Item 1. Business.
GENERAL
American General Finance Corporation will be referred to in this document as "AGFC" or collectively with its subsidiaries, whether directly or indirectly owned, as the "Company" or "we". AGFC was incorporated in Indiana in 1927 as successor to a business started in 1920. All of the common stock of AGFC is owned by American General Finance, Inc. (AGFI), which was incorporated in Indiana in 1974. Since 1982, AGFI has been a direct or indirect wholly-owned subsidiary of American General Corporation (American General), a leading provider of retirement services, life insurance, consumer loans, and investments to 12 million customers. American General, a Texas corporation headquartered in Houston, is the successor to American General Insurance Company, an insurance company incorporated in Texas in 1926.
AGFC is a financial services holding company with subsidiaries engaged primarily in the consumer finance and credit insurance business. We conduct the credit insurance business to supplement our consumer finance business through Merit Life Insurance Co. (Merit) and Yosemite Insurance Company (Yosemite), which are both subsidiaries of AGFC.
At December 31, 1999, the Company had 1,314 offices in 39 states, Puerto Rico, and the U.S. Virgin Islands and approximately 7,500 employees. Our executive offices are located in Evansville, Indiana.
Selected Financial Information
The following table shows selected financial information of the Company:
Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Average finance receivables net of unearned finance charges (average net receivables) $9,815,930 $8,335,435 $7,340,902
Average borrowings $9,018,168 $7,630,925 $6,949,021
Yield - finance charges as a percentage of average net receivables 14.50% 15.87% 16.80%
Borrowing cost - interest expense as a percentage of average borrowings 6.25% 6.57% 6.82%
Item 1. Continued
At or for the Years Ended December 31, 1999 1998 1997
Interest spread - yield less borrowing cost 8.25% 9.30% 9.98%
Insurance revenues as a percentage of average net receivables 1.88% 2.11% 2.57%
Operating expenses as a percentage of average net receivables 5.19% 5.93% 6.36%
Allowance ratio - allowance for finance receivable losses as a percentage of net finance receivables 3.58% 3.94% 4.64%
Charge-off ratio - net charge-offs as a percentage of the average of net finance receivables at the beginning of each month during the period 2.08% 2.60% 3.62%
Charge-off coverage ratio - allowance for finance receivable losses as a percentage of net charge-offs 190% 173% 137%
Delinquency ratio - finance receivables 60 days or more past due as a percentage of related receivables 3.50% 3.78% 3.61%
Return on average assets 1.96% 1.96% 1.51%
Return on average equity 13.86% 13.31% 10.16%
Ratio of earnings to fixed charges (refer to Exhibit 12 for calculations) 1.61 1.60 1.44
Debt to tangible equity ratio - debt to equity less goodwill and net unrealized gains or losses on investment securities 6.47 6.46 6.54
Debt to equity ratio 5.85 5.33 5.16
Item 1. Continued
CONSUMER FINANCE OPERATIONS
The Company makes loans directly to individuals, acquires real estate loans made by brokers and other real estate lenders, purchases retail sales contract obligations of individuals, and offers revolving retail and private label services. We conduct our lending and retail operations through our consumer branch and centralized real estate segments. See Note 21. of the Notes to Consolidated Financial Statements in Item 8. for further information on the Company's segments.
In our loan operations, we make home equity loans, originate secured and unsecured consumer loans, and acquire real estate loans from mortgage brokers and other real estate lenders. We generally take a security interest in the real property and/or personal property of the borrower. At December 31, 1999, real estate loans accounted for 64% of the amount and 8% of the number of net finance receivables outstanding, compared to 60% of the amount and 7% of the number of net finance receivables outstanding at December 31, 1998. Real estate loans are secured by first and second mortgages and generally have maximum original terms of 360 months. Non- real estate loans are secured by consumer goods, automobiles, or other chattel security or are unsecured and generally have maximum original terms of 60 months.
In our retail operations, we purchase retail sales contracts arising from the retail sale of consumer goods and services, provide revolving retail services for various business entities, and purchase private label receivables originated by American General Bank, FSB (AG Bank), a subsidiary of AGFI, under a participation agreement. Retail sales contracts are closed-end accounts that consist of a single purchase. Revolving retail and private label are open-end revolving accounts that can be used for repeated purchases. Retail sales contracts are secured by the real property or personal property giving rise to the contract and generally have maximum original terms of 60 months. Revolving retail and private label are secured by purchase money security interests in the goods purchased and generally require minimum monthly payments based on outstanding balances.
Item 1. Continued
Finance Receivables
All finance receivable data in this report (except as otherwise indicated) is calculated after deducting unearned finance charges but before deducting allowance for finance receivable losses.
The following table shows the amount, number, and average size of finance receivables originated and renewed by type of finance receivable (retail sales contracts, revolving retail, and private label comprise retail sales finance) and the net purchased amount:
Years Ended December 31, 1999 1998 1997 Amount (in thousands):
Real estate loans $1,893,771 $1,721,378 $1,542,498 Non-real estate loans 2,509,254 2,347,929 2,392,730 Retail sales finance 1,668,519 1,591,816 1,419,352
Total originated and renewed 6,071,544 5,661,123 5,354,580 Net purchased 1,650,107 1,919,795 600,174
Total originated, renewed, and purchased $7,721,651 $7,580,918 $5,954,754
Number:
Real estate loans 54,995 56,416 58,136 Non-real estate loans 832,417 865,814 888,382 Retail sales finance 976,359 989,902 949,319
Total 1,863,771 1,912,132 1,895,837
Average size (to nearest dollar):
Real estate loans $34,435 $30,512 $26,533 Non-real estate loans 3,014 2,712 2,693 Retail sales finance 1,709 1,608 1,495
Item 1. Continued
The following table shows the amount, number, and average size of finance receivables by type of finance receivable:
December 31, 1999 1998 1997
Amount (in thousands):
Real estate loans $ 6,918,753 $ 5,660,414 $ 4,067,500 Non-real estate loans 2,526,556 2,510,525 2,502,051 Retail sales finance 1,312,169 1,301,225 1,257,485
Total $10,757,478 $ 9,472,164 $ 7,827,036
Number:
Real estate loans 174,600 164,382 158,034 Non-real estate loans 977,188 1,066,482 1,107,869 Retail sales finance 937,239 971,461 1,041,854
Total 2,089,027 2,202,325 2,307,757
Average size (to nearest dollar):
Real estate loans $39,626 $34,435 $25,738 Non-real estate loans 2,586 2,354 2,258 Retail sales finance 1,400 1,339 1,207
Geographic Distribution
Geographic diversification of finance receivables reduces the concentration of credit risk associated with a recession in any one region. The largest concentrations of net finance receivables were as follows:
December 31, 1999 1998 1997 Amount Percent Amount Percent Amount Percent (dollars in thousands)
California $ 1,537,524 14% $ 1,461,438 15% $ 842,690 11% N. Carolina 811,625 8 728,801 8 696,261 9 Florida 671,970 6 574,693 6 518,837 7 Illinois 659,674 6 593,789 6 434,029 5 Ohio 644,804 6 559,964 6 465,489 6 Indiana 560,887 5 502,653 5 438,369 6 Virginia 430,687 4 367,995 4 356,928 4 Georgia 427,523 4 351,347 4 310,485 4 Other 5,012,784 47 4,331,484 46 3,763,948 48
$10,757,478 100% $ 9,472,164 100% $ 7,827,036 100%
Item 1. Continued
Average Net Receivables and Yield
We recognize finance charges as revenue on the accrual basis using the interest method. We stop accruing revenue when the fourth contractual payment becomes past due for loans, retail sales contracts, and revolving retail and when the sixth contractual payment becomes past due for private label. Extension fees, late charges, and prepayment penalties are recognized as revenue when received.
We defer the costs to originate certain finance receivables and the revenue from nonrefundable points and fees on loans. We include deferred origination costs and nonrefundable points and fees in finance receivables and amortize them to revenue on the accrual basis using the interest method over the lesser of the contractual term or the estimated life based upon prepayment experience. If a finance receivable liquidates before amortization is completed, we charge or credit any unamortized costs or points and fees to revenue at the date of liquidation.
The following table shows average net receivables and yield by type of finance receivable: Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Real estate loans: Average net receivables $6,119,182 $4,589,034 $3,627,736 Yield 11.55% 12.87% 13.69%
Non-real estate loans: Average net receivables $2,461,356 $2,481,479 $2,486,771 Yield 21.94% 22.01% 21.88%
Total loans: Average net receivables $8,580,538 $7,070,513 $6,114,507 Yield 14.53% 16.07% 17.02%
Retail sales finance: Average net receivables $1,235,392 $1,264,922 $1,226,395 Yield 14.29% 14.74% 15.71%
Total: Average net receivables $9,815,930 $8,335,435 $7,340,902 Yield 14.50% 15.87% 16.80%
See Management's Discussion and Analysis in Item 7. for information on the trends in yield.
Finance Receivable Credit Quality Information
Our policy is to charge off each month non-real estate loans on which little or no collections were made in the prior six months, retail sales contracts that are six installments past due, and revolving retail and private label accounts that are 180 days past due. We start foreclosure proceedings on real estate loans when four monthly installments are past due. When foreclosure is completed and we have obtained title to the property, the real estate is established as an asset valued at fair
Item 1. Continued
value, and any loan amount in excess of that value is charged off. We occasionally extend the charge-off period for individual accounts when, in our opinion, such treatment is warranted.
The following table shows finance receivable loss experience by type of finance receivable:
Years Ended December 31, 1999 1998 1997 (dollars in thousands) Real estate loans: Net charge-offs $ 38,058 $ 32,462 $ 31,849 Charge-off ratio .63% .72% .88%
Non-real estate loans: Net charge-offs $131,942 $141,804 $178,644 Charge-off ratio 5.36% 5.72% 7.17%
Total loans: Net charge-offs $170,000 $174,266 $210,493 Charge-off ratio 1.99% 2.49% 3.45%
Retail sales finance: Net charge-offs $ 32,977 $ 40,763 $ 54,460 Charge-off ratio 2.67% 3.23% 4.44%
Total: Net charge-offs $202,977 $215,029 $264,953 Charge-off ratio 2.08% 2.60% 3.62%
The following table shows delinquency (finance receivables 60 days or more past due including unearned finance charges and excluding deferred origination costs, a fair value adjustment on finance receivables, and accrued interest) based on contract terms in effect by type of finance receivable:
December 31, 1999 1998 1997 (dollars in thousands) Real estate loans: Delinquency $212,428 $188,452 $107,066 Delinquency ratio 3.08% 3.32% 2.59%
Non-real estate loans: Delinquency $154,189 $156,331 $160,700 Delinquency ratio 5.39% 5.48% 5.71%
Total loans: Delinquency $366,617 $344,783 $267,766 Delinquency ratio 3.76% 4.04% 3.85%
Retail sales finance: Delinquency $ 27,716 $ 34,080 $ 35,930 Delinquency ratio 1.85% 2.26% 2.45%
Total: Delinquency $394,333 $378,863 $303,696 Delinquency ratio 3.50% 3.78% 3.61%
Item 1. Continued
We maintain the allowance for finance receivable losses at a level that we consider adequate to absorb anticipated losses in our existing portfolio. We periodically evaluate the portfolio as a group and consider numerous factors in estimating the anticipated finance receivable losses, including current economic conditions, prior finance receivable loss and delinquency experience, and the composition of our finance receivable portfolio.
The following table shows changes in the allowance for finance receivable losses:
At or for the Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Balance at beginning of year $372,923 $363,126 $385,272 Provision for finance receivable losses 202,977 207,529 242,453 Allowance related to acquired receivables 12,404 17,297 354 Charge-offs, net of recoveries (202,977) (215,029) (264,953)
Balance at end of year $385,327 $372,923 $363,126
Allowance ratio 3.58% 3.94% 4.64%
See Management's Discussion and Analysis in Item 7. for further information on finance receivable loss and delinquency experience and the related allowance for finance receivable losses.
Sources of Funds
We fund our consumer finance operations principally through net cash flows from operating activities, issuances of long-term debt, short-term borrowings in the commercial paper market, borrowings from banks under credit facilities, and capital contributions from AGFI.
Item 1. Continued
Average Borrowings and Borrowing Cost
The following table shows average borrowings and interest expense as a percentage of average borrowings by type of debt:
Years Ended December 31, 1999 1998 1997 (dollars in thousands) Long-term debt: Average borrowings $5,420,729 $4,266,955 $4,022,819 Borrowing cost 6.61% 6.96% 7.34%
Short-term debt: Average borrowings $3,597,439 $3,363,970 $2,926,202 Borrowing cost 5.72% 6.08% 6.12%
Total: Average borrowings $9,018,168 $7,630,925 $6,949,021 Borrowing cost 6.25% 6.57% 6.82%
The Company's use of interest rate swap agreements, the effect of which is included in short-term borrowing cost above, is described in Note 12. of the Notes to Consolidated Financial Statements in Item 8.
Contractual Maturities
Contractual maturities of net finance receivables and debt at December 31, 1999 were as follows: Net Finance Receivables Debt (dollars in thousands) Due in: 2000 $ 1,135,962 $ 5,531,747 2001 1,366,735 1,262,240 2002 1,008,956 1,077,460 2003 600,552 1,039,179 2004 372,855 275,575 2005 and thereafter 6,272,418 770,074
Total $10,757,478 $ 9,956,275
See Note 4. of the Notes to Consolidated Financial Statements in Item 8. 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 licensed in 43 states, the District of Columbia, and the U.S. Virgin Islands. Merit writes or assumes (through affiliated and non-affiliated insurance companies) credit life, credit accident and health, and non- credit insurance coverages.
Yosemite is a property and casualty insurance company formerly domiciled in California, redomiciled in Indiana effective December 29, 1998, and licensed in 41 states. Yosemite principally writes or assumes credit- related property and casualty coverages.
Both Merit and Yosemite market their products through our consumer branch and centralized real estate segments. The credit life insurance policies insure the life of the borrower in an amount typically equal to the unpaid balance of the finance receivable and provide for payment in full to the lender of the finance receivable in the event of death. The credit accident and health insurance policies provide for the payment to the lender of the installments on the finance receivable coming due during a period of disability due to illness or injury. The credit-related property and casualty insurance policies are written to protect the lender's interest in property pledged as security for the finance receivable and provide for the payment to the lender of the installments on the finance receivable coming due during a period of unemployment. The purchase by the borrower of credit life, credit accident and health, and credit-related property and casualty insurance is voluntary with the exception of lender- placed property damage coverage for automobiles, large equipment, dwellings, and real estate pledged as collateral. In these instances, property damage coverage is provided under the terms of the lending agreement if the borrower does not provide evidence of coverage with another insurance carrier. The non-credit insurance policies are primarily ordinary life level term coverage. The purchase of this coverage is voluntary. Premiums for insurance products are most often financed as part of the finance receivable but may be paid in cash to the insurer.
Merit and Yosemite have entered into reinsurance agreements with other insurance companies, including certain other American General subsidiaries, for assumption of various annuities and non-credit, group, credit life, credit accident and health, and credit-related property and casualty insurance on a coinsurance basis. The reserves attributable to this business fluctuate over time and in certain instances are subject to recapture by the ceding company. At December 31, 1999, reserves on the books of Merit and Yosemite attributable to these reinsurance agreements totaled $127.7 million.
See Note 21. of the Notes to Consolidated Financial Statements in Item 8. for further information on the Company's insurance business segment.
Item 1. Continued
The following table shows information concerning our insurance operations:
At or for the Years Ended December 31, 1999 1998 1997 (dollars in thousands) Life Insurance in Force
Credit life $2,709,962 $2,459,818 $2,387,084 Non-credit life 3,355,547 3,618,052 3,910,534
Total $6,065,509 $6,077,870 $6,297,618
Premiums Earned
Credit insurance premiums earned: Credit life $ 34,760 $ 32,289 $ 33,269 Credit accident and health 43,237 42,261 45,687 Property and casualty 49,026 49,403 54,292 Other insurance premiums earned: Non-credit life 46,333 42,981 46,190 Non-credit accident and health 4,541 702 - Premiums assumed under coinsurance agreements 3,340 4,355 5,177
Total $ 181,237 $ 171,991 $ 184,615
Premiums Written
Credit insurance premiums written: Credit life $ 42,114 $ 35,695 $ 28,057 Credit accident and health 52,910 42,452 39,401 Property and casualty 49,846 47,324 47,029 Other insurance premiums written: Non-credit life 46,333 42,981 46,190 Non-credit accident and health 4,541 702 - Premiums assumed under coinsurance agreements 3,340 4,355 5,177
Total $ 199,084 $ 173,509 $ 165,854
Losses Incurred
Credit insurance losses incurred: Credit life $ 16,240 $ 14,775 $ 17,465 Credit accident and health 22,370 21,094 20,292 Property and casualty 13,112 20,187 23,009 Other insurance losses incurred: Non-credit life 20,746 16,999 21,279 Non-credit accident and health 2,724 409 - Losses incurred under coinsurance agreements 11,442 11,223 11,402
Total $ 86,634 $ 84,687 $ 93,447
Item 1. Continued
Investments and Investment Results
The following table shows the investment results of the insurance operations:
Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Net investment revenue (a) $ 74,732 $ 74,421 $ 67,837
Average invested assets (b) $1,056,183 $ 983,439 $ 924,411
Adjusted portfolio yield (c) 7.35% 7.88% 8.07%
Net realized gains (losses) on investments (d) $ (1,564) $ (693) $ 1,071
(a) Net investment revenue is after deducting investment expense but before net realized gains or losses on investments and provision for income taxes.
(b) Average invested assets excludes the effect of Statement of Financial Accounting Standards 115.
(c) Adjusted portfolio yield is calculated based upon the definitions of net investment revenue and average invested assets listed in (a) and (b) above and also includes an adjustment for tax-exempt investments in 1997.
(d) Includes net realized gains or losses on investment securities and other invested assets before provision for income taxes.
See Note 6. of the Notes to Consolidated Financial Statements in Item 8. for information regarding investment securities for all operations of the Company.
REGULATION
Consumer Finance
The Company is subject to various federal regulations, including the Federal Consumer Credit Protection Act (governing disclosure of applicable charges and other finance receivable terms), the Equal Credit Opportunity Act (prohibiting discrimination against credit-worthy applicants), the Fair Credit Reporting Act (governing the accuracy and use of credit bureau reports), the Real Estate Settlement Procedures Act (regulating certain loans secured by real estate), the Truth in Lending Act (requiring uniform disclosure of the cost of credit), the Federal Fair Debt Collection Practices Act (regulating debt collection activity in certain instances), the Federal Trade Commission Act and the Federal Reserve Board's Regulations B, Z and AA. In most states, federal law preempts state law restrictions on interest rates and terms for first lien residential mortgage loans and for residential mortgage loans made under the federal Alternative Mortgage Transactions Parity Act. We make residential mortgage loans under the provisions of these federal laws.
Item 1. Continued
Various state laws also regulate our consumer lending and retail sales financing businesses. The degree and nature of such regulation vary from state to state. The laws under which a substantial amount of our business is conducted: (1) provide for state licensing of lenders; (2) impose maximum term, amount, interest rate, and other charge limitations; and (3) enumerate whether and under what circumstances insurance and other ancillary products may be sold in connection with a lending transaction. Certain of these laws prohibit the taking of liens on real estate for loans of small dollar amounts, except liens resulting from judgments. These state laws also may require contract disclosures in addition to those required under Federal law and may limit remedies available in the event of default by an obligor on the credit. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions where applicable.
Insurance
State authorities regulate and supervise our insurance subsidiaries. The extent of such regulation varies but relates primarily to conduct of business, types of products offered, standards of solvency, payment of dividends and other transactions with related parties, licensing, deposits of securities for the benefit of policyholders, approval of policy forms and premium rates, periodic examination of the affairs of insurers, form and content of required financial reports, and establishment of reserves required to be maintained for unearned premiums, losses, and other purposes. Substantially all of the states in which we operate regulate the rates of premiums charged for credit life and credit accident and health insurance. State insurance laws and regulations also prescribe the nature, quality and percentage of various types of investments which our insurance subsidiaries may make.
COMPETITION
Consumer Finance
The consumer finance business is highly competitive due to the large number of companies offering financial products and services, the sophistication of those products, technological improvements, and more rapid communication. We compete with other consumer finance companies and other types of financial institutions that offer similar products and services, including, but not limited to, industrial banks, industrial loan companies, mortgage banks, commercial banks, sales finance companies, savings and loan associations, federal savings banks, and credit unions. The availability of the Internet as a distribution channel for financial products and services is making the consumer finance industry more competitive by allowing many non-financial institution e-commerce companies to promote or advertise the products and services of financial institutions.
Item 1. Continued
Insurance
Our insurance operations supplement our consumer finance operations. As such, competition for the insurance operations is relatively limited.
Item 2.
Item 2. Properties.
The Company's investment in real estate and tangible property is not significant in relation to its total assets due to the nature of our business. AGFI and certain of its subsidiaries own real estate upon which AGFC and other affiliates conduct business. We generally conduct branch office operations in leased premises. Lease terms ordinarily range from three to five years.
The Company's exposure to environmental regulation arises from our ownership of such properties and properties obtained through foreclosure. We monitor properties for compliance with federal and local environmental guidelines. We estimate that potential costs related to any environmental clean-up are immaterial.
Item 3.
Item 3. Legal Proceedings.
AGFC and certain of its subsidiaries are parties to various lawsuits and proceedings, including certain class action claims, arising in the ordinary course of business. In addition, many of these claims arise in jurisdictions, such as Alabama and Mississippi, that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the Company's consolidated results of operations and financial position. However, the frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given suit.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
No trading market exists for AGFC's common stock because AGFI owns all of AGFC's common stock. AGFC declared the following cash dividends on its common stock:
Quarter Ended 1999 1998 (dollars in thousands)
March 31 $ 38,000 $ 26,315 June 30 98,045 - September 30 30,478 16,561 December 31 - -
$166,523 $ 42,876
See Management's Discussion and Analysis in Item 7., and Note 16. of the Notes to Consolidated Financial Statements in Item 8., regarding limitations on the ability of AGFC and its subsidiaries to pay dividends.
Item 6.
Item 6. Selected Financial Data.
The following selected financial data are taken from the Company's consolidated financial statements. The data should be read in conjunction with the consolidated financial statements and related notes in Item 8., Management's Discussion and Analysis in Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes in Item 8. and other financial information in Item 1.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sources of funds include operations, issuances of long-term debt, short-term borrowings in the commercial paper market, and borrowings from banks under credit facilities. AGFI has also contributed capital to the Company when needed for finance receivable growth or other circumstances.
The following table shows principal sources and uses of cash flow:
Years Ended December 31, 1999 1998 1997 (dollars in millions) Principal sources of cash flow:
Operations $ 441.2 $ 445.5 $ 514.3 Net issuance of debt 1,305.1 1,545.9 - Capital contributions 66.6 92.0 27.0 Sale of non-strategic assets - - 732.5 Net collections on assets held for sale - - 61.3
Principal sources of cash flow $1,812.9 $2,083.4 $1,335.1
Principal uses of cash flow:
Net originations and purchases of finance receivables $1,462.4 $1,808.7 $ 676.3 Dividends paid 166.5 42.9 137.1 Increase in premiums on finance receivables purchased and deferred charges 52.3 123.1 41.7 Net repayment of debt - - 336.0 Repurchase of securitized finance receivables - - 100.0
Principal uses of cash flow $1,681.2 $1,974.7 $1,291.1
Management believes that the overall sources of liquidity available to the Company will continue to be sufficient to satisfy its foreseeable financial obligations and operational requirements.
Item 7. Continued
Capital Resources December 31, 1999 1998 (dollars in millions)
Long-term debt $ 5,709.8 $ 5,162.0 Short-term debt 4,246.5 3,485.7
Total debt 9,956.3 8,647.7 Equity 1,701.9 1,623.3
Total capital $11,658.2 $10,271.0
Net finance receivables $10,757.5 $ 9,472.2 Debt to tangible equity ratio 6.47 6.46
Our capital requirements vary directly with the level of net finance receivables. The mix of capital between debt and equity is based primarily upon maintaining leverage that supports cost-effective funding.
We issue a combination of fixed-rate debt, principally long-term, and floating-rate debt, principally short-term. AGFC obtains the Company's fixed-rate debt through issuances of medium-term notes and underwritten debt offerings with maturities generally ranging from two to ten years. AGFC and one of its subsidiaries obtain most of our floating-rate debt through sales of commercial paper. Commercial paper, with maturities ranging from 1 to 270 days, is sold directly to banks, insurance companies, corporations, and other institutional investors. AGFC also sells extendible commercial notes with initial maturities of up to 90 days, which may be extended by AGFC to 390 days.
AGFC has paid dividends to (or received capital contributions from) AGFI to manage our leverage of debt to tangible equity (equity less goodwill and net unrealized gains or losses on investment securities) to 6.50 to 1. An AGFC financing agreement limits the amount of dividends AGFC may pay. See Note 16. of the Notes to Consolidated Financial Statements in Item 8. for information on dividend restrictions.
Credit Ratings
AGFC's debt and commercial paper ratings facilitate its access to capital markets. On February 18, 2000, AGFC's ratings were as follows:
Long-term Debt Commercial Paper
Duff & Phelps A+ (Average) D-1+ (Highest) Fitch - + (Highest) Moody's A2 (Favorable) P-1 (Highest) Standard & Poor's A+ (Strong) A-1 (Strong)
Item 7. Continued
Liquidity Facilities
We participate in credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. At December 31, 1999, credit facilities, including facilities shared with American General and AGFI, totaled $5.7 billion, with remaining availability of $5.7 billion. See Note 11. of the Notes to Consolidated Financial Statements in Item 8. for additional information on credit facilities.
Securitization
In April 1997, we repurchased $100.0 million of private label and credit card finance receivables that previously had been sold through securitization. No gain or loss resulted from this transaction. The repurchased credit card finance receivables were subsequently offered for sale along with the Company's other credit card finance receivables. See Note 17. of the Notes to Consolidated Financial Statements in Item 8. for additional information on the sale of non-strategic assets.
The Company may securitize a portion of our finance receivable portfolio in the future as an additional source of funds for finance receivable growth.
ANALYSIS OF OPERATING RESULTS
Net Income Years Ended December 31, 1999 1998 1997 (dollars in millions)
Net income $224.7 $194.4 $137.1 Return on average assets 1.96% 1.96% 1.51% Return on average equity 13.86% 13.31% 10.16% Ratio of earnings to fixed charges 1.61x 1.60x 1.44x
Net income increased $30.3 million, or 16%, for 1999 and $57.3 million, or 42%, for 1998 when compared to the respective previous year. See Note 21. of the Notes to Consolidated Financial Statements for information on the results of the Company's business segments.
During the past three years, we improved credit quality results through extensive use of our credit risk management systems and the shift toward a higher percentage of real estate loans. At December 31, 1999, real estate loans accounted for 64% of total net finance receivables outstanding compared to 60% at December 31, 1998 and 52% at December 31, 1997.
Factors that specifically affected the Company's operating results are as follows:
Item 7. Continued
Finance Charges Years Ended December 31, 1999 1998 1997 (dollars in millions)
Finance charges $1,423.4 $1,323.0 $1,233.4 Average net receivables $9,815.9 $8,335.4 $7,340.9 Yield 14.50% 15.87% 16.80%
Finance charges increased $100.4 million, or 8%, for 1999 and $89.6 million, or 7%, for 1998 when compared to the respective previous year due to higher average net receivables, partially offset by lower yield.
Average net receivables increased $1.5 billion, or 18%, during 1999 and $994.5 million, or 14%, during 1998 when compared to the respective previous year primarily due to growth in real estate loans. Yield decreased 137 basis points during 1999 and 93 basis points during 1998 when compared to the respective previous year reflecting the larger proportion of finance receivables that are real estate loans, which generally have lower yields, and a decline in real estate loan yield.
Insurance Revenues Years Ended December 31, 1999 1998 1997 (dollars in millions)
Insurance revenues $184.5 $176.0 $188.6 Premiums earned $181.2 $172.0 $184.6 Insurance revenues as a percentage of average net receivables 1.88% 2.11% 2.57%
Insurance revenues increased $8.5 million, or 5%, for 1999 and decreased $12.6 million, or 7%, for 1998 when compared to the respective previous year.
The increase in insurance revenues for 1999 when compared to 1998 was primarily due to higher earned premiums. Earned premiums increased primarily due to higher related loan volume during 1998 and 1999.
The decrease in insurance revenues for 1998 when compared to 1997 was primarily due to lower earned premiums. Earned premiums decreased primarily due to lower related loan volume during 1996 and the first three quarters of 1997.
The decreases in insurance revenues as a percentage of average net receivables in 1999 and 1998 reflect a higher proportion of finance receivables that are real estate loans, including purchased real estate loans, where the opportunity to sell insurance products is limited.
Item 7. Continued
Other Revenues Years Ended December 31, 1999 1998 1997 (dollars in millions)
Other revenues $ 107.9 $ 95.2 $ 90.0 Interest revenue - notes receivable from parent $ 21.1 $ 17.5 $ 16.8 Investment revenue $ 78.5 $ 75.2 $ 69.4 Net realized gains (losses) on investments $ (1.6) $ (0.7) $ 1.1 Average invested assets $1,056.2 $ 983.4 $ 924.4 Adjusted portfolio yield 7.35% 7.88% 8.07%
Other revenues increased $12.7 million, or 13%, for 1999 and $5.2 million, or 6%, for 1998 when compared to the respective previous year.
The increase in other revenues for 1999 when compared to 1998 was primarily due to increases in interest revenue on notes receivable from parent and investment revenue. The increase in investment revenue reflected growth in average invested assets for the insurance operations of $72.8 million, partially offset by a decline in adjusted portfolio yield of 53 basis points and higher realized losses on investments.
The increase in other revenues for 1998 when compared to 1997 was primarily due to an increase in investment revenue reflecting growth in average invested assets for the insurance operations of $59.0 million, partially offset by realized losses in 1998 compared to realized gains in 1997 and a decline in adjusted portfolio yield of 19 basis points.
The increases in average invested assets in 1999 and 1998 reflect reinvestment of insurance operations cash flows. The decreases in adjusted portfolio yield in 1999 and 1998 reflect market conditions.
Interest Expense Years Ended December 31, 1999 1998 1997 (dollars in millions)
Interest expense $ 564.0 $ 501.5 $ 450.9 Average borrowings $9,018.2 $7,630.9 $6,949.0 Borrowing cost 6.25% 6.57% 6.82%
Interest expense increased $62.5 million, or 12%, for 1999 and $50.6 million, or 11%, for 1998 when compared to the respective previous year due to higher average borrowings, partially offset by lower borrowing cost.
Average borrowings increased $1.4 billion, or 18%, during 1999 and $681.9 million, or 10%, during 1998 when compared to the respective previous year primarily to support finance receivable growth. Borrowing cost decreased 32 basis points during 1999 and 25 basis points during 1998 when compared to the respective previous year due to lower average issuance rates on both long-term and short-term debt and the maturity of long-term debt with higher rates.
Item 7. Continued
Operating Expenses Years Ended December 31, 1999 1998 1997 (dollars in millions)
Operating expenses $509.5 $494.3 $466.8 Operating expenses as a percentage of average net receivables 5.19% 5.93% 6.36%
Operating expenses increased $15.2 million, or 3%, for 1999 and $27.5 million, or 6%, for 1998 when compared to the respective previous year, but less than the increases in average net receivables of 18% and 14%, respectively.
The increase in operating expenses for 1999 when compared to 1998 was primarily due to increases in salaries, occupancy expenses, and amortization of intangibles, partially offset by higher deferred loan origination costs. The increase in salaries reflects the higher competitive compensation within the branch network, partially offset by a workforce reduction of approximately 400 positions during 1999 due to improved productivity.
The increase in operating expenses for 1998 when compared to 1997 was primarily due to increases in litigation expenses, salaries, and amortization of intangibles, partially offset by higher deferred loan origination costs. The increase in litigation expenses was primarily due to estimated settlements and costs of litigation in various Alabama and Mississippi cases. The increase in salaries reflected an increase in incentive program expenses, partially offset by a workforce reduction of approximately 400 positions during 1998 which included the effects of cost containment programs and the sale of the non-strategic assets during second quarter 1997.
The improvements in operating expenses as a percentage of average net receivables in 1999 and 1998 reflect operating efficiencies resulting from the higher proportion of finance receivables that are real estate loans.
Item 7. Continued
Provision for Finance Receivable Losses
At or for the Years Ended December 31, 1999 1998 1997 (dollars in millions) Provision for finance receivable losses $203.0 $207.5 $242.5
Net charge-offs $203.0 $215.0 $265.0 Charge-off ratio 2.08% 2.60% 3.62% Charge-off coverage ratio 190% 173% 137%
60 day+ delinquency $394.3 $378.9 $303.7 Delinquency ratio 3.50% 3.78% 3.61%
Allowance for finance receivable losses $385.3 $372.9 $363.1 Allowance ratio 3.58% 3.94% 4.64%
Provision for finance receivable losses decreased $4.5 million, or 2%, for 1999 and $35.0 million, or 14%, for 1998 when compared to the respective previous year primarily due to decreases in net charge-offs.
The decrease in the charge-off ratio for 1999 and 1998 when compared to the respective previous year reflected the results of past and ongoing credit quality improvement efforts, including improved credit risk management systems and an increased proportion of real estate loans. In 1996, we initiated a fundamental change in our credit risk management focus, shifting to a more proactive process. We developed statistically-based risk scoring and prediction tools, implemented more extensive and ongoing analysis of performance data, and instituted early warning systems. As a result, we have improved our underwriting skills and our ability to identify problem loans and take effective corrective action.
The decrease in the delinquency ratio for 1999 when compared to 1998 reflected the continued improvement in credit quality and the increased proportion of real estate loans. The increase in the delinquency ratio for 1998 when compared to 1997 reflected the maturing of real estate loan portfolios purchased in prior periods and the effects of general economic conditions.
We maintain the allowance for finance receivable losses at a level based on periodic evaluation of our finance receivable portfolio which reflects an amount that, in our opinion, is adequate to absorb anticipated losses in our existing portfolio. The charge-off coverage ratio, which compares the allowance for finance receivable losses to net charge-offs, improved in both 1999 and 1998. In first quarter 2000, we expect to sell approximately $25.0 million of fully-reserved receivables. Our allowance ratio and charge-off coverage ratio would have been 3.36% and 178%, respectively, had this sale occurred at year-end 1999.
Item 7. Continued
Loss on Non-strategic Assets
In fourth quarter 1996, we decided to offer for sale $874.8 million of non- strategic, underperforming finance receivable portfolios, consisting of $520.3 million of credit card and $354.5 million of private label finance receivables. We reclassified these receivables and an associated allowance for finance receivable losses of $70.0 million to assets held for sale at December 31, 1996, and we recognized a loss of $137.0 million ($88.1 million aftertax) to reduce the carrying amount of the assets held for sale to net realizable value. In June 1997, we sold the assets held for sale and $81.4 million of other private label finance receivables and recorded an additional loss of $42.2 million ($27.0 million aftertax) primarily to establish a liability for estimated future payments to the purchaser under a five-year loss sharing agreement. See Note 17. of the Notes to Consolidated Financial Statements in Item 8. for further information on the reclassification and subsequent sale of non-strategic assets.
Insurance Losses and Loss Adjustment Expenses
Years Ended December 31, 1999 1998 1997 (dollars in millions)
Claims incurred $82.4 $86.5 $91.4 Change in benefit reserves 4.2 (1.8) 2.0
Insurance losses and loss adjustment expenses $86.6 $84.7 $93.4
Insurance losses and loss adjustment expenses increased $1.9 million, or 2%, for 1999 and decreased $8.7 million, or 9%, for 1998 when compared to the respective previous year.
The increase in insurance losses and loss adjustment expenses for 1999 when compared to 1998 was due to an increase in provision for future benefits, partially offset by a decrease in claims incurred. Provision for future benefits increased $6.0 million for 1999 due to increased sales of non- credit insurance products. Claims decreased $4.1 million for 1999 primarily due to favorable loss experience on credit insurance.
The decrease in insurance losses and loss adjustment expenses for 1998 when compared to 1997 was due to decreases in claims incurred and provision for future benefits. Claims decreased $4.9 million for 1998 primarily due to lower premiums written in 1997 and favorable loss experience on credit insurance. Provision for future benefits decreased $3.8 million for 1998 due to reduced sales of non-credit insurance products.
Item 7. Continued
Provision for Income Taxes Years Ended December 31, 1999 1998 1997 (dollars in millions)
Provision for income taxes $128.1 $111.8 $ 79.0 Pretax income $352.8 $306.2 $216.1 Effective income tax rate 36.31% 36.52% 36.57%
Provision for income taxes increased $16.3 million, or 15%, for 1999 and $32.8 million, or 42%, for 1998 when compared to the respective previous year primarily due to higher taxable income.
ANALYSIS OF FINANCIAL CONDITION
At December 31, 1999, the Company's assets were distributed as follows: 83% in net finance receivables, less allowance for finance receivable losses; 8% in investment securities; 6% in other assets; 2% in notes receivable from parent; and 1% in cash and cash equivalents.
Asset Quality
We believe that our geographic diversification reduces the risk associated with a recession in any one region. In addition, 96% of our finance receivables at December 31, 1999 were secured by real property or personal property.
The allowance ratio decrease for 1999 reflects the action taken after management's review of the allowance adequacy. See Analysis of Operating Results for further information on allowance ratio, delinquency ratio, and charge-off ratio. While finance receivables have some exposure to further economic uncertainty, we believe that the allowance for finance receivable losses is adequate to absorb anticipated losses in our existing portfolio.
Investment securities principally represent the investment portfolio of the Company's insurance operations. The investment strategy is to optimize after-tax returns on invested assets, subject to the constraints of safety, liquidity, diversification, and regulation.
The largest intangible asset is acquisition-related goodwill which is charged to expense in equal amounts over 20 to 40 years. The decrease in goodwill reflected a change in the tax basis of assets acquired in a 1988 taxable purchase business combination. To reflect the new tax basis, we reduced deferred tax liabilities by $68.2 million and reduced goodwill by the same amount. See Notes 2. and 8. of the Notes to Consolidated Financial Statements in Item 8. for further information on goodwill.
Item 7. Continued
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities in an effort to reduce the risk associated with unfavorable changes in interest rates. Management determines the mix of fixed-rate and floating-rate debt based, in part, on the nature of the assets being supported. We limit our exposure to market interest rate increases by fixing interest rates that we pay for term periods. The primary means by which we accomplish this is through the issuance of fixed-rate debt. To supplement fixed-rate debt issuances, AGFC also uses interest rate swap agreements to synthetically create fixed-rate debt by altering the nature of floating-rate funding, thereby limiting our exposure to market interest rate increases.
REGULATION AND OTHER
Regulation
The regulatory environment of the consumer finance and insurance business is described in Item 1.
Taxation
Tax laws affect not only the way that the Company is taxed but also the design of many of our products. We monitor federal and state tax legislation and respond with appropriate tax planning in order to minimize the impact of taxation.
Year 2000
As of February 18, 2000, all of our major technology systems, programs, and applications, including those which rely on third parties, are operating smoothly following our transition into 2000. We have experienced no interruptions to normal business operations, including the processing of customer account data and transactions. We will continue to monitor our technology systems, including critical third party dependencies, as necessary to maintain our Year 2000 readiness. We do not expect any future disruptions, if they occur, to have a material effect on the Company's results of operations, liquidity, or financial condition.
Through December 31, 1999, we incurred and expensed pretax costs of $8.3 million related to Year 2000 readiness, including $2.0 million in 1999 and $5.6 million in 1998. In addition, we accelerated the planned replacement of certain systems as part of our Year 2000 plan. The cost of these replacement systems totaled $2.1 million in 1998 and were immaterial in 1999. We do not anticipate incurring any significant costs in the future to maintain Year 2000 readiness.
Item 7. Continued
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained in this report relative to trends in our operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. We have made these forward-looking statements based upon our current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those we anticipated. Actual results may differ materially from those included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties including, but not limited to, the following: (1) changes in general economic conditions, including the performance of financial markets, interest rates, and the level of personal bankruptcies; (2) competitive, regulatory, or tax changes that affect the cost of, or demand for, our products; (3) our ability to secure necessary regulatory approvals; and (4) adverse litigation results or resolution of litigation. Readers are also directed to other risks and uncertainties discussed in other documents we filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The fair values of certain of our assets and liabilities are sensitive to changes in market interest rates. The impact of changes in interest rates would be reduced by the fact that increases (decreases) in fair values of assets would be partially offset by corresponding changes in fair values of liabilities. In aggregate, the estimated impact of an immediate and sustained 100 basis point increase or decrease in interest rates on the fair values of our interest rate-sensitive financial instruments would not be material to our financial position.
Item 7A. Continued
The estimated increases (decreases) in fair values of interest rate- sensitive financial instruments were as follows:
December 31, 1999 December 31, 1998 +100 bp -100 bp +100 bp -100 bp (dollars in thousands) Assets Net finance receivables, less allowance for finance receivable losses $(323,097) $ 352,759 $(248,813) $ 269,131 Fixed-maturity securities (42,572) 44,776 (52,838) 55,410
Liabilities Long-term debt (122,347) 128,047 (154,796) 162,750
Derivatives Interest rate swaps 34,727 (36,721) 34,109 (36,430)
At each year end, we derived the changes in fair values by modeling estimated cash flows of certain of the Company's assets and liabilities. The assumptions we used adjusted cash flows to reflect changes in prepayments and calls but did not consider loan originations, debt issuances, or new investment purchases.
Readers should exercise care in drawing conclusions based on the above analysis. While these changes in fair values provide a measure of interest rate sensitivity, they do not represent our expectations about the impact of interest rate changes. This analysis was also based on our exposure at a particular point in time and incorporated numerous assumptions and estimates. It also assumed an immediate change in interest rates, without regard to the impact of certain business decisions or initiatives that we would likely undertake to mitigate or eliminate some or all of the adverse effects of the modeled scenarios.
Item 8.
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 Corporation
We have audited the accompanying consolidated balance sheets of American General Finance Corporation (a wholly-owned subsidiary of American General Finance, Inc.) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholder's equity, cash flows, and comprehensive income for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American General Finance Corporation and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG, LLP
Indianapolis, Indiana February 18, 2000
American General Finance Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999
Note 1. Nature of Operations
American General Finance Corporation will be referred to in these Notes to Consolidated Financial Statements as "AGFC" or collectively with its subsidiaries, whether directly or indirectly owned, as the "Company" or "we". AGFC is a wholly-owned subsidiary of American General Finance, Inc. (AGFI). AGFC is a financial services holding company with subsidiaries engaged primarily in the consumer finance and credit insurance business. We conduct loan and retail operations and market insurance products through our consumer branch and centralized real estate segments. At December 31, 1999, the Company had 1,314 offices in 39 states, Puerto Rico and the U.S. Virgin Islands and approximately 7,500 employees.
In our loan operations, we make loans directly to individuals and acquire real estate loans made by brokers and other real estate lenders. In our retail operations, we purchase retail sales contracts and provide revolving retail services arising from the retail sale of consumer goods and services by approximately 16,000 retail merchants and purchase private label receivables originated by American General Bank, FSB (AG Bank), a subsidiary of AGFI, arising from the sales by approximately 330 retail merchants under a participation agreement. In our insurance operations, we write and assume credit life, credit accident and health, credit-related property and casualty insurance, and non-credit insurance coverages on our consumer finance customers and property pledged as collateral. See Note 21. for further information on the Company's business segments.
We fund our operations principally through net cash flows from operating activities, issuances of long-term debt, short-term borrowings in the commercial paper market, borrowings from banks under credit facilities, and capital contributions from AGFI.
At December 31, 1999, the Company had $10.8 billion of net finance receivables due from approximately 2.1 million customer accounts and $6.1 billion of credit and non-credit life insurance in force covering approximately 1.1 million customer accounts.
Note 2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of AGFC and its subsidiaries. The subsidiaries are all wholly-owned and all intercompany items have been eliminated. All of the issued and outstanding common stock of AGFC is owned by AGFI, a holding company organized to acquire AGFC in a reorganization during 1974. AGFI is a wholly-owned subsidiary of American General Corporation (American General).
Notes to Consolidated Financial Statements, Continued
FINANCE OPERATIONS
Revenue Recognition
We recognize finance charges as revenue on the accrual basis using the interest method. We stop accruing revenue when the fourth contractual payment becomes past due for loans, retail sales contracts, and revolving retail and when the sixth contractual payment becomes past due for private label. Extension fees, late charges, and prepayment penalties are recognized as revenue when received.
We defer the costs to originate certain finance receivables and the revenue from nonrefundable points and fees on loans. We include deferred origination costs and nonrefundable points and fees in finance receivables and amortize them to revenue on the accrual basis using the interest method over the lesser of the contractual term or the estimated life based upon prepayment experience. If a finance receivable liquidates before amortization is completed, we charge or credit any unamortized costs or points and fees to revenue at the date of liquidation.
Allowance For Finance Receivable Losses
We maintain the allowance for finance receivable losses at a level that we consider adequate to absorb anticipated losses in our existing portfolio. We periodically evaluate the portfolio as a group and consider numerous factors in estimating the anticipated finance receivable losses, including current economic conditions, prior finance receivable loss and delinquency experience, and the composition of our finance receivable portfolio.
Our policy is to charge off each month non-real estate loans on which little or no collections were made in the prior six months, retail sales contracts that are six installments past due, and revolving retail and private label accounts that are 180 days past due. We start foreclosure proceedings on real estate loans when four monthly installments are past due. When foreclosure is completed and we have obtained title to the property, the real estate is established as an asset valued at fair value, and any loan amount in excess of that value is charged off. We occasionally extend the charge-off period for individual accounts when, in our opinion, such treatment is warranted.
Notes to Consolidated Financial Statements, Continued
INSURANCE OPERATIONS
Revenue Recognition
Premiums on credit life insurance are recognized as revenue using the sum- of-the-digits or actuarial methods, except in the case of level-term contracts, which are recognized as revenue using the straight-line method over the terms of the policies. Premiums on credit accident and health insurance are recognized as revenue using an average of the sum-of-the- digits and the straight-line methods. Premiums on credit-related property and casualty insurance are recognized as revenue using the straight-line method over the terms of the policies or appropriate shorter periods. Non- credit life insurance premiums are recognized when collected but not before their due dates.
Policy Reserves
Policy reserves for credit life and credit accident and health insurance equal related unearned premiums. Claim reserves are based on Company experience. Reserves for losses and loss adjustment expenses for credit- related property and casualty insurance are estimated based upon claims reported plus estimates of incurred but not reported claims. Liabilities for future life insurance policy benefits associated with non-credit life contracts are accrued when premium revenue is recognized and are based on assumptions as to investment yields, mortality, and surrenders. Annuity reserves are based on assumptions as to investment yields and mortality. Non-credit life, group annuity, and accident and health insurance reserves assumed under coinsurance agreements are based on various tabular and unearned premium methods.
Acquisition Costs
Insurance acquisition costs, principally commissions, reinsurance fees, and premium taxes, are deferred and charged to expense over the terms of the related policies or reinsurance agreements.
INVESTMENT SECURITIES
Valuation
All investment securities are currently classified as available-for-sale and recorded at fair value. We adjust related balance sheet accounts as if the unrealized gains and losses on investment securities had been realized, and record the net adjustment in accumulated other comprehensive income in shareholder's equity. If the fair value of an investment security classified as available-for-sale declines below its cost and we consider the decline to be other than temporary, we reduce the investment security to its fair value, and recognize a realized loss.
Notes to Consolidated Financial Statements, Continued
Realized Gains and Losses on Investments
Realized gains and losses on investments are specifically identified and are included in other revenues.
OTHER
Cash Equivalents
We consider all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents.
Goodwill
Goodwill is charged to expense in equal amounts over 20 to 40 years. We regularly review goodwill for indicators of impairment in value which we believe are not temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which we operate, (2) profitability analyses, and (3) cash flow analyses. If facts and circumstances suggest that goodwill is impaired, we assess the fair value of the underlying business and reduce goodwill to an amount that results in the book value of the Company approximating fair value.
Income Taxes
Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, using the tax rates expected to be in effect when the temporary differences reverse.
We provide a valuation allowance for deferred tax assets if it is likely that some portion of the deferred tax asset will not be realized. An increase or decrease in a valuation allowance resulting from a change in the realizability of the related deferred tax asset is included in income. Fluctuations in fair value of available-for-sale investment securities are included in accumulated other comprehensive income in shareholder's equity.
Derivative Financial Instruments
We account for our derivative financial instruments as hedges. Hedge accounting requires a high correlation between changes in fair values or cash flows of the derivative financial instrument and the specific item being hedged, both at inception and throughout the life of the hedge.
We record the difference between amounts payable and receivable on interest rate swap agreements on the accrual basis as an adjustment to interest expense over the life of the agreements. The related amounts payable to, or receivable from, counterparties are included in other liabilities or other assets. The fair values of interest rate swap agreements are not recognized in the consolidated balance sheet, which is consistent with the treatment of the related debt that is hedged.
Notes to Consolidated Financial Statements, Continued
Any gain or loss resulting from the early termination of an interest rate swap agreement is deferred and amortized into income over the remaining term of the related debt. If the underlying debt is extinguished, any related gain or loss on the interest rate swap agreement is recognized in income.
Use of Estimates
We make estimates and assumptions in preparing financial statements that affect amounts reported in our financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from our estimates.
Fair Value of Financial Instruments
The fair values disclosed in Note 23. are estimated using discounted cash flows when quoted market prices or values obtained from independent pricing services are not available. The assumptions used, including the discount rate and estimates of future cash flows, significantly affect the valuation techniques employed. In certain cases, the derived fair value estimates cannot be substantiated by comparison to independent markets or realized in immediate settlement of the instrument.
Note 3. Accounting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be recognized at fair value in the balance sheet. Changes in the fair value of a derivative instrument will be reported as earnings or other comprehensive income, depending upon the intended use of the derivative instrument. We will adopt SFAS 133 on January 1, 2001. We do not expect adoption to have a material impact on the Company's consolidated results of operations or financial position.
Notes to Consolidated Financial Statements, Continued
Note 4. Finance Receivables
Real estate loans are secured by first or second mortgages and generally have maximum original terms of 360 months. Non-real estate loans are secured by consumer goods, automobiles or other chattel security, or are unsecured and generally have maximum original terms of 60 months. Retail sales contracts are secured principally by consumer goods and automobiles and generally have maximum original terms of 60 months. Revolving retail and private label are secured by purchase money security interests in the goods purchased and generally require minimum monthly payments based on outstanding balances. At December 31, 1999, 96% of our net finance receivables were secured by the real and/or personal property of the borrower. At December 31, 1999, real estate loans accounted for 64% of the amount and 8% of the number of net finance receivables outstanding.
Contractual maturities of net finance receivables at December 31, 1999 were as follows:
Amount Percent (dollars in thousands)
2000 $ 1,135,962 11% 2001 1,366,735 13 2002 1,008,956 9 2003 600,552 6 2004 372,855 3 2005 and thereafter 6,272,418 58
$10,757,478 100%
Company experience has shown that customers will renew, convert or pay in full a substantial portion of finance receivables prior to maturity. Contractual maturities are not a forecast of future cash collections.
Principal cash collections and such collections as a percentage of average net receivables were as follows:
Years Ended December 31, 1999 1998 1997 (dollars in thousands) Real estate loans: Principal cash collections $1,856,908 $1,528,775 $1,298,455 % of average net receivables 30.35% 33.31% 35.79%
Non-real estate loans: Principal cash collections $1,489,110 $1,536,582 $1,503,813 % of average net receivables 60.50% 61.92% 60.47%
Retail sales finance: Principal cash collections $1,659,220 $1,610,869 $1,448,758 % of average net receivables 134.31% 127.35% 118.13%
Notes to Consolidated Financial Statements, Continued
Unused credit limits extended by AG Bank (whose private label finance receivables are fully participated to the Company) and by the Company to its customers were as follows: December 31, 1999 1998 (dollars in thousands)
Unused credit limits $3,107,888 $2,759,432
Company experience has shown that the funded amounts have been less than the unused credit limits. All unused credit limits, in part or in total, can be cancelled at the discretion of AG Bank and the Company.
Geographic diversification of finance receivables reduces the concentration of credit risk associated with a recession in any one region. The largest concentrations of net finance receivables were as follows:
December 31, 1999 December 31, 1998 Amount Percent Amount Percent (dollars in thousands)
California $ 1,537,524 14% $1,461,438 15% N. Carolina 811,625 8 728,801 8 Florida 671,970 6 574,693 6 Illinois 659,674 6 593,789 6 Ohio 644,804 6 559,964 6 Indiana 560,887 5 502,653 5 Virginia 430,687 4 367,995 4 Georgia 427,523 4 351,347 4 Other 5,012,784 47 4,331,484 46
$10,757,478 100% $9,472,164 100%
Note 5. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses are detailed below.
Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Balance at beginning of year $372,923 $363,126 $385,272 Provision for finance receivable losses 202,977 207,529 242,453 Allowance related to acquired receivables 12,404 17,297 354 Charge-offs, net of recoveries (202,977) (215,029) (264,953)
Balance at end of year $385,327 $372,923 $363,126
See Note 2. for information on the determination of the allowance for finance receivable losses.
Notes to Consolidated Financial Statements, Continued
Note 6. Investment Securities
Investment securities were as follows at December 31:
Fair Value Amortized Cost 1999 1998 1999 1998 (dollars in thousands) Fixed-maturity investment securities: Bonds: Corporate securities $581,313 $575,336 $601,458 $546,135 Mortgage-backed securities 148,696 175,014 149,000 168,346 States and political subdivisions 178,865 184,255 177,283 173,508 Other 39,148 42,871 31,599 29,297 Redeemable preferred stocks 15,233 11,194 14,272 10,916 Total 963,255 988,670 973,612 928,202 Non-redeemable preferred stocks 3,679 2,910 3,631 2,731 Other long-term investments 18,517 4,219 18,517 4,219 Common stocks 32 - 21 -
Total investment securities $985,483 $995,799 $995,781 $935,152
At December 31, the gross unrealized gains and losses on investment securities were as follows: Gross Gross Unrealized Gains Unrealized Losses 1999 1998 1999 1998 (dollars in thousands) Fixed-maturity investment securities: Bonds: Corporate securities $ 4,331 $31,955 $24,476 $ 2,754 Mortgage-backed securities 1,228 6,683 1,532 15 State and political subdivisions 3,248 10,821 1,666 74 Other 7,625 13,574 76 - Redeemable preferred stocks 966 316 5 38 Total 17,398 63,349 27,755 2,881 Non-redeemable preferred stocks 48 179 - - Common stocks 11 - - -
Total investment securities $17,457 $63,528 $27,755 $ 2,881
The fair values of investment securities sold or redeemed and the resulting gross realized gains and losses were as follows:
Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Fair value $247,015 $157,970 $104,491
Gross realized gains 3,003 340 1,481 Gross realized losses 4,567 1,033 410
Notes to Consolidated Financial Statements, Continued
Contractual maturities of fixed-maturity securities at December 31, 1999 were as follows: Fair Amortized Value Cost (dollars in thousands) Fixed maturities, excluding mortgage-backed securities: Due in 1 year or less $ 15,664 $ 15,640 Due after 1 year through 5 years 179,410 176,715 Due after 5 years through 10 years 470,367 480,588 Due after 10 years 149,118 151,669 Mortgage-backed securities 148,696 149,000
Total $963,255 $973,612
Actual maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations. The Company may sell investments before maturity to achieve corporate requirements and investment strategies.
Bonds on deposit with regulatory authorities had carrying values of $6.4 million at December 31, 1999 and $7.9 million at December 31, 1998.
Note 7. Notes Receivable from Parent
Notes receivable from AGFI totaled $189.9 million at December 31, 1999 and $182.9 million at December 31, 1998. Interest revenue on notes receivable from parent totaled $21.1 million in 1999, $17.5 million in 1998, and $16.8 million in 1997.
Note 8. Other Assets
The components of other assets were as follows:
December 31, 1999 1998 (dollars in thousands)
Goodwill $170,481 $245,664 Income tax assets 112,567 26,809 Customer base valuations 92,499 91,520 Fixed assets 89,781 72,224 Other insurance investments 75,701 64,470 Real estate owned 51,433 32,558 Prepaid expenses and deferred charges 38,749 41,052 Other 167,223 77,834
Total $798,434 $652,131
Notes to Consolidated Financial Statements, Continued
Goodwill is net of accumulated amortization of $100.4 million at December 31, 1999 and $93.4 million at December 31, 1998. The decrease in goodwill (and increase in income tax assets) reflected a change in the tax basis of assets acquired in a 1988 taxable purchase business combination. To reflect the new tax basis, we reduced deferred tax liabilities by $68.2 million and reduced goodwill by the same amount. See Note 18. for further information on the examinations of American General's tax returns.
The customer base valuations are charged to expense in equal amounts over 6 to 25 years.
Note 9. Long-term Debt
The carrying value and fair value of long-term debt at December 31 were as follows:
Carrying Value Fair Value 1999 1998 1999 1998 (dollars in thousands)
Senior debt $5,709,755 $5,162,012 $5,634,059 $5,332,847
Weighted average interest rates on long-term debt were as follows:
Years Ended December 31, December 31, 1999 1998 1997 1999 1998
Senior debt 6.61% 6.96% 7.34% 6.58% 6.67%
Maturities of long-term debt at December 31, 1999 were as follows:
Carrying Value (dollars in thousands)
2000 $1,285,227 2001 1,262,240 2002 1,077,460 2003 1,039,179 2004 275,575 2005-2009 770,074
Total $5,709,755
A debt agreement contains restrictions on consolidated retained earnings for certain purposes (see Note 16.).
Notes to Consolidated Financial Statements, Continued
Note 10. Short-term Notes Payable
AGFC and one of its subsidiaries issue commercial paper with terms ranging from 1 to 270 days. Included in commercial paper are extendible commercial notes that AGFC sells with initial maturities of up to 90 days which may be extended by AGFC to 390 days.
Information concerning short-term notes payable for commercial paper and to banks under credit facilities was as follows:
At or for the Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Average borrowings $3,596,916 $3,362,788 $2,923,726 Weighted average interest rate, at year end: Money market yield 5.94% 5.29% 5.80% Semi-annual bond equivalent yield 6.01% 5.35% 5.87%
Note 11. Liquidity Facilities
We participate in credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. The Company is an eligible borrower under committed credit facilities extended to American General and certain of its subsidiaries (the "shared committed facilities"). At December 31, 1999, the annual commitment fees for the shared committed facilities ranged from .05% to .07%. We pay only an allocated portion of the commitment fees for the shared committed facilities. The Company also has uncommitted credit facilities and is an eligible borrower under uncommitted credit facilities extended to American General and certain of its subsidiaries (the "shared uncommitted facilities"). Available borrowings under all facilities are reduced by any outstanding borrowings.
Information concerning the credit facilities was as follows:
December 31, 1999 1998 (dollars in thousands) Committed credit facilities: Shared committed facilities $5,600,000 $5,000,000 Borrowings - -
Remaining availability $5,600,000 $5,000,000
Uncommitted credit facilities: Company uncommitted facilities $ 1,000 $ 141,000 Shared uncommitted facilities 50,000 150,000 Borrowings - -
Remaining availability $ 51,000 $ 291,000
Notes to Consolidated Financial Statements, Continued
Note 12. Derivative Financial Instruments
AGFC makes limited use of derivative financial instruments to manage the cost of its debt and is neither a dealer nor a trader in derivative financial instruments. AGFC has generally limited its use of derivative financial instruments to interest rate swap agreements.
AGFC uses interest rate swap agreements to reduce its exposure to market interest expense rate increases by effectively converting short-term, and certain long-term, floating-rate debt to a fixed-rate basis. These floating-rate obligations are recorded at amortized cost. The effective long-term fixed rates achieved through interest rate swap agreements are slightly lower than could have been achieved by issuing comparable long- term fixed-rate debt. As an alternative to fixed-rate term debt, AGFC's interest rate swap agreements did not have a material effect on the Company's weighted-average interest rate or reported interest expense in any of the three years ended December 31, 1999.
AGFC contracted to pay interest at fixed rates and receive interest at floating rates on the interest rate swap agreements. Notional amounts and weighted average receive and pay rates were as follows:
December 31, 1999 1998 1997 (dollars in thousands)
Notional amount $1,295,000 $935,000 $940,000
Weighted average receive rate 5.40% 4.57% 5.69% Weighted average pay rate 6.70% 6.94% 7.39%
These agreements mature at various dates and had the respective fixed rates at December 31, 1999 as follows:
Notional Weighted Average Amount Interest Rate (dollars in thousands)
2000 $ 225,000 8.80% 2001 270,000 6.38 2002 300,000 6.53 2004 200,000 6.16 2006 100,000 7.03 2008 200,000 5.50
$1,295,000 6.70%
Notes to Consolidated Financial Statements, Continued
The following table shows changes in the notional amounts for interest rate swap agreements:
Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Balance at beginning of year $ 935,000 $940,000 $540,000 New contracts 410,000 260,000 425,000 Expired contracts (50,000) (265,000) (25,000)
Balance at end of year $1,295,000 $935,000 $940,000
AGFC is exposed to credit risk in the event of non-performance by counterparties to derivative financial instruments. AGFC limits this exposure by entering into agreements with counterparties having strong credit ratings and by basing the amount and term of an agreement on these credit ratings. AGFC regularly monitors counterparty credit ratings throughout the term of the agreements.
AGFC's credit exposure on derivative financial instruments is limited to the fair value of the agreements that are favorable to the Company. See Note 23. for the fair values of the interest rate swap agreements. AGFC does not expect any counterparty to fail to meet its obligation; however, non-performance would not have a material impact on the Company's consolidated results of operations and financial position.
AGFC's exposure to market risk is mitigated by the offsetting effects of changes in the value of the agreements and of the underlying debt to which they relate.
Note 13. Short-term Notes Payable - Parent
Borrowings from American General primarily provide overnight operating liquidity when American General is in a surplus cash position. These borrowings are due on demand at short-term rates based on overnight bank investment rates. At December 31, 1999, 1998 and 1997, AGFC had no borrowings outstanding with American General.
Notes to Consolidated Financial Statements, Continued
Note 14. Insurance
Our insurance subsidiaries enter into reinsurance agreements among themselves and other insurers, including other American General insurance subsidiaries. Insurance claims and policyholder liabilities included the following amounts with other American General insurance subsidiaries:
December 31, 1999 1998 (dollars in thousands) Annuity, credit life, and credit accident and health reserves $76,712 $68,866
Our insurance subsidiaries assumed reinsurance premiums from other insurers as follows:
December 31, 1999 1998 1997 (dollars in thousands)
Assumed reinsurance premiums $44,214 $40,081 $38,554
The Company's ceded reinsurance activities were not significant during the last three years.
Statutory accounting practices differ from generally accepted accounting principles in the following respects:
Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Statutory net income $48,754 $68,537 $58,157 Change in deferred policy acquisition costs 7,405 254 (6,848) Reserve changes 5,848 (4,885) 10,273 Deferred income tax (charge) benefit (1,870) (1,024) 1,808 Amortization of interest maintenance reserve (711) (561) (354) Goodwill amortization (458) (458) (458) Other, net 7,744 2,542 (266)
GAAP net income $66,712 $64,405 $62,312
Notes to Consolidated Financial Statements, Continued
December 31, 1999 1998 (dollars in thousands)
Statutory equity $575,767 $525,450 Deferred policy acquisition costs 70,530 62,785 Reserve changes 57,724 55,608 Net unrealized (losses) gains (27,879) 25,237 Goodwill 14,710 15,168 Decrease in carrying value of affiliates (12,836) (20,721) Asset valuation reserve 10,579 15,499 Deferred income taxes 3,606 1,225 Interest maintenance reserve (580) (4,401) Other, net 12,970 8,142
GAAP equity $704,591 $683,992
Note 15. Capital Stock
AGFC has two classes of authorized capital stock: special shares and common shares. AGFC may issue special shares in series. The board of directors determines the dividend, liquidation, redemption, conversion, voting and other rights prior to issuance. Par value, shares authorized, and shares issued and outstanding at December 31, 1999 and 1998 were as follows:
Shares Issued and Outstanding Par Shares December 31, Value Authorized 1999 1998
Special Shares - 25,000,000 - - Common Shares $0.50 25,000,000 10,160,012 10,160,012
Note 16. Retained Earnings
State laws restrict the amounts our insurance subsidiaries may pay as dividends without prior notice to, or in some cases prior approval from, their respective state insurance departments. At December 31, 1999, the maximum amount of dividends which the Company's insurance subsidiaries may pay in 2000 without prior approval was $65.7 million. At December 31, 1999, our insurance subsidiaries had statutory capital and surplus of $575.8 million. Merit Life Insurance Co. (Merit), a wholly-owned subsidiary of AGFC, had $52.7 million of accumulated earnings at December 31, 1999 for which no federal income tax provisions have been required. Merit would be liable for federal income taxes on such earnings if they were distributed as dividends or exceeded limits prescribed by tax laws. No distributions are presently contemplated from these earnings. If such earnings were to become taxable at December 31, 1999, the federal income tax would approximate $18.4 million.
An AGFC financing agreement limits the amount of dividends AGFC may pay. Under the restrictive provision contained in this agreement, $545.5 million of the retained earnings of AGFC was free from such restriction at December 31, 1999.
Notes to Consolidated Financial Statements, Continued
Note 17. Loss on Non-strategic Assets
During fourth quarter 1996, we decided to offer for sale $874.8 million of non-strategic, underperforming finance receivable portfolios, consisting of $520.3 million of credit card and $354.5 million of private label finance receivables. We reclassified these finance receivables and $70.0 million of allowance for finance receivable losses to assets held for sale on December 31, 1996.
We hired an outside advisor to market the portfolios. Based on negotiations with prospective purchasers subsequent to year end 1996, we determined that a write-down of $137.0 million ($88.1 million aftertax) at December 31, 1996 was necessary to reduce the carrying amount of the assets held for sale to net realizable value, after considering related expenses.
In April 1997, we repurchased $100.0 million of private label and credit card receivables that previously had been sold through securitization. No gain or loss resulted from this transaction. These repurchased credit card receivables were offered for sale along with the Company's other credit card receivables, which increased the carrying amount of assets held for sale by approximately $70.0 million in April 1997.
In June 1997, we sold all of the assets held for sale (with a remaining balance of $658.1 million) and $81.4 million of other private label finance receivables. In connection with these sales, we recorded a loss of $42.2 million ($27.0 million aftertax) in second quarter 1997. This loss primarily resulted from establishing a liability for estimated future payments to the purchaser of the credit card portfolio under a five-year loss sharing arrangement.
Note 18. Income Taxes
AGFC and all of its subsidiaries file a consolidated federal income tax return with American General and the majority of its subsidiaries. We provide for federal income taxes as if filing a separate tax return, and pay such amounts to American General under a tax sharing agreement.
Provision for income taxes is summarized as follows:
Years Ended December 31, 1999 1998 1997 (dollars in thousands) Federal Current $110,872 $ 90,531 $ 15,679 Deferred 10,427 13,429 57,807 Total federal 121,299 103,960 73,486 State 6,799 7,872 5,556
Total $128,098 $111,832 $ 79,042
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, 1999 1998 1997
Statutory federal income tax rate 35.00% 35.00% 35.00% State income taxes 1.25 1.67 1.67 Amortization of goodwill .70 1.00 1.42 Nontaxable investment income (.79) (.90) (1.28) Other, net .15 (.25) (.24)
Effective income tax rate 36.31% 36.52% 36.57%
Net deferred tax assets were as follows:
December 31, 1999 1998 (dollars in thousands)
Deferred tax assets $184,295 $176,936 Deferred tax liabilities (78,138) (153,384)
Net deferred tax assets $106,157 $ 23,552
The most significant deferred tax asset relates to the allowance for finance receivable losses. The decrease in deferred tax liabilities reflects a change in the tax basis of assets acquired in a 1988 taxable purchase business combination.
During 1999, the Internal Revenue Service completed its examinations of American General's tax returns through 1988, which resulted in a change in the tax basis of assets acquired in a 1988 taxable purchase business combination. To reflect the new tax basis, we reduced deferred tax liabilities by $68.2 million and reduced goodwill by the same amount.
State net operating loss (NOL) carryforwards were $617.9 million at December 31, 1999 and $630.5 million at December 31, 1998 and expire in the years 2005 and 2006. These carryforwards resulted from a 1995 state audit of a return and the state's acceptance of an amended return. At December 31, 1999 and 1998, the valuation allowance relating to the state NOL carryforwards totaled $39.5 million.
Notes to Consolidated Financial Statements, Continued
Note 19. Lease Commitments, Rent Expense and Contingent Liabilities
Annual rental commitments for leased office space, automobiles and data processing and related equipment accounted for as operating leases, excluding leases on a month-to-month basis, are as follows:
Lease Commitments (dollars in thousands)
2000 $ 42,875 2001 35,176 2002 27,428 2003 19,532 2004 6,594 subsequent to 2004 14,597
Total $146,202
Taxes, insurance and maintenance expenses are obligations of the Company under certain leases. In the normal course of business, leases that expire will be renewed or replaced by leases on other properties. Future minimum annual rental commitments will probably not be less than the amount of rental expense incurred in 1999. Rental expense totaled $46.9 million in 1999, $36.1 million in 1998, and $40.8 million in 1997.
AGFC and certain of its subsidiaries are parties to various lawsuits and proceedings, including certain class action claims, arising in the ordinary course of business. In addition, many of these claims arise in jurisdictions, such as Alabama and Mississippi, that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the Company's consolidated results of operations and financial position. However, the frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given suit.
Note 20. Benefit Plans
RETIREMENT INCOME PLANS
We participate in the American General Retirement Plans (AGRP), which are noncontributory defined benefit pension plans covering most employees. Pension benefits are based on the participant's compensation and length of credited service. American General's funding policy is to contribute annually no more than the maximum amount deductible for federal income tax purposes.
Notes to Consolidated Financial Statements, Continued
At December 31, 1999, the plans' assets were invested as follows: (1) 71% in equity mutual funds managed outside the Company; (2) 26% in fixed income mutual funds managed by an American General subsidiary; (3) 1% in American General common stock; and 4) 1% in deposit administration insurance contracts issued by American General subsidiaries. The pension plans have purchased annuity contracts from American General subsidiaries to provide approximately $8.3 million of future annual benefits to certain retirees.
Because net plan assets are not calculated separately for the Company, the remaining information is for AGFI.
AGFI accounts for its participation in the AGRP as if it had its own plans. The following table shows AGFI's portion of the plans' funded status:
December 31, 1999 1998 1997 (dollars in thousands)
Projected benefit obligation $ 85,757 $ 87,882 $ 70,864 Plan assets at fair value 109,371 95,653 86,418 Plan assets in excess of projected benefit obligation 23,614 7,771 15,554 Other unrecognized items, net (20,208) (5,086) (10,905)
Prepaid pension expense $ 3,406 $ 2,685 $ 4,649
Pension expense included the following components:
Years Ended December 31, 1999 1998 1997 (dollars in thousands)
Service cost $ 3,927 $ 3,623 $ 3,150 Interest cost 6,412 5,688 4,800 Expected return on plan assets (8,713) (6,950) (6,060) Net amortization and deferral 119 136 (127)
Pension expense $ 1,745 $ 2,497 $ 1,763
Additional assumptions concerning the determination of pension expense were as follows: Years Ended December 31, 1999 1998 1997
Weighted average discount rate 7.75% 7.00% 7.25% Expected long-term rate of return on plan assets 10.35 10.25 10.00 Rate of increase in compensation levels 4.25 4.25 4.00
Notes to Consolidated Financial Statements, Continued
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
We participate in American General's life, medical, supplemental major medical, and dental plans for certain retired employees. Most plans are contributory, with retiree contributions adjusted annually to limit employer contributions to predetermined amounts. American General and its subsidiaries reserve the right to change or eliminate these benefits at any time.
American General's life plans are insured through December 31, 2000. The majority of the retiree medical and dental plans is unfunded and self- insured.
Because plan information is not calculated separately for the Company, the remaining information is for AGFI.
AGFI accounts for its participation in the plans as if it had its own plans. The accrued liability for postretirement benefits was $6.6 million at December 31, 1999 and $6.9 million at December 31, 1998. These liabilities were discounted at the same rates used for the pension plans. Postretirement benefit expense totaled $.7 million in 1999, $.5 million in 1998, and $.7 million in 1997.
Note 21. Segment Information
We have three business segments: consumer branches, centralized real estate, and insurance. Our segments are managed separately because they offer different financial service products. The consumer branch operation originates and acquires home equity and consumer loans, extends lines of credit, offers retail sales financing to merchants, and sells credit and non-credit insurance products. The centralized real estate operation acquires individual first and second mortgage loans originated by real estate brokers and purchases portfolios of mortgage loans originated by various real estate lenders. The insurance operation writes and assumes credit and non-credit insurance through products that are sold principally by the consumer branches.
We evaluate the performance of the segments based on pretax operating earnings. The accounting policies of the segments are the same as those disclosed in Note 2., except that: (1) segment finance charge revenues are not reduced for the amortization of the deferred origination costs; (2) segment operating expenses are not reduced for the deferral of origination costs and exclude the amortization of goodwill; and (3) segment finance receivables exclude the deferred origination costs. Intersegment sales and transfers are intended to approximate the amounts segments would earn if dealing with independent third parties.
The following tables display information about the Company's segments as well as reconciliations of the segment totals to the consolidated financial statement amounts. Adjustments for revenues are amortization of deferred origination costs, realized gains (losses) on investments, and certain investment expenses. Reconciling items for pretax income include the amortization of goodwill, realized gains (losses) on investments, and certain investment expenses. Adjustments for assets include goodwill, deferred origination costs, other assets, and corporate assets that are not considered pertinent to determining segment performance. Corporate assets
Notes to Consolidated Financial Statements, Continued
include cash, prepaid expenses, deferred charges, and fixed assets.
Because segment information is not calculated separately for the Company, the remaining information is for AGFI.
At or for the Year Ended December 31, 1999:
Consumer Centralized Total Branches Real Estate Insurance Segments (dollars in thousands) Revenues: External: Finance charges $ 1,357,403 $ 158,358 $ - $ 1,515,761 Insurance 1,573 - 182,956 184,529 Other (5,281) 8,339 81,620 84,678 Intercompany 73,903 713 (72,195) 2,421 Interest expense 423,720 105,795 - 529,515 Provision for finance receivable losses 193,104 16,728 - 209,832 Pretax income 317,931 17,831 74,759 410,521 Assets 8,535,194 1,921,504 1,095,150 11,551,848
At or for the Year Ended December 31, 1998:
Consumer Centralized Total Branches Real Estate Insurance Segments (dollars in thousands) Revenues: External: Finance charges $ 1,263,391 $ 128,986 $ - $ 1,392,377 Insurance 1,925 - 175,154 177,079 Other - 3,202 74,978 78,180 Intercompany 70,959 561 (68,850) 2,670 Interest expense 384,182 79,612 112 463,906 Provision for finance receivable losses 209,027 10,404 - 219,431 Pretax income 248,149 24,823 70,220 343,192 Assets 7,415,107 1,911,538 1,077,892 10,404,537
At or for the Year Ended December 31, 1997:
Consumer Centralized Total Branches Real Estate Insurance Segments (dollars in thousands) Revenues: External: Finance charges $ 1,223,312 $ 79,769 $ - $ 1,303,081 Insurance 2,069 - 185,076 187,145 Other 534 132 69,243 69,909 Intercompany 74,724 169 (72,740) 2,153 Interest expense 376,263 50,011 - 426,274 Provision for finance receivable losses 252,942 2,209 - 255,151 Pretax income 202,364 18,508 63,684 284,556 Assets 6,564,446 1,050,335 1,000,176 8,614,957
Notes to Consolidated Financial Statements, Continued
Reconciliation of segment totals to consolidated financial statement amounts is summarized below:
At or for the Years Ended December 31, 1999 1998 1997 (dollars in thousands) Revenues
Segments $ 1,787,389 $ 1,650,306 $ 1,562,288 Corporate (751) 4,971 967 Adjustments (55,036) (46,172) (39,150)
Consolidated revenue $ 1,731,602 $ 1,609,105 $ 1,524,105
Interest Expense
Segments $ 529,515 $ 463,906 $ 426,274 Corporate 44,319 47,681 35,001
Consolidated interest expense $ 573,834 $ 511,587 $ 461,275
Provision for Finance Receivable Losses
Segments $ 209,832 $ 219,431 $ 255,151 Corporate (3,200) (7,341) (7,168)
Consolidated provision for finance receivable losses $ 206,632 $ 212,090 $ 247,983
Pretax Income
Segments $ 410,521 $ 343,192 $ 284,556 Corporate (116,711) (37,091) (72,270) Adjustments (11,151) (10,510) (7,933)
Consolidated pretax income $ 282,659 $ 295,591 $ 204,353
Assets
Segments $11,551,848 $10,404,537 $ 8,614,957 Corporate 869,614 476,552 397,105 Adjustments 213,845 291,834 277,438
Consolidated assets $12,635,307 $11,172,923 $ 9,289,500
Notes to Consolidated Financial Statements, Continued
Note 22. Interim Financial Information (Unaudited)
Unaudited interim information is summarized below:
Total Revenues Three Months Ended 1999 1998 (dollars in thousands)
March 31 $ 418,819 $ 385,631 June 30 421,160 393,297 September 30 432,270 403,867 December 31 443,620 411,444
Total $1,715,869 $1,594,239
Income Before Provision for Income Taxes Three Months Ended 1999 1998 (dollars in thousands)
March 31 $ 82,730 $ 73,808 June 30 90,129 75,645 September 30 93,569 76,684 December 31 86,323 80,091
Total $ 352,751 $ 306,228
Net Income Three Months Ended 1999 1998 (dollars in thousands)
March 31 $ 52,674 $ 46,006 June 30 57,380 47,117 September 30 59,623 49,304 December 31 54,976 51,969
Total $ 224,653 $ 194,396
Notes to Consolidated Financial Statements, Continued
Note 23. Fair Value of Financial Instruments
The carrying values and estimated fair values of certain of the Company's financial instruments are presented below. The reader should exercise care in drawing conclusions based on fair value, since the fair values presented below can be misinterpreted and do not include the value associated with all of the Company's assets and liabilities.
December 31, 1999 December 31, 1998 Carrying Fair Carrying Fair Value Value Value Value (dollars in thousands) Assets
Net finance receivables, less allowance for finance receivable losses $10,372,151 $10,372,151 $ 9,099,241 $ 9,099,241 Investment securities 985,483 985,483 995,799 995,799 Cash and cash equivalents 118,151 118,151 129,500 129,500
Liabilities
Long-term debt 5,709,755 5,634,059 5,162,012 5,332,847 Short-term notes payable 4,246,520 4,246,520 3,485,648 3,485,648
Off-Balance Sheet Financial Instruments
Unused customer credit limits - - - - Interest rate swap agreements - 23,129 - (36,697)
VALUATION METHODOLOGIES AND ASSUMPTIONS
We used the following methods and assumptions to estimate the fair value of the financial instruments.
Finance Receivables
Fair values of net finance receivables (which approximate carrying amount less allowance for finance receivable losses) were estimated using projected cash flows, computed by category of finance receivable, discounted at the weighted-average interest rates currently being offered for similar finance receivables. Cash flows were based on contractual payment terms adjusted for delinquencies and finance receivable losses. The fair value estimates do not reflect the value of the underlying customer relationships or the related distribution systems.
Notes to Consolidated Financial Statements, Continued
Investment Securities
When available, quoted market prices were used as fair values of investment securities. For investment securities not actively traded, we estimated fair values using values obtained from independent pricing services or, in the case of some private placements, by discounting expected future cash flows using a current market rate applicable to yield, credit quality, and average life of the investments.
Cash and Cash Equivalents
The carrying values of cash and cash equivalents approximated the fair values.
Long-term Debt
The fair values of long-term debt were estimated using cash flows discounted at current borrowing rates.
Short-term Notes Payable
The carrying values of short-term notes payable approximated the fair values.
Unused Customer Credit Limits
The unused credit limits available to AG Bank's and the Company's customers have no fair value. The interest rates charged on these facilities can be changed at AG Bank's discretion for private label, or are adjustable and reprice frequently for loan and retail revolving lines of credit. These amounts, in part or in total, can be cancelled at the discretion of AG Bank and the Company.
Derivative Financial Instruments
The fair values of interest rate swap agreements were estimated using cash flows discounted at current market rates.
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 Corporation and subsidiaries are included in Item 8:
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Income, years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Shareholder's Equity, years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows, years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Comprehensive Income, years ended December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is included in Item 14(d).
All other financial statement schedules have been omitted because they are inapplicable.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 68 herein.
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 28, 1999, with respect to the issuance of an Earnings Release announcing certain unaudited financial results of the Company for the quarter ended September 30, 1999.
Current Report on Form 8-K dated November 1, 1999, with respect to the establishment of a program providing for the issuance from time to time of up to $3.0 billion aggregate principal amount of our Medium-Term Notes, Series F.
Current Report on Form 8-K dated November 9, 1999, with respect to the authorization for issuance of $200 million aggregate principal amount of our 6 3/4% Senior Notes due November 15, 2004.
Current Report on Form 8-K dated January 26, 2000, with respect to the issuance of an Earnings Release announcing certain unaudited financial results of the Company for the year ended December 31, 1999.
Reports on Form 8-K, Continued
(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
Schedule I, Continued
Schedule I, Continued
Schedule I, Continued
American General Finance Corporation Notes to Condensed Financial Statements December 31, 1999
Note 1. Accounting Policies
AGFC'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 AGFC's consolidated financial statements.
Note 2. Receivable from Subsidiaries
AGFC provides funding to most of its finance subsidiaries for lending activities. Such funding is made at 215 basis points over the borrowing cost rate.
Note 3. Long-Term Debt
Long-term debt maturities for the five years after December 31, 1999, were as follows: 2000, $1.3 billion; 2001, $1.3 billion; 2002, $1.1 billion; 2003, $1.0 billion; and 2004, $275.6 million.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 21, 2000.
AMERICAN GENERAL FINANCE CORPORATION
By: /s/ Robert A. Cole Robert A. Cole (Senior Vice President and Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 21, 2000.
/s/ Frederick W. Geissinger /s/ W. Tal Bratton Frederick W. Geissinger W. Tal Bratton (President and Chief Executive (Director) Officer and Director - Principal Executive Officer) /s/ Jerry L. Gilpin Jerry L. Gilpin /s/ Robert A. Cole (Director) Robert A. Cole (Senior Vice President and Chief Financial Officer and /s/ Philip M. Hanley Director - Principal Philip M. Hanley Financial Officer) (Director)
/s/ George W. Schmidt /s/ Bennie D. Hendrix George W. Schmidt Bennie D. Hendrix (Controller and Assistant (Director) Secretary - Principal Accounting Officer)
/s/ Stephen L. Blake Stephen L. Blake (Director)
Exhibit Index
Exhibit Number
(3) a. Restated Articles of Incorporation of American General Finance Corporation (formerly Credithrift Financial Corporation) dated July 22, 1988 and amendments thereto dated August 25, 1988 and March 20, 1989. Incorporated by reference to Exhibit (3)a. filed as a part of the Company's Annual Report on Form 10-K for the year ended December 31, 1988 (File No. 1-6155).
b. By-laws of American General Finance Corporation. Incorporated by reference to Exhibit (3)b. filed as a part of the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 1-6155).
(4) a. The following instruments are filed pursuant to Item 601(b)(4)(ii) of Regulation S-K, which requires with certain exceptions that all instruments be filed which define the rights of holders of the Company's long-term debt and our consolidated subsidiaries. In the aggregate, the outstanding issuances of debt under each of the Indentures referred to under items (1) and (2) below exceed 10% of the Company's total assets on a consolidated basis.
(1) Indenture dated as of October 1, 1994 from American General Finance Corporation to The Chase Manhattan Bank. Incorporated by reference to Exhibit 4(a) filed as a part of our Registration Statement on Form S-3 (Registration No. 33-55803).
(2) Indenture dated as of May 1, 1997 from American General Finance Corporation to Bank One, National Association (formerly known as The First National Bank of Chicago). Incorporated by reference to Exhibit 4(a) filed as a part of our Registration Statement on Form S-3 (Registration No. 333-28925).
b. In accordance with Item 601(b)(4)(iii) of Regulation S-K, certain other instruments defining the rights of holders of the Company's long-term debt and our subsidiaries have not been filed as exhibits to this Annual Report on Form 10-K because the total amount of securities authorized and outstanding under each instrument does not exceed 10% of the total assets of the Company on a consolidated basis. We hereby agree to furnish a copy of each instrument to the Securities and Exchange Commission upon request.
(12) Computation of ratio of earnings to fixed charges.
(23) Consent of Ernst & Young LLP, Independent Auditors
(27) Financial Data Schedule