UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 1-7422
AMERICAN GENERAL FINANCE, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1313922
(State of incorporation) (I.R.S. Employer Identification No.)
601 N.W. Second Street, Evansville, IN 47708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 424-8031
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]. Not applicable.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
The registrant meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format.
As the registrant is an indirect wholly owned subsidiary of American
International Group, Inc., none of the registrant's common stock is held by
non-affiliates of the registrant.
At March 7, 2005, there were 2,000,000 shares of the registrant's common
stock, $.50 par value, outstanding.
2
TABLE OF CONTENTS
Item Page
Part I 1. Business . . . . . . . . . . . . . . . . . . . . . . 4
2. Properties . . . . . . . . . . . . . . . . . . . . . 17
3. Legal Proceedings . . . . . . . . . . . . . . . . . 17
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . *
Part II 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . 18
6. Selected Financial Data . . . . . . . . . . . . . . 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 19
7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . 51
8. Financial Statements and Supplementary Data . . . . 51
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . **
9A. Controls and Procedures . . . . . . . . . . . . . . 94
9B. Other Information . . . . . . . . . . . . . . . . ***
Part III 10. Directors and Executive Officers of the Registrant . *
11. Executive Compensation . . . . . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters . . *
13. Certain Relationships and Related Transactions . . . *
14. Principal Accountant Fees and Services . . . . . . . 95
Part IV 15. Exhibits and Financial Statement Schedules . . . . . 96
* Items 4, 10, 11, 12, and 13 are not included, as the registrant
meets the conditions set forth in General Instructions I(1)(a) and
(b) of Form 10-K.
** Item 9 is not included, as no information was required by Item 304
of Regulation S-K.
*** Item 9B is not included because it is inapplicable.
3
AVAILABLE INFORMATION
American General Finance, Inc. (AGFI) files annual, quarterly, and
current reports and other information with the Securities and Exchange
Commission (the SEC). The SEC maintains a website that contains
annual, quarterly, and current reports and other information that
issuers (including AGFI) file electronically with the SEC. The SEC's
website is www.sec.gov.
The following reports are available free of charge on our Internet
website www.agfinance.com as soon as reasonably practicable after we
file them with or furnish them to the SEC:
* our 2004 Current Reports on Form 8-K;
* our 2004 Quarterly Reports on Form 10-Q; and
* this Annual Report on Form 10-K for the year ended December
31, 2004.
The information on our website is not incorporated by reference into
this report. The website addresses listed above are provided for the
information of the reader and are not intended to be active links.
4
PART I
Item 1. Business.
GENERAL
American General Finance, Inc. will be referred to as "AGFI" or
collectively with its subsidiaries, whether directly or indirectly
owned, as the "Company" or "we". AGFI was incorporated in Indiana in
1974 to become the parent holding company of American General Finance
Corporation (AGFC). AGFC was incorporated in Indiana in 1927 as
successor to a business started in 1920. Since August 29, 2001, AGFI
has been an indirect wholly owned subsidiary of American International
Group, Inc. (AIG), a Delaware corporation. AIG is a holding company
which, through its subsidiaries, is engaged in a broad range of
insurance and insurance-related activities, financial services and
asset management in the United States and abroad.
AGFI is a financial services holding company whose principal
subsidiary is AGFC. AGFC is also an SEC registrant. AGFC is a
financial services holding company with subsidiaries engaged primarily
in the consumer finance and credit insurance businesses. We conduct
the credit insurance business to supplement our consumer finance
business through Merit Life Insurance Co. (Merit) and Yosemite
Insurance Company (Yosemite), which are both wholly owned subsidiaries
of AGFC.
Effective January 1, 2003, we acquired 100% of the common stock of
Wilmington Finance, Inc. (WFI) in a purchase business combination.
WFI provides services for the origination of non-conforming
residential real estate loans for sale to investors.
At December 31, 2004, the Company had 1,444 branch offices in 45
states, Puerto Rico, and the U.S. Virgin Islands and approximately
9,100 employees. Our executive offices are located in Evansville,
Indiana.
Selected Financial Information
Selected financial information of the Company was as follows:
Years Ended December 31,
2004 2003 2002
(dollars in thousands)
Average net receivables $17,658,922 $14,232,110 $12,409,908
Average borrowings $16,300,928 $13,381,555 $11,471,189
5
Item 1. Continued
At or for the
Years Ended December 31,
2004 2003 2002
Yield - finance charges as a
percentage of average net
receivables 11.20% 12.46% 13.85%
Borrowing cost - interest
expense as a percentage
of average borrowings 3.90% 4.08% 4.88%
Interest spread - yield
less borrowing cost 7.30% 8.38% 8.97%
Operating expenses as a
percentage of average
net receivables 4.43% 4.82% 4.52%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 2.26% 3.04% 3.34%
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 1.60% 2.19% 2.41%
Charge-off coverage - allowance
for finance receivable losses
to net charge-offs 1.63x 1.50x 1.56x
Delinquency ratio - gross finance
receivables 60 days or more
past due as a percentage
of gross finance receivables 2.31% 3.28% 3.67%
Return on average assets 2.46% 2.27% 2.48%
Return on average equity 23.01% 21.33% 24.49%
Ratio of earnings to fixed charges
(refer to Exhibit 12 for
calculations) 2.06x 2.02x 1.85x
Debt to tangible equity ratio -
debt to equity less goodwill
and accumulated other
comprehensive income (loss) 8.98x 8.88x 8.66x
Debt to equity ratio 7.99x 7.86x 8.16x
6
Item 1. Continued
We have three business segments: branch, centralized real estate, and
insurance. We define our segments by type of financial service
product offered, nature of the production process, and method used to
distribute our products and to provide our services, as well as our
management reporting structure.
In prior years, we reported our centralized real estate business and
our branch business in our consumer finance business segment. During
2004, we expanded our segment reporting to reflect our centralized
real estate business as a separate segment. We also restated prior
periods so that these prior periods are shown on a comparable basis to
our new presentation.
Revenues, pretax income, and assets for our three business segments
and consolidated totals were as follows:
At or for the
Years Ended December 31,
2004 2003 2002
(dollars in thousands)
Branch:
Revenues $ 1,785,721 $ 1,779,442 $ 1,801,708
Pretax income 494,773 448,817 458,918
Assets 11,305,399 11,016,603 11,614,069
Centralized real estate:
Revenues $ 566,400 $ 309,453 $ 64,579
Pretax income 151,016 89,054 6,341
Assets 8,410,635 3,948,498 1,858,919
Insurance:
Revenues $ 199,160 $ 197,961 $ 202,113
Pretax income 91,323 96,914 84,436
Assets 1,472,399 1,389,527 1,320,844
Consolidated:
Revenues $ 2,459,162 $ 2,190,106 $ 1,999,838
Pretax income 693,671 575,408 492,168
Assets 22,235,772 17,006,164 15,484,286
See Note 22. of the Notes to Consolidated Financial Statements in Item
8. for reconciliations of segment totals to consolidated financial
statement amounts.
BRANCH BUSINESS SEGMENT
The branch business segment is the core of the Company's operations.
Through its 1,444 branch offices and its centralized support
operations, the 6,700 employees of the branch business segment
serviced over 1.8 million real estate loans, non-real estate loans,
and retail sales finance accounts totaling $11.7 billion at December
31, 2004. Many of our customers are described as non-conforming, non-
prime, or subprime.
7
Item 1. Continued
Structure and Responsibilities
Branch personnel are responsible for originating real estate loans and
non-real estate loans, purchasing retail sales finance obligations
from retail merchants, offering credit and non-credit insurance and
ancillary products to the customers, and servicing these receivables.
Branch Managers have numerous responsibilities including hiring and
training the branch staff and supervising their work, establishing
retail merchant relationships, identifying portfolio acquisition
opportunities, maintaining finance receivable credit quality, and
generating branch profitability.
To ensure profitability and growth in our branch operations, we
continuously review the performance of our individual branches and the
markets they serve. During 2004, we opened 45 branch offices and
closed 4 branch offices.
Products and Services
Real estate loans are secured by first or second mortgages on
residential real estate, generally have maximum original terms of 360
months, and are considered non-conforming. These loans may be closed-
end accounts or open-end home equity lines of credit and may be fixed-
rate or adjustable-rate products. The home equity lines of credit
generally have a predetermined period during which the borrower may
take advances. After this draw period, all advances outstanding under
the line of credit convert to a fixed-term repayment period, generally
over an agreed upon period between 15 and 30 years.
Non-real estate loans are secured by consumer goods, automobiles, or
other personal property or are unsecured and generally have maximum
original terms of 60 months.
We purchase retail sales contracts and provide revolving retail
services arising from the retail sale of consumer goods and services
by retail merchants. We also purchase private label receivables
originated by AIG Federal Savings Bank (AIG Bank), a non-subsidiary
affiliate, under a participation agreement. Retail sales contracts
are closed-end accounts that represent a single purchase transaction.
Revolving retail and private label are open-end accounts that can be
used for financing repeated purchases from the same merchant. Retail
sales contracts are secured by the real property or personal property
designated in the contract and generally have maximum original terms
of 60 months. Revolving retail and private label are secured by the
goods purchased and generally require minimum monthly payments based
on outstanding balances. We refer to retail sales contracts,
revolving retail, and private label collectively as "retail sales
finance".
We offer credit life, credit accident and health, credit related
property and casualty, credit involuntary unemployment, and non-credit
insurance and ancillary products to all eligible branch customers.
Affiliated as well as non-affiliated insurance and/or financial
services companies issue these products which are described under
"Insurance Business Segment".
8
Item 1. Continued
Customer Development
The Company solicits customers through a variety of channels including
direct mail, E-commerce and retail sales financing.
We solicit new prospects, as well as current and former customers,
through a variety of direct mail offers. The Company's data warehouse
is a central, proprietary source of information regarding current and
former customers. We use this information to tailor offers to
specific customer segments. In addition to internal data, the Company
purchases prospect lists from major list vendors based on
predetermined selection criteria. Types of direct mail solicitations
include invitations to apply, guaranteed loan offers, and live checks
which, if cashed by the customer, constitute non-real estate loans.
E-commerce has become another source of new customers. The Company's
web site includes a brief, user-friendly credit application that is
automatically routed to the branch office nearest the consumer upon
completion. E-commerce relationships exist with a variety of search
engines to drive prospects to the Company's website. The Company's
web site also has a branch office locator feature so potential
customers can quickly and easily find the branch office nearest to
them and can contact branch personnel directly.
New customer relationships also begin through our alliances with
approximately 20,000 retail merchants across the United States, Puerto
Rico, and the U.S. Virgin Islands. After a customer takes advantage
of the merchant's retail sales financing option, the Company purchases
that retail sales finance obligation. We then contact the customer
using various marketing methods to invite the customer to discuss his
or her overall credit needs with our consumer lending specialists.
Any resulting loan may pay off the customer's retail sales finance
obligation and consolidate his or her debts with other creditors.
Our consumer lending specialists, who, where required, are licensed to
offer insurance and ancillary products, explain our credit and non-
credit insurance and ancillary products to the customer. The customer
then determines whether to purchase any of these products.
The Company's growth strategy is to supplement our solicitation of
customers through direct mail, E-commerce, and retail sales financing
activities with portfolio acquisitions. These acquisitions include
real estate loans, non-real estate loans, and retail sales finance
receivables originated by other lenders whose customers meet our
credit quality standards and profitability objectives. A large amount
of our portfolio acquisitions comes from sellers with whom we have
previously done business. Our branch and field operations management
also seek sources of potential portfolio acquisitions.
9
Item 1. Continued
Account Servicing
Establishing and maintaining customer relationships is very important
to us. Branch personnel are in frequent contact with our real estate
loan and non-real estate loan customers through solicitation phone
calls to assess customers' current financial situations to determine
if they need additional funds. Centralized support operations
personnel are in frequent contact with our retail sales finance
customers through solicitation or collection calls. We view
collection efforts as opportunities to help our customers solve their
temporary financial problems and to maintain our customer
relationships.
We do not modify existing accounts, except in certain bankruptcy
situations. However, we may renew a delinquent account if the
customer has sufficient income and it does not appear that the cause
of past delinquency will affect the customer's ability to repay the
new loan. We subject all renewals, whether the customer's account is
current or delinquent, to the same credit risk underwriting process as
we would a new application for credit.
We may allow a deferment, which is a partial payment that extends the
term of an account. The partial payment amount is usually the greater
of one-half of a regular monthly payment or the amount necessary to
bring the interest on the account current. We limit a customer to two
deferments in a rolling twelve-month period unless we determine that
an exception is warranted and consistent with our credit risk
policies.
To accommodate a customer's preferred monthly payment pattern, we may
agree to a customer's request to change a payment due date on an
account. We will not change an account's due date if the change will
affect the thirty day plus delinquency status of the account at month
end.
When two payments are past due on a real estate loan and it appears
that foreclosure may be necessary, we inspect the property as part of
assessing the costs, risks, and benefits associated with foreclosure.
Generally, we begin foreclosure proceedings when the fourth monthly
payment is past due. When foreclosure is completed and we have
obtained title to the property, we obtain an unrelated party's
valuation of the property, which is either a full appraisal or a real
estate broker's or appraiser's estimate of the property's sale value
without the benefit of a full interior and exterior appraisal and
lacking sales comparisons. We reduce finance receivables by the
amount of the real estate loan, establish a foreclosed real estate
owned asset at lower of loan balance or 85% of the valuation, and
charge off any loan amount in excess of that value to the allowance
for finance receivable losses.
Branch and centralized support operations personnel charge-off non-
real estate loans and retail sales finance obligations according to
our policy. See Note 3. of the Notes to Consolidated Financial
Statements in Item 8. for our charge-off policy. If recovery efforts
are feasible, we transfer charged-off accounts to our centralized
charge-off recovery operation for ultimate disposition.
10
Item 1. Continued
See Note 22. of the Notes to Consolidated Financial Statements in Item
8. for further information on the Company's branch business segment.
CENTRALIZED REAL ESTATE BUSINESS SEGMENT
The centralized real estate business segment performs originating and
servicing activities for real estate loan customers that we obtain
through distribution channels other than our branches. These
distribution channels include mortgage brokers, correspondent
relationships with mortgage lenders, and portfolio acquisitions from
various types of mortgage lenders as well as direct lending to
customers. This segment includes the originating and servicing
operations of our WFI and MorEquity, Inc. (MorEquity) subsidiaries.
At December 31, 2004, the centralized real estate business segment had
approximately 1,600 employees.
Structure and Responsibilities
Our mortgage origination subsidiaries have entered into agreements
with AIG Bank whereby for fees these subsidiaries provide marketing,
certain origination processing services, loan servicing, and related
services for AIG Bank's origination and sale of non-conforming
residential real estate loans. Our mortgage origination subsidiaries
and AIG Bank originated a combined $10.6 billion of real estate loans
during 2004 and $5.0 billion of real estate loans during 2003. We
ultimately retained $4.5 billion of these real estate loans during
2004 and $1.9 billion of these real estate loans during 2003 and sold
the remainder in the secondary mortgage market to third party
investors. For accounting purposes, we report as originations any
real estate loans we purchase from AIG Bank that were originated using
our mortgage origination subsidiaries' services rather than reporting
the transactions as portfolio acquisitions because the Company and AIG
Bank share a common parent.
Products and Services
WFI originates non-conforming residential real estate loans, primarily
through broker relationships (wholesale) and, to lesser extents,
directly to consumers (retail) and through correspondent relationships
and sells these loans to investors with servicing released to the
purchaser. WFI had a national network of 19 wholesale, retail, and
correspondent production and sales offices at December 31, 2004.
During 2004, WFI originated real estate loans through approximately
5,000 brokers and sold them to more than 20 investors. WFI's
investors include money center and regional banks, national finance
companies, investment banks, and our affiliates.
11
Item 1. Continued
MorEquity originates non-conforming residential real estate loans
primarily through refinancings of its existing real estate loan
customers and, to a lesser extent, through direct mail solicitations.
MorEquity also services approximately 52,000 real estate loans
totaling $8.4 billion at December 31, 2004 from a centralized
location. These real estate loans were generated through:
* portfolio acquisitions from third party lenders;
* our mortgage origination subsidiaries;
* refinancing existing mortgages; or
* advances on home equity lines of credit.
See Note 22. of the Notes to Consolidated Financial Statements in Item
8. for further information on the Company's centralized real estate
business segment.
CREDIT RISK MANAGEMENT
A risk in all consumer lending and retail sales financing transactions
is the customer's unwillingness or inability to repay obligations.
Unwillingness to repay is usually evidenced in a consumer's historical
credit repayment record. An inability to repay usually results from
lower income due to unemployment or underemployment, major medical
expenses, or divorce. Occasionally, these types of events can be so
economically severe that the customer files for bankruptcy. Because
we evaluate credit applications with a view toward ability to repay,
our customer's inability to repay occurs after our initial credit
evaluation and funding of an outstanding finance receivable.
In our branch business segment, we use credit risk scoring models at
the time of credit application to assess our risk of the applicant's
unwillingness or inability to repay. We develop these models using
numerous factors, including past customer credit repayment experience,
and periodically revalidate them based on recent portfolio
performance. We use different credit risk scoring models for
different types of loan and retail sales finance products. We extend
credit to those customers who fit our risk guidelines as determined by
these models and, in some cases, manual underwriting. Price and size
of the loan or retail sales finance transaction are in relation to the
estimated credit risk assumed.
In our centralized real estate business segment, AIG Bank originates
real estate loans according to established underwriting criteria and,
for those loans retained by the Company, we individually review the
real estate loans as part of our due diligence.
12
Item 1. Continued
OPERATIONAL CONTROLS
We control and monitor our branch and centralized real estate business
segments through a variety of methods including the following:
* Our operational policies and procedures standardize various
aspects of lending, collections, and business development
processes.
* Our branch finance receivable systems control amounts, rates,
terms, and fees of our customers' accounts; create loan
documents specific to the state in which the branch operates;
and control cash receipts and disbursements.
* Our headquarters accounting personnel reconcile bank accounts,
investigate discrepancies, and resolve differences.
* Our credit risk management system reports are used by various
personnel to compare branch lending and collection activities
with predetermined parameters.
* Our executive information system is available to headquarters
and field operations management to review the status of
activity through the close of business of the prior day.
* Our branch field operations management structure is designed
to control a large, decentralized organization with each
succeeding level staffed with more experienced personnel.
* Our field operations compensation plan aligns the operating
activities and goals with corporate strategies by basing the
incentive portion of field personnel compensation on
profitability and credit quality.
* Our internal audit department audits for operational policy
and procedure and state law and regulation compliance.
Internal audit reports directly to AIG to enhance
independence.
CENTRALIZED SUPPORT
We continually seek to identify functions that could be more cost-
effective if centralized, thereby reducing costs and freeing our
lending specialists to concentrate on providing service to our
customers. Our centralized operational functions include the
following:
* customer solicitations;
* payment processing;
* real estate loan approvals;
* real estate owned processing;
* collateral protection insurance tracking;
* retail sales finance approvals;
* revolving retail and private label collections;
* revolving retail and private label processing;
* merchant services; and
* charge-off recovery operations.
13
Item 1. Continued
SOURCES OF FUNDS
We fund our branch and centralized real estate business segments
principally through cash flows from operations, public and private
capital markets borrowings, and capital contributions from our parent.
Our ability to access capital is dependent upon internal and external
factors including our ability to maintain adequately strong operating
performance and debt credit ratings and the overall condition of the
capital markets. Our principal funding sources through the capital
markets include:
* issuances of long-term debt in domestic and foreign markets;
* short-term borrowings in the commercial paper market;
* borrowings from banks under credit facilities; and
* securitizations.
INSURANCE BUSINESS SEGMENT
The insurance business segment markets its products to all eligible
branch customers. Cash generated from operations is invested in
investment securities, commercial mortgage loans, investment real
estate, and policy loans and is also used to pay dividends. At
December 31, 2004, the insurance business segment had $3.0 billion of
credit life insurance and $2.7 billion of non-credit life insurance in
force covering approximately 892,000 customer accounts and also had
$1.4 billion of investments.
Structure and Responsibilities
Merit is a life and health insurance company domiciled in Indiana and
licensed in 46 states, the District of Columbia, and the U.S. Virgin
Islands. Merit principally writes or reinsures credit life, credit
accident and health, and non-credit insurance.
Yosemite is a property and casualty insurance company domiciled in
Indiana and licensed in 45 states. Yosemite principally writes or
reinsures credit-related property and casualty and credit involuntary
unemployment insurance.
The 100 employees of the insurance business segment have numerous
responsibilities relating to the underwriting, compliance, and service
activities for the insurance companies and provide services to the
branch and centralized real estate business segments.
Products and Services
Our credit life insurance policies insure the life of the borrower in
an amount typically equal to the unpaid balance of the finance
receivable and provide for payment in full to the lender of the
finance receivable in the event of the borrower's death. Our credit
accident and health insurance policies provide, to the lender, payment
of the installments on the finance receivable coming due during a
period of the borrower's disability due to illness or injury. Our
credit-related property and casualty insurance policies are written to
protect the lender's interest in property pledged as collateral for
14
Item 1. Continued
the finance receivable. Our credit involuntary unemployment insurance
policies provide, to the lender, payment of the installments on the
finance receivable coming due during a period of the borrower's
involuntary unemployment. The borrower's purchase of credit life,
credit accident and health, credit-related property and casualty, or
credit involuntary unemployment insurance is voluntary with the
exception of lender-placed property damage coverage for property
pledged as collateral. In these instances, our branch or centralized
real estate business segment personnel obtain property damage coverage
through Yosemite either on a direct or reinsured basis under the terms
of the lending agreement if the borrower does not provide evidence of
coverage with another insurance carrier. Non-credit insurance
policies are primarily traditional life level term policies. The
purchase of this coverage is voluntary.
The ancillary products we offer are home security and auto security
membership plans and home warranty service contracts. These products
are generally not considered to be insurance policies. Our insurance
business segment has no risk of loss on these products. The
unaffiliated companies providing these membership plans and service
contracts are responsible for any required reimbursement to the
customer on these products.
Customers usually either finance premiums for insurance products and
contract fees for ancillary products as part of the finance receivable
or pay the premiums monthly with their finance receivable payment, but
they may pay the premiums and contract fees in cash to the insurer.
We do not offer single premium credit insurance products to our real
estate loan customers.
Reinsurance
Merit and Yosemite have entered into reinsurance agreements with other
insurance companies, including certain affiliated companies, for
reinsurance of various non-credit life, individual annuity, group
annuity, credit life, credit accident and health, credit-related
property and casualty, and credit involuntary unemployment insurance
where our insurance subsidiaries reinsure the risk of loss. The
reserves for this business fluctuate over time and in some instances
are subject to recapture by the insurer. At December 31, 2004,
reserves on the books of Merit and Yosemite for these reinsurance
agreements totaled $86.0 million.
Investments
We invest cash generated by our insurance business segment primarily
in bonds. We invest in, but are not limited to, the following:
* bonds;
* commercial mortgage loans;
* short-term investments;
* limited partnerships;
* preferred stock;
* investment real estate;
* policy loans; and
* common stock.
15
Item 1. Continued
AIG subsidiaries manage substantially all of our insurance business
segment's investments on our behalf.
See Note 22. of the Notes to Consolidated Financial Statements in Item
8. for further information on the Company's insurance business
segment.
REGULATION
Branch and Centralized Real Estate
The Company's branch and centralized real estate business segments are
subject to various state and federal laws and regulations. Applicable
federal laws include:
* the Equal Credit Opportunity Act (prohibits discrimination
against credit-worthy applicants);
* the Fair Credit Reporting Act (governs the accuracy and use of
credit bureau reports);
* the Truth in Lending Act (governs disclosure of applicable
charges and other finance receivable terms);
* the Fair Housing Act (prohibits discrimination in housing
lending);
* the Real Estate Settlement Procedures Act (regulates certain
loans secured by real estate);
* the Federal Trade Commission Act; and
* the Federal Reserve Board's Regulations B, C, P, and Z.
In many states, federal law preempts state law restrictions on
interest rates and points and fees for first lien residential mortgage
loans. The federal Alternative Mortgage Transactions Parity Act
preempts certain state law restrictions on variable rate loans in many
states. The Company makes residential mortgage loans under the
provisions of these and other federal laws. The Company is also
subject to federal laws governing practices and disclosures when
dealing with consumer or customer information.
Various state laws also regulate our branch and centralized real
estate segments. The degree and nature of such regulation vary from
state to state. The laws under which a substantial amount of our
business is conducted generally:
* provide for state licensing of lenders;
* impose maximum term, amount, interest rate, and other charge
limitations;
* regulate whether and under what circumstances insurance and
other ancillary products may be offered in connection with a
lending transaction; and
* provide for consumer protection.
The federal government is considering, and a number of states,
counties, and cities have enacted or may be considering, laws or rules
that restrict the credit terms or other aspects of residential
mortgage loans that are typically described as "high cost mortgage
loans". These laws or regulations, if adopted, may impose specific
statutory liabilities in cases of non-compliance and may also limit or
restrict the terms of covered loan transactions. Additionally, some
16
Item 1. Continued
of these laws may restrict other business activities or business
dealings of affiliates of the Company under certain conditions.
Insurance
State authorities regulate and supervise our insurance business
segment. The extent of such regulation varies by product and by
state, but relates primarily to the following:
* licensing;
* conduct of business;
* periodic examination of the affairs of insurers;
* form and content of required financial reports;
* standards of solvency;
* limitations on dividend payments and other related party
transactions;
* types of products offered;
* approval of policy forms and premium rates;
* permissible investments;
* deposits of securities for the benefit of policyholders;
* reserve requirements for unearned premiums, losses, and other
purposes; and
* claims processing.
The states in which we operate regulate credit insurance premium rates
and premium refund calculations.
COMPETITION
Branch and Centralized Real Estate
The consumer finance industry is highly competitive due to the large
number of companies offering financial products and services, the
sophistication of those products, the capital market resources of some
competitors, and the general acceptance and widespread usage of
available credit. We compete with other consumer finance companies as
well as other types of financial institutions that offer similar
products and services.
Insurance
Our insurance business segment supplements our branch business
segment. We believe that our insurance companies' abilities to market
insurance products through our distribution systems provide a
competitive advantage.
17
Item 2. Properties.
We generally conduct branch office operations, branch office
administration, other operations, and operational support in leased
premises. Lease terms generally range from three to five years.
Our investment in real estate and tangible property is not significant
in relation to our total assets due to the nature of our business.
AGFC subsidiaries own two branch offices in Riverside and Barstow,
California, two branch offices in Hato Rey and Isabela, Puerto Rico,
and eight buildings in Evansville, Indiana. These buildings primarily
include certain of our administrative offices, our centralized
services and support operations facilities, and one of our branch
offices. Merit owns an office building in Houston, Texas that is
leased to third parties and affiliates and also owns a consumer
finance branch office in Terre Haute, Indiana that is leased to an
AGFC subsidiary.
Item 3. Legal Proceedings.
Satellite Dish Operations Bankruptcy
In August 1999, a subsidiary of the Company, A.G. Financial Service
Center, Inc. (Financial Service Center) filed a voluntary petition to
reorganize under Chapter 11 of the United States Bankruptcy Code. The
decision to reorganize was necessitated by the judgment rendered
against Financial Service Center by a Mississippi state court in May
1999 in the amount of $167 million. The filing for reorganization
under Chapter 11 was limited to Financial Service Center.
The plan of reorganization was confirmed by the bankruptcy court in
February 2001, distributions under the plan were substantially
completed, and in September 2003 the court closed the case. Certain
creditors appealed the 2001 confirmation of the plan. In January
2005, the United States Court of Appeals for the Seventh Circuit
affirmed the confirmation of the plan of reorganization. We do not
expect any further appeal.
Other
AGFI and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain purported class action claims,
arising in the ordinary course of business. In addition, many of
these proceedings are pending in jurisdictions 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, if any, that will ultimately be paid arising
from these lawsuits and proceedings will not have a material adverse
effect on our consolidated results of operations or financial
position. However, the continued occurrences of large damage awards
in general in the United States, including large punitive damage
awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, create the potential for
an unpredictable judgment in any given suit.
18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
No trading market exists for AGFI's common stock. AGFI is an indirect
wholly owned subsidiary of AIG. AGFI paid the following cash
dividends on its common stock:
Quarter Ended 2004 2003
(dollars in thousands)
March 31 $ 24,000 $ 895
June 30 - 99,322
September 30 29,998 67,002
December 31 - 15,895
Total $ 53,998 $183,114
See Management's Discussion and Analysis in Item 7., and Note 17. of
the Notes to Consolidated Financial Statements in Item 8., regarding
limitations on the ability of AGFI and its subsidiaries to pay
dividends.
Item 6. Selected Financial Data.
You should read the following selected financial data in conjunction
with the consolidated financial statements and related notes in Item
8. and Management's Discussion and Analysis in Item 7.
At or for the Years Ended December 31,
2004 2003 2002 2001 2000
(dollars in thousands)
Total revenues $ 2,459,162 $ 2,190,106 $ 1,999,838 $ 1,998,498 $ 1,909,916
Net income (a) 478,054 366,103 346,826 228,257 207,938
Total assets 22,235,772 17,006,164 15,484,286 13,531,654 13,408,395
Long-term debt 14,679,501 10,862,218 9,566,256 6,301,433 5,670,670
(a) Per share information is not included because all of AGFI's common stock
is indirectly owned by AIG.
19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
You should read Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with the
consolidated financial statements and related notes in Item 8. With
this discussion and analysis, we intend to enhance the reader's
understanding of our consolidated financial statements in general and
more specifically our liquidity and capital resources, our asset
quality, and the results of our operations.
An index to our discussion and analysis follows:
Topic Page
Forward Looking Statements 20
Overview 21
Basis of Reporting 21
2004 Highlights 22
2005 Outlook 22
Critical Accounting Policies 23
Off-Balance Sheet Arrangements 25
Capital Resources 26
Liquidity 27
Finance Receivables 31
Real Estate Owned 34
Investments 35
Asset/Liability Management 35
Net Income 36
Finance Charges 38
Insurance Revenues 40
Other Revenues 41
Interest Expense 42
Operating Expenses 44
Provision for Finance Receivable Losses 45
Insurance Losses and Loss Adjustment Expenses 48
Provision for Income Taxes 49
Regulation 50
Taxation 50
20
Item 7. Continued
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and our other publicly available
documents may include, and the Company's officers and representatives
may from time to time make, statements which may constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are not historical
facts but instead represent only our belief regarding future events,
many of which are inherently uncertain and outside of our control.
These statements may address, among other things, the Company's
strategy for growth, product development, regulatory approvals, market
position, financial results and reserves. The Company's actual
results and financial condition may differ from the anticipated
results and financial condition indicated in these forward-looking
statements. The important factors, many of which are outside of our
control, which could cause the Company's actual results to differ,
possibly materially, include, but are not limited to, the following:
* changes in general economic conditions, including the interest
rate environment in which we conduct business and the
financial markets through which we access capital and invest
cash flows from the insurance business segment;
* changes in the competitive environment in which we operate,
including the demand for our products, customer responsiveness
to our distribution channels and the formation of business
combinations among our competitors;
* the effectiveness of our credit risk scoring models in
assessing the risk of customer unwillingness or inability to
repay;
* shifts in collateral values, contractual delinquencies, and
credit losses;
* levels of unemployment and personal bankruptcies;
* our ability to access capital markets and maintain our credit
rating position;
* changes in laws or regulations that affect our ability to
conduct business or the manner in which we conduct business,
such as licensing requirements, pricing limitations or
restrictions on the method of offering products;
* the costs and effects of any litigation or governmental
inquiries or investigations that are determined adversely to
the Company;
* changes in accounting standards or tax policies and practices
and the application of such new policies and practices to the
manner in which we conduct business;
* our ability to integrate the operations of our acquisitions
into our businesses;
* changes in our ability to attract and retain employees or key
executives to support our businesses; and
* natural or accidental events such as fires or floods affecting
our branches or other operating facilities.
We also direct readers to other risks and uncertainties discussed in
other documents we file with the SEC. We are under no obligation to
(and expressly disclaim any such obligation to) update or alter any
forward-looking statement, whether written or oral, that we may make
from time to time, whether as a result of new information, future
events or otherwise.
21
Item 7. Continued
OVERVIEW
Our branch and centralized real estate business segments borrow money
at wholesale prices and lend money at retail prices. Our branch
business segment also offers credit and non-credit insurance and
ancillary products to eligible customers. Our insurance business
segment writes and reinsures credit and non-credit insurance products
for eligible customers of our branch business segment and invests
premiums received in various investments.
BASIS OF REPORTING
We prepared our consolidated financial statements using accounting
principles generally accepted in the United States (GAAP). The
statements include the accounts of AGFI and its subsidiaries, all of
which are wholly owned. We eliminated all intercompany items. We
made estimates and assumptions that affect amounts reported in our
financial statements and disclosures of contingent assets and
liabilities. Ultimate results could differ from our estimates.
At December 31, 2004, 89% of our assets were net finance receivables
less allowance for finance receivable losses. Our finance charge
revenue is a function of the amount of average net receivables and the
yield on those average net receivables. GAAP requires that we
recognize finance charges as revenue on the accrual basis using the
interest method. The only areas of discretion we have are amortizing
unearned points and fees and deferred origination costs over the
lesser of the contractual or the estimated life based on prepayment
experience and determining the point of suspension of the accrual of
finance charge revenue.
At December 31, 2004, 96% of our liabilities were debt issued
primarily to support our net finance receivables. Our interest
expense is a function of the amount of average borrowings and the
borrowing cost on those average borrowings. GAAP requires that we
recognize interest on borrowings as expense on the accrual basis using
the interest method. Interest expense includes the effect of our swap
agreements.
Our insurance revenues consist primarily of insurance premiums
resulting from our branch customers purchasing various credit and non-
credit insurance policies. Insurance premium revenue is a function of
the premium amounts and policy terms. GAAP dictates the methods of
insurance premium revenue recognition.
We invest cash generated by our insurance business segment primarily
in investment securities, which were 6% of our assets at December 31,
2004, and to a lesser extent in commercial mortgage loans, investment
real estate, and policy loans, which we include in other assets. We
report the resulting investment revenue in other revenue. GAAP
requires that we recognize interest on these investments as revenue on
the accrual basis using the interest method. The only areas of
discretion we have are determining the classification of the
investment, the point of suspension of the accrual of this investment
revenue, and when we consider the investment security's decline in
fair value to be other than temporary and reduce it to its fair value.
22
Item 7. Continued
Our other revenue includes service fees we charge for marketing,
certain origination processing services, and loan servicing of real
estate loans under our agreements with AIG Federal Savings Bank (AIG
Bank). As required by GAAP, we recognize these fees as revenue when
we perform the services. Other revenue also includes net gain on sale
of real estate loans held for sale and net interest income on real
estate loans held for sale. GAAP requires that we recognize the
difference between the sales price we receive when we sell a real
estate loan held for sale and our investment in that loan as a gain or
loss at the time of sale. GAAP also requires that we recognize
interest as revenue on the accrual basis using the interest method
during the periods we hold real estate loans held for sale. The only
discretion we have is determining the point of suspension of the
accrual of this interest revenue.
2004 HIGHLIGHTS
During 2004, net finance receivables increased $4.9 billion, or 32%,
to $20.2 billion at December 31, 2004. The historically low interest
rate environment in the first half of the year contributed to
continued significant mortgage refinancing activity. Real estate
loans increased $4.7 billion, or 43%, in 2004. Aided by an improving
economy, we also experienced an improvement in our finance receivable
credit quality. Our charge-off ratio improved to 1.60% for 2004
compared to 2.19% for 2003. Our delinquency ratio improved to 2.31%
at December 31, 2004 from 3.28% at December 31, 2003. AGFC issued
$5.7 billion of long-term debt during 2004 to support finance
receivable growth and replace maturing long-term debt. During second
quarter 2004, we expanded our investor base by completing our first
Euro-denominated debt issuances to European investors. Then in third
quarter 2004, we completed our first Sterling-denominated debt
issuance to United Kingdom investors.
2005 OUTLOOK
We enter 2005 with net charge-offs and delinquency that are below or
within our targeted ranges. The Federal Reserve raised interest rates
five times during 2004 totaling 125 basis points, and we expect
additional increases during 2005. These increases will raise our
finance receivable yield as our adjustable-rate finance receivables
reprice to these market rates over time and as we generate new
business at higher rates. Our borrowing cost on our debt will also
increase as our floating-rate debt reprices to higher market rates and
we issue new fixed-rate long-term debt at rates above our current
long-term debt portfolio rates. We anticipate interest margin
compression along with rising market interest rates, but expect
finance receivable growth at higher rates to mitigate most of the net
income effect. We also anticipate that the higher interest rate
environment will favorably impact our real estate loan liquidations
that had increased during the last several years. Investment revenue
from our investment securities portfolio should also increase.
23
Item 7. Continued
CRITICAL ACCOUNTING POLICIES
We consider our most critical accounting policy to be the
establishment of an adequate allowance for finance receivable losses.
Our finance receivable portfolio consists of $20.2 billion of net
finance receivables due from approximately 1.9 million customer
accounts. These accounts were originated or purchased and are
serviced by our branch or centralized real estate business segments.
To manage our exposure to credit losses, we use credit risk scoring
models for finance receivables that we originate through our branch
business segment. In our centralized real estate business segment,
AIG Bank originates real estate loans according to established
underwriting criteria and we individually review the portion of these
real estate loans that are retained by the Company as part of our due
diligence. We also perform due diligence investigations for finance
receivables that we purchase. We utilize standard collection
procedures supplemented with data processing systems to aid branch,
centralized support operations, and centralized real estate personnel
in their finance receivable collection processes.
Despite our efforts to avoid losses on our finance receivables,
personal circumstances and national, regional, and local economic
situations affect our customers' abilities to repay their obligations.
Personal circumstances include lower income due to unemployment or
underemployment, major medical expenses, and divorce. Occasionally,
these types of events can be so economically severe that the customer
files for bankruptcy.
Our Credit Strategy and Policy Committee evaluates our finance
receivable portfolio monthly. Within our three main finance
receivable types are sub-portfolios, each consisting of a large number
of relatively small, homogenous accounts. We evaluate these sub-
portfolios for impairment as groups. None of our accounts are large
enough to warrant individual evaluation for impairment. Our Credit
Strategy and Policy Committee considers numerous factors in estimating
losses inherent in our finance receivable portfolio, including the
following:
* prior finance receivable loss and delinquency experience;
* the composition of our finance receivable portfolio; and
* current economic conditions, including the levels of
unemployment and personal bankruptcies.
24
Item 7. Continued
Our Credit Strategy and Policy Committee uses several ratios to aid in
the process of evaluating prior finance receivable loss and
delinquency experience. Each ratio is useful, but each has its
limitations. These ratios include:
* Delinquency ratio - gross finance receivables 60 days or more
past due (customer has not made 3 or more contractual
payments) as a percentage of gross finance receivables.
* Allowance ratio - allowance for finance receivable losses as a
percentage of net finance receivables.
* Charge-off ratio - net charge-offs as a percentage of the
average of net finance receivables at the beginning of each
month during the period.
* Charge-off coverage - allowance for finance receivable losses
to net charge-offs.
We use migration analysis as one of the tools to determine the
appropriate amount of allowance for finance receivable losses.
Migration analysis is a statistical technique that attempts to predict
the future amount of losses for existing pools of finance receivables.
This technique applies empirically measured historical movement of
like finance receivables through various levels of repayment,
delinquency, and loss categories to existing finance receivable pools.
We calculate migration analysis using three different scenarios based
on varying assumptions to evaluate a range of possible outcomes. We
aggregate the results of our analysis for all segments of the
Company's portfolio to arrive at an estimate of future finance
receivable losses for the finance receivables existing at the time of
analysis. We adjust the amounts determined by migration analysis for
management's best estimate of the effects of current economic
conditions, including the levels of unemployment and personal
bankruptcies, on the amounts determined from historical loss and
delinquency experience.
25
Item 7. Continued
If we had chosen to establish the allowance for finance receivable
losses at the highest and lowest levels produced by the various
migration analysis scenarios, our allowance for finance receivable
losses at December 31, 2004 and 2003 and provision for finance
receivable losses and net income for 2004 and 2003 would have changed
as follows:
At or for the
Years Ended December 31,
2004 2003
(dollars in millions)
Highest level:
Increase in allowance for finance
receivable losses $ 13.0 $ 30.1
Increase in provision for finance
receivable losses 13.0 30.1
Decrease in net income (8.4) (19.6)
Lowest level:
Decrease in allowance for finance
receivable losses $(98.8) $(67.4)
Decrease in provision for finance
receivable losses (98.8) (67.4)
Increase in net income 64.2 43.8
The Credit Strategy and Policy Committee exercises its judgment, based
on quantitative analyses, qualitative factors, and each committee
member's experience in the consumer finance industry, when determining
the amount of the allowance for finance receivable losses. If its
review concludes that an adjustment is necessary, we charge or credit
this adjustment to expense through the provision for finance
receivable losses. We consider this estimate to be a critical
accounting estimate that affects the net income of the Company in
total and the pretax operating income of our branch and centralized
real estate business segments. We document the adequacy of the
allowance for finance receivable losses, the analysis of the trends in
credit quality, and the current economic conditions considered by the
Credit Strategy and Policy Committee to support its conclusions. See
Provision for Finance Receivable Losses for further information on the
allowance for finance receivable losses.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements as defined
by SEC rules.
26
Item 7. Continued
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
Our capital varies primarily with the amount of net finance
receivables. The mix of debt and equity is based primarily upon
maintaining leverage that supports cost-effective funding.
December 31,
2004 2003
Amount Percent Amount Percent
(dollars in millions)
Long-term debt $14,679.5 69% $10,862.2 67%
Short-term debt 4,299.1 20 3,467.1 22
Total debt 18,978.6 89 14,329.3 89
Equity 2,376.2 11 1,823.8 11
Total capital $21,354.8 100% $16,153.1 100%
Net finance receivables $20,167.9 $15,308.0
Debt to equity ratio 7.99x 7.86x
Debt to tangible equity ratio 8.98x 8.88x
Reconciliations of equity to tangible equity were as follows:
December 31,
2004 2003
(dollars in millions)
Equity $2,376.2 $1,823.8
Goodwill (224.7) (224.7)
Accumulated other comprehensive
(income) loss (37.4) 14.9
Tangible equity $2,114.1 $1,614.0
We issue a combination of fixed-rate debt, principally long-term, and
floating-rate debt, both long-term and short-term. AGFC obtains most
of our fixed-rate funding through public issuances of long-term debt
with maturities generally ranging from three to ten years. AGFC and
AGFI obtain floating-rate funding through sales and refinancing of
commercial paper and through issuances of long-term, floating-rate
debt. We sell commercial paper, with maturities ranging from 1 to 270
days, to banks, insurance companies, corporations, and other
accredited investors. At December 31, 2004, short-term debt included
$3.7 billion of commercial paper. AGFC also sells extendible
commercial notes with initial maturities of up to 90 days, which AGFC
may extend to 390 days. At December 31, 2004, short-term debt
included $552.9 million of extendible commercial notes.
27
Item 7. Continued
We maintain credit facilities to support the issuance of commercial
paper and to provide an additional source of funds for operating
requirements. At December 31, 2004, credit facilities totaled $3.5
billion with remaining availability of $3.4 billion. A total of $3.3
billion of these credit facilities are committed lending agreements
and include $1.8 billion of 364-day facilities and a $1.5 billion
multi-year facility. See Note 11. of the Notes to Consolidated
Financial Statements in Item 8. for additional information on credit
facilities.
Our larger committed credit facilities at December 31, 2004 expire as
follows:
Committed Credit Facilities
(dollars in millions)
July 2005 (a) $1,750.0
July 2007 1,500.0
Total $3,250.0
(a) The agreement includes a provision that allows us to extend the
maturity of any borrowings for one year past facility expiration.
We expect to replace or extend these credit facilities on or prior to
their expiration.
AGFI has historically paid dividends to (or received capital
contributions from) its parent to manage our leverage of debt to
tangible equity to a targeted amount, which is currently 9.0 to 1.
During third quarter 2004, AGFI executed a long-term, prepayable bank
loan that requires AGFI to maintain at least $1.3 billion in tangible
equity. AGFI's ability to pay dividends is substantially dependent on
the receipt of dividends or other funds from its subsidiaries,
primarily AGFC. Certain AGFC financing agreements effectively limit
the amount of dividends AGFC may pay. Under the most restrictive
provision contained in these agreements, $1.3 billion of AGFC's
retained earnings was free from restriction at December 31, 2004.
Liquidity
Our sources of funds include operations, issuances of long-term debt,
short-term borrowings in the commercial paper market, borrowings from
banks under credit facilities, and securitizations. AGFI has also
received capital contributions from its parent to support finance
receivable growth and maintain targeted leverage.
28
Item 7. Continued
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable operational requirements and
financial obligations. The principal factors that could decrease our
sources of liquidity are delinquent payments from our customers and an
inability to access capital markets. The principal factors that could
increase our cash needs are significant increases in net originations
and purchases of finance receivables. We intend to mitigate liquidity
risk by continuing to operate the Company utilizing the following
existing strategies:
* maintain a finance receivable portfolio comprised mostly of
real estate loans, which generally represent a lower risk of
customer non-payment;
* originate and monitor finance receivables with our credit risk
management system;
* maintain an investment securities portfolio of predominantly
investment grade, liquid securities; and
* maintain a capital structure appropriate to our asset base.
Principal sources and uses of cash were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Principal sources of cash:
Net issuances of debt $4,445.3 $1,382.2 $1,766.1
Operations 787.4 817.3 568.8
Capital contributions 75.0 - 33.0
Total $5,307.7 $2,199.5 $2,367.9
Principal uses of cash:
Net originations and purchases
of finance receivables $5,128.8 $1,837.4 $1,885.3
Dividends paid 54.0 183.1 147.0
Total $5,182.8 $2,020.5 $2,032.3
Net originations and purchases of finance receivables and net
issuances of debt increased in 2004 primarily due to increases in our
centralized real estate loan production.
Net cash from operations increased in 2003 primarily due to net sales
of real estate loans held for sale, higher finance charges, lower
interest expense, and routine operating activities. Net issuances of
debt decreased in 2003 in response to the increase in net cash from
operations.
Dividends paid, less capital contributions received, reflect net
income retained by AGFI to maintain equity and total debt at our
current leverage target of 9.0 to 1 for debt to tangible equity.
29
Item 7. Continued
At December 31, 2004, material contractual obligations were as
follows:
Less than From 1-3 From 4-5 Over 5
1 year years years years Total
(dollars in millions)
Debt (a):
Long-term debt $ 1,548.8 $ 5,361.2 $ 2,897.8 $ 4,871.7 $14,679.5
Short-term debt 4,299.1 - - - 4,299.1
Operating leases (b) 51.0 70.2 29.2 9.1 159.5
Total $ 5,898.9 $ 5,431.4 $ 2,927.0 $ 4,880.8 $19,138.1
(a) With consistent execution of our business strategies, we expect
to refinance maturities of our debt in the capital markets. Any
adverse changes in our operating performance or credit ratings
could limit our access to capital markets to accomplish these
refinancings.
(b) Operating leases represent annual rental commitments for leased
office space, automobiles, and data processing and related
equipment.
AGFC anticipates issuing approximately $4 billion to $5 billion of
long-term debt during 2005, including refinancings of $1.5 billion of
maturing long-term debt. The actual amount of debt issuances will
depend on economic and market conditions, receivable growth, and
acquisition opportunities. We anticipate that these debt issuances
will occur primarily in the domestic capital markets as public long-
term debt and in the international capital markets we began accessing
in 2004.
To further diversify its funding sources, AGFC completed its first
foreign currency denominated debt issuances during 2004 as follows:
* In second quarter 2004, AGFC completed two concurrent issues
totaling 1.0 billion Euro ($1.2 billion) in principal amount
sold to European investors.
* In third quarter 2004, AGFC issued 350 million pounds Sterling
($622 million) in principal amount sold to United Kingdom
investors.
In each case, we executed financial derivative transactions with a
non-subsidiary affiliate to effectively convert the related foreign
currency exposure into U.S. dollars.
In second quarter 2003, AGFC began issuing long-term debt under a
retail note program. These senior, unsecured notes are sold by
brokers to individual investors for a minimum investment of $1,000 in
increments of $1,000.
Also in second quarter 2003, a consolidated special purpose subsidiary
of AGFI purchased $266.8 million of real estate loans from seven
subsidiaries of AGFC. The AGFI subsidiary securitized $259.0 million
of these real estate loans and recorded $256.4 million of debt issued
30
Item 7. Continued
by the trust that purchased these real estate loans. We recorded this
transaction as an "on balance sheet" secured financing.
Management believes that consistent execution of our business
strategies should result in continued profitability, strong credit
ratings, and investor confidence. These results should allow
continued access to capital markets to issue our commercial paper and
long-term debt. We have implemented programs and operating guidelines
to ensure adequate liquidity, to mitigate the impact of any inability
to access capital markets, and to provide contingent funding sources.
These programs and guidelines include the following:
* We manage our commercial paper as a percentage of total debt.
At December 31, 2004 that percentage was 19% compared to 20%
at December 31, 2003.
* We spread commercial paper maturities throughout upcoming
weeks and months.
* We limit the amount of our commercial paper that can be held
by any one investor.
* We maintain credit facilities to support the issuance of
commercial paper and to provide an additional source of funds
for operating requirements. At December 31, 2004, we had $3.3
billion of committed bank credit facilities.
* To access the domestic long-term debt markets, we had $5.9
billion of long-term debt securities registered under the
Securities Act of 1933 as of December 31, 2004. We could
issue these securities as traditional public term debt, retail
notes, or equity index-linked notes, among other forms.
* We have established AGFC as an issuer in the international
capital markets with our 2004 Euro and Sterling debt offerings
described previously.
* We have the ability to sell, on a whole loan basis, or
securitize a portion of our finance receivables to provide
additional sources of liquidity for needs potentially not met
through other funding sources.
* Collections from our finance receivable portfolio are also a
source of funds. We collected principal payments on our
finance receivables totaling $7.5 billion in 2004, $7.1
billion in 2003, and $6.3 billion during 2002. We chose to
reinvest most of these collections, plus additional amounts
from borrowings, in new finance receivables during these
periods, but such funds could be made available for other
uses, if necessary.
* We have the ability to sell a portion of our insurance
subsidiaries' investment securities and dividend, subject to
certain limits, cash from the securities sales.
31
Item 7. Continued
ANALYSIS OF FINANCIAL CONDITION
Finance Receivables
Amount, number, and average size of net finance receivables originated
and renewed and purchased by type were as follows:
Years Ended December 31,
2004 2003 2002
Amount Percent Amount Percent Amount Percent
Originated and renewed
Amount (in millions):
Real estate loans $ 7,934.1 63% $ 4,829.4 52% $ 2,572.7 37%
Non-real estate loans 3,102.6 24 2,826.4 31 2,742.6 39
Retail sales finance 1,624.3 13 1,611.0 17 1,642.3 24
Total $ 12,661.0 100% $ 9,266.8 100% $ 6,957.6 100%
Number:
Real estate loans 93,141 6% 73,427 5% 59,757 4%
Non-real estate loans 812,339 49 774,464 48 766,582 46
Retail sales finance 739,640 45 764,612 47 824,162 50
Total 1,645,120 100% 1,612,503 100% 1,650,501 100%
Average size (to nearest
dollar):
Real estate loans $85,184 $65,771 $43,053
Non-real estate loans 3,819 3,649 3,578
Retail sales finance 2,196 2,107 1,993
Purchased
Amount (in millions):
Real estate loans $ 1,239.1 96% $ 837.0 96% $ 2,355.2 92%
Non-real estate loans 14.5 1 3.0 - 125.0 5
Retail sales finance 36.3 3 30.5 4 84.0 3
Total $ 1,289.9 100% $ 870.5 100% $ 2,564.2 100%
Number:
Real estate loans 7,372 42% 10,620 44% 39,158 38%
Non-real estate loans 1,999 11 1,735 7 35,222 34
Retail sales finance 8,435 47 11,926 49 28,176 28
Total 17,806 100% 24,281 100% 102,556 100%
Average size (to nearest
dollar):
Real estate loans $168,078 $78,810 $60,146
Non-real estate loans 7,258 1,759 3,548
Retail sales finance 4,301 2,555 2,983
We had no sales in 2004, 2003, or 2002.
32
Item 7. Continued
Amount, number, and average size of total net finance receivables
originated, renewed, and purchased by type were as follows:
Years Ended December 31,
2004 2003 2002
Amount Percent Amount Percent Amount Percent
Originated, renewed,
and purchased
Amount (in millions):
Real estate loans $ 9,173.2 66% $ 5,666.4 56% $ 4,927.9 52%
Non-real estate loans 3,117.1 22 2,829.4 28 2,867.6 30
Retail sales finance 1,660.6 12 1,641.5 16 1,726.3 18
Total $ 13,950.9 100% $ 10,137.3 100% $ 9,521.8 100%
Number:
Real estate loans 100,513 6% 84,047 5% 98,915 6%
Non-real estate loans 814,338 49 776,199 47 801,804 46
Retail sales finance 748,075 45 776,538 48 852,338 48
Total 1,662,926 100% 1,636,784 100% 1,753,057 100%
Average size (to nearest
dollar):
Real estate loans $91,264 $67,419 $49,820
Non-real estate loans 3,828 3,645 3,576
Retail sales finance 2,220 2,114 2,025
Amount of purchased as a percentage of total originated, renewed, and
purchased was as follows:
Years Ended December 31,
2004 2003 2002
Real estate loans 14% 15% 48%
Non-real estate loans - - 4
Retail sales finance 2 2 5
Total 9% 9% 27%
During the first half of 2004, the lowest interest rate environment
since the 1950s contributed to significant increases in originations
and liquidations of our real estate loans. Our centralized real
estate business segment produced $4.5 billion of our real estate loan
originations during the year. These real estate loan originations
increased the average size of our real estate loans originated in
2004. Real estate loan purchases and average size of real estate
loans purchased also increased in 2004 primarily due to correspondent
relationships we have established.
33
Item 7. Continued
In 2003, the low interest rate environment contributed to increases in
both originations and liquidations of our real estate loans. Our
centralized real estate loan production of $1.9 billion also increased
our real estate loan originations as well as the average size of real
estate loans originated in 2003. We reduced real estate loan
acquisitions in 2003 because premiums on portfolios of real estate
loans produced by third party originators and required by sellers
reached levels unacceptable to us.
Amount, number, and average size of net finance receivables by type
were as follows:
December 31,
2004 2003 2002
Amount Percent Amount Percent Amount Percent
Net finance receivables
Amount (in millions):
Real estate loans $ 15,742.3 78% $ 11,038.2 72% $ 9,498.1 69%
Non-real estate loans 3,043.6 15 2,932.1 19 2,958.9 21
Retail sales finance 1,382.0 7 1,337.7 9 1,389.2 10
Total $ 20,167.9 100% $ 15,308.0 100% $ 13,846.2 100%
Number:
Real estate loans 229,882 12% 215,294 12% 218,615 11%
Non-real estate loans 892,117 48 895,879 48 927,604 48
Retail sales finance 729,666 40 743,850 40 805,734 41
Total 1,851,665 100% 1,855,023 100% 1,951,953 100%
Average size (to nearest
dollar):
Real estate loans $68,480 $51,270 $43,446
Non-real estate loans 3,412 3,273 3,190
Retail sales finance 1,894 1,798 1,724
The amount of first mortgage loans was 89% of our real estate loan net
receivables at December 31, 2004, compared to 81% at December 31,
2003, and 74% at December 31, 2002.
34
Item 7. Continued
The largest concentrations of net finance receivables were as follows:
December 31,
2004 2003 2002
Amount Percent Amount Percent Amount Percent
(dollars in millions)
California $ 2,892.1 14% $ 2,276.4 15% $ 2,160.8 16%
Florida 1,233.9 6 936.4 6 840.2 6
Ohio 1,125.9 6 841.4 6 785.5 6
Illinois 992.1 5 835.2 5 786.6 6
Virginia 954.8 5 680.3 4 553.4 4
N. Carolina 904.5 4 883.9 6 887.2 6
Georgia 760.2 4 661.3 4 592.0 4
Indiana 743.4 4 639.2 4 598.8 4
Other 10,561.0 52 7,553.9 50 6,641.7 48
Total $20,167.9 100% $15,308.0 100% $13,846.2 100%
We believe that our geographic diversification reduces the risk
associated with a recession in any one region. In addition, 98% of
our finance receivables at December 31, 2004 were secured by real
property or personal property. While finance receivables have some
exposure to further economic uncertainty, we believe that the
allowance for finance receivable losses is adequate to absorb losses
inherent in our existing portfolio. See Analysis of Operating Results
for further information on allowance ratio, delinquency ratio, and
charge-off ratio and Note 3. of the Notes to Consolidated Financial
Statements in Item 8. for further information on how we estimate
finance receivable losses.
Real Estate Owned
Changes in the amount of real estate owned were as follows:
At or for the
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Balance at beginning of year $ 51.3 $ 49.0 $ 50.0
Properties acquired 74.3 78.0 73.7
Properties sold or disposed of (76.9) (67.3) (65.6)
Monthly writedowns (9.6) (8.4) (9.1)
Balance at end of year $ 39.1 $ 51.3 $ 49.0
Real estate owned as a percentage
of real estate loans 0.25% 0.46% 0.52%
35
Item 7. Continued
Changes in the number of real estate owned properties were as follows:
At or for the
Years Ended December 31,
2004 2003 2002
Balance at beginning of year 987 951 1,006
Properties acquired 1,385 1,451 1,418
Properties sold or disposed of (1,527) (1,415) (1,473)
Balance at end of year 845 987 951
Investments
Insurance investments by type were as follows:
December 31,
2004 2003 2002
Amount Percent Amount Percent Amount Percent
(dollars in millions)
Investment securities $1,378.4 97% $1,307.5 96% $1,227.2 95%
Commercial mortgage
loans 39.7 3 43.8 3 47.0 4
Investment real estate 7.1 - 7.1 1 7.0 1
Policy loans 2.0 - 2.1 - 2.0 -
Total $1,427.2 100% $1,360.5 100% $1,283.2 100%
Investment securities are the majority of our insurance business
segment's investment portfolio. Our investment strategy is to
optimize aftertax returns on invested assets, subject to the
constraints of liquidity, diversification, and regulation.
Asset/Liability Management
In an effort to reduce the risk associated with unfavorable changes in
interest rates not met by favorable changes in finance charge yields
of our finance receivables, we monitor the anticipated cash flows of
our assets and liabilities, principally our finance receivables and
debt. Although finance receivable lives may change in response to
interest rate changes, for the quarter ending December 31, 2004, our
total receivable portfolio was experiencing an average life of 2.2
years. For that same period, real estate loans had an average life of
3.0 years while non-real estate loans had an average life of 1.5 years
and retail sales finance receivables had an average life of 10 months.
The weighted-average life until maturity for our long-term debt was
3.6 years at December 31, 2004.
We fund finance receivables with a combination of fixed-rate and
floating-rate debt and equity. Management determines the mix of
fixed-rate and floating-rate debt based, in part, on the nature of the
finance receivables being supported.
36
Item 7. Continued
The primary means by which we obtain fixed-rate debt is by issuing
fixed-rate, long-term debt. To supplement fixed-rate debt issuances,
AGFC also alters the nature of certain floating-rate funding by using
swap agreements to create synthetic fixed-rate, long-term debt,
thereby limiting our exposure to market interest rate increases.
Additionally, AGFC has swapped fixed-rate, long-term debt to floating-
rate, long-term debt. Including the impact of interest rate swap
agreements that effectively fix floating-rate debt or float fixed-rate
debt, our floating-rate debt represented 41% of our borrowings at
December 31, 2004 compared to 43% at December 31, 2003. Adjustable-
rate net finance receivables represented 19% of our net finance
receivables at December 31, 2004 compared to 25% at December 31, 2003.
ANALYSIS OF OPERATING RESULTS
Net Income
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Net income $478.1 $366.1 $346.8
Amount change $112.0 $ 19.3 $118.5
Percent change 31% 6% 52%
Return on average assets 2.46% 2.27% 2.48%
Return on average equity 23.01% 21.33% 24.49%
Ratio of earnings to fixed charges 2.06x 2.02x 1.85x
Net income for 2004 and 2002 included reductions in the provision for
income taxes resulting from favorable settlements of income tax audit
issues totaling $38.7 million in 2004 and $30.0 million in 2002.
The historically low interest rate environment during the first half
of 2004 contributed to further reductions in both our yield and
borrowing cost during 2004. This low interest rate environment and
the expanding production capacity of our centralized real estate
services resulted in a significant increase in real estate loan
production during 2004. Real estate loan average net receivables
increased to 76% of total average net receivables in 2004 compared to
71% in 2003. As our centralized real estate business segment used its
production capacity to originate real estate loans for AIG Bank rather
than for itself, most of its revenue during 2004 was from fees charged
to AIG Bank for these services, rather than net gains on sales of real
estate loans held for sale and interest income on real estate loans
held for sale. In addition to rising interest rates, the improving
economy contributed to significant improvements in our charge-off
ratio and delinquency ratio, which allowed us to decrease our
allowance for finance receivable losses. Expansion of our centralized
real estate production capacity caused increases in our operating
expenses but, overall, operating expenses were well controlled.
A continued sluggish economy in the first half of 2003 and the low
interest rate environment contributed to decreases in both our yield
and borrowing cost during 2003. Our acquisition of WFI, effective
January 1, 2003, caused increases in our other revenue and also
37
Item 7. Continued
increased our operating expenses during 2003. Real estate loan
production of $1.9 billion from our centralized real estate business
segment more than offset the decrease in real estate loans acquired
from third party lenders. We also continued to control operating
expenses during 2003. The higher proportion of real estate loans in
our finance receivable portfolio resulted in net charge-offs that were
also well controlled. This, plus the improving economy in the second
half of 2003, resulted in lower additions to the allowance for finance
receivable losses when compared to the prior year.
In 2002, a sluggish economy contributed to the decrease in our
borrowing cost; however, the low interest rate environment had the
anticipated effect of also reducing our yield. We continued to invest
in business development programs, including new branch office openings
and a second customer solicitation center, but still controlled
operating expenses.
See Note 22. of the Notes to Consolidated Financial Statements in Item
8. for information on the results of the Company's business segments.
Our statements of income line items as percentages of each year's
average net receivables were as follows:
Years Ended December 31,
2004 2003 2002
Revenues
Finance charges 11.20% 12.46% 13.85%
Insurance 1.00 1.28 1.54
Other:
Service fee income from a
non-subsidiary affiliate 1.13 0.35 0.02
Miscellaneous 0.60 1.30 0.70
Total revenues 13.93 15.39 16.11
Expenses
Interest expense 3.60 3.84 4.51
Operating expenses:
Salaries and benefits 2.82 2.90 2.55
Other operating expenses 1.62 1.92 1.97
Provision for finance
receivable losses 1.53 2.21 2.45
Insurance losses and loss
adjustment expenses 0.43 0.48 0.67
Total expenses 10.00 11.35 12.15
Income before provision for
income taxes 3.93 4.04 3.96
Provision for income taxes 1.22 1.47 1.17
Net income 2.71% 2.57% 2.79%
38
Item 7. Continued
Factors that affected the Company's operating results were as follows:
Finance Charges
Finance charges by type were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Real estate loans $ 1,163.3 $ 970.6 $ 902.9
Non-real estate loans 628.0 612.5 616.1
Retail sales finance 185.9 190.2 199.9
Total $ 1,977.2 $ 1,773.3 $ 1,718.9
Amount change $ 203.9 $ 54.4 $ 6.4
Percent change 11% 3% -%
Average net receivables $17,658.9 $14,232.1 $12,409.9
Yield 11.20% 12.46% 13.85%
Finance charges increased due to the following:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Increase in average net
receivables $ 381.2 $ 216.4 $ 84.0
Decrease in yield (181.8) (162.0) (77.6)
Increase in number of days 4.5 - -
Total $ 203.9 $ 54.4 $ 6.4
Average net receivables by type were as follows:
December 31,
2004 2003 2002
Amount Percent Amount Percent Amount Percent
(dollars in millions)
Real estate loans $13,396.1 76% $10,033.3 71% $ 8,184.0 66%
Non-real estate loans 2,965.5 17 2,883.2 20 2,858.0 23
Retail sales finance 1,297.3 7 1,315.6 9 1,367.9 11
Total $17,658.9 100% $14,232.1 100% $12,409.9 100%
39
Item 7. Continued
Changes in average net receivables by type were as follows:
Years Ended December 31,
2004 2003 2002
Percent Percent Percent
Amount Change Amount Change Amount Change
(dollars in millions)
Real estate loans $3,362.8 33% $1,849.3 23% $ 827.2 11%
Non-real estate loans 82.3 3 25.2 1 (96.7) (3)
Retail sales finance (18.3) (1) (52.3) (4) (47.0) (3)
Total $3,426.8 24% $1,822.2 15% $ 683.5 6%
The historically low interest rate environment contributed to the
increase in originations of our real estate loans. Real estate loan
production arising from our centralized real estate origination
services also increased real estate loan originations by $4.5 billion
during 2004 and $1.9 billion during 2003.
Yield by type were as follows:
Years Ended December 31,
2004 2003 2002
Real estate loans 8.68% 9.67% 11.03%
Non-real estate loans 21.18 21.24 21.56
Retail sales finance 14.33 14.46 14.61
Total 11.20 12.46 13.85
Changes in yield in basis points (bp) by type were as follows:
Years Ended December 31,
2004 2003 2002
Real estate loans (99) bp (136) bp (84) bp
Non-real estate loans (6) (32) (3)
Retail sales finance (13) (15) 36
Total (126) (139) (75)
Yield decreased in both 2004 and 2003 primarily reflecting a lower
real estate loan yield resulting from the low interest rate
environment and the larger proportion of finance receivables that are
real estate loans. We anticipate that yield will increase in 2005 in
response to the recent market interest rate increases and further
increases we expect in 2005.
40
Item 7. Continued
Insurance Revenues
Insurance revenues were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Earned premiums $175.8 $178.5 $189.0
Commissions 1.0 3.1 2.2
Total $176.8 $181.6 $191.2
Amount change $ (4.8) $ (9.6) $ (4.2)
Percent change (3)% (5)% (2)%
Premiums earned by type were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Credit insurance:
Life $ 33.5 $ 35.0 $ 37.6
Accident and health 42.9 45.1 47.7
Property and casualty 40.7 42.9 41.0
Involuntary unemployment 16.5 15.5 14.7
Non-credit insurance:
Life 30.6 32.9 38.1
Accident and health 8.6 7.7 7.3
Premiums assumed under
reinsurance agreements 3.0 (0.6) 2.6
Total $175.8 $178.5 $189.0
Premiums written by type were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Credit insurance:
Life $ 30.0 $ 26.1 $ 23.3
Accident and health 38.5 39.7 40.5
Property and casualty 37.9 34.3 39.3
Involuntary unemployment 16.0 16.4 15.9
Non-credit insurance:
Life 30.6 32.9 38.1
Accident and health 8.6 7.7 7.3
Premiums assumed under
reinsurance agreements 3.0 (0.6) 2.6
Total $164.6 $156.5 $167.0
Earned premiums decreased for 2004 primarily due to lower credit life
and credit accident and health premium volume in prior years.
41
Item 7. Continued
Earned premiums decreased for 2003 primarily due to lower premium
volume in prior years. Premium volume decreased due to fewer non-real
estate loan customers who historically have purchased the majority of
our insurance products. Also, in April 2003, we terminated a
reinsurance agreement with a non-subsidiary affiliate and reversed
$3.6 million of annuity premiums and annuity reserve expense that we
previously recorded.
Other Revenues
Other revenues were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Service fee income from a
non-subsidiary affiliate $199.9 $ 49.5 $ 3.1
Miscellaneous:
Investment revenue 92.0 82.2 85.9
Net gain on sales of real estate
loans held for sale 11.4 84.0 -
Writedowns on real estate owned (9.6) (8.4) (9.1)
Net recovery on sales of real
estate owned 2.5 2.2 2.9
Net interest income on real estate
loans held for sale 0.9 14.8 -
Other 8.0 10.9 6.9
Total $305.1 $235.2 $ 89.7
Amount change $ 69.9 $145.5 $ (0.9)
Percent change 30% 162% (1)%
Other revenues increased for 2004 primarily due to higher service fee
income from a non-subsidiary affiliate and investment revenue,
partially offset by lower revenue on real estate loans held for sale.
In 2003, WFI entered into an agreement with AIG Bank whereby for fees
WFI provides marketing, certain origination processing services, loan
servicing, and related services for AIG Bank's origination and sale of
non-conforming residential real estate loans. In 2004, MorEquity
entered into a similar agreement with AIG Bank.
Other revenues increased for 2003 primarily due to the acquisition of
WFI effective January 1, 2003 which resulted in net gain on sales of
real estate loans held for sale, higher service fee income from a non-
subsidiary affiliate, and net interest income on real estate loans
held for sale.
42
Item 7. Continued
Investment revenue was affected by the following:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Average invested assets $1,361.4 $1,302.5 $1,252.6
Investment portfolio yield 6.54% 6.56% 6.84%
Net realized losses on
investments $ - $ (8.4) $ (4.4)
Interest Expense
The impact of using swap agreements to fix floating-rate debt or float
fixed-rate debt is included in interest expense and the related
borrowing statistics below. Interest expense by type was as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Long-term debt $ 531.7 $ 447.9 $ 432.8
Short-term debt 104.6 98.8 126.5
Total $ 636.3 $ 546.7 $ 559.3
Amount change $ 89.6 $ (12.6) $ (76.2)
Percent change 16% (2)% (12)%
Average borrowings $16,300.9 $13,381.6 $11,471.2
Borrowing cost 3.90% 4.08% 4.88%
Interest expense increased (decreased) due to the following:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Increase in average borrowings $ 119.1 $ 93.2 $ 45.5
Decrease in borrowing cost (29.5) (105.8) (121.7)
Total $ 89.6 $ (12.6) $ (76.2)
Average borrowings by type were as follows:
December 31,
2004 2003 2002
Amount Percent Amount Percent Amount Percent
(dollars in millions)
Long-term debt $12,387.3 76% $ 9,716.4 73% $ 7,344.3 64%
Short-term debt 3,913.6 24 3,665.2 27 4,126.9 36
Total $16,300.9 100% $13,381.6 100% $11,471.2 100%
43
Item 7. Continued
Changes in average borrowings by type were as follows:
Years Ended December 31,
2004 2003 2002
Percent Percent Percent
Amount Change Amount Change Amount Change
(dollars in millions)
Long-term debt $2,670.9 27% $2,372.1 32% $1,320.0 22%
Short-term debt 248.4 7 (461.7) (11) (490.3) (11)
Deposits - - - - (63.1) (100)
Total $2,919.3 22% $1,910.4 17% $ 766.6 7%
AGFC issued $5.7 billion of long-term debt in 2004, compared to $2.7
billion in 2003 and $4.6 billion in 2002. Long-term debt issuances in
2004 were higher than in 2003 primarily due to higher levels of
finance receivable growth and long-term debt refinancings in 2004.
In second quarter 2003, a consolidated special purpose subsidiary of
AGFI recorded $256.4 million of debt issued by a trust that purchased
$259.0 million of real estate loans as part of our securitization. We
recorded the transaction as an "on balance sheet" secured financing.
Borrowing cost by type were as follows:
Years Ended December 31,
2004 2003 2002
Long-term debt 4.28% 4.61% 5.89%
Short-term debt 2.68 2.70 3.06
Total 3.90 4.08 4.88
Changes in borrowing cost in basis points by type were as follows:
Years Ended December 31,
2004 2003 2002
Long-term debt (33) bp (128) bp (77) bp
Short-term debt (2) (36) (193)
Total (18) (80) (105)
Federal Reserve actions from 2001 through June 2003 created the lowest
interest rate environment since the 1950s and resulted in lower long-
term debt rates as new issuances were at substantially lower rates
than long-term debt being refinanced. In 2004, the Federal Reserve
raised the federal funds rate 125 basis points in five actions
beginning in June 2004.
44
Item 7. Continued
Operating Expenses
Operating expenses were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Salaries and benefits $498.3 $413.4 $316.3
Other 284.0 272.9 245.2
Total $782.3 $686.3 $561.5
Amount change $ 96.0 $124.8 $ 10.7
Percent change 14% 22% 2%
Operating expenses as a percentage
of average net receivables 4.43% 4.82% 4.52%
Operating expenses increased in both 2004 and 2003 primarily due to
growth in our centralized real estate business segment and higher
salaries and benefits and advertising expenses. The increase in
salaries and benefits for 2004 and 2003 reflected the acquisition of
WFI which resulted in the addition of approximately 500 WFI employees
effective January 1, 2003, 400 centralized real estate employees hired
during 2003, and 500 centralized real estate employees hired during
2004. Competitive compensation and rising benefit costs also
contributed to higher salaries and benefits in 2004 and 2003.
The increase in operating expenses for 2003 also reflected higher
credit and collection and occupancy expenses. The increase in credit
and collection expenses reflected higher credit investigation,
recording and releasing, and mortgage appraisal fees resulting from
higher real estate loan originations and renewals during 2003.
The decrease in operating expenses as a percentage of average net
receivables for 2004 reflected higher average net receivables and
continued emphasis on controlling operating expenses, partially offset
by growth in our centralized real estate business segment. The
increase in operating expenses as a percentage of average net
receivables for 2003 reflected the acquisition of WFI and growth in
its operations.
Approximately $204.7 million of the Company's operating expenses for
2004 and $112.4 million for 2003 were directly related to our
centralized real estate business segment.
45
Item 7. Continued
Provision for Finance Receivable Losses
At or for the
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Provision for finance
receivable losses $270.2 $313.8 $303.6
Amount change $(43.6) $ 10.2 $ 14.3
Percent change (14)% 3% 5%
Net charge-offs $280.2 $310.8 $297.6
Charge-off ratio 1.60% 2.19% 2.41%
Charge-off coverage 1.63x 1.50x 1.56x
60 day+ delinquency $474.2 $515.4 $523.3
Delinquency ratio 2.31% 3.28% 3.67%
Allowance for finance
receivable losses $456.0 $466.0 $463.0
Allowance ratio 2.26% 3.04% 3.34%
Charge-offs, recoveries, net charge-offs, and charge-off ratio by type
were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Real estate loans:
Charge-offs $ 71.3 $ 68.7 $ 58.6
Recoveries (5.9) (4.2) (4.5)
Net charge-offs $ 65.4 $ 64.5 $ 54.1
Charge-off ratio .50% .65% .67%
Non-real estate loans:
Charge-offs $206.5 $229.2 $225.3
Recoveries (30.2) (28.2) (27.2)
Net charge-offs $176.3 $201.0 $198.1
Charge-off ratio 5.95% 6.97% 6.94%
Retail sales finance:
Charge-offs $ 49.4 $ 55.3 $ 54.9
Recoveries (10.9) (10.0) (9.5)
Net charge-offs $ 38.5 $ 45.3 $ 45.4
Charge-off ratio 2.97% 3.44% 3.31%
Total:
Charge-offs $327.2 $353.2 $338.8
Recoveries (47.0) (42.4) (41.2)
Net charge-offs $280.2 $310.8 $297.6
Charge-off ratio 1.60% 2.19% 2.41%
46
Item 7. Continued
Changes in net charge-offs by type were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Real estate loans $ 0.9 $10.4 $ 4.0
Non-real estate loans (24.7) 2.9 24.3
Retail sales finance (6.8) (0.1) 5.0
Total $(30.6) $13.2 $33.3
The improvement in net charge-offs for 2004 reflected lower non-real
estate loan and retail sales finance net charge-offs primarily due to
the improving economy. Real estate loan net charge-offs increased in
2004 and 2003 primarily due to increases in real estate loan average
net receivables of $3.4 billion, or 33%, in 2004 and $1.8 billion, or
23%, in 2003.
Changes in charge-off ratios in basis points by type were as follows:
Years Ended December 31,
2004 2003 2002
Real estate loans (15) bp (2) bp (1) bp
Non-real estate loans (102) 3 107
Retail sales finance (47) 13 46
Total (59) (22) 15
The improvement in the charge-off ratio for 2004 and 2003 was
primarily due to the improving economy which began in the second half
of 2003 and a higher proportion of average net receivables that were
real estate loans.
47
Item 7. Continued
Delinquency based on contract terms in effect and delinquency ratio by
type were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Real estate loans:
Delinquency $286.6 $306.7 $300.0
Delinquency ratio 1.83% 2.79% 3.19%
Non-real estate loans:
Delinquency $152.6 $167.4 $178.7
Delinquency ratio 4.54% 5.16% 5.42%
Retail sales finance:
Delinquency $ 35.0 $ 41.3 $ 44.6
Delinquency ratio 2.32% 2.79% 2.87%
Total:
Delinquency $474.2 $515.4 $523.3
Delinquency ratio 2.31% 3.28% 3.67%
Changes in delinquency from the prior year end by type were as
follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Real estate loans $(20.1) $ 6.7 $48.2
Non-real estate loans (14.8) (11.3) 7.2
Retail sales finance (6.3) (3.3) 2.8
Total $(41.2) $ (7.9) $58.2
Delinquency at December 31, 2004 and 2003 was favorably impacted by
the improving economy which began in the second half of 2003. Real
estate loan delinquency increased in 2003 primarily due to an increase
in real estate loans of $1.5 billion.
Changes in delinquency ratio from the prior year end in basis points
by type were as follows:
Years Ended December 31,
2004 2003 2002
Real estate loans (96) bp (40) bp (12) bp
Non-real estate loans (62) (26) 18
Retail sales finance (47) (8) 31
Total (97) (39) (4)
48
Item 7. Continued
The improvement in the delinquency ratio at December 31, 2004 and 2003
reflected the improving economy and a higher proportion of net finance
receivables that were real estate loans.
Our Credit Strategy and Policy Committee evaluates our finance
receivable portfolio monthly to determine the appropriate level of the
allowance for finance receivable losses. We believe the amount of the
allowance for finance receivable losses is the most significant
estimate we make. In our opinion, the allowance is adequate to absorb
losses inherent in our existing portfolio. The decrease in the
allowance for finance receivable losses at December 31, 2004 when
compared to December 31, 2003 was due to net decreases to the
allowance for finance receivable losses through the provision for
finance receivable losses in 2004 totaling $10.0 million. These
decreases were in response to our lower levels of delinquency and the
lower levels of both unemployment and personal bankruptcies in the
United States.
The allowance as a percentage of net finance receivables decreased
during 2004 and 2003 primarily due to the improving economy and a
higher proportion of net finance receivables that were real estate
loans.
Charge-off coverage, which compares the allowance for finance
receivable losses to net charge-offs, improved in 2004 primarily due
to lower net charge-offs. Charge-off coverage declined slightly in
2003 primarily due to a higher proportion of net finance receivables
that were real estate loans.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses were as follows:
Years Ended December 31,
2004 2003 2002
(dollars in millions)
Claims incurred $80.7 $ 75.3 $85.3
Change in benefit reserves (4.0) (7.5) (2.0)
Total $76.7 $ 67.8 $83.3
Amount change $ 8.9 $(15.5) $(4.8)
Percent change 13% (19)% (5)%
49
Item 7. Continued
Losses incurred by type were as follows:
Years Ended December 31,