UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
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
12-3/4% Senior Subordinated Notes, New York Stock Exchange
due December 1, 1994
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]. Not applicable.
The registrant meets the conditions set forth in General Instructions
J(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with
the reduced disclosure format.
As of March 23, 1994, no voting stock of registrant was held by a
non-affiliate.
As of March 23, 1994, 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 . . . . . . . . . . . . . . . . . . . . . . 13
3. Legal Proceedings . . . . . . . . . . . . . . . . . . 14
4. Submission of Matters to a Vote of Security-Holders. . *
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 15
6. Selected Financial Data . . . . . . . . . . . . . . . 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 16
8. Financial Statements and Supplementary Data . . . . . 22
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . **
Part III 10. Directors and Executive Officers of the Registrant . . *
11. Executive Compensation . . . . . . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . *
13. Certain Relationships and Related Transactions . . . . *
Part IV 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 49
* Items 4, 10, 11, 12, and 13 are not included, as per conditions
met by Registrant set forth in General Instructions J(1)(a) and
(b) of Form 10-K.
** Item 9 is not included, as no information was required by Item
304 of Regulation S-K.
3
PART I
Item 1. Business.
GENERAL
American General Finance Corporation (AGFC) is a financial services holding
company, the subsidiaries of which are engaged primarily in the consumer
finance and credit insurance business. The credit insurance operations are
conducted by Merit Life Insurance Co. (Merit) and Yosemite Insurance
Company (Yosemite) as a part of the Company's consumer finance business.
Unless the context otherwise indicates, references to the Company relate to
AGFC and its subsidiaries, whether directly or indirectly owned.
At December 31, 1993, the Company had 1,200 offices in 38 states, Puerto
Rico, and the Virgin Islands. In January 1994, a purchasing office was
opened in Texas increasing the total number of states in which the Company
operates to 39. Total finance receivables net of unearned finance charges
as of December 31, 1993, were $5.9 billion. At December 31, 1993, the
Company employed approximately 7,000 persons. The Company's executive
offices are located in Evansville, Indiana.
AGFC was incorporated under the laws of the State of 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
under the laws of the State of Indiana in 1974. Since 1982, AGFI has been
a direct or indirect wholly-owned subsidiary of American General
Corporation (American General), a consumer financial services organization
incorporated in the State of Texas in 1980 as the successor to American
General Insurance Company, a Texas insurance company incorporated in 1926.
Certain amounts in the 1992 and 1991 information presented herein have been
reclassified to conform to the 1993 presentation.
4
Item 1. Continued
Selected Financial Statistics
The following table sets forth certain selected financial information and
ratios of the Company and illustrates certain aspects of the Company's
business for the years indicated:
1993 1992 1991
(dollars in thousands)
Average finance receivables
net of unearned finance
charges (ANR) $5,776,256 $5,365,479 $4,874,477
Average borrowings $5,453,440 $5,010,378 $4,439,513
Finance charges as a
percentage of ANR (yield) 16.8% 16.6% 16.4%
Interest expense as a
percentage of average
borrowings (borrowing cost) 6.8% 7.6% 8.5%
Spread between yield and
borrowing cost 10.0% 9.0% 7.9%
Insurance revenues as a
percentage of ANR 2.5% 2.2% 2.3%
Operating expenses as a
percentage of ANR 5.3% 5.2% 5.0%
Allowance for finance receivable
losses as a percentage of net
finance receivables 2.6% 2.4% 2.3%
Net charge-offs as a percentage
of ANR (charge-off ratio) 2.0% 1.9% 1.9%
Delinquency ratio - 60 days or more
(defined in Finance Receivable
Loss and Delinquency Experience
in Item 1. herein.) 2.5% 2.2% 2.5%
Debt to equity ratio 4.7 4.7 4.4
Return on average assets 2.6% 2.4% 2.2%
Return on average assets before
deducting cumulative effect
of accounting changes 2.8% 2.4% 2.2%
5
Item 1. Continued
1993 1992 1991
Return on average equity 16.4% 14.5% 12.2%
Return on average equity before
deducting cumulative effect
of accounting changes 17.5% 14.5% 12.2%
Ratio of earnings to fixed charges
(refer to Exhibit 12 in Item 14.
herein for calculations) 1.9 1.7 1.6
CONSUMER FINANCE OPERATIONS
Through its subsidiaries, the Company makes loans directly to individuals
and purchases retail sales contract obligations of individuals.
In its lending operations, the Company generally takes a security interest
in real property and/or personal property of the borrower. Of the loans
outstanding at December 31, 1993, 89% were secured by such property. At
December 31, 1993, mortgage loans (generally second mortgages) accounted
for 11% of the total number of loans outstanding and 53% of the aggregate
dollar amount of loans outstanding; compared to 12% and 57%, respectively,
at December 31, 1992. Loans secured by real property generally have
maximum original terms of 180 months. Loans secured by personal property
or that are unsecured generally have maximum original terms of 60 months.
The Company purchases retail sales contracts arising from the retail sale
of consumer goods and services. Retail sales contracts are secured by the
real property or personal property giving rise to the contract. Retail
sales contracts generally have a maximum original term of 60 months.
Finance Receivables
All data in this report on finance receivables (except as otherwise
indicated) are calculated on a net basis -- that is, after deduction of
unearned finance charges but before deduction of an allowance for finance
receivable losses.
6
Item 1. Continued
The following table sets forth certain information concerning finance
receivables of the Company:
Years Ended December 31,
1993 1992 1991
Originated, renewed and purchased:
Amount (in thousands):
Real estate loans $ 930,493 $ 815,290 $ 732,800
Non-real estate loans 2,475,855 1,924,479 1,468,105
Retail sales contracts 1,161,933 889,176 611,537
Total originated and renewed 4,568,281 3,628,945 2,812,442
Purchased (net of sales) (a) 105,171 546,923 491,090
Total originated, renewed,
and purchased $4,673,452 $4,175,868 $3,303,532
(a) Includes purchases of finance receivables from affiliates for 1993,
1992, and 1991 of $62 million, $308 million, and $304 million,
respectively.
Number:
Real estate loans 57,648 47,549 42,325
Non-real estate loans 1,272,065 898,130 684,885
Retail sales contracts 1,028,432 786,892 514,246
Average size (to nearest dollar):
Real estate loans $16,141 $17,146 $17,314
Non-real estate loans 1,946 2,143 2,144
Retail sales contracts 1,130 1,130 1,189
Balance at end of period:
Amount (in thousands):
Real estate loans $2,637,266 $2,724,677 $2,767,417
Non-real estate loans 2,313,478 2,022,055 1,704,937
Retail sales contracts 920,904 860,346 665,588
Total $5,871,648 $5,607,078 $5,137,942
Number:
Real estate loans 153,273 150,366 147,250
Non-real estate loans 1,268,178 1,061,339 886,598
Retail sales contracts 886,679 744,857 516,132
Total 2,308,130 1,956,562 1,549,980
Average size (to nearest dollar):
Real estate loans $17,206 $18,120 $18,794
Non-real estate loans 1,824 1,905 1,923
Retail sales contracts 1,039 1,155 1,290
7
Item 1. Continued
ANR
The following table details ANR by type of finance receivable for the years
indicated:
1993 1992 1991
(dollars in thousands)
Loans $4,887,347 $4,613,542 $4,205,538
Retail sales contracts 888,909 751,937 668,939
Total $5,776,256 $5,365,479 $4,874,477
Yield
The following table details yield for the years indicated:
1993 1992 1991
Loans 17.0% 16.7% 16.6%
Retail sales contracts 15.7% 16.1% 15.6%
Total 16.8% 16.6% 16.4%
Finance Receivable Loss and Delinquency Experience
The finance receivable loss experience for the Company for the periods
indicated is set forth in the net charge-off and charge-off ratio(a)
information below:
Years Ended December 31,
1993 1992 1991
(dollars in thousands)
Real estate loans:
Net charge-offs $ 20,206 $ 21,156 $ 17,395
Charge-off ratio .7% .8% .7%
Non-real estate loans:
Net charge-offs $ 78,407 $ 70,113 $ 65,115
Charge-off ratio 3.8% 4.0% 4.5%
Total loans:
Net charge-offs $ 98,613 $ 91,269 $ 82,510
Charge-off ratio 2.0% 2.0% 2.0%
Retail sales contracts:
Net charge-offs $ 17,015 $ 11,331 $ 11,221
Charge-off ratio 1.9% 1.5% 1.7%
Total:
Net charge-offs $115,628 $102,600 $ 93,731
Charge-off ratio 2.0% 1.9% 1.9%
Allowance for finance
receivable losses (b) $152,696 $133,211 $115,624
Allowance ratio (b) 2.6% 2.4% 2.3%
8
Item 1. Continued
(a) The charge-off ratio represents charge-offs net of recoveries as a
percentage of the average of the amount of net finance receivables at
the beginning of each month during the period.
(b) The amount shown for allowance for finance receivable losses represents
the balance at the end of the period. The allowance ratio represents
the allowance for finance receivable losses at the end of the period as
a percentage of net finance receivables.
The allowance for finance receivable losses is maintained at a level based
on management's periodic evaluation of the finance receivable portfolio and
reflects an amount that, in management's opinion, is adequate to absorb
losses in the existing portfolio. In evaluating the portfolio, management
takes into consideration numerous factors, including current economic
conditions, prior finance receivable loss and delinquency experience, the
composition of the finance receivable portfolio, and management's estimate
of anticipated finance receivable losses.
AGFC's basic policy is to charge off each month loan accounts, except those
secured by real estate, on which little or no collections were made in the
prior six-month period. Retail sales contracts are charged off when four
installments are past due. In the case of loans secured by real estate,
foreclosure proceedings are instituted when four monthly installments are
past due. When foreclosure is completed and the Company has obtained title
to the property, the real estate is established as an asset valued at
market value, and any loan value in excess of that amount is charged off.
Exceptions are made to the charge-off policies when, in the opinion of
management, such treatment is warranted.
Based upon contract terms in effect at the respective dates, delinquency(a)
was as follows:
December 31,
1993 1992 1991
(dollars in thousands)
Real estate loans $ 48,426 $ 52,239 $ 57,142
% of related receivables 1.8% 1.8% 2.0%
Non-real estate loans $102,818 $ 74,868 $ 72,824
% of related receivables 3.8% 3.2% 3.7%
Total loans $151,244 $127,107 $129,966
% of related receivables 2.8% 2.5% 2.7%
Retail sales contracts $ 14,885 $ 10,735 $ 9,975
% of related receivables 1.4% 1.0% 1.3%
Total $166,129 $137,842 $139,941
% of related receivables 2.5% 2.2% 2.5%
9
Item 1. Continued
(a) Finance receivables any portion of which was 60 days or more past due
(including unearned finance charges and excluding deferred origination
costs, a fair value adjustment on finance receivables and accrued
interest).
Geographic Distribution
See Note 5. of the Notes to Consolidated Financial Statements in Item 8.
herein for information on geographic distribution of finance receivables.
Sources of Funds
AGFC funds its consumer finance operations principally through net cash
flows from operating activities, issuances of long-term debt, short-term
borrowings in the commercial paper market, and borrowings from banks. The
spread between the rates charged in consumer finance operations and the
cost of borrowed funds is one of the major factors determining the
Company's earnings. The Company is limited by statute in most states to a
maximum rate which it may charge in its lending operations. A relatively
high ratio of borrowings to invested capital is customary in the consumer
finance industry and is an important element in profitable operations.
Average Borrowings
The following table details average borrowings by type of debt for the
years indicated:
1993 1992 1991
(dollars in thousands)
Long-term debt $3,805,890 $3,138,376 $2,518,162
Short-term debt 1,647,550 1,872,002 1,921,351
Total $5,453,440 $5,010,378 $4,439,513
Borrowing Cost
The following table details interest expense as a percentage of average
borrowings by type of debt for the years indicated:
1993 1992 1991
Long-term debt 7.9% 8.7% 9.2%
Short-term debt 4.2% 5.7% 7.5%
Total 6.8% 7.6% 8.5%
10
Item 1. Continued
Contractual Maturities
Contractual maturities of finance receivables and debt as of December 31,
1993 were as follows:
Finance
Receivables Debt
(dollars in thousands)
Due in:
1994 $2,076,750 $2,301,555
1995 1,216,653 926,220
1996 756,292 556,384
1997 374,697 341,130
1998 223,796 232,302
1999 and thereafter 1,223,460 1,255,642
Total $5,871,648 $5,613,233
See Note 5. of the Notes to Consolidated Financial Statements in Item 8.
herein for further information on principal cash collections of finance
receivables.
INSURANCE OPERATIONS
Merit is a life and health insurance company domiciled in Indiana and
currently licensed in 43 states and the District of Columbia. Merit writes
or assumes (through affiliated and non-affiliated insurance companies)
credit life, credit accident and health, and ordinary insurance coverages.
Yosemite is a property and casualty insurance company domiciled in
California and licensed in 41 states which principally underwrites credit-
related property and casualty coverages.
Both Merit and Yosemite market their products through the consumer finance
network of the Company. The credit life insurance policies typically cover
the life of the borrower in an amount equal to the unpaid balance of the
obligation and provide for payment in full to the lender of the insured's
obligation in the event of death. The credit accident and health
insurance policies provide for the payment of the installments on the
insured's obligation to the lender coming due during a period of
unemployment or disability due to illness or injury. The credit-related
property and casualty insurance is written to protect property pledged as
security for the obligation. The purchase by the borrower of credit life,
credit accident and health, and credit property and casualty insurance is
voluntary with the exception of property damage coverage for automobiles,
dwellings, and commercial real estate pledged as collateral. In these
instances, property damage coverage is provided under the terms of the
lending agreement if the borrower does not provide evidence of coverage
with another insurance carrier. Premiums for insurance products are
financed as part of the insured's obligation to the lender.
11
Item 1. Continued
Merit has from time to time entered into reinsurance agreements with other
insurance companies, including certain American General subsidiaries, for
assumptions of various shares of annuities and ordinary, group, and credit
life insurance on a coinsurance basis. The reserves attributable to this
business fluctuate over time and in certain instances are subject to
recapture by the ceding company. At December 31, 1993, life reserves on
the books of Merit attributable to this business amounted to $74.2 million.
The following tables set forth information concerning the insurance
operations:
Life Insurance in Force December 31,
1993 1992 1991
(dollars in thousands)
Credit life $2,547,784 $2,221,940 $1,955,560
Ordinary life 2,373,685 2,208,685 2,189,817
Total $4,921,469 $4,430,625 $4,145,377
Premiums Earned Years Ended December 31,
1993 1992 1991
(dollars in thousands)
Insurance premiums earned in
connection with affiliated
finance and loan activities:
Credit life $ 35,711 $ 30,324 $ 28,794
Credit accident and health 42,978 34,222 29,968
Property 25,686 18,594 15,370
Other insurance premiums earned:
Ordinary life 20,823 19,344 22,177
Premiums assumed under
coinsurance agreements 12,318 6,984 5,783
Total $137,516 $109,468 $102,092
Premiums Written Years Ended December 31,
1993 1992 1991
(dollars in thousands)
Insurance premiums written in
connection with affiliated
finance and loan activities:
Credit life $ 41,036 $ 36,605 $ 27,975
Credit accident and health 56,839 44,029 36,695
Property 47,358 19,344 18,250
Other insurance premiums written:
Ordinary life 20,823 23,968 20,233
Premiums assumed under
coinsurance agreements 12,318 6,984 5,035
Total $178,374 $130,930 $108,188
12
Item 1. Continued
Investments and Investment Results
The investment portfolio of the Company's insurance subsidiaries is subject
to state insurance laws and regulations which prescribe the nature, quality
and percentage of various types of investments which may be made by
insurance companies.
The following table summarizes the investment results of the Company's
insurance subsidiaries for the periods indicated:
Years Ended December 31,
1993 1992 1991
(dollars in thousands)
Net investment revenue (a) $ 55,654 $ 54,134 $ 51,023
Average invested assets $666,982 $597,631 $549,359
Return on invested assets (a) 8.3% 9.1% 9.3%
Net realized investment gains
(losses) (b) $ 7,101 $ 1,937 $ (1,694)
(a) Net investment revenue and return on invested assets are after
deduction of investment expense but before net realized investment
gains (losses) and provision for income taxes.
(b) Includes net realized investment gains (losses) on marketable
securities and other invested assets before provision for income taxes.
REGULATION
Consumer Finance
The Company operates under various state laws which regulate the consumer
lending and retail sales financing businesses. The degree and nature of
such regulation varies from state to state. In general, the laws under
which a substantial amount of the Company's business is conducted provide
for state licensing of lenders, impose maximum term, amount, interest rate
and other charge limitations, and enumerate whether and under what
circumstances insurance and other ancillary products may be sold in
connection with a lending transaction. In addition, certain of these laws
prohibit the taking of liens on real estate except liens resulting from
judgments.
The Company also is subject to various types of federal regulation,
including the Federal Consumer Credit Protection Act, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, and certain Federal Trade
Commission rules.
13
Item 1. Continued
It is difficult for the Company to predict to what extent its business will
be affected by changes in economic, competitive, political and
international conditions, state and federal laws and regulations, judicial
or administrative interpretations, and taxation.
Insurance
The operations of the Company's insurance subsidiaries are subject to
regulation and supervision by state authorities. The extent of such
regulation varies but relates primarily to conduct of business, types of
products offered, standards of solvency, payment of dividends, licensing,
nature of and limitations on investments, deposits of securities for the
benefit of policyholders, the approval of policy forms and premium rates,
periodic examination of the affairs of insurers, form and content of
required financial reports and establishment of reserves required to be
maintained for unearned premiums, losses and other purposes. Substantially
all of the states in which the Company operates regulate the rates of
premiums charged for credit life and credit accident and health insurance
issued with respect to all credit transactions by the Company in those
states.
COMPETITION
Consumer Finance
The consumer finance business in which the Company engages is highly
competitive. The Company competes with other consumer finance companies,
industrial banks, industrial loan companies, commercial banks, sales
finance companies, savings and loan associations, credit unions, mutual or
cooperative agencies and others. See Competitive Factors in Item 7. herein
for more information.
Insurance
The Company's insurance business generally operates as an ancillary
business to the consumer lending operations. As such, the competition for
this business is relatively limited.
Item 2. Properties.
Due to the nature of the Company's business, its investment in real estate
and tangible property is not significant in relation to its total assets.
AGFI and certain of its subsidiaries own real estate on which AGFC and
other affiliates conduct business. Branch office operations are generally
conducted in leased premises. Leases are ordinarily entered into for
three- to five-year terms.
14
Item 2. Continued
The Company's exposure to environmental regulation arises from its
ownership of such properties. The properties are monitored for compliance
with federal and local guidelines. Potential costs related to
environmental clean-up are estimated to be immaterial.
Item 3. Legal Proceedings.
The Company is a defendant in various lawsuits arising in the normal course
of business. The Company believes it has valid defenses in these lawsuits
and is defending them vigorously. The Company also believes that the total
amounts that would ultimately have to be paid, if any, arising from these
lawsuits would have no material effect on its consolidated financial
position or its consolidated results of operations.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
There is no trading market for AGFC's common stock, all of which is owned
by AGFI. The frequency and amount of cash dividends declared on AGFC's
common stock for the years indicated were as follows:
Quarter Ended 1993 1992
(dollars in thousands)
March 31 $ 19,754 $ 36,373
June 30 39,001 37,999
September 30 50,089 30,390
December 31 32,512 21,273
$141,356 $126,035
See Management's Discussion and Analysis of Financial Condition and Results
of Operations in Item 7. herein, as well as Note 14. of Notes to
Consolidated Financial Statements in Item 8. herein, with respect to
limitations on the ability of AGFC to pay dividends.
Item 6. Selected Financial Data.
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in
conjunction with the consolidated financial statements, related notes, and
other financial information included herein.
Selected Financial Data
Years Ended December 31,
1993(a) 1992 1991 1990 1989
(dollars in thousands)
Total revenues $1,212,917 $1,092,858 $993,405 $969,373 $926,711
Net income (b) 189,628 160,171 135,837 122,947 100,398
December 31,
1993(a) 1992 1991 1990 1989
(dollars in thousands)
Total assets $7,504,798 $6,999,570 $6,464,519 $5,917,962 $5,805,340
Long-term debt 3,965,772 3,558,401 2,776,561 2,191,695 2,290,313
16
Item 6. Continued
(a) The Company adopted three new accounting standards through cumulative
adjustments as of January 1, 1993, resulting in a one-time reduction
of net income of $12.6 million. See Note 2. of the Notes to
Consolidated Financial Statements in Item 8. herein for information on
the adoption of new accounting standards.
(b) Per share information is not included because all of the common stock
of AGFC is owned by AGFI.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
Overview. The Company believes that its overall sources of liquidity will
continue to be sufficient to satisfy its foreseeable financial obligations.
Operating Activities. The Consolidated Statements of Cash Flows included
in Item 8. herein indicate the adjustments for non-cash items in order to
reconcile net income to net cash from operating activities. Such non-cash
items include the provision for finance receivable losses, the depreciation
and amortization of assets, the deferral of finance receivable origination
costs, the change in other assets and other liabilities and the change in
insurance claims and policyholder liabilities.
Net cash flows from operating activities include the receipt of finance
charges on finance receivables and the payment of interest on borrowings,
the payment of operating expenses and income taxes, the receipt of
insurance premiums and payment of contractual obligations to policyholders,
and net investment revenue. The Company's increase in finance charges for
1993 and 1992 when compared to the respective previous year reflects an
increase in ANR and yield. The decline in interest expense for 1993 when
compared to 1992 reflects a decline in both short-term and long-term
borrowing cost which more than offsets the increase in average borrowings.
The increase in interest expense for 1992 when compared to 1991 reflects an
increase in average borrowings which more than offsets the decline in
borrowing cost. Operating expenses increased for 1993 and 1992 when
compared to the respective previous year primarily due to increases in
salaries, benefits, and occupancy costs. These expenses increased
primarily due to an increase in the number of consumer finance offices in
the third quarter of 1992 and the additional employees required to operate
such offices.
Investing Activities. Net cash flows from investing activities include
funding finance receivables originated or purchased, which is the Company's
primary requirement for cash, and principal collections on finance
receivables, which is the Company's primary source of cash. Finance
receivables originated or purchased and principal collections on finance
receivables increased for 1993 and 1992 when compared to the respective
17
Item 7. Continued
previous year due to the purchase of assets from affiliates, business
development efforts, and the continuance of the Company's historical
practice of purchasing portfolios of receivables. Also included in net
cash flows from investing activities are the marketable securities
purchased and sold by the insurance operations and the change in notes
receivable from parent and affiliates.
Financing Activities. To the extent net cash flows from operating
activities do not match net cash flows from investing activities, the
Company adjusts its financing activities accordingly. Net cash flows from
financing activities include proceeds from issuance of long-term debt and
short-term debt as major sources of funds, and repayment of such borrowings
and the payment of dividends as major uses of funds. The ability of AGFC
and its subsidiaries to pay dividends is limited by certain dividend
restrictions. See Note 14. of the Notes to Consolidated Financial
Statements in Item 8. herein for information on dividend restrictions. The
Company's issuances of long-term debt for 1993 and 1992 reflect the
replacement of maturing issues of long-term interest obligations, asset
growth, and the long-term funding opportunities resulting from declining
long-term interest rates.
The Company obtains funds by the issuance of commercial paper, long-term
debt, and through bank borrowings. AGFC is a party to various interest
conversion agreements, which are used to manage its exposure to the
volatility of short-term interest rates. On a portfolio basis, the Company
attempts generally to match the cash flows of its debt to those anticipated
for its finance receivables. Fixed-rate finance receivables are generally
funded with fixed-rate debt while floating-rate finance receivables are
generally funded with commercial paper. Some of the long-term debt
agreements of the Company contain restrictive covenants which limit the
amount of various levels of debt based upon maintenance of defined ratios.
Credit Facilities. Credit facilities are maintained to support the
issuance of commercial paper by AGFC and as an additional source of funds
for operating requirements. See Note 9. of the Notes to Consolidated
Financial Statements in Item 8. herein for additional information on credit
facilities.
Analysis of Operating Results
See Selected Financial Statistics in Item 1. herein, for illustration of
important aspects of the Company's business and to provide a frame of
reference for the discussion following.
Net income for the years ended December 31, 1993, 1992, and 1991, was
$189.6 million, $160.2 million, and $135.8 million, respectively.
18
Item 7. Continued
Factors which specifically affected the Company's operating results are as
follows:
Finance Charges. Changes in finance charge revenues, the principal
component of total revenues, are a function of period to period changes in
the levels of ANR, the yield, and the number of days in the periods
compared. ANR for 1993 and 1992 increased when compared to the respective
previous year. The increases resulted from the purchase of receivables
from affiliates, receivables originated or renewed by the Company due to
business development efforts and the continuance of the Company's
historical practice of purchasing portfolios of receivables. The yield for
1993 and 1992 increased when compared to the respective previous year
primarily due to increased emphasis on higher-rate non-real estate secured
loans during 1993 and 1992 and higher yield on retail sales contracts for
1992. The additional day in 1992 also increased finance charge revenues
for 1992 when compared to 1993 and 1991.
Insurance Revenues. There was an increase in insurance premiums earned for
1993 when compared to 1992 primarily due to the increase in premiums
written in 1992 when compared to 1991. Insurance premiums written also
increased for 1993 when compared to 1992 primarily due to an increase in
the sale of the core credit and credit-related insurance products that
resulted from increased loan volume, insurance product roll-outs, and the
assumption of additional reinsurance business. Insurance premiums earned
increased in 1992 when compared to 1991 primarily due to the increase in
premiums written in 1991 when compared to 1990.
Other Revenues. Other revenues increased for 1993 and 1992 when compared
to the respective previous year primarily due to an increase in investment
revenue. The increase in investment revenue is due to the increased amount
of investments in marketable securities and realized investment gains
partially offset by a decline in investment yields. The decline in
investment yields is primarily due to the low interest rate environment
which caused some higher-yielding investments to be called. The proceeds
of the called investments were reinvested at then current rates. Other
revenues also increased for 1993 when compared to 1992 due to an increase
in interest revenue on notes receivable from parent and affiliates.
Interest Expense. Changes in interest expense are a function of period to
period changes in the borrowing cost, average borrowings, and the number of
days in the periods compared. The borrowing cost for 1993 and 1992
decreased when compared to the respective previous year due to the decline
in short-term interest rates and the issuance of long-term debt at rates
lower than the rates on fixed-rate obligations maturing, redeemed or that
remain outstanding. Average borrowings for 1993 and 1992 increased when
compared to the respective previous year primarily to fund asset growth.
Operating Expenses. Operating expenses increased for 1993 and 1992 when
compared to the respective previous period. The increases were primarily
due to increases in salaries, benefits, and occupancy costs. These
expenses increased primarily due to an increase in the number of consumer
finance offices in the third quarter of 1992 and the additional employees
required to operate such offices. The increase in operating expenses for
1993 and 1992 when compared to the respective previous year was partially
19
Item 7. Continued
offset by the increase in deferral of finance receivable origination costs.
Operating expenses also increased for 1993 when compared to 1992 due to a
major branch office automation program.
Provision for Finance Receivable Losses. Provision for finance receivable
losses for 1993 and 1992 increased when compared to the respective previous
year due to an increase in net charge-offs and amounts provided for the
allowance for finance receivable losses. Net charge-offs for 1993 and 1992
increased when compared to the respective previous year primarily due to
the increase in ANR. The allowance for finance receivable losses for 1993
and 1992 increased when compared to the respective previous year primarily
due to the increase in net finance receivables and to bring the balance to
appropriate levels based upon the economic climate, portfolio mix, levels
of delinquency, and net charge-offs.
Insurance Losses and Loss Adjustment Expenses. Insurance losses and loss
adjustment expenses for 1993 increased when compared to 1992 primarily due
to an increase in premiums written and the assumption of additional
reinsurance business, slightly offset by a decrease in loss ratios.
Insurance losses and loss adjustment expenses for 1992 also increased when
compared to 1991. This increase was primarily due to an increase in
premiums written and annuity payments that were made beginning in 1992 on
annuity business which was acquired in 1991.
Cumulative Effect of Accounting Changes. The adoption of three new
accounting standards resulted in a cumulative adjustment effective January
1, 1993 consisting of a one-time charge to earnings of $12.6 million.
Other than the cumulative effect, adoption of these new accounting
standards did not have a material effect on 1993 net income and is not
expected to have a material impact in the future. See Note 2. of the Notes
to Consolidated Financial Statements in Item 8. herein for information on
the adoption of new accounting standards.
Analysis of Financial Condition
At December 31, 1993, the Company's assets are distributed primarily as
follows: 76.2% in finance receivables, 9.3% in marketable securities, 7.8%
in notes receivable from parent and affiliates, 4.0% in acquisition-related
goodwill and 2.7% in other assets.
Asset Quality. The Company believes that its geographic diversification
reduces the risk associated with a recession in any one region. An
additional indication of asset quality is that of the loans and retail
sales contracts outstanding, 91% are secured by real property or personal
property.
The delinquency ratio increased for 1993 when compared to 1992 reflecting
increases in the delinquency ratio of loans, due to the Company's emphasis
on non-real estate secured loans, and retail sales contracts. The charge-
off ratio for 1993 increased when compared to 1992 reflecting an increase
in the charge-off ratio of retail sales contracts. While finance
receivables have some exposure to further economic uncertainty, the Company
believes that in the present environment, the allowance for finance
20
Item 7. Continued
receivable losses is adequate.
Marketable securities principally represent the investment portfolio of the
Company's insurance operations. The investment strategy is to maximize
after-tax returns on invested assets, subject to the constraints of safety,
liquidity, diversification, and regulation.
The largest intangible asset is acquisition-related goodwill which is being
amortized over periods of twenty or forty years. The carrying value of
this asset is regularly reviewed for indicators of impairment in value.
The value and remaining life are considered appropriate.
Operating Requirements. The Company's principal operating requirements for
cash are: funding finance receivables, payment of interest, payment of
operating expenses and income taxes, and contractual obligations to
policyholders. The principal sources of cash are collections of finance
receivables and finance charges, and proceeds from the issuance of
debt. The overall sources of cash available to the Company are expected
to be more than sufficient to satisfy operating requirements in 1994.
Capital Requirements. Long-term debt repayments and maturities plus normal
refinancing of short-term debt and any funds required to support growth in
finance receivables are expected to be financed through the issuance of new
long-term and short-term debt and surplus operating cash.
Asset/Liability Management. Anticipated cash flows of the Company's assets
and liabilities are managed in an effort to reduce the risk associated with
unfavorable changes in interest rates. On a portfolio basis, the Company
generally attempts to match the cash flows of its debt to those anticipated
for its finance receivables. Fixed-rate finance receivables are generally
funded with fixed-rate debt while floating-rate finance receivables are
generally funded with commercial paper. The Company has also entered into
interest conversion agreements to effectively fix interest rates on a
portion of its floating rate obligations.
Business Environment Factors
The Company operates in a business environment in which effective and
efficient managerial performance, and a prudent lending and investment
strategy are essential. The three most relevant environmental factors
affecting the Company are economic, regulatory, and competitive.
Economic Factors
The three key economic factors that affect the results of the Company are
interest rates, inflation, and recession/recovery.
Interest Rates. The pricing of products and services must be sensitive to
changes in interest rates if profit margins are to be maintained or
improved. Fluctuations in interest rates also affect the duration of the
assets and liabilities supporting these products and services.
21
Item 7. Continued
Inflation. Inflation affects the Company's growth and operating costs.
The Company endeavors to facilitate growth through pricing strategies and
to offset the effects of increasing operating costs through cost control.
Recession/Recovery. The impact on the Company of economic recession/
recovery will depend on the cycle's duration and severity. A cycle
influences the number of defaults on finance receivables and investments.
The Company believes that it can mitigate the potential impact of cycles by
using conservative lending, underwriting and investment policies, and by
geographic diversification.
Regulatory Factors
The regulatory environment of the consumer finance and insurance industries
is described in Item 1. Taxation is another regulatory factor affecting
the Company. A risk to any business is that changes in state and federal
tax laws or regulations may affect the way that the business operates.
Since tax laws affect not only the way that the Company is taxed but also
the design of many of its products, these laws and regulations and the way
they are interpreted are of concern to the Company. The Company monitors
federal and state tax legislation and responds with appropriate tax
planning in order to minimize the impact of taxation.
Competitive Factors
Consumer finance companies compete with other types of financial
institutions which offer similar products and services. Competition in
financial services markets also continues to intensify due to an increase
in the number and sophistication of financial products, technological
improvement, and more rapid communication.
The Company has positioned itself to meet the continuing challenge of
competition in three primary ways:
Customer Focus. The Company focuses on selling financial service products
to low- to middle-income consumers.
Customer Service. The Company concentrates on delivering quality service
to its customers. This is done through one of the industry's largest
domestic branch networks.
Productivity. The Company continuously monitors performance of its
branches and products. Organizational and procedural changes are made as
necessary to manage marketing and cost effectiveness.
22
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated financial
statements are presented on the following pages.
23
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American General Finance Corporation
We have audited the accompanying consolidated balance sheets of American
General Finance Corporation (a wholly-owned subsidiary of American General
Finance, Inc.) as of December 31, 1993 and 1992, and the related
consolidated statements of income, shareholder's equity and cash flows for
each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American General Finance Corporation and subsidiaries at
December 31, 1993 and 1992, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in Note 2. of the Notes to Consolidated Financial Statements,
in 1993 the Company changed its method of accounting for postretirement
benefits other than pensions, income taxes, postemployment benefits,
reinsurance, loan impairments, and certain investments in debt and equity
securities, as a result of adopting recently promulgated accounting
standards governing the accounting treatment for these items.
ERNST & YOUNG
Nashville, Tennessee
February 14, 1994
24
American General Finance Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
Assets 1993 1992
(dollars in thousands)
Finance receivables, net of unearned
finance charges (Note 5.):
Loans $4,950,744 $4,746,732
Retail sales contracts 920,904 860,346
Net finance receivables 5,871,648 5,607,078
Deduct allowance for finance receivable
losses (Note 6.) 152,696 133,211
Net finance receivables, less allowance
for finance receivable losses 5,718,952 5,473,867
Marketable securities (Note 4.) 699,332 585,511
Cash and cash equivalents 11,793 15,928
Notes receivable from parent and
affiliates (Note 7.) 585,385 399,500
Goodwill (Note 8.) 299,158 310,225
Other assets (Note 8.) 190,178 214,539
Total assets $7,504,798 $6,999,570
25
December 31,
Liabilities and Shareholder's Equity 1993 1992
(dollars in thousands)
Long-term debt (Note 12.) $3,965,772 $3,558,401
Short-term notes payable (Notes 9. and 10.)
Commercial paper 1,643,961 1,708,281
Banks and other 3,500 10,558
Insurance claims and policyholder
liabilities 415,488 363,174
Other liabilities 207,687 198,421
Accrued taxes 66,501 40,241
Total liabilities 6,302,909 5,879,076
Shareholder's equity (Notes 4., 13., and 14.)
Common stock 5,080 5,080
Additional paid-in capital 611,914 611,914
Net unrealized investment gains 33,740 617
Retained earnings 551,155 502,883
Total shareholder's equity 1,201,889 1,120,494
Total liabilities and shareholder's equity $7,504,798 $6,999,570
See Notes to Consolidated Financial Statements.
26
American General Finance Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
1993 1992 1991
(dollars in thousands)
Revenues
Finance charges $ 974,276 $ 890,989 $ 801,040
Insurance 142,333 118,950 110,069
Other 96,308 82,919 82,296
Total revenues 1,212,917 1,092,858 993,405
Expenses
Interest expense 368,986 378,679 375,349
Operating expenses 304,037 280,605 243,619
Provision for finance receivable
losses 133,577 107,608 96,732
Insurance losses and loss
adjustment expenses 79,214 66,603 59,410
Total expenses 885,814 833,495 775,110
Income before provision for income
taxes and cumulative effect of
accounting changes 327,103 259,363 218,295
Provision for Income Taxes
(Note 11.) 124,884 99,192 82,458
Income before cumulative effect
of accounting changes 202,219 160,171 135,837
Cumulative Effect of Accounting
Changes (Note 2.) 12,591 - -
Net Income $ 189,628 $ 160,171 $ 135,837
See Notes to Consolidated Financial Statements.
27
American General Finance Corporation and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31,
1993 1992 1991
(dollars in thousands)
Preferred Stock
Balance at beginning of year $ - $ 4,000 $ 4,000
Redeemed - 4,000 -
Balance at end of year - - 4,000
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 611,914 611,914 611,914
Balance at end of year 611,914 611,914 611,914
Net Unrealized Investment Gains
Balance at beginning of year 617 655 427
Change in non-redeemable
preferred stock investments (318) (38) 228
Effect of accounting change
on fixed-maturity investments 33,441 - -
Balance at end of year 33,740 617 655
Retained Earnings
Balance at beginning of year 502,883 469,107 468,270
Net income 189,628 160,171 135,837
Cash dividends:
Preferred stock - (360) (360)
Common stock (141,356) (126,035) (134,640)
Balance at end of year 551,155 502,883 469,107
Total common equity 1,201,889 1,120,494 1,086,756
Total Shareholder's Equity $1,201,889 $1,120,494 $1,090,756
See Notes to Consolidated Financial Statements.
28
American General Finance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
1993 1992 1991
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $189,628 $160,171 $135,837
Reconciling adjustments to net cash
provided by operating activities:
Provision for finance receivable losses 133,577 107,608 96,732
Depreciation and amortization 110,483 89,278 72,735
Deferral of finance receivable
origination costs (70,570) (49,370) (31,411)
Deferred federal income tax charge (6,135) 1,059 4,793
Change in other assets and other
liabilities 40,942 (4,690) 46,720
Change in insurance claims and
policyholder liabilities 52,314 16,117 3,746
Other, net (5,086) 12,109 (4,610)
Net cash provided by operating activities 445,153 332,282 324,542
Cash Flows from Investing Activities
Finance receivables originated or purchased (3,509,398) (2,967,644) (2,315,516)
Principal collections on finance receivables 3,178,054 2,699,987 2,165,343
Marketable securities purchased (193,286) (179,702) (94,643)
Marketable securities called, matured and sold 141,394 127,871 61,667
Purchase of affiliate - - (1,036)
Change in notes receivable from parent
and affiliates (185,885) (36,029) (173,532)
Purchase of assets from affiliate (62,885) (294,392) (312,955)
Other, net (19,891) (30,510) (10,884)
Net cash used for investing activities (651,897) (680,419) (681,556)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 987,503 1,017,852 997,369
Repayment of long-term debt (583,400) (253,675) (414,000)
Redemption of preferred stock - (4,000) -
Net decrease in short-term notes payable (71,378) (296,231) (122,884)
Dividends paid (130,116) (141,236) (98,885)
Net cash provided by financing activities 202,609 322,710 361,600
(Decrease) increase in cash and cash equivalents (4,135) (25,427) 4,586
Cash and cash equivalents at beginning of year 15,928 41,355 36,769
Cash and cash equivalents at end of year $ 11,793 $ 15,928 $ 41,355
Supplemental Disclosure of Cash Flow Information
Income taxes paid $105,784 $ 87,176 $ 71,057
Interest paid $372,474 $371,547 $363,928
<FN>
See Notes to Consolidated Financial Statements.
29
American General Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1993
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of American
General Finance Corporation (AGFC) and all of its subsidiaries (the
Company). The subsidiaries are all wholly-owned and all intercompany items
have been eliminated. All of the issued and outstanding common stock of
AGFC is owned by American General Finance, Inc. (AGFI), a holding company
organized to acquire AGFC in a reorganization during 1974. AGFI is a
wholly-owned subsidiary of American General Corporation (American General).
Reclassifications
Certain amounts in the 1992 and 1991 financial statements have been
reclassified to conform to the 1993 presentation.
Finance Receivable Revenue
Revenue on finance receivables is accounted for as follows:
(1) Finance charges on discounted finance receivables and interest on
interest-bearing finance receivables are recognized as revenue on the
accrual basis using the interest method. The accrual of revenue is
suspended when the fourth contractual payment becomes past due.
(2) Extension fees and late charges are recognized as revenue when
received.
(3) Nonrefundable points and fees on finance receivables are recognized on
the accrual basis using the interest method over the lesser of the
contractual term or the estimated life based upon prepayment
experience. Effective January 1, 1992, the Company changed, on a
prospective basis, the estimated life over which nonrefundable points
and fees are amortized to finance charges to the lesser of the
contractual term or 50 months for real estate secured finance
receivables and 19 months for non-real estate secured finance
receivables. This change did not have a material impact on the
results of operations of the Company. For finance receivables
originated prior to January 1, 1992, the estimated life over which
nonrefundable points and fees are amortized to finance charges
continues to be 36 months. If a finance receivable liquidates before
amortization is completed, any unamortized fees are recognized as
revenue at the date of liquidation.
30
Notes to Consolidated Financial Statements, Continued
Finance Receivable Origination Costs
The Company defers costs associated with the origination of loans.
Deferred origination costs are included in finance receivables and are
required to be amortized to finance charges using the interest method over
the contractual term or the estimated economic life of the finance
receivables. In 1992, the Company changed, on a prospective basis, the
method used to amortize deferred origination costs to revenue, and the term
over which such deferred costs are amortized. Effective January 1, 1992,
deferred costs on loans originated are amortized to finance charges using
the interest method over the lesser of the contractual term or 50 months
for real estate secured loans and 19 months for non-real estate secured
loans. This change did not have a material impact on the results of
operations of the Company. For loans originated prior to January 1, 1992,
the Company amortizes these deferred costs over the contractual term or 24
months on a straight-line basis; which produces a result not materially
different from the interest method over 36 months, which was the estimated
life based upon prepayment experience. If a loan liquidates before
amortization is completed, any unamortized costs are charged to revenue at
the date of liquidation.
Allowance For Finance Receivable Losses
The allowance for finance receivable losses is maintained at a level based
on management's periodic evaluation of the finance receivable portfolio and
reflects an amount that, in management's opinion, is adequate to absorb
losses in the existing portfolio. In evaluating the portfolio, management
takes into consideration numerous factors, including current economic
conditions, prior finance receivable loss and delinquency experience, the
composition of the finance receivable portfolio, and management's estimate
of anticipated finance receivable losses.
AGFC's basic policy is to charge off each month loan accounts, except those
secured by real estate, on which little or no collections were made in the
prior six-month period. Retail sales contracts are charged off when four
installments are past due. In the case of loans secured by real estate,
foreclosure proceedings are instituted when four monthly installments are
past due. When foreclosure is completed and the Company has obtained title
to the property, the real estate is established as an asset valued at
market value and any loan value in excess of that amount is charged off.
Exceptions are made to the charge-off policies when, in the opinion of
management, such treatment is warranted.
Cash Equivalents
The Company considers all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
31
Notes to Consolidated Financial Statements, Continued
Marketable Securities
Prior to December 31, 1993, the Company reported marketable securities in
accordance with the then-existing accounting standards. Investments in
bonds and redeemable preferred stocks were considered held for investment
purposes and were carried at cost, adjusted where appropriate for
amortization of premiums or discounts. Investments in non-redeemable
preferred stocks were stated at fair value and net unrealized gains or
losses on revaluation of these stocks were credited or charged to
shareholder's equity.
Effective with the adoption of Statement of Financial Accounting Standards
115 (see Note 2.), management determines the appropriate classification of
marketable securities at the time of purchase and re-evaluates such
designation as of each balance sheet date. All marketable securities are
currently classified as available-for-sale and recorded at fair value. The
fair value adjustment, net of deferred taxes, is recorded in net unrealized
investment gains within shareholder's equity.
Interest Conversion Agreements
The interest differential to be paid or received on interest conversion
agreements is accrued as interest rates change and is recognized over the
life of the agreements as an adjustment to interest expense.
Realized Gains or Losses
The difference between the selling price and cost of an investment is
recorded as a gain or loss (using the specific identification method) and
is included in other revenues.
If the fair value of an investment declines below its cost or amortized
cost and this decline is considered to be other than temporary, the
investment is reduced to its fair value, and the reduction is recorded as a
realized loss.
Insurance Operations
The Company's insurance subsidiaries are engaged in writing credit life and
credit accident and health insurance, ordinary life insurance, and property
and casualty insurance. Premiums on credit life insurance are recognized
as revenue using the sum-of-the-digits or actuarial methods, except in the
case of level-term contracts, which are recognized as revenue using the
straight-line method over the lives of the policies. Premiums on credit
accident and health insurance are recognized as revenue using an average of
the sum-of-the-digits and the straight-line methods. Ordinary life
insurance premiums are reported as earned when collected but not before
their due dates. Premiums on property and casualty insurance are
recognized as revenue using the straight-line method over the terms of the
policies or appropriate shorter periods.
32
Notes to Consolidated Financial Statements, Continued
Policy reserves for credit life and credit accident and health insurance
are equal to related unearned premiums, and claim reserves are based on
company experience. Liabilities for future life insurance policy benefits
associated with ordinary life contracts are accrued when premium revenue is
recognized and are computed on the basis of assumptions as to investment
yields, mortality, and withdrawals. Annuity reserves are computed on the
basis of assumptions as to investment yields and mortality. Reserves for
losses and loss adjustment expenses of the property and casualty insurance
company are based upon estimates of claims reported plus estimates of
incurred but not reported claims. Ordinary life, group annuity, and
accident and health insurance reserves assumed under coinsurance agreements
are established on the bases of various tabular and unearned premium
methods.
Insurance acquisition costs, principally commissions, reinsurance fees, and
premium taxes, are deferred and charged to expense over the terms of the
related policies or reinsurance agreements.
The Company's insurance subsidiaries enter into reinsurance agreements
among themselves and other insurers, including insurance subsidiaries of
American General. The life reserves attributable to this business with the
subsidiaries of American General were $62.6 million and $63.4 million at
December 31, 1993 and 1992, respectively. In 1993, the Company's insurance
subsidiaries assumed from and ceded to other insurers $42.5 million and
$3.7 million of reinsurance premiums, respectively. Liabilities for unpaid
claims and claim adjustment expenses and receivables for reinsurance
credits are included in the balance sheet at their respective gross
amounts. The Company's insurance subsidiaries remain liable to the extent
reinsurers do not meet their obligations.
Statutory accounting practices differ from generally accepted accounting
principles, primarily in the following respects: credit life insurance
reserves are maintained on the basis of mortality tables; ordinary life and
group annuity insurance reserves are based on statutory requirements;
insurance acquisition costs are expensed when incurred rather than expensed
over the related contract period; deferred income taxes are not recorded on
temporary differences in the recognition of revenue and expense for tax
versus statutory reporting purposes; certain intangible assets resulting
from a purchase and the related amortization are not reflected in statutory
financial statements; and a security valuation reserve is required for
Merit Life Insurance Co. (Merit), which is a wholly-owned subsidiary of the
Company. The following compares net income and shareholder's equity
determined under statutory accounting practices with those determined under
generally accepted accounting principles:
Net Income Shareholder's Equity
Years Ended December 31, December 31,
1993 1992 1991 1993 1992
(dollars in thousands)
Statutory accounting
practices $31,080 $32,128 $22,837 $245,145 $221,233
Generally accepted
accounting principles 39,363 38,164 34,991 386,821 317,636
33
Notes to Consolidated Financial Statements, Continued
Effective December 31, 1991, an indirect insurance subsidiary of American
General was purchased by a subsidiary of AGFC. Total assets at the time of
purchase were $12.3 million. The cash paid for the affiliate as shown in
the Consolidated Statements of Cash Flows was $1.0 million.
Fair Value of Financial Instruments
Fair values are based on estimates using discounted cash flows when quoted
market prices are not available. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates
of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of the instrument.
The fair value amounts presented can be misinterpreted, and care should be
exercised in drawing conclusions from such data.
Cash and Cash Equivalents. The carrying amounts reported in the
Consolidated Balance Sheets for cash and cash equivalents approximate those
assets' fair values.
Marketable Securities. Fair values for investment securities are based on
quoted market prices, where available. For investments not actively
traded, fair values were estimated using values obtained from independent
pricing services or, in the case of private placements, by discounting
expected future cash flows using a current market rate applicable to yield,
credit quality, and maturity of the investment.
Finance Receivables. The fair values for fixed-rate finance receivables
are estimated using discounted cash flow analysis, using interest rates
currently being offered for finance receivables with similar terms to
borrowers of similar credit quality. For variable-rate finance receivables
that reprice frequently and with no significant change in credit risk, fair
values are based on carrying values.
Interest Conversion Agreements. Fair values for the Company's interest
conversion agreements are based on estimates, obtained from the individual
counterparties, of the cost or benefit of terminating the agreements.
Unused Customer Credit Lines. The unused credit lines available to the
Company's customers are considered to have no fair value. The interest
rates charged on these facilities are either variable and reprice
frequently or can be changed at the Company's discretion. Furthermore,
these amounts, in part or in total, may be cancelled at the discretion of
the Company.
Credit Facilities. The Company's committed credit facilities are
substantially short-term, and therefore no fair value is determined.
Long-term Debt. The fair values of the Company's long-term borrowings are
estimated using discounted cash flows based on current borrowing rates.
34
Notes to Consolidated Financial Statements, Continued
Short-term Notes Payable. The carrying value of short-term notes payable
approximates the fair value.
Note 2. New Accounting Standards
During 1993, the Company adopted six new Statements of Financial Accounting
Standards (SFAS) issued by the Financial Accounting Standards Board.
The Company adopted SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," through a cumulative adjustment, effective
January 1, 1993, resulting in a one-time reduction of net income of $2.9
million ($4.4 million pretax). This standard requires accrual of a
liability for postretirement benefits other than pensions. Other than the
cumulative effect, adoption of SFAS 106 did not have a material impact on
1993 net income and is not expected to have a material impact in the
future.
The Company adopted SFAS 109, "Accounting for Income Taxes," through a
cumulative adjustment, effective January 1, 1993, resulting in a one-time
reduction of net income of $8.5 million. This standard changes the way
income tax expense is determined for financial reporting purposes. Other
than the cumulative effect, adoption of SFAS 109 did not have a material
impact on 1993 net income and is not expected to have a material impact in
the future.
The Company adopted SFAS 112, "Employers' Accounting for Postemployment
Benefits," through a cumulative adjustment, effective January 1, 1993,
resulting in a one-time reduction of net income of $1.2 million ($1.8
million pretax). This standard requires the accrual of a liability for
benefits provided to employees after employment but before retirement.
Other than the cumulative effect, adoption of SFAS 112 did not have a
material impact on 1993 net income and is not expected to have a material
impact in the future.
The Company adopted SFAS 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," effective January 1, 1993.
This standard, which does not have a material impact on the consolidated
financial statements, requires that reinsurance receivables and prepaid
reinsurance premiums be reported as assets, rather than netted against the
related insurance liabilities.
The Company adopted SFAS 114, "Accounting by Creditors for Impairment of a
Loan," effective January 1, 1993. This standard requires that certain
impaired loans be reported at the present value of expected future cash
flows, the loan's observable market price, or the fair value of underlying
collateral. The adoption of SFAS 114 did not have a material impact on
1993 net income and is not expected to have a material impact in the
future.
The Company adopted SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities," at December 31, 1993. This statement requires that
debt and equity securities be carried at fair value unless the Company
35
Notes to Consolidated Financial Statements, Continued
has the positive intent and ability to hold these investments to maturity.
Marketable securities must be classified into one of three categories: 1)
held-to-maturity, 2) available-for-sale, or 3) trading securities. Upon
adoption of SFAS 115, the Company classified all marketable securities as
available-for-sale and, accordingly, recorded them at fair value. The
corresponding unrealized gain, net of deferred taxes, was credited directly
to shareholder's equity. The adjustment increased marketable securities by
$51.4 million, deferred income taxes by $18.0 million, and shareholder's
equity by $33.4 million.
Note 3. Acquisition
Subsidiaries of AGFC purchased finance receivables and other assets from
subsidiaries of AGFI in 1993, 1992, and 1991. The cash paid for the
finance receivables and other assets as shown in the Consolidated
Statements of Cash Flows consisted of the following:
1993 1992 1991
(dollars in thousands)
Finance receivables, net $62,326 $308,327 $303,854
Other assets (liabilities) 559 (13,935) 9,101
Cash paid $62,885 $294,392 $312,955
Note 4. Marketable Securities
At December 31, 1993, all marketable securities were classified as
available-for-sale and reported at fair value due to the adoption of SFAS
115 (see Note 2.). Previously, fixed-maturity marketable securities were
classified as held-to-maturity and reported at amortized cost. Marketable
securities were as follows at December 31:
Fair Value Amortized Cost
1993 1992 1993 1992
Fixed-maturity marketable (dollars in thousands)
securities:
Bonds:
Corporate securities $313,174 $307,156 $290,153 $289,186
Mortgage-backed securities 234,062 183,988 223,868 176,627
States and political
subdivisions 102,073 70,001 94,175 64,199
Other 40,766 51,328 30,736 44,247
Redeemable preferred stocks 7,486 8,877 7,180 8,913
Total 697,561 621,350 646,112 583,172
Non-redeemable preferred
stocks 1,771 2,339 1,313 2,339
Total marketable securities $699,332 $623,689 $647,425 $585,511
36
Notes to Consolidated Financial Statements, Continued
At December 31, the gross unrealized gains and losses were as follows:
Gross Gross
Unrealized Gains Unrealized Losses
1993 1992 1993 1992
(dollars in thousands)
Fixed-maturity marketable
securities:
Bonds:
Corporate securities $23,836 $19,597 $ 815 $ 1,627
Mortgage-backed securities 11,681 7,916 1,487 555
State and political
subdivisions 8,031 5,865 133 63
Other 10,032 7,141 2 60
Redeemable preferred stocks 315 111 9 147
Total 53,895 40,630 2,446 2,452
Non-redeemable preferred
stocks 458 - - -
Total marketable securities $54,353 $40,630 $ 2,446 $ 2,452
During the years ended December 31, 1993, 1992, and 1991, marketable
securities with a fair value of $141.4 million, $127.9 million, and $61.7
million, respectively, were sold or redeemed. The gross realized gains on
such sales or redemptions totaled $7.4 million, $3.1 million, and $.9
million, respectively. The gross realized losses totaled $.1 million, $.5
million and $2.8 million, respectively.
The contractual maturities of fixed-maturity securities at December 31,
1993 were as follows:
Fair Amortized
Value Cost
(dollars in thousands)
Fixed maturities, excluding
mortgage-backed securities:
Due in 1 year or less $ 11,298 $ 11,146
Due after 1 year through 5 years 75,114 69,284
Due after 5 years through 10 years 232,315 215,813
Due after 10 years 144,772 126,001
463,499 422,244
Mortgage-backed securities 234,062 223,868
Total $697,561 $646,112
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Company requirements and
investment strategies may result in the sale of investments before
maturity.
37
Notes to Consolidated Financial Statements, Continued
Certain of the bonds were on deposit with regulatory authorities. The
carrying value of such bonds was $18.6 million and $21.2 million at
December 31, 1993 and 1992, respectively.
Note 5. Finance Receivables
Loans collateralized by security interests in real estate generally have
maximum original terms of 180 months. Loans collateralized by consumer
goods, automobiles or other chattel security, and loans that are unsecured,
generally have maximum original terms of 60 months. Retail sales contracts
are collateralized principally by consumer goods and automobiles, and
generally have maximum original terms of 60 months. Of the loans and
retail sales contracts outstanding at December 31, 1993, 91% were secured
by the real or personal property of the borrower. At December 31, 1993,
mortgage loans (generally second mortgages) accounted for 11% of the total
number of loans outstanding and 53% of the aggregate dollar amount of loans
outstanding.
Contractual maturities of loans and retail sales contracts were as follows:
December 31, 1993
Net Receivables Percent of
Amount Net Receivables
(dollars in thousands)
1994 $2,076,750 35.4%
1995 1,216,653 20.7
1996 756,292 12.9
1997 374,697 6.4
1998 223,796 3.8
Thereafter 1,223,460 20.8
Total $5,871,648 100.0%
Experience of the Company has shown that a substantial portion of loans and
retail sales contracts will be renewed, converted, or paid in full prior to
maturity. Accordingly, the preceding information as to contractual
maturities should not be considered as a forecast of future cash
collections. Principal cash collections and such collections as a
percentage of average net finance receivables were as follows:
1993 1992
(dollars in thousands)
Loans:
Principal cash collections $2,067,597 $1,846,280
Percent of average net finance receivables 42.3% 40.0%
Retail sales contracts:
Principal cash collections $1,110,457 $ 853,707
Percent of average net finance receivables 124.9% 113.5%
38
Notes to Consolidated Financial Statements, Continued
Unused credit limits on revolving lines of credit extended by the Company
to its customers were $188.3 million and $126.3 million at December 31,
1993 and 1992, respectively. These amounts, in part or in total, can be
cancelled at the discretion of the Company, and are not indicative of the
amount expected to be funded.
Geographic diversification of finance receivables reduces the concentration
of credit risk associated with a recession in any one region. The largest
concentrations of finance receivables, net of unearned finance charges, are
as follows:
December 31, 1993 December 31, 1992
Location Amount Percent Amount Percent
(dollars in thousands) (dollars in thousands)
California $ 640,849 11% $ 738,887 13%
N. Carolina 559,271 10 497,490 9
Florida 459,257 8 474,399 8
Illinois 372,576 6 359,134 6
Indiana 345,682 6 258,406 5
Virginia 331,606 6 308,168 6
Ohio 318,766 5 266,442 5
Georgia 236,727 4 231,979 4
Other 2,606,914 44 2,472,173 44
$5,871,648 100% $5,607,078 100%
The fair values determined for finance receivables at December 31, 1993 and
1992 approximate the carrying amounts reported in the Consolidated Balance
Sheets net of the allowance for finance receivable losses. Care should be
exercised in drawing conclusions based on the estimated fair values at the
end of the year, since such fair value estimates are based only on the
value of the finance receivables and do not reflect the value of the
underlying customer relationships or the related distribution system.
Note 6. Allowance for Finance Receivable Losses
The changes in the allowance for finance receivable losses are detailed
below:
1993 1992 1991
(dollars in thousands)
Balance at beginning of year $133,211 $115,624 $105,639
Provision for finance receivable
losses 133,577 107,608 96,732
Allowance related to net acquired
receivables and other 1,536 12,579 6,984
Charge-offs:
Finance receivables charged off (141,732) (129,016) (114,871)
Recoveries 26,104 26,416 21,140
Net charge-offs (115,628) (102,600) (93,731)
Balance at end of year $152,696 $133,211 $115,624
39
Notes to Consolidated Financial Statements, Continued
Note 7. Notes Receivable from Parent and Affiliates
Notes receivable from AGFI and affiliates outstanding at December 31, are
summarized as follows:
1993 1992
(dollars in thousands)
Affiliates $ 12,129 $ 20,829
Parent 573,256 378,671
Total $585,385 $399,500
Interest revenue on notes receivable from parent and affiliates for the
years ended December 31, 1993, 1992, and 1991, was $32.2 million, $26.9
million, and $25.1 million, respectively.
Note 8. Costs In Excess of Net Assets Acquired
Goodwill, resulting from the excess of the purchase price paid over the
value of separately identified tangible and intangible assets acquired,
amounted to $299.2 million and $310.2 million at December 31, 1993 and
1992, respectively, and is being amortized on a straight-line basis over
periods of twenty or forty years. Accumulated amortization amounted to
$46.7 million and $37.7 million at December 31, 1993 and 1992, repectively.
Included in other assets is a customer base valuation of $23.2 million and
$24.8 million at December 31, 1993 and 1992, respectively, which is being
amortized to operating expenses on a straight-line basis over a twenty-five
year period.
Note 9. Short-term Notes Payable and Credit Facilities
AGFC issues commercial paper with terms ranging from 1 to 270 days.
Information concerning short-term notes payable for commercial paper and to
banks was as follows:
1993 1992 1991
(dollars in thousands)
Maximum borrowings at any month end $1,746,426 $2,086,961 $2,143,947
Average borrowings $1,633,062 $1,844,727 $1,904,246
Weighted average interest rate
(total interest expense divided
by average borrowings) 3.2% 3.9% 6.3%
Weighted average interest rate,
giving effect to commitment fees
and interest conversion agreements 4.2% 5.7% 7.5%
Weighted average interest rate,
at December 31, 3.3% 3.5% 4.9%
40
Notes to Consolidated Financial Statements, Continued
Credit facilities are maintained to support the issuance of commercial
paper and as an additional source of funds for operating requirements. At
December 31, 1993 and 1992, the Company had a committed credit facility of
$345.0 million and was an eligible borrower under a $2.1 billion committed
credit facility and $2.6 billion of committed credit facilities,
respectively, extended to American General and certain of its subsidiaries.
The annual commitment fees for all committed facilities range from .075% to
.10%. At December 31, 1993 and 1992, the Company also had $341.0 million
and $286.0 million, respectively, of uncommitted credit facilities and was
an eligible borrower under $240.0 million and $220.0 million, respectively,
of uncommitted credit facilities extended to American General and certain
of its subsidiaries. Available borrowings under all facilities are reduced
by any amounts outstanding thereunder. At December 31, 1993 and 1992,
Company short-term borrowings outstanding under all credit facilities were
$3.5 million and $8.3 million, respectively, and Company long-term
borrowings outstanding under all credit facilities were $147.0 million and
$117.2 million, respectively, with remaining availability to the Company of
$2.4 billion and $2.9 billion, respectively, in committed facilities and
$430.5 million and $380.5 million, respectively, in uncommitted facilities.
Interest conversion agreements in which the Company contracted to pay
interest at fixed rates and receive interest at floating rates were $290.0
million, $415.0 million, and $765.0 million in notional amounts at December
31, 1993, 1992, and 1991, respectively. The fair value of these agreements
was $29.4 million and $19.9 million at December 31, 1993 and 1992,
respectively, which would have been the cost to the Company of termination
of the agreements. The weighted average interest rate was 8.75%, 8.83%,
and 8.87% at December 31, 1993, 1992, and 1991, respectively. These
agreements mature at various dates and have various fixed rates as shown in
the table below:
Weighted
Average
Notional Interest
Maturity Amount Rate
(dollars in
thousands)
1994 $100,000 8.71%
1996 50,000 8.38
1998 90,000 9.06
2000 50,000 8.64
$290,000 8.75%
Options on interest conversion agreements at December 31, 1993, 1992, and
1991, in aggregate notional amounts were $200.0 million, $250.0 million,
and $350.0 million, respectively. The fair value of these agreements was
$33.3 million and $20.7 million at December 31, 1993 and 1992,
respectively, which would have been the cost to the Company of termination
of the agreements. The option agreements at December 31, 1993, if
exercised by the counterparty,
41
Notes to Consolidated Financial Statements, Continued
will commit the Company to pay interest at fixed rates. The related option
fees received are being amortized as a reduction of interest expense over
the aggregate of the option period and interest conversion period.
Interest conversion agreements involve credit risk due to possible non-
performance by the counterparties. The Company manages the credit risk of
counterparty defaults in these transactions by limiting the total amount of
arrangements outstanding, both by individual counterparty and in the
aggregate, by monitoring the size and maturity structure of the
off-balance-sheet portfolio, and by applying uniform credit standards. The
Company does not anticipate non-performance by the counterparties, and any
such non-performance would not have a material impact on net income.
Notional amounts represent amounts on which interest payments to be
exchanged are calculated. The credit risk to the Company is limited to the
interest differential based on the interest rates contained in the
agreements.
Note 10. Short-term Notes Payable - Parent
Borrowings from AGFI are primarily to provide operating funds for lending
activities. Borrowings from American General are primarily to provide
overnight operating liquidity when American General is in a surplus cash
position. All such borrowings are made on a due on demand basis at
short-term rates based on American General's or AGFC's commercial paper
rates or bank prime rates. At December 31, 1993, 1992 and 1991, AGFC had
no borrowings outstanding with AGFI or American General. Information
concerning such borrowings was as follows:
1993 1992 1991
(dollars in thousands)
Maximum borrowings at any month end $50,000 $129,400 $75,000
Average borrowings $14,488 $ 27,275 $17,105
Weighted average interest rate (total
interest expense divided by average
borrowings) 7.0% 7.1% 8.3%
The information above excludes $2.3 million in borrowings from American
General by the Company's insurance subsidiaries at December 31, 1992, which
are not material. At December 31, 1993 and 1991, the Company's insurance
subsidiaries had no borrowings outstanding from American General.
Note 11. Income Taxes
AGFC and all of its subsidiaries file a consolidated federal income tax
return with American General and its subsidiaries. AGFC and its
subsidiaries provide for federal income taxes as if filing a separate tax
return, and pay such amounts to American General in accordance with a tax
sharing agreement.
42
Notes to Consolidated Financial Statements, Continued
Beginning in 1993, income taxes have been provided in accordance with SFAS
109 (see Note 2.). Under this method, deferred tax assets and liabilities
are calculated using the differences between the financial reporting basis
and the tax basis of assets and liabilities, using the enacted tax rate.
The effect of a tax rate change is recognized in income in the period of
enactment. Before 1993, the Company recognized deferred taxes on timing
differences between financial reporting income and taxable income.
Deferred taxes were not adjusted for tax rate changes.
As a result of this accounting change, 1993 income tax disclosures are not
comparable to prior years.
Provision for income taxes is summarized as follows:
Years Ended December 31,
1993 1992 1991
(dollars in thousands)
Federal
Current $119,758 $85,664 $68,651
Deferred (6,135) 1,059 4,793
Total federal 113,623 86,723 73,444
State 11,261 12,469 9,014
Total $124,884 $99,192 $82,458
Provision for deferred federal income taxes is summarized as follows:
Years Ended December 31,
1992 1991
(dollars in thousands)
Finance receivable losses $(3,504) $ 2,656
Other, net 4,563 2,137
Total $ 1,059 $ 4,793
The U.S. statutory federal income tax rate differs from the effective
income tax rate as follows:
Years Ended December 31,
1993 1992 1991
Statutory federal income tax rate 35.0% 34.0% 34.0%
State income taxes 2.2 3.2 2.7
Amortization of goodwill 1.2 1.1 1.3
Nontaxable investment income (.6) (.7) (.8)
Other, net .4 .6 .6
Effective income tax rate 38.2% 38.2% 37.8%
43
Notes to Consolidated Financial Statements, Continued
The net deferred tax liability of $36.5 million is net of deferred tax
assets totalling $70.0 million. The most significant deferred tax assets
relate to the provision for finance receivable losses and insurance
premiums recorded for financial reporting purposes. No valuation allowance
on deferred tax assets is considered necessary at December 31, 1993.
On August 10, 1993, the Revenue Reconciliation Act of 1993 was enacted,
which increased the corporate tax rate from 34% to 35%, retroactive to
January 1, 1993. The additional 1% tax on earnings for first and second
quarter 1993 was $1.5 million, and the effect of the 1% increase in the tax
rate used to value existing deferred tax liabilities, as required by SFAS
109, was $.9 million. In accordance with SFAS 109, this total one-time
charge of $2.4 million was included in provision for income taxes for the
quarter ended September 30, 1993.
Note 12. Long-term Debt
Long-term debt outstanding at December 31, is summarized as follows:
Senior
Maturity Senior Subordinated Total
(dollars in thousands)
1994 $ 457,120 $196,974 $ 654,094
1995 651,641 274,579 926,220
1996 556,384 - 556,384
1997 341,130 - 341,130
1998 232,302 - 232,302
1999-2003 957,931 - 957,931
2004-2009 297,711 - 297,711
Total $3,494,219 $471,553 $3,965,772
Certain debt issues of the Company are redeemable prior to maturity at par,
at the option of the holders. If these issues were so redeemed, the senior
amounts above would increase $150.0 million in 1994 and 1996 and would
decrease $150.0 million in 1999 and 2009.
Carrying Value Fair Value
Type of Debt 1993 1992 1993 1992
(dollars in thousands)
Senior $3,494,219 $3,109,224 $3,721,719 $3,251,489
Senior subordinated 471,553 449,177 486,806 478,470
Total $3,965,772 $3,558,401 $4,208,525 $3,729,959
The senior subordinated debt at December 31, 1992 included $50 million held
by certain subsidiaries of American General.
44
Notes to Consolidated Financial Statements, Continued
The weighted average interest rates on long-term debt outstanding by type
were as follows:
Years Ended December 31, December 31,
1993 1992 1993 1992
Senior 7.7% 8.4% 7.4% 8.1%
Senior subordinated 8.7 9.4 7.1 9.0
Total 7.9 8.7 7.3 8.2
The agreements under which certain of the Company's long-term debt was
issued contain provisions for optional prepayments after a specified period
of time. Certain debt agreements also contain restrictions on consolidated
retained earnings for certain purposes (see Note 14.).
Note 13. Capital Stock
AGFC has two classes of capital stock: special shares (without par value,
25 million shares authorized) which may be issued in series with such
dividend, liquidation, redemption, conversion, voting and other rights as
the board of directors may determine prior to issuance; and common shares
($.50 par value, 25 million shares authorized). Issued shares were as
follows:
Special Shares - As of December 31, 1993 and 1992, there were no shares
issued and outstanding. All 40,000 shares of 9% Preferred Stock were
redeemed by the Company on December 31, 1992 at $100 per share plus unpaid
accrued dividends.
Common Shares - Issued and outstanding 10,160,012 shares at December 31,
1993 and 1992.
Note 14. Consolidated Retained Earnings
AGFC's insurance subsidiaries are restricted by state laws as to the
amounts they may pay as dividends without prior notice to, or in some cases
prior approval from, their respective state insurance departments. The
maximum amount of dividends which can be paid by the Company's insurance
subsidiaries in 1994 without prior approval is $29.6 million. AGFC's
insurance subsidiaries had statutory capital and surplus of $245.2 million
at December 31, 1993. The amount of dividends which may be paid by AGFC
is limited by provisions of certain of its debt agreements. Under the most
restrictive provisions of such agreements, $38.9 million of the
consolidated retained earnings of AGFC at December 31, 1993, was free from
such restrictions.
At December 31, 1993, Merit had $52.7 million of accumulated earnings for
which no federal income tax provisions have been required. Federal income
taxes will become payable only to the extent such earnings are distributed
as dividends or exceed limits prescribed by tax laws. No distributions
are presently contemplated from these earnings. If such earnings were to
45
Notes to Consolidated Financial Statements, Continued
become taxable at December 31, 1993, the federal income tax would
approximate $18.4 million.
Note 15. Benefit Plans
Retirement Income Plans
The Company participates in the American General Retirement Plans (AGRP),
which are noncontributory defined benefit pension plans covering most
employees. Pension benefits are based on the participant's average monthly
compensation and length of credited service. American General's funding
policy is to contribute annually no more than the maximum amount that can
be deducted for federal income tax purposes. American General uses the
projected unit credit method to compute pension expense.
The plans' assets include primarily readily marketable stocks and bonds.
The pension plans purchased annuity contracts from several of American
General's life insurance subsidiaries that provide benefits to certain
retirees. These annuity contracts provided $2 million for benefits to the
Company's retirees for the years ended December 31, 1993 and 1992.
Pension plan activity allocated to the Company for 1993, 1992 and 1991
reduced operating expenses by $21 thousand, $1.4 million and $1.4 million,
respectively.
Because net plan assets are not calculated separately for the Company, the
remainder of the information presented herein is for AGFI.
AGFI's participation in the AGRP is accounted for as if AGFI had its own
plan. The following table sets forth AGFI's portion of the plans' funded
status:
Years Ended December 31,
1993 1992 1991
Actuarial present value of benefit (dollars in thousands)
obligation:
Accumulated benefit obligation $35,868 $22,400 $39,249
Vested benefits (included in
accumulated benefit obligation) $35,639 $21,985 $38,810
Projected benefit obligation $43,212 $29,278 $42,686
Plan assets at fair value 49,767 44,678 63,090
Plan assets in excess of projected
benefit obligation 6,555 15,400 20,404
Unrecognized prior service cost (659) (821) (984)
Unrecognized net loss (gain) 3,485 (4,320) (9,295)
Unrecognized net asset at
January 1, net of amortization (2,747) (3,925) (5,118)
Prepaid pension expense $ 6,634 $ 6,334 $ 5,007
46
Notes to Consolidated Financial Statements, Continued
Net pension expense included the following components for the years ended
December 31:
1993 1992 1991
(dollars in thousands)
Service cost $ 2,375 $ 1,881 $ 1,349
Interest on projected benefit obligation 2,791 3,687 3,373
Actual return on plan assets (6,112) (5,000) (8,926)
Amortization of prior service costs (157) (163) (157)
Amortization of unrecognized net
asset existing at date of
initial application (1,190) (1,193) (562)
Deferral of net asset (loss) gain 2,224 (631) 3,093
Total pension expense (income) $ (69) $(1,419) $(1,830)
Additional assumptions concerning the determination of net pension costs is
as follows:
1993 1992 1991
Weighted average discount rate 7.25% 8.00% 8.50%
Expected long-term rate of
return on plan assets 10.00 10.00 10.00
Rate of increase in
compensation levels 4.00 5.00 5.00
Postretirement Benefits Other Than Pensions
The Company participates in American General's life, medical and dental
plans for certain retired employees. Most plans are contributory, with
retiree contributions adjusted annually to limit employer contributions to
predetermined amounts. For individuals retiring after December 31, 1992,
the cost of the supplemental major medical plan is borne entirely by
retirees. American General and its subsidiaries have reserved the right to
change or eliminate these benefits at any time.
American General's retiree medical and dental plans are unfunded and self-
insured. The life plans are fully insured.
Postretirement benefits other than pension plan activity incurred by the
Company for 1993 was $.6 million.
Because plan information is not calculated separately for the Company, the
remainder of the information presented herein is for AGFI.
47
Notes to Consolidated Financial Statements, Continued
AGFI's participation in the plans is accounted for as if AGFI had its own
plans. The following table sets forth AGFI's portion of the plans'
combined funded status and the accrued postretirement benefit cost included
in other liabilities in AGFI's Consolidated Balance Sheet at December 31,
1993:
Accumulated postretirement benefit obligation (dollars in thousands):
Retirees $2,223
Fully eligible active plan participants 1,804
Other active plan participants 2,341
Accumulated postretirement benefit
obligation 6,368
Unrecognized net gain (226)
Accrued postretirement benefit cost $6,142
Postretirement benefit expense for the year ended December 31, 1993
included the following components (dollars in thousands):
Service cost-benefits attributed to
service during the period $ 184
Interest cost on accumulated
postretirement benefit obligation 403
Postretirement benefit expense $ 587
For measurement purposes, a 13.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed in 1994; the rate was
assumed to decrease gradually to 6% for 2009 and remain at that level. A
1% increase in the assumed annual rate of increase in per capita cost of
health care benefits results in an immaterial increase in the accumulated
postretirement benefit obligation and postretirement benefit expense. The
discount rate used in determining the accumulated postretirement benefit
obligation was 7.25%.
Note 16. Lease Commitments, Rent Expense and Contingent Liabilities
The approximate annual rental commitments for leased office space,
automobiles and data processing and related equipment accounted for as
operating leases, excluding leases on a month-to-month basis and those with
a remaining term of one year or less, are as follows: 1994, $24.5 million;
1995, $16.8 million; 1996, $12.3 million; 1997, $8.0 million; 1998, $4.1
million; and subsequent to 1998, $18.3 million.
48
Notes to Consolidated Financial Statements, Continued
Taxes, insurance and maintenance expenses are obligations of the Company
under certain leases. It is expected that, in the normal course of
business, leases that expire will be renewed or replaced by leases on other
properties; therefore, it is believed that future minimum annual rental
commitments will not be less than the amount of rental expense incurred in
1993. Rental expense incurred for the years ended December 31, 1993, 1992,
and 1991, was $32.7 million, $25.9 million, and $22.1 million,
respectively.
The Company is a defendant in various lawsuits arising in the normal course
of business. The Company believes it has valid defenses in these lawsuits
and is defending the cases vigorously. The Company also believes that the
total amounts that would ultimately have to be paid, if any, arising from
these lawsuits would have no material effect on its consolidated financial
position.
Note 17. Interim Financial Information (Unaudited)
Unaudited interim information for 1993 and 1992 is summarized below:
Income Before Provision
for Income Taxes and
Cumulative Effect of
Total Revenues Accounting Changes
Three Months Ended 1993 1992 1993 1992
(dollars in thousands)
March 31 $ 292,378 $ 263,764 $ 74,059 $ 61,060
June 30 304,005 268,726 87,616 60,904
September 30 309,136 275,723 84,425 67,763
December 31 307,398 284,645 81,003 69,636
Total $1,212,917 $1,092,858 $327,103 $259,363
Net Income
Three Months Ended 1993 1992
(dollars in thousands)
March 31 $ 33,733(a) $ 37,843
June 30 55,035 37,667
September 30 50,116(b) 41,887
December 31 50,744 42,774
Total $189,628 $160,171
(a) Includes cumulative charge of $12.6 million due to adoption of
accounting changes: SFAS 106, SFAS 109, and SFAS 112. Amounts
previously reported in the 1993 first quarter Form 10-Q have been
restated above for SFAS 112.
(b) Includes corporate tax rate increase enacted in the third quarter,
retroactive to January 1, 1993 (see Note 11.).
49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) The following consolidated financial statements of American
General Finance Corporation and subsidiaries are included in Item 8:
Consolidated Balance Sheets, December 31, 1993 and 1992
Consolidated Statements of Income, years ended December 31, 1993,
1992, and 1991
Consolidated Statements of Shareholder's Equity, years ended
December 31, 1993, 1992, and 1991
Consolidated Statements of Cash Flows, years ended December 31,
1993, 1992, and 1991
Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted,
because they are inapplicable, or the information required therein is
included in the consolidated financial statements or notes.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 51
herein.
(b) Reports on Form 8-K
Current Report on Form 8-K dated February 1, 1994, with respect to the
issuance of an Earnings Release announcing certain unaudited financial
results of the Company for the year ended December 31, 1993.
(c) Exhibits
The exhibits required to be included in this portion of Item 14. are
submitted as a separate section of this report.
50
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.
AMERICAN GENERAL FINANCE CORPORATION
(Registrant)
By /s/ Philip M. Hanley
(Philip M. Hanley)
Date: March 23, 1994 Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Daniel Leitch III President and Chief Executive March 23, 1994
(Daniel Leitch III) Officer and Director (Principal
Executive Officer)
/s/ Philip M. Hanley Senior Vice President and Chief March 23, 1994
(Philip M. Hanley) Financial Officer and Director
(Principal Financial Officer)
/s/ George W. Schmidt Controller and Assistant March 23, 1994
(George W. Schmidt) Secretary (Principal Accounting
Officer)
/s/ Wayne D. Baker Director March 23, 1994
(Wayne D. Baker)
/s/ Bennie D. Hendrix Director March 23, 1994
(Bennie D. Hendrix)
/s/ James R. Jerwers Director March 23, 1994
(James R. Jerwers)
/s/ Larry R. Klaholz Director March 23, 1994
(Larry R. Klaholz)
/s/ David C. Seeley Director March 23, 1994
(David C. Seeley)
/s/ James R. Tuerff Director March 23, 1994
(James R. Tuerff)
/s/ Peter V. Tuters Director March 23, 1994
(Peter V. Tuters)
51
Exhibit Index
Exhibits Page
(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 long-
term debt of the registrant and its consolidated subsidiaries. In
the aggregate, the issuances of debt under each Indenture referred
to under items (1), (2) and (3) below exceed 10% of the total
assets of the Company on a consolidated basis.
(1) Indenture dated as of January 1, 1988 from American General
Finance Corporation (formerly Credithrift Financial
Corporation) to Continental Bank, N.A. (formerly Continental
Illinois National Bank and Trust Company of Chicago).
Incorporated by reference to Exhibit 4(c) filed as a part of
the Company's Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 1-6155).
(a) Resolutions and form of note for senior note, 8 3/8% due
January 15, 1995. Incorporated by reference to Exhibits
4(a)(1) and 4(a)(2) filed as a part of the Company's
Current Report on Form 8-K dated January 21, 1988 (File
No. 1-6155).
(b) Resolutions and forms of notes for (senior) Medium-Term
Notes, Series A. Incorporated by reference to Exhibits
4(a), 4(b), 4(c), 4(d), and 4(e) filed as a part of the
Company's Current Report on Form 8-K dated July 12, 1988
(File No. 1-6155).
(c) Resolutions and form of note for senior note, 8 1/2% due
June 15, 1999. Incorporated by reference to Exhibits
4(a)(1) and 4(a)(2) filed as a part of the Company's
Current Report on Form 8-K dated June 12, 1989 (File No.
1-6155).
(d) Consent and form of note for senior note, 8 1/8% due
August 15, 2009. Incorporated by reference to Exhibits
4(a)(1) and 4(a)(2) filed as a part of the Company's
Current Report on Form 8-K dated August 3, 1989 (File No.
1-6155).
52
Exhibit Index, Continued
Exhibits Page
(e) Resolutions and form of note for senior note, 8.45% due
October 15, 2009. Incorporated by reference to Exhibits
4(a)(1) and 4(a)(2) filed as a part of the Company's
Current Report on Form 8-K dated October 24, 1989 (File
No. 1-6155).
(f) Resolutions and form of note for senior note, 9 1/4% due
July 1, 1994. Incorporated by reference to Exhibits
4(a)(1) and 4(a)(2) filed as a part of the Company's
Current Report on Form 8-K dated June 28, 1990 (File No.
1-6155).
(2) Indenture dated as of December 1, 1985 from American General
Finance Corporation (formerly Credithrift Financial
Corporation) to The Chase Manhattan Bank (National
Association). Incorporated by reference to Exhibit 4(a)
filed as a part of the Company's Current Report on Form 8-K
dated February 4, 1986 (File No. 1-6155).
(a) Resolutions and form of note for senior note, 7 3/4% due
January 15, 1997. Incorporated by reference to Exhibit 4
filed as a part of the Company's Current Report on Form
8-K dated January 22, 1987 (File No. 1-6155).
(b) Resolutions and form of note for (senior) Medium-Term
Notes, Series B. Incorporated by reference to Exhibits
4(a) and 4(b) filed as a part of the Company's Current
Report on Form 8-K dated September 10, 1990 (File No. 1-
6155).
(c) Resolutions and form of note for senior note, 8 7/8% due
March 15, 1996. Incorporated by reference to Exhibits
4(a) and 4(b) filed as a part of the Company's Current
Report on Form 8-K dated March 7, 1991 (File No. 1-6155).
(d) Resolutions for (senior) Medium-Term Notes, Series B.
Incorporated by reference to Exhibit 4 filed as a part of
the Company's Current Report on Form 8-K dated March 18,
1991 (File No. 1-6155).
(e) Resolutions and form of note for senior note, 8.10% due
August 15, 1995. Incorporated by reference to Exhibits
4(a) and 4(b) filed as a part of the Company's Current
Report on Form 8-K dated July 31, 1991 (File No. 1-6155).
53
Exhibit Index, Continued
Exhibits Page
(f) Resolutions and form of note for senior note, 8 1/2% due
August 15, 1998. Incorporated by reference to Exhibits
4(a) and 4(b) filed as a part of the Company's Current
Report on Form 8-K dated August 6, 1991 (File No. 1-
6155).
(g) Resolutions for (senior) Medium-Term Notes, Series B.
Incorporated by reference to Exhibit 4 filed as a part of
the Company's Current Report on Form 8-K dated November
20, 1991 (File No. 1-6155).
(3) Senior Indenture dated as of November 1, 1991 from American
General Finance Corporation to Morgan Guaranty Trust Company
of New York. Incorporated by reference to Exhibit 4(a) filed
as part of the Company's Current Report on Form 8-K dated
November 6, 1991 (File No. 1-6155).
(a) Resolutions and form of note for senior note, 7 3/8% due
November 15, 1996. Incorporated by reference to Exhibits
4(c) and 4(d) filed as part of the Company's Current
Report on Form 8-K dated November 6, 1991 (File No. 1-
6155).
(b) Resolutions and form of note for senior note, 7.15% due
May 15, 1997. Incorporated by reference to Exhibits 4(a)
and 4(b) filed as part of the Company's Current Report on
Form 8-K dated May 13, 1992 (File No. 1-6155).
(c) Resolutions and form of note for senior note, 7.45% due
July 1, 2002. Incorporated by reference to Exhibits 4(a)
and 4(b) filed as a part of the Company's Current Report
on Form 8-K dated July 2, 1992 (File No. 1-6155).
(d) Resolutions and form of note for senior note, 5% due
September 1, 1995. Incorporated by reference to Exhibits
4(a) and 4(b) filed as a part of the Company's Current
Report on Form 8-K dated August 20, 1992 (File No. 1-
6155).
(e) Resolutions and form of note for senior note, 7 1/8% due
December 1, 1999. Incorporated by reference to Exhibits
4(a) and 4(b) filed as a part of the Company's Current
Report on Form 8-K dated December 1, 1992 (File No. 1-
6155).
54
Exhibit Index, Continued
Exhibits Page
(f) Resolutions and forms of notes for (senior) Medium-Term
Notes, Series C. Incorporated by reference to Exhibits
4(a), 4(b) and 4(c) filed as a part of the Company's
Current Report on Form 8-K dated December 10, 1992 (File
No. 1-6155).
(g) Resolutions and form of note for senior note, 6 7/8% due
January 15, 2000. Incorporated by reference to Exhibits
4(a) and 4(b) filed as a part of the Company's Current
Report on Form 8-K dated January 11, 1993 (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 long-term debt
of the Company and its subsidiaries have not been filed as
exhibits to this Annual Report on Form 10-K because the total
amount of securities authorized under each such instrument does
not exceed 10% of the total assets of the Company on a
consolidated basis. The Company hereby agrees to furnish a copy
of each such instrument to the Securities and Exchange Commission
upon request therefor.
(12) Computation of ratio of earnings to fixed charges. 55
(23) Consent of Ernst & Young 56