UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 1-6155
AMERICAN GENERAL FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0416090
(State of incorporation) (I.R.S. Employer Identification No.)
601 N.W. Second Street, Evansville, IN 47708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 424-8031
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
6-3/8% Senior Notes due March 1, 2003 New York Stock Exchange
8.45% Senior Notes due October 15, 2009 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]. Not applicable.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
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 14, 2003, there were 10,160,012 shares of the registrant's common
stock, $.50 par value, outstanding.
2
TABLE OF CONTENTS
Item Page
Part I 1. Business . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . 24
3. Legal Proceedings . . . . . . . . . . . . . . . . . 24
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . *
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . 25
6. Selected Financial Data . . . . . . . . . . . . . . 25
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 26
7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . 45
8. Financial Statements and Supplementary Data . . . . 45
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . 86
Part III 10. Directors and Executive Officers of the Registrant . *
11. Executive Compensation . . . . . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters . . *
13. Certain Relationships and Related Transactions . . . *
14. Controls and Procedures . . . . . . . . . . . . . . 87
Part IV 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . 88
* Items 4, 10, 11, 12, and 13 are not included, as per conditions met
by Registrant set forth in General Instructions I(1)(a) and (b) of
Form 10-K.
3
PART I
Item 1. Business.
GENERAL
American General Finance Corporation will be referred to as "AGFC" or
collectively with its subsidiaries, whether directly or indirectly
owned, as the "Company" or "we". AGFC was incorporated in Indiana
in 1927 as successor to a business started in 1920. All of the common
stock of AGFC is owned by American General Finance, Inc. (AGFI), which
was incorporated in Indiana in 1974. Since 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 in a broad range of insurance
and insurance-related activities and financial services in the United
States and abroad.
AGFC is a financial services holding company with subsidiaries engaged
primarily in the consumer finance and credit insurance businesses. We
conduct the credit insurance business to supplement our consumer
finance business through Merit Life Insurance Co. (Merit) and Yosemite
Insurance Company (Yosemite), which are both subsidiaries of AGFC.
At December 31, 2002, the Company had 1,369 offices in 44 states,
Puerto Rico, and the U.S. Virgin Islands and approximately 7,400
employees. Our executive offices are located in Evansville, Indiana.
This annual report on Form 10-K is available free of charge on our
Internet website (http://www.agfinance.com).
Selected Financial Information
Selected financial information of the Company was as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Average net receivables $12,135,806 $11,411,464 $11,119,117
Average borrowings $11,180,394 $10,373,630 $10,258,474
Yield - finance charges as a
percentage of average net
receivables 13.83% 14.62% 14.19%
Borrowing cost - interest
expense as a percentage
of average borrowings 4.95% 5.98% 6.60%
4
Item 1. Continued
At or for the
Years Ended December 31,
2002 2001 2000
Interest spread - yield
less borrowing cost 8.88% 8.64% 7.59%
Operating expenses as a
percentage of average
net receivables 4.54% 4.64% 4.73%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 3.34% 3.74% 3.26%
Charge-off ratio - net charge-offs
as a percentage of the average
of net finance receivables at
the beginning of each month
during the period 2.41% 2.27% 1.82%
Charge-off coverage - allowance
for finance receivable losses
to net charge-offs 1.56x 1.70x 1.84x
Delinquency ratio - gross finance
receivables 60 days or more
past due as a percentage
of gross finance receivables 3.68% 3.73% 3.45%
Return on average assets 2.51% 1.91% 2.01%
Return on average equity 21.69% 14.46% 14.81%
Ratio of earnings to fixed charges
(refer to Exhibit 12 for
calculations) 1.87x 1.62x 1.59x
Debt to tangible equity ratio -
debt to equity less goodwill
and accumulated other
comprehensive income 7.34x 7.50x 6.49x
Debt to equity ratio 6.98x 7.04x 5.89x
5
Item 1. Continued
CONSUMER FINANCE OPERATION
The consumer finance operation makes loans directly to individuals,
offers retail sales financing to merchants, purchases portfolios of
finance receivables originated by others, and offers credit and non-
credit insurance through its 1,369 branch offices and its centralized
operational support. Our customers are usually described as non-
conforming, non-prime, or sub-prime.
We make home equity loans, originate secured and unsecured consumer
loans, and extend lines of credit. We generally take a security
interest in the real property and/or personal property of the borrower.
At December 31, 2002, real estate loans accounted for 69% of the amount
and 11% of the number of net finance receivables outstanding, compared
to 64% of the amount and 9% of the number of net finance receivables
outstanding at December 31, 2001. Real estate loans are secured by
first or second mortgages on residential real estate and generally have
maximum original terms of 360 months. Non-real estate loans are
secured by consumer goods, automobiles, or other personal property or
are unsecured and generally have maximum original terms of 60 months.
We purchase retail sales contracts and provide revolving retail
services arising from the retail sale of consumer goods and services by
approximately 20,000 retail merchants. We also purchase private label
receivables originated by AIG Federal Savings Bank, a non-subsidiary
affiliate of ours, arising from the sales by approximately 40 retail
merchants under a participation agreement. Retail sales contracts are
closed-end accounts that consist of a single purchase. Revolving
retail and private label are open-end revolving accounts that can be
used for repeated purchases. Retail sales contracts are secured by the
real property or personal property giving rise to the contract and
generally have maximum original terms of 60 months. Revolving retail
and private label are secured by the goods purchased and generally
require minimum monthly payments based on outstanding balances.
To supplement our lending and retail sales financing activities, we
purchase portfolios of real estate loans, non-real estate loans, and
retail sales finance receivables with customers that meet our credit
quality standards and profitability objectives.
We also offer credit life, credit accident and health, credit related
property and casualty, and non-credit insurance to our consumer finance
customers. These insurance products are issued by affiliated as well
as non-affiliated insurance companies. The benefits of these insurance
products for both our customers and the consumer finance operation are
described under "Insurance Operation".
Retail sales finance obligations that we purchase from merchants
provide an important source of new loan customers. These customers
have demonstrated an apparent need to finance a retail purchase and a
willingness to use credit. After purchase of the retail sales finance
obligation, we contact the customer using various marketing methods.
We attempt to have the customer visit one of our branch offices to
discuss his or her overall financial needs with our consumer lending
specialists. Any resulting loan may pay off the customer's retail
sales finance obligation and consolidate debts with other creditors.
6
Item 1. Continued
At the time of loan origination, our consumer lending specialists, who
are licensed to offer insurance products, explain our credit and non-
credit insurance products to the customer. The customer then
determines whether to purchase any insurance products.
We also originate loans by solicitation of current customers obtained
through portfolio acquisitions and former customers who have recently
paid off their loans. In addition, we purchase customer lists from
major list compilers based on our predetermined selection criteria. We
market our financial products to these potential customers using
various solicitation methods. We also use various Internet loan
application sources, including our own website, to obtain potential
customer contacts. We forward these applications to our branch offices
where consumer lending specialists contact potential customers in
attempts to initiate lasting relationships.
Our branch offices are supported by centralized administrative and
operational functions. Our centralized operational support functions
include the following:
* real estate loan processing;
* revolving retail and private label processing;
* merchant services;
* retail sales finance approvals;
* real estate loan approvals;
* customer solicitations;
* retail sales finance collections;
* retail sales finance payment processing;
* real estate owned processing; and
* charge-off recovery operations.
We continually seek to identify functions that could be more cost-
effective if centralized, thereby reducing costs and freeing our
consumer lending specialists in our branches to concentrate on
providing service to our customers.
7
Item 1. Continued
We control and monitor our branch network through a variety of methods
including the following:
* Our operational policies and procedures standardize various
aspects of branch lending, collections, and business
development processes.
* Our 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 branch cash receipts and disbursements.
* Our home office 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 field operations management structure is appropriate to
control a large, decentralized organization with each
succeeding level staffed with more experienced personnel.
* Our field operations incentive compensation plan aligns branch
activities and goals with corporate strategies by basing a
portion of branch personnel and field operations management
total compensation on profitability and credit quality.
* Our internal audit department audits branches for operational
policy and procedure and state law and regulation compliance.
Internal audit reports directly to AIG to enhance
independence.
See Note 23. of the Notes to Consolidated Financial Statements in Item
8. for further information on the Company's consumer finance business
segment.
Finance Receivables
We carry finance receivables at amortized cost which includes accrued
finance charges on interest bearing finance receivables, unamortized
deferred origination costs, and unamortized net premiums and discounts
on purchased finance receivables. They are net of unamortized finance
charges on precomputed receivables and unamortized points and fees.
Although a significant portion of insurance claims and policyholder
liabilities originate from the finance receivables, our policy is to
report them as liabilities and not net them against finance
receivables. Finance receivables relate to the financing activities of
our consumer finance business segment, and insurance claims and
policyholder liabilities relate to the underwriting activities of our
insurance business segment.
8
Item 1. Continued
Amount, number, and average size of net finance receivables originated
and renewed and net purchased by type (retail sales contracts,
revolving retail, and private label comprise retail sales finance) were
as follows:
Years Ended December 31,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
Originated and renewed
Amount (in thousands):
Real estate loans $2,518,226 37% $2,129,623 33% $2,025,581 31%
Non-real estate loans 2,690,135 39 2,704,901 41 2,675,986 41
Retail sales finance 1,611,943 24 1,695,115 26 1,880,360 28
Total $6,820,304 100% $6,529,639 100% $6,581,927 100%
Number:
Real estate loans 57,909 4% 55,935 3% 56,479 3%
Non-real estate loans 748,226 46 765,716 45 810,030 42
Retail sales finance 810,598 50 889,863 52 1,046,367 55
Total 1,616,733 100% 1,711,514 100% 1,912,876 100%
Average size (to nearest
dollar):
Real estate loans $43,486 $38,073 $35,864
Non-real estate loans 3,595 3,533 3,304
Retail sales finance 1,989 1,905 1,797
Net purchased
Amount (in thousands):
Real estate loans $2,343,636 92% $ 945,621 85% $ 355,131 41%
Non-real estate loans 124,665 5 25,327 2 442,583 51
Retail sales finance 83,576 3 142,875 13 64,587 8
Total $2,551,877 100% $1,113,823 100% $ 862,301 100%
Number:
Real estate loans 38,948 38% 15,169 23% 5,969 5%
Non-real estate loans 35,096 35 12,790 19 84,663 75
Retail sales finance 27,791 27 38,516 58 22,332 20
Total 101,835 100% 66,475 100% 112,964 100%
Average size (to nearest
dollar):
Real estate loans $60,173 $62,339 $59,496
Non-real estate loans 3,552 1,980 5,228
Retail sales finance 3,007 3,709 2,892
Net purchased was net of sales of $27.1 million during 2000. We had no
sales in 2002 or 2001.
9
Item 1. Continued
Amount, number, and average size of total net finance receivables
originated, renewed, and net purchased by type were as follows:
Years Ended December 31,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
Originated, renewed,
and net purchased
Amount (in thousands):
Real estate loans $4,861,862 52% $3,075,244 40% $2,380,712 32%
Non-real estate loans 2,814,800 30 2,730,228 36 3,118,569 42
Retail sales finance 1,695,519 18 1,837,990 24 1,944,947 26
Total $9,372,181 100% $7,643,462 100% $7,444,228 100%
Number:
Real estate loans 96,857 6% 71,104 4% 62,448 3%
Non-real estate loans 783,322 45 778,506 44 894,693 44
Retail sales finance 838,389 49 928,379 52 1,068,699 53
Total 1,718,568 100% 1,777,989 100% 2,025,840 100%
Average size (to nearest
dollar):
Real estate loans $50,196 $43,250 $38,123
Non-real estate loans 3,593 3,507 3,486
Retail sales finance 2,022 1,980 1,820
Amount of net purchased as a percentage of total originated, renewed,
and net purchased was as follows:
Years Ended December 31,
2002 2001 2000
Real estate loans 48% 31% 15%
Non-real estate loans 4 1 14
Retail sales finance 5 8 3
Total 27% 15% 12%
10
Item 1. Continued
Amount, number, and average size of net finance receivables by type
were as follows:
December 31,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
Net finance receivables
Amount (in thousands):
Real estate loans $ 9,313,496 69% $ 7,444,484 64% $ 7,040,925 62%
Non-real estate loans 2,905,339 21 2,865,985 24 2,970,233 26
Retail sales finance 1,355,503 10 1,408,111 12 1,416,667 12
Total $13,574,338 100% $11,718,580 100% $11,427,825 100%
Number:
Real estate loans 212,082 11% 183,406 9% 177,429 9%
Non-real estate loans 907,405 48 932,165 48 995,000 47
Retail sales finance 789,703 41 850,123 43 923,911 44
Total 1,909,190 100% 1,965,694 100% 2,096,340 100%
Average size (to nearest
dollar):
Real estate loans $43,915 $40,590 $39,683
Non-real estate loans 3,202 3,075 2,985
Retail sales finance 1,716 1,656 1,533
Geographic Distribution
Geographic diversification of finance receivables reduces the
concentration of credit risk associated with a recession in any one
region. The largest concentrations of net finance receivables were as
follows:
December 31,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
California $ 2,160,846 16% $ 1,374,599 12% $ 1,514,878 13%
N. Carolina 887,243 7 850,995 7 831,977 7
Florida 840,182 6 772,830 7 740,186 6
Illinois 786,593 6 731,238 6 698,181 6
Ohio 785,506 6 741,702 7 678,238 6
Indiana 598,832 4 586,625 5 597,898 5
Georgia 591,970 4 510,140 4 477,110 4
Virginia 553,386 4 500,137 4 486,607 4
Other 6,369,780 47 5,650,314 48 5,402,750 49
Total $13,574,338 100% $11,718,580 100% $11,427,825 100%
11
Item 1. Continued
Average Net Receivables
Average net receivables by type were as follows:
Years Ended December 31,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
Real estate loans $ 7,995,507 66% $ 7,133,476 63% $ 7,012,439 63%
Non-real estate loans 2,804,579 23 2,897,617 25 2,748,663 25
Retail sales finance 1,335,720 11 1,380,371 12 1,358,015 12
Total $12,135,806 100% $11,411,464 100% $11,119,117 100%
Growth in average net receivables by type was as follows:
Years Ended December 31,
2002 2001 2000
Percent Percent Percent
Amount Change Amount Change Amount Change
(dollars in thousands)
Real estate loans $ 862,031 12% $ 121,037 2% $ 893,257 15%
Non-real estate loans (93,038) (3) 148,954 5 287,307 12
Retail sales finance (44,651) (3) 22,356 2 122,623 10
Total $ 724,342 6% $ 292,347 3% $1,303,187 13%
Finance Charges and Yield
We recognize finance charges as revenue on the accrual basis using the
interest method. We amortize premiums and discounts on purchased
finance receivables as a revenue adjustment. We defer the costs to
originate certain finance receivables and the revenue from
nonrefundable points and fees on loans and amortize them to revenue on
the accrual basis using the interest method over the lesser of the
contractual term or the estimated life based upon prepayment
experience. If a finance receivable liquidates before amortization is
completed, we charge or credit any unamortized premiums, discounts,
origination costs, or points and fees to revenue at the date of
liquidation. We recognize late charges, prepayment penalties, and
deferment fees as revenue when received.
We stop accruing revenue when the fourth contractual payment becomes
past due for loans and retail sales contracts and when the sixth
contractual payment becomes past due for revolving retail and private
label. Beginning in third quarter 2001, in conformity with AIG policy,
we reverse amounts previously accrued upon suspension. Prior to AIG's
indirect acquisition of the Company, we did not reverse amounts
previously accrued upon suspension. After suspension, we recognize
revenue for loans and retail sales contracts only to the extent of any
additional payments we receive.
12
Item 1. Continued
Finance charges and yield by type of finance receivable were as
follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Real estate loans:
Finance charges $ 880,021 $ 847,110 $ 798,974
Yield 11.01% 11.88% 11.39%
Non-real estate loans:
Finance charges $ 604,005 $ 625,159 $ 591,426
Yield 21.54% 21.57% 21.52%
Retail sales finance:
Finance charges $ 194,897 $ 196,344 $ 187,151
Yield 14.59% 14.22% 13.78%
Total:
Finance charges $1,678,923 $1,668,613 $1,577,551
Yield 13.83% 14.62% 14.19%
See Management's Discussion and Analysis in Item 7. for information on
the trends in yield.
Finance Receivable Credit Quality Information
A risk in all consumer lending and retail sales financing transactions
is the customer's unwillingness or inability to repay obligations.
Unwillingness to repay is usually evidenced in a consumer's historical
credit repayment record. An inability to repay usually results from
lower income due to unemployment or underemployment, major medical
expenses, or divorce. Occasionally, these types of events are so
economically severe that the customer must file for protection under
the bankruptcy laws. 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 loan.
We use credit risk scoring models at the time of borrower application
to assess our risk of the applicant's unwillingness or inability to
repay. These models are developed and based upon numerous factors
including past customer credit repayment experience. The risk scoring
models are periodically revalidated based on current portfolio
performance. We extend credit to those consumers who fit our risk
guidelines as determined by these models and, in some cases, manual
underwriting. Price and size of the loan or retail sales finance
transaction are generally in relation to the estimated credit risk
assumed.
Our policy is to charge off each month to the allowance for finance
receivable losses non-real estate loans on which payments received in
the prior six months have totaled less than 5% of the original loan
amount and retail sales finance that are six installments past due. We
start foreclosure proceedings on real estate loans when four monthly
installments are past due. When foreclosure is completed and we have
13
Item 1. Continued
obtained title to the property, we obtain a broker purchase offer,
which is a real estate broker's or appraiser's estimate of the
property's sale value without the benefit of a full interior and
exterior appraisal and lacking sales comparisons. We reduce finance
receivables by the amount of the real estate loan, establish a real
estate owned asset valued at lower of cost or 85% of the broker
purchase offer, and charge off any loan amount in excess of that value
to the allowance for finance receivable losses. We occasionally extend
the charge-off period for individual accounts when, in our opinion,
such treatment is warranted. We increase the allowance for finance
receivable losses for recoveries on accounts previously charged off.
Charge-offs, recoveries, net charge-offs, and charge-off ratio by type
of finance receivable were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Real estate loans:
Charge-offs $ 56,602 $ 53,875 $ 49,361
Recoveries (4,467) (4,459) (4,547)
Net charge-offs $ 52,135 $ 49,416 $ 44,814
Charge-off ratio .66% .69% .64%
Non-real estate loans:
Charge-offs $220,557 $196,947 $157,411
Recoveries (26,788) (26,640) (29,222)
Net charge-offs $193,769 $170,307 $128,189
Charge-off ratio 6.91% 5.87% 4.66%
Retail sales finance:
Charge-offs $ 53,601 $ 47,439 $ 38,767
Recoveries (9,346) (8,427) (9,309)
Net charge-offs $ 44,255 $ 39,012 $ 29,458
Charge-off ratio 3.31% 2.83% 2.18%
Total:
Charge-offs $330,760 $298,261 $245,539
Recoveries (40,601) (39,526) (43,078)
Net charge-offs $290,159 $258,735 $202,461
Charge-off ratio 2.41% 2.27% 1.82%
Establishing and maintaining customer relationships is very important
to us. A delinquent payment often indicates that the customer is
experiencing temporary financial difficulties. We view collection
efforts as opportunities to help our customers solve their temporary
financial problems and retain our customer relationships.
We may rewrite a delinquent account if the customer has sufficient
income and it does not appear that the cause of past delinquency will
affect the customer's ability to repay the new loan. We subject all
renewals, whether the customer's account is current or delinquent, to
the same credit risk underwriting process as we would a new customer.
14
Item 1. Continued
We may allow a deferment, which is a partial payment that extends the
term of an account. The partial payment amount is usually the greater
of one-half of a regular monthly payment or the amount necessary to
bring the interest on the account current. We limit a customer to two
deferments in a rolling twelve-month period.
To accommodate a customer's preferred monthly payment pattern, we may
agree to a customer's request to change a payment due date on an
account. An account's due date will not be changed if the change will
affect the thirty day plus delinquency status of the account at month
end.
Delinquency (gross finance receivables 60 days or more past due) based
on contract terms in effect and delinquency ratio by type of finance
receivable were as follows:
December 31,
2002 2001 2000
(dollars in thousands)
Real estate loans:
Delinquency $295,244 $248,266 $237,301
Delinquency ratio 3.20% 3.34% 3.36%
Non-real estate loans:
Delinquency $175,167 $168,001 $145,476
Delinquency ratio 5.40% 5.22% 4.40%
Retail sales finance:
Delinquency $ 43,381 $ 40,586 $ 31,142
Delinquency ratio 2.88% 2.55% 1.92%
Total:
Delinquency $513,792 $456,853 $413,919
Delinquency ratio 3.68% 3.73% 3.45%
We establish the allowance for finance receivable losses primarily
through the provision for finance receivable losses charged to expense.
We believe the amount of the allowance for finance receivable losses is
the most significant estimate we make. Our Credit Strategy and Policy
Committee evaluates our finance receivable portfolio monthly. This
review determines any adjustment necessary to maintain the allowance
for finance receivable losses at a level we consider adequate to absorb
losses inherent in the existing portfolio.
15
Item 1. Continued
Changes in the allowance for finance receivable losses were as follows:
At or for the
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Balance at beginning of year $ 438,860 $ 372,825 $ 385,327
Provision for finance receivable
losses 296,365 284,735 202,461
Allowance related to net
acquired (sold) receivables 8,602 15,035 (12,502)
Charge-offs (330,760) (298,261) (245,539)
Recoveries 40,601 39,526 43,078
Other charges - additional
provision - 25,000 -
Balance at end of year $ 453,668 $ 438,860 $ 372,825
See Management's Discussion and Analysis in Item 7. for further
information on finance receivable loss and delinquency experience and
the related allowance for finance receivable losses.
Real Estate Owned
We acquire real estate owned through foreclosure on real estate loans.
We record real estate owned in other assets, initially at lower of cost
or 85% of the broker purchase offer, which approximates the fair value
less the estimated cost to sell. If we do not sell a property within
one year of acquisition, we reduce the carrying value by five percent
of the initial value each month beginning in the thirteenth month.
Prior to AIG's indirect acquisition of the Company in August 2001, we
did not begin this writedown until the nineteenth month. The other
charges recorded in third quarter 2001 included $5.0 million to adjust
for this difference. We continue the writedown until the property is
sold or the carrying value is reduced to ten percent of the initial
value. We charge these writedowns to other revenues. We record the
sale price we receive for a property less the carrying value and any
amounts required to be refunded to the customer as a gain or loss in
other revenues. We do not profit from foreclosures in accordance with
the American Financial Services Association's Voluntary Standards for
Consumer Mortgage Lending. We only attempt to recover our investment
in the property, including expenses incurred.
16
Item 1. Continued
Changes in the amount of real estate owned were as follows:
At or for the
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Balance at beginning of year $ 48,359 $ 45,033 $ 51,433
Properties acquired 71,329 57,533 45,100
Properties sold or disposed of (63,794) (44,651) (48,014)
Monthly writedowns (8,605) (9,556) (3,486)
Balance at end of year $ 47,289 $ 48,359 $ 45,033
Real estate owned as a percentage
of real estate loans 0.51% 0.65% 0.64%
Net gains (losses) on real estate
owned sales $ 2,943 $ (1,063) $ 4,190
Changes in the number of real estate owned properties were as follows:
At or for the
Years Ended December 31,
2002 2001 2000
Balance at beginning of year 970 817 706
Properties acquired 1,355 1,526 1,449
Properties sold or disposed of (1,428) (1,373) (1,338)
Balance at end of year 897 970 817
Sources of Funds
We fund our consumer finance operation principally through the
following sources:
* net cash flows from operating activities;
* issuances of long-term debt;
* short-term borrowings in the commercial paper market;
* borrowings from banks under credit facilities; and
* capital contributions from parent.
17
Item 1. Continued
Average Borrowings
Average borrowings by term of debt were as follows:
Years Ended December 31,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
Long-term debt $ 7,343,929 66% $ 6,022,033 58% $ 5,703,564 56%
Short-term debt 3,836,465 34 4,351,597 42 4,554,910 44
Total $11,180,394 100% $10,373,630 100% $10,258,474 100%
Average borrowings by rate of debt were as follows:
Years Ended December 31,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
Fixed rate debt $ 7,416,047 66% $ 7,240,971 70% $ 6,546,966 64%
Floating rate debt 3,764,347 34 3,132,659 30 3,711,508 36
Total $11,180,394 100% $10,373,630 100% $10,258,474 100%
Interest Expense and Borrowing Cost
Interest expense and borrowing cost by term of debt were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Long-term debt:
Interest expense $432,737 $400,920 $378,807
Borrowing cost 5.89% 6.66% 6.64%
Short-term debt:
Interest expense $121,140 $219,567 $298,565
Borrowing cost 3.16% 5.04% 6.54%
Total:
Interest expense $553,877 $620,487 $677,372
Borrowing cost 4.95% 5.98% 6.60%
18
Item 1. Continued
Interest expense and borrowing cost by rate of debt were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Fixed rate debt:
Interest expense $480,258 $484,661 $436,527
Borrowing cost 6.48% 6.69% 6.67%
Floating rate debt:
Interest expense $ 73,619 $135,826 $240,845
Borrowing cost 1.96% 4.33% 6.47%
Total:
Interest expense $553,877 $620,487 $677,372
Borrowing cost 4.95% 5.98% 6.60%
The Company's use of interest rate swap agreements to fix floating-rate
debt or float fixed-rate debt, the effect of which is included in the
rates above, is described in Note 12. of the Notes to Consolidated
Financial Statements in Item 8.
Contractual Maturities
Contractual maturities of net finance receivables and debt at December
31, 2002 were as follows:
Net Finance
Receivables Debt
(dollars in thousands)
2003 $ 1,332,044 $ 4,636,041
2004 1,568,684 2,097,877
2005 1,162,712 1,479,335
2006 722,524 1,273,961
2007 476,261 1,355,550
2008 and thereafter 8,312,113 1,784,633
Total $13,574,338 $12,627,397
See Note 4. of the Notes to Consolidated Financial Statements in Item
8. for contractual maturities and principal cash collections of net
finance receivables by type.
19
Item 1. Continued
INSURANCE OPERATION
The insurance operation markets insurance products to our consumer
finance customers. Cash generated from operations is invested in
investment securities, commercial mortgage loans, investment real
estate, and policy loans and is also used to pay dividends.
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 principally writes or assumes (through affiliated and
non-affiliated insurance companies) credit life, credit accident and
health, and non-credit insurance.
Yosemite is a property and casualty insurance company domiciled in
Indiana and licensed in 45 states. Yosemite principally writes or
assumes credit-related property and casualty insurance.
Our credit life insurance policies insure the life of the borrower in
an amount typically equal to the unpaid balance of the finance
receivable and provide for payment in full to the lender of the finance
receivable in the event of the borrower's death. Our credit accident
and health insurance policies provide for payment to the lender of the
installments on the finance receivable coming due during a period of
the borrower's disability due to illness or injury. Our credit-related
property and casualty insurance policies are written either to protect
the lender's interest in property pledged as collateral for the finance
receivable or to provide for payment to the lender of the installments
on the finance receivable coming due during a period of the borrower's
unemployment. The borrower's purchase of credit life, credit accident
and health, or credit-related property and casualty insurance is
voluntary with the exception of lender-placed property damage coverage
for property pledged as collateral. In these instances, we obtain
property damage coverage through Yosemite under the terms of the
lending agreement if the borrower does not provide evidence of coverage
with another insurance carrier. Non-credit insurance policies are
primarily ordinary life level term coverage. The purchase of this
coverage is voluntary. Customers usually either finance premiums for
insurance products as part of the finance receivable or pay premiums
monthly with their finance receivable payment, but they may pay the
premiums in cash to the insurer. We do not offer single premium credit
insurance products to our real estate loan customers.
Merit and Yosemite have entered into reinsurance agreements with other
insurance companies, including certain affiliated companies, for
assumption of various non-credit life, individual annuity, group
annuity, credit life, credit accident and health, and credit-related
property and casualty insurance where our insurance subsidiaries assume
the risk of loss. The reserves for this business fluctuate over time
and in certain instances are subject to recapture by the insurer. At
December 31, 2002, reserves on the books of Merit and Yosemite for
these reinsurance agreements totaled $112.6 million.
See Note 23. of the Notes to Consolidated Financial Statements in Item
8. for further information on the Company's insurance business segment.
20
Item 1. Continued
Premiums earned, premiums written, and losses incurred by type of
insurance were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Premiums Earned
Credit insurance premiums earned:
Credit life $ 37,576 $ 41,046 $ 38,958
Credit accident and health 47,726 50,405 48,006
Property and casualty 55,645 53,537 50,016
Other insurance premiums earned:
Non-credit life 38,097 39,157 48,539
Non-credit accident and health 7,323 6,136 6,689
Premiums assumed under
coinsurance agreements 2,631 2,725 1,156
Total $188,998 $193,006 $193,364
Premiums Written
Credit insurance premiums written:
Credit life $ 23,263 $ 29,333 $ 45,486
Credit accident and health 40,458 44,570 55,981
Property and casualty 55,186 54,048 58,387
Other insurance premiums written:
Non-credit life 38,097 39,157 48,539
Non-credit accident and health 7,323 6,136 6,689
Premiums assumed under
coinsurance agreements 2,631 2,725 1,156
Total $166,958 $175,969 $216,238
Losses Incurred
Credit insurance losses incurred:
Credit life $ 21,869 $ 21,830 $ 18,409
Credit accident and health 26,494 24,814 24,412
Property and casualty 9,247 15,715 12,397
Other insurance losses incurred:
Non-credit life 11,996 11,102 20,142
Non-credit accident and health 4,485 3,751 4,031
Losses incurred under
coinsurance agreements 9,184 10,899 8,963
Total $ 83,275 $ 88,111 $ 88,354
21
Item 1. Continued
Life insurance in force by type of insurance was as follows:
December 31,
2002 2001 2000
(dollars in thousands)
Credit life $3,091,211 $3,126,473 $3,075,206
Non-credit life 3,104,772 3,275,199 3,343,066
Total $6,195,983 $6,401,672 $6,418,272
Investments and Investment Results
We invest cash generated by our insurance operation primarily in bonds.
We invest in, but are not limited to, the following:
* bonds;
* commercial mortgage loans;
* short-term investments;
* limited partnerships;
* preferred stock;
* investment real estate;
* policy loans; and
* common stock.
AIG subsidiaries manage the majority of our insurance operation's
investments.
Investment results of our insurance operation were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Net investment revenue (a) $ 82,812 $ 81,711 $ 80,807
Average invested assets (b) $1,252,625 $1,231,187 $1,148,950
Adjusted portfolio yield (c) 6.84% 7.03% 7.35%
Net realized (losses) gains
on investments (d) $ (4,400) $ (2,989) $ 2,809
(a) Net investment revenue is after deducting investment expense but
before net realized gains or losses on investments and provision
for income taxes.
(b) Average invested assets excludes the effect of Statement of
Financial Accounting Standards 115.
(c) Adjusted portfolio yield is calculated based upon the definitions
of net investment revenue and average invested assets listed in
(a) and (b) above.
(d) Includes net realized gains or losses on investment securities
and other invested assets before provision for income taxes.
22
Item 1. Continued
See Note 6. of the Notes to Consolidated Financial Statements in Item
8. for information regarding investment securities for all operations
of the Company.
REGULATION
Consumer Finance
The Company's consumer finance subsidiaries are subject to various
state and federal laws and regulations. Applicable federal laws
include:
* the Equal Credit Opportunity Act (prohibits discrimination
against credit-worthy 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 (regulates certain
loans secured by real estate);
* the Federal Trade Commission Act; and
* the Federal Reserve Board's Regulations B, C, P, and Z.
In many states, the Company relies on federal law to preempt state law
restrictions on interest rates and points and fees for first lien
residential mortgage loans. The Company also relies on the Federal
Alternative Mortgage Transactions Parity Act in many states to preempt
state restrictions on variable rate loans and balloon payments. The
Company makes residential mortgage loans under the provisions of these
and other federal laws. The Company is also subject to federal laws
governing practices and disclosures when dealing with consumer or
customer information.
Various state laws also regulate our consumer lending and retail sales
financing businesses. The degree and nature of such regulation vary
from state to state. The laws under which a substantial amount of our
business is conducted generally:
* provide for state licensing of lenders;
* impose maximum term, amount, interest rate, and other charge
limitations;
* 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.
Certain of these laws prohibit the taking of liens on real estate for
loans of small dollar amounts, except liens resulting from judgments.
These state laws may require contract disclosures in addition to those
required under federal law and may limit remedies available in the
event of default by an obligor on the credit.
23
Item 1. Continued
The federal government is considering, and a number of states,
counties, and cities have enacted or may be considering, laws or rules
that restrict the credit terms or other aspects of residential mortgage
loans that are typically described as "high cost mortgage loans".
These requirements may impose specific statutory liabilities in cases
of non-compliance and may also limit or restrict the terms of covered
loan transactions. Additionally, some of these laws may restrict other
business activities or business dealings of affiliates of the Company
under certain conditions.
Insurance
State authorities regulate and supervise our insurance subsidiaries.
The extent of such regulation varies by product and by state, but
relates primarily to the following:
* conduct of business;
* types of products offered;
* standards of solvency;
* limitations on dividend payments and other related party
transactions;
* licensing;
* deposits of securities for the benefit of policyholders;
* permissible investments;
* approval of policy forms and premium rates;
* periodic examination of the affairs of insurers;
* form and content of required financial reports; and
* reserve requirements for unearned premiums, losses, and other
purposes.
The states in which we operate regulate credit insurance premium rates
and premium refund calculations.
COMPETITION
Consumer Finance
The consumer finance industry is highly competitive due to the large
number of companies offering financial products and services, the
sophistication of those products, capital market resources of some
competitors, and general acceptance and widespread usage of available
credit. We compete with other consumer finance companies as well as
other types of financial institutions that offer similar products and
services.
Insurance
Our insurance operation supplements our consumer finance operation. We
believe that our insurance companies' abilities to market insurance
products through our distribution systems provide a competitive
advantage over our insurance competitors.
24
Item 2. Properties.
Our investment in real estate and tangible property is not significant
in relation to our total assets due to the nature of our business.
AGFC subsidiaries own two branch offices in Riverside and Barstow,
California and two branch offices in Hato Rey and Isabela, Puerto Rico.
AGFI owns eight buildings in Evansville, Indiana, one of which is a
branch office of a subsidiary of AGFC. The other buildings contain
certain administrative offices of AGFI and its subsidiaries, our
insurance operation, and the majority of our centralized operational
support. Merit owns an office building in Houston, Texas that is
leased to third parties and affiliates and also owns a consumer finance
branch office in Terre Haute, Indiana that is leased to an affiliate.
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.
Item 3. Legal Proceedings.
AGFC and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain class action claims, arising in the
ordinary course of business. In addition, many of these proceedings
are pending in jurisdictions, such as Mississippi, that permit damage
awards disproportionate to the actual economic damages alleged to have
been incurred. Based upon information presently available, we believe
that the total amounts that will ultimately be paid arising from these
lawsuits and proceedings will not have a material adverse effect on our
consolidated results of operations or financial position. However, the
frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given suit.
25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
No trading market exists for AGFC's common stock. AGFC is an indirect
wholly owned subsidiary of AIG. AGFC paid the following cash dividends
on its common stock:
Quarter Ended 2002 2001
(dollars in thousands)
March 31 $ 89,920 $ 75,386
June 30 61,972 63,196
September 30 - 45,208
December 31 - 245,065
Total $151,892 $428,855
At the end of fourth quarter 2001, we increased our leverage target to
7.5 to 1 for debt to tangible equity. Approximately $195.0 million of
the $245.1 million fourth quarter 2001 dividend was due to our change
in targeted leverage. See Management's Discussion and Analysis in Item
7., and Note 17. of the Notes to Consolidated Financial Statements in
Item 8., regarding limitations on the ability of AGFC and its
subsidiaries to pay dividends.
To manage our leverage of debt to tangible equity, AGFC received
capital contributions from its parent totaling $66.7 million in 2002.
AGFC also received a non-cash capital contribution from its parent of
$7.3 million in fourth quarter 2002 reflecting AIG's assumption of
certain benefit obligations effective January 1, 2002.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction
with the consolidated financial statements and related notes in Item
8., Management's Discussion and Analysis in Item 7., and other
financial information in Item 1.
At or for the Years Ended December 31,
2002 2001 2000 1999 1998
(dollars in thousands)
Total revenues $ 1,980,974 $ 1,975,536 $ 1,902,826 $ 1,715,869 $ 1,594,239
Net income (a) 349,495 252,791 260,130 224,653 194,396
Total assets 15,400,722 13,447,626 13,193,153 12,464,102 11,059,601
Long-term debt 9,566,256 6,300,171 5,667,567 5,709,755 5,162,012
(a) Per share information is not included because all of AGFC's common stock
is owned by AGFI.
26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the consolidated
financial statements and related notes in Item 8. and other financial
information in Item 1.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and our other publicly available
documents may include, and the Company's officers and representatives
may from time to time make, statements which may constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are not historical
facts but instead represent only our belief regarding future events,
many of which are inherently uncertain and outside of our control.
These statements may address, among other things, the Company's
strategy for growth, product development, regulatory approvals, market
position, financial results and reserves. The Company's actual results
and financial condition may differ, possibly materially, from the
anticipated results and financial condition indicated in these forward-
looking statements. The important factors, many of which are outside
of our control, which could cause the Company's actual results to
differ, possibly materially, include, but are not limited to, the
following:
* changes in general economic conditions, including the interest
rate environment in which we conduct business and the
financial markets through which we access capital;
* 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, credit
losses and the level of personal bankruptcies;
* changes in laws or regulations 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;
* the costs and effects of any litigation or governmental
inquiries or investigations that are determined adversely to
the Company;
* 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 integrate the operations of our acquisitions
into our business;
* changes in our ability to attract and retain employees or key
executives to support our businesses; and
* natural events and acts of God such as fires or floods
affecting our branches or other operating facilities.
27
Item 7. Continued
Readers are also directed to other risks and uncertainties discussed in
other documents we file with the Securities and Exchange Commission.
We are under no obligation to (and expressly disclaim any such
obligation to) update or alter any forward-looking statement, whether
written or oral, that may be made from time to time, whether as a
result of new information, future events or otherwise.
OVERVIEW
We are in the consumer finance and credit insurance businesses. The
basic functions of our consumer finance operation are to borrow money
at wholesale prices and to lend money at retail prices and offer credit
and non-credit insurance products. The basic functions of our
insurance operation are to write and assume various insurance products
for customers of our consumer finance operation and to invest premiums
received in various investments.
BASIS OF REPORTING
We prepared our consolidated financial statements using accounting
principles generally accepted in the United States (GAAP). The
statements include the accounts of AGFC and its subsidiaries, all of
which are wholly owned. We eliminated all intercompany items. We made
estimates and assumptions that affect amounts reported in our financial
statements and disclosures of contingent assets and liabilities.
Ultimate results could differ from our estimates.
At December 31, 2002, 85% of our assets were net finance receivables
less allowance for finance receivable losses. Our 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. The only discretion we have is the point of
suspension of the accrual of this finance charge revenue.
At December 31, 2002, 93% of our liabilities were debt issued primarily
to support our net finance receivables. Our interest expense is a
function of the amount of average borrowings and the borrowing cost 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 interest rate swap
agreements.
Our insurance revenues consist primarily of insurance premiums
resulting from our consumer finance 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.
We invest cash generated by our insurance operation primarily in
investment securities, which were 8% of our assets at December 31,
2002, and to a lesser extent in commercial mortgage loans, investment
real estate, and policy loans, which are included in other assets. We
report the resulting investment revenue in other revenue. GAAP
requires that we recognize interest on these investments as revenue on
the accrual basis using the interest method. The only areas of
28
Item 7. Continued
discretion we have are determining the point of suspension of the
accrual of this investment revenue and when the investment security's
decline in fair value is considered to be other than temporary and is
to be reduced to its fair value.
CRITICAL ACCOUNTING POLICIES
Our finance receivable portfolio consists of approximately $13.6
billion of net finance receivables due from approximately 1.9 million
customer accounts. These accounts were originated or purchased and are
serviced by our centralized operational support or by our 1,369 branch
offices in 44 states, Puerto Rico, and the U.S. Virgin Islands.
To manage our exposure to credit losses, we use credit risk scoring
models for finance receivables that we originate or perform due
diligence investigations for finance receivables that we purchase. We
also have standard collection procedures supplemented with data
processing systems to aid the centralized operational support and
branch personnel in their finance receivable collection processes.
Despite our efforts to avoid losses on our finance receivables, our
customers are subject to national, regional, and local economic
situations and personal circumstances that affect their abilities to
repay their obligations. These circumstances include lower income due
to unemployment or underemployment, major medical expenses, or divorce.
Occasionally, these types of events are so economically severe that the
customer must file for protection under the bankruptcy laws.
Our Credit Strategy and Policy Committee evaluates our finance
receivable portfolio monthly. Within our three main finance receivable
types are sub-portfolios, each consisting of a large number of
relatively small, homogenous accounts. We evaluate these sub-
portfolios as groups. None of our accounts are large enough to warrant
individual evaluation for impairment. Our Credit Strategy and Policy
Committee considers numerous factors in estimating losses inherent in
our finance receivable portfolio, including the following:
* current economic conditions;
* prior finance receivable loss and delinquency experience; and
* the composition of our finance receivable portfolio.
Our Credit Strategy and Policy Committee uses several ratios to aid in
the process of evaluating prior finance receivable loss and delinquency
experience. Each ratio is useful, but each has its limitations. These
ratios include:
* Delinquency ratio - gross finance receivables 60 days or more
past due (3 or more contractual payments have not been made)
as a percentage of gross finance receivables.
* Allowance ratio - allowance for finance receivable losses as a
percentage of net finance receivables.
* Charge-off ratio - net charge-offs as a percentage of the
average of net finance receivables at the beginning of each
month during the period.
* Charge-off coverage - allowance for finance receivable losses
to net charge-offs.
29
Item 7. Continued
We use migration analysis as one of the tools to determine the
appropriate amount of allowance for finance receivable losses.
Migration analysis is a statistical technique that attempts to predict
the future amount of losses for existing pools of finance receivables.
This technique applies empirically measured historical movement of like
finance receivables through various levels of repayment, delinquency,
and loss categories to existing finance receivable pools. These
results are aggregated for all segments of the Company's portfolio to
arrive at an estimate of future finance receivable losses for the
finance receivables existing at the time of analysis. We calculate
migration analysis using several different scenarios based on varying
assumptions in order to evaluate the widest range of possible outcomes.
If we had chosen to establish the allowance for finance receivable
losses at the highest and lowest levels produced by the various
migration analysis scenarios, our allowance for finance receivable
losses at December 31, 2002 and 2001 and provision for finance
receivable losses and net income for 2002 and 2001 would have changed
as follows:
At or for the
Years Ended December 31,
2002 2001
(dollars in millions)
Highest level:
Increase in allowance for finance
receivable losses $ 16.0 $ 30.7
Increase in provision for finance
receivable losses 16.0 30.7
Decrease in net income (11.3) (19.7)
Lowest level:
Decrease in allowance for finance
receivable losses $(103.8) $(117.3)
Decrease in provision for finance
receivable losses (103.8) (117.3)
Increase in net income 73.1 75.2
The Credit Strategy and Policy Committee exercises its judgement, based
on each committee member's experience in the consumer finance industry,
when determining the amount of the allowance for finance receivable
losses. If its review concludes that an adjustment is necessary, we
charge or credit this adjustment to expense through the provision for
finance receivable losses. 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 consumer finance business
segment. We document the adequacy of the allowance for finance
receivable losses and the analysis of the trends in credit quality
considered by the Credit Strategy and Policy Committee to support its
conclusions. See Provision for Finance Receivable Losses for further
information on the allowance for finance receivable losses.
30
Item 7. Continued
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into material off-balance sheet arrangements as
defined by Securities and Exchange Commission rules.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sources of funds include operations, issuances of long-term debt,
short-term borrowings in the commercial paper market, and borrowings
from banks under credit facilities. AGFC has also historically
received capital contributions from its parent to support finance
receivable growth and maintain targeted leverage.
Principal sources and uses of cash were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Principal sources of cash:
Operations $ 563.2 $ 750.1 $ 772.2
Net issuances of debt 1,727.8 361.0 554.3
Capital contributions 66.7 - -
Total $2,357.7 $1,111.1 $1,326.5
Principal uses of cash:
Net originations and purchases
of finance receivables $1,876.1 $ 551.2 $ 903.7
Dividends paid 151.9 428.9 185.1
Total $2,028.0 $ 980.1 $1,088.8
Net cash from operations decreased in 2002 due to changes in various
components of taxes receivable and payable and other assets and other
liabilities resulting from routine operating activities, partially
offset by higher finance charges and lower interest expense. Net cash
from operations remained near the same in 2001. Net originations and
purchases of finance receivables and net issuances of debt increased in
2002 due to significant increases in real estate loan acquisitions.
Net originations and purchases of finance receivables and net issuances
of debt decreased in 2001 due to a slowing economy. Dividends paid,
less capital contributions received, reflect changes in net income
retained by AGFC to maintain equity and total debt at a targeted ratio.
See Capital Resources for the fourth quarter 2001 change in targeted
leverage and resulting dividends.
31
Item 7. Continued
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable operational requirements and
financial obligations. The principal risk factors that could decrease
our sources of liquidity are delinquent payments from our customers and
an inability to access capital markets. The principal factors that
could increase our cash needs are significant increases in net
originations and purchases of finance receivables. We intend to
mitigate liquidity risk factors by continuing to operate the Company
within the following strategies:
* maintain a finance receivable portfolio comprised mostly of
real estate loans, which generally represent a lower risk of
customer non-payment;
* originate and monitor finance receivables with our proprietary
credit risk management system;
* maintain an investment securities portfolio of predominantly
investment grade, liquid securities; and
* maintain a capital structure appropriate to our asset base.
Consistent execution of our business strategies should result in
continued profitability, strong credit ratings, and investor
confidence. These results should allow continued access to capital
markets for issuances of our commercial paper and long-term debt. At
December 31, 2002, we had $4.3 billion of long-term debt securities
registered under the Securities Act of 1933 and available for issuance.
We also maintain committed bank credit facilities to provide an
additional source of liquidity for needs potentially not met through
capital markets. See Note 11. of the Notes to Consolidated Financial
Statements in Item 8. for information on our credit facilities.
At December 31, 2002, material contractual obligations were as follows:
Less than From 1-3 From 4-5 Over 5
1 year years years years Total
(dollars in millions)
Debt:
Long-term debt $ 1,574.9 $ 3,577.2 $ 2,629.5 $ 1,784.6 $ 9,566.2
Commercial paper 3,061.2 - - - 3,061.2
Operating leases 46.8 61.0 17.8 16.6 142.2
Total $ 4,682.9 $ 3,638.2 $ 2,647.3 $ 1,801.2 $12,769.6
Debt
Based on the strength of our current credit ratings, we expect to
refinance maturities of our debt. Any adverse changes in our operating
performance or credit ratings could limit our access to capital markets
to accomplish these refinancings.
Operating Leases
Operating leases represent annual rental commitments for leased office
space, automobiles, and data processing and related equipment. At
December 31, 2002, our rental commitments totaled $142.2 million.
32
Item 7. Continued
Capital Resources
December 31,
2002 2001
Amount Percent Amount Percent
(dollars in millions)
Long-term debt $ 9,566.3 66% $ 6,300.2 51%
Short-term debt 3,061.1 21 4,578.6 37
Total debt 12,627.4 87 10,878.8 88
Equity 1,809.9 13 1,545.9 12
Total capital $14,437.3 100% $12,424.7 100%
Net finance receivables $13,574.3 $11,718.6
Debt to tangible equity ratio 7.34x 7.50x
Our capital varies with the level of net finance receivables. The
capital mix of debt and equity is based primarily upon maintaining
leverage that supports cost-effective funding.
We issue a combination of fixed-rate debt, principally long-term, and
floating-rate debt, principally short-term. AGFC obtains our fixed-
rate funding through public issuances of long-term debt with maturities
generally ranging from three to ten years. Most floating-rate funding
is through AGFC sales and refinancing of commercial paper and through
AGFC issuance of long-term, floating-rate debt. Commercial paper, with
maturities ranging from 1 to 270 days, is sold to banks, insurance
companies, corporations, and other accredited investors. AGFC also
sells extendible commercial notes with initial maturities of up to 90
days, which may be extended by AGFC to 390 days. At December 31, 2002,
commercial paper included $359.3 million of extendible commercial
notes.
We participate in credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for
operating requirements. At December 31, 2002, credit facilities
totaled $3.1 billion (including $3.0 billion of committed credit
facilities) with remaining availability of $3.1 billion. See Note 11.
of the Notes to Consolidated Financial Statements in Item 8. for
additional information on credit facilities.
Our committed credit facilities at December 31, 2002 expire as follows:
Committed Credit Facilities
(dollars in millions)
2003 $1,500.0
2007 1,500.0
Total $3,000.0
33
Item 7. Continued
Until fourth quarter 2001, AGFC paid dividends to (or received capital
contributions from) AGFI to manage AGFC's leverage of debt to tangible
equity (equity less goodwill and accumulated other comprehensive
income) to 6.5 to 1. At the end of fourth quarter 2001, following
discussions with the credit rating agencies, we increased our leverage
target to 7.5 to 1. This increase was based on our success with
managing credit risk and maintaining a lower risk finance receivable
portfolio. Approximately $195.0 million of the $245.1 million fourth
quarter 2001 dividend was due to the change in targeted leverage.
Certain AGFC financing agreements effectively limit the amount of
dividends AGFC may pay. These agreements have not prevented AGFC from
managing its capital to targeted leverage. See Note 17. of the Notes
to Consolidated Financial Statements in Item 8. for information on
dividend restrictions.
ANALYSIS OF OPERATING RESULTS
Net Income
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Net income $349.5 $252.8 $260.1
Amount change $ 96.7 $ (7.3) $ 35.4
Percent change 38% (3)% 16%
Return on average assets 2.51% 1.91% 2.01%
Return on average equity 21.69% 14.46% 14.81%
Ratio of earnings to fixed charges 1.87x 1.62x 1.59x
Net income for 2002 included a $30.0 million reduction in the provision
for income taxes resulting from a favorable settlement of income tax
audit issues. Net income for 2002 did not include goodwill
amortization due to the adoption of Statement of Financial Accounting
Standards 142 on January 1, 2002. Net income included goodwill
amortization of $6.4 million for 2001 and $6.5 million for 2000.
Net income for 2001 included charges of $58.0 million ($37.7 million
aftertax) resulting from our review of our businesses and the assets
supporting those businesses, as well as the adoption of AIG's
accounting policies and methodologies, in connection with AIG's
indirect acquisition of the Company.
The impact of the other charges on net income was as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Net income $349.5 $252.8 $260.1
Other charges, aftertax - 37.7 -
Net income excluding other charges $349.5 $290.5 $260.1
34
Item 7. Continued
See Note 18. of the Notes to Consolidated Financial Statements in Item
8. for further information on these charges. See Note 23. of the Notes
to Consolidated Financial Statements in Item 8. for information on the
results of the Company's business segments.
We manage the components of our revenue and expenses in response to
economic events and to achieve our profitability objectives. In 2002,
a sluggish economy decreased our borrowing cost; however, the low
interest rate environment had the anticipated effect of also reducing
our yield. We continued to invest in business development programs,
including new branch openings and a second customer solicitation
center, but still controlled operating expenses. In 2001, a slowing
economy resulted in lower borrowing cost but higher net charge-offs.
We invested in business development programs, including new branch
openings, and increased our allowance for finance receivable losses in
response to higher delinquency, charge-offs, unemployment, and personal
bankruptcies. In 2000, an accelerating economy resulted in higher
borrowing cost but favorable net charge-off experience. We increased
our finance charge rates on new business, which was reflected in our
yield in 2001. We also controlled operating expenses in 2000.
Our statements of income line items as percentages of each year's
average net receivables were as follows:
Years Ended December 31,
2002 2001 2000
Revenues
Finance charges 13.83% 14.62% 14.19%
Insurance 1.58 1.71 1.76
Other 0.91 0.98 1.16
Total revenues 16.32 17.31 17.11
Expenses
Interest expense 4.56 5.44 6.09
Operating expenses 4.54 4.64 4.73
Provision for finance
receivable losses 2.44 2.50 1.82
Insurance losses and loss
adjustment expenses 0.69 0.77 0.79
Other charges - 0.51 -
Total expenses 12.23 13.86 13.43
Income before provision for
income taxes 4.09 3.45 3.68
Provision for income taxes 1.21 1.23 1.34
Net income 2.88% 2.22% 2.34%
35
Item 7. Continued
Factors that specifically affected the Company's operating results were
as follows:
Finance Charges
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Finance charges $ 1,678.9 $ 1,668.6 $ 1,577.6
Amount change $ 10.3 $ 91.0 $ 154.2
Percent change 1% 6% 11%
Average net receivables $12,135.8 $11,411.5 $11,119.1
Yield 13.83% 14.62% 14.19%
Finance charges increased due to the following:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Increase in average net
receivables $ 89.1 $ 37.1 $169.0
(Decrease) increase in yield (78.8) 57.4 (18.0)
(Decrease) increase in
number of days - (3.5) 3.2
Total $ 10.3 $ 91.0 $154.2
Growth in average net receivables by type was as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Real estate loans $ 862.0 $ 121.0 $ 893.3
Non-real estate loans (93.0) 149.0 287.3
Retail sales finance (44.7) 22.4 122.6
Total $ 724.3 $ 292.4 $1,303.2
Percent change 6% 3% 13%
In 2002, the low interest rate environment caused significant increases
in both originations and liquidations of our real estate loans.
However, we took advantage of the record real estate loan refinancings
that occurred in the market in general and acquired $2.3 billion of
real estate loan portfolios from third party originators. In 2001, a
slowing economy limited average net receivable growth.
36
Item 7. Continued
Changes in yield in basis points (bp) by type were as follows:
Years Ended December 31,
2002 2001 2000
Real estate loans (87) bp 49 bp (16) bp
Non-real estate loans (3) 5 (42)
Retail sales finance 37 44 (51)
Total (79) 43 (31)
Yield decreased in 2002 primarily reflecting a lower real estate loan
yield resulting from the low interest rate environment. We anticipate
further decreases in yield in 2003. Yield increased in 2001 primarily
due to higher yield on real estate loans originated, renewed, and
purchased during 2000 and the first half of 2001 in response to rising
interest rates from mid-1999 through mid-2000.
Insurance Revenues
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Insurance revenues $191.2 $195.4 $196.2
Amount change $ (4.2) $ (0.8) $ 11.7
Percent change (2)% -% 6%
Insurance revenues declined during 2002 reflecting a higher proportion
of average net receivables that are real estate loans, as well as a
decrease in the amount of premiums permitted to be charged in a number
of states. Our experience is that customers purchase fewer insurance
products on real estate loans than on non-real estate loans.
Insurance revenues were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Earned premiums $189.0 $193.0 $193.4
Commissions 2.2 2.4 2.8
Total $191.2 $195.4 $196.2
Earned premiums decreased in 2002 and 2001 due to lower premium volume
and lower premium rates.
37
Item 7. Continued
Other Revenues
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Other revenues $ 110.8 $ 111.5 $ 129.0
Amount change $ (0.7) $ (17.5) $ 21.1
Percent change (1)% (14)% 20%
Average invested assets $1,252.6 $1,231.2 $1,149.0
Adjusted portfolio yield 6.84% 7.03% 7.35%
Net realized (losses) gains
on investments $ (4.4) $ (3.0) $ 2.8
Other revenues were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Investment revenue $ 85.8 $ 86.7 $ 90.5
Interest revenue - notes
receivable from AGFI 15.8 21.0 30.6
Writedowns on real estate owned (8.6) (4.6) (3.5)
Net gains (losses) on real estate
owned sales 2.9 (1.1) 4.2
Other 14.9 9.5 7.2
Total $110.8 $111.5 $129.0
The decrease in other revenues for 2002 was primarily due to lower
interest revenue on notes receivable from AGFI and higher writedowns on
real estate owned, partially offset by net gains on foreclosed real
estate in 2002 compared to net losses in 2001 and higher service fee
income from a non-subsidiary affiliate. The decrease in interest
revenue on notes receivable from AGFI reflected lower interest rates.
These notes support AGFI's funding of finance receivables.
The decrease in other revenues for 2001 was primarily due to lower
interest revenue on notes receivable from AGFI, which reflected lower
interest rates, net losses on foreclosed real estate in 2001 compared
to net gains in 2000, and lower investment revenue. The decrease in
investment revenue reflected net realized losses in 2001 compared to
net realized gains in 2000 and a decline in adjusted portfolio yield of
32 basis points, partially offset by growth in average invested assets
for the insurance operation of $82.2 million. The increase in average
invested assets in 2001 was primarily due to investment of insurance
operation's cash flows. The decrease in adjusted portfolio yield in
2001 reflected market conditions.
38
Item 7. Continued
Interest Expense
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Interest expense $ 553.9 $ 620.5 $ 677.4
Amount change $ (66.6) $ (56.9) $ 113.4
Percent change (11)% (8)% 20%
Average borrowings $11,180.4 $10,373.6 $10,258.5
Borrowing cost 4.95% 5.98% 6.60%
Interest expense (decreased) increased due to the following:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Increase in average borrowings $ 48.2 $ 7.6 $ 77.5
(Decrease) increase in borrowing
cost (114.8) (64.1) 35.2
(Decrease) increase in
number of days - (0.4) 0.7
Total $ (66.6) $(56.9) $113.4
Changes in average borrowings by type were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Long-term debt $1,321.9 $ 318.4 $ 282.8
Short-term debt (515.1) (203.3) 957.5
Total $ 806.8 $ 115.1 $1,240.3
Percent change 8% 1% 14%
AGFC issued $4.6 billion of long-term debt in 2002, compared to $1.9
billion in 2001. The proceeds of the 2002 long-term debt issuances
were used to support finance receivable growth and to repay commercial
paper.
Changes in borrowing cost in basis points by type were as follows:
Years Ended December 31,
2002 2001 2000
Long-term debt (77) bp 2 bp 3 bp
Short-term debt (188) (150) 82
Total (103) (62) 35
39
Item 7. Continued
Federal Reserve actions lowered the federal funds rate a total of 475
basis points between December 2000 and December 2001 and another 50
basis points on November 6, 2002 resulting in a low market rate
environment. These actions resulted in lower rates for short-term debt
and long-term debt in 2002 and lower rates for short-term debt in 2001.
Operating Expenses
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Operating expenses $551.2 $530.0 $525.8
Amount change $ 21.2 $ 4.2 $ 16.3
Percent change 4% 1% 3%
Operating expenses as a
percentage of average
net receivables 4.54% 4.64% 4.73%
Operating expenses were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Salaries and benefits $309.2 $294.0 $282.9
Other 242.0 236.0 242.9
Total $551.2 $530.0 $525.8
The increase in operating expenses for 2002 was primarily due to higher
salaries and benefits, data processing, and administrative expenses
allocated from AIG, partially offset by the absence of goodwill
amortization in 2002.
The increase in operating expenses for 2001 was primarily due to higher
salaries and benefits, partially offset by higher deferred loan
origination costs.
The increases in salaries and benefits for 2002 and 2001 reflected
higher competitive compensation and rising benefit costs.
The improvements in operating expenses as a percentage of average net
receivables in 2002 and 2001 reflected controlled operating expenses.
The decrease in operating expenses as a percentage of average net
receivables in 2002 also reflected moderate finance receivable growth.
40
Item 7. Continued
Provision for Finance Receivable Losses
At or for the
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Provision for finance
receivable losses $296.4 $284.7 $202.5
Amount change $ 11.7 $ 82.2 $ (0.5)
Percent change 4% 41% -%
Net charge-offs $290.2 $258.7 $202.5
Charge-off ratio 2.41% 2.27% 1.82%
Charge-off coverage 1.56x 1.70x 1.84x
60 day+ delinquency $513.8 $456.9 $413.9
Delinquency ratio 3.68% 3.73% 3.45%
Allowance for finance
receivable losses $453.7 $438.9 $372.8
Allowance ratio 3.34% 3.74% 3.26%
Changes in net charge-offs by type were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Real estate loans $ 2.7 $ 4.6 $ 6.8
Non-real estate loans 23.5 42.1 (3.8)
Retail sales finance 5.3 9.5 (3.5)
Total $31.5 $56.2 $(0.5)
Changes in charge-off ratios in basis points by type were as follows:
Years Ended December 31,
2002 2001 2000
Real estate loans (3) bp 5 bp 1 bp
Non-real estate loans 104 121 (70)
Retail sales finance 48 65 (49)
Total 14 45 (26)
Net charge-offs and the charge-off ratio increased in 2002 and 2001
reflecting a sluggish economy in 2002 and a slowing economy in 2001 and
higher levels of unemployment and personal bankruptcies.
41
Item 7. Continued
Changes in delinquency from the prior year end by type were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Real estate loans $47.0 $11.0 $24.9
Non-real estate loans 7.1 22.5 (8.7)
Retail sales finance 2.8 9.5 3.4
Total $56.9 $43.0 $19.6
Changes in delinquency ratio from the prior year end in basis points by
type were as follows:
Years Ended December 31,
2002 2001 2000
Real estate loans (14) bp (2) bp 28 bp
Non-real estate loans 18 82 (99)
Retail sales finance 33 63 7
Total (5) 28 (5)
The delinquency ratio at December 31, 2002 decreased due to a higher
proportion of net finance receivables that are real estate loans, which
generally have lower delinquency. The delinquency ratio at December
31, 2001 increased reflecting slowing economic conditions in 2001. The
increase in delinquency at December 31, 2002 and 2001 also reflected
higher net finance receivables.
Our Credit Strategy and Policy Committee evaluates our finance
receivable portfolio monthly to determine the appropriate level of the
allowance for finance receivable losses. We believe the amount of the
allowance for finance receivable losses is the most significant
estimate we make. In our opinion, the allowance is adequate to absorb
losses inherent in our existing portfolio. The increase in the
allowance for finance receivable losses at December 31, 2002 was due
to:
* increases to the allowance for finance receivable losses
through the provision for finance receivable losses in 2002
totaling $6.2 million (these increases were necessary in
response to our increased delinquency and net charge-offs and
the higher levels of both unemployment and personal
bankruptcies in the United States);
* increase to the allowance for finance receivable losses in
2002 of $8.6 million resulting from a purchase business
combination.
The allowance as a percentage of net finance receivables declined in
2002 reflecting purchases of higher quality real estate loans during
the last half of 2002. The increase in the allowance ratio in 2001
reflected slowing economic conditions.
42
Item 7. Continued
Charge-off coverage, which compares the allowance for finance
receivable losses to net charge-offs, declined in 2002 and 2001
reflecting higher net charge-offs, partially offset by increases to
allowance for finance receivable losses.
Insurance Losses and Loss Adjustment Expenses
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Insurance losses and loss
adjustment expenses $83.3 $88.1 $88.4
Amount change $(4.8) $(0.3) $ 1.8
Percent change (5)% -% 2%
Insurance losses and loss adjustment expenses were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Claims incurred $85.3 $90.3 $83.0
Change in benefit reserves (2.0) (2.2) 5.4
Total $83.3 $88.1 $88.4
Claims incurred decreased $5.0 million for 2002 primarily due to
decreases in claim reserves, partially offset by increases in claims
paid.
Benefit reserves decreased $7.6 million for 2001 due to decreased sales
of non-credit insurance products. Claims incurred increased $7.3
million for 2001 primarily due to increased credit insurance loss
experience.
Other Charges
In third quarter 2001, we recorded charges of $58.0 million ($37.7
million aftertax) resulting from our review of our businesses and the
assets supporting those businesses, as well as the adoption of AIG's
accounting policies and methodologies, in connection with AIG's
indirect acquisition of the Company. See Note 18. of the Notes to
Consolidated Financial Statements in Item 8. for further information on
these charges.
43
Item 7. Continued
Provision for Income Taxes
Years Ended December 31,
2002 2001 2000
(dollars in millions)
Provision for income taxes $146.8 $141.4 $148.7
Amount change $ 5.4 $ (7.3) $ 20.6
Percent change 4% (5)% 16%
Pretax income $496.3 $394.2 $408.8
Effective income tax rate 29.58% 35.88% 36.37%
Provision for income taxes increased during 2002 primarily due to
higher taxable income, partially offset by a lower effective income tax
rate. During fourth quarter 2002, we reduced the provision for income
taxes by $30.0 million resulting from a favorable settlement of income
tax audit issues. This decreased the effective income tax rate for
2002. The decrease in provision for income taxes for 2001 was
primarily due to lower taxable income resulting from the other charges
of $58.0 million in third quarter 2001.
ANALYSIS OF FINANCIAL CONDITION
Asset Quality
We believe that our geographic diversification reduces the risk
associated with a recession in any one region. In addition, 96% of our
finance receivables at December 31, 2002 were secured by real property
or personal property. While finance receivables have some exposure to
further economic uncertainty, we believe that the allowance for finance
receivable losses is adequate to absorb losses inherent in our existing
portfolio. See Analysis of Operating Results for further information
on allowance ratio, delinquency ratio, and charge-off ratio and Note 2.
of the Notes to Consolidated Financial Statements in Item 8. for
further information on how we estimate finance receivable losses.
Investment securities are the majority of our insurance operation's
investment portfolio. Our investment strategy is to optimize aftertax
returns on invested assets, subject to the constraints of safety,
liquidity, diversification, and regulation.
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities,
principally our finance receivables and debt, in an effort to reduce
the risk associated with unfavorable changes in interest rates not met
by changes in finance charge yields of our finance receivables. Real
estate loans have an expected life of 2.7 years (although this can
change in response to interest rate changes), non-real estate loans
have an expected life of 1.6 years and retail sales finance receivables
have an expected life of 9 months. The weighted-average years to
maturity for our long-term debt was 3.5 years at December 31, 2002.
44
Item 7. Continued
We fund finance receivables with a combination of fixed-rate and
floating-rate debt and equity. Management determines the mix of fixed-
rate and floating-rate debt based, in part, on the nature of the
finance receivables being supported.
We limit our exposure to market interest rate increases by fixing
interest rates that we pay for term periods. The primary way we
accomplish this is by issuing fixed-rate debt. To supplement fixed-
rate debt issuances, AGFC also alters the nature of certain floating-
rate funding by using interest rate swap agreements to synthetically
create fixed-rate, long-term debt, thereby limiting our exposure to
market interest rate increases. Additionally, AGFC has swapped fixed-
rate, long-term debt to floating-rate, long-term debt. Including the
effect of interest rate swap agreements that effectively fix floating-
rate debt or float fixed-rate debt, floating-rate debt represented 34%
of our average borrowings for 2002 compared to 30% for 2001.
REGULATION AND OTHER
Regulation
The regulatory environment of the consumer finance and insurance
businesses is described in Item 1.
Taxation
We monitor federal and state tax legislation and respond with
appropriate tax planning.
45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The fair values of certain of our assets and liabilities are sensitive
to changes in market interest rates. The impact of changes in interest
rates would be reduced by the fact that increases (decreases) in fair
values of assets would be partially offset by corresponding changes in
fair values of liabilities. In aggregate, the estimated impact of an
immediate and sustained 100 basis point increase or decrease in
interest rates on the fair values of our interest rate-sensitive
financial instruments would not be material to our financial position.
The estimated increases (decreases) in fair values of interest rate-
sensitive financial instruments were as follows:
December 31, 2002 December 31, 2001
+100 bp -100 bp +100 bp -100 bp
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $(346,670) $ 379,042 $(309,671) $ 334,852
Fixed-maturity investment
securities (73,058) 77,812 (54,178) 44,508
Liabilities
Long-term debt (227,886) 240,637 (122,673) 128,185
Interest rate swap agreements 10,114 (9,979) 37,902 (72,169)
At each year end, we derived the changes in fair values by modeling
estimated cash flows of certain of our assets and liabilities. The
assumptions we used adjusted cash flows to reflect changes in
prepayments and calls but did not consider loan originations, debt
issuances, or new investment purchases.
Readers should exercise care in drawing conclusions based on the above
analysis. While these changes in fair values provide a measure of
interest rate sensitivity, they do not represent our expectations about
the impact of interest rate changes on our financial results. This
analysis is also based on our exposure at a particular point in time
and incorporates numerous assumptions and estimates. It also assumes
an immediate change in interest rates, without regard to the impact of
certain business decisions or initiatives that we would likely
undertake to mitigate or eliminate some or all of the adverse effects
of the modeled scenarios.
Item 8. Financial Statements and Supplementary Data.
The Report of Management's Responsibility, Report of Independent
Accountants, Report of Independent Auditors, and the related
consolidated financial statements are presented on the following pages.
46
REPORT OF MANAGEMENT'S RESPONSIBILITY
The Company's management is responsible for the integrity and fair
presentation of our consolidated financial statements and all other
financial information presented in this report. We prepared our
consolidated financial statements using accounting principles generally
accepted in the United States (GAAP). We made estimates and
assumptions that affect amounts recorded in the financial statements
and disclosures of contingent assets and liabilities.
The Company's management is responsible for establishing and
maintaining an internal control structure and procedures for financial
reporting. These systems are designed to provide reasonable assurance
that assets are safeguarded from loss or unauthorized use, that
transactions are recorded according to GAAP under management's
direction and that financial records are reliable to prepare financial
statements. We support the internal control structure with careful
selection, training and development of qualified personnel. The
Company's employees are subject to AIG's Code of Conduct designed to
assure that all employees perform their duties with honesty and
integrity. We do not allow loans to executive officers. The systems
include a documented organizational structure and policies and
procedures that we communicate throughout the Company. Our internal
auditors report directly to AIG to strengthen independence. They
continually monitor the operation of our internal controls and report
their findings to the Company's management and AIG's internal audit
department. We take prompt action to correct control deficiencies and
address opportunities for improving the system. The Company's
management assesses the adequacy of our internal control structure
quarterly. Based on these assessments, management has concluded that
the internal control structure and the procedures for financial
reporting have functioned effectively and that the consolidated
financial statements fairly present our consolidated financial position
and the results of our operations for the periods presented.
47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
American General Finance Corporation:
In our opinion, the consolidated financial statements listed in the
index appearing under Items 15(a)(1) and (2) on page 88 present fairly,
in all material respects, the financial position of American General
Finance Corporation and its subsidiaries (the "Company") at December
31, 2002, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion,
the financial statement schedule at and for the year ended December 31,
2002 listed in the index appearing under Item 15(d) on page 89 presents
fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
As discussed in Note 3, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002. Additionally, as discussed in Note 22, the Company
has changed its method of accounting for pensions for the year ended
December 31, 2002.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 14, 2003
48
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American General Finance Corporation
We have audited the accompanying consolidated balance sheet of American
General Finance Corporation (a wholly owned subsidiary of American
General Finance, Inc.) and subsidiaries as of December 31, 2001, and
the related consolidated statements of income, shareholder's equity,
cash flows, and comprehensive income for each of the two years in the
period ended December 31, 2001. Our audits also included the financial
statement schedule as of or for each of the two years in the period
ended December 31, 2001 listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American General Finance Corporation and subsidiaries at
December 31, 2001, and the consolidated results of their operations and
their cash flows for each of the two years in the period ended December
31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.
As discussed in Note 3. to the consolidated financial statements, in
2001 the Company changed its method of accounting for derivative
financial instruments.
/s/ Ernst & Young LLP
Indianapolis, Indiana
January 31, 2002
49
American General Finance Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
2002 2001
(dollars in thousands)
Assets
Net finance receivables (Notes 2. and 4.):
Real estate loans $ 9,313,496 $ 7,444,484
Non-real estate loans 2,905,339 2,865,985
Retail sales finance 1,355,503 1,408,111
Net finance receivables 13,574,338 11,718,580
Allowance for finance receivable
losses (Note 5.) (453,668) (438,860)
Net finance receivables, less allowance
for finance receivable losses 13,120,670 11,279,720
Investment securities (Note 6.) 1,227,156 1,142,186
Cash and cash equivalents 144,565 175,492
Notes receivable from parent (Note 7.) 269,240 267,656
Other assets (Note 8.) 639,091 582,572
Total assets $15,400,722 $13,447,626
Liabilities and Shareholder's Equity
Long-term debt (Notes 9. and 12.) $ 9,566,256 $ 6,300,171
Commercial paper (Notes 10. and 12.) 3,061,141 4,578,637
Insurance claims and policyholder
liabilities (Note 13.) 472,348 495,588
Other liabilities (Note 14.) 453,487 441,280
Accrued taxes 37,562 86,023
Total liabilities 13,590,794 11,901,699
Shareholder's equity:
Common stock (Note 15.) 5,080 5,080
Additional paid-in capital 951,175 877,526
Accumulated other comprehensive
loss (Note 16.) (68,938) (61,687)
Retained earnings (Note 17.) 922,611 725,008
Total shareholder's equity 1,809,928 1,545,927
Total liabilities and shareholder's equity $15,400,722 $13,447,626
See Notes to Consolidated Financial Statements.
50
American General Finance Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Revenues
Finance charges $1,678,923 $1,668,613 $1,577,551
Insurance 191,230 195,393 196,241
Other 110,821 111,530 129,034
Total revenues 1,980,974 1,975,536 1,902,826
Expenses
Interest expense 553,877 620,487 677,372
Operating expenses 551,187 529,966 525,836
Provision for finance receivable
losses 296,365 284,735 202,461
Insurance losses and loss
adjustment expenses 83,275 88,111 88,354
Other charges (Note 18.) - 58,020 -
Total expenses 1,484,704 1,581,319 1,494,023
Income before provision for income
taxes 496,270 394,217 408,803
Provision for Income Taxes
(Note 19.) 146,775 141,426 148,673
Net Income $ 349,495 $ 252,791 $ 260,130
See Notes to Consolidated Financial Statements.
51
American General Finance Corporation and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Common Stock
Balance at beginning of year $ 5,080 $ 5,080 $ 5,080
Balance at end of year 5,080 5,080 5,080
Additional Paid-in Capital
Balance at beginning of year 877,526 877,514 877,514
Capital contributions from
parent and other 73,649 12 -
Balance at end of year 951,175 877,526 877,514
Accumulated Other Comprehensive
(Loss) Income
Balance at beginning of year (61,687) 2,628 (6,694)
Change in net unrealized
gains (losses):
Investment securities 23,792 3,546 9,322
Interest rate swaps (31,391) (67,513) -
Minimum pension liability 348 (348) -
Balance at end of year (68,938) (61,687) 2,628
Retained Earnings
Balance at beginning of year 725,008 901,072 826,059
Net income 349,495 252,791 260,130
Common stock dividends (151,892) (428,855) (185,117)
Balance at end of year 922,611 725,008 901,072
Total Shareholder's Equity $1,809,928 $1,545,927 $1,786,294
See Notes to Consolidated Financial Statements.
52
American General Finance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 349,495 $ 252,791 $ 260,130
Reconciling adjustments:
Provision for finance receivable losses 296,365 284,735 202,461
Depreciation and amortization 149,248 143,896 143,919
Deferral of finance receivable
origination costs (58,688) (56,940) (52,874)
Deferred income tax (benefit) charge (59,155) (26,211) 10,536
Change in other assets and other liabilities (39,780) 50,799 88,890
Change in insurance claims and
policyholder liabilities (23,240) (23,859) 57,347
Change in taxes receivable and payable (51,977) 70,163 69,076
Other charges - 58,020 -
Other, net 931 (3,306) (7,317)
Net cash provided by operating activities 563,199 750,088 772,168
Cash Flows from Investing Activities
Finance receivables originated or purchased (8,054,343) (6,366,214) (6,102,085)
Principal collections on finance receivables 6,178,230 5,814,968 5,198,382
Acquisition of First Horizon (208,666) - -
Investment securities purchased (806,989) (1,024,553) (644,133)
Investment securities called and sold 713,653 981,068 524,627
Investment securities matured 42,475 10,310 10,335
Change in notes receivable from parent (1,584) (6,335) (71,438)
Change in premiums on finance receivables
purchased and deferred charges (87,837) (35,621) (21,941)
Other, net (11,683) (14,942) (18,664)
Net cash used for investing activities (2,236,744) (641,319) (1,124,917)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 4,638,983 1,892,820 1,240,329
Repayment of long-term debt (1,393,714) (1,263,973) (1,286,000)
Change in short-term notes payable (1,517,496) (267,808) 599,925
Capital contributions from parent 66,737 - -
Dividends paid (151,892) (428,855) (185,117)
Net cash provided by (used for)
financing activities 1,642,618 (67,816) 369,137
(Decrease) increase in cash and cash equivalents (30,927) 40,953 16,388
Cash and cash equivalents at beginning of year 175,492 134,539 118,151
Cash and cash equivalents at end of year $ 144,565 $ 175,492 $ 134,539
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
53
American General Finance Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Net Income $ 349,495 $ 252,791 $ 260,130
Other comprehensive (loss) gain:
Net unrealized (losses) gains:
Investment securities 32,220 2,446 17,151
Interest rate swaps:
Transition adjustment - (42,103) -
Current period (151,142) (121,636) -
Minimum pension liability 535 (535) -
Income tax effect:
Investment securities (11,288) (843) (6,003)
Interest rate swaps:
Transition adjustment - 14,736 -
Current period 52,900 42,573 -
Minimum pension liability (187) 187 -
Net unrealized (losses) gains,
net of tax (76,962) (105,175) 11,148
Reclassification adjustments
for realized losses (gains)
included in net income:
Investment securities 4,400 2,989 (2,809)
Interest rate swaps 102,848 59,872 -
Income tax effect:
Investment securities (1,540) (1,046) 983
Interest rate swaps (35,997) (20,955) -
Realized losses (gains)
included in net income,
net of tax 69,711 40,860 (1,826)
Other comprehensive (loss) gain,
net of tax (7,251) (64,315) 9,322
Comprehensive income $ 342,244 $ 188,476 $ 269,452
See Notes to Consolidated Financial Statements.
54
American General Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2002
Note 1. Nature of Operations
American General Finance Corporation will be referred to as "AGFC" or
collectively with its subsidiaries, whether directly or indirectly
owned, as the "Company" or "we". AGFC is a wholly owned subsidiary
of American General Finance, Inc. (AGFI). Since August 29, 2001, AGFI
has been an indirect wholly owned subsidiary of American International
Group, Inc. (AIG). AIG is a holding company, which through its
subsidiaries is engaged in a broad range of insurance and insurance-
related activities and financial services in the United States and
abroad.
AGFC is a financial services holding company with subsidiaries engaged
primarily in the consumer finance and credit insurance businesses. At
December 31, 2002, the Company had 1,369 offices in 44 states, Puerto
Rico and the U.S. Virgin Islands and approximately 7,400 employees.
In our consumer finance operation, we:
* make home equity loans;
* originate secured and unsecured consumer loans;
* extend lines of credit;
* purchase retail sales contracts and provide revolving retail
services arising from the retail sale of consumer goods and
services by approximately 20,000 retail merchants; and
* purchase private label receivables originated by a non-
subsidiary affiliate arising from the sales by approximately
40 retail merchants under a participation agreement.
To supplement our lending and retail sales financing activities, we
purchase portfolios of real estate loans, non-real estate loans, and
retail sales finance receivables. We also offer credit and non-credit
insurance to our consumer finance customers.
In our insurance operation, we principally write and assume credit
life, credit accident and health, credit-related property and casualty,
and non-credit insurance covering our consumer finance customers and
property pledged as collateral. See Note 23. for further information
on the Company's business segments.
We fund our operations principally through net cash flows from
operating activities, issuances of long-term debt, short-term
borrowings in the commercial paper market, borrowings from banks under
credit facilities, and capital contributions from our parent.
On September 16, 2002, we acquired the majority of the assets of First
Horizon Money Centers, a consumer financial services subsidiary of
First Tennessee Bank National Association, in a purchase business
combination. The fair value of the assets acquired totaled $208.7
million, representing real estate loans, non-real estate loans, and
retail sales finance receivables. We also acquired certain branch
office locations by assuming the branch office leases and hired certain
branch office personnel. We included the acquisition of First Horizon
in our consolidated financial statements since the date of acquisition.
55
Notes to Consolidated Financial Statements, Continued
At December 31, 2002, the Company had $13.6 billion of net finance
receivables due from approximately 1.9 million customer accounts and
$6.2 billion of credit and non-credit life insurance in force covering
approximately 1.0 million customer accounts.
Note 2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
We prepared our consolidated financial statements using accounting
principles generally accepted in the United States (GAAP). The
statements include the accounts of AGFC and its subsidiaries, all of
which are wholly owned. We eliminated all intercompany items. We made
estimates and assumptions that affect amounts reported in our financial
statements and disclosures of contingent assets and liabilities.
Ultimate results could differ from our estimates. To conform to the
2002 presentation, we reclassified certain items in prior periods.
CONSUMER FINANCE OPERATION
Finance Receivables
We carry finance receivables at amortized cost which includes accrued
finance charges on interest bearing finance receivables, unamortized
deferred origination costs, and unamortized net premiums and discounts
on purchased finance receivables. They are net of unamortized finance
charges on precomputed receivables and unamortized points and fees. We
determine delinquency on finance receivables contractually.
Although a significant portion of insurance claims and policyholder
liabilities originate from the finance receivables, our policy is to
report them as liabilities and not net them against finance
receivables. Finance receivables relate to the financing activities of
our consumer finance business segment, and insurance claims and
policyholder liabilities relate to the underwriting activities of our
insurance business segment.
Revenue Recognition
We recognize finance charges as revenue on the accrual basis using the
interest method. We amortize premiums and discounts on purchased
finance receivables as a revenue adjustment. We defer the costs to
originate certain finance receivables and the revenue from
nonrefundable points and fees on loans and amortize them to revenue on
the accrual basis using the interest method over the lesser of the
contractual term or the estimated life based upon prepayment
experience. If a finance receivable liquidates before amortization is
completed, we charge or credit any unamortized premiums, discounts,
origination costs, or points and fees to revenue at the date of
liquidation. We recognize late charges, prepayment penalties, and
deferment fees as revenue when received.
56
Notes to Consolidated Financial Statements, Continued
We stop accruing revenue when the fourth contractual payment becomes
past due for loans and retail sales contracts and when the sixth
contractual payment becomes past due for revolving retail and private
label. Beginning in third quarter 2001, in conformity with AIG policy,
we reverse amounts previously accrued upon suspension. Prior to AIG's
indirect acquisition of the Company, we did not reverse amounts
previously accrued upon suspension. After suspension, we recognize
revenue for loans and retail sales contracts only to the extent of any
additional payments we receive.
Allowance for Finance Receivable Losses
We establish the allowance for finance receivable losses primarily
through the provision for finance receivable losses charged to expense.
We believe the amount of the allowance for finance receivable losses is
the most significant estimate we make. Our Credit Strategy and Policy
Committee evaluates our finance receivable portfolio monthly. Within
our three main finance receivable types are sub-portfolios, each
consisting of a large number of relatively small, homogenous accounts.
We evaluate these sub-portfolios for impairment as groups. None of our
accounts are large enough to warrant individual evaluation for
impairment. Our Credit Strategy and Policy Committee considers
numerous factors in estimating losses inherent in our finance
receivable portfolio, including the following:
* current economic conditions;
* prior finance receivable loss and delinquency experience; and
* the composition of our finance receivable portfolio.
Our policy is to charge off each month to the allowance for finance
receivable losses non-real estate loans on which payments received in
the prior six months have totaled less than 5% of the original loan
amount and retail sales finance that are six installments past due. We
start foreclosure proceedings on real estate loans when four monthly
installments are past due. When foreclosure is completed and we have
obtained title to the property, we obtain a broker purchase offer,
which is a real estate broker's or appraiser's estimate of the
property's sale value without the benefit of a full interior and
exterior appraisal and lacking sales comparisons. We reduce finance
receivables by the amount of the real estate loan, establish a real
estate owned asset valued at lower of cost or 85% of the broker
purchase offer, and charge off any loan amount in excess of that value
to the allowance for finance receivable losses. We occasionally extend
the charge-off period for individual accounts when, in our opinion,
such treatment is warranted. We increase the allowance for finance
receivable losses for recoveries on accounts previously charged off.
We may rewrite delinquent account if the customer has sufficient income
and it does not appear that the cause of past delinquency will affect
the customer's ability to repay the new loan. We subject all renewals,
whether the customer's account is current or delinquent, to the same
credit risk underwriting process as we would a new customer.
57
Notes to Consolidated Financial Statements, Continued
We may allow a deferment, which is a partial payment that extends the
term of an account. The partial payment amount is usually the greater
of one-half of a regular monthly payment or the amount necessary to
bring the interest on the account current. We limit a customer to two
deferments in a rolling twelve-month period.
Real Estate Owned
We acquire real estate owned through foreclosure on real estate loans.
We record real estate owned in other assets, initially at lower of cost
or 85% of the broker purchase offer, which approximates the fair value
less the estimated cost to sell. If we do not sell a property within
one year of acquisition, we reduce the carrying value by five percent
of the initial value each month beginning in the thirteenth month.
Prior to AIG's indirect acquisition of the Company in August 2001, we
did not begin this writedown until the nineteenth month. We continue
the writedown until the property is sold or the carrying value is
reduced to ten percent of the initial value. We charge these
writedowns to other revenues. We record the sale price we receive for
a property less the carrying value and any amounts required to be
refunded to the customer as a gain or loss in other revenues. We do not
profit from foreclosures in accordance with the American Financial
Services Association's Voluntary Standards for Consumer Mortgage
Lending. We only attempt to recover our investment in the property,
including expenses incurred.
Customer Relationships
Customer relationships, included in other assets, are intangible assets
we acquire by assigning a portion of the purchase price on certain
portfolio acquisitions to the customer relationships. In those
instances, we expect our relationships with the customers to last
beyond the terms of the finance receivables we purchased. We charge
customer relationships to expense in equal amounts generally over six
years.
INSURANCE OPERATION
Revenue Recognition
We recognize credit insurance premiums on closed-end real estate loans
and revolving finance receivables as revenue when billed monthly. We
defer credit insurance premiums collected in advance in unearned
premium reserves which are included in insurance claims and
policyholder liabilities. We recognize unearned premiums on credit
life insurance as revenue using the sum-of-the-digits or actuarial
methods, except in the case of level-term contracts, which we recognize
as revenue using the straight-line method over the terms of the
policies. We recognize unearned premiums on credit accident and health
insurance as revenue using an average of the sum-of-the-digits and the
straight-line methods. We recognize unearned premiums on credit-
related property and casualty insurance as revenue using the straight-
line method over the terms of the policies or appropriate shorter
periods. We recognize non-credit life insurance premiums as revenue
when collected but not before their due dates.
58
Notes to Consolidated Financial Statements, Continued
Policy Reserves
Policy reserves for credit life, credit accident and health, and
credit-related property and casualty insurance equal related unearned
premiums. We base claim reserves on Company experience. We estimate
reserves for losses and loss adjustment expenses for credit-related
property and casualty insurance based upon claims reported plus
estimates of incurred but not reported claims. We accrue liabilities
for future life insurance policy benefits associated with non-credit
life contracts when we recognize premium revenue and base the amounts
on assumptions as to investment yields, mortality, and surrenders. We
base annuity reserves on assumptions as to investment yields and
mortality. We base non-credit life, individual annuity, group annuity,
credit life, credit accident and health, and credit-related property
and casualty insurance reserves assumed under coinsurance agreements
where we assume the risk of loss on various tabular and unearned
premium methods.
Acquisition Costs
We defer insurance policy acquisition costs, principally commissions,
reinsurance fees, and premium taxes. We include them in other assets
and charge them to expense over the terms of the related policies or
reinsurance agreements.
INVESTMENT SECURITIES
Valuation
We currently classify all investment securities as available-for-sale
and record them at fair value. We adjust related balance sheet
accounts as if the unrealized gains and losses on investment securities
had been realized, and record the net adjustment in accumulated other
comprehensive income (loss) in shareholder's equity. If the fair value
of an investment security classified as available-for-sale declines
below its cost and we consider the decline to be other than temporary,
we reduce the investment security to its fair value, and recognize a
realized loss.
Revenue Recognition
We recognize interest on interest bearing fixed maturity investment
securities as revenue on the accrual basis. We amortize any premiums
or discounts as a revenue adjustment using the interest method. We
stop accruing interest revenue when the collection of interest becomes
uncertain. We record dividends as revenue on ex-dividend dates. We
recognize income on mortgage-backed securities as revenue using a
constant effective yield based on estimated prepayment of the
underlying mortgages. If actual prepayments differ from estimated
prepayments, we calculate a new effective yield and adjust the net
investment in the security accordingly. We record the adjustment,
along with all investment revenue, in other revenues.
59
Notes to Consolidated Financial Statements, Continued
Realized Gains and Losses on Investment Securities
We specifically identify realized gains and losses on investment
securities and include them in other revenues.
OTHER
Other Invested Assets
Commercial mortgage loans, investment real estate, and insurance policy
loans are part of our insurance operation's investment portfolio and
are included in other assets. We recognize interest on commercial
mortgage loans and insurance policy loans as revenue using the interest
method. We stop accruing revenue when collection of interest becomes
uncertain. We recognize pretax operating income from the operation of
our investment real estate as revenue monthly. Other invested asset
revenue is included in other revenues.
Cash Equivalents
We consider all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
Goodwill
On January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) 142, "Goodwill and Other Intangible Assets." During
the first quarter of each year, we test both the consumer finance
business segment and the insurance business segment for goodwill
impairment. Impairment is the condition that exists when the carrying
value of goodwill exceeds its implied fair value. We assess the fair
value of the underlying business using a projected ten year earnings
stream, discounted using the Treasury "risk free" rate. The "risk
free" rate is the yield on ten year U.S. Treasury Bills as of December
31 of the prior year. If the required impairment testing suggests that
goodwill is impaired, we reduce goodwill to an amount that results in
the carrying value of the underlying business approximating fair value.
See Note 3. for information on the adoption of SFAS 142.
Prior to our adoption of SFAS 142, we charged goodwill to expense in
equal amounts over 20 to 40 years.
Income Taxes
We establish deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, using the tax rates expected to be in effect
when the temporary differences reverse.
We provide a valuation allowance for deferred tax assets if it is
likely that some portion of the deferred tax asset will not be
realized. We include an increase or decrease in a valuation allowance
resulting from a change in the realizability of the related deferred
tax asset in income.
60
Notes to Consolidated Financial Statements, Continued
Derivative Financial Instruments
On the date we enter into a derivative contract, we designate the
interest rate swap agreement as a cash flow hedge or a fair value
hedge. We recognize the fair values of interest rate swap agreements
in the consolidated balance sheet in other assets or other liabilities
depending on their positive or negative fair values. Cash flow hedges
hedge the variable cash flows to be paid on recognized liabilities and
fair value hedges hedge the fair value of recognized liabilities. We
formally document all relationships between the interest rate swap
agreement and the hedged liability. This documentation includes the
following:
* our risk management objective;
* our strategy in entering into the interest rate swap
agreement; and
* our method to measure hedge effectiveness and ineffectiveness.
We also formally assess, both at the interest rate swap agreement
inception and ongoing, whether the interest rate swap agreements are
highly effective in offsetting changes in cash flows or fair values of
the hedged liabilities. We report the effective portion of the gain or
loss on the instruments as a component of other comprehensive income.
We report any ineffectiveness in other revenues.
If we discontinue hedge accounting because we determine the interest
rate swap agreement no longer qualifies as an effective hedge, we will
continue to carry the interest rate swap agreement in the balance sheet
at its fair value, and recognize changes in fair value in income. For
cash flow hedges, we will reclassify amounts we previously recorded in
other comprehensive income to income as earnings are affected by the
variability in cash flows of the hedged item. For fair value hedges,
we will reverse the recorded fair value adjustment of the hedged item
to income.
If we terminate an interest rate swap agreement before maturity, we
will remove it from the balance sheet.
We accrue the differences between amounts payable and receivable on
interest rate swap agreements as adjustments to interest expense over
the lives of the agreements. We include the related amounts payable to
and receivable from counterparties in other liabilities and other
assets.
Fair Value of Financial Instruments
We estimate the fair values disclosed in Note 25. using discounted cash
flows when quoted market prices or values obtained from independent
pricing services are not available. The assumptions used, including
the discount rate and estimates of future cash flows, significantly
affect the valuation techniques employed. In certain cases, we cannot
verify the estimated fair values by comparison to independent markets
or realize the estimated fair values in immediate settlement of the
instruments.
61
Notes to Consolidated Financial Statements, Continued
Note 3. Accounting Changes
On January 1, 2002, we adopted SFAS 142, "Goodwill and Other
Intangible Assets." SFAS 142 provides that goodwill and other
intangible assets with indefinite lives are no longer to be amortized.
These assets are to be reviewed for impairment annually, or more
frequently if impairment indicators are present. We will continue to
amortize separable intangible assets that have finite lives over their
useful lives. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001.
Amortization of goodwill and intangible assets acquired prior to July
1, 2001 continued through December 31, 2001. During first quarter
2002, we determined that the required impairment testing related to the
Company's goodwill and other intangible assets did not require a write-
down of any such assets. There has been no indication of impairment
since our review of the Company's goodwill during the first quarter of
2002.
In 2001, we adopted SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires all derivative instruments to
be recognized at fair value in the balance sheet. Changes in the fair
value of a derivative instrument are reported in net income or
comprehensive income, depending upon the intended use of the derivative
instrument. Upon adoption of SFAS 133, we recorded cumulative
adjustments of $42.1 million to recognize the fair value of interest
rate swap agreements related to debt in the balance sheet, which
reduced accumulated other comprehensive income in shareholder's equity
by $27.4 million. During 2001, we reclassified into earnings $13.6
million of net realized losses which related to the cumulative
adjustment.
In 2001, we conformed to Emerging Issues Task Force (EITF) Issue 99-20,
"Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets." As a
result of applying the impairment provisions of EITF 99-20, we recorded
a $1.0 million ($.6 million aftertax) write-down of the carrying value
of certain collateralized debt obligations in other revenues.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing
the guarantee. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of FIN 45, including, among
others, residual value guarantees under capital lease arrangements,
commercial letters of credit, and loan commitments. The disclosure
requirements of FIN 45 are effective as of December 31, 2002. The
recognition requirements of FIN 45 are to be applied prospectively to
guarantees issued or modified after December 31, 2002. We do not
expect the adoption of FIN 45 to have a material impact on our
consolidated results of operations, financial position, or liquidity.
62
Notes to Consolidated Financial Statements, Continued
Note 4. Finance Receivables
Components of net finance receivables by type were as follows:
December 31, 2002
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $9,224,803 $3,244,413 $1,507,184 $13,976,400
Unearned finance charges
and points and fees (145,039) (431,812) (166,922) (743,773)
Accrued finance charges 77,852 41,006 12,953 131,811
Deferred origination costs 12,447 35,441 - 47,888
Premiums, net of discounts 143,433 16,291 2,288 162,012
Total $9,313,496 $2,905,339 $1,355,503 $13,574,338
December 31, 2001
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $7,433,025 $3,218,884 $1,593,357 $12,245,266
Unearned finance charges
and points and fees (148,722) (443,591) (201,875) (794,188)
Accrued finance charges 67,745 41,948 15,658 125,351
Deferred origination costs 10,410 36,807 - 47,217
Premiums, net of discounts 82,026 11,937 971 94,934
Total $7,444,484 $2,865,985 $1,408,111 $11,718,580
Real estate loans are secured by first or second mortgages on
residential real estate and generally have maximum original terms of
360 months. Non-real estate loans are secured by consumer goods,
automobiles or other personal property, or are unsecured and generally
have maximum original terms of 60 months. Retail sales contracts are
secured principally by consumer goods and automobiles and generally
have maximum original terms of 60 months. Revolving retail and private
label are secured by the goods purchased and generally require minimum
monthly payments based on outstanding balances. At December 31, 2002
and 2001, 96% of our net finance receivables were secured by the real
and/or personal property of the borrower. At December 31, 2002, real
estate loans accounted for 69% of the amount and 11% of the number of
net finance receivables outstanding, compared to 64% of the amount and
9% of the number of net finance receivables outstanding at December 31,
2001.
63
Notes to Consolidated Financial Statements, Continued
Contractual maturities of net finance receivables by type at December
31, 2002 were as follows:
Real Non-Real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
2003 $ 230,800 $ 725,762 $ 375,482 $ 1,332,044
2004 302,201 962,534 303,949 1,568,684
2005 318,285 701,809 142,618 1,162,712
2006 330,353 322,223 69,948 722,524
2007 331,537 107,481 37,243 476,261
2008+ 7,800,320 85,530 426,263 8,312,113
Total $ 9,313,496 $ 2,905,339 $ 1,355,503 $13,574,338
Company experience has shown that customers will renew, convert or pay
in full a substantial portion of finance receivables prior to maturity.
Contractual maturities are not a forecast of future cash collections.
Principal cash collections and such collections as a percentage of
average net receivables by type were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Real estate loans:
Principal cash collections $2,893,830 $2,391,674 $1,809,767
% of average net receivables 36.19% 33.53% 25.81%
Non-real estate loans:
Principal cash collections $1,581,916 $1,622,283 $1,578,034
% of average net receivables 56.40% 55.99% 57.41%
Retail sales finance:
Principal cash collections $1,702,484 $1,801,011 $1,810,581
% of average net receivables 127.46% 130.47% 133.33%
Unused credit limits extended by a non-subsidiary affiliate (whose
private label finance receivables are fully participated to the
Company) and the Company to their customers were $3.5 billion at
December 31, 2002 and $3.6 billion at December 31, 2001.
Company experience has shown that the funded amounts have been
substantially less than the credit limits. All unused credit limits,
in part or in total, can be cancelled at the discretion of the
affiliate and the Company.
64
Notes to Consolidated Financial Statements, Continued
Geographic diversification of finance receivables reduces the
concentration of credit risk associated with a recession in any one
region. The largest concentrations of net finance receivables were as
follows:
December 31, 2002 December 31, 2001
Amount Percent Amount Percent
(dollars in thousands)
California $ 2,160,846 16% $ 1,374,599 12%
N. Carolina 887,243 7 850,995 7
Florida 840,182 6 772,830 7
Illinois 786,593 6 731,238 6
Ohio 785,506 6 741,702 7
Indiana 598,832 4 586,625 5
Georgia 591,970 4 510,140 4
Virginia 553,386 4 500,137 4
Other 6,369,780 47 5,650,314 48
Total $13,574,338 100% $11,718,580 100%
Finance receivables on which we stopped accruing revenue totaled $382.0
million at December 31, 2002 and $334.8 million at December 31, 2001.
Our accounting policy for revenue recognition on revolving retail and
private label finance receivables provides for the accrual of revenue
up to the date of charge-off at six months past due. We accrued
revenue on revolving retail and private label finance receivables
greater than 90 days contractually delinquent of $.8 million at
December 31, 2002 and $.6 million at December 31, 2001.
Note 5. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Balance at beginning of year $ 438,860 $ 372,825 $ 385,327
Provision for finance receivable
losses 296,365 284,735 202,461
Allowance related to net
acquired (sold) receivables 8,602 15,035 (12,502)
Charge-offs (330,760) (298,261) (245,539)
Recoveries 40,601 39,526 43,078
Other charges - additional
provision - 25,000 -
Balance at end of year $ 453,668 $ 438,860 $ 372,825
See Note 2. for information on the determination of the allowance for
finance receivable losses and Note 18. for discussion of other charges.
65
Notes to Consolidated Financial Statements, Continued
Note 6. Investment Securities
Fair value and amortized cost of investment securities by type at
December 31 were as follows:
Fair Value Amortized Cost
2002 2001 2002 2001
(dollars in thousands)
Fixed maturity investment
securities:
Bonds:
Corporate securities $ 549,552 $ 532,295 $ 530,229 $ 528,551
Mortgage-backed securities 179,155 209,128 170,909 207,119
State and political
subdivisions 446,605 315,640 429,637 314,263
Other 26,593 47,146 24,447 45,436
Redeemable preferred stocks - 9,063 - 8,329
Total 1,201,905 1,113,272 1,155,222 1,103,698
Non-redeemable preferred
stocks 5,109 4,225 5,624 4,251
Other long-term investments 19,586 24,133 19,586 24,133
Common stocks 556 556 606 606
Total $1,227,156 $1,142,186 $1,181,038 $1,132,688
Unrealized gains and losses on investment securities by type at
December 31 were as follows:
Unrealized Gains Unrealized Losses
2002 2001 2002 2001
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $35,401 $19,660 $16,078 $15,916
Mortgage-backed securities 8,246 3,543 - 1,534
State and political
subdivisions 16,986 5,409 18 4,032
Other 5,198 1,710 3,052 -
Redeemable preferred stocks - 738 - 4
Total 65,831 31,060 19,148 21,486
Non-redeemable preferred
stocks 55 - 570 26
Common stocks - - 50 50
Total $65,886 $31,060 $19,768 $21,562
66
Notes to Consolidated Financial Statements, Continued
The fair values of investment securities sold or redeemed and the
resulting realized gains, realized losses, and net realized gains
(losses) were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Fair value $756,128 $991,378 $534,962
Realized gains $ 9,147 $ 16,441 $ 14,166
Realized losses 13,547 19,430 11,357
Net realized (losses) gains $ (4,400) $ (2,989) $ 2,809
Contractual maturities of fixed-maturity investment securities at
December 31, 2002 were as follows:
Fair Amortized
Value Cost
(dollars in thousands)
Fixed maturities, excluding
mortgage-backed securities:
Due in 1 year or less $ 23,714 $ 23,432
Due after 1 year through 5 years 186,126 175,306
Due after 5 years through 10 years 389,539 374,157
Due after 10 years 423,371 411,418
Mortgage-backed securities 179,155 170,909
Total $1,201,905 $1,155,222
Actual maturities may differ from contractual maturities since
borrowers may have the right to prepay obligations. The Company may
sell investment securities before maturity to achieve corporate
requirements and investment strategies.
Other long-term investments consist of five limited partnerships.
These limited partnerships provide diversification and have high
yielding, long-term financial objectives. These limited partnerships
invest primarily in private equity investments, high yielding
securities, and mezzanine investments within a variety of industries.
At December 31, 2002, our total commitments for these five limited
partnerships were $47.3 million, consisting of $21.2 million funded and
$26.1 million unfunded.
Bonds on deposit with insurance regulatory authorities had carrying
values of $8.4 million at December 31, 2002 and $7.9 million at
December 31, 2001.
67
Notes to Consolidated Financial Statements, Continued
Note 7. Notes Receivable from Parent
Notes receivable from AGFI totaled $269.2 million at December 31, 2002
and $267.7 million at December 31, 2001. Interest revenue on notes
receivable from parent totaled $15.8 million in 2002, $21.0 million in
2001, and $30.6 million in 2000. These notes primarily support AGFI's
funding of finance receivables.
Note 8. Other Assets
Components of other assets were as follows:
December 31,
2002 2001
(dollars in thousands)
Goodwill $157,595 $157,595
Income tax assets (a) 146,013 83,176
Fixed assets 73,934 83,014
Other insurance investments 67,438 78,813
Real estate owned 47,289 48,359
Customer relationships 43,399 63,552
Prepaid expenses and deferred
charges 29,721 35,635
Other (b) 73,702 32,428
Total $639,091 $582,572
(a) The components of net deferred tax assets are detailed in Note
19.
(b) Effective January 1, 2003, we acquired Wilmington Finance, Inc.,
an originator and seller of residential mortgage loans. In
anticipation of this acquisition, we entered into a warehouse
line participation agreement to provide interim funding support
to the mortgage originator totaling $50.0 million. See Note 26.
for further information on this acquisition.
Changes in goodwill by business segment were as follows:
Consumer
Finance Insurance Total
(dollars in thousands)
Balance December 31, 2000 $151,438 $ 12,562 $164,000
Amortization (5,947) (458) (6,405)
Balance December 31, 2001 145,491 12,104 157,595
Balance December 31, 2002 $145,491 $ 12,104 $157,595
68
Notes to Consolidated Financial Statements, Continued
The impact of goodwill amortization on net income was as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Reported net income $349,495 $252,791 $260,130
Goodwill amortization,
net of tax - 4,163 4,213
Adjusted net income $349,495 $256,954 $264,343
Customer relationships are net of accumulated amortization of $76.4
million at December 31, 2002 and $71.2 million at December 31, 2001.
Customer relationships amortization expense totaled $24.0 million in
2002 and $22.3 million in 2001. In addition to customer relationships
amortization expense in 2001, we reduced customer relationships through
the other charge by $12.0 million resulting from post-business
combination plans in connection with AIG's indirect acquisition of the
Company.
At December 31, 2002, estimated customer relationships amortization
expense for the next five years was as follows:
Customer Relationships
Amortization Expense
(dollars in thousands)
2003 $18,997
2004 14,074
2005 6,917
2006 1,573
2007 1,211
Note 9. Long-term Debt
Carrying value and fair value of long-term debt at December 31 were as
follows:
Carrying Value Fair Value
2002 2001 2002 2001
(dollars in thousands)
Senior debt $9,566,256 $6,300,171 $9,849,447 $6,468,550
Weighted average interest rates on long-term debt were as follows:
Years Ended December 31, December 31,
2002 2001 2000 2002 2001
Senior debt 5.89% 6.66% 6.64% 5.09% 6.41%
69
Notes to Consolidated Financial Statements, Continued
Contractual maturities of long-term debt at December 31, 2002 were as
follows:
Carrying Value
(dollars in thousands)
2003 $1,574,900
2004 2,097,877
2005 1,479,335
2006 1,273,961
2007 1,355,550
2008-2012 1,784,633
Total $9,566,256
At December 31, 2002, we had $4.3 billion of long-term debt securities
registered under the Securities Act of 1933 and available for issuance.
A debt agreement contains restrictions on consolidated retained
earnings for certain purposes (see Note 17.).
Note 10. Short-term Notes Payable
AGFC issues commercial paper with terms ranging from 1 to 270 days.
The weighted average maturity of our commercial paper at December 31,
2002 was 30 days.
Included in commercial paper are extendible commercial notes that AGFC
sells with initial maturities of up to 90 days which may be extended by
AGFC to 390 days. At December 31, 2002, extendible commercial notes
totaled $359.3 million.
Information concerning short-term notes payable for commercial paper
and to banks under credit facilities was as follows:
At or for the
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Average borrowings $3,836,296 $4,351,397 $4,554,409
Weighted average interest
rate, at year end:
Money market yield 1.45% 1.96% 6.58%
Semi-annual bond
equivalent yield 1.46% 1.96% 6.67%
70
Notes to Consolidated Financial Statements, Continued
Note 11. Liquidity Facilities
We maintain credit facilities to support the issuance of commercial
paper and to provide an additional source of funds for operating
requirements. At December 31, 2002, AGFC had committed credit
facilities totaling $3.0 billion, including a facility under which AGFI
is an eligible borrower for up to $300 million. The annual commitment
fees for the facilities currently average 0.07% and are based upon
AGFC's long-term credit ratings.
At December 31, 2002, AGFC and certain of its subsidiaries also had
uncommitted credit facilities (including shared uncommitted facilities
with AGFI) totaling $51.0 million which could be increased depending
upon lender ability to participate its loans under the facilities.
Available borrowings under all facilities are reduced by any
outstanding borrowings. There were no amounts outstanding at December
31, 2002 or December 31, 2001. AGFC guarantees its subsidiary
borrowings under uncommitted credit facilities. AGFC does not
guarantee any borrowings of AGFI.
Note 12. Derivative Financial Instruments
AGFC uses derivative financial instruments in managing the cost of its
debt and is neither a dealer nor a trader in derivative financial
instruments. AGFC has generally limited its use of derivative
financial instruments to interest rate swap agreements. These interest
rate swap agreements are designated and qualify as cash flow hedges or
fair value hedges.
AGFC uses interest rate swap agreements to limit our exposure to market
interest rate risk in the funding of our operations. Most of our swaps
synthetically convert certain short-term or floating-rate debt to a
long-term fixed-rate. The synthetic long-term fixed rates achieved
through interest rate swap agreements are slightly lower than could
have been achieved by issuing comparable long-term fixed-rate debt.
Additionally, AGFC has swapped fixed-rate, long-term debt to floating-
rate, long-term debt. As an alternative to funding without these
derivative financial instruments, AGFC's interest rate swap agreements
did not have a material effect on the Company's other revenues,
interest expense, or net income in any of the three years ended
December 31, 2002.
Notional amounts and weighted average receive and pay rates were as
follows:
At or for the
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Notional amount $2,940,000 $2,500,000 $2,450,000
Weighted average receive rate 2.28% 2.06% 6.72%
Weighted average pay rate 5.24% 6.58% 6.71%
71
Notes to Consolidated Financial Statements, Continued
Notional amount maturities and the respective weighted average interest
rates at December 31, 2002 were as follows:
Notional Weighted Average
Amount Interest Rate
(dollars in
thousands)
2003 $ 445,000 7.86%
2004 920,000 6.05
2005 525,000 5.25
2006 100,000 7.03
2007 750,000 2.36
2008 200,000 5.50
Total $2,940,000 5.24%
Changes in the notional amounts of interest rate swap agreements were
as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Balance at beginning of year $2,500,000 $2,450,000 $1,295,000
New contracts 1,050,000 320,000 1,380,000
Expired contracts (610,000) (270,000) (225,000)
Balance at end of year $2,940,000 $2,500,000 $2,450,000
AGFC is exposed to credit risk in the event of non-performance by
counterparties to derivative financial instruments. AGFC limits this
exposure by entering into agreements with counterparties having high
credit ratings and by basing the amounts and terms of these agreements
on their credit ratings. AGFC regularly monitors counterparty credit
ratings throughout the term of the agreements. At December 31, 2002,
AGFC had notional amounts of $1.1 billion in interest rate swap
agreements with a highly-rated AIG affiliate.
AGFC's credit exposure on derivative financial instruments is limited
to the fair value of the agreements that are favorable to the Company.
At December 31, 2002, the interest rate swap agreements were recorded
at fair value of $137.7 million in other liabilities. AGFC does not
expect any counterparty to fail to meet its obligation; however, non-
performance would not have a material impact on the Company's
consolidated results of operations and financial position.
AGFC's exposure to market risk is mitigated by the offsetting effects
of changes in the value of the agreements and of the related debt being
hedged. During 2002, we reported an immaterial amount of
ineffectiveness in other revenues. At December 31, 2002, we expect to
reclassify $70.3 million of net realized losses on interest rate swap
agreements from accumulated other comprehensive income to income during
the next twelve months.
72
Notes to Consolidated Financial Statements, Continued
Note 13. Insurance
Components of insurance claims and policyholder liabilities were as
follows:
December 31,
2002 2001
(dollars in thousands)
Finance receivable related:
Unearned premium reserves $187,631 $209,670
Benefit reserves 14,520 10,421
Claim reserves 35,823 35,305
Subtotal 237,974 255,396
Non-finance receivable related:
Benefit reserves 212,702 218,840
Claim reserves 21,672 21,352
Subtotal 234,374 240,192
Total $472,348 $495,588
Our insurance subsidiaries enter into reinsurance agreements among
themselves and with other insurers, including affiliated insurance
companies. Insurance claims and policyholder liabilities included the
following amounts assumed from other insurers:
December 31,
2002 2001
(dollars in thousands)
Affiliated insurance companies $ 64,387 $ 73,446
Non-affiliated insurance companies 48,227 40,559
Total $112,614 $114,005
Our insurance subsidiaries' business reinsured to others was not
significant during any of the last three years.
73
Notes to Consolidated Financial Statements, Continued
Our insurance subsidiaries file financial statements prepared using
statutory accounting practices prescribed or permitted by each
insurance company's state of domicile. These are comprehensive bases
of accounting other than GAAP.
Reconciliations of statutory net income to GAAP net income were as
follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Statutory net income $78,149 $87,632 $58,027
Change in deferred policy
acquisition costs (8,678) (7,561) 12,650
Reserve changes 2,919 (669) 19,298
Deferred income tax benefit (charge) 8,299 1,512 (6,599)
Amortization of interest
maintenance reserve (1,456) (2,322) (710)
Goodwill amortization - (458) (458)
Other, net (5,623) (5,500) (2,263)
GAAP net income $73,610 $72,634 $79,945
Reconciliations of statutory equity to GAAP equity were as follows:
December 31,
2002 2001
(dollars in thousands)
Statutory equity $734,146 $664,461
Deferred policy acquisition costs 66,018 76,043
Reserve changes 84,119 83,001
Net unrealized gains 46,119 9,479
Goodwill 13,794 13,794
Decrease in carrying value
of affiliates (24,932) (20,708)
Asset valuation reserve 17,134 15,685
Deferred income taxes (36,074) (28,670)
Interest maintenance reserve (1,985) 6,766
Other, net 26,100 7,186
GAAP equity $924,439 $827,037
74
Notes to Consolidated Financial Statements, Continued
Note 14. Other Liabilities
Components of other liabilities were as follows:
December 31,
2002 2001
(dollars in thousands)
Interest rate swap agreements fair
values $137,682 $103,867
Uncashed checks, reclassified from
cash 113,402 119,054
Accrued interest 104,553 121,771
Salary and benefit liabilities 18,699 32,395
Other 79,151 64,193
Total $453,487 $441,280
The decrease in salary and benefit liabilities reflected AIG's
assumption of certain benefit obligations totaling $12.9 million
effective December 31, 2002.
Note 15. Capital Stock
AGFC has two classes of authorized capital stock: special shares and
common shares. AGFC may issue special shares in series. The board of
directors determines the dividend, liquidation, redemption, conversion,
voting and other rights prior to issuance. Par value, shares
authorized, and shares issued and outstanding at December 31, 2002 and
2001 were as follows:
Shares
Issued and Outstanding
Par Shares December 31,
Value Authorized 2002 2001
Special Shares - 25,000,000 - -
Common Shares $0.50 25,000,000 10,160,012 10,160,012
75
Notes to Consolidated Financial Statements, Continued
Note 16. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
December 31,
2002 2001
(dollars in thousands)
Net unrealized losses on interest
rate swaps $ (98,904) $ (67,513)
Net unrealized gains on investment
securities 29,966 6,174
Net unrealized losses on minimum
pension liability - (348)
Accumulated other comprehensive loss $ (68,938) $ (61,687)
Note 17. Retained Earnings
State laws restrict the amounts our insurance subsidiaries may pay as
dividends without prior notice to, or in some cases prior approval
from, their respective state insurance departments. At December 31,
2002, the maximum amount of dividends which our insurance subsidiaries
may pay in 2003 without prior approval was $85.6 million. At December
31, 2002, our insurance subsidiaries had statutory capital and surplus
of $734.1 million. Merit Life Insurance Co. (Merit), a wholly owned
subsidiary of AGFC, had $52.7 million of accumulated earnings at
December 31, 2002 for which no federal income tax provisions have been
required. Merit would be liable for federal income taxes on such
earnings if they were distributed as dividends or exceeded limits
prescribed by tax laws. No distributions are presently contemplated
from these earnings. If such earnings were to become taxable at
December 31, 2002, the federal income tax would approximate $18.4
million.
Certain AGFC financing agreements effectively limit the amount of
dividends AGFC may pay. Under the most restrictive provision contained
in these agreements, $642.1 million of the retained earnings of AGFC
was free from restriction at December 31, 2002.
Note 18. Other Charges
In September 2001, we recorded one-time charges totaling $58.0 million
($37.7 million aftertax), resulting from AIG's and the Company's joint
assessment of the business environment and post-business combination
plans. These charges recognized that certain assets had no future
economic benefit or ability to generate future revenues. These costs
included an asset impairment charge related to customer relationships
intangibles that resulted from a previous business acquisition. Also
included were certain adjustments associated with conforming the
Company's balances to AIG's accounting policies and methodologies, as
well as an increase in the allowance for finance receivable losses to
reflect AIG's and the Company's assumptions about the business
environment.
76
Notes to Consolidated Financial Statements, Continued
Note 19. Income Taxes
For the period August 30, 2001 to December 31, 2001 and the year 2002,
the life insurance subsidiaries of AGFC file separate federal income
tax returns. AGFC and all other AGFC subsidiaries file a consolidated
federal income tax return with AIG. We provide federal income taxes as
if AGFC and the other AGFC subsidiaries file separate tax returns and
pay AIG accordingly under a tax sharing agreement.
For the year 2000 and the period January 1, 2001 to August 29, 2001,
AGFC and all of its subsidiaries were included in a federal income tax
return with AGFI's then parent company and the majority of its
subsidiaries. We provided federal income taxes as if AGFC and other
AGFC subsidiaries filed separate tax returns and paid AGFI's then
parent company accordingly under a tax sharing agreement.
Components of provision for income taxes were as follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Federal:
Current $199,217 $163,940 $133,277
Deferred (61,156) (28,436) 5,828
Total federal 138,061 135,504 139,105
State 8,714 5,922 9,568
Total $146,775 $141,426 $148,673
Reconciliations of the statutory federal income tax rate to the
effective tax rate were as follows:
Years Ended December 31,
2002 2001 2000
Statutory federal income tax rate 35.00% 35.00% 35.00%
Contingency reduction (6.04) - -
State income taxes 1.11 .98 1.52
Amortization of goodwill - .57 .55
Nontaxable investment income (.64) (.89) (.81)
Other, net .15 .22 .11
Effective income tax rate 29.58% 35.88% 36.37%
During fourth quarter 2002, we reduced the provision for income taxes
by $30.0 million resulting from a favorable settlement of income tax
audit issues. This decreased the effective income tax rate for 2002.
The Internal Revenue Service (IRS) has completed examinations of AIG's
tax returns through 1990. The IRS has also completed examinations of
AGFI's previous parent company's tax returns through 1999.
77
Notes to Consolidated Financial Statements, Continued
Components of deferred tax assets and liabilities were as follows:
December 31,
2002 2001
(dollars in thousands)
Deferred tax assets:
Allowance for finance receivable
losses $142,386 $ 99,900
Interest rate swap agreements 32,014 36,354
Deferred insurance commissions 4,054 8,254
Other 15,981 11,645
Total 194,435 156,153
Deferred tax liabilities:
Loan origination costs 16,199 16,039
Insurance reserves (2,321) 8,582
Fixed assets 6,227 5,281
Other 30,917 43,075
Total 51,022 72,977
Net deferred tax assets $143,413 $ 83,176
State net operating loss (NOL) carryforwards were $593.8 million at
December 31, 2001 and expired in 2002. These carryforwards resulted
from a 1995 state audit of a return and the state's acceptance of an
amended return. The valuation allowance relating to the state NOL
carryforwards totaled $43.5 million at December 31, 2001.
Note 20. Lease Commitments, Rent Expense and Contingent Liabilities
Annual rental commitments for leased office space, automobiles and data
processing and related equipment accounted for as operating leases,
excluding leases on a month-to-month basis, were as follows:
Lease Commitments
(dollars in thousands)
2003 $ 46,783
2004 35,866
2005 25,098
2006 11,651
2007 6,127
subsequent to 2007 16,628
Total $142,153
78
Notes to Consolidated Financial Statements, Continued
Taxes, insurance and maintenance expenses are obligations of the
Company under certain leases. In the normal course of business, leases
that expire will be renewed or replaced by leases on other properties.
Future minimum annual rental commitments will probably not be less than
the amount of rental expense incurred in 2002. Rental expense totaled
$53.1 million in 2002, $50.6 million in 2001, and $48.9 million in
2000.
AGFC and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain class action claims, arising in the
ordinary course of business. In addition, many of these proceedings
are pending in jurisdictions, such as Mississippi, that permit damage
awards disproportionate to the actual economic damages alleged to have
been incurred. Based upon information presently available, we believe
that the total amounts that will ultimately be paid arising from these
lawsuits and proceedings will not have a material adverse effect on our
consolidated results of operations or financial position. However, the
frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given suit.
Note 21. Consolidated Statements of Cash Flows
Supplemental disclosure of certain cash flow information was as
follows:
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Interest paid $542,190 $634,439 $667,572
Income taxes paid 259,289 99,096 68,580
AGFC received a non-cash capital contribution from its parent of $7.3
million in fourth quarter 2002 reflecting AIG's assumption of certain
benefit obligations effective January 1, 2002. See Note 22. for
further information on the Company's benefit plans.
Note 22. Benefit Plans
Effective January 1, 2002, the Company's employees participate in
various benefit plans sponsored by AIG, including a noncontributory
qualified defined benefit retirement plan, various stock option and
purchase plans, and a 401(k) plan.
AIG's U.S. plans do not separately identify projected benefit
obligations and plan assets attributable to employees of participating
affiliates. AIG's projected benefit obligations exceeded the plan
assets at December 31, 2002 by $428.5 million.
79
Notes to Consolidated Financial Statements, Continued
Prior to January 1, 2002, the Company's employees participated in
AGFI's then parent company's benefit plans. AGFI accounted for its
participation in these plans as if it had its own plans. Because net
plan assets were not calculated separately for the Company, the
remaining information in this Note 22. was for AGFI.
AGFI's portion of the retirement plans' funded status was as follows:
December 31,
2001 2000
(dollars in thousands)
Projected benefit obligation $123,648 $ 99,622
Plan assets at fair value 95,030 112,194
Plan assets (less than) in excess
of projected benefit obligation (28,618) 12,572
Other unrecognized items, net 27,660 (10,615)
(Accrued) prepaid pension expense $ (958) $ 1,957
Components of pension expense were as follows:
Years Ended December 31,
2001 2000
(dollars in thousands)
Service cost $ 3,849 $ 3,914
Interest cost 8,245 7,488
Expected return on plan assets (10,283) (10,061)
Net amortization and deferral 260 199
Pension expense $ 2,071 $ 1,540
Additional assumptions concerning the determination of pension expense
were as follows:
Years Ended December 31,
2001 2000
Weighted average discount rate 7.25% 8.00%
Expected long-term rate of
return on plan assets 10.35 10.35
Rate of increase in
compensation levels 4.25 4.50
The accrued liability for postretirement benefits was $6.2 million at
December 31, 2001. These liabilities were discounted at the same rates
used for the pension plans. Postretirement benefit expense totaled $.8
million in 2001 and 2000.
80
Notes to Consolidated Financial Statements, Continued
Note 23. Segment Information
We have two business segments: consumer finance and insurance. Our
segments are defined by the type of financial service product offered.
The consumer finance segment makes home equity loans, originates
secured and unsecured consumer loans, extends lines of credit, and
purchases retail sales contracts from, and provides revolving retail
services for, retail merchants. We also purchase private label
receivables originated by a non-subsidiary affiliate of ours, under a
participation agreement. To supplement our lending and retail sales
financing activities, we purchase portfolios of real estate loans, non-
real estate loans, and retail sales finance receivables. We also offer
credit and non-credit insurance to our consumer finance customers. The
insurance segment writes and assumes credit and non-credit insurance
through products that are offered principally by the consumer finance
segment.
We evaluate the performance of the segments based on pretax operating
earnings. The accounting policies of the segments are the same as
those disclosed in Note 2., except for the following:
* segment finance charge revenues are not reduced for the
amortization of the deferred origination costs;
* segment operating expenses are not reduced for the deferral of
origination costs (segment operating expenses for 2001 also
excluded the amortization of goodwill);
* segment finance receivables exclude deferred origination
costs; and
* segment investment revenues exclude realized gains and losses
and certain investment expenses.
Intersegment sales and transfers are intended to approximate the
amounts segments would earn if dealing with independent third parties.
The following tables display information about the Company's segments
as well as reconciliations of the segment totals to the consolidated
financial statement amounts. The adjustments in the reconciliations
include the following:
* amortization of deferred origination costs, realized gains
(losses) on investments, and certain investment expenses for
revenues;
* releveraging of debt for interest expense;
* redistribution of amounts provided for the allowance for
finance receivable losses for provision for finance receivable
losses;
* realized gains (losses) and certain other investment revenue,
interest expense due to releveraging of debt, provision for
finance receivable losses due to redistribution of amounts
provided for the allowance for finance receivable losses, and
pension expense (2001 and 2000 also included the amortization
of goodwill) for pretax income; and
* goodwill, deferred origination costs, other assets, and
corporate assets that are not considered pertinent to
determining segment performance for assets. Corporate assets
include cash, prepaid expenses, deferred charges, and fixed
assets.
81
Notes to Consolidated Financial Statements, Continued
At or for the year ended December 31, 2002:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,762,193 $ - $ 1,762,193
Insurance 994 190,236 191,230
Other (16,557) 87,746 71,189
Intercompany 78,086 (75,869) 2,217
Interest expense 500,187 - 500,187
Provision for finance
receivable losses 297,629 - 297,629
Pretax income 458,850 84,436 543,286
Assets 13,209,012 1,320,844 14,529,856
At or for the year ended December 31, 2001:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,747,282 $ - $ 1,747,282
Insurance 1,111 194,282 195,393
Other (11,356) 91,134 79,778
Intercompany 79,265 (77,000) 2,265
Interest expense 571,346 - 571,346
Provision for finance
receivable losses 283,402 - 283,402
Pretax income 359,196 86,418 445,614
Assets 11,321,030 1,261,589 12,582,619
At or for the year ended December 31, 2000:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,652,677 $ - $ 1,652,677
Insurance 1,129 195,112 196,241
Other (8,505) 89,086 80,581
Intercompany 75,806 (73,641) 2,165
Interest expense 605,746 - 605,746
Provision for finance
receivable losses 201,838 - 201,838
Pretax income 392,127 90,524 482,651
Assets 11,018,563 1,220,235 12,238,798
82
Notes to Consolidated Financial Statements, Continued
Reconciliations of segment totals to consolidated financial statement
amounts were as follows:
At or for the
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Revenues
Segments $ 2,026,829 $ 2,024,718 $ 1,931,664
Corporate 14,474 2,962 21,535
Adjustments (60,329) (52,144) (50,373)
Consolidated revenue $ 1,980,974 $ 1,975,536 $ 1,902,826
Interest Expense
Segments $ 500,187 $ 571,346 $ 605,746
Corporate 46,109 40,492 50,615
Adjustments 7,581 8,649 21,011
Consolidated interest
expense $ 553,877 $ 620,487 $ 677,372
Provision for Finance
Receivable Losses
Segments $ 297,629 $ 283,402 $ 201,838
Corporate (1,259) 594 898
Adjustments (5) 739 (275)
Consolidated provision for
finance receivable losses $ 296,365 $ 284,735 $ 202,461
Pretax Income
Segments $ 543,286 $ 445,614 $ 482,651
Corporate (34,919) (37,994) (45,513)
Adjustments (12,097) (13,403) (28,335)
Consolidated pretax income $ 496,270 $ 394,217 $ 408,803
Assets
Segments $14,529,856 $12,582,619 $12,238,798
Corporate 698,267 685,330 750,143
Adjustments 172,599 179,677 204,212
Consolidated assets $15,400,722 $13,447,626 $13,193,153
83
Notes to Consolidated Financial Statements, Continued
Note 24. Interim Financial Information (Unaudited)
Our quarterly statements of income for 2002 and 2001 were as follows:
2002 Quarter Ended
Dec. 31, Sep. 30, June 30, Mar. 31,
(dollars in thousands)
Revenues
Finance charges $434,786 $417,476 $412,979 $413,682
Insurance 49,841 47,839 48,050 45,500
Other 27,213 25,484 27,931 30,193
Total revenues 511,840 490,799 488,960 489,375
Expenses
Interest expense 146,297 134,494 137,134 135,952
Operating expenses 135,804 136,762 137,797 140,824
Provision for finance
receivable losses 86,187 69,482 71,099 69,597
Insurance losses and loss
adjustment expenses 22,281 19,201 19,811 21,982
Total expenses 390,569 359,939 365,841 368,355
Income before provision for
income taxes 121,271 130,860 123,119 121,020
Provision for Income Taxes 13,300 46,576 43,832 43,067
Net Income $107,971 $ 84,284 $ 79,287 $ 77,953
2001 Quarter Ended
Dec. 31, Sep. 30, June 30, Mar. 31,
(dollars in thousands)
Revenues
Finance charges $419,745 $420,974 $418,984 $408,910
Insurance 48,798 48,314 50,203 48,078
Other 28,731 26,885 25,059 30,855
Total revenues 497,274 496,173 494,246 487,843
Expenses
Interest expense 142,653 153,630 156,966 167,238
Operating expenses 125,805 136,160 136,094 131,907
Provision for finance
receivable losses 93,815 64,860 67,356 58,704
Insurance losses and loss
adjustment expenses 22,413 21,462 20,978 23,258
Other charges - 58,020 - -
Total expenses 384,686 434,132 381,394 381,107
Income before provision for
income taxes 112,588 62,041 112,852 106,736
Provision for Income Taxes 40,202 21,965 40,698 38,561
Net Income $ 72,386 $ 40,076 $ 72,154 $ 68,175
84
Notes to Consolidated Financial Statements, Continued
Note 25. Fair Value of Financial Instruments
The carrying values and estimated fair values of certain of the
Company's financial instruments are presented below. The reader should
exercise care in drawing conclusions based on fair value, since the
fair values presented below can be misinterpreted and do not include
the value associated with all of the Company's assets and liabilities.
December 31, 2002 December 31, 2001
Carrying Fair Carrying Fair
Value Value Value Value
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $13,120,670 $13,164,367 $11,279,720 $10,904,950
Investment securities 1,227,156 1,227,156 1,142,186 1,142,186
Cash and cash equivalents 144,565 144,565 175,492 175,492
Liabilities
Long-term debt 9,566,256 9,849,447 6,300,171 6,468,550
Commercial paper 3,061,141 3,061,141 4,578,637 4,578,637
Interest rate swap
agreements 137,682 137,682 103,867 103,867
Off-Balance Sheet Financial
Instruments
Unused customer credit
limits - - - -
Limited partnership commitments - 26,110 - 27,545
VALUATION METHODOLOGIES AND ASSUMPTIONS
We used the following methods and assumptions to estimate the fair
value of our financial instruments.
Finance Receivables
We estimated fair values of net finance receivables, less allowance for
finance receivable losses using projected cash flows, computed by
category of finance receivable, discounted at the weighted-average
interest rates offered for similar finance receivables at December 31
of each year. We based cash flows on contractual payment terms
adjusted for delinquencies and finance receivable losses. The fair
value estimates do not reflect the value of the underlying customer
relationships or the related distribution systems.
85
Notes to Consolidated Financial Statements, Continued
Investment Securities
When available, we used quoted market prices as fair values of
investment securities. For investment securities not actively traded,
we estimated fair values using values obtained from independent pricing
services or, in the case of some private placements, by discounting
expected future cash flows using each year's December 31 market rate
applicable to yield, credit quality, and average life of the
investments.
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximated the carrying
values.
Long-term Debt
We estimated the fair values of long-term debt using cash flows
discounted at each year's December 31 borrowing rates.
Commercial Paper
The fair values of commercial paper approximated the carrying values.
Interest Rate Swap Agreements
We estimated the fair values of interest rate swap agreements using
market recognized valuation systems at each year's December 31 market
rates.
Unused Customer Credit Limits
The unused credit limits available to the customers of the non-
subsidiary affiliate that sells private label receivables to the
Company under a participation agreement and to the Company's customers
have no fair value. The interest rates charged on these facilities can
be changed at the affiliate's discretion for private label, or are
adjustable and reprice frequently for loan and retail revolving lines
of credit. These amounts, in part or in total, can be cancelled at the
discretion of the affiliate and the Company.
Limited Partnership Commitments
The fair values of limited partnership commitments equal the commitment
amounts since the partnership may call these commitments on demand.
86
Notes to Consolidated Financial Statements, Continued
Note 26. Subsequent Event
During fourth quarter 2002, AGFI entered into a definitive agreement to
acquire Wilmington Finance, Inc. (WFI), a majority owned subsidiary of
WSFS Financial Corporation. WFI is an originator and seller of
residential mortgage loans. The agreement allows the investment to be
purchased by any affiliate of AGFI. WFI became an indirect subsidiary
of AGFC. The transaction closed effective January 1, 2003 at a
purchase price of $117.1 million.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
As previously reported in AGFC's Current Report on Form 8-K dated April
22, 2002, the Company changed independent auditors effective with the
year beginning January 1, 2002. There were no disagreements, as
defined in Securities and Exchange Commission rules, between the
Company and its previous independent auditors.
87
PART III
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
The conclusions of our principal executive officer and principal
financial officer about the effectiveness of the Company's
disclosure controls and procedures based on their evaluation of
these controls and procedures as of a date within 90 days of the
filing date of this annual report on Form 10-K are as follows:
The Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company
is recorded, processed, summarized and reported within required
timeframes. The Company's disclosure controls and procedures
include controls and procedures designed to ensure that
information required to be disclosed is accumulated and
communicated to the Company's management, including its principal
executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure.
The Company's management, including its principal executive
officer and principal financial officer, assesses the adequacy of
our disclosure controls and procedures quarterly. Based on these
assessments, the Company's principal executive officer and
principal financial officer have concluded that the disclosure
controls and procedures have functioned effectively and that the
consolidated financial statements fairly present our consolidated
financial position and the results of our operations for the
periods presented.
(b) Changes in internal control
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of management's most recent
evaluation, including any corrective actions with regard to any
significant deficiencies and material weaknesses.
88
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) (1) and (2) The following consolidated financial statements of
American General Finance Corporation and subsidiaries are
included in Item 8:
Consolidated Balance Sheets, December 31, 2002 and 2001
Consolidated Statements of Income, years ended December 31,
2002, 2001, and 2000
Consolidated Statements of Shareholder's Equity, years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows, years ended December
31, 2002, 2001, and 2000
Consolidated Statements of Comprehensive Income, years ended
December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is
included in Item 15(d).
All other financial statement schedules have been omitted because
they are inapplicable.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page
98 herein.
(b) Reports on Form 8-K
Current Report on Form 8-K dated November 14, 2002 with respect
to the issuance from time to time of up to $5.75 billion
aggregate principal amount of our Medium-Term Notes, Series H.
Current Report on Form 8-K dated November 15, 2002 with respect
to the authorization for issuance of $75.0 million aggregate
principal amount of our 4.411% Senior Notes due November 30,
2007.
(c) Exhibits
The exhibits required to be included in this portion of Item 15.
are submitted as a separate section of this report.
89
Item 15(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance Corporation
Condensed Balance Sheets
December 31,
2002 2001
(dollars in thousands)
Assets
Net finance receivables:
Loans $ 1,229,165 $ 1,179,043
Retail sales finance 124,103 120,589
Net finance receivables 1,353,268 1,299,632
Allowance for finance receivable losses (28,285) (22,594)
Net finance receivables, less allowance
for finance receivable losses 1,324,983 1,277,038
Cash and cash equivalents 90,125 111,300
Investment in subsidiaries 1,841,831 1,565,638
Receivable from parent and affiliates 12,685,484 10,465,283
Notes receivable from parent and
subsidiaries 269,240 267,656
Other assets 380,381 119,233
Total assets $16,592,044 $13,806,148
Liabilities and Shareholder's Equity
Long-term debt, 1.48% - 8.45%
due 2003 - 2012 $ 9,566,256 $ 6,295,715
Short-term notes payable:
Commercial paper 2,938,221 4,439,367
Notes payable to subsidiaries 1,900,899 1,152,052
Other liabilities 376,740 373,087
Total liabilities 14,782,116 12,260,221
Shareholder's equity:
Common stock 5,080 5,080
Additional paid-in capital 951,175 877,526
Other equity (68,938) (61,687)
Retained earnings 922,611 725,008
Total shareholder's equity 1,809,928 1,545,927
Total liabilities and shareholder's equity $16,592,044 $13,806,148
See Notes to Condensed Financial Statements.
90
Schedule I, Continued
American General Finance Corporation
Condensed Statements of Income
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Revenues
Interest received from affiliates $ 926,377 $1,005,246 $1,036,734
Dividends received from subsidiaries 73,035 104,896 57,116
Finance charges 18,470 18,583 17,135
Other 245 285 298
Total revenues 1,018,127 1,129,010 1,111,283
Expenses
Interest expense 639,775 685,899 753,627
Operating expenses 2,350 2,555 5,517
Other charges - 13,020 -
Total expenses 642,125 701,474 759,144
Income before income taxes and equity
in undistributed (overdistributed)
net income of subsidiaries 376,002 427,536 352,139
Provision for Income Taxes 76,038 113,042 103,376
Income before equity in undistributed
(overdistributed) net income of
subsidiaries 299,964 314,494 248,763
Equity in Undistributed (Overdistributed)
Net Income of Subsidiaries 49,531 (61,703) 11,367
Net Income $ 349,495 $ 252,791 $ 260,130
See Notes to Condensed Financial Statements.
91
Schedule I, Continued
American General Finance Corporation
Condensed Statements of Cash Flows
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 349,495 $ 252,791 $ 260,130
Reconciling adjustments:
Equity in (undistributed) overdistributed
net income of subsidiaries (49,531) 61,703 (11,367)
Change in other assets and other liabilities (23,565) 24,709 6,503
Change in taxes receivable and payable (102,548) 22,111 66,036
Other charges - 13,020 -
Other, net (3,292) (4,788) (5,150)
Net cash provided by operating activities 170,559 369,546 316,152
Cash Flows from Investing Activities
Finance receivables originated or purchased
from subsidiaries (1,163,968) (1,359,156) (1,111,099)
Principal collections on finance receivables 97,718 93,176 75,116
Finance receivables sold to subsidiaries 1,040,335 1,251,525 796,651
Capital contributions to subsidiaries,
net of return of capital (202,869) (51,725) (9,709)
Change in receivable from parent
and affiliates (2,362,835) (478,562) (424,410)
Other, net (10,802) (310) (49)
Net cash used for investing activities (2,602,421) (545,052) (673,500)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 4,638,983 1,892,820 1,240,329
Repayment of long-term debt (1,389,258) (1,263,325) (1,285,517)
Change in commercial paper (1,501,146) (252,400) 636,176
Change in notes receivable or payable
with parent and subsidiaries 747,263 255,190 (40,403)
Capital contributions from parent 66,737 - -
Dividends paid (151,892) (428,855) (185,117)
Net cash provided by financing activities 2,410,687 203,430 365,468
(Decrease) increase in cash and cash equivalents (21,175) 27,924 8,120
Cash and cash equivalents at beginning of year 111,300 83,376 75,256
Cash and cash equivalents at end of year $ 90,125 $ 111,300 $ 83,376
<FN>
<F1>
See Notes to Condensed Financial Statements.
</FN>
92
Schedule I, Continued
American General Finance Corporation
Notes to Condensed Financial Statements
December 31, 2002
Note 1. Accounting Policies
AGFC's investments in subsidiaries are stated at cost plus the equity
in undistributed (overdistributed) net income of subsidiaries since the
date of the acquisition. The condensed financial statements of the
registrant should be read in conjunction with AGFC's consolidated
financial statements.
Note 2. Receivable from Subsidiaries
AGFC provides funding to most of its finance subsidiaries for lending
activities. Such funding is made at 215 basis points over the
borrowing cost rate.
Note 3. Long-Term Debt
Long-term debt maturities for the five years after December 31, 2002,
were as follows: 2003, $1.6 billion; 2004, $2.1 billion; 2005, $1.5
billion; 2006, $1.3 billion; and 2007, $1.4 billion.
Note 4. Other Charges
In September 2001, AGFC recorded one-time charges totaling $13.0
million ($8.5 million aftertax), resulting from AIG's and AGFC's joint
assessment of the business environment and post-business combination
plans. These charges recognized that certain assets had no future
economic benefit or ability to generate future revenues. These costs
included an asset impairment charge related to customer relationships
that resulted from a previous business acquisition.
Note 5. Subsidiary Debt Guarantee
AGFC guarantees the short-term notes payable, consisting of commercial
paper and bank borrowings, of CommoLoCo, Inc., AGFC's consumer
financial services subsidiary that conducts business in Puerto Rico and
the U.S. Virgin Islands. These short-term notes payable partially fund
CommoLoCo, Inc.'s operations and totaled $122.9 million at December 31,
2002 and $139.2 million at December 31, 2001. AGFC would be required
to repay this debt if CommoLoCo, Inc.'s cash flows from operations and
new debt issuances become inadequate.
93
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 14, 2003.
AMERICAN GENERAL FINANCE CORPORATION
By: /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
(Senior Vice President and Chief
Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 14, 2003.
Frederick W. Geissinger* Robert A. Cole*
Frederick W. Geissinger Robert A. Cole
(President and Chief Executive (Director)
Officer and Director -
Principal Executive Officer)
William N. Dooley*
William N. Dooley
/s/ Donald R. Breivogel, Jr. (Director)
Donald R. Breivogel, Jr.
(Senior Vice President and
Chief Financial Officer - Jerry L. Gilpin*
Principal Financial Officer) Jerry L. Gilpin
(Director)
George W. Schmidt*
George W. Schmidt Ben D. Hendrix*
(Vice President, Controller, Ben D. Hendrix
and Assistant Secretary - (Director)
Principal Accounting Officer)
*By: /s/ Donald R. Breivogel, Jr.
Stephen L. Blake* Donald R. Breivogel, Jr.
Stephen L. Blake (Attorney-in-fact)
(Director)
94
Certifications
I, Frederick W. Geissinger, President and Chief Executive Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of American
General Finance Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
95
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/ Frederick W. Geissinger
Frederick W. Geissinger
President and Chief Executive
Officer
96
Certifications
I, Donald R. Breivogel, Jr., Senior Vice President and Chief Financial
Officer, certify that:
1. I have reviewed this annual report on Form 10-K of American
General Finance Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
97
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Senior Vice President and
Chief Financial Officer
98
Exhibit Index
Exhibit
Number
(3) a. Restated Articles of Incorporation of American General Finance
Corporation (formerly Credithrift Financial Corporation) dated
July 22, 1988 and amendments thereto dated August 25, 1988 and
March 20, 1989. Incorporated by reference to Exhibit (3)a.
filed as a part of the Company's Annual Report on Form 10-K
for the year ended December 31, 1988 (File No. 1-6155).
b. By-laws of American General Finance Corporation. Incorporated
by reference to Exhibit (3)b. filed as a part of the Company's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-6155).
(4) a. The following instruments are filed pursuant to Item
601(b)(4)(ii) of Regulation S-K, which requires with certain
exceptions that all instruments be filed which define the
rights of holders of the Company's long-term debt and our
consolidated subsidiaries. In the aggregate, the outstanding
issuances of debt at December 31, 2002 under the following
Indenture exceeds 10% of the Company's total assets on a
consolidated basis:
Indenture dated as of May 1, 1999 from American General
Finance Corporation to Citibank, N.A. Incorporated by
reference to Exhibit (4)a.(1) filed as a part of our
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 1-6155).
b. In accordance with Item 601(b)(4)(iii) of Regulation S-K,
certain other instruments defining the rights of holders of
the Company's long-term debt and our subsidiaries have not
been filed as exhibits to this Annual Report on Form 10-K
because the total amount of securities authorized and
outstanding under each instrument does not exceed 10% of the
total assets of the Company on a consolidated basis. We
hereby agree to furnish a copy of each instrument to the
Securities and Exchange Commission upon request.
(12) Computation of ratio of earnings to fixed charges
(23)(a) Consent of PricewaterhouseCoopers LLP, Independent Accountants
(23)(b) Consent of Ernst & Young LLP, Independent Auditors
(24) Power of Attorney