Item 1. Business.
GENERAL
American General Finance, Inc. (AGFI) was incorporated under the laws of the State of Indiana in 1974 to become the parent holding company of American General Finance Corporation (AGFC). AGFC was incorporated under the laws of the State of Indiana in 1927 as successor to a business started in 1920. Since 1982, AGFI has been a direct or indirect wholly-owned subsidiary of American General Corporation (American General), the parent of one of the nation's largest consumer financial services organizations. American General was incorporated in the State of Texas in 1980 as the successor to American General Insurance Company, a Texas insurance company incorporated in 1926.
AGFI is a financial services holding company whose principal subsidiaries are AGFC and American General Financial Center (AGF-Utah). AGFC is also a holding company with subsidiaries that are engaged primarily in the consumer finance and credit insurance business. The credit insurance operations are conducted by Merit Life Insurance Co. (Merit) and Yosemite Insurance Company (Yosemite) as a part of the Company's consumer finance business. AGF-Utah is an industrial loan company engaged primarily in the consumer finance business with funding for its operations including public deposits insured by the Federal Deposit Insurance Corporation. Unless the context otherwise indicates, references to the Company relate to AGFI and its subsidiaries, whether directly or indirectly owned.
At December 31, 1994, the Company had 1,305 offices in 41 states, Puerto Rico, and the U.S. Virgin Islands and employed approximately 8,800 persons. The Company's executive offices are located in Evansville, Indiana.
Certain amounts in the 1993 and 1992 information presented herein have been reclassified to conform to the 1994 presentation.
Item 1. Continued
Selected Financial Statistics
The following table sets forth certain selected financial information and ratios of the Company and illustrates certain aspects of the Company's business for the years indicated: 1994 1993 1992 (dollars in thousands) Average finance receivables net of unearned finance charges (ANR) $7,096,011 $6,387,044 $5,939,417
Average borrowings $6,308,901 $5,693,080 $5,317,836
Finance charges as a percentage of ANR (yield) 17.58% 16.95% 16.74%
Interest expense as a percentage of average borrowings (borrowing cost) 6.60% 6.67% 7.49%
Spread between yield and borrowing cost 10.98% 10.28% 9.25%
Insurance revenues as a percentage of ANR 2.55% 2.24% 2.01%
Operating expenses as a percentage of ANR 5.23% 5.17% 5.18%
Allowance for finance receivable losses as a percentage of net finance receivables 2.86% 2.80% 2.61%
Charge-off ratio (defined in "Consumer Finance Operations - Finance Receivable Loss and Delinquency Experience" in Item 1. herein.) 2.45% 2.21% 2.18%
Delinquency ratio - 60 days or more (defined in "Consumer Finance Operations - Finance Receivable Loss and Delinquency Experience" in Item 1. herein.) 2.89% 2.51% 2.24%
Debt to equity ratio 5.85 5.26 5.27
Return on average assets 3.00% 2.64% 2.34%
Return on average assets before deducting cumulative effect of accounting changes 3.00% 2.81% 2.34%
Return on average equity 21.27% 18.08% 15.68%
Item 1. Continued
1994 1993 1992 Return on average equity before deducting cumulative effect of accounting changes 21.27% 19.04% 15.68%
Ratio of earnings to fixed charges (refer to Exhibit 12 herein for calculations) 1.92 1.86 1.65
CONSUMER FINANCE OPERATIONS
Through its subsidiaries, the Company makes loans directly to individuals, purchases retail sales contract obligations of individuals, and offers credit card services.
In its lending operations, the Company generally takes a security interest in real property and/or personal property of the borrower. Of the loans outstanding at December 31, 1994, 89% were secured by such property. At December 31, 1994, mortgage loans (generally second mortgages) accounted for 50% of the aggregate dollar amount of loans outstanding and 10% of the total number of loans outstanding; compared to 53% and 11%, respectively, at December 31, 1993. Loans secured by real property generally have maximum original terms of 180 months. Loans secured by personal property or that are unsecured generally have maximum original terms of 60 months.
In its retail operations, the Company purchases retail sales contracts arising from the retail sale of consumer goods and services, and issues private label credit cards for various business entities. Retail sales contracts are primarily closed-end accounts which consist of a single purchase. 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 a maximum original term of 60 months. Private label are secured by a purchase money security interest in the goods purchased and generally require minimum monthly payments based on current balances.
In its credit card operations, the Company issues MasterCard and Visa credit cards to individuals through branch and direct mail solicitation programs. Credit cards are unsecured and require minimum monthly payments based on current balances.
Finance Receivables
All finance receivable data in this report (except as otherwise indicated) are calculated on a net basis -- that is, after deduction of unearned finance charges but before deduction of an allowance for finance receivable losses.
Item 1. Continued
The following table sets forth certain information concerning finance receivables of the Company: Years Ended December 31, 1994 1993 1992 Originated, renewed, and purchased:
Amount (in thousands): Real estate loans $1,173,386 $ 939,769 $ 841,898 Non-real estate loans 2,983,418 2,499,113 1,969,564 Retail sales finance 2,283,561 1,422,851 1,044,549 Credit cards 537,738 546,611 506,176
Total originated and renewed 6,978,103 5,408,344 4,362,187 Purchased (net of sales) 60,533 31,501 259,492
Total originated, renewed, and purchased $7,038,636 $5,439,845 $4,621,679
Number: Real estate loans 70,823 58,163 48,778 Non-real estate loans 1,511,166 1,280,639 915,311 Retail sales finance 1,862,342 1,175,447 846,420
Average size (to nearest dollar): Real estate loans $16,568 $16,158 $17,260 Non-real estate loans 1,974 1,951 2,152 Retail sales finance 1,226 1,210 1,234
Balance at end of period:
Amount (in thousands): Real estate loans $2,704,929 $2,641,879 $2,782,297 Non-real estate loans 2,660,523 2,318,102 2,054,380 Retail sales finance 2,075,380 1,218,016 986,008 Credit cards 479,480 395,991 377,001
Total $7,920,312 $6,573,988 $6,199,686
Number: Real estate loans 162,315 153,562 153,621 Non-real estate loans 1,432,054 1,270,167 1,074,511 Retail sales finance 1,524,072 993,058 784,067 Credit cards 403,262 336,837 333,616
Total 3,521,703 2,753,624 2,345,815
Average size (to nearest dollar): Real estate loans $16,665 $17,204 $18,111 Non-real estate loans 1,858 1,825 1,912 Retail sales finance 1,362 1,227 1,258 Credit cards 1,189 1,176 1,130
Item 1. Continued
ANR
The following table details ANR by type of finance receivable for the years indicated:
1994 1993 1992 (dollars in thousands)
Loans $5,099,942 $4,942,508 $4,736,611 Retail sales finance 1,578,521 1,076,550 847,558 Credit cards 417,548 367,986 355,248
Total $7,096,011 $6,387,044 $5,939,417
Yield
The following table details yield for the years indicated:
1994 1993 1992
Loans 17.70% 17.05% 16.63% Retail sales finance 16.20% 15.48% 15.87% Credit cards 21.39% 19.91% 20.30%
Total 17.58% 16.95% 16.74%
Geographic Distribution
See Note 3. of the Notes to Consolidated Financial Statements in Item 8. herein for information on geographic distribution of finance receivables.
Item 1. Continued
Finance Receivable Loss and Delinquency Experience
The finance receivable loss experience for the Company, for the periods indicated, is set forth in the net charge-offs and charge-off ratio(a) information below: Years Ended December 31, 1994 1993 1992 (dollars in thousands) Real estate loans: Net charge-offs $ 15,408 $ 20,325 $ 21,403 Charge-off ratio .58% .74% .76%
Non-real estate loans: Net charge-offs $ 93,790 $ 79,016 $ 71,052 Charge-off ratio 3.92% 3.74% 4.00%
Total loans: Net charge-offs $109,198 $ 99,341 $ 92,455 Charge-off ratio 2.15% 2.01% 1.95%
Retail sales finance: Net charge-offs $ 38,404 $ 18,651 $ 12,166 Charge-off ratio 2.49% 1.75% 1.45%
Credit cards: Net charge-offs $ 24,885 $ 22,756 $ 24,459 Charge-off ratio 6.01% 6.20% 6.90%
Total: Net charge-offs $172,487 $140,748 $129,080 Charge-off ratio 2.45% 2.21% 2.18% Allowance for finance receivable losses (b) $226,226 $183,756 $161,678 Allowance ratio (b) 2.86% 2.80% 2.61%
(a) The charge-off ratio represents charge-offs net of recoveries as a percentage of the average of the amount of net finance receivables at the beginning of each month during the period.
(b) Allowance for finance receivable losses represents the balance at the end of the period. The allowance ratio represents the allowance for finance receivable losses at the end of the period as a percentage of net finance receivables.
The allowance for finance receivable losses is maintained at a level based on management's periodic evaluation of the finance receivable portfolio and reflects an amount that, in management's opinion, is adequate to absorb losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior finance receivable loss and delinquency experience, the composition of the finance receivable portfolio, and management's estimate of anticipated finance receivable losses.
Item 1. Continued
AGFI's basic policy is to charge off each month loan accounts, except those secured by real estate, on which little or no collections were made in the prior six-month period. Retail sales contracts are charged off when four installments are past due. Private label and credit card accounts are charged off when 180 days past due. In the case of loans secured by real estate, foreclosure proceedings are instituted when four monthly installments are past due. When foreclosure is completed and the Company has obtained title to the property, the real estate is established as an asset valued at market value, and any loan value in excess of that amount is charged off. Exceptions are made to the charge-off policies when, in the opinion of management, such treatment is warranted.
Based upon contract terms in effect at the respective dates, delinquency(a) was as follows: December 31, 1994 1993 1992 (dollars in thousands)
Real estate loans $ 46,746 $ 48,426 $ 53,046 % of related receivables 1.64% 1.75% 1.83%
Non-real estate loans $140,615 $102,855 $ 75,449 % of related receivables 4.54% 3.83% 3.18%
Total loans $187,361 $151,281 $128,495 % of related receivables 3.15% 2.77% 2.44%
Retail sales finance $ 49,259 $ 17,746 $ 11,670 % of related receivables 2.13% 1.27% 1.01%
Credit cards $ 15,454 $ 12,537 $ 12,373 % of related receivables 3.25% 3.19% 3.31%
Total $252,074 $181,564 $152,538 % of related receivables 2.89% 2.51% 2.24%
(a) Finance receivables any portion of which was 60 days or more past due (including unearned finance charges and excluding deferred origination costs, a fair value adjustment on finance receivables, and accrued interest).
Sources of Funds
AGFI funds its consumer finance operations principally through net cash flows from operating activities, issuances of long-term debt, short-term borrowings in the commercial paper market, and borrowings from banks. The spread between the rates charged in consumer finance operations and the cost of borrowed funds is one of the major factors determining the Company's earnings. The Company is limited by statute in most states to a maximum rate which it may charge in its lending operations.
Item 1. Continued
Average Borrowings
The following table details average borrowings by type of debt for the years indicated: 1994 1993 1992 (dollars in thousands)
Long-term debt $4,162,229 $3,856,328 $3,181,509 Short-term debt 2,138,324 1,781,165 1,889,874 Investment certificates 8,348 55,587 246,453
Total $6,308,901 $5,693,080 $5,317,836
Borrowing Cost
The following table details interest expense as a percentage of average borrowings by type of debt for the years indicated:
1994 1993 1992
Long-term debt 7.33% 7.88% 8.68% Short-term debt 5.18% 4.11% 5.64% Investment certificates 5.68% 4.74% 6.31%
Total 6.60% 6.67% 7.49%
Contractual Maturities
Contractual maturities of finance receivables and debt as of December 31, 1994 were as follows: Net Finance Receivables Debt (dollars in thousands) Due in: 1995 $3,152,603 $3,681,094 1996 1,468,445 590,897 1997 900,143 1,132,176 1998 455,543 242,492 1999 275,705 533,694 2000 and thereafter 1,667,873 910,643
Total $7,920,312 $7,090,996
See Note 3. of the Notes to Consolidated Financial Statements in Item 8. herein for further information on principal cash collections of finance receivables.
Item 1. Continued
INSURANCE OPERATIONS
Merit is a life and health insurance company domiciled in Indiana and currently licensed in 43 states and the District of Columbia. Merit writes or assumes (through affiliated and non-affiliated insurance companies) credit life, credit accident and health, and ordinary insurance coverages.
Yosemite is a property and casualty insurance company domiciled in California and licensed in 42 states which principally underwrites credit- related property and casualty coverages.
Both Merit and Yosemite market their products through the consumer finance network of the Company. The credit life insurance policies typically cover the life of the borrower in an amount equal to the unpaid balance of the obligation and provide for payment in full to the lender of the insured's obligation in the event of death. The credit accident and health insurance policies provide for the payment of the installments on the insured's obligation to the lender coming due during a period of unemployment or disability due to illness or injury. The credit-related property and casualty insurance is written to protect property pledged as security for the obligation. The purchase by the borrower of credit life, credit accident and health, and credit property and casualty insurance is voluntary with the exception of property damage coverage for automobiles, dwellings, and commercial real estate pledged as collateral. In these instances, property damage coverage is provided under the terms of the lending agreement if the borrower does not provide evidence of coverage with another insurance carrier. Premiums for insurance products are financed as part of the insured's obligation to the lender.
Merit has from time to time entered into reinsurance agreements with other insurance companies, including certain American General subsidiaries, for assumptions of various shares of annuities and ordinary, group, and credit life insurance on a coinsurance basis. The reserves attributable to this business fluctuate over time and in certain instances are subject to recapture by the ceding company. At December 31, 1994, life reserves on the books of Merit attributable to these reinsurance agreements amounted to $75.9 million.
Item 1. Continued
The following tables set forth information concerning the insurance operations:
Life Insurance in Force December 31, 1994 1993 1992 (dollars in thousands)
Credit life $2,899,124 $2,547,784 $2,221,940 Ordinary life 2,773,928 2,373,685 2,208,685
Total $5,673,052 $4,921,469 $4,430,625
Premiums Earned Years Ended December 31, 1994 1993 1992 (dollars in thousands) Insurance premiums earned in connection with affiliated finance and loan activities: Credit life $ 39,398 $ 35,711 $ 30,324 Credit accident and health 51,983 42,978 34,222 Property 37,847 25,686 18,594 Other insurance premiums earned: Ordinary life 26,685 20,823 19,344 Premiums assumed under coinsurance agreements 18,599 12,318 6,984
Total $174,512 $137,516 $109,468
Premiums Written Years Ended December 31, 1994 1993 1992 (dollars in thousands) Insurance premiums written in connection with affiliated finance and loan activities: Credit life $ 47,864 $ 41,036 $ 36,605 Credit accident and health 64,395 56,839 44,029 Property 55,086 47,358 19,344 Other insurance premiums written: Ordinary life 26,685 20,823 23,968 Premiums assumed under coinsurance agreements 18,599 12,318 6,984
Total $212,629 $178,374 $130,930
Item 1. Continued
Investments and Investment Results
The following table summarizes the investment results of the Company's insurance subsidiaries for the periods indicated:
Years Ended December 31, 1994 1993 1992 (dollars in thousands)
Net investment revenue (a) $ 56,795 $ 55,654 $ 54,134
Average invested assets $722,117 $666,982 $597,631
Return on invested assets (a) 7.87% 8.34% 9.06%
Net realized investment (losses) gains (b) $ (141) $ 7,101 $ 1,937
(a) Net investment revenue and return on invested assets are after deduction of investment expense but before net realized investment (losses) gains and provision for income taxes.
(b) Includes net realized investment (losses) gains on marketable securities and other invested assets before provision for income taxes.
See Note 5. of the Notes to Consolidated Financial Statements in Item 8. herein for information regarding investments in marketable securities for all operations of the Company.
REGULATION
Consumer Finance
The Company operates under various state laws which regulate the consumer lending and retail sales financing businesses. The degree and nature of such regulation varies from state to state. In general, the laws under which a substantial amount of the Company's business is conducted provide for state licensing of lenders; impose maximum term, amount, interest rate, and other charge limitations; and enumerate whether and under what circumstances insurance and other ancillary products may be sold in connection with a lending transaction. In addition, certain of these laws prohibit the taking of liens on real estate except liens resulting from judgments.
The Company also is subject to various types of federal regulation, including the Federal Consumer Credit Protection Act (governing disclosure of applicable charges), the Equal Credit Opportunity Act (prohibiting discrimination against credit worthy applicants), the Fair Credit Reporting Act (governing the accuracy and use of credit bureau reports), and certain Federal Trade Commission rules. AGF-Utah, which engages in the consumer
Item 1. Continued
finance business and accepts insured deposits, is subject to regulation by and reporting requirements of the Federal Deposit Insurance Corporation and is subject to regulatory codes in the state of Utah.
Insurance
The operations of the Company's insurance subsidiaries are subject to regulation and supervision by state authorities. The extent of such regulation varies but relates primarily to conduct of business, types of products offered, standards of solvency, payment of dividends, licensing, nature of and limitations on investments, deposits of securities for the benefit of policyholders, the approval of policy forms and premium rates, periodic examination of the affairs of insurers, form and content of required financial reports and establishment of reserves required to be maintained for unearned premiums, losses, and other purposes. Substantially all of the states in which the Company operates regulate the rates of premiums charged for credit life and credit accident and health insurance.
The investment portfolio of the Company's insurance subsidiaries is subject to state insurance laws and regulations which prescribe the nature, quality and percentage of various types of investments which may be made by insurance companies.
COMPETITION
Consumer Finance
The consumer finance business is highly competitive. The Company competes with other consumer finance companies, industrial banks, industrial loan companies, commercial banks, sales finance companies, savings and loan associations, credit unions, mutual or cooperative agencies, and others. See Competitive Factors in Item 7. herein for more information.
Insurance
The Company's insurance business primarily operates as a supplementary business to the consumer lending operations. As such, the competition for this business is relatively limited.
Item 2.

Item 2. Properties.
Due to the nature of the Company's business, its investment in real estate and tangible property is not significant in relation to its total assets. AGFI and certain of its subsidiaries own real estate on which AGFI and other affiliates conduct business. Branch office operations are generally conducted in leased premises. Leases ordinarily have terms from three to five years.
The Company's exposure to environmental regulation arises from its ownership of such properties and properties obtained through foreclosure. The properties are monitored for compliance with federal and local environmental guidelines. Potential costs related to environmental clean- up are estimated to be immaterial.
Item 3.

Item 3. Legal Proceedings.
The Company is a defendant in various lawsuits and proceedings arising in the normal course of business that are not discussed below. Some of these lawsuits and proceedings arise in jurisdictions such as Alabama that permit punitive damages disproportionate to the actual damages alleged. Although no assurances can be given and no determination can be made at this time as to the outcome of any particular lawsuit or proceeding, the Company believes that there are meritorious defenses for all of these claims and is defending them vigorously. The Company also believes that the total amounts that would ultimately be paid, if any, arising from these claims would have no material effect on the Company's consolidated results of operations and consolidated financial position.
Environmental
In March 1994, a subsidiary of AGFI and a subsidiary of AGFC were named as defendants in a lawsuit, The People of the State of California ("California") V. Luis Ochoa, Skeeters Automotive, Morris Plan, Creditway of America, Inc., and American General Finance, filed in the Superior Court of California, County of San Joaquin, Case No. 271130. California is seeking injunctive relief, a civil penalty of not less than $5,000 per day or not less than $250,000 for violation of its Health and Safety Code in connection with the failure to register and remove underground storage tanks on property acquired through a foreclosure proceeding by a subsidiary of AGFI, and a civil penalty of $2,500 for each act of unfair competition prohibited by its Business and Professions Code, but not less than $250,000, plus costs. The Company believes that the total amounts that would ultimately be paid, if any, arising from this environmental claim would have no material effect on the Company's consolidated results of operations and consolidated financial position.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no trading market for AGFI's common stock, all of which is owned by American General. The frequency and amount of cash dividends declared on AGFI's common stock for the years indicated were as follows:
Quarter Ended 1994 1993 (dollars in thousands)
March 31 $ 33,201 $ 26,000 June 30 22,800 42,100 September 30 21,600 52,900 December 31 14,200 48,198
$ 91,801 $169,198
See Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7. herein, as well as Note 13. of Notes to Consolidated Financial Statements in Item 8. herein, with respect to limitations on the ability of AGFI and its subsidiaries to pay dividends.
Item 6.

Item 6. Selected Financial Data.
The following selected financial data are derived from the consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.
Years Ended December 31, 1994 1993(a) 1992 1991 1990 (dollars in thousands)
Total revenues $1,491,239 $1,288,777 $1,170,371 $1,141,662 $1,114,068
Net income (b) 244,988 195,741 161,908 135,020 121,925
December 31, 1994 1993(a) 1992 1991 1990 (dollars in thousands)
Total assets $8,980,728 $7,658,775 $7,210,763 $6,906,025 $6,802,524
Long-term debt 4,312,932 4,018,797 3,604,371 2,819,045 2,239,448
(a) The Company adopted three new accounting standards through cumulative adjustments as of January 1, 1993, resulting in a one-time reduction of net income of $12.7 million. See Note 2. of the Notes to Consolidated Financial Statements in Item 8. herein for information on the adoption of new accounting standards.
(b) Per share information is not included because all of the common stock of AGFI is owned by American General.
Item 7.

Item 7. Continued
ANALYSIS OF OPERATING RESULTS
See Selected Financial Statistics in Item 1. herein, for information on important aspects of the Company's business and as a frame of reference for the discussion following.
Net income for the years ended December 31, 1994, 1993, and 1992, was $245.0 million, $195.7 million, and $161.9 million, respectively.
Factors which specifically affected the Company's operating results are as follows:
Finance Charges
Changes in finance charge revenues, the principal component of total revenues, are a function of period to period changes in the levels of ANR and yield. ANR for 1994 and 1993 increased when compared to the respective previous year. Finance receivables increased primarily due to receivables originated or renewed by the Company due to business development efforts. The yield for 1994 and 1993 increased when compared to the respective previous year primarily due to the increased proportion of higher-rate, non-real estate loans in the loan portfolio during 1994 and 1993 and higher yield on retail sales finance and credit cards for 1994.
Insurance Revenues
Insurance revenues increased for 1994 and 1993 when compared to the respective previous year primarily due to the increase in earned premiums. Earned premiums increased primarily due to increased written premiums in prior periods and reinsurance assumptions. Written premiums increased primarily due to increased loan activity and insurance product introductions.
Other Revenues
Other revenues decreased slightly for 1994 and increased for 1993 when compared to the respective previous year primarily due to the respective decrease and increase in investment revenue. The decrease in investment revenue for 1994 when compared to 1993 resulted from realized investment losses and a decrease in investment portfolio yields, partially offset by an increase in invested assets. The increase in investment revenue for 1993 when compared to 1992 resulted from an increase in invested assets and realized investment gains, partially offset by a decline in investment portfolio yields. Investment portfolio yields declined for 1994 and 1993 when compared to the respective previous year primarily due to prepayments of higher yielding investments and lower reinvestment rates in recent years.
Item 7. Continued
Interest Expense
Changes in interest expense are a function of period to period changes in average borrowings and borrowing cost. Average borrowings for 1994 and 1993 increased when compared to the respective previous year primarily to fund asset growth. The borrowing cost for 1994 decreased when compared to 1993 due to lower long-term borrowing cost, partially offset by an increase in short-term borrowing cost. The borrowing cost for 1993 decreased when compared to 1992 due to lower short-term and long-term borrowing costs.
Operating Expenses
Operating expenses increased for 1994 when compared to 1993 primarily due to increases in salaries and data processing expense. The increase in salaries expense was primarily due to operational staffing increases, to support the Company's growth (including over 100 new consumer finance offices), and merit salary increases. The increase in data processing expense was primarily due to equipment expenses resulting from a branch office automation program and an increase in processor fees due to higher private label and credit card activity. Operating expenses increased for 1993 when compared to 1992 primarily due to increases in salaries, benefits, and occupancy costs. These expenses increased in 1993 as a result of the 1992 third quarter increase in the number of consumer finance offices and the additional employees required to operate such offices. Operating expenses also increased for 1993 when compared to 1992 due to the branch office automation program. The increase in operating expenses for 1994 and 1993 when compared to the respective previous year was partially offset by the increase in deferral of finance receivable origination costs.
Provision for Finance Receivable Losses
Provision for finance receivable losses for 1994 and 1993 increased when compared to the respective previous year due to an increase in net charge- offs and amounts provided for the allowance for finance receivable losses. Net charge-offs for 1994 increased when compared to 1993 due to the increase in charge-off ratios and ANR. Charge-off ratios increased for 1994 when compared to 1993 due to the increase in the charge-off ratio on retail sales finance and loans partially offset by a decrease in the charge-off ratio for credit cards. The charge-off ratio on loans increased primarily due to the increased proportion of non-real estate loans in the loan portfolio and the increase in the charge-off ratio on such loans. As expected, the increased proportion of non-real estate loans in the loan portfolio has contributed to both higher charge-off ratios and corresponding higher yields. Net charge-offs for 1993 increased when compared to 1992 primarily due to the increase in ANR. The allowance for finance receivable losses for 1994 and 1993 increased when compared to the respective previous year primarily to bring the balance to appropriate levels based upon the balance of finance receivables, portfolio mix, levels of delinquency, net charge-offs, and the economic climate.
Item 7. Continued
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses for 1994 and 1993 increased when compared to the respective previous year primarily due to an increase in claims and reserves resulting from the increase in premiums written due to increased loan activity and reinsurance assumptions.
Cumulative Effect of Accounting Changes
The adoption of three new accounting standards resulted in a cumulative adjustment effective January 1, 1993 consisting of a one-time charge to earnings of $12.7 million. Other than the cumulative effect, adoption of these new accounting standards did not have a material effect on 1994 or 1993 net income and is not expected to have a material impact in the future.
ANALYSIS OF FINANCIAL CONDITION
At December 31, 1994, the Company's assets are distributed primarily as follows: 85.67% in finance receivables, 7.82% in marketable securities, 3.22% in acquisition-related goodwill, 2.70% in other assets, and .59% in cash and cash equivalents.
Asset Quality
The Company believes that its geographic diversification reduces the risk associated with a recession in any one region. An additional indication of asset quality is that of the loans and retail sales finance outstanding at December 31, 1994, 92% are secured by real property or personal property.
The delinquency ratio increased for 1994 when compared to 1993 reflecting the increase in the delinquency ratio of loans, primarily due to the increase in the delinquency ratio on non-real estate loans and the increased proportion of such loans in the loan portfolio, and the increase in the delinquency ratio on retail sales finance and credit cards. The charge-off ratio for 1994 increased when compared to 1993 reflecting an increase in the charge-off ratio of retail sales finance and loans partially offset by a decrease in the charge-off ratio of credit cards. The charge-off ratio on loans increased primarily due to the increased proportion of non-real estate loans in the loan portfolio and the increase in the charge-off ratio on such loans. While finance receivables have some exposure to further economic uncertainty, the Company believes that in the present environment, the allowance for finance receivable losses is adequate.
Marketable securities principally represent the investment portfolio of the Company's insurance operations. The investment strategy is to optimize after-tax returns on invested assets, subject to the constraints of safety, liquidity, diversification, and regulation.
Item 7. Continued
The largest intangible asset is acquisition-related goodwill which is charged to expense in equal amounts, generally over 20 or 40 years. See Note 1. of the Notes to Consolidated Financial Statements in Item 8.

Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated financial statements are presented on the following pages.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors American General Finance, Inc.
We have audited the accompanying consolidated balance sheets of American General Finance, Inc. (a wholly-owned subsidiary of American General Corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1994. Our audit also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American General Finance, Inc. and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. 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 2. of the Notes to Consolidated Financial Statements, in 1993 the Company changed its method of accounting for postretirement benefits other than pensions, income taxes, postemployment benefits, reinsurance, loan impairments, and certain investments in debt and equity securities, as a result of adopting promulgated accounting standards governing the accounting treatment for these items.
ERNST & YOUNG LLP
Nashville, Tennessee February 14, 1995
American General Finance, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, Assets 1994 1993 (dollars in thousands) Finance receivables, net of unearned finance charges (Note 3.): Real estate loans $2,704,929 $2,641,879 Non-real estate loans 2,660,523 2,318,102 Retail sales finance 2,075,380 1,218,016 Credit cards 479,480 395,991
Net finance receivables 7,920,312 6,573,988 Allowance for finance receivable losses (Note 4.) (226,226) (183,756) Net finance receivables, less allowance for finance receivable losses 7,694,086 6,390,232
Marketable securities (Note 5.) 702,510 699,697 Cash and cash equivalents 52,729 48,374 Goodwill (Note 6.) 289,000 299,653 Other assets (Note 6.) 242,403 220,819
Total assets $8,980,728 $7,658,775
Liabilities and Shareholder's Equity
Long-term debt (Note 7.) $4,312,932 $4,018,797 Short-term notes payable: Commercial paper (Notes 8. and 9.) 2,609,986 1,643,961 Banks and other (Notes 8. and 10) 161,477 171,000 Investment certificates 6,601 9,406 Insurance claims and policyholder liabilities 466,883 415,488 Other liabilities 191,278 231,737 Accrued taxes 19,831 57,686
Total liabilities 7,768,988 6,548,075
Shareholder's equity Common stock (Note 12.) 1,000 1,000 Additional paid-in capital 616,021 616,021 Net unrealized investment (losses) gains (Note 5.) (18,407) 33,740 Retained earnings (Note 13.) 613,126 459,939
Total shareholder's equity 1,211,740 1,110,700
Total liabilities and shareholder's equity $8,980,728 $7,658,775
See Notes to Consolidated Financial Statements.
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1994 1993 1992 (dollars in thousands) Revenues Finance charges $1,247,727 $1,082,660 $ 994,296 Insurance 180,913 142,856 119,272 Other 62,599 63,261 56,803
Total revenues 1,491,239 1,288,777 1,170,371
Expenses Interest expense 416,233 379,764 398,168 Operating expenses 371,125 330,122 307,782 Provision for finance receivable losses 213,987 162,847 135,102 Insurance losses and loss adjustment expenses 97,893 79,214 66,603
Total expenses 1,099,238 951,947 907,655
Income before provision for income taxes and cumulative effect of accounting changes 392,001 336,830 262,716
Provision for Income Taxes (Note 11.) 147,013 128,437 100,808
Income before cumulative effect of accounting changes 244,988 208,393 161,908
Cumulative Effect of Accounting Changes (Note 2.) - (12,652) -
Net Income $ 244,988 $ 195,741 $ 161,908
See Notes to Consolidated Financial Statements.
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31, 1994 1993 1992 (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 616,021 615,874 615,874 Capital contribution from parent and other - 147 - Balance at end of year 616,021 616,021 615,874
Net Unrealized Investment (Losses) Gains Balance at beginning of year 33,740 617 655 Change during year (52,147) (318) (38) Effect of accounting change - 33,441 - Balance at end of year (18,407) 33,740 617
Retained Earnings Balance at beginning of year 459,939 433,396 404,328 Net income 244,988 195,741 161,908 Common stock dividends (91,801) (169,198) (132,840) Balance at end of year 613,126 459,939 433,396
Total Shareholder's Equity $1,211,740 $1,110,700 $1,050,887
See Notes to Consolidated Financial Statements.
American General Finance, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994
Note 1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of American General Finance, Inc. (AGFI) and all of its subsidiaries (the Company) including American General Finance Corporation (AGFC) and American General Financial Center (AGF-Utah). The subsidiaries are all wholly-owned and all intercompany items have been eliminated. AGFI is a wholly-owned subsidiary of American General Corporation (American General).
Certain amounts in the 1993 and 1992 financial statements have been reclassified to conform to the 1994 presentation.
FINANCE OPERATIONS
Revenue Recognition
Revenue on finance receivables is accounted for as follows:
(1) Finance charges on discounted finance receivables and interest on interest-bearing finance receivables are recognized as revenue on the accrual basis using the interest method. The accrual of revenue is suspended when the fourth contractual payment becomes past due for loans and retail sales contracts (which are included in retail sales finance) and when the sixth contractual payment becomes past due for private label (which are also included in retail sales finance) and credit cards.
(2) Extension fees and late charges are recognized as revenue when received.
(3) Nonrefundable points and fees on loans are recognized on the accrual basis using the interest method over the lesser of the contractual term or the estimated life based upon prepayment experience (50 months for real estate loans and 19 months for non-real estate loans). If a loan liquidates before amortization is completed, any unamortized fees are recognized as revenue at the date of liquidation. Nonrefundable points and fees on retail sales finance and deferred annual fees on credit cards are not material.
Notes to Consolidated Financial Statements, Continued
Origination Costs
The Company defers costs associated with the origination of loans, private label, and credit card receivables. Deferred loan origination costs are included in finance receivables and are amortized to finance charges using the interest method over the contractual term or the estimated economic life of the loans (50 months for real estate loans and 19 months for non- real estate loans). If a loan liquidates before amortization is completed, any unamortized costs are charged to revenue at the date of liquidation. Deferred costs for the origination of private label and credit cards are not material.
Allowance For Finance Receivable Losses
The allowance for finance receivable losses is maintained at a level based on management's periodic evaluation of the finance receivable portfolio and reflects an amount that, in management's opinion, is adequate to absorb losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior finance receivable loss and delinquency experience, the composition of the finance receivable portfolio, and management's estimate of anticipated finance receivable losses.
AGFI's basic policy is to charge off each month loan accounts, except those secured by real estate, on which little or no collections were made in the prior six-month period. Retail sales contracts are charged off when four installments are past due. Private label and credit card accounts are charged off when 180 days past due. In the case of loans secured by real estate, foreclosure proceedings are instituted when four monthly installments are past due. When foreclosure is completed and the Company has obtained title to the property, the real estate is established as an asset valued at market value, and any loan value in excess of that amount is charged off. Exceptions are made to the charge-off policies when, in the opinion of management, such treatment is warranted.
INSURANCE OPERATIONS
Revenue Recognition
The Company's insurance subsidiaries are engaged in writing credit life and credit accident and health insurance, ordinary life insurance, and property and casualty insurance. Premiums on credit life insurance are recognized as revenue using the sum-of-the-digits or actuarial methods, except in the case of level-term contracts, which are recognized as revenue using the straight-line method over the lives of the policies. Premiums on credit accident and health insurance are recognized as revenue using an average of the sum-of-the-digits and the straight-line methods. Ordinary life insurance premiums are reported as earned when collected but not before their due dates. Premiums on property and casualty insurance are recognized as revenue using the straight-line method over the terms of the policies or appropriate shorter periods.
Notes to Consolidated Financial Statements, Continued
Policy Reserves
Policy reserves for credit life and credit accident and health insurance are equal to related unearned premiums, and claim reserves are based on company experience. Liabilities for future life insurance policy benefits associated with ordinary life contracts are accrued when premium revenue is recognized and are computed on the basis of assumptions as to investment yields, mortality, and withdrawals. Annuity reserves are computed on the basis of assumptions as to investment yields and mortality. Reserves for losses and loss adjustment expenses of the property and casualty insurance company are based upon estimates of claims reported plus estimates of incurred but not reported claims. Ordinary life, group annuity, and accident and health insurance reserves assumed under coinsurance agreements are established on the bases of various tabular and unearned premium methods.
Acquisition Costs
Insurance acquisition costs, principally commissions, reinsurance fees, and premium taxes, are deferred and charged to expense over the terms of the related policies or reinsurance agreements.
Reinsurance
The Company's insurance subsidiaries enter into reinsurance agreements among themselves and other insurers, including insurance subsidiaries of American General. The life reserves attributable to this business with the subsidiaries of American General were $61.6 million and $62.6 million at December 31, 1994 and 1993, respectively. The Company's insurance subsidiaries assumed from other insurers $51.4 million, $42.5 million, and $30.3 million of reinsurance premiums during 1994, 1993, and 1992, respectively. The Company's ceded reinsurance activities were not significant during the last three years.
GAAP vs. Statutory Accounting
Statutory accounting practices differ from generally accepted accounting principles, primarily in the following respects: credit life insurance reserves are maintained on the basis of mortality tables; ordinary life and group annuity insurance reserves are based on statutory requirements; insurance acquisition costs are expensed when incurred rather than expensed over the related contract period; deferred income taxes are not recorded on temporary differences in the recognition of revenue and expense for tax versus statutory reporting purposes; certain intangible assets resulting from a purchase and the related amortization are not reflected in statutory financial statements; investments in fixed-maturity marketable securities are carried at amortized cost; and an asset valuation reserve and interest maintenance reserve are required for Merit Life Insurance Co. (Merit), which is a wholly-owned subsidiary of AGFC. The following compares net income and shareholder's equity determined under statutory accounting
Notes to Consolidated Financial Statements, Continued
practices with those determined under generally accepted accounting principles:
Net Income Shareholder's Equity Years Ended December 31, December 31, 1994 1993 1992 1994 1993 (dollars in thousands) Statutory accounting practices $35,466 $31,080 $32,128 $279,231 $245,175
Generally accepted accounting principles 46,903 39,363 38,164 381,577 386,821
MARKETABLE SECURITIES
Valuation
Effective with the adoption of Statement of Financial Accounting Standards (SFAS) 115 (see Note 2.), management determines the appropriate classification of marketable securities at the time of purchase and re- evaluates such designation at each balance sheet date. All marketable securities are currently classified as available-for-sale and recorded at fair value. After adjusting related balance sheet accounts as if the unrealized investment gains or losses had been realized, the net adjustment is recorded in net unrealized investment gains or losses within shareholder's equity. If the fair value of a marketable security classified as available-for-sale declines below its cost and this decline is considered to be other than temporary, the marketable security is reduced to its net realizable value, and the reduction is recorded as a realized loss.
Realized Gains or Losses
Realized gains or losses are recognized using the specific identification method and include declines in fair value of marketable securities below cost that are considered other than temporary. Realized gains or losses are included in other revenues.
OTHER
Cash Equivalents
The Company considers all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents.
Notes to Consolidated Financial Statements, Continued
Goodwill
Acquisition-related goodwill is charged to expense in equal amounts, generally over 20 or 40 years. The carrying value of goodwill is regularly reviewed for indicators of impairment in value, which in the view of management are other than temporary, including unexpected or adverse changes in the following: 1) the economic or competitive environments in which the Company operates, 2) profitability analyses, and 3) cash flow analyses. If facts and circumstances suggest that goodwill is impaired, the Company assesses the fair value of the underlying business and reduces goodwill to an amount that results in the book value of the Company approximating fair value. The Company determines the fair value based on an independent appraisal.
At December 31, 1994, the reported value and the remaining life of acquisition-related goodwill are considered appropriate.
Income Taxes
Beginning in 1993, income taxes have been provided in accordance with SFAS 109 (see Note 2.). Under this standard, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences reverse. The effect of a tax rate change is recognized in income in the period of enactment.
A valuation allowance for deferred tax assets is provided if all or some portion of the deferred tax asset may not be realized. An increase or decrease in a valuation allowance that results from a change in circumstances that causes a change in judgement about the realizability of the related deferred tax asset is included in income. A change related to fluctuations in fair value of available-for-sale marketable securities is included in unrealized investment gains or losses in shareholder's equity.
Before 1993, the Company recognized deferred taxes on timing differences between financial reporting income and taxable income. Deferred taxes were not adjusted for tax rate changes.
Interest Conversion Agreements
The interest differential to be paid or received on interest conversion agreements is accrued as interest rates change and is recognized over the life of the agreements as an adjustment to interest expense. The related amount payable to or receivable from counterparties is included in other liabilities or other assets.
Notes to Consolidated Financial Statements, Continued
Fair Value of Financial Instruments
The fair values disclosed in Note 17. are based on estimates using discounted cash flows when quoted market prices are not available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The fair value amounts presented can be misinterpreted, and care should be exercised in drawing conclusions from such data.
Note 2. Accounting Changes
During 1994, the Company adopted two SFAS's issued by the Financial Accounting Standards Board.
The Company adopted SFAS 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," and SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." SFAS 118 requires disclosures about the recorded investment in certain impaired loans and the recognition of related interest income. SFAS 119 requires additional disclosures about derivative financial instruments and amends existing fair value disclosure requirements. These standards do not impact the Company's consolidated financial statements.
During 1993, the Company adopted six SFAS's issued by the Financial Accounting Standards Board.
The Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," through a cumulative adjustment, effective January 1, 1993, resulting in a one-time reduction of net income of $2.9 million ($4.4 million pretax). This standard requires accrual of a liability for postretirement benefits other than pensions.
The Company adopted SFAS 109, "Accounting for Income Taxes," through a cumulative adjustment, effective January 1, 1993, resulting in a one-time reduction of net income of $8.6 million. This standard changes the way income tax expense is determined for financial reporting purposes.
The Company adopted SFAS 112, "Employers' Accounting for Postemployment Benefits," through a cumulative adjustment, effective January 1, 1993, resulting in a one-time reduction of net income of $1.2 million ($1.8 million pretax). This standard requires the accrual of a liability for benefits provided to employees after employment but before retirement.
Notes to Consolidated Financial Statements, Continued
The Company adopted SFAS 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," effective January 1, 1993. This standard, which does not have a material impact on the consolidated financial statements, requires that reinsurance receivables and prepaid reinsurance premiums be reported as assets, rather than netted against the related insurance liabilities.
The Company adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan," effective January 1, 1993. This standard requires that certain impaired loans be reported at the present value of expected future cash flows, the loan's observable market price, or the fair value of underlying collateral. This standard does not have a material impact on the consolidated financial statements.
The Company adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," at December 31, 1993. This standard requires that debt and equity securities be carried at fair value unless the Company has the positive intent and ability to hold these investments to maturity. Marketable securities must be classified into one of three categories: 1) held-to-maturity, 2) available-for-sale, or 3) trading securities. At December 31, 1993, the Company classified all marketable securities as available-for-sale and recorded net unrealized investment gains of $33.4 million to shareholder's equity. Rising interest rates during 1994 caused a decrease in the fair value of the Company's available-for-sale marketable securities. As a result, shareholder's equity included net unrealized investment losses on marketable securities affected by SFAS 115 of $18.5 million at December 31, 1994.
Note 3. Finance Receivables
Loans collateralized by security interests in real estate generally have maximum original terms of 180 months. Loans collateralized by consumer goods, automobiles or other chattel security, and loans that are unsecured, generally have maximum original terms of 60 months. Retail sales contracts are collateralized principally by consumer goods and automobiles, and generally have maximum original terms of 60 months. Private label are secured by a purchase money security interest in the goods purchased and generally require minimum monthly payments based upon current balances. Credit card receivables are unsecured and require minimum monthly payments based upon current balances. Of the loans and retail sales finance outstanding at December 31, 1994, 92% were secured by the real or personal property of the borrower. At December 31, 1994, mortgage loans (generally second mortgages) accounted for 50% of the aggregate dollar amount of loans outstanding and 10% of the total number of loans outstanding.
Notes to Consolidated Financial Statements, Continued
Contractual maturities of finance receivables were as follows:
December 31, 1994 Net Receivables Percent of Amount Net Receivables (dollars in thousands)
1995 $3,152,603 39.80% 1996 1,468,445 18.54 1997 900,143 11.37 1998 455,543 5.75 1999 275,705 3.48 2000 and thereafter 1,667,873 21.06
Total $7,920,312 100.00%
Experience of the Company has shown that a substantial portion of finance receivables will be renewed, converted, or paid in full prior to maturity. Accordingly, the preceding information as to contractual maturities should not be considered as a forecast of future cash collections. Principal cash collections and such collections as a percentage of average net finance receivables were as follows:
1994 1993 (dollars in thousands) Loans: Principal cash collections $2,436,747 $2,100,565 Percent of average net finance receivables 47.78% 42.50%
Retail sales finance: Principal cash collections $1,454,419 $1,191,745 Percent of average net finance receivables 92.14% 110.70%
Credit cards: Principal cash collections $ 431,426 $ 504,529 Percent of average net finance receivables 103.32% 137.11%
Unused credit limits on private label extended by the Company to its customers were $2.4 billion and $595.0 million at December 31, 1994 and 1993, respectively. Unused credit limits on credit cards extended by the Company to its customers were $1.7 billion and $1.3 billion at December 31, 1994 and 1993, respectively. Unused credit limits on loan and other retail sales finance revolving lines of credit extended by the Company to its customers were $260.2 million and $176.5 million at December 31, 1994 and 1993, respectively. These amounts, in part or in total, can be cancelled at the discretion of the Company, and are not indicative of the amounts expected to be funded.
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 finance receivables, net of unearned finance charges, are as follows:
December 31, 1994 December 31, 1993 Location Amount Percent Amount Percent (dollars in thousands) (dollars in thousands)
California $ 810,562 10.23% $ 750,772 11.42% N. Carolina 638,942 8.07 581,754 8.85 Florida 574,229 7.25 502,977 7.65 Illinois 458,170 5.78 409,032 6.22 Indiana 410,265 5.18 364,706 5.55 Ohio 400,643 5.06 341,179 5.19 Virginia 355,094 4.48 353,397 5.38 Georgia 347,321 4.39 264,260 4.02 Other 3,925,086 49.56 3,005,911 45.72 $7,920,312 100.00% $6,573,988 100.00%
Note 4. Allowance for Finance Receivable Losses
The changes in the allowance for finance receivable losses are detailed below: 1994 1993 1992 (dollars in thousands)
Balance at beginning of year $183,756 $161,678 $151,091 Provision for finance receivable losses 213,987 162,847 135,102 Allowance related to net acquired receivables and other 970 (21) 4,565 Charge-offs: Finance receivables charged off (209,340) (169,758) (158,781) Recoveries 36,853 29,010 29,701 Net charge-offs (172,487) (140,748) (129,080) Balance at end of year $226,226 $183,756 $161,678
Notes to Consolidated Financial Statements, Continued
Note 5. Marketable Securities
At December 31, 1994 and 1993, all marketable securities were classified as available-for-sale and reported at fair value. Marketable securities were as follows at December 31:
Fair Value Amortized Cost 1994 1993 1994 1993 (dollars in thousands) Fixed-maturity marketable securities: Bonds: Corporate securities $324,706 $313,174 $338,624 $290,153 Mortgage-backed securities 206,120 234,062 222,788 223,868 States and political subdivisions 123,116 102,438 124,701 94,540 Other 38,561 40,766 34,297 30,736 Redeemable preferred stocks 8,782 7,486 9,334 7,180
Total 701,285 697,926 729,744 646,477
Non-redeemable preferred stocks 1,225 1,771 1,084 1,313
Total marketable securities $702,510 $699,697 $730,828 $647,790
At December 31, the gross unrealized investment gains and losses were as follows:
Gross Gross Unrealized Gains Unrealized Losses 1994 1993 1994 1993 (dollars in thousands) Fixed-maturity marketable securities: Bonds: Corporate securities $ 3,701 $23,836 $17,619 $ 815 Mortgage-backed securities 781 11,681 17,449 1,487 State and political subdivisions 2,534 8,031 4,119 133 Other 4,539 10,032 275 2 Redeemable preferred stocks - 315 552 9
Total 11,555 53,895 40,014 2,446
Non-redeemable preferred stocks 215 458 74 -
Total marketable securities $11,770 $54,353 $40,088 $ 2,446
Notes to Consolidated Financial Statements, Continued
During the years ended December 31, 1994, 1993, and 1992, marketable securities with a fair value of $81.2 million, $141.4 million, and $127.9 million, respectively, were sold or redeemed. The gross realized investment gains on such sales or redemptions totaled $.3 million, $7.4 million, and $3.1 million, respectively. The gross realized investment losses totaled $.6 million, $.1 million and $.5 million, respectively.
The contractual maturities of fixed-maturity securities at December 31, 1994 were as follows: Fair Amortized Value Cost (dollars in thousands) Fixed maturities, excluding mortgage-backed securities: Due in 1 year or less $ 8,732 $ 8,632 Due after 1 year through 5 years 82,417 81,144 Due after 5 years through 10 years 276,186 288,561 Due after 10 years 127,830 128,619
495,165 506,956 Mortgage-backed securities 206,120 222,788
Total $701,285 $729,744
Actual maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations. Company requirements and investment strategies may result in the sale of investments before maturity.
Certain of the bonds were on deposit with regulatory authorities. The carrying values of such bonds were $7.5 million and $18.6 million at December 31, 1994 and 1993, respectively.
Note 6. Costs In Excess of Net Assets Acquired
Goodwill, resulting from the excess of the purchase price paid over the fair value of separately identified tangible and intangible net assets acquired, amounted to $289.0 million and $299.7 million at December 31, 1994 and 1993, respectively. Accumulated amortization amounted to $59.0 million and $48.4 million at December 31, 1994 and 1993, respectively.
Included in other assets is a customer base valuation of $21.6 million and $23.2 million at December 31, 1994 and 1993, respectively, which is being amortized to operating expenses on a straight-line basis over a 25 year period.
Notes to Consolidated Financial Statements, Continued
Note 7. Long-term Debt
Long-term debt outstanding at December 31, is summarized as follows:
Senior Maturity Senior Subordinated Total (dollars in thousands)
1995 $ 753,076 $149,954 $ 903,030 1996 590,897 - 590,897 1997 1,132,176 - 1,132,176 1998 242,492 - 242,492 1999 533,694 - 533,694 2000-2004 612,787 - 612,787 2005-2009 297,856 - 297,856
Total $4,162,978 $149,954 $4,312,932
Certain debt issues of the Company are redeemable prior to maturity at par, at the option of the holders. If these issues were so redeemed, the senior amounts above would increase $148.9 million in 1996 and $149.0 million in 1999 and would decrease $297.9 million in 2009.
Carrying Value Fair Value Type of Debt 1994 1993 1994 1993 (dollars in thousands)
Senior $4,162,978 $3,547,244 $4,058,247 $3,776,820 Senior subordinated 149,954 471,553 149,922 486,806
Total $4,312,932 $4,018,797 $4,208,169 $4,263,626
The weighted average interest rates on long-term debt outstanding by type were as follows: Years Ended December 31, December 31, 1994 1993 1994 1993
Senior 7.28% 7.63% 7.11% 7.37% Senior subordinated 7.46 8.71 6.34 7.07 Total 7.33 7.88 7.08 7.33
Certain debt agreements contain restrictions on consolidated retained earnings for certain purposes (see Note 13.).
Notes to Consolidated Financial Statements, Continued
Note 8. Short-term Notes Payable and Credit Facilities
AGFC issues commercial paper with terms ranging from 1 to 270 days. Information concerning short-term notes payable for commercial paper and to banks was as follows: 1994 1993 1992 (dollars in thousands)
Maximum borrowings at any month end $2,770,886 $1,886,426 $2,096,961 Average borrowings $2,138,124 $1,780,732 $1,887,408 Weighted average interest rate, giving effect to interest conversion agreements and commitment fees 5.18% 4.11% 5.64% Weighted average interest rate, at December 31, 5.85% 3.30% 3.53%
Credit facilities are maintained to support the issuance of commercial paper and as an additional source of funds for operating requirements. At December 31, 1994 and 1993, the Company had committed credit facilities of $500.0 million and $390.0 million, respectively, and was an eligible borrower under $2.5 billion and $2.1 billion of committed credit facilities, respectively, extended to American General and certain of its subsidiaries. On January 31, 1995, the $2.5 billion of committed credit facilities extended to American General and certain of its subsidiaries were increased by $1.3 billion. The annual commitment fees for all committed facilities range from .070% to .125%. At December 31, 1994 and 1993, the Company also had $611.0 million and $496.0 million, respectively, of uncommitted credit facilities and was an eligible borrower under $195.0 million and $240.0 million, respectively, of uncommitted credit facilities extended to American General and certain of its subsidiaries. Available borrowings under all facilities are reduced by any amounts outstanding thereunder. At December 31, 1994 and 1993, Company short-term borrowings outstanding under all credit facilities were $160.9 million and $171.0 million, respectively, and Company long-term borrowings outstanding under all credit facilities were $168.1 million and $147.0 million, respectively, with remaining availability to the Company of $3.0 billion and $2.4 billion, respectively, in committed facilities and $477.0 million and $461.0 million, respectively, in uncommitted facilities.
Notes to Consolidated Financial Statements, Continued
Note 9. Derivative Financial Instruments
The Company is neither a dealer nor a trader in derivative financial instruments. On infrequent occasions, the Company has used interest conversion agreements and options on interest conversion agreements to manage the Company's exposure to market interest rate risk associated with debt. Interest rate conversion agreements involve the receipt of floating- rate amounts in exchange for fixed-rate interest payments, or vice versa, over the life of the agreement without an exchange of the underlying principal (or notional) amount.
The Company's objective for using interest conversion agreements and options on interest conversion agreements is to synthetically modify a portion of the Company's floating-rate borrowings to fixed rates. Such floating-rate obligations are carried at amortized cost (as opposed to fair value) in the Company's consolidated financial statements.
Fixed interest rates contracted to be paid on interest conversion agreements and options on interest conversion agreements approximated the rates on fixed-rate term debt with maturities similar to the derivative financial instruments at the date of contract. Accordingly, the Company's use of interest conversion agreements and options on interest conversion agreements did not have a material effect on the weighted-average interest rate or reported interest expense in any of the three years ended December 31, 1994.
Interest conversion agreements in which the Company contracted to pay interest at fixed rates and receive interest at floating rates were $390.0 million, $290.0 million, and $415.0 million in notional amounts at December 31, 1994, 1993, and 1992, respectively. The weighted average interest rate paid was 8.77%, 8.69%, and 8.71% for the year ended December 31, 1994, 1993, and 1992, respectively. The weighted average interest rate received was 4.64%, 3.35%, and 3.91% for the year ended December 31, 1994, 1993, and 1992, respectively. These agreements mature at various dates and have the respective fixed rates at December 31, 1994 as shown in the table below:
Notional Weighted Average Maturity Amount Interest Rate (dollars in thousands)
1996 $ 50,000 8.38% 1998 90,000 9.06 1999 50,000 9.39 2000 200,000 9.10
$390,000 9.03%
Notes to Consolidated Financial Statements, Continued
The rollforward of notional amounts for interest conversion agreements was as follows:
Notional Amounts 1994 1993 1992 (dollars in thousands)
Balance at beginning of year $ 290,000 $ 415,000 $ 765,000 New contracts (a) 200,000 50,000 100,000 Expired contracts (100,000) (175,000) (450,000)
Balance at end of year $ 390,000 $ 290,000 $ 415,000
(a) Reflects options exercised.
Options on interest conversion agreements at December 31, 1993 and 1992, in aggregate notional amounts, were $200.0 million and $250.0 million, respectively. There were no such agreements outstanding as of December 31, 1994. All such option agreements, when exercised by the counterparty, committed the Company to pay interest at fixed rates in exchange for receiving floating-rate interest payments. The related option fees received are being amortized as a reduction of interest expense over the aggregate of the option period and interest conversion period.
The Company is exposed to credit risk in the event of non-performance by counterparties to interest conversion agreements. The Company limits its exposure to credit risk by entering into interest conversion agreements with counterparties having high credit ratings and by basing the amount and term of an agreement on these credit ratings. Furthermore, the Company regularly monitors counterparty credit ratings throughout the term of the agreements.
The Company's current credit exposure on interest conversion agreements is limited to the fair value of interest conversion agreements that are favorable to the Company. At December 31, 1994, 1993, and 1992, the Company was in a payable position on all outstanding interest conversion agreements. The Company does not expect any counterparty to fail to meet its obligation; however, non-performance would not have a material impact on the consolidated financial statements.
The Company's exposure to market risk is mitigated by the offsetting effects of changes in the value of interest conversion agreements and of the underlying liabilities to which they relate.
Notes to Consolidated Financial Statements, Continued
Note 10. Short-term Notes Payable - Parent
Borrowings from American General primarily provide overnight operating liquidity when American General is in a surplus cash position. All such borrowings are made on a due on demand basis at short-term rates based on overnight bank investment rates. At December 31, 1994, 1993 and 1992, AGFI had no borrowings outstanding with American General. Information concerning such borrowings is as follows:
1994 1993 1992 (dollars in thousands)
Maximum borrowings at any month end $ - $ 178 $29,200 Average borrowings $ 200 $ 433 $ 2,466 Weighted average interest rate (total interest expense divided by average borrowings) 4.35% 3.22% 3.98%
Note 11. Income Taxes
AGFI and all of its subsidiaries file a consolidated federal income tax return with American General and its subsidiaries. AGFI and its subsidiaries provide for federal income taxes as if filing a separate tax return, and pay such amounts to American General in accordance with a tax sharing agreement.
As a result of the adoption of SFAS 109, income tax disclosures for 1994 and 1993 are not comparable to 1992.
Provision for income taxes is summarized as follows:
Years Ended December 31, 1994 1993 1992 (dollars in thousands) Federal Current $152,968 $124,295 $ 86,942 Deferred (17,020) (7,617) 759
Total federal 135,948 116,678 87,701 State 11,065 11,759 13,107
Total $147,013 $128,437 $100,808
Notes to Consolidated Financial Statements, Continued
The U.S. statutory federal income tax rate differs from the effective income tax rate as follows: Years Ended December 31, 1994 1993 1992
Statutory federal income tax rate 35.00% 35.00% 34.00% State income taxes 1.83 2.26 3.29 Amortization of goodwill 1.13 1.17 1.13 Nontaxable investment income (.55) (.56) (.65) Other, net .09 .26 .60
Effective income tax rate 37.50% 38.13% 38.37%
The net deferred tax asset at December 31, 1994 of $13.6 million was net of deferred tax liabilities totalling $97.8 million. The net deferred tax liability at December 31, 1993 of $25.5 million was net of deferred tax assets totalling $80.9 million. The most significant deferred tax assets relate to the provision for finance receivable losses and insurance premiums recorded for financial reporting purposes. No valuation allowance was considered necessary at December 31, 1994 and 1993.
On August 10, 1993, the Revenue Reconciliation Act of 1993 was enacted, which increased the corporate tax rate from 34% to 35%, retroactive to January 1, 1993. The additional 1% tax on earnings for first and second quarter 1993 was $1.6 million, and the effect of the 1% increase in the tax rate used to value existing deferred tax liabilities, as required by SFAS 109, was $.6 million. In accordance with SFAS 109, this total one-time charge of $2.2 million was included in provision for income taxes for the quarter ended September 30, 1993.
Note 12. Capital Stock
AGFI has two classes of capital stock: special shares (without par value, 25 million shares authorized) which may be issued in series with such dividend, liquidation, redemption, conversion, voting and other rights as the board of directors may determine prior to issuance; and common shares ($.50 par value, 25 million shares authorized). Issued shares were as follows:
Special Shares - As of December 31, 1994 and 1993, there were no shares issued and outstanding.
Common Shares - As of December 31, 1994 and 1993, there were 2 million shares issued and outstanding.
Notes to Consolidated Financial Statements, Continued
Note 13. Consolidated Retained Earnings
The ability of AGFI to pay dividends is substantially dependent on the receipt of dividends or other funds from its subsidiaries. The Company's insurance subsidiaries are restricted by state laws as to the amounts they may pay as dividends without prior notice to, or in some cases prior approval from, their respective state insurance departments. The maximum amount of dividends which can be paid by the Company's insurance subsidiaries in 1995 without prior approval is $35.5 million. The Company's insurance subsidiaries had statutory capital and surplus of $279.2 million at December 31, 1994. The amount of dividends which may be paid by AGFC is limited by provisions of certain of its financing agreements. Under the most restrictive provisions of such agreements, $407.9 million of the consolidated retained earnings of AGFC at December 31, 1994, was free from such restrictions. At that same date, $6.6 million of the retained earnings of AGFI's industrial loan company subsidiaries was unrestricted as to the payment of dividends.
At December 31, 1994, Merit had $52.7 million of accumulated earnings for which no federal income tax provisions have been required. Federal income taxes will become payable only to the extent such earnings are distributed as dividends or exceed limits prescribed by tax laws. No distributions are presently contemplated from these earnings. If such earnings were to become taxable at December 31, 1994, the federal income tax would approximate $18.4 million.
Note 14. Benefit Plans
RETIREMENT INCOME PLANS
The Company participates in the American General Retirement Plans (AGRP), which are noncontributory defined benefit pension plans covering most employees. Pension benefits are based on the participant's average monthly compensation and length of credited service. American General's funding policy is to contribute annually no more than the maximum amount that can be deducted for federal income tax purposes. American General uses the projected unit credit method to compute pension expense.
The plans' assets include primarily readily marketable securities.
Prior to 1994, the pension plans purchased annuity contracts from American General subsidiaries that provide benefits to certain retirees. These annuity contracts provided $2.3 million, $2.3 million, and $2.0 million for benefits to the Company's retirees for the years ended December 31, 1994, 1993, and 1992.
Notes to Consolidated Financial Statements, Continued
AGFI's participation in the AGRP is accounted for as if AGFI had its own plan. The following table sets forth AGFI's portion of the plans' funded status:
December 31, 1994 1993 1992 (dollars in thousands) Actuarial present value of benefit obligation: Accumulated benefit obligation $31,591 $35,868 $22,400 Vested benefits (included in accumulated benefit obligation) $30,748 $35,639 $21,985
Projected benefit obligation $38,778 $43,212 $29,278 Plan assets at fair value 50,247 49,767 44,678 Plan assets in excess of projected benefit obligation 11,469 6,555 15,400 Unrecognized prior service cost (480) (659) (821) Unrecognized net (gain) loss (2,656) 3,485 (4,320) Unrecognized net asset at January 1, net of amortization (1,528) (2,747) (3,925)
Prepaid pension expense $ 6,805 $ 6,634 $ 6,334
Net pension expense included the following components for the years ended December 31: 1994 1993 1992 (dollars in thousands)
Service cost $ 2,960 $ 2,375 $ 1,881 Interest on projected benefit obligation 3,084 2,791 3,687 Actual return on plan assets (237) (6,112) (5,000) Amortization of prior service costs (154) (157) (163) Amortization of unrecognized net asset existing at date of initial application (1,190) (1,190) (1,193) Deferral of net asset (loss) gain (4,179) 2,224 (631)
Total pension expense (income) $ 284 $ (69) $(1,419)
Additional assumptions concerning the determination of net pension costs is as follows: 1994 1993 1992
Weighted average discount rate 8.50% 7.25% 8.00% Expected long-term rate of return on plan assets 10.00 10.00 10.00 Rate of increase in compensation levels 4.00 4.00 5.00
Notes to Consolidated Financial Statements, Continued
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company participates in American General's life, medical, supplemental major medical, and dental plans for certain retired employees. Most plans are contributory, with retiree contributions adjusted annually to limit employer contributions to predetermined amounts. For individuals retiring after December 31, 1992, the cost of the supplemental major medical plan is borne entirely by retirees. American General and its subsidiaries have reserved the right to change or eliminate these benefits at any time.
American General's life plans are fully insured. A portion of the retiree medical and dental plans are funded through a voluntary employees' beneficiary association (VEBA) established in 1994; the remainder is unfunded and self-insured. All of the retiree medical and dental plans' assets held in the VEBA were invested in readily marketable securities at the plans' most recent balance sheet date.
AGFI's participation in the plans is accounted for as if AGFI had its own plans. The following table sets forth AGFI's portion of the plans' combined funded status and the accrued postretirement benefit cost included in other liabilities in the Company's Consolidated Balance Sheet:
December 31, 1994 1993 (dollars in thousands)
Retirees $1,847 $2,223 Fully eligible active plan participants 1,728 1,804 Other active plan participants 2,498 2,341
Accumulated postretirement benefit obligation 6,073 6,368 Plan assets at fair value (110) -
Accumulated postretirement benefit obligation in excess of plan assets at fair value 5,963 6,368 Unrecognized net loss (gain) 373 (226)
Accrued postretirement benefit cost $6,336 $6,142
Notes to Consolidated Financial Statements, Continued
Postretirement benefit expense included the following components for the year ended December 31: 1994 1993 (dollars in thousands) Service cost-benefits attributed to service during the period $ 271 $ 184 Interest cost on accumulated postretirement benefit obligation 470 403 Actual return on plan assets (2) - Deferral of net asset gain 2 -
Postretirement benefit expense $ 741 $ 587
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation for the years ended December 31, 1994 and 1993 was 8.50% and 7.25%, respectively. For measurement purposes, a 12% annual rate of increase in the per capita cost of covered health care benefits was assumed in 1995; the rate was assumed to decrease gradually to 6% in 2007 and remain at that level. A 1% increase in the assumed annual rate of increase in per capita cost of health care benefits results in an immaterial increase in the accumulated postretirement benefit obligation and postretirement benefit expense.
Note 15. Lease Commitments, Rent Expense and Contingent Liabilities
The approximate annual rental commitments for leased office space, automobiles and data processing and related equipment accounted for as operating leases, excluding leases on a month-to-month basis, are as follows: 1995, $24.6 million; 1996, $19.8 million; 1997, $14.7 million; 1998, $9.3 million; 1999, $5.0 million; and subsequent to 1999, $11.3 million.
Taxes, insurance and maintenance expenses are obligations of the Company under certain leases. It is expected that, in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; therefore, it is believed that future minimum annual rental commitments will not be less than the amount of rental expense incurred in 1994. Rental expense incurred for the years ended December 31, 1994, 1993, and 1992, was $32.2 million, $31.4 million, and $25.9 million, respectively.
The Company is a defendant in various lawsuits and proceedings arising in the normal course of business. Some of these lawsuits and proceedings arise in jurisdictions such as Alabama that permit punitive damages disproportionate to the actual damages alleged. Although no assurances can be given and no determination can be made at this time as to the outcome of any particular lawsuit or proceeding, the Company believes that there are meritorious defenses for all of these claims and is defending them vigorously. The Company also believes that the total amounts that would ultimately be paid, if any, arising from these claims would have no
Notes to Consolidated Financial Statements, Continued
material effect on the Company's consolidated results of operations and consolidated financial position.
Note 16. Interim Financial Information (Unaudited)
Unaudited interim information for 1994 and 1993 is summarized below:
Total Revenues Three Months Ended 1994 1993 (dollars in thousands)
March 31 $ 335,587 $ 310,915 June 30 360,413 322,485 September 30 386,928 328,277 December 31 408,311 327,100
Total $1,491,239 $1,288,777
Income Before Provision for Income Taxes and Cumulative Effect of Accounting Changes Three Months Ended 1994 1993 (dollars in thousands)
March 31 $ 86,018 $ 77,317 June 30 98,176 89,793 September 30 101,271 86,797 December 31 106,536 82,923
Total $ 392,001 $ 336,830
Net Income Three Months Ended 1994 1993 (dollars in thousands)
March 31 $ 53,162 $ 35,761(a) June 30 61,145 56,391 September 30 63,580 51,642(b) December 31 67,101 51,947
Total $ 244,988 $ 195,741
(a) Includes cumulative charge of $12.7 million due to adoption of accounting changes: SFAS 106, SFAS 109, and SFAS 112. Amounts previously reported in the 1993 first quarter Form 10-Q have been restated above for SFAS 112.
(b) Includes corporate tax rate increase enacted in the third quarter, retroactive to January 1, 1993 (see Note 11.).
Notes to Consolidated Financial Statements, Continued
Note 17. Fair Value of Financial Instruments
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments. This standard excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Care should be exercised in drawing conclusions based on fair value, since the fair values presented below do not include the value associated with all the Company's assets and liabilities.
The carrying values and estimated fair values of the Company's financial instruments covered by SFAS 107 are as follows:
December 31, 1994 December 31, 1993 Carrying Fair Carrying Fair Value Value Value Value (dollars in thousands) Assets
Net finance receivables, less allowance for finance receivable losses $7,694,086 $7,694,086 $6,390,232 $6,390,232 Marketable securities 702,510 702,510 699,697 699,697 Cash and cash equivalents 52,729 52,729 48,374 48,374
Liabilities
Long-term debt (4,312,932) (4,208,169) (4,018,797) (4,263,626) Short-term notes payable (2,771,463) (2,771,463) (1,814,961) (1,814,961) Investment certificates (6,601) (6,648) (9,406) (9,652)
Off-Balance Sheet Financial Instruments
Unused credit limits: Credit cards - - - - Private label - - - - Loan and other retail sales finance revolving lines of credit - - - - Interest conversion agreements - (13,407) - (29,371) Options on interest conversion agreements - - - (33,265)
Notes to Consolidated Financial Statements, Continued
VALUATION METHODOLOGIES AND ASSUMPTIONS
The following methods and assumptions were used in estimating the fair value of the Company's financial instruments.
Finance Receivables
Fair value of net finance receivables (which approximates carrying amount less allowance for finance receivable losses) was estimated using discounted cash flows computed by category of finance receivable. Cash flows were based on contractual payment terms adjusted for delinquencies and finance receivable losses, discounted at the weighted-average interest rates currently being offered for similar finance receivables. The fair value estimate does not reflect the value of the underlying customer relationships or the related distribution system.
Marketable Securities
Fair values for marketable securities are based on quoted market prices, where available. For marketable securities not actively traded, fair values were estimated using values obtained from independent pricing services or, in the case of private placements, by discounting expected future cash flows using a current market rate applicable to yield, credit quality, and average life of the investments.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents approximate those assets' fair values.
Long-term Debt
The fair values of the Company's long-term borrowings are estimated using discounted cash flows based on current borrowing rates.
Short-term Notes Payable
The carrying value of short-term notes payable approximates the fair value.
Notes to Consolidated Financial Statements, Continued
Investment Certificates
Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits. The carrying amounts for variable-rate time deposits approximate their fair values at the reporting date. The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date.
Unused Customer Credit Lines
The unused credit lines available to the Company's customers are considered to have no fair value. The interest rates charged on these facilities can either be changed at the Company's discretion, such as for credit cards and private label, or are adjustable and reprice frequently, such as for loan and other retail sales finance revolving lines of credit. Furthermore, these amounts, in part or in total, can be cancelled at the discretion of the Company.
Interest Conversion Agreements
Fair values for the Company's interest conversion agreements are based on estimates, obtained from the individual counterparties, of the cost or benefit of terminating the agreements.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) The following consolidated financial statements of American General Finance, Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets, December 31, 1994 and 1993
Consolidated Statements of Income, years ended December 31, 1994, 1993, and 1992
Consolidated Statements of Shareholder's Equity, years ended December 31, 1994, 1993, and 1992
Consolidated Statements of Cash Flows, years ended December 31, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is included in Item 14(d).
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted, because they are inapplicable, or the information required therein is included in the consolidated financial statements or notes.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 64 herein.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the last quarter of 1994.
(c) Exhibits
The exhibits required to be included in this portion of Item 14. are submitted as a separate section of this report.
Item 14(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance, Inc.
Condensed Balance Sheets
December 31, 1994 1993 Assets (dollars in thousands)
Cash $ 151 $ 217
Finance receivables, net of unearned finance charges: Credit cards - 336,476 Retail sales finance - 250,928
Net finance receivables - 587,404 Allowance for finance receivable losses - (26,143) Net finance receivables, less allowance for finance receivables losses - 561,261
Investments in subsidiaries 1,348,916 1,268,775 Notes receivable from subsidiaries 3,299 - Other assets 49,145 79,534
Total assets $1,401,511 $1,909,787
Liabilities and Shareholder's Equity
Senior long-term debt, 5.0% - 13.0%, due 1995-2000 $ 47,706 $ 53,025 Notes payable to banks 141,000 120,000 Notes payable to subsidiaries - 573,256 Other liabilities 1,065 52,806
Total liabilities 189,771 799,087
Shareholder's equity: Common stock 1,000 1,000 Additional paid-in capital 616,021 616,021 Other equity (18,407) 33,740 Retained earnings 613,126 459,939
Total shareholder's equity 1,211,740 1,110,700
Total liabilities and shareholder's equity $1,401,511 $1,909,787
See Notes to Condensed Financial Statements.
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Income
Years Ended December 31, 1994 1993 1992 (dollars in thousands)
Revenues Dividends received from subsidiaries $119,145 $152,555 $171,139 Finance charges 151,246 84,367 25,043 Interest and other 13,816 3,517 3,369
Total revenues 284,207 240,439 199,551
Expenses Interest expense 83,070 40,122 22,821 Operating expenses 41,638 24,967 6,569 Provision for finance receivable losses 51,492 24,429 6,868
Total expenses 176,200 89,518 36,258
Income before income taxes, equity in undistributed net income of subsidiaries, and cumulative effect of accounting changes 108,007 150,921 163,293
Income Tax Credit 3,925 584 10,260
Income before equity in undistributed net income of subsidiaries and cumulative effect of accounting changes 111,932 151,505 173,553
Equity in Undistributed Net Income of Subsidiaries 133,056 56,888 (11,645)
Income before cumulative effect of accounting changes 244,988 208,393 161,908
Cumulative Effect of Accounting Changes Parent company - 65 - Subsidiaries - (12,717) -
Net Income $244,988 $195,741 $161,908
See Notes to Condensed Financial Statements.
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Cash Flows
Years ended December 31, 1994 1993 1992 (dollars in thousands) Cash Flows from Operating Activities Net Income $244,988 $195,741 $161,908 Reconciling adjustments to net cash provided by operating activities: Provision for finance receivable losses 51,492 24,429 6,868 Change in dividends receivable 32,512 (11,239) 14,842 Equity in undistributed net income of subsidiaries (133,056) (44,171) 11,645 Other, net 1,107 10,616 (13,107) Net cash provided by operating activities 197,043 175,376 182,156
Cash Flows from Investing Activities Participation in finance receivables (1,246,417) (677,847) (586,151) Cash collections on participated finance receivables 548,384 487,200 161,853 Sale of participated finance receivables 1,205,945 - - Return of capital from subsidiary 7,435 - 23,537 Capital contribution to subsidiary (6,667) (4,577) (17,267) Preferred stock redemption of subsidiary - - 4,000 Other, net (3,780) (18,040) (8,604) Net cash provided by (used for) investing activities 504,900 (213,264) (422,632)
Cash Flows from Financing Activities Proceeds from issuance of long-term debt 5,664 17,320 16,043 Repayment of long-term debt (12,118) (11,448) (14,108) Change in notes receivable or payable with parent and subsidiaries (576,555) 194,585 254,733 Change in notes payable to banks 21,000 - 120,000 Common stock dividends paid (140,000) (162,600) (124,740) Preferred stock dividends paid - - (12,078) Net cash (used for) provided by financing activities (702,009) 37,857 239,850
Decrease in cash (66) (31) (626) Cash at beginning of year 217 248 874 Cash at end of year $ 151 $ 217 $ 248
See Notes to Condensed Financial Statements.
Schedule I, Continued
American General Finance, Inc.
Notes to Condensed Financial Statements
December 31, 1994
Note 1. Accounting Policies
In the financial statements of the registrant, AGFI's investments in subsidiaries are stated at cost plus the equity in undistributed net income of subsidiaries since the date of the acquisition. The condensed financial statements of the registrant should be read in conjunction with AGFI's consolidated financial statements.
Note 2. Long-Term Debt
The aggregate amounts of long-term senior debt maturities for the five years subsequent to December 31, 1994, are as follows: 1995, $12.6 million; 1996, $8.5 million; 1997, $11.6 million; 1998, $11.0 million; 1999, $3.8 million; and thereafter, $.2 million.
Note 3. Participation Agreement
On May 1, 1992, AGFI entered into a participation agreement whereby AGFI purchased finance receivables from a subsidiary. The servicing fee expense for the participation transaction for the years ended December 31, 1994, 1993, and 1992 was $30.1 million, $18.2 million, and $5.1 million, respectively. On December 31, 1994, the participation agreement was transferred to a subsidiary of AGFI.
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 15, 1995.
AMERICAN GENERAL FINANCE, INC.
By: /s/ Philip M. Hanley Philip M. Hanley (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 15, 1995.
/s/ Daniel Leitch III /s/ James R. Jerwers Daniel Leitch III James R. Jerwers (Chairman and Chief Executive (Director) Officer and Director - Principal Executive Officer) /s/ Larry R. Klaholz Larry R. Klaholz /s/ Philip M. Hanley (Director) Philip M. Hanley (Senior Vice President and Chief Financial Officer and Director - /s/ Jon P. Newton Principal Financial Officer) Jon P. Newton (Director)
/s/ George W. Schmidt George W. Schmidt /s/ David C. Seeley (Controller and Assistant Secretary - David C. Seeley Principal Accounting Officer) (Director)
/s/ Wayne D. Baker /s/ James R. Tuerff Wayne D. Baker James R. Tuerff (Director) (Director)
/s/ Robert M. Devlin /s/ Peter V. Tuters Robert M. Devlin Peter V. Tuters (Director) (Director)
/s/ Bennie D. Hendrix /s/ Robert D. Womack Bennie D. Hendrix Robert D. Womack (Director) (Director)
/s/ Harold S. Hook Harold S. Hook (Director)
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
Exhibits Page
(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 long-term debt of the Company and its consolidated subsidiaries. In the aggregate, the outstanding issuances of debt under each Indenture referred to under items (1) and (2) below exceed 10% of the total assets of the Company on a consolidated basis.
(1) Senior Indenture dated as of February 1, 1993 from American General Finance Corporation to Citibank, N.A. Incorporated by reference to Exhibit 4(a) filed as a part of American General Finance Corporation's Registration Statement on Form S-3 (Registration No. 33-57910).
(a) Resolutions and form of note for senior note, 6 3/8% due March 15, 2003. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated March 4, 1993 (File No. 1-6155).
(b) Resolutions and form of note for senior note, 5% due June 15, 1996. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated June 10, 1993 (File No. 1-6155).
(c) Resolutions and form of note for senior note, 5 7/8% due July 1, 2000. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated June 29, 1993 (File No. 1-6155).
(d) Resolutions and form of note for senior note, 5.80% due April 1, 1997. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated March 22, 1994 (File No. 1-6155).
Exhibit Index, Continued
Exhibits Page
(e) Resolutions and form of note for senior note, 6 5/8% due June 1, 1997. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated May 17, 1994 (File No. 1-6155).
(f) Resolutions and form of note for senior note, 6 7/8% due July 1, 1999. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated June 8, 1994 (File No. 1-6155).
(g) Resolutions and form of note for senior note, 7% due October 1, 1997. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated September 26, 1994 (File No. 1-6155).
(h) Resolutions and form of note for senior note, 7.70% due November 15, 1997. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated November 10, 1994 (File No. 1-6155).
(i) Resolutions and form of note for senior note, 8 1/4% due January 15, 1998. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated January 6, 1995 (File No. 1-6155).
(2) Senior Indenture dated as of November 1, 1991 from American General Finance Corporation to Citibank, N.A., as successor trustee. Incorporated by reference to Exhibit 4(a) filed as part of American General Finance Corporation's Current Report on Form 8-K dated November 6, 1991 (File No. 1-6155).
(a) Resolutions and form of note for senior note, 7 3/8% due November 15, 1996. Incorporated by reference to Exhibits 4(c) and 4(d) filed as part of American General Finance Corporation's Current Report on Form 8-K dated November 6, 1991 (File No. 1-6155).
(b) Resolutions and form of note for senior note, 7.15% due May 15, 1997. Incorporated by reference to Exhibits 4(a) and 4(b) filed as part of American General Finance Corporation's Current Report on Form 8-K dated May 13, 1992 (File No. 1-6155).
Exhibit Index, Continued
Exhibits Page
(c) Resolutions and form of note for senior note, 7.45% due July 1, 2002. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated July 2, 1992 (File No. 1-6155).
(d) Resolutions and form of note for senior note, 5% due September 1, 1995. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated August 20, 1992 (File No. 1-6155).
(e) Resolutions and form of note for senior note, 7 1/8% due December 1, 1999. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated December 1, 1992 (File No. 1-6155).
(f) Resolutions and forms of notes for (senior) Medium- Term Notes, Series C. Incorporated by reference to Exhibits 4(a), 4(b) and 4(c) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated December 10, 1992 (File No. 1-6155).
(g) Resolutions and form of note for senior note, 6 7/8% due January 15, 2000. Incorporated by reference to Exhibits 4(a) and 4(b) filed as a part of American General Finance Corporation's Current Report on Form 8-K dated January 11, 1993 (File No. 1-6155).
(h) Resolutions for (senior) Medium-Term Notes, Series C. Incorporated by reference to Exhibit 4 filed as a part of American General Finance Corporation's Current Report on Form 8-K dated April 6, 1994 (File No. 1- 6155).
b. In accordance with Item 601(b)(4)(iii) of Regulation S-K, certain other instruments defining the rights of holders of long-term debt of the Company and its subsidiaries have not been filed as exhibits to this Annual Report on Form 10-K because the total amount of securities authorized under each such instrument does not exceed 10% of the total assets of the Company on a consolidated basis. The Company hereby agrees to furnish a copy of each such instrument to the Securities and Exchange Commission upon request therefor.
(12) Computation of ratio of earnings to fixed charges. 67
(23) Consent of Ernst & Young LLP 68
(27) Financial Data Schedule 69