UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.  20549  FORM 10-K  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2009  OR


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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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|Commission file number 2-82985

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ̈      No þ  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ̈      No þ  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 þ      No ̈  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ̈      No ̈  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer ̈             Accelerated filer  ̈             Non-accelerated filer þ             Smaller reporting company  ̈ (Do not check if a smaller reporting company)  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈      No þ  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 4, 2010, there were 2,000,000 shares of the registrants common stock, $.50 par value, outstanding.   TABLE OF CONTENTS


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|         | Item   |                                                                                                              | Page
|Part I   | 1.     | Business                                                                                                     | 3   
|         | 1A.    | Risk Factors                                                                                                 | 19  
|         | 1B.    | Unresolved Staff Comments                                                                                    | 24  
|         | 2.     | Properties                                                                                                   | 25  
|         | 3.     | Legal Proceedings                                                                                            | 25  
|         | 4.     | Reserved                                                                                                     |     
|Part II  | 5.     | Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities | 26  
|         | 6.     | Selected Financial Data                                                                                      | 27  
|         | 7.     | Managements Discussion and Analysis of Financial Condition and
Results of Operations                        | 29  
|         | 7A.    | Quantitative and Qualitative Disclosures About Market Risk                                                   | 80  
|         | 8.     | Financial Statements and Supplementary Data                                                                  | 81  
|         | 9.     | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure                         | **  
|         | 9A(T). | Controls and Procedures                                                                                      | 154 
|         | 9B.    | Other Information                                                                                            | *** 
|Part III | 10.    | Directors, Executive Officers and Corporate Governance                                                       | *   
|         | 11.    | Executive Compensation                                                                                       | *   
|         | 12.    | Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters               | *   
|         | 13.    | Certain Relationships and Related Transactions, and Director
Independence                                    | *   
|         | 14.    | Principal Accountant Fees and Services                                                                       | 156 
|Part IV  | 15.    | Exhibits and Financial Statement Schedules                                                                   | 157 

* Items 10, 11, 12, and 13 are not included in this report, 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 in this report, as no information was required by Item 304 of Regulation S-K.  *** Item 9B is not included in this report because it is inapplicable.  2    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s website, www.sec.gov, contains these reports and other information that registrants (including AGFI) file electronically with the SEC.  The following reports are available free of charge through our website, www.agfinance.com, as soon as reasonably practicable after we file them with or furnish them to the SEC:  · Annual Reports on Form 10-K; · Quarterly Reports on Form 10-Q; · Current Reports on Form 8-K; and · amendments to those reports.  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.    PART I  Item 1.  Business.  GENERAL  American General Finance, Inc. (AGFI, or collectively with its subsidiaries, whether directly or indirectly owned, the Company, we, or our) 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 primarily in a broad range of insurance and insurance-related activities in the United States and abroad. Effective June 29, 2007, AGFI became a direct wholly owned subsidiary of AIG Capital Corporation, a direct wholly owned subsidiary of AIG. AIG Capital Corporation also holds full or majority interests in other AIG financial services affiliates.  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 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 2, 2007, we acquired Ocean Finance and Mortgages Limited (Ocean), which is headquartered in Staffordshire, England. As a finance broker in the United Kingdom, Ocean offers primarily home owner loans, mortgages, refinancings, and consumer loans. We accounted for this acquisition using purchase accounting, which dictates that the total consideration for a business must be allocated among the fair values of all the underlying assets and liabilities acquired.  Effective February 29, 2008, we purchased a substantial portion of Equity One, Inc.s consumer branch finance receivable portfolio consisting of $1.0 billion of real estate loans, $289.8 million of non-real estate loans, and $156.0 million of retail sales finance receivables.   3     Item 1.  Continued    Effective June 17, 2008, Wilmington Finance, Inc. (WFI), a wholly owned subsidiary of AGFC, ceased its wholesale originations (originations through mortgage brokers) but continued its retail originations (originations directly with consumers) at a substantially reduced level as a result of our decision to significantly reduce our mortgage banking operations primarily due to the slower U.S. housing market.Currently, WFIs limited loan origination activity relates to the financial remediation program discussed in Note 3 of the Notes to Consolidated Financial Statements in Item 8.  In September 2008, AIG and the Company experienced a severe strain on their liquidity. Since September 2008, management has implemented measures to preserve our liquidity, including an on-balance sheet securitization, portfolio sales, expense reductions, branch closures, reductions in finance receivable originations, and suspension of our centralized real estate originations and purchases. For further information, see Managements Discussion and Analysis of Financial Condition and Results of Operations  Going Concern Consideration in Item 7 and Going Concern Consideration in Note 1 of the Notes to Consolidated Financial Statements in Item 8.  At December 31, 2009, the Company had 1,213 branch offices in 40 states, Puerto Rico, and the U.S. Virgin Islands; foreign operations in the United Kingdom; and approximately 6,600 employees. Our executive offices are located in Evansville, Indiana.   SEGMENTS  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.  Revenues, pretax (loss) income, and assets for our three business segments and consolidated totals were as follows:  At or for the Years Ended December 31,(dollars in thousands)200920082007Branch:
Revenues$  1,790,610$  2,066,101$  1,972,801Pretax (loss) income(358,676)(264,334)351,407Assets11,605,98914,777,00714,085,109Centralized real estate:
Revenues$     363,837$     649,379$     553,811Pretax loss(405,535)(293,830)(275,358)Assets6,463,7749,695,65611,201,192Insurance:
Revenues$     140,819$     191,076$     196,830Pretax income55,72082,334101,524Assets937,6841,034,4741,613,176Consolidated:
Revenues$  2,260,954$  2,781,025$  2,842,180Pretax (loss) income(909,190)(950,693)142,043Assets22,780,12926,547,37530,620,147  4     Item 1.  Continued    See Note 27 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 1,213 branch offices and its centralized support operations, the 5,500 employees of the branch business segment serviced 1.4 million real estate loans, non-real estate loans, and retail sales finance accounts totaling $12.3 billion at December 31, 2009.  Our branch customers encompass a wide range of borrowers. In the consumer finance industry, they are described as prime or near-prime at one extreme and non-prime or sub-prime at the other. These customers incomes are generally near the national median but vary, as do their debt-to-income ratios, employment and residency stability, and credit repayment histories. In general, branch customers have lower credit quality than our centralized real estate customers and require significant levels of servicing and, as a result, we charge them interest rates higher than our centralized real estate customers to compensate us for such services and related credit risks.   Structure and Responsibilities.Branch personnel originate real estate loans and non-real estate loans, purchase retail sales finance contracts from retail merchants, offer credit and non-credit insurance and ancillary products to the loan customers, and service these receivables. Branch managers establish retail merchant relationships, identify portfolio acquisition opportunities, manage finance receivable credit quality, and are responsible for branch profitability. Branch managers also hire and train the branch staff and supervise their work. The Company coordinates branch staff training through centrally developed training programs to maintain quality customer service.  We continuously review the performance of our individual branches and the markets they serve, as well as economic conditions. During 2009, we closed 200 branch offices. Customers of closed branch offices are primarily serviced by our other nearby offices.   Products and Services.Real estate loans are secured by first or second mortgages on residential real estate (including manufactured housing), generally have maximum original terms of 360 months, and are usually considered non-conforming. At December 31, 2009, 14% of our branch real estate loans were second mortgages. Real estate loans may be closed-end accounts or open-end home equity lines of credit and are primarily fixed-rate products. Our real estate loans do not contain any borrower payment options that allow the loan principal balance to increase through negative loan amortization. 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, usually over an agreed upon period between 15 and 30 years. At December 31, 2009, 8% of our branch real estate loans were adjustable-rate mortgages, some of which contain a fixed-rate for the first 24, 36, or 48 months and then convert to an adjustable-rate for the remainder of the term. At December 31, 2009, $16.0 million (less than 1%) of our branch business segment real estate loans had this conversion feature and had not yet converted to an adjustable rate.  Non-real estate loans are secured by consumer goods, automobiles, or other personal property or are unsecured, and are generally fixed-rate, fixed-term loans with maximum original terms of 60 months. We also offer unsecured lines of credit to customers that meet the criteria in our credit risk policies.  5     Item 1.  Continued    We purchase retail sales contracts and provide revolving retail sales financing 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 the amount financed calculated after the most recent purchase or 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 we describe under Insurance Business Segment.   Customer Development.We solicit finance receivable customers through a variety of channels including mail, E-commerce, and telephone calls.  We solicit new prospects, as well as current and former customers, through a variety of mail offers. Our 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, we purchase prospect lists from major list vendors based on predetermined selection criteria. Mail solicitations include invitations to apply and guaranteed loan offers.  E-commerce provides another source of new customers. Our website includes a brief, user-friendly credit application that, upon completion, is automatically routed to the branch office nearest the consumer. We have established E-commerce relationships with a variety of search engines to bring prospects to our website. Our website also has a branch office locator feature so potential customers can readily find the branch office nearest to them and can contact branch personnel directly.  New customer relationships also begin through our alliances with approximately 300 retail merchants across the United States. After a customer utilizes the merchants retail sales financing option, we may purchase 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, if permitted. During 2009, our active retail merchant relationships declined from 21,500 to 300, reflecting the suspension of dealer operating agreements, which may be reactivated in the future.  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.  Traditionally, our growth strategy has been to supplement our solicitation of customers through mail, E-commerce, and retail sales financing activities with portfolio acquisitions. These acquisitions included real estate loans, non-real estate loans, and retail sales finance receivables originated by other lenders whose customers met our credit quality standards and profitability objectives. Our branch and field operations management also sought sources of potential portfolio acquisitions. However, with our current limited funding sources, we are not pursuing acquisition opportunities.  6     Item 1.  Continued    Account Servicing.Establishing and maintaining customer relationships is very important to us. Branch personnel contact our real estate loan, non-real estate loan, and retail sales finance customers through solicitation or collection phone calls to assess customers current financial situations to determine if they desire additional funds. Centralized support operations personnel contact our retail sales finance customers through solicitation or collection calls. Solicitation and collection efforts are opportunities to help our customers solve their temporary financial problems and to maintain our customer relationships.  See Note 2 of the Notes to Consolidated Financial Statements in Item 8 for our Troubled Debt Restructuring (TDR) policy, charge-off policy, and policies regarding delinquent accounts. If recovery efforts are feasible, we transfer charged-off accounts to our centralized charge-off recovery operation for ultimate disposition.   Selected Financial Information.Amount, number, and average size of total net finance receivables originated and renewed and amount and number of total net finance receivables (transferred/sold) purchased, in each case, by type for the branch business segment were as follows:  Years Ended December 31,200920082007Branch originated and renewed

Amount (in thousands):
Real estate loans$   281,430$1,567,707$2,936,646Non-real estate loans2,051,4613,297,2323,858,660Retail sales finance687,8802,198,9322,472,170Total$3,020,771$7,063,871$9,267,476Number:
Real estate loans3,95924,79144,619Non-real estate loans524,264730,334842,503Retail sales finance214,338764,868907,805Total742,5611,519,9931,794,927Average size (to nearest dollar):
Real estate loans$71,086$63,237$65,816Non-real estate loans3,9134,5154,580Retail sales finance3,2092,8752,723Branch net (transferred/sold) purchased

Amount (in thousands):
Real estate loans$(277,246)$1,018,888$25,130Non-real estate loans-289,7713,968Retail sales finance470167,3533,669Total$(276,776)$1,476,012$32,767Number:
Real estate loans(3,614)17,886483Non-real estate loans-80,951416Retail sales finance6930,0831,791Total(3,545)128,9202,690   During 2009, we transferred $278.2 million of branch segment real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance  7     Item 1.  Continued    receivables for the foreseeable future. In 2009, we sold $60.6 million of branch segment finance receivables held for sale.  Amount, number, and average size of net finance receivables by type for the branch business segment were as follows:  December 31,200920082007Branch net finance receivables

Amount (in thousands):
Real estate loans$  7,980,604$  9,248,523$  8,425,567Non-real estate loans3,186,5774,030,6703,890,399Retail sales finance1,130,1552,211,3092,165,910Total$12,297,336$15,490,502$14,481,876Number:
Real estate loans149,335170,543160,361Non-real estate loans843,258978,062931,432Retail sales finance436,435899,877953,192Total1,429,0282,048,4822,044,985Average size (to nearest dollar):
Real estate loans$53,441$54,230$52,541Non-real estate loans3,7794,1214,177Retail sales finance2,5902,4572,272   Selected financial data for the branch business segment were as follows:  At or for the Years Ended December 31,200920082007Branch yield:
Real estate loans9.41%10.19%11.06%Non-real estate loans20.4420.2020.74Retail sales finance12.1111.0811.45Total12.5612.9513.69Branch charge-off ratio:
Real estate loans3.36%1.73%0.82%Non-real estate loans8.315.944.20Retail sales finance5.603.352.20Total4.913.071.91Branch delinquency ratio:
Real estate loans7.52%5.29%3.52%Non-real estate loans5.055.474.12Retail sales finance5.783.272.23Total6.685.043.49  8     Item 1.  Continued    See Note 27 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 services generally non-conforming residential real estate loans that were originated or purchased through distribution channels other than our branches. MorEquity, Inc. (MorEquity) and WFI are included in this segment. Real estate loans in our centralized real estate business segment have typically had higher credit quality than the real estate loans originated by our branch business segment and are thereby cost-effectively serviced centrally. Our centralized real estate customers are generally described as either prime or near-prime, but for reasons such as elevated debt-to-income ratios, lack of income stability, the level of income disclosure and verification required for a conforming mortgage, as well as credit repayment history or similar measurements, or convenience, they have applied for a non-conforming mortgage. The distribution channels include direct lending to customers and portfolio acquisitions from third party lenders. However, with our current limited funding sources, we are not pursuing originations or acquisitions. At December 31, 2009, the centralized real estate business segment had approximately 100 employees, compared to approximately 200 employees at December 31, 2008, as a result of our decision to significantly reduce our mortgage banking operations, including ceasing WFIs wholesale originations effective June 17, 2008.   Structure and Responsibilities.During 2009, our centralized real estate business segment originated $7.5 million of real estate loans, compared to $100.8 million in 2008. This decrease was primarily due to our limiting of lending activities while focusing on liquidity. Historically, WFI originated non-conforming residential real estate loans and sold those loans to investors with servicing released to the purchaser. Effective June 17, 2008, WFI ceased its wholesale originations (originations through mortgage brokers) but continued its retail originations (originations directly with consumers) at a substantially reduced level. Currently, WFIs limited loan origination activity relates only to the financial remediation program discussed in Note 3 of the Notes to Consolidated Financial Statements in Item 8.     Products and Services.Real estate loans are secured by first or second mortgages on residential real estate and are generally considered non-conforming. At December 31, 2009, less than 1% of our centralized real estate loans were second mortgages. We offer a broad range of fixed and adjustable-rate loans that meet our customers needs. Real estate loans generally have maximum original terms of 360 months but we also offer loans with maximum original terms of 480 months and 600 months, some of which require a balloon payment at the end of 360 months. Our real estate loans do not contain any borrower payment options that allow the loan principal balance to increase through negative loan amortization. At December 31, 2009, 5% of our centralized real estate loans were adjustable-rate mortgages, some of which contain a fixed-rate for the first 24, 36, 48, or 60 months and then convert to an adjustable-rate for the remainder of the 360 months. At December 31, 2009, $85.5 million, or 1%, of our total centralized real estate business segment loans outstanding had this conversion feature and had not yet converted to an adjustable rate.  Historically, MorEquity originated non-conforming residential real estate loans primarily through refinancing loans with existing customers and, to a lesser extent, through mail solicitations.  9     Item 1.  Continued    From a centralized location, MorEquity serviced approximately 23,000 real estate loans totaling $4.5 billion at December 31, 2009, compared to approximately 47,000 real estate loans totaling $9.0 billion at December 31, 2008. At December 31, 2009, approximately 10,000 of MorEquitys loans totaling $1.9 billion were serviced by a third party in conjunction with the 2009 securitization of these real estate loans. These real estate loans were generated through:  · portfolio acquisitions from third party lenders; · our mortgage origination subsidiaries; · refinancing existing mortgages; · advances on home equity lines of credit; or · correspondent relationships.  At December 31, 2009, MorEquity had $761.1 million of interest only real estate loans. Our underwriting criteria for interest only loans included borrower qualification on a fully amortizing payment basis and excluded investment properties. At December 31, 2009, MorEquity also had $530.2 million of real estate loans that amortize over 480 months or 600 months, some of which require a balloon payment at the end of 360 months.   Selected Financial Information.Selected financial data for the centralized real estate business segments real estate loans were as follows:  At or for the Years Ended December 31,200920082007Centralized real estate net finance receivables
originated and renewed:
Amount (in thousands)$        7,455$   100,785$  1,425,913Number374586,094Average size (to nearest dollar)$    201,486$   220,055$     233,986Centralized real estate net finance receivables
net (transferred/sold) purchased:
Amount (in thousands)$(1,555,805)$  (887,323)$     100,929Number(8,338)(4,290)661Centralized real estate net finance receivables:
Amount (in thousands)$ 6,414,674$9,020,042$10,909,376Number33,47146,73456,194Average size (to nearest dollar)$    191,649$   193,008$     194,138Centralized real estate yield5.78%6.14%6.21%Centralized real estate charge-off ratio2.16%0.64%0.19%Centralized real estate delinquency ratio8.40%4.93%1.93%  10     Item 1.  Continued    Selected financial data for the centralized real estate business segments finance receivables held for sale were as follows:  At or for the Years Ended December 31,(dollars in thousands)200920082007Finance receivables held for sale$   491,058$960,432$   232,667Origination of finance receivables held for sale4,864140,2114,494,235Sales and principal collections of finance receivables
held for sale1,933,423352,4555,386,970   During 2009, we transferred $1.6 billion of centralized real estate segment real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance receivables for the foreseeable future. In 2009, we sold $1.9 billion of centralized real estate segment finance receivables held for sale.  In December 2008, we transferred $972.5 million of real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance receivables for the foreseeable future.  See Note 2 of the Notes to Consolidated Financial Statements in Item 8 for our TDR policy, charge-off policy, and policies regarding delinquent accounts. If recovery efforts are feasible, we transfer charged-off accounts to our centralized charge-off recovery operation for ultimate disposition.  See Note 27 of the Notes to Consolidated Financial Statements in Item 8 for further information on the Companys centralized real estate business segment.   Insurance Business Segment  The insurance business segment markets its products to eligible branch customers. We invest cash generated from operations in investment securities, commercial mortgage loans, investment real estate, and policy loans and also use it to pay dividends. The 90 employees of the insurance business segment have numerous underwriting, compliance, and service responsibilities for the insurance companies and also provide services to the branch and centralized real estate business segments.   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 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 46 states. Yosemite writes or reinsures credit-related property and casualty and credit involuntary unemployment insurance.  11     Item 1.  Continued    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 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 also voluntary.  The ancillary products we offer are home security and auto security membership plans and home warranty service contracts of unaffiliated companies. 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 pay premiums for insurance products monthly with their finance receivable payment or finance the premiums and contract fees for ancillary products as part of the finance receivable, but they may pay the premiums and contract fees in cash to the insurer or financial services company. We do not offer single premium credit insurance products to our real estate loan customers.   Reinsurance.Merit and Yosemite enter into reinsurance agreements with other insurers, including non-subsidiary affiliated companies, for reinsurance of various non-credit life, 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. Yosemite also reinsures risks associated with a closed block of excess and surplus lines dating back to the 1970s. At December 31, 2009, reserves on the books of Merit and Yosemite for reinsurance agreements totaled $84.1 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.  12     Item 1.  Continued    Other AIG subsidiaries manage substantially all of our insurance business segments investments on our behalf, under the supervision and control of our investment committees.   Selected Financial Information.Selected financial data for the insurance business segment were as follows:  At or for the Years Ended December 31,(dollars in thousands)200920082007Life insurance in force:
Credit$2,166,654$2,666,569$2,718,538Non-credit1,591,6601,884,8922,040,015Total$3,758,314$4,551,461$4,758,553Investments:
Investment securities$   733,263$   696,338$1,422,004Commercial mortgage loans139,284143,874137,290Policy loans1,6121,5931,711Investment real estate485869Total$   874,207$   841,863$1,561,074Premiums earned$   136,281$   155,484$   159,965Premiums written$   108,556$   150,004$   165,541Insurance losses and loss adjustment expenses$     61,410$     69,992$     65,878   See Note 27 of the Notes to Consolidated Financial Statements in Item 8 for further information on the Companys insurance 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. Declines in residential real estate values also may reduce a customers willingness to repay his or her mortgage. An inability to repay usually results from lower income due to unemployment or underemployment, major medical expenses, or divorce. The risk of inability to repay intensifies when economic conditions deteriorate. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Overview and Outlook in Item 7 for significant economic conditions relevant to the Company. Occasionally, these 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 real estate loan, non-real estate loan, and retail sales finance products. We extend credit to those customers who fit our risk guidelines as determined by these models or, in some cases, manual  13     Item 1.  Continued    underwriting. Price and size of the loan or retail sales finance transaction are in relation to the estimated credit risk we assume.  In our centralized real estate business segment, MorEquity originated real estate loans according to established underwriting criteria. We performed due diligence investigations on all portfolio acquisitions, including re-underwriting of the individual real estate loans by our own personnel.  See Note 17 of the Notes to Consolidated Financial Statements in Item 8 for a discussion of derivative counterparty credit risk management.   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 succeeding levels of supervision 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. · AIGs internal audit department audits the Company for operational policy and procedure and state law and regulation compliance.  14     Item 1.  Continued    CENTRALIZED SUPPORT  We continually seek to identify functions that could be more effective if centralized to achieve reduced costs or free our branch lending specialists to service our customers and market our products. Our centralized operational functions support the following:  · mail and telephone solicitations; · payment processing; · real estate loan approvals; · foreclosure and real estate owned processing; · collateral protection insurance tracking; · retail sales finance approvals; · revolving retail and private label processing and collections; · merchant services; and · charge-off recovery operations.   SOURCES OF FUNDS  We have funded our branch and centralized real estate business segments using the following sources:  · cash flows from 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; · sales of finance receivables; · securitizations; and · capital contributions from our parent.  Due to the significant disruption in the U.S. residential mortgage and credit markets, AIGs liquidity issues, and our reduced liquidity, we borrowed all available commitments under our primary credit facilities during September 2008. In addition, AGFC borrowed funds from AIG Funding, Inc. (AIG Funding) under a demand note agreement. Until we have access to other reliable funding sources, we anticipate that our primary sources of funds to support operations and repay obligations will be finance receivable collections from operations and additional on-balance sheet securitizations and portfolio sales, while we continue to significantly limit our lending activities and focus on expense reductions.  As part of our efforts to support our liquidity from sources other than our traditional capital market sources, we completed an on-balance sheet securitization on July 30, 2009. The securitization included the sale of approximately $1.9 billion of our centralized real estate loans to a wholly-owned consolidated special purpose vehicle, Third Street Funding LLC (Third Street), that concurrently formed a trust to issue tranches of notes totaling $1.6 billion in initial principal balance of trust certificates to Third Street in exchange for the loans. In connection with the securitization, Third Street sold at a discount $1.2 billion of senior certificates with a 5.75% coupon to a third party. Third Street received cash proceeds, including accrued interest after the sales discount but before expenses, of $967.3 million, and retained subordinated and residual interest trust certificates.  15     Item 1.  Continued    We have also sold certain finance receivables as an alternative funding source. During 2009, we transferred $1.9 billion of real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance receivables for the foreseeable future. In 2009, we sold $1.9 billion of finance receivables held for sale.  During March 2009, AIG caused AGFC to receive a $600.0 million capital contribution. Subject to insurance regulations, we also have the ability to receive dividends from our insurance subsidiaries. AGFC received $466.0 million of dividends from its insurance subsidiaries during 2008 and $200.0 million during first quarter 2009. The majority of these insurance subsidiary dividends exceeded insurance company ordinary dividend levels and required regulatory approval before they could be paid. There can be no assurance that any regulatory approvals for future dividends exceeding ordinary dividend levels will be obtained.   REGULATION  Branch and Centralized Real Estate  Various federal laws regulate our branch and centralized real estate business segments including:  · the Equal Credit Opportunity Act (prohibits discrimination against creditworthy 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 and the Department of Housing and Urban Developments Regulation X (regulate certain loans secured by real estate); · the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act); · 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. We make residential mortgage loans under these and other federal laws. Federal laws also govern our 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 we conduct a substantial amount of our business generally:  · provide for state licensing of lenders and loan originators, including state laws adopted or amended to comply with licensing requirements of the federal SAFE Act; · impose maximum term, amount, interest rate, and other charge limitations; · regulate whether and under what circumstances we may offer insurance and other ancillary products in connection with a lending transaction; and · provide for consumer protection.  16     Item 1.  Continued    On March 4, 2009, the United States Department of the Treasury issued uniform guidance for loan modifications to be utilized by the mortgage industry in connection with the Home Affordable Modification Program (HAMP). The HAMP is designed to assist certain eligible homeowners who are at risk of foreclosure by applying loan modification requirements in a stated order of succession until their monthly payments are lowered to a specified percentage target of their monthly gross income. The modification guidelines require the servicer to use a uniform loan modification process to provide a borrower with sustainable monthly payments. Effective April 5, 2010, a new program under the HAMP will provide certain incentives to borrowers, servicers, and investors to encourage short sales and deeds in lieu of foreclosure as a way to avoid the foreclosure process. The HAMP guidelines are likely to be subject to additional changes and requirements as the United States Department of the Treasury makes adjustments to the program.  As part of a Securities Purchase Agreement and a Securities Exchange Agreement between AIG and the United States Department of the Treasury dated April 17, 2009, AIG agreed that its subsidiaries that were eligible would join the HAMP and would comply with the HAMP guidelines. In third quarter 2009, MorEquity entered into a Commitment to Purchase Financial Instrument and Servicer Participation Agreement (the Agreement) with the Federal National Mortgage Association as financial agent for the United States Treasury, which provides for participation in the HAMP. MorEquity entered into the Agreement as the servicer with respect to our centralized real estate finance receivables, with an effective date of September 1, 2009, in order for MorEquity to prepare its systems to implement the HAMP. As of December 31, 2009, no HAMP modifications had been completed due to MorEquitys recent entry into the HAMP and the mandatory three-month trial period. Our branch operations currently are planning to join the HAMP during the second quarter of 2010, after systems changes necessary to accommodate the HAMP modifications are implemented.  The U.S. government 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 or higher-priced mortgage loans. These laws or regulations, if adopted, may limit or restrict the terms of covered loan transactions and may also impose specific statutory liabilities in cases of non-compliance. Additionally, some of these laws may restrict other business activities of the Company and its affiliates.   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, including marketing practices; · 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.  17     Item 1.  Continued    We operate in states which regulate credit insurance premium rates and premium refund calculations.   International Regulation  In the United Kingdom, the Financial Services Authority (FSA) regulates first mortgage residential real estate loans and insurance products. The FSA is an independent non-governmental body given statutory powers by the Financial Services and Markets Act 2000. The Consumer Credit Act 2006, which amends the Consumer Credit Act 1974, regulates second mortgage residential real estate loans and consumer loans.   COMPETITION  Branch and Centralized Real Estate  The consumer finance industry is competitive due to the large number of companies offering financial products and services and the sophistication of those products. 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.   International Competition  Ocean competes with other credit intermediaries, many of which are national in scope rather than regional. These credit intermediaries compete on service and quality of products offered. Ocean also competes with various real estate loan lenders which advertise for direct lending to customers.   18      Item 1A.  Risk Factors.   We face a variety of risks that are inherent in our business. Accordingly, you should carefully consider the following discussion of risks in addition to the other information regarding our business provided in this report. These risks are subject to contingencies which may or may not occur, and we are not able to express a view on the likelihood of any such contingency occurring. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our business or financial performance.  AIGs agreements with the Federal Reserve Bank of New York include financial and other covenants that impose restrictions on the financial and business operations of AIG and its restricted subsidiaries, including AGFC and AGFI.  In the second half of 2008, AIG experienced an unprecedented strain on liquidity. On September 22, 2008, AIG entered into a definitive credit agreement (as amended, the FRBNY Credit Agreement) in the form of a secured loan and a Guarantee and Pledge Agreement (the Pledge Agreement) with the Federal Reserve Bank of New York (FRBNY), which established the credit facility (the FRBNY Facility).  The FRBNY Credit Agreement requires AIG to maintain a minimum aggregate liquidity level. In addition, the FRBNY Credit Agreement restricts, among other things, the ability of AIG and its restricted subsidiaries, including AGFC and AGFI, to make certain capital expenditures, incur additional indebtedness, incur liens, merge, consolidate, sell assets, enter into hedging transactions or pay dividends. These covenants could restrict our business and thereby adversely affect our results of operations. Pursuant to the FRBNY Credit Agreement and the Pledge Agreement, AIG Capital Corporation (AGFIs immediate parent) pledged the common stock of AGFI to secure the loans made to AIG pursuant to the FRBNY Credit Agreement. We did not guarantee, nor were any of our assets pledged to secure, AIGs obligations under the FRBNY Credit Agreement or the Pledge Agreement.  We have been adversely affected by AIGs liquidity issues and our reduced liquidity.  We are affected by the financial stability (both actual and perceived) of AIG and its subsidiaries. Perceptions that AIG or its subsidiaries may not be able to meet their obligations can negatively affect us in many ways including a refusal of customers to continue to do business with us and requests by customers and other parties to terminate existing contractual relationships. In addition, our credit ratings have been negatively impacted by AIGs liquidity issues and our reduced liquidity. Major ratings agencies have lowered our credit ratings to reflect the uncertainty regarding the availability of support from AIG and the increase in our operating risks because of weakening residential real estate markets, slower consumer spending, and higher consumer delinquency rates. Credit ratings by the major ratings agencies are an important factor in establishing our competitive position and affect the availability and cost of borrowings to us.  The decline in AIGs common stock price and AIGs asset disposition program may prevent us from retaining key personnel.  We rely upon the knowledge and talent of our employees to successfully conduct business. The decline in AIGs common stock price has dramatically reduced the value of equity awards previously granted to key employees. In addition, the announcement of proposed AIG asset dispositions may result in competitors seeking to hire our key employees. A loss of key personnel could adversely affect our business.    19     Item 1A.  Continued    The prolonged inability of AGFC to access traditional sources of liquidity may adversely affect its ability to fund our operational requirements and satisfy our financial obligations.  Our ability to access capital and credit was significantly affected by the significant disruption in the U.S. residential mortgage and credit markets, AIGs liquidity issues, and the credit rating downgrades on our debt. Historically, we funded our operations and repaid our obligations using funds collected from our finance receivable portfolio and new debt issuances. Since the events of September 2008 and through the filing of this report, our traditional borrowing sources, including our ability to issue unsecured debt in the capital markets, have not been available, and management does not expect them to become available to us in the near future. Until we have access to other reliable funding sources, our sources of funding will likely continue to be far more limited than those that have been available to us during the past several years. Management has programs to limit liquidity risks based on pursuing alternative funding sources while significantly limiting our lending activities and focusing on expense reductions. While we anticipate, based on our estimates and after consideration of the risks and uncertainties described in Managements Discussion and Analysis of Financial Condition and Results of Operations  Going Concern Consideration in Item 7, that our existing and alternative sources of funds, including AIGs expressed intention to support us, will be sufficient to meet our debt and other obligations, we cannot provide any assurance that this will be the case in the long term. Failure to gain access to adequate capital and credit sources could have a material adverse effect on our financial position, results of operations, and cash flows.  Our consolidated results of operations and financial condition have been adversely affected by economic conditions and other factors, including difficult conditions in the U.S. residential real estate and credit markets, and we do not expect these conditions to significantly improve in the near future.  Our actual consolidated results of operations or financial condition may differ from the consolidated results of operations or financial condition that we anticipate or that we achieved in the past. We believe that generally the factors affecting our consolidated results of operations or financial condition relate to:  general economic conditions, such as unemployment levels, housing markets, and interest rates; our ability to access the capital markets and successfully invest cash flows from our businesses; fluctuations in the demand for our products and services and the effectiveness of our distribution channels; and natural or other events and catastrophes that affect our customers, collateral, and branches or other operating facilities.  Since 2007, the U.S. residential real estate markets and credit markets experienced significant disruption as housing prices generally declined, unemployment increased, consumer delinquencies increased, and credit availability contracted and became more expensive for consumers and financial institutions. Decreased property values that accompany a market downturn can reduce a borrowers ability to refinance his or her mortgage, as well as increase the loan-to-value (LTV) ratios of our real estate loans. Defaults by borrowers on real estate loans could cause losses to us, could lead to increased claims relating to non-prime or sub-prime mortgage origination practices, and could encourage increased or changing regulation. Any increased or changing regulation could limit the availability of, or require changes in, the terms of certain real estate loan products and could also require us to devote additional resources to comply with that regulation.  The market developments discussed above are reflected in our negative operating results and have also resulted in the collapse or closing of several prominent financial institutions. The continuation or worsening of these conditions could further adversely affect our business and results of operations. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Forward-Looking Statements in Item 7 for a more detailed list of factors which could cause our consolidated  20     Item 1A.  Continued    results of operations or financial condition to differ, possibly materially, from the consolidated results of operations or financial condition that we anticipate.  AIGs ability to continue as a going concern may adversely affect our business and results of operations.  In connection with the preparation of its Annual Report on Form 10-K for the fiscal year ended December 31, 2009, AIG management assessed AIGs ability to continue as a going concern. Based on the U.S. governments continuing commitment to AIG, AIGs completed transactions with the FRBNY, and AIG managements plans to stabilize its businesses and dispose of certain of its assets, and after consideration of the risks and uncertainties of such plans, AIG management believes that AIG will have adequate liquidity to finance and operate its businesses, execute its asset disposition plan, and repay its obligations for at least the next twelve months.  It is possible that the actual outcome of one or more of AIG managements plans could be materially different, or that one or more of AIG managements significant judgments or estimates about the potential effects of the above-mentioned risks and uncertainties could prove to be materially incorrect or that AIGs transactions with the FRBNY will fail to achieve their desired objectives. If one or more of these possible outcomes occurs, AIG may need additional U.S. government support to meet its obligations as they become due. Without additional support from the U.S. government, in the future there could be substantial doubt about AIGs ability to continue as a going concern. If AIG is not able to meet its obligations as they become due, it will have a negative impact on our business and results of operations and on our ability to borrow funds from AIG, to make our debt payments, and to issue new debt.  21     Item 1A.  Continued    The assessment of our liquidity is based upon significant judgments or estimates that could prove to be materially incorrect.  In assessing our current financial position and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:  · the ability and intent of AIG to provide funding to us; · declining financial flexibility and reduced income as we use more of our higher performing assets for on-balance sheet securitizations and portfolio sales; · reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios; · our ability to complete on favorable terms additional on-balance sheet securitizations and portfolio sales and the costs associated with these alternative funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which will affect profitability; · the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates; · our ability to comply with our debt covenants, including covenants requiring our net worth to be maintained at specified levels and certain tangible equity ratios to be met; · access to unsecured debt markets and other sources of funding, and the potential increased cost of alternative funding sources as compared to historic borrowing rates; · adverse credit ratings actions on our debt; · constraints on our business resulting from the FRBNY Credit Agreement and other AIG agreements, including limitations on our ability to pursue (and retain proceeds from) certain funding sources, such as additional on-balance sheet securitizations and portfolio sales, without AIG receiving prior consent from the FRBNY; · the potential for additional unforeseen cash demands or accelerations of obligations; · reduced income due to loan modifications where the borrowers interest rate is reduced, principal payments are deferred, or other concessions are made; · the potential for declines in bond and equity markets; · the potential effect on us if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans; · the potential loss of key personnel; and · the potential adverse effect on us relating to intercompany transactions with AIG, including derivatives and intercompany borrowings, if AIGs liquidity position deteriorates or if AIG is not able to continue as a going concern.  After consideration of the above factors, including AIGs expressed intention to support us, as expressed in AIGs Annual Report on Form 10-K for the fiscal year ended December 31, 2009, based on our estimates and taking into account the risks and uncertainties of such plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations for at least the next twelve months.  It is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates about the potential effects of the risks and uncertainties could prove to be materially incorrect.  22     Item 1A.  Continued    Certain of our debt agreements contain terms that could result in acceleration of payments.  Our anticipated liquidity requirements are based upon our continued compliance with our existing debt agreements. An event of default or declaration of acceleration under certain of our borrowing agreements could also result in an event of default and declaration of acceleration under certain of our other borrowing agreements, as well as for AIG under the FRBNY Credit Agreement. Such acceleration of debt repayments would have a material adverse effect on our liquidity and our ability to continue as a going concern.  AIG may divest the Company, which may adversely affect our results of operations.  Since September 2008, AIG has been working to execute an orderly asset disposition plan, protect and enhance the value of its key businesses, and position these franchises for the future. AIG continually reassesses this plan to maximize value while maintaining flexibility in its liquidity and capital, and expects to accomplish this over a longer time frame than originally contemplated. Certain of our debt agreements require AIG majority ownership and would be subject to prepayment or renegotiation if the Company is sold.  We are a party to various lawsuits and proceedings which, if resolved in a manner adverse to us, could materially adversely affect our consolidated results of operations or financial condition.  We are a party to various legal proceedings, including certain purported class action claims, arising in the ordinary course of our business. Some of these proceedings are pending in jurisdictions that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. 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 result in any given proceeding. A large judgment that is adverse to us could have a material adverse effect on our consolidated results of operations or financial condition. See Legal Proceedings in Item 3 for more information.  We are subject to extensive regulation in the jurisdictions in which we conduct our business.  Our branch and centralized real estate business segments are subject to various U.S. state and federal laws and regulations, and various U.S. state authorities regulate and supervise our insurance business segment. The laws under which a substantial amount of our branch and centralized real estate businesses are conducted generally: provide for state licensing of lenders and, in some cases, licensing of employees involved in real estate lending; impose maximum terms, amounts, interest rates, and other charges regarding loans; 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 extent of state regulation of our insurance business varies by product and by jurisdiction, 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. We are also subject to various laws and regulations relating to our subsidiaries in the United Kingdom. Changes in laws or regulations affecting us could impact our ability to conduct business or the manner in which we conduct business and, accordingly, could have a material adverse effect on our consolidated results of operations or financial condition. See Regulation in Item 1 for a discussion of the regulation of our business segments.  23      Item 1B.  Unresolved Staff Comments.   None.   24      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. Ocean leases approximately one-half of the space it currently occupies for office facilities under leases that expire in 2018. Ocean also leases land on which it owns office facilities in Tamworth, England under a 999 year land lease that expires in 3001. As a result of our decision to cease WFIs wholesale operations effective June 17, 2008, we vacated WFIs decentralized wholesale origination office facilities and the majority of the WFI headquarters facility in 2008.  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, one branch office in Terre Haute, Indiana, and eight buildings in Evansville, Indiana. The Evansville buildings house our administrative offices, our centralized services and support operations, and one of our branch offices.    Item 3.  Legal Proceedings.   On January 19, 2007, HSA Residential Mortgage Services of Texas, Inc. (RMST), a subsidiary of AGFI, and State Bank of Long Island (SBLI) reached an agreement to settle all claims between them relating to Island Mortgage Network, Inc., including all claims asserted in the matter of HSA Residential Mortgage Services of Texas, Inc. v. State Bank of Long Island, U.S. District Court for the Eastern District of New York, 2:05-cv-03185 (JS). As part of that settlement, SBLI agreed to pay RMST $65 million. This settlement was completed on January 24, 2007, and RMSTs lawsuit against SBLI has been dismissed.  AGFI and certain of its subsidiaries are parties to various legal proceedings, including certain purported class action claims, arising in the ordinary course of business. Some 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 legal 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 result in any given proceeding.   25      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 did not pay any cash dividends on its common stock in 2008 or 2009.  See Managements Discussion and Analysis of Financial Condition and Results of Operations  Capital Resources and Liquidity in Item 7, and Note 22 of the Notes to Consolidated Financial Statements in Item 8, regarding limitations on the ability of AGFI and its subsidiaries to pay dividends.    26      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 of Financial Condition and Results of Operations in Item 7.  At or for the Years
Ended December 31,(dollars in thousands)20092008200720062005Total revenues$  2,260,954$  2,781,025$  2,842,180$  2,932,967$  2,944,131Net (loss) income (a)$    (477,675)$ (1,345,652)$     112,301$     414,862$     527,330Total assets$22,780,129$26,547,375$30,620,147$27,771,412$25,801,527Long-term debt$17,743,343$20,980,980$22,586,994$19,189,292$18,314,837Average net receivables$21,703,335$26,081,007$24,937,508$24,119,045$22,451,674Average borrowings$21,791,944$24,853,566$23,952,538$23,185,018$20,830,445Yield10.16%10.20%10.42%10.39%10.32%Interest expense rate5.00%5.03%5.24%5.07%4.25%Interest spread5.16%5.17%5.18%5.32%6.07%Operating expense ratio (b)3.42%5.09%3.91%3.58%3.74%Allowance ratio8.13%4.64%2.36%2.01%2.20%Charge-off ratio3.92%2.08%1.16%0.95%1.19%Charge-off coverage1.78x2.10x2.09x2.13x1.97xDelinquency ratio7.24%4.99%2.84%2.06%1.93%Return on average assets(1.92)%(4.60)%0.40%1.54%2.15%Return on average equity(24.86)%(49.96)%3.97%14.48%19.99%Ratio of earnings to fixed
charges (c)N/AN/A1.11x1.53x1.91xAdjusted tangible leverage9.16x11.75x9.72x9.12x8.86xDebt to equity ratio10.54x14.71x9.44x8.28x7.96x  (a) We exclude per share information because AIG indirectly owns all of AGFIs common stock.  (b) 2008 operating expenses include significant goodwill and other intangible assets impairment charges.  (c) Not applicable for 2009 and 2008. Earnings were inadequate to cover total fixed charges by $909.2 million in 2009 and $950.7 million in 2008.  27     Item 6.  Continued    Glossary  Adjusted tangible
leveragetotal debt less 75% of hybrid debt divided by the sum of tangible equity and 75% of hybrid debtAllowance ratioallowance for finance receivable losses as a percentage of net finance receivablesAverage borrowingsaverage of debt for each day in the periodAverage net
receivablesaverage of net finance receivables at the beginning and end of each month in the periodCharge-off coverageallowance for finance receivable losses to net charge-offsCharge-off rationet charge-offs as a percentage of the average of net finance receivables at the beginning of each month in the periodDebt to equity ratiototal debt divided by total equityDelinquency ratiogross finance receivables 60 days or more past due (customer has not made 3 or more contractual payments) as a percentage of gross finance receivablesHybrid debtcapital securities classified as debt for accounting purposes but due to their terms are afforded, at least in part, equity capital treatment in the calculation of effective leverage by rating agenciesInterest expense rateinterest expense as a percentage of average borrowingsInterest spreadyield less interest expense rateOperating expense
ratiototal operating expenses as a percentage of average net receivablesRatio of earnings to
fixed chargessee Exhibit 12 for calculationReturn on average
assetsnet (loss) income as a percentage of the average of total assets at the beginning and end of each month in the periodReturn on average
equitynet (loss) income as a percentage of the average of total equity at the beginning and end of each month in the periodTangible equitytotal equity less accumulated other comprehensive income or lossYieldfinance charges as a percentage of average net receivables    28      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:  TopicPageForward-Looking Statements30Going Concern Consideration31Overview and Outlook34Basis of Reporting35Critical Accounting Estimates37Critical Accounting Policies41Off-Balance Sheet Arrangements41Fair Value Measurements42Selected Segment Information43Capital Resources and Liquidity49Analysis of Financial Condition55Analysis of Operating Results61Regulation and Other79  29     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, our strategy for growth, product development, regulatory approvals, market position, financial results and reserves. Our 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, that could cause our actual results to differ, possibly materially, include, but are not limited to, the following:  · the ability and intent of AIG to provide funding to us, including AIGs ability to continue as a going concern; · lack of access to the capital markets or the sufficiency of our current sources of funds to satisfy our cash flow requirements; · changes in the rate at which we can collect or potentially sell our finance receivable portfolio; · the impact of our on-balance sheet securitization; · our ability to comply with our debt covenants; · changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we can access capital and also 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; · adverse shifts in residential real estate values; · levels of unemployment and personal bankruptcies; · adverse credit ratings actions on our debt; · constraints on our business resulting from the FRBNY Credit Agreement, including on our ability to pursue (and retain proceeds from) certain funding sources without AIG receiving prior consent from the FRBNY; · changes in laws, regulations, or regulatory policies and practices 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, as well as changes that may result from increased regulatory scrutiny of the sub-prime lending industry; · the effects of our participation in the HAMP; · the costs and effects of any litigation or governmental inquiries or investigations involving us, including those that are determined adversely to us; · 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 mitigate any adverse effects that may occur as a result of AIGs intention to explore divestiture opportunities for certain of its businesses and assets, including us; · our ability to maintain sufficient capital levels in our regulated and unregulated subsidiaries; · changes in our ability to attract and retain employees or key executives to support our businesses; · natural or accidental events such as earthquakes, hurricanes, tornadoes, fires, or floods affecting our customers, collateral, or branches or other operating facilities; and · war, acts of terrorism, riots, civil disruption, pandemics, or other events disrupting business or commerce.  30     Item 7.  Continued    We also direct readers to other risks and uncertainties discussed in Item 1A in this report and 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.     GOING CONCERN CONSIDERATION  Liquidity of the Company and Support from AIG  Since the events of September 2008 and through the filing of this report, our traditional borrowing sources, including our ability to issue unsecured debt in the capital markets, have remained unavailable, and management does not expect them to become available to us in the near future. Due to a combination of the challenges facing AIG, our dependency on AIG, our liquidity concerns, our results of operations, downgrades of our credit ratings by the rating agencies, and the turmoil in the capital markets, we currently have no access to the unsecured debt market, and the maximum amount of our credit facilities has been drawn. We cannot determine when access to our traditional borrowing sources will become available to us again.  In light of AIGs current financial situation, AIG has been dependent on the FRBNY Facility provided by the FRBNY under the FRBNY Credit Agreement between AIG and the FRBNY. As a result of AIG entering into the FRBNY Facility and the Pledge Agreement, we, as a subsidiary of AIG, are subject to certain covenants under the FRBNY Credit Agreement. These covenants, among other factors, may limit or restrict our ability to: incur debt, encumber or sell assets, make equity or debt investments in other parties, and pay dividends and distributions.  On March 2, 2009, the U.S. government issued a statement describing its commitment to continue to work with AIG to maintain its ability to meet its obligations as they become due.  In connection with the preparation of AIGs Annual Report on Form 10-K for the fiscal year ended December 31, 2009, AIG management assessed AIGs ability to continue as a going concern. Based on the U.S. governments continuing commitment to AIG, AIGs completed transactions with the FRBNY, and AIG managements plans to stabilize its businesses and dispose of certain of its assets, and after consideration of the risks and uncertainties of such plans, AIG management believes that AIG will have adequate liquidity to finance and operate its businesses, execute its asset disposition plan, and repay its obligations for at least the next twelve months.  It is possible that the actual outcome of one or more of AIG managements plans could be materially different, or that one or more of AIG managements significant judgments or estimates about the potential effects of the above-mentioned risks and uncertainties could prove to be materially incorrect or that AIGs transactions with the FRBNY will fail to achieve their desired objectives. If one or more of these possible outcomes occurs, AIG may need additional U.S. government support to meet its obligations as they become due. Without additional support from the U.S. government, in the future there could be substantial doubt about AIGs ability to continue as a going concern. If AIG is not able to meet its obligations as they become due, it will have a negative impact on our business and results of operations and on our ability to borrow funds from AIG, to make our debt payments, and to issue new debt.  31     Item 7.  Continued    Progress on Managements Plan for Stabilization of the Company and Repayment of Our Obligations as They Become Due  In addition to finance receivable collections, management is exploring additional initiatives to preserve our liquidity and capital and to meet our financial and operating obligations. These initiatives include additional on-balance sheet securitizations, portfolio sales, expense reductions, and branch closures, while continuing to limit our new lending. The exact nature and magnitude of any additional measures will be driven by our available resources and needs, prevailing market conditions, and the results of our operations. During 2009, we closed 200 branch offices, reduced retail sales financing operations, reduced our number of employees by approximately 1,400 through reductions in force and attrition, and sold $1.9 billion of finance receivables held for sale. In July 2009, we securitized $1.9 billion of real estate loans and received $967.3 million in cash proceeds including accrued interest after the sales discount but before expenses. If our sources of liquidity are not sufficient to meet our contractual obligations as they become due over the next twelve months, we will seek additional funding from AIG, which funding would be subject to AIG receiving the consent of the FRBNY. AIG intends to support our liquidity needs and compliance with all debt covenants and acceleration clauses contained within our debt agreements, or any other significant agreements which could have a material adverse impact on us, through the earlier of a sale of us (or a sale of a portion of us sufficient to deconsolidate us from AIG) or February 28, 2011. In addition, AIG is currently seeking restructuring opportunities for us.  32     Item 7.  Continued    Managements Assessment and Conclusion  In assessing our current financial position and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:  · the ability and intent of AIG to provide funding to us; · declining financial flexibility and reduced income as we use more of our higher performing assets for on-balance sheet securitizations and portfolio sales; · reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios; · our ability to complete on favorable terms additional on-balance sheet securitizations and portfolio sales and the costs associated with these alternative funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which will affect profitability; · the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates; · our ability to comply with our debt covenants, including covenants requiring our net worth to be maintained at specified levels and certain tangible equity ratios to be met; · access to unsecured debt markets and other sources of funding, and the potential increased cost of alternative funding sources as compared to historic borrowing rates; · adverse credit ratings actions on our debt; · constraints on our business resulting from the FRBNY Credit Agreement and other AIG agreements, including limitations on our ability to pursue (and retain proceeds from) certain funding sources, such as additional on-balance sheet securitizations and portfolio sales, without AIG receiving prior consent from the FRBNY; · the potential for additional unforeseen cash demands or accelerations of obligations; · reduced income due to loan modifications where the borrowers interest rate is reduced, principal payments are deferred, or other concessions are made; · the potential for declines in bond and equity markets; · the potential effect on us if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans; · the potential loss of key personnel; and · the potential adverse effect on us relating to intercompany transactions with AIG, including derivatives and intercompany borrowings, if AIGs liquidity position deteriorates or if AIG is not able to continue as a going concern.  After consideration of the above factors, including AIGs expressed intention to support us, as expressed in AIGs Annual Report on Form 10-K for the fiscal year ended December 31, 2009, based on our estimates and taking into account the risks and uncertainties of such plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations for at least the next twelve months.  It is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates about the potential effects of the risks and uncertainties could prove to be materially incorrect.  33     Item 7.  Continued    OVERVIEW AND OUTLOOK  2009 Overview  The U.S. economy was declared to be in a recession during 2008. The recession continued into 2009 and by technical measures ended during the second half of 2009. Despite technically emerging from recession, housing prices did not significantly rebound and unemployment remained high at approximately 10%. Rising personal delinquencies and bankruptcies continued throughout the year.  On March 2, 2009, AIG, the FRBNY, and the United States Department of the Treasury announced various restructuring transactions involving AIG, and the U.S. government issued a statement describing its commitment to continue to work with AIG to maintain its ability to meet its obligations as they become due.  During 2009, we were unable to access our traditional capital market funding sources. Federal actions and programs to support market liquidity provided lower benchmark interest rates and direct funding benefits for many financial institutions, primarily banks. We were not eligible to directly benefit from these programs. The continued limited availability of unsecured wholesale funding for non-bank financial companies and the specific AIG liquidity issues resulted in further credit ratings downgrades on AIGs debt as well as our debt.  To maintain the franchise value and support our liquidity, we significantly limited lending, consolidated certain branch operations, reduced operating expenses, and pursued an on-balance sheet securitization and portfolio sales. During 2009, we closed 200 branch offices, reduced retail sales financing operations, reduced our number of employees by approximately 1,400, sold $1.9 billion of finance receivables held for sale, and received cash proceeds of $967.3 million through a securitization of real estate loans. Additionally, AIG caused AGFC to receive a $600 million capital contribution during 2009 to support capital maintenance requirements.   2010 Outlook  Many economists predict that the U.S. economic recovery from the 2008-2009 recession will not be particularly strong, with a 2010 real gross domestic product growth of approximately 3%, continued weak labor markets, and a limited housing recovery that will inhibit personal income and consumption.  We anticipate continuing to limit our new lending and to reduce our total finance receivables during 2010. While we believe our limited new lending will represent some of our highest quality originations over recent years, additional increases in overall delinquency and net charge-off percentages in some products are possible due to the continuing U.S. economic stresses and our net declining finance receivable balances. Writedowns relating to foreclosures on real estate loans could increase as our remaining mortgage portfolio continues to mature and the housing markets continue to struggle. Our interest margin is likely to decline due to declining revenues from a net reduction in finance receivables and rising interest expense from refinancing maturing debt through higher cost securitization financing. We will continue our focus on reducing operating expenses in conjunction with our anticipated reduction of finance receivables.  34     Item 7.  Continued    Until there is less uncertainty regarding our need for, and access to, a financially stronger ultimate parent, we will likely continue to be prevented from accessing our traditional capital market sources. We will rely upon funding generated from operations, available alternative funding sources such as additional on-balance sheet securitizations and portfolio sales, and, to the extent needed and available, additional funding from AIG. We anticipate that our sources of funding will be adequate to fund our obligations and operations through 2010. However, there can be no assurance as to the sufficiency or availability of these funds. Failure to access these sources of funding could have a material adverse effect on our financial position, results of operations, and cash flows.   BASIS OF REPORTING  We prepared our consolidated financial statements using accounting principles generally accepted in the United States of America (GAAP). The statements include the accounts of AGFI and its subsidiaries, all of which are wholly owned. We eliminated all material intercompany accounts and transactions. We made judgments, 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.  Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets nor relating to the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.  At December 31, 2009, 76% of our assets were net finance receivables less allowance for finance receivable losses. 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.  At December 31, 2009, 97% of our liabilities were debt issued primarily to support our net finance receivables. Interest expense is a function of the amount of average borrowings and the interest expense rate 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 that qualify for hedge accounting under GAAP.  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. Our credit life premiums are recognized as revenue using the rule of 78s method for decreasing credit life and the pro rata method for level credit life. Our credit accident and health premiums are recognized as revenue using the mean of the rule of 78s method and the pro rata method. Our credit property and casualty and credit involuntary unemployment premiums are recognized as revenue using the pro rata method. Our non-credit premiums are recognized as revenue when collected. Insurance revenues also include commissions received from selling third party insurers products, primarily through the operations of Ocean, which we acquired in January 2007.  We invest cash generated by our insurance business segment primarily in investment securities, which were 3% of our assets at December 31, 2009, and to lesser extents in commercial mortgage loans, investment real estate, and policy loans, which we include in other assets. We report the resulting revenue in investment revenue. GAAP requires that we recognize interest on these investments as revenue on the accrual basis.  35     Item 7.  Continued    Net service fees from affiliates include amounts we charged AIG Bank for services under our agreements for AIG Banks origination and sale of non-conforming residential real estate loans. (Previously, WFI and MorEquity maintained agreements with AIG Bank whereby WFI and MorEquity provided services for AIG Banks origination and sale of such real estate loans.) We assumed financial responsibility for recourse exposure pertaining to these loans. We netted the provisions for the related recourse in net service fee revenue. Net service fees from affiliates also include amounts we charge AIG Bank for certain services under our agreement for AIG Banks origination of private label services. As required by GAAP, we recognize these fees as revenue when we provide the services.  Loan brokerage fees revenues (included in other revenues), through the operations of Ocean, consist of commissions from lenders for loans brokered to them, fees from customers to process their loans, and fees from other credit originators for customer referrals. We recognize these commissions and fees in loan brokerage fees revenues when earned.  Mortgage banking revenues (included in other revenues) consist of net gain or loss on sale of finance receivables held for sale, provision for warranty reserve, and interest income on finance receivables held for sale. GAAP requires that we recognize the difference between the sales price we receive when we sell a finance receivable held for sale and the carrying value of that loan as a gain or loss at the time of the sale. We carry finance receivables held for sale at the lower of cost or fair value. We recognize net unrealized losses through a valuation allowance and record changes in the valuation allowance in other revenues. We also charge provisions for recourse obligations to provision for warranty reserve to maintain the reserves for recourse obligations at appropriate levels. We recognize interest as revenue on the accrual basis using the interest method during the period we hold a real estate loan held for sale.  36     Item 7.  Continued    CRITICAL ACCOUNTING ESTIMATES  Our Ability to Continue as a Going Concern  When assessing our ability to continue as a going concern, management must make judgments and estimates about the following:  · the ability and intent of AIG to provide funding to us; · declining financial flexibility and reduced income as we use more of our higher performing assets for on-balance sheet securitizations and portfolio sales; · reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios; · our ability to complete on favorable terms additional on-balance sheet securitizations and portfolio sales and the costs associated with these alternative funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which will affect profitability; · the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates; · our ability to comply with our debt covenants, including covenants requiring our net worth to be maintained at specified levels and certain tangible equity ratios to be met; · access to unsecured debt markets and other sources of funding, and the potential increased cost of alternative funding sources as compared to historic borrowing rates; · adverse credit ratings actions on our debt; · constraints on our business resulting from the FRBNY Credit Agreement and other AIG agreements, including limitations on our ability to pursue (and retain proceeds from) certain funding sources, such as additional on-balance sheet securitizations and portfolio sales, without AIG receiving prior consent from the FRBNY; · the potential for additional unforeseen cash demands or accelerations of obligations; · reduced income due to loan modifications where the borrowers interest rate is reduced, principal payments are deferred, or other concessions are made; · the potential for declines in bond and equity markets; · the potential effect on us if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans; · the potential loss of key personnel; and · the potential adverse effect on us relating to intercompany transactions with AIG, including derivatives and intercompany borrowings, if AIGs liquidity position deteriorates or if AIG is not able to continue as a going concern.  These factors, individually and collectively, will have a significant effect on our ability to generate sufficient cash to repay indebtedness as it becomes due and profitably operate our business.   Allowance for Finance Receivable Losses  We consider our most critical accounting estimate to be the establishment of an adequate allowance for finance receivable losses. At December 31, 2009, our finance receivable portfolio consisted of $18.8 billion of net finance receivables due from 1.5 million customer accounts. These accounts were originated or purchased and are serviced primarily by our branch or centralized real estate business segments.  37     Item 7.  Continued    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, MorEquity originated real estate loans according to our established underwriting criteria. We performed due diligence investigations on all portfolio acquisitions. 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 willingness or abilities to repay their obligations. Economic situations include adverse shifts in residential real estate values, which may reduce a customers willingness to repay his or her mortgage. Personal circumstances include lower income due to unemployment or underemployment, major medical expenses, and divorce. Occasionally, these events can be so economically severe that the customer files for bankruptcy.  Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly by real estate loans, non-real estate loans, and retail sales finance. 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 internal and external 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.  Our Credit Strategy and Policy Committee uses our delinquency ratio, allowance ratio, charge-off ratio, and charge-off coverage to evaluate prior finance receivable loss and delinquency experience. Each ratio is useful, but each has its limitations.  We use migration analysis and the Monte Carlo technique as the principal tools to determine the appropriate amount of allowance for finance receivable losses. Both techniques are historically-based statistical techniques that attempt to predict the future amount of losses for existing pools of finance receivables. We validate the results of the models through the review of historical results by the Credit Strategy and Policy Committee.  Our migration analysis utilizes a rolling 12 months of historical data that is updated quarterly. The primary inputs for our migration analysis are (a) historical finance receivable balances, (b) historical delinquency, charge-off, recovery and repayment amounts, and (c) the current finance receivable balances in each stage of delinquency (i.e., current, greater than 30 days past due, greater than 60 days past due, etc.). The primary assumptions used in our migration analysis are the weighting of historical data and our estimate of the loss emergence period for the portfolio.  The Monte Carlo technique currently utilizes historical loan level data from January 2003 through the mid month of the current quarter and is updated quarterly. The primary inputs for Monte Carlo are the historical finance receivable accounts, the variability in account migration through the various stages of delinquency (i.e., the probability of a loan moving from 30 days past due to 60 days past due in any given month), and average charge-off amounts. The primary assumptions used in our Monte Carlo analysis are the loss emergence period for the portfolio and average charge-off amounts. The program currently employs a discrete method of incorporating economic conditions with a set of matrices, each of which  38     Item 7.  Continued    represents a historical month of data. Each matrix is therefore representative of certain seasonal and secular economic conditions, and the probability of selecting a given matrix during the simulation increases as the simulated economic conditions approach those represented by the matrix.  We consider the current and historical levels of nonaccrual loans in our analysis of the allowance by factoring the delinquency status of loans into both the migration analysis and Monte Carlo technique. We classify loans as nonaccrual based on our accounting policy, which is based on the delinquency status of the loan. As delinquency is a primary input into our migration analysis and Monte Carlo scenarios, we inherently consider nonaccrual loans in our estimate of the allowance for finance receivable losses. See Note 5 of the Notes to Consolidated Financial Statements in Item 8 for further information on our nonaccrual loans and finance receivables more than 90 days past due, as well as troubled debt restructured finance receivables at December 31, 2009.  The allowance for finance receivable losses related to our TDRs is calculated in homogeneous aggregated pools of impaired loans that have common risk characteristics. We establish our allowance for finance receivable losses related to our TDRs by calculating the present value (discounted at the loans effective interest rate prior to modification) of all expected cash flows less the recorded investment in the aggregated pool. We use certain assumptions to estimate the expected cash flows from our TDRs. The primary assumptions for our model are prepayment speeds, default rates, and severity rates.  Changes in housing prices and the related impact on homeowners equity is one factor that influences borrower decisions regarding whether to continue making payments on their real estate loan. The delinquency and losses resulting from these borrower decisions are incorporated in our allowance models as described above.  We generally obtain a current appraisal before closing a loan secured by real estate. In addition, when we complete foreclosure proceedings on a real estate loan, we obtain an unrelated partys valuation of the property, which is used to establish the value of the real estate owned.  We utilize the migration and Monte Carlo results for the Companys finance receivable portfolio to arrive at an estimate of inherent losses for the finance receivables existing at the time of analysis. We adjust the amounts determined by migration and Monte Carlo for managements estimate of the effects of model imprecision, recent changes to our underwriting criteria, portfolio seasoning, and current economic conditions, including the levels of unemployment and personal bankruptcies. This adjustment resulted in a $29.9 million increase to the amount determined by migration and Monte Carlo at December 31, 2009, compared to a $63.1 million increase at December 31, 2008.  39     Item 7.  Continued    We maintain our allowance for finance receivable losses at our estimated most predictive outcome of our adjusted migration and Monte Carlo scenarios. The most predictive outcome is the scenario within the migration and Monte Carlo scenario ranges that the Credit Strategy and Policy Committee has identified to be a better estimate than any other amount within the range considering how the analyses best represent the probable losses inherent in our portfolio at the balance sheet date, taking into account the relevant qualitative factors, observable trends, economic conditions and our historical experience with our portfolio.  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 the committees review concludes that an adjustment is necessary, we charge or credit this adjustment to expense through the provision for finance receivable losses. On a quarterly basis, AIGs Chief Credit Officer and the Chief Financial Officer of AIGs Financial Services Division review and approve the conclusions reached by the committee. 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 Analysis of Operating Results  Provision for Finance Receivable Losses for further information on the allowance for finance receivable losses.   Valuation Allowance on Deferred Tax Assets  The authoritative guidance for the accounting for income taxes permits a deferred tax asset to be recorded if the asset meets a more likely than not standard (i.e., more than 50 percent likely) that the asset will be realized. Realization of our net deferred tax asset depends on our ability to generate sufficient taxable income of the appropriate character within the carryforward periods of the jurisdictions in which the net operating and capital losses, deductible temporary differences and credits were generated. Because the realization of the deferred tax assets relies on a projection of future income, we view this as a critical accounting estimate.  When making our assessment about the realization of our deferred tax assets, we consider all available evidence, including:  · the nature, frequency, and severity of current and cumulative financial reporting losses; · the carryforward periods for the net operating and capital loss carryforwards; · the sources and timing of future taxable income, giving greater weight to discrete sources and to earlier future years in the forecast period; and · tax planning strategies that would be implemented, if necessary, to accelerate taxable amounts.   Other Intangible Assets Impairment  Other intangible assets consisted of trade names, broker relationships, customer relationships, investor relationships, employment agreements, non-compete agreements, and lender panel (group of lenders for whom Ocean performs loan origination services). Historically, we tested our other intangible assets for impairment during the first quarter of each year. We tested for impairment between these annual reviews if adverse changes developed in the underlying business. Accordingly, we performed an assessment of our other intangible assets to test for recoverability. The assessment of recoverability was based on our estimates. We compared projected undiscounted future cash flows to the carrying value of the asset  40     Item 7.  Continued    group. When the test for recoverability identified that the carrying value of the asset group was not recoverable and the asset groups fair value was measured in accordance with the fair value measurement framework, we recognized an impairment charge in operating expenses for the amount by which the carrying value of the asset group exceeded its estimated fair value. We calculated the amount of the impairment using the income approach. The income approach uses discounted cash flow projections. Based on our estimate of a market participants view of the risks associated with the projected cash flows, the discount rate used in these calculations was 20%. In third quarter 2008 we wrote down other intangible assets to zero fair value, reflecting our reduced discounted cash flow expectations. See Note 29 of the Notes to Consolidated Financial Statements in Item 8 for further information on fair value measurements.   Goodwill Impairment  Historically, we tested goodwill for impairment during the first quarter of each year. We tested for impairment between these annual reviews if adverse changes developed in the underlying business. Goodwill impairment testing was performed at the reporting unit level. We assigned goodwill to our reporting units at the date the goodwill was initially recorded. We recorded our goodwill in our branch, centralized real estate, and insurance business segments and all other reporting units (Ocean). Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.  We initially assessed the potential for impairment by estimating the fair value of each of our reporting units and comparing the estimated fair values with the carrying amounts of those reporting units, including goodwill. The estimate of a reporting units fair value was calculated using the discounted expected future cash flows approach. If the carrying value of a reporting unit exceeded its estimated fair value, goodwill associated with that reporting unit was potentially impaired. The amount of impairment was measured as the excess of the carrying value of goodwill over the estimated fair value of the goodwill. The estimated fair value of the goodwill was measured as the excess of the fair value of the reporting unit over the amounts that would be assigned to the reporting units assets and liabilities in a hypothetical market. Based on our estimate of a market participants view of the risks associated with the projected cash flows, the discount rate used in these calculations was 20% when we wrote down our goodwill to zero fair value in third quarter 2008. This impairment charge was recorded in operating expenses. See Note 29 of the Notes to Consolidated Financial Statements in Item 8 for further information on fair value measurements.   CRITICAL ACCOUNTING POLICIES  We consider the determination of the allowance for finance receivable losses to be our most critical accounting policy. Information regarding this critical accounting policy is disclosed in Critical Accounting Estimates. We describe our significant accounting policies in Note 2 of the Notes to Consolidated Financial Statements in Item 8.   OFF-BALANCE SHEET ARRANGEMENTS  We have no off-balance sheet arrangements as defined by SEC rules.  41     Item 7.  Continued    FAIR VALUE MEASUREMENTS  The fair value of a financial instrument is the amount that would be received if an asset were to be sold or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is listed on an exchange or traded over-the-counter or is new to the market and not yet established, the characteristics specific to the transaction, and general market conditions.  Management is responsible for the determination of the value of the financial assets and financial liabilities carried at fair value and the supporting methodologies and assumptions. Third party valuation service providers are employed to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When the valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models.  Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates, and other market-observable information as of the measurement date as well as the specific attributes of the security being valued, including its term interest rate, credit rating, industry sector, and other issue or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased. We assess the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, we may validate the reasonableness of fair values by comparing information obtained from the valuation service providers to other third party valuation sources for selected securities. We also validate prices for selected securities obtained from brokers through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.  See Note 29 of the Notes to Consolidated Financial Statements in Item 8 for further information on fair value measurements.  42     Item 7.  Continued    SELECTED SEGMENT INFORMATION  Allowance for Finance Receivable Losses  Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly by real estate loans, non-real estate loans, and retail sales finance. Allowance for finance receivable losses is calculated for each product and then allocated to each segment based upon its delinquency. Changes in the allowance for finance receivable losses for our branch and centralized real estate business segments and consolidated totals were as follows:  Years Ended December 31,(dollars in millions)200920082007Balance at beginning of period:
Branch real estate loans$   399.6$   234.2$ 203.3Centralized real estate369.8137.276.0Branch non-real estate loans301.3187.6181.5Branch retail sales finance69.742.927.9Total segment1,140.4601.9488.7All other---Total$1,140.4$   601.9$ 488.7Provision for finance receivable losses:
Branch real estate loans$   532.2$   324.8$   98.1Centralized real estate353.0299.482.1Branch non-real estate loans290.2355.4160.3Branch retail sales finance95.2100.858.9Total segment1,270.61,080.4399.4All other4.90.51.9Total$1,275.5$1,080.9$ 401.3Charge-offs:
Branch real estate loans$  (302.4)$  (164.9)$  (71.6)Centralized real estate(168.1)(67.1)(21.6)Branch non-real estate loans(332.8)(272.7)(188.2)Branch retail sales finance(108.0)(83.3)(53.9)Total segment(911.3)(588.0)(335.3)All other(1.3)(0.8)(3.6)Total$  (912.6)$  (588.8)$(338.9)Recoveries:
Branch real estate loans$       7.6$       5.5$     4.4Centralized real estate1.00.30.7Branch non-real estate loans33.331.034.0Branch retail sales finance10.59.310.0Total segment52.446.149.1All other(0.1)0.31.7Total$     52.3$     46.4$   50.8Transfers to finance receivables held for sale:
Branch real estate loans$     (3.8)$        -$      -Centralized real estate(19.3)--Total$   (23.1)$        -$      -Balance at end of period:
Branch real estate loans$   633.2$   399.6$ 234.2Centralized real estate536.4369.8137.2Branch non-real estate loans292.0301.3187.6Branch retail sales finance67.469.742.9Total segment1,529.01,140.4601.9All other3.5--Total$1,532.5$1,140.4$ 601.9  43     Item 7.  Continued    Fair Isaac & Co. (FICO) Credit Scores  There are many different categorizations used in the consumer lending industry to describe the creditworthiness of a borrower, including prime, non-prime, and sub-prime. While there are no industry-wide agreed upon definitions for these categorizations, many market participants utilize third party credit scores as a means to categorize the creditworthiness of the borrower and his or her finance receivable. Our finance receivable underwriting process does not use third party credit scores as a primary determinant for credit decisions. However, for informational purposes, we present below our net finance receivables and delinquency ratios grouped into the following categories based solely on borrower FICO credit scores at the date of origination or renewal:  · Prime:  Borrower FICO score greater than or equal to 660 · Non-prime:  Borrower FICO score greater than 619 and less than 660 · Sub-prime:  Borrower FICO score less than or equal to 619  Many finance receivables included in the prime category in the table below might not meet other market definitions of prime loans due to certain characteristics of the borrowers, such as their elevated debt-to-income ratios, lack of income stability, or level of income disclosure and verification, as well as credit repayment history or similar measurements.  44     Item 7.  Continued    FICO-delineated prime, non-prime, and sub-prime categories for net finance receivables for the business segments were as follows:  December 31,(dollars in millions)20092008Net finance receivables:
Branch real estate loans:Prime$1,262.1$1,587.9Non-prime1,462.51,727.5Sub-prime5,242.75,915.8Other/FICO unavailable13.317.3Total$7,980.6$9,248.5Centralized real estate loans:Prime$4,783.9$6,827.0Non-prime1,171.81,602.5Sub-prime458.4584.9Other/FICO unavailable0.65.6Total$6,414.7$9,020.0Branch non-real estate loans:Prime$   584.8$   661.1Non-prime708.0909.6Sub-prime1,883.42,370.4Other/FICO unavailable10.489.6Total$3,186.6$4,030.7Branch retail sales finance:Prime$   638.2$1,447.6Non-prime177.3317.8Sub-prime306.5410.3Other/FICO unavailable8.235.6Total$1,130.2$2,211.3  45     Item 7.  Continued    FICO-delineated prime, non-prime, and sub-prime categories for delinquency ratios for the business segments were as follows:  December 31,20092008Delinquency ratio:
Branch real estate loans:Prime4.44%2.08%Non-prime6.664.58Sub-prime8.456.37Other/FICO unavailable28.763.42Total7.525.29Centralized real estate loans:Prime6.62%3.65%Non-prime12.888.81Sub-prime15.379.19Other/FICO unavailable3.5510.43Total8.404.93Branch non-real estate loans:Prime2.92%3.00%Non-prime4.284.80Sub-prime5.986.42Other/FICO unavailable6.755.02Total5.055.47Branch retail sales finance:Prime3.57%1.46%Non-prime8.965.77Sub-prime8.747.90Other/FICO unavailable5.522.60Total5.783.27  46     Item 7.  Continued    Higher-risk Real Estate Loans  Certain types of our real estate loans, such as interest only real estate loans, sub-prime real estate loans, second mortgages, high LTV ratio mortgages, and low documentation real estate loans, can have a greater risk of non-collection than our other real estate loans. Interest only real estate loans contain an initial period where the scheduled monthly payment amount is equal to the interest charged on the loan. The payment amount resets upon the expiration of this period to an amount sufficient to amortize the balance over the remaining term of the loan. Sub-prime real estate loans are loans originated to a borrower with a FICO score at the date of origination or renewal of less than or equal to 619. Second mortgages are secured by a mortgage whose rights are subordinate to those of a first mortgage. High LTV ratio mortgages have an original amount equal to or greater than 95.5% of the value of the collateral property at the time the loan was originated. Low documentation real estate loans are loans to a borrower that meets certain criteria which gives the borrower the option to supply less than the normal amount of supporting documentation for income.  Additional information regarding these higher-risk real estate loans for our branch and centralized real estate business segments follows (our higher-risk real estate loans can be included in more than one of the types of higher-risk real estate loans):  December 31, 2009DelinquencyAverageAverage(dollars in millions)AmountRatioLTVFICOBranch

Higher-risk real estate loans:
Interest only (a)Sub-prime$5,242.78.45%74.9%557Second mortgages$1,124.88.66%N/A (b)602LTV greater than 95.5% at origination$   328.77.26%97.8%611Low documentation (a)Centralized real estate

Higher-risk real estate loans:
Interest only$1,146.29.48%88.3%709Sub-prime$   458.415.37%77.1%586Second mortgages$     43.52.88%N/A (b)702LTV greater than 95.5% at origination$2,307.36.39%99.4%709Low documentation$   367.814.96%76.6%665  (a) Not applicable because these higher-risk loans are not offered by our branch business segment.  (b) Not available.  47     Item 7.  Continued     December 31, 2008DelinquencyAverageAverage(dollars in millions)AmountRatioLTVFICOBranch

Higher-risk real estate loans:
Interest only (a)Sub-prime$5,915.86.37%75.1%557Second mortgages$1,367.77.26%N/A (b)601LTV greater than 95.5% at origination$   380.45.99%97.8%611Low documentation (a)Centralized real estate

Higher-risk real estate loans:
Interest only$1,418.68.36%88.4%707Sub-prime$   584.99.19%76.4%589Second mortgages$     55.63.77%N/A (b)700LTV greater than 95.5% at origination$2,902.04.75%99.4%712Low documentation$   475.110.37%76.0%667  (a) Not applicable because these higher-risk loans are not offered by our branch business segment.  (b) Not available.   Charge-off ratios for these higher-risk real estate loans for our branch and centralized real estate business segments were as follows:  Years Ended December 31,(dollars in millions)200920082007Branch

Higher-risk real estate loans charge-off ratios:
Interest only (a)Sub-prime3.71%2.11%1.05%Second mortgages10.50%5.98%2.24%LTV greater than 95.5% at origination4.96%3.47%2.95%Low documentation (a)Centralized real estate

Higher-risk real estate loans charge-off ratios:
Interest only4.12%1.55%0.33%Sub-prime2.49%0.97%0.41%Second mortgages4.92%1.31%0.43%LTV greater than 95.5% at origination2.53%0.89%0.33%Low documentation3.27%1.22%0.14%  (a) Not applicable because these higher-risk loans are not offered by our branch business segment.  48     Item 7.  Continued    A decline in the value of assets serving as collateral for our real estate loans may impact our ability to collect on these real estate loans. The total amount of all real estate loans for which the estimated LTV ratio exceeds 100% at December 31, 2009 was $2.4 billion, or 16%, of total real estate loans.   CAPITAL RESOURCES AND LIQUIDITY  Capital Resources  Our capital has varied primarily with the amount of net finance receivables. We have based our mix of debt and equity, or leverage, primarily upon maintaining leverage that supports cost-effective funding.


|                        |           |         |      |           |        
|----------------------- | --------- | ------- | ---- | --------- | -------
|December 31,            | 2009      |         | 2008
|(dollars in millions)   | Amount    | Percent |      | Amount    | Percent
|Long-term debt          | $17,743.3 | 80%     |      | $20,981.0 | 82%    
|Short-term debt         | 2,450.0   | 11      |      | 3,135.8   | 12     
|Total debt              | 20,193.3  | 91      |      | 24,116.8  | 94     
|Equity                  | 1,916.7   | 9       |      | 1,639.3   | 6      
|Total capital           | $22,110.0 | 100%    |      | $25,756.1 | 100%   
|Net finance receivables | $18,839.2 |         |      | $24,599.4 |        

We have issued a combination of fixed-rate debt, principally long-term, and floating-rate debt, both long-term and short-term. AGFC obtained our fixed-rate funding by issuing public or private long-term unsecured debt with maturities primarily ranging from three to ten years. Until September 2008, AGFC and AGFI obtained most of our floating-rate funding by issuing and refinancing commercial paper and by issuing long-term, floating-rate unsecured debt. We have issued commercial paper, with maturities ranging from 1 to 270 days, to banks, insurance companies, corporations, and other institutional investors. At December 31, 2009, we had no issuances of commercial paper outstanding.  We historically maintained credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. Due to the extraordinary events in the credit markets, AIGs liquidity issues, and our reduced liquidity, we borrowed all available commitments under our primary credit facilities during September 2008. AGFC does not guarantee any borrowings of AGFI. See Note 15 of the Notes to Consolidated Financial Statements in Item 8 for additional information on credit facilities.  49     Item 7.  Continued    As of December 31, 2009, our primary committed credit facilities were as follows:  (dollars in millions)FacilityCommitted
AmountDrawnExpirationOne-year term loans*$2,450.0$2,450.0July 2010Multi-year facility2,125.02,125.0July 2010Total$4,575.0$4,575.0  * AGFI was an eligible borrower under a 364-day facility for up to $400.0 million, which was fully drawn during September 2008. On July 9, 2009, we converted the outstanding amounts under our expiring 364-day facility into one-year term loans. Any remaining balance of the term loans will mature on July 9, 2010, at which time AGFC and AGFI will be obligated to pay the respective remaining amounts of principal outstanding, plus accrued interest.   Each of the facilities requires that AGFC remain directly or indirectly majority-owned by AIG. If AIG were to divest the Company, we would be required to renegotiate or repay the facilities. The annual commitment fees for the facilities are based upon AGFCs long-term credit ratings and averaged 0.15% at December 31, 2009. AGFCs outstanding borrowings under the committed credit facilities totaled $4.2 billion at December 31, 2008. If other funding to repay our credit facilities is unavailable, we will seek to replace or extend the facilities on or prior to their expiration. However, there can be no assurance that we will be able to obtain replacements or extensions.  From 2001 through 2006, we targeted our leverage to be a ratio of 9.0x of debt to tangible equity, where tangible equity equaled total shareholders equity less goodwill and accumulated other comprehensive income or loss. Beginning in the first quarter of 2007, we changed our method of measuring target leverage primarily to accommodate AGFCs issuance of $350.0 million aggregate principal amount of 60-year junior subordinated debentures (hybrid debt) following our acquisition of Ocean in January 2007. The debentures underlie a series of trust preferred securities sold by a trust sponsored by AGFC in a Rule 144A/Regulation S offering. AGFC can redeem the debentures at par beginning in January 2017. Based upon the terms of these junior subordinated debentures, credit rating agencies have acknowledged that until January 2017, at least 75% of such hybrid debt will be afforded equity treatment in their measurement of AGFCs leverage.  Accordingly, beginning in first quarter 2007, our targeted leverage was changed to 9.0x of adjusted debt to adjusted tangible equity, where adjusted debt equals total debt less 75% of hybrid debt and where adjusted tangible equity equals total shareholders equity plus 75% of hybrid debt and less goodwill, other intangible assets, and accumulated other comprehensive income or loss. Due to the Companys and AIGs liquidity positions, our primary capitalization efforts have been focused on improving liquidity and maintaining compliance with our existing debt agreements, and not on achieving our target leverage. This focus (which will likely continue as long as liquidity challenges persist) could result in AGFIs actual leverage being different than our most recent target leverage. Our adjusted tangible leverage at December 31, 2009 was 9.16x compared to 11.75x at December 31, 2008. In calculating December 31, 2009 leverage, management deducted $1.1 billion of cash equivalents from adjusted debt, resulting in an effective adjusted tangible leverage of 8.64x (including the $1.6 billion loaned to AIG under a demand note as a cash equivalent debt reduction would lower this December 31, 2009 leverage measurement to 7.93x). In calculating December 31, 2008 leverage, management deducted $624.0 million of cash equivalents from adjusted debt, resulting in an effective adjusted tangible leverage of 11.44x. Adjusted tangible leverage and effective adjusted tangible leverage each exceeded 9.0x at December 31, 2008 due  50     Item 7.  Continued    to the determination that the Company would be required to establish a $622.6 million valuation reserve against its deferred tax assets.  The Companys one-year term loan (previously, a 364-day facility) includes a capital support agreement (for the benefit of the lenders under the facility) with AIG, whereby AIG agrees to cause AGFC to maintain: (a) a consolidated net worth (stockholders equity minus the amount of accumulated other comprehensive income or loss) of at least $2.2 billion; and (b) an adjusted tangible leverage at or below 8.0x (further adjusting for excess cash for a calculated support leverage). At December 31, 2009, the support agreements measurement of consolidated net worth was $2.4 billion. If AIG terminates the capital support agreement or does not comply with its terms, the one-year term loan would require renegotiation or repayment. At December 31, 2008, AGFCs support leverage was 8.99x. During March 2009, AIG caused AGFC to receive a $600.0 million capital contribution that would have reduced AGFCs support leverage at December 31, 2008 to 7.05x, in addition to supporting AGFC leverage at March 31, 2009. At December 31, 2009, the leverage measurement under the support agreement was 6.91x. Further capital infusions into the Company would require AIG to obtain the consent of the FRBNY under the FRBNY Credit Agreement.  Certain debt agreements of the Company contain terms that could result in acceleration of payments. Under certain circumstances, an event of default or declaration of acceleration under the borrowing agreements of the Company could also result in an event of default and declaration of acceleration under other borrowing agreements of the Company, as well as for AIG under the FRBNY Credit Agreement.  Based upon AGFCs financial results for the twelve months ended September 30, 2009, a mandatory trigger event occurred under AGFCs hybrid debt with respect to the hybrid debts semi-annual payment due in January 2010. The mandatory trigger event required AGFC to defer interest payments to the junior subordinated debt holders unless AGFC obtained non-debt capital funding in an amount equal to all accrued and unpaid interest on the hybrid debt otherwise payable on the next interest payment date. During January 2010, AIG caused AGFC to receive the non-debt capital funding necessary to satisfy the January 2010 interest payments required by AGFCs hybrid debt.  Reconciliations of total debt to adjusted debt were as follows:  December 31,(dollars in millions)20092008Total debt$20,193.3$24,116.875% of hybrid debt(262.0)(262.0)Adjusted debt$19,931.3$23,854.8   Reconciliations of equity to adjusted tangible equity were as follows:  December 31,(dollars in millions)20092008Equity$1,916.7$1,639.375% of hybrid debt262.0262.0Accumulated other comprehensive (income) loss(1.8)129.1Adjusted tangible equity$2,176.9$2,030.4  51     Item 7.  Continued    Liquidity  Our sources of funds have included cash flows from 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, sales of finance receivables, and securitizations. AGFI has also received capital contributions from its parent to support finance receivable growth and maintain targeted leverage. Subject to insurance regulations, we also have the ability to receive dividends from our insurance subsidiaries. AGFC received $466.0 million of dividends from its insurance subsidiaries during 2008 and $200.0 million during first quarter 2009. The majority of these insurance subsidiary dividends exceeded insurance company ordinary dividend levels and required regulatory approval before they could be paid. There can be no assurance that any regulatory approvals for future dividends exceeding ordinary dividend levels will be obtained.  Due to the significant disruption in the U.S. residential mortgage and credit markets, AIGs liquidity issues, and our reduced liquidity, we borrowed all available commitments under our primary credit facilities during September 2008. In addition, AGFC borrowed funds from AIG Funding under a demand note agreement. Until we have access to other reliable funding sources, we anticipate that our primary sources of funds to support operations and repay obligations will be finance receivable collections from operations and additional on-balance sheet securitizations and portfolio sales, while we continue to significantly limit our lending activities and focus on expense reductions. Funding sources currently under evaluation include additional on-balance sheet securitizations, portfolio sales, and borrowings from AIG Funding and others. Accessing these funding sources is uncertain and may require AIG to obtain the consent of the FRBNY under the FRBNY Credit Agreement.  The principal factors that could decrease our liquidity are customer non-payment, a decline in customer prepayments, a prolonged inability to access our historical capital market sources, and AIGs inability to provide funding. We intend to support our liquidity position by operating the Company utilizing the following strategies:  · limiting net originations and purchases of finance receivables and having more restrictive underwriting standards and pricing for such loans; and · pursuing additional on-balance sheet securitizations, portfolio sales, and borrowings from AIG Funding and others.  However, it is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates could prove to be materially incorrect.  52     Item 7.  Continued    Principal sources and uses of cash were as follows:  Years Ended December 31,(dollars in millions)200920082007Principal sources of cash:
Net collections/originations and purchases of
finance receivables$2,962.2$         -$         -Sales and principal collections on finance receivables
held for sale originated as held for investment1,990.9--Capital contributions604.3220.0126.0Operations473.1794.31,479.9Net investment securities called and sold/purchased27.8581.5-Net issuances/repayments of debt--2,110.7Total$6,058.3$1,595.8$3,716.6Principal uses of cash:
Net repayment/issuances of debt$4,039.4$1,993.3$         -Establishment of note receivable from affiliate1,550.9--Net originations and purchases/collections of
finance receivables-617.81,343.5Dividends paid--213.0Net investment securities purchased/called and sold--50.0Total$5,590.3$2,611.1$1,606.5   Due to our liquidity issues, we have sold certain finance receivables as an alternative funding source. During 2009, we received proceeds of $2.0 billion from sales and principal collections on finance receivables held for sale originated as held for investment.  During March 2009, AGFC repaid the $419.5 million (plus interest) owed under the demand note payable to AIG Funding and, on March 24, 2009, AGFC made a loan of $800.0 million to AIG that is callable on one business days notice under the March 24, 2009 demand note agreement. On August 11, 2009, AGFC made an additional loan of $750.0 million to AIG under the March 24, 2009 demand note agreement. The cash used to fund the repayment of the demand note and these loans to AIG came from asset sale and securitization proceeds, operations, insurance subsidiary dividends, and the AIG capital contribution received in March 2009. These loans are subject to a subordination agreement in favor of the FRBNY. These loans to AIG were made as short-term investment sources for excess cash and to facilitate AIGs obligation to manage its excess cash and excess cash held by its subsidiaries under the FRBNY Facility.  As part of our efforts to support our liquidity from sources other than our traditional capital market sources, we completed an on-balance sheet securitization on July 30, 2009. The securitization included the sale of approximately $1.9 billion of our centralized real estate loans to a wholly-owned consolidated special purpose vehicle, Third Street, that concurrently formed a trust to issue tranches of notes totaling $1.6 billion in initial principal balance of trust certificates to Third Street in exchange for the loans. In connection with the securitization, Third Street sold at a discount $1.2 billion of senior certificates with a 5.75% coupon to a third party. Third Street received cash proceeds, including accrued interest after the sales discount but before expenses, of $967.3 million, and retained subordinated and residual interest trust certificates.  53     Item 7.  Continued    During 2008, significant disruptions in the capital markets and liquidity issues resulted in credit ratings downgrades on our debt as well as AIGs debt. These events prevented access to our traditional funding sources and resulted in the Company borrowing funds from AIG, drawing the full amounts available under our primary credit facilities, significantly limiting our lending activities, and pursuing alternative funding sources, including portfolio or asset sales. These factors as well as the slower U.S. housing market, our tighter underwriting guidelines, and our liquidity management efforts are reflected in our principal sources and uses of cash in 2008. Net cash from operations decreased in 2008 primarily due to a decrease in net sales and principal collections of finance receivables held for sale resulting from our decision to significantly reduce our mortgage banking operations, including ceasing WFIs wholesale originations effective June 17, 2008. As an additional source of funds, during 2008 our insurance subsidiaries sold investment securities, the proceeds of which were used by them to pay dividends of $466.0 million to AGFC.  Net cash from operations increased in 2007 primarily due to a significant decrease in net originations of finance receivables held for sale resulting from the slower U.S. housing market and our tighter underwriting guidelines. Net issuances of debt increased in 2007 primarily to support growth in finance receivables.  Dividends paid, less capital contributions received, reflect net income retained by AGFI to maintain equity and total debt at our leverage target.  At December 31, 2009, material contractual obligations were as follows:  (dollars in millions)Long-term
Debt (a)Short-term
Debt (b)Interest
Payments
on Debt (c)Operating
Leases (d)TotalFirst quarter 2010$     729.0$        -$   217.6$  13.1$     959.7Second quarter 2010572.9-292.812.0877.7Third quarter 20102,691.92,450.0128.110.95,280.9Fourth quarter 2010106.5-236.710.0353.220104,100.32,450.0875.246.07,471.52011-20125,857.7-1,258.453.77,169.82013-20142,779.3-769.916.83,566.02015+5,006.1-1,192.16.26,204.4Total$17,743.4$2,450.0$4,095.6$122.7$24,411.7  (a) During 2009, AGFC issued $961.9 million of long-term debt via a securitization transaction. We used the proceeds of this long-term debt issuance to support our liquidity position.  (b) Short-term debt includes one-year term loans of $2.450 billion. Any remaining balance of the term loans will mature on July 9, 2010, at which time AGFC and AGFI will be obligated to pay the respective remaining amounts of principal outstanding, plus accrued interest.  (c) Future interest payments on floating-rate debt are estimated based upon floating rates in effect at December 31, 2009.  (d) Operating leases include annual rental commitments for leased office space, automobiles, and data processing and related equipment.  54     Item 7.  Continued    ANALYSIS OF FINANCIAL CONDITION  Finance Receivables  Amount, number, and average size of net finance receivables originated and renewed by type were as follows:  Years Ended December 31,200920082007AmountPercentAmountPercentAmountPercentOriginated

Amount (in millions):
Real estate loans$   267.416%$1,172.225%$3,426.245%Non-real estate loans714.0431,399.3291,791.823Retail sales finance687.9412,198.9462,472.232Total$1,669.3100%$4,770.4100%$7,690.2100%Number:
Real estate loans4,7891%18,5672%39,2213%Non-real estate loans191,48447321,67229402,38130Retail sales finance214,33852764,86869907,80567Total410,611100%1,105,107100%1,349,407100%Average size (to nearest dollar):
Real estate loans$55,843$63,131$87,356Non-real estate loans3,7294,3504,453Retail sales finance3,2092,8752,723Renewed (includes additional
funds borrowed)

Amount (in millions):
Real estate loans$      77.05%$   534.822%$   977.032%Non-real estate loans1,338.3951,901.0782,069.468Total$1,415.3100%$2,435.8100%$3,046.4100%Number:
Real estate loans1,456-%7,9442%12,5723%Non-real estate loans332,348100409,01198440,59397Total333,804100%416,955100%453,165100%Average size (to nearest dollar):
Real estate loans$52,883$67,322$77,712Non-real estate loans4,0274,6484,697  55     Item 7.  Continued    Amount and number of net finance receivables net (transferred/sold) purchased by type were as follows:


|                                                                          |            |         |          |         |             |        
|------------------------------------------------------------------------- | ---------- | ------- | -------- | ------- | ----------- | -------
|Years Ended December 31,                                                  | 2009       | 2008    | 2007    
|                                                                          | Amount     | Percent | Amount   | Percent | Amount      | Percent
|Net (transferred/sold) purchased

Amount (in millions):
Real estate loans | $(1,867.7) | 100%    | $  116.6 | 21%     | $     234.1 | 97%    
|Non-real estate loans                                                     | -          | -       | 287.0    | 50      | 4.0         | 2      
|Retail sales finance                                                      | 0.5        | -       | 166.9    | 29      | 3.7         | 1      
|Total                                                                     | $(1,867.2) | 100%    | $  570.5 | 100%    | $     241.8 | 100%   
|Number:
Real estate loans                                                 | (11,952)   | 100%    | 12,136   | 10%     | 4,505       | 67%    
|Non-real estate loans                                                     | -          | -       | 80,385   | 66      | 415         | 6      
|Retail sales finance                                                      | 68         | -       | 29,991   | 24      | 1,791       | 27     
|Total                                                                     | (11,884)   | 100%    | 122,512  | 100%    | 6,711       | 100%   

During 2008 and 2009, we transferred $972.5 million and $1.9 billion, respectively, of real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance receivables for the foreseeable future.  Effective February 29, 2008, we purchased a substantial portion of Equity One, Inc.s consumer branch finance receivable portfolio consisting of $1.0 billion of real estate loans, $289.8 million of non-real estate loans, and $156.0 million of retail sales finance receivables.  During 2007, we sold $11.0 million of real estate loans.  Amount and number of total net finance receivables originated, renewed, and net (transferred/sold) purchased by type were as follows:  Years Ended December 31,200920082007AmountPercentAmountPercentAmountPercentOriginated, renewed, and
net (transferred/sold)
purchased

Amount (in millions):
Real estate loans$(1,523.3)(125)%$1,823.624%$  4,637.342%Non-real estate loans2,052.31693,587.3463,865.235Retail sales finance688.4562,365.8302,475.923Total$ 1,217.4100%$7,776.7100%$10,978.4100%Number:
Real estate loans(5,707)(1)%38,6473%56,2983%Non-real estate loans523,83272811,06849843,38947Retail sales finance214,40629794,85948909,59650Total732,531100%1,644,574100%1,809,283100%  56     Item 7.  Continued    The slower U.S. housing market, our tighter underwriting guidelines, and liquidity management efforts resulted in lower levels of originations of real estate loans in 2009 than in 2008 and 2007.  Amount, number, and average size of net finance receivables by type were as follows:  December 31,200920082007AmountPercentAmountPercentAmountPercentNet finance receivables

Amount (in millions):
Real estate loans$14,519.977%$18,352.975%$19,451.676%Non-real estate loans3,190.1174,035.1163,895.315Retail sales finance1,129.262,211.492,165.89Total$18,839.2100%$24,599.4100%$25,512.7100%Number:
Real estate loans187,71513%221,32510%220,84511%Non-real estate loans843,25857978,06247930,74544Retail sales finance436,43530899,87743953,19545Total1,467,408100%2,099,264100%2,104,785100%Average size (to nearest dollar):
Real estate loans$77,351$82,923$88,078Non-real estate loans3,7834,1264,185Retail sales finance2,5872,4572,272   As of December 31, 2009, it is probable that we will hold the remainder of the finance receivable portfolio for the foreseeable future, as managements intent is to focus on alternative funding sources, including additional on-balance sheet securitizations.  The amount of first mortgage loans was 91% of our real estate loan net receivables at December 31, 2009, compared to 92% at December 31, 2008 and 2007.  The largest concentrations of net finance receivables were as follows:  December 31,20092008*2007*(dollars in millions)AmountPercentAmountPercentAmountPercentCalifornia$  2,206.212%$  3,011.512%$  3,485.314%Florida1,229.071,565.261,607.56N. Carolina1,116.561,340.261,036.44Ohio989.451,231.351,308.25Virginia974.051,258.551,109.94Illinois836.841,091.141,141.64Pennsylvania779.341,040.44981.14Tennessee669.64888.84897.34Other10,038.45313,172.45413,945.455Total$18,839.2100%$24,599.4100%$25,512.7100%  * December 31, 2007 and 2008 concentrations of net finance receivables are presented in the order of December 31, 2009 state concentrations.  57     Item 7.  Continued    Geographic diversification of finance receivables reduces the concentration of credit risk associated with economic stresses in any one region. However, the unemployment and housing market stresses in the U.S. have been national in scope and not limited to a particular region. While finance receivables have exposure to further economic uncertainty, we believe that the allowance for finance receivable losses is adequate to absorb losses inherent in our existing portfolio. In addition, 96% of our finance receivables at December 31, 2009 were secured by real property or personal property. See Analysis of Operating Results  Provision for Finance Receivable Losses for further information on allowance ratio, delinquency ratio, and charge-off ratio and Note 2 of the Notes to Consolidated Financial Statements in Item 8 for further information on how we estimate finance receivable losses.  Contractual maturities of net finance receivables by type at December 31, 2009 were as follows:  RealNon-RealRetail(dollars in millions)Estate LoansEstate LoansSales FinanceTotal2010$     284.0$   873.2$   286.8$  1,444.02011375.01,070.7230.91,676.62012396.1675.9150.01,222.02013415.5287.994.9798.32014431.7104.358.9594.92015+12,617.6178.1307.713,103.4Total$14,519.9$3,190.1$1,129.2$18,839.2   Company experience has shown that customers will renew, convert or pay in full a substantial portion of finance receivables prior to maturity. Contractual maturities are not a forecast of future cash collections. See Note 5 of the Notes to Consolidated Financial Statements in Item 8 for actual principal cash collections and such collections as a percentage of average net receivables by type for each of the last three years.     Real Estate Owned  Changes in the amount of real estate owned were as follows:  At or for the Years Ended December 31,(dollars in millions)200920082007Balance at beginning of year$ 135.3$ 123.7$  57.7Properties acquired320.2209.6158.4Properties sold or disposed of(277.4)(165.2)(80.3)Writedowns(35.0)(32.8)(12.1)Balance at end of year$ 143.1$ 135.3$123.7Real estate owned as a percentage of
real estate loans0.99%0.74%0.64%  58     Item 7.  Continued    Changes in the number of real estate owned properties were as follows:  At or for the Years Ended December 31,200920082007Balance at beginning of year1,7301,5021,014Properties acquired3,8142,5812,065Properties sold or disposed of(3,677)(2,353)(1,577)Balance at end of year1,8671,7301,502   Real estate owned increased in 2009 and 2008 reflecting an increase in foreclosures as a result of negative economic fundamentals and the downturn in the U.S. residential real estate market. See Note 2 ofthe Notes to Consolidated Financial Statements in Item 8 for information relating to our accounting policy for real estate owned.   Finance Receivables Held for Sale  Finance receivables held for sale were as follows:  December 31,(dollars in millions)200920082007Finance receivables originated as held for investment$693.7$945.0$      -Finance receivables originated as held for sale-15.4232.7Total$693.7$960.4$232.7   During 2009, we transferred $1.9 billion of real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance receivables for the foreseeable future. In 2009, we sold $1.9 billion of finance receivables held for sale.  Finance receivables held for sale increased in 2008 when compared to 2007 primarily due to the transfer of $972.5 million of real estate loans from finance receivables to finance receivables held for sale in December 2008 due to managements intent to no longer hold these finance receivables for the foreseeable future. The increase in finance receivables held for sale during 2008 was partially offset by our decision to significantly reduce our mortgage banking operations, including ceasing WFIs wholesale originations effective June 17, 2008.  Currently, WFIs limited loan origination activity relates to the financial remediation program discussed in Note 3 of the Notes to Consolidated Financial Statements in Item 8.  59     Item 7.  Continued    Investments  Insurance investments by type were as follows:  December 31,200920082007(dollars in millions)AmountPercentAmountPercentAmountPercentInvestment securities$733.384%$696.383%$1,422.091%Commercial mortgage loans139.316143.917137.39Policy loans1.6-1.6-1.7-Investment real estate--0.1-0.1-Total$874.2100%$841.9100%$1,561.1100%   Investment securities are the majority of our insurance business segments investment portfolio. The decrease in investment securities during 2008 was primarily due to sales of investment securities, the proceeds of which were used by our insurance subsidiaries to pay dividends of $466.0 million to AGFC during 2008 and $200 million during first quarter 2009.  Our investment strategy is to optimize after-tax returns on invested assets, subject to the constraints of liquidity, diversification, and regulation. See Note 9 of the Notes to Consolidated Financial Statements in Item 8 for further information on investment securities.   Asset/Liability Management  To reduce the risk associated with unfavorable changes in interest rates on our debt 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. Although finance receivable lives may change in response to market interest rates and credit conditions, for the quarter ending December 31, 2009, our finance receivables had the following average lives based upon the levels of principal repayments during the fourth quarter of 2009 and excluding the impact of renewals:  Average Life
In YearsReal estate loans7.9Non-real estate loans1.8Retail sales finance1.0Total3.8   The contractual weighted-average life until maturity for our long-term debt was 4.5 years at December 31, 2009.  We have funded finance receivables with a combination of fixed-rate and floating-rate debt and equity. We based the mix of fixed-rate and floating-rate debt issuances, in part, on the nature of the finance receivables being supported.  60     Item 7.  Continued    We have historically issued fixed-rate, long-term unsecured debt as the primary source of fixed-rate debt. AGFC also has altered 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 interest payments to floating-rate interest payments. Including the impact of interest rate swap agreements that effectively fix floating-rate debt or float fixed-rate debt, our floating-rate debt represented 26% of our borrowings at December 31, 2009, compared to 30% at December 31, 2008. Adjustable-rate net finance receivables represented 5% of our total portfolio at December 31, 2009 and 2008. Some of our adjustable-rate real estate loans contain a fixed-rate for the first 24, 36, 48, or 60 months and then convert to an adjustable-rate for the remainder of the term. These real estate loans still in a fixed-rate period totaled $101.5 million and represented 1% of total real estate loans at December 31, 2009, compared to $326.5 million, or 2%, at December 31, 2008. Approximately $893.0 million, or 6%, of our real estate loans at December 31, 2009 are scheduled to reset by the end of 2010.  For the past several quarters, we have had limited direct control of our asset/liability mix as a result of our inability to access historical capital markets, our significantly restricted origination of new finance receivables, and our sale or securitization of finance receivables.   ANALYSIS OF OPERATING RESULTS  Net (Loss) Income  Years Ended December 31,(dollars in millions)200920082007Net (loss) income$(477.7)$(1,345.7)$  112.3Amount change$ 868.0$(1,458.0)$(302.6)Percent change65%N/M (a)(73)%Return on average assets(1.92)%(4.60)%0.40%Return on average equity(24.86)%(49.96)%3.97%Ratio of earnings to fixed charges (b)N/AN/A1.11x  (a) Not meaningful.  (b) Not applicable for 2009 and 2008. Earnings were inadequate to cover total fixed charges by $909.2 million in 2009 and $950.7 million in 2008.   During 2007, 2008, and 2009, the U.S. residential real estate and credit markets experienced significant disruption as housing prices generally declined, unemployment increased, consumer delinquencies increased, and credit availability contracted and became more expensive for consumers and financial institutions. These market developments negatively impacted our results during 2007, 2008, and 2009.  Decreased property values that accompany a market downturn can reduce a borrowers ability to refinance his or her mortgage. In addition, interest rate resets on adjustable-rate loans could negatively impact a borrowers ability to repay. Defaults by borrowers on real estate loans could cause losses to us, could lead to increased claims relating to non-prime or sub-prime mortgage origination practices, and could encourage increased or changing regulation. Any increased or changing regulation could limit the availability of, or require changes in, the terms of certain real estate loan products and could also require us to devote additional resources to comply with that regulation.  61     Item 7.  Continued    Net loss decreased in 2009 primarily due to lower provision for income taxes, operating expenses (reflecting goodwill and other intangible assets impairments during 2008), and interest expense, partially offset by lower finance charges resulting from the sales of real estate loan portfolios as part of our liquidity management efforts, higher provision for finance receivable losses resulting from our higher levels of delinquency and net charge-offs, and lower revenues on finance receivables held for sale originated as held for investment. See (Benefit from) Provision for Income Taxes, Operating Expenses, Interest Expense, Finance Charges, Provision for Finance Receivable Losses, and Finance Receivables Held for Sale Originated as Held for Investment Revenues for further information. Due to economic conditions, we re-evaluated all of our business segments and other operations (including headquarters) in 2009, which resulted in the consolidation of certain branch operations and the closing of 200 branch offices throughout the United States and reductions in our number of employees. See Operating Expenses for further information. The overall credit quality of our finance receivable portfolios declined during 2009. Our charge-off ratio increased to 3.92% in 2009 compared to 2.08% in 2008. Our delinquency ratio increased to 7.24% at December 31, 2009, from 4.99% at December 31, 2008. As a result of our quarterly evaluations of our finance receivable portfolios and economic assessments, we increased our allowance for finance receivable losses by a net addition of $415.3 million to $1.5 billion in 2009.  Benefit from income taxes increased in 2009 when compared to provision for income taxes in 2008 reflecting: (a) AIGs projection that it will have sufficient taxable income in 2009 to use our current year estimated tax losses; and (b) a tax return election made by certain of the Companys affiliates. To the best of its knowledge, AIG is now able to utilize our 2009 net operating losses based on the fact that the two transactions that were projected to be completed in December, 2009 were completed and that AIG will have sufficient taxable income to offset our 2009 net operating losses. This receivable will be settled with AIG in accordance with our tax sharing agreement. We do not anticipate cash receipts due to us for calendar year 2009 under the AIG tax sharing agreement to be paid until late 2010.  Net loss for 2008 reflected a $679.7 million increase in provision for finance receivable losses, the establishment of a deferred tax asset valuation allowance of $622.6 million, goodwill and other intangible assets impairments of $443.7 million, and a $91.6 million increase in realized losses on investment securities and securities lending. See Provision for Finance Receivable Losses, (Benefit from) Provision for Income Taxes, Operating Expenses, and Investment Revenue for further information. Net loss for 2008 also reflected a $59.4 million decline in mortgage banking revenues primarily due to the slower U.S. housing market. Effective June 17, 2008, we significantly reduced our mortgage banking operations, including ceasing WFIs wholesale originations (originations through mortgage brokers). See Note 3 of the Notes to Consolidated Financial Statements in Item 8 for information on the Supervisory Agreement with the Office of Thrift Supervision (OTS) dated June 7, 2007 (the Supervisory Agreement). Due to economic conditions, we re-evaluated our branch business segment during 2008, which resulted in the consolidation of certain branch operations and the closing of 242 branch offices throughout the United States. See Operating Expenses for further information. Our charge-off ratio increased to 2.08% in 2008 compared to 1.16% in 2007. Our delinquency ratio increased to 4.99% at December 31, 2008, from 2.84% at December 31, 2007. As a result of our quarterly evaluations of our finance receivable portfolios and economic assessments, we increased our allowance for finance receivable losses by a net addition of $538.5 million to $1.1 billion in 2008.  Net income decreased significantly in 2007, reflecting a $231.8 million decline in net service fees from affiliates, a $205.9 million increase in provision for finance receivable losses, and a $158.2 million decrease in mortgage banking revenues. Our branch operations experienced growth in 2007 as many mortgage lending sources that became available in the market during the previous few years withdrew. While total finance charges increased compared to 2006, most of the increase was offset by higher corporate borrowing costs due to higher debt refinancing rates and increased credit risk spreads required by institutional investors. The market turmoil also resulted in many legislative and regulatory initiatives  62     Item 7.  Continued    attempting to address concerns surrounding continued consumer homeownership affordability. Our mortgage banking operations in our centralized real estate segment continued to contract during 2007 and we established a reserve of $178 million for estimated costs of a financial remediation program whereby certain borrowers may be provided loans on more affordable terms and/or reimbursed for certain fees. See Note 3 of the Notes to Consolidated Financial Statements in Item 8 for information on the Supervisory Agreement. In addition, the softening U.S. economy and tightening of credit availability were primary drivers for increasing consumer charge-offs and delinquencies during 2007 for the general market and our operations as well. Our charge-off ratio increased to 1.16% in 2007 compared to 0.95% in 2006. Our delinquency ratio increased to 2.84% at December 31, 2007, from 2.06% at December 31, 2006. As a result of our quarterly evaluations of our finance receivable portfolios and economic assessments, we increased our allowance for finance receivable losses by a net addition of $113.2 million in 2007. Net income in 2007 also included a recovery of $65.0 million (pretax) on a legal settlement in January 2007. See Legal Proceedings in Item 3. for additional information on this legal settlement.  See Note 27 of the Notes to Consolidated Financial Statements in Item 8 for information on the results of the Companys business segments.  For a discussion of risk factors relating to our businesses, see Risk Factors in Part I, Item 1A.  Our statements of operations line items as percentages of each years average net receivables were as follows:  Years Ended December 31,200920082007Revenues
Finance charges10.16%10.20%10.42%Insurance0.630.610.67Finance receivables held for sale originated as
held for investment(0.33)(0.11)-Investment0.23(0.03)0.35Net service fees from affiliates0.070.27(0.70)Other(0.34)(0.28)0.66Total revenues10.4210.6611.40Expenses
Interest expense5.034.815.04Operating expenses:
Salaries and benefits1.981.912.25Other operating expenses1.443.181.66Provision for finance receivable losses5.884.141.61Insurance losses and loss adjustment expenses0.280.270.27Total expenses14.6114.3110.83(Loss) income before (benefit from) provision for
income taxes(4.19)(3.65)0.57(Benefit from) provision for income taxes(1.99)1.510.12Net (loss) income(2.20)%(5.16)%0.45%  63     Item 7.  Continued    Factors that affected the Companys operating results were as follows:  Finance Charges   Finance charges by type were as follows:  Years Ended December 31,(dollars in millions)200920082007Real estate loans$  1,269.0$  1,587.0$  1,602.5Non-real estate loans731.3827.3763.9Retail sales finance205.3245.0231.7Total$  2,205.6$  2,659.3$  2,598.1Amount change$    (453.7)$       61.2$       92.8Percent change(17)%2%4%Average net receivables$21,703.3$26,081.0$24,937.5Yield10.16%10.20%10.42%   Finance charges (decreased) increased due to the following:  Years Ended December 31,(dollars in millions)200920082007Change in average net receivables$(443.3)$129.9$85.0Change in yield(5.2)(75.1)7.8Change in number of days(5.2)6.4-Total$(453.7)$  61.2$92.8   Average net receivables by type were as follows:  Years Ended December 31,200920082007(dollars in millions)AmountPercentAmountPercentAmountPercentReal estate loans$16,430.676%$19,756.176%$19,225.677%Non-real estate loans3,578.6164,098.8163,705.415Retail sales finance1,694.182,226.182,006.58Total$21,703.3100%$26,081.0100%$24,937.5100%   Changes in average net receivables by type were as follows:  Years Ended December 31,200920082007(dollars in millions)AmountPercent
ChangeAmountPercent
ChangeAmountPercent
ChangeReal estate loans$(3,325.5)(17)%$   530.53%$  95.21%Non-real estate loans(520.2)(13)393.411380.511Retail sales finance(532.0)(24)219.611342.821Total$(4,377.7)(17)%$1,143.55%$818.53%  64     Item 7.  Continued    The decrease in average net finance receivables in 2009 reflected the slower U.S. housing market, our tighter underwriting guidelines, and liquidity management efforts. We transfer finance receivables to finance receivables held for sale when it is probable that managements intent or ability is to no longer hold those finance receivables for the foreseeable future as part of our liquidity management efforts. In December 2008, we transferred $972.5 million of real estate loans from finance receivables to finance receivables held for sale. During 2009, we transferred $1.9 billion of real estate loans from finance receivables to finance receivables held for sale. As of December 31, 2009, it is probable that we will hold the remainder of the finance receivable portfolio for the foreseeable future, as managements intent is to focus on alternative funding sources, including additional on-balance sheet securitizations.  Effective February 29, 2008, we purchased a substantial portion of Equity One, Inc.s consumer branch finance receivable portfolio consisting of $1.0 billion of real estate loans, $289.8 million of non-real estate loans, and $156.0 million of retail sales finance receivables. However, finance receivable growth resulting from this purchase was partially offset by the slower U.S. housing market, our tighter underwriting guidelines, and our liquidity management efforts which resulted in lower levels of originations of real estate loans in 2008 than in 2007.  Yield by type were as follows:  Years Ended December 31,200920082007Real estate loans7.72%8.03%8.34%Non-real estate loans20.4420.1820.62Retail sales finance12.1211.0111.55Total10.1610.2010.42   Changes in yield in basis points (bp) by type were as follows:  Years Ended December 31,200920082007Real estate loans(31) bp(31) bp(11) bpNon-real estate loans26(44)(36)Retail sales finance111(54)8Total(4)(22)3   Yield decreased in 2009 primarily due to lower real estate loan yield reflecting the increase in later stage delinquencies (which result in reversal of accrued finance charges) and the increase of real estate loan modifications, including TDRs (which result in reduced finance charges), partially offset by higher retail sales finance and non-real estate loan yield reflecting the origination of new finance receivables at higher rates based on market conditions and the discontinuation of certain promotional products.  Yield decreased in 2008 reflecting lower points and fees earned primarily due to the slowing liquidation of our finance receivable portfolio, the increase in later stage delinquencies, the inception of real estate loan modifications, and the lower effective yield on purchased finance receivables.  65     Item 7.  Continued    Insurance Revenues  Insurance revenues were as follows:  Years Ended December 31,(dollars in millions)200920082007Earned premiums$136.3$155.5$159.9Commissions0.63.68.0Total$136.9$159.1$167.9Amount change$(22.2)$  (8.8)$  12.4Percent change(14)%(5)%8%   Earned premiums decreased in 2009 primarily due to decreases in non-credit premium volume and credit earned premiums. Commissions decreased in 2009 primarily due to a decline in commissions that Ocean receives from the sale of various insurance products.  Commissions decreased in 2008 primarily due to a decline in commissions that Ocean receives from the sale of various insurance products. Earned premiums decreased in 2008 primarily due to a decrease in non-credit premium volume.  Premiums earned by type were as follows:  Years Ended December 31,(dollars in millions)200920082007Credit insurance:
Life$  28.3$  31.6$  31.9Accident and health30.835.036.4Property and casualty23.926.524.4Involuntary unemployment15.615.315.2Non-credit insurance:
Life9.315.520.8Accident and health5.810.113.8Premiums assumed under reinsurance agreements22.621.517.4Total$136.3$155.5$159.9  66     Item 7.  Continued    Premiums written by type were as follows:  Years Ended December 31,(dollars in millions)200920082007Credit insurance:
Life$  20.7$  28.8$  34.1Accident and health18.930.738.0Property and casualty19.626.225.3Involuntary unemployment13.315.316.5Non-credit insurance:
Life9.315.420.8Accident and health5.810.113.8Premiums assumed under reinsurance agreements21.023.517.0Total$108.6$150.0$165.5   Finance Receivables Held for Sale Originated as Held for Investment Revenues  Finance receivables held for sale originated as held for investment revenues were as follows:  Years Ended December 31,(dollars in millions)200920082007Mark to market provision$(92.5)$(27.5)$    -Interest income39.8--Net loss on sales(18.9)--Total$(71.6)$(27.5)$    -Amount change$(44.1)$(27.5)$    -Percent change(161)%N/A*-  * Not applicable   During 2008 and 2009, we transferred $972.5 million and $1.9 billion, respectively, of real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance receivables for the foreseeable future. Based on negotiations with prospective purchasers, we determined that a mark to market provision on finance receivables held for sale originated as held for investment of $27.5 million and $92.5 million for 2008 and 2009, respectively, was necessary to reduce the carrying amount of these finance receivables held for sale to fair value.   Investment Revenue  Years Ended December 31,(dollars in millions)200920082007Investment revenue$48.9$  (6.8)$87.6Amount change$55.7$(94.4)$(1.9)Percent change816%(108)%(2)%  67     Item 7.  Continued    Investment revenue was affected by the following:  Years Ended December 31,(dollars in millions)200920082007Average invested assets$919.1$1,496.2$1,526.9Average invested asset yield5.85%5.76%6.13%Net realized losses on investment securities
and securities lending$  (5.6)$   (99.2)$     (7.6)   Generally, we invest cash generated by our insurance operations in various investments, primarily investment securities.  The decrease in average invested assets in 2009 was primarily due to sales of investment securities, the proceeds of which were used by our insurance subsidiaries to pay dividends to AGFC during 2008 and the first quarter of 2009.  Average invested asset yield in 2008 reflected difficult market conditions in recent quarters. Net realized losses on investment securities and securities lending in 2008 included realized losses of $60.7 million on investment securities for which we considered the decline in fair value to be other than temporary. Net realized losses on investment securities and securities lending in 2008 also included $31.5 million of final losses on sales of our investments in AIGs securities lending pool, which we exited during third quarter 2008.   Net Service Fees from Affiliates  Years Ended December 31,(dollars in millions)200920082007Net service fees from affiliates$  14.2$  70.5$(174.4)Amount change$(56.3)$244.9$(231.8)Percent change(80)%140%(404)%   Net service fees from affiliates decreased in 2009 primarily due to lower 2009 reversals of reserves that were recorded in 2007 for costs expected to be incurred relating to WFIs surviving obligations under the terminated mortgage services agreement with AIG Bank. (In first quarter 2006, we terminated the mortgage services agreements with AIG Bank and began originating finance receivables held for sale using our own state licenses.) We established a $128 million reserve in first quarter 2007 and recorded an additional reserve of $50 million in second quarter 2007 reflecting managements then best estimate of the expected costs of the remediation program pursuant to the terms of the Supervisory Agreement. As a result of our subsequent evaluations of our loss exposure, we reduced the OTS remediation reserve by $17.6 million in 2009 and by $66.6 million in 2008. See Note 3 of the Notes to Consolidated Financial Statements in Item 8 for information on the Supervisory Agreement.  68     Item 7.  Continued    Other Revenues  Other revenues were as follows:  Years Ended December 31,(dollars in millions)200920082007Foreign exchange (loss) gain on foreign currency
denominated debt$(51.9)$   8.8$ (33.4)Writedowns on real estate owned(35.0)(32.8)(12.1)Net (loss) recovery on sales of real estate owned(20.1)(25.0)0.2Derivative adjustments19.5(54.8)2.4Loan brokerage fees6.725.475.7Mortgage banking revenues(2.8)0.860.2Recovery on legal settlement--65.0Other10.54.05.0Total$(73.1)$(73.6)$163.0Amount change$   0.5$(236.6)$  37.7Percent change1%(145)%30%   Due to the de-designation of our fair value hedge on April 1, 2009, we recorded a derivative adjustment gain of $61.8 million, partially offset by a foreign exchange loss of $52.4 million in 2009. Derivative adjustments included a credit valuation adjustment loss of $11.3 million on our fair value derivative that no longer qualifies for hedge accounting and an ineffectiveness loss of $30.2 million on our fair value and cash flow derivatives. The credit valuation adjustment loss on our fair value derivative resulted from the measurement of credit risk using credit default swap valuation modeling. If we do not exit these derivatives prior to maturity, the credit valuation adjustment will result in no impact to earnings over the life of the agreements. We do not anticipate exiting these derivatives prior to maturity. These derivatives were with AIG Financial Products Corp., a non-subsidiary affiliate that receives credit support from AIG, its parent.  In third quarter 2008, we recognized a cumulative benefit in other revenues of $27.6 million resulting from the correction of an accounting error. In connection with the January 1, 2008 implementation of the authoritative guidance for the fair value measurements for derivatives, we recorded a loss in other revenues of $39.4 million in first quarter 2008 and a gain of $4.9 million in second quarter 2008 for the credit valuation adjustments on our fair value and cash flow hedges. Upon further review, we concluded that the credit valuation adjustments on our cash flow hedges should have been recorded to accumulated other comprehensive loss. Therefore, in third quarter 2008, we increased other revenues by $27.6 million ($30.5 million loss recorded in first quarter 2008 and $2.9 million gain recorded in second quarter 2008) and decreased accumulated other comprehensive loss by $17.9 million. The impact of this error did not have a material effect on our financial condition or results of operations for the previously reported periods in 2008. Derivative adjustments in 2008 reflected an ineffectiveness loss of $35.6 million, a loss of $9.4 million related to the maturity of a cross currency interest rate swap, and a credit valuation adjustment loss of $1.6 million on our fair value hedges due to the implementation of authoritative guidance for the fair value measurements for derivatives effective January 1, 2008 (of which a $13.3 million loss represents the transition amount at January 1, 2008).  Loan brokerage fees revenues decreased in 2009 and 2008 primarily due to a significant decline in Oceans brokered loan volume reflecting the slower United Kingdom housing market.  69     Item 7.  Continued    Mortgage banking revenues decreased in 2009 and 2008 reflecting a significant decrease in originations of finance receivables held for sale primarily due to the slower U.S. housing market, our tighter underwriting guidelines, and our decision to significantly reduce our mortgage banking operations, including ceasing WFIs wholesale originations effective June 17, 2008. Currently, WFIs limited loan origination activity relates to the financial remediation program discussed in Note 3 of the Notes to Consolidated Financial Statements in Item 8.  The loss in other revenues in 2009 and 2008 also reflected the activity on real estate owned resulting from negative economic fundamentals and the downturn in the U.S. residential real estate market.  Other revenues for 2007 included a recovery on a legal settlement. On January 19, 2007, RMST and SBLI reached an agreement to settle all claims between them relating to Island Mortgage Network, Inc. As part of that settlement, SBLI agreed to pay RMST $65 million. This settlement was completed on January 24, 2007, and RMST dismissed their lawsuit against SBLI.   Interest Expense  The impact of using the swap agreements that qualify for hedge accounting under GAAP is included in interest expense and the related borrowing statistics below. Interest expense by type was as follows:  Years Ended December 31,(dollars in millions)200920082007Long-term debt$     968.9$  1,110.8$     990.7Short-term debt122.3143.3266.5Total$  1,091.2$  1,254.1$  1,257.2Amount change$    (162.9)$       (3.1)$       82.0Percent change(13)%-%7%Average borrowings$21,791.9$24,853.6$23,952.5Interest expense rate5.00%5.03%5.24%   Interest expense (decreased) increased due to the following:  Years Ended December 31,(dollars in millions)200920082007Change in average borrowings$(154.0)$ 47.2$38.9Change in interest expense rate(8.9)(50.3)43.1Total$(162.9)$  (3.1)$82.0   Average borrowings by type were as follows:  Years Ended December 31,200920082007(dollars in millions)AmountPercentAmountPercentAmountPercentLong-term debt$19,192.688%$21,176.585%$18,943.079%Short-term debt2,599.3123,677.1155,009.521Total$21,791.9100%$24,853.6100%$23,952.5100%  70     Item 7.  Continued    Changes in average borrowings by type were as follows:  Years Ended December 31,200920082007(dollars in millions)AmountPercent
ChangeAmountPercent
ChangeAmountPercent
ChangeLong-term debt$(1,983.9)(9)%$2,233.512%$ 896.65%Short-term debt(1,077.8)(29)(1,332.4)(27)(129.1)(3)Total$(3,061.7)(12)%$   901.14%$767.53%   AGFC issued $961.9 million of long-term debt in 2009 (via a securitization transaction), compared to $2.6 billion in 2008 (including $2.1 billion of credit facility borrowings) and $7.1 billion in 2007. We used the proceeds of these long-term debt issuances to support our liquidity position, finance receivable volume, and to refinance maturing debt.  Due to the significant disruption in the U.S. residential mortgage and credit markets, AIGs liquidity issues, and our reduced liquidity, we borrowed all available commitments under our primary credit facilities during September 2008. Prior to our credit facility borrowings, we also borrowed funds under a demand note agreement with AIG Funding. The outstanding balance under this demand note accrued interest at a rate based upon AIGs borrowing rate under the FRBNY Credit Agreement. During March 2009, AGFC repaid the $419.5 million (plus interest) owed under this demand note. Under certain circumstances, an event of default or declaration of acceleration under our borrowing agreements could also result in an event of default under other borrowing agreements of the Company, as well as for AIG under the FRBNY Credit Agreement.  As part of our on-balance sheet, servicing-released securitization transaction that closed July 30, 2009, we sold at a discount to a third party $1.2 billion of senior certificates with a 5.75% coupon. AGFCs reported interest expense on the senior certificates will depend (in addition to the 5.75% coupon and sales discount) upon the actual repayment rates and losses experienced with respect to the underlying mortgage loans. The prevailing market conditions and the servicing and modification activities of the servicer will also influence the performance of the mortgage loans, and therefore the actual annualized interest expense rate incurred by AGFC. Pricing assumptions for the behavior of these servicing-released mortgage loans are a 10% annualized constant prepayment and a 3% annualized constant default rate. Based on the assumptions above, and the fact that the tranches of senior certificates were issued at various discounts, the yield on the senior certificates would range from 13.79% to 18.13% throughout the life of the transaction and the expected weighted average remaining life of the senior certificates would be 2.2 years.  Interest expense rate by type were as follows:  Years Ended December 31,200920082007Long-term debt5.05%5.24%5.22%Short-term debt4.643.865.32Total5.005.035.24  71     Item 7.  Continued    Changes in interest expense rate in basis points by type were as follows:  Years Ended December 31,200920082007Long-term debt(19) bp2  bp17  bpShort-term debt78(146)18Total(3)(21)17   Prior to the events limiting our access to capital markets beginning in September 2008, our previously issued long-term floating rate unsecured debt and commercial paper experienced lower overall costs of funds as compared to recent prior periods. Our future overall interest expense rates could be materially higher, but actual future interest expense rates will depend on our funding sources utilized, general interest rate levels and market credit spreads, which are influenced by our asset credit quality, our credit ratings, and the market perception of credit risk for the Company and our ultimate parent.  The following table presents the credit ratings of AGFI and AGFC as of March 4, 2010. These credit ratings may be changed, suspended, or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request. In parentheses, following the initial occurrence in the table of each rating, is an indication of that ratings relative rank within the agencys rating categories. That ranking refers only to the generic or major rating category and not to the modifiers appended to the rating by the rating agencies to denote relative position within such generic or major category. AGFI does not intend to disclose any future changes to, or suspensions or withdrawals of, these ratings except in its Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.


|     |                 |              |                       |  |                  |                 |                 
|---- | --------------- | ------------ | --------------------- |  | ---------------- | --------------- | ----------------
|     | Short-term Debt |              | Senior Long-term Debt
|     | Moodys         | S&P          | Fitch (a)             |  | Moodys (b)      | S&P (c)         | Fitch (d)       
|AGFC | Not prime       | C (7th of 8) | -                     |  | B2 (6th of 9)(e) | B (6th of 8)(e) | BB (5th of 9)(f)
|AGFI | Not prime       | C            | -                     |  | -                | -               | BB(f)           

(a) On May 15, 2009, Fitch Ratings (Fitch) withdrew its short-term debt ratings for AGFC and AGFI. (b) Moodys Investors Service (Moodys) appends numerical modifiers 1, 2, and 3 to the generic rating categories to show relative position within rating categories. (c) Standard & Poors (S&P) ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. (d) Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. (e) Negative Outlook. (f) Rating Watch Negative.  72     Item 7.  Continued    Operating Expenses  Operating expenses were as follows:  Years Ended December 31,(dollars in millions)200920082007Salaries and benefits$ 428.7$   497.9$561.7Other operating expenses313.3828.8414.0Total$ 742.0$1,326.7$975.7Amount change$(584.7)$   351.0$111.9Percent change(44)%36%13%Operating expense ratio3.42%5.09%3.91%   Salaries and benefits decreased in 2009 primarily due to fewer employees. The decrease in the number of employees in our centralized real estate business segment reflected our decision to significantly reduce our mortgage banking operations, including ceasing WFIs wholesale originations effective June 17, 2008. The decrease in the number of employees in our branch business segment reflected 242 branch office closings in 2008 (including 179 branch offices closed during fourth quarter 2008) and 200 branch office closings in 2009 (including 149 branch offices closed during second quarter 2009). Due to economic conditions, we re-evaluated our branch business segment during 2008 and re-evaluated all of our business segments and other operations (including headquarters) in second quarter 2009, both of which resulted in the consolidation of certain branch operations and branch office closings throughout the United States and reductions in our number of employees. As a result of the branch office closings, operating expenses included charges of approximately $20.6 million in 2009 and $16.7 million in 2008 for lease termination costs, employee severance and outplacement services, and fixed asset disposals.  Salaries and benefits decreased in 2008 primarily due to decreases in commissions resulting from lower centralized real estate loan production (including our reduced mortgage banking operations) and fewer employees in our centralized real estate and branch business segments.  Other operating expenses decreased in 2009 primarily due to goodwill and other assets impairments in 2008, lower advertising expenses, and reduced operating expenses resulting from our decision to significantly reduce our mortgage banking operations in 2008 and the branch office closings in 2008 and 2009. In 2008, we wrote down goodwill and other intangible assets to zero fair value, reflecting our reduced discounted cash flow expectations. The goodwill and other intangible assets impairment charges were $443.7 million (including $11 million recorded in second quarter 2008 relating to WFIs intangible impairments). In second quarter 2008, we recorded a pretax charge of $27 million resulting from our decision to significantly reduce our mortgage banking operations. The primary components of the $27 million pretax charge were $11 million in lease termination costs and fixed asset disposals, $11 million in intangible impairments, and $3 million in one-time termination costs.  Other operating expenses increased in 2008 primarily due to goodwill and other intangible assets impairments (as previously discussed), partially offset by lower advertising expenses.  The operating expense ratio decreased in 2009 primarily due to lower operating expenses, partially offset by the decline in average net finance receivables. The operating expense ratio increased in 2008 primarily due to higher operating expenses.  73     Item 7.  Continued    Provision for Finance Receivable Losses  At or for the Years Ended December 31,(dollars in millions)200920082007Provision for finance receivable losses$1,275.5$1,080.9$401.3Amount change$   194.6$   679.6$205.9Percent change18%169%105%Net charge-offs$   860.3$   542.4$288.1Charge-off ratio3.92%2.08%1.16%Charge-off coverage1.78x2.10x2.09x60 day+ delinquency$1,391.8$1,255.3$739.3Delinquency ratio7.24%4.99%2.84%Allowance for finance receivable losses$1,532.5$1,140.4$601.9Allowance ratio8.13%4.64%2.36%   Provision for finance receivable losses increased in 2009 and 2008 as a result of our higher levels of delinquency and net charge-offs in 2009 and 2008.  Charge-offs, recoveries, net charge-offs, and charge-off ratio by type were as follows:  Years Ended December 31,(dollars in millions)200920082007Real estate loans:
Charge-offs$473.2$232.5$  96.1Recoveries(10.0)(5.8)(6.5)Net charge-offs$463.2$226.7$  89.6Charge-off ratio2.79%1.14%.47%Non-real estate loans:
Charge-offs$331.4$273.0$188.8Recoveries(31.8)(31.1)(34.2)Net charge-offs$299.6$241.9$154.6Charge-off ratio8.29%5.91%4.19%Retail sales finance:
Charge-offs$108.0$  83.3$  54.0Recoveries(10.5)(9.5)(10.1)Net charge-offs$  97.5$  73.8$  43.9Charge-off ratio5.61%3.32%2.20%Total:
Charge-offs$912.6$588.8$338.9Recoveries(52.3)(46.4)(50.8)Net charge-offs$860.3$542.4$288.1Charge-off ratio3.92%2.08%1.16%  74     Item 7.  Continued    Changes in net charge-offs by type were as follows:  Years Ended December 31,(dollars in millions)200920082007Real estate loans$236.5$137.1$26.4Non-real estate loans57.787.319.1Retail sales finance23.729.913.0Total$317.9$254.3$58.5   Changes in charge-off ratios in basis points by type were as follows:  Years Ended December 31,200920082007Real estate loans165  bp67  bp14  bpNon-real estate loans23817210Retail sales finance22911232Total1849221    Total charge-off ratio increased in 2009 and 2008primarily due to negative economic fundamentals, the aging of the real estate loan portfolio, portfolio sales and liquidations, and a higher proportion of branch business segment real estate loans compared to a lower proportion of centralized real estate business segment real estate loans which typically have lower charge-off rates.  Charge-off coverage, which compares the allowance for finance receivable losses to net charge-offs, decreased in 2009 primarily due to higher net charge-offs, partially offset by higher allowance for finance receivable losses. Charge-off coverage increased slightly in 2008 primarily due to higher allowance for finance receivable losses, partially offset by higher net charge-offs.  Delinquency based on contract terms in effect and delinquency ratio by type were as follows:  December 31,(dollars in millions)200920082007Real estate loans:
Delinquency$1,145.6$   936.8$512.7Delinquency ratio7.88%5.11%2.64%Non-real estate loans:
Delinquency$   174.2$   239.1$174.4Delinquency ratio5.06%5.47%4.12%Retail sales finance:
Delinquency$     72.0$     79.4$  52.2Delinquency ratio5.78%3.27%2.23%Total:
Delinquency$1,391.8$1,255.3$739.3Delinquency ratio7.24%4.99%2.84%  75     Item 7.  Continued    Changes in delinquency from the prior year end by type were as follows:  December 31,(dollars in millions)200920082007Real estate loans$208.8$424.1$181.3Non-real estate loans(64.9)64.731.6Retail sales finance(7.4)27.215.3Total$136.5$516.0$228.2   Changes in delinquency ratio from the prior year end in basis points by type were as follows:  December 31,200920082007Real estate loans277  bp247  bp88  bpNon-real estate loans(41)13541Retail sales finance25110446Total22521578   The total delinquency ratio at December 31, 2009 and December 31, 2008, increased when compared to December 31, 2008 and December 31, 2007, respectively, primarily due to negative economic fundamentals, the aging of the real estate loan portfolio, portfolio sales and liquidations, and a higher proportion of branch business segment real estate loans compared to a lower proportion of centralized real estate business segment real estate loans which typically have lower delinquency rates. The increase in total delinquency ratio at December 31, 2009 was partially offset by a decline in the non-real estate loan delinquency ratio reflecting our tighter underwriting guidelines.  Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly to determine the appropriate level of the allowance for finance receivable losses. We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. In our opinion, the allowance is adequate to absorb losses inherent in our existing portfolio. The increase in the allowance for finance receivable losses at December 31, 2009 when compared to December 31, 2008 was primarily due to increases to the allowance for finance receivable losses through the provision for finance receivable losses in response to our higher levels of delinquency. The allowance for finance receivable losses at December 31, 2009 also included $302.5 million related to TDRs, compared to $56.2 million at December 31, 2008. See Note 5 of the Notes to Consolidated Financial Statements in Item 8 for further information on our TDRs.  The increase in the allowance ratio at December 31, 2009and December 31, 2008, when compared to December 31, 2008and December 31, 2007, respectively, was primarily due to increases to the allowance for finance receivable losses through the provision for finance receivable losses and a decline in finance receivables.  Real estate owned increased to $143.1 million at December 31, 2009, from $135.3 million at December 31, 2008, reflecting an increase in foreclosures as a result of negative economic fundamentals and the downturn in the U.S. residential real estate market. See Note 2 of the Notes to Consolidated Financial Statements in Item 8 for information relating to our accounting policy for real estate owned.  76     Item 7.  Continued    Insurance Losses and Loss Adjustment Expenses  Insurance losses and loss adjustment expenses were as follows:  Years Ended December 31,(dollars in millions)200920082007Claims incurred$ 76.4$73.2$65.9Change in benefit reserves(15.0)(3.2)-Total$ 61.4$70.0$65.9Amount change$ (8.6)$  4.1$  6.0Percent change(12)%6%10%   Losses incurred by type were as follows:  Years Ended December 31,(dollars in millions)200920082007Credit insurance:
Life$15.7$18.5$16.2Accident and health16.116.715.2Property and casualty5.95.98.6Involuntary unemployment12.34.82.4Non-credit insurance:
Life(2.9)5.03.5Accident and health1.44.88.6Losses incurred under reinsurance agreements12.914.311.4Total$61.4$70.0$65.9   Insurance losses and loss adjustment expenses decreased in 2009 primarily due to favorable changes in benefit reserves reflecting a decrease in non-credit premium volume, partially offset by higher claims incurred.  Insurance losses and loss adjustment expenses increased in 2008 primarily due to higher claims incurred, partially offset by favorable changes in benefit reserves for ordinary policies.   (Benefit from) Provision for Income Taxes  Years Ended December 31,(dollars in millions)200920082007(Benefit from) provision for income taxes$(431.5)$ 395.0$    29.7Amount change$(826.5)$ 365.3$(194.1)Percent change(209)%N/M*(87)%Pretax (loss) income$(909.2)$(950.7)$ 142.0Effective income tax rate47.46%(41.54)%20.94%  * Not meaningful  77     Item 7.  Continued    Pretax loss decreased in 2009 primarily due to lower operating expenses (reflecting goodwill and other intangible assets impairments during 2008) and interest expense, partially offset by lower finance charges resulting from the sales of real estate loan portfolios as part of our liquidity management efforts, higher provision for finance receivable losses resulting from increases to the allowance for finance receivable losses in response to our higher levels of delinquency and net charge-offs, and lower revenues on finance receivables held for sale originated as held for investment primarily due to mark to market losses upon transfer to finance receivables held for sale.  Pretax loss in 2008 reflected significantly higher provision for finance receivable losses as a result of our higher levels of delinquency and net charge-offs, goodwill and other intangible assets impairments, and significantly higher realized losses on investment securities and securities lending.  Benefit from income taxes increased in 2009 when compared to provision for income taxes in 2008 reflecting: (a) AIGs projection that it will have sufficient taxable income in 2009 to use our current year estimated tax losses; and (b) a tax return election made by certain of the Companys affiliates. To the best of its knowledge, AIG is now able to utilize our 2009 net operating losses based on the fact that the two transactions that were projected to be completed in December, 2009 were completed and that AIG will have sufficient taxable income to offset our 2009 net operating losses. This receivable will be settled with AIG in accordance with our tax sharing agreement. We do not anticipate cash receipts due to us for calendar year 2009 under the AIG tax sharing agreement to be paid until late 2010.  In second quarter 2009, we recorded a tax true-up of $14.5 million (which increased benefit from income taxes) to reflect AIGs revised methodology for the allocation of AIGs tax assets to its subsidiaries, resulting from the utilization of 2008 net operating losses.  As of December 31, 2009, we had a deferred tax asset valuation allowance of $531.6 million to reduce net deferred tax assets to amounts we considered more likely than not (a likelihood of more than 50 percent) to be realized. After the valuation allowance, we had a net deferred tax asset of $9.1 million, which reflected the net deferred tax asset of our Puerto Rico subsidiary and the tax effect of unrealized losses on certain of our available-for-sale investment securities, which management believes is more likely than not to be realized because of our intent and ability to hold these securities until the unrealized losses are recovered. Realization of our net deferred tax asset depends on the ability of the subsidiary to generate sufficient taxable income of the appropriate character within the carryforward periods of the jurisdictions in which the net operating and capital losses, deductible temporary differences and credits were generated.  The effective income tax rate for 2009 reflected the increases in the benefit from income taxes discussed above.  The negative effective income tax rate for 2008 reflected the establishment of a deferred tax asset valuation allowance of $622.6 million, partially offset by tax benefits on our pretax loss, tax-exempt interest, and the impairment of non-deductible goodwill.  The effective income tax rate for 2007 reflected a cumulative deferred tax benefit of $8.6 million resulting from the correction of an accounting error. In connection with the January 1, 2003, purchase business combination of WFI, we identified $40.9 million of intangible assets in accordance with the authoritative guidance for business combinations for which there was no corresponding tax basis. In years 2003 through 2006, we recorded a cumulative $8.6 million in current tax expense associated with the amortization of the intangible assets. Upon review of the amortization of these intangible assets, we concluded that a deferred tax liability of $14.3 million should have been established at the time of the purchase business combination and that, for years 2003 through 2006, the amortization of the intangible  78     Item 7.  Continued    assets should have resulted in a cumulative deferred tax benefit of $8.6 million. Since no deferred tax liability was initially recorded, we recognized a cumulative deferred tax benefit of $8.6 million in first quarter 2007. We further concluded that the $14.3 million deferred tax liability that should have been recorded at the time of the purchase business combination would have increased the amount of goodwill recorded in connection with the purchase business combination. Therefore, in first quarter 2007, we increased the $54.1 million of goodwill initially recorded in connection with the purchase business combination of WFI to $68.4 million. The impact of this error did not have a material effect on our financial condition or results of operations for the previously reported periods.  Additionally, in fourth quarter 2007, we determined that we should have recorded a deferred tax liability for certain Ocean assets (primarily other intangibles) totaling $116.6 million for which there was no corresponding tax basis. As a result, we established a deferred tax liability of $32.9 million and increased the amount of goodwill recorded in connection with this purchase by $32.9 million in fourth quarter 2007. We established the deferred tax liability at the United Kingdom tax rate. The impact of this error did not have a material effect on our financial condition or results of operations for the previously reported periods.   REGULATION AND OTHER  Regulation  We discuss regulation of the branch, centralized real estate, and insurance business segments and international regulation in Item 1.   Taxation  We monitor federal, state, and United Kingdom tax legislation and respond with appropriate tax planning.   79      Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.   The fair values of certain of our assets and liabilities are sensitive to changes in market interest rates. The impact of changes in interest rates would be reduced by the fact that increases (decreases) in fair values of assets would be partially offset by corresponding changes in fair values of liabilities. In aggregate, the estimated impact of an immediate and sustained 100 basis point increase or decrease in interest rates on the fair values of our interest rate-sensitive financial instruments would not be material to our financial position.  The estimated increases (decreases) in fair values of interest rate-sensitive financial instruments were as follows:  December 31,20092008(dollars in thousands)+100 bp-100 bp+100 bp-100 bpAssets
Net finance receivables, less allowance
for finance receivable losses$(686,228)$766,671$(924,822)$1,034,078Fixed-maturity investment securities(37,514)36,855(37,312)40,796Swap agreements26,765(65,616)1,490(87,267)Liabilities
Long-term debt(363,154)337,679(185,885)143,890Bank short-term debt(769)(2,040)992(7,474)Swap agreements--(34,112)31,952   We derived the changes in fair values by modeling estimated cash flows of certain of our assets and liabilities. We adjusted the cash flows to reflect changes in prepayments and calls, but did not consider loan originations, debt issuances, or new investment purchases.  We do not enter into interest rate-sensitive financial instruments for trading or speculative purposes.  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.   80      Item 8.  Financial Statements and Supplementary Data.   An index to our financial statements and supplementary data follows:  TopicPageReport of Independent Registered Public Accounting Firm82Consolidated Balance Sheets83Consolidated Statements of Operations84Consolidated Statements of Shareholders Equity85Consolidated Statements of Cash Flows86Consolidated Statements of Comprehensive (Loss) Income87Notes to Consolidated Financial Statements:Note 1.Nature of Operations88Note 2.Summary of Significant Accounting Policies92Note 3.Supervisory Agreement104Note 4.Recent Accounting Pronouncements105Note 5.Finance Receivables108Note 6.On-Balance Sheet Securitization Transactions112Note 7.Allowance for Finance Receivable Losses113Note 8.Finance Receivables Held for Sale114Note 9.Investment Securities115Note 10.Cash and Cash Equivalents119Note 11.Related Party Transactions120Note 12.Other Assets121Note 13.Long-term Debt121Note 14.Short-term Debt123Note 15.Liquidity Facilities123Note 16.VIEs124Note 17.Derivative Financial Instruments125Note 18.Insurance129Note 19.Other Liabilities131Note 20.Capital Stock131Note 21.Accumulated Other Comprehensive Income (Loss)132Note 22.(Accumulated Deficit) Retained Earnings132Note 23.Income Taxes133Note 24.Lease Commitments, Rent Expense, and Contingent Liabilities137Note 25.Supplemental Cash Flow Information138Note 26.Benefit Plans138Note 27.Segment Information139Note 28.Interim Financial Information (Unaudited)141Note 29.Fair Value Measurements143Note 30.Legal Settlement152Note 31.Subsequent Event153Financial Statement Schedules  Condensed Financial Information of Registrant158  81         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM      To the Shareholder and Board of Directors of American General Finance, Inc.:   In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, shareholders equity and cash flows present fairly, in all material respects, the consolidated financial position of American General Finance, Inc. and its subsidiaries (the Company) at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for other-than-temporary impairments of fixed maturity securities as of April 1, 2009.  As discussed in Note 1 to the consolidated financial statements, the Company is dependent upon the continued financial support of its ultimate parent company, American International Group, Inc., to meet its financial obligations as they become due and to support its ongoing operations.    /s/  PricewaterhouseCoopers LLP   Chicago, Illinois March 3, 2010  82      American General Finance, Inc. and Subsidiaries Consolidated Balance Sheets    December 31,(dollars in thousands)20092008Assets

Net finance receivables (Notes 5 and 7):
Real estate loans$14,519,909$18,352,859Non-real estate loans3,190,0564,035,152Retail sales finance1,129,2202,211,359Net finance receivables18,839,18524,599,370Allowance for finance receivable losses (Note 7)(1,532,485)(1,140,421)Net finance receivables, less allowance for finance
receivable losses17,306,70023,458,949Finance receivables held for sale (Note 8)693,675960,432Investment securities (Note 9)733,263696,338Cash and cash equivalents (Note 10)1,311,842916,318Notes receivable from affiliate (Note 11)1,550,906-Other assets (Note 12)1,183,743515,338Total assets$22,780,129$26,547,375Liabilities and shareholders equity

Long-term debt (Notes 13 and 17)$17,743,343$20,980,980Short-term debt (Notes 14 and 17):Note payable to affiliate-422,001Other short-term debt2,450,0002,713,771Insurance claims and policyholder liabilities (Note 18)350,874393,583Other liabilities (Note 19)312,926390,284Accrued taxes (Note 23)6,3337,425Total liabilities20,863,47624,908,044Shareholders equity:
Common stock (Note 20)1,0001,000Additional paid-in capital1,971,1751,366,791Accumulated other comprehensive income (loss) (Note 21)1,846(129,145)(Accumulated deficit) retained earnings (Note 22)(57,368)400,685Total shareholders equity1,916,6531,639,331Total liabilities and shareholders equity$22,780,129$26,547,375     See Notes to Consolidated Financial Statements.  83      American General Finance, Inc. and Subsidiaries Consolidated Statements of Operations    Years Ended December 31,(dollars in thousands)200920082007Revenues
Finance charges$ 2,205,573$ 2,659,324$2,598,103Insurance136,947159,096167,948Finance receivables held for sale originated as
held for investment(71,605)(27,456)-Investment48,935(6,835)87,554Net service fees from affiliates14,21370,451(174,401)Other(73,109)(73,555)162,976Total revenues2,260,9542,781,0252,842,180Expenses
Interest expense1,091,1631,254,0941,257,188Operating expenses:
Salaries and benefits428,680497,922561,691Other operating expenses313,345828,742414,058Provision for finance receivable losses1,275,5461,080,968401,322Insurance losses and loss adjustment expenses61,41069,99265,878Total expenses3,170,1443,731,7182,700,137(Loss) income before (benefit from) provision for
income taxes(909,190)(950,693)142,043(Benefit from) provision for income taxes(Note 23)(431,515)394,95929,742Net (loss) income$  (477,675)$(1,345,652)$   112,301     See Notes to Consolidated Financial Statements.  84      American General Finance, Inc. and Subsidiaries Consolidated Statements of Shareholders Equity    Years Ended December 31,(dollars in thousands)200920082007Common stock
Balance at beginning of year$       1,000$       1,000$       1,000Balance at end of year1,0001,0001,000Additional paid-in capital
Balance at beginning of year1,366,7911,146,3661,016,305Capital contributions from parent and other604,384220,425130,061Balance at end of year1,971,1751,366,7911,146,366Accumulated other comprehensive income (loss)
Balance at beginning of year(129,145)(81,846)24,460Change in net unrealized gains (losses):
Investment securities and securities lending55,944(42,047)(7,281)Swap agreements81,99813,853(101,503)Foreign currency translation adjustments11,522(18,089)1,647Retirement plan liabilities adjustment892(1,016)831Cumulative effect of change in accounting
principle, net of tax(19,365)--Other comprehensive gain (loss), net of tax130,991(47,299)(106,306)Balance at end of year1,846(129,145)(81,846)(Accumulated deficit) retained earnings
Balance at beginning of year400,6851,746,3371,847,041Net (loss) income(477,675)(1,345,652)112,301Cumulative effect of change in accounting
principle, net of tax19,622--Common stock dividends--(213,005)Balance at end of year(57,368)400,6851,746,337Total shareholders equity$1,916,653$1,639,331$2,811,857     See Notes to Consolidated Financial Statements.  85      American General Finance, Inc. and Subsidiaries Consolidated Statements of Cash Flows   Years Ended December 31,(dollars in thousands)200920082007Cash flows from operating activities
Net (loss) income$   (477,675)$(1,345,652)$    112,301Reconciling adjustments:
Provision for finance receivable losses1,275,5461,080,968401,322Depreciation and amortization138,517156,710155,583Deferral of finance receivable origination costs(37,114)(64,949)(79,827)Deferred income tax (benefit) charge(662)373,167(128,000)Writedown of goodwill and other intangible assets-443,690-Origination of finance receivables held for sale(4,864)(140,211)(4,494,235)Sales and principal collections of finance receivables originated
as held for sale3,129352,4555,386,970Net loss (gain) on mark to market provision and sales of finance
receivables originated as held for sale1,2223,653(3,822)Mark to market provision on finance receivables held for sale
originated as held for investment92,51627,456-Net loss on sales of finance receivables held for sale originated
as held for investment18,898--Net realized losses on investment securities and securities lending5,55699,2297,646Change in other assets and other liabilities(95,723)(190,952)133,914Change in insurance claims and policyholder liabilities(42,709)(5,168)7,234Change in taxes receivable and payable(465,719)8,423(6,271)Change in accrued finance charges55,1492,236(11,925)Other, net7,058(6,754)(1,039)Net cash provided by operating activities473,125794,3011,479,851Cash flows from investing activities
Finance receivables originated or purchased(2,091,824)(7,113,646)(8,845,032)Principal collections on finance receivables5,054,0226,495,8367,501,553Net cash paid in acquisition of Ocean Finance and Mortgages Limited(29,535)(38,470)(159,293)Sales and principal collections on finance receivables held for sale
originated as held for investment1,990,909--Investment securities purchased(82,185)(80,109)(186,438)Investment securities called and sold103,342645,060103,749Investment securities matured6,61016,51532,665Change in notes receivable from affiliate(1,550,906)--Change in premiums on finance receivables purchased and deferred
charges(8,023)(63,136)(28,240)Change in real estate owned(16,701)(19,176)(55,003)Other, net(18,165)(35,943)(14,257)Net cash provided by (used for) investing activities3,357,544(193,069)(1,650,296)Cash flows from financing activities
Proceeds from issuance of long-term debt961,8562,592,5607,086,745Repayment of long-term debt(4,337,993)(3,816,378)(4,083,858)Change in short-term debt(663,236)(769,492)(892,158)Capital contributions from parent604,261220,000126,000Dividends paid--(213,005)Net cash (used for) provided by financing activities(3,435,112)(1,773,310)2,023,724Effect of exchange rate changes(33)(593)561Increase (decrease) in cash and cash equivalents395,524(1,172,671)1,853,840Cash and cash equivalents at beginning of year916,3182,088,989235,149Cash and cash equivalents at end of year$ 1,311,842$    916,318$ 2,088,989    See Notes to Consolidated Financial Statements.  86      American General Finance, Inc. and Subsidiaries Consolidated Statements of Comprehensive (Loss) Income    Years Ended December 31,(dollars in thousands)200920082007Net (loss) income$(477,675)$(1,345,652)$112,301Other comprehensive gain (loss):
Cumulative effect of change in accounting principle(29,792)--Net unrealized gains (losses) on:
Investment securities on which other-than-temporary
impairments were taken755--All other investment securities and securities lending63,441(163,917)(18,847)Swap agreements81,99819,520(158,549)Foreign currency translation adjustments11,522(18,089)1,647Retirement plan liabilities adjustment1,463(1,665)1,363Income tax effect:
Cumulative effect of change in accounting principle10,427--Net unrealized (gains) losses on:
Investment securities on which other-than-temporary
impairments were taken(264)--All other investment securities and securities lending(22,205)57,3716,596Swap agreements(28,699)(6,832)55,493Retirement plan liabilities adjustment(571)649(532)Valuation allowance on deferred tax assets for:
Investment securities10,605--Swap agreements28,699--Other comprehensive gain (loss), net of tax, before
reclassification adjustments127,379(112,963)(112,829)Reclassification adjustments included in net (loss) income:
Realized losses on:
Investment securities and securities lending5,55699,2297,646Swap agreements-1,7932,390Income tax effect:
Realized losses on:
Investment securities and securities lending(1,944)(34,730)(2,676)Swap agreements-(628)(837)Reclassification adjustments included in net (loss) income,
net of tax3,61265,6646,523Other comprehensive gain (loss), net of tax130,991(47,299)(106,306)Comprehensive (loss) income$(346,684)$(1,392,951)$     5,995     See Notes to Consolidated Financial Statements.  87      American General Finance, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2009    Note 1.  Nature of Operations  American General Finance, Inc. (AGFI, or collectively with its subsidiaries, whether directly or indirectly owned, the Company, we, or our) has been an indirect wholly owned subsidiary of American International Group, Inc. (AIG) since August 29, 2001. AIG is a holding company which, through its subsidiaries, is engaged primarily in a broad range of insurance and insurance-related activities in the United States and abroad. Effective June 29, 2007, AGFI became a direct wholly owned subsidiary of AIG Capital Corporation, a direct wholly owned subsidiary of AIG. AIG Capital Corporation also holds full or majority interests in other AIG financial services affiliates.  AGFI is a financial services holding company whose principal subsidiary is American General Finance Corporation (AGFC). AGFC is also a financial services holding company with subsidiaries engaged in the consumer finance and credit insurance businesses. At December 31, 2009, the Company had 1,213 branch offices in 40 states, Puerto Rico and the U.S. Virgin Islands; foreign operations in the United Kingdom; and approximately 6,600 employees.  GOING CONCERN CONSIDERATION  Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, nor relating to the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.   Liquidity of the Company and Support from AIG  Since the events of September 2008 and through the filing of this report, our traditional borrowing sources, including our ability to issue unsecured debt in the capital markets, have remained unavailable, and management does not expect them to become available to us in the near future. Due to a combination of the challenges facing AIG, our dependency on AIG, our liquidity concerns, our results of operations, downgrades of our credit ratings by the rating agencies, and the turmoil in the capital markets, we currently have no access to the unsecured debt market, and the maximum amount of our credit facilities has been drawn. We cannot determine when access to our traditional borrowing sources will become available to us again.  In light of AIGs current financial situation, AIG has been dependent on the facility (the FRBNY Facility) provided by the Federal Reserve Bank of New York (FRBNY) under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY Credit Agreement), between AIG and the FRBNY. As a result of AIG entering into the FRBNY Facility and AIGs Guarantee and Pledge Agreement with the FRBNY, we, as a subsidiary of AIG, are subject to certain covenants under the FRBNY Credit Agreement. These covenants, among other factors, may limit or restrict our ability to: incur debt, encumber or sell assets, make equity or debt investments in other parties, and pay dividends and distributions.  On March 2, 2009, the U.S. government issued a statement describing its commitment to continue to work with AIG to maintain its ability to meet its obligations as they become due.   88     Notes to Consolidated Financial Statements, Continued    In connection with the preparation of AIGs Annual Report on Form 10-K for the fiscal year ended December 31, 2009, AIG management assessed AIGs ability to continue as a going concern. Based on the U.S. governments continuing commitment to AIG, AIGs completed transactions with the FRBNY, and AIG managements plans to stabilize its businesses and dispose of certain of its assets, and after consideration of the risks and uncertainties of such plans, AIG management believes that AIG will have adequate liquidity to finance and operate its businesses, execute its asset disposition plan, and repay its obligations for at least the next twelve months.  It is possible that the actual outcome of one or more of AIG managements plans could be materially different, or that one or more of AIG managements significant judgments or estimates about the potential effects of the above-mentioned risks and uncertainties could prove to be materially incorrect or that AIGs transactions with the FRBNY will fail to achieve their desired objectives. If one or more of these possible outcomes occurs, AIG may need additional U.S. government support to meet its obligations as they become due. Without additional support from the U.S. government, in the future there could be substantial doubt about AIGs ability to continue as a going concern. If AIG is not able to meet its obligations as they become due, it will have a negative impact on our business and results of operations and on our ability to borrow funds from AIG, to make our debt payments, and to issue new debt.   Progress on Managements Plan for Stabilization of the Company and Repayment of Our Obligations as They Become Due  In addition to finance receivable collections, management is exploring additional initiatives to preserve our liquidity and capital and to meet our financial and operating obligations. These initiatives include additional on-balance sheet securitizations, portfolio sales, expense reductions, and branch closures, while continuing to limit our new lending. The exact nature and magnitude of any additional measures will be driven by our available resources and needs, prevailing market conditions, and the results of our operations. During 2009, we closed 200 branch offices, reduced retail sales financing operations, reduced our number of employees by approximately 1,400 through reductions in force and attrition, and sold $1.9 billion of finance receivables held for sale. In July 2009, we securitized $1.9 billion of real estate loans and received $967.3 million in cash proceeds including accrued interest after the sales discount but before expenses. If our sources of liquidity are not sufficient to meet our contractual obligations as they become due over the next twelve months, we will seek additional funding from AIG, which funding would be subject to AIG receiving the consent of the FRBNY. AIG intends to support our liquidity needs and compliance with all debt covenants and acceleration clauses contained within our debt agreements, or any other significant agreements which could have a material adverse impact on us, through the earlier of a sale of us (or a sale of a portion of us sufficient to deconsolidate us from AIG) or February 28, 2011. In addition, AIG is currently seeking restructuring opportunities for us.  89     Notes to Consolidated Financial Statements, Continued    Managements Assessment and Conclusion  In assessing our current financial position and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:  · the ability and intent of AIG to provide funding to us; · declining financial flexibility and reduced income as we use more of our higher performing assets for on-balance sheet securitizations and portfolio sales; · reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios; · our ability to complete on favorable terms additional on-balance sheet securitizations and portfolio sales and the costs associated with these alternative funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which will affect profitability; · the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates; · our ability to comply with our debt covenants, including covenants requiring our net worth to be maintained at specified levels and certain tangible equity ratios to be met; · access to unsecured debt markets and other sources of funding, and the potential increased cost of alternative funding sources as compared to historic borrowing rates; · adverse credit ratings actions on our debt; · constraints on our business resulting from the FRBNY Credit Agreement and other AIG agreements, including limitations on our ability to pursue (and retain proceeds from) certain funding sources, such as additional on-balance sheet securitizations and portfolio sales, without AIG receiving prior consent from the FRBNY; · the potential for additional unforeseen cash demands or accelerations of obligations; · reduced income due to loan modifications where the borrowers interest rate is reduced, principal payments are deferred, or other concessions are made; · the potential for declines in bond and equity markets; · the potential effect on us if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans; · the potential loss of key personnel; and · the potential adverse effect on us relating to intercompany transactions with AIG, including derivatives and intercompany borrowings, if AIGs liquidity position deteriorates or if AIG is not able to continue as a going concern.  After consideration of the above factors, including AIGs expressed intention to support us, as expressed in AIGs Annual Report on Form 10-K for the fiscal year ended December 31, 2009, based on our estimates and taking into account the risks and uncertainties of such plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations for at least the next twelve months.  It is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates about the potential effects of the risks and uncertainties could prove to be materially incorrect.  90     Notes to Consolidated Financial Statements, Continued    SEGMENTS  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 branch business segment, we:  · originate secured and unsecured non-real estate loans; · 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 and are generally considered non-conforming; · 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 finance receivables originated by AIG Federal Savings Bank (AIG Bank) under a participation agreement.  To supplement our lending and retail sales financing activities, we have historically purchased 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:  · service a portfolio of residential real estate loans generated through: · portfolio acquisitions from third party lenders; · our mortgage origination subsidiaries; · refinancing existing mortgages; · advances on home equity lines of credit; or · correspondent relationships; · originate and have historically acquired residential real estate loans for transfer to the centralized real estate servicing center; · originated residential real estate loans directly with consumers for sale to investors with servicing released to the purchaser; and · originated residential real estate loans through mortgage brokers for sale to investors with servicing released to the purchaser.  Effective June 17, 2008, Wilmington Finance, Inc. (WFI), a wholly owned subsidiary of AGFC, ceased its wholesale originations (originations through mortgage brokers) but continued its retail originations (originations directly with consumers) at a substantially reduced level. Currently, WFIs limited loan origination activity relates to the financial remediation program discussed in Note 3.  In our insurance business segment, we write and reinsure credit life, credit accident and health, credit-related property and casualty, and credit involuntary unemployment insurance covering our customers and the property pledged as collateral through products that the branch business segment offers to its customers. We also offer non-credit insurance products. See Note 27 for further information on the Companys business segments.  At December 31, 2009, the Company had $18.8 billion of net finance receivables due from 1.5 million customer accounts and $3.8 billion of credit and non-credit life insurance in force covering approximately 615,000 customer accounts.  91     Notes to Consolidated Financial Statements, Continued    Note 2.  Summary of Significant Accounting Policies  BASIS OF PRESENTATION  We prepared our consolidated financial statements using accounting principles generally accepted in the United States of America (GAAP). The statements include the accounts of AGFI and its subsidiaries, all of which are wholly owned. We eliminated all material intercompany accounts and transactions. 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. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date through March 4, 2010, the date we filed our financial statements with the SEC. To conform to the 2009 presentation, we reclassified certain items in prior periods.   BRANCH AND CENTRALIZED REAL ESTATE BUSINESS SEGMENTS  Finance Receivables  Generally, we classify finance receivables originated in our branch business segment as finance receivables held for investment based on managements intent at the time of origination. We also classify certain real estate loans originated in our centralized real estate business segment as finance receivables held for investment based on managements intent at the time of origination. We determine classification on a loan-by-loan basis. We classify finance receivables as held for investment due to our ability and intent to hold them until customer payoff. We carry finance receivables at amortized cost which includes accrued finance charges on interest bearing finance receivables, unamortized deferred origination costs, and unamortized net premiums and discounts on purchased finance receivables. They are net of unamortized finance charges on precomputed receivables and unamortized points and fees. We include the cash flows from finance receivables held for investment in the consolidated statements of cash flows as investing activities.  Although a significant portion of insurance claims and policyholder liabilities originate from the finance receivables, our policy is to report them as liabilities and not net them against finance receivables. Finance receivables relate primarily to the financing activities of our branch and centralized real estate business segments. Insurance claims and policyholder liabilities relate to the underwriting activities of our insurance business segment.  We determine delinquency on finance receivables contractually. In our branch business segment we advance the due date on a customers account when the customer makes a partial payment of 90% or more of the scheduled contractual payment. We do not advance the due date on a customers account further if the customer makes an additional partial payment of 90% or more of the scheduled contractual payment and has not yet paid the deficiency amount from a prior partial payment. We do not advance the customers due date on our centralized real estate business segment accounts until we receive full contractual payment.   Finance Receivable Revenue Recognition  We recognize finance charges as revenue on the accrual basis using the interest method. We amortize premiums or accrete discounts on purchased finance receivables as a revenue adjustment using the interest method. We defer the costs to originate certain finance receivables and the revenue from nonrefundable points and fees on loans and amortize them to revenue using the interest method.  92     Notes to Consolidated Financial Statements, Continued    In our branch business segment, we stop accruing finance charges when the fourth contractual payment becomes past due for real estate loans, non-real estate loans, and retail sales contracts and when the sixth contractual payment becomes past due for revolving retail and private label. In our centralized real estate business segment, we stop accruing finance charges when the third contractual payment becomes past due for real estate loans. We reverse finance charge amounts previously accrued upon suspension of accrual of finance charges.   Troubled Debt Restructured Finance Receivables  During 2008 and 2009, we have made an increasing number of modifications to our real estate loans in our centralized real estate and branch business segments to assist borrowers in avoiding foreclosure. When we modify a real estate loans contractual terms for economic or other reasons related to the borrowers financial difficulties and grant a concession that we would not otherwise consider, we classify that loan as a Troubled Debt Restructuring (TDR). We restructure finance receivables only if we believe the customer has the ability to pay under the restructured terms for the foreseeable future. We establish TDR reserves in accordance with the authoritative guidance for impaired loans.  Finance charges for TDR finance receivables require the application of judgment. The following criteria are required for a TDR to be reported with our standard interest accrual practices:  · the performance of a credit evaluation of the modified loan; · the lack of doubt regarding the collectability of all amounts contractually due on the modified loan; and · a period of satisfactory payment performance by the borrower.   Allowance for Finance Receivable Losses  We establish the allowance for finance receivable losses through the provision for finance receivable losses charged to expense. We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly by real estate loans, non-real estate loans, and retail sales finance. 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 internal and external 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.  We charge off each month to the allowance for finance receivable losses non-real estate loans on which payments received in the prior six months have totaled less than 5% of the original loan amount and retail sales finance that are six installments past due. To avoid unnecessary real estate loan foreclosures we may refer borrowers to counseling services, as well as consider a cure agreement, loan modification, voluntary sale (including a short sale), or deed in lieu of foreclosure. 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 start foreclosure proceedings on  93     Notes to Consolidated Financial Statements, Continued    real estate loans when four monthly installments are 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 sale value without the benefit of a full interior and exterior appraisal and lacking sales comparisons. We reduce finance receivables by the amount of the real estate loan, establish a real estate owned asset valued at lower of 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. We occasionally extend the charge-off period for individual accounts when, in our opinion, such treatment is warranted and consistent with our credit risk policies. We increase the allowance for finance receivable losses for recoveries on accounts previously charged off.  We may modify the terms of existing accounts (which may eliminate delinquency) in certain circumstances, such as certain bankruptcy or other catastrophic situations or for economic or other reasons related to the borrowers financial difficulties that justify modification. We also may renew a delinquent account if the customer meets current underwriting criteria 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.   Finance Receivables Held for Sale  Originated as held for sale.We classify certain real estate loans originated in our centralized real estate business segment as finance receivables held for sale based on managements intent at the time of origination. We determine classification on a loan-by-loan basis. We carry real estate loans originated and intended for sale in the secondary market at the lower of cost or fair value, which we primarily determine in the aggregate. We pool most of these loans for valuation because they are homogenous (loans secured by residential one- to four-family dwellings). We compare loans that are viewed as a potential distressed sale (loans rejected from sale transactions, loans repurchased under warranty provisions, loans aged in inventory greater than 60 days, or loans otherwise identified by management) to market on an individual loan basis. We determine fair value by reference to available market indicators such as current investor yield requirements, outstanding forward sale commitments, or negotiations with prospective purchasers, if any. We recognize net unrealized losses through a valuation allowance by charges to income.  We defer real estate loan origination fees and direct costs to originate real estate loans and include them in finance receivables held for sale.  We sell finance receivables held for sale to investors typically with servicing released to the purchaser. We record the sales price we receive less our carrying value of these finance receivables held for sale in mortgage banking revenues (included in other revenues). We also charge a provision for sales recourse to mortgage banking revenues to maintain a reserve for sales recourse.  94     Notes to Consolidated Financial Statements, Continued    We accrue interest income due from the borrower on these finance receivables held for sale from the date of funding until the date of sale to the investor. Upon sale, we collect from the investor any accrued interest income not paid by the borrower. We stop accruing interest income on finance receivables held for sale when the third payment becomes past due and reverse amounts previously accrued upon suspension. We include the cash flows from finance receivables held for sale in the consolidated statements of cash flows as operating activities.   Originated as held for investment. Depending on market conditions or certain capital sourcing strategies, which may impact our ability and/or intent to hold our finance receivables until maturity or for the foreseeable future, we may decide to sell finance receivables originally intended for investment. Managements view of foreseeable future is generally a twelve-month period based on the longest reasonably reliable liquidity forecast period. Our ability to hold finance receivables for the foreseeable future is subject to a number of factors, including economic and liquidity conditions, and therefore may change. As of each reporting period, management determines our ability to hold finance receivables for the foreseeable future based on assumptions for liquidity requirements. When it is probable that managements intent or ability is to no longer hold finance receivables for the foreseeable future and we subsequently decide to sell specifically identified finance receivables that were originally classified as held for investment, the net finance receivables, less allowance for finance receivable losses are reclassified as finance receivables held for sale and are carried at the lower of cost or fair value. Any amount by which cost exceeds fair value is accounted for as a valuation allowance and is recognized in finance receivables held for sale originated as held for investment revenues. We base the fair value estimates on negotiations with prospective purchasers (if any) or by using projected cash flows discounted at the weighted-average interest rates offered in the market for similar finance receivables. We base cash flows on contractual payment terms adjusted for estimates of prepayments and credit related losses. Cash flows resulting from the sale of the finance receivables that were originally classified as held for investment are recorded as an investing activity in the consolidated statements of cash flows since GAAP requires the statement of cash flow presentation to be based on the original classification of the finance receivable. When sold, we record the sales price we receive less our carrying value of these finance receivables held for sale in finance receivables held for sale originated as held for investment revenues.   Real Estate Owned  We acquire real estate owned through foreclosure on real estate loans. We record real estate owned in other assets, initially at lower of loan balance or 85% of the unrelated partys valuation, which approximates the fair value less the estimated cost to sell. We test the balances of real estate owned for impairment whenever events or changes in circumstances indicate that the real estate owned may be impaired. If the required impairment testing suggests real estate owned is impaired, we reduce the carrying amount to estimated fair value less the estimated costs to sell. We charge these impairments to other revenues. We record the sale price we receive for a property less the carrying value and any amounts refunded to the customer as a recovery or loss in other revenues. We do not profit from foreclosures in accordance with the American Financial Services Associations Voluntary Standards for Consumer Mortgage Lending. We only attempt to recover our investment in the property, including expenses incurred.  95     Notes to Consolidated Financial Statements, Continued    Other Intangible Assets  Other intangible assets consisted of trade names, broker relationships, customer relationships, investor relationships, employment agreements, non-compete agreements, and lender panel (group of lenders for whom Ocean Finance and Mortgages Limited (Ocean) performs loan origination services). Historically, we tested our other intangible assets for impairment during the first quarter of each year. We tested for impairment between these annual reviews if adverse changes developed in the underlying business. Accordingly, we performed an assessment of our other intangible assets to test for recoverability. The assessment of recoverability was based on our estimates. We compared projected undiscounted future cash flows to the carrying value of the asset group. When the test for recoverability identified that the carrying value of the asset group was not recoverable and the asset groups fair value was measured in accordance with the fair value measurement framework, we recognized an impairment charge in operating expenses for the amount by which the carrying value of the asset group exceeded its estimated fair value. We calculated the amount of the impairment using the income approach. The income approach uses discounted cash flow projections. Based on our estimate of a market participants view of the risks associated with the projected cash flows, the discount rate used in these calculations was 20% when we wrote down other intangible assets to zero fair value in third quarter 2008. See Note 29 for further information on fair value measurements.   Loan Brokerage Fees Revenues Recognition  We recognize the following as loan brokerage fees in other revenues:  · commissions from lenders for loans brokered to them; · fees from customers to process their loans; and · fees from other credit originators for customer referrals.  We recognize these commissions and fees in loan brokerage fees revenues when we provide the services or referrals listed above.   Net Service Fees from Affiliates  Net service fees from affiliates include amounts we charged AIG Bank for services under our agreements for AIG Banks origination and sale of non-conforming residential real estate loans. Our mortgage origination subsidiaries assumed financial responsibility for recourse exposure pertaining to these loans. We netted the provisions for recourse from service fees in net service fee revenue. Net service fees from affiliates also include amounts we charge AIG Bank for certain services under our agreement for AIG Banks origination of private label finance receivables. We recognize these service fees as revenue when we provide the services.  96     Notes to Consolidated Financial Statements, Continued    INSURANCE BUSINESS SEGMENT  Revenue Recognition  We recognize credit insurance premiums on closed-end real estate loans and revolving finance receivables as revenue when billed monthly. We defer single premium credit insurance premiums in unearned premium reserves which we include in insurance claims and policyholder liabilities. We recognize unearned premiums on credit life insurance as revenue using the sum-of-the-digits or actuarial methods, except in the case of level-term contracts, for which we recognize unearned premiums as revenue using the straight-line method over the terms of the policies. We recognize unearned premiums on credit accident and health insurance as revenue using an average of the sum-of-the-digits and the straight-line methods. We recognize unearned premiums on credit-related property and casualty and credit involuntary unemployment insurance as revenue using the straight-line method over the terms of the policies. We recognize non-credit life insurance premiums as revenue when collected but not before their due dates. We recognize commissions on ancillary products as other revenue when received.   Policy Reserves  Policy reserves for credit life, credit accident and health, credit-related property and casualty, and credit involuntary unemployment insurance equal related unearned premiums. We base claim reserves on Company experience. We estimate reserves for losses and loss adjustment expenses for credit-related property and casualty insurance based upon claims reported plus estimates of incurred but not reported claims. We accrue liabilities for future life insurance policy benefits associated with non-credit life contracts and base the amounts on assumptions as to investment yields, mortality, and surrenders. We base annuity reserves on assumptions as to investment yields and mortality. We base insurance reserves assumed under reinsurance agreements where we assume the risk of loss on various tabular and unearned premium methods.   Acquisition Costs  We defer insurance policy acquisition costs, primarily commissions, reinsurance fees, and premium taxes. We include them in other assets and charge them to expense over the terms of the related policies, whether directly written or reinsured.   INVESTMENT SECURITIES  Valuation  We currently classify substantially all of our investment securities as available-for-sale, which we record at fair value. We adjust related balance sheet accounts to reflect the current fair value of investment securities and record the adjustment, net of tax, in accumulated other comprehensive income (loss) in shareholders equity. We record interest receivable on certain investment securities in other assets.  97     Notes to Consolidated Financial Statements, Continued    We evaluate our investment securities for other-than-temporary impairment. The determination that an investment security has incurred an other-than-temporary impairment in value and the amount of any loss recognized requires the judgment of management and a continual review of our investment securities. We consider an investment security to be a candidate for other-than-temporary impairment if it meets any of the following criteria:  · trading at a significant (25 percent or more) discount to par, amortized cost (if lower) or cost for an extended period of time (nine consecutive months or longer); · the occurrence of a discrete credit event resulting in the issuer defaulting on a material outstanding obligation, the issuer seeking protection from creditors under the bankruptcy laws or any similar laws intended for court supervised reorganization of insolvent enterprises, or the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than the par value of their claims; or · we have determined that we may not realize a full recovery on our investment regardless of the occurrence of one of the foregoing events.  Impairment Policy - Effective April 1, 2009 and Thereafter. If we intend to sell a fixed-maturity security or it is more likely than not that we will be required to sell a fixed-maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an other-than-temporary impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to earnings. For all other fixed-maturity securities for which a credit impairment has occurred, the amortized cost is written down to the estimated recovery value with a corresponding charge to earnings. A change in fair value compared to recovery value, if any, is charged to accumulated other comprehensive income (loss), because this is considered a non-credit impairment. When assessing our intent to sell a fixed-maturity security, or if it is more likely than not that we will be required to sell a fixed-maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sale of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. We consider severe price declines and the duration of such price declines in our assessment of potential credit impairments. We also modify our modeled outputs for certain securities when we determine that price declines are indicative of factors not comprehended by the cash flow models. In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed-maturity securities that is not foreign exchange related, we generally prospectively accrete into income the difference between the new amortized cost and the expected undiscounted recovery value over the remaining expected holding period of the security.  98     Notes to Consolidated Financial Statements, Continued    In assessing whether a credit impairment has occurred for a structured fixed-maturity security, we perform evaluations of expected future cash flows, as required by the authoritative guidance for the recognition of other-than-temporary impairments of fixed-maturity securities. Certain critical assumptions are made with respect to the performance of the securities. When estimating future cash flows for a structured fixed-maturity security (e.g. residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDO), and asset-backed securities (ABS)), management considers historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs, which vary by asset class:  · current delinquency rates; · expected default rates and timing of such defaults; · loss severity and timing of any such recovery; · expected prepayment speeds; and · ratings of securities underlying structured products.  For corporate fixed-maturity securities determined to be credit impaired, management considers the fair value as the recovery value when available information does not indicate that another value is more relevant or reliable. When management identifies information that supports a recovery value other than the fair value, the determination of a recovery value considers scenarios specific to the issue and the security, and may be based upon estimates of outcomes of corporate restructurings, the value of any secondary sources of repayment and the disposition of assets.  Impairment Policy  Prior to April 1, 2009. At each balance sheet date, we evaluated our investment securities holdings that had unrealized losses. When we did not intend to hold such securities until they had recovered their cost basis, based on the circumstances at the date of the evaluation, we recorded the unrealized loss in income. If a loss was recognized from a sale subsequent to a balance sheet date as a result of changes in circumstances, the loss was recognized in the period in which the intent to hold the investment securities to recovery no longer existed. Impairment criteria also considered circumstances of a rapid and severe market valuation decline, such as that recently experienced in the credit markets, in which we could not reasonably assert that the recovery period would be temporary (severity losses). In periods subsequent to the recognition of an other-than-temporary impairment charge for fixed-maturity investment securities which was not credit or foreign exchange related, we generally accreted the discount or amortized the reduced premium resulting from the reduction in cost basis over the remaining life of the investment security.   Revenue Recognition  We recognize interest on interest bearing fixed-maturity investment securities as revenue on the accrual basis. We amortize any premiums or accrete any discounts as a revenue adjustment using the effective interest method. We stop accruing interest revenue when the collection of interest becomes uncertain. We record dividends on equity securities as revenue on ex-dividend dates. We recognize income on mortgage-backed securities as revenue using a constant effective yield based on estimated prepayments of the underlying mortgages. If actual prepayments differ from estimated prepayments, we calculate a new effective yield and adjust the net investment in the security accordingly. We record the adjustment, along with all investment securities revenue, in investment revenues.  99     Notes to Consolidated Financial Statements, Continued    Realized Gains and Losses on Investment Securities  We specifically identify realized gains and losses on investment securities and include them in investment revenues.   OTHER  Variable Interest Entities (VIEs)  Certain entities that do not have sufficient equity that is at risk to allow the entity to finance its activities without additional subordinated financial support are considered to be VIEs. A VIE is consolidated by its primary beneficiary, which is the party or group of related parties that absorbs a majority of the expected losses of the VIE, receives the majority of the expected residual returns of the VIE, or both. We determine whether we are the primary beneficiary based on a qualitative assessment of the VIE. This includes a review of the VIEs capital structure, contractual relationships and terms, nature of the VIEs operations and purpose, nature of the VIEs interests issued, and our interests in the entity that either create or absorb variability. We evaluate the design of the VIE, and the related risks the entity was designed to expose to the variable interest holders, in determining whether to consolidate.   Other Invested Assets  Commercial mortgage loans, investment real estate, and insurance policy loans are part of our insurance business segments investment portfolio and we include them in other assets at amortized cost. We recognize interest on commercial mortgage loans and insurance policy loans as revenue on the accrual basis using the interest method. We stop accruing revenue when collection of interest becomes uncertain. We recognize pretax operating income from the operation of our investment real estate as revenue monthly. We include other invested asset revenue in investment revenues. We record accrued other invested asset revenue receivable in other assets.   Cash Equivalents  We consider short-term investments having maturity dates within three months of their date of acquisition to be cash equivalents.   Goodwill  Historically, we tested goodwill for impairment during the first quarter of each year. We tested for impairment between these annual reviews if adverse changes developed in the underlying business. Goodwill impairment testing was performed at the reporting unit level. We assigned goodwill to our reporting units at the date the goodwill was initially recorded. We recorded our goodwill in our branch, centralized real estate, and insurance business segments and all other reporting units (Ocean). Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.  100     Notes to Consolidated Financial Statements, Continued    We initially assessed the potential for impairment by estimating the fair value of each of our reporting units and comparing the estimated fair values with the carrying amounts of those reporting units, including goodwill. The estimate of a reporting units fair value was calculated using the discounted expected future cash flows approach. If the carrying value of a reporting unit exceeded its estimated fair value, goodwill associated with that reporting unit was potentially impaired. The amount of impairment was measured as the excess of the carrying value of goodwill over the estimated fair value of the goodwill. The estimated fair value of the goodwill was measured as the excess of the fair value of the reporting unit over the amounts that would be assigned to the reporting units assets and liabilities in a hypothetical market. Based on our estimate of a market participants view of the risks associated with the projected cash flows, the discount rate used in these calculations was 20% when we wrote down our goodwill to zero fair value in third quarter 2008. This impairment charge was recorded in operating expenses. See Note 29 for further information on fair value measurements.   Income Taxes  We recognize income taxes using the asset and liability method. We establish deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, using the tax rates expected to be in effect when the temporary differences reverse.  We assess our ability to realize deferred tax assets considering all available evidence, including earnings history; timing, character, and amount of future earnings potential; reversal of taxable temporary differences; and tax planning strategies. We provide a valuation allowance for deferred tax assets if it is likely that we will not realize some portion of the deferred tax asset. We include an increase or decrease in a valuation allowance resulting from a change in the realizability of the related deferred tax asset in income.   Derivative Financial Instruments  All of our derivatives are governed by International Swap and Derivatives Association, Inc. (ISDA) standard Master Agreements. The parties to an ISDA Master Agreement agree to net the amounts payable and receivable under all contracts governed by the ISDA Master Agreement in the event of a contract default by either one of the parties. The ISDA Master Agreement further defines close-out netting, or netting upon default, which is the netting of transactions stipulated in the ISDA Master Agreement in case either party is unable to fulfill its obligations going forward. The net exposure by counterparty is determined as the sum of the mid-market values, prior to consideration of non-performance risk, of the derivative transactions governed by a Master Agreement. If the net exposure is from the counterparty to us, we record the derivative asset in other assets on our consolidated balance sheet. If the net exposure is from us to the counterparty, we record the derivative liability in other liabilities on our consolidated balance sheet. We record net unrealized gains and losses on derivative transactions as adjustments to cash flows from operating activities on our consolidated statement of cash flows.  We recognize all derivatives on our consolidated balance sheet at their fair value. We estimate the fair value of our derivatives using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, foreign exchange rates, and the contractual terms of the derivative transactions.  In compliance with the authoritative guidance for fair value measurements, our valuation methodology for derivatives incorporates the effect of our non-performance risk and the non-performance risk of our counterparties. Fair value measurements for derivative liabilities incorporate our own non-performance  101     Notes to Consolidated Financial Statements, Continued    risk by determining the explicit cost for each counterparty to protect against its net exposure to us at the balance sheet date by reference to observable AGFC credit default swap (CDS) spreads. Fair value measurements for derivative assets incorporate counterparty non-performance risk by determining the explicit cost for us to protect against our net exposure to each counterparty at the balance sheet date by reference to observable counterparty CDS spreads. The cost of credit protection is determined under a discounted present value approach considering the market levels for CDS spreads, the mid market value of the net exposure (reflecting the amount of protection required) and the weighted average life of the net exposure. CDS spreads are provided to us by an independent third-party provider of aggregated broker quotes for CDS spreads. We utilize a London Interbank Offered Rate (LIBOR) based interest rate curve to derive our discount rates. A CDS is a derivative contract which allows the transfer of third party credit risk from one party to the other. The buyer of the CDS pays an upfront and/or annual premium to the seller. The sellers payment obligation is triggered by the occurrence of a credit event under a specified reference security and is determined by the loss on that specified reference security. The present value of the amount of the annual and/or upfront premium, the CDS spread, therefore represents a market based expectation of the likelihood that the specified reference party will fail to perform on the reference obligation, a key market observable indicator of non-performance risk. While this approach does not explicitly consider all potential future behavior of the derivative transactions or potential future changes in valuation inputs, we believe this approach provides a reasonable estimate of the fair value of the derivative assets and liabilities, including consideration of the impact of non-performance risk.  We designate each derivative as:  · a hedge of the variability of cash flows that we will receive or pay in connection with a recognized asset or liability (a cash flow hedge); · a hedge of the fair value of a recognized asset or liability (a fair value hedge); or · a derivative that does not qualify as either a cash flow or fair value hedge.  We record the effective portion of the changes in the fair value of a derivative that is highly effective and is qualified and designated as a cash flow hedge in accumulated other comprehensive income (loss), net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We record the effective portion of the changes in the fair value of a derivative that is highly effective and is qualified and designated as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, in current period earnings in other revenues. We record changes in the fair value of a derivative that does not qualify as either a cash flow or fair value hedge and changes in the fair value of hedging instruments measured as ineffectiveness in current period earnings in other revenues.  We formally document all relationships between derivative hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions and our method to assess ineffectiveness. We link all derivatives that we designate as cash flow or fair value hedges to specific assets and liabilities on the balance sheet. For certain types of hedge relationships meeting specific criteria, the Financial Accounting Standards Board (FASB) issued authoritative guidance which allows a shortcut method that provides for an assumption of zero ineffectiveness. Under this method, the periodic assessment of effectiveness is not required. The Companys use of this method was limited to interest rate swaps that hedged certain borrowings, the last of which matured in mid-June 2008. For other AGFC cash flow and fair value hedges, we perform and document an initial prospective assessment of hedge effectiveness using regression analysis to demonstrate that the hedge is expected to be highly effective in future periods. Subsequently, on at least a quarterly basis or sooner if necessary, we perform a prospective hedge effectiveness assessment to demonstrate the continued expectation that the hedge will be highly effective in future periods and a retrospective hedge effectiveness assessment to demonstrate that the hedge was effective in the most recent period. For fair value hedges, ineffectiveness  102     Notes to Consolidated Financial Statements, Continued    is the difference between the change in fair value included in the assessment of hedge effectiveness related to the gain or loss on the derivative and the change in the hedged item related to the risks being hedged. For cash flow hedges, ineffectiveness is the amount by which the cumulative change in the fair value of the hedging instrument exceeds the cumulative change in the fair value of the hypothetical derivative.  We discontinue hedge accounting prospectively when:  · the derivative is no longer effective in offsetting changes in the cash flows or fair value of a hedged item; · we sell, terminate, or exercise the derivative and/or the hedged item or they expire; or · we change our objectives or strategies and designating the derivative as a hedging instrument is no longer appropriate.  For discontinued asset and liability fair value hedges, we begin amortizing the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level yield method. For cash flow hedges that are discontinued for reasons other than the forecasted transaction is not probable of occurring, we begin reclassifying the accumulated other comprehensive income (loss) adjustment to earnings when earnings are affected by the hedged item.   Fair Value Measurements  The fair value of a financial instrument is the amount that would be received if an asset were to be sold or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value should be based on assumptions that market participants would use, including a consideration of non-performance risk.  In determining fair value, we use various valuation techniques and prioritize the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument; whether the instrument is actively traded and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.  We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, currency exchange rates and yield curves. Level 3 inputs are not observable in the market and include managements judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in our hierarchy assessment disclosed in Note 29.  Our fair value processes include controls that are designed to ensure that fair values are appropriate. Such controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and reviews by senior management.  103     Notes to Consolidated Financial Statements, Continued    Foreign Currency  The functional currency of our operations in the United Kingdom is the local currency, the British Pound. We translate financial statement amounts expressed in British Pounds into U.S. Dollars using the authoritative guidance for foreign currency translation. We translate functional currency assets and liabilities into U.S. Dollars using exchange rates prevailing at the balance sheet date. We translate revenues and expenses using monthly average exchange rates for the period. We record the translation adjustments, net of tax, as a separate component of other comprehensive income (loss), which we include in stockholders equity. We record exchange gains and losses resulting from foreign currency transactions in other revenues.    Note 3.  Supervisory Agreement  As disclosed in AGFIs Current Report on Form 8-K dated June 7, 2007, AIG Bank, WFI, and AGFI entered into the Supervisory Agreement with the Office of Thrift Supervision (OTS) on June 7, 2007 (the Supervisory Agreement). The Supervisory Agreement pertains to certain mortgage loans originated in the name of AIG Bank by WFI from July 2003 through early May 2006 pursuant to a mortgage services agreement between WFI and AIG Bank. The mortgage services agreement was terminated in February 2006.  Pursuant to the terms of the Supervisory Agreement, AIG Bank, WFI, and AGFI implemented a financial remediation program whereby certain borrowers may be provided loans on more affordable terms and/or reimbursed for certain fees. Pursuant to the requirements of the Supervisory Agreement, we engaged the services of an external consultant to monitor, evaluate, and periodically report to the OTS on our compliance with the remediation program. The Supervisory Agreement will remain in effect until terminated, modified or suspended in writing by the OTS. Failure to comply with the terms of the Supervisory Agreement could result in the initiation of formal enforcement action by the OTS.  AIG Bank, WFI, and AGFI also made a commitment to donate a total of $15 million over a three-year period to certain not-for-profit organizations to support their efforts to promote financial literacy and credit counseling. As of December 31, 2009, we have donated $10.5 million to this cause.  In accordance with WFIs surviving obligations under the mortgage services agreement with AIG Bank, we established a reserve of $128 million (pretax) as a reduction to net service fees from affiliates as of March 31, 2007, reflecting managements then best estimate of the expected costs of the remediation program. After completion of discussions with the OTS and the execution of the Supervisory Agreement, we recorded an additional reserve of $50 million, inclusive of the $15 million donation commitment, in second quarter 2007. As of December 31, 2009, we have made reimbursements of $59.6 million for payments made by AIG Bank to refund certain fees to customers pursuant to the terms of the Supervisory Agreement. As of December 31, 2009, we have also reduced the reserve by $84.6 million ($17.6 million in 2009, $66.6 million in 2008, and $0.4 million in 2007 as an addition to net service fees from affiliates) resulting from our subsequent evaluations of our loss exposure. As the estimate is based on judgments and assumptions made by management, the actual cost of the remediation program may differ from our estimate.  104     Notes to Consolidated Financial Statements, Continued    Note 4.  Recent Accounting Pronouncements  We adopted the following accounting standards during 2008:  Fair Value Measurements  In September 2006, the FASB issued an accounting standard that defined fair value, established a framework for measuring fair value and expanded disclosure requirements regarding fair value measurements but did not change existing guidance about whether an asset or liability is carried at fair value.The standard also clarified that an issuers credit standing should be considered when measuring liabilities at fair value. We adopted the standard on January 1, 2008, its required effective date. With respect to the implementation of the standard, we applied the credit valuation adjustments to the market value of our derivative instruments prospectively. The most significant effect of the new standard on our results of operations for 2008 related to changes in the fair value methodology with respect to derivative assets already carried at fair value. Our adoption of the new standard resulted in a credit valuation adjustment loss of $1.6 million on our fair value hedges in 2008 (of which $13.3 million represented the transition amount at January 1, 2008). See Note 17 for additional information on our derivatives and Note 29 for additional information on our fair value measurements disclosures.   Fair Value Option  In February 2007, the FASB issued an accounting standard that permits entities to choose to measure at fair value many financial instruments and certain other items that are not required to be measured at fair value. Subsequent changes in fair value for designated items are required to be reported in income. The new standard also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. The new standard permits the fair value option election on an instrument-by-instrument basis for eligible items existing at the adoption date and at initial recognition of an asset or liability, or upon most events that give rise to a new basis of accounting for that instrument. We adopted the new standard on January 1, 2008, its required effective date. Since we did not elect to measure any eligible existing instruments at fair value upon initial application of the new standard, on January 1, 2008, there was no impact to retained earnings. Additionally, we did not elect the fair value option for any newly acquired instruments or other eligible items during 2008 or 2009.   Fair Value of Financial Assets in Inactive Markets  In October 2008, the FASB issued an accounting standard that provides guidance clarifying certain aspects with respect to the fair value measurements of a security when the market for that security is inactive. We have adopted this guidance. Our adoption of the new standard did not have a material effect on our consolidated financial condition or results of operations.   Disclosures about Transfers of Financial Assets and Variable Interest Entities  In December 2008, the FASB issued an accounting standard that amends and expands the disclosure requirements regarding transfers of financial assets and a companys involvement with variable interest entities. The standard was effective for interim and annual periods ending after December 15, 2008. Our adoption of the standard did not affect our financial condition, results of operations, or cash flows, as only additional disclosures were required.  105     Notes to Consolidated Financial Statements, Continued    We adopted the following accounting standards during 2009:  Business Combinations  In December 2007, the FASB issued an accounting standard that changed the accounting for business combinations in a number of ways, including broadening the transactions or events that are considered business combinations; requiring an acquirer to recognize 100 percent of the fair value of certain assets acquired, liabilities assumed, and noncontrolling (i.e., minority) interests; and recognizing contingent consideration arrangements at their acquisition-date fair values with subsequent changes in fair value generally reflected in income, among other changes. We adopted the new business combination standard for business combinations for which the acquisition date is on or after January 1, 2009. Our adoption of the new standard did not have a material effect on our consolidated financial condition, results of operations, or cash flows, but will affect the future accounting for business combinations, if any, as well as goodwill impairment assessments.   Disclosures about Derivative Instruments and Hedging Activities  In March 2008, the FASB issued an accounting standard that requires enhanced disclosures about (a) how and why we use derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect our consolidated financial condition, results of operations, and cash flows. We adopted the new standard on January 1, 2009. See Notes 2 and 17 for related disclosures.   Interim Disclosures about Fair Value of Financial Instruments  In April 2009, the FASB issued an accounting standard that requires companies to disclose in interim financial statements information about the fair value of financial instruments (including methods and significant assumptions used). The standard also requires the disclosure of summarized financial information for interim reporting periods. We adopted the new standard on April 1, 2009.   Recognition and Presentation of Other-Than-Temporary Impairments  In April 2009, the FASB issued an accounting standard that requires a company to recognize the credit component of an other-than-temporary impairment of a fixed-maturity security in income and the non-credit component in accumulated other comprehensive income when the company does not intend to sell the security or it is more likely than not that the company will not be required to sell the security prior to recovery. The standard also changed the threshold for determining when an other-than-temporary impairment has occurred on a fixed-maturity security with respect to intent and ability to hold until recovery. The standard does not change the recognition of other-than-temporary impairment for equity securities. The standard requires additional disclosures in interim and annual reporting periods for fixed- maturity and equity securities. See Note 9 for the expanded disclosures. We adopted the new standard on April 1, 2009 and recorded an after-tax cumulative effect adjustment to decrease accumulated deficit by $19.6 million with an offsetting increase to accumulated other comprehensive loss as of April 1, 2009. The cumulative effect adjustment resulted in an increase of approximately $30.2 million in the amortized cost of bonds, which has the effect of significantly reducing the accretion of investment income over the remaining life of the underlying bonds, beginning in the second quarter of 2009.  106     Notes to Consolidated Financial Statements, Continued    The new standard is expected to reduce the level of other-than-temporary impairment charges recorded in earnings for fixed-maturity securities due to the following required changes in our accounting policy for other-than-temporary impairments:  · Impairment charges for non-credit (e.g., severity) losses are no longer recognized; · The amortized cost basis of credit impaired securities will be written down through a charge to earnings to the present value of expected cash flows, rather than to fair value; and · For fixed maturity securities that are not deemed to be credit impaired, we are no longer required to assert that we have the intent and ability to hold such securities to recovery to avoid an other-than-temporary impairment charge. Instead, an impairment charge through earnings is required only in situations where we have the intent to sell the fixed maturity security or it is more likely than not that we will be required to sell the security prior to recovery.   Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly  In April 2009, the FASB issued an accounting standard that provides guidance for estimating the fair value of assets and liabilities when the volume and level of activity for an asset or liability have significantly decreased and for identifying circumstances that indicate a transaction is not orderly. The new standard also requires extensive additional fair value disclosures. The adoption of the new standard on April 1, 2009, did not have a material effect on our consolidated financial condition, results of operations, or cash flows.   Subsequent Events  In May 2009, the FASB issued an accounting standard that requires disclosure of the date through which a company evaluated the events that occurred subsequent to the balance sheet date and whether that date represents the date the financial statements were issued or were available to be issued. We adopted the new standard for the period ended June 30, 2009. The adoption of the new standard did not affect our consolidated financial condition, results of operations, or cash flows.   Measuring Liabilities at Fair Value  In August 2009, the FASB issued an accounting standard to clarify how the fair value measurement principles should be applied to measuring liabilities carried at fair value. The new standard explains how to prioritize market inputs in measuring liabilities at fair value and what adjustments to market inputs are appropriate for debt obligations that are restricted from being transferred to another obligor. The new standard was effective beginning October 1, 2009 for us. The adoption of the new standard did not have a material effect on our consolidated financial condition, results of operations, or cash flows.   Accounting and Reporting for Decreases in Ownership of a Subsidiary  In January 2010, the FASB issued an accounting standard that clarifies that the partial sale and deconsolidation provisions of the accounting standards addressing consolidation should be applied to (1) a business that is not in the legal form of a subsidiary, (2) transactions with equity method investees and joint ventures, (3) exchanges of groups of assets that constitute businesses for noncontrolling interests in other entities, (4) the deconsolidation of a subsidiary that does not qualify as a business if the substance of  107     Notes to Consolidated Financial Statements, Continued    the transaction is not addressed directly by other guidance, and that the accounting standards addressing consolidation do not apply to the sales of in-substance real estate. The adoption of the new standard did not have a material effect on our consolidated financial condition, results of operations, or cash flows.   We will adopt the following accounting standards in 2010:  Accounting for Transfers of Financial Assets  In June 2009, the FASB issued an accounting standard addressing transfers of financial assets that removed the concept of a qualifying special-purpose entity (QSPE) from the FASB Accounting Standards Codification (ASC) and removed the exception from applying the consolidation rules to QSPEs. The new standard is effective for interim and annual periods beginning on January 1, 2010 for us. Earlier application is prohibited. We do not expect the effect of adopting this new standard on our consolidated financial condition, results of operations, or cash flows to be material.   Consolidation of Variable Interest Entities  In June 2009, the FASB issued an accounting standard that amends the rules addressing consolidation of variable interest entities to an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly affect the entitys economic performance and has (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. The new standard also requires enhanced financial reporting by enterprises involved with variable interest entities. The new standard is effective for interim and annual periods beginning on January 1, 2010 for us. Earlier application is prohibited. We do not expect the effect of adopting this new standard on our consolidated financial condition, results of operations, or cash flows to be material.    Note 5.  Finance Receivables  Components of net finance receivables by type were as follows:  December 31, 2009RealNon-RealRetail(dollars in thousands)Estate LoansEstate LoansSales FinanceTotalGross receivables$14,540,362$3,446,460$1,245,600$19,232,422Unearned finance charges
and points and fees(165,302)(329,454)(132,782)(627,538)Accrued finance charges93,88541,76913,978149,632Deferred origination costs17,82029,582-47,402Premiums, net of discounts33,1441,6992,42437,267Total$14,519,909$3,190,056$1,129,220$18,839,185  108     Notes to Consolidated Financial Statements, Continued     December 31, 2008RealNon-RealRetail(dollars in thousands)Estate LoansEstate LoansSales FinanceTotalGross receivables$18,342,932$4,366,869$2,426,181$25,135,982Unearned finance charges
and points and fees(206,900)(433,219)(253,275)(893,394)Accrued finance charges122,99354,60634,775212,374Deferred origination costs22,57641,915-64,491Premiums, net of discounts71,2584,9813,67879,917Total$18,352,859$4,035,152$2,211,359$24,599,370   Included in the tables above are finance receivables associated with the securitizations that remain on our balance sheet totaling $2.2 billion at December 31, 2009 and $371.0 million at December 31, 2008. See Note 6 and Note 16 for further discussion regarding our securitization transactions.  Real estate loans are secured by first or second mortgages on residential real estate (including manufactured housing) and generally have maximum original terms of 360 months. These loans may be closed-end accounts or open-end home equity lines of credit and may be fixed-rate or adjustable-rate products. Non-real estate loans are secured by consumer goods, automobiles or other personal property, or are unsecured and generally have maximum original terms of 60 months. Retail sales contracts are secured principally by consumer goods and automobiles and generally have maximum original terms of 60 months. Revolving retail and private label are secured by the goods purchased and generally require minimum monthly payments based on outstanding balances. At December 31, 2009 and 2008, 96% of our net finance receivables were secured by the real and/or personal property of the borrower. At December 31, 2009, real estate loans accounted for 77% of the amount and 13% of the number of net finance receivables outstanding, compared to 75% of the amount and 10% of the number of net finance receivables outstanding at December 31, 2008.  Contractual maturities of net finance receivables by type at December 31, 2009 were as follows:  RealNon-RealRetail(dollars in thousands)Estate LoansEstate LoansSales FinanceTotal2010$     283,967$   873,189$   286,812$  1,443,9682011374,9291,070,750230,9491,676,6282012396,141675,854150,0231,222,0182013415,537287,90994,849798,2952014431,731104,26458,866594,8612015+12,617,604178,090307,72113,103,415Total$14,519,909$3,190,056$1,129,220$18,839,185   Contractual maturities are not a forecast of future cash collections. Company experience has shown that customers typically renew, convert or pay in full a substantial portion of finance receivables prior to maturity.  109     Notes to Consolidated Financial Statements, Continued    Principal cash collections and such collections as a percentage of average net receivables by type were as follows:  Years Ended December 31,(dollars in thousands)200920082007Real estate loans:
Principal cash collections$1,738,445$2,365,074$3,352,355% of average net receivables10.58%11.97%17.44%Non-real estate loans:
Principal cash collections$1,621,158$1,886,355$1,967,246% of average net receivables45.30%46.02%53.09%Retail sales finance:
Principal cash collections$1,650,927$2,244,407$2,181,952% of average net receivables97.45%100.82%108.74%   Unused credit limits extended to customers by the Company or by AIG Bank (whose private label finance receivables are fully participated to the Company), totaled $205.0 million at December 31, 2009 and $6.6 billion at December 31, 2008. All unused credit limits, in part or in total, can be cancelled at the discretion of the Company or AIG Bank. During 2009, our active retail merchant relationships declined from 21,500 to 300 reflecting the suspension of dealer operating agreements, which may be reactivated in the future. As a result of this reduction, our unused credit limits decreased significantly in 2009.  Geographic diversification of finance receivables reduces the concentration of credit risk associated with economic stresses in any one region. However, the unemployment and housing market stresses in the U.S. have been national in scope and not limited to a particular region. The largest concentrations of net finance receivables were as follows:  December 31,20092008*(dollars in thousands)AmountPercentAmountPercentCalifornia$  2,206,19412%$  3,011,45812%Florida1,229,00771,565,1916N. Carolina1,116,50461,340,2406Ohio989,42251,231,2855Virginia973,97051,258,4675Illinois836,85641,091,0524Pennsylvania779,25641,040,4034Tennessee669,5904888,8514Other10,038,3865313,172,42354Total$18,839,185100%$24,599,370100%  * December 31, 2008 concentrations of net finance receivables are presented in the order of December 31, 2009 state concentrations.  110     Notes to Consolidated Financial Statements, Continued    At December 31, 2009, we had stopped accruing finance charges on $1.1 billion of real estate loans, non-real estate loans, and retail sales contracts compared to $955.2 million of these types of finance receivables at December 31, 2008. If these finance receivables would have been current in accordance with their original terms, we would have recorded finance charges of approximately $54.6 million in 2009 and $50.8 million in 2008. We accrue finance charges on revolving retail and private label finance receivables up to the date of charge-off at six months past due. We have accrued finance charges of $1.8 million on $27.3 million of revolving retail and private label finance receivables more than 90 days past due at December 31, 2009 and $1.7 million on $25.5 million of these finance receivables that were more than 90 days past due at December 31, 2008.  Due to our liquidity issues, we have sold certain finance receivables as an alternative funding source. During 2008 and 2009, we transferred $972.5 million and $1.9 billion, respectively, of real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance receivables for the foreseeable future. As of December 31, 2009, it is probable that we will hold the remainder of the finance receivable portfolio for the foreseeable future, as managements intent is to focus on alternative funding sources, including additional on-balance sheet securitizations.  Information regarding TDR finance receivables (which are all real estate loans) was as follows:  December 31,(dollars in thousands)20092008TDR net finance receivables$1,381,561$620,590TDR net finance receivables that have a valuation allowance$1,381,561$620,590Allowance for TDR finance receivable losses$   302,500$  56,184   We had no material TDR activity prior to 2008. In addition, we have no commitments to lend additional funds on these TDR finance receivables.  TDR average net receivables and finance charges recognized on TDR finance receivables were as follows:  Years ended December 31,(dollars in thousands)20092008TDR average net receivables$1,117,081$244,286TDR finance charges recognized$     54,248$  13,075   On March 4, 2009, the United States Department of the Treasury issued uniform guidance for loan modifications to be utilized by the mortgage industry in connection with the Home Affordable Modification Program (HAMP). The HAMP is designed to assist certain eligible homeowners who are at risk of foreclosure by applying loan modification requirements in a stated order of succession until their monthly payments are lowered to a specified percentage target of their monthly gross income. The modification guidelines require the servicer to use a uniform loan modification process to provide a borrower with sustainable monthly payments. Effective April 5, 2010, a new program under the HAMP will provide certain incentives to borrowers, servicers, and investors to encourage short sales and deeds in lieu of foreclosure as a way to avoid the foreclosure process. The HAMP guidelines are likely to be  111     Notes to Consolidated Financial Statements, Continued    subject to additional changes and requirements as the United States Department of the Treasury makes adjustments to the program.  As part of a Securities Purchase Agreement and a Securities Exchange Agreement between AIG and the United States Department of the Treasury dated April 17, 2009, AIG agreed that its subsidiaries that were eligible would join the HAMP and would comply with the HAMP guidelines. In third quarter 2009, MorEquity, Inc. (MorEquity) entered into a Commitment to Purchase Financial Instrument and Servicer Participation Agreement (the Agreement) with the Federal National Mortgage Association as financial agent for the United States Treasury, which provides for participation in the HAMP. MorEquity entered into the Agreement as the servicer with respect to our centralized real estate finance receivables, with an effective date of September 1, 2009, in order for MorEquity to prepare its systems to implement the HAMP. As of December 31, 2009, no HAMP modifications had been completed due to MorEquitys recent entry into the HAMP and the mandatory three-month trial period. Our branch operations currently are planning to join the HAMP during the second quarter of 2010, after systems changes necessary to accommodate the HAMP modifications are implemented.    Note 6.  On-Balance Sheet Securitization Transactions  The Company, as part of our overall funding strategy and as part of our efforts to support our liquidity from sources other than our traditional capital market sources, transfers certain finance receivables into VIEs for securitization transactions. Our most recent securitization transaction closed on July 30, 2009. Our securitization transactions do not satisfy the requirements for accounting sale treatment because the securitization trusts do not meet the QSPE criteria and do not have the right to freely pledge or exchange the transferred assets. The securitization trusts do not meet the QSPE criteria due to the significant discretion permitted for working out and disposing of defaulted real estate loans and disposing of any foreclosed real estate. Since the transactions do not meet all of the criteria for sale accounting treatment, the securitized assets and related liabilities are included in our financial statements and are accounted for as secured borrowings.  The Company has limited continued involvement with the finance receivables that have been included in securitization transactions. The most recent securitization transaction, discussed in more detail below, utilizes a third-party servicer to service the finance receivables. The Company services the finance receivables for all of its other existing securitization transactions. These finance receivables have been legally isolated and are only available for payment of the debt and other obligations issued or arising in the securitization transactions. The cash and cash equivalent balances relating to securitization transactions are used only to support the on-balance sheet securitization transactions and are recorded as restricted cash in other assets. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in our securitization transactions. The asset-backed debt has been issued by consolidated VIEs. Refer to Note 16 for further discussion regarding these VIEs and the related assets and liabilities included in our financial statements as part of our secured debt arrangements.  Our 2009 securitization transaction included the sale of approximately $1.9 billion of our centralized real estate loans to a wholly-owned consolidated special purpose vehicle, Third Street Funding LLC (Third Street), that concurrently formed a trust to issue tranches of notes totaling $1.6 billion in initial principal balance of trust certificates to Third Street in exchange for the loans. In connection with the securitization, Third Street sold to a third party at a discount $1.2 billion of senior certificates with a 5.75% coupon. Third Street received cash proceeds, including accrued interest after the sales discount but before expenses, of $967.3 million and retained subordinated and residual interest trust certificates. As a result of  112     Notes to Consolidated Financial Statements, Continued    the combination of over-collateralization and the retained subordinated and residual interest trust certificates, the Company has an economic interest in approximately 40% of the assets transferred.  Pricing assumptions for the behavior of these servicing-released mortgage loans are a 10% annualized constant prepayment and a 3% annualized constant default rate. Based on the assumptions above, and the fact that the tranches of senior certificates were issued at various discounts, the yield on the senior certificates would range from 13.79% to 18.13% throughout the life of the transaction and the expected weighted average remaining life of the senior certificates would be 2.2 years.  In addition to our 2009 securitization, we also executed on-balance sheet securitizations in 2003 (from our branch business segment real estate portfolio) and 2006 (from our centralized real estate business segment real estate portfolio). At December 31, 2009, the 2003 securitization had $23.0 million of real estate loans supporting $20.8 million of our debt and the 2006 securitization had $278.8 million of real estate loans supporting $247.4 million of our debt. At December 31, 2008, the 2003 securitization had $28.6 million of real estate loans supporting $26.0 million of our debt and the 2006 securitization had $342.4 million of real estate loans supporting $307.8 million of our debt.    Note 7.  Allowance for Finance Receivable Losses  Changes in the allowance for finance receivable losses were as follows:  Years Ended December 31,(dollars in thousands)200920082007Balance at beginning of year$1,140,421$   601,900$  488,700Provision for finance receivable losses1,275,5461,080,968401,322Charge-offs(912,602)(588,840)(338,904)Recoveries52,32746,39350,782Transfers to finance receivables held for sale*(23,207)--Balance at end of year$1,532,485$1,140,421$  601,900  * During 2009, we decreased the allowance for finance receivable losses as a result of the transfers of $1.9 billion of real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance receivables for the foreseeable future.   We estimated our allowance for finance receivable losses primarily using the authoritative guidance for contingencies. We based our allowance for finance receivable losses primarily on historical loss experience using migration analysis and the Monte Carlo technique applied to sub-portfolios of large numbers of relatively small homogenous accounts. We adjusted the amounts determined by migration and Monte Carlo for managements estimate of the effects of model imprecision, recent changes to our underwriting criteria, portfolio seasoning, and current economic conditions, including the levels of unemployment and personal bankruptcies. This adjustment resulted in an increase to the amount determined by migration and Monte Carlo of $29.9 million at December 31, 2009, compared to an increase of $63.1 million at December 31, 2008.  113     Notes to Consolidated Financial Statements, Continued    We used the Companys internal data of net charge-offs and delinquency by sub-portfolio as the basis to determine the historical loss experience component of our allowance for finance receivable losses. We used monthly bankruptcy statistics, monthly unemployment statistics, and various other monthly or periodic economic statistics published by departments of the U.S. government and other economic statistics providers to determine the economic component of our allowance for finance receivable losses. There were no other significant changes in the types of observable data we used to measure these components during 2009 or 2008.  We also established TDR reserves in accordance with the authoritative guidance for impaired loans, which are included in our allowance for finance receivable losses. The allowance for finance receivable losses related to our TDRs is calculated in homogeneous aggregated pools of impaired loans that have common risk characteristics. We establish our allowance for finance receivable losses related to our TDRs by calculating the present value (discounted at the loans effective interest rate prior to modification) of all expected cash flows less the recorded investment in the aggregated pool. We use certain assumptions to estimate the expected cash flows from our TDRs. The primary assumptions for our model are prepayment speeds, default rates, and severity rates. See Note 5 for information on TDR reserves.  See Note 2 for information on the determination of the allowance for finance receivable losses.    Note 8.  Finance Receivables Held for Sale  Components of finance receivables held for sale were as follows:  December 31,(dollars in thousands)20092008Finance receivables originated as held for investment:
Principal balance and accrued interest receivable$757,192$970,815Deferred loan costs and fees(6,189)1,699Valuation allowance(57,328)(27,456)Total693,675945,058Finance receivables originated as held for sale:
Principal balance and accrued interest receivable-44,547Deferred loan costs and fees-36Valuation allowance and derivative impact-(29,209)Total-15,374Total$693,675$960,432   During 2009, we transferred $1.9 billion of real estate loans from finance receivables to finance receivables held for sale due to managements intent to no longer hold these finance receivables for the foreseeable future. In 2009, we sold $1.9 billion of finance receivables held for sale. In December 2008, we transferred $972.5 million of real estate loans from finance receivables to finance receivables held for sale.  The slower U.S. housing market, our tighter underwriting guidelines, and our decision to significantly reduce our mortgage banking operations, including ceasing WFIs wholesale originations effective June  114     Notes to Consolidated Financial Statements, Continued    17, 2008, resulted in significantly lower levels of originations of finance receivables held for sale in 2009 and 2008.Currently, WFIs limited loan origination activity relates to the financial remediation program discussed in Note 3.     Note 9.  Investment Securities  Cost/amortized cost, unrealized gains and losses, and fair value of investment securities by type were as follows:


|                                                                                               |                 |            |              |            |                                   
|---------------------------------------------------------------------------------------------- | --------------- | ---------- | ------------ | ---------- | ----------------------------------
|December 31, 2009                                                                              | Cost/
Amortized | Unrealized | Unrealized   | Fair       | Other-
Than-
Temporary
Impairments
|(dollars in thousands)                                                                         | Cost            | Gains      | Losses       | Value      | in AOCI(L) (a)                    
|Fixed maturity investment securities:
Bonds:
U.S. government and government
sponsored entities | $    8,713      | $     543  | $       (72) | $    9,184 | $     -                           
|Obligations of states, municipalities,
and political subdivisions                              | 225,879         | 8,632      | (259)        | 234,252    | -                                 
|Corporate debt                                                                                 | 352,237         | 11,886     | (5,909)      | 358,214    | -                                 
|Mortgage-backed, asset-backed,
and collateralized:
RMBS                                        | 86,174          | 324        | (6,807)      | 79,691     | (3,039)                           
|CMBS                                                                                           | 23,753          | 82         | (10,637)     | 13,198     | (5,582)                           
|CDO/ABS                                                                                        | 30,978          | 269        | (8,566)      | 22,681     | -                                 
|Total                                                                                          | 727,734         | 21,736     | (32,250)     | 717,220    | (8,621)                           
|Preferred stocks                                                                               | 3,991           | -          | (347)        | 3,644      | -                                 
|Other long-term investments (b)                                                                | 6,668           | 1,859      | (769)        | 7,758      | -                                 
|Common stocks                                                                                  | 1,741           | 1,632      | (99)         | 3,274      | -                                 
|Total                                                                                          | $740,134        | $25,227    | $(33,465)    | $731,896   | $(8,621)                          

(a) Represents the amount of other-than-temporary impairment losses in accumulated other comprehensive income (loss), which, starting April 1, 2009, were not included in earnings. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.  (b) Excludes interest in a limited partnership that we account for using the equity method ($1.4 million).   We adopted a new accounting standard relating to the recognition and presentation of other-than-temporary impairments on April 1, 2009 and recorded a cumulative effect adjustment to increase the cost/amortized cost of investment securities by $30.2 million.  115     Notes to Consolidated Financial Statements, Continued     December 31, 2008Cost/
AmortizedUnrealizedUnrealizedFair(dollars in thousands)CostGainsLossesValueFixed maturity investment securities:
Bonds:
U.S. government and government
sponsored entities$    8,135$  1,732$    -$  9,867Obligations of states, municipalities, and
political subdivisions234,1003,585(8,891)228,794Corporate debt423,1554,505(40,596)387,064Mortgage-backed, asset-backed, and
collateralized:
RMBS23,07056(5,107)18,019CMBS13,848-(1,364)12,484CDO/ABS26,646-(4,280)22,366Total728,9549,878(60,238)678,594Preferred stocks5,000-(172)4,828Other long-term investments (a)7,1442,665(230)9,579Common stocks1,6179(109)1,517Total$742,715$12,552$(60,749)$694,518  (a) Excludes interest in a limited partnership that we account for using the equity method ($1.8 million).   Fair value and unrealized losses on investment securities by type and length of time in a continuous unrealized loss position at December 31, 2009 were as follows:  December 31, 200912 Months or LessMore Than 12 MonthsTotal(dollars in thousands)Fair
ValueUnrealized
LossesFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesBonds:
U.S. government and
government
sponsored entities$       480$       (72)$    -$      -$       480$       (72)Obligations of states,
municipalities, and
political subdivisions20,394(140)2,075(119)22,469(259)Corporate debt48,701(1,139)57,095(4,770)105,796(5,909)RMBS51,025(2,236)14,576(4,571)65,601(6,807)CMBS7,178(8,747)947(1,890)8,125(10,637)CDO/ABS10,395(7,870)3,837(696)14,232(8,566)Total138,173(20,204)78,530(12,046)216,703(32,250)Preferred stocks3,644(347)--3,644(347)Other long-term
investments2,201(769)--2,201(769)Common stocks136(99)--136(99)Total$144,154$(21,419)$78,530$(12,046)$222,684$(33,465)   Management reviews all securities in an unrealized loss position on a quarterly basis to determine the ability and intent to hold such securities to recovery, which could be maturity, if necessary, by performing an evaluation of expected cash flows. Management considers factors such as the Company's investment strategy, liquidity requirements, overall business plans, and recovery periods for securities in previous  116     Notes to Consolidated Financial Statements, Continued    periods of broad market declines. For fixed-maturity securities with significant declines, management performed extended fundamental credit analysis on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other market available data.  We did not recognize in earnings the unrealized losses on fixed-maturity securities at December 31, 2009, because management neither intends to sell the securities nor does it believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Furthermore, management expects to recover the entire amortized cost basis of these securities (that is, they are not credit impaired).  At December 31, 2009, $4.8 million of unrealized losses on corporate securities exceeding 12 months were derived from 21 separate bonds from various asset class groups, including Investment Grade, Private Placement and High Yield bonds. The vast majority were rated investment grade. The market value to book value ratio of these securities was approximately 92% as of December 31, 2009. Only two securities were rated below investment grade. The book value on these securities was $12.8 million and the associated unrealized loss was $1.1 million. The Company did not consider these securities in an unrealized loss position to be credit impaired at December 31, 2009.  At December 31, 2009, of the six RMBS representing $4.6 million of unrealized losses exceeding 12 months, four securities were backed by prime jumbo collateral, one was an Alt-A collateral-backed deal and one was a sub-prime collateral-backed deal. Our surveillance process as of the fourth quarter of 2009 indicates that three of the securities were classified as Critical, i.e. credit impaired. Of the three impaired securities, two are backed by jumbo collateral and one is a sub-prime collateral-backed deal. As of February 21, 2010, of the two jumbo impaired securities, one is currently rated CCC by Standard & Poors (S&P) and the other is rated B by Fitch Ratings (Fitch) and BBB by S&P. The impaired sub-prime security is rated CC by S&P, C by Fitch and Aa3 by Moodys Investors Service. All six securities estimated recovery values exceed December 31, 2009 market prices.  Fair value and unrealized losses on investment securities by type and length of time in a continuous unrealized loss position at December 31, 2008 were as follows:  December 31, 200812 Months or LessMore Than 12 MonthsTotal(dollars in thousands)Fair
ValueUnrealized
LossesFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesBonds:
Obligations of states,
municipalities, and
political subdivisions$114,264$  (8,287)$    7,434$     (604)$121,698$  (8,891)Corporate debt176,740(25,988)92,821(14,608)269,561(40,596)RMBS7,414(1,104)9,022(4,003)16,436(5,107)CMBS5,959(1,275)1,922(89)7,881(1,364)CDO/ABS10,570(2,092)5,390(2,188)15,960(4,280)Total314,947(38,746)116,589(21,492)431,536(60,238)Preferred stocks4,828(172)--4,828(172)Other long-term
investments299(230)--299(230)Common stocks258(109)--258(109)Total$320,332$(39,257)$116,589$(21,492)$436,921$(60,749)  117     Notes to Consolidated Financial Statements, Continued    Fair value and unrealized losses on investment securities by type and length of time in a continuous unrealized loss position for which an other-than-temporary impairment was recognized and only the amount related to a credit loss was recognized in earnings, were as follows:  December 31, 200912 Months or LessMore Than 12 MonthsTotal(dollars in thousands)Fair
ValueUnrealized
LossesFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesBonds:
RMBS$   502$(1,152)$5,186$(1,957)$5,688$(3,109)CMBS1,821(5,582)--1,821(5,582)Total$2,323$(6,734)$5,186$(1,957)$7,509$(8,691)   The net realized losses on investment securities and securities lending were as follows:  Years Ended December 31,(dollars in thousands)200920082007Total other-than-temporary impairment losses$(7,022)$(60,698)$(4,128)Portion of loss recognized in accumulated
other comprehensive income2,326--Net impairment losses recognized in net (loss)
income(4,696)(60,698)(4,128)Other net realized losses on investment
securities and securities lending(860)(38,531)(3,518)Total net realized losses on investment
securities and securities lending$(5,556)$(99,229)$(7,646)   Credit impairments recognized in earnings on investment securities for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income were as follows:  Year Ended December 31, 2009April 1, 2009 to(dollars in thousands)December 31, 2009 (a)Balance at beginning of period$ 3,845Additions:
Due to other-than-temporary impairments:
Not previously impaired/impairment not previously recognized246Previously impaired/impairment previously recognized508Reductions:
Realized due to sales with no prior intention to sell(1,267)Realized due to intention to sell-Due to increase in expected cash flows-Balance at end of period$ 3,332  (a) We adopted a new accounting standard on April 1, 2009 that requires us to recognize the credit component of an other-than-temporary impairment in earnings.  118     Notes to Consolidated Financial Statements, Continued    The fair values of investment securities sold or redeemed and the resulting realized gains, realized losses, and net realized losses were as follows:  Years Ended December 31,(dollars in thousands)200920082007Fair value$71,231$646,185$360,110Realized gains$  2,998$  13,532$       915Realized losses(3,610)(20,387)(1,693)Net realized losses$   (612)$  (6,855)$     (778)   Contractual maturities of fixed-maturity investment securities at December 31, 2009 were as follows:  December 31, 2009FairAmortized(dollars in thousands)ValueCostFixed maturities, excluding mortgage-backed
securities:
Due in 1 year or less$    6,898$    6,823Due after 1 year through 5 years122,423118,378Due after 5 years through 10 years232,503227,334Due after 10 years239,826234,294Mortgage-backed securities115,570140,905Total$717,220$727,734   Actual maturities may differ from contractual maturities since borrowers may have the right to prepay obligations. The Company may sell investment securities before maturity to achieve corporate requirements and investment strategies.    Note 10.  Cash and Cash Equivalents  Cash and cash equivalents totaled $1.3 billion at December 31, 2009 and $916.3 million at December 31, 2008. Cash and cash equivalents at December 31, 2009 included cash realized through net liquidations of finance receivables in 2009, sales of finance receivables held for sale in 2009, and our 2009 securitization transaction.  Cash and cash equivalents at December 31, 2008 included cash realized through the September 2008 borrowings under our primary credit facilities (see Note 15).  119     Notes to Consolidated Financial Statements, Continued    Note 11.  Related Party Transactions  On March 24, 2009, AGFC made a loan of $800.0 million to AIG under a demand note agreement between AGFC and AIG dated March 24, 2009. On August 11, 2009, AGFC made an additional loan of $750.0 million to AIG under the March 24, 2009 demand note agreement. The interest rate for the unpaid principal balance is overnight LIBOR plus 50 basis points. Interest is payable monthly, and principal and interest also are payable on demand at any time, provided that notice of demand is delivered to AIG at least one business day prior to the date payment is demanded. AIG may repay principal and interest at any time without penalty. The cash used to fund these loans came from asset sale and securitization proceeds, operations, insurance subsidiary dividends, and the AIG capital contribution received in March 2009. These loans are subject to a subordination agreement in favor of the FRBNY and were made as short-term investment sources for excess cash and to facilitate AIGs obligation to manage its excess cash and excess cash held by its subsidiaries under the FRBNY Facility. At December 31, 2009, notes receivable from AIG totaled $1.6 billion, which included interest receivable of $0.9 million. Interest revenue on these notes receivable from AIG totaled $6.6 million in 2009.  In addition, we are party to cost sharing agreements, including tax sharing arrangements, with AIG. Generally, these agreements provide for the allocation of shared corporate costs based upon a proportional allocation of costs to all AIG subsidiaries. We also reimburse AIG Bank for costs associated with the remediation program related to the Supervisory Agreement. See Note 3 for further information on the Supervisory Agreement.  In September 2008, AGFC borrowed funds from AIG Funding, Inc. (AIG Funding) under a demand note agreement. At December 31, 2008, borrowings under this demand note were at a rate of 7.06% based upon AIGs borrowing rate under the FRBNY Credit Agreement. During March 2009, AGFC repaid the $419.5 million (plus interest) owed under the demand note payable to AIG Funding.  All of our derivative financial instruments are with AIG Financial Products Corp. (AIGFP), a non-subsidiary affiliate that receives credit support from AIG, its parent. See Note 17 for further information on these derivatives.  120     Notes to Consolidated Financial Statements, Continued    Note 12.  Other Assets  Components of other assets were as follows:  December 31,(dollars in thousands)20092008Income tax assets (a)$   474,010$  23,050Derivatives fair values (Notes 17 and 29)181,03214,831Other insurance investments (b)150,603157,137Real estate owned143,057135,321Fixed assets91,78994,499Prepaid expenses and deferred charges69,24067,945Restricted cash (c)50,4974,377Other23,51518,178Total$1,183,743$515,338  (a) Income tax assets include both current and deferred amounts. The components of net deferred tax assets are detailed in Note 23.  (b) Other insurance investments primarily include commercial mortgage loans and accrued investment income.  (c) Restricted cash at December 31, 2009 reflected escrow deposits and funds to be used for future debt payments relating to our 2009 securitization.    Note 13.  Long-term Debt  Carrying value and fair value of long-term debt by type were as follows:  December 31,20092008(dollars in thousands)Carrying
ValueFair
ValueCarrying
ValueFair
ValueSenior debt$17,393,996$14,816,664$20,631,704$10,267,816Junior subordinated debt349,347124,813349,276106,398Total$17,743,343$14,941,477$20,980,980$10,374,214   Weighted average interest expense rates on long-term debt by type were as follows:  Years Ended December 31,200920082007December 31,20092008Senior debt5.03%5.23%5.20%Senior debt5.54%5.03%Junior subordinated
debt6.186.186.14Junior subordinated
debt6.186.11Total5.055.245.22Total5.555.05  121     Notes to Consolidated Financial Statements, Continued    Contractual maturities of long-term debt at December 31, 2009 were as follows:  Carrying(dollars in thousands)ValueFirst quarter 2010$    728,951Second quarter 2010572,917Third quarter 20102,691,920Fourth quarter 2010106,47020104,100,25820113,580,99120122,276,70420132,320,1452014459,1112015-20675,006,134Total$17,743,343   Long-term debt includes a multi-year committed credit facility of $2.125 billion which was fully drawn during September 2008. This facility requires that AGFI and AGFC remain directly or indirectly majority-owned by AIG. If AIG were to divest the Company, we would be required to renegotiate or repay this facility.  The Companys one-year term loan (previously, a 364-day facility) includes a capital support agreement (for the benefit of the lenders under the facility) with AIG, whereby AIG agrees to cause AGFC to maintain: (a) a consolidated net worth (stockholders equity minus the amount of accumulated other comprehensive income or loss) of at least $2.2 billion; and (b) an adjusted tangible leverage at or below 8.0x (further adjusting for excess cash for a calculated support leverage). At December 31, 2009, the support agreements measurement of consolidated net worth was $2.4 billion. If AIG terminates the capital support agreement or does not comply with its terms, the one-year term loan would require renegotiation or repayment. At December 31, 2008, AGFCs support leverage was 8.99x. During March 2009, AIG caused AGFC to receive a $600.0 million capital contribution that would have reduced AGFCs support leverage at December 31, 2008 to 7.05x, in addition to supporting AGFC leverage at March 31, 2009. At December 31, 2009, the leverage measurement under the support agreement was 6.91x. Further capital infusions into the Company would require AIG to obtain the consent of the FRBNY under the FRBNY Credit Agreement.  Certain debt agreements of the Company contain terms that could result in acceleration of payments. Under certain circumstances, an event of default or declaration of acceleration under the borrowing agreements of the Company could also result in an event of default and declaration of acceleration under other borrowing agreements of the Company, as well as for AIG under the FRBNY Credit Agreement.  Based upon AGFCs financial results for the twelve months ended September 30, 2009, a mandatory trigger event occurred under AGFCs hybrid debt with respect to the hybrid debts semi-annual payment due in January 2010. The mandatory trigger event required AGFC to defer interest payments to the junior subordinated debt holders unless AGFC obtained non-debt capital funding in an amount equal to all accrued and unpaid interest on the hybrid debt otherwise payable on the next interest payment date. During January 2010, AIG caused AGFC to receive the non-debt capital funding necessary to satisfy the January 2010 interest payments required by AGFCs hybrid debt.  122     Notes to Consolidated Financial Statements, Continued    Note 14.  Short-term Debt  Information concerning short-term debt by type was as follows:  At or for the Years Ended December 31,(dollars in thousands)200920082007Banks$2,450,000$2,504,146$   108,238Note payable to affiliate-422,001-Commercial paper-172,9743,606,682Extendible commercial notes-14,700193,986Other-21,95134,554Total$2,450,000$3,135,772$3,943,460Average borrowings$2,599,368$3,677,111$5,009,499Weighted average interest rate, at year end:
Money market yield5.10%5.45%4.88%Semi-annual bond equivalent yield5.15%5.51%4.93%   In September 2008, AGFC borrowed funds from AIG Funding under a demand note agreement. At December 31, 2008, borrowings under this demand note were at a rate of 7.06% based upon AIGs borrowing rate under the FRBNY Credit Agreement. During March 2009, AGFC repaid the $419.5 million (plus interest) owed under the demand note payable to AIG Funding.  AGFI and AGFC issuances of commercial paper had terms ranging from 1 to 270 days. At December 31, 2009, we had no issuances of commercial paper outstanding.  AGFC issuances of extendible commercial notes had initial maturities of up to 90 days which AGFC extended to 390 days. At December 31, 2009, AGFC had no issuances of extendible commercial notes outstanding.  Contractual maturities of short-term debt at December 31, 2009 were as follows:  Carrying(dollars in thousands)ValueFirst quarter 2010$         -Second quarter 2010-Third quarter 20102,450,000Fourth quarter 2010-Total$2,450,000    Note 15.  Liquidity Facilities  We historically maintained credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. Due to the extraordinary events in the credit markets, AIGs liquidity issues, and our reduced liquidity, we borrowed all available commitments under our primary credit facilities during September 2008. AGFC does not guarantee any borrowings of AGFI.  123     Notes to Consolidated Financial Statements, Continued    As of December 31, 2009, our primary committed credit facilities were as follows:  (dollars in millions)FacilityCommitted
AmountDrawnExpirationOne-year term loans*$2,450.0$2,450.0July 2010Multi-year facility2,125.02,125.0July 2010Total$4,575.0$4,575.0  * AGFI was an eligible borrower under a 364-day facility for up to $400.0 million, which was fully drawn during September 2008. On July 9, 2009, we converted the outstanding amounts under our expiring 364-day facility into one-year term loans. Any remaining balance of the term loans will mature on July 9, 2010, at which time AGFC and AGFI will be obligated to pay the respective remaining amounts of principal outstanding, plus accrued interest.   Each of the facilities requires that AGFC remain directly or indirectly majority-owned by AIG. If AIG were to divest the Company, we would be required to renegotiate or repay the facilities. The annual commitment fees for the facilities are based upon AGFCs long-term credit ratings and averaged 0.15% at December 31, 2009. AGFCs outstanding borrowings under the committed credit facilities totaled $4.2 billion at December 31, 2008.  AGFI and certain of its subsidiaries also had uncommitted credit facilities of $195.0 million at December 31, 2009 and 2008. Portions of these uncommitted facilities could be increased depending upon lender ability to participate its loans under these facilities. There were no amounts outstanding under the uncommitted credit facilities at December 31, 2009 or 2008.    Note 16.  VIEs  CONSOLIDATED VIES  We use special purpose entities to issue asset-backed securities in securitization transactions to investors. The asset-backed securities are backed by the expected cash flows from securitized real estate loans. Other than servicing fees and prepayment penalties (for our 2003 and 2006 securitizations only), payments from these real estate loans are not available to the Company until the repayment of the debt issued in connection with the securitization transactions has occurred. We recorded these transactions as on-balance sheet secured financings because the transfer of these real estate loans to the trusts did not qualify for sale accounting treatment. We evaluated the securitization trusts, determined that these entities are VIEs of which we are the primary beneficiary, and therefore consolidated such entities. We retain interests in our securitization transactions, including senior and subordinated securities issued by the VIEs and residual interests. We retain credit risk in our securitizations because our retained interests include the most subordinated interest in the securitized assets, which are the first to absorb credit losses on the securitized assets. These retained interests are primarily comprised of $786.3 million, or 40%, of the assets transferred in connection with the on-balance sheet securitization completed on July 30, 2009. We expect that any credit losses in the pool of securitized assets would likely be limited to our retained interests. We generally have no obligation to repurchase or replace securitized assets that subsequently become delinquent or are otherwise in default. See Note 6 for further discussion regarding the securitization transaction.  124     Notes to Consolidated Financial Statements, Continued    Finance receivables that collateralize the secured debt of the VIE remain on our balance sheet and therefore are not included in the VIE assets shown in the following table. These finance receivables totaled $2.2 billion at December 31, 2009 and $371.0 million at December 31, 2008. The total consolidated VIE assets and liabilities associated with our securitization transactions were as follows:  (dollars in thousands)December 31, 2009December 31, 2008Assets:Cash and cash equivalents (a)$     20,388$      -LiabilitiesLong-term debt$1,168,379$333,709  (a) The cash and cash equivalent balances relating to securitization transactions are used only to support the on-balance sheet securitization transactions and are recorded in other assets.   We had no off-balance sheet exposure associated with our variable interests in consolidated VIEs. No additional support to these VIEs beyond what was previously contractually required has been provided during the year. Consolidated interest expense related to these VIEs totaled $75.0 million in 2009, $20.4 million in 2008, and $23.4 million in 2007.  UNCONSOLIDATED VIES  We also have variable interests in VIEs, primarily related to debt issuance, of which we are not the primary beneficiary, and therefore did not consolidate such entities. We calculate our maximum exposure to loss primarily to be the amount of debt issued to or equity invested in the VIE. Our on-balance sheet maximum exposure to loss associated with these VIEs was $349.3 million at December 31, 2009 and December 31, 2008. Our off-balance sheet maximum exposure to loss associated with these VIEs was zero at December 31, 2009 and December 31, 2008.    Note 17.  Derivative Financial Instruments  Our principal borrowing subsidiary is AGFC. AGFC uses derivative financial instruments in managing the cost of its debt by mitigating its exposures (interest rate and currency) in conjunction with specific long-term debt issuances and has used them in managing its return on finance receivables held for sale, but is neither a dealer nor a trader in derivative financial instruments. AGFCs derivative financial instruments consist of interest rate, cross currency, cross currency interest rate, and equity-indexed swap agreements.  While all of our interest rate, cross currency, cross currency interest rate, and equity-indexed swap agreements mitigate economic exposure of related debt, not all of these swap agreements currently qualify as cash flow or fair value hedges under GAAP. At December 31, 2009, equity-indexed debt and related swaps were immaterial.  125     Notes to Consolidated Financial Statements, Continued    In June 2007, we designated certain derivatives as either fair value or cash flow hedges of debt. The fair value hedge consisted of a cross currency interest rate swap designated as a hedge of the change in fair value of foreign currency denominated debt attributable to changes in the foreign exchange rate and the benchmark interest rate. With respect to cash flow hedges, interest rate swaps were designated as hedges of the changes in cash flows on floating-rate debt attributable to changes in the benchmark interest rate, and cross currency and cross currency interest rate swaps were designated as hedges of changes in cash flows on foreign currency denominated debt attributable to changes in the foreign exchange rates and/or the benchmark interest rate.  We formally document all relationships between derivative hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions and our method to assess ineffectiveness. We link all derivatives that we designate as cash flow or fair value hedges to specific assets and liabilities on the balance sheet. For certain types of hedge relationships meeting specific criteria, the FASB issued authoritative guidance which allows a shortcut method that provides for an assumption of zero ineffectiveness. Under this method, the periodic assessment of effectiveness is not required. The Companys use of this method was limited to interest rate swaps that hedged certain borrowings, the last of which matured in mid-June 2008. For other AGFC cash flow and fair value hedges, we perform and document an initial prospective assessment of hedge effectiveness using regression analysis to demonstrate that the hedge is expected to be highly effective in future periods. Subsequently, on at least a quarterly basis or sooner if necessary, we perform a prospective hedge effectiveness assessment to demonstrate the continued expectation that the hedge will be highly effective in future periods and a retrospective hedge effectiveness assessment to demonstrate that the hedge was effective in the most recent period. For fair value hedges, ineffectiveness is the difference between the change in fair value included in the assessment of hedge effectiveness related to the gain or loss on the derivative and the change in the hedged item related to the risks being hedged. For cash flow hedges, ineffectiveness is the amount by which the cumulative change in the fair value of the hedging instrument exceeds the cumulative change in the fair value of the hypothetical derivative.  Notional amounts of our swap agreements and foreign currency forward agreement and weighted average receive and pay rates were as follows:  At or for the Years Ended December 31,(dollars in thousands)200920082007Notional amount:
Interest rate$1,000,000$1,750,000$3,100,000Cross currency and cross currency interest rate2,492,8002,523,2483,129,794Equity-indexed6,8866,8866,886Total$3,499,686$4,280,134$6,236,680Weighted average receive rate3.28%3.90%4.85%Weighted average pay rate4.19%4.65%4.87%  126     Notes to Consolidated Financial Statements, Continued    Notional amount maturities of our swap agreements and foreign currency forward agreement and the respective weighted average pay rates at December 31, 2009 were as follows:  NotionalWeighted Average(dollars in thousands)AmountPay Rate2010$   772,3004.45%20111,457,8865.4520131,269,5002.59Total$3,499,6864.19%   Changes in the notional amounts of our swap agreements and foreign currency forward agreement were as follows:  Years Ended December 31,(dollars in thousands)200920082007Balance at beginning of year$ 4,280,134$ 6,236,680$6,050,686New contracts-34,1121,121,869Expired contracts(780,448)(1,990,658)(935,875)Balance at end of year$ 3,499,686$ 4,280,134$6,236,680   New contracts in 2008 included notional amounts for foreign currency forward agreements for 17.3 million British Pounds ($34.1 million). New contracts in 2007 included notional amounts for interest rate swap agreements of $900.0 million and a foreign currency forward agreement for 111.9 million British Pounds ($221.9 million).  Fair value of derivative instruments presented on a gross basis (excludes the effect of master netting arrangements) by type and the effect of master netting arrangements were as follows:  December 31, 2009NotionalHedgingNon-Designated
Hedging(dollars in thousands)AmountInstrumentsInstrumentsDerivatives  Other Assets:Cross currency and cross currency interest rate$1,870,500$ 184,826$105,791Equity-indexed6,886-1,645Total excluding effect of master netting arrangements1,877,386184,826107,436Effect of master netting arrangementsN/A*(70,740)(40,490)TotalN/A$ 114,086$  66,946Derivatives  Other Liabilities:
Interest rate$1,000,000$   72,183$       -Cross currency and cross currency interest rate622,30039,047-Equity-indexed6,886-483Total excluding effect of master netting arrangements1,629,186111,230483Effect of master netting arrangementsN/A(111,230)-TotalN/A$        -$      483  * not applicable  127     Notes to Consolidated Financial Statements, Continued    The amount of gain (loss) for cash flow hedges recognized in accumulated other comprehensive income (loss) (effective portion), reclassified from accumulated other comprehensive income (loss) into other revenues (effective portion), and recognized in other revenues (ineffective portion) were as follows:  Year Ended December 31, 2009EffectiveIneffective(dollars in thousands)AOCI(L)*From AOCI(L)
to RevenuesRevenuesInterest rate$38,907$  9,078$  (3,529)Cross currency and cross currency interest rate56,0463,877(27,916)Total$94,953$12,955$(31,445)  * accumulated other comprehensive income (loss)   We immediately recognize the portion of the gain or loss in the fair value of a derivative instrument in a cash flow hedge that represents hedge ineffectiveness in current period earnings. We recognized losses related to ineffectiveness of $31.4 million during 2009 in other revenues, compared to losses of $35.4 million during 2008. We included all components of each derivatives gain or loss in the assessment of hedge effectiveness.  At December 31, 2009, we expect $12.3 million of the deferred net loss on cash flow hedges in accumulated other comprehensive income (loss) to be reclassified to earnings during the next twelve months. In 2009, there were no instances in which we reclassified amounts from accumulated other comprehensive income (loss) to earnings as a result of a discontinuance of a cash flow hedge due to it becoming probable that the original forecasted transaction would not occur at the end of the originally specified time period.  The amount recognized in other revenues for the fair value hedge that no longer qualifies for hedge accounting, the related hedged item, and the non-designated hedging instruments were as follows:  Year Ended December 31, 2009Fair Value HedgeNon-Designated Hedging(dollars in thousands)DerivativeHedged ItemInstrumentsCross currency and cross currency interest rate$(13,641)$14,926$49,410Equity-indexed--277Total$(13,641)$14,926$49,687   Due to the de-designation of our fair value hedge on April 1, 2009, we recorded a derivative adjustment gain of $61.8 million, partially offset by a foreign exchange loss of $52.4 million in 2009. We recognized net gains of $1.3 million during 2009 in other revenues related to the ineffective portion of our fair value hedging instruments. We recognized a net loss related to the ineffective portion of our fair value hedging instruments of $0.2 million during 2008 in other revenues. We included all components of each derivatives gain or loss in the assessment of hedge effectiveness.  128     Notes to Consolidated Financial Statements, Continued    AGFC is exposed to credit risk if counterparties to swap agreements do not perform. AGFC regularly monitors counterparty credit ratings throughout the term of the agreements. AGFCs exposure to market risk is limited to changes in the value of swap agreements offset by changes in the value of the hedged debt. In compliance with the authoritative guidance for fair value measurements, our valuation methodology for derivatives incorporates the effect of our non-performance risk and the non-performance risk of our counterparties. We recorded an $11.3 million credit valuation adjustment loss in other revenues on our non-designated derivative and a $20.2 million credit valuation adjustment loss in accumulated other comprehensive income on our cash flow hedges in 2009. We recorded a $1.6 million credit valuation adjustment loss on our fair value hedges and a $2.3 million credit valuation adjustment loss on our cash flow hedges in 2008, of which $13.3 million represented the transition amount at January 1, 2008, from the adoption of the authoritative guidance for the fair value measurements for derivatives. If we do not exit these derivatives prior to maturity and no counterparty defaults occur, the credit valuation adjustment will result in no impact to earnings over the life of the agreements. We do not anticipate exiting these derivatives prior to maturity. These derivatives were with AIGFP, a non-subsidiary affiliate that receives credit support from AIG, its parent.  See Note 29 for information on how we determine fair value on our derivative financial instruments.    Note 18.  Insurance  Components of insurance claims and policyholder liabilities were as follows:  December 31,(dollars in thousands)20092008Finance receivable related:
Unearned premium reserves$110,644$138,369Benefit reserves87,06896,427Claim reserves31,49232,013Subtotal229,204266,809Non-finance receivable related:
Benefit reserves100,882106,538Claim reserves20,78820,236Subtotal121,670126,774Total$350,874$393,583   Our insurance subsidiaries enter into reinsurance agreements with other insurers, including affiliated companies. Insurance claims and policyholder liabilities included the following amounts assumed from other insurers:  December 31,(dollars in thousands)20092008Affiliated insurance companies$50,115$53,410Non-affiliated insurance companies33,97835,568Total$84,093$88,978  129     Notes to Consolidated Financial Statements, Continued    Our insurance subsidiaries business reinsured to others was not significant during any of the last three years.  Our insurance subsidiaries file financial statements prepared using statutory accounting practices prescribed or permitted by the Indiana Department of Insurance, which is a comprehensive basis of accounting other than GAAP.  Reconciliations of statutory net income to GAAP net income (loss) were as follows:  Years Ended December 31,(dollars in thousands)200920082007Statutory net income$ 50,691$ 27,831$83,759Income tax (charge) benefit(9,362)24,7312,485Change in deferred policy acquisition costs(7,687)(2,197)952Reserve changes(5,158)(3,828)4,081Realized gains (losses)3,162(46,207)(7,646)Amortization of interest maintenance reserve2,7641,177(142)Writedown of goodwill-(12,104)-Other, net(851)(881)(1,745)GAAP net income (loss)$ 33,559$(11,478)$81,744   Reconciliations of statutory equity to GAAP equity were as follows:  December 31,(dollars in thousands)20092008Statutory equity$578,132$722,274Reserve changes56,31761,582Decrease in carrying value of affiliates(39,548)(39,334)Deferred policy acquisition costs33,64841,945Net unrealized losses(10,514)(50,360)Asset valuation reserve5,9782,729Income tax charge54722,629Other, net2,917(23,743)GAAP equity$627,477$737,722  130     Notes to Consolidated Financial Statements, Continued    Note 19.  Other Liabilities  Components of other liabilities were as follows:  December 31,(dollars in thousands)20092008Accrued interest on debt$191,581$236,288Escrow liabilities (a)18,981-Surviving obligations under a mortgage servicing agreement (Note 3)15,53947,842Salary and benefit liabilities8,53118,205Derivatives fair values4836,838Uncashed checks, reclassified from cash-13,459Other77,81167,652Total$312,926$390,284  (a) Escrow liabilities at December 31, 2009 reflected liabilities for mortgagors funds placed in escrow for future payments of insurance, tax, and other charges for real estate loans.    Note 20.  Capital Stock  AGFI has two classes of authorized capital stock:  special shares and common shares. AGFI may issue special shares in series. The board of directors determines the dividend, liquidation, redemption, conversion, voting and other rights prior to issuance.  Par value and shares authorized at December 31, 2009 were as follows:  ParSharesValueAuthorizedSpecial Shares-25,000,000Common Shares$0.5025,000,000   Shares issued and outstanding at December 31, 2009 and 2008 were as follows:  December 31,20092008Special Shares--Common Shares2,000,0002,000,000  131     Notes to Consolidated Financial Statements, Continued    Note 21.  Accumulated Other Comprehensive Income (Loss)  Components of accumulated other comprehensive income (loss) were as follows:  December 31,(dollars in thousands)20092008Net unrealized gains (losses) on:
Investment securities and securities lending$ 5,251$  (31,328)Swap agreements3,681(78,317)Foreign currency translation adjustments(4,920)(16,442)Retirement plan liabilities adjustment(2,166)(3,058)Accumulated other comprehensive income (loss)$ 1,846$(129,145)   As of December 31, 2009, we have recognized $5.6 million in accumulated other comprehensive income (loss) related to investment securities for which the credit-related portion of an other-than-temporary impairment has been recognized in earnings. In addition, accumulated other comprehensive income (loss) related to investment securities as of December 31, 2009 includes a valuation allowance of $10.6 million against the related deferred tax assets.      Note 22.  (Accumulated Deficit) Retained Earnings  Certain financing agreements of the Company have requirements regarding maximum leverage and minimum consolidated net worth.  The Companys one-year term loan (previously, a 364-day facility) includes a capital support agreement (for the benefit of the lenders under the facility) with AIG, whereby AIG agrees to cause AGFC to maintain: (a) a consolidated net worth (stockholders equity minus the amount of accumulated other comprehensive income or loss) of at least $2.2 billion; and (b) an adjusted tangible leverage at or below 8.0x (further adjusting for excess cash for a calculated support leverage). At December 31, 2009, the support agreements measurement of consolidated net worth was $2.4 billion. If AIG terminates the capital support agreement or does not comply with its terms, the one-year term loan would require renegotiation or repayment. At December 31, 2008, AGFCs support leverage was 8.99x. During March 2009, AIG caused AGFC to receive a $600.0 million capital contribution that would have reduced AGFCs support leverage at December 31, 2008 to 7.05x, in addition to supporting AGFC leverage at March 31, 2009. At December 31, 2009, the leverage measurement under the support agreement was 6.91x. Further capital infusions into the Company would require AIG to obtain the consent of the FRBNY under the FRBNY Credit Agreement.  Certain debt agreements of the Company contain terms that could result in acceleration of payments. Under certain circumstances, an event of default or declaration of acceleration under the borrowing agreements of the Company could also result in an event of default and declaration of acceleration under other borrowing agreements of the Company, as well as for AIG under the FRBNY Credit Agreement.  132     Notes to Consolidated Financial Statements, Continued    Based upon AGFCs financial results for the twelve months ended September 30, 2009, a mandatory trigger event occurred under AGFCs hybrid debt with respect to the hybrid debts semi-annual payment due in January 2010. The mandatory trigger event required AGFC to defer interest payments to the junior subordinated debt holders unless AGFC obtained non-debt capital funding in an amount equal to all accrued and unpaid interest on the hybrid debt otherwise payable on the next interest payment date. During January 2010, AIG caused AGFC to receive the non-debt capital funding necessary to satisfy the January 2010 interest payments required by AGFCs hybrid debt.  State law restricts the amounts our insurance subsidiaries may pay as dividends without prior notice to, or in some cases prior approval from, the Indiana Department of Insurance. During 2008, our insurance subsidiaries paid $116 million of dividends that did not require prior approval and received authority to pay up to $600 million in additional dividends before March 2009. Of this $600 million, the insurance subsidiaries paid $350 million in December 2008 and $200 million in first quarter 2009. At December 31, 2009, our insurance subsidiaries had statutory capital and surplus of $578.1 million.    Note 23.  Income Taxes  AGFI files a consolidated federal income tax return with AIG. All of the domestic U.S. subsidiaries of AGFI are included in the AIG consolidated return. We provide federal income taxes as if AGFI and the domestic U.S. subsidiaries of AGFI file separate tax returns and pay AIG accordingly under a tax sharing agreement. Our foreign subsidiaries file tax returns in Puerto Rico, the U.S. Virgin Islands, and the United Kingdom.  Components of (benefit from) provision for income taxes were as follows:  Years Ended December 31,(dollars in thousands)200920082007Federal:
Current$(430,984)$  30,363$ 156,043Deferred98,381(238,600)(115,694)Deferred - valuation allowance(98,381)582,898-Total federal(430,984)374,66140,349Foreign:
Current(1,783)(2,685)5,435Deferred(648)(492)665Total foreign(2,431)(3,177)6,100State:
Current1,900(5,886)(3,736)Deferred(89,638)(13,916)(12,971)Deferred - valuation allowance89,63843,277-Total state1,90023,475(16,707)Total$(431,515)$394,959$   29,742  133     Notes to Consolidated Financial Statements, Continued    Benefit from income taxes increased in 2009 when compared to provision for income taxes in 2008 reflecting: (a) AIGs projection that it will have sufficient taxable income in 2009 to use our current year estimated tax losses; and (b) a tax return election made by certain of the Companys affiliates. As a result, during 2009 we reclassified $384.1 million of deferred tax assets related to the 2009 net operating losses to a current tax receivable and the valuation allowance related to these deferred tax assets was reversed. To the best of its knowledge, AIG is now able to utilize our 2009 net operating losses based on the fact that the two transactions that were projected to be completed in December, 2009 were completed and that AIG will have sufficient taxable income to offset our 2009 net operating losses. The net current federal income tax receivable of $464.9 million recorded at December 31, 2009 will be settled with AIG in accordance with our tax sharing agreement. We do not anticipate cash receipts due to us for calendar year 2009 under the AIG tax sharing agreement to be paid until late 2010.  We recorded a current federal income tax provision for 2008. Under applicable federal income tax law, taxable income of a life insurance company may not be fully offset by losses from non-life operations. As a result, the 2008 current tax provision was based upon life insurance company taxable income in excess of the allowed offset. Any non-life losses not used to offset life insurance company taxable income in the current year are carried forward and available for use in a future year, subject to limitations. Losses in its non-life insurance operations primarily were related to goodwill impairment and loan loss allowance charges, which are not deductible currently for federal income tax purposes. Further, under the terms of our tax sharing arrangement with AIG, we were not able to record a federal income tax benefit related to its non-life insurance operations losses because AIG was unable to realize a federal income tax benefit for these losses in its consolidated federal income tax return.  We recorded a current state income tax provision for 2009 attributable to profitable operations in certain states in which we do business that could not be offset against losses incurred in other states.  (Benefit from) provision for foreign income taxes includes our foreign subsidiaries that operate in Puerto Rico, the U.S. Virgin Islands, and the United Kingdom.  Reconciliations of the statutory federal income tax rate to the effective tax rate were as follows:  Years Ended December 31,200920082007Statutory federal income tax rate35.00%35.00%35.00%Valuation allowance5.68(65.49)-State income taxes5.00.97(7.09)Nontaxable investment income.35.69(4.55)Contingency reduction(.13).59(.56)Effect of foreign operations(.06)(.91).92Writedown of goodwill-(12.54)-Correction of accounting error--(6.06)Other, net1.62.153.28Effective income tax rate47.46%(41.54)%20.94%   The effective income tax rate for 2009 reflected the movement of the valuation allowance, partially offset by tax exempt interest.  The negative effective income tax rate for 2008 reflected the establishment of a deferred tax asset valuation allowance of $622.6 million, partially offset by tax benefits on our pretax loss, tax-exempt interest, and the impairment of non-deductible goodwill.  134     Notes to Consolidated Financial Statements, Continued    The effective income tax rate for 2007 reflected a cumulative deferred tax benefit of $8.6 million resulting from the correction of an accounting error. In connection with the January 1, 2003, purchase business combination of WFI, we identified $40.9 million of intangible assets in accordance with the authoritative guidance for business combinations for which there was no corresponding tax basis. In years 2003 through 2006, we recorded a cumulative $8.6 million in current tax expense associated with the amortization of the intangible assets. Upon review of the amortization of these intangible assets, we concluded that a deferred tax liability of $14.3 million should have been established at the time of the purchase business combination and that, for years 2003 through 2006, the amortization of the intangible assets should have resulted in a cumulative deferred tax benefit of $8.6 million. Since no deferred tax liability was initially recorded, we recognized a cumulative deferred tax benefit of $8.6 million in first quarter 2007. We further concluded that the $14.3 million deferred tax liability that should have been recorded at the time of the purchase business combination would have increased the amount of goodwill recorded in connection with the purchase business combination. Therefore, in first quarter 2007, we increased the $54.1 million of goodwill initially recorded in connection with the purchase business combination of WFI to $68.4 million. The impact of this error did not have a material effect on our financial condition or results of operations for the previously reported periods.  Additionally, in fourth quarter 2007, we determined that we should have recorded a deferred tax liability for certain Ocean assets (primarily other intangibles) totaling $116.6 million for which there was no corresponding tax basis. As a result, we established a deferred tax liability of $32.9 million and increased the amount of goodwill recorded in connection with this purchase by $32.9 million in fourth quarter 2007. We established the deferred tax liability at the United Kingdom tax rate. The impact of this error did not have a material effect on our financial condition or results of operations for the previously reported periods.  A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:  Years Ended December 31,(dollars in thousands)20092008Balance at beginning of year$ 121$ 3,786Increases in tax positions for prior years--Decreases in tax positions for prior years--Increases in tax positions for current year--Lapse in statute of limitations(121)(3,665)Settlements--Balance at end of year$    -$    121   Our unrecognized tax benefit (all of which would affect the effective tax rate if recognized), excluding interest and penalties, was zero at December 31, 2009 and $0.1 million at December 31, 2008.  We recognize interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2009 and December 31, 2008, we had accrued zero and $0.1 million, respectively, for the payment of interest (net of the federal benefit) and penalties. We recognized a benefit of $0.1 million of interest and penalties in income tax expense in 2009 and a benefit of $3.3 million in 2008.  We continually evaluate proposed adjustments by taxing authorities. At December 31, 2009, such proposed adjustments would not result in a material change to our consolidated financial condition.  135     Notes to Consolidated Financial Statements, Continued    The Internal Revenue Service (IRS) has completed examinations of AIGs tax returns through 1999. The IRS has also completed examinations of our former direct parent companys tax returns through 2000. Although a Revenue Agents Report has not yet been issued for the years ended December 31, 2001 or 2002, AIG has received a notice of proposed adjustments for certain items during that period from the IRS. The portion of proposed adjustments attributable to AGFI was immaterial.  Components of deferred tax assets and liabilities were as follows:  December 31,(dollars in thousands)20092008Deferred tax assets:
Allowance for finance receivable losses$ 536,499$ 398,708Net operating losses and tax attributes143,18656,593State taxes86,39528,130Derivatives30,54151,166Deferred intercompany revenue23,92048,748Supervisory agreement obligations5,43916,745Goodwill2,0312,586Deferred insurance commissions1,4502,956Other45,46870,267Total874,929675,899Deferred tax liabilities:
Securitization202,439-Mark to market111,382-Loan origination costs16,52922,361Fixed assets2,6643,323Non-deductible other intangibles189196Other1,0334,482Total334,23630,362Net deferred tax assets before valuation allowance540,693645,537Valuation allowance(531,608)(622,570)Net deferred tax assets$     9,085$   22,967   At December 31, 2009, we had a federal net operating loss carryforward of $118.5 million, compared to $17.9 million at December 31, 2008. Net operating loss carryforwards may be carried forward for twenty years from the date they were incurred. At December 31, 2009, we had a capital loss carryforward of $24.3 million, compared to $24.2 million at December 31, 2008, the majority of which will expire in four years.  As of December 31, 2009, we had a deferred tax asset valuation allowance of $531.6 million, compared to $622.6 million at December 31, 2008 to reduce net deferred tax assets to amounts we considered more likely than not (a likelihood of more than 50 percent) to be realized. After the valuation allowance, we had a net deferred tax asset of $9.1 million and $23.0 million, respectively, which reflected the net deferred tax asset of our Puerto Rico subsidiary and the tax effect of unrealized losses on certain of our available-for-sale investment securities, which management believes is more likely than not of being realized because of our intent and ability to hold these securities until the unrealized losses are recovered.  136     Notes to Consolidated Financial Statements, Continued    When making our assessment about the realization of our deferred tax assets, we consider all available evidence, including:  · the nature, frequency, and severity of current and cumulative financial reporting losses; · the carryforward periods for the net operating and capital loss carryforwards; · the sources and timing of future taxable income, giving greater weight to discrete sources and to earlier future years in the forecast period; and · tax planning strategies that would be implemented, if necessary, to accelerate taxable amounts.  Realization of our net deferred tax asset depends on the ability of the subsidiary to generate sufficient taxable income of the appropriate character within the carryforward periods of the jurisdictions in which the net operating and capital losses, deductible temporary differences and credits were generated.  At December 31, 2009, other assets included $464.9 million of net current federal income tax receivable and $9.1 million of net deferred tax assets, compared to $0.1 million and $23.0 million, respectively, at December 31, 2008. At December 31, 2009, accrued taxes consisted of $6.3 million of non-income based taxes, compared to $7.4 million at December 31, 2008.    Note 24.  Lease Commitments, Rent Expense, and Contingent Liabilities  Annual rental commitments for leased office space, automobiles and data processing equipment accounted for as operating leases, excluding leases on a month-to-month basis, were as follows:  Lease(dollars in thousands)Commitments*First quarter 2010$  13,052Second quarter 201012,039Third quarter 201010,863Fourth quarter 201010,001201045,955201132,986201220,673201311,49520145,3442015+6,198Total$122,651  * Includes $10.8 million of rental commitments for leased office space at closed locations (included in other liabilities at December 31, 2009).   In addition to rent, the Company pays taxes, insurance, and maintenance expenses under certain leases. In the normal course of business, we will renew leases that expire or replace them with leases on other properties. Rental expense totaled $59.2 million in 2009, $81.3 million in 2008, and $65.5 million in 2007. We anticipate minimum annual rental commitments in 2010 to be less than the amount of rental expense incurred in 2009 primarily due to the closing of 200 branch offices in 2009.  137     Notes to Consolidated Financial Statements, Continued    AGFI and certain of its subsidiaries are parties to various legal proceedings, including certain purported class action claims, arising in the ordinary course of business. Some 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 legal 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 result in any given proceeding.    Note 25.  Supplemental Cash Flow Information  Supplemental disclosure of certain cash flow information was as follows:  Years Ended December 31,(dollars in thousands)200920082007Interest paid$1,109,741$1,261,993$1,187,063Income taxes paid31,88322,713172,395   Supplemental disclosure of non-cash activities was as follows:  Year Ended December 31,(dollars in thousands)20092008Transfer of finance receivables held for investment to
finance receivables held for sale (prior to deducting
allowance for finance receivable losses)$1,856,889$972,514    Note 26.  Benefit Plans  The majority of the Companys employees participate in various benefit plans sponsored by AIG, including a noncontributory qualified defined benefit retirement plan, post retirement health and welfare and life insurance plans, various stock option, incentive and purchase plans, and a 401(k) plan. The Companys employees in Puerto Rico, the U.S. Virgin Islands, and the United Kingdom, as well as WFIs employees, do not participate in these benefit plans.   PENSION PLANS  Pension plan expense allocated to the Company by AIG was $15.0 million for 2009, $7.5 million for 2008, and $12.2 million for 2007. AIGs U.S. pension plans do not separately identify projected benefit obligations and pension plan assets attributable to employees of participating affiliates. AIGs projected benefit obligations of $3.7 billion for its U.S. pension plans exceeded the plan assets at December 31, 2009 by $324.9 million.  138     Notes to Consolidated Financial Statements, Continued    We are jointly and severally responsible with AIG and its other subsidiaries for funding obligations under the AIG Retirement Plan, a qualified U.S. defined benefit pension plan. Pursuant to and as required by Section 4062 (a) of the Employee Retirement Income Security Act of 1974, as amended, we are jointly and severally liable to the Pension Benefit Guaranty Corporation (PBGC) for the AIG Retirement Plan liabilities and to any trustee appointed if this pension plan were to be terminated by the PBGC in a distress termination. We are liable to pay any plan deficiencies and could have a lien placed on our assets by the PBGC to collateralize this liability. Our financial condition and ability to repay unsecured debt could be materially adversely affected if we were required to pay some or all of these obligations.  The Companys employees in Puerto Rico and the U.S. Virgin Islands participate in a defined benefit pension plan sponsored by CommoLoCo, Inc. The disclosures related to this plan are immaterial to the financial statements of the Company.   SHARE-BASED COMPENSATION PLANS  During 2009, our employees participated in the following AIG share-based employee compensation plans:  Employee Plans · AIG 1999 Stock Option Plan · AIG 1996 Employee Stock Purchase Plan · AIG 2002 Stock Incentive Plan · AIG 2007 Stock Incentive Plan · Starr International Company, Inc.s Deferred Compensation Profit Participation Plans · AIGs 2005-2006 Deferred Compensation Profit Participation Plan · AIG Partners Plan  Other Awards · Troubled Asset Relief Program Executive Compensation  Under the fair value recognition provisions of the authoritative guidance for stock compensation, we recognized compensation costs of $7.2 million in 2009 and $12.3 million in 2008 for our participation in AIGs share-based employee compensation plans.    Note 27.  Segment Information  See Note 1 for a description of our business segments.  We evaluate the performance of the segments based on pretax operating earnings. The accounting policies of the segments are the same as those disclosed in Note 2, except we exclude realized gains and losses from segment investment revenues.  We intend intersegment sales and transfers to approximate the amounts segments would earn if dealing with independent third parties.  139     Notes to Consolidated Financial Statements, Continued    The following tables display information about the Companys segments as well as reconciliations to the consolidated financial statement amounts.   At or for the year ended
December 31, 2009BranchCentralized
Real EstateInsuranceAllConsolidated(dollars in thousands)SegmentSegmentSegmentOtherAdjustmentsTotalRevenues:
External:
Finance charges$ 1,755,350$     440,231$        -$     9,992$      -$  2,205,573Insurance481-136,41551-136,947Other(32,994)(78,590)58,705(22,161)(6,526)(81,566)Intercompany67,7732,196(54,301)(15,668)--Interest expense590,828340,040-160,295-1,091,163Operating expenses654,25961,19321,0865,487-742,025Provision for finance
receivable losses904,199368,139-3,208-1,275,546Pretax (loss) income(358,676)(405,535)55,720(194,173)(6,526)(909,190)Assets11,605,9896,463,774937,6843,764,9757,70722,780,129   At or for the year ended
December 31, 2008BranchCentralized
Real EstateInsuranceAllConsolidated(dollars in thousands)SegmentSegmentSegmentOtherAdjustmentsTotalRevenues:
External:
Finance charges$ 2,013,312$     638,877$        -$     7,135$      -$  2,659,324Insurance541-155,6492,906-159,096Other(22,693)8,37897,402(21,253)(99,229)(37,395)Intercompany74,9412,124(61,975)(15,090)--Interest expense670,261453,776-130,057-1,254,094Operating expenses868,215197,14436,707224,598-1,326,664Provision for finance
receivable losses791,959292,289-(3,280)-1,080,968Pretax (loss) income(264,334)(293,830)82,334(375,634)(99,229)(950,693)Assets14,777,0079,695,6561,034,4741,029,76010,47826,547,375   At or for the year ended
December 31, 2007BranchCentralized
Real EstateInsuranceAllConsolidated(dollars in thousands)SegmentSegmentSegmentOtherAdjustmentsTotalRevenues:
External:
Finance charges$ 1,908,283$     675,411$        -$   14,409$      -$  2,598,103Insurance579-160,1537,216-167,948Other(12,213)(123,427)100,414119,001(7,646)76,129Intercompany76,1521,827(63,737)(14,242)--Interest expense631,819535,347-90,022-1,257,188Operating expenses670,063211,33828,09866,250-975,749Provision for finance
receivable losses319,51282,484-(674)-401,322Pretax income (loss)351,407(275,358)101,524(27,884)(7,646)142,043Assets14,085,10911,201,1921,613,1763,206,364514,30630,620,147  140     Notes to Consolidated Financial Statements, Continued    The All Other column includes:  · corporate revenues and expenses such as management and administrative revenues and expenses and derivatives adjustments and foreign exchange gain or loss on foreign currency denominated debt that are not considered pertinent in determining segment performance; · revenues, expenses, and assets from our foreign subsidiary, Ocean; and · corporate assets which include cash, derivatives, prepaid expenses, deferred charges, and fixed assets.  The Adjustments column includes:  · realized gains (losses) on investment securities, securities lending, and commercial mortgage loans; and · other assets that are not considered pertinent to determining performance.  Adjustments for assets in 2007 also included goodwill that was not considered pertinent to determining performance.    Note 28.  Interim Financial Information (Unaudited)  Our quarterly statements of operations for 2009 were as follows:  Quarter Ended 2009Dec. 31,Sep. 30,June 30,Mar. 31,(dollars in thousands)Revenues
Finance charges$ 493,977$ 536,529$ 570,466$ 604,601Insurance34,02133,88833,98035,058Finance receivables held for sale originated
as held for investment14,869(3,539)(68,243)(14,692)Investment13,44712,07314,7368,679Net service fees from affiliates(5,605)16,5162,418884Other8,8615,239(50,290)(36,919)Total revenues559,570600,706503,067597,611Expenses
Interest expense268,485283,988259,363279,327Operating expenses:
Salaries and benefits97,137102,577115,719113,247Other operating expenses72,08776,43088,57676,252Provision for finance receivable losses407,850252,878260,093354,725Insurance losses and loss adjustment expenses13,90414,23716,48016,789Total expenses859,463730,110740,231840,340Loss before (benefit from) provision for income taxes(299,893)(129,404)(237,164)(242,729)(Benefit from) provision for income taxes(61,486)(364,508)(10,852)5,331Net (loss) income$(238,407)$ 235,104$(226,312)$(248,060)  141     Notes to Consolidated Financial Statements, Continued    Our quarterly statements of operations for 2008 were as follows:  Quarter Ended 2008Dec. 31,Sep. 30,June 30,Mar. 31,(dollars in thousands)Revenues
Finance charges$ 647,877$   670,148$675,286$666,013Insurance38,82139,58140,87439,820Finance receivables held for sale originated
as held for investment(27,456)---Investment(16,978)(13,098)6,92016,321Net service fees from affiliates14,59710,97925,92318,952Other(10,915)(1,446)(13,390)(47,804)Total revenues645,946706,164735,613693,302Expenses
Interest expense328,461308,338300,316316,979Operating expenses:
Salaries and benefits114,432121,364129,901132,225Other operating expenses81,187528,966115,468103,121Provision for finance receivable losses358,837308,490237,995175,646Insurance losses and loss adjustment expenses15,15122,26816,11516,458Total expenses898,0681,289,426799,795744,429Loss before provision for (benefit from) income taxes(252,122)(583,262)(64,182)(51,127)Provision for (benefit from) income taxes523,938(79,779)(31,352)(17,848)Net loss$(776,060)$ (503,483)$ (32,830)$ (33,279)  142     Notes to Consolidated Financial Statements, Continued    Note 29.  Fair Value Measurements  The fair value of a financial instrument is the amount that would be received if an asset were to be sold or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is listed on an exchange or traded over-the-counter or is new to the market and not yet established, the characteristics specific to the transaction, and general market conditions.  Management is responsible for the determination of the value of the financial assets and financial liabilities carried at fair value and the supporting methodologies and assumptions. Third party valuation service providers are employed to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When the valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models.  Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates, and other market-observable information as of the measurement date as well as the specific attributes of the security being valued, including its term interest rate, credit rating, industry sector, and other issue or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased. We assess the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, we may validate the reasonableness of fair values by comparing information obtained from the valuation service providers to other third party valuation sources for selected securities. We also validate prices for selected securities obtained from brokers through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.  143     Notes to Consolidated Financial Statements, Continued    FAIR VALUE HIERARCHY  Beginning January 1, 2008, we measure and classify assets and liabilities recorded at fair value in the consolidated balance sheet in a hierarchy for disclosure purposes consisting of three Levels based on the observability of inputs available in the market place used to measure the fair values. In general, we determine the fair value measurements classified as Level 1 based on inputs utilizing quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. We generally obtain market price data from exchange or dealer markets. We do not adjust the quoted price for such instruments. Assets measured using Level 1 inputs include certain investment securities (including certain actively traded listed common stock).  We determine the fair value measurements classified as Level 2 based on inputs utilizing other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Assets and liabilities measured on a recurring basis using Level 2 inputs include certain investment securities (including certain government and agency securities, most investment-grade and high-yield corporate bonds, certain asset-backed securities, and state and municipal obligations), certain cash equivalents, short-term investments, and derivative assets and liabilities. We outsource the investment of our liquid assets to AIG, which, as agent, invests the liquid assets of the Company together with other AIG subsidiaries and maintains these assets in common pools. Our interest in these jointly owned investments that are disclosed in the fair value table represents negotiable instruments, predominantly commercial paper. The carrying value of these negotiable instruments approximates fair value as similar and identical instruments trade at price levels with a similar discount to par. The prices for trades of similar and identical instruments are observable and therefore are consistent with Level 2 in the fair value hierarchy.  Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Assets measured using Level 3 inputs include certain investment securities (including certain corporate debt, asset-backed securities, and private equity investments), finance receivables held for sale, and real estate owned.  In certain cases, the inputs we use to measure the fair value of an asset may fall into different levels of the fair value hierarchy. In such cases, we determine the level in the fair value hierarchy within which the fair value measurement in its entirety falls based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.  144     Notes to Consolidated Financial Statements, Continued    Fair Value Measurements  Recurring Basis  On a recurring basis, we measure the fair value of investment securities, cash and cash equivalents, short-term investments, and derivative assets and liabilities. The following tables present information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008 and indicate the fair value hierarchy based on the levels of inputs we utilized to determine such fair value. Fair value measurements on a recurring basis were as follows:  December 31, 2009Fair Value Measurements UsingCounterpartyTotal Carried(dollars in thousands)Level 1Level 2Level 3Netting (a)At Fair ValueAssets
Investment securities:
Bonds:
U.S. government and government
sponsored entities$     -$    9,184$     -$       -$    9,184Obligations of states,
municipalities, and political
subdivisions-234,252--234,252Corporate debt-308,23649,978-358,214RMBS-79,242449-79,691CMBS-5,3577,841-13,198CDO/ABS-11,30011,381-22,681Total-647,57169,649-717,220Preferred stocks-3,644--3,644Other long-term investments (b)--7,758-7,758Common stocks3,013-261-3,274Total3,013651,21577,668-731,896Cash and cash equivalents in
AIG pools-36,123--36,123Derivatives-290,6171,645(111,230)181,032Total$3,013$977,955$79,313$(111,230)$949,051LiabilitiesDerivatives$     -$111,713$       -$(111,230)$       483  (a) Represents netting of derivative exposures covered by a qualifying master netting agreement in accordance with the authoritative guidance for certain contracts.  (b) Other long-term investments at December 31, 2009 excluded our interest in a limited partnership that we account for using the equity method of $1.4 million.  145     Notes to Consolidated Financial Statements, Continued     December 31, 2008Fair Value Measurements UsingCounterpartyTotal Carried(dollars in thousands)Level 1Level 2Level 3NettingAt Fair ValueAssets
Investment securities:
Bonds$     -$615,572$63,022$      -$678,594Preferred stocks-4,828--4,828Other long-term investments (a)--9,579-9,579Common stocks1,510-7-1,517Total1,510620,40072,608-694,518Cash and cash equivalents in
AIG pools-85,041--85,041Short-term investments-169--169Derivatives-213,3921,341(199,902)14,831Total$1,510$919,002$73,949$(199,902)$794,559LiabilitiesDerivatives$     -$206,740$    -$(199,902)$    6,838  (a) Other long-term investments at December 31, 2008 excluded our interest in a limited partnership that we account for using the equity method of $1.8 million.   The following table presents changes during 2009 in Level 3 assets and liabilities measured at fair value on a recurring basis:  Year Ended
December 31, 2009Net (losses) gains
included in:(dollars in
thousands)Balance at
beginning
of periodOther
revenuesOther
comprehensive
incomePurchases
sales,
issuances,
settlementsTransfers
in (out) of
Level 3Other (a)Balance
at end of
periodInvestment securities:
Bonds:
Corporate debt$47,323$     49$ 12,884$(2,283)$(7,995)$    -$49,978RMBS394(26)(348)(35)(220)684449CMBS9,633(79)(6,026)(1,415)-5,7287,841CDO/ABS5,672(1,585)(12,520)(2,145)8,38813,57111,381Total63,022(1,641)(6,010)(5,878)17319,98369,649Other long-term
investments9,579654(1,345)(1,130)--7,758Common stocks7-(1)-255-261Total investment
securities72,608(987)(7,356)(7,008)42819,98377,668Derivatives1,341222-82--1,645Total assets$73,949$   (765)$  (7,356)$(6,926)$    428$19,983$79,313  (a) We adopted a new accounting standard relating to the recognition and presentation of other-than-temporary impairments on April 1, 2009 and recorded a cumulative effect adjustment to increase the cost/amortized cost of level 3 investment securities by $20.0 million.   During 2009, we transferred into Level 3 approximately $49.3 million of assets, consisting of certain private placement corporate debt, RMBS, and CDO/ABS. Transfers into Level 3 for private placement corporate debt are primarily the result of our over-riding third party matrix pricing information downward to better reflect the additional risk premium associated with those securities that we believe were not  146     Notes to Consolidated Financial Statements, Continued    captured in the matrix. Transfers into Level 3 for investments in RMBS and CDO/ABS are primarily due to a decrease in market transparency and downward credit migration in these securities.  Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant input(s) becoming observable, or when a long-term interest rate significant to a valuation becomes short-term and thus observable. During 2009, we transferred approximately $49.1 million of assets out of Level 3, consisting of certain private placement corporate debt, RMBS, and CDO/ABS. Transfers out of Level 3 for private placement corporate debt are primarily the result of using observable pricing information or a third party pricing quote that appropriately reflects the fair value of those securities, without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market. Transfers out of Level 3 for RMBS and CDO/ABS investments are primarily due to increased usage of pricing from valuation service providers that are reflective of market activity, where previously an internally adjusted price had been used.  The following table presents changes during 2008 in Level 3 assets and liabilities measured at fair value on a recurring basis:  Year Ended
December 31, 2008Net (losses) gains
included in:(dollars in
thousands)Balance at
beginning
of periodOther
revenuesOther
comprehensive
incomePurchases
sales,
issuances,
settlementsTransfers
in (out) of
Level 3 (a)Balance
at end of
periodInvestment securities$67,823$(6,158)$(11,420)$(16,101)$38,464$72,608Securities lending27,212--(27,212)--Derivatives839462-40-1,341Total assets$95,874$(5,696)$(11,420)$(43,273)$38,464$73,949Derivatives$     563$ 2,712$      -$  (3,275)$    -$    -Total liabilities$     563$ 2,712$      -$  (3,275)$    -$    -  (a) During 2008, we transferred from Level 2 to Level 3 approximately $38.5 million of investment securities, primarily bonds, for which the significant inputs used to measure their fair value became unobservable.   There were no unrealized gains or losses recognized in earnings on instruments held at December 31, 2009 or 2008.  We used observable and/or unobservable inputs to determine the fair value of positions that we have classified within the Level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category presented in the table above may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.   Fair Value Measurements  Nonrecurring Basis  We measure the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. These assets include real estate owned, finance receivables held for sale, goodwill, and other intangible assets.  147     Notes to Consolidated Financial Statements, Continued    At December 31, 2009, we had assets measured at fair value on a non-recurring basis on which we recorded impairment charges during 2009 as follows:  Year Ended December 31, 2009Fair Value Measurements Using(dollars in thousands)Level 1Level 2Level 3TotalGains (Losses)Real estate owned$   -$   -$168,303$168,303$  (35,034)Finance receivables held for sale--693,675693,675(93,738)Total$   -$   -$861,978$861,978$(128,772)   At December 31, 2008, we had assets measured at fair value on a non-recurring basis on which we recorded impairment charges during 2008 as follows:  Year Ended December 31, 2008Fair Value Measurements Using(dollars in thousands)Level 1Level 2Level 3TotalGains (Losses)Real estate owned$   -$   -$   159,201$   159,201$  (32,778)Finance receivables held for sale--960,427960,427(42,743)Goodwill----(340,594)Other intangible assets----(103,096)Total$   -$   -$1,119,628$1,119,628$(519,211)   In accordance with the authoritative guidance for the accounting for the impairment of long-lived assets, we wrote down certain real estate owned reported in our branch and centralized real estate business segments to their fair value during 2009 and 2008 and recorded the writedowns in other revenues.The fair values disclosed in the tables above are unadjusted for transaction costs as required by the authoritative guidance for fair value measurements. The amounts recorded on the balance sheet are net of transaction costs as required by the authoritative guidance for accounting for the impairment of long-lived assets.  In accordance with the authoritative guidance for the accounting for certain mortgage banking activities, we wrote down certain finance receivables held for sale reported in our centralized real estate business segment to their fair value during 2009 and 2008 and recorded the writedowns in other revenues.  In accordance with the authoritative guidance for the accounting for the impairment of goodwill and other intangible assets, we wrote down goodwill and other intangible assets to zero fair value during 2008 reflecting our reduced discounted cash flow expectations. These writedowns were included in operating expenses. Prior to these impairment charges, goodwill and other intangible assets were reported under the following business segments:  Other
Intangible(dollars in thousands)GoodwillAssetsBranch segment$149,781$    1,103Centralized real estate segment77,13411,732Insurance segment12,104-All other (Ocean)101,57590,261Total$340,594$103,096  148     Notes to Consolidated Financial Statements, Continued    Financial Instruments Not Measured at Fair Value  In accordance with the amended authoritative guidance for the fair value disclosures of financial instruments, we present the carrying values and estimated fair values of certain of our financial instruments below. Readers should exercise care in drawing conclusions based on fair value, since the fair values presented below can be misinterpreted since they were estimated at a particular point in time and do not include the value associated with all of our assets and liabilities.  December 31,20092008(dollars in thousands)Carrying
ValueFair
ValueCarrying
ValueFair
ValueAssets
Net finance receivables, less allowance
for finance receivable losses$17,306,700$16,179,436$23,458,949$21,232,046Cash and cash equivalents (excluding cash
and cash equivalents in AIG pools and
short-term investments)1,275,7191,275,719831,108831,108Liabilities
Long-term debt17,743,34314,941,47720,980,98010,374,214Short-term debt2,450,0002,411,7093,135,7722,688,965Off-balance sheet financial
instruments
Unused customer credit limits----   FAIR VALUE MEASUREMENTS  VALUATION METHODOLOGIES AND ASSUMPTIONS  We used the following methods and assumptions to estimate fair value.   Finance Receivables  We estimated fair values of net finance receivables, less allowance for finance receivable losses using projected cash flows, computed by category of finance receivable, discounted at the weighted-average interest rates offered in the market for similar finance receivables at the balance sheet date. We based cash flows on contractual payment terms adjusted for delinquencies and estimates of finance receivable losses. The fair value estimates do not reflect the value of the underlying customer relationships or the related distribution systems.   Real Estate Owned  We initially based our estimate of the fair value on third party appraisals at the time we took title to real estate owned. Subsequent changes in fair value are based upon managements judgment of national and local economic conditions to estimate a price that would be received in a then current transaction to sell the asset.  149     Notes to Consolidated Financial Statements, Continued    Finance Receivables Held for Sale  Originated as held for sale.We determined the fair value of finance receivables held for sale that were originated as held for sale by reference to available market indicators such as current investor yield requirements, outstanding forward sale commitments, or negotiations with prospective purchasers, if any.   Originated as held for investment.We determined the fair value of finance receivables held for sale that were originated as held for investment based on negotiations with prospective purchasers (if any) or by using projected cash flows discounted at the weighted-average interest rates offered for similar finance receivables. We based cash flows on contractual payment terms adjusted for estimates of prepayments and credit related losses.   Investment Securities  To measure the fair value of investment securities (which consist primarily of bonds), we maximized the use of observable inputs and minimized the use of unobservable inputs. Whenever available, we obtained quoted prices in active markets for identical assets at the balance sheet date to measure investment securities at fair value. We generally obtained market price data from exchange or dealer markets.  We estimated the fair value of fixed maturity investment securities not traded in active markets by referring to traded securities with similar attributes, using dealer quotations and a matrix pricing methodology, or discounted cash flow analyses. This methodology considers such factors as the issuers industry, the securitys rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. For fixed maturity investment securities that are not traded in active markets or that are subject to transfer restrictions, we adjusted the valuations to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, managements best estimate is used.  We initially estimated the fair value of equity instruments not traded in active markets by reference to the transaction price. We adjusted this valuation only when changes to inputs and assumptions were corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations, and other transactions across the capital structure, offerings in the equity capital markets, and changes in financial ratios or cash flows. For equity securities that are not traded in active markets or that are subject to transfer restrictions, we adjusted the valuations to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, managements best estimate is used.   Cash and Cash Equivalents  We estimated the fair value of cash and cash equivalents using quoted prices where available and industry standard valuation models using market-based inputs when quoted prices were unavailable.   Short-term Investments  We estimated the fair value of short-term investments using quoted prices where available and industry standard valuation models using market-based inputs when quoted prices were unavailable.  150     Notes to Consolidated Financial Statements, Continued    Derivatives  Our derivatives are not traded on an exchange. The valuation model used to calculate fair value of our derivative instruments includes a variety of observable inputs, including contractual terms, interest rate curves, foreign exchange rates, yield curves, credit curves, measure of volatility, and correlations of such inputs. Valuation adjustments may be made in the determination of fair value. These adjustments include amounts to reflect counterparty credit quality and liquidity risk, as well as credit and market valuation adjustments. The credit valuation adjustment adjusts the valuation of derivatives to account for nonperformance risk of our counter-party with respect to all net derivative assets positions. The credit valuation adjustment also accounts for our own credit risk in the fair value measurement of all net derivative liabilities positions, when appropriate. The market valuation adjustment adjusts the valuation of derivatives to reflect the fact that we are an end-user of derivative products. As such, the valuation is adjusted to take into account the bid-offer spread (the liquidity risk), as we are not a dealer of derivative products.   Other Intangible Assets  Historically, we tested our other intangible assets for impairment during the first quarter of each year. We tested for impairment between these annual reviews if adverse changes developed in the underlying business. Accordingly, we performed an assessment of our other intangible assets to test for recoverability. The assessment of recoverability was based on our estimates. We compared projected undiscounted future cash flows to the carrying value of the asset group. When the test for recoverability identified that the carrying value of the asset group was not recoverable and the asset groups fair value was measured in accordance with the fair value measurement framework, we recognized an impairment charge in operating expenses for the amount by which the carrying value of the asset group exceeded its estimated fair value. We calculated the amount of the impairment using the income approach. The income approach uses discounted cash flow projections. Based on our estimate of a market participants view of the risks associated with the projected cash flows, the discount rate used in these calculations was 20% when we wrote down other intangible assets to zero fair value in third quarter 2008.   Goodwill  Historically, we tested goodwill for impairment during the first quarter of each year. We tested for impairment between these annual reviews if adverse changes developed in the underlying business. Goodwill impairment testing was performed at the reporting unit level. We assigned goodwill to our reporting units at the date the goodwill was initially recorded. We recorded our goodwill in our branch, centralized real estate, and insurance business segments and all other reporting units (Ocean). Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.  151     Notes to Consolidated Financial Statements, Continued    We initially assessed the potential for impairment by estimating the fair value of each of our reporting units and comparing the estimated fair values with the carrying amounts of those reporting units, including goodwill. The estimate of a reporting units fair value was calculated using the discounted expected future cash flows approach. If the carrying value of a reporting unit exceeded its estimated fair value, goodwill associated with that reporting unit was potentially impaired. The amount of impairment was measured as the excess of the carrying value of goodwill over the estimated fair value of the goodwill. The estimated fair value of the goodwill was measured as the excess of the fair value of the reporting unit over the amounts that would be assigned to the reporting units assets and liabilities in a hypothetical market. Based on our estimate of a market participants view of the risks associated with the projected cash flows, the discount rate used in these calculations was 20% when we wrote down our goodwill to zero fair value in third quarter 2008.   Long-term Debt  Where market-observable prices are not available, we estimated the fair values of long-term debt using projected cash flows discounted at each balance sheet dates market-observable implicit-credit spread rates for our long-term debt and adjusted for foreign currency translations.   Short-term Debt  We estimated the fair values of bank short-term debt using projected cash flows discounted at each balance sheet dates market-observable implicit-credit spread rates for similar types of borrowings with maturities consistent with those remaining for the short-term debt being valued. The fair values of the remaining short-term debt approximated the carrying values.   Unused Customer Credit Limits  The unused credit limits available to the customers of AIG Bank, which sells private label receivables to the Company under a participation agreement, and to the Companys customers have no fair value. The interest rates charged on these facilities can be changed at AIG Banks discretion for private label, or are adjustable and reprice frequently for loan and retail revolving lines of credit. These amounts, in part or in total, can be cancelled at the discretion of AIG Bank or the Company.    Note 30.  Legal Settlement  On January 19, 2007, HSA Residential Mortgage Services of Texas, Inc. (RMST), a subsidiary of AGFI, and State Bank of Long Island (SBLI) reached an agreement to settle all claims between them relating to Island Mortgage Network, Inc., including all claims asserted in the matter of HSA Residential Mortgage Services of Texas, Inc. v. State Bank of Long Island, U.S. District Court for the Eastern District of New York, 2:05-cv-03185 (JS). As part of that settlement, SBLI agreed to pay RMST $65 million. This settlement was completed on January 24, 2007, and RMSTs lawsuit against SBLI has been dismissed.  152     Notes to Consolidated Financial Statements, Continued    Note 31.  Subsequent Event  Transfer of Subsidiaries to AGFC  Effective January 1, 2010, AGFI contributed two of its wholly-owned subsidiaries to AGFC. The contribution included $300.3 million of finance receivables. At December 31, 2009, these subsidiaries owed an aggregate total of $278.9 million to AGFI under intercompany notes. As part of the January 1, 2010 transaction, AGFC established direct notes to the subsidiaries in the same amount and as a result, AGFI then reduced its intercompany borrowings from AGFC. Because the transaction was between entities under common control, we recorded the transaction by transferring the assets, liability, and equity from AGFI to AGFC at the carrying value that existed as of January 1, 2010.   153      Item 9A(T).  Controls and Procedures.   (a) Evaluation of Disclosure Controls and Procedures  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 the time period specified by the SECs rules and forms. 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 Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  The Companys management, including its Chief Executive Officer and its Chief Financial Officer, evaluates the effectiveness of our disclosure controls and procedures as of the end of each quarter and year using the framework and criteria established in Internal Control  Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on an evaluation of the disclosure controls and procedures as of December 31, 2009, the Companys Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective and that the consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.  (b) Managements Annual Report on Internal Control over Financial Reporting  The Companys management is responsible for the integrity and fair presentation of our consolidated financial statements and all other financial information presented in this report. We prepared our consolidated financial statements using GAAP, and they reflect all material correcting adjustments. 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 effective system of internal control over financial reporting. We established this system to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, that transactions are recorded in accordance with 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. Also, AIGs Director, Executive Officer and Senior Financial Officer Code of Business Conduct and Ethics 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 system includes a documented organizational structure and policies and procedures that we communicate throughout the Company. AIGs internal audit department continually monitors the operation of our internal controls and reports their findings to the Companys management and AIGs management. We take prompt action to correct control deficiencies and improve the system.  All internal control structures and procedures for financial reporting, no matter how well designed, have inherent limitations. Even internal controls and procedures determined to be effective may not prevent or detect all misstatements. Changes in conditions or the complexity of compliance with policies and procedures creates a risk that the effectiveness of our internal control structure and procedures for financial reporting may vary over time.  154     Item 9A(T).  Continued    The Companys management, including its Chief Executive Officer and its Chief Financial Officer, evaluates the effectiveness of our internal control over financial reporting as of the end of each year using the framework and criteria established in Internal Control  Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on an evaluation of the internal control over financial reporting as of December 31, 2009, the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, has concluded that the internal control over financial reporting was effective and that the consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.  This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.   (c) Changes in Internal Control over Financial Reporting  There have been no changes in the Companys internal control over financial reporting during the three months ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.   155      PART III   Item 14.  Principal Accountant Fees and Services.   One of AIGs Audit Committees duties is to oversee our independent accountants, PricewaterhouseCoopers LLP. AGFI does not have its own Audit Committee. AIGs Audit Committee has adopted pre-approval policies and procedures regarding audit and non-audit services provided by PricewaterhouseCoopers LLP for AIG and its consolidated subsidiaries, including AGFI, and pre-approved 100% of AGFIs audit-related fees in 2009 and 2008.  Independent accountant fees charged to AGFI and the related services were as follows:  Years Ended December 31,(dollars in thousands)20092008Audit fees$2,755$1,905Audit-related fees-150Total$2,755$2,055   Audit fees in 2009 and 2008 were primarily for the audit of AGFIs and AGFCs Annual Reports on Form 10-K, quarterly review procedures in relation to AGFIs and AGFCs Quarterly Reports on Form 10-Q, statutory audits of insurance subsidiaries of AGFC, and audits of other subsidiaries of AGFC. AGFC is a separate SEC registrant and its fees are part of the total AGFI fee, representing 98% of the total audit fees for AGFI. Audit-related fees in 2008 were primarily for issuances of comfort letters. There were no tax fees or other fees in 2009 or 2008.    156      PART IV   Item 15.  Exhibits and Financial Statement Schedules.   (a) (1) and (2)  The following consolidated financial statements of American General Finance, Inc. and subsidiaries are included in Item 8:  Consolidated Balance Sheets, December 31, 2009 and 2008  Consolidated Statements of Operations, years ended December 31, 2009, 2008, and 2007  Consolidated Statements of Shareholders Equity, years ended December 31, 2009, 2008, and 2007  Consolidated Statements of Cash Flows, years ended December 31, 2009, 2008, and 2007  Consolidated Statements of Comprehensive (Loss) Income, years ended December 31, 2009, 2008, and 2007  Notes to Consolidated Financial Statements  Schedule I--Condensed Financial Information of Registrant is included in Item 15(c).  All other financial statement schedules have been omitted because they are inapplicable.  (3) Exhibits:  Exhibits are listed in the Exhibit Index beginning on page 164 herein.  (b) Exhibits  The exhibits required to be included in this portion of Item 15 are submitted as a separate section of this report.  157      Item 15(c).   Schedule I  Condensed Financial Information of Registrant   American General Finance, Inc. Condensed Balance Sheets    December 31,(dollars in thousands)20092008Assets

Cash and cash equivalents$       8,787$     60,927Investment in subsidiaries2,453,5852,175,530Notes receivable from subsidiaries292,201341,500Other assets15,056196Total assets$2,769,629$2,578,153Liabilities and shareholders equity

Long-term debt$         -$   165,000Short-term debt851,988751,664Other liabilities98822,158Total liabilities852,976938,822Shareholders equity:
Common stock1,0001,000Additional paid-in capital1,971,1751,366,788Other equity1,846(129,145)(Accumulated deficit) retained earnings(57,368)400,688Total shareholders equity1,916,6531,639,331Total liabilities and shareholders equity$2,769,629$2,578,153     See Notes to Condensed Financial Statements.  158      Schedule I, Continued   American General Finance, Inc. Condensed Statements of Operations    Years Ended December 31,(dollars in thousands)200920082007Revenues
Dividends received from subsidiaries$       -$           570$166,600Interest and other22,45524,36724,481Total revenues22,45524,937191,081Expenses
Interest expense37,78743,35855,382Operating expenses375526Total expenses37,82443,41355,408(Loss) income before (benefit from) provision for income taxes
and equity in overdistributed net income of subsidiaries(15,369)(18,476)135,673(Benefit from) provision for income taxes(17,087)10,308(10,233)Income (loss) before equity in overdistributed net income
of subsidiaries1,718(28,784)145,906Equity in overdistributed net income of subsidiaries(479,393)(1,316,868)(33,605)Net (loss) income$(477,675)$(1,345,652)$112,301     See Notes to Condensed Financial Statements.  159      Schedule I, Continued   American General Finance, Inc. Condensed Statements of Cash Flows    Years Ended December 31,(dollars in thousands)200920082007Cash flows from operating activities
Net (loss) income$(477,675)$(1,345,652)$ 112,301Reconciling adjustments:
Equity in overdistributed net income of subsidiaries479,3931,316,86833,605Change in other assets and other liabilities(33,851)31,6205,785Other, net(4,630)(9,278)37,097Net cash (used for) provided by operating activities(36,763)(6,442)188,788Cash flows from investing activities
Capital contributions to subsidiaries(604,387)(218,000)(115,000)Change in notes receivable from subsidiaries49,299(17,459)(18,435)Net cash used for investing activities(555,088)(235,459)(133,435)Cash flows from financing activities
Repayment of long-term debt(165,000)--Change in short-term debt100,32477,02937,148Capital contributions from parent604,387220,000126,000Dividends paid--(213,005)Net cash provided by (used for) financing activities539,711297,029(49,857)(Decrease) increase in cash and cash equivalents(52,140)55,1285,496Cash and cash equivalents at beginning of year60,9275,799303Cash and cash equivalents at end of year$     8,787$      60,927$     5,799     See Notes to Condensed Financial Statements.  160      Schedule I, Continued   American General Finance, Inc. Notes to Condensed Financial Statements December 31, 2009    Note 1.  Accounting Policies  AGFI records its investments in subsidiaries at cost plus the equity in (overdistributed) undistributed net income of subsidiaries since the date of incorporation or, if purchased, the date of the acquisition. You should read the condensed financial statements of the registrant in conjunction with AGFIs consolidated financial statements.    Note 2.  Long-term Debt  We repaid our long-term debt in 2009.    Note 3.  Short-term Debt  Components of short-term debt were as follows:  December 31,(dollars in thousands)20092008Notes payable to banks$400,000$400,000Notes payable to subsidiaries451,988331,565Commercial paper-20,099Total$851,988$751,664    Note 4.  Subsidiary Lease Guarantee  AGFI guaranteed the lease payments for the headquarters office of WFI. The lease was to expire in 2015. Effective June 17, 2008, WFI ceased its wholesale originations (originations through mortgage brokers) but continued its retail originations (originations directly with consumers) at a substantially reduced level. As a result, the majority of WFIs headquarters office was vacated in 2008.   161      Signatures   Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 4, 2010.  AMERICAN GENERAL FINANCE, INC.By:/s/Donald R. Breivogel, Jr.Donald R. Breivogel, Jr.(Senior Vice President, Chief Financial Officer,
and Director)   Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 4, 2010.    /s/Frederick W. Geissinger/s/William N. DooleyFrederick W. GeissingerWilliam N. Dooley(Chairman, President, Chief Executive(Director)Officer, and Director - Principal ExecutiveOfficer)/s/Robert A. GenderRobert A. Gender/s/Donald R. Breivogel, Jr.(Director)Donald R. Breivogel, Jr.(Senior Vice President, Chief Financial Officer,and Director  Principal Financial Officer)/s/David L. HerzogDavid L. Herzog(Director)/s/Leonard J. WinigerLeonard J. Winiger(Vice President, Controller, and Assistant/s/Alain M. KaraoglanSecretary  Principal Accounting Officer)Alain M. Karaoglan(Director)/s/Bradford D. BorchersBradford D. Borchers/s/Alan M. Pryor(Director)Alan M. Pryor(Director)/s/Robert A. ColeRobert A. Cole(Director)  162      SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934.  No annual report to security-holders or proxy material has been sent to security-holders.  163      Exhibit Index   Exhibit Number  (3) a. Amended and Restated Articles of Incorporation of American General Finance, Inc. dated October 8, 2009.  b. Amended and Restated By-laws of American General Finance, Inc. dated October 8, 2009.  (4) a. The following instruments are filed pursuant to Item 601(b)(4)(ii) of Regulation S-K, which requires with certain exceptions that all instruments be filed which define the rights of holders of the Companys long-term debt and of our consolidated subsidiaries. In the aggregate, the outstanding issuances of debt at December 31, 2009 under the following Indenture exceeds 10% of the Companys total assets on a consolidated basis:  Indenture dated as of May 1, 1999 from American General Finance Corporation to Wilmington Trust Company (successor trustee to Citibank, N.A.). Incorporated by reference to Exhibit (4)a.(1) filed as a part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 2-82985).  b. In accordance with Item 601(b)(4)(iii) of Regulation S-K, certain other instruments defining the rights of holders of the Companys long-term debt and of our consolidated subsidiaries have not been filed as exhibits to this Annual Report on Form 10-K because the total amount of securities authorized and outstanding under each instrument does not exceed 10% of the total assets of the Company on a consolidated basis. We hereby agree to furnish a copy of each instrument to the Securities and Exchange Commission upon request.  (10) Supervisory Agreement, dated June 7, 2007, among AIG Federal Savings Bank, Wilmington Finance, Inc., American General Finance, Inc., and the Office of Thrift Supervision. Incorporated by reference to Exhibit (10) filed as part of the Companys Current Report on Form 8-K dated June 7, 2007.  (10.1) Demand Promissory Note and Demand Note Agreement between American General Finance Corporation and American International Group, Inc. dated March 24, 2009. Incorporated by reference to Exhibit (99.1) filed as part of the Companys Current Report on Form 8-K dated March 24, 2009.  (10.2) Affiliate Subordination Agreement between American General Finance Corporation and American International Group, Inc. dated March 24, 2009. Incorporated by reference to Exhibit (99.2) filed as part of the Companys Current Report on Form 8-K dated March 24, 2009.  (10.3) Commitment to Purchase Financial Instrument and Service Participation Agreement dated July 17, 2009 between MorEquity, Inc. and the Federal National Mortgage Association. Incorporated by reference to Exhibit (10.1) to the Companys Current Report on Form 8-K dated July 17, 2009.  (10.4) Mortgage Loan Purchase Agreement dated July 30, 2009 between MorEquity, Inc., American General Financial Services of Arkansas, Inc., American General Home Equity, Inc., American General Finance Corporation, and Third Street Funding LLC. Incorporated by reference to Exhibit (10.1) to the Companys Current Report on Form 8-K dated July 30, 2009.   164      Exhibit Index (Continued)   Exhibit Number  (10.5) Purchase Agreement dated July 30, 2009 between Third Street Funding LLC and Credit Suisse Securities (USA) LLC. Incorporated by reference to Exhibit (10.2) to the Companys Current Report on Form 8-K dated July 30, 2009.  (10.6) Letter Agreement dated July 8, 2009 between PennyMac Loan Services, LLC; Credit Suisse; and American General Finance Corporation. Incorporated by reference to Exhibit (10.6) to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009.  (10.7) Demand Promissory Note between American General Finance Corporation and American International Group, Inc. dated August 11, 2009. Incorporated by reference to Exhibit (10.7) to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009.  (10.8) Pooling and Servicing Agreement dated July 30, 2009 between Third Street Funding LLC; Wells Fargo Bank, N.A.; PennyMac Loan Services, LLC; MorEquity, Inc.; Select Portfolio Servicing, Inc.; U.S. Bank National Association; and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to Exhibit (10.8) to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.  (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   165