Item 1. Business.
GENERAL
American General Finance, Inc. will be referred to 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 August 29, 2001, AGFI has been an indirect wholly owned subsidiary of American International Group, Inc. (AIG), a Delaware corporation. AIG is a holding company, which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities and financial services in the United States and abroad.
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 businesses. We conduct the credit insurance business to supplement our consumer finance business through Merit Life Insurance Co. (Merit) and Yosemite Insurance Company (Yosemite), which are both subsidiaries of AGFC.
Concurrent with AIG's indirect acquisition of the Company in August 2001, American General Bank, FSB (AG Bank), a subsidiary of AGFI, was merged into AIG Federal Savings Bank, a non-subsidiary affiliate of AGFI, with AIG Federal Savings Bank being the surviving entity. AG Bank previously operated as a traditional thrift, whose products included deposit and savings accounts, residential mortgage and home equity loans, and private label services.
At December 31, 2002, the Company had 1,405 offices in 45 states, Puerto Rico, and the U.S. Virgin Islands and approximately 7,600 employees. Our executive offices are located in Evansville, Indiana.
This annual report on Form 10-K is available free of charge on our Internet website (http://www.agfinance.com).
Selected Financial Information
Selected financial information of the Company was as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Average net receivables $12,409,908 $11,726,436 $11,408,913
Average borrowings $11,471,189 $10,704,644 $10,518,190
Yield - finance charges as a percentage of average net receivables 13.85% 14.60% 14.19%
Item 1. Continued
At or for the Years Ended December 31, 2002 2001 2000
Borrowing cost - interest expense as a percentage of average borrowings 4.88% 5.93% 6.59%
Interest spread - yield less borrowing cost 8.97% 8.67% 7.60%
Operating expenses as a percentage of average net receivables 4.52% 4.70% 4.75%
Allowance ratio - allowance for finance receivable losses as a percentage of net finance receivables 3.34% 3.74% 3.26%
Charge-off ratio - net charge-offs as a percentage of the average of net finance receivables at the beginning of each month during the period 2.41% 2.26% 1.81%
Charge-off coverage - allowance for finance receivable losses to net charge-offs 1.56x 1.70x 1.86x
Delinquency ratio - gross finance receivables 60 days or more past due as a percentage of gross finance receivables 3.67% 3.71% 3.41%
Return on average assets 2.48% 1.70% 1.59%
Return on average equity 24.49% 14.34% 13.03%
Ratio of earnings to fixed charges (refer to Exhibit 12 for calculations) 1.85x 1.55x 1.46x
Debt to tangible equity ratio - debt to equity less goodwill and accumulated other comprehensive income 8.66x 8.89x 7.50x
Debt to equity ratio 8.16x 8.24x 6.61x
Item 1. Continued
CONSUMER FINANCE OPERATION
The consumer finance operation makes loans directly to individuals, offers retail sales financing to merchants, purchases portfolios of finance receivables originated by others, and offers credit and non- credit insurance through its 1,405 branch offices and its centralized operational support. Our customers are usually described as non- conforming, non-prime, or sub-prime.
We make home equity loans, originate secured and unsecured consumer loans, and extend lines of credit. We generally take a security interest in the real property and/or personal property of the borrower. At December 31, 2002, real estate loans accounted for 69% of the amount and 11% of the number of net finance receivables outstanding, compared to 64% of the amount and 9% of the number of net finance receivables outstanding at December 31, 2001. Real estate loans are secured by first or second mortgages on residential real estate and generally have maximum original terms of 360 months. Non-real estate loans are secured by consumer goods, automobiles, or other personal property or are unsecured and generally have maximum original terms of 60 months.
We purchase retail sales contracts and provide revolving retail services arising from the retail sale of consumer goods and services by approximately 20,000 retail merchants. We also purchase private label receivables originated by AIG Federal Savings Bank, a non-subsidiary affiliate of ours, arising from the sales by approximately 40 retail merchants under a participation agreement. Retail sales contracts are closed-end accounts that consist of a single purchase. Revolving retail and private label are open-end revolving accounts that can be used for repeated purchases. Retail sales contracts are secured by the real property or personal property giving rise to the contract and generally have maximum original terms of 60 months. Revolving retail and private label are secured by the goods purchased and generally require minimum monthly payments based on outstanding balances.
To supplement our lending and retail sales financing activities, we purchase portfolios of real estate loans, non-real estate loans, and retail sales finance receivables with customers that meet our credit quality standards and profitability objectives.
We also offer credit life, credit accident and health, credit related property and casualty, and non-credit insurance to our consumer finance customers. These insurance products are issued by affiliated as well as non-affiliated insurance companies. The benefits of these insurance products for both our customers and the consumer finance operation are described under "Insurance Operation".
Retail sales finance obligations that we purchase from merchants provide an important source of new loan customers. These customers have demonstrated an apparent need to finance a retail purchase and a willingness to use credit. After purchase of the retail sales finance obligation, we contact the customer using various marketing methods. We attempt to have the customer visit one of our branch offices to discuss his or her overall financial needs with our consumer lending specialists. Any resulting loan may pay off the customer's retail sales finance obligation and consolidate debts with other creditors.
Item 1. Continued
At the time of loan origination, our consumer lending specialists, who are licensed to offer insurance products, explain our credit and non- credit insurance products to the customer. The customer then determines whether to purchase any insurance products.
We also originate loans by solicitation of current customers obtained through portfolio acquisitions and former customers who have recently paid off their loans. In addition, we purchase customer lists from major list compilers based on our predetermined selection criteria. We market our financial products to these potential customers using various solicitation methods. We also use various Internet loan application sources, including our own website, to obtain potential customer contacts. We forward these applications to our branch offices where consumer lending specialists contact potential customers in attempts to initiate lasting relationships.
Our branch offices are supported by centralized administrative and operational functions. Our centralized operational support functions include the following:
* real estate loan processing; * revolving retail and private label processing; * merchant services; * retail sales finance approvals; * real estate loan approvals; * customer solicitations; * retail sales finance collections; * retail sales finance payment processing; * real estate owned processing; and * charge-off recovery operations.
We continually seek to identify functions that could be more cost- effective if centralized, thereby reducing costs and freeing our consumer lending specialists in our branches to concentrate on providing service to our customers.
Item 1. Continued
We control and monitor our branch network through a variety of methods including the following:
* Our operational policies and procedures standardize various aspects of branch lending, collections, and business development processes. * Our finance receivable systems control amounts, rates, terms, and fees of our customers' accounts; create loan documents specific to the state in which the branch operates; and control branch cash receipts and disbursements. * Our home office accounting personnel reconcile bank accounts, investigate discrepancies, and resolve differences. * Our credit risk management system reports are used by various personnel to compare branch lending and collection activities with predetermined parameters. * Our field operations management structure is appropriate to control a large, decentralized organization with each succeeding level staffed with more experienced personnel. * Our field operations incentive compensation plan aligns branch activities and goals with corporate strategies by basing a portion of branch personnel and field operations management total compensation on profitability and credit quality. * Our internal audit department audits branches for operational policy and procedure and state law and regulation compliance. Internal audit reports directly to AIG to enhance independence.
See Note 22. of the Notes to Consolidated Financial Statements in Item 8. for further information on the Company's consumer finance business segment.
Finance Receivables
We carry finance receivables at amortized cost which includes accrued finance charges on interest bearing finance receivables, unamortized deferred origination costs, and unamortized net premiums and discounts on purchased finance receivables. They are net of unamortized finance charges on precomputed receivables and unamortized points and fees.
Although a significant portion of insurance claims and policyholder liabilities originate from the finance receivables, our policy is to report them as liabilities and not net them against finance receivables. Finance receivables relate to the financing activities of our consumer finance business segment, and insurance claims and policyholder liabilities relate to the underwriting activities of our insurance business segment.
Item 1. Continued
Amount, number, and average size of net finance receivables originated and renewed and net purchased by type (retail sales contracts, revolving retail, and private label comprise retail sales finance) were as follows:
Years Ended December 31, 2002 2001 2000 Amount Percent Amount Percent Amount Percent
Originated and renewed
Amount (in thousands): Real estate loans $2,572,734 37% $2,193,452 33% $2,086,721 31% Non-real estate loans 2,742,647 39 2,759,478 41 2,728,318 41 Retail sales finance 1,642,246 24 1,728,061 26 1,917,128 28
Total $6,957,627 100% $6,680,991 100% $6,732,167 100%
Number: Real estate loans 59,757 4% 58,066 3% 58,540 3% Non-real estate loans 766,582 46 784,953 45 829,852 42 Retail sales finance 824,162 50 905,801 52 1,064,865 55
Total 1,650,501 100% 1,748,820 100% 1,953,257 100%
Average size (to nearest dollar): Real estate loans $43,053 $37,775 $35,646 Non-real estate loans 3,578 3,515 3,288 Retail sales finance 1,993 1,908 1,800
Net purchased
Amount (in thousands): Real estate loans $2,355,181 92% $ 904,629 84% $ 405,848 44% Non-real estate loans 124,983 5 27,085 3 450,655 49 Retail sales finance 84,053 3 143,065 13 66,748 7
Total $2,564,217 100% $1,074,779 100% $ 923,251 100%
Number: Real estate loans 39,158 38% 14,753 22% 6,343 5% Non-real estate loans 35,222 34 13,399 20 86,114 71 Retail sales finance 28,176 28 38,633 58 29,476 24
Total 102,556 100% 66,785 100% 121,933 100%
Average size (to nearest dollar): Real estate loans $60,146 $61,318 $63,984 Non-real estate loans 3,548 2,021 5,233 Retail sales finance 2,983 3,703 2,264
Net purchased was net of sales of $68.7 million during 2001 and $27.1 million during 2000. We had no sales in 2002.
Item 1. Continued
Amount, number, and average size of total net finance receivables originated, renewed, and net purchased by type were as follows:
Years Ended December 31, 2002 2001 2000 Amount Percent Amount Percent Amount Percent
Originated, renewed, and net purchased
Amount (in thousands): Real estate loans $4,927,915 52% $3,098,081 40% $2,492,569 33% Non-real estate loans 2,867,630 30 2,786,563 36 3,178,973 41 Retail sales finance 1,726,299 18 1,871,126 24 1,983,876 26
Total $9,521,844 100% $7,755,770 100% $7,655,418 100%
Number: Real estate loans 98,915 6% 72,819 4% 64,883 3% Non-real estate loans 801,804 46 798,352 44 915,966 44 Retail sales finance 852,338 48 944,434 52 1,094,341 53
Total 1,753,057 100% 1,815,605 100% 2,075,190 100%
Average size (to nearest dollar): Real estate loans $49,820 $42,545 $38,416 Non-real estate loans 3,576 3,490 3,471 Retail sales finance 2,025 1,981 1,813
Amount of net purchased as a percentage of total originated, renewed, and net purchased was as follows:
Years Ended December 31, 2002 2001 2000
Real estate loans 48% 29% 16% Non-real estate loans 4 1 14 Retail sales finance 5 8 3
Total 27% 14% 12%
Item 1. Continued
Amount, number, and average size of net finance receivables by type were as follows:
December 31, 2002 2001 2000 Amount Percent Amount Percent Amount Percent
Net finance receivables
Amount (in thousands): Real estate loans $ 9,498,046 69% $ 7,624,824 64% $ 7,280,234 62% Non-real estate loans 2,958,925 21 2,922,557 24 3,027,989 26 Retail sales finance 1,389,241 10 1,440,908 12 1,453,588 12
Total $13,846,212 100% $11,988,289 100% $11,761,811 100%
Number: Real estate loans 218,615 11% 189,907 9% 184,591 9% Non-real estate loans 927,604 48 953,600 48 1,017,127 47 Retail sales finance 805,734 41 868,064 43 944,923 44
Total 1,951,953 100% 2,011,571 100% 2,146,641 100%
Average size (to nearest dollar): Real estate loans $43,446 $40,150 $39,440 Non-real estate loans 3,190 3,065 2,977 Retail sales finance 1,724 1,660 1,538
Geographic Distribution
Geographic diversification of finance receivables reduces the concentration of credit risk associated with a recession in any one region. The largest concentrations of net finance receivables were as follows:
December 31, 2002 2001 2000 Amount Percent Amount Percent Amount Percent (dollars in thousands)
California $ 2,160,846 16% $ 1,374,599 12% $ 1,582,130 13% N. Carolina 887,243 6 850,995 7 831,977 7 Florida 840,182 6 772,830 7 740,186 6 Illinois 786,593 6 731,238 6 698,181 6 Ohio 785,506 6 741,702 6 678,238 6 Indiana 598,832 4 586,625 5 597,898 5 Georgia 591,970 4 510,140 4 477,110 4 Virginia 553,386 4 500,137 4 486,607 4 Other 6,641,654 48 5,920,023 49 5,669,484 49
Total $13,846,212 100% $11,988,289 100% $11,761,811 100%
Item 1. Continued
Average Net Receivables
Average net receivables by type were as follows:
Years Ended December 31, 2002 2001 2000 Amount Percent Amount Percent Amount Percent (dollars in thousands)
Real estate loans $ 8,184,040 66% $ 7,356,898 63% $ 7,211,254 63% Non-real estate loans 2,858,016 23 2,954,690 25 2,801,815 25 Retail sales finance 1,367,852 11 1,414,848 12 1,395,844 12
Total $12,409,908 100% $11,726,436 100% $11,408,913 100%
Growth in average net receivables by type was as follows:
Years Ended December 31, 2002 2001 2000 Percent Percent Percent Amount Change Amount Change Amount Change (dollars in thousands)
Real estate loans $ 827,142 11% $ 145,644 2% $ 983,674 16% Non-real estate loans (96,674) (3) 152,875 5 292,403 12 Retail sales finance (46,996) (3) 19,004 1 124,027 10
Total $ 683,472 6% $ 317,523 3% $1,400,104 14%
Finance Charges and Yield
We recognize finance charges as revenue on the accrual basis using the interest method. We amortize premiums and discounts on purchased finance receivables as a revenue adjustment. We defer the costs to originate certain finance receivables and the revenue from nonrefundable points and fees on loans and amortize them to revenue on the accrual basis using the interest method over the lesser of the contractual term or the estimated life based upon prepayment experience. If a finance receivable liquidates before amortization is completed, we charge or credit any unamortized premiums, discounts, origination costs, or points and fees to revenue at the date of liquidation. We recognize late charges, prepayment penalties, and deferment fees as revenue when received.
We stop accruing revenue when the fourth contractual payment becomes past due for loans and retail sales contracts and when the sixth contractual payment becomes past due for revolving retail and private label. Beginning in third quarter 2001, in conformity with AIG policy, we reverse amounts previously accrued upon suspension. Prior to AIG's indirect acquisition of the Company, we did not reverse amounts previously accrued upon suspension. After suspension, we recognize revenue for loans and retail sales contracts only to the extent of any additional payments we receive.
Item 1. Continued
Finance charges and yield by type of finance receivable were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Real estate loans: Finance charges $ 902,925 $ 872,914 $ 822,458 Yield 11.03% 11.87% 11.41%
Non-real estate loans: Finance charges $ 616,094 $ 638,019 $ 603,461 Yield 21.56% 21.59% 21.54%
Retail sales finance: Finance charges $ 199,854 $ 201,552 $ 193,050 Yield 14.61% 14.25% 13.83%
Total: Finance charges $1,718,873 $1,712,485 $1,618,969 Yield 13.85% 14.60% 14.19%
See Management's Discussion and Analysis in Item 7. for information on the trends in yield.
Finance Receivable Credit Quality Information
A risk in all consumer lending and retail sales financing transactions is the customer's unwillingness or inability to repay obligations. Unwillingness to repay is usually evidenced in a consumer's historical credit repayment record. An inability to repay usually results from lower income due to unemployment or underemployment, major medical expenses, or divorce. Occasionally, these types of events are so economically severe that the customer must file for protection under the bankruptcy laws. Because we evaluate credit applications with a view toward ability to repay, our customer's inability to repay occurs after our initial credit evaluation and funding of an outstanding loan.
We use credit risk scoring models at the time of borrower application to assess our risk of the applicant's unwillingness or inability to repay. These models are developed and based upon numerous factors including past customer credit repayment experience. The risk scoring models are periodically revalidated based on current portfolio performance. We extend credit to those consumers who fit our risk guidelines as determined by these models and, in some cases, manual underwriting. Price and size of the loan or retail sales finance transaction are generally in relation to the estimated credit risk assumed.
Our policy is to charge off each month to the allowance for finance receivable losses non-real estate loans on which payments received in the prior six months have totaled less than 5% of the original loan amount and retail sales finance that are six installments past due. We start foreclosure proceedings on real estate loans when four monthly installments are past due. When foreclosure is completed and we have
Item 1. Continued
obtained title to the property, we obtain a broker purchase offer, which is a real estate broker's or appraiser's estimate of the property's sale value without the benefit of a full interior and exterior appraisal and lacking sales comparisons. We reduce finance receivables by the amount of the real estate loan, establish a real estate owned asset valued at lower of cost or 85% of the broker purchase offer, and charge off any loan amount in excess of that value to the allowance for finance receivable losses. We occasionally extend the charge-off period for individual accounts when, in our opinion, such treatment is warranted. We increase the allowance for finance receivable losses for recoveries on accounts previously charged off.
Charge-offs, recoveries, net charge-offs, and charge-off ratio by type of finance receivable were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands) Real estate loans: Charge-offs $ 58,592 $ 54,615 $ 49,869 Recoveries (4,546) (4,540) (4,635) Net charge-offs $ 54,046 $ 50,075 $ 45,234 Charge-off ratio .67% .68% .63%
Non-real estate loans: Charge-offs $225,294 $200,917 $160,294 Recoveries (27,170) (27,071) (29,708) Net charge-offs $198,124 $173,846 $130,586 Charge-off ratio 6.94% 5.87% 4.66%
Retail sales finance: Charge-offs $ 54,916 $ 49,060 $ 40,167 Recoveries (9,501) (8,679) (9,712) Net charge-offs $ 45,415 $ 40,381 $ 30,455 Charge-off ratio 3.31% 2.85% 2.19%
Total: Charge-offs $338,802 $304,592 $250,330 Recoveries (41,217) (40,290) (44,055) Net charge-offs $297,585 $264,302 $206,275 Charge-off ratio 2.41% 2.26% 1.81%
Establishing and maintaining customer relationships is very important to us. A delinquent payment often indicates that the customer is experiencing temporary financial difficulties. We view collection efforts as opportunities to help our customers solve their temporary financial problems and retain our customer relationships.
We may rewrite a delinquent account if the customer has sufficient income and it does not appear that the cause of past delinquency will affect the customer's ability to repay the new loan. We subject all renewals, whether the customer's account is current or delinquent, to the same credit risk underwriting process as we would a new customer.
Item 1. Continued
We may allow a deferment, which is a partial payment that extends the term of an account. The partial payment amount is usually the greater of one-half of a regular monthly payment or the amount necessary to bring the interest on the account current. We limit a customer to two deferments in a rolling twelve-month period.
To accommodate a customer's preferred monthly payment pattern, we may agree to a customer's request to change a payment due date on an account. An account's due date will not be changed if the change will affect the thirty day plus delinquency status of the account at month end.
Delinquency (gross finance receivables 60 days or more past due) based on contract terms in effect and delinquency ratio by type of finance receivable were as follows:
December 31, 2002 2001 2000 (dollars in thousands) Real estate loans: Delinquency $300,001 $251,759 $239,462 Delinquency ratio 3.19% 3.31% 3.28%
Non-real estate loans: Delinquency $178,696 $171,514 $148,621 Delinquency ratio 5.42% 5.24% 4.42%
Retail sales finance: Delinquency $ 44,565 $ 41,798 $ 32,493 Delinquency ratio 2.87% 2.56% 1.95%
Total: Delinquency $523,262 $465,071 $420,576 Delinquency ratio 3.67% 3.71% 3.41%
We establish the allowance for finance receivable losses primarily through the provision for finance receivable losses charged to expense. We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly. This review determines any adjustment necessary to maintain the allowance for finance receivable losses at a level we consider adequate to absorb losses inherent in the existing portfolio.
Item 1. Continued
Changes in the allowance for finance receivable losses were as follows:
At or for the Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Balance at beginning of year $ 448,251 $ 383,415 $ 395,626 Provision for finance receivable losses 303,585 289,302 206,275 Allowance related to net acquired (sold) receivables 8,780 14,836 (12,211) Charge-offs (338,802) (304,592) (250,330) Recoveries 41,217 40,290 44,055 Other charges - additional provision - 25,000 -
Balance at end of year $ 463,031 $ 448,251 $ 383,415
See Management's Discussion and Analysis in Item 7. for further information on finance receivable loss and delinquency experience and the related allowance for finance receivable losses.
Real Estate Owned
We acquire real estate owned through foreclosure on real estate loans. We record real estate owned in other assets, initially at lower of cost or 85% of the broker purchase offer, which approximates the fair value less the estimated cost to sell. If we do not sell a property within one year of acquisition, we reduce the carrying value by five percent of the initial value each month beginning in the thirteenth month. Prior to AIG's indirect acquisition of the Company in August 2001, we did not begin this writedown until the nineteenth month. The other charges recorded in third quarter 2001 included $5.0 million to adjust for this difference. We continue the writedown until the property is sold or the carrying value is reduced to ten percent of the initial value. We charge these writedowns to other revenues. We record the sale price we receive for a property less the carrying value and any amounts required to be refunded to the customer as a gain or loss in other revenues. We do not profit from foreclosures in accordance with the American Financial Services Association's Voluntary Standards for Consumer Mortgage Lending. We only attempt to recover our investment in the property, including expenses incurred.
Item 1. Continued
Changes in the amount of real estate owned were as follows:
At or for the Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Balance at beginning of year $ 49,985 $ 45,864 $ 52,232 Properties acquired 73,745 59,026 45,758 Properties sold or disposed of (65,629) (45,043) (48,562) Monthly writedowns (9,089) (9,862) (3,564)
Balance at end of year $ 49,012 $ 49,985 $ 45,864
Real estate owned as a percentage of real estate loans 0.52% 0.66% 0.63%
Net gains (losses) on real estate owned sales $ 2,933 $ (1,059) $ 4,184
Changes in the number of real estate owned properties were as follows:
At or for the Years Ended December 31, 2002 2001 2000
Balance at beginning of year 1,006 834 728 Properties acquired 1,418 1,557 1,467 Properties sold or disposed of (1,473) (1,385) (1,361)
Balance at end of year 951 1,006 834
Sources of Funds
We fund our consumer finance operation principally through the following sources:
* net cash flows from operating activities; * issuances of long-term debt; * short-term borrowings in the commercial paper market; * borrowings from banks under credit facilities; and * capital contributions from parent.
Item 1. Continued
Average Borrowings
Average borrowings by term of debt were as follows:
Years Ended December 31, 2002 2001 2000 Amount Percent Amount Percent Amount Percent (dollars in thousands)
Long-term debt $ 7,344,323 64% $ 6,024,311 56% $ 5,708,732 54% Short-term debt 4,126,866 36 4,617,152 43 4,765,923 45 Deposits - - 63,181 1 43,535 1
Total $11,471,189 100% $10,704,644 100% $10,518,190 100%
Average borrowings by rate of debt were as follows:
Years Ended December 31, 2002 2001 2000 Amount Percent Amount Percent Amount Percent (dollars in thousands)
Fixed rate debt $ 7,416,440 65% $ 7,306,430 68% $ 6,595,668 63% Floating rate debt 4,054,749 35 3,398,214 32 3,922,522 37
Total $11,471,189 100% $10,704,644 100% $10,518,190 100%
Interest Expense and Borrowing Cost
Interest expense and borrowing cost by term of debt were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands) Long-term debt: Interest expense $432,764 $401,073 $379,160 Borrowing cost 5.89% 6.66% 6.64%
Short-term debt: Interest expense $126,527 $230,684 $312,496 Borrowing cost 3.06% 4.99% 6.54%
Deposits: Interest expense $ - $ 3,726 $ 2,595 Borrowing cost - 5.90% 5.94%
Total: Interest expense $559,291 $635,483 $694,251 Borrowing cost 4.88% 5.93% 6.59%
Item 1. Continued
Interest expense and borrowing cost by rate of debt were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands) Fixed rate debt: Interest expense $480,285 $488,540 $439,475 Borrowing cost 6.48% 6.69% 6.67%
Floating rate debt: Interest expense $ 79,006 $146,943 $254,776 Borrowing cost 1.95% 4.31% 6.47%
Total: Interest expense $559,291 $635,483 $694,251 Borrowing cost 4.88% 5.93% 6.59%
The Company's use of interest rate swap agreements to fix floating-rate debt or float fixed-rate debt, the effect of which is included in the rates above, is described in Note 11. of the Notes to Consolidated Financial Statements in Item 8.
Contractual Maturities
Contractual maturities of net finance receivables and debt at December 31, 2002 were as follows: Net Finance Receivables Debt (dollars in thousands)
2003 $ 1,366,060 $ 4,950,574 2004 1,609,388 2,097,877 2005 1,190,771 1,479,335 2006 739,925 1,273,961 2007 488,632 1,355,550 2008 and thereafter 8,451,436 1,784,633
Total $13,846,212 $12,941,930
See Note 4. of the Notes to Consolidated Financial Statements in Item 8. for contractual maturities and principal cash collections of net finance receivables by type.
Item 1. Continued
INSURANCE OPERATION
The insurance operation markets insurance products to our consumer finance customers. Cash generated from operations is invested in investment securities, commercial mortgage loans, investment real estate, and policy loans and is also used to pay dividends.
Merit is a life and health insurance company domiciled in Indiana and licensed in 46 states, the District of Columbia, and the U.S. Virgin Islands. Merit principally writes or assumes (through affiliated and non-affiliated insurance companies) credit life, credit accident and health, and non-credit insurance.
Yosemite is a property and casualty insurance company domiciled in Indiana and licensed in 45 states. Yosemite principally writes or assumes credit-related property and casualty insurance.
Our credit life insurance policies insure the life of the borrower in an amount typically equal to the unpaid balance of the finance receivable and provide for payment in full to the lender of the finance receivable in the event of the borrower's death. Our credit accident and health insurance policies provide for payment to the lender of the installments on the finance receivable coming due during a period of the borrower's disability due to illness or injury. Our credit-related property and casualty insurance policies are written either to protect the lender's interest in property pledged as collateral for the finance receivable or to provide for payment to the lender of the installments on the finance receivable coming due during a period of the borrower's unemployment. The borrower's purchase of credit life, credit accident and health, or credit-related property and casualty insurance is voluntary with the exception of lender-placed property damage coverage for property pledged as collateral. In these instances, we obtain property damage coverage through Yosemite under the terms of the lending agreement if the borrower does not provide evidence of coverage with another insurance carrier. Non-credit insurance policies are primarily ordinary life level term coverage. The purchase of this coverage is voluntary. Customers usually either finance premiums for insurance products as part of the finance receivable or pay premiums monthly with their finance receivable payment, but they may pay the premiums in cash to the insurer. We do not offer single premium credit insurance products to our real estate loan customers.
Merit and Yosemite have entered into reinsurance agreements with other insurance companies, including certain affiliated companies, for assumption of various non-credit life, individual annuity, group annuity, credit life, credit accident and health, and credit-related property and casualty insurance where our insurance subsidiaries assume the risk of loss. The reserves for this business fluctuate over time and in certain instances are subject to recapture by the insurer. At December 31, 2002, reserves on the books of Merit and Yosemite for these reinsurance agreements totaled $112.6 million.
See Note 22. of the Notes to Consolidated Financial Statements in Item 8. for further information on the Company's insurance business segment.
Item 1. Continued
Premiums earned, premiums written, and losses incurred by type of insurance were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands) Premiums Earned
Credit insurance premiums earned: Credit life $ 37,576 $ 41,046 $ 38,958 Credit accident and health 47,726 50,405 48,006 Property and casualty 55,645 53,537 50,016 Other insurance premiums earned: Non-credit life 38,097 39,157 48,539 Non-credit accident and health 7,323 6,136 6,689 Premiums assumed under coinsurance agreements 2,631 2,725 1,156
Total $188,998 $193,006 $193,364
Premiums Written
Credit insurance premiums written: Credit life $ 23,263 $ 29,333 $ 45,486 Credit accident and health 40,458 44,570 55,981 Property and casualty 55,186 54,048 58,387 Other insurance premiums written: Non-credit life 38,097 39,157 48,539 Non-credit accident and health 7,323 6,136 6,689 Premiums assumed under coinsurance agreements 2,631 2,725 1,156
Total $166,958 $175,969 $216,238
Losses Incurred
Credit insurance losses incurred: Credit life $ 21,869 $ 21,830 $ 18,409 Credit accident and health 26,494 24,814 24,412 Property and casualty 9,247 15,715 12,397 Other insurance losses incurred: Non-credit life 11,996 11,102 20,142 Non-credit accident and health 4,485 3,751 4,031 Losses incurred under coinsurance agreements 9,184 10,899 8,963
Total $ 83,275 $ 88,111 $ 88,354
Item 1. Continued
Life insurance in force by type of insurance was as follows:
December 31, 2002 2001 2000 (dollars in thousands)
Credit life $3,091,211 $3,126,473 $3,075,206 Non-credit life 3,104,772 3,275,199 3,343,066
Total $6,195,983 $6,401,672 $6,418,272
Investments and Investment Results
We invest cash generated by our insurance operation primarily in bonds. We invest in, but are not limited to, the following:
* bonds; * commercial mortgage loans; * short-term investments; * limited partnerships; * preferred stock; * investment real estate; * policy loans; and * common stock.
AIG subsidiaries manage the majority of our insurance operation's investments.
Investment results of our insurance operation were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Net investment revenue (a) $ 82,812 $ 81,711 $ 80,807
Average invested assets (b) $1,252,625 $1,231,187 $1,148,950
Adjusted portfolio yield (c) 6.84% 7.03% 7.35%
Net realized (losses) gains on investments (d) $ (4,400) $ (2,989) $ 2,809
(a) Net investment revenue is after deducting investment expense but before net realized gains or losses on investments and provision for income taxes.
(b) Average invested assets excludes the effect of Statement of Financial Accounting Standards 115.
(c) Adjusted portfolio yield is calculated based upon the definitions of net investment revenue and average invested assets listed in (a) and (b) above.
(d) Includes net realized gains or losses on investment securities and other invested assets before provision for income taxes.
Item 1. Continued
See Note 6. of the Notes to Consolidated Financial Statements in Item 8. for information regarding investment securities for all operations of the Company.
REGULATION
Consumer Finance
The Company's consumer finance subsidiaries are subject to various state and federal laws and regulations. Applicable federal laws include:
* the Equal Credit Opportunity Act (prohibits discrimination against credit-worthy applicants); * the Fair Credit Reporting Act (governs the accuracy and use of credit bureau reports); * the Truth in Lending Act (governs disclosure of applicable charges and other finance receivable terms); * the Fair Housing Act (prohibits discrimination in housing lending); * the Real Estate Settlement Procedures Act (regulates certain loans secured by real estate); * the Federal Trade Commission Act; and * the Federal Reserve Board's Regulations B, C, P, and Z.
In many states, the Company relies on federal law to preempt state law restrictions on interest rates and points and fees for first lien residential mortgage loans. The Company also relies on the Federal Alternative Mortgage Transactions Parity Act in many states to preempt state restrictions on variable rate loans and balloon payments. The Company makes residential mortgage loans under the provisions of these and other federal laws. The Company is also subject to federal laws governing practices and disclosures when dealing with consumer or customer information.
Various state laws also regulate our consumer lending and retail sales financing businesses. The degree and nature of such regulation vary from state to state. The laws under which a substantial amount of our business is conducted generally:
* provide for state licensing of lenders; * impose maximum term, amount, interest rate, and other charge limitations; * regulate whether and under what circumstances insurance and other ancillary products may be offered in connection with a lending transaction; and * provide for consumer protection.
Certain of these laws prohibit the taking of liens on real estate for loans of small dollar amounts, except liens resulting from judgments. These state laws may require contract disclosures in addition to those required under federal law and may limit remedies available in the event of default by an obligor on the credit.
Item 1. Continued
The federal government is considering, and a number of states, counties, and cities have enacted or may be considering, laws or rules that restrict the credit terms or other aspects of residential mortgage loans that are typically described as "high cost mortgage loans". These requirements may impose specific statutory liabilities in cases of non-compliance and may also limit or restrict the terms of covered loan transactions. Additionally, some of these laws may restrict other business activities or business dealings of affiliates of the Company under certain conditions.
Insurance
State authorities regulate and supervise our insurance subsidiaries. The extent of such regulation varies by product and by state, but relates primarily to the following:
* conduct of business; * types of products offered; * standards of solvency; * limitations on dividend payments and other related party transactions; * licensing; * deposits of securities for the benefit of policyholders; * permissible investments; * approval of policy forms and premium rates; * periodic examination of the affairs of insurers; * form and content of required financial reports; and * reserve requirements for unearned premiums, losses, and other purposes.
The states in which we operate regulate credit insurance premium rates and premium refund calculations.
COMPETITION
Consumer Finance
The consumer finance industry is highly competitive due to the large number of companies offering financial products and services, the sophistication of those products, capital market resources of some competitors, and general acceptance and widespread usage of available credit. We compete with other consumer finance companies as well as other types of financial institutions that offer similar products and services.
Insurance
Our insurance operation supplements our consumer finance operation. We believe that our insurance companies' abilities to market insurance products through our distribution systems provide a competitive advantage over our insurance competitors.
Item 2.
Item 2. Properties.
Our investment in real estate and tangible property is not significant in relation to our total assets due to the nature of our business. AGFC subsidiaries own two branch offices in Riverside and Barstow, California and two branch offices in Hato Rey and Isabela, Puerto Rico. AGFI owns eight buildings in Evansville, Indiana, one of which is a branch office of a subsidiary of AGFC. The other buildings contain certain administrative offices of AGFI and its subsidiaries, our insurance operation, and the majority of our centralized operational support. Merit owns an office building in Houston, Texas that is leased to third parties and affiliates and also owns a consumer finance branch office in Terre Haute, Indiana that is leased to an affiliate.
We generally conduct branch office operations, branch office administration, other operations, and operational support in leased premises. Lease terms generally range from three to five years.
Item 3.
Item 3. Legal Proceedings.
Satellite Dish Operations Bankruptcy
In August 1999, a subsidiary of the Company, A.G. Financial Service Center, Inc. (Financial Service Center), formerly named American General Financial 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 a Mississippi state court in May 1999 in the amount of $167 million. The filing for reorganization under Chapter 11 was 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.
The plan of reorganization was confirmed by the bankruptcy court in February 2001 and distribution under the plan is substantially complete. Certain creditors have appealed the confirmation of the plan, but we do not expect their appeal to prevail. We expect our remaining recorded liability related to this matter to be sufficient to cover the costs of the plan of reorganization.
Item 3. Continued
Other
AGFI and certain of its subsidiaries are also parties to various other lawsuits and proceedings, including certain class action claims, arising in the ordinary course of business. In addition, many of these proceedings are pending in jurisdictions, such as Mississippi, that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts that will ultimately be paid arising from these lawsuits and proceedings will not have a material adverse effect on our consolidated results of operations or financial position. However, the frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given suit.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
No trading market exists for AGFI's common stock. AGFI is an indirect wholly owned subsidiary of AIG. AGFI paid the following cash dividends on its common stock:
Quarter Ended 2002 2001 (dollars in thousands)
March 31 $ 85,003 $ 67,801 June 30 61,996 59,996 September 30 - 50,500 December 31 - 260,006
Total $146,999 $438,303
At the end of fourth quarter 2001, we increased our leverage target to 9.0 to 1 for debt to tangible equity. Approximately $210.0 million of the $260.0 million fourth quarter 2001 dividend was due to our change in targeted leverage. See Management's Discussion and Analysis in Item 7., and Note 16. of the Notes to Consolidated Financial Statements in Item 8., regarding limitations on the ability of AGFI and its subsidiaries to pay dividends.
To manage our leverage of debt to tangible equity, AGFI received a capital contribution from its parent totaling $33.0 million in third quarter 2002. AGFI also received a non-cash capital contribution from its parent of $7.3 million in fourth quarter 2002 reflecting AIG's assumption of certain benefit obligations effective January 1, 2002.
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the consolidated financial statements and related notes in Item 8., Management's Discussion and Analysis in Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes in Item 8. and other financial information in Item 1.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and our other publicly available documents may include, and the Company's officers and representatives may from time to time make, statements which may constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only our belief regarding future events, many of which are inherently uncertain and outside of our control. These statements may address, among other things, the Company's strategy for growth, product development, regulatory approvals, market position, financial results and reserves. The Company's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward- looking statements. The important factors, many of which are outside of our control, which could cause the Company's actual results to differ, possibly materially, include, but are not limited to, the following:
* changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we access capital; * changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels and the formation of business combinations among our competitors; * the effectiveness of our credit risk scoring models in assessing the risk of customer unwillingness or inability to repay; * shifts in collateral values, contractual delinquencies, credit losses and the level of personal bankruptcies; * changes in laws or regulations that affect our ability to conduct business or the manner in which we conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products; * the costs and effects of any litigation or governmental inquiries or investigations that are determined adversely to the Company; * changes in accounting standards or tax policies and practices and the application of such new policies and practices to the manner in which we conduct business; * our ability to integrate the operations of our acquisitions into our business; * changes in our ability to attract and retain employees or key executives to support our businesses; and * natural events and acts of God such as fires or floods affecting our branches or other operating facilities.
Item 7. Continued
Readers are also directed to other risks and uncertainties discussed in other documents we file with the Securities and Exchange Commission. We are under no obligation to (and expressly disclaim any such obligation to) update or alter any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.
OVERVIEW
We are in the consumer finance and credit insurance businesses. The basic functions of our consumer finance operation are to borrow money at wholesale prices and to lend money at retail prices and offer credit and non-credit insurance products. The basic functions of our insurance operation are to write and assume various insurance products for customers of our consumer finance operation and to invest premiums received in various investments.
BASIS OF REPORTING
We prepared our consolidated financial statements using accounting principles generally accepted in the United States (GAAP). The statements include the accounts of AGFI and its subsidiaries, all of which are wholly owned. We eliminated all intercompany items. We made estimates and assumptions that affect amounts reported in our financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from our estimates.
At December 31, 2002, 86% of our assets were net finance receivables less allowance for finance receivable losses. Our finance charge revenue is a function of the amount of average net receivables and the yield on those average net receivables. GAAP requires that we recognize finance charges as revenue on the accrual basis using the interest method. The only discretion we have is the point of suspension of the accrual of this finance charge revenue.
At December 31, 2002, 93% of our liabilities were debt issued primarily to support our net finance receivables. Our interest expense is a function of the amount of average borrowings and the borrowing cost on those average borrowings. GAAP requires that we recognize interest on borrowings as expense on the accrual basis using the interest method. Interest expense includes the effect of our interest rate swap agreements.
Our insurance revenues consist primarily of insurance premiums resulting from our consumer finance customers purchasing various credit and non-credit insurance policies. Insurance premium revenue is a function of the premium amounts and policy terms. GAAP dictates the methods of insurance premium revenue recognition.
We invest cash generated by our insurance operation primarily in investment securities, which were 8% of our assets at December 31, 2002, and to a lesser extent in commercial mortgage loans, investment real estate, and policy loans, which are included in other assets. We report the resulting investment revenue in other revenue. GAAP requires that we recognize interest on these investments as revenue on the accrual basis using the interest method. The only areas of
Item 7. Continued
discretion we have are determining the point of suspension of the accrual of this investment revenue and when the investment security's decline in fair value is considered to be other than temporary and is to be reduced to its fair value.
CRITICAL ACCOUNTING POLICIES
Our finance receivable portfolio consists of approximately $13.8 billion of net finance receivables due from approximately 2.0 million customer accounts. These accounts were originated or purchased and are serviced by our centralized operational support or by our 1,405 branch offices in 45 states, Puerto Rico, and the U.S. Virgin Islands.
To manage our exposure to credit losses, we use credit risk scoring models for finance receivables that we originate or perform due diligence investigations for finance receivables that we purchase. We also have standard collection procedures supplemented with data processing systems to aid the centralized operational support and branch personnel in their finance receivable collection processes.
Despite our efforts to avoid losses on our finance receivables, our customers are subject to national, regional, and local economic situations and personal circumstances that affect their abilities to repay their obligations. These circumstances include lower income due to unemployment or underemployment, major medical expenses, or divorce. Occasionally, these types of events are so economically severe that the customer must file for protection under the bankruptcy laws.
Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly. Within our three main finance receivable types are sub-portfolios, each consisting of a large number of relatively small, homogenous accounts. We evaluate these sub- portfolios as groups. None of our accounts are large enough to warrant individual evaluation for impairment. Our Credit Strategy and Policy Committee considers numerous factors in estimating losses inherent in our finance receivable portfolio, including the following:
* current economic conditions; * prior finance receivable loss and delinquency experience; and * the composition of our finance receivable portfolio.
Our Credit Strategy and Policy Committee uses several ratios to aid in the process of evaluating prior finance receivable loss and delinquency experience. Each ratio is useful, but each has its limitations. These ratios include:
* Delinquency ratio - gross finance receivables 60 days or more past due (3 or more contractual payments have not been made) as a percentage of gross finance receivables. * Allowance ratio - allowance for finance receivable losses as a percentage of net finance receivables. * Charge-off ratio - net charge-offs as a percentage of the average of net finance receivables at the beginning of each month during the period. * Charge-off coverage - allowance for finance receivable losses to net charge-offs.
Item 7. Continued
We use migration analysis as one of the tools to determine the appropriate amount of allowance for finance receivable losses. Migration analysis is a statistical technique that attempts to predict the future amount of losses for existing pools of finance receivables. This technique applies empirically measured historical movement of like finance receivables through various levels of repayment, delinquency, and loss categories to existing finance receivable pools. These results are aggregated for all segments of the Company's portfolio to arrive at an estimate of future finance receivable losses for the finance receivables existing at the time of analysis. We calculate migration analysis using several different scenarios based on varying assumptions in order to evaluate the widest range of possible outcomes.
If we had chosen to establish the allowance for finance receivable losses at the highest and lowest levels produced by the various migration analysis scenarios, our allowance for finance receivable losses at December 31, 2002 and 2001 and provision for finance receivable losses and net income for 2002 and 2001 would have changed as follows:
At or for the Years Ended December 31, 2002 2001 (dollars in millions)
Highest level: Increase in allowance for finance receivable losses $ 15.8 $ 31.4 Increase in provision for finance receivable losses 15.8 31.4 Decrease in net income (11.1) (20.1)
Lowest level: Decrease in allowance for finance receivable losses $(106.4) $(120.0) Decrease in provision for finance receivable losses (106.4) (120.0) Increase in net income 75.0 76.8
The Credit Strategy and Policy Committee exercises its judgement, based on each committee member's experience in the consumer finance industry, when determining the amount of the allowance for finance receivable losses. If its review concludes that an adjustment is necessary, we charge or credit this adjustment to expense through the provision for finance receivable losses. We consider this estimate to be a critical accounting estimate that affects the net income of the Company in total and the pretax operating income of our consumer finance business segment. We document the adequacy of the allowance for finance receivable losses and the analysis of the trends in credit quality considered by the Credit Strategy and Policy Committee to support its conclusions. See Provision for Finance Receivable Losses for further information on the allowance for finance receivable losses.
Item 7. Continued
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into material off-balance sheet arrangements as defined by Securities and Exchange Commission rules.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sources of funds include operations, issuances of long-term debt, short-term borrowings in the commercial paper market, and borrowings from banks under credit facilities. AGFI has also historically received capital contributions from its parent to support finance receivable growth and maintain targeted leverage.
Principal sources and uses of cash were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions) Principal sources of cash: Operations $ 568.8 $ 720.1 $ 620.0 Net issuances of debt 1,766.1 420.9 622.9 Capital contributions 33.0 - -
Total $2,367.9 $1,141.0 $1,242.9
Principal uses of cash: Net originations and purchases of finance receivables $1,885.3 $ 562.0 $ 968.1 Dividends paid 147.0 438.3 107.1
Total $2,032.3 $1,000.3 $1,075.2
Net cash from operations decreased in 2002 due to changes in various components of taxes receivable and payable and other assets and other liabilities resulting from routine operating activities, partially offset by higher finance charges and lower interest expense. Net cash from operations increased in 2001 due to higher finance charges and lower interest expense. Net originations and purchases of finance receivables and net issuances of debt increased in 2002 due to significant increases in real estate loan acquisitions. Net originations and purchases of finance receivables and net issuances of debt decreased in 2001 due to a slowing economy. Dividends paid, less capital contributions received, reflect changes in net income retained by AGFI to maintain equity and total debt at a targeted ratio. See Capital Resources for the fourth quarter 2001 change in targeted leverage and resulting dividends.
Item 7. Continued
We believe that our overall sources of liquidity will continue to be sufficient to satisfy our foreseeable operational requirements and financial obligations. The principal risk factors that could decrease our sources of liquidity are delinquent payments from our customers and an inability to access capital markets. The principal factors that could increase our cash needs are significant increases in net originations and purchases of finance receivables. We intend to mitigate liquidity risk factors by continuing to operate the Company within the following strategies:
* maintain a finance receivable portfolio comprised mostly of real estate loans, which generally represent a lower risk of customer non-payment; * originate and monitor finance receivables with our proprietary credit risk management system; * maintain an investment securities portfolio of predominantly investment grade, liquid securities; and * maintain a capital structure appropriate to our asset base.
Consistent execution of our business strategies should result in continued profitability, strong credit ratings, and investor confidence. These results should allow continued access to capital markets for issuances of our commercial paper and long-term debt. At December 31, 2002, we had $4.3 billion of long-term debt securities registered under the Securities Act of 1933 and available for issuance. We also maintain committed bank credit facilities to provide an additional source of liquidity for needs potentially not met through capital markets. See Note 10. of the Notes to Consolidated Financial Statements in Item 8. for information on our credit facilities.
At December 31, 2002, material contractual obligations were as follows:
Less than From 1-3 From 4-5 Over 5 1 year years years years Total (dollars in millions)
Debt: Long-term debt $ 1,574.9 $ 3,577.2 $ 2,629.5 $ 1,784.6 $ 9,566.2 Short-term notes payable 3,375.7 - - - 3,375.7 Operating leases 47.7 62.1 18.1 16.6 144.5
Total $ 4,998.3 $ 3,639.3 $ 2,647.6 $ 1,801.2 $13,086.4
Debt
Based on the strength of our current credit ratings, we expect to refinance maturities of our debt. Any adverse changes in our operating performance or credit ratings could limit our access to capital markets to accomplish these refinancings.
Operating Leases
Operating leases represent annual rental commitments for leased office space, automobiles, and data processing and related equipment. At December 31, 2002, our rental commitments totaled $144.5 million.
Item 7. Continued
Capital Resources
December 31, 2002 2001 Amount Percent Amount Percent (dollars in millions)
Long-term debt $ 9,566.2 66% $ 6,301.4 50% Short-term debt 3,375.7 23 4,853.5 39
Total debt 12,941.9 89 11,154.9 89 Equity 1,586.8 11 1,354.6 11
Total capital $14,528.7 100% $12,509.5 100%
Net finance receivables $13,846.2 $11,988.3 Debt to tangible equity ratio 8.66x 8.89x
Our capital varies with the level of net finance receivables. The capital mix of debt and equity is based primarily upon maintaining leverage that supports cost-effective funding.
We issue a combination of fixed-rate debt, principally long-term, and floating-rate debt, principally short-term. AGFC obtains our fixed- rate funding through public issuances of long-term debt with maturities generally ranging from three to ten years. Most floating-rate funding is through AGFI and AGFC sales and refinancing of commercial paper and through AGFC issuance of long-term, floating-rate debt. Commercial paper, with maturities ranging from 1 to 270 days, is sold to banks, insurance companies, corporations, and other accredited investors. AGFC also sells extendible commercial notes with initial maturities of up to 90 days, which may be extended by AGFC to 390 days. At December 31, 2002, commercial paper included $359.3 million of extendible commercial notes.
We participate in credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. At December 31, 2002, credit facilities totaled $3.2 billion (including $3.0 billion of committed credit facilities) with remaining availability of $3.1 billion. See Note 10. of the Notes to Consolidated Financial Statements in Item 8. for additional information on credit facilities.
Our committed credit facilities at December 31, 2002 expire as follows:
Committed Credit Facilities (dollars in millions)
2003 $1,500.0 2007 1,500.0
Total $3,000.0
Item 7. Continued
Until fourth quarter 2001, AGFI paid dividends to (or received capital contributions from) its parent to manage AGFI's leverage of debt to tangible equity (equity less goodwill and accumulated other comprehensive income) to 7.5 to 1. At the end of fourth quarter 2001, following discussions with the credit rating agencies, we increased our leverage target to 9.0 to 1. This increase was based on our success with managing credit risk and maintaining a lower risk finance receivable portfolio. Approximately $210.0 million of the $260.0 million fourth quarter 2001 dividend was due to the change in targeted leverage.
AGFI's ability to pay dividends is substantially dependent on the receipt of dividends or other funds from its subsidiaries, primarily AGFC. Certain AGFC financing agreements effectively limit the amount of dividends AGFC may pay. These agreements have not prevented AGFI from managing its capital to targeted leverage. See Note 16. of the Notes to Consolidated Financial Statements in Item 8. for information on dividend restrictions.
ANALYSIS OF OPERATING RESULTS
Net Income Years Ended December 31, 2002 2001 2000 (dollars in millions)
Net income $346.8 $228.3 $207.9 Amount change $118.5 $ 20.4 $ 28.2 Percent change 52% 10% 16%
Return on average assets 2.48% 1.70% 1.59% Return on average equity 24.49% 14.34% 13.03% Ratio of earnings to fixed charges 1.85x 1.55x 1.46x
Net income for 2002 included a $30.0 million reduction in the provision for income taxes resulting from a favorable settlement of income tax audit issues. Net income for 2002 did not include goodwill amortization due to the adoption of Statement of Financial Accounting Standards 142 on January 1, 2002. Net income included goodwill amortization of $7.8 million for 2001 and $7.9 million for 2000.
Net income for 2001 included charges of $78.3 million ($50.9 million aftertax) resulting from our review of our businesses and the assets supporting those businesses, as well as the adoption of AIG's accounting policies and methodologies, in connection with AIG's indirect acquisition of the Company.
Net income for 2000 included a charge of $50.0 million ($32.5 million aftertax) for the estimated loss on a fraud against our mortgage warehouse lending subsidiary that was discovered in June 2000.
Item 7. Continued
The impact of the other charges on net income was as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Net income $346.8 $228.3 $207.9 Other charges, aftertax - 50.9 32.5
Net income excluding other charges $346.8 $279.2 $240.4
See Note 17. of the Notes to Consolidated Financial Statements in Item 8. for further information on these charges. See Note 22. of the Notes to Consolidated Financial Statements in Item 8. for information on the results of the Company's business segments.
We manage the components of our revenue and expenses in response to economic events and to achieve our profitability objectives. In 2002, a sluggish economy decreased our borrowing cost; however, the low interest rate environment had the anticipated effect of also reducing our yield. We continued to invest in business development programs, including new branch openings and a second customer solicitation center, but still controlled operating expenses. In 2001, a slowing economy resulted in lower borrowing cost but higher net charge-offs. We invested in business development programs, including new branch openings, and increased our allowance for finance receivable losses in response to higher delinquency, charge-offs, unemployment, and personal bankruptcies. In 2000, an accelerating economy resulted in higher borrowing cost but favorable net charge-off experience. We increased our finance charge rates on new business, which was reflected in our yield in 2001. We also controlled operating expenses in 2000.
Item 7. Continued
Our statements of income line items as percentages of each year's average net receivables were as follows:
Years Ended December 31, 2002 2001 2000
Revenues Finance charges 13.85% 14.60% 14.19% Insurance 1.54 1.67 1.72 Other 0.72 0.77 0.83
Total revenues 16.11 17.04 16.74
Expenses Interest expense 4.51 5.42 6.09 Operating expenses 4.52 4.70 4.75 Provision for finance receivable losses 2.45 2.47 1.81 Insurance losses and loss adjustment expenses 0.67 0.75 0.77 Other charges - 0.66 0.44
Total expenses 12.15 14.00 13.86
Income before provision for income taxes 3.96 3.04 2.88
Provision for income taxes 1.17 1.09 1.06
Net income 2.79% 1.95% 1.82%
Item 7. Continued
Factors that specifically affected the Company's operating results were as follows:
Finance Charges Years Ended December 31, 2002 2001 2000 (dollars in millions)
Finance charges $ 1,718.9 $ 1,712.5 $ 1,619.0 Amount change $ 6.4 $ 93.5 $ 163.5 Percent change -% 6% 11%
Average net receivables $12,409.9 $11,726.4 $11,408.9 Yield 13.85% 14.60% 14.19%
Finance charges increased due to the following:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Increase in average net receivables $ 84.0 $ 40.4 $182.4 (Decrease) increase in yield (77.6) 56.7 (22.2) (Decrease) increase in number of days - (3.6) 3.3
Total $ 6.4 $ 93.5 $163.5
Growth in average net receivables by type was as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Real estate loans $ 827.2 $ 145.6 $ 983.7 Non-real estate loans (96.7) 152.9 292.4 Retail sales finance (47.0) 19.0 124.0
Total $ 683.5 $ 317.5 $1,400.1
Percent change 6% 3% 14%
In 2002, the low interest rate environment caused significant increases in both originations and liquidations of our real estate loans. However, we took advantage of the record real estate loan refinancings that occurred in the market in general and acquired $2.4 billion of real estate loan portfolios from third party originators. In 2001, a slowing economy limited average net receivable growth.
Item 7. Continued
Changes in yield in basis points (bp) by type were as follows:
Years Ended December 31, 2002 2001 2000
Real estate loans (84) bp 46 bp (18) bp Non-real estate loans (3) 5 (42) Retail sales finance 36 42 (52)
Total (75) 41 (32)
Yield decreased in 2002 primarily reflecting a lower real estate loan yield resulting from the low interest rate environment. We anticipate further decreases in yield in 2003. Yield increased in 2001 primarily due to higher yield on real estate loans originated, renewed, and purchased during 2000 and the first half of 2001 in response to rising interest rates from mid-1999 through mid-2000.
Insurance Revenues Years Ended December 31, 2002 2001 2000 (dollars in millions)
Insurance revenues $191.2 $195.4 $196.2 Amount change $ (4.2) $ (0.8) $ 11.7 Percent change (2)% -% 6%
Insurance revenues declined during 2002 reflecting a higher proportion of average net receivables that are real estate loans, as well as a decrease in the amount of premiums permitted to be charged in a number of states. Our experience is that customers purchase fewer insurance products on real estate loans than on non-real estate loans.
Insurance revenues were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Earned premiums $189.0 $193.0 $193.4 Commissions 2.2 2.4 2.8
Total $191.2 $195.4 $196.2
Earned premiums decreased in 2002 and 2001 due to lower premium volume and lower premium rates.
Item 7. Continued
Other Revenues
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Other revenues $ 89.7 $ 90.6 $ 94.7 Amount change $ (0.9) $ (4.1) $ 3.1 Percent change (1)% (4)% 3%
Average invested assets $1,252.6 $1,231.2 $1,149.0 Adjusted portfolio yield 6.84% 7.03% 7.35% Net realized (losses) gains on investments $ (4.4) $ (3.0) $ 2.8
Other revenues were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Investment revenue $85.9 $87.9 $92.4 Writedowns on real estate owned (9.1) (4.9) (3.6) Net gains (losses) on real estate owned sales 2.9 (1.1) 4.2 Other 10.0 8.7 1.7
Total $89.7 $90.6 $94.7
The decrease in other revenues for 2002 was primarily due to lower revenue on mortgage warehouse lending activity and higher writedowns on real estate owned, partially offset by net gains on foreclosed real estate in 2002 compared to net losses in 2001 and higher service fee income from a non-subsidiary affiliate. During first quarter 2002, we discontinued the operations of our mortgage warehouse lending subsidiary.
The decrease in other revenues for 2001 was primarily due to net losses on foreclosed real estate in 2001 compared to net gains in 2000 and lower investment revenue, partially offset by mark-to-market and portfolio servicing adjustments recorded in 2000. The decrease in investment revenue reflected net realized losses in 2001 compared to net realized gains in 2000 and a decline in adjusted portfolio yield of 32 basis points, partially offset by growth in average invested assets for the insurance operation of $82.2 million. The increase in average invested assets in 2001 was primarily due to investment of insurance operation's cash flows. The decrease in adjusted portfolio yield in 2001 reflected market conditions.
As a result of the higher interest rate levels in the last half of 1999 and the first half of 2000, we made mark-to-market and portfolio servicing adjustments to write-down mortgage loans generated by outside originators and serviced by our warehouse lending subsidiary that were not sold in the normal course of business to secondary mortgage investors. These mark-to-market and portfolio servicing adjustments reduced other revenues by approximately $8.0 million during 2000.
Item 7. Continued
Interest Expense Years Ended December 31, 2002 2001 2000 (dollars in millions)
Interest expense $ 559.3 $ 635.5 $ 694.3 Amount change $ (76.2) $ (58.8) $ 120.5 Percent change (12)% (8)% 21%
Average borrowings $11,471.2 $10,704.6 $10,518.2 Borrowing cost 4.88% 5.93% 6.59%
Interest expense (decreased) increased due to the following:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Increase in average borrowings $ 45.5 $ 12.3 $ 81.8 (Decrease) increase in borrowing cost (121.7) (70.7) 38.0 (Decrease) increase in number of days - (0.4) 0.7
Total $ (76.2) $(58.8) $120.5
Changes in average borrowings by type were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Long-term debt $1,320.0 $ 315.6 $ 277.5 Short-term debt (490.3) (148.8) 1,016.8 Deposits (63.1) 19.6 18.8
Total $ 766.6 $ 186.4 $1,313.1
Percent change 7% 2% 14%
AGFC issued $4.6 billion of long-term debt in 2002, compared to $1.9 billion in 2001. The proceeds of the 2002 long-term debt issuances were used to support finance receivable growth and to repay commercial paper.
Changes in borrowing cost in basis points by type were as follows:
Years Ended December 31, 2002 2001 2000
Long-term debt (77) bp 2 bp 3 bp Short-term debt (193) (155) 84 Deposits n/a (4) 75
Total (105) (66) 36
Item 7. Continued
Federal Reserve actions lowered the federal funds rate a total of 475 basis points between December 2000 and December 2001 and another 50 basis points on November 6, 2002 resulting in a low market rate environment. These actions resulted in lower rates for short-term debt and long-term debt in 2002 and lower rates for short-term debt in 2001.
Operating Expenses Years Ended December 31, 2002 2001 2000 (dollars in millions)
Operating expenses $561.5 $550.8 $542.4 Amount change $ 10.7 $ 8.4 $ 17.6 Percent change 2% 2% 3%
Operating expenses as a percentage of average net receivables 4.52% 4.70% 4.75%
Operating expenses were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Salaries and benefits $316.3 $302.5 $292.1 Other 245.2 248.3 250.3
Total $561.5 $550.8 $542.4
The increase in operating expenses for 2002 was primarily due to higher salaries and benefits, data processing, and administrative expenses allocated from AIG, partially offset by the absence of goodwill amortization in 2002.
The increase in operating expenses for 2001 was primarily due to higher salaries and benefits and litigation expenses, partially offset by higher deferred loan origination costs.
The increases in salaries and benefits for 2002 and 2001 reflected higher competitive compensation and rising benefit costs.
The improvements in operating expenses as a percentage of average net receivables in 2002 and 2001 reflected controlled operating expenses. The decrease in operating expenses as a percentage of average net receivables in 2002 also reflected moderate finance receivable growth.
Item 7. Continued
Provision for Finance Receivable Losses
At or for the Years Ended December 31, 2002 2001 2000 (dollars in millions) Provision for finance receivable losses $303.6 $289.3 $206.3 Amount change $ 14.3 $ 83.0 $ (0.3) Percent change 5% 40% -%
Net charge-offs $297.6 $264.3 $206.3 Charge-off ratio 2.41% 2.26% 1.81% Charge-off coverage 1.56x 1.70x 1.86x
60 day+ delinquency $523.3 $465.1 $420.6 Delinquency ratio 3.67% 3.71% 3.41%
Allowance for finance receivable losses $463.0 $448.3 $383.4 Allowance ratio 3.34% 3.74% 3.26%
Changes in net charge-offs by type were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Real estate loans $ 4.0 $ 4.8 $ 6.9 Non-real estate loans 24.3 43.3 (3.5) Retail sales finance 5.0 9.9 (3.7)
Total $33.3 $58.0 $(0.3)
Changes in charge-off ratios in basis points by type were as follows:
Years Ended December 31, 2002 2001 2000
Real estate loans (1) bp 5 bp 1 bp Non-real estate loans 107 121 (68) Retail sales finance 46 66 (50)
Total 15 45 (27)
Net charge-offs and the charge-off ratio increased in 2002 and 2001 reflecting a sluggish economy in 2002 and a slowing economy in 2001 and higher levels of unemployment and personal bankruptcies.
Item 7. Continued
Changes in delinquency from the prior year end by type were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Real estate loans $48.2 $12.3 $25.5 Non-real estate loans 7.2 22.9 (7.7) Retail sales finance 2.8 9.3 3.8
Total $58.2 $44.5 $21.6
Changes in delinquency ratio from the prior year end in basis points by type were as follows:
Years Ended December 31, 2002 2001 2000
Real estate loans (12) bp 3 bp 26 bp Non-real estate loans 18 82 (95) Retail sales finance 31 61 10
Total (4) 30 (5)
The delinquency ratio at December 31, 2002 decreased due to a higher proportion of net finance receivables that are real estate loans, which generally have lower delinquency. The delinquency ratio at December 31, 2001 increased reflecting slowing economic conditions in 2001. The increase in delinquency at December 31, 2002 and 2001 also reflected higher net finance receivables.
Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly to determine the appropriate level of the allowance for finance receivable losses. We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. In our opinion, the allowance is adequate to absorb losses inherent in our existing portfolio. The increase in the allowance for finance receivable losses at December 31, 2002 was due to:
* increases to the allowance for finance receivable losses through the provision for finance receivable losses in 2002 totaling $6.0 million (these increases were necessary in response to our increased delinquency and net charge-offs and the higher levels of both unemployment and personal bankruptcies in the United States); * increase to the allowance for finance receivable losses in 2002 of $8.7 million resulting from a purchase business combination.
The allowance as a percentage of net finance receivables declined in 2002 reflecting purchases of higher quality real estate loans during the last half of 2002. The increase in the allowance ratio in 2001 reflected slowing economic conditions.
Item 7. Continued
Charge-off coverage, which compares the allowance for finance receivable losses to net charge-offs, declined in 2002 and 2001 reflecting higher net charge-offs, partially offset by increases to allowance for finance receivable losses.
Insurance Losses and Loss Adjustment Expenses
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Insurance losses and loss adjustment expenses $83.3 $88.1 $88.4 Amount change $(4.8) $(0.3) $ 1.8 Percent change (5)% -% 2%
Insurance losses and loss adjustment expenses were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in millions)
Claims incurred $85.3 $90.3 $83.0 Change in benefit reserves (2.0) (2.2) 5.4
Total $83.3 $88.1 $88.4
Claims incurred decreased $5.0 million for 2002 primarily due to decreases in claim reserves, partially offset by increases in claims paid.
Benefit reserves decreased $7.6 million for 2001 due to decreased sales of non-credit insurance products. Claims incurred increased $7.3 million for 2001 primarily due to increased credit insurance loss experience.
Other Charges
In third quarter 2001, we recorded charges of $78.3 million ($50.9 million aftertax) resulting from our review of our businesses and the assets supporting those businesses, as well as the adoption of AIG's accounting policies and methodologies, in connection with AIG's indirect acquisition of the Company.
In second quarter 2000, we recorded a charge of $50.0 million ($32.5 million aftertax) for the estimated loss on the fraud against our mortgage warehouse lending subsidiary that was discovered in June 2000.
See Note 17. of the Notes to Consolidated Financial Statements in Item 8. for further information on these charges.
Item 7. Continued
Provision for Income Taxes Years Ended December 31, 2002 2001 2000 (dollars in millions)
Provision for income taxes $145.3 $128.3 $120.7 Amount change $ 17.0 $ 7.6 $ 17.8 Percent change 13% 6% 17%
Pretax income $492.2 $356.5 $328.6 Effective income tax rate 29.53% 35.98% 36.72%
Provision for income taxes increased during 2002 and 2001 primarily due to higher taxable income, partially offset by a lower effective income tax rate. During fourth quarter 2002, we reduced the provision for income taxes by $30.0 million resulting from a favorable settlement of income tax audit issues. This decreased the effective income tax rate for 2002.
ANALYSIS OF FINANCIAL CONDITION
Asset Quality
We believe that our geographic diversification reduces the risk associated with a recession in any one region. In addition, 96% of our finance receivables at December 31, 2002 were secured by real property or personal property. While finance receivables have some exposure to further economic uncertainty, we believe that the allowance for finance receivable losses is adequate to absorb losses inherent in our existing portfolio. See Analysis of Operating Results for further information on allowance ratio, delinquency ratio, and charge-off ratio and Note 2. of the Notes to Consolidated Financial Statements in Item 8. for further information on how we estimate finance receivable losses.
Investment securities are the majority of our insurance operation's investment portfolio. Our investment strategy is to optimize aftertax returns on invested assets, subject to the constraints of safety, liquidity, diversification, and regulation.
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities, principally our finance receivables and debt, in an effort to reduce the risk associated with unfavorable changes in interest rates not met by changes in finance charge yields of our finance receivables. Real estate loans have an expected life of 2.7 years (although this can change in response to interest rate changes), non-real estate loans have an expected life of 1.6 years and retail sales finance receivables have an expected life of 9 months. The weighted-average years to maturity for our long-term debt was 3.5 years at December 31, 2002.
Item 7. Continued
We fund finance receivables with a combination of fixed-rate and floating-rate debt and equity. Management determines the mix of fixed- rate and floating-rate debt based, in part, on the nature of the finance receivables being supported.
We limit our exposure to market interest rate increases by fixing interest rates that we pay for term periods. The primary way we accomplish this is by issuing fixed-rate debt. To supplement fixed- rate debt issuances, AGFC also alters the nature of certain floating- rate funding by using interest rate swap agreements to synthetically create fixed-rate, long-term debt, thereby limiting our exposure to market interest rate increases. Additionally, AGFC has swapped fixed- rate, long-term debt to floating-rate, long-term debt. Including the effect of interest rate swap agreements that effectively fix floating- rate debt or float fixed-rate debt, floating-rate debt represented 35% of our average borrowings for 2002 compared to 32% for 2001.
REGULATION AND OTHER
Regulation
The regulatory environment of the consumer finance and insurance businesses is described in Item 1.
Taxation
We monitor federal and state tax legislation and respond with appropriate tax planning.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The fair values of certain of our assets and liabilities are sensitive to changes in market interest rates. The impact of changes in interest rates would be reduced by the fact that increases (decreases) in fair values of assets would be partially offset by corresponding changes in fair values of liabilities. In aggregate, the estimated impact of an immediate and sustained 100 basis point increase or decrease in interest rates on the fair values of our interest rate-sensitive financial instruments would not be material to our financial position.
The estimated increases (decreases) in fair values of interest rate- sensitive financial instruments were as follows:
December 31, 2002 December 31, 2001 +100 bp -100 bp +100 bp -100 bp (dollars in thousands) Assets Net finance receivables, less allowance for finance receivable losses $(354,578) $ 386,430 $(319,469) $ 344,436 Fixed-maturity investment securities (73,058) 77,812 (54,178) 44,508
Liabilities Long-term debt (227,886) 240,637 (122,677) 128,189 Interest rate swap agreements 10,114 (9,979) 37,902 (72,169)
At each year end, we derived the changes in fair values by modeling estimated cash flows of certain of our assets and liabilities. The assumptions we used adjusted cash flows to reflect changes in prepayments and calls but did not consider loan originations, debt issuances, or new investment purchases.
Readers should exercise care in drawing conclusions based on the above analysis. While these changes in fair values provide a measure of interest rate sensitivity, they do not represent our expectations about the impact of interest rate changes on our financial results. This analysis is also based on our exposure at a particular point in time and incorporates numerous assumptions and estimates. It also assumes an immediate change in interest rates, without regard to the impact of certain business decisions or initiatives that we would likely undertake to mitigate or eliminate some or all of the adverse effects of the modeled scenarios.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The Report of Management's Responsibility, Report of Independent Accountants, Report of Independent Auditors, and the related consolidated financial statements are presented on the following pages.
REPORT OF MANAGEMENT'S RESPONSIBILITY
The Company's management is responsible for the integrity and fair presentation of our consolidated financial statements and all other financial information presented in this report. We prepared our consolidated financial statements using accounting principles generally accepted in the United States (GAAP). We made estimates and assumptions that affect amounts recorded in the financial statements and disclosures of contingent assets and liabilities.
The Company's management is responsible for establishing and maintaining an internal control structure and procedures for financial reporting. These systems are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, that transactions are recorded according to GAAP under management's direction and that financial records are reliable to prepare financial statements. We support the internal control structure with careful selection, training and development of qualified personnel. The Company's employees are subject to AIG's Code of Conduct designed to assure that all employees perform their duties with honesty and integrity. We do not allow loans to executive officers. The systems include a documented organizational structure and policies and procedures that we communicate throughout the Company. Our internal auditors report directly to AIG to strengthen independence. They continually monitor the operation of our internal controls and report their findings to the Company's management and AIG's internal audit department. We take prompt action to correct control deficiencies and address opportunities for improving the system. The Company's management assesses the adequacy of our internal control structure quarterly. Based on these assessments, management has concluded that the internal control structure and the procedures for financial reporting have functioned effectively and that the consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of American General Finance, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Items 15(a)(1) and (2) on page 92 present fairly, in all material respects, the financial position of American General Finance, Inc. and its subsidiaries (the "Company") at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule at and for the year ended December 31, 2002 listed in the index appearing under Item 15(d) on page 93 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 3, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. Additionally, as discussed in Note 21, the Company has changed its method of accounting for pensions for the year ended December 31, 2002.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois February 14, 2003
REPORT OF INDEPENDENT AUDITORS
The Board of Directors American General Finance, Inc.
We have audited the accompanying consolidated balance sheet of American General Finance, Inc. (a wholly owned indirect subsidiary of American International Group, Inc.) and subsidiaries as of December 31, 2001, and the related consolidated statements of income, shareholder's equity, cash flows, and comprehensive income for each of the two years in the period ended December 31, 2001. Our audits also included the financial statement schedule as of or for each of the two years in the period ended December 31, 2001 listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American General Finance, Inc. and subsidiaries at December 31, 2001, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 3. to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivative financial instruments.
/s/ Ernst & Young LLP
Indianapolis, Indiana January 31, 2002
American General Finance, Inc. and Subsidiaries Consolidated Balance Sheets
December 31, 2002 2001 (dollars in thousands) Assets
Net finance receivables (Notes 2. and 4.): Real estate loans $ 9,498,046 $ 7,624,824 Non-real estate loans 2,958,925 2,922,557 Retail sales finance 1,389,241 1,440,908
Net finance receivables 13,846,212 11,988,289 Allowance for finance receivable losses (Note 5.) (463,031) (448,251) Net finance receivables, less allowance for finance receivable losses 13,383,181 11,540,038
Investment securities (Note 6.) 1,227,156 1,142,186 Cash and cash equivalents 153,660 179,002 Other assets (Note 7.) 720,289 670,428
Total assets $15,484,286 $13,531,654
Liabilities and Shareholder's Equity
Long-term debt (Notes 8. and 11.) $ 9,566,256 $ 6,301,433 Short-term notes payable: Commercial paper (Notes 9. and 11.) 3,315,674 4,853,520 Notes payable to banks 60,000 - Insurance claims and policyholder liabilities (Note 12.) 472,348 495,588 Other liabilities (Note 13.) 442,932 452,354 Accrued taxes 40,259 74,200
Total liabilities 13,897,469 12,177,095
Shareholder's equity: Common stock (Note 14.) 1,000 1,000 Additional paid-in capital 920,276 880,594 Accumulated other comprehensive loss (Note 15.) (68,938) (61,687) Retained earnings (Note 16.) 734,479 534,652
Total shareholder's equity 1,586,817 1,354,559
Total liabilities and shareholder's equity $15,484,286 $13,531,654
See Notes to Consolidated Financial Statements.
American General Finance, Inc. and Subsidiaries Consolidated Statements of Income
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Revenues Finance charges $1,718,873 $1,712,485 $1,618,969 Insurance 191,230 195,393 196,241 Other 89,735 90,620 94,706
Total revenues 1,999,838 1,998,498 1,909,916
Expenses Interest expense 559,291 635,483 694,251 Operating expenses 561,519 550,787 542,412 Provision for finance receivable losses 303,585 289,302 206,275 Insurance losses and loss adjustment expenses 83,275 88,111 88,354 Other charges (Note 17.) - 78,297 50,000
Total expenses 1,507,670 1,641,980 1,581,292
Income before provision for income taxes 492,168 356,518 328,624
Provision for Income Taxes (Note 18.) 145,342 128,261 120,686
Net Income $ 346,826 $ 228,257 $ 207,938
See Notes to Consolidated Financial Statements.
American General Finance, Inc. and Subsidiaries Consolidated Statements of Shareholder's Equity
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Common Stock Balance at beginning of year $ 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 880,594 877,576 876,708 Capital contributions from parent and other 39,682 3,018 868 Balance at end of year 920,276 880,594 877,576
Accumulated Other Comprehensive (Loss) Income Balance at beginning of year (61,687) 2,631 (6,696) Change in net unrealized gains (losses): Investment securities 23,792 3,543 9,327 Interest rate swaps (31,391) (67,513) - Minimum pension liability 348 (348) - Balance at end of year (68,938) (61,687) 2,631
Retained Earnings Balance at beginning of year 534,652 757,060 656,223 Net income 346,826 228,257 207,938 Common stock dividends (146,999) (438,303) (107,101) Disposition of American General Bank, FSB - (12,362) - Balance at end of year 734,479 534,652 757,060
Total Shareholder's Equity $1,586,817 $1,354,559 $1,638,267
See Notes to Consolidated Financial Statements.
American General Finance, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Net Income $ 346,826 $ 228,257 $ 207,938
Other comprehensive (loss) gain:
Net unrealized (losses) gains: Investment securities 32,220 2,396 17,204 Interest rate swaps: Transition adjustment - (42,103) - Current period (151,142) (121,636) - Minimum pension liability 535 (535) -
Income tax effect: Investment securities (11,288) (796) (6,051) Interest rate swaps: Transition adjustment - 14,736 - Current period 52,900 42,573 - Minimum pension liability (187) 187 -
Net unrealized (losses) gains, net of tax (76,962) (105,178) 11,153
Reclassification adjustments for realized losses (gains) included in net income: Investment securities 4,400 2,989 (2,809) Interest rate swaps 102,848 59,872 -
Income tax effect: Investment securities (1,540) (1,046) 983 Interest rate swaps (35,997) (20,955) -
Realized losses (gains) included in net income, net of tax 69,711 40,860 (1,826)
Other comprehensive (loss) gain, net of tax (7,251) (64,318) 9,327
Comprehensive income $ 339,575 $ 163,939 $ 217,265
See Notes to Consolidated Financial Statements.
American General Finance, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2002
Note 1. Nature of Operations
American General Finance, Inc. will be referred to as "AGFI" or collectively with its subsidiaries, whether directly or indirectly owned, as the "Company" or "we". Since August 29, 2001, AGFI has been an indirect wholly owned subsidiary of American International Group, Inc. (AIG). AIG is a holding company, which through its subsidiaries is engaged in a broad range of insurance and insurance- related activities and financial services in the United States and abroad.
AGFI is a financial services holding company whose principal subsidiary is American General Finance Corporation (AGFC). AGFC is also a financial services holding company with subsidiaries engaged primarily in the consumer finance and credit insurance businesses. At December 31, 2002, the Company had 1,405 offices in 45 states, Puerto Rico and the U.S. Virgin Islands and approximately 7,600 employees.
In our consumer finance operation, we:
* make home equity loans; * originate secured and unsecured consumer loans; * extend lines of credit; * purchase retail sales contracts and provide revolving retail services arising from the retail sale of consumer goods and services by approximately 20,000 retail merchants; and * purchase private label receivables originated by a non- subsidiary affiliate arising from the sales by approximately 40 retail merchants under a participation agreement.
To supplement our lending and retail sales financing activities, we purchase portfolios of real estate loans, non-real estate loans, and retail sales finance receivables. We also offer credit and non-credit insurance to our consumer finance customers.
In our insurance operation, we principally write and assume credit life, credit accident and health, credit-related property and casualty, and non-credit insurance covering our consumer finance customers and property pledged as collateral. See Note 22. for further information on the Company's business segments.
We fund our operations principally through net cash flows from operating activities, issuances of long-term debt, short-term borrowings in the commercial paper market, borrowings from banks under credit facilities, and capital contributions from our parent.
On September 16, 2002, we acquired the majority of the assets of First Horizon Money Centers, a consumer financial services subsidiary of First Tennessee Bank National Association, in a purchase business combination. The fair value of the assets acquired totaled $208.7 million, representing real estate loans, non-real estate loans, and retail sales finance receivables. We also acquired certain branch office locations by assuming the branch office leases and hired certain branch office personnel. We included the acquisition of First Horizon in our consolidated financial statements since the date of acquisition.
Notes to Consolidated Financial Statements, Continued
One of AGFI's former subsidiaries, American General Bank, FSB (AG Bank) operated as a traditional thrift, whose products included deposit and savings accounts, residential mortgage and home equity loans, and private label services. Concurrent with AIG's indirect acquisition of the Company in August 2001, AG Bank was merged into AIG Federal Savings Bank, a non-subsidiary affiliate of AGFI, with AIG Federal Savings Bank being the surviving entity.
At December 31, 2002, the Company had $13.8 billion of net finance receivables due from approximately 2.0 million customer accounts and $6.2 billion of credit and non-credit life insurance in force covering approximately 1.0 million customer accounts.
Note 2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
We prepared our consolidated financial statements using accounting principles generally accepted in the United States (GAAP). The statements include the accounts of AGFI and its subsidiaries, all of which are wholly owned. We eliminated all intercompany items. We made estimates and assumptions that affect amounts reported in our financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from our estimates. To conform to the 2002 presentation, we reclassified certain items in prior periods.
CONSUMER FINANCE OPERATION
Finance Receivables
We carry finance receivables at amortized cost which includes accrued finance charges on interest bearing finance receivables, unamortized deferred origination costs, and unamortized net premiums and discounts on purchased finance receivables. They are net of unamortized finance charges on precomputed receivables and unamortized points and fees. We determine delinquency on finance receivables contractually.
Although a significant portion of insurance claims and policyholder liabilities originate from the finance receivables, our policy is to report them as liabilities and not net them against finance receivables. Finance receivables relate to the financing activities of our consumer finance business segment, and insurance claims and policyholder liabilities relate to the underwriting activities of our insurance business segment.
Notes to Consolidated Financial Statements, Continued
Revenue Recognition
We recognize finance charges as revenue on the accrual basis using the interest method. We amortize premiums and discounts on purchased finance receivables as a revenue adjustment. We defer the costs to originate certain finance receivables and the revenue from nonrefundable points and fees on loans and amortize them to revenue on the accrual basis using the interest method over the lesser of the contractual term or the estimated life based upon prepayment experience. If a finance receivable liquidates before amortization is completed, we charge or credit any unamortized premiums, discounts, origination costs, or points and fees to revenue at the date of liquidation. We recognize late charges, prepayment penalties, and deferment fees as revenue when received.
We stop accruing revenue when the fourth contractual payment becomes past due for loans and retail sales contracts and when the sixth contractual payment becomes past due for revolving retail and private label. Beginning in third quarter 2001, in conformity with AIG policy, we reverse amounts previously accrued upon suspension. Prior to AIG's indirect acquisition of the Company, we did not reverse amounts previously accrued upon suspension. After suspension, we recognize revenue for loans and retail sales contracts only to the extent of any additional payments we receive.
Allowance for Finance Receivable Losses
We establish the allowance for finance receivable losses primarily through the provision for finance receivable losses charged to expense. We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly. Within our three main finance receivable types are sub-portfolios, each consisting of a large number of relatively small, homogenous accounts. We evaluate these sub-portfolios for impairment as groups. None of our accounts are large enough to warrant individual evaluation for impairment. Our Credit Strategy and Policy Committee considers numerous factors in estimating losses inherent in our finance receivable portfolio, including the following:
* current economic conditions; * prior finance receivable loss and delinquency experience; and * the composition of our finance receivable portfolio.
Our policy is to charge off each month to the allowance for finance receivable losses non-real estate loans on which payments received in the prior six months have totaled less than 5% of the original loan amount and retail sales finance that are six installments past due. We start foreclosure proceedings on real estate loans when four monthly installments are past due. When foreclosure is completed and we have obtained title to the property, we obtain a broker purchase offer, which is a real estate broker's or appraiser's estimate of the property's sale value without the benefit of a full interior and exterior appraisal and lacking sales comparisons. We reduce finance receivables by the amount of the real estate loan, establish a real estate owned asset valued at lower of cost or 85% of the broker purchase offer, and charge off any loan amount in excess of that value
Notes to Consolidated Financial Statements, Continued
to the allowance for finance receivable losses. We occasionally extend the charge-off period for individual accounts when, in our opinion, such treatment is warranted. We increase the allowance for finance receivable losses for recoveries on accounts previously charged off.
We may rewrite a delinquent account if the customer has sufficient income and it does not appear that the cause of past delinquency will affect the customer's ability to repay the new loan. We subject all renewals, whether the customer's account is current or delinquent, to the same credit risk underwriting process as we would a new customer.
We may allow a deferment, which is a partial payment that extends the term of an account. The partial payment amount is usually the greater of one-half of a regular monthly payment or the amount necessary to bring the interest on the account current. We limit a customer to two deferments in a rolling twelve-month period.
Real Estate Owned
We acquire real estate owned through foreclosure on real estate loans. We record real estate owned in other assets, initially at lower of cost or 85% of the broker purchase offer, which approximates the fair value less the estimated cost to sell. If we do not sell a property within one year of acquisition, we reduce the carrying value by five percent of the initial value each month beginning in the thirteenth month. Prior to AIG's indirect acquisition of the Company in August 2001, we did not begin this writedown until the nineteenth month. We continue the writedown until the property is sold or the carrying value is reduced to ten percent of the initial value. We charge these writedowns to other revenues. We record the sale price we receive for a property less the carrying value and any amounts required to be refunded to the customer as a gain or loss in other revenues. We do not profit from foreclosures in accordance with the American Financial Services Association's Voluntary Standards for Consumer Mortgage Lending. We only attempt to recover our investment in the property, including expenses incurred.
Customer Relationships
Customer relationships, included in other assets, are intangible assets we acquire by assigning a portion of the purchase price on certain portfolio acquisitions to the customer relationships. In those instances, we expect our relationships with the customers to last beyond the terms of the finance receivables we purchased. We charge customer relationships to expense in equal amounts generally over six years.
Notes to Consolidated Financial Statements, Continued
INSURANCE OPERATION
Revenue Recognition
We recognize credit insurance premiums on closed-end real estate loans and revolving finance receivables as revenue when billed monthly. We defer credit insurance premiums collected in advance in unearned premium reserves which are included in insurance claims and policyholder liabilities. We recognize unearned premiums on credit life insurance as revenue using the sum-of-the-digits or actuarial methods, except in the case of level-term contracts, which we recognize as revenue using the straight-line method over the terms of the policies. We recognize unearned premiums on credit accident and health insurance as revenue using an average of the sum-of-the-digits and the straight-line methods. We recognize unearned premiums on credit- related property and casualty insurance as revenue using the straight- line method over the terms of the policies or appropriate shorter periods. We recognize non-credit life insurance premiums as revenue when collected but not before their due dates.
Policy Reserves
Policy reserves for credit life, credit accident and health, and credit-related property and casualty insurance equal related unearned premiums. We base claim reserves on Company experience. We estimate reserves for losses and loss adjustment expenses for credit-related property and casualty insurance based upon claims reported plus estimates of incurred but not reported claims. We accrue liabilities for future life insurance policy benefits associated with non-credit life contracts when we recognize premium revenue and base the amounts on assumptions as to investment yields, mortality, and surrenders. We base annuity reserves on assumptions as to investment yields and mortality. We base non-credit life, individual annuity, group annuity, credit life, credit accident and health, and credit-related property and casualty insurance reserves assumed under coinsurance agreements where we assume the risk of loss on various tabular and unearned premium methods.
Acquisition Costs
We defer insurance policy acquisition costs, principally commissions, reinsurance fees, and premium taxes. We include them in other assets and charge them to expense over the terms of the related policies or reinsurance agreements.
Notes to Consolidated Financial Statements, Continued
INVESTMENT SECURITIES
Valuation
We currently classify all investment securities as available-for-sale and record them at fair value. We adjust related balance sheet accounts as if the unrealized gains and losses on investment securities had been realized, and record the net adjustment in accumulated other comprehensive income (loss) in shareholder's equity. If the fair value of an investment security classified as available-for-sale declines below its cost and we consider the decline to be other than temporary, we reduce the investment security to its fair value, and recognize a realized loss.
Revenue Recognition
We recognize interest on interest bearing fixed maturity investment securities as revenue on the accrual basis. We amortize any premiums or discounts as a revenue adjustment using the interest method. We stop accruing interest revenue when the collection of interest becomes uncertain. We record dividends as revenue on ex-dividend dates. We recognize income on mortgage-backed securities as revenue using a constant effective yield based on estimated prepayment of the underlying mortgages. If actual prepayments differ from estimated prepayments, we calculate a new effective yield and adjust the net investment in the security accordingly. We record the adjustment, along with all investment revenue, in other revenues.
Realized Gains and Losses on Investment Securities
We specifically identify realized gains and losses on investment securities and include them in other revenues.
OTHER
Other Invested Assets
Commercial mortgage loans, investment real estate, and insurance policy loans are part of our insurance operation's investment portfolio and are included in other assets. We recognize interest on commercial mortgage loans and insurance policy loans as revenue using the interest method. We stop accruing revenue when collection of interest becomes uncertain. We recognize pretax operating income from the operation of our investment real estate as revenue monthly. Other invested asset revenue is included in other revenues.
Cash Equivalents
We consider all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents.
Notes to Consolidated Financial Statements, Continued
Goodwill
On January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets." During the first quarter of each year, we test both the consumer finance business segment and the insurance business segment for goodwill impairment. Impairment is the condition that exists when the carrying value of goodwill exceeds its implied fair value. We assess the fair value of the underlying business using a projected ten year earnings stream, discounted using the Treasury "risk free" rate. The "risk free" rate is the yield on ten year U.S. Treasury Bills as of December 31 of the prior year. If the required impairment testing suggests that goodwill is impaired, we reduce goodwill to an amount that results in the carrying value of the underlying business approximating fair value. See Note 3. for information on the adoption of SFAS 142.
Prior to our adoption of SFAS 142, we charged goodwill to expense in equal amounts over 20 to 40 years.
Income Taxes
We establish deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, using the tax rates expected to be in effect when the temporary differences reverse.
We provide a valuation allowance for deferred tax assets if it is likely that some portion of the deferred tax asset will not be realized. We include an increase or decrease in a valuation allowance resulting from a change in the realizability of the related deferred tax asset in income.
Derivative Financial Instruments
On the date we enter into a derivative contract, we designate the interest rate swap agreement as a cash flow hedge or a fair value hedge. We recognize the fair values of interest rate swap agreements in the consolidated balance sheet in other assets or other liabilities depending on their positive or negative fair values. Cash flow hedges hedge the variable cash flows to be paid on recognized liabilities and fair value hedges hedge the fair value of recognized liabilities. We formally document all relationships between the interest rate swap agreement and the hedged liability. This documentation includes the following:
* our risk management objective; * our strategy in entering into the interest rate swap agreement; and * our method to measure hedge effectiveness and ineffectiveness.
Notes to Consolidated Financial Statements, Continued
We also formally assess, both at the interest rate swap agreement inception and ongoing, whether the interest rate swap agreements are highly effective in offsetting changes in cash flows or fair values of the hedged liabilities. We report the effective portion of the gain or loss on the instruments as a component of other comprehensive income. We report any ineffectiveness in other revenues.
If we discontinue hedge accounting because we determine the interest rate swap agreement no longer qualifies as an effective hedge, we will continue to carry the interest rate swap agreement in the balance sheet at its fair value, and recognize changes in fair value in income. For cash flow hedges, we will reclassify amounts we previously recorded in other comprehensive income to income as earnings are affected by the variability in cash flows of the hedged item. For fair value hedges, we will reverse the recorded fair value adjustment of the hedged item to income.
If we terminate an interest rate swap agreement before maturity, we will remove it from the balance sheet.
We accrue the differences between amounts payable and receivable on interest rate swap agreements as adjustments to interest expense over the lives of the agreements. We include the related amounts payable to and receivable from counterparties in other liabilities and other assets.
Fair Value of Financial Instruments
We estimate the fair values disclosed in Note 24. using discounted cash flows when quoted market prices or values obtained from independent pricing services are not available. The assumptions used, including the discount rate and estimates of future cash flows, significantly affect the valuation techniques employed. In certain cases, we cannot verify the estimated fair values by comparison to independent markets or realize the estimated fair values in immediate settlement of the instruments.
Note 3. Accounting Changes
On January 1, 2002, we adopted SFAS 142, "Goodwill and Other Intangible Assets." SFAS 142 provides that goodwill and other intangible assets with indefinite lives are no longer to be amortized. These assets are to be reviewed for impairment annually, or more frequently if impairment indicators are present. We will continue to amortize separable intangible assets that have finite lives over their useful lives. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. Amortization of goodwill and intangible assets acquired prior to July 1, 2001 continued through December 31, 2001. During first quarter 2002, we determined that the required impairment testing related to the Company's goodwill and other intangible assets did not require a write- down of any such assets. There has been no indication of impairment since our review of the Company's goodwill during the first quarter of 2002.
Notes to Consolidated Financial Statements, Continued
In 2001, we adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be recognized at fair value in the balance sheet. Changes in the fair value of a derivative instrument are reported in net income or comprehensive income, depending upon the intended use of the derivative instrument. Upon adoption of SFAS 133, we recorded cumulative adjustments of $42.1 million to recognize the fair value of interest rate swap agreements related to debt in the balance sheet, which reduced accumulated other comprehensive income in shareholder's equity by $27.4 million. During 2001, we reclassified into earnings $13.6 million of net realized losses which related to the cumulative adjustment.
In 2001, we conformed to Emerging Issues Task Force (EITF) Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." As a result of applying the impairment provisions of EITF 99-20, we recorded a $1.0 million ($.6 million aftertax) write-down of the carrying value of certain collateralized debt obligations in other revenues.
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of FIN 45, including, among others, residual value guarantees under capital lease arrangements, commercial letters of credit, and loan commitments. The disclosure requirements of FIN 45 are effective as of December 31, 2002. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. We do not expect the adoption of FIN 45 to have a material impact on our consolidated results of operations, financial position, or liquidity.
Notes to Consolidated Financial Statements, Continued
Note 4. Finance Receivables
Components of net finance receivables by type were as follows:
December 31, 2002 Real Non-real Retail Estate Estate Sales Loans Loans Finance Total (dollars in thousands)
Gross receivables $9,409,294 $3,297,232 $1,550,215 $14,256,741 Unearned finance charges and points and fees (148,421) (432,747) (176,463) (757,631) Accrued finance charges 79,664 41,788 13,194 134,646 Deferred origination costs 12,864 36,223 - 49,087 Premiums, net of discounts 144,645 16,429 2,295 163,369
Total $9,498,046 $2,958,925 $1,389,241 $13,846,212
December 31, 2001 Real Non-real Retail Estate Estate Sales Loans Loans Finance Total (dollars in thousands)
Gross receivables $7,613,988 $3,274,716 $1,634,686 $12,523,390 Unearned finance charges and points and fees (152,301) (444,604) (210,658) (807,563) Accrued finance charges 69,296 42,760 15,910 127,966 Deferred origination costs 10,787 37,645 - 48,432 Premiums, net of discounts 83,054 12,040 970 96,064
Total $7,624,824 $2,922,557 $1,440,908 $11,988,289
Real estate loans are secured by first or second mortgages on residential real estate and generally have maximum original terms of 360 months. Non-real estate loans are secured by consumer goods, automobiles or other personal property, or are unsecured and generally have maximum original terms of 60 months. Retail sales contracts are secured principally by consumer goods and automobiles and generally have maximum original terms of 60 months. Revolving retail and private label are secured by the goods purchased and generally require minimum monthly payments based on outstanding balances. At December 31, 2002, 96% of our net finance receivables were secured by the real and/or personal property of the borrower, compared to 97% at December 31, 2001. At December 31, 2002, real estate loans accounted for 69% of the amount and 11% of the number of net finance receivables outstanding, compared to 64% of the amount and 9% of the number of net finance receivables outstanding at December 31, 2001.
Notes to Consolidated Financial Statements, Continued
Contractual maturities of net finance receivables by type at December 31, 2002 were as follows:
Real Non-Real Retail Estate Estate Sales Loans Loans Finance Total (dollars in thousands)
2003 $ 237,985 $ 741,561 $ 386,514 $ 1,366,060 2004 312,176 982,718 314,494 1,609,388 2005 328,584 713,588 148,599 1,190,771 2006 340,851 325,936 73,138 739,925 2007 341,666 108,387 38,579 488,632 2008+ 7,936,784 86,735 427,917 8,451,436
Total $ 9,498,046 $ 2,958,925 $ 1,389,241 $13,846,212
Company experience has shown that customers will renew, convert or pay in full a substantial portion of finance receivables prior to maturity. Contractual maturities are not a forecast of future cash collections.
Principal cash collections and such collections as a percentage of average net receivables by type were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands) Real estate loans: Principal cash collections $2,953,426 $2,462,318 $1,854,554 % of average net receivables 36.09% 33.47% 25.72%
Non-real estate loans: Principal cash collections $1,614,216 $1,655,484 $1,610,183 % of average net receivables 56.48% 56.03% 57.47%
Retail sales finance: Principal cash collections $1,731,160 $1,836,811 $1,849,069 % of average net receivables 126.56% 129.82% 132.47%
Unused credit limits extended by a non-subsidiary affiliate (whose private label finance receivables are fully participated to the Company) and the Company to their customers were $3.5 billion at December 31, 2002 and $3.6 billion at December 31, 2001.
Company experience has shown that the funded amounts have been substantially less than the credit limits. All unused credit limits, in part or in total, can be cancelled at the discretion of the affiliate and the Company.
Notes to Consolidated Financial Statements, Continued
Geographic diversification of finance receivables reduces the concentration of credit risk associated with a recession in any one region. The largest concentrations of net finance receivables were as follows:
December 31, 2002 December 31, 2001 Amount Percent Amount Percent (dollars in thousands)
California $ 2,160,846 16% $ 1,374,599 12% N. Carolina 887,243 6 850,995 7 Florida 840,182 6 772,830 7 Illinois 786,593 6 731,238 6 Ohio 785,506 6 741,702 6 Indiana 598,832 4 586,625 5 Georgia 591,970 4 510,140 4 Virginia 553,386 4 500,137 4 Other 6,641,654 48 5,920,023 49
Total $13,846,212 100% $11,988,289 100%
Finance receivables on which we stopped accruing revenue totaled $388.8 million at December 31, 2002 and $341.1 million at December 31, 2001. Our accounting policy for revenue recognition on revolving retail and private label finance receivables provides for the accrual of revenue up to the date of charge-off at six months past due. We accrued revenue on revolving retail and private label finance receivables greater than 90 days contractually delinquent of $.8 million at December 31, 2002 and $.6 million at December 31, 2001.
Note 5. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Balance at beginning of year $ 448,251 $ 383,415 $ 395,626 Provision for finance receivable losses 303,585 289,302 206,275 Allowance related to net acquired (sold) receivables 8,780 14,836 (12,211) Charge-offs (338,802) (304,592) (250,330) Recoveries 41,217 40,290 44,055 Other charges - additional provision - 25,000 -
Balance at end of year $ 463,031 $ 448,251 $ 383,415
See Note 2. for information on the determination of the allowance for finance receivable losses and Note 17. for discussion of other charges.
Notes to Consolidated Financial Statements, Continued
Note 6. Investment Securities
Fair value and amortized cost of investment securities by type at December 31 were as follows:
Fair Value Amortized Cost 2002 2001 2002 2001 (dollars in thousands) Fixed maturity investment securities: Bonds: Corporate securities $ 549,552 $ 532,295 $ 530,229 $ 528,551 Mortgage-backed securities 179,155 209,128 170,909 207,119 State and political subdivisions 446,605 315,640 429,637 314,263 Other 26,593 47,146 24,447 45,436 Redeemable preferred stocks - 9,063 - 8,329 Total 1,201,905 1,113,272 1,155,222 1,103,698 Non-redeemable preferred stocks 5,109 4,225 5,624 4,251 Other long-term investments 19,586 24,133 19,586 24,133 Common stocks 556 556 606 606
Total $1,227,156 $1,142,186 $1,181,038 $1,132,688
Unrealized gains and losses on investment securities by type at December 31 were as follows:
Unrealized Gains Unrealized Losses 2002 2001 2002 2001 (dollars in thousands) Fixed-maturity investment securities: Bonds: Corporate securities $35,401 $19,660 $16,078 $15,916 Mortgage-backed securities 8,246 3,543 - 1,534 State and political subdivisions 16,986 5,409 18 4,032 Other 5,198 1,710 3,052 - Redeemable preferred stocks - 738 - 4 Total 65,831 31,060 19,148 21,486 Non-redeemable preferred stocks 55 - 570 26 Common stocks - - 50 50
Total $65,886 $31,060 $19,768 $21,562
Notes to Consolidated Financial Statements, Continued
The fair values of investment securities sold or redeemed and the resulting realized gains, realized losses, and net realized gains (losses) were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Fair value $756,128 $992,437 $536,058
Realized gains $ 9,147 $ 16,441 $ 14,166 Realized losses 13,547 19,430 11,357
Net realized (losses) gains $ (4,400) $ (2,989) $ 2,809
Contractual maturities of fixed-maturity investment securities at December 31, 2002 were as follows: Fair Amortized Value Cost (dollars in thousands) Fixed maturities, excluding mortgage-backed securities: Due in 1 year or less $ 23,714 $ 23,432 Due after 1 year through 5 years 186,126 175,306 Due after 5 years through 10 years 389,539 374,157 Due after 10 years 423,371 411,418 Mortgage-backed securities 179,155 170,909
Total $1,201,905 $1,155,222
Actual maturities may differ from contractual maturities since borrowers may have the right to prepay obligations. The Company may sell investment securities before maturity to achieve corporate requirements and investment strategies.
Other long-term investments consist of five limited partnerships. These limited partnerships provide diversification and have high yielding, long-term financial objectives. These limited partnerships invest primarily in private equity investments, high yielding securities, and mezzanine investments within a variety of industries. At December 31, 2002, our total commitments for these five limited partnerships were $47.3 million, consisting of $21.2 million funded and $26.1 million unfunded.
Bonds on deposit with insurance regulatory authorities had carrying values of $8.4 million at December 31, 2002 and $7.9 million at December 31, 2001.
Notes to Consolidated Financial Statements, Continued
Note 7. Other Assets
Components of other assets were as follows:
December 31, 2002 2001 (dollars in thousands)
Goodwill $161,885 $161,885 Income tax assets (a) 152,469 94,326 Fixed assets 93,365 102,704 Other insurance investments 67,438 78,813 Real estate owned 49,012 49,985 Customer relationships 44,294 64,712 Prepaid expenses and deferred charges 29,802 35,755 Other (b) 122,024 82,248
Total $720,289 $670,428
(a) The components of net deferred tax assets are detailed in Note 18.
(b) Effective January 1, 2003, we acquired Wilmington Finance, Inc., an originator and seller of residential mortgage loans. In anticipation of this acquisition, we entered into a warehouse line participation agreement to provide interim funding support to the mortgage originator totaling $50.0 million. See Note 25. for further information on this acquisition.
Changes in goodwill by business segment were as follows:
Consumer Finance Insurance Total (dollars in thousands)
Balance December 31, 2000 $178,255 $ 12,562 $190,817 Amortization (7,323) (458) (7,781) Impairment loss - other charge (a) (20,177) - (20,177) Disposition (b) (974) - (974)
Balance December 31, 2001 149,781 12,104 161,885
Balance December 31, 2002 $149,781 $ 12,104 $161,885
(a) In third quarter 2001, we decided to exit the warehouse lending business and wrote off remaining goodwill of $20.2 million applicable to our warehouse lending subsidiary through the other charge.
(b) In third quarter 2001, we reduced goodwill by $1.0 million resulting from the merger of AG Bank into AIG Federal Savings Bank.
Notes to Consolidated Financial Statements, Continued
The impact of goodwill amortization on net income was as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Reported net income $346,826 $228,257 $207,938 Goodwill amortization, net of tax - 5,058 5,136
Adjusted net income $346,826 $233,315 $213,074
Customer relationships are net of accumulated amortization of $77.3 million at December 31, 2002 and $72.3 million at December 31, 2001. Customer relationships amortization expense totaled $24.4 million in 2002 and $22.8 million in 2001. In addition to customer relationships amortization expense in 2001, we reduced customer relationships through the other charge by $12.0 million resulting from post-business combination plans in connection with AIG's indirect acquisition of the Company.
At December 31, 2002, estimated customer relationships amortization expense for the next five years was as follows:
Customer Relationships Amortization Expense (dollars in thousands)
2003 $19,350 2004 14,413 2005 7,113 2006 1,583 2007 1,211
Note 8. Long-term Debt
Carrying value and fair value of long-term debt at December 31 were as follows:
Carrying Value Fair Value 2002 2001 2002 2001 (dollars in thousands)
Senior debt $9,566,256 $6,301,433 $9,849,447 $6,469,832
Weighted average interest rates on long-term debt were as follows:
Years Ended December 31, December 31, 2002 2001 2000 2002 2001
Senior debt 5.89% 6.66% 6.64% 5.09% 6.41%
Notes to Consolidated Financial Statements, Continued
Contractual maturities of long-term debt at December 31, 2002 were as follows:
Carrying Value (dollars in thousands)
2003 $1,574,900 2004 2,097,877 2005 1,479,335 2006 1,273,961 2007 1,355,550 2008-2012 1,784,633
Total $9,566,256
At December 31, 2002, we had $4.3 billion of long-term debt securities registered under the Securities Act of 1933 and available for issuance.
A debt agreement contains restrictions on consolidated retained earnings for certain purposes (see Note 16.).
Note 9. Short-term Notes Payable
AGFI and AGFC issue commercial paper with terms ranging from 1 to 270 days. The weighted average maturity of our commercial paper at December 31, 2002 was 31 days.
Included in commercial paper are extendible commercial notes that AGFC sells with initial maturities of up to 90 days which may be extended by AGFC to 390 days. At December 31, 2002, extendible commercial notes totaled $359.3 million.
Information concerning short-term notes payable for commercial paper and to banks under credit facilities was as follows:
At or for the Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Average borrowings $4,126,072 $4,603,669 $4,765,422 Weighted average interest rate, at year end: Money market yield 1.45% 1.95% 6.58% Semi-annual bond equivalent yield 1.45% 1.96% 6.67%
Notes to Consolidated Financial Statements, Continued
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. At December 31, 2002, AGFC had committed credit facilities totaling $3.0 billion, including a facility under which AGFI is an eligible borrower for up to $300 million. The annual commitment fees for the facilities currently average 0.07% and are based upon AGFC's long-term credit ratings.
At December 31, 2002, AGFI and certain of its subsidiaries also had uncommitted credit facilities totaling $171.0 million which could be increased depending upon lender ability to participate its loans under the facilities.
Available borrowings under all facilities are reduced by any outstanding borrowings. At December 31, 2002, AGFI's outstanding borrowings totaled $60.0 million. There were no amounts outstanding at December 31, 2001. AGFC guarantees its subsidiary borrowings under uncommitted credit facilities. AGFC does not guarantee any borrowings of AGFI.
Note 11. Derivative Financial Instruments
Our principal borrowing subsidiary is AGFC. AGFC uses derivative financial instruments in managing the cost of its debt and is neither a dealer nor a trader in derivative financial instruments. AGFC has generally limited its use of derivative financial instruments to interest rate swap agreements. These interest rate swap agreements are designated and qualify as cash flow hedges or fair value hedges.
AGFC uses interest rate swap agreements to limit our exposure to market interest rate risk in the funding of our operations. Most of our swaps synthetically convert certain short-term or floating-rate debt to a long-term fixed-rate. The synthetic long-term fixed rates achieved through interest rate swap agreements are slightly lower than could have been achieved by issuing comparable long-term fixed-rate debt. Additionally, AGFC has swapped fixed-rate, long-term debt to floating- rate, long-term debt. As an alternative to funding without these derivative financial instruments, AGFC's interest rate swap agreements did not have a material effect on the Company's other revenues, interest expense, or net income in any of the three years ended December 31, 2002.
Notional amounts and weighted average receive and pay rates were as follows:
At or for the Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Notional amount $2,940,000 $2,500,000 $2,450,000
Weighted average receive rate 2.28% 2.06% 6.72% Weighted average pay rate 5.24% 6.58% 6.71%
Notes to Consolidated Financial Statements, Continued
Notional amount maturities and the respective weighted average interest rates at December 31, 2002 were as follows:
Notional Weighted Average Amount Interest Rate (dollars in thousands)
2003 $ 445,000 7.86% 2004 920,000 6.05 2005 525,000 5.25 2006 100,000 7.03 2007 750,000 2.36 2008 200,000 5.50
Total $2,940,000 5.24%
Changes in the notional amounts of interest rate swap agreements were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Balance at beginning of year $2,500,000 $2,450,000 $1,295,000 New contracts 1,050,000 320,000 1,380,000 Expired contracts (610,000) (270,000) (225,000)
Balance at end of year $2,940,000 $2,500,000 $2,450,000
AGFC is exposed to credit risk in the event of non-performance by counterparties to derivative financial instruments. AGFC limits this exposure by entering into agreements with counterparties having high credit ratings and by basing the amounts and terms of these agreements on their credit ratings. AGFC regularly monitors counterparty credit ratings throughout the term of the agreements. At December 31, 2002, AGFC had notional amounts of $1.1 billion in interest rate swap agreements with a highly-rated AIG affiliate.
AGFC's credit exposure on derivative financial instruments is limited to the fair value of the agreements that are favorable to the Company. At December 31, 2002, the interest rate swap agreements were recorded at fair value of $137.7 million in other liabilities. AGFC does not expect any counterparty to fail to meet its obligation; however, non- performance would not have a material impact on the Company's consolidated results of operations and financial position.
AGFC's exposure to market risk is mitigated by the offsetting effects of changes in the value of the agreements and of the related debt being hedged. During 2002, we reported an immaterial amount of ineffectiveness in other revenues. At December 31, 2002, we expect to reclassify $70.3 million of net realized losses on interest rate swap agreements from accumulated other comprehensive income to income during the next twelve months.
Notes to Consolidated Financial Statements, Continued
Note 12. Insurance
Components of insurance claims and policyholder liabilities were as follows:
December 31, 2002 2001 (dollars in thousands)
Finance receivable related: Unearned premium reserves $187,631 $209,670 Benefit reserves 14,520 10,421 Claim reserves 35,823 35,305
Subtotal 237,974 255,396
Non-finance receivable related: Benefit reserves 212,702 218,840 Claim reserves 21,672 21,352
Subtotal 234,374 240,192
Total $472,348 $495,588
Our insurance subsidiaries enter into reinsurance agreements among themselves and with other insurers, including affiliated insurance companies. Insurance claims and policyholder liabilities included the following amounts assumed from other insurers:
December 31, 2002 2001 (dollars in thousands)
Affiliated insurance companies $ 64,387 $ 73,446 Non-affiliated insurance companies 48,227 40,559
Total $112,614 $114,005
Our insurance subsidiaries' business reinsured to others was not significant during any of the last three years.
Notes to Consolidated Financial Statements, Continued
Our insurance subsidiaries file financial statements prepared using statutory accounting practices prescribed or permitted by each insurance company's state of domicile. These are comprehensive bases of accounting other than GAAP.
Reconciliations of statutory net income to GAAP net income were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Statutory net income $78,149 $87,632 $58,027
Change in deferred policy acquisition costs (8,678) (7,561) 12,650 Reserve changes 2,919 (669) 19,298 Deferred income tax benefit (charge) 8,299 1,512 (6,599) Amortization of interest maintenance reserve (1,456) (2,322) (710) Goodwill amortization - (458) (458) Other, net (5,623) (5,500) (2,263)
GAAP net income $73,610 $72,634 $79,945
Reconciliations of statutory equity to GAAP equity were as follows:
December 31, 2002 2001 (dollars in thousands)
Statutory equity $734,146 $664,461
Deferred policy acquisition costs 66,018 76,043 Reserve changes 84,119 83,001 Net unrealized gains 46,119 9,479 Goodwill 13,794 13,794 Decrease in carrying value of affiliates (24,932) (20,708) Asset valuation reserve 17,134 15,685 Deferred income taxes (36,074) (28,670) Interest maintenance reserve (1,985) 6,766 Other, net 26,100 7,186
GAAP equity $924,439 $827,037
Notes to Consolidated Financial Statements, Continued
Note 13. Other Liabilities
Components of other liabilities were as follows:
December 31, 2002 2001 (dollars in thousands)
Interest rate swap agreements fair values $137,682 $103,867 Uncashed checks, reclassified from cash 113,402 119,124 Accrued interest 104,679 121,975 Salary and benefit liabilities 18,796 33,311 Other 68,373 74,077
Total $442,932 $452,354
The decrease in salary and benefit liabilities reflected AIG's assumption of certain benefit obligations totaling $12.9 million effective December 31, 2002.
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, 2002 and 2001 were as follows:
Shares Issued and Outstanding Par Shares December 31, Value Authorized 2002 2001
Special Shares - 25,000,000 - - Common Shares $0.50 25,000,000 2,000,000 2,000,000
Notes to Consolidated Financial Statements, Continued
Note 15. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
December 31, 2002 2001 (dollars in thousands)
Net unrealized losses on interest rate swaps $ (98,904) $ (67,513) Net unrealized gains on investment securities 29,966 6,174 Net unrealized losses on minimum pension liability - (348)
Accumulated other comprehensive loss $ (68,938) $ (61,687)
Note 16. 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, 2002, the maximum amount of dividends which our insurance subsidiaries may pay in 2003 without prior approval was $85.6 million. At December 31, 2002, our insurance subsidiaries had statutory capital and surplus of $734.1 million. Merit Life Insurance Co. (Merit), a wholly owned subsidiary of AGFC, had $52.7 million of accumulated earnings at December 31, 2002 for which no federal income tax provisions have been required. Merit would be liable for federal income taxes on such earnings if they were distributed as dividends or exceeded limits prescribed by tax laws. No distributions are presently contemplated from these earnings. If such earnings were to become taxable at December 31, 2002, the federal income tax would approximate $18.4 million.
Certain AGFC financing agreements effectively limit the amount of dividends AGFC may pay. Under the most restrictive provision contained in these agreements, $642.1 million of the retained earnings of AGFC was free from restriction at December 31, 2002.
Notes to Consolidated Financial Statements, Continued
Note 17. Other Charges
AIG ACQUISITION
In September 2001, we recorded one-time charges totaling $78.3 million ($50.9 million aftertax), resulting from AIG's and the Company's joint assessment of the business environment and post-business combination plans. These charges recognized that certain assets had no future economic benefit or ability to generate future revenues. These costs included asset impairment charges related to goodwill and customer relationships intangibles that resulted from previous business acquisitions. Also included were certain adjustments associated with conforming the Company's balances to AIG's accounting policies and methodologies, as well as an increase in the allowance for finance receivable losses to reflect AIG's and the Company's assumptions about the business environment.
MORTGAGE WAREHOUSE LENDING
In June 2000, we discovered a potential fraud committed against a subsidiary that conducted mortgage warehouse lending activities in our consumer finance operation. Mortgages processed by one originator allegedly had been funded based on fraudulent information. In July 2000, the originator's license was suspended and the originator and its parent company filed for bankruptcy. Based on the available information, we recorded a charge of $50.0 million ($32.5 million aftertax) in second quarter 2000 for our loss related to this fraud. We are pursuing all appropriate remedies and believe our recorded liability is sufficient to cover this loss.
Note 18. Income Taxes
For the period August 30, 2001 to December 31, 2001 and the year 2002, the life insurance subsidiaries of AGFC file separate federal income tax returns. AGFI and all other AGFI subsidiaries file a consolidated federal income tax return with AIG. We provide federal income taxes as if AGFI and the other AGFI subsidiaries file separate tax returns and pay AIG accordingly under a tax sharing agreement.
For the year 2000 and the period January 1, 2001 to August 29, 2001, AGFI and all of its subsidiaries were included in a federal income tax return with our then parent company and the majority of its subsidiaries. We provided federal income taxes as if AGFI and other AGFI subsidiaries filed separate tax returns and paid our then parent company accordingly under a tax sharing agreement.
Notes to Consolidated Financial Statements, Continued
Components of provision for income taxes were as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands) Federal: Current $197,226 $152,218 $ 94,085 Deferred (60,601) (30,051) 17,021 Total federal 136,625 122,167 111,106 State 8,717 6,094 9,580
Total $145,342 $128,261 $120,686
Reconciliations of the statutory federal income tax rate to the effective tax rate were as follows:
Years Ended December 31, 2002 2001 2000
Statutory federal income tax rate 35.00% 35.00% 35.00%
Contingency reduction (6.10) - - State income taxes 1.11 1.11 1.89 Amortization of goodwill - .60 .71 Nontaxable investment income (.64) (.98) (1.01) Other, net .16 .25 .13
Effective income tax rate 29.53% 35.98% 36.72%
During fourth quarter 2002, we reduced the provision for income taxes by $30.0 million resulting from a favorable settlement of income tax audit issues. This decreased the effective income tax rate for 2002.
The Internal Revenue Service (IRS) has completed examinations of AIG's tax returns through 1990. The IRS has also completed examinations of our previous parent company's tax returns through 1999.
Notes to Consolidated Financial Statements, Continued
Components of deferred tax assets and liabilities were as follows:
December 31, 2002 2001 (dollars in thousands) Deferred tax assets: Allowance for finance receivable losses $145,663 $103,426 Interest rate swap agreements 32,014 36,354 Deferred insurance commissions 4,054 8,254 Goodwill 5,910 8,057 Other 21,013 12,646
Total 208,654 168,737
Deferred tax liabilities: Loan origination costs 16,619 16,309 Insurance reserves (2,321) 8,582 Fixed assets 7,001 6,055 Other 34,886 43,465
Total 56,185 74,411
Net deferred tax assets $152,469 $ 94,326
State net operating loss (NOL) carryforwards were $593.8 million at December 31, 2001 and expired in 2002. These carryforwards resulted from a 1995 state audit of a return and the state's acceptance of an amended return. The valuation allowance relating to the state NOL carryforwards totaled $43.5 million at December 31, 2001.
Note 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, were as follows:
Lease Commitments (dollars in thousands)
2003 $ 47,711 2004 36,510 2005 25,570 2006 11,861 2007 6,179 subsequent to 2007 16,628
Total $144,459
Notes to Consolidated Financial Statements, Continued
Taxes, insurance and maintenance expenses are obligations of the Company under certain leases. In the normal course of business, leases that expire will be renewed or replaced by leases on other properties. Future minimum annual rental commitments will probably not be less than the amount of rental expense incurred in 2002. Rental expense totaled $51.5 million in 2002, $49.4 million in 2001, and $47.9 million in 2000.
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 proceedings are pending in jurisdictions, such as Mississippi, that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts that will ultimately be paid arising from these lawsuits and proceedings will not have a material adverse effect on our consolidated results of operations or financial position. However, the frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given suit.
Note 20. Consolidated Statements of Cash Flows
Supplemental disclosure of certain cash flow information was as follows:
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Interest paid $547,676 $649,737 $685,059 Income taxes paid 238,632 95,975 34,385
AGFI received a non-cash capital contribution from its parent of $7.3 million in fourth quarter 2002 reflecting AIG's assumption of certain benefit obligations effective January 1, 2002. See Note 21. for further information on the Company's benefit plans.
Note 21. Benefit Plans
Effective January 1, 2002, the Company's employees participate in various benefit plans sponsored by AIG, including a noncontributory qualified defined benefit retirement plan, various stock option and purchase plans, and a 401(k) plan.
AIG's U.S. plans do not separately identify projected benefit obligations and plan assets attributable to employees of participating affiliates. AIG's projected benefit obligations exceeded the plan assets at December 31, 2002 by $428.5 million.
Notes to Consolidated Financial Statements, Continued
Prior to January 1, 2002, the Company's employees participated in our then parent company's benefit plans. AGFI accounted for its participation in these plans as if it had its own plans.
AGFI's portion of the retirement plans' funded status was as follows:
December 31, 2001 2000 (dollars in thousands)
Projected benefit obligation $123,648 $ 99,622 Plan assets at fair value 95,030 112,194 Plan assets (less than) in excess of projected benefit obligation (28,618) 12,572 Other unrecognized items, net 27,660 (10,615)
(Accrued) prepaid pension expense $ (958) $ 1,957
Components of pension expense were as follows:
Years Ended December 31, 2001 2000 (dollars in thousands)
Service cost $ 3,849 $ 3,914 Interest cost 8,245 7,488 Expected return on plan assets (10,283) (10,061) Net amortization and deferral 260 199
Pension expense $ 2,071 $ 1,540
Additional assumptions concerning the determination of pension expense were as follows:
Years Ended December 31, 2001 2000
Weighted average discount rate 7.25% 8.00% Expected long-term rate of return on plan assets 10.35 10.35 Rate of increase in compensation levels 4.25 4.50
The accrued liability for postretirement benefits was $6.2 million at December 31, 2001. These liabilities were discounted at the same rates used for the pension plans. Postretirement benefit expense totaled $.8 million in 2001 and 2000.
Notes to Consolidated Financial Statements, Continued
Note 22. Segment Information
We have two business segments: consumer finance and insurance. Our segments are defined by the type of financial service product offered. The consumer finance segment makes home equity loans, originates secured and unsecured consumer loans, extends lines of credit, and purchases retail sales contracts from, and provides revolving retail services for, retail merchants. We also purchase private label receivables originated by a non-subsidiary affiliate of ours, under a participation agreement. To supplement our lending and retail sales financing activities, we purchase portfolios of real estate loans, non- real estate loans, and retail sales finance receivables. We also offer credit and non-credit insurance to our consumer finance customers. The insurance segment writes and assumes credit and non-credit insurance through products that are offered principally by the consumer finance segment.
We evaluate the performance of the segments based on pretax operating earnings. The accounting policies of the segments are the same as those disclosed in Note 2., except for the following:
* segment finance charge revenues are not reduced for the amortization of the deferred origination costs; * segment operating expenses are not reduced for the deferral of origination costs (segment operating expenses for 2001 also excluded the amortization of goodwill); * segment finance receivables exclude deferred origination costs; and * segment investment revenues exclude realized gains and losses and certain investment expenses.
Intersegment sales and transfers are intended to approximate the amounts segments would earn if dealing with independent third parties.
The following tables display information about the Company's segments as well as reconciliations of the segment totals to the consolidated financial statement amounts. The adjustments in the reconciliations include the following:
* amortization of deferred origination costs, realized gains (losses) on investments, and certain investment expenses for revenues; * realized gains (losses) and certain other investment revenue and pension expense (2001 and 2000 also included the amortization of goodwill) for pretax income; and * goodwill, deferred origination costs, other assets, and corporate assets that are not considered pertinent to determining segment performance for assets. Corporate assets include cash, prepaid expenses, deferred charges, and fixed assets.
Notes to Consolidated Financial Statements, Continued
At or for the year ended December 31, 2002:
Consumer Total Finance Insurance Segments (dollars in thousands) Revenues: External: Finance charges $ 1,803,472 $ - $ 1,803,472 Insurance 994 190,236 191,230 Other (17,057) 87,746 70,689 Intercompany 78,878 (75,869) 3,009 Interest expense 513,685 - 513,685 Provision for finance receivable losses 304,844 - 304,844 Pretax income 465,259 84,436 549,695 Assets 13,472,988 1,320,844 14,793,832
At or for the year ended December 31, 2001:
Consumer Total Finance Insurance Segments (dollars in thousands) Revenues: External: Finance charges $ 1,788,875 $ - $ 1,788,875 Insurance 1,111 194,282 195,393 Other (5,465) 91,134 85,669 Intercompany 80,064 (77,000) 3,064 Interest expense 591,024 - 591,024 Provision for finance receivable losses 288,709 - 288,709 Pretax income 347,222 86,418 433,640 Assets 11,645,931 1,261,589 12,907,520
At or for the year ended December 31, 2000:
Consumer Total Finance Insurance Segments (dollars in thousands) Revenues: External: Finance charges $ 1,692,881 $ - $ 1,692,881 Insurance 1,129 195,112 196,241 Other (8,512) 89,086 80,574 Intercompany 76,622 (73,641) 2,981 Interest expense 640,504 - 640,504 Provision for finance receivable losses 206,846 - 206,846 Pretax income 327,761 90,524 418,285 Assets 11,337,094 1,220,235 12,557,329
Notes to Consolidated Financial Statements, Continued
Reconciliations of segment totals to consolidated financial statement amounts were as follows:
At or for the Years Ended December 31, 2002 2001 2000 (dollars in thousands) Revenues
Segments $ 2,068,400 $ 2,073,001 $ 1,972,677 Corporate (7,197) (13,499) (11,176) Adjustments (61,365) (61,004) (51,585)
Consolidated revenue $ 1,999,838 $ 1,998,498 $ 1,909,916
Interest Expense
Segments $ 513,685 $ 591,024 $ 640,504 Corporate 45,606 44,459 53,747
Consolidated interest expense $ 559,291 $ 635,483 $ 694,251
Provision for Finance Receivable Losses
Segments $ 304,844 $ 288,709 $ 206,846 Corporate (1,259) 593 (571)
Consolidated provision for finance receivable losses $ 303,585 $ 289,302 $ 206,275
Pretax Income
Segments $ 549,695 $ 433,640 $ 418,285 Corporate (53,050) (65,247) (83,599) Adjustments (4,477) (11,875) (6,062)
Consolidated pretax income $ 492,168 $ 356,518 $ 328,624
Assets
Segments $14,793,832 $12,907,520 $12,557,329 Corporate 516,853 443,318 624,556 Adjustments 173,601 180,816 226,510
Consolidated assets $15,484,286 $13,531,654 $13,408,395
Notes to Consolidated Financial Statements, Continued
Note 23. Interim Financial Information (Unaudited)
Our quarterly statements of income for 2002 and 2001 were as follows:
2002 Quarter Ended Dec. 31, Sep. 30, June 30, Mar. 31, (dollars in thousands) Revenues Finance charges $444,636 $427,457 $422,926 $423,854 Insurance 49,841 47,839 48,050 45,500 Other 23,602 19,896 23,087 23,150 Total revenues 518,079 495,192 494,063 492,504
Expenses Interest expense 147,557 135,914 138,588 137,232 Operating expenses 138,598 139,424 139,882 143,615 Provision for finance receivable losses 88,270 71,404 72,852 71,059 Insurance losses and loss adjustment expenses 22,281 19,201 19,811 21,982 Total expenses 396,706 365,943 371,133 373,888
Income before provision for income taxes 121,373 129,249 122,930 118,616
Provision for Income Taxes 13,336 46,013 43,766 42,227
Net Income $108,037 $ 83,236 $ 79,164 $ 76,389
2001 Quarter Ended Dec. 31, Sep. 30, June 30, Mar. 31, (dollars in thousands) Revenues Finance charges $429,452 $432,030 $430,678 $420,325 Insurance 48,798 48,314 50,203 48,078 Other 22,522 22,433 20,831 24,834 Total revenues 500,772 502,777 501,712 493,237
Expenses Interest expense 144,480 157,238 161,577 172,188 Operating expenses 130,829 141,986 142,460 135,512 Provision for finance receivable losses 95,352 66,272 67,646 60,032 Insurance losses and loss adjustment expenses 22,413 21,462 20,978 23,258 Other charges - 78,297 - - Total expenses 393,074 465,255 392,661 390,990
Income before provision for income taxes 107,698 37,522 109,051 102,247
Provision for Income Taxes 38,376 13,354 39,419 37,112
Net Income $ 69,322 $ 24,168 $ 69,632 $ 65,135
Notes to Consolidated Financial Statements, Continued
Note 24. Fair Value of Financial Instruments
The carrying values and estimated fair values of certain of the Company's financial instruments are presented below. The reader should exercise care in drawing conclusions based on fair value, since the fair values presented below can be misinterpreted and do not include the value associated with all of the Company's assets and liabilities.
December 31, 2002 December 31, 2001 Carrying Fair Carrying Fair Value Value Value Value (dollars in thousands) Assets
Net finance receivables, less allowance for finance receivable losses $13,383,181 $13,432,536 $11,540,038 $11,286,604 Investment securities 1,227,156 1,227,156 1,142,186 1,142,186 Cash and cash equivalents 153,660 153,660 179,002 179,002
Liabilities
Long-term debt 9,566,256 9,849,447 6,301,433 6,469,832 Short-term notes payable 3,375,674 3,375,674 4,853,520 4,853,520 Interest rate swap agreements 137,682 137,682 103,867 103,867
Off-Balance Sheet Financial Instruments
Unused customer credit limits - - - - Limited partnership commitments - 26,110 - 27,545
VALUATION METHODOLOGIES AND ASSUMPTIONS
We used the following methods and assumptions to estimate the fair value of our financial instruments.
Finance Receivables
We estimated fair values of net finance receivables, less allowance for finance receivable losses using projected cash flows, computed by category of finance receivable, discounted at the weighted-average interest rates offered for similar finance receivables at December 31 of each year. We based cash flows on contractual payment terms adjusted for delinquencies and finance receivable losses. The fair value estimates do not reflect the value of the underlying customer relationships or the related distribution systems.
Notes to Consolidated Financial Statements, Continued
Investment Securities
When available, we used quoted market prices as fair values of investment securities. For investment securities not actively traded, we estimated fair values using values obtained from independent pricing services or, in the case of some private placements, by discounting expected future cash flows using each year's December 31 market rate applicable to yield, credit quality, and average life of the investments.
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximated the carrying values.
Long-term Debt
We estimated the fair values of long-term debt using cash flows discounted at each year's December 31 borrowing rates.
Short-term Notes Payable
The fair values of short-term notes payable approximated the carrying values.
Interest Rate Swap Agreements
We estimated the fair values of interest rate swap agreements using market recognized valuation systems at each year's December 31 market rates.
Unused Customer Credit Limits
The unused credit limits available to the customers of the non- subsidiary affiliate that sells private label receivables to the Company under a participation agreement and to the Company's customers have no fair value. The interest rates charged on these facilities can be changed at the affiliate's discretion for private label, or are adjustable and reprice frequently for loan and retail revolving lines of credit. These amounts, in part or in total, can be cancelled at the discretion of the affiliate and the Company.
Limited Partnership Commitments
The fair values of limited partnership commitments equal the commitment amounts since the partnership may call these commitments on demand.
Notes to Consolidated Financial Statements, Continued
Note 25. Subsequent Event
During fourth quarter 2002, AGFI entered into a definitive agreement to acquire Wilmington Finance, Inc. (WFI), a majority owned subsidiary of WSFS Financial Corporation. WFI is an originator and seller of residential mortgage loans. The transaction closed effective January 1, 2003 at a purchase price of $117.1 million.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
As previously reported in AGFI's Current Report on Form 8-K dated April 22, 2002, the Company changed independent auditors effective with the year beginning January 1, 2002. There were no disagreements, as defined in Securities and Exchange Commission rules, between the Company and its previous independent auditors.
PART III
Item 14.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
The conclusions of our principal executive officer and principal financial officer about the effectiveness of the Company's disclosure controls and procedures based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this annual report on Form 10-K are as follows:
The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is recorded, processed, summarized and reported within required timeframes. The Company's disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
The Company's management, including its principal executive officer and principal financial officer, assesses the adequacy of our disclosure controls and procedures quarterly. Based on these assessments, the Company's principal executive officer and principal financial officer have concluded that the disclosure controls and procedures have functioned effectively and that the consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.
(b) Changes in internal control
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of management's most recent evaluation, including any corrective actions with regard to any significant deficiencies and material weaknesses.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) The following consolidated financial statements of American General Finance, Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets, December 31, 2002 and 2001
Consolidated Statements of Income, years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Shareholder's Equity, years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows, years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Comprehensive Income, years ended December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is included in Item 15(d).
All other financial statement schedules have been omitted because they are inapplicable.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 103 herein.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during fourth quarter 2002.
(c) Exhibits
The exhibits required to be included in this portion of Item 15. are submitted as a separate section of this report.
Item 15(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance, Inc. Condensed Balance Sheets
December 31, 2002 2001 (dollars in thousands) Assets
Cash and cash equivalents $ 289 $ 61 Investment in subsidiaries 1,818,267 1,556,995 Notes receivable from subsidiaries 297,470 325,562 Other assets 72,183 39,136
Total assets $2,188,209 $1,921,754
Liabilities and Shareholder's Equity
Long-term debt $ - $ 1,262 Short-term notes payable: Commercial paper 254,533 282,068 Notes payable to banks 60,000 - Notes payable to subsidiaries 269,328 267,765 Other liabilities 17,531 16,100
Total liabilities 601,392 567,195
Shareholder's equity: Common stock 1,000 1,000 Additional paid-in capital 920,276 880,594 Other equity (68,938) (61,687) Retained earnings 734,479 534,652
Total shareholder's equity 1,586,817 1,354,559
Total liabilities and shareholder's equity $2,188,209 $1,921,754
See Notes to Condensed Financial Statements.
Schedule I, Continued
American General Finance, Inc. Condensed Statements of Income
Years Ended December 31, 2002 2001 2000 (dollars in thousands)
Revenues Dividends received from subsidiaries $154,692 $431,234 $185,115 Interest and other 20,389 24,626 29,557
Total revenues 175,081 455,860 214,672
Expenses Interest expense 21,254 32,280 44,861 Operating expenses 2,713 12,929 6,349 Other charges - 20,277 -
Total expenses 23,967 65,486 51,210
Income before income taxes and equity in undistributed (overdistributed) net income of subsidiaries 151,114 390,374 163,462
Income Tax Credit 1,252 14,455 7,573
Income before equity in undistributed (overdistributed) net income of subsidiaries 152,366 404,829 171,035
Equity in Undistributed (Overdistributed) Net Income of Subsidiaries 194,460 (176,572) 36,903
Net Income $346,826 $228,257 $207,938
See Notes to Condensed Financial Statements.
Schedule I, Continued
Schedule I, Continued
American General Finance, Inc. Notes to Condensed Financial Statements December 31, 2002
Note 1. Accounting Policies
AGFI's investments in subsidiaries are stated at cost plus the equity in undistributed (overdistributed) net income of subsidiaries since the date of the acquisition. The condensed financial statements of the registrant should be read in conjunction with AGFI's consolidated financial statements.
Note 2. Other Charges
In September 2001, AGFI recorded one-time charges totaling $20.3 million ($13.2 million aftertax), resulting from AIG's and AGFI's joint assessment of the business environment and post-business combination plans. These charges recognized that certain assets had no future economic benefit or ability to generate future revenues. These costs included an asset impairment charge related to goodwill that resulted from a previous business acquisition.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 14, 2003.
AMERICAN GENERAL FINANCE, INC.
By: /s/ Donald R. Breivogel, Jr. Donald R. Breivogel, Jr. (Senior Vice President and Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 14, 2003.
Frederick W. Geissinger* Robert A. Cole* Frederick W. Geissinger Robert A. Cole (President and Chief Executive (Director) Officer and Director - Principal Executive Officer) William N. Dooley* William N. Dooley /s/ Donald R. Breivogel, Jr. (Director) Donald R. Breivogel, Jr. (Senior Vice President and Chief Financial Officer - Jerry L. Gilpin* Principal Financial Officer) Jerry L. Gilpin (Director)
George W. Schmidt* George W. Schmidt Ben D. Hendrix* (Vice President, Controller, Ben D. Hendrix and Assistant Secretary - (Director) Principal Accounting Officer)
*By: /s/ Donald R. Breivogel, Jr. Stephen L. Blake* Donald R. Breivogel, Jr. Stephen L. Blake (Attorney-in-fact) (Director)
Certifications
I, Frederick W. Geissinger, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of American General Finance, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/ Frederick W. Geissinger Frederick W. Geissinger President and Chief Executive Officer
Certifications
I, Donald R. Breivogel, Jr., Senior Vice President and Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of American General Finance, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/ Donald R. Breivogel, Jr. Donald R. Breivogel, Jr. Senior Vice President and Chief Financial Officer
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.
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 at December 31, 2002 under the following Indenture exceeds 10% of the Company's total assets on a consolidated basis:
Indenture dated as of May 1, 1999 from American General Finance Corporation to Citibank, N.A. Incorporated by reference to Exhibit (4)a.(1) filed as a part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-7422).
b. 	In accordance with Item 601(b)(4)(iii) of Regulation S-K, certain other instruments defining the rights of holders of the Company's long-term debt and our subsidiaries have not been filed as exhibits to this Annual Report on Form 10-K because the total amount of securities authorized and outstanding under each instrument does not exceed 10% of the total assets of the Company on a consolidated basis. We hereby agree to furnish a copy of each instrument to the Securities and Exchange Commission upon request.
(12) 	Computation of ratio of earnings to fixed charges
(23)(a)	Consent of PricewaterhouseCoopers LLP, Independent Accountants
(23)(b)	Consent of Ernst & Young LLP, Independent Auditors
(24) 	Power of Attorney