credit Act 2006, which amends the Consumer Credit Act 1974, regulates second mortgage residential real estate loans and consumer loans.

COMPETITION

Branch and Centralized Real Estate

The consumer finance industry is competitive due to the large number of companies offering financial products and services and the sophistication of those products. We compete with other consumer finance companies as well as other types of financial institutions that offer similar products and services.

Insurance

Our insurance business segment supplements our branch business segment. We believe that our insurance companies’ abilities to market insurance products through our distribution systems provide a competitive advantage.

International Competition

Ocean competes with other credit intermediaries, many of which are national in scope rather than regional. These credit intermediaries compete on service and quality of products offered. Ocean also competes with various real estate loan lenders which advertise for direct lending to customers.

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Item 1A.  Risk Factors.

We face a variety of risks that are inherent in our business. Accordingly, you should carefully consider the following discussion of risks in addition to the other information regarding our business provided in this report. These risks are subject to contingencies which may or may not occur, and we are not able to express a view on the likelihood of any such contingency occurring. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our business or financial performance.

AIG’s agreements with the Federal Reserve Bank of New York include financial and other covenants that impose restrictions on the financial and business operations of AIG and its restricted subsidiaries, including AGFC.

In the second half of 2008, AIG experienced an unprecedented strain on liquidity. On September 22, 2008, AIG entered into a definitive credit agreement (as amended, the FRBNY Credit Agreement) in the form of a secured loan and a Guarantee and Pledge Agreement (the Pledge Agreement) with the Federal Reserve Bank of New York (FRBNY), which established the credit facility (the FRBNY Facility).

The FRBNY Credit Agreement requires AIG to maintain a minimum aggregate liquidity level. In addition, the FRBNY Credit Agreement restricts, among other things, the ability of AIG and its restricted subsidiaries, including AGFC, to make certain capital expenditures, incur additional indebtedness, incur liens, merge, consolidate, sell assets, enter into hedging transactions or pay dividends. These covenants could restrict our business and thereby adversely affect our results of operations. Pursuant to the FRBNY Credit Agreement and the Pledge Agreement, AIG Capital Corporation (AGFI’s immediate parent) pledged the common stock of AGFI to secure the loans made to AIG pursuant to the FRBNY Credit Agreement. We did not guarantee, nor were any of our assets pledged to secure, AIG’s obligations under the FRBNY Credit Agreement or the Pledge Agreement.

We have been adversely affected by AIG’s liquidity issues and our reduced liquidity.

We are affected by the financial stability (both actual and perceived) of AIG and its subsidiaries. Perceptions that AIG or its subsidiaries may not be able to meet their obligations can negatively affect us in many ways including a refusal of customers to continue to do business with us and requests by customers and other parties to terminate existing contractual relationships. In addition, our credit ratings have been negatively impacted by AIG’s liquidity issues and our reduced liquidity. Major ratings agencies have lowered our credit ratings to reflect the uncertainty regarding the availability of support from AIG and the increase in our operating risks because of weakening residential real estate markets, slower consumer spending, and higher consumer delinquency rates. Credit ratings by the major ratings agencies are an important factor in establishing our competitive position and affect the availability and cost of borrowings to us.

The decline in AIG’s common stock price and AIG’s asset disposition program may prevent us from retaining key personnel.

We rely upon the knowledge and talent of our employees to successfully conduct business. The decline in AIG’s common stock price has dramatically reduced the value of equity awards previously granted to key employees. In addition, the announcement of proposed AIG asset dispositions may result in competitors seeking to hire our key employees. A loss of key personnel could adversely affect our business.

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Item 1A.  Continued

The prolonged inability of AGFC to access traditional sources of liquidity may adversely affect its ability to fund our operational requirements and satisfy our financial obligations.

Our ability to access capital and credit was significantly affected by the significant disruption in the U.S. residential mortgage and credit markets, AIG’s liquidity issues, and the credit rating downgrades on our debt. Historically, we funded our operations and repaid our obligations using funds collected from our finance receivable portfolio and new debt issuances. Since the events of September 2008 and through the filing of this report, our traditional borrowing sources, including our ability to issue unsecured debt in the capital markets, have not been available, and management does not expect them to become available to us in the near future. Until we have access to other reliable funding sources, our sources of funding will likely continue to be far more limited than those that have been available to us during the past several years. Management has programs to limit liquidity risks based on pursuing alternative funding sources while significantly limiting our lending activities and focusing on expense reductions. While we anticipate, based on our estimates and after consideration of the risks and uncertainties described in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Going Concern Consideration in Item 7, that our existing and alternative sources of funds, including AIG’s expressed intention to support us, will be sufficient to meet our debt and other obligations, we cannot provide any assurance that this will be the case in the long term. Failure to gain access to adequate capital and credit sources could have a material adverse effect on our financial position, results of operations, and cash flows.

Our consolidated results of operations and financial condition have been adversely affected by economic conditions and other factors, including difficult conditions in the U.S. residential real estate and credit markets, and we do not expect these conditions to significantly improve in the near future.

Our actual consolidated results of operations or financial condition may differ from the consolidated results of operations or financial condition that we anticipate or that we achieved in the past. We believe that generally the factors affecting our consolidated results of operations or financial condition relate to:  general economic conditions, such as unemployment levels, housing markets, and interest rates; our ability to access the capital markets and successfully invest cash flows from our businesses; fluctuations in the demand for our products and services and the effectiveness of our distribution channels; and natural or other events and catastrophes that affect our customers, collateral, and branches or other operating facilities.

Since 2007, the U.S. residential real estate markets and credit markets experienced significant disruption as housing prices generally declined, unemployment increased, consumer delinquencies increased, and credit availability contracted and became more expensive for consumers and financial institutions. Decreased property values that accompany a market downturn can reduce a borrower’s ability to refinance his or her mortgage, as well as increase the loan-to-value (LTV) ratios of our real estate loans. Defaults by borrowers on real estate loans could cause losses to us, could lead to increased claims relating to non-prime or sub-prime mortgage origination practices, and could encourage increased or changing regulation. Any increased or changing regulation could limit the availability of, or require changes in, the terms of certain real estate loan products and could also require us to devote additional resources to comply with that regulation.

The market developments discussed above are reflected in our negative operating results and have also resulted in the collapse or closing of several prominent financial institutions. The continuation or worsening of these conditions could further adversely affect our business and results of operations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements in Item 7 for a more detailed list of factors which could cause our consolidated

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Item 1A.  Continued

results of operations or financial condition to differ, possibly materially, from the consolidated results of operations or financial condition that we anticipate.

AIG’s ability to continue as a going concern may adversely affect our business and results of operations.

In connection with the preparation of its Annual Report on Form 10-K for the fiscal year ended December 31, 2009, AIG management assessed AIG’s ability to continue as a going concern. Based on the U.S. government’s continuing commitment to AIG, AIG’s completed transactions with the FRBNY, and AIG management’s plans to stabilize its businesses and dispose of certain of its assets, and after consideration of the risks and uncertainties of such plans, AIG management believes that AIG will have adequate liquidity to finance and operate its businesses, execute its asset disposition plan, and repay its obligations for at least the next twelve months.

It is possible that the actual outcome of one or more of AIG management’s plans could be materially different, or that one or more of AIG management’s significant judgments or estimates about the potential effects of the above-mentioned risks and uncertainties could prove to be materially incorrect or that AIG’s transactions with the FRBNY will fail to achieve their desired objectives. If one or more of these possible outcomes occurs, AIG may need additional U.S. government support to meet its obligations as they become due. Without additional support from the U.S. government, in the future there could be substantial doubt about AIG’s ability to continue as a going concern. If AIG is not able to meet its obligations as they become due, it will have a negative impact on our business and results of operations and on our ability to borrow funds from AIG, to make our debt payments, and to issue new debt.

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Item 1A.  Continued

The assessment of our liquidity is based upon significant judgments or estimates that could prove to be materially incorrect.

In assessing our current financial position and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:

·

the ability and intent of AIG to provide funding to us;

·

declining financial flexibility and reduced income as we use more of our higher performing assets for on-balance sheet securitizations and portfolio sales;

·

reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios;

·

our ability to complete on favorable terms additional on-balance sheet securitizations and portfolio sales and the costs associated with these alternative funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which will affect profitability;

·

the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates;

·

our ability to comply with our debt covenants, including covenants requiring our net worth to be maintained at specified levels and certain tangible equity ratios to be met;

·

access to unsecured debt markets and other sources of funding, and the potential increased cost of alternative funding sources as compared to historic borrowing rates;

·

adverse credit ratings actions on our debt;

·

constraints on our business resulting from the FRBNY Credit Agreement and other AIG agreements, including limitations on our ability to pursue (and retain proceeds from) certain funding sources, such as additional on-balance sheet securitizations and portfolio sales, without AIG receiving prior consent from the FRBNY;

·

the potential for additional unforeseen cash demands or accelerations of obligations;

·

reduced income due to loan modifications where the borrower’s interest rate is reduced, principal payments are deferred, or other concessions are made;

·

the potential for declines in bond and equity markets;

·

the potential effect on us if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans;

·

the potential loss of key personnel; and

·

the potential adverse effect on us relating to intercompany transactions with AIG, including derivatives and intercompany borrowings, if AIG’s liquidity position deteriorates or if AIG is not able to continue as a going concern.

After consideration of the above factors, including AIG’s expressed intention to support us, as expressed in AIG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, based on our estimates and taking into account the risks and uncertainties of such plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations for at least the next twelve months.

It is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates about the potential effects of the risks and uncertainties could prove to be materially incorrect.

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Item 1A.  Continued

Certain of our debt agreements contain terms that could result in acceleration of payments.

Our anticipated liquidity requirements are based upon our continued compliance with our existing debt agreements. An event of default or declaration of acceleration under certain of our borrowing agreements could also result in an event of default and declaration of acceleration under certain of our other borrowing agreements, as well as for AIG under the FRBNY Credit Agreement. Such acceleration of debt repayments would have a material adverse effect on our liquidity and our ability to continue as a going concern.

AIG may divest the Company, which may adversely affect our results of operations.

Since September 2008, AIG has been working to execute an orderly asset disposition plan, protect and enhance the value of its key businesses, and position these franchises for the future. AIG continually reassesses this plan to maximize value while maintaining flexibility in its liquidity and capital, and expects to accomplish this over a longer time frame than originally contemplated. Certain of our debt agreements require AIG majority ownership and would be subject to prepayment or renegotiation if the Company is sold.

We are a party to various lawsuits and proceedings which, if resolved in a manner adverse to us, could materially adversely affect our consolidated results of operations or financial condition.

We are a party to various legal proceedings, including certain purported class action claims, arising in the ordinary course of our business. Some of these proceedings are pending in jurisdictions that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. The continued occurrences of large damage awards in general in the United States, including, in some jurisdictions, large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs, create the potential for an unpredictable result in any given proceeding. A large judgment that is adverse to us could have a material adverse effect on our consolidated results of operations or financial condition. See Legal Proceedings in Item 3 for more information.

We are subject to extensive regulation in the jurisdictions in which we conduct our business.

Our branch and centralized real estate business segments are subject to various U.S. state and federal laws and regulations, and various U.S. state authorities regulate and supervise our insurance business segment. The laws under which a substantial amount of our branch and centralized real estate businesses are conducted generally: provide for state licensing of lenders and, in some cases, licensing of employees involved in real estate lending; impose maximum terms, amounts, interest rates, and other charges regarding loans; regulate whether and under what circumstances insurance and other ancillary products may be offered in connection with a lending transaction; and provide for consumer protection. The extent of state regulation of our insurance business varies by product and by jurisdiction, but relates primarily to the following: licensing; conduct of business; periodic examination of the affairs of insurers; form and content of required financial reports; standards of solvency; limitations on dividend payments and other related party transactions; types of products offered; approval of policy forms and premium rates; permissible investments; deposits of securities for the benefit of policyholders; reserve requirements for unearned premiums, losses, and other purposes; and claims processing. We are also subject to various laws and regulations relating to our subsidiaries in the United Kingdom. Changes in laws or regulations affecting us could impact our ability to conduct business or the manner in which we conduct business and, accordingly, could have a material adverse effect on our consolidated results of operations or financial condition. See Regulation in Item 1 for a discussion of the regulation of our business segments.

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Item 1B.  Unresolved Staff Comments.

None.

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Item 2.  Properties.

We generally conduct branch office operations, branch office administration, other operations, and operational support in leased premises. Lease terms generally range from three to five years. Ocean leases approximately one-half of the space it currently occupies for office facilities under leases that expire in 2018. Ocean also leases land on which it owns office facilities in Tamworth, England under a 999 year land lease that expires in 3001. As a result of our decision to cease WFI’s wholesale operations effective June 17, 2008, we vacated WFI’s decentralized wholesale origination office facilities and the majority of the WFI headquarters facility in 2008.

Our investment in real estate and tangible property is not significant in relation to our total assets due to the nature of our business. AGFC subsidiaries own two branch offices in Riverside and Barstow, California, two branch offices in Hato Rey and Isabela, Puerto Rico, one branch office in Terre Haute, Indiana, and eight buildings in Evansville, Indiana. The Evansville buildings house our administrative offices, our centralized services and support operations, and one of our branch offices.

Item 3.  Legal Proceedings.

AGFC and certain of its subsidiaries are parties to various legal proceedings, including certain purported class action claims, arising in the ordinary course of business. Some of these proceedings are pending in jurisdictions that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts, if any, that will ultimately be paid arising from these legal proceedings will not have a material adverse effect on our consolidated results of operations or financial position. However, the continued occurrences of large damage awards in general in the United States, including, in some jurisdictions, large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs, create the potential for an unpredictable result in any given proceeding.

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PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

No trading market exists for AGFC’s common stock. AGFC is an indirect wholly owned subsidiary of AIG. AGFC did not pay any cash dividends on its common stock in 2008 or 2009.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity in Item 7, and Note 22 of the Notes to Consolidated Financial Statements in Item 8, regarding limitations on the ability of AGFC and its subsidiaries to pay dividends.

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Item 6.  Selected Financial Data.

You should read the following selected financial data in conjunction with the consolidated financial statements and related notes in Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.

At or for the Years Ended December 31,
(dollars in thousands)	2009	2008	2007	2006	2005
Total revenues	$  2,216,836	$  2,734,266	$  2,737,435	$  2,890,774	$  2,898,512
Net (loss) income (a)	$    (473,865)	$ (1,307,234)	$       90,130	$     430,563	$     514,850
Total assets	$22,587,597	$26,078,492	$30,124,244	$27,212,402	$25,659,878
Long-term debt	$17,475,107	$20,482,271	$22,036,616	$18,585,636	$18,092,860
Average net receivables	$21,011,867	$25,306,685	$24,127,084	$23,252,015	$22,043,734
Average borrowings	$20,951,489	$23,909,940	$23,030,478	$22,257,314	$20,306,789
Yield	10.19%	10.22%	10.46%	10.44%	10.27%
Interest expense rate	5.01%	5.07%	5.22%	5.06%	4.26%
Interest spread	5.18%	5.15%	5.24%	5.38%	6.01%
Operating expense ratio (b)	3.47%	5.18%	3.99%	3.67%	3.76%
Allowance ratio	8.32%	4.72%	2.40%	2.04%	2.25%
Charge-off ratio	4.00%	2.12%	1.17%	0.97%	1.18%
Charge-off coverage	1.78x	2.10x	2.10x	2.14x	1.99x
Delinquency ratio	7.39%	5.07%	2.89%	2.09%	1.97%
Return on average assets	(1.94)%	(4.55)%	0.32%	1.63%	2.11%
Return on average equity	(19.89)%	(41.81)%	2.79%	13.25%	17.04%
Ratio of earnings to fixed charges (c)	N/A	N/A	1.09x	1.58x	1.92x
Adjusted tangible leverage	7.31x	9.23x	8.11x	7.59x	7.43x
Debt to equity ratio	8.22x	11.08x	7.93x	6.98x	6.79x

(a)

We exclude per share information because AGFI owns all of AGFC’s common stock.

(b)

2008 operating expenses include significant goodwill and other intangible assets impairment charges.

(c)

Not applicable for 2009 and 2008. Earnings were inadequate to cover total fixed charges by $888.6 million in 2009 and $924.7 million in 2008.

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Item 6.  Continued

Glossary

Adjusted tangible leverage	total debt less 75% of hybrid debt divided by the sum of tangible equity and 75% of hybrid debt
Allowance ratio	allowance for finance receivable losses as a percentage of net finance receivables
Average borrowings	average of debt for each day in the period
Average net receivables	average of net finance receivables at the beginning and end of each month in the period
Charge-off coverage	allowance for finance receivable losses to net charge-offs
Charge-off ratio	net charge-offs as a percentage of the average of net finance receivables at the beginning of each month in the period
Debt to equity ratio	total debt divided by total equity
Delinquency ratio	gross finance receivables 60 days or more past due (customer has not made 3 or more contractual payments) as a percentage of gross finance receivables
Hybrid debt	capital securities classified as debt for accounting purposes but due to their terms are afforded, at least in part, equity capital treatment in the calculation of effective leverage by rating agencies
Interest expense rate	interest expense as a percentage of average borrowings
Interest spread	yield less interest expense rate
Operating expense ratio	total operating expenses as a percentage of average net receivables
Ratio of earnings to fixed charges	see Exhibit 12 for calculation
Return on average assets	net (loss) income as a percentage of the average of total assets at the beginning and end of each month in the period
Return on average equity	net (loss) income as a percentage of the average of total equity at the beginning and end of each month in the period
Tangible equity	total equity less accumulated other comprehensive income or loss
Yield	finance charges as a percentage of average net receivables

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and related notes in Item 8. With this discussion and analysis, we intend to enhance the reader’s understanding of our consolidated financial statements in general and more specifically our liquidity and capital resources, our asset quality, and the results of our operations.

An index to our discussion and analysis follows:

Topic	Page
Forward-Looking Statements	30
Going Concern Consideration	31
Overview and Outlook	34
Basis of Reporting	35
Critical Accounting Estimates	37
Critical Accounting Policies	41
Off-Balance Sheet Arrangements	41
Fair Value Measurements	42
Selected Segment Information	43
Capital Resources and Liquidity	49
Analysis of Financial Condition	55
Analysis of Operating Results	61
Regulation and Other	79

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Item 7.  Continued

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and our other publicly available documents may include, and the Company’s officers and representatives may from time to time make, statements which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only our belief regarding future events, many of which are inherently uncertain and outside of our control. These statements may address, among other things, our strategy for growth, product development, regulatory approvals, market position, financial results and reserves. Our actual results and financial condition may differ from the anticipated results and financial condition indicated in these forward-looking statements. The important factors, many of which are outside of our control, that could cause our actual results to differ, possibly materially, include, but are not limited to, the following:

·

the ability and intent of AIG to provide funding to us, including AIG’s ability to continue as a going concern;

·

lack of access to the capital markets or the sufficiency of our current sources of funds to satisfy our cash flow requirements;

·

changes in the rate at which we can collect or potentially sell our finance receivable portfolio;

·

the impact of our on-balance sheet securitization;

·

our ability to comply with our debt covenants;

·

changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we can access capital and also invest cash flows from the insurance business segment;

·

changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels, and the formation of business combinations among our competitors;

·

the effectiveness of our credit risk scoring models in assessing the risk of customer unwillingness or inability to repay;

·

shifts in collateral values, contractual delinquencies, and credit losses;

·

adverse shifts in residential real estate values;

·

levels of unemployment and personal bankruptcies;

·

adverse credit ratings actions on our debt;

·

constraints on our business resulting from the FRBNY Credit Agreement, including on our ability to pursue (and retain proceeds from) certain funding sources without AIG receiving prior consent from the FRBNY;

·

changes in laws, regulations, or regulatory policies and practices that affect our ability to conduct business or the manner in which we conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products, as well as changes that may result from increased regulatory scrutiny of the sub-prime lending industry;

·

the effects of our participation in the HAMP;

·

the costs and effects of any litigation or governmental inquiries or investigations involving us, including those that are determined adversely to us;

·

changes in accounting standards or tax policies and practices and the application of such new policies and practices to the manner in which we conduct business;

·

our ability to mitigate any adverse effects that may occur as a result of AIG’s intention to explore divestiture opportunities for certain of its businesses and assets, including us;

·

our ability to maintain sufficient capital levels in our regulated and unregulated subsidiaries;

·

changes in our ability to attract and retain employees or key executives to support our businesses;

·

natural or accidental events such as earthquakes, hurricanes, tornadoes, fires, or floods affecting our customers, collateral, or branches or other operating facilities; and

·

war, acts of terrorism, riots, civil disruption, pandemics, or other events disrupting business or commerce.

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Item 7.  Continued

We also direct readers to other risks and uncertainties discussed in Item 1A in this report and in other documents we file with the SEC. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future events or otherwise.

GOING CONCERN CONSIDERATION

Liquidity of the Company and Support from AIG

Since the events of September 2008 and through the filing of this report, our traditional borrowing sources, including our ability to issue unsecured debt in the capital markets, have remained unavailable, and management does not expect them to become available to us in the near future. Due to a combination of the challenges facing AIG, our dependency on AIG, our liquidity concerns, our results of operations, downgrades of our credit ratings by the rating agencies, and the turmoil in the capital markets, we currently have no access to the unsecured debt market, and the maximum amount of our credit facilities has been drawn. We cannot determine when access to our traditional borrowing sources will become available to us again.

In light of AIG’s current financial situation, AIG has been dependent on the FRBNY Facility provided by the FRBNY under the FRBNY Credit Agreement between AIG and the FRBNY. As a result of AIG entering into the FRBNY Facility and the Pledge Agreement, we, as a subsidiary of AIG, are subject to certain covenants under the FRBNY Credit Agreement. These covenants, among other factors, may limit or restrict our ability to: incur debt, encumber or sell assets, make equity or debt investments in other parties, and pay dividends and distributions.

On March 2, 2009, the U.S. government issued a statement describing its commitment to continue to work with AIG to maintain its ability to meet its obligations as they become due.

In connection with the preparation of AIG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, AIG management assessed AIG’s ability to continue as a going concern. Based on the U.S. government’s continuing commitment to AIG, AIG’s completed transactions with the FRBNY, and AIG management’s plans to stabilize its businesses and dispose of certain of its assets, and after consideration of the risks and uncertainties of such plans, AIG management believes that AIG will have adequate liquidity to finance and operate its businesses, execute its asset disposition plan, and repay its obligations for at least the next twelve months.

It is possible that the actual outcome of one or more of AIG management’s plans could be materially different, or that one or more of AIG management’s significant judgments or estimates about the potential effects of the above-mentioned risks and uncertainties could prove to be materially incorrect or that AIG’s transactions with the FRBNY will fail to achieve their desired objectives. If one or more of these possible outcomes occurs, AIG may need additional U.S. government support to meet its obligations as they become due. Without additional support from the U.S. government, in the future there could be substantial doubt about AIG’s ability to continue as a going concern. If AIG is not able to meet its obligations as they become due, it will have a negative impact on our business and results of operations and on our ability to borrow funds from AIG, to make our debt payments, and to issue new debt.

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Item 7.  Continued

Progress on Management’s Plan for Stabilization of the Company and Repayment of Our Obligations as They Become Due

In addition to finance receivable collections, management is exploring additional initiatives to preserve our liquidity and capital and to meet our financial and operating obligations. These initiatives include additional on-balance sheet securitizations, portfolio sales, expense reductions, and branch closures, while continuing to limit our new lending. The exact nature and magnitude of any additional measures will be driven by our available resources and needs, prevailing market conditions, and the results of our operations. During 2009, we closed 196 branch offices, reduced retail sales financing operations, reduced our number of employees by approximately 1,400 through reductions in force and attrition, and sold $1.9 billion of finance receivables held for sale. In July 2009, we securitized $1.9 billion of real estate loans and received $967.3 million in cash proceeds including accrued interest after the sales discount but before expenses. If our sources of liquidity are not sufficient to meet our contractual obligations as they become due over the next twelve months, we will seek additional funding from AIG, which funding would be subject to AIG receiving the consent of the FRBNY. AIG intends to support our liquidity needs and compliance with all debt covenants and acceleration clauses contained within our debt agreements, or any other significant agreements which could have a material adverse impact on us, through the earlier of a sale of us (or a sale of a portion of us sufficient to deconsolidate us from AIG) or February 28, 2011. In addition, AIG is currently seeking restructuring opportunities for us.

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Item 7.  Continued

Management’s Assessment and Conclusion

In assessing our current financial position and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:

·

the ability and intent of AIG to provide funding to us;

·

declining financial flexibility and reduced income as we use more of our higher performing assets for on-balance sheet securitizations and portfolio sales;

·

reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios;

·

our ability to complete on favorable terms additional on-balance sheet securitizations and portfolio sales and the costs associated with these alternative funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which will affect profitability;

·

the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates;

·

our ability to comply with our debt covenants, including covenants requiring our net worth to be maintained at specified levels and certain tangible equity ratios to be met;

·

access to unsecured debt markets and other sources of funding, and the potential increased cost of alternative funding sources as compared to historic borrowing rates;

·

adverse credit ratings actions on our debt;

·

constraints on our business resulting from the FRBNY Credit Agreement and other AIG agreements, including limitations on our ability to pursue (and retain proceeds from) certain funding sources, such as additional on-balance sheet securitizations and portfolio sales, without AIG receiving prior consent from the FRBNY;

·

the potential for additional unforeseen cash demands or accelerations of obligations;

·

reduced income due to loan modifications where the borrower’s interest rate is reduced, principal payments are deferred, or other concessions are made;

·

the potential for declines in bond and equity markets;

·

the potential effect on us if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans;

·

the potential loss of key personnel; and

·

the potential adverse effect on us relating to intercompany transactions with AIG, including derivatives and intercompany borrowings, if AIG’s liquidity position deteriorates or if AIG is not able to continue as a going concern.

After consideration of the above factors, including AIG’s expressed intention to support us, as expressed in AIG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, based on our estimates and taking into account the risks and uncertainties of such plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations for at least the next twelve months.

It is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates about the potential effects of the risks and uncertainties could prove to be materially incorrect.

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Item 7.  Continued

OVERVIEW AND OUTLOOK

2009 Overview

The U.S. economy was declared to be in a recession during 2008. The recession continued into 2009 and by technical measures ended during the second half of 2009. Despite technically emerging from recession, housing prices did not significantly rebound and unemployment remained high at approximately 10%. Rising personal delinquencies and bankruptcies continued throughout the year.

On March 2, 2009, AIG, the FRBNY, and the United States Department of the Treasury announced various restructuring transactions involving AIG, and the U.S. government issued a statement describing its commitment to continue to work with AIG to maintain its ability to meet its obligations as they become due.

During 2009, we were unable to access our traditional capital market funding sources. Federal actions and programs to support market liquidity provided lower benchmark interest rates and direct funding benefits for many financial institutions, primarily banks. We were not eligible to directly benefit from these programs. The continued limited availability of unsecured wholesale funding for non-bank financial companies and the specific AIG liquidity issues resulted in further credit ratings downgrades on AIG’s debt as well as our debt.

To maintain the franchise value and support our liquidity, we significantly limited lending, consolidated certain branch operations, reduced operating expenses, and pursued an on-balance sheet securitization and portfolio sales. During 2009, we closed 196 branch offices, reduced retail sales financing operations, reduced our number of employees by approximately 1,400, sold $1.9 billion of finance receivables held for sale, and received cash proceeds of $967.3 million through a securitization of real estate loans. Additionally, AIG caused AGFC to receive a $600 million capital contribution during 2009 to support capital maintenance requirements.

2010 Outlook

Many economists predict that the U.S. economic recovery from the 2008-2009 recession will not be particularly strong, with a 2010 real gross domestic product growth of approximately 3%, continued weak labor markets, and a limited housing recovery that will inhibit personal income and consumption.

We anticipate continuing to limit our new lending and to reduce our total finance receivables during 2010. While we believe our limited new lending will represent some of our highest quality originations over recent years, additional increases in overall delinquency and net charge-off percentages in some products are possible due to the continuing U.S. economic stresses and our net declining finance receivable balances. Writedowns relating to foreclosures on real estate loans could increase as our remaining mortgage portfolio continues to mature and the housing markets continue to struggle. Our interest margin is likely to decline due to declining revenues from a net reduction in finance receivables and rising interest expense from refinancing maturing debt through higher cost securitization financing. We will continue our focus on reducing operating expenses in conjunction with our anticipated reduction of finance receivables.

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Until there is less uncertainty regarding our need for, and access to, a financially stronger ultimate parent, we will likely continue to be prevented from accessing our traditional capital market sources. We will rely upon funding generated from operations, available alternative funding sources such as additional on-balance sheet securitizations and portfolio sales, and, to the extent needed and available, additional funding from AIG. We anticipate that our sources of funding will be adequate to fund our obligations and operations through 2010. However, there can be no assurance as to the sufficiency or availability of these funds. Failure to access these sources of funding could have a material adverse effect on our financial position, results of operations, and cash flows.

BASIS OF REPORTING

We prepared our consolidated financial statements using accounting principles generally accepted in the United States of America (GAAP). The statements include the accounts of AGFC and its subsidiaries, all of which are wholly owned. We eliminated all material intercompany accounts and transactions. We made judgments, estimates, and assumptions that affect amounts reported in our financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from our estimates.

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets nor relating to the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

At December 31, 2009, 74% of our assets were net finance receivables less allowance for finance receivable losses. Finance charge revenue is a function of the amount of average net receivables and the yield on those average net receivables. GAAP requires that we recognize finance charges as revenue on the accrual basis using the interest method.

At December 31, 2009, 97% of our liabilities were debt issued primarily to support our net finance receivables. Interest expense is a function of the amount of average borrowings and the interest expense rate on those average borrowings. GAAP requires that we recognize interest on borrowings as expense on the accrual basis using the interest method. Interest expense includes the effect of our swap agreements that qualify for hedge accounting under GAAP.

Insurance revenues consist primarily of insurance premiums resulting from our branch customers purchasing various credit and non-credit insurance policies. Insurance premium revenue is a function of the premium amounts and policy terms. GAAP dictates the methods of insurance premium revenue recognition. Our credit life premiums are recognized as revenue using the rule of 78’s method for decreasing credit life and the pro rata method for level credit life. Our credit accident and health premiums are recognized as revenue using the mean of the rule of 78’s method and the pro rata method. Our credit property and casualty and credit involuntary unemployment premiums are recognized as revenue using the pro rata method. Our non-credit premiums are recognized as revenue when collected. Insurance revenues also include commissions received from selling third party insurers’ products, primarily through the operations of Ocean, which we acquired in January 2007.

We invest cash generated by our insurance business segment primarily in investment securities, which were 3% of our assets at December 31, 2009, and to lesser extents in commercial mortgage loans, investment real estate, and policy loans, which we include in other assets. We report the resulting revenue in investment revenue. GAAP requires that we recognize interest on these investments as revenue on the accrual basis.

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Net service fees from affiliates include amounts we charged AIG Bank for services under our agreements for AIG Bank’s origination and sale of non-conforming residential real estate loans. (Previously, WFI and MorEquity maintained agreements with AIG Bank whereby WFI and MorEquity provided services for AIG Bank’s origination and sale of such real estate loans.) We assumed financial responsibility for recourse exposure pertaining to these loans. We netted the provisions for the related recourse in net service fee revenue. Net service fees from affiliates also include amounts we charge AIG Bank for certain services under our agreement for AIG Bank’s origination of private label services. As required by GAAP, we recognize these fees as revenue when we provide the services.

Loan brokerage fees revenues (included in other revenues), through the operations of Ocean, consist of commissions from lenders for loans brokered to them, fees from customers to process their loans, and fees from other credit originators for customer referrals. We recognize these commissions and fees in loan brokerage fees revenues when earned.

Mortgage banking revenues (included in other revenues) consist of net gain or loss on sale of finance receivables held for sale, provision for warranty reserve, and interest income on finance receivables held for sale. GAAP requires that we recognize the difference between the sales price we receive when we sell a finance receivable held for sale and the carrying value of that loan as a gain or loss at the time of the sale. We carry finance receivables held for sale at the lower of cost or fair value. We recognize net unrealized losses through a valuation allowance and record changes in the valuation allowance in other revenues. We also charge provisions for recourse obligations to provision for warranty reserve to maintain the reserves for recourse obligations at appropriate levels. We recognize interest as revenue on the accrual basis using the interest method during the period we hold a real estate loan held for sale.

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CRITICAL ACCOUNTING ESTIMATES

Our Ability to Continue as a Going Concern

When assessing our ability to continue as a going concern, management must make judgments and estimates about the following:

·

the ability and intent of AIG to provide funding to us;

·

declining financial flexibility and reduced income as we use more of our higher performing assets for on-balance sheet securitizations and portfolio sales;

·

reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios;

·

our ability to complete on favorable terms additional on-balance sheet securitizations and portfolio sales and the costs associated with these alternative funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which will affect profitability;

·

the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates;

·

our ability to comply with our debt covenants, including covenants requiring our net worth to be maintained at specified levels and certain tangible equity ratios to be met;

·

access to unsecured debt markets and other sources of funding, and the potential increased cost of alternative funding sources as compared to historic borrowing rates;

·

adverse credit ratings actions on our debt;

·

constraints on our business resulting from the FRBNY Credit Agreement and other AIG agreements, including limitations on our ability to pursue (and retain proceeds from) certain funding sources, such as additional on-balance sheet securitizations and portfolio sales, without AIG receiving prior consent from the FRBNY;

·

the potential for additional unforeseen cash demands or accelerations of obligations;

·

reduced income due to loan modifications where the borrower’s interest rate is reduced, principal payments are deferred, or other concessions are made;

·

the potential for declines in bond and equity markets;

·

the potential effect on us if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans;

·

the potential loss of key personnel; and

·

the potential adverse effect on us relating to intercompany transactions with AIG, including derivatives and intercompany borrowings, if AIG’s liquidity position deteriorates or if AIG is not able to continue as a going concern.

These factors, individually and collectively, will have a significant effect on our ability to generate sufficient cash to repay indebtedness as it becomes due and profitably operate our business.

Allowance for Finance Receivable Losses

We consider our most critical accounting estimate to be the establishment of an adequate allowance for finance receivable losses. At December 31, 2009, our finance receivable portfolio consisted of $18.2 billion of net finance receivables due from 1.4 million customer accounts. These accounts were originated or purchased and are serviced primarily by our branch or centralized real estate business segments.

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To manage our exposure to credit losses, we use credit risk scoring models for finance receivables that we originate through our branch business segment. In our centralized real estate business segment, MorEquity originated real estate loans according to our established underwriting criteria. We performed due diligence investigations on all portfolio acquisitions. We utilize standard collection procedures supplemented with data processing systems to aid branch, centralized support operations, and centralized real estate personnel in their finance receivable collection processes.

Despite our efforts to avoid losses on our finance receivables, personal circumstances and national, regional, and local economic situations affect our customers’ willingness or abilities to repay their obligations. Economic situations include adverse shifts in residential real estate values, which may reduce a customer’s willingness to repay his or her mortgage. Personal circumstances include lower income due to unemployment or underemployment, major medical expenses, and divorce. Occasionally, these events can be so economically severe that the customer files for bankruptcy.

Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly by real estate loans, non-real estate loans, and retail sales finance. Within our three main finance receivable types are sub-portfolios, each consisting of a large number of relatively small, homogenous accounts. We evaluate these sub-portfolios for impairment as groups. None of our accounts are large enough to warrant individual evaluation for impairment. Our Credit Strategy and Policy Committee considers numerous internal and external factors in estimating losses inherent in our finance receivable portfolio, including the following:

·

prior finance receivable loss and delinquency experience;

·

the composition of our finance receivable portfolio; and

·

current economic conditions, including the levels of unemployment and personal bankruptcies.

Our Credit Strategy and Policy Committee uses our delinquency ratio, allowance ratio, charge-off ratio, and charge-off coverage to evaluate prior finance receivable loss and delinquency experience. Each ratio is useful, but each has its limitations.

We use migration analysis and the Monte Carlo technique as the principal tools to determine the appropriate amount of allowance for finance receivable losses. Both techniques are historically-based statistical techniques that attempt to predict the future amount of losses for existing pools of finance receivables. We validate the results of the models through the review of historical results by the Credit Strategy and Policy Committee.

Our migration analysis utilizes a rolling 12 months of historical data that is updated quarterly. The primary inputs for our migration analysis are (a) historical finance receivable balances, (b) historical delinquency, charge-off, recovery and repayment amounts, and (c) the current finance receivable balances in each stage of delinquency (i.e., current, greater than 30 days past due, greater than 60 days past due, etc.). The primary assumptions used in our migration analysis are the weighting of historical data and our estimate of the loss emergence period for the portfolio.

The Monte Carlo technique currently utilizes historical loan level data from January 2003 through the mid month of the current quarter and is updated quarterly. The primary inputs for Monte Carlo are the historical finance receivable accounts, the variability in account migration through the various stages of delinquency (i.e., the probability of a loan moving from 30 days past due to 60 days past due in any given month), and average charge-off amounts. The primary assumptions used in our Monte Carlo analysis are the loss emergence period for the portfolio and average charge-off amounts. The program currently employs a discrete method of incorporating economic conditions with a set of matrices, each of which

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represents a historical month of data. Each matrix is therefore representative of certain seasonal and secular economic conditions, and the probability of selecting a given matrix during the simulation increases as the simulated economic conditions approach those represented by the matrix.

We consider the current and historical levels of nonaccrual loans in our analysis of the allowance by factoring the delinquency status of loans into both the migration analysis and Monte Carlo technique. We classify loans as nonaccrual based on our accounting policy, which is based on the delinquency status of the loan. As delinquency is a primary input into our migration analysis and Monte Carlo scenarios, we inherently consider nonaccrual loans in our estimate of the allowance for finance receivable losses. See Note 5 of the Notes to Consolidated Financial Statements in Item 8 for further information on our nonaccrual loans and finance receivables more than 90 days past due, as well as troubled debt restructured finance receivables at December 31, 2009.

The allowance for finance receivable losses related to our TDRs is calculated in homogeneous aggregated pools of impaired loans that have common risk characteristics. We establish our allowance for finance receivable losses related to our TDRs by calculating the present value (discounted at the loan’s effective interest rate prior to modification) of all expected cash flows less the recorded investment in the aggregated pool. We use certain assumptions to estimate the expected cash flows from our TDRs. The primary assumptions for our model are prepayment speeds, default rates, and severity rates.

Changes in housing prices and the related impact on homeowners’ equity is one factor that influences borrower decisions regarding whether to continue making payments on their real estate loan. The delinquency and losses resulting from these borrower decisions are incorporated in our allowance models as described above.

We generally obtain a current appraisal before closing a loan secured by real estate. In addition, when we complete foreclosure proceedings on a real estate loan, we obtain an unrelated party’s valuation of the property, which is used to establish the value of the real estate owned.

We utilize the migration and Monte Carlo results for the Company’s finance receivable portfolio to arrive at an estimate of inherent losses for the finance receivables existing at the time of analysis. We adjust the amounts determined by migration and Monte Carlo for management’s estimate of the effects of model imprecision, recent changes to our underwriting criteria, portfolio seasoning, and current economic conditions, including the levels of unemployment and personal bankruptcies. This adjustment resulted in a $25.7 million increase to the amount determined by migration and Monte Carlo at December 31, 2009, compared to a $57.7 million increase at December 31, 2008.

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We maintain our allowance for finance receivable losses at our estimated “most predictive” outcome of our adjusted migration and Monte Carlo scenarios. The “most predictive” outcome is the scenario within the migration and Monte Carlo scenario ranges that the Credit Strategy and Policy Committee has identified to be a better estimate than any other amount within the range considering how the analyses best represent the probable losses inherent in our portfolio at the balance sheet date, taking into account the relevant qualitative factors, observable trends, economic conditions and our historical experience with our portfolio.

The Credit Strategy and Policy Committee exercises its judgment, based on quantitative analyses, qualitative factors, and each committee member’s experience in the consumer finance industry, when determining the amount of the allowance for finance receivable losses. If the committee’s review concludes that an adjustment is necessary, we charge or credit this adjustment to expense through the provision for finance receivable losses. On a quarterly basis, AIG’s Chief Credit Officer and the Chief Financial Officer of AIG’s Financial Services Division review and approve the conclusions reached by the committee. We consider this estimate to be a critical accounting estimate that affects the net income of the Company in total and the pretax operating income of our branch and centralized real estate business segments. We document the adequacy of the allowance for finance receivable losses, the analysis of the trends in credit quality, and the current economic conditions considered by the Credit Strategy and Policy Committee to support its conclusions. See Analysis of Operating Results – Provision for Finance Receivable Losses for further information on the allowance for finance receivable losses.

Valuation Allowance on Deferred Tax Assets

The authoritative guidance for the accounting for income taxes permits a deferred tax asset to be recorded if the asset meets a more likely than not standard (i.e., more than 50 percent likely) that the asset will be realized. Realization of our net deferred tax asset depends on our ability to generate sufficient taxable income of the appropriate character within the carryforward periods of the jurisdictions in which the net operating and capital losses, deductible temporary differences and credits were generated. Because the realization of the deferred tax assets relies on a projection of future income, we view this as a critical accounting estimate.

When making our assessment about the realization of our deferred tax assets, we consider all available evidence, including:

·

the nature, frequency, and severity of current and cumulative financial reporting losses;

·

the carryforward periods for the net operating and capital loss carryforwards;

·

the sources and timing of future taxable income, giving greater weight to discrete sources and to earlier future years in the forecast period; and

·

tax planning strategies that would be implemented, if necessary, to accelerate taxable amounts.

Other Intangible Assets Impairment

Other intangible assets consisted of trade names, broker relationships, customer relationships, investor relationships, employment agreements, non-compete agreements, and lender panel (group of lenders for whom Ocean performs loan origination services). Historically, we tested our other intangible assets for impairment during the first quarter of each year. We tested for impairment between these annual reviews if adverse changes developed in the underlying business. Accordingly, we performed an assessment of our other intangible assets to test for recoverability. The assessment of recoverability was based on our estimates. We compared projected undiscounted future cash flows to the carrying value of the asset

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group. When the test for recoverability identified that the carrying value of the asset group was not recoverable and the asset group’s fair value was measured in accordance with the fair value measurement framework, we recognized an impairment charge in operating expenses for the amount by which the carrying value of the asset group exceeded its estimated fair value. We calculated the amount of the impairment using the income approach. The income approach uses discounted cash flow projections. Based on our estimate of a market participant’s view of the risks associated with the projected cash flows, the discount rate used in these calculations was 20%. In third quarter 2008 we wrote down other intangible assets to zero fair value, reflecting our reduced discounted cash flow expectations. See Note 29 of the Notes to Consolidated Financial Statements in Item 8 for further information on fair value measurements.

Goodwill Impairment

Historically, we tested goodwill for impairment during the first quarter of each year. We tested for impairment between these annual reviews if adverse changes developed in the underlying business. Goodwill impairment testing was performed at the “reporting unit” level. We assigned goodwill to our reporting units at the date the goodwill was initially recorded. We recorded our goodwill in our branch, centralized real estate, and insurance business segments and all other reporting units (Ocean). Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.

We initially assessed the potential for impairment by estimating the fair value of each of our reporting units and comparing the estimated fair values with the carrying amounts of those reporting units, including goodwill. The estimate of a reporting unit’s fair value was calculated using the discounted expected future cash flows approach. If the carrying value of a reporting unit exceeded its estimated fair value, goodwill associated with that reporting unit was potentially impaired. The amount of impairment was measured as the excess of the carrying value of goodwill over the estimated fair value of the goodwill. The estimated fair value of the goodwill was measured as the excess of the fair value of the reporting unit over the amounts that would be assigned to the reporting unit’s assets and liabilities in a hypothetical market. Based on our estimate of a market participant’s view of the risks associated with the projected cash flows, the discount rate used in these calculations was 20% when we wrote down our goodwill to zero fair value in third quarter 2008. This impairment charge was recorded in operating expenses. See Note 29 of the Notes to Consolidated Financial Statements in Item 8 for further information on fair value measurements.

CRITICAL ACCOUNTING POLICIES

We consider the determination of the allowance for finance receivable losses to be our most critical accounting policy. Information regarding this critical accounting policy is disclosed in Critical Accounting Estimates. We describe our significant accounting policies in Note 2 of the Notes to Consolidated Financial Statements in Item 8.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as defined by SEC rules.

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Item 7.  Continued

FAIR VALUE MEASUREMENTS

The fair value of a financial instrument is the amount that would be received if an asset were to be sold or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is listed on an exchange or traded over-the-counter or is new to the market and not yet established, the characteristics specific to the transaction, and general market conditions.

Management is responsible for the determination of the value of the financial assets and financial liabilities carried at fair value and the supporting methodologies and assumptions. Third party valuation service providers are employed to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When the valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates, and other market-observable information as of the measurement date as well as the specific attributes of the security being valued, including its term interest rate, credit rating, industry sector, and other issue or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased. We assess the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, we may validate the reasonableness of fair values by comparing information obtained from the valuation service providers to other third party valuation sources for selected securities. We also validate prices for selected securities obtained from brokers through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.

See Note 29 of the Notes to Consolidated Financial Statements in Item 8 for further information on fair value measurements.

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Item 7.  Continued

SELECTED SEGMENT INFORMATION

Allowance for Finance Receivable Losses

Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly by real estate loans, non-real estate loans, and retail sales finance. Allowance for finance receivable losses is calculated for each product and then allocated to each segment based upon its delinquency. Changes in the allowance for finance receivable losses for our branch and centralized real estate business segments and consolidated totals were as follows:

Years Ended December 31,
(dollars in millions)	2009	2008	2007
Balance at beginning of period: Branch real estate loans	$   394.1	$   230.3	$ 199.7
Centralized real estate	369.8	137.2	76.0
Branch non-real estate loans	297.3	184.6	177.2
Branch retail sales finance	65.0	41.4	27.0
Total segment	1,126.2	593.5	479.9
All other	-	-	-
Total	$1,126.2	$   593.5	$ 479.9
Provision for finance receivable losses: Branch real estate loans	$   494.4	$   321.6	$   96.0
Centralized real estate	353.0	299.4	82.1
Branch non-real estate loans	317.5	351.1	159.1
Branch retail sales finance	94.8	97.0	57.9
Total segment	1,259.7	1,069.1	395.1
All other	4.1	(0.3)	1.4
Total	$1,263.8	$1,068.8	$ 396.5
Charge-offs: Branch real estate loans	$  (299.0)	$  (163.1)	$  (69.8)
Centralized real estate	(168.1)	(67.1)	(21.6)
Branch non-real estate loans	(328.6)	(269.4)	(185.4)
Branch retail sales finance	(106.5)	(82.5)	(53.3)
Total segment	(902.2)	(582.1)	(330.1)
All other	(0.7)	(0.2)	(3.2)
Total	$  (902.9)	$  (582.3)	$(333.3)
Recoveries: Branch real estate loans	$       7.6	$       5.3	$     4.4
Centralized real estate	1.0	0.3	0.7
Branch non-real estate loans	33.3	31.0	33.7
Branch retail sales finance	10.3	9.1	9.8
Total segment	52.2	45.7	48.6
All other	0.1	0.5	1.8
Total	$     52.3	$     46.2	$   50.4
Transfers to finance receivables held for sale: Branch real estate loans	$     (3.8)	$        -	$      -
Centralized real estate	(19.3)	-	-
Total	$   (23.1)	$        -	$      -
Balance at end of period: Branch real estate loans	$   593.3	$   394.1	$ 230.3
Centralized real estate	536.4	369.8	137.2
Branch non-real estate loans	319.5	297.3	184.6
Branch retail sales finance	63.6	65.0	41.4
Total segment	1,512.8	1,126.2	593.5
All other	3.5	-	-
Total	$1,516.3	$1,126.2	$ 593.5

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Item 7.  Continued

Fair Isaac & Co. (FICO) Credit Scores

There are many different categorizations used in the consumer lending industry to describe the creditworthiness of a borrower, including “prime”, “non-prime”, and “sub-prime”. While there are no industry-wide agreed upon definitions for these categorizations, many market participants utilize third party credit scores as a means to categorize the creditworthiness of the borrower and his or her finance receivable. Our finance receivable underwriting process does not use third party credit scores as a primary determinant for credit decisions. However, for informational purposes, we present below our net finance receivables and delinquency ratios grouped into the following categories based solely on borrower FICO credit scores at the date of origination or renewal:

·

Prime:  Borrower FICO score greater than or equal to 660

·

Non-prime:  Borrower FICO score greater than 619 and less than 660

·

Sub-prime:  Borrower FICO score less than or equal to 619

Many finance receivables included in the “prime” category in the table below might not meet other market definitions of prime loans due to certain characteristics of the borrowers, such as their elevated debt-to-income ratios, lack of income stability, or level of income disclosure and verification, as well as credit repayment history or similar measurements.

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Item 7.  Continued

FICO-delineated prime, non-prime, and sub-prime categories for net finance receivables for the business segments were as follows:

December 31,
(dollars in millions)	2009	2008
Net finance receivables: Branch real estate loans:
Prime	$1,242.2	$1,560.4
Non-prime	1,431.7	1,690.2
Sub-prime	5,082.8	5,733.3
Other/FICO unavailable	13.2	16.9
Total	$7,769.9	$9,000.8
Centralized real estate loans:
Prime	$4,783.9	$6,827.0
Non-prime	1,171.8	1,602.5
Sub-prime	458.4	584.9
Other/FICO unavailable	0.6	5.6
Total	$6,414.7	$9,020.0
Branch non-real estate loans:
Prime	$   573.1	$   650.3
Non-prime	695.3	895.8
Sub-prime	1,846.9	2,330.9
Other/FICO unavailable	10.1	87.9
Total	$3,125.4	$3,964.9
Branch retail sales finance:
Prime	$   629.3	$1,431.8
Non-prime	173.5	312.0
Sub-prime	274.7	368.6
Other/FICO unavailable	8.0	34.6
Total	$1,085.5	$2,147.0

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Item 7.  Continued

FICO-delineated prime, non-prime, and sub-prime categories for delinquency ratios for the business segments were as follows:

December 31,	2009	2008
Delinquency ratio: Branch real estate loans:
Prime	4.47%	2.10%
Non-prime	6.73	4.62
Sub-prime	8.58	6.45
Other/FICO unavailable	29.15	3.53
Total	7.62	5.34
Centralized real estate loans:
Prime	6.62%	3.65%
Non-prime	12.88	8.81
Sub-prime	15.37	9.19
Other/FICO unavailable	3.55	10.43
Total	8.40	4.93
Branch non-real estate loans:
Prime	2.93%	3.02%
Non-prime	4.30	4.82
Sub-prime	5.98	6.44
Other/FICO unavailable	6.91	5.07
Total	5.06	5.49
Branch retail sales finance:
Prime	3.60%	1.47%
Non-prime	8.97	5.79
Sub-prime	8.64	7.57
Other/FICO unavailable	5.57	2.59
Total	5.65	3.13

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Item 7.  Continued

Higher-risk Real Estate Loans

Certain types of our real estate loans, such as interest only real estate loans, sub-prime real estate loans, second mortgages, high LTV ratio mortgages, and low documentation real estate loans, can have a greater risk of non-collection than our other real estate loans. Interest only real estate loans contain an initial period where the scheduled monthly payment amount is equal to the interest charged on the loan. The payment amount resets upon the expiration of this period to an amount sufficient to amortize the balance over the remaining term of the loan. Sub-prime real estate loans are loans originated to a borrower with a FICO score at the date of origination or renewal of less than or equal to 619. Second mortgages are secured by a mortgage whose rights are subordinate to those of a first mortgage. High LTV ratio mortgages have an original amount equal to or greater than 95.5% of the value of the collateral property at the time the loan was originated. Low documentation real estate loans are loans to a borrower that meets certain criteria which gives the borrower the option to supply less than the normal amount of supporting documentation for income.

Additional information regarding these higher-risk real estate loans for our branch and centralized real estate business segments follows (our higher-risk real estate loans can be included in more than one of the types of higher-risk real estate loans):

December 31, 2009		Delinquency	Average	Average
(dollars in millions)	Amount	Ratio	LTV	FICO
Branch Higher-risk real estate loans: Interest only (a)
Sub-prime	$5,082.8	8.58%	74.8%	557
Second mortgages	$1,111.7	8.72%	N/A (b)	602
LTV greater than 95.5% at origination	$   322.6	7.32%	97.8%	612
Low documentation (a)
Centralized real estate Higher-risk real estate loans: Interest only	$1,146.2	9.48%	88.3%	709
Sub-prime	$   458.4	15.37%	77.1%	586
Second mortgages	$     43.5	2.88%	N/A (b)	702
LTV greater than 95.5% at origination	$2,307.3	6.39%	99.4%	709
Low documentation	$   367.8	14.96%	76.6%	665

(a)

Not applicable because these higher-risk loans are not offered by our branch business segment.

(b)

Not available.

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Item 7.  Continued

December 31, 2008		Delinquency	Average	Average
(dollars in millions)	Amount	Ratio	LTV	FICO
Branch Higher-risk real estate loans: Interest only (a)
Sub-prime	$5,733.3	6.45%	75.0%	557
Second mortgages	$1,351.6	7.31%	N/A (b)	601
LTV greater than 95.5% at origination	$   373.0	5.93%	97.8%	612
Low documentation (a)
Centralized real estate Higher-risk real estate loans: Interest only	$1,418.6	8.36%	88.4%	707
Sub-prime	$   584.9	9.19%	76.4%	589
Second mortgages	$     55.6	3.77%	N/A (b)	700
LTV greater than 95.5% at origination	$2,902.0	4.75%	99.4%	712
Low documentation	$   475.1	10.37%	76.0%	667

(a)

Not applicable because these higher-risk loans are not offered by our branch business segment.

(b)

Not available.

Charge-off ratios for these higher-risk real estate loans for our branch and centralized real estate business segments were as follows:

Years Ended December 31,
(dollars in millions)	2009	2008	2007
Branch Higher-risk real estate loans charge-off ratios: Interest only (a)
Sub-prime	3.78%	2.15%	1.06%
Second mortgages	10.58%	6.02%	2.25%
LTV greater than 95.5% at origination	4.96%	3.51%	2.99%
Low documentation (a)
Centralized real estate Higher-risk real estate loans charge-off ratios: Interest only	4.12%	1.55%	0.33%
Sub-prime	2.49%	0.97%	0.41%
Second mortgages	4.92%	1.31%	0.43%
LTV greater than 95.5% at origination	2.53%	0.89%	0.33%
Low documentation	3.27%	1.22%	0.14%

(a)

Not applicable because these higher-risk loans are not offered by our branch business segment.

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Item 7.  Continued

A decline in the value of assets serving as collateral for our real estate loans may impact our ability to collect on these real estate loans. The total amount of all real estate loans for which the estimated LTV ratio exceeds 100% at December 31, 2009 was $2.4 billion, or 17%, of total real estate loans.

CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Our capital has varied primarily with the amount of net finance receivables. We have based our mix of debt and equity, or “leverage”, primarily upon maintaining leverage that supports cost-effective funding.

We have issued a combination of fixed-rate debt, principally long-term, and floating-rate debt, both long-term and short-term. AGFC obtained our fixed-rate funding by issuing public or private long-term unsecured debt with maturities primarily ranging from three to ten years. Until September 2008, AGFC obtained most of our floating-rate funding by issuing and refinancing commercial paper and by issuing long-term, floating-rate unsecured debt. We have issued commercial paper, with maturities ranging from 1 to 270 days, to banks, insurance companies, corporations, and other institutional investors. At December 31, 2009, we had no issuances of commercial paper outstanding.

We historically maintained credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. Due to the extraordinary events in the credit markets, AIG’s liquidity issues, and our reduced liquidity, we borrowed all available commitments under our primary credit facilities ($400.0 million of which was borrowed by AGFI) during September 2008. AGFC does not guarantee any borrowings of AGFI. See Note 15 of the Notes to Consolidated Financial Statements in Item 8 for additional information on credit facilities.

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Item 7.  Continued

As of December 31, 2009, our primary committed credit facilities were as follows:

(dollars in millions)
Facility	Committed Amount	Drawn by AGFC	Expiration
One-year term loans*	$2,450.0	$2,050.0	July 2010
Multi-year facility	2,125.0	2,125.0	July 2010
Total	$4,575.0	$4,175.0

*

AGFI was an eligible borrower under a 364-day facility for up to $400.0 million, which was fully drawn during September 2008. On July 9, 2009, we converted the outstanding amounts under our expiring 364-day facility into one-year term loans. Any remaining balance of the term loans will mature on July 9, 2010, at which time AGFC and AGFI will be obligated to pay the respective remaining amounts of principal outstanding, plus accrued interest.

Each of the facilities requires that AGFC remain directly or indirectly majority-owned by AIG. If AIG were to divest the Company, we would be required to renegotiate or repay the facilities. The annual commitment fees for the facilities are based upon AGFC’s long-term credit ratings and averaged 0.15% at December 31, 2009. AGFC’s outstanding borrowings under the committed credit facilities totaled $4.2 billion at December 31, 2008. If other funding to repay our credit facilities is unavailable, we will seek to replace or extend the facilities on or prior to their expiration. However, there can be no assurance that we will be able to obtain replacements or extensions.

From 2001 through 2006, we targeted our leverage to be a ratio of 7.5x of debt to tangible equity, where tangible equity equaled total shareholder’s equity less goodwill and accumulated other comprehensive income or loss. Beginning in the first quarter of 2007, we changed our method of measuring target leverage primarily to accommodate AGFC’s issuance of $350.0 million aggregate principal amount of 60-year junior subordinated debentures (hybrid debt) following our acquisition of Ocean in January 2007. The debentures underlie a series of trust preferred securities sold by a trust sponsored by AGFC in a Rule 144A/Regulation S offering. AGFC can redeem the debentures at par beginning in January 2017. Based upon the terms of these junior subordinated debentures, credit rating agencies have acknowledged that until January 2017, at least 75% of such hybrid debt will be afforded equity treatment in their measurement of AGFC’s leverage.

Accordingly, beginning in first quarter 2007, our targeted leverage was changed to 7.5x of adjusted debt to adjusted tangible equity, where adjusted debt equals total debt less 75% of hybrid debt and where adjusted tangible equity equals total shareholder’s equity plus 75% of hybrid debt and less goodwill, other intangible assets, and accumulated other comprehensive income or loss. Due to the Company’s and AIG’s liquidity positions, our primary capitalization efforts have been focused on improving liquidity and maintaining compliance with our existing debt agreements, and not on achieving our target leverage. This focus (which will likely continue as long as liquidity challenges persist) could result in AGFC’s actual leverage being different than our most recent target leverage. Our adjusted tangible leverage at December 31, 2009 was 7.31x compared to 9.23x at December 31, 2008. In calculating December 31, 2009 leverage, management deducted $1.1 billion of cash equivalents from adjusted debt, resulting in an effective adjusted tangible leverage of 6.88x (including the $1.6 billion loaned to AIG under a demand note as a cash equivalent debt reduction would lower this December 31, 2009 leverage measurement to 6.30x). In calculating December 31, 2008 leverage, management deducted $563.2 million of cash equivalents from adjusted debt, resulting in an effective adjusted tangible leverage of 9.00x. Adjusted tangible leverage and effective adjusted tangible leverage each exceeded 7.5x at December 31, 2008 due

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to the determination that the Company would be required to establish a $603.2 million valuation reserve against its deferred tax assets.

The Company’s one-year term loan (previously, a 364-day facility) includes a capital support agreement (for the benefit of the lenders under the facility) with AIG, whereby AIG agrees to cause AGFC to maintain: (a) a consolidated net worth (stockholder’s equity minus the amount of accumulated other comprehensive income or loss) of at least $2.2 billion; and (b) an adjusted tangible leverage at or below 8.0x (further adjusting for excess cash for a calculated “support leverage”). At December 31, 2009, the support agreement’s measurement of consolidated net worth was $2.4 billion. If AIG terminates the capital support agreement or does not comply with its terms, the one-year term loan would require renegotiation or repayment. At December 31, 2008, AGFC’s support leverage was 8.99x. During March 2009, AIG caused AGFC to receive a $600.0 million capital contribution that would have reduced AGFC’s support leverage at December 31, 2008 to 7.05x, in addition to supporting AGFC leverage at March 31, 2009. At December 31, 2009, the leverage measurement under the support agreement was 6.91x. Further capital infusions into the Company would require AIG to obtain the consent of the FRBNY under the FRBNY Credit Agreement.

Certain debt agreements of the Company contain terms that could result in acceleration of payments. Under certain circumstances, an event of default or declaration of acceleration under the borrowing agreements of the Company could also result in an event of default and declaration of acceleration under other borrowing agreements of the Company, as well as for AIG under the FRBNY Credit Agreement.

Based upon AGFC’s financial results for the twelve months ended September 30, 2009, a mandatory trigger event occurred under AGFC’s hybrid debt with respect to the hybrid debt’s semi-annual payment due in January 2010. The mandatory trigger event required AGFC to defer interest payments to the junior subordinated debt holders unless AGFC obtained non-debt capital funding in an amount equal to all accrued and unpaid interest on the hybrid debt otherwise payable on the next interest payment date. During January 2010, AIG caused AGFC to receive the non-debt capital funding necessary to satisfy the January 2010 interest payments required by AGFC’s hybrid debt.

Reconciliations of total debt to adjusted debt were as follows:

December 31,
(dollars in millions)	2009	2008
Total debt	$19,525.1	$23,197.9
75% of hybrid debt	(262.0)	(262.0)
Adjusted debt	$19,263.1	$22,935.9

Reconciliations of equity to adjusted tangible equity were as follows:

December 31,
(dollars in millions)	2009	2008
Equity	$2,375.6	$2,094.5
75% of hybrid debt	262.0	262.0
Accumulated other comprehensive (income) loss	(1.8)	129.1
Adjusted tangible equity	$2,635.8	$2,485.6

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Item 7.  Continued

Liquidity

Our sources of funds have included cash flows from operations, issuances of long-term debt in domestic and foreign markets, short-term borrowings in the commercial paper market, borrowings from banks under credit facilities, sales of finance receivables, and securitizations. AGFC has also received capital contributions from its parent to support finance receivable growth and maintain targeted leverage. Subject to insurance regulations, we also have the ability to receive dividends from our insurance subsidiaries. AGFC received $466.0 million of dividends from its insurance subsidiaries during 2008 and $200.0 million during first quarter 2009. The majority of these insurance subsidiary dividends exceeded insurance company ordinary dividend levels and required regulatory approval before they could be paid. There can be no assurance that any regulatory approvals for future dividends exceeding ordinary dividend levels will be obtained.

Due to the significant disruption in the U.S. residential mortgage and credit markets, AIG’s liquidity issues, and our reduced liquidity, we borrowed all available commitments under our primary credit facilities during September 2008. In addition, AGFC borrowed funds from AIG Funding under a demand note agreement. Until we have access to other reliable funding sources, we anticipate that our primary sources of funds to support operations and repay obligations will be finance receivable collections from operations and additional on-balance sheet securitizations and portfolio sales, while we continue to significantly limit our lending activities and focus on expense reductions. Funding sources currently under evaluation include additional on-balance sheet securitizations, portfolio sales, and borrowings from AIG Funding and others. Accessing these funding sources is uncertain and may require AIG to obtain the consent of the FRBNY under the FRBNY Credit Agreement.

The principal factors that could decrease our liquidity are customer non-payment, a decline in customer prepayments, a prolonged inability to access our historical capital market sources, and AIG’s inability to provide funding. We intend to support our liquidity position by operating the Company utilizing the following strategies:

·

limiting net originations and purchases of finance receivables and having more restrictive underwriting standards and pricing for such loans; and

·

pursuing additional on-balance sheet securitizations, portfolio sales, and borrowings from AIG Funding and others.

However, it is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates could prove to be materially incorrect.

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Principal sources and uses of cash were as follows:

Years Ended December 31,
(dollars in millions)	2009	2008	2007
Principal sources of cash: Net collections/originations and purchases of finance receivables	$2,851.2	$         -	$         -
Sales and principal collections on finance receivables held for sale originated as held for investment	1,988.3	-	-
Capital contributions	604.3	218.0	115.0
Operations	506.7	795.9	1,440.2
Net investment securities called and sold/purchased	27.8	581.5	-
Net issuances/repayments of debt	-	-	2,159.1
Total	$5,978.3	$1,595.4	$3,714.3
Principal uses of cash: Net repayment/issuances of debt	$3,788.8	$2,001.2	$         -
Establishment of note receivable from affiliate	1,550.9	-	-
Net originations and purchases/collections of finance receivables	-	647.6	1,374.0
Dividends paid	-	-	160.0
Net investment securities purchased/called and sold	-	-	50.0
Total	$5,339.7	$2,648.8	$1,584.0

Due to our liquidity issues, we have sold certain finance receivables as an alternative funding source. During 2009, we received proceeds of $2.0 billion from sales and principal collections on finance receivables held for sale originated as held for investment.

During March 2009, AGFC repaid the $419.5 million (plus interest) owed under the demand note payable to AIG Funding and, on March 24, 2009, AGFC made a loan of $800.0 million to AIG that is callable on one business day’s notice under the March 24, 2009 demand note agreement. On August 11, 2009, AGFC made an additional loan of $750.0 million to AIG under the March 24, 2009 demand note agreement. The cash used to fund the repayment of the demand note and these loans to AIG came from asset sale and securitization proceeds, operations, insurance subsidiary dividends, and the AIG capital contribution received in March 2009. These loans are subject to a subordination agreement in favor of the FRBNY. These loans to AIG were made as short-term investment sources for excess cash and to facilitate AIG’s obligation to manage its excess cash and excess cash held by its subsidiaries under the FRBNY Facility.

As part of our efforts to support our liquidity from sources other than our traditional capital market sources, we completed an on-balance sheet securitization on July 30, 2009. The securitization included the sale of approximately $1.9 billion of our centralized real estate loans to a wholly-owned consolidated special purpose vehicle, Third Street, that concurrently formed a trust to issue tranches of notes totaling $1.6 billion in initial principal balance of trust certificates to Third Street in exchange for the loans. In connection with the securitization, Third Street sold at a discount $1.2 billion of senior certificates with a 5.75% coupon to a third party. Third Street received cash proceeds, including accrued interest after the sales discount but before expenses, of $967.3 million, and retained subordinated and residual interest trust certificates.

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Item 7.  Continued

During 2008, significant disruptions in the capital markets and liquidity issues resulted in credit ratings downgrades on our debt as well as AIG’s debt. These events prevented access to our traditional funding sources and resulted in the Company borrowing funds from AIG, drawing the full amounts available under our primary credit facilities, significantly limiting our lending activities, and pursuing alternative funding sources, including portfolio or asset sales. These factors as well as the slower U.S. housing market, our tighter underwriting guidelines, and our liquidity management efforts are reflected in our principal sources and uses of cash in 2008. Net cash from operations decreased in 2008 primarily due to a decrease in net sales and principal collections of finance receivables held for sale resulting from our decision to significantly reduce our mortgage banking operations, including ceasing WFI’s wholesale originations effective June 17, 2008. As an additional source of funds, during 2008 our insurance subsidiaries sold investment securities, the proceeds of which were used by them to pay dividends of $466.0 million to AGFC.

Net cash from operations increased in 2007 primarily due to a significant decrease in net originations of finance receivables held for sale resulting from the slower U.S. housing market and our tighter underwriting guidelines. Net issuances of debt increased in 2007 primarily to support growth in finance receivables.

Dividends paid, less capital contributions received, reflect net income retained by AGFC to maintain equity and total debt at our leverage target.

At December 31, 2009, material contractual obligations were as follows:

(dollars in millions)	Long-term Debt (a)	Short-term Debt (b)	Interest Payments on Debt (c)	Operating Leases (d)	Total
First quarter 2010	$     729.0	$        -	$   208.5	$  12.8	$     950.3
Second quarter 2010	552.1	-	283.9	11.8	847.8
Third quarter 2010	2,691.9	2,050.0	123.9	10.7	4,876.5
Fourth quarter 2010	106.5	-	233.5	9.8	349.8
2010	4,079.5	2,050.0	849.8	45.1	7,024.4
2011-2012	5,812.5	-	1,238.8	52.7	7,104.0
2013-2014	2,779.3	-	758.3	16.6	3,554.2
2015+	4,803.8	-	1,178.4	6.2	5,988.4
Total	$17,475.1	$2,050.0	$4,025.3	$120.6	$23,671.0

(a)

During 2009, AGFC issued $961.9 million of long-term debt via a securitization transaction. We used the proceeds of this long-term debt issuance to support our liquidity position.

(b)

Short-term debt includes a one-year term loan of $2.050 billion. Any remaining balance of the term loan will mature on July 9, 2010, at which time AGFC will be obligated to pay the remaining amount of principal outstanding, plus accrued interest.

(c)

Future interest payments on floating-rate debt are estimated based upon floating rates in effect at December 31, 2009.

(d)

Operating leases include annual rental commitments for leased office space, automobiles, and data processing and related equipment.

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Item 7.  Continued

ANALYSIS OF FINANCIAL CONDITION

Finance Receivables

Amount, number, and average size of net finance receivables originated and renewed by type were as follows:

Years Ended December 31,	2009		2008		2007
	Amount	Percent	Amount	Percent	Amount	Percent
Originated Amount (in millions): Real estate loans	$   262.5	16%	$1,144.6	25%	$3,373.1	45%
Non-real estate loans	693.5	43	1,369.4	29	1,759.8	23
Retail sales finance	670.3	41	2,157.2	46	2,420.1	32
Total	$1,626.3	100%	$4,671.2	100%	$7,553.0	100%
Number: Real estate loans	4,716	1%	18,060	2%	38,278	3%
Non-real estate loans	184,980	47	312,818	29	392,463	30
Retail sales finance	208,916	52	751,815	69	890,157	67
Total	398,612	100%	1,082,693	100%	1,320,898	100%
Average size (to nearest dollar): Real estate loans	$55,667		$63,378		$88,122
Non-real estate loans	3,749		4,377		4,484
Retail sales finance	3,208		2,869		2,719
Renewed (includes additional funds borrowed) Amount (in millions): Real estate loans	$      73.7	5%	$   503.2	21%	$   941.9	32%
Non-real estate loans	1,302.1	95	1,859.4	79	2,032.0	68
Total	$1,375.8	100%	$2,362.6	100%	$2,973.9	100%
Number: Real estate loans	1,384	-%	7,423	2%	11,987	3%
Non-real estate loans	321,819	100	397,351	98	429,854	97
Total	323,203	100%	404,774	100%	441,841	100%
Average size (to nearest dollar): Real estate loans	$53,260		$67,791		$78,573
Non-real estate loans	4,046		4,680		4,727

55

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Item 7.  Continued

Amount and number of net finance receivables net (transferred/sold) purchased by type were as follows: