UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-Q



(Mark One)



[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934



|For the quarterly period ended                                                                | September 30, 2005
|--------------------------------------------------------------------------------------------- | ------------------
|OR                                                                                           
|[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|For the transition period from                                                                |                   





|Commission file number 1-7422

AMERICAN GENERAL FINANCE, INC.
|-------------------------------------------------------------
|(Exact name of registrant as specified in its charter)       
|Indiana                                                      
|(State of Incorporation)                                     
|601 N.W. Second Street, Evansville, IN                       
|(Address of principal executive offices)                     
|(812) 424-8031                                               
|(Registrants telephone number, including area code)         





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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X   No



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes    No X



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    No X



At November 1, 2005, there were 2,000,000 shares of the registrants common stock, $.50 par value, outstanding.



TABLE OF CONTENTS





|Item                           |                                                                                      | Page
|------------------------------ | ------------------------------------------------------------------------------------ | ----
|Part I  Financial Information
|1.                             | Financial Statements (Unaudited)                                                     | 3   
|2.                             | Managements Discussion and Analysis of Financial Conditionand
Results of Operations | 12  
|3.                             | Quantitative and Qualitative Disclosures About Market Risk                           | 29  
|4.                             | Controls and Procedures                                                              | 30  
|Part II  Other Information   
|1.                             | Legal Proceedings                                                                    | 30  
|2.                             | Unregistered Sales of Equity Securities and Use of Proceeds                          | 30  
|3.                             | Defaults Upon Senior Securities                                                      | 30  
|4.                             | Submission of Matters to a Vote of Security Holders                                  | 31  
|5.                             | Other Information                                                                    | 31  
|6.                             | Exhibits                                                                             | 31  







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 2005 Current Reports on Form 8-K;

·

our 2005 Quarterly Reports on Form 10-Q; and

·

our Annual Report on Form 10-K as amended by our Annual Report on Form 10-K/A (Amendment No. 1) 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.



2





Part I  FINANCIAL INFORMATION





Item 1.  Financial Statements







AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)







|                                                              | Three Months Ended     |          | Nine Months Ended
|------------------------------------------------------------- | ---------------------- | -------- | -----------------
|                                                              | September 30,          |          | September 30,    
|                                                              | 2005                   | 2004     |                  
|                                                              | (dollars in thousands)
|Revenues
Finance charges                                      | $592,662               | $507,232 |                  
|Insurance                                                     | 39,334                 | 43,989   |                  
|Other:
Net service fee income from a
non-subsidiary affiliate | 97,855                 | 59,724   |                  
|Miscellaneous                                                 | 27,158                 | 25,458   |                  
|Total revenues                                                | 757,009                | 636,403  |                  
|Expenses
Interest expense                                     | 238,625                | 167,518  |                  
|Operating expenses:
Salaries and benefits                     | 140,758                | 120,509  |                  
|Other operating expenses                                      | 77,137                 | 75,909   |                  
|Provision for finance receivable losses                       | 119,470                | 69,126   |                  
|Insurance losses and loss adjustment
expenses                 | 17,357                 | 21,267   |                  
|Total expenses                                                | 593,347                | 454,329  |                  
|Income before provision for income taxes                      | 163,662                | 182,074  |                  
|Provision for Income Taxes                                    | 61,397                 | 67,151   |                  
|Net Income                                                    | $102,265               | $114,923 |                  









See Notes to Condensed Consolidated Financial Statements.



3





AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)







|                                                                      | September 30,          | December 31,
|--------------------------------------------------------------------- | ---------------------- | ------------
|                                                                      | 2005                   | 2004        
|                                                                      | (dollars in thousands)
|Assets

Net finance receivables:
Real estate loans                    | $18,724,784            | $15,742,238 
|Non-real estate loans                                                 | 3,143,014              | 3,043,602   
|Retail sales finance                                                  | 1,431,392              | 1,382,018   
|Net finance receivables                                               | 23,299,190             | 20,167,858  
|Allowance for finance receivable losses                               | (522,831)              | (456,031)   
|Net finance receivables, less allowance for finance
receivable losses | 22,776,359             | 19,711,827  
|Investment securities                                                 | 1,382,140              | 1,378,362   
|Cash and cash equivalents                                             | 161,747                | 160,610     
|Other assets                                                          | 1,071,307              | 984,973     
|Total assets                                                          | $25,391,553            | $22,235,772 
|Liabilities and Shareholders Equity

Long-term debt                  | $17,944,765            | $14,679,501 
|Short-term debt                                                       | 3,800,404              | 4,299,085   
|Insurance claims and policyholder liabilities                         | 404,050                | 422,957     
|Other liabilities                                                     | 491,019                | 414,441     
|Accrued taxes                                                         | 23,292                 | 43,546      
|Total liabilities                                                     | 22,663,530             | 19,859,530  
|Shareholders equity:
Common stock                                    | 1,000                  | 1,000       
|Additional paid-in capital                                            | 1,016,305              | 996,305     
|Accumulated other comprehensive income                                | 84,662                 | 37,413      
|Retained earnings                                                     | 1,626,056              | 1,341,524   
|Total shareholders equity                                            | 2,728,023              | 2,376,242   
|Total liabilities and shareholders equity                            | $25,391,553            | $22,235,772 









See Notes to Condensed Consolidated Financial Statements.



4





AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)







|                                                                                 | Nine Months Ended     
|-------------------------------------------------------------------------------- | ----------------------
|                                                                                 | September 30,         
|                                                                                 | 2005                  
|                                                                                 | (dollars in thousands)
|Cash Flows from Operating Activities
Net income                                  | $  352,531            
|Reconciling adjustments:
Provision for finance receivable losses                 | 254,057               
|Depreciation and amortization                                                    | 120,696               
|Deferral of finance receivable origination costs                                 | (63,285)              
|Deferred income tax (benefit) charge                                             | (41,599)              
|Origination of real estate loans held for sale                                   | (363,061)             
|Sales and principal collections of real estate loans held for sale               | 209,348               
|Change in other assets and other liabilities                                     | 15,961                
|Change in insurance claims and policyholder liabilities                          | (18,907)              
|Change in taxes receivable and payable                                           | (29,319)              
|Other, net                                                                       | (16,258)              
|Net cash provided by operating activities                                        | 420,164               
|Cash Flows from Investing Activities
Finance receivables originated or purchased | (9,514,568)           
|Principal collections on finance receivables                                     | 6,217,631             
|Investment securities purchased                                                  | (319,160)             
|Investment securities called and sold                                            | 254,031               
|Investment securities matured                                                    | 37,047                
|Change in premiums on finance receivables purchased and
deferred charges         | (20,096)              
|Other, net                                                                       | (18,579)              
|Net cash used for investing activities                                           | (3,363,694)           
|Cash Flows from Financing Activities
Proceeds from issuance of long-term debt    | 4,753,515             
|Repayment of long-term debt                                                      | (1,262,168)           
|Change in short-term debt                                                        | (498,681)             
|Capital contribution from parent                                                 | 20,000                
|Dividends paid                                                                   | (67,999)              
|Net cash provided by financing activities                                        | 2,944,667             
|Increase in cash and cash equivalents                                            | 1,137                 
|Cash and cash equivalents at beginning of period                                 | 160,610               
|Cash and cash equivalents at end of period                                       | $  161,747            









See Notes to Condensed Consolidated Financial Statements.



5





AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)







|                                                                                                       | Three Months Ended     |          | Nine Months Ended
|------------------------------------------------------------------------------------------------------ | ---------------------- | -------- | -----------------
|                                                                                                       | September 30,          |          | September 30,    
|                                                                                                       | 2005                   | 2004     |                  
|                                                                                                       | (dollars in thousands)
|Net income                                                                                             | $102,265               | $114,923 |                  
|Other comprehensive gain:

Changes in net unrealized (losses) gains:
Investment securities             | (26,566)               | 38,106   |                  
|Swap agreements                                                                                        | 46,435                 | 11,582   |                  
|Minimum pension liability                                                                              | -                      | -        |                  
|Income tax effect:
Investment securities                                                               | 9,298                  | (13,338) |                  
|Swap agreements                                                                                        | (16,251)               | (4,055)  |                  
|Minimum pension liability                                                                              | -                      | -        |                  
|Changes in net unrealized gains, net of tax                                                            | 12,916                 | 32,295   |                  
|Reclassification adjustments for realized
losses (gains) included in net income:
Investment securities | 35                     | (485)    |                  
|Swap agreements                                                                                        | 3,682                  | 14,908   |                  
|Income tax effect:
Investment securities                                                               | (12)                   | 170      |                  
|Swap agreements                                                                                        | (1,289)                | (5,217)  |                  
|Realized losses included in net income,
net of tax                                                     | 2,416                  | 9,376    |                  
|Other comprehensive gain, net of tax                                                                   | 15,332                 | 41,671   |                  
|Comprehensive income                                                                                   | $117,597               | $156,594 |                  









See Notes to Condensed Consolidated Financial Statements.



6





AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2005







Note 1.  Basis of Presentation



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. We prepared our condensed consolidated financial statements using accounting principles generally accepted in the United States (GAAP) for interim periods. The statements include the accounts of AGFI and its subsidiaries, all of which are wholly owned. We eliminated all intercompany items. AGFI is an indirect wholly owned subsidiary of American International Group, Inc. (AIG).



We made all adjustments, consisting only of normal recurring adjustments, that we considered necessary for a fair statement of the Companys condensed consolidated financial statements. You should read these statements in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2004. To conform to the 2005 presentation, we reclassified certain items in the prior period.





Note 2.  Finance Receivables



Components of net finance receivables by type were as follows:



|                                             | September 30, 2005    
|-------------------------------------------- | ----------------------
|                                             | Real
Estate Loans     
|                                             | (dollars in thousands)
|Gross receivables                            | $18,639,062           
|Unearned finance charges
and points and fees | (137,517)             
|Accrued finance charges                      | 116,297               
|Deferred origination costs                   | 30,853                
|Premiums, net of discounts                   | 76,089                
|Total                                        | $18,724,784           





|                                             | December 31, 2004     
|-------------------------------------------- | ----------------------
|                                             | Real
Estate Loans     
|                                             | (dollars in thousands)
|Gross receivables                            | $15,664,295           
|Unearned finance charges
and points and fees | (128,899)             
|Accrued finance charges                      | 101,475               
|Deferred origination costs                   | 30,168                
|Premiums, net of discounts                   | 75,199                
|Total                                        | $15,742,238           



7





Note 3.  Allowance for Finance Receivable Losses



Changes in the allowance for finance receivable losses were as follows:



|                                        | Three Months Ended     |          | Nine Months Ended
|--------------------------------------- | ---------------------- | -------- | -----------------
|                                        | September 30,          |          | September 30,    
|                                        | 2005                   | 2004     |                  
|                                        | (dollars in thousands)
|Balance at beginning of period          | $466,032               | $456,031 |                  
|Provision for finance receivable losses | 119,470                | 69,126   |                  
|Charge-offs                             | (75,204)               | (80,748) |                  
|Recoveries                              | 12,533                 | 11,622   |                  
|Balance at end of period                | $522,831               | $456,031 |                  





Note 4.  Derivative Financial Instruments



Our principal borrowing subsidiary is American General Finance Corporation (AGFC), a wholly owned subsidiary of AGFI. AGFC uses derivative financial instruments in managing the cost of its debt but is neither a dealer nor a trader in derivative financial instruments. AGFCs derivative financial instruments consist of interest rate, foreign currency, and equity-indexed swap agreements.



We design our interest rate and foreign currency swap agreements to qualify as cash flow hedges or fair value hedges. While our equity-indexed swap agreement mitigates economic exposure of related equity-indexed debt, this swap agreement does not qualify as a cash flow or fair value hedge under GAAP. At September 30, 2005, equity-indexed debt was immaterial.





Note 5.  Accumulated Other Comprehensive Income



Components of accumulated other comprehensive income were as follows:



|                                                   | September 30,          | December 31,
|-------------------------------------------------- | ---------------------- | ------------
|                                                   | 2005                   | 2004        
|                                                   | (dollars in thousands)
|Net unrealized gains (losses) on swap agreements   | $56,305                | $ (6,102)   
|Net unrealized gains on investment securities      | 29,728                 | 43,515      
|Net unrealized losses on minimum pension liability | (1,371)                | -           
|Accumulated other comprehensive income             | $84,662                | $37,413     





8





Note 6.  Segment Information



We have three business segments:  branch, centralized real estate, and insurance. We define our segments by types of financial service products we offer, nature of our production processes, and methods we use to distribute our products and to provide our services, as well as our management reporting structure.



In our Annual Report on Form 10-K for the year ended December 31, 2004, we expanded our segment reporting to reflect our centralized real estate business as a separate segment. We also restated prior interim periods so that these prior periods are shown on a comparable basis to our new presentation.



In our branch business segment, we:



·

originate real estate loans secured by first or second mortgages on residential real estate, which may be closed-end accounts or open-end home equity lines of credit;

·

originate secured and unsecured non-real estate loans;

·

purchase retail sales contracts and provide revolving retail sales financing services arising from the retail sale of consumer goods and services by retail merchants; and

·

purchase private label receivables originated by AIG Federal Savings Bank (AIG Bank) under a participation agreement.



To supplement our lending and retail sales financing activities, we purchase portfolios of real estate loans, non-real estate loans, and retail sales finance receivables originated by other lenders. We also offer credit and non-credit insurance and ancillary products to all eligible branch customers.



In our centralized real estate business segment, we:



·

provide, for fees, marketing services, certain origination processing services, loan servicing, and related services for AIG Bank;

·

originate real estate loans for transfer to the centralized real estate servicing center;

·

originate real estate loans for sale to investors with servicing released to the purchaser; and

·

service a portfolio of real estate loans generated through:

·

portfolio acquisitions from third party lenders;

·

correspondent relationships;

·

our mortgage origination subsidiaries;

·

refinancing existing mortgages; or

·

advances on home equity lines of credit.



In our insurance business segment, we write and reinsure credit life, credit accident and health, credit-related property and casualty, credit involuntary unemployment, and non-credit insurance covering our customers and the property pledged as collateral through products that the branch business segment offers its customers. We also monitor our finance receivables to ensure that the related collateral is adequately protected.





9





Information about the Companys segments as well as reconciliations of total segment pretax income to the condensed consolidated financial statement amounts were as follows:



For the three months ended September 30, 2005:



|                                    |                        | Centralized |           | Total   
|----------------------------------- | ---------------------- | ----------- | --------- | --------
|                                    | Branch                 | Real Estate | Insurance | Segments
|                                    | (dollars in thousands)
|Revenues:
External:
Finance charges | $448,653               | $173,874    | $     -   | $622,527
|Insurance                           | 171                    | -           | 39,163    | 39,334  
|Other                               | (32)                   | 98,831      | 22,096    | 120,895 
|Intercompany                        | 18,486                 | 462         | (15,640)  | 3,308   
|Pretax income                       | 64,503                 | 93,017      | 21,529    | 179,049 





For the three months ended September 30, 2004:



|                                    |                        | Centralized |           | Total   
|----------------------------------- | ---------------------- | ----------- | --------- | --------
|                                    | Branch                 | Real Estate | Insurance | Segments
|                                    | (dollars in thousands)
|Revenues:
External:
Finance charges | $429,010               | $100,316    | $     -   | $529,326
|Insurance                           | 187                    | -           | 43,802    | 43,989  
|Other                               | (2,014)                | 59,172      | 22,921    | 80,079  
|Intercompany                        | 20,105                 | 293         | (17,486)  | 2,912   
|Pretax income                       | 122,605                | 46,219      | 20,352    | 189,176 





For the nine months ended September 30, 2005:



|                                    |                        | Centralized |           | Total     
|----------------------------------- | ---------------------- | ----------- | --------- | ----------
|                                    | Branch                 | Real Estate | Insurance | Segments  
|                                    | (dollars in thousands)
|Revenues:
External:
Finance charges | $1,322,938             | $471,345    | $     -   | $1,794,283
|Insurance                           | 518                    | -           | 122,134   | 122,652   
|Other                               | (986)                  | 242,449     | 71,337    | 312,800   
|Intercompany                        | 57,445                 | 1,266       | (48,739)  | 9,972     
|Pretax income                       | 334,957                | 203,106     | 72,373    | 610,436   





10





For the nine months ended September 30, 2004:



|                                    |                        | Centralized |           | Total     
|----------------------------------- | ---------------------- | ----------- | --------- | ----------
|                                    | Branch                 | Real Estate | Insurance | Segments  
|                                    | (dollars in thousands)
|Revenues:
External:
Finance charges | $1,279,409             | $241,768    | $     -   | $1,521,177
|Insurance                           | 578                    | -           | 132,791   | 133,369   
|Other                               | (7,329)                | 140,479     | 72,620    | 205,770   
|Intercompany                        | 60,671                 | 737         | (53,223)  | 8,185     
|Pretax income                       | 380,887                | 93,372      | 67,915    | 542,174   





Reconciliations of total segment pretax income to the condensed consolidated financial statement amounts were as follows:



|                           | Three Months Ended     |          | Nine Months Ended
|-------------------------- | ---------------------- | -------- | -----------------
|                           | September 30,          |          | September 30,    
|                           | 2005                   | 2004     |                  
|                           | (dollars in thousands)
|Pretax income:
Segments    | $179,049               | $189,176 |                  
|Corporate                  | (16,160)               | (8,827)  |                  
|Adjustments                | 773                    | 1,725    |                  
|Consolidated pretax income | $163,662               | $182,074 |                  





Adjustments for pretax income include realized gains (losses) and certain other investment revenue.





Note 7.  Legal Contingencies



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, in some jurisdictions, large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs, create the potential for an unpredictable judgment in any given suit.





11





Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations.





REPORT OF MANAGEMENTS RESPONSIBILITY



The Companys management is responsible for the integrity and fair statement of our condensed consolidated financial statements and all other financial information presented in this report. We prepared our condensed consolidated financial statements using accounting principles generally accepted in the United States (GAAP) for interim periods. We made estimates and assumptions that affect amounts recorded in the financial statements and disclosures of contingent assets and liabilities.



The Companys management is responsible for establishing and maintaining an internal control structure and procedures for financial reporting. We designed these systems to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, that transactions are recorded according to GAAP under managements direction and that financial records are reliable to prepare financial statements. We support the internal control structure with careful selection, training and development of qualified personnel. The Companys employees are subject to AIGs Code of Conduct designed to assure that all employees perform their duties with honesty and integrity. In 2004, AIG adopted the AIG Director, Executive Officer, and Senior Financial Officer Code of Business Conduct and Ethics, which covers such directors and officers of AIG and its subsidiaries, including the Companys Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. We do not allow loans to executive officers. The aforementioned systems include a documented organizational structure and policies and procedures that we communicate throughout the Company. Our internal auditors report directly to AIG to strengthen independence. They continually monitor the operation of our internal controls and report their findings to the Companys management, AIGs management, and AIGs internal audit department. We take prompt action to correct control deficiencies and improve the systems. The Companys management assesses any changes to our internal control structure quarterly. Based on these assessments, management has concluded that the internal control structure and the procedures for financial reporting have functioned effectively and that the condensed consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.





12





FORWARD-LOOKING STATEMENTS



This Quarterly Report on Form 10-Q 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 any 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 (and expressly disclaim any 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.





13





CRITICAL ACCOUNTING ESTIMATES



We consider our most critical accounting estimate to be the establishment of an adequate allowance for finance receivable losses. Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly. 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 the Credit Strategy and Policy Committee considered 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 off-balance sheet arrangements as defined by SEC rules.





CAPITAL RESOURCES AND LIQUIDITY



Capital Resources



Our capital varies primarily with the amount of net finance receivables. We base the mix of debt and equity primarily upon maintaining leverage that supports cost-effective funding.



|                              | September 30,        
|----------------------------- | ---------------------
|                              | 2005                 
|                              | Amount               
|                              | (dollars in millions)
|Long-term debt                | $17,944.8            
|Short-term debt               | 3,800.4              
|Total debt                    | 21,745.2             
|Equity                        | 2,728.0              
|Total capital                 | $24,473.2            
|Net finance receivables       | $23,299.2            
|Debt to equity ratio          | 7.97x                
|Debt to tangible equity ratio | 8.99x                





14





Reconciliations of equity to tangible equity were as follows:



|                                       | September 30,        
|-------------------------------------- | ---------------------
|                                       | 2005                 
|                                       | (dollars in millions)
|Equity                                 | $2,728.0             
|Goodwill                               | (224.7)              
|Accumulated other comprehensive income | (84.7)               
|Tangible equity                        | $2,418.6             





We issue a combination of fixed-rate debt, principally long-term, and floating-rate debt, both long-term and short-term. AGFC obtains our fixed-rate funding through public issuances of long-term debt with maturities generally ranging from three to ten years. AGFC and AGFI obtain most of our floating-rate funding by issuing and refinancing commercial paper and through issuances of long-term, floating-rate debt. We issue commercial paper, with maturities ranging from 1 to 270 days, to banks, insurance companies, corporations, and other institutional investors. At September 30, 2005, short-term debt included $3.2 billion of commercial paper. AGFC also issues extendible commercial notes with initial maturities of up to 90 days, which AGFC may extend to 390 days. At September 30, 2005, short-term debt included $492.9 million of extendible commercial notes.



AGFC uses interest rate, foreign currency, and equity-indexed swap agreements in conjunction with specific debt issuances. AGFCs objective is to achieve net U.S. dollar, fixed or floating interest rate exposure at costs not materially different from costs AGFC would have incurred by issuing debt for the same net exposure without using derivatives. Accordingly, this cost differential did not have a material effect on the Companys net income during the nine months ended September 30, 2005 or September 30, 2004.



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. Certain AGFI and AGFC financing agreements effectively limit the amount of dividends they may pay. AGFIs ability to pay dividends depends on dividends or other funds it receives from its subsidiaries, primarily AGFC.





Liquidity Facilities



We maintain credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. At September 30, 2005, AGFC had committed credit facilities totaling $4.253 billion, including a $2.125 billion multi-year credit facility and a $2.125 billion 364-day credit facility. The 364-day facility allows for the conversion by the borrower of any outstanding loans at expiration into one-year term loans. AGFI is an eligible borrower under the 364-day facility for up to $400.0 million. The annual commitment fees for the facilities are based upon AGFCs long-term credit ratings and averaged 0.07% at September 30, 2005.



At September 30, 2005, AGFI and certain of its subsidiaries also had uncommitted credit facilities totaling $170.0 million which could be increased depending upon lender ability to participate its loans under the facilities.



Outstanding borrowings under all facilities totaled $60.0 million at September 30, 2005 and September 30, 2004. AGFC does not guarantee any borrowings of AGFI.





15





Liquidity



Our sources of funds include operations, 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. AGFI has also received capital contributions from its parent to support finance receivable growth and maintain targeted leverage.



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 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;

·

monitor finance receivables using our credit risk and asset/liability management systems;

·

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:



|                                                                              | Nine Months Ended
September 30,
|----------------------------------------------------------------------------- | -------------------------------
|                                                                              | 2005                           
|                                                                              | (dollars in millions)          
|Principal sources of cash:
Net issuances of debt                              | $2,992.7                       
|Operations                                                                    | 420.2                          
|Capital contributions                                                         | 20.0                           
|Total                                                                         | $3,432.9                       
|Principal uses of cash:
Net originations and purchases of finance receivables | $3,296.9                       
|Dividends paid                                                                | 68.0                           
|Total                                                                         | $3,364.9                       





Net cash from operations decreased for the nine months ended September 30, 2005 when compared to the same period in 2004 primarily due to an increase in net originations of real estate loans held for sale.





16





We believe 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 commercial paper as a percentage of total debt. At September 30, 2005 that percentage was 15% compared to 19% at September 30, 2004.

·

We spread commercial paper maturities throughout upcoming weeks and months.

·

We limit the amount of commercial paper that any one investor may hold.

·

We maintain credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. At September 30, 2005, we had $4.253 billion of committed bank credit facilities.

·

As of September 30, 2005, we had effective shelf registration statements that provided AGFC with the ability to issue up to $11.8 billion of long-term debt securities registered under the Securities Act of 1933.

·

We have established AGFC as an issuer in the international capital markets.

·

We have the ability to sell, on a whole loan basis, or securitize, a portion of our finance receivables.

·

We collect principal payments on our finance receivables. Principal payments collected totaled $8.1 billion in the past twelve months. We chose to reinvest most of these collections, plus additional amounts from borrowings, in new finance receivables during this period, but these 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 to dividend, subject to certain regulatory limits, cash from the securities sales.







ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION





Net Income

|                                   | Three Months Ended    |         | Nine Months Ended
|---------------------------------- | --------------------- | ------- | -----------------
|                                   | September 30,         |         | September 30,    
|                                   | 2005                  | 2004    |                  
|                                   | (dollars in millions)
|Net income                         | $102.3                | $114.9  |                  
|Amount change                      | $ (12.6)              | $  20.2 |                  
|Percent change                     | (11)%                 | 21%     |                  
|Return on average assets           | 1.62%                 | 2.27%   |                  
|Return on average equity           | 14.91%                | 21.48%  |                  
|Ratio of earnings to fixed charges | 1.67x                 | 2.06x   |                  





Net income and the related ratios for the three and nine months ended September 30, 2005 reflected the anticipated impact of Hurricane Katrina, which decreased net income by approximately $40.6 million. Due to the unprecedented nature of this event, there can be no assurance that our ultimate costs will not exceed these estimates. For further information regarding the impact of Hurricane Katrina on the Companys operating results, see Provision for Finance Receivable Losses, as well as Other Revenues and Insurance Losses and Loss Adjustment Expenses.





17





See Note 6. of the Notes to Condensed Consolidated Financial Statements for information on the results of the Companys business segments.



Factors that affected the Companys operating results were as follows:





Finance Charges



Finance charges by type were as follows:



|                        | Three Months Ended    |              | Nine Months Ended
|----------------------- | --------------------- | ------------ | -----------------
|                        | September 30,         |              | September 30,    
|                        | 2005                  | 2004         |                  
|                        | (dollars in millions)
|Real estate loans       | $     388.9           | $     302.4  |                  
|Non-real estate loans   | 161.0                 | 157.8        |                  
|Retail sales finance    | 42.8                  | 47.0         |                  
|Total                   | $     592.7           | $     507.2  |                  
|Amount change           | $       85.5          | $       62.0 |                  
|Percent change          | 17%                   | 14%          |                  
|Average net receivables | $23,127.2             | $18,420.2    |                  
|Yield                   | 10.18%                | 10.96%       |                  





Finance charges increased due to the following:



|                                      | Three Months Ended    |         | Nine Months Ended
|------------------------------------- | --------------------- | ------- | -----------------
|                                      | September 30,         |         | September 30,    
|                                      | 2005                  | 2004    |                  
|                                      | (dollars in millions)
|Increase in average net receivables   | $117.9                | $117.4  |                  
|Decrease in yield                     | (32.4)                | (55.4)  |                  
|(Decrease) increase in number of days | -                     | -       |                  
|Total                                 | $  85.5               | $  62.0 |                  





18





Average net receivables by type and changes in average net receivables when compared to the same periods for the previous year were as follows:



|                      | Three Months Ended September 30,
|--------------------- | --------------------------------
|                      | 2005                            
|                      | Amount                          
|                      | (dollars in millions)           
|Real estate loans     | $18,584.2                       
|Non-real estate loans | 3,139.3                         
|Retail sales finance  | 1,403.7                         
|Total                 | $23,127.2                       
|Percent change        |                                 





|                      | Nine Months Ended September 30,
|--------------------- | -------------------------------
|                      | 2005                           
|                      | Amount                         
|                      | (dollars in millions)          
|Real estate loans     | $17,637.1                      
|Non-real estate loans | 3,079.4                        
|Retail sales finance  | 1,373.5                        
|Total                 | $22,090.0                      
|Percent change        |                                





The low interest rate environment contributed to the increase in real estate loan average net receivables. Real estate loan production arising from our centralized real estate origination services represented $4.1 billion of our real estate loan originations during the last twelve months. In addition, real estate loan production continued to benefit from correspondent relationships we have established.



Yield by type and changes in yield in basis points (bp) when compared to the same periods for the previous year were as follows:



|                      | Three Months Ended September 30,
|--------------------- | --------------------------------
|                      | 2005                            
|                      | Yield                           
|Real estate loans     | 8.30%                           
|Non-real estate loans | 20.41                           
|Retail sales finance  | 12.11                           
|Total                 | 10.18                           





19







|                      | Nine Months Ended September 30,
|--------------------- | -------------------------------
|                      | 2005                           
|                      | Yield                          
|Real estate loans     | 8.37%                          
|Non-real estate loans | 20.81                          
|Retail sales finance  | 12.71                          
|Total                 | 10.37                          





Yield decreased for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 primarily due to the low interest rate environment and the larger proportion of finance receivables that are real estate loans. Retail sales finance yield also decreased for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 due to the change in the term over which we amortize discounts taken from retail merchants. This reflects a change in the mix to longer term promotional products caused by competitive market conditions.





Insurance Revenues



Insurance revenues were as follows:



|                | Three Months Ended    |         | Nine Months Ended
|--------------- | --------------------- | ------- | -----------------
|                | September 30,         |         | September 30,    
|                | 2005                  | 2004    |                  
|                | (dollars in millions)
|Earned premiums | $39.1                 | $43.7   |                  
|Commissions     | 0.2                   | 0.3     |                  
|Total           | $39.3                 | $44.0   |                  
|Amount change   | $(4.7)                | $ (2.3) |                  
|Percent change  | (11)%                 | (5)%    |                  





Earned premiums decreased for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 primarily due to declining credit and non-credit premium volume. We continued to experience decreases in the number of non-real estate loan customers, who historically have purchased the majority of our insurance products, due to the low mortgage interest rate environment.





20





Other Revenues



Other revenues were as follows:



|                                                            | Three Months Ended    |       | Nine Months Ended
|----------------------------------------------------------- | --------------------- | ----- | -----------------
|                                                            | September 30,         |       | September 30,    
|                                                            | 2005                  | 2004  |                  
|                                                            | (dollars in millions)
|Net service fee income from a non-subsidiary
affiliate      | $  97.9               | $59.7 |                  
|Miscellaneous:
Investment revenue                           | 22.0                  | 23.9  |                  
|Writedowns on real estate owned                             | (1.8)                 | (2.6) |                  
|Net (loss) gain on sales of real estate loans
held for sale | (0.2)                 | 0.9   |                  
|Net recovery on sales of real estate owned                  | 1.2                   | 0.9   |                  
|Derivative income  change in fair value                    | 2.4                   | -     |                  
|Net interest income on real estate loans
held for sale      | 1.6                   | 0.2   |                  
|Other                                                       | 1.9                   | 2.2   |                  
|Total                                                       | $125.0                | $85.2 |                  
|Amount change                                               | $  39.8               | $23.5 |                  
|Percent change                                              | 47%                   | 38%   |                  





Other revenues increased for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 primarily due to higher net service fee income from a non-subsidiary affiliate, partially offset by lower investment revenue. The increase in other revenues for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 was also offset by lower net gain on sales of real estate loans held for sale due to a $3.2 million market value provision related to the anticipated impact of Hurricane Katrina charged to other revenues in third quarter 2005.



Net service fee income from a non-subsidiary affiliate increased due to higher AIG Bank real estate loan production using our centralized real estate segments services. Our mortgage origination subsidiaries have entered into agreements with AIG Bank whereby for fees these subsidiaries provide marketing services, certain origination processing services, loan servicing, and related services for AIG Banks origination and sale of non-conforming residential real estate loans. The subsidiaries assume financial responsibility for recourse exposure pertaining to these loans. We net the provisions for recourse from service fees in net service fee income from a non-subsidiary affiliate.



Investment revenue was affected by the following:



|                                           | Three Months Ended    |             | Nine Months Ended
|------------------------------------------ | --------------------- | ----------- | -----------------
|                                           | September 30,         |             | September 30,    
|                                           | 2005                  | 2004        |                  
|                                           | (dollars in millions)
|Average invested assets                    | $1,438.8              | $1,370.3    |                  
|Investment portfolio yield                 | 6.14%                 | 6.60%       |                  
|Net realized gains (losses) on investments | $       -             | $       0.5 |                  





21





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:



|                   | Three Months Ended    |              | Nine Months Ended
|------------------ | --------------------- | ------------ | -----------------
|                   | September 30,         |              | September 30,    
|                   | 2005                  | 2004         |                  
|                   | (dollars in millions)
|Long-term debt     | $     197.8           | $     140.3  |                  
|Short-term debt    | 40.8                  | 27.2         |                  
|Total              | $     238.6           | $     167.5  |                  
|Amount change      | $       71.1          | $       35.2 |                  
|Percent change     | 42%                   | 27%          |                  
|Average borrowings | $21,447.6             | $16,992.7    |                  
|Borrowing cost     | 4.42%                 | 3.94%        |                  





Interest expense increased due to the following:



|                                      | Three Months Ended    |       | Nine Months Ended
|------------------------------------- | --------------------- | ----- | -----------------
|                                      | September 30,         |       | September 30,    
|                                      | 2005                  | 2004  |                  
|                                      | (dollars in millions)
|Increase in average borrowings        | $ 43.9                | $36.3 |                  
|Increase (decrease) in borrowing cost | 27.2                  | (1.1) |                  
|Total                                 | $ 71.1                | $35.2 |                  





Average borrowings by type and changes in average borrowings when compared to the same periods for the previous year were as follows:



|                | Three Months Ended September 30,
|--------------- | --------------------------------
|                | 2005                            
|                | Amount                          
|                | (dollars in millions)           
|Long-term debt  | $17,341.8                       
|Short-term debt | 4,105.8                         
|Total           | $21,447.6                       
|Percent change  |                                 





22







|                | Nine Months Ended September 30,
|--------------- | -------------------------------
|                | 2005                           
|                | Amount                         
|                | (dollars in millions)          
|Long-term debt  | $15,996.5                      
|Short-term debt | 4,469.9                        
|Total           | $20,466.4                      
|Percent change  |                                





AGFC issued $6.1 billion of long-term debt during the last twelve months. We used the proceeds of these long-term debt issuances to support finance receivable growth and to refinance maturing debt.



Borrowing cost by type and changes in borrowing cost in basis points when compared to the same periods for the previous year were as follows:



|                | Three Months Ended September 30,
|--------------- | --------------------------------
|                | 2005                            
|                | Rate                            
|Long-term debt  | 4.54%                           
|Short-term debt | 3.96                            
|Total           | 4.42                            





|                | Nine Months Ended September 30,
|--------------- | -------------------------------
|                | 2005                           
|                | Rate                           
|Long-term debt  | 4.46%                          
|Short-term debt | 3.47                           
|Total           | 4.23                           





Short-term market interest rates have risen significantly since mid-2004, when interest rates were at their lowest levels since the 1950s. We expect our borrowing costs to continue to rise over the remainder of 2005, particularly for short-term debt. Our actual future borrowing costs will depend on general interest rate levels and market credit spreads, which are influenced by our credit ratings and the market perception of credit risk for the Company and possibly our affiliates, including our ultimate parent, AIG.





23





Operating Expenses



Operating expenses were as follows:



|                                                              | Three Months Ended    |         | Nine Months Ended
|------------------------------------------------------------- | --------------------- | ------- | -----------------
|                                                              | September 30,         |         | September 30,    
|                                                              | 2005                  | 2004    |                  
|                                                              | (dollars in millions)
|Salaries and benefits                                         | $140.8                | $120.5  |                  
|Other operating expenses                                      | 77.1                  | 75.9    |                  
|Total                                                         | $217.9                | $196.4  |                  
|Amount change                                                 | $  21.5               | $  26.9 |                  
|Percent change                                                | 11%                   | 16%     |                  
|Operating expenses as a percentage of
average net receivables | 3.77%                 | 4.27%   |                  





Operating expenses increased for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 primarily due to growth in our centralized real estate business segment, including higher salaries and benefits expenses. Approximately $66.7 million of the Companys operating expenses for the three months ended September 30, 2005 and $191.2 million of such expenses for the nine months ended September 30, 2005 were directly related to the centralized real estate business segment, compared to $51.6 million for the three months ended September 30, 2004 and $148.6 million for the nine months ended September 30, 2004. The increase in salaries and benefits reflected approximately 750 centralized real estate employees hired during the last twelve months. The decrease in operating expenses as a percentage of average net receivables for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 reflected higher average net receivables and continued emphasis on controlling operating expenses, partially offset by growth in our centralized real estate business segment.





24





Provision for Finance Receivable Losses



|                                        | Three Months Ended    |         | At or for the
Nine Months Ended
|--------------------------------------- | --------------------- | ------- | -------------------------------
|                                        | September 30,         |         | September 30,                  
|                                        | 2005                  | 2004    |                                
|                                        | (dollars in millions)
|Provision for finance receivable losses | $119.5                | $ 69.1  |                                
|Amount change                           | $  50.4               | $(13.3) |                                
|Percent change                          | 73%                   | (16)%   |                                
|Net charge-offs                         | $  62.7               | $ 69.1  |                                
|Charge-off ratio                        | 1.09%                 | 1.51%   |                                
|Charge-off coverage                     | 2.09x                 | 1.65x   |                                
|60 day+ delinquency                     |                       |         |                                
|Delinquency ratio                       |                       |         |                                
|Allowance for finance receivable losses |                       |         |                                
|Allowance ratio                         |                       |         |                                





The increase in the provision for finance receivable losses for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 was primarily due to a $56.8 million addition to the allowance for finance receivable losses through the provision for finance receivable losses in September 2005 related to the anticipated impact of Hurricane Katrina on our net charge-offs.



Net charge-offs by type and changes in net charge-offs when compared to the same periods for the previous year were as follows:



|                      | Three Months Ended September 30,
|--------------------- | --------------------------------
|                      | 2005                            
|                      | Amount                          
|                      | (dollars in millions)           
|Real estate loans     | $15.3                           
|Non-real estate loans | 39.3                            
|Retail sales finance  | 8.1                             
|Total                 | $62.7                           





|                      | Nine Months Ended September 30,
|--------------------- | -------------------------------
|                      | 2005                           
|                      | Amount                         
|                      | (dollars in millions)          
|Real estate loans     | $  44.2                        
|Non-real estate loans | 118.1                          
|Retail sales finance  | 25.0                           
|Total                 | $187.3                         





25





The improvement in net charge-offs for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 was primarily due to the improving economy.



Charge-off ratios by type and changes in charge-off ratios in basis points when compared to the same periods for the previous year were as follows:



|                      | Three Months Ended September 30,
|--------------------- | --------------------------------
|                      | 2005                            
|                      | Ratio                           
|Real estate loans     | 0.33%                           
|Non-real estate loans | 5.01                            
|Retail sales finance  | 2.32                            
|Total                 | 1.09                            





|                      | Nine Months Ended September 30,
|--------------------- | -------------------------------
|                      | 2005                           
|                      | Ratio                          
|Real estate loans     | 0.34%                          
|Non-real estate loans | 5.12                           
|Retail sales finance  | 2.43                           
|Total                 | 1.14                           





The improvement in the charge-off ratios for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 was primarily due to the improving economy and a higher proportion of average net receivables that were real estate loans.



Delinquency based on contract terms in effect by type and changes in delinquency when compared to the same period for the previous year were as follows:



|                      | September 30,        
|--------------------- | ---------------------
|                      | 2005                 
|                      | Amount               
|                      | (dollars in millions)
|Real estate loans     | $276.0               
|Non-real estate loans | 147.2                
|Retail sales finance  | 31.3                 
|Total                 | $454.5               





Delinquency at September 30, 2005 was favorably impacted by the improving economy.





26





Delinquency ratios based on contract terms in effect by type and changes in delinquency ratios in basis points when compared to the same period for the previous year were as follows:



|                      | September 30,
|--------------------- | -------------
|                      | 2005         
|                      | Ratio        
|Real estate loans     | 1.48%        
|Non-real estate loans | 4.26         
|Retail sales finance  | 2.00         
|Total                 | 1.92         





The delinquency ratio at September 30, 2005 improved when compared to September 30, 2004 primarily due to 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 increase in the allowance for finance receivable losses at September 30, 2005 when compared to September 30, 2004 was through the provision for finance receivable losses during the period totaling $66.8 million. The increase was primarily due to a $56.8 million addition to the allowance for finance receivable losses through the provision for finance receivable losses in September 2005 due to the anticipated additional finance receivable charge-offs related to the impact of Hurricane Katrina. We expect that we will not know the total amount of these net charge-offs until late 2006.



The allowance ratio at September 30, 2005 decreased when compared to September 30, 2004 primarily due to the improving economy and a higher proportion of net finance receivables that were real estate loans, partially offset by the addition to the allowance for finance receivable losses in September 2005 reflecting the anticipated additional finance receivable charge-offs due to the impact of Hurricane Katrina.



Charge-off coverage, which compares the allowance for finance receivable losses to net charge-offs (annualized), improved for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 due to a higher allowance for finance receivable losses and lower net charge-offs.





Insurance Losses and Loss Adjustment Expenses



Insurance losses and loss adjustment expenses were as follows:



|                           | Three Months Ended    |        | Nine Months Ended
|-------------------------- | --------------------- | ------ | -----------------
|                           | September 30,         |        | September 30,    
|                           | 2005                  | 2004   |                  
|                           | (dollars in millions)
|Claims incurred            | $19.6                 | $22.3  |                  
|Change in benefit reserves | (2.2)                 | (1.0)  |                  
|Total                      | $17.4                 | $21.3  |                  
|Amount change              | $(3.9)                | $  3.9 |                  
|Percent change             | (18)%                 | 22%    |                  



27





Insurance losses and loss adjustment expenses decreased for the three and nine months ended September 30, 2005 when compared to the same periods in 2004 primarily due to lower credit and non-credit insurance claims incurred, partially offset by a $2.4 million increase in reserves established for the anticipated impact of Hurricane Katrina.





Provision for Income Taxes



|                           | Three Months Ended    |         | Nine Months Ended
|-------------------------- | --------------------- | ------- | -----------------
|                           | September 30,         |         | September 30,    
|                           | 2005                  | 2004    |                  
|                           | (dollars in millions)
|Provision for income taxes | $  61.4               | $  67.2 |                  
|Amount change              | $  (5.8)              | $  10.2 |                  
|Percent change             | (9)%                  | 18%     |                  
|Pretax income              | $163.7                | $182.1  |                  
|Effective income tax rate  | 37.51%                | 36.88%  |                  





Provision for income taxes decreased for the three months ended September 30, 2005 when compared to the same period in 2004 due to lower pretax income, partially offset by a higher effective income tax rate. Provision for income taxes increased for the nine months ended September 30, 2005 when compared to the same period in 2004 due to higher pretax income and a higher effective income tax rate.







Asset/Liability Management



To reduce the risk associated with unfavorable changes in interest rates not offset by favorable changes in yield of our finance receivables, we monitor the anticipated cash flows of our assets and liabilities, principally our finance receivables and debt. We fund finance receivables with a combination of fixed-rate and floating-rate debt and equity. We base the mix of fixed-rate and floating-rate debt, in part, on the nature of the finance receivables being supported.



We issue fixed-rate, long-term debt as the primary source of fixed-rate debt. AGFC also alters the nature of certain floating-rate funding by using swap agreements to create synthetic fixed-rate, long-term debt, to limit 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 40% of our borrowings at September 30, 2005 compared to 37% at September 30, 2004. Adjustable-rate net finance receivables represented approximately 13% of our net finance receivables at September 30, 2005 compared to 20% at September 30, 2004.





28





Item 3.  Quantitative and Qualitative Disclosures About Market Risk.





The fair values of certain of our assets and liabilities are sensitive to changes in market interest rates. The impact of changes in interest rates would be reduced by the fact that increases (decreases) in fair values of assets would be partially offset by corresponding changes in fair values of liabilities. In the aggregate, the estimated impact of an immediate and sustained 100 basis point increase or decrease in interest rates on the fair values of our interest rate-sensitive financial instruments would not be material to our financial position.



The estimated increases (decreases) in fair values of interest rate-sensitive financial instruments were as follows:



|                                                                             | September 30, 2005     |            | December 31, 2004
|---------------------------------------------------------------------------- | ---------------------- | ---------- | -----------------
|                                                                             | +100 bp                | -100 bp    |                  
|                                                                             | (dollars in thousands)
|Assets
Net finance receivables, less
allowance for finance receivable
losses | $(1,052,535)           | $1,199,545 |                  
|Fixed-maturity investment securities                                         | (80,040)               | 83,344     |                  
|Swap agreements                                                              | 95,891                 | (101,776)  |                  
|Liabilities
Long-term debt                                                   | (389,474)              | 407,532    |                  
|Swap agreements                                                              | (29,489)               | 32,462     |                  





We derived the changes in fair values by modeling estimated cash flows of certain of our assets and liabilities. The assumptions we used adjusted cash flows to reflect changes in prepayments and calls, but did not consider loan originations, debt issuances, or new investment purchases.



Readers should exercise care in drawing conclusions based on the above analysis. While these changes in fair values provide a measure of interest rate sensitivity, they do not represent our expectations about the impact of interest rate changes on our financial results. This analysis is also based on our exposure at a particular point in time and incorporates numerous assumptions and estimates. It also assumes an immediate change in interest rates, without regard to the impact of certain business decisions or initiatives that we would likely undertake to mitigate or eliminate some or all of the adverse effects of the modeled scenarios.



29





Item 4.  Controls and Procedures.





(a)

Evaluation of disclosure controls and procedures



The conclusions of our principal executive officer and principal financial officer about the effectiveness of the Companys disclosure controls and procedures based on their evaluation of these controls and procedures as of September 30, 2005 are as follows:



The Companys disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is recorded, processed, summarized and reported within required timeframes. The Companys disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.



The Companys management, including its principal executive officer and principal financial officer, evaluates the effectiveness of our disclosure controls and procedures as of the end of each quarter. Based on an evaluation of the disclosure controls and procedures as of September 30, 2005, the Companys principal executive officer and principal financial officer have concluded that the disclosure controls and procedures have functioned effectively and that the condensed consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.



(b)

Changes in internal control over financial reporting



There was no change in the Companys internal control over financial reporting during the three months ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.







PART II  OTHER INFORMATION





Item 1.  Legal Proceedings.





See Note 7. of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.







Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.





The Company had no unregistered sales of equity securities.







Item 3.  Defaults Upon Senior Securities.





The Company had no defaults upon senior securities.





30





Item 4.  Submission of Matters to a Vote of Security Holders.





The Company did not submit any matters to a vote of its security holder.







Item 5.  Other Information.





The Company had no other information to report.







Item 6.  Exhibits.





Exhibits are listed in the Exhibit Index beginning on page 33 herein.



31





Signature





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





|      | AMERICAN GENERAL FINANCE, INC. |                                                                                                            
|----- | ------------------------------ | -----------------------------------------------------------------------------------------------------------
|      |                                | (Registrant)                                                                                               
|Date: | November 1, 2005               |                                                                                                            
|      |                                |                                                                                                            
|      |                                | Senior Vice President and Chief Financial
Officer
(Duly Authorized Officer and Principal
Financial Officer)



32





Exhibit Index





Exhibit



(12)

Computation of Ratio of Earnings to Fixed Charges



(31.1)

Rule 13a-14(a)/15d-14(a) Certifications of the President and Chief Executive Officer of American General Finance, Inc.



(31.2)

Rule 13a-14(a)/15d-14(a) Certifications of the Senior Vice President and Chief Financial Officer of American General Finance, Inc.



(32)

Section 1350 Certifications







33