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, 2003
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
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 10, 2004, 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 . . . . . . . . . . . . . . . . . . . . . 26
3. Legal Proceedings . . . . . . . . . . . . . . . . . 26
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . *
Part II 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . 27
6. Selected Financial Data . . . . . . . . . . . . . . 27
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 28
7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . 49
8. Financial Statements and Supplementary Data . . . . 49
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . 93
9A. Controls and Procedures . . . . . . . . . . . . . . 93
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. Principal Accountant Fees and Services . . . . . . . 94
Part IV 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . 95
* Items 4, 10, 11, 12, and 13 are not included, per conditions met by
Registrant set forth in General Instructions I(1)(a) and (b) of
Form 10-K.
AVAILABLE INFORMATION
American General Finance Corporation (AGFC) files annual, quarterly,
and current reports and other information with the Securities and
Exchange Commission (the SEC). The SEC maintains a website that
contains annual, quarterly, and current reports and other information
that issuers (including AGFC) file electronically with the SEC. The
SEC's website is www.sec.gov. This Annual Report on Form 10-K for the
year ended December 31, 2003, our Annual Report on Form 10-K for the
year ended December 31, 2002, and our 2003 Quarterly Reports on Form
10-Q are available free of charge on our Internet website
www.agfinance.com. The information on our website is not incorporated
by reference into this report. The website addresses listed above are
provided for the information of the reader and are not intended to be
active links.
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, financial services, and
retirement services and asset management 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 wholly owned subsidiaries
of AGFC.
Effective January 1, 2003, we acquired 100% of the common stock of
Wilmington Finance, Inc. (WFI) in a purchase business combination.
WFI provides services for the origination of non-conforming
residential real estate loans for sale to investors.
At December 31, 2003, the Company had 1,365 offices in 44 states,
Puerto Rico, and the U.S. Virgin Islands and approximately 8,400
employees. Our executive offices are located in Evansville, Indiana.
Selected Financial Information
Selected financial information of the Company was as follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Average net receivables $13,800,558 $12,135,806 $11,411,464
Average borrowings $12,952,422 $11,180,394 $10,373,630
4
Item 1. Continued
At or for the
Years Ended December 31,
2003 2002 2001
Yield - finance charges as a
percentage of average net
receivables 12.41% 13.83% 14.62%
Borrowing cost - interest
expense as a percentage
of average borrowings 4.17% 4.95% 5.98%
Interest spread - yield
less borrowing cost 8.24% 8.88% 8.64%
Operating expenses as a
percentage of average
net receivables 4.90% 4.54% 4.64%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 3.07% 3.34% 3.74%
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 2.21% 2.41% 2.27%
Charge-off coverage - allowance
for finance receivable losses
to net charge-offs 1.50x 1.56x 1.70x
Delinquency ratio - gross finance
receivables 60 days or more
past due as a percentage
of gross finance receivables 3.33% 3.68% 3.73%
Return on average assets 2.28% 2.51% 1.91%
Return on average equity 18.79% 21.69% 14.46%
Ratio of earnings to fixed charges
(refer to Exhibit 12 for
calculations) 2.03x 1.87x 1.62x
Debt to tangible equity ratio -
debt to equity less goodwill
and accumulated other
comprehensive income 7.51x 7.34x 7.50x
Debt to equity ratio 6.76x 6.98x 7.04x
5
Item 1. Continued
CONSUMER FINANCE BUSINESS SEGMENT
Through its 1,365 branch offices and its centralized services and
support operations, the consumer finance business segment:
* makes loans directly to individuals;
* offers retail sales financing to merchants;
* purchases portfolios of finance receivables originated by
other lenders;
* provides for a fee, marketing, certain origination processing
services, and loan servicing for a non-subsidiary affiliate;
* originates real estate loans for sale to investors; and
* offers credit and non-credit insurance products.
Most of our customers are usually described as non-conforming, non-
prime, or subprime.
Products and Services
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. 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 retail merchants. We also purchase private label receivables
originated by AIG Federal Savings Bank, a non-subsidiary affiliate,
under a participation agreement. Retail sales contracts, revolving
retail, and private label receivables are generated at approximately
24,000 retail merchant locations across the United States, Puerto
Rico, and the U.S. Virgin Islands. Retail sales contracts are closed-
end accounts that consist of a single purchase transaction. Revolving
retail and private label are open-end 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 originated by other lenders whose
customers meet our credit quality standards and profitability
objectives. We also purchase real estate loans originated by AIG
Federal Savings Bank under a purchase agreement. Additionally, we
provide for a fee, marketing, certain origination processing services,
and loan servicing for AIG Federal Savings Bank's origination and sale
of non-conforming residential real estate loans. We also originate
real estate loans, primarily through broker relationships and, to a
lesser extent, directly to consumers, and sell the originated loans to
investors with servicing released.
6
Item 1. Continued
We offer credit life, credit accident and health, credit related
property and casualty, credit involuntary unemployment, and non-credit
insurance to eligible consumer finance customers. These products are
issued by affiliated as well as non-affiliated insurance companies and
are described under "Insurance Business Segment".
Customer Development and Servicing
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 to
invite the customer to discuss his or her overall credit needs with
our consumer lending specialists. Any resulting loan may pay off the
customer's retail sales finance obligation and consolidate his or her
debts with other creditors.
Our consumer lending specialists, who, where required, 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 of these products.
We also originate loans by soliciting former customers who have
recently paid off their loans as well as current customers. In
addition, we purchase prospect 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 customers. We forward
this information to our branch offices where consumer lending
specialists contact the potential customers in attempts to initiate
loans.
Our branch offices are supported by centralized administrative and
operational functions. Our centralized operations include the
following:
* customer solicitations;
* real estate loan approvals;
* real estate loan servicing;
* real estate owned processing;
* retail sales finance approvals;
* retail sales finance collections;
* retail sales finance payment processing;
* revolving retail and private label processing;
* merchant services; 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
Operational Controls
We control and monitor our consumer finance business segment through a
variety of methods including the following:
* Our operational policies and procedures standardize various
aspects of 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 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 lending and collection activities with
predetermined parameters.
* Our field operations management structure is designed to
control a large, decentralized organization with each
succeeding level staffed with more experienced personnel.
* Our field operations incentive compensation plan aligns the
operating activities and goals with corporate strategies by
basing a portion of field personnel total compensation on
profitability and credit quality.
* Our internal audit department audits for operational policy
and procedure and state law and regulation compliance.
Internal audit reports directly to AIG to enhance
independence.
See Note 24. 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,
2003 2002 2001
Amount Percent Amount Percent Amount Percent
Originated and renewed
Amount (in thousands):
Real estate loans $4,747,121 52% $2,518,226 37% $2,129,623 33%
Non-real estate loans 2,769,548 31 2,690,135 39 2,704,901 41
Retail sales finance 1,577,749 17 1,611,943 24 1,695,115 26
Total $9,094,418 100% $6,820,304 100% $6,529,639 100%
Number:
Real estate loans 71,161 5% 57,909 4% 55,935 3%
Non-real estate loans 755,595 48 748,226 46 765,716 45
Retail sales finance 753,303 47 810,598 50 889,863 52
Total 1,580,059 100% 1,616,733 100% 1,711,514 100%
Average size (to nearest
dollar):
Real estate loans $66,710 $43,486 $38,073
Non-real estate loans 3,665 3,595 3,533
Retail sales finance 2,094 1,989 1,905
Net purchased
Amount (in thousands):
Real estate loans $ 555,774 94% $2,343,636 92% $ 945,621 85%
Non-real estate loans 3,052 1 124,665 5 25,327 2
Retail sales finance 30,044 5 83,576 3 142,875 13
Total $ 588,870 100% $2,551,877 100% $1,113,823 100%
Number:
Real estate loans 5,563 30% 38,948 38% 15,169 23%
Non-real estate loans 1,735 9 35,096 35 12,790 19
Retail sales finance 11,533 61 27,791 27 38,516 58
Total 18,831 100% 101,835 100% 66,475 100%
Average size (to nearest
dollar):
Real estate loans $99,905 $60,173 $62,339
Non-real estate loans 1,759 3,552 1,980
Retail sales finance 2,605 3,007 3,709
Net purchased for 2003 included a sale of $266.8 million of real
estate loans to an AGFI subsidiary for securitization. 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,
2003 2002 2001
Amount Percent Amount Percent Amount Percent
Originated, renewed,
and net purchased
Amount (in thousands):
Real estate loans $5,302,895 55% $4,861,862 52% $3,075,244 40%
Non-real estate loans 2,772,600 28 2,814,800 30 2,730,228 36
Retail sales finance 1,607,793 17 1,695,519 18 1,837,990 24
Total $9,683,288 100% $9,372,181 100% $7,643,462 100%
Number:
Real estate loans 76,724 5% 96,857 6% 71,104 4%
Non-real estate loans 757,330 47 783,322 45 778,506 44
Retail sales finance 764,836 48 838,389 49 928,379 52
Total 1,598,890 100% 1,718,568 100% 1,777,989 100%
Average size (to nearest
dollar):
Real estate loans $69,117 $50,196 $43,250
Non-real estate loans 3,661 3,593 3,507
Retail sales finance 2,102 2,022 1,980
Amount of net purchased as a percentage of total originated, renewed,
and net purchased was as follows:
Years Ended December 31,
2003 2002 2001
Real estate loans 10% 48% 31%
Non-real estate loans - 4 1
Retail sales finance 2 5 8
Total 6% 27% 15%
10
Item 1. Continued
Amount, number, and average size of net finance receivables by type
were as follows:
December 31,
2003 2002 2001
Amount Percent Amount Percent Amount Percent
Net finance receivables
Amount (in thousands):
Real estate loans $10,657,742 72% $ 9,313,496 69% $ 7,444,484 64%
Non-real estate loans 2,877,825 19 2,905,339 21 2,865,985 24
Retail sales finance 1,302,922 9 1,355,503 10 1,408,111 12
Total $14,838,489 100% $13,574,338 100% $11,718,580 100%
Number:
Real estate loans 205,391 11% 212,082 11% 183,406 9%
Non-real estate loans 876,083 49 907,405 48 932,165 48
Retail sales finance 730,861 40 789,703 41 850,123 43
Total 1,812,335 100% 1,909,190 100% 1,965,694 100%
Average size (to nearest
dollar):
Real estate loans $51,890 $43,915 $40,590
Non-real estate loans 3,285 3,202 3,075
Retail sales finance 1,783 1,716 1,656
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,
2003 2002 2001
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
California $ 2,263,038 15% $ 2,160,846 16% $ 1,374,599 12%
Florida 921,092 6 840,182 6 772,830 7
N. Carolina 883,866 6 887,243 7 850,995 7
Illinois 835,156 6 786,593 6 731,238 6
Ohio 833,064 6 785,506 6 741,702 7
Georgia 658,833 4 591,970 4 510,140 4
Virginia 657,683 4 553,386 4 500,137 4
Indiana 618,636 4 598,832 4 586,625 5
Other 7,167,121 49 6,369,780 47 5,650,314 48
Total $14,838,489 100% $13,574,338 100% $11,718,580 100%
11
Item 1. Continued
Average Net Receivables
Average net receivables by type were as follows:
Years Ended December 31,
2003 2002 2001
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
Real estate loans $ 9,687,738 70% $ 7,995,507 66% $ 7,133,476 63%
Non-real estate loans 2,831,197 21 2,804,579 23 2,897,617 25
Retail sales finance 1,281,623 9 1,335,720 11 1,380,371 12
Total $13,800,558 100% $12,135,806 100% $11,411,464 100%
Growth in average net receivables by type was as follows:
Years Ended December 31,
2003 2002 2001
Percent Percent Percent
Amount Change Amount Change Amount Change
(dollars in thousands)
Real estate loans $1,692,231 21% $ 862,031 12% $ 121,037 2%
Non-real estate loans 26,618 1 (93,038) (3) 148,954 5
Retail sales finance (54,097) (4) (44,651) (3) 22,356 2
Total $1,664,752 14% $ 724,342 6% $ 292,347 3%
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 using the interest method.
We defer the costs to originate certain finance receivables and the
revenue from nonrefundable points and fees on loans and amortize them
to revenue 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 finance charges 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,
2003 2002 2001
(dollars in thousands)
Real estate loans:
Finance charges $ 926,109 $ 880,021 $ 847,110
Yield 9.56% 11.01% 11.88%
Non-real estate loans:
Finance charges $ 600,903 $ 604,005 $ 625,159
Yield 21.22% 21.54% 21.57%
Retail sales finance:
Finance charges $ 185,082 $ 194,897 $ 196,344
Yield 14.44% 14.59% 14.22%
Total:
Finance charges $1,712,094 $1,678,923 $1,668,613
Yield 12.41% 13.83% 14.62%
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 files for bankruptcy. Because
we evaluate credit applications with a view toward ability to repay,
our customer's inability to repay occurs after our initial credit
evaluation and funding of an outstanding loan.
We use credit risk scoring models at the time of credit application to
assess our risk of the applicant's unwillingness or inability to
repay. These models are developed and based upon numerous factors
including past customer credit repayment experience. The risk scoring
models are periodically revalidated based on recent 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.
Generally, we start foreclosure proceedings on real estate loans when
four monthly installments are past due. When foreclosure is completed
13
Item 1. Continued
and we have obtained title to the property, we obtain an unrelated
party's valuation of the property, which is either a full appraisal or
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 loan balance or 85% of the valuation, 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 and consistent with our credit risk policies. 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,
2003 2002 2001
(dollars in thousands)
Real estate loans:
Charge-offs $ 66,846 $ 56,602 $ 53,875
Recoveries (4,149) (4,467) (4,459)
Net charge-offs $ 62,697 $ 52,135 $ 49,416
Charge-off ratio .65% .66% .69%
Non-real estate loans:
Charge-offs $224,716 $220,557 $196,947
Recoveries (27,699) (26,788) (26,640)
Net charge-offs $197,017 $193,769 $170,307
Charge-off ratio 6.96% 6.91% 5.87%
Retail sales finance:
Charge-offs $ 54,210 $ 53,601 $ 47,439
Recoveries (9,912) (9,346) (8,427)
Net charge-offs $ 44,298 $ 44,255 $ 39,012
Charge-off ratio 3.45% 3.31% 2.83%
Total:
Charge-offs $345,772 $330,760 $298,261
Recoveries (41,760) (40,601) (39,526)
Net charge-offs $304,012 $290,159 $258,735
Charge-off ratio 2.21% 2.41% 2.27%
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 renew 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
application for credit.
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,
2003 2002 2001
(dollars in thousands)
Real estate loans:
Delinquency $302,242 $295,244 $248,266
Delinquency ratio 2.85% 3.20% 3.34%
Non-real estate loans:
Delinquency $164,638 $175,167 $168,001
Delinquency ratio 5.16% 5.40% 5.22%
Retail sales finance:
Delinquency $ 40,217 $ 43,381 $ 40,586
Delinquency ratio 2.80% 2.88% 2.55%
Total:
Delinquency $507,097 $513,792 $456,853
Delinquency ratio 3.33% 3.68% 3.73%
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,
2003 2002 2001
(dollars in thousands)
Balance at beginning of year $ 453,668 $ 438,860 $ 372,825
Provision for finance receivable
losses 308,451 296,365 284,735
Allowance related to sale of
finance receivables to AGFI
subsidiary for securitization (2,705) - -
Allowance related to net
acquired receivables - 8,602 15,035
Charge-offs (345,772) (330,760) (298,261)
Recoveries 41,760 40,601 39,526
Other charges - additional
provision - - 25,000
Balance at end of year $ 455,402 $ 453,668 $ 438,860
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
loan balance or 85% of the unrelated party's valuation, 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
refunded to the customer as a recovery 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,
2003 2002 2001
(dollars in thousands)
Balance at beginning of year $ 47,289 $ 48,359 $ 45,033
Properties acquired 75,627 71,329 57,533
Properties sold or disposed of (65,003) (63,794) (44,651)
Monthly writedowns (8,018) (8,605) (9,556)
Balance at end of year $ 49,895 $ 47,289 $ 48,359
Real estate owned as a percentage
of real estate loans 0.47% 0.51% 0.65%
Net recovery (loss) on sales of
real estate owned $ 1,843 $ 2,943 $ (1,063)
Changes in the number of real estate owned properties were as follows:
At or for the
Years Ended December 31,
2003 2002 2001
Balance at beginning of year 897 970 817
Properties acquired 1,384 1,355 1,526
Properties sold or disposed of (1,336) (1,428) (1,373)
Balance at end of year 945 897 970
Sources of Funds
We fund our consumer finance business segment 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;
* sales of finance receivables for securitizations; and
* capital contributions from parent.
17
Item 1. Continued
Average Borrowings
Average borrowings by term of debt were as follows:
Years Ended December 31,
2003 2002 2001
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
Long-term debt $ 9,584,778 74% $ 7,343,929 66% $ 6,022,033 58%
Short-term debt 3,367,644 26 3,836,465 34 4,351,597 42
Total $12,952,422 100% $11,180,394 100% $10,373,630 100%
Average borrowings by rate of debt were as follows:
Years Ended December 31,
2003 2002 2001
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
Fixed-rate debt $ 7,640,490 59% $ 7,416,047 66% $ 7,240,971 70%
Floating-rate debt 5,311,932 41 3,764,347 34 3,132,659 30
Total $12,952,422 100% $11,180,394 100% $10,373,630 100%
Interest Expense and Borrowing Cost
Interest expense and borrowing cost by term of debt were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Long-term debt:
Interest expense $444,380 $432,737 $400,920
Borrowing cost 4.64% 5.89% 6.66%
Short-term debt:
Interest expense $ 94,478 $121,140 $219,567
Borrowing cost 2.82% 3.16% 5.04%
Total:
Interest expense $538,858 $553,877 $620,487
Borrowing cost 4.17% 4.95% 5.98%
18
Item 1. Continued
Interest expense and borrowing cost by rate of debt were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Fixed-rate debt:
Interest expense $433,748 $480,258 $484,661
Borrowing cost 5.68% 6.48% 6.69%
Floating-rate debt:
Interest expense $105,110 $ 73,619 $135,826
Borrowing cost 1.99% 1.96% 4.33%
Total:
Interest expense $538,858 $553,877 $620,487
Borrowing cost 4.17% 4.95% 5.98%
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 13. of the Notes to Consolidated
Financial Statements in Item 8.
Contractual Maturities
Contractual maturities of net finance receivables and debt at December
31, 2003 were as follows:
Net Finance
Receivables Debt
(dollars in thousands)
2004 $ 1,329,392 $ 5,283,718
2005 1,537,085 1,822,330
2006 1,135,178 2,454,296
2007 704,280 1,387,618
2008 472,996 540,668
2009 and thereafter 9,659,558 2,382,786
Total $14,838,489 $13,871,416
See Note 5. 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 BUSINESS SEGMENT
The insurance business segment markets its products to our eligible
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 reinsures credit life, credit
accident and health, and non-credit insurance.
Yosemite is a property and casualty insurance company domiciled in
Indiana and licensed in 45 states. Yosemite principally writes or
reinsures credit-related property and casualty and credit involuntary
unemployment insurance.
Products and Services
Our credit life insurance policies insure the life of the borrower in
an amount typically equal to the unpaid balance of the finance
receivable and provide for payment in full to the lender of the
finance receivable in the event of the borrower's death. Our credit
accident and health insurance policies provide, to the lender, payment
of the installments on the finance receivable coming due during a
period of the borrower's disability due to illness or injury. Our
credit-related property and casualty insurance policies are written to
protect the lender's interest in property pledged as collateral for
the finance receivable. Our credit involuntary unemployment insurance
policies provide, to the lender, payment of the installments on the
finance receivable coming due during a period of the borrower's
involuntary unemployment. The borrower's purchase of credit life,
credit accident and health, credit-related property and casualty, or
credit involuntary unemployment insurance is voluntary with the
exception of lender-placed property damage coverage for property
pledged as collateral. In these instances, our consumer finance
business segment obtains property damage coverage through Yosemite
either on a direct or reinsured basis under the terms of the lending
agreement if the borrower does not provide evidence of coverage with
another insurance carrier. Non-credit insurance policies are
primarily traditional life level term 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.
20
Item 1. Continued
Reinsurance
Merit and Yosemite have entered into reinsurance agreements with other
insurance companies, including certain affiliated companies, for
reinsurance 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
reinsure 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, 2003, reserves on the books of Merit and
Yosemite for these reinsurance agreements totaled $93.5 million.
See Note 24. of the Notes to Consolidated Financial Statements in Item
8. for further information on the Company's insurance business
segment.
Insurance Premium 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, for which we
recognize unearned premiums 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 and credit
involuntary unemployment insurance as revenue using the straight-line
method over the terms of the policies. We recognize non-credit life
insurance premiums as revenue when collected but not before their due
dates.
21
Item 1. Continued
Premiums earned and premiums written by type of insurance were as
follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Premiums Earned
Credit insurance premiums earned:
Credit life $ 35,026 $ 37,576 $ 41,046
Credit accident and health 45,114 47,726 50,405
Property and casualty 58,371 55,645 53,537
Other insurance premiums earned:
Non-credit life 32,934 38,097 39,157
Non-credit accident and health 7,719 7,323 6,136
Premiums assumed under
coinsurance agreements (654) 2,631 2,725
Total $178,510 $188,998 $193,006
Premiums Written
Credit insurance premiums written:
Credit life $ 26,057 $ 23,263 $ 29,333
Credit accident and health 39,754 40,458 44,570
Property and casualty 50,697 55,186 54,048
Other insurance premiums written:
Non-credit life 32,934 38,097 39,157
Non-credit accident and health 7,719 7,323 6,136
Premiums assumed under
coinsurance agreements (654) 2,631 2,725
Total $156,507 $166,958 $175,969
Insurance Losses Incurred
Insurance losses incurred represent claims paid on behalf of the
insured plus changes in various insurance reserves. 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 amounts on assumptions as to
investment yields, mortality, and surrenders. We base annuity
reserves on assumptions as to investment yields and mortality. We
base insurance reserves assumed under coinsurance agreements where we
assume the risk of loss on various tabular and unearned premium
methods.
22
Item 1. Continued
Losses incurred by type of insurance were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Credit insurance losses incurred:
Credit life $ 20,661 $ 21,869 $ 21,830
Credit accident and health 16,501 26,494 24,814
Property and casualty 13,917 9,247 15,715
Other insurance losses incurred:
Non-credit life 6,800 11,996 11,102
Non-credit accident and health 4,632 4,485 3,751
Losses incurred under
coinsurance agreements 5,338 9,184 10,899
Total $ 67,849 $ 83,275 $ 88,111
Life Insurance in Force
Life insurance in force by type of insurance was as follows:
December 31,
2003 2002 2001
(dollars in thousands)
Credit life $3,050,535 $3,091,211 $3,126,473
Non-credit life 2,900,944 3,104,772 3,275,199
Total $5,951,479 $6,195,983 $6,401,672
Investments and Investment Results
We invest cash generated by our insurance business segment primarily
in bonds. We invest in, but are not limited to, the following:
* bonds;
* commercial mortgage loans;
* short-term investments;
* limited partnerships;
* preferred stock;
* investment real estate;
* policy loans; and
* common stock.
AIG subsidiaries manage substantially all of our insurance business
segment's investments on our behalf.
We currently classify all investment securities as available-for-sale
and record them at fair value. We specifically identify realized
gains and losses on investment securities.
23
Item 1. Continued
We recognize interest on interest bearing fixed maturity investment
securities, commercial mortgage loans, and policy loans as revenue on
the accrual basis using the interest method. We amortize any premiums
or discounts as a revenue adjustment using the interest method. We
stop accruing interest revenue when 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 prepayments of the
underlying mortgages. We recognize the pretax operating income from
our investment real estate as revenue monthly and from our investments
in limited partnerships as revenue quarterly.
Investment results of our insurance business segment were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Net investment revenue (a) $ 82,630 $ 82,812 $ 81,711
Average invested assets (b) $1,302,509 $1,252,625 $1,231,187
Adjusted portfolio yield (c) 6.56% 6.84% 7.03%
Net realized losses on
investments (d) $ (8,361) $ (4,400) $ (2,989)
(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.
The increase in net realized losses on investments in 2003 was
primarily due to a write-off of a limited partnership, which was
considered other than temporary. See Note 7. of the Notes to
Consolidated Financial Statements in Item 8. for information regarding
investment securities for all operations of the Company.
24
Item 1. Continued
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, federal law preempts state law restrictions on
interest rates and points and fees for first lien residential mortgage
loans. The federal Alternative Mortgage Transactions Parity Act
preempts certain state law restrictions on variable rate loans and
loans with balloon payments in many states. The Company makes
residential mortgage loans under the provisions of 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.
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 laws or regulations, if adopted, 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.
25
Item 1. Continued
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;
* reserve requirements for unearned premiums, losses, and other
purposes; and
* claims processing.
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, the capital market resources of some
competitors, and the 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 business segment supplements our consumer finance
business segment. We believe that our insurance companies' abilities
to market insurance products through our distribution systems provide
a competitive advantage over our insurance competitors.
26
Item 2. Properties.
We generally conduct branch office operations, branch office
administration, other operations, and operational support in leased
premises. Lease terms generally range from three to five years.
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. These
buildings primarily include certain of our administrative offices, our
centralized services and support operations facilities, and one of our
branch offices. 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
AGFC subsidiary.
Item 3. Legal Proceedings.
AGFC and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain purported 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, if any, 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 continued occurrences
of large damage awards in general in the United States, including
large punitive damage awards that bear little or no relation to actual
economic damages incurred by plaintiffs in some jurisdictions, create
the potential for an unpredictable judgment in any given suit.
27
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
No trading market exists for AGFC's common stock. AGFC is an indirect
wholly owned subsidiary of AIG. AGFC paid the following cash
dividends on its common stock:
Quarter Ended 2003 2002
(dollars in thousands)
March 31 $ 897 $ 89,920
June 30 118,779 61,972
September 30 56,387 -
December 31 - -
Total $176,063 $151,892
See Management's Discussion and Analysis in Item 7., and Note 18. of
the Notes to Consolidated Financial Statements in Item 8., regarding
limitations on the ability of AGFC and its subsidiaries to pay
dividends.
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction
with the consolidated financial statements and related notes in Item
8., Management's Discussion and Analysis in Item 7., and other
financial information in Item 1.
At or for the Years Ended December 31,
2003 2002 2001 2000 1999
(dollars in thousands)
Total revenues $ 2,162,373 $ 1,980,974 $ 1,975,536 $ 1,902,826 $ 1,715,869
Net income (a) 363,573 349,495 252,791 260,130 224,653
Total assets 16,771,141 15,400,722 13,447,626 13,193,153 12,464,102
Long-term debt 10,686,887 9,566,256 6,300,171 5,667,567 5,709,755
(a) Per share information is not included because all of AGFC's common stock
is owned by AGFI.
28
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 and invest
cash flows from the insurance business segment;
* changes in the competitive environment in which we operate,
including the demand for our products, customer responsiveness
to our distribution channels and the formation of business
combinations among our competitors;
* the effectiveness of our credit risk scoring models in
assessing the risk of customer unwillingness or inability to
repay;
* shifts in collateral values, contractual delinquencies, credit
losses and the levels of unemployment and personal
bankruptcies;
* our ability to access capital markets and maintain our credit
rating position;
* 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 businesses;
* changes in our ability to attract and retain employees or key
executives to support our businesses; and
* natural or accidental events such as fires or floods affecting
our branches or other operating facilities.
29
Item 7. Continued
Readers are also directed to other risks and uncertainties discussed
in other documents we file with the SEC. 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. Our
consumer finance business segment borrows money at wholesale prices,
lends money at retail prices, and offers credit and non-credit
insurance products to eligible customers. Our insurance business
segment writes and reinsures credit and non-credit insurance products
for eligible customers of our consumer finance business segment and
invests 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, 2003, 86% 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, 2003, 94% 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 business segment primarily
in investment securities, which were 8% of our assets at December 31,
2003, 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
30
Item 7. Continued
discretion we have are determining the classification of the
investment, 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.
Our other revenue includes service fees we charge for marketing,
certain origination processing services, and loan servicing of real
estate loans under our agreement with AIG Federal Savings Bank. As
required by GAAP, we recognize these fees as revenue when we perform
the services. Other revenue also includes net gain on sale of real
estate loans held for sale and net interest income on real estate
loans held for sale. GAAP requires that we recognize the difference
between the sales price we receive when we sell a real estate loan
held for sale and our investment in that loan as a gain or loss at the
time of sale. GAAP also requires that we recognize interest as
revenue on the accrual basis using the interest method during the
periods we hold real estate loans held for sale. The only discretion
we have is the point of suspension of the accrual of this interest
revenue.
CRITICAL ACCOUNTING POLICIES
Our finance receivable portfolio consists of approximately $14.8
billion of net finance receivables due from approximately 1.8 million
customer accounts. These accounts were originated or purchased and
are serviced by our 1,365 branch offices or by our centralized
services and support operations.
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 branch and centralized services and support
operations 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, and
divorce. Occasionally, these types of events are so economically
severe that the customer files for bankruptcy.
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:
* prior finance receivable loss and delinquency experience;
* the composition of our finance receivable portfolio; and
* current economic conditions, including the levels of
unemployment and personal bankruptcies.
31
Item 7. Continued
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.
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. We adjust the amounts determined by migration
analysis for management's best estimate of the effects of current
economic conditions, including the levels of unemployment and personal
bankruptcies, on the amounts determined from historical loss and
delinquency experience.
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, 2003 and 2002 and provision for finance
receivable losses and net income for 2003 and 2002 would have changed
as follows:
At or for the
Years Ended December 31,
2003 2002
(dollars in millions)
Highest level:
Increase in allowance for finance
receivable losses $ 31.8 $ 16.0
Increase in provision for finance
receivable losses 31.8 16.0
Decrease in net income (20.2) (11.3)
Lowest level:
Decrease in allowance for finance
receivable losses $(100.6) $(103.8)
Decrease in provision for finance
receivable losses (100.6) (103.8)
Increase in net income 64.0 73.1
32
Item 7. Continued
The Credit Strategy and Policy Committee exercises its judgment, based
on quantitative analyses, qualitative factors, and each committee
member's experience in the consumer finance industry, when determining
the amount of the allowance for finance receivable losses. If 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, the analysis of the trends in credit quality, and
the current economic conditions considered by the Credit Strategy and
Policy Committee to support its conclusions. See Provision for
Finance Receivable Losses for further information on the allowance for
finance receivable losses.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements as defined
by SEC 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, borrowings from
banks under credit facilities, and sales of finance receivables for
securitizations. AGFC has also historically received capital
contributions from its parent to support finance receivable growth and
maintain targeted leverage.
In second quarter 2003, AGFC began issuing long-term debt under a
retail note program. These senior, unsecured notes are sold by
brokers to individual investors for a minimum investment of $1,000 in
increments of $1,000.
Also in second quarter 2003, a consolidated special purpose subsidiary
of AGFI purchased $266.8 million of real estate loans from seven
subsidiaries of AGFC.
33
Item 7. Continued
Principal sources and uses of cash were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Principal sources of cash:
Net issuances of debt $1,239.0 $1,727.8 $ 361.0
Operations 736.3 563.2 750.1
Sale of finance receivables to
AGFI subsidiary for
securitization 284.7 - -
Capital contributions - 66.7 -
Total $2,260.0 $2,357.7 $1,111.1
Principal uses of cash:
Net originations and purchases
of finance receivables $1,899.0 $1,876.1 $ 551.2
Dividends paid 176.1 151.9 428.9
Total $2,075.1 $2,028.0 $ 980.1
Net cash from operations increased in 2003 primarily due to net sales
of real estate loans held for sale, higher finance charges, lower
interest expense, and routine operating activities. Net issuances of
debt decreased in 2003 in response to the increase in net cash from
operations and the sale of finance receivables for securitization.
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 cash from operations decreased in
2002 due to routine operating activities, partially offset by higher
finance charges and lower interest expense.
Dividends paid, less capital contributions received, reflect changes
in net income retained by AGFC to maintain equity and total debt at a
targeted ratio. At year end 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.
34
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
by utilizing the following existing 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, 2003, we had $9.1 billion of long-term debt securities
registered under the Securities Act of 1933 that had not yet been
issued. We also maintain committed bank credit facilities and have
the ability to sell a portion of our finance receivables for
securitization to provide additional sources of liquidity for needs
potentially not met through other funding sources. See Note 12. of
the Notes to Consolidated Financial Statements in Item 8. for
information on our credit facilities.
At December 31, 2003, 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 $ 2,099.2 $ 4,276.6 $ 1,928.3 $ 2,382.8 $10,686.9
Short-term debt 3,184.5 - - - 3,184.5
Operating leases 49.7 60.0 21.0 14.6 145.3
Total $ 5,333.4 $ 4,336.6 $ 1,949.3 $ 2,397.4 $14,016.7
Debt
With consistent execution of our business strategies, we expect to
refinance maturities of our debt in the capital markets. Any adverse
changes in our operating performance or credit ratings could limit our
access to capital markets to accomplish these refinancings.
35
Item 7. Continued
Operating Leases
Operating leases represent annual rental commitments for leased office
space, automobiles, and data processing and related equipment.
Capital Resources
December 31,
2003 2002
Amount Percent Amount Percent
(dollars in millions)
Long-term debt $10,686.9 67% $ 9,566.3 66%
Short-term debt 3,184.5 20 3,061.1 21
Total debt 13,871.4 87 12,627.4 87
Equity 2,051.4 13 1,809.9 13
Total capital $15,922.8 100% $14,437.3 100%
Net finance receivables $14,838.5 $13,574.3
Debt to equity ratio 6.76x 6.98x
Debt to tangible equity ratio 7.51x 7.34x
Reconciliations of equity to tangible equity were as follows:
December 31,
2003 2002
(dollars in millions)
Equity $ 2,051.4 $ 1,809.9
Goodwill (220.4) (157.6)
Accumulated other comprehensive loss 14.9 68.9
Tangible equity $ 1,845.9 $ 1,721.2
Our capital varies primarily with the level of net finance
receivables. The increase in total capital at December 31, 2003 when
compared to December 31, 2002 was greater than our finance receivable
growth for the same period primarily due to capital required to
support the acquisition of WFI and its operations. The capital mix of
debt and equity is based primarily upon maintaining leverage that
supports cost-effective funding. AGFC has historically paid dividends
to (or received capital contributions from) its parent to manage our
leverage of debt to tangible equity to a targeted amount. Since year-
end 2001, that tangible leverage target has been 7.5 to 1.
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 18. of the Notes
to Consolidated Financial Statements in Item 8. for information on
dividend restrictions.
36
Item 7. Continued
We issue a combination of fixed-rate debt, principally long-term, and
floating-rate debt, principally short-term. AGFC obtains our fixed-
rate 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 issuances 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. At December 31, 2003, short-term debt included $2.7
billion of commercial paper. 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, 2003, short-term debt included
$530.4 million of extendible commercial notes.
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, 2003, credit facilities totaled $3.1
billion (including $3.0 billion of committed credit facilities) with
remaining availability of $3.1 billion. See Note 12. of the Notes to
Consolidated Financial Statements in Item 8. for additional
information on credit facilities.
Our committed credit facilities at December 31, 2003 expire as
follows:
Committed Credit Facilities
(dollars in millions)
2004 $1,503.0
2007 1,500.0
Total $3,003.0
ANALYSIS OF OPERATING RESULTS
Net Income
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Net income $363.6 $349.5 $252.8
Amount change $ 14.1 $ 96.7 $ (7.3)
Percent change 4% 38% (3)%
Return on average assets 2.28% 2.51% 1.91%
Return on average equity 18.79% 21.69% 14.46%
Ratio of earnings to fixed charges 2.03x 1.87x 1.62x
37
Item 7. Continued
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 2003 and 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.
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. See Note 19. of the Notes to
Consolidated Financial Statements in Item 8. for further information
on these charges.
We manage our operations in response to economic events and to achieve
our profitability objectives. A continued sluggish economy in the
first half of 2003 and the lowest interest rate environment in 45
years caused further decreases in both our yield and borrowing cost.
Our acquisition of WFI, effective January 1, 2003, caused increases in
our other revenue and also increased our operating expenses. Real
estate loan production of approximately $1.9 billion from the recently
acquired WFI operations more than offset the decrease in real estate
loans acquired from third party lenders. We also continued to control
operating expenses. The higher proportion of real estate loans in our
finance receivable portfolio resulted in net charge-offs that were
also well controlled. This, plus the improving economy in the second
half of 2003, resulted in lower additions to the allowance for finance
receivable losses when compared to the prior two years.
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.
See Note 24. of the Notes to Consolidated Financial Statements in Item
8. for information on the results of the Company's business segments.
38
Item 7. Continued
Our statements of income line items as percentages of each year's
average net receivables were as follows:
Years Ended December 31,
2003 2002 2001
Revenues
Finance charges 12.41% 13.83% 14.62%
Insurance 1.32 1.58 1.71
Other 1.94 0.91 0.98
Total revenues 15.67 16.32 17.31
Expenses
Interest expense 3.90 4.56 5.44
Operating expenses 4.90 4.54 4.64
Provision for finance
receivable losses 2.24 2.44 2.50
Insurance losses and loss
adjustment expenses 0.49 0.69 0.77
Other charges - - 0.51
Total expenses 11.53 12.23 13.86
Income before provision for
income taxes 4.14 4.09 3.45
Provision for income taxes 1.51 1.21 1.23
Net income 2.63% 2.88% 2.22%
Factors that specifically affected the Company's operating results
were as follows:
Finance Charges
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Finance charges $ 1,712.1 $ 1,678.9 $ 1,668.6
Amount change $ 33.2 $ 10.3 $ 91.0
Percent change 2% 1% 6%
Average net receivables $13,800.6 $12,135.8 $11,411.5
Yield 12.41% 13.83% 14.62%
39
Item 7. Continued
Finance charges increased due to the following:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Increase in average net
receivables $ 195.9 $ 89.1 $ 37.1
(Decrease) increase in yield (162.7) (78.8) 57.4
Decrease in number of days - - (3.5)
Total $ 33.2 $ 10.3 $ 91.0
Growth in average net receivables by type was as follows:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Real estate loans $1,692.3 $ 862.0 $ 121.0
Non-real estate loans 26.6 (93.0) 149.0
Retail sales finance (54.1) (44.7) 22.4
Total $1,664.8 $ 724.3 $ 292.4
Percent change 14% 6% 3%
In 2003, the lowest interest rate environment in 45 years continued to
cause increases in both originations and liquidations of our real
estate loans. Real estate loan production of approximately $1.9
billion from the recently acquired WFI operations also increased real
estate loan originations as well as the average size of real estate
loans originated in 2003. We reduced real estate loan acquisitions in
2003 because premiums on portfolios of real estate loans produced by
third party originators and required by sellers reached levels
unacceptable to us.
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 and acquired $2.3 billion of
real estate loan portfolios from third party originators.
Changes in yield in basis points (bp) by type were as follows:
Years Ended December 31,
2003 2002 2001
Real estate loans (145) bp (87) bp 49 bp
Non-real estate loans (32) (3) 5
Retail sales finance (15) 37 44
Total (142) (79) 43
40
Item 7. Continued
Yield decreased in both 2003 and 2002 primarily reflecting a lower
real estate loan yield resulting from the low interest rate
environment. We anticipate yield to level off or decrease less in
2004.
Insurance Revenues
Insurance revenues were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Earned premiums $178.5 $189.0 $193.0
Commissions 3.1 2.2 2.4
Total $181.6 $191.2 $195.4
Amount change $ (9.6) $ (4.2) $ (0.8)
Percent change (5)% (2)% -%
Earned premiums decreased for 2003 primarily due to lower premium
volume over the last three years. Premium volume decreased due to
fewer non-real estate loan customers who historically have purchased
the majority of our insurance products. Also, in April 2003, we
terminated a reinsurance agreement with a non-subsidiary affiliate and
reversed approximately $3.6 million of annuity premiums and annuity
reserve expense that we previously recorded.
Earned premiums decreased in 2002 primarily due to lower premium
volume and lower premium rates. The lower premium volume reflected 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.
41
Item 7. Continued
Other Revenues
Other revenues were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Net gain on sales of real estate
loans held for sale $ 84.0 $ - $ -
Investment revenue 82.1 85.8 86.7
Service fee income from a
non-subsidiary affiliate 49.5 3.1 -
Net gain on sale of finance
receivables to AGFI subsidiary
for securitization 20.7 - -
Net interest income on real estate
loans held for sale 14.8 - -
Interest revenue - notes
receivable from AGFI 14.0 15.8 21.0
Writedowns on real estate owned (8.0) (8.6) (4.6)
Net recovery (loss) on sales of
real estate owned 1.8 2.9 (1.1)
Other 9.7 11.8 9.5
Total $268.6 $110.8 $111.5
Amount change $157.8 $ (0.7) $(17.5)
Percent change 142% (1)% (14)%
The increase in other revenues for 2003 was primarily due to the
acquisition of WFI effective January 1, 2003 which resulted in net
gain on sales of real estate loans held for sale, higher service fee
income from a non-subsidiary affiliate, and net interest income on
real estate loans held for sale in 2003. Effective July 1, 2003, WFI
and AIG Federal Savings Bank, a non-subsidiary affiliate, entered into
an agreement whereby for a fee, WFI provides marketing, certain
origination processing services, loan servicing, and related services
for the affiliate's origination and sale of non-conforming residential
real estate loans. These WFI service activities have supplanted much
of WFI's origination and sales activity and are anticipated to do so
going forward. The increase in other revenues for 2003 also reflected
net gain on sale of finance receivables to a subsidiary of AGFI for
securitization.
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 recovery on sales of
foreclosed real estate in 2002 compared to net loss 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.
42
Item 7. Continued
Investment revenue was affected by the following:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Average invested assets $1,302.5 $1,252.6 $1,231.2
Adjusted portfolio yield 6.56% 6.84% 7.03%
Net realized losses on
investments $ (8.4) $ (4.4) $ (3.0)
Interest Expense
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Interest expense $ 538.9 $ 553.9 $ 620.5
Amount change $ (15.0) $ (66.6) $ (56.9)
Percent change (3)% (11)% (8)%
Average borrowings $12,952.4 $11,180.4 $10,373.6
Borrowing cost 4.17% 4.95% 5.98%
Interest expense decreased due to the following:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Decrease in borrowing cost $(102.7) $(114.8) $(64.1)
Increase in average borrowings 87.7 48.2 7.6
Decrease in number of days - - (0.4)
Total $ (15.0) $ (66.6) $(56.9)
Changes in average borrowings by type were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Long-term debt $2,240.8 $1,321.9 $ 318.4
Short-term debt (468.8) (515.1) (203.3)
Total $1,772.0 $ 806.8 $ 115.1
Percent change 16% 8% 1%
AGFC issued $2.7 billion of long-term debt in 2003, compared to $4.6
billion in 2002 and $1.9 billion in 2001. Long-term debt issuances in
2003 were lower than in 2002 primarily due to reductions in commercial
paper, higher levels of finance receivable growth, and long-term debt
refinancings in 2002.
43
Item 7. Continued
Changes in borrowing cost in basis points by type were as follows:
Years Ended December 31,
2003 2002 2001
Long-term debt (125) bp (77) bp 2 bp
Short-term debt (34) (188) (150)
Total (78) (103) (62)
Federal Reserve actions lowered the federal funds rate 50 basis points
in November 2002 and 25 basis points in June 2003 which resulted in
lower short-term debt rates and lower rates on floating-rate long-term
debt for 2003. Federal Reserve actions from 2001 through June 2003
created the lowest interest rate environment in 45 years and resulted
in lower long-term debt rates as new issuances were at substantially
lower rates than long-term debt being refinanced.
Operating Expenses
Operating expenses were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Salaries and benefits $406.8 $309.2 $294.0
Other 268.8 242.0 236.0
Total $675.6 $551.2 $530.0
Amount change $124.4 $ 21.2 $ 4.2
Percent change 23% 4% 1%
Operating expenses as a
percentage of average
net receivables 4.90% 4.54% 4.64%
The increase in operating expenses for 2003 was primarily due to
higher salaries and benefits, credit and collection expenses,
occupancy, and advertising expenses. The increase in salaries and
benefits for 2003 reflected the acquisition of WFI which resulted in
the addition of approximately 500 WFI employees effective January 1,
2003 and 400 additional WFI employees hired during 2003, competitive
compensation, and rising benefit costs. The increase in credit and
collection expenses reflected higher credit investigation, recording
and releasing, and mortgage appraisal fees resulting from higher real
estate loan originations and renewals during 2003.
44
Item 7. Continued
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 increases in salaries and benefits
for 2002 reflected higher competitive compensation and rising benefit
costs.
The increase in operating expenses as a percentage of average net
receivables for 2003 reflected increased operating expenses due to the
acquisition of WFI, partially offset by continued emphasis on
controlled operating expenses. Approximately $83.9 million of the
Company's 2003 operating expenses were directly related to WFI
operations. The improvements in operating expenses as a percentage of
average net receivables in 2002 reflected controlled operating
expenses and moderate finance receivable growth.
Provision for Finance Receivable Losses
At or for the
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Provision for finance
receivable losses $308.5 $296.4 $284.7
Amount change $ 12.1 $ 11.7 $ 82.2
Percent change 4% 4% 41%
Net charge-offs $304.0 $290.2 $258.7
Charge-off ratio 2.21% 2.41% 2.27%
Charge-off coverage 1.50x 1.56x 1.70x
60 day+ delinquency $507.1 $513.8 $456.9
Delinquency ratio 3.33% 3.68% 3.73%
Allowance for finance
receivable losses $455.4 $453.7 $438.9
Allowance ratio 3.07% 3.34% 3.74%
Changes in net charge-offs by type were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Real estate loans $10.6 $ 2.7 $ 4.6
Non-real estate loans 3.2 23.5 42.1
Retail sales finance - 5.3 9.5
Total $13.8 $31.5 $56.2
Real estate loan net charge-offs increased in 2003 and 2002 primarily
due to increases in real estate loan average net receivables of $1.7
billion, or 21%, in 2003 and $862.0 million, or 12%, in 2002. The
increase in non-real estate loan and retail sales finance net charge-
offs in 2002 reflected the sluggish economy during 2002.
45
Item 7. Continued
Changes in charge-off ratios in basis points by type were as follows:
Years Ended December 31,
2003 2002 2001
Real estate loans (1) bp (3) bp 5 bp
Non-real estate loans 5 104 121
Retail sales finance 14 48 65
Total (20) 14 45
The decrease in total charge-off ratio for 2003 reflected a higher
proportion of average net receivables that were real estate loans and
the improving economy during the second half of 2003. The increase in
total charge-off ratio for 2002 reflected a sluggish economy in 2002
and higher levels of unemployment and personal bankruptcies.
Changes in delinquency from the prior year end by type were as
follows:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Real estate loans $ 7.0 $47.0 $11.0
Non-real estate loans (10.5) 7.1 22.5
Retail sales finance (3.2) 2.8 9.5
Total $ (6.7) $56.9 $43.0
Real estate loan delinquency increased in 2003 and 2002 primarily due
to increases in real estate loans of $1.3 billion in 2003 and $1.9
billion in 2002. Delinquency was favorably impacted at December 31,
2003 by the improving economy in the second half of 2003, but was
unfavorably impacted at December 31, 2002 by the sluggish economy
during 2002.
Changes in delinquency ratio from the prior year end in basis points
by type were as follows:
Years Ended December 31,
2003 2002 2001
Real estate loans (35) bp (14) bp (2) bp
Non-real estate loans (24) 18 82
Retail sales finance (8) 33 63
Total (35) (5) 28
The delinquency ratio at December 31, 2003 and 2002 decreased
primarily due to a higher proportion of net finance receivables that
were real estate loans. The delinquency ratio at December 31, 2003
also reflected the improving economy during the second half of 2003
and improvements in non-real estate and retail sales finance
delinquency ratios.
46
Item 7. Continued
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, 2003 when
compared to December 31, 2002 was due to the net result of the
following:
* net increases to the allowance for finance receivable losses
through the provision for finance receivable losses in 2003
totaling $4.4 million (these increases were necessary in
response to our levels of delinquency and net charge-offs and
the levels of both unemployment and personal bankruptcies in
the United States); and
* decrease to the allowance for finance receivable losses during
second quarter 2003 of $2.7 million resulting from the sale of
finance receivables to a subsidiary of AGFI for
securitization.
The allowance as a percentage of net finance receivables at December
31, 2003 and 2002 decreased primarily due to a higher proportion of
net finance receivables that were real estate loans. The allowance as
a percentage of net finance receivables at December 31, 2003 also
reflected the improving economy during the second half of 2003.
Charge-off coverage, which compares the allowance for finance
receivable losses to net charge-offs, declined in 2003 and 2002
primarily due to a higher proportion of net finance receivables that
were real estate loans.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Claims incurred $75.3 $85.3 $90.3
Change in benefit reserves (7.5) (2.0) (2.2)
Total $67.8 $83.3 $88.1
Amount change $(15.5) $(4.8) $(0.3)
Percent change (19)% (5)% -%
Insurance losses and loss adjustment expenses declined in 2003
primarily due to lower claims incurred and a decrease in required
benefit reserves due to lower premium volume in the last three years.
Also, in April 2003, we terminated a reinsurance agreement with a non-
subsidiary affiliate and reversed approximately $3.6 million of
annuity reserve expense and annuity premiums that we previously
recorded.
47
Item 7. Continued
Claims incurred decreased in 2002 primarily due to decreases in claim
reserves, partially offset by increases in claims paid.
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 19. of the Notes to
Consolidated Financial Statements in Item 8. for further information
on these charges.
Provision for Income Taxes
Years Ended December 31,
2003 2002 2001
(dollars in millions)
Provision for income taxes $208.0 $146.8 $141.4
Amount change $ 61.2 $ 5.4 $ (7.3)
Percent change 42% 4% (5)%
Pretax income $571.6 $496.3 $394.2
Effective income tax rate 36.39% 29.58% 35.88%
Provision for income taxes increased during 2003 due to higher
effective income tax rate and higher taxable income. The increase in
the provision for income taxes for 2002 reflected 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.
ANALYSIS OF FINANCIAL CONDITION
Asset Quality
We believe that our geographic diversification reduces the risk
associated with a recession in any one region. In addition, 97% of
our finance receivables at December 31, 2003 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 3. 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 business
segment's investment portfolio. Our investment strategy is to
optimize aftertax returns on invested assets, subject to the
constraints of safety, liquidity, diversification, and regulation.
48
Item 7. Continued
Asset/Liability Management
In an effort to reduce the risk associated with unfavorable changes in
interest rates not met by favorable changes in finance charge yields
of our finance receivables, we monitor the anticipated cash flows of
our assets and liabilities, principally our finance receivables and
debt. For 2003, real estate loans had an average life of 2.5 years
(although loan lives may change in response to interest rate changes),
while non-real estate loans had an average life of 1.6 years and
retail sales finance receivables had an average life of 9 months. The
weighted-average life until maturity for our long-term debt was 3.2
years at December 31, 2003.
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 means by
which we accomplish this is by issuing fixed-rate, long-term 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, our
floating-rate debt represented 42% of our borrowings at December 31,
2003 compared to 37% at December 31, 2002. Adjustable-rate net
finance receivables represented 26% of our net finance receivables at
December 31, 2003 compared to 22% at December 31, 2002.
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.
49
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, 2003 December 31, 2002
+100 bp -100 bp +100 bp -100 bp
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $(465,657) $ 522,708 $(346,670) $ 379,042
Fixed-maturity investment
securities (77,750) 82,802 (73,058) 77,812
Liabilities
Long-term debt (285,717) 296,632 (227,886) 240,637
Interest rate swap agreements (1,195) 1,555 10,114 (9,979)
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, PricewaterhouseCoopers LLP
Report of Independent Auditors, Ernst & Young LLP Report of
Independent Auditors, and the related consolidated financial
statements are presented on the following pages.
50
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.
51
REPORT OF INDEPENDENT AUDITORS
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 95 present
fairly, in all material respects, the financial position of American
General Finance Corporation and its subsidiaries (the "Company") at
December 31, 2003 and 2002, and the results of their operations and
their cash flows for each of the two years in the period ended
December 31, 2003 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 years ended
December 31, 2003 and 2002 listed in the index appearing under Item
15(d) on page 96 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 audits. We conducted our audits 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 audits provide
a reasonable basis for our opinion.
As discussed in Note 4, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002. Additionally, as discussed in Note 23, the Company
changed its method of accounting for pensions for the year ended
December 31, 2002.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 16, 2004
52
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American General Finance Corporation
We have audited the accompanying consolidated statements of income,
shareholder's equity, cash flows, and comprehensive income of American
General Finance Corporation (a wholly owned subsidiary of American
General Finance, Inc.) and subsidiaries for the year ended December
31, 2001. Our audit also included the financial statement schedule
for the year 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2001 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
results of operations and cash flows of American General Finance
Corporation and subsidiaries for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related 2001 financial statement
schedule, when considered in relation to the basic 2001 financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 4. 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
53
American General Finance Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
2003 2002
(dollars in thousands)
Assets
Net finance receivables (Notes 3. and 5.):
Real estate loans $10,657,742 $ 9,313,496
Non-real estate loans 2,877,825 2,905,339
Retail sales finance 1,302,922 1,355,503
Net finance receivables 14,838,489 13,574,338
Allowance for finance receivable
losses (Note 6.) (455,402) (453,668)
Net finance receivables, less allowance
for finance receivable losses 14,383,087 13,120,670
Investment securities (Note 7.) 1,307,472 1,227,156
Cash and cash equivalents 136,223 144,565
Notes receivable from parent (Note 8.) 276,666 269,240
Other assets (Note 9.) 667,693 639,091
Total assets $16,771,141 $15,400,722
Liabilities and Shareholder's Equity
Long-term debt (Notes 10. and 13.) $10,686,887 $ 9,566,256
Short-term debt (Notes 11. and 13.) 3,184,529 3,061,141
Insurance claims and policyholder
liabilities (Note 14.) 438,362 472,348
Other liabilities (Note 15.) 372,416 453,487
Accrued taxes 37,518 37,562
Total liabilities 14,719,712 13,590,794
Shareholder's equity:
Common stock (Note 16.) 5,080 5,080
Additional paid-in capital 951,175 951,175
Accumulated other comprehensive
loss (Note 17.) (14,947) (68,938)
Retained earnings (Note 18.) 1,110,121 922,611
Total shareholder's equity 2,051,429 1,809,928
Total liabilities and shareholder's equity $16,771,141 $15,400,722
See Notes to Consolidated Financial Statements.
54
American General Finance Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Revenues
Finance charges $1,712,094 $1,678,923 $1,668,613
Insurance 181,642 191,230 195,393
Other 268,637 110,821 111,530
Total revenues 2,162,373 1,980,974 1,975,536
Expenses
Interest expense 538,858 553,877 620,487
Operating expenses:
Salaries and benefits 406,807 309,214 293,991
Other operating expenses 268,821 241,973 235,975
Provision for finance receivable
losses 308,451 296,365 284,735
Insurance losses and loss
adjustment expenses 67,849 83,275 88,111
Other charges (Note 19.) - - 58,020
Total expenses 1,590,786 1,484,704 1,581,319
Income before provision for income
taxes 571,587 496,270 394,217
Provision for Income Taxes
(Note 20.) 208,014 146,775 141,426
Net Income $ 363,573 $ 349,495 $ 252,791
See Notes to Consolidated Financial Statements.
55
American General Finance Corporation and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31,
2003 2002 2001
(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 951,175 877,526 877,514
Capital contributions from
parent and other - 73,649 12
Balance at end of year 951,175 951,175 877,526
Accumulated Other Comprehensive
(Loss) Income
Balance at beginning of year (68,938) (61,687) 2,628
Change in net unrealized
gains (losses):
Investment securities 10,673 23,792 3,546
Interest rate swaps 43,318 (31,391) (67,513)
Minimum pension liability - 348 (348)
Balance at end of year (14,947) (68,938) (61,687)
Retained Earnings
Balance at beginning of year 922,611 725,008 901,072
Net income 363,573 349,495 252,791
Common stock dividends (176,063) (151,892) (428,855)
Balance at end of year 1,110,121 922,611 725,008
Total Shareholder's Equity $2,051,429 $1,809,928 $1,545,927
See Notes to Consolidated Financial Statements.
56
American General Finance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 363,573 $ 349,495 $ 252,791
Reconciling adjustments:
Provision for finance receivable losses 308,451 296,365 284,735
Depreciation and amortization 192,759 149,248 143,896
Deferral of finance receivable
origination costs (69,769) (58,688) (56,940)
Deferred income tax benefit (2,809) (59,155) (26,211)
Origination of real estate loans held
for sale (1,789,108) - -
Sales and principal collections of real
estate loans held for sale 1,885,122 - -
Net gain on sale of finance receivables to
AGFI subsidiary for securitization (20,661) - -
Change in other assets and other liabilities (101,855) (39,780) 50,799
Change in insurance claims and
policyholder liabilities (33,986) (23,240) (23,859)
Change in taxes receivable and payable (1,810) (51,977) 70,163
Other charges - - 58,020
Other, net 6,389 931 (3,306)
Net cash provided by operating activities 736,296 563,199 750,088
Cash Flows from Investing Activities
Finance receivables originated or purchased (8,781,856) (8,054,343) (6,366,214)
Principal collections on finance receivables 6,882,883 6,178,230 5,814,968
Sale of finance receivables to AGFI
subsidiary for securitization 284,731 - -
Acquisition of Wilmington Finance, Inc. (93,189) - -
Acquisition of First Horizon - (208,666) -
Investment securities purchased (504,561) (806,989) (1,024,553)
Investment securities called and sold 413,554 713,653 981,068
Investment securities matured 23,335 42,475 10,310
Change in notes receivable from parent (7,117) (1,584) (6,335)
Change in premiums on finance receivables
purchased and deferred charges (696) (87,837) (35,621)
Other, net (24,626) (11,683) (14,942)
Net cash used for investing activities (1,807,542) (2,236,744) (641,319)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 2,691,229 4,638,983 1,892,820
Repayment of long-term debt (1,575,650) (1,393,714) (1,263,973)
Change in short-term debt 123,388 (1,517,496) (267,808)
Capital contributions from parent - 66,737 -
Dividends paid (176,063) (151,892) (428,855)
Net cash provided by (used for)
financing activities 1,062,904 1,642,618 (67,816)
(Decrease) increase in cash and cash equivalents (8,342) (30,927) 40,953
Cash and cash equivalents at beginning of year 144,565 175,492 134,539
Cash and cash equivalents at end of year $ 136,223 $ 144,565 $ 175,492
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
57
American General Finance Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Net Income $ 363,573 $ 349,495 $ 252,791
Other comprehensive gain (loss):
Net unrealized gains (losses):
Investment securities 8,040 32,220 2,446
Interest rate swaps:
Transition adjustment - - (42,103)
Current period (6,773) (151,142) (121,636)
Minimum pension liability - 535 (535)
Income tax effect:
Investment securities (2,802) (11,288) (843)
Interest rate swaps:
Transition adjustment - - 14,736
Current period 2,369 52,900 42,573
Minimum pension liability - (187) 187
Net unrealized gains (losses),
net of tax 834 (76,962) (105,175)
Reclassification adjustments
for realized losses included
in net income:
Investment securities 8,361 4,400 2,989
Interest rate swaps 73,418 102,848 59,872
Income tax effect:
Investment securities (2,926) (1,540) (1,046)
Interest rate swaps (25,696) (35,997) (20,955)
Realized losses included
in net income, net of tax 53,157 69,711 40,860
Other comprehensive gain (loss),
net of tax 53,991 (7,251) (64,315)
Comprehensive income $ 417,564 $ 342,244 $ 188,476
See Notes to Consolidated Financial Statements.
58
American General Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
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, financial services, and retirement services and
asset management 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, 2003, the Company had 1,365 offices in 44 states, Puerto
Rico and the U.S. Virgin Islands and approximately 8,400 employees.
In our consumer finance business segment, 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 retail merchants;
* purchase private label receivables originated by AIG Federal
Savings Bank, a non-subsidiary affiliate, arising from the
sales by retail merchants under a participation agreement;
* purchase real estate loans originated by AIG Federal Savings
Bank under a purchase agreement;
* provide for a fee, marketing, certain origination processing
services, and loan servicing for AIG Federal Savings Bank; and
* originate real estate loans for sale to investors.
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 originated by other lenders. We also
offer credit and non-credit insurance products to our eligible
consumer finance customers.
In our insurance business segment, we principally write and reinsure
credit life, credit accident and health, credit-related property and
casualty, credit involuntary unemployment, and non-credit insurance
covering our consumer finance customers and property pledged as
collateral. See Note 24. 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, sales of finance receivables for securitizations,
and capital contributions from our parent.
59
Notes to Consolidated Financial Statements, Continued
At December 31, 2003, the Company had $14.8 billion of net finance
receivables due from approximately 1.8 million customer accounts and
$6.0 billion of credit and non-credit life insurance in force covering
approximately 900,000 customer accounts.
Note 2. Acquisitions
Effective January 1, 2003, we acquired 100% of the common stock of
Wilmington Finance, Inc. (WFI), a majority owned subsidiary of WSFS
Financial Corporation, in a purchase business combination. The
purchase price was $120.8 million, consisting of $25.8 million for net
assets and $95.0 million for intangibles. The majority of the
tangible assets acquired were real estate loans held for sale. We
included the results of WFI's operations in our financial statements
beginning January 1, 2003, the effective date of the acquisition. We
finalized an independent valuation of the intangibles in second
quarter 2003 and recorded $54.2 million as goodwill and $40.8 million
as other intangibles. Goodwill and other intangibles are both
included in other assets. Other intangibles primarily consisted of
broker relationships and non-compete agreements and had an initial
weighted-average amortization period of 9 years. WFI originates non-
conforming residential real estate loans, primarily through broker
relationships and, to a lesser extent, directly to consumers, and
sells its originated loans to investors with servicing released to the
purchaser. Effective July 1, 2003, WFI and AIG Federal Savings Bank,
a non-subsidiary affiliate, entered into an agreement whereby for a
fee, WFI provides marketing, certain origination processing services,
loan servicing, and related services for the affiliate's origination
and sale of non-conforming residential real estate loans. These WFI
service activities have supplanted much of WFI's origination and sales
activity and are anticipated to do so going forward. WFI provides the
Company with other sources of revenue through its servicing fees and
net gain on sales of real estate loans held for sale.
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.
60
Notes to Consolidated Financial Statements, Continued
Note 3. 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 2003 presentation, we reclassified certain items in
prior periods.
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.
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 using the interest method.
We defer the costs to originate certain finance receivables and the
revenue from nonrefundable points and fees on loans and amortize them
to revenue 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 finance charges 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
61
Notes to Consolidated Financial Statements, Continued
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:
* prior finance receivable loss and delinquency experience;
* the composition of our finance receivable portfolio; and
* current economic conditions including the levels of
unemployment and personal bankruptcies.
Our 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.
Generally, 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 an unrelated
party's valuation of the property, which is either a full appraisal or
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 loan balance or 85% of the valuation, 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 and consistent with our credit risk policies. We increase
the allowance for finance receivable losses for recoveries on accounts
previously charged off.
We may renew 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
application for credit.
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.
62
Notes to Consolidated Financial Statements, Continued
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
loan balance or 85% of the unrelated party's valuation, 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 refunded to the customer as a recovery 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. If the required impairment testing suggests that
customer relationships are impaired, we reduce customer relationships
to an amount that results in the carrying value of the customer
relationships approximating fair value. See Note 4. for information
on the adoption of SFAS 142.
Real Estate Loans Held for Sale
We carry real estate loans held for sale, included in other assets, at
lower of amortized cost or market value. We include the sales price
we receive less the carrying value of the real estate loan in other
revenues.
We accrue interest income due from the borrower on real estate loans
held for sale from the date of loan funding until the date of sale to
the investor and include it in other revenues. Upon sale, we collect
from the investor any accrued interest income not paid by the
borrower. We record the fees we receive from AIG Federal Savings
Bank, a non-subsidiary affiliate, for providing services for its
investment in real estate loans held for sale in other revenues when
we provide the services.
63
Notes to Consolidated Financial Statements, Continued
INSURANCE BUSINESS SEGMENT
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, for which we
recognize unearned premiums 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 and credit
involuntary unemployment insurance as revenue using the straight-line
method over the terms of the policies. We recognize non-credit life
insurance premiums as revenue when collected but not before their due
dates.
Policy Reserves
Policy reserves for credit life, credit accident and health, and
credit-related property and casualty and credit involuntary
unemployment 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 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-
64
Notes to Consolidated Financial Statements, Continued
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 using the interest method.
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 prepayments 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. We recognize the pretax operating income
from our investments in limited partnerships as revenue quarterly.
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 business segment's investment
portfolio and are included in other assets. We recognize interest on
commercial mortgage loans and insurance policy loans as revenue on the
accrual basis 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 having a maturity date within
three months of its purchase date 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
65
Notes to Consolidated Financial Statements, Continued
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 4. 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.
Derivative Financial Instruments
We recognize all derivatives on our consolidated balance sheet at
their fair value and designate them as either a hedge of the
variability of cash flows that are to be received or paid in
connection with a recognized asset or liability (a "cash flow" hedge)
or as a hedge of the fair value of a recognized asset or liability (a
"fair value" hedge).
We record changes in the fair value of a derivative that is effective
as - and that is designated and qualifies as - a cash flow hedge, to
the extent that the hedge is effective, in other comprehensive income,
until earnings are affected by the variability of cash flows of the
hedged transaction. We record changes in the fair value of a
derivative that is effective as - and that is designated and qualifies
as - a fair value hedge, along with changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, in
current period earnings.
We formally document all relationships between derivative hedging
instruments and hedged items, as well as the risk-management
objectives and strategies for undertaking various hedge transactions
and the method of assessing ineffectiveness. This process includes
linking all derivatives that are designated as cash flow or fair value
hedges to assets and liabilities on the balance sheet. We also
formally assess (both at the hedge's inception and at least quarterly
thereafter) whether the derivatives that are used in hedging
transactions have been effective in offsetting changes in the cash
flows or fair value of hedged items and whether those derivatives may
be expected to remain effective in future periods. We typically use
regression analyses or other statistical analyses to assess the
effectiveness of our hedges.
66
Notes to Consolidated Financial Statements, Continued
We discontinue hedge accounting prospectively when we determine (1)
that the derivative is no longer effective in offsetting changes in
the cash flows or fair value of a hedged item; (2) the derivative
and/or the hedged item expires or is sold, terminated, or exercised;
or (3) that designating the derivative as a hedging instrument is no
longer appropriate due to changes in our objectives or strategies.
When we determine that a derivative no longer qualifies as an
effective cash flow hedge of an existing hedged item and discontinue
hedge accounting, we will continue to carry the derivative on the
balance sheet at its fair value and amortize the cumulative other
comprehensive income adjustment to earnings when earnings are affected
by the original forecasted transaction. When we determine that a
derivative no longer qualifies as an effective fair value hedge and
discontinue hedge accounting, we will continue to carry the derivative
on the consolidated balance sheet at its fair value, cease to adjust
the hedged asset or liability for changes in fair value, and begin to
amortize the cumulative basis adjustment on the hedged item into
earnings over the remaining life of the hedged item using a method
that approximates the level-yield method. In all situations in which
we discontinue hedge accounting and the derivative remains
outstanding, we will carry the derivative at its fair value on the
consolidated balance sheet, and recognize changes in the fair value of
the derivative in current period earnings.
Fair Value of Financial Instruments
We estimate the fair values disclosed in Note 26. using discounted
cash flows when quoted market prices or values obtained from
independent pricing services are not available. The assumptions used,
including the discount rate and estimates of future cash flows,
significantly affect the valuation techniques employed. In certain
cases, we cannot verify the estimated fair values by comparison to
independent markets or realize the estimated fair values in immediate
settlement of the instruments.
Note 4. Accounting Changes
In 2001, we adopted SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires all derivative instruments to
be recognized at fair value on 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 on 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
67
Notes to Consolidated Financial Statements, Continued
recorded a $1.0 million ($.6 million aftertax) write-down of the
carrying value of certain collateralized debt obligations in other
revenues.
On January 1, 2002, we adopted SFAS 142, "Goodwill and Other
Intangible Assets." SFAS 142 provides that goodwill and other
intangible assets with indefinite lives are no longer to be amortized.
These assets are to be reviewed for impairment annually, or more
frequently if impairment indicators are present. 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.
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 and
loan commitments. The disclosure requirements of FIN 45 were
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. The adoption of FIN 45 did not have
a material impact on our consolidated results of operations, financial
position, or liquidity.
In December 2003, the Accounting Standards Executive Committee issued
Statement of Position No. 03-3 (SOP 03-3) "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer". SOP 03-3 addresses
accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment
in loans acquired in a transfer if those differences are attributable,
at least in part, to credit quality. SOP 03-3 limits the yield that
may be accreted (accretable yield) to the excess of the investor's
estimate of undiscounted expected principal, interest, and other cash
flows (cash flows expected at acquisition to be collected) over the
investor's initial investment in the loan. SOP 03-3 requires that the
excess of contractual cash flows over cash flows expected to be
collected (nonaccretable difference) not be recognized as an
adjustment of yield, loss accrual, or valuation allowance. Subsequent
increases in cash flows expected to be collected generally should be
recognized prospectively through adjustment of the loan's yield over
its remaining life. Decreases in cash flows expected to be collected
should be recognized as impairment. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 15, 2004. For loans
acquired in fiscal years beginning on or before December 15, 2004, SOP
03-3 should be applied prospectively for fiscal years beginning after
December 15, 2004 for decreases in cash flows expected to be
collected. Early adoption is encouraged. We have not yet determined
the effect of the adoption of SOP 03-3 on our results of operations or
financial position in future periods.
68
Notes to Consolidated Financial Statements, Continued
Note 5. Finance Receivables
Components of net finance receivables by type were as follows:
December 31, 2003
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $10,598,133 $3,191,045 $1,436,756 $15,225,934
Unearned finance charges
and points and fees (131,037) (387,049) (145,056) (663,142)
Accrued finance charges 80,111 39,806 11,664 131,581
Deferred origination costs 19,424 28,244 - 47,668
Premiums, net of discounts 91,111 5,779 (442) 96,448
Total $10,657,742 $2,877,825 $1,302,922 $14,838,489
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
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, 2003, 97% of our net finance receivables were secured by the real
and/or personal property of the borrower, compared to 96% at December
31, 2002. At December 31, 2003, real estate loans accounted for 72%
of the amount and 11% of the number of net finance receivables
outstanding, compared to 69% of the amount and 11% of the number of
net finance receivables outstanding at December 31, 2002.
69
Notes to Consolidated Financial Statements, Continued
Contractual maturities of net finance receivables by type at December
31, 2003 were as follows:
Real Non-Real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
2004 $ 238,371 $ 736,763 $ 354,258 $ 1,329,392
2005 296,693 960,893 279,499 1,537,085
2006 312,344 687,458 135,376 1,135,178
2007 326,275 306,688 71,317 704,280
2008 331,825 101,594 39,577 472,996
2009+ 9,152,234 84,429 422,895 9,659,558
Total $10,657,742 $ 2,877,825 $ 1,302,922 $14,838,489
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,
2003 2002 2001
(dollars in thousands)
Real estate loans:
Principal cash collections $3,707,756 $2,893,830 $2,391,674
% of average net receivables 38.27% 36.19% 33.53%
Non-real estate loans:
Principal cash collections $1,563,070 $1,581,916 $1,622,283
% of average net receivables 55.21% 56.40% 55.99%
Retail sales finance:
Principal cash collections $1,612,057 $1,702,484 $1,801,011
% of average net receivables 125.78% 127.46% 130.47%
Unused credit limits extended by AIG Federal Savings Bank (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, 2003 and December 31, 2002. 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 AIG Federal Savings Bank
and the Company.
70
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, 2003 December 31, 2002
Amount Percent Amount Percent
(dollars in thousands)
California $ 2,263,038 15% $ 2,160,846 16%
Florida 921,092 6 840,182 6
N. Carolina 883,866 6 887,243 7
Illinois 835,156 6 786,593 6
Ohio 833,064 6 785,506 6
Georgia 658,833 4 591,970 4
Virginia 657,683 4 553,386 4
Indiana 618,636 4 598,832 4
Other 7,167,121 49 6,369,780 47
Total $14,838,489 100% $13,574,338 100%
Finance receivables on which we stopped accruing revenue totaled
$391.7 million at December 31, 2003 and $382.0 million at December 31,
2002. 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.
Revolving retail and private label finance receivables more than 90
days contractually delinquent totaled $12.0 million at December 31,
2003 and December 31, 2002. We accrued $.8 million of revenue on
these finance receivables during 2003 and 2002.
Note 6. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses were as
follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Balance at beginning of year $ 453,668 $ 438,860 $ 372,825
Provision for finance receivable
losses 308,451 296,365 284,735
Allowance related to sale of
finance receivables to AGFI
subsidiary for securitization (2,705) - -
Allowance related to net
acquired receivables - 8,602 15,035
Charge-offs (345,772) (330,760) (298,261)
Recoveries 41,760 40,601 39,526
Other charges - additional
provision - - 25,000
Balance at end of year $ 455,402 $ 453,668 $ 438,860
71
Notes to Consolidated Financial Statements, Continued
We estimated our allowance for finance receivable losses using SFAS 5,
"Accounting for Contingencies." We based our allowance for finance
receivable losses primarily on historical loss experience using
migration analysis applied to sub-portfolios of large numbers of
relatively small homogenous accounts. We adjusted the amounts
determined by migration analysis for management's best estimate about
the effects of current economic conditions, including the levels of
unemployment and personal bankruptcies, on the amounts determined from
historical loss experience.
We used the Company's internal data of net charge-offs and delinquency
by sub-portfolio as the basis to determine the historical loss
experience component of our allowance for finance receivable losses.
We used monthly bankruptcy statistics, monthly unemployment
statistics, and various other monthly or periodic economic statistics
published by departments of the federal government and other economic
statistics providers to determine the economic component of our
allowance for finance receivable losses. There were no significant
changes in the kinds of observable data we used to measure these
components during 2003 or 2002.
See Note 3. for information on the determination of the allowance for
finance receivable losses and Note 19. for discussion of other
charges.
Note 7. Investment Securities
Fair value and amortized cost of investment securities by type at
December 31 were as follows:
Fair Value Amortized Cost
2003 2002 2003 2002
(dollars in thousands)
Fixed maturity investment
securities:
Bonds:
Corporate securities $ 583,264 $ 549,552 $ 548,838 $ 530,229
Mortgage-backed securities 158,184 179,155 151,240 170,909
State and political
subdivisions 330,857 446,605 314,111 429,637
Other 208,963 26,593 203,011 24,447
Total 1,281,268 1,201,905 1,217,200 1,155,222
Non-redeemable preferred
stocks 9,296 5,109 9,275 5,624
Other long-term investments 16,727 19,586 18,388 19,586
Common stocks 181 556 90 606
Total $1,307,472 $1,227,156 $1,244,953 $1,181,038
72
Notes to Consolidated Financial Statements, Continued
Unrealized gains and losses on investment securities by type at
December 31 were as follows:
Unrealized Gains Unrealized Losses
2003 2002 2003 2002
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $37,591 $35,401 $ 3,165 $16,078
Mortgage-backed securities 7,129 8,246 185 -
State and political
subdivisions 16,932 16,986 186 18
Other 10,029 5,198 4,077 3,052
Total 71,681 65,831 7,613 19,148
Non-redeemable preferred
stocks 51 55 30 570
Other long-term investments - - 1,661 -
Common stocks 91 - - 50
Total $71,823 $65,886 $ 9,304 $19,768
Our unrealized losses on investment securities and the related
investment securities' fair value by type, all of which have been in a
continuous unrealized loss position for twelve months or more, at
December 31, 2003 were as follows:
12 Months or More
Fair Unrealized
Value Losses
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $ 65,212 $3,165
Mortgage-backed securities 12,337 185
State and political
subdivisions 7,394 186
Other 50,648 4,077
Total 135,591 7,613
Non-redeemable preferred stocks 445 30
Other long-term investments 6,159 1,661
Total $142,195 $9,304
73
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,
2003 2002 2001
(dollars in thousands)
Fair value $436,889 $756,128 $991,378
Realized gains $ 10,583 $ 9,147 $ 16,441
Realized losses 18,944 13,547 19,430
Net realized losses $ (8,361) $ (4,400) $ (2,989)
Contractual maturities of fixed-maturity investment securities at
December 31, 2003 were as follows:
Fair Amortized
Value Cost
(dollars in thousands)
Fixed maturities, excluding
mortgage-backed securities:
Due in 1 year or less $ 22,518 $ 21,909
Due after 1 year through 5 years 235,648 216,759
Due after 5 years through 10 years 539,565 515,850
Due after 10 years 325,353 311,442
Mortgage-backed securities 158,184 151,240
Total $1,281,268 $1,217,200
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, 2003, our total commitments for these five limited
partnerships were $33.8 million, consisting of $19.3 million funded
and $14.5 million unfunded.
Bonds on deposit with insurance regulatory authorities had carrying
values of $11.1 million at December 31, 2003 and $8.4 million at
December 31, 2002.
74
Notes to Consolidated Financial Statements, Continued
Note 8. Notes Receivable from Parent
Notes receivable from AGFI totaled $276.7 million at December 31, 2003
and $269.2 million at December 31, 2002. Interest revenue on notes
receivable from parent totaled $14.0 million in 2003, $15.8 million in
2002, and $21.0 million in 2001. These notes primarily support AGFI's
funding of finance receivables.
Note 9. Other Assets
Components of other assets were as follows:
December 31,
2003 2002
(dollars in thousands)
Goodwill $220,431 $157,595
Income tax assets (a) 120,304 146,013
Prepaid expenses and deferred
charges 83,151 73,120
Other insurance investments 73,809 67,438
Fixed assets 71,938 73,934
Real estate owned 49,895 47,289
Other 48,165 73,702 (b)
Total $667,693 $639,091
(a) The components of net deferred tax assets are detailed in Note
20.
(b) Effective January 1, 2003, we acquired Wilmington Finance, Inc.,
an originator and seller of residential real estate loans. In
anticipation of this acquisition, we entered into a warehouse
line participation agreement effective December 3, 2002 to
provide interim funding support to the mortgage originator
totaling $50.0 million. See Note 2. 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, 2001 $145,491 $ 12,104 $157,595
Balance December 31, 2002 145,491 12,104 157,595
Acquisitions 62,836 - 62,836
Balance December 31, 2003 $208,327 $ 12,104 $220,431
75
Notes to Consolidated Financial Statements, Continued
The impact of goodwill amortization on net income was as follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Reported net income $363,573 $349,495 $252,791
Goodwill amortization,
net of tax - - 4,163
Adjusted net income $363,573 $349,495 $256,954
During first quarter 2002, 2003, and 2004, we determined that the
required impairment testing for the Company's goodwill and other
intangible assets did not require a write-down of any such assets.
Note 10. Long-term Debt
Carrying value and fair value of long-term debt at December 31 were as
follows:
Carrying Value Fair Value
2003 2002 2003 2002
(dollars in thousands)
Senior debt $10,686,887 $9,566,256 $10,975,736 $9,849,447
Weighted average interest rates on long-term debt were as follows:
Years Ended December 31, December 31,
2003 2002 2001 2003 2002
Senior debt 4.64% 5.89% 6.66% 4.37% 5.09%
Contractual maturities of long-term debt at December 31, 2003 were as
follows:
Carrying Value
(dollars in thousands)
2004 $ 2,099,189
2005 1,822,330
2006 2,454,296
2007 1,387,618
2008 540,668
2009-2013 2,382,786
Total $10,686,887
At December 31, 2003, we had $9.1 billion of long-term debt securities
registered under the Securities Act of 1933 that had not yet been
issued.
76
Notes to Consolidated Financial Statements, Continued
An AGFC debt agreement contains restrictions on consolidated retained
earnings for certain purposes (see Note 18.).
Note 11. Short-term Debt
AGFC issues commercial paper with terms ranging from 1 to 270 days.
The weighted average maturity of our commercial paper at December 31,
2003 was 21 days.
Included in short-term debt 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, 2003, extendible commercial
notes totaled $530.4 million.
Information concerning short-term debt was as follows:
At or for the
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Average borrowings $3,367,644 $3,836,465 $4,351,597
Weighted average interest
rate, at year end:
Money market yield 1.06% 1.45% 1.96%
Semi-annual bond
equivalent yield 1.07% 1.46% 1.96%
Note 12. 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, 2003, 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 are based upon AGFC's long-term
credit ratings and averaged 0.07% at December 31, 2003.
At December 31, 2003, AGFC and certain of its subsidiaries also had an
uncommitted credit facility totaling $50.0 million which was shared
with AGFI and could be increased depending upon lender ability to
participate its loans under the facility.
There were no amounts outstanding under all facilities at December 31,
2003 or December 31, 2002. AGFC does not guarantee any borrowings of
AGFI.
77
Notes to Consolidated Financial Statements, Continued
Note 13. 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 fixed-rate, long-term
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 net income
in any of the three years ended December 31, 2003.
Notional amounts and weighted average receive and pay rates were as
follows:
At or for the
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Notional amount $2,495,000 $2,940,000 $2,500,000
Weighted average receive rate 2.19% 2.28% 2.06%
Weighted average pay rate 4.70% 5.24% 6.58%
Notional amount maturities and the respective weighted average
interest rates at December 31, 2003 were as follows:
Notional Weighted Average
Amount Interest Rate
(dollars in
thousands)
2004 $ 920,000 6.05%
2005 525,000 5.25
2006 100,000 7.03
2007 750,000 2.12
2008 200,000 5.50
Total $2,495,000 4.70%
78
Notes to Consolidated Financial Statements, Continued
Changes in the notional amounts of interest rate swap agreements were
as follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Balance at beginning of year $2,940,000 $2,500,000 $2,450,000
New contracts - 1,050,000 320,000
Expired contracts (445,000) (610,000) (270,000)
Balance at end of year $2,495,000 $2,940,000 $2,500,000
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, 2003,
AGFC had notional amounts of $1.1 billion in interest rate swap
agreements with a highly-rated non-subsidiary 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, 2003, the interest rate swap agreements were recorded
at fair value of $75.7 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 or 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. At December 31, 2003, we expect to reclassify $51.4
million of net realized losses on interest rate swap agreements from
accumulated other comprehensive income to income during the next
twelve months.
79
Notes to Consolidated Financial Statements, Continued
Note 14. Insurance
Components of insurance claims and policyholder liabilities were as
follows:
December 31,
2003 2002
(dollars in thousands)
Finance receivable related:
Unearned premium reserves $165,627 $187,631
Benefit reserves 18,788 14,520
Claim reserves 30,264 35,823
Subtotal 214,679 237,974
Non-finance receivable related:
Benefit reserves 200,992 212,702
Claim reserves 22,691 21,672
Subtotal 223,683 234,374
Total $438,362 $472,348
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,
2003 2002
(dollars in thousands)
Affiliated insurance companies $ 55,184 $ 64,387
Non-affiliated insurance companies 38,352 48,227
Total $ 93,536 $112,614
Our insurance subsidiaries' business reinsured to others was not
significant during any of the last three years.
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.
80
Notes to Consolidated Financial Statements, Continued
Reconciliations of statutory net income to GAAP net income were as
follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Statutory net income $88,607 $78,149 $87,632
Change in deferred policy
acquisition costs (8,550) (8,678) (7,561)
Reserve changes (6,758) 2,919 (669)
Deferred income tax benefit 6,537 8,299 1,512
Amortization of interest
maintenance reserve (1,262) (1,456) (2,322)
Goodwill amortization - - (458)
Other, net (1,612) (5,623) (5,500)
GAAP net income $76,962 $73,610 $72,634
Reconciliations of statutory equity to GAAP equity were as follows:
December 31,
2003 2002
(dollars in thousands)
Statutory equity $ 861,589 $734,146
Reserve changes 69,550 84,119
Net unrealized gains 64,181 46,119
Deferred policy acquisition costs 56,924 66,018
Deferred income taxes (31,015) (36,074)
Decrease in carrying value
of affiliates (28,603) (24,932)
Goodwill 12,104 13,794
Asset valuation reserve 6,178 17,134
Interest maintenance reserve 453 (1,985)
Other, net 1,286 26,100
GAAP equity $1,012,647 $924,439
81
Notes to Consolidated Financial Statements, Continued
Note 15. Other Liabilities
Components of other liabilities were as follows:
December 31,
2003 2002
(dollars in thousands)
Accrued interest $114,135 $125,900
Uncashed checks, reclassified from
cash 101,122 113,402
Interest rate swap agreements fair
values 75,679 137,682
Salary and benefit liabilities 26,145 18,699
Other 55,335 57,804
Total $372,416 $453,487
Note 16. 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,
2003 and 2002 were as follows:
Shares
Issued and Outstanding
Par Shares December 31,
Value Authorized 2003 2002
Special Shares - 25,000,000 - -
Common Shares $0.50 25,000,000 10,160,012 10,160,012
Note 17. Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss were as follows:
December 31,
2003 2002
(dollars in thousands)
Net unrealized losses on interest
rate swaps $(55,586) $(98,904)
Net unrealized gains on investment
securities 40,639 29,966
Accumulated other comprehensive loss $(14,947) $(68,938)
82
Notes to Consolidated Financial Statements, Continued
Note 18. 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,
2003, the maximum amount of dividends which our insurance subsidiaries
may pay in 2004 without prior approval was $94.1 million. At December
31, 2003, our insurance subsidiaries had statutory capital and surplus
of $861.6 million. Merit Life Insurance Co. (Merit), a wholly owned
subsidiary of AGFC, had $52.7 million of accumulated earnings at
December 31, 2003 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, 2003, 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, $829.6 million of the retained earnings
of AGFC was free from restriction at December 31, 2003.
Note 19. Other Charges - AIG Acquisition
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.
Note 20. Income Taxes
For the period August 30, 2001 to December 31, 2001 and the years 2002
and 2003, 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 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.
83
Notes to Consolidated Financial Statements, Continued
Components of provision for income taxes were as follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Federal:
Current $197,137 $199,217 $163,940
Deferred (2,924) (61,156) (28,436)
Total federal 194,213 138,061 135,504
State 13,801 8,714 5,922
Total $208,014 $146,775 $141,426
Reconciliations of the statutory federal income tax rate to the
effective tax rate were as follows:
Years Ended December 31,
2003 2002 2001
Statutory federal income tax rate 35.00% 35.00% 35.00%
Contingency reduction - (6.04) -
State income taxes 2.41 1.11 .98
Amortization of goodwill - - .57
Amortization of other intangibles 1.34 - -
Nontaxable investment income (2.55) (.64) (.89)
Other, net .19 .15 .22
Effective income tax rate 36.39% 29.58% 35.88%
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.
84
Notes to Consolidated Financial Statements, Continued
Components of deferred tax assets and liabilities were as follows:
December 31,
2003 2002
(dollars in thousands)
Deferred tax assets:
Allowance for finance receivable
losses $146,229 $142,386
Interest rate swap agreements 8,049 32,014
Deferred insurance commissions 4,275 4,054
Insurance reserves 3,100 2,321
Other 16,871 15,981
Total 178,524 196,756
Deferred tax liabilities:
Loan origination costs 16,195 16,199
Fixed assets 6,728 6,227
Other 37,169 30,917
Total 60,092 53,343
Net deferred tax assets $118,432 $143,413
No valuation allowance was considered necessary at December 31, 2003
and 2002.
Note 21. Lease Commitments, Rent Expense and Contingent Liabilities
Annual rental commitments for leased office space, automobiles and
data processing equipment accounted for as operating leases, excluding
leases on a month-to-month basis, were as follows:
Lease Commitments
(dollars in thousands)
2004 $ 49,716
2005 38,380
2006 21,587
2007 12,951
2008 8,016
subsequent to 2008 14,650
Total $145,300
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 2003.
Rental expense totaled $55.1 million in 2003, $53.1 million in 2002,
and $50.6 million in 2001.
85
Notes to Consolidated Financial Statements, Continued
AGFC and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain purported 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 continued occurrences
of large damage awards in general in the United States, including
large punitive damage awards that bear little or no relation to actual
economic damages incurred by plaintiffs in some jurisdictions, create
the potential for an unpredictable judgment in any given suit.
Note 22. Consolidated Statements of Cash Flows
Supplemental disclosure of certain cash flow information was as
follows:
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Interest paid $540,278 $542,190 $634,439
Income taxes paid 209,687 259,289 99,096
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 23. for
further information on the Company's benefit plans.
Note 23. 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, 2003 by $454.6 million.
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 23. was for AGFI.
86
Notes to Consolidated Financial Statements, Continued
AGFI's portion of the retirement plans' funded status was as follows:
December 31, 2001
(dollars in thousands)
Projected benefit obligation $123,648
Plan assets at fair value 95,030
Plan assets less than projected
benefit obligation (28,618)
Other unrecognized items, net 27,660
Accrued pension expense $ (958)
Components of pension expense were as follows:
Year Ended December 31, 2001
(dollars in thousands)
Service cost $ 3,849
Interest cost 8,245
Expected return on plan assets (10,283)
Net amortization and deferral 260
Pension expense $ 2,071
Additional assumptions concerning the determination of pension expense
were as follows:
Year Ended December 31, 2001
Weighted average discount rate 7.25%
Expected long-term rate of
return on plan assets 10.35
Rate of increase in
compensation levels 4.25
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.
Note 24. 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, from AIG Federal
Savings Bank, a non-subsidiary affiliate, private label receivables
under a participation agreement and real estate loans under a purchase
agreement. To supplement our lending and retail sales financing
activities, we purchase portfolios of real estate loans, non-real
87
Notes to Consolidated Financial Statements, Continued
estate loans, and retail sales finance receivables. We also provide
for a fee, marketing, certain origination processing services, and
loan servicing for AIG Federal Savings Bank and originate real estate
loans through brokers for sale to investors. We offer credit and non-
credit insurance products to our eligible consumer finance customers.
The insurance segment writes and reinsures 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 3., 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 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.
88
Notes to Consolidated Financial Statements, Continued
At or for the year ended December 31, 2003:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,832,311 $ - $ 1,832,311
Insurance 881 180,761 181,642
Other 121,768 88,633 210,401
Intercompany 91,610 (71,433) 20,177
Interest expense 490,912 - 490,912
Provision for finance
receivable losses 308,490 - 308,490
Pretax income 525,967 96,914 622,881
Assets 14,508,526 1,389,527 15,898,053
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
89
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,
2003 2002 2001
(dollars in thousands)
Revenues
Segments $ 2,244,531 $ 2,026,829 $ 2,024,718
Corporate (4,784) 14,474 2,962
Adjustments (77,374) (60,329) (52,144)
Consolidated revenue $ 2,162,373 $ 1,980,974 $ 1,975,536
Interest Expense
Segments $ 490,912 $ 500,187 $ 571,346
Corporate 46,511 46,109 40,492
Adjustments 1,435 7,581 8,649
Consolidated interest
expense $ 538,858 $ 553,877 $ 620,487
Provision for Finance
Receivable Losses
Segments $ 308,490 $ 297,629 $ 283,402
Corporate (788) (1,259) 594
Adjustments 749 (5) 739
Consolidated provision for
finance receivable losses $ 308,451 $ 296,365 $ 284,735
Pretax Income
Segments $ 622,881 $ 543,286 $ 445,614
Corporate (35,630) (34,919) (37,994)
Adjustments (15,664) (12,097) (13,403)
Consolidated pretax income $ 571,587 $ 496,270 $ 394,217
Assets
Segments $15,898,053 $14,529,856 $12,582,619
Corporate 635,925 698,267 685,330
Adjustments 237,163 172,599 179,677
Consolidated assets $16,771,141 $15,400,722 $13,447,626
90
Notes to Consolidated Financial Statements, Continued
Note 25. Interim Financial Information (Unaudited)
Our quarterly statements of income for 2003 and 2002 were as follows:
2003 Quarter Ended
Dec. 31, Sep. 30, June 30, Mar. 31,
(dollars in thousands)
Revenues
Finance charges $429,994 $428,003 $423,435 $430,662
Insurance 46,955 46,307 42,672 45,708
Other 70,988 63,889 88,574 45,186
Total revenues 547,937 538,199 554,681 521,556
Expenses
Interest expense 132,406 130,008 134,615 141,829
Operating expenses 178,938 166,393 169,843 160,454
Provision for finance
receivable losses 83,683 80,662 74,655 69,451
Insurance losses and loss
adjustment expenses 14,862 17,438 15,160 20,389
Total expenses 409,889 394,501 394,273 392,123
Income before provision for
income taxes 138,048 143,698 160,408 129,433
Provision for Income Taxes 50,270 54,165 57,983 45,596
Net Income $ 87,778 $ 89,533 $102,425 $ 83,837
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
91
Notes to Consolidated Financial Statements, Continued
Note 26. 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, 2003 December 31, 2002
Carrying Fair Carrying Fair
Value Value Value Value
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $14,383,087 $14,708,788 $13,120,670 $13,164,367
Investment securities 1,307,472 1,307,472 1,227,156 1,227,156
Cash and cash equivalents 136,223 136,223 144,565 144,565
Liabilities
Long-term debt 10,686,887 10,975,736 9,566,256 9,849,447
Short-term debt 3,184,529 3,184,529 3,061,141 3,061,141
Interest rate swap
agreements 75,679 75,679 137,682 137,682
Off-Balance Sheet Financial
Instruments
Unused customer credit
limits - - - -
Limited partnership commitments - 14,520 - 26,110
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.
92
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 and adjusted for
the fair value hedge interest rate swap agreement.
Short-term Debt
The fair values of short-term debt 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 AIG Federal
Savings Bank, a non-subsidiary affiliate, which 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 AIG Federal Savings Bank and the
Company.
Limited Partnership Commitments
The fair values of limited partnership commitments equal the
commitment amounts due to the partnership's ability to call these
commitments on demand.
93
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.
Item 9A. 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 December 31, 2003 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, evaluates the
effectiveness of our disclosure controls and procedures as of the
end of each quarter. Based on an evaluation of the disclosure
controls and procedures as of December 31, 2003, 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 over financial reporting
There was no change in the Company's internal control over
financial reporting during the three months ended December 31,
2003, that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
94
PART III
Item 14. Principal Accountant Fees and Services.
As an indirect wholly-owned subsidiary of AIG, oversight functions
regarding our independent accountants, PricewaterhouseCoopers LLP, are
included in the duties of AIG's Audit Committee. AGFC does not have
its own Audit Committee. AIG's Audit Committee has adopted pre-
approval policies and procedures regarding audit and non-audit
services provided by PricewaterhouseCoopers LLP for AIG and its
consolidated subsidiaries, including AGFC.
Independent accountant fees and services were as follows:
Years Ended December 31,
2003 2002
(dollars in thousands)
Audit fees $848 $708
Audit-related fees 90 -
Tax fees - -
All other fees 2 2
Total $940 $710
Audit fees in 2003 and 2002 were primarily for the audit of the AGFC
Annual Report on Form 10-K, quarterly review procedures in relation to
the AGFC Quarterly Reports on Form 10-Q, and statutory audits of
insurance subsidiaries of AGFC. Audit-related fees were primarily for
the audit of a subsidiary of AGFC in 2003. There were no audit-
related fees in 2002. All other fees in 2003 and 2002 were primarily
for accounting research licensing. AGFC is a subsidiary of AGFI, and
its audit fees, audit-related fees, and all other fees are also
included in the fees of AGFI.
95
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, 2003 and 2002
Consolidated Statements of Income, years ended December 31,
2003, 2002, and 2001
Consolidated Statements of Shareholder's Equity, years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows, years ended December
31, 2003, 2002, and 2001
Consolidated Statements of Comprehensive Income, years ended
December 31, 2003, 2002, and 2001
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
102 herein.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during fourth quarter
2003.
(c) Exhibits
The exhibits required to be included in this portion of Item 15.
are submitted as a separate section of this report.
96
Item 15(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance Corporation
Condensed Balance Sheets
December 31,
2003 2002
(dollars in thousands)
Assets
Net finance receivables:
Loans $ 1,219,600 $ 1,229,165
Retail sales finance 117,151 124,103
Net finance receivables 1,336,751 1,353,268
Allowance for finance receivable losses (32,621) (28,285)
Net finance receivables, less allowance
for finance receivable losses 1,304,130 1,324,983
Cash and cash equivalents 83,471 90,125
Investment in subsidiaries 2,118,958 1,841,831
Receivable from parent and affiliates 12,332,428 12,685,484
Notes receivable from parent and
affiliates 276,665 269,240
Other assets 256,943 380,381
Total assets $16,372,595 $16,592,044
Liabilities and Shareholder's Equity
Long-term debt, 1.16% - 8.45%
due 2004 - 2013 $10,686,887 $ 9,566,256
Short-term debt 3,313,974 4,839,120
Other liabilities 320,305 376,740
Total liabilities 14,321,166 14,782,116
Shareholder's equity:
Common stock 5,080 5,080
Additional paid-in capital 951,175 951,175
Other equity (14,947) (68,938)
Retained earnings 1,110,121 922,611
Total shareholder's equity 2,051,429 1,809,928
Total liabilities and shareholder's equity $16,372,595 $16,592,044
See Notes to Condensed Financial Statements.
97
Schedule I, Continued
American General Finance Corporation
Condensed Statements of Income
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Revenues
Interest received from affiliates $ 800,794 $ 926,377 $1,005,246
Dividends received from subsidiaries 52,816 73,035 104,896
Finance charges 17,809 18,470 18,583
Other 225 245 285
Total revenues 871,644 1,018,127 1,129,010
Expenses
Interest expense 552,037 639,775 685,899
Operating expenses 10,397 2,350 2,555
Other charges - - 13,020
Total expenses 562,434 642,125 701,474
Income before income taxes and equity
in undistributed (overdistributed)
net income of subsidiaries 309,210 376,002 427,536
Provision for Income Taxes 92,420 76,038 113,042
Income before equity in undistributed
(overdistributed) net income of
subsidiaries 216,790 299,964 314,494
Equity in Undistributed (Overdistributed)
Net Income of Subsidiaries 146,783 49,531 (61,703)
Net Income $ 363,573 $ 349,495 $ 252,791
See Notes to Condensed Financial Statements.
98
Schedule I, Continued
American General Finance Corporation
Condensed Statements of Cash Flows
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 363,573 $ 349,495 $ 252,791
Reconciling adjustments:
Equity in (undistributed) overdistributed
net income of subsidiaries (146,783) (49,531) 61,703
Change in other assets and other liabilities 43,421 (23,565) 24,709
Change in taxes receivable and payable 157,269 (102,548) 22,111
Other charges - - 13,020
Other, net 7,034 (3,292) (4,788)
Net cash provided by operating activities 424,514 170,559 369,546
Cash Flows from Investing Activities
Finance receivables originated or purchased
from subsidiaries (1,148,881) (1,163,968) (1,359,156)
Principal collections on finance receivables 98,398 97,718 93,176
Finance receivables sold to subsidiaries 1,090,092 1,040,335 1,251,525
Acquisition of Wilmington Finance, Inc. (102,213) - -
Capital contributions to subsidiaries,
net of return of capital (119,670) (202,869) (51,725)
Change in receivable from parent
and affiliates 361,082 (2,362,835) (478,562)
Change in notes receivable from parent
and affiliates (7,425) (1,584) (6,335)
Other, net (16,921) (10,802) (310)
Net cash provided by (used for)
investing activities 154,462 (2,604,005) (551,387)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 2,691,229 4,638,983 1,892,820
Repayment of long-term debt (1,575,650) (1,389,258) (1,263,325)
Change in short-term debt (1,525,146) (752,299) 9,125
Capital contributions from parent - 66,737 -
Dividends paid (176,063) (151,892) (428,855)
Net cash (used for) provided by
financing activities (585,630) 2,412,271 209,765
(Decrease) increase in cash and cash equivalents (6,654) (21,175) 27,924
Cash and cash equivalents at beginning of year 90,125 111,300 83,376
Cash and cash equivalents at end of year $ 83,471 $ 90,125 $ 111,300
<FN>
<F1>
See Notes to Condensed Financial Statements.
</FN>
99
Schedule I, Continued
American General Finance Corporation
Notes to Condensed Financial Statements
December 31, 2003
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, 2003,
were as follows: 2004, $2.1 billion; 2005, $1.8 billion; 2006, $2.5
billion; 2007, $1.4 billion; and 2008, $540.7 million.
Note 4. Short-term Debt
Components of short-term debt were as follows:
December 31,
2003 2002
(dollars in thousands)
Commercial paper $2,546,943 $2,578,880
Notes payable to subsidiaries 236,668 1,900,899
Extendible commercial notes 530,363 359,341
Total $3,313,974 $4,839,120
Note 5. 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.
100
Notes to Consolidated Financial Statements, Continued
Note 6. Subsidiary Debt Guarantee
AGFC guarantees the short-term debt, 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. This short-term debt partially funds CommoLoCo,
Inc.'s operations and totaled $107.2 million at December 31, 2003 and
$122.9 million at December 31, 2002. AGFC would be required to repay
this debt if CommoLoCo, Inc.'s cash flows from operations and new debt
issuances become inadequate.
101
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 10, 2004.
AMERICAN GENERAL FINANCE CORPORATION
By: /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
(Senior Vice President, Chief
Financial Officer, and Director)
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 10, 2004.
Frederick W. Geissinger* Robert A. Cole*
Frederick W. Geissinger Robert A. Cole
(President, 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, Chief
Financial Officer, and Jerry L. Gilpin*
Director - Principal Financial Jerry L. Gilpin
Officer (Director)
George W. Schmidt* Ben D. Hendrix*
George W. Schmidt Ben D. Hendrix
(Vice President, Controller, (Director)
and Assistant Secretary -
Principal Accounting Officer)
*By: /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Stephen L. Blake* (Attorney-in-fact)
Stephen L. Blake
(Director)
102
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 of 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 of our consolidated 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
(23.1) Consent of PricewaterhouseCoopers LLP, Independent Accountants
(23.2) Consent of Ernst & Young LLP, Independent Auditors
(24) Power of Attorney
(31.1) Rule 13a-14(a)/15d-14(a) Certifications
(31.2) Rule 13a-14(a)/15d-14(a) Certifications
(32) Section 1350 Certifications