SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number 1-7422
AMERICAN GENERAL FINANCE, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1313922
(State of incorporation) (I.R.S. Employer Identification No.)
601 N.W. Second Street, Evansville, IN 47708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 424-8031
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]. Not applicable.
The registrant meets the conditions set forth in General Instructions
I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with
the reduced disclosure format.
At March 21, 2000, no common stock of the registrant was held by a
non-affiliate.
At March 21, 2000, there were 2,000,000 shares of the registrant's common
stock, $.50 par value, outstanding.
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TABLE OF CONTENTS
Item Page
Part I 1. Business . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . 16
3. Legal Proceedings . . . . . . . . . . . . . . . . . 17
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . *
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . 18
6. Selected Financial Data . . . . . . . . . . . . . . 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 19
7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . 29
8. Financial Statements and Supplementary Data . . . . 30
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . **
Part III 10. Directors and Executive Officers of the Registrant . *
11. Executive Compensation . . . . . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . *
13. Certain Relationships and Related Transactions . . . *
Part IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . 62
* Items 4, 10, 11, 12, and 13 are not included, as per conditions met
by Registrant set forth in General Instructions I(1)(a) and (b) of
Form 10-K.
** Item 9 is not included, as no information was required by Item 304 of
Regulation S-K.
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PART I
Item 1. Business.
GENERAL
American General Finance, Inc. will be referred to in this document as
"AGFI" or collectively with its subsidiaries, whether directly or
indirectly owned, as the "Company" or "we". AGFI was incorporated in
Indiana in 1974 to become the parent holding company of American General
Finance Corporation (AGFC). AGFC was incorporated in Indiana in 1927 as
successor to a business started in 1920. Since 1982, AGFI has been a
direct or indirect wholly-owned subsidiary of American General Corporation
(American General), a leading provider of retirement services, life
insurance, consumer loans, and investments to 12 million customers.
American General, a Texas corporation headquartered in Houston, is the
successor to American General Insurance Company, an insurance company
incorporated in Texas in 1926.
AGFI is a financial services holding company whose principal subsidiary is
AGFC. AGFC is also a financial services holding company with subsidiaries
engaged primarily in the consumer finance and credit insurance business.
We conduct the credit insurance business to supplement our consumer finance
business through Merit Life Insurance Co. (Merit) and Yosemite Insurance
Company (Yosemite), which are both subsidiaries of AGFC.
In May 1999, we acquired Standard Pacific Savings, F.A. from Standard
Pacific Corporation and renamed the institution American General Bank, FSB
(AG Bank). AG Bank currently operates as a traditional thrift, whose
products include deposit and savings accounts, residential mortgage and
home equity loans, and private label services.
At December 31, 1999, the Company had 1,347 offices in 40 states, Puerto
Rico, and the U.S. Virgin Islands and approximately 7,700 employees. Our
executive offices are located in Evansville, Indiana.
Selected Financial Information
The following table shows selected financial information of the Company:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Average finance receivables net
of unearned finance charges
(average net receivables) $10,008,809 $8,518,922 $7,522,841
Average borrowings $9,205,119 $7,806,977 $7,123,397
Yield - finance charges as a
percentage of average net
receivables 14.54% 15.90% 16.81%
Borrowing cost - interest
expense as a percentage
of average borrowings 6.23% 6.55% 6.80%
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Item 1. Continued
At or for the
Years Ended December 31,
1999 1998 1997
Interest spread - yield
less borrowing cost 8.31% 9.35% 10.01%
Insurance revenues as a
percentage of average
net receivables 1.84% 2.07% 2.51%
Operating expenses as a
percentage of average
net receivables 5.24% 5.93% 6.31%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 3.59% 3.96% 4.65%
Charge-off ratio - net charge-offs
as a percentage of the average
of net finance receivables at
the beginning of each month
during the period 2.08% 2.60% 3.60%
Charge-off coverage ratio -
allowance for finance receivable
losses as a percentage of net
charge-offs 191% 174% 138%
Delinquency ratio - finance
receivables 60 days or more
past due as a percentage
of related receivables 3.46% 3.75% 3.60%
Return on average assets 1.56% 1.88% 1.42%
Return on average equity 12.03% 13.96% 10.49%
Ratio of earnings to fixed charges
(refer to Exhibit 12 for
calculations) 1.48 1.56 1.41
Debt to tangible equity ratio -
debt to equity less goodwill
and net unrealized gains or
losses on investment securities 7.64 7.46 7.52
Debt to equity ratio 6.68 5.89 5.75
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Item 1. Continued
CONSUMER FINANCE OPERATIONS
The Company makes loans directly to individuals, acquires real estate loans
made by brokers and other real estate lenders, purchases retail sales
contract obligations of individuals, and offers revolving retail and
private label services. We conduct our lending and retail operations
through our consumer branch and centralized real estate segments. See Note
21. of the Notes to Consolidated Financial Statements in Item 8. for
further information on the Company's segments.
In our loan operations, we make home equity loans, originate secured and
unsecured consumer loans, and acquire real estate loans from mortgage
brokers and other real estate lenders. We generally take a security
interest in the real property and/or personal property of the borrower.
At December 31, 1999, real estate loans accounted for 64% of the amount and
8% of the number of net finance receivables outstanding, compared to 60%
of the amount and 8% of the number of net finance receivables outstanding
at December 31, 1998. Real estate loans are secured by first and second
mortgages and generally have maximum original terms of 360 months. Non-
real estate loans are secured by consumer goods, automobiles, or other
chattel security or are unsecured and generally have maximum original terms
of 60 months.
In our retail operations, we purchase retail sales contracts arising from
the retail sale of consumer goods and services, and provide revolving
retail and private label services for various business entities. Retail
sales contracts are closed-end accounts that consist of a single purchase.
Revolving retail and private label are open-end revolving accounts that can
be used for repeated purchases. Retail sales contracts are secured by the
real property or personal property giving rise to the contract and
generally have maximum original terms of 60 months. Revolving retail and
private label are secured by purchase money security interests in the goods
purchased and generally require minimum monthly payments based on
outstanding balances.
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Item 1. Continued
Finance Receivables
All finance receivable data in this report (except as otherwise indicated)
is calculated after deducting unearned finance charges but before deducting
allowance for finance receivable losses.
The following table shows the amount, number, and average size of finance
receivables originated and renewed by type of finance receivable (retail
sales contracts, revolving retail, and private label comprise retail sales
finance) and the net purchased amount:
Years Ended December 31,
1999 1998 1997
Amount (in thousands):
Real estate loans $1,945,181 $1,766,041 $1,584,101
Non-real estate loans 2,557,486 2,394,623 2,437,266
Retail sales finance 1,705,635 1,629,258 1,456,352
Total originated and renewed 6,208,302 5,789,922 5,477,719
Net purchased 1,727,382 1,920,701 598,608
Total originated, renewed,
and purchased $7,935,684 $7,710,623 $6,076,327
Number:
Real estate loans 56,933 58,219 59,927
Non-real estate loans 851,798 885,212 906,756
Retail sales finance 995,152 1,010,225 968,881
Total 1,903,883 1,953,656 1,935,564
Average size (to nearest dollar):
Real estate loans $34,166 $30,334 $26,434
Non-real estate loans 3,002 2,705 2,688
Retail sales finance 1,714 1,613 1,503
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Item 1. Continued
The following table shows the amount, number, and average size of finance
receivables by type of finance receivable:
December 31,
1999 1998 1997
Amount (in thousands):
Real estate loans $ 7,104,227 $ 5,757,185 $ 4,155,167
Non-real estate loans 2,576,081 2,560,565 2,554,888
Retail sales finance 1,349,689 1,339,367 1,301,133
Total $11,029,997 $ 9,657,117 $ 8,011,188
Number:
Real estate loans 181,484 169,314 163,119
Non-real estate loans 998,150 1,088,584 1,132,039
Retail sales finance 957,841 993,233 1,065,280
Total 2,137,475 2,251,131 2,360,438
Average size (to nearest dollar):
Real estate loans $39,145 $34,003 $25,473
Non-real estate loans 2,581 2,352 2,257
Retail sales finance 1,409 1,348 1,221
Geographic Distribution
Geographic diversification of finance receivables reduces the concentration
of credit risk associated with a recession in any one region. The largest
concentrations of net finance receivables were as follows:
December 31,
1999 1998 1997
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
California $ 1,562,183 14% $ 1,461,438 15% $ 842,690 11%
N. Carolina 811,625 7 728,801 7 696,261 9
Florida 671,970 6 574,693 6 518,837 7
Illinois 659,674 6 593,789 6 434,029 5
Ohio 644,804 6 559,964 6 465,489 6
Indiana 560,887 5 502,653 5 438,369 5
Virginia 430,687 4 367,995 4 356,928 4
Georgia 427,523 4 351,347 4 310,485 4
Other 5,260,644 48 4,516,437 47 3,948,100 49
$11,029,997 100% $ 9,657,117 100% $ 8,011,188 100%
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Item 1. Continued
Average Net Receivables and Yield
We recognize finance charges as revenue on the accrual basis using the
interest method. We stop accruing revenue when the fourth contractual
payment becomes past due for loans, retail sales contracts, and revolving
retail and when the sixth contractual payment becomes past due for private
label. Extension fees, late charges, and prepayment penalties are
recognized as revenue when received.
We defer the costs to originate certain finance receivables and the revenue
from nonrefundable points and fees on loans. We include deferred
origination costs and nonrefundable points and fees in finance receivables
and amortize them to revenue on the accrual basis using the interest method
over the lesser of the contractual term or the estimated life based upon
prepayment experience. If a finance receivable liquidates before
amortization is completed, we charge or credit any unamortized costs or
points and fees to revenue at the date of liquidation.
The following table shows average net receivables and yield by type of
finance receivable:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Real estate loans:
Average net receivables $ 6,227,580 $ 4,681,038 $ 3,711,444
Yield 11.59% 12.90% 13.71%
Non-real estate loans:
Average net receivables $ 2,509,412 $ 2,532,267 $ 2,542,651
Yield 21.96% 22.02% 21.84%
Total loans:
Average net receivables $ 8,736,992 $ 7,213,305 $ 6,254,095
Yield 14.57% 16.10% 17.02%
Retail sales finance:
Average net receivables $ 1,271,817 $ 1,305,617 $ 1,268,746
Yield 14.35% 14.78% 15.80%
Total:
Average net receivables $10,008,809 $ 8,518,922 $ 7,522,841
Yield 14.54% 15.90% 16.81%
See Management's Discussion and Analysis in Item 7. for information on the
trends in yield.
Finance Receivable Credit Quality Information
Our policy is to charge off each month non-real estate loans on which
little or no collections were made in the prior six months, retail sales
contracts that are six installments past due, and revolving retail and
private label accounts that are 180 days past due. We start foreclosure
proceedings on real estate loans when four monthly installments are past
due. When foreclosure is completed and we have obtained title to the
property, the real estate is established as an asset valued at fair
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Item 1. Continued
value, and any loan amount in excess of that value is charged off. We
occasionally extend the charge-off period for individual accounts when, in
our opinion, such treatment is warranted.
The following table shows finance receivable loss experience by type of
finance receivable:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Real estate loans:
Net charge-offs $ 38,364 $ 32,843 $ 32,240
Charge-off ratio .62% .71% .87%
Non-real estate loans:
Net charge-offs $134,070 $144,382 $182,371
Charge-off ratio 5.34% 5.70% 7.15%
Total loans:
Net charge-offs $172,434 $177,225 $214,611
Charge-off ratio 1.99% 2.48% 3.44%
Retail sales finance:
Net charge-offs $ 34,198 $ 42,365 $ 55,872
Charge-off ratio 2.69% 3.25% 4.40%
Total:
Net charge-offs $206,632 $219,590 $270,483
Charge-off ratio 2.08% 2.60% 3.60%
The following table shows delinquency (finance receivables 60 days or more
past due including unearned finance charges and excluding deferred
origination costs, a fair value adjustment on finance receivables, and
accrued interest) based on contract terms in effect by type of finance
receivable:
December 31,
1999 1998 1997
(dollars in thousands)
Real estate loans:
Delinquency $214,013 $189,474 $108,277
Delinquency ratio 3.02% 3.28% 2.56%
Non-real estate loans:
Delinquency $156,325 $159,027 $163,942
Delinquency ratio 5.37% 5.48% 5.72%
Total loans:
Delinquency $370,338 $348,501 $272,219
Delinquency ratio 3.70% 4.02% 3.84%
Retail sales finance:
Delinquency $ 28,672 $ 35,236 $ 37,504
Delinquency ratio 1.85% 2.26% 2.46%
Total:
Delinquency $399,010 $383,737 $309,723
Delinquency ratio 3.46% 3.75% 3.60%
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Item 1. Continued
We maintain the allowance for finance receivable losses at a level that we
consider adequate to absorb anticipated losses in our existing portfolio.
We periodically evaluate the portfolio as a group and consider numerous
factors in estimating the anticipated finance receivable losses, including
current economic conditions, prior finance receivable loss and delinquency
experience, and the composition of our finance receivable portfolio.
The following table shows changes in the allowance for finance receivable
losses:
At or for the
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Balance at beginning of year $382,450 $372,653 $395,153
Provision for finance receivable
losses 206,632 212,090 247,983
Allowance related to acquired
receivables 13,176 17,297 -
Charge-offs, net of recoveries (206,632) (219,590) (270,483)
Balance at end of year $395,626 $382,450 $372,653
Allowance ratio 3.59% 3.96% 4.65%
See Management's Discussion and Analysis in Item 7. for further information
on finance receivable loss and delinquency experience and the related
allowance for finance receivable losses.
Sources of Funds
We fund our consumer finance operations principally through net cash flows
from operating activities, issuances of long-term debt, short-term
borrowings in the commercial paper market, borrowings from banks under
credit facilities, acceptance of bank demand and time deposits, and capital
contributions from American General.
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Item 1. Continued
Average Borrowings and Borrowing Cost
The following table shows average borrowings and interest expense as a
percentage of average borrowings by type of debt:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Long-term debt:
Average borrowings $5,431,257 $4,327,990 $4,100,324
Borrowing cost 6.61% 6.95% 7.32%
Short-term debt:
Average borrowings $3,749,160 $3,476,910 $3,019,808
Borrowing cost 5.70% 6.06% 6.10%
Deposits:
Average borrowings $ 24,702 $ 2,077 $ 3,265
Borrowing cost 5.19% 5.67% 5.73%
Total:
Average borrowings $9,205,119 $7,806,977 $7,123,397
Borrowing cost 6.23% 6.55% 6.80%
The Company's use of interest rate swap agreements, the effect of which is
included in short-term borrowing cost above, is described in Note 11. of
the Notes to Consolidated Financial Statements in Item 8.
Contractual Maturities
Contractual maturities of net finance receivables and debt at December 31,
1999 were as follows:
Net Finance
Receivables Debt
(dollars in thousands)
Due in:
2000 $ 1,172,210 $ 5,771,273
2001 1,408,590 1,269,408
2002 1,037,910 1,080,061
2003 619,228 1,040,111
2004 386,273 275,702
2005 and thereafter 6,405,786 770,074
Total $11,029,997 $10,206,629
See Note 4. of the Notes to Consolidated Financial Statements in Item 8.
for further information on principal cash collections of finance
receivables.
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Item 1. Continued
INSURANCE OPERATIONS
Merit is a life and health insurance company domiciled in Indiana and
licensed in 43 states, the District of Columbia, and the U.S. Virgin
Islands. Merit writes or assumes (through affiliated and non-affiliated
insurance companies) credit life, credit accident and health, and non-
credit insurance coverages.
Yosemite is a property and casualty insurance company formerly domiciled
in California, redomiciled in Indiana effective December 29, 1998, and
licensed in 41 states. Yosemite principally writes or assumes credit-
related property and casualty coverages.
Both Merit and Yosemite market their products through our consumer branch
and centralized real estate segments. The credit life insurance policies
insure the life of the borrower in an amount typically equal to the unpaid
balance of the finance receivable and provide for payment in full to the
lender of the finance receivable in the event of death. The credit
accident and health insurance policies provide for the payment to the
lender of the installments on the finance receivable coming due during a
period of disability due to illness or injury. The credit-related property
and casualty insurance policies are written to protect the lender's
interest in property pledged as security for the finance receivable and
provide for the payment to the lender of the installments on the finance
receivable coming due during a period of unemployment. The purchase by the
borrower of credit life, credit accident and health, and credit-related
property and casualty insurance is voluntary with the exception of lender-
placed property damage coverage for automobiles, large equipment,
dwellings, and real estate pledged as collateral. In these instances,
property damage coverage is provided under the terms of the lending
agreement if the borrower does not provide evidence of coverage with
another insurance carrier. The non-credit insurance policies are primarily
ordinary life level term coverage. The purchase of this coverage is
voluntary. Premiums for insurance products are most often financed as part
of the finance receivable but may be paid in cash to the insurer.
Merit and Yosemite have entered into reinsurance agreements with other
insurance companies, including certain other American General subsidiaries,
for assumption of various annuities and non-credit, group, credit life,
credit accident and health, and credit-related property and casualty
insurance on a coinsurance basis. The reserves attributable to this
business fluctuate over time and in certain instances are subject to
recapture by the ceding company. At December 31, 1999, reserves on the
books of Merit and Yosemite attributable to these reinsurance agreements
totaled $127.7 million.
See Note 21. of the Notes to Consolidated Financial Statements in Item 8.
for further information on the Company's insurance business segment.
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Item 1. Continued
The following table shows information concerning our insurance operations:
At or for the
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Life Insurance in Force
Credit life $2,709,962 $2,459,818 $2,387,084
Non-credit life 3,355,547 3,618,052 3,910,534
Total $6,065,509 $6,077,870 $6,297,618
Premiums Earned
Credit insurance premiums earned:
Credit life $ 34,760 $ 32,289 $ 33,269
Credit accident and health 43,237 42,261 45,687
Property and casualty 49,026 49,403 54,292
Other insurance premiums earned:
Non-credit life 46,333 42,981 46,190
Non-credit accident and health 4,541 702 -
Premiums assumed under
coinsurance agreements 3,340 4,355 5,177
Total $ 181,237 $ 171,991 $ 184,615
Premiums Written
Credit insurance premiums
written:
Credit life $ 42,114 $ 35,695 $ 28,057
Credit accident and health 52,910 42,452 39,401
Property and casualty 49,846 47,324 47,029
Other insurance premiums written:
Non-credit life 46,333 42,981 46,190
Non-credit accident and health 4,541 702 -
Premiums assumed under
coinsurance agreements 3,340 4,355 5,177
Total $ 199,084 $ 173,509 $ 165,854
Losses Incurred
Credit insurance losses incurred:
Credit life $ 16,240 $ 14,775 $ 17,465
Credit accident and health 22,370 21,094 20,292
Property and casualty 13,112 20,187 23,009
Other insurance losses incurred:
Non-credit life 20,746 16,999 21,279
Non-credit accident and health 2,724 409 -
Losses incurred under
coinsurance agreements 11,442 11,223 11,402
Total $ 86,634 $ 84,687 $ 93,447
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Item 1. Continued
Investments and Investment Results
The following table shows the investment results of the insurance
operations:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Net investment revenue (a) $ 74,732 $ 74,421 $ 67,837
Average invested assets (b) $1,056,183 $ 983,439 $ 924,411
Adjusted portfolio yield (c) 7.35% 7.88% 8.07%
Net realized gains (losses)
on investments (d) $ (1,564) $ (693) $ 1,071
(a) Net investment revenue is after deducting investment expense but
before net realized gains or losses on investments and provision for
income taxes.
(b) Average invested assets excludes the effect of Statement of
Financial Accounting Standards 115.
(c) Adjusted portfolio yield is calculated based upon the definitions
of net investment revenue and average invested assets listed in (a)
and (b) above and also includes an adjustment for tax-exempt
investments in 1997.
(d) Includes net realized gains or losses on investment securities and
other invested assets before provision for income taxes.
See Note 6. of the Notes to Consolidated Financial Statements in Item 8.
for information regarding investment securities for all operations of the
Company.
REGULATION
Consumer Finance
The Company is subject to various federal regulations, including the
Federal Consumer Credit Protection Act (governing disclosure of applicable
charges and other finance receivable terms), the Equal Credit Opportunity
Act (prohibiting discrimination against credit-worthy applicants), the Fair
Credit Reporting Act (governing the accuracy and use of credit bureau
reports), the Real Estate Settlement Procedures Act (regulating certain
loans secured by real estate), the Truth in Lending Act (requiring uniform
disclosure of the cost of credit), the Federal Fair Debt Collection
Practices Act (regulating debt collection activity in certain instances),
the Federal Trade Commission Act and the Federal Reserve Board's
Regulations B, Z and AA. In most states, federal law preempts state law
restrictions on interest rates and terms for first lien residential
mortgage loans and for residential mortgage loans made under the federal
Alternative Mortgage Transactions Parity Act. We make residential mortgage
loans under the provisions of these federal laws.
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<PAGE> 15
Item 1. Continued
Various state laws also regulate our consumer lending and retail sales
financing businesses. The degree and nature of such regulation vary from
state to state. The laws under which a substantial amount of our business
is conducted: (1) provide for state licensing of lenders; (2) impose
maximum term, amount, interest rate, and other charge limitations; and (3)
enumerate whether and under what circumstances insurance and other
ancillary products may be sold in connection with a lending transaction.
Certain of these laws prohibit the taking of liens on real estate for loans
of small dollar amounts, except liens resulting from judgments. These
state laws also may require contract disclosures in addition to those
required under Federal law and may limit remedies available in the event
of default by an obligor on the credit. These requirements impose specific
statutory liabilities upon creditors who fail to comply with their
provisions where applicable.
As an insured depository institution, AG Bank is subject to the
examination, regulation and supervision of the Office of Thrift Supervision
(the "OTS"). AG Bank's deposit accounts are insured by the Federal Deposit
Insurance Corporation.
Insurance
State authorities regulate and supervise our insurance subsidiaries. The
extent of such regulation varies but relates primarily to conduct of
business, types of products offered, standards of solvency, payment of
dividends and other transactions with related parties, licensing, deposits
of securities for the benefit of policyholders, approval of policy forms
and premium rates, periodic examination of the affairs of insurers, form
and content of required financial reports, and establishment of reserves
required to be maintained for unearned premiums, losses, and other
purposes. Substantially all of the states in which we operate regulate the
rates of premiums charged for credit life and credit accident and health
insurance. State insurance laws and regulations also prescribe the nature,
quality and percentage of various types of investments which our insurance
subsidiaries may make.
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Item 1. Continued
COMPETITION
Consumer Finance
The consumer finance business is highly competitive due to the large number
of companies offering financial products and services, the sophistication
of those products, technological improvements, and more rapid
communication. We compete with other consumer finance companies and other
types of financial institutions that offer similar products and services,
including, but not limited to, industrial banks, industrial loan companies,
mortgage banks, commercial banks, sales finance companies, savings and loan
associations, federal savings banks, and credit unions. The availability
of the Internet as a distribution channel for financial products and
services is making the consumer finance industry more competitive by
allowing many non-financial institution e-commerce companies to promote or
advertise the products and services of financial institutions.
Insurance
Our insurance operations supplement our consumer finance operations. As
such, competition for the insurance operations is relatively limited.
Item 2. Properties.
The Company's investment in real estate and tangible property is not
significant in relation to our total assets due to the nature of our
business. AGFI and certain of its subsidiaries own real estate upon which
AGFI and its subsidiaries conduct business. We generally conduct branch
office operations in leased premises. Lease terms ordinarily range from
three to five years.
The Company's exposure to environmental regulation arises from our
ownership of such properties and properties obtained through foreclosure.
We monitor properties for compliance with federal and local environmental
guidelines. We estimate that potential costs related to any environmental
clean-up are immaterial.
<PAGE>
<PAGE> 17
Item 3. Legal Proceedings.
Satellite Dish Litigation
In the mid-1990's, one of our subsidiaries, A.G. Financial Service Center,
Inc. (Financial Service Center), formerly named American General Financial
Center, provided financing for satellite dishes sold by independent
unaffiliated dealers. On May 18, 1999, the Chancery Court of the First
Judicial District of Jones County, Mississippi in a case captioned Clayton
D. Smith, et al. v. Delta TV Corporation, Don Acy, US Electronics, American
General Financial Center, Civil Action No. 96-0254 (the Clayton Smith
matter), rendered a judgment awarding approximately $500,000 in
compensatory damages and $167 million in punitive damages against Financial
Service Center. The lawsuit was filed on November 15, 1996, by 29
individuals who had each purchased a satellite dish. Financial Service
Center, together with certain other American General companies, currently
are named as defendants in other pending cases involving the financing of
satellite dishes.
In August 1999, Financial Service Center filed a voluntary petition to
reorganize under Chapter 11 of the United States Bankruptcy Code with the
United States Bankruptcy Court for the Southern District of Indiana. The
decision to reorganize was necessitated by the judgment rendered against
Financial Service Center by the Mississippi state court. The filing for
reorganization under Chapter 11 is limited to Financial Service Center and
was intended to provide a fair and orderly process for managing the claims
against Financial Service Center. Prior to the bankruptcy filing,
Financial Service Center had assets of approximately $7 million.
In January 2000, settlement agreements were entered into in connection with
the Clayton Smith matter and other pending cases relating to satellite dish
financing. Accordingly, we recorded a charge of $57.0 million ($36.2
million aftertax) in fourth quarter 1999 to cover the proposed settlements
and other litigation. Resolution of the satellite dish litigation is
dependent upon a number of factors, including the bankruptcy court's
approval of Financial Service Center's plan of reorganization. If court
approvals are obtained and appeals are not taken, we expect that the
settlements will be final in third quarter 2000.
Other
AGFI and certain of its subsidiaries are parties to various other lawsuits
and proceedings, including certain class action claims, arising in the
ordinary course of business. In addition, many of these claims arise in
jurisdictions, such as Alabama and Mississippi, that permit damage awards
disproportionate to the actual economic damages alleged to have been
incurred. Based upon information presently available, we believe that the
total amounts that will ultimately be paid, if any, arising from these
lawsuits and proceedings will not have a material adverse effect on the
Company's consolidated results of operations and financial position.
However, the frequency of large damage awards, including large punitive
damage awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given suit.
<PAGE>
<PAGE> 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
No trading market exists for AGFI's common stock because American General
owns all of AGFI's common stock. AGFI declared the following cash
dividends on its common stock:
Quarter Ended 1999 1998
(dollars in thousands)
March 31 $ 41,001 $ 31,600
June 30 93,003 -
September 30 29,996 -
December 31 - -
$164,000 $ 31,600
See Management's Discussion and Analysis in Item 7., and Note 15. of the
Notes to Consolidated Financial Statements in Item 8., regarding
limitations on the ability of AGFI and its subsidiaries to pay dividends.
Item 6. Selected Financial Data.
The following selected financial data are taken from the Company's
consolidated financial statements. The data should be read in conjunction
with the consolidated financial statements and related notes in Item 8.,
Management's Discussion and Analysis in Item 7., and other financial
information in Item 1.
At or for the Years Ended December 31,
1999 1998 1997 1996 1995
(dollars in thousands)
Total revenues $ 1,731,602 $ 1,609,105 $1,524,105 $1,724,948 $1,791,494
Net income (a) 179,734 187,359 129,433 34,146 85,655
Total assets 12,635,307 11,172,923 9,289,500 9,563,696 9,561,350
Long-term debt 5,716,991 5,176,965 4,011,457 4,498,530 4,979,883
(a) Per share information is not included because all of AGFI's common stock
is owned by American General.
<PAGE>
<PAGE> 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements and related notes in Item 8. and other financial information in
Item 1.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sources of funds include operations, issuances of long-term debt,
short-term borrowings in the commercial paper market, borrowings from banks
under credit facilities, and acceptance of bank demand and time deposits.
American General has also contributed capital to the Company when needed
for finance receivable growth or other circumstances.
The following table shows principal sources and uses of cash flow:
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Principal sources of cash flow:
Operations $ 493.8 $ 438.6 $ 516.1
Net issuance of debt 1,294.4 1,592.7 -
Capital contributions 54.0 79.0 46.5
Sale of non-strategic assets - - 732.5
Net collections on assets held
for sale - - 61.3
Principal sources of cash flow $1,842.2 $2,110.3 $1,356.4
Principal uses of cash flow:
Net originations and purchases
of finance receivables $1,551.4 $1,814.2 $ 692.9
Dividends paid 164.0 31.6 126.5
Increase in premiums on finance
receivables purchased and
deferred charges 54.6 122.9 42.1
Net repayment of debt - - 366.0
Repurchase of securitized
finance receivables - - 100.0
Principal uses of cash flow $1,770.0 $1,968.7 $1,327.5
Management believes that the overall sources of liquidity available to the
Company will continue to be sufficient to satisfy its foreseeable financial
obligations and operational requirements.
<PAGE>
<PAGE> 20
Item 7. Continued
Capital Resources
December 31,
1999 1998
(dollars in millions)
Long-term debt $ 5,717.0 $ 5,177.0
Short-term debt 4,457.5 3,683.6
Deposits 32.1 1.9
Total debt 10,206.6 8,862.5
Equity 1,527.3 1,503.4
Total capital $11,733.9 $10,365.9
Net finance receivables $11,030.0 $ 9,657.1
Debt to tangible equity ratio 7.64 7.46
Our capital requirements vary directly with the level of net finance
receivables. The mix of capital between debt and equity is based primarily
upon maintaining leverage that supports cost-effective funding.
We issue a combination of fixed-rate debt, principally long-term, and
floating-rate debt, principally short-term. AGFC obtains most of the
Company's fixed-rate debt through issuances of medium-term notes and
underwritten debt offerings with maturities generally ranging from two to
ten years. AGFC and one of its subsidiaries obtain most of our floating-
rate debt through sales of commercial paper. Commercial paper, with
maturities ranging from 1 to 270 days, is sold directly to banks, insurance
companies, corporations, and other institutional investors. AGFC also
sells extendible commercial notes with initial maturities of up to 90 days,
which may be extended by AGFC to 390 days.
AGFI has paid dividends to (or received capital contributions from)
American General to manage our leverage of debt to tangible equity (equity
less goodwill and net unrealized gains or losses on investment securities)
to 7.50 to 1. AGFI's ability to pay dividends is substantially dependent
on the receipt of dividends or other funds from its subsidiaries, primarily
AGFC. An AGFC financing agreement limits the amount of dividends AGFC may
pay. See Note 15. of the Notes to Consolidated Financial Statements in
Item 8. for information on dividend restrictions.
Credit Ratings
AGFC's debt and commercial paper ratings facilitate its access to capital
markets. On February 18, 2000, AGFC's ratings were as follows:
Long-term Debt Commercial Paper
Duff & Phelps A+ (Average) D-1+ (Highest)
Fitch - F-1+ (Highest)
Moody's A2 (Favorable) P-1 (Highest)
Standard & Poor's A+ (Strong) A-1 (Strong)
<PAGE>
<PAGE> 21
Item 7. Continued
Liquidity Facilities
We participate in credit facilities to support the issuance of commercial
paper and to provide an additional source of funds for operating
requirements. At December 31, 1999, credit facilities, including
facilities shared with American General, totaled $5.9 billion, with
remaining availability of $5.7 billion. See Note 10. of the Notes to
Consolidated Financial Statements in Item 8. for additional information on
credit facilities.
A subsidiary of AGFI arranges interim financing for third-party mortgage
originators through a purchase facility. At December 31, 1999, this
facility totaled $250.0 million and had no remaining availability.
Securitization
In April 1997, we repurchased $100.0 million of private label and credit
card finance receivables that previously had been sold through
securitization. No gain or loss resulted from this transaction. The
repurchased credit card finance receivables were subsequently offered for
sale along with the Company's other credit card finance receivables. See
Note 17. of the Notes to Consolidated Financial Statements in Item 8. for
additional information on the sale of non-strategic assets.
The Company may securitize a portion of our finance receivable portfolio
in the future as an additional source of funds for finance receivable
growth.
ANALYSIS OF OPERATING RESULTS
Net Income
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Net income $179.7 $187.4 $129.4
Return on average assets 1.56% 1.88% 1.42%
Return on average equity 12.03% 13.96% 10.49%
Ratio of earnings to fixed charges 1.48x 1.56x 1.41x
Net income decreased $7.7 million, or 4%, for 1999 and increased $58.0
million, or 45%, for 1998 when compared to the respective previous year.
See Note 21. of the Notes to Consolidated Financial Statements for
information on the results of the Company's business segments.
The decrease in net income for 1999 when compared to 1998 reflected a non-
recurring charge of $57.0 million ($36.2 million aftertax) for the
settlement of satellite dish and other related litigation. See Legal
Proceedings in Item 3. and Note 16. of the Notes to Consolidated Financial
Statements in Item 8. for further information on the satellite dish
litigation. Without this non-recurring charge, net income for 1999 would
have been $215.9 million, an increase of $28.5 million, or 15%, from 1998.
<PAGE>
<PAGE> 22
Item 7. Continued
During the past three years, we improved credit quality results through
extensive use of our credit risk management systems and the shift toward
a higher percentage of real estate loans. At December 31, 1999, real
estate loans accounted for 64% of total net finance receivables outstanding
compared to 60% at December 31, 1998 and 52% at December 31, 1997.
Factors that specifically affected the Company's operating results are as
follows:
Finance Charges
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Finance charges $ 1,455.5 $ 1,354.2 $ 1,264.8
Average net receivables $10,008.8 $ 8,518.9 $ 7,522.8
Yield 14.54% 15.90% 16.81%
Finance charges increased $101.3 million, or 7%, for 1999 and $89.4
million, or 7%, for 1998 when compared to the respective previous year due
to higher average net receivables, partially offset by lower yield.
Average net receivables increased $1.5 billion, or 17%, during 1999 and
$996.1 million, or 13%, during 1998 when compared to the respective
previous year primarily due to growth in real estate loans. Yield
decreased 136 basis points during 1999 and 91 basis points during 1998 when
compared to the respective previous year reflecting the larger proportion
of finance receivables that are real estate loans, which generally have
lower yields, and a decline in real estate loan yield.
Insurance Revenues
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Insurance revenues $184.5 $176.0 $188.6
Premiums earned $181.2 $172.0 $184.6
Insurance revenues as a
percentage of average
net receivables 1.84% 2.07% 2.51%
Insurance revenues increased $8.5 million, or 5%, for 1999 and decreased
$12.6 million, or 7%, for 1998 when compared to the respective previous
year.
The increase in insurance revenues for 1999 when compared to 1998 was
primarily due to higher earned premiums. Earned premiums increased
primarily due to higher related loan volume during 1998 and 1999.
The decrease in insurance revenues for 1998 when compared to 1997 was
primarily due to lower earned premiums. Earned premiums decreased
primarily due to lower related loan volume during 1996 and the first three
quarters of 1997.
<PAGE>
<PAGE> 23
Item 7. Continued
The decreases in insurance revenues as a percentage of average net
receivables in 1999 and 1998 reflect a higher proportion of finance
receivables that are real estate loans, including purchased real estate
loans, where the opportunity to sell insurance products is limited.
Other Revenues
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Other revenues $ 91.6 $ 79.0 $ 70.7
Investment revenue $ 80.3 $ 75.9 $ 70.1
Net realized gains (losses)
on investments $ (1.6) $ (0.7) $ 1.1
Average invested assets $1,056.2 $ 983.4 $ 924.4
Adjusted portfolio yield 7.35% 7.88% 8.07%
Other revenues increased $12.6 million, or 16%, for 1999 and $8.3 million,
or 12%, for 1998 when compared to the respective previous year.
The increase in other revenues for 1999 when compared to 1998 was primarily
due to increases in investment revenue and mortgage set-up/warehousing
fees. The increase in investment revenue reflected growth in average
invested assets for the insurance operations of $72.8 million, partially
offset by a decline in adjusted portfolio yield of 53 basis points and
higher realized losses on investments.
The increase in other revenues for 1998 when compared to 1997 was primarily
due to an increase in investment revenue reflecting growth in average
invested assets for the insurance operations of $59.0 million, partially
offset by realized losses in 1998 compared to realized gains in 1997 and
a decline in adjusted portfolio yield of 19 basis points.
The increases in average invested assets in 1999 and 1998 reflect
reinvestment of insurance operations cash flows. The decreases in adjusted
portfolio yield in 1999 and 1998 reflect market conditions.
Interest Expense
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Interest expense $ 573.8 $ 511.6 $ 461.3
Average borrowings $9,205.1 $7,807.0 $7,123.4
Borrowing cost 6.23% 6.55% 6.80%
Interest expense increased $62.2 million, or 12%, for 1999 and $50.3
million, or 11%, for 1998 when compared to the respective previous year due
to higher average borrowings, partially offset by lower borrowing cost.
Average borrowings increased $1.4 billion, or 18%, during 1999 and $683.6
million, or 10%, during 1998 when compared to the respective previous year
primarily to support finance receivable growth. Borrowing cost decreased
32 basis points during 1999 and 25 basis points during 1998 when compared
<PAGE>
<PAGE> 24
Item 7. Continued
to the respective previous year due to lower average issuance rates on both
long-term and short-term debt and the maturity of long-term debt with
higher rates.
Operating Expenses
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Operating expenses $524.8 $505.2 $474.8
Operating expenses as a
percentage of average
net receivables 5.24% 5.93% 6.31%
Operating expenses increased $19.6 million, or 4%, for 1999 and $30.4
million, or 6%, for 1998 when compared to the respective previous year, but
less than the increases in average net receivables of 17% and 13%,
respectively.
The increase in operating expenses for 1999 when compared to 1998 was
primarily due to increases in salaries, litigation expenses, amortization
of intangibles, and occupancy expenses, partially offset by higher deferred
loan origination costs. The increase in salaries reflects the higher
competitive compensation within the branch network, partially offset by a
workforce reduction of approximately 400 positions during 1999 due to
improved productivity. The increase in litigation expenses reflected the
satellite dish and other related litigation. See Legal Proceedings in Item
3. and Note 16. of the Notes to Consolidated Financial Statements in Item
8. for further information on litigation.
The increase in operating expenses for 1998 when compared to 1997 was
primarily due to increases in litigation expenses, salaries, and
amortization of intangibles, partially offset by higher deferred loan
origination costs. The increase in litigation expenses was primarily due
to estimated settlements and costs of litigation in various Alabama and
Mississippi cases. The increase in salaries reflected an increase in
incentive program expenses, partially offset by a workforce reduction of
approximately 400 positions during 1998 which included the effects of cost
containment programs and the sale of the non-strategic assets during second
quarter 1997.
The improvements in operating expenses as a percentage of average net
receivables in 1999 and 1998 reflect operating efficiencies resulting from
the higher proportion of finance receivables that are real estate loans.
<PAGE>
<PAGE> 25
Item 7. Continued
Provision for Finance Receivable Losses
At or for the
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Provision for finance
receivable losses $206.6 $212.1 $248.0
Net charge-offs $206.6 $219.6 $270.5
Charge-off ratio 2.08% 2.60% 3.60%
Charge-off coverage ratio 191% 174% 138%
60 day+ delinquency $399.0 $383.7 $309.7
Delinquency ratio 3.46% 3.75% 3.60%
Allowance for finance
receivable losses $395.6 $382.5 $372.7
Allowance ratio 3.59% 3.96% 4.65%
Provision for finance receivable losses decreased $5.5 million, or 3%, for
1999 and $35.9 million, or 14%, for 1998 when compared to the respective
previous year primarily due to decreases in net charge-offs.
The decrease in the charge-off ratio for 1999 and 1998 when compared to the
respective previous year reflected the results of past and ongoing credit
quality improvement efforts, including improved credit risk management
systems and an increased proportion of real estate loans. In 1996, we
initiated a fundamental change in our credit risk management focus,
shifting to a more proactive process. We developed statistically-based
risk scoring and prediction tools, implemented more extensive and ongoing
analysis of performance data, and instituted early warning systems. As a
result, we have improved our underwriting skills and our ability to
identify problem loans and take effective corrective action.
The decrease in the delinquency ratio for 1999 when compared to 1998
reflected the continued improvement in credit quality and the increased
proportion of real estate loans. The increase in the delinquency ratio for
1998 when compared to 1997 reflected the maturing of real estate loan
portfolios purchased in prior periods and the effects of general economic
conditions.
We maintain the allowance for finance receivable losses at a level based
on periodic evaluation of our finance receivable portfolio which reflects
an amount that, in our opinion, is adequate to absorb anticipated losses
in our existing portfolio. The charge-off coverage ratio, which compares
the allowance for finance receivable losses to net charge-offs, improved
in both 1999 and 1998. In first quarter 2000, we expect to sell
approximately $25.0 million of fully-reserved receivables. Our allowance
ratio and charge-off coverage ratio would have been 3.37% and 179%,
respectively, had this sale occurred at year-end 1999.
<PAGE>
<PAGE> 26
Item 7. Continued
Loss on Non-strategic Assets
In fourth quarter 1996, we decided to offer for sale $874.8 million of non-
strategic, underperforming finance receivable portfolios, consisting of
$520.3 million of credit card and $354.5 million of private label finance
receivables. We reclassified these receivables and an associated allowance
for finance receivable losses of $70.0 million to assets held for sale at
December 31, 1996, and we recognized a loss of $145.5 million ($93.5
million aftertax) to reduce the carrying amount of the assets held for sale
to net realizable value. In June 1997, we sold the assets held for sale
and $81.4 million of other private label finance receivables and recorded
an additional loss of $42.2 million ($27.0 million aftertax) primarily to
establish a liability for estimated future payments to the purchaser under
a five-year loss sharing agreement. See Note 17. of the Notes to
Consolidated Financial Statements in Item 8. for further information on the
reclassification and subsequent sale of non-strategic assets.
Insurance Losses and Loss Adjustment Expenses
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Claims incurred $82.4 $86.5 $91.4
Change in benefit reserves 4.2 (1.8) 2.0
Insurance losses and loss
adjustment expenses $86.6 $84.7 $93.4
Insurance losses and loss adjustment expenses increased $1.9 million, or
2%, for 1999 and decreased $8.7 million, or 9%, for 1998 when compared to
the respective previous year.
The increase in insurance losses and loss adjustment expenses for 1999 when
compared to 1998 was due to an increase in provision for future benefits,
partially offset by a decrease in claims incurred. Provision for future
benefits increased $6.0 million for 1999 due to increased sales of non-
credit insurance products. Claims decreased $4.1 million for 1999
primarily due to favorable loss experience on credit insurance.
The decrease in insurance losses and loss adjustment expenses for 1998 when
compared to 1997 was due to decreases in claims incurred and provision for
future benefits. Claims decreased $4.9 million for 1998 primarily due to
lower premiums written in 1997 and favorable loss experience on credit
insurance. Provision for future benefits decreased $3.8 million for 1998
due to reduced sales of non-credit insurance products.
<PAGE>
<PAGE> 27
Item 7. Continued
Provision for Income Taxes
Years Ended December 31,
1999 1998 1997
(dollars in millions)
Provision for income taxes $102.9 $108.2 $ 74.9
Pretax income $282.7 $295.6 $204.4
Effective income tax rate 36.41% 36.62% 36.66%
Provision for income taxes decreased $5.3 million, or 5%, for 1999 and
increased $33.3 million, or 44%, for 1998 when compared to the respective
previous year.
The decrease in provision for income taxes for 1999 when compared to 1998
reflected lower taxable income primarily due to a non-recurring charge of
$57.0 million for the settlement of satellite dish and other related
litigation. The increase in provision for income taxes for 1998 when
compared to 1997 was primarily due to higher taxable income.
ANALYSIS OF FINANCIAL CONDITION
At December 31, 1999, the Company's assets were distributed as follows: 84%
in net finance receivables, less allowance for finance receivable losses;
8% in investment securities; 7% in other assets; and 1% in cash and cash
equivalents.
Asset Quality
We believe that our geographic diversification reduces the risk associated
with a recession in any one region. In addition, 96% of our finance
receivables at December 31, 1999 were secured by real property or personal
property.
The allowance ratio decrease for 1999 reflects the action taken after
management's review of the allowance adequacy. See Analysis of Operating
Results for further information on allowance ratio, delinquency ratio, and
charge-off ratio. While finance receivables have some exposure to further
economic uncertainty, we believe that the allowance for finance receivable
losses is adequate to absorb anticipated losses in our existing portfolio.
Investment securities principally represent the investment portfolio of the
Company's insurance operations. The investment strategy is to optimize
after-tax returns on invested assets, subject to the constraints of safety,
liquidity, diversification, and regulation.
The largest intangible asset is acquisition-related goodwill which is
charged to expense in equal amounts over 20 to 40 years. The decrease in
goodwill reflected a change in the tax basis of assets acquired in a 1988
taxable purchase business combination. To reflect the new tax basis, we
reduced deferred tax liabilities by $70.3 million and reduced goodwill by
the same amount. See Notes 2. and 7. of the Notes to Consolidated
Financial Statements in Item 8. for further information on goodwill.
<PAGE>
<PAGE> 28
Item 7. Continued
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities in an effort
to reduce the risk associated with unfavorable changes in interest rates.
Management determines the mix of fixed-rate and floating-rate debt based,
in part, on the nature of the assets being supported. We limit our
exposure to market interest rate increases by fixing interest rates that
we pay for term periods. The primary means by which we accomplish this is
through the issuance of fixed-rate debt. To supplement fixed-rate debt
issuances, AGFC also uses interest rate swap agreements to synthetically
create fixed-rate debt by altering the nature of floating-rate funding,
thereby limiting our exposure to market interest rate increases.
REGULATION AND OTHER
Regulation
The regulatory environment of the consumer finance and insurance business
is described in Item 1.
Taxation
Tax laws affect not only the way that the Company is taxed but also the
design of many of our products. We monitor federal and state tax
legislation and respond with appropriate tax planning in order to minimize
the impact of taxation.
Year 2000
As of February 18, 2000, all of our major technology systems, programs, and
applications, including those which rely on third parties, are operating
smoothly following our transition into 2000. We have experienced no
interruptions to normal business operations, including the processing of
customer account data and transactions. We will continue to monitor our
technology systems, including critical third party dependencies, as
necessary to maintain our Year 2000 readiness. We do not expect any future
disruptions, if they occur, to have a material effect on the Company's
results of operations, liquidity, or financial condition.
Through December 31, 1999, we incurred and expensed pretax costs of $8.3
million related to Year 2000 readiness, including $2.0 million in 1999 and
$5.6 million in 1998. In addition, we accelerated the planned replacement
of certain systems as part of our Year 2000 plan. The cost of these
replacement systems totaled $2.1 million in 1998 and were immaterial in
1999. We do not anticipate incurring any significant costs in the future
to maintain Year 2000 readiness.
<PAGE>
<PAGE> 29
Item 7. Continued
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained in this
report relative to trends in our operations or financial results, as well
as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend," and other similar expressions,
constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. We have made these forward-looking
statements based upon our current expectations and beliefs concerning
future developments and their potential effects on the Company. There can
be no assurance that future developments affecting the Company will be
those we anticipated. Actual results may differ materially from those
included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties including,
but not limited to, the following: (1) changes in general economic
conditions, including the performance of financial markets, interest rates,
and the level of personal bankruptcies; (2) competitive, regulatory, or tax
changes that affect the cost of, or demand for, our products; (3) our
ability to secure necessary court and regulatory approvals; and (4) adverse
litigation results or resolution of litigation. Readers are also directed
to other risks and uncertainties discussed in other documents we filed with
the Securities and Exchange Commission. We undertake no obligation to
update or revise any forward-looking information, whether as a result of
new information, future developments, or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The fair values of certain of our assets and liabilities are sensitive to
changes in market interest rates. The impact of changes in interest rates
would be reduced by the fact that increases (decreases) in fair values of
assets would be partially offset by corresponding changes in fair values
of liabilities. In aggregate, the estimated impact of an immediate and
sustained 100 basis point increase or decrease in interest rates on the
fair values of our interest rate-sensitive financial instruments would not
be material to our financial position.
<PAGE>
<PAGE> 30
Item 7A. Continued
The estimated increases (decreases) in fair values of interest rate-
sensitive financial instruments were as follows:
December 31, 1999 December 31, 1998
+100 bp -100 bp +100 bp -100 bp
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $(331,210) $ 361,526 $(253,623) $ 274,955
Fixed-maturity securities (42,700) 44,911 (52,838) 55,410
Liabilities
Long-term debt (122,447) 128,121 (155,029) 162,993
Deposits (214) 214 (23) 23
Derivatives
Interest rate swaps 34,727 (36,721) 34,109 (36,430)
At each year end, we derived the changes in fair values by modeling
estimated cash flows of certain of the Company's assets and liabilities.
The assumptions we used adjusted cash flows to reflect changes in
prepayments and calls but did not consider loan originations, debt
issuances, or new investment purchases.
Readers should exercise care in drawing conclusions based on the above
analysis. While these changes in fair values provide a measure of interest
rate sensitivity, they do not represent our expectations about the impact
of interest rate changes. This analysis was also based on our exposure at
a particular point in time and incorporated numerous assumptions and
estimates. It also assumed an immediate change in interest rates, without
regard to the impact of certain business decisions or initiatives that we
would likely undertake to mitigate or eliminate some or all of the adverse
effects of the modeled scenarios.
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated financial
statements are presented on the following pages.
<PAGE>
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American General Finance, Inc.
We have audited the accompanying consolidated balance sheets of American
General Finance, Inc. (a wholly-owned subsidiary of American General
Corporation) and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholder's equity, cash
flows, and comprehensive income for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American General Finance, Inc. and subsidiaries at December 31,
1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG, LLP
Indianapolis, Indiana
February 18, 2000
<PAGE>
<PAGE> 32
<TABLE>
American General Finance, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31,
1999 1998
(dollars in thousands)
<S> <C> <C>
Assets
Finance receivables, net of unearned
finance charges (Note 4.):
Real estate loans $ 7,104,227 $ 5,757,185
Non-real estate loans 2,576,081 2,560,565
Retail sales finance 1,349,689 1,339,367
Net finance receivables 11,029,997 9,657,117
Allowance for finance receivable
losses (Note 5.) (395,626) (382,450)
Net finance receivables, less allowance
for finance receivable losses 10,634,371 9,274,667
Investment securities (Note 6.) 988,563 996,599
Cash and cash equivalents 146,710 148,002
Other assets (Note 7.) 865,663 753,655
Total assets $12,635,307 $11,172,923
Liabilities and Shareholder's Equity
Long-term debt (Note 8.) $ 5,716,991 $ 5,176,965
Short-term notes payable:
Commercial paper (Notes 9. and 11.) 4,245,961 3,485,648
Banks and other (Notes 10. and 12.) 211,559 198,000
Deposits 32,118 1,874
Insurance claims and policyholder
liabilities 462,100 437,079
Other liabilities 416,572 348,866
Accrued taxes 22,771 21,086
Total liabilities 11,108,072 9,669,518
Shareholder's equity:
Common stock (Note 14.) 1,000 1,000
Additional paid-in capital 876,708 822,497
Accumulated other comprehensive
income (Note 6.) (6,696) 39,419
Retained earnings (Note 15.) 656,223 640,489
Total shareholder's equity 1,527,235 1,503,405
Total liabilities and shareholder's equity $12,635,307 $11,172,923
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 33
<TABLE>
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Income
<CAPTION>
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
<S> <C> <C> <C>
Revenues
Finance charges $1,455,485 $1,354,158 $1,264,798
Insurance 184,529 175,969 188,574
Other 91,588 78,978 70,733
Total revenues 1,731,602 1,609,105 1,524,105
Expenses
Interest expense 573,834 511,587 461,275
Operating expenses 524,843 505,150 474,822
Provision for finance receivable
losses 206,632 212,090 247,983
Litigation settlement (Note 16.) 57,000 - -
Loss on non-strategic assets - - 42,225
Insurance losses and loss
adjustment expenses 86,634 84,687 93,447
Total expenses 1,448,943 1,313,514 1,319,752
Income before provision for income
taxes 282,659 295,591 204,353
Provision for Income Taxes
(Note 18.) 102,925 108,232 74,920
Net Income $ 179,734 $ 187,359 $ 129,433
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 34
<TABLE>
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Shareholder's Equity
<CAPTION>
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
<S> <C> <C> <C>
Common Stock
Balance at beginning of year $ 1,000 $ 1,000 $ 1,000
Balance at end of year 1,000 1,000 1,000
Additional Paid-in Capital
Balance at beginning of year 822,497 743,083 696,230
Capital contributions from
parent and other 54,211 79,414 46,853
Balance at end of year 876,708 822,497 743,083
Accumulated Other Comprehensive
Income
Balance at beginning of year 39,419 34,512 21,454
Change in net unrealized
(losses) gains on
investment securities (46,115) 4,907 13,058
Balance at end of year (6,696) 39,419 34,512
Retained Earnings
Balance at beginning of year 640,489 484,730 481,797
Net income 179,734 187,359 129,433
Common stock dividends (164,000) (31,600) (126,500)
Balance at end of year 656,223 640,489 484,730
Total Shareholder's Equity $1,527,235 $1,503,405 $1,263,325
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 35
<TABLE>
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 179,734 $ 187,359 $ 129,433
Reconciling adjustments:
Provision for finance receivable losses 206,632 212,090 247,983
Depreciation and amortization 132,552 107,946 86,330
Deferral of finance receivable
origination costs (53,291) (46,773) (39,134)
Deferred income tax (benefit) charge (8,020) 16,446 62,620
Change in other assets and other liabilities (57,210) (34,947) (20,862)
Change in insurance claims and
policyholder liabilities 25,021 220 (19,571)
Change in taxes receivable and payable 1,422 19,681 (11,073)
Litigation settlement 57,000 - -
Loss on non-strategic assets - - 42,225
Operations related to assets held for sale - - 39,905
Other, net 9,932 (23,444) (1,772)
Net cash provided by operating activities 493,772 438,578 516,084
Cash Flows from Investing Activities
Finance receivables originated or purchased (6,653,665) (6,589,414) (5,035,973)
Principal collections on finance receivables 5,102,250 4,775,254 4,343,120
Net collections on assets held for sale - - 61,266
Securitized finance receivables purchased - - (100,000)
Acquisition of Standard Pacific Savings, F.A. 44,516 - -
Acquisition of HSA Residential Mortgage
Services of Texas, Inc. - (25,600) -
Sale of non-strategic assets - - 732,504
Investment securities purchased (328,442) (211,087) (129,468)
Investment securities called, matured and sold 247,886 158,360 104,801
Change in premiums on finance receivables
purchased and deferred charges (54,609) (122,879) (42,147)
Other, net (37,420) (20,963) (4,028)
Net cash used for investing activities (1,679,484) (2,036,329) (69,925)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,107,517 2,028,405 730,566
Repayment of long-term debt (571,286) (866,024) (1,221,070)
Change in deposits (15,683) (700) (1,204)
Change in short-term notes payable 773,872 430,977 125,751
Capital contribution from parent 54,000 79,000 46,500
Dividends paid (164,000) (31,600) (126,500)
Net cash provided by (used for)
financing activities 1,184,420 1,640,058 (445,957)
(Decrease) increase in cash and cash equivalents (1,292) 42,307 202
Cash and cash equivalents at beginning of year 148,002 105,695 105,493
Cash and cash equivalents at end of year $ 146,710 $ 148,002 $ 105,695
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 111,127 $ 74,047 $ 30,165
Interest paid $ 552,702 $ 493,356 $ 485,067
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 36
<TABLE>
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
<CAPTION>
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
<S> <C> <C> <C>
Net Income $179,734 $187,359 $129,433
Other comprehensive income:
Net unrealized (losses) gains
on investment securities (72,512) 6,857 21,161
Income tax effect 25,380 (2,401) (7,406)
Net unrealized (losses) gains
on investment securities,
net of tax (47,132) 4,456 13,755
Reclassification adjustment
for realized losses (gains)
included in net income 1,564 693 (1,071)
Income tax effect (547) (242) 374
Realized losses (gains) included
in net income, net of tax 1,017 451 (697)
Other comprehensive (loss) income,
net of tax (46,115) 4,907 13,058
Comprehensive income $133,619 $192,266 $142,491
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 37
American General Finance, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
Note 1. Nature of Operations
American General Finance, Inc. will be referred to in these Notes to
Consolidated Financial Statements as "AGFI" or collectively with its
subsidiaries, whether directly or indirectly owned, as the "Company" or
"we". AGFI is a wholly-owned subsidiary of American General Corporation
(American General). AGFI is a financial services holding company whose
principal subsidiary is American General Finance Corporation (AGFC). AGFC
is also a holding company with subsidiaries engaged primarily in the
consumer finance and credit insurance business. We conduct loan and retail
operations and market insurance products through our consumer branch and
centralized real estate segments. At December 31, 1999, the Company had
1,347 offices in 40 states, Puerto Rico and the U.S. Virgin Islands and
approximately 7,700 employees.
In our loan operations, we make loans directly to individuals and acquire
real estate loans made by brokers and other real estate lenders. In our
retail operations, we purchase retail sales contracts and provide revolving
retail services arising from the retail sale of consumer goods and services
by approximately 16,000 retail merchants and provide private label services
for approximately 330 retail merchants. In our insurance operations, we
write and assume credit life, credit accident and health, credit-related
property and casualty insurance, and non-credit insurance coverages on our
consumer finance customers and property pledged as collateral. See Note
21. for further information on the Company's business segments.
We fund our operations principally through net cash flows from operating
activities, issuances of long-term debt, short-term borrowings in the
commercial paper market, borrowings from banks under credit facilities,
acceptance of bank demand and time deposits, and capital contributions from
American General.
In May 1999, we acquired Standard Pacific Savings, F.A. from Standard
Pacific Corporation and renamed the institution American General Bank, FSB
(AG Bank). AG Bank currently operates as a traditional thrift, whose
products include deposit and savings accounts, residential mortgage and
home equity loans, and private label services.
At December 31, 1999, the Company had $11.0 billion of net finance
receivables due from approximately 2.1 million customer accounts and $6.1
billion of credit and non-credit life insurance in force covering
approximately 1.1 million customer accounts.
Note 2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of AGFI
and its subsidiaries. The subsidiaries are all wholly-owned and all
intercompany items have been eliminated. AGFI is a wholly-owned subsidiary
of American General.
<PAGE>
<PAGE> 38
Notes to Consolidated Financial Statements, Continued
FINANCE OPERATIONS
Revenue Recognition
We recognize finance charges as revenue on the accrual basis using the
interest method. We stop accruing revenue when the fourth contractual
payment becomes past due for loans, retail sales contracts, and revolving
retail and when the sixth contractual payment becomes past due for private
label. Extension fees, late charges, and prepayment penalties are
recognized as revenue when received.
We defer the costs to originate certain finance receivables and the revenue
from nonrefundable points and fees on loans. We include deferred
origination costs and nonrefundable points and fees in finance receivables
and amortize them to revenue on the accrual basis using the interest method
over the lesser of the contractual term or the estimated life based upon
prepayment experience. If a finance receivable liquidates before
amortization is completed, we charge or credit any unamortized costs or
points and fees to revenue at the date of liquidation.
Allowance For Finance Receivable Losses
We maintain the allowance for finance receivable losses at a level that we
consider adequate to absorb anticipated losses in our existing portfolio.
We periodically evaluate the portfolio as a group and consider numerous
factors in estimating the anticipated finance receivable losses, including
current economic conditions, prior finance receivable loss and delinquency
experience, and the composition of our finance receivable portfolio.
Our policy is to charge off each month non-real estate loans on which
little or no collections were made in the prior six months, retail sales
contracts that are six installments past due, and revolving retail and
private label accounts that are 180 days past due. We start foreclosure
proceedings on real estate loans when four monthly installments are past
due. When foreclosure is completed and we have obtained title to the
property, the real estate is established as an asset valued at fair value,
and any loan amount in excess of that value is charged off. We
occasionally extend the charge-off period for individual accounts when, in
our opinion, such treatment is warranted.
<PAGE>
<PAGE> 39
Notes to Consolidated Financial Statements, Continued
INSURANCE OPERATIONS
Revenue Recognition
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 terms of the policies. Premiums on credit accident and health
insurance are recognized as revenue using an average of the sum-of-the-
digits and the straight-line methods. Premiums on credit-related property
and casualty insurance are recognized as revenue using the straight-line
method over the terms of the policies or appropriate shorter periods. Non-
credit life insurance premiums are recognized when collected but not before
their due dates.
Policy Reserves
Policy reserves for credit life and credit accident and health insurance
equal related unearned premiums. Claim reserves are based on Company
experience. Reserves for losses and loss adjustment expenses for credit-
related property and casualty insurance are estimated based upon claims
reported plus estimates of incurred but not reported claims. Liabilities
for future life insurance policy benefits associated with non-credit life
contracts are accrued when premium revenue is recognized and are based on
assumptions as to investment yields, mortality, and surrenders. Annuity
reserves are based on assumptions as to investment yields and mortality.
Non-credit life, group annuity, and accident and health insurance reserves
assumed under coinsurance agreements are based on various tabular and
unearned premium methods.
Acquisition Costs
Insurance acquisition costs, principally commissions, reinsurance fees, and
premium taxes, are deferred and charged to expense over the terms of the
related policies or reinsurance agreements.
INVESTMENT SECURITIES
Valuation
All investment securities are currently classified as available-for-sale
and recorded at fair value. We adjust related balance sheet accounts as
if the unrealized gains and losses on investment securities had been
realized, and record the net adjustment in accumulated other comprehensive
income in shareholder's equity. If the fair value of an investment
security classified as available-for-sale declines below its cost and we
consider the decline to be other than temporary, we reduce the investment
security to its fair value, and recognize a realized loss.
<PAGE>
<PAGE> 40
Notes to Consolidated Financial Statements, Continued
Realized Gains and Losses on Investments
Realized gains and losses on investments are specifically identified and
are included in other revenues.
OTHER
Cash Equivalents
We consider all short-term investments with a maturity at date of purchase
of three months or less to be cash equivalents.
Goodwill
Goodwill is charged to expense in equal amounts over 20 to 40 years. We
regularly review goodwill for indicators of impairment in value which we
believe are not temporary, including unexpected or adverse changes in the
following: (1) the economic or competitive environments in which we
operate, (2) profitability analyses, and (3) cash flow analyses. If facts
and circumstances suggest that goodwill is impaired, we assess the fair
value of the underlying business and reduce goodwill to an amount that
results in the book value of the Company approximating fair value.
Income Taxes
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, using the tax rates expected to be in effect when
the temporary differences reverse.
We provide a valuation allowance for deferred tax assets if it is likely
that some portion of the deferred tax asset will not be realized. An
increase or decrease in a valuation allowance resulting from a change in
the realizability of the related deferred tax asset is included in income.
Fluctuations in fair value of available-for-sale investment securities are
included in accumulated other comprehensive income in shareholder's equity.
Derivative Financial Instruments
We account for our derivative financial instruments as hedges. Hedge
accounting requires a high correlation between changes in fair values or
cash flows of the derivative financial instrument and the specific item
being hedged, both at inception and throughout the life of the hedge.
<PAGE>
<PAGE> 41
Notes to Consolidated Financial Statements, Continued
We record the difference between amounts payable and receivable on interest
rate swap agreements on the accrual basis as an adjustment to interest
expense over the life of the agreements. The related amounts payable to,
or receivable from, counterparties are included in other liabilities or
other assets. The fair values of interest rate swap agreements are not
recognized in the consolidated balance sheet, which is consistent with the
treatment of the related debt that is hedged.
Any gain or loss resulting from the early termination of an interest rate
swap agreement is deferred and amortized into income over the remaining
term of the related debt. If the underlying debt is extinguished, any
related gain or loss on the interest rate swap agreement is recognized in
income.
Use of Estimates
We make estimates and assumptions in preparing financial statements that
affect amounts reported in our financial statements and disclosures of
contingent assets and liabilities. Ultimate results could differ from our
estimates.
Fair Value of Financial Instruments
The fair values disclosed in Note 23. are estimated using discounted cash
flows when quoted market prices or values obtained from independent pricing
services are not available. The assumptions used, including the discount
rate and estimates of future cash flows, significantly affect the valuation
techniques employed. In certain cases, the derived fair value estimates
cannot be substantiated by comparison to independent markets or realized
in immediate settlement of the instrument.
Note 3. Accounting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires all
derivative instruments to be recognized at fair value in the balance sheet.
Changes in the fair value of a derivative instrument will be reported as
earnings or other comprehensive income, depending upon the intended use of
the derivative instrument. We will adopt SFAS 133 on January 1, 2001. We
do not expect adoption to have a material impact on the Company's
consolidated results of operations or financial position.
<PAGE>
<PAGE> 42
Notes to Consolidated Financial Statements, Continued
Note 4. Finance Receivables
Real estate loans are secured by first or second mortgages and generally
have maximum original terms of 360 months. Non-real estate loans are
secured by consumer goods, automobiles or other chattel security, or are
unsecured and generally have maximum original terms of 60 months. Retail
sales contracts are secured principally by consumer goods and automobiles
and generally have maximum original terms of 60 months. Revolving retail
and private label are secured by purchase money security interests in the
goods purchased and generally require minimum monthly payments based on
outstanding balances. At December 31, 1999, 96% of our net finance
receivables were secured by the real and/or personal property of the
borrower. At December 31, 1999, real estate loans accounted for 64% of the
amount and 8% of the number of net finance receivables outstanding.
Contractual maturities of net finance receivables at December 31, 1999 were
as follows:
Amount Percent
(dollars in thousands)
2000 $ 1,172,210 11%
2001 1,408,590 13
2002 1,037,910 9
2003 619,228 6
2004 386,273 3
2005 and thereafter 6,405,786 58
$11,029,997 100%
Company experience has shown that customers will renew, convert or pay in
full a substantial portion of finance receivables prior to maturity.
Contractual maturities are not a forecast of future cash collections.
Principal cash collections and such collections as a percentage of average
net receivables were as follows:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Real estate loans:
Principal cash collections $1,886,041 $1,553,759 $1,321,943
% of average net receivables 30.29% 33.19% 35.62%
Non-real estate loans:
Principal cash collections $1,519,531 $1,568,858 $1,537,178
% of average net receivables 60.55% 61.95% 60.46%
Retail sales finance:
Principal cash collections $1,696,678 $1,652,637 $1,483,999
% of average net receivables 133.41% 126.58% 116.97%
<PAGE>
<PAGE> 43
Notes to Consolidated Financial Statements, Continued
Unused credit limits extended by the Company to its customers were as
follows:
December 31,
1999 1998
(dollars in thousands)
Unused credit limits $3,116,526 $2,759,462
Company experience has shown that the funded amounts have been less than
the unused credit limits. All unused credit limits, in part or in total,
can be cancelled at the discretion of the Company.
Geographic diversification of finance receivables reduces the concentration
of credit risk associated with a recession in any one region. The largest
concentrations of net finance receivables were as follows:
December 31, 1999 December 31, 1998
Amount Percent Amount Percent
(dollars in thousands)
California $ 1,562,183 14% $1,461,438 15%
N. Carolina 811,625 7 728,801 7
Florida 671,970 6 574,693 6
Illinois 659,674 6 593,789 6
Ohio 644,804 6 559,964 6
Indiana 560,887 5 502,653 5
Virginia 430,687 4 367,995 4
Georgia 427,523 4 351,347 4
Other 5,260,644 48 4,516,437 47
$11,029,997 100% $9,657,117 100%
Note 5. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses are detailed below.
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Balance at beginning of year $382,450 $372,653 $395,153
Provision for finance receivable
losses 206,632 212,090 247,983
Allowance related to acquired
receivables 13,176 17,297 -
Charge-offs, net of recoveries (206,632) (219,590) (270,483)
Balance at end of year $395,626 $382,450 $372,653
See Note 2. for information on the determination of the allowance for
finance receivable losses.
<PAGE>
<PAGE> 44
Notes to Consolidated Financial Statements, Continued
Note 6. Investment Securities
Investment securities were as follows at December 31:
Fair Value Amortized Cost
1999 1998 1999 1998
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $581,313 $575,336 $601,458 $546,135
Mortgage-backed securities 151,028 175,014 151,335 168,346
States and political
subdivisions 179,445 185,055 177,863 174,308
Other 39,148 42,871 31,599 29,297
Redeemable preferred stocks 15,233 11,194 14,272 10,916
Total 966,167 989,470 976,527 929,002
Non-redeemable preferred
stocks 3,679 2,910 3,631 2,731
Other long-term investments 18,517 4,219 18,517 4,219
Common stocks 200 - 189 -
Total investment securities $988,563 $996,599 $998,864 $935,952
At December 31, the gross unrealized gains and losses on investment
securities were as follows:
Gross Gross
Unrealized Gains Unrealized Losses
1999 1998 1999 1998
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $ 4,331 $31,955 $24,476 $ 2,754
Mortgage-backed securities 1,228 6,683 1,535 15
State and political
subdivisions 3,249 10,821 1,667 74
Other 7,625 13,574 76 -
Redeemable preferred stocks 966 316 5 38
Total 17,399 63,349 27,759 2,881
Non-redeemable preferred
stocks 48 179 - -
Common stocks 11 - - -
Total investment securities $17,458 $63,528 $27,759 $ 2,881
The fair values of investment securities sold or redeemed and the resulting
gross realized gains and losses were as follows:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Fair value $247,886 $158,360 $104,801
Gross realized gains 3,003 340 1,481
Gross realized losses 4,567 1,033 410
<PAGE>
<PAGE> 45
Notes to Consolidated Financial Statements, Continued
Contractual maturities of fixed-maturity securities at December 31, 1999
were as follows:
Fair Amortized
Value Cost
(dollars in thousands)
Fixed maturities, excluding
mortgage-backed securities:
Due in 1 year or less $ 16,064 $ 16,040
Due after 1 year through 5 years 179,590 176,895
Due after 5 years through 10 years 470,367 480,588
Due after 10 years 149,118 151,669
Mortgage-backed securities 151,028 151,335
Total $966,167 $976,527
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. The Company may sell
investments before maturity to achieve corporate requirements and
investment strategies.
Bonds on deposit with regulatory authorities had carrying values of $6.4
million at December 31, 1999 and $7.9 million at December 31, 1998.
Note 7. Other Assets
The components of other assets were as follows:
December 31,
1999 1998
(dollars in thousands)
Goodwill $198,720 $276,330
Income tax assets 132,280 28,579
Fixed assets 110,725 91,857
Customer base valuations 94,143 91,751
Other insurance investments 75,701 64,470
Real estate owned 52,232 33,273
Prepaid expenses and deferred
charges 39,181 41,334
Other 162,681 126,061
Total $865,663 $753,655
Goodwill is net of accumulated amortization of $104.6 million at December
31, 1999 and $96.2 million at December 31, 1998. The decrease in goodwill
(and increase in income tax assets) reflected a change in the tax basis of
assets acquired in a 1988 taxable purchase business combination. To
reflect the new tax basis, we reduced deferred tax liabilities by $70.3
million and reduced goodwill by the same amount. See Note 17. for further
information on the examinations of American General's tax returns.
The customer base valuations are charged to expense in equal amounts over
6 to 25 years.
<PAGE>
<PAGE> 46
Notes to Consolidated Financial Statements, Continued
Note 8. Long-term Debt
The carrying value and fair value of long-term debt at December 31 were as
follows:
Carrying Value Fair Value
1999 1998 1999 1998
(dollars in thousands)
Senior debt $5,716,991 $5,176,965 $5,641,284 $5,348,086
Weighted average interest rates on long-term debt were as follows:
Years Ended December 31, December 31,
1999 1998 1997 1999 1998
Senior debt 6.61% 6.95% 7.32% 6.58% 6.69%
Maturities of long-term debt at December 31, 1999 were as follows:
Carrying Value
(dollars in thousands)
2000 $1,289,280
2001 1,264,147
2002 1,078,736
2003 1,039,179
2004 275,575
2005-2009 770,074
Total $5,716,991
A debt agreement contains restrictions on consolidated retained earnings
for certain purposes (see Note 15.).
Note 9. Short-term Notes Payable
AGFC and one of its subsidiaries issue commercial paper with terms ranging
from 1 to 270 days. Included in commercial paper are extendible commercial
notes that AGFC sells with initial maturities of up to 90 days which may
be extended by AGFC to 390 days.
<PAGE>
<PAGE> 47
Notes to Consolidated Financial Statements, Continued
Information concerning short-term notes payable for commercial paper and
to banks under credit facilities was as follows:
At or for the
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Average borrowings $3,748,637 $3,475,728 $3,017,332
Weighted average interest
rate, at year end:
Money market yield 5.95% 5.30% 5.80%
Semi-annual bond
equivalent yield 6.02% 5.36% 5.87%
Note 10. Liquidity Facilities
We participate in credit facilities to support the issuance of commercial
paper and to provide an additional source of funds for operating
requirements. The Company is an eligible borrower under committed credit
facilities extended to American General and certain of its subsidiaries
(the "shared committed facilities"). At December 31, 1999, the annual
commitment fees for the shared committed facilities ranged from .05% to
.07%. We pay only an allocated portion of the commitment fees for the
shared committed facilities. The Company also has uncommitted credit
facilities and is an eligible borrower under uncommitted credit facilities
extended to American General and certain of its subsidiaries (the "shared
uncommitted facilities"). Available borrowings under all facilities are
reduced by any outstanding borrowings.
Information concerning the credit facilities was as follows:
December 31,
1999 1998
(dollars in thousands)
Committed credit facilities:
Shared committed facilities $5,600,000 $5,000,000
Borrowings - -
Remaining availability $5,600,000 $5,000,000
Uncommitted credit facilities:
Company uncommitted facilities $ 271,000 $ 363,500
Shared uncommitted facilities 50,000 150,000
Borrowings (211,000) (198,000)
Remaining availability $ 110,000 $ 315,500
A subsidiary of AGFI arranges interim financing for third-party mortgage
originators through a purchase facility. At December 31, 1999, this
facility totaled $250.0 million and had no remaining availability.
<PAGE>
<PAGE> 48
Notes to Consolidated Financial Statements, Continued
Note 11. Derivative Financial Instruments
Our principal borrowing subsidiary is AGFC. AGFC makes limited use of
derivative financial instruments to manage the cost of its debt and is
neither a dealer nor a trader in derivative financial instruments. AGFC
has generally limited its use of derivative financial instruments to
interest rate swap agreements.
AGFC uses interest rate swap agreements to reduce its exposure to market
interest expense rate increases by effectively converting short-term, and
certain long-term, floating-rate debt to a fixed-rate basis. These
floating-rate obligations are recorded at amortized cost. The effective
long-term fixed rates achieved through interest rate swap agreements are
slightly lower than could have been achieved by issuing comparable long-
term fixed-rate debt. As an alternative to fixed-rate term debt, AGFC's
interest rate swap agreements did not have a material effect on the
Company's weighted-average interest rate or reported interest expense in
any of the three years ended December 31, 1999.
AGFC contracted to pay interest at fixed rates and receive interest at
floating rates on the interest rate swap agreements. Notional amounts and
weighted average receive and pay rates were as follows:
December 31,
1999 1998 1997
(dollars in thousands)
Notional amount $1,295,000 $935,000 $940,000
Weighted average receive rate 5.40% 4.57% 5.69%
Weighted average pay rate 6.70% 6.94% 7.39%
These agreements mature at various dates and had the respective fixed rates
at December 31, 1999 as follows:
Notional Weighted Average
Amount Interest Rate
(dollars in
thousands)
2000 $ 225,000 8.80%
2001 270,000 6.38
2002 300,000 6.53
2004 200,000 6.16
2006 100,000 7.03
2008 200,000 5.50
$1,295,000 6.70%
<PAGE>
<PAGE> 49
Notes to Consolidated Financial Statements, Continued
The following table shows changes in the notional amounts for interest rate
swap agreements:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Balance at beginning of year $ 935,000 $940,000 $540,000
New contracts 410,000 260,000 425,000
Expired contracts (50,000) (265,000) (25,000)
Balance at end of year $1,295,000 $935,000 $940,000
AGFC is exposed to credit risk in the event of non-performance by
counterparties to derivative financial instruments. AGFC limits this
exposure by entering into agreements with counterparties having strong
credit ratings and by basing the amount and term of an agreement on these
credit ratings. AGFC regularly monitors counterparty credit ratings
throughout the term of the agreements.
AGFC's credit exposure on derivative financial instruments is limited to
the fair value of the agreements that are favorable to the Company. See
Note 23. for the fair values of the interest rate swap agreements. AGFC
does not expect any counterparty to fail to meet its obligation; however,
non-performance would not have a material impact on the Company's
consolidated results of operations and financial position.
AGFC's exposure to market risk is mitigated by the offsetting effects of
changes in the value of the agreements and of the underlying debt to which
they relate.
Note 12. Short-term Notes Payable - Parent
Borrowings from American General primarily provide overnight operating
liquidity when American General is in a surplus cash position. These
borrowings are due on demand at short-term rates based on overnight bank
investment rates. At December 31, 1999, 1998 and 1997, AGFI had no
borrowings outstanding with American General.
<PAGE>
<PAGE> 50
Notes to Consolidated Financial Statements, Continued
Note 13. Insurance
Our insurance subsidiaries enter into reinsurance agreements among
themselves and other insurers, including other American General insurance
subsidiaries. Insurance claims and policyholder liabilities included the
following amounts with other American General insurance subsidiaries:
December 31,
1999 1998
(dollars in thousands)
Annuity, credit life, and credit
accident and health reserves $76,712 $68,866
Our insurance subsidiaries assumed reinsurance premiums from other insurers
as follows:
December 31,
1999 1998 1997
(dollars in thousands)
Assumed reinsurance premiums $44,214 $40,081 $38,554
The Company's ceded reinsurance activities were not significant during the
last three years.
Statutory accounting practices differ from generally accepted accounting
principles in the following respects:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Statutory net income $48,754 $68,537 $58,157
Change in deferred policy
acquisition costs 7,405 254 (6,848)
Reserve changes 5,848 (4,885) 10,273
Deferred income tax (charge)
benefit (1,870) (1,024) 1,808
Amortization of interest
maintenance reserve (711) (561) (354)
Goodwill amortization (458) (458) (458)
Other, net 7,744 2,542 (266)
GAAP net income $66,712 $64,405 $62,312
<PAGE>
<PAGE> 51
Notes to Consolidated Financial Statements, Continued
December 31,
1999 1998
(dollars in thousands)
Statutory equity $575,767 $525,450
Deferred policy acquisition costs 70,530 62,785
Reserve changes 57,724 55,608
Net unrealized (losses) gains (27,879) 25,237
Goodwill 14,710 15,168
Decrease in carrying value
of affiliates (12,836) (20,721)
Asset valuation reserve 10,579 15,499
Deferred income taxes 3,606 1,225
Interest maintenance reserve (580) (4,401)
Other, net 12,970 8,142
GAAP equity $704,591 $683,992
Note 14. Capital Stock
AGFI has two classes of authorized capital stock: special shares and common
shares. AGFI may issue special shares in series. The board of directors
determines the dividend, liquidation, redemption, conversion, voting and
other rights prior to issuance. Par value, shares authorized, and shares
issued and outstanding at December 31, 1999 and 1998 were as follows:
Shares
Issued and Outstanding
Par Shares December 31,
Value Authorized 1999 1998
Special Shares - 25,000,000 - -
Common Shares $0.50 25,000,000 2,000,000 2,000,000
Note 15. Retained Earnings
AGFI's ability to pay dividends is substantially dependent on the receipt
of dividends or other funds from its subsidiaries. State laws restrict the
amounts our insurance subsidiaries may pay as dividends without prior
notice to, or in some cases prior approval from, their respective state
insurance departments. At December 31, 1999, the maximum amount of
dividends which the Company's insurance subsidiaries may pay in 2000
without prior approval was $65.7 million. At December 31, 1999, our
insurance subsidiaries had statutory capital and surplus of $575.8 million.
Merit Life Insurance Co. (Merit), a wholly-owned subsidiary of AGFC, had
$52.7 million of accumulated earnings at December 31, 1999 for which no
federal income tax provisions have been required. Merit would be liable
for federal income taxes on such earnings if they were distributed as
dividends or exceeded limits prescribed by tax laws. No distributions are
presently contemplated from these earnings. If such earnings were to
become taxable at December 31, 1999, the federal income tax would
approximate $18.4 million.
An AGFC financing agreement limits the amount of dividends AGFC may pay.
Under the restrictive provision contained in this agreement, $545.5 million
<PAGE>
<PAGE> 52
Notes to Consolidated Financial Statements, Continued
of the retained earnings of AGFC was free from such restriction at December
31, 1999.
Note 16. Litigation Settlement
In the mid-1990's, one of our subsidiaries, A.G. Financial Service Center,
Inc. (Financial Service Center), formerly named American General Financial
Center, provided financing for satellite dishes sold by independent
unaffiliated dealers. On May 18, 1999, a Mississippi state court rendered
a judgement against Financial Service Center for approximately $500,000 in
compensatory damages and $167 million in punitive damages, in a lawsuit
brought by 29 individuals who had each purchased a satellite dish. In
August 1999, Financial Service Center voluntarily filed for bankruptcy.
As part of the resolution process, certain settlement agreements were
executed in January 2000. Accordingly, we recorded a charge of $57.0
million ($36.2 million aftertax) in fourth quarter 1999 to cover the
proposed settlements of this and other litigation. Resolution of the
satellite dish litigation is dependent upon a number of factors, including
the bankruptcy court's approval of Financial Service Center's plan of
reorganization. If court approvals are obtained and appeals are not taken,
we expect that the settlements will be final in third quarter 2000.
Note 17. Loss on Non-strategic Assets
During fourth quarter 1996, we decided to offer for sale $874.8 million of
non-strategic, underperforming finance receivable portfolios, consisting
of $520.3 million of credit card and $354.5 million of private label
finance receivables. We reclassified these finance receivables and $70.0
million of allowance for finance receivable losses to assets held for sale
on December 31, 1996.
We hired an outside advisor to market the portfolios. Based on
negotiations with prospective purchasers subsequent to year end 1996, we
determined that a write-down of $145.5 million ($93.5 million aftertax) at
December 31, 1996 was necessary to reduce the carrying amount of the assets
held for sale to net realizable value, after considering related expenses.
In April 1997, we repurchased $100.0 million of private label and credit
card receivables that previously had been sold through securitization. No
gain or loss resulted from this transaction. These repurchased credit card
receivables were offered for sale along with the Company's other credit
card receivables, which increased the carrying amount of assets held for
sale by approximately $70.0 million in April 1997.
In June 1997, we sold all of the assets held for sale (with a remaining
balance of $658.1 million) and $81.4 million of other private label finance
receivables. In connection with these sales, we recorded a loss of $42.2
million ($27.0 million aftertax) in second quarter 1997. This loss
primarily resulted from establishing a liability for estimated future
payments to the purchaser of the credit card portfolio under a five-year
loss sharing arrangement.
<PAGE>
<PAGE> 53
Notes to Consolidated Financial Statements, Continued
Note 18. Income Taxes
AGFI and all of its subsidiaries file a consolidated federal income tax
return with American General and the majority of its subsidiaries. We
provide for federal income taxes as if filing a separate tax return, and
pay such amounts to American General under a tax sharing agreement.
Provision for income taxes is summarized as follows:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Federal
Current $106,189 $ 86,813 $ 8,588
Deferred (8,917) 13,475 60,860
Total federal 97,272 100,288 69,448
State 5,653 7,944 5,472
Total $102,925 $108,232 $ 74,920
The U.S. statutory federal income tax rate differs from the effective
income tax rate as follows:
Years Ended December 31,
1999 1998 1997
Statutory federal income tax rate 35.00% 35.00% 35.00%
State income taxes 1.30 1.75 1.74
Amortization of goodwill .90 1.07 1.54
Nontaxable investment income (.99) (.94) (1.37)
Other, net .20 (.26) (.25)
Effective income tax rate 36.41% 36.62% 36.66%
Net deferred tax assets were as follows:
December 31,
1999 1998
(dollars in thousands)
Deferred tax assets $205,257 $177,239
Deferred tax liabilities (78,358) (153,384)
Net deferred tax assets $126,899 $ 23,855
The most significant deferred tax assets relate to the allowance for
finance receivable losses and the reserve for the settlement of satellite
dish and other related litigation. The decrease in deferred tax
liabilities reflects a change in the tax basis of assets acquired in a 1988
taxable purchase business combination.
During 1999, the Internal Revenue Service completed its examinations of
American General's tax returns through 1988, which resulted in a change in
the tax basis of assets acquired in a 1988 taxable purchase business
combination. To reflect the new tax basis, we reduced deferred tax
liabilities by $70.3 million and reduced goodwill by the same amount.
<PAGE>
<PAGE> 54
Notes to Consolidated Financial Statements, Continued
State net operating loss (NOL) carryforwards were $617.9 million at
December 31, 1999 and $630.5 million at December 31, 1998 and expire in the
years 2005 and 2006. These carryforwards resulted from a 1995 state audit
of a return and the state's acceptance of an amended return. At December
31, 1999 and 1998, the valuation allowance relating to the state NOL
carryforwards totaled $39.5 million.
Note 19. Lease Commitments, Rent Expense and Contingent Liabilities
Annual rental commitments for leased office space, automobiles and data
processing and related equipment accounted for as operating leases,
excluding leases on a month-to-month basis, are as follows:
Lease Commitments
(dollars in thousands)
2000 $ 44,295
2001 36,214
2002 28,026
2003 19,988
2004 6,746
subsequent to 2004 14,607
Total $149,876
Taxes, insurance and maintenance expenses are obligations of the Company
under certain leases. In the normal course of business, leases that expire
will be renewed or replaced by leases on other properties. Future minimum
annual rental commitments will probably not be less than the amount of
rental expense incurred in 1999. Rental expense totaled $45.6 million in
1999, $35.2 million in 1998, and $32.4 million in 1997.
AGFI and certain of its subsidiaries are parties to various lawsuits and
proceedings, including certain class action claims, arising in the ordinary
course of business. In addition, many of these claims arise in
jurisdictions, such as Alabama and Mississippi, that permit damage awards
disproportionate to the actual economic damages alleged to have been
incurred. Based upon information presently available, we believe that the
total amounts that will ultimately be paid, if any, arising from these
lawsuits and proceedings will not have a material adverse effect on the
Company's consolidated results of operations and financial position.
However, the frequency of large damage awards, including large punitive
damage awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given suit.
Note 20. Benefit Plans
RETIREMENT INCOME PLANS
We participate in the American General Retirement Plans (AGRP), which are
noncontributory defined benefit pension plans covering most employees.
Pension benefits are based on the participant's compensation and length of
credited service. American General's funding policy is to contribute
<PAGE>
<PAGE> 55
Notes to Consolidated Financial Statements, Continued
annually no more than the maximum amount deductible for federal income tax
purposes.
At December 31, 1999, the plans' assets were invested as follows: (1) 71%
in equity mutual funds managed outside the Company; (2) 26% in fixed income
mutual funds managed by an American General subsidiary; (3) 1% in American
General common stock; and 4) 1% in deposit administration insurance
contracts issued by American General subsidiaries. The pension plans have
purchased annuity contracts from American General subsidiaries to provide
approximately $8.3 million of future annual benefits to certain retirees.
AGFI accounts for its participation in the AGRP as if it had its own plans.
The following table shows AGFI's portion of the plans' funded status:
December 31,
1999 1998 1997
(dollars in thousands)
Projected benefit obligation $ 85,757 $ 87,882 $ 70,864
Plan assets at fair value 109,371 95,653 86,418
Plan assets in excess of projected
benefit obligation 23,614 7,771 15,554
Other unrecognized items, net (20,208) (5,086) (10,905)
Prepaid pension expense $ 3,406 $ 2,685 $ 4,649
Pension expense included the following components:
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Service cost $ 3,927 $ 3,623 $ 3,150
Interest cost 6,412 5,688 4,800
Expected return on plan assets (8,713) (6,950) (6,060)
Net amortization and deferral 119 136 (127)
Pension expense $ 1,745 $ 2,497 $ 1,763
Additional assumptions concerning the determination of pension expense were
as follows:
Years Ended December 31,
1999 1998 1997
Weighted average discount rate 7.75% 7.00% 7.25%
Expected long-term rate of
return on plan assets 10.35 10.25 10.00
Rate of increase in
compensation levels 4.25 4.25 4.00
<PAGE>
<PAGE> 56
Notes to Consolidated Financial Statements, Continued
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
We participate in American General's life, medical, supplemental major
medical, and dental plans for certain retired employees. Most plans are
contributory, with retiree contributions adjusted annually to limit
employer contributions to predetermined amounts. American General and its
subsidiaries reserve the right to change or eliminate these benefits at any
time.
American General's life plans are insured through December 31, 2000. The
majority of the retiree medical and dental plans is unfunded and self-
insured.
AGFI accounts for its participation in the plans as if it had its own
plans. The accrued liability for postretirement benefits was $6.6 million
at December 31, 1999 and $6.9 million at December 31, 1998. These
liabilities were discounted at the same rates used for the pension plans.
Postretirement benefit expense totaled $.7 million in 1999, $.5 million in
1998, and $.7 million in 1997.
Note 21. Segment Information
We have three business segments: consumer branches, centralized real
estate, and insurance. Our segments are managed separately because they
offer different financial service products. The consumer branch operation
originates and acquires home equity and consumer loans, extends lines of
credit, offers retail sales financing to merchants, and sells credit and
non-credit insurance products. The centralized real estate operation
acquires individual first and second mortgage loans originated by real
estate brokers and purchases portfolios of mortgage loans originated by
various real estate lenders. The insurance operation writes and assumes
credit and non-credit insurance through products that are sold principally
by the consumer branches.
We evaluate the performance of the segments based on pretax operating
earnings. The accounting policies of the segments are the same as those
disclosed in Note 2., except that: (1) segment finance charge revenues are
not reduced for the amortization of the deferred origination costs; (2)
segment operating expenses are not reduced for the deferral of origination
costs and exclude the amortization of goodwill; and (3) segment finance
receivables exclude the deferred origination costs. Intersegment sales and
transfers are intended to approximate the amounts segments would earn if
dealing with independent third parties.
The following tables display information about the Company's segments as
well as reconciliations of the segment totals to the consolidated financial
statement amounts. Adjustments for revenues are amortization of deferred
origination costs, realized gains (losses) on investments, and certain
investment expenses. Reconciling items for pretax income include the
amortization of goodwill, realized gains (losses) on investments, and
certain investment expenses. Adjustments for assets include goodwill,
deferred origination costs, other assets, and corporate assets that are not
considered pertinent to determining segment performance. Corporate assets
include cash, prepaid expenses, deferred charges, and fixed assets.
<PAGE>
<PAGE> 57
Notes to Consolidated Financial Statements, Continued
At or for the Year Ended December 31, 1999:
Consumer Centralized Total
Branches Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,357,403 $ 158,358 $ - $ 1,515,761
Insurance 1,573 - 182,956 184,529
Other (5,281) 8,339 81,620 84,678
Intercompany 73,903 713 (72,195) 2,421
Interest expense 423,720 105,795 - 529,515
Provision for finance
receivable losses 193,104 16,728 - 209,832
Pretax income 317,931 17,831 74,759 410,521
Assets 8,535,194 1,921,504 1,095,150 11,551,848
At or for the Year Ended December 31, 1998:
Consumer Centralized Total
Branches Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,263,391 $ 128,986 $ - $ 1,392,377
Insurance 1,925 - 175,154 177,079
Other - 3,202 74,978 78,180
Intercompany 70,959 561 (68,850) 2,670
Interest expense 384,182 79,612 112 463,906
Provision for finance
receivable losses 209,027 10,404 - 219,431
Pretax income 248,149 24,823 70,220 343,192
Assets 7,415,107 1,911,538 1,077,892 10,404,537
At or for the Year Ended December 31, 1997:
Consumer Centralized Total
Branches Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,223,312 $ 79,769 $ - $ 1,303,081
Insurance 2,069 - 185,076 187,145
Other 534 132 69,243 69,909
Intercompany 74,724 169 (72,740) 2,153
Interest expense 376,263 50,011 - 426,274
Provision for finance
receivable losses 252,942 2,209 - 255,151
Pretax income 202,364 18,508 63,684 284,556
Assets 6,564,446 1,050,335 1,000,176 8,614,957
<PAGE>
<PAGE> 58
Notes to Consolidated Financial Statements, Continued
Reconciliation of segment totals to consolidated financial statement
amounts is summarized below:
At or for the
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
Revenues
Segments $ 1,787,389 $ 1,650,306 $ 1,562,288
Corporate (751) 4,971 967
Adjustments (55,036) (46,172) (39,150)
Consolidated revenue $ 1,731,602 $ 1,609,105 $ 1,524,105
Interest Expense
Segments $ 529,515 $ 463,906 $ 426,274
Corporate 44,319 47,681 35,001
Consolidated interest
expense $ 573,834 $ 511,587 $ 461,275
Provision for Finance
Receivable Losses
Segments $ 209,832 $ 219,431 $ 255,151
Corporate (3,200) (7,341) (7,168)
Consolidated provision for
finance receivable losses $ 206,632 $ 212,090 $ 247,983
Pretax Income
Segments $ 410,521 $ 343,192 $ 284,556
Corporate (116,711) (37,091) (72,270)
Adjustments (11,151) (10,510) (7,933)
Consolidated pretax income $ 282,659 $ 295,591 $ 204,353
Assets
Segments $11,551,848 $10,404,537 $ 8,614,957
Corporate 869,614 476,552 397,105
Adjustments 213,845 291,834 277,438
Consolidated assets $12,635,307 $11,172,923 $ 9,289,500
<PAGE>
<PAGE> 59
Notes to Consolidated Financial Statements, Continued
Note 22. Interim Financial Information (Unaudited)
Unaudited interim information is summarized below:
Total Revenues
Three Months Ended 1999 1998
(dollars in thousands)
March 31 $ 422,636 $ 388,665
June 30 424,191 396,094
September 30 435,936 407,585
December 31 448,839 416,761
Total $1,731,602 $1,609,105
Income Before Provision
for Income Taxes
Three Months Ended 1999 1998
(dollars in thousands)
March 31 $ 79,739 $ 71,129
June 30 86,671 72,687
September 30 85,102 73,978
December 31 31,147 77,797
Total $ 282,659 $ 295,591
Net Income
Three Months Ended 1999 1998
(dollars in thousands)
March 31 $ 50,707 $ 44,222
June 30 55,114 45,181
September 30 54,113 47,527
December 31 19,800 50,429
Total $ 179,734 $ 187,359
<PAGE>
<PAGE> 60
Notes to Consolidated Financial Statements, Continued
Note 23. Fair Value of Financial Instruments
The carrying values and estimated fair values of certain of the Company's
financial instruments are presented below. The reader should exercise care
in drawing conclusions based on fair value, since the fair values presented
below can be misinterpreted and do not include the value associated with
all of the Company's assets and liabilities.
December 31, 1999 December 31, 1998
Carrying Fair Carrying Fair
Value Value Value Value
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $10,634,371 $10,634,371 $ 9,274,667 $ 9,274,667
Investment securities 988,563 988,563 996,599 996,599
Cash and cash equivalents 146,710 146,710 148,002 148,002
Liabilities
Long-term debt 5,716,991 5,641,284 5,176,965 5,348,086
Short-term notes payable 4,457,520 4,457,520 3,683,648 3,683,648
Deposits 32,118 32,062 1,874 1,906
Off-Balance Sheet Financial
Instruments
Unused customer credit
limits - - - -
Interest rate swap
agreements - 23,129 - (36,697)
VALUATION METHODOLOGIES AND ASSUMPTIONS
We used the following methods and assumptions to estimate the fair value
of the financial instruments.
Finance Receivables
Fair values of net finance receivables (which approximate carrying amount
less allowance for finance receivable losses) were estimated using
projected cash flows, computed by category of finance receivable,
discounted at the weighted-average interest rates currently being offered
for similar finance receivables. Cash flows were based on contractual
payment terms adjusted for delinquencies and finance receivable losses.
The fair value estimates do not reflect the value of the underlying
customer relationships or the related distribution systems.
<PAGE>
<PAGE> 61
Notes to Consolidated Financial Statements, Continued
Investment Securities
When available, quoted market prices were used as fair values of investment
securities. For investment securities not actively traded, we estimated
fair values using values obtained from independent pricing services or, in
the case of some private placements, by discounting expected future cash
flows using a current market rate applicable to yield, credit quality, and
average life of the investments.
Cash and Cash Equivalents
The carrying values of cash and cash equivalents approximated the fair
values.
Long-term Debt
The fair values of long-term debt were estimated using cash flows
discounted at current borrowing rates.
Short-term Notes Payable
The carrying values of short-term notes payable approximated the fair
values.
Unused Customer Credit Limits
The unused credit limits available to our customers have no fair value.
The interest rates charged on these facilities can be changed at our
discretion for private label, or are adjustable and reprice frequently for
loan and retail revolving lines of credit. These amounts, in part or in
total, can be cancelled at the discretion of the Company.
Derivative Financial Instruments
The fair values of interest rate swap agreements were estimated using cash
flows discounted at current market rates.
<PAGE>
<PAGE> 62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) (1) and (2) The following consolidated financial statements of
American General Finance, Inc. and subsidiaries are included in Item
8:
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Income, years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Shareholder's Equity, years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows, years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Comprehensive Income, years ended
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is included
in Item 14(d).
All other financial statement schedules have been omitted because
they are inapplicable.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 69
herein.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the fourth quarter
of 1999.
(c) Exhibits
The exhibits required to be included in this portion of Item 14. are
submitted as a separate section of this report.
<PAGE>
<PAGE> 63
Item 14(d).
Schedule I - Condensed Financial Information of Registrant
<TABLE>
American General Finance, Inc.
Condensed Balance Sheets
<CAPTION>
December 31,
1999 1998
(dollars in thousands)
<S> <C> <C>
Assets
Cash $ 312 $ 4,670
Investment in subsidiaries 1,727,479 1,637,634
Notes receivable from subsidiaries 212,987 212,232
Other assets 76,039 46,516
Total assets $2,016,817 $1,901,052
Liabilities and Shareholder's Equity
Long-term debt, 6.35% - 9.00%
due 2000 - 2002 $ 7,236 $ 14,953
Short-term notes payable:
Notes payable to banks 211,000 198,000
Notes payable to subsidiaries 189,973 183,018
Other liabilities 81,373 1,676
Total liabilities 489,582 397,647
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 876,708 822,497
Other equity (6,696) 39,419
Retained earnings 656,223 640,489
Total shareholder's equity 1,527,235 1,503,405
Total liabilities and shareholder's equity $2,016,817 $1,901,052
<FN>
<F1>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 64
Schedule I, Continued
<TABLE>
American General Finance, Inc.
Condensed Statements of Income
<CAPTION>
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
<S> <C> <C> <C>
Revenues
Dividends received from subsidiaries $166,524 $ 42,875 $147,136
Interest and other 21,331 19,536 25,560
Total revenues 187,855 62,411 172,696
Expenses
Interest expense 29,651 27,439 26,950
Operating expenses 1,434 3,929 12,130
Litigation settlement 57,000 - -
Total expenses 88,085 31,368 39,080
Income before income taxes and equity
in undistributed (overdistributed)
net income of subsidiaries 99,770 31,043 133,616
Income Tax Credit 24,080 4,135 4,883
Income before equity in undistributed
(overdistributed) net income of
subsidiaries 123,850 35,178 138,499
Equity in Undistributed (Overdistributed)
Net Income of Subsidiaries 55,884 152,181 (9,066)
Net Income $179,734 $187,359 $129,433
<FN>
<F1>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 65
Schedule I, Continued
<TABLE>
American General Finance, Inc.
Condensed Statements of Cash Flows
<CAPTION>
Years Ended December 31,
1999 1998 1997
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 179,734 $ 187,359 $ 129,433
Reconciling adjustments:
Equity in (undistributed) overdistributed
net income of subsidiaries (55,884) (152,181) 9,066
Change in other assets and other liabilities (28,519) (153) (11,203)
Litigation settlement 57,000 - -
Other, net 4,065 (1,816) 13,437
Net cash provided by operating activities 156,396 33,209 140,733
Cash Flows from Investing Activities
Capital contributions to subsidiaries (82,598) (92,000) (27,000)
Transfer of liabilities from subsidiary 22,996 - -
Net additions to fixed assets (2,389) (522) (7,184)
Net cash used for investing activities (61,991) (92,522) (34,184)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt - - 3,616
Repayment of long-term debt (7,963) (55,553) (16,320)
Change in notes receivable or payable
with parent and subsidiaries 6,200 (31,025) 1,715
Change in notes payable to banks 13,000 103,000 (16,000)
Capital contributions from parent 54,000 79,000 46,500
Dividends paid (164,000) (31,600) (126,500)
Net cash (used for) provided by
financing activities (98,763) 63,822 (106,989)
(Decrease) increase in cash (4,358) 4,509 (440)
Cash at beginning of year 4,670 161 601
Cash at end of year $ 312 $ 4,670 $ 161
<FN>
<F1>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 66
Schedule I, Continued
American General Finance, Inc.
Notes to Condensed Financial Statements
December 31, 1999
Note 1. Accounting Policies
AGFI's investments in subsidiaries are stated at cost plus the equity in
undistributed net income of subsidiaries since the date of the acquisition.
The condensed financial statements of the registrant should be read in
conjunction with AGFI's consolidated financial statements.
Note 2. Long-Term Debt
Maturities of long-term debt at December 31, 1999 were as follows: 2000,
$4.0 million; 2001, $1.9 million; and 2002, $1.3 million.
<PAGE>
<PAGE> 67
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 21, 2000.
AMERICAN GENERAL FINANCE, INC.
By: /s/ Robert A. Cole
Robert A. Cole
(Senior Vice President and
Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 21, 2000.
/s/ Frederick W. Geissinger /s/ W. Tal Bratton
Frederick W. Geissinger W. Tal Bratton
(President and Chief Executive (Director)
Officer and Director -
Principal Executive Officer)
/s/ Jerry L. Gilpin
Jerry L. Gilpin
/s/ Robert A. Cole (Director)
Robert A. Cole
(Senior Vice President and
Chief Financial Officer and /s/ Philip M. Hanley
Director - Principal Philip M. Hanley
Financial Officer) (Director)
/s/ George W. Schmidt /s/ Bennie D. Hendrix
George W. Schmidt Bennie D. Hendrix
(Controller and Assistant (Director)
Secretary - Principal
Accounting Officer)
/s/ Stephen L. Blake
Stephen L. Blake
(Director)
<PAGE>
<PAGE> 68
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934.
No annual report to security-holders or proxy material has been sent to
security-holders.
<PAGE>
<PAGE> 69
Exhibit Index
Exhibit
Number
(3) a. Restated Articles of Incorporation of American General Finance,
Inc. (formerly Credithrift Financial, Inc.) dated May 27, 1988
and amendments thereto dated September 7, 1988 and March 20,
1989. Incorporated by reference to Exhibit (3)a. filed as a
part of the Company's Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 1-7422).
b. By-laws of American General Finance, Inc. Incorporated by
reference to Exhibit (3)b. filed as a part of the Company's
Annual Report on Form 10-K for the year ended December 31, 1992
(File No. 1-7422).
(4) a. The following instruments are filed pursuant to Item
601(b)(4)(ii) of Regulation S-K, which requires with certain
exceptions that all instruments be filed which define the rights
of holders of the Company's long-term debt and our consolidated
subsidiaries. In the aggregate, the outstanding issuances of
debt under each of the Indentures referred to under items (1)
and (2) below exceed 10% of the Company's total assets on a
consolidated basis.
(1) Indenture dated as of October 1, 1994 from American General
Finance Corporation to The Chase Manhattan Bank.
Incorporated by reference to Exhibit 4(a) filed as a part
of American General Finance Corporation's Registration
Statement on Form S-3 (Registration No. 33-55803).
(2) Indenture dated as of May 1, 1997 from American General
Finance Corporation to Bank One, National Association
(formerly known as The First National Bank of Chicago).
Incorporated by reference to Exhibit 4(a) filed as a part
of American General Finance Corporation's Registration
Statement on Form S-3 (Registration No. 333-28925).
b. In accordance with Item 601(b)(4)(iii) of Regulation S-K,
certain other instruments defining the rights of holders of the
Company's long-term debt and our subsidiaries have not been
filed as exhibits to this Annual Report on Form 10-K because the
total amount of securities authorized and outstanding under each
instrument does not exceed 10% of the total assets of the
Company on a consolidated basis. We hereby agree to furnish a
copy of each instrument to the Securities and Exchange
Commission upon request.
(12) Computation of ratio of earnings to fixed charges.
(23) Consent of Ernst & Young LLP, Independent Auditors
(27) Financial Data Schedule
<PAGE>
<PAGE>
<PAGE> 70
Exhibit 12
<TABLE>
American General Finance, Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
<CAPTION>
Years Ended December 31,
1999 1998 1997 1996 1995
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Earnings:
Income before provision
for income taxes $282,659 $295,591 $204,353 $ 53,483 $115,549
Interest expense
(including $23,221
for 1997 to fund
assets held for sale) 573,834 511,587 484,496 493,051 517,475
Implicit interest in
rents 15,195 11,738 10,810 12,007 12,817
Total earnings $871,688 $818,916 $699,659 $558,541 $645,841
Fixed Charges:
Interest expense
(including $23,221
for 1997 to fund
assets held for sale) $573,834 $511,587 $484,496 $493,051 $517,475
Implicit interest in
rents 15,195 11,738 10,810 12,007 12,817
Total fixed charges $589,029 $523,325 $495,306 $505,058 $530,292
Ratio of earnings to
fixed charges 1.48 1.56 1.41 1.11 1.22
</TABLE>
<PAGE>
<PAGE>
<PAGE> 71
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-3 Number 33-47865) of American General Finance, Inc.
and in the related Prospectus of our report dated February 18, 2000,
with respect to the consolidated financial statements and schedule of
American General Finance, Inc. and subsidiaries included in this Annual
Report (Form 10-K) for the year ended December 31, 1999.
ERNST & YOUNG, LLP
Indianapolis, Indiana
March 17, 2000
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 146,710
<SECURITIES> 988,563
<RECEIVABLES> 11,029,997<F1>
<ALLOWANCES> 395,626<F2>
<INVENTORY> 0<F3>
<CURRENT-ASSETS> 0<F4>
<PP&E> 0<F4>
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 12,635,307
<CURRENT-LIABILITIES> 0<F4>
<BONDS> 5,716,991<F5>
0<F3>
0<F3>
<COMMON> 1,000
<OTHER-SE> 1,526,235<F6>
<TOTAL-LIABILITY-AND-EQUITY> 12,635,307
<SALES> 0<F3>
<TOTAL-REVENUES> 1,731,602<F7>
<CGS> 0<F3>
<TOTAL-COSTS> 0<F4>
<OTHER-EXPENSES> 668,477<F8>
<LOSS-PROVISION> 206,632<F9>
<INTEREST-EXPENSE> 573,834<F10>
<INCOME-PRETAX> 282,659
<INCOME-TAX> 102,925
<INCOME-CONTINUING> 179,734
<DISCONTINUED> 0<F3>
<EXTRAORDINARY> 0<F3>
<CHANGES> 0<F3>
<NET-INCOME> 179,734
<EPS-BASIC> 0<F3>
<EPS-DILUTED> 0<F3>
<FN>
<F1>RECEIVABLES IN THIS EXHIBIT REPRESENTS NET FINANCE RECEIVABLES REPORTED
IN THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS.
<F2>ALLOWANCES IN THIS EXHIBIT REPRESENTS ALLOWANCE FOR FINANCE RECEIVABLE
LOSSES REPORTED IN THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS.
<F3>NOT APPLICABLE.
<F4>NOT REPORTED SEPARATELY (OR NOT REPORTED SEPARATELY AS DEFINED BY
ARTICLE 5 OF REGULATION S-X) IN DOCUMENT FILED.
<F5>BONDS IN THIS EXHIBIT REPRESENTS LONG-TERM DEBT REPORTED IN THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS WHICH INCLUDES OTHER LONG-TERM DEBT.
<F6>OTHER STOCKHOLDER'S EQUITY IN THIS EXHIBIT REPRESENTS ADDITIONAL PAID-IN-
CAPITAL, ACCUMULATED OTHER COMPREHENSIVE INCOME, AND RETAINED EARNINGS
REPORTED IN THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS.
<F7>TOTAL REVENUES IN THIS EXHIBIT REPRESENTS TOTAL REVENUES REPORTED IN THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS.
<F8>OTHER EXPENSES IN THIS EXHIBIT REPRESENTS OPERATING EXPENSES,
INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES, AND LITIGATION
SETTLEMENT REPORTED IN THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS.
<F9>LOSS PROVISION IN THIS EXHIBIT REPRESENTS PROVISION FOR FINANCE
RECEIVABLE LOSSES REPORTED IN THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS.
<F10>INTEREST EXPENSE IN THIS EXHIBIT REPRESENTS INTEREST EXPENSE REPORTED
IN THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
</FN>
</TABLE>
