<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 13, 1995
AMERICAN GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1-7981 74-0483432
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
</TABLE>
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 522-1111
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
AMERICAN GENERAL CORPORATION
TABLE OF CONTENTS TO FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 7. Financial Statements, Pro Forma Financial Information, and Exhibits........... 3
(b) Pro Forma Financial Information.
Pro Forma Financial Information of American General Corporation.......... 3
Pro Forma Consolidated Balance Sheet at September 30, 1995 (Unaudited)... 4
Pro Forma Consolidated Statement of Income for the year ended December
31, 1994 (Unaudited)................................................... 5
Pro Forma Consolidated Statement of Income for the nine months ended
September 30, 1995 (Unaudited)......................................... 6
Notes to Pro Forma Consolidated Financial Statements (Unaudited)......... 7
Signature..................................................................... 15
</TABLE>
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, AND EXHIBITS.
(b) Pro Forma Financial Information of American General Corporation.
On October 19, 1995, American General Corporation ("American General") and
Independent Insurance Group, Inc. ("IIG") announced a definitive agreement under
which American General will acquire IIG for a total consideration of $362
million or $27.50 per share. IIG's shareholders may elect to receive from among
cash, American General common stock, and a new issue of 7% mandatorily
convertible preferred stock of American General. Cash and preferred stock
elections by IIG shareholders will each be limited to 50% of the aggregate
consideration. The exchange ratio for American General common stock and the new
preferred stock will be based on the 10-day average trading price of American
General common stock five days prior to closing. The transaction, which is
subject to approval by IIG's shareholders and requisite regulatory authorities,
is expected to be completed in January 1996.
On January 31, 1995, American General through its wholly-owned subsidiary,
AGC Life Insurance Company ("AGC Life"), acquired American Franklin Company
("AFC"), the holding company of The Franklin Life Insurance Company ("Franklin
Life"), pursuant to a Stock Purchase Agreement dated as of November 29, 1994,
between American General and American Brands, Inc. ("American Brands"). The
purchase price was $1.17 billion, consisting of $920 million in cash paid at
closing and a $250 million cash dividend paid by AFC to American Brands prior to
closing. The dividend was paid on January 30, 1995.
On December 23, 1994, American General, through AGC Life, acquired a 40%
interest in Western National Corporation ("WNC"), the holding company of Western
National Life Insurance Company, through the acquisition of 24,947,500 shares of
WNC common stock from Conseco, Inc. for $274 million in cash.
American General filed Current Reports on Form 8-K on February 15, 1995,
April 14, 1995, May 9, 1995, and August 23, 1995 that included 1993 and 1994
audited consolidated financial statements of AFC and various pro forma
consolidated financial statements of American General.
This Current Report on Form 8-K, updating the previously filed financial
statements and reflecting the proposed acquisition of IIG, includes the pro
forma consolidated financial statements of American General as of and for the
nine months ended September 30, 1995 and for the year ended December 31, 1994,
as follows:
Balance Sheet. The unaudited pro forma consolidated balance sheet as of
September 30, 1995 presents the historical consolidated balance sheets of
American General and IIG. The purchase accounting and other pro forma
adjustments, as described in the related notes, are calculated as if the IIG
acquisition had been effective at September 30, 1995.
Statement of Income for the Year Ended December 31, 1994. The unaudited
pro forma consolidated statement of income for the year ended December 31, 1994
presents i) the consolidated results of operations of American General and AFC,
and reflects American General's 40% equity in the earnings of WNC ("Pro Forma
A"); and ii) the consolidated results of operations of these entities and IIG
("Pro Forma B"). The purchase accounting and other pro forma adjustments, as
described in the related notes, are calculated as if the acquisitions had been
effective January 1, 1994.
Statement of Income for the Nine Months Ended September 30, 1995. The
unaudited pro forma consolidated statement of income for the nine months ended
September 30, 1995 presents i) the consolidated results of operations of
American General, which includes the operations of AFC for February through
September 1995 and American General's 40% equity in the earnings of WNC, and AFC
for January 1995 ("Pro Forma A"); and ii) the consolidated results of operations
of these entities and IIG ("Pro Forma B"). The purchase accounting and other pro
forma adjustments, as described in the related notes, are calculated as if the
AFC and IIG acquisitions had been effective January 1, 1994.
3
<PAGE> 4
AMERICAN GENERAL CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HISTORICAL ----------
-------------------- RELATING
AMERICAN TO IIG PRO FORMA
GENERAL IIG ACQUISITION CONSOLIDATED
---------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Assets
Investments
Fixed maturity securities.................... $ 35,916 $ 706 $ 7 (C) $ 36,629
Mortgage loans on real estate................ 3,126 141 (20)(D) 3,247
Equity securities............................ 227 207 (1)(D) 433
Policy loans................................. 1,592 35 2 (C) 1,629
Investment real estate....................... 545 14 (7)(D) 552
Other long-term investments.................. 205 - - 205
Short-term investments....................... 136 14 (5)(E) 145
------- ------ ------- -------
Total investments....................... 41,747 1,117 (24) 42,840
Cash............................................ 56 6 - 62
Finance receivables, net........................ 8,139 - - 8,139
Investment in WNC............................... 365 - - 365
Deferred policy acquisition costs............... 1,916 173 (173)(F) 1,916
Cost of insurance purchased..................... 613 14 (14)(F) 886
273 (G)
Acquisition-related goodwill.................... 582 17 (17)(F) 582
Other assets.................................... 1,820 89 (12)(D) 1,897
Assets held in Separate Accounts................ 4,659 - - 4,659
------- ------ ------- -------
Total assets............................ $ 59,897 $1,416 $ 33 $ 61,346
======= ====== ======= =======
Liabilities
Insurance and annuity liabilities............... $ 37,396 $ 948 $ (31)(H) $ 38,313
Debt
Corporate:
Short-term................................. 744 - 181(I) 925
Long-term.................................. 1,170 - - 1,170
Consumer Finance (short-term: $2,591)........ 7,568 - - 7,568
Income tax liabilities.......................... 1,169 (1) 22(J) 1,190
Other liabilities............................... 936 133 16(K) 1,085
Liabilities related to Separate Accounts........ 4,659 - - 4,659
------- ------ ------- -------
Total liabilities....................... 53,642 1,080 188 54,910
------- ------ ------- -------
Redeemable equity
Company-obligated mandatorily redeemable non-
convertible preferred securities of
subsidiary................................... 485 - - 485
Company-obligated mandatorily redeemable
convertible preferred securities of
subsidiary................................... 244 - - 244
Common stock subject to put contracts........... 14 - - 14
------- ------ ------- -------
Total redeemable equity................. 743 - - 743
------- ------ ------- -------
Shareholders' equity
Mandatorily convertible preferred stock......... - - 90 (I) 90
Common stock.................................... 366 21 (21)(L) 383
17 (I)
Net unrealized gains on securities.............. 732 27 (27)(L) 732
Retained earnings............................... 4,842 313 (313)(L) 4,842
Cost of treasury stock.......................... (428) (25) 25 (L) (354)
74 (I)
------- ------ ------- -------
Total shareholders' equity.............. 5,512 336 (155) 5,693
------- ------ ------- -------
Total liabilities and equity............ $ 59,897 $1,416 $ 33 $ 61,346
======= ====== ======= =======
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
4
<PAGE> 5
AMERICAN GENERAL CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RELATING TO RELATING TO IIG
AFC & WNC ACQUISITIONS
------------------------------- ACQUISITION
AFC -----------------------
HISTORICAL PRO WNC IIG
AMERICAN HISTORICAL FORMA PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA
GENERAL AFC ADJUSTMENTS ADJUSTMENTS A IIG ADJUSTMENTS B
-------- ------ ---- ----------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Premiums and other
considerations............... $ 1,210 $ 503 $ - $ - $ 1,713 $272 $ - $ 1,985
Net investment income........... 2,493 479 9 (M) (4)(U) 2,975 69 (2)(W) 3,042
(2)(N)
Finance charges................. 1,248 - - - 1,248 - - 1,248
Realized investment gains
(losses)..................... (172) (14) 14 (O) - (172) 4 (4)(X) (172)
Equity in earnings of WNC....... - - - 27 (V) 27 - - 27
Other........................... 62 68 - - 130 10 - 140
-------- ------ ----- ----- ------- ----- ----- --------
Total revenues.......... 4,841 1,036 21 23 5,921 355 (6) 6,270
-------- ------ ----- ----- ------- ----- ----- --------
Benefits and expenses
Insurance and annuity
benefits..................... 2,224 721 5 (P) - 2,950 132 (13)(Y) 3,069
Operating costs and expenses.... 1,013 108 (3)(Q) - 1,118 129 (1)(Z) 1,246
Commission expense.............. 400 126 - - 526 67 - 593
Change in deferred policy
acquisition costs............ (142) (40) (71)(Q) - (253) 9 (24)(Z) (268)
Amortization of cost of
insurance purchased.......... 18 9 (9)(Q) - 59 2 (2)(Z) 90
41 (R) 31(AA)
Interest expense
Corporate.................... 110 - 32 (S) 11 (U) 153 - 10 (BB) 163
Consumer Finance............. 416 - - - 416 - - 416
-------- ------ ----- ----- ------- ----- ----- --------
Total benefits and
expenses.............. 4,039 924 (5) 11 4,969 339 1 5,309
-------- ------ ----- ----- ------- ----- ----- --------
Earnings
Income before income tax
expense...................... 802 112 26 12 952 16 (7) 961
Income tax expense.............. 289 44 9 (CC) (5)(CC) 345 5 (3)(CC) 347
8 (V)
-------- ------ ----- ----- ------- ----- ----- --------
Income before net dividends on
preferred securities of
subsidiary................... 513 68 17 9 607 11 (4) 614
Net dividends on preferred
securities of subsidiary..... - - 27 (T) - 27 - - 27
-------- ------ ----- ----- ------- ----- ----- --------
Net income.............. $ 513 $ 68 $(10) $ 9 $ 580 $ 11 $ (4) $ 587
======== ====== ===== ===== ======= ===== ===== ========
Earnings per share and average
shares outstanding:
Primary:
Net income................... $ 2.45 $ 2.77 $ 2.73
======== ======= ========
Average shares outstanding
(in thousands)............. 209,403 209,403 214,767
======== ======= ========
Fully diluted:
Net income................... $ 2.45 $ 2.77 $ 2.73
======== ======= ========
Average shares outstanding
(in thousands)............. 209,420 209,420 214,784
======== ======= ========
</TABLE>
Pro Forma A represents American General, AFC, and WNC.
Pro Forma B represents American General, AFC, WNC, and IIG.
See Notes to Pro Forma Consolidated Financial Statements.
5
<PAGE> 6
AMERICAN GENERAL CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RELATING TO AFC ACQUISITION RELATING TO IIG
--------------------------- ACQUISITION
HISTORICAL JANUARY 1995 -------------------------
AMERICAN HISTORICAL PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA
GENERAL AFC ADJUSTMENTS A IIG ADJUSTMENTS B
---------- ------------ ----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Premiums and other
considerations............ $ 1,297 $ 35 $ - $ 1,332 $196 $ - $ 1,528
Net investment income........ 2,291 41 1 (M) 2,332 51 (1)(W) 2,382
(1)(N)
Finance charges.............. 1,113 - - 1,113 - - 1,113
Realized investment gains
(losses).................. 8 1 (1)(O) 8 (2) 2 (X) 8
Equity in earnings of WNC.... 31 - - 31 - - 31
Other........................ 78 4 - 82 8 - 90
------- --- ---- ------- ---- ---- -------
Total revenues....... 4,818 81 (1) 4,898 253 1 5,152
------- --- ---- ------- ---- ---- -------
Benefits and expenses
Insurance and annuity
benefits.................. 2,239 55 - 2,294 96 (9)(Y) 2,381
Operating costs and
expenses.................. 987 11 - 998 85 (1)(Z) 1,082
Commission expense........... 388 8 - 396 53 - 449
Change in deferred policy
acquisition costs......... (157) (3) (6)(Q) (166) - (17)(Z) (183)
Amortization of cost of
insurance purchased....... 29 1 (1)(Q) 32 1 (1)(Z) 52
3 (R) 20 (AA)
Interest expense
Corporate................. 123 - (6)(S) 117 - 8 (BB) 125
Consumer Finance.......... 386 - - 386 - - 386
------- --- ---- ------- ---- ---- -------
Total benefits and
expenses........... 3,995 72 (10) 4,057 235 - 4,292
------- --- ---- ------- ---- ---- -------
Earnings
Income before income tax
expense................... 823 9 9 841 18 1 860
Income tax expense........... 277 3 3 (CC) 283 6 - (CC) 289
------- --- ---- ------- ---- ---- -------
Income before net dividends
on preferred securities of
subsidiaries.............. 546 6 6 558 12 1 571
Net dividends on preferred
securities of
subsidiaries.............. 10 - 15 (T) 25 - - 25
------- --- ---- ------- ---- ---- -------
Net income........... $ 536 $ 6 $ (9) $ 533 $ 12 $ 1 $ 546
======= === ==== ======= ==== ==== =======
Earnings per share and average
shares outstanding:
Primary:
Net income................ $ 2.61 $ 2.60 $ 2.59
======= ======= =======
Average shares outstanding
(in thousands).......... 205,247 205,247 210,611
======= ======= =======
Fully diluted:
Net income................ $ 2.59 $ 2.58 $ 2.57
======= ======= =======
Average shares outstanding
(in thousands).......... 208,168 208,168 213,532
======= ======= =======
</TABLE>
Pro forma A represents American General and AFC.
Pro forma B represents American General, AFC, and IIG.
See Notes to Pro Forma Consolidated Financial Statements.
6
<PAGE> 7
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. BASIS OF PRESENTATION
On October 19, 1995, American General and IIG announced a definitive
agreement under which American General will acquire IIG for a total
consideration of $362 million or $27.50 per share. IIG's shareholders may elect
to receive from among cash, American General common stock, and a new issue of 7%
mandatorily convertible preferred stock of American General. Cash and preferred
stock elections by IIG shareholders will each be limited to 50% of the aggregate
consideration. The exchange ratio for American General common stock and the new
preferred stock will be based on the 10-day average trading price of American
General common stock five days prior to closing. The transaction, which is
subject to approval by IIG's shareholders and requisite regulatory authorities,
is expected to be completed in January 1996.
On January 31, 1995, American General through its wholly-owned subsidiary,
AGC Life, acquired AFC, the holding company of Franklin Life, pursuant to a
Stock Purchase Agreement dated as of November 29, 1994, between American General
and American Brands. The purchase price was $1.17 billion, consisting of $920
million in cash paid at closing and a $250 million cash dividend paid by AFC to
American Brands prior to closing. The dividend was paid on January 30, 1995. The
permanent financing of the AFC acquisition, including related issue costs,
consists of $503 million of company-obligated mandatorily redeemable preferred
securities ("non-convertible preferred securities of subsidiary"), $300 million
of long-term debt, and $150 million of short-term debt (see Notes S and T).
On December 23, 1994, American General, through AGC Life, acquired a 40%
interest in WNC, the holding company of Western National Life Insurance Company,
through the acquisition of 24,947,500 shares of WNC common stock from Conseco,
Inc. for $274 million in cash.
Included on the following pages is information related to these
acquisitions, as follows:
Balance Sheet. The unaudited pro forma consolidated balance sheet as of
September 30, 1995 presents the historical consolidated balance sheets of
American General and IIG. The purchase accounting and other pro forma
adjustments, as described in the related notes, are calculated as if the IIG
acquisition had been effective at September 30, 1995.
Statement of Income for the Year Ended December 31, 1994. The unaudited
pro forma consolidated statement of income for the year ended December 31, 1994
presents i) the consolidated results of operations of American General and AFC,
and reflects American General's 40% equity in the earnings of WNC ("Pro Forma
A"); and ii) the consolidated results of operations of these entities and IIG
("Pro Forma B"). The purchase accounting and other pro forma adjustments, as
described in the related notes, are calculated as if the acquisitions had been
effective January 1, 1994.
Statement of Income for the Nine Months Ended September 30, 1995. The
unaudited pro forma consolidated statement of income for the nine months ended
September 30, 1995 presents i) the consolidated results of operations of
American General, which includes the operations of AFC for February through
September 1995 and American General's 40% equity in the earnings of WNC, and AFC
for January 1995 ("Pro Forma A"); and ii) the consolidated results of operations
of these entities and IIG ("Pro Forma B"). The purchase accounting and other pro
forma adjustments, as described in the related notes, are calculated as if the
AFC and IIG acquisitions had been effective January 1, 1994.
The unaudited pro forma consolidated financial statements and the related
notes reflect the application of the purchase method of accounting for the AFC
and IIG acquisitions. Under this method, the purchase prices were allocated to
the assets acquired and liabilities assumed based on their respective estimated
fair values at January 31, 1995 for AFC (the actual acquisition date), and
September 30, 1995 for IIG (the assumed acquisition date for purposes of the pro
forma consolidated balance sheet) (see Note B), including an adjustment for
income tax effects for the difference between the assigned values and the tax
bases of the assets
7
<PAGE> 8
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
acquired and liabilities assumed. The purchase method of accounting was also
applied to the financial statements of WNC before recording American General's
40% equity in the earnings of WNC using the equity method of accounting.
The unaudited pro forma consolidated financial statements will change due
to IIG's results of operations and varying market conditions from September 30,
1995 through the actual date of acquisition. Prior to completion of accounting
for the acquisitions, changes to the purchase accounting adjustments included in
the unaudited pro forma consolidated financial statements are anticipated as the
valuations of acquired assets and assumed liabilities are finalized.
Accordingly, the actual consolidated financial statements of American General
reflecting the AFC, WNC, and IIG acquisitions may differ from the pro forma
financial statements included herein. The unaudited pro forma consolidated
financial statements are intended for informational purposes only and may not
necessarily be indicative of American General's future financial position or
future results of operations.
American General anticipates first year cost savings of $5 million related
to the AFC acquisition, primarily from centralizing AFC's investment management
function at American General immediately following the acquisition. This
expected savings has been included in the pro forma consolidated financial
statements (see Note N). American General projects additional future cost
savings. The extent and timing of these additional cost savings, however, may
vary from management's expectations, and therefore, no adjustment has been
included in the pro forma consolidated financial statements.
American General plans to consolidate IIG's operations into those of its
Nashville-based life insurance subsidiary, American General Life & Accident
Insurance Company. The consolidation is expected to take 18 to 24 months and,
when completed, should result in annual cost savings of $75 million. The extent
and timing of the cost savings, however, may vary from management's
expectations, and therefore, no adjustment has been included in the pro forma
consolidated financial statements.
8
<PAGE> 9
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE B. ALLOCATION OF IIG PURCHASE PRICE
The total acquisition cost of IIG is allocated as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
(IN MILLIONS) 1995
-------------
<S> <C>
Net assets purchased.................................................... $ 336
Increase (decrease) in IIG's net asset value to estimated fair value:
Held-to-maturity fixed maturity securities......................... 7
Mortgage loans on real estate...................................... (20)
Equity securities.................................................. (1)
Policy loans....................................................... 2
Investment real estate............................................. (7)
Deferred policy acquisition costs.................................. (173)
Cost of insurance purchased (historical)........................... (14)
Cost of insurance purchased........................................ 273
Acquisition-related goodwill....................................... (17)
Other assets....................................................... (12)
Insurance and annuity liabilities.................................. 31
Income tax liabilities............................................. (22)
Other liabilities.................................................. (16)
-----
Total estimated fair value adjustments........................ 31
American General transaction costs...................................... (5)
-----
Purchase price..................................................... $ 362
=====
</TABLE>
Each of the above allocations is described in more detail in the following
notes to the pro forma consolidated financial statements.
As explained in Note A, purchase accounting adjustments will change as
additional information becomes available, affecting the ultimate allocation of
the purchase price.
NOTE C. FIXED MATURITY SECURITIES AND POLICY LOANS
IIG's held-to-maturity fixed maturity securities and policy loans are
restated to fair value as of the assumed date of acquisition to reflect premiums
of $7 million and $2 million, respectively. In addition, all fixed maturity
securities are classified as available-for-sale in the consolidated pro forma
financial statements.
NOTE D. MORTGAGE LOANS ON REAL ESTATE, EQUITY SECURITIES, INVESTMENT REAL
ESTATE, AND OTHER ASSETS
The consolidated pro forma financial statements are adjusted to reflect
write-downs on IIG's mortgage loans on real estate of $20 million, real estate
partnerships (included in equity securities) of $1 million, investment real
estate of $7 million, and other assets of $12 million.
NOTE E. SHORT-TERM INVESTMENTS
Short-term investments are adjusted to reflect the liquidation of
securities to fund $5 million in projected transaction costs for legal and
investment banking expenses associated with the IIG acquisition.
9
<PAGE> 10
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE F. DEFERRED POLICY ACQUISITION COSTS ("DPAC"), HISTORICAL COST OF INSURANCE
PURCHASED ("CIP"), AND ACQUISITION-RELATED GOODWILL
DPAC and historical CIP of IIG are eliminated since these amounts are
reflected in the determination of new CIP (see Note G).
Goodwill recorded on IIG's historical consolidated financial statements is
eliminated under purchase accounting. No goodwill is associated with the
acquisition because the excess of the cost of the investment in IIG over the
fair value of the tangible net assets acquired is fully reflected in CIP.
NOTE G. NEW CIP
CIP reflects the estimated fair value of the business in force and
represents the portion of the purchase price that is allocated to the value of
the right to receive future cash flows from insurance contracts existing at the
assumed date of the acquisition. Such value is the actuarially-determined amount
that, when amortized into income, results in expected earnings that meet the
profit objective of American General. This profit objective is an expected
aftertax rate of return of 13% on capital required to support the business in
force. This rate of return is believed to be appropriate based on considerations
of the relative risk associated with realizing the expected cash flows, the cost
of capital to American General to fund the acquisition, and the operating
environment of IIG, namely, the regulatory and tax factors affecting future
profitability and the profit objectives of American General for newly issued
policies.
The value allocated to CIP is based on a preliminary valuation;
accordingly, this amount will be adjusted after final determination of the
value. On a pro forma basis, assuming that the IIG acquisition occurred at
September 30, 1995, expected gross amortization using current assumptions and
accretion of interest based on an interest rate equal to the liability rate
(6 1/2%), for each of the years in the five-year period ending September 30,
2000, is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
YEAR ENDING BEGINNING GROSS ACCRETION NET ENDING
SEPTEMBER 30, BALANCE AMORTIZATION OF INTEREST AMORTIZATION BALANCE
--------------- --------- ------------ ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
1996.......................... $ 273 $ 49 $18 $ 31 $ 242
1997.......................... 242 42 16 26 216
1998.......................... 216 36 14 22 194
1999.......................... 194 33 13 20 174
2000.......................... 174 30 12 18 156
</TABLE>
NOTE H. INSURANCE AND ANNUITY LIABILITIES
IIG's insurance and annuity liabilities are restated as of the assumed
acquisition date to a value that reflects changes due to purchase accounting,
primarily related to IIG's life insurance contracts.
10
<PAGE> 11
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE I. SHORT-TERM DEBT, MANDATORILY CONVERTIBLE PREFERRED STOCK, COMMON STOCK,
AND COST OF TREASURY STOCK
Short-term debt, mandatorily convertible preferred stock, and common stock
are increased, and cost of treasury stock is decreased, at September 30, 1995 to
reflect the expected components of the total consideration to be paid for IIG
(see Note A). For purposes of the consolidated pro forma financial statements,
the $362 million in consideration is assumed to consist of 50% short-term debt,
25% mandatorily convertible preferred stock, and 25% common stock, as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) NUMBER STATED OR
OF AMOUNT ASSUMED
TYPE OF ISSUE SHARES OUTSTANDING RATE
------------- --------- ----------- ---------
<S> <C> <C> <C>
Short-term floating-rate corporate debt............ $181 5.75%
Mandatorily convertible preferred stock............ 2,681,759 90 7.00%
Common stock....................................... 2,681,759 91
----
Total.................................... $362
====
</TABLE>
The exchange ratio for the American General common stock and mandatorily
convertible preferred stock is assumed to be .8148 shares for each share of IIG
common stock based on an assumed American General common stock price of $33.75,
the closing market price on November 10, 1995 (see Note A). The assumed rate for
the short-term floating-rate corporate debt is based on American General's
portfolio rate with a 28 day average portfolio maturity. The rate for the
mandatorily convertible preferred stock is 7% as stated in the definitive
agreement between American General and IIG. Common stock is assumed to be issued
out of treasury at an average cost of $27.49 per share.
NOTE J. INCOME TAX LIABILITIES
Deferred taxes are adjusted to reflect differences between the assigned
values and tax bases of IIG's assets acquired and liabilities assumed.
NOTE K. OTHER LIABILITIES
Other liabilities are increased to reflect accruals primarily related to
IIG's severance program.
NOTE L. SHAREHOLDERS' EQUITY
IIG's historical shareholders' equity is eliminated in consolidation.
NOTE M. ACCRETION OF DISCOUNT ON FIXED MATURITY SECURITIES AND MORTGAGE LOANS ON
REAL ESTATE -- AFC
AFC's historical consolidated financial statements accrete the difference
between par value and amortized cost of fixed maturity securities and mortgage
loans into income on an effective yield basis over the remaining lives of the
individual fixed maturity securities and mortgage loans. The pro forma
consolidated financial statements are adjusted to reflect additional accretion
of the difference, at the assumed acquisition date, between amortized cost and
fair value of these same fixed maturity securities and mortgage loans.
Expected incremental accretion of the discount on fixed maturity securities
and mortgage loans for the next five years is $9 million, $11 million, $14
million, $16 million, and $19 million (pretax), respectively.
11
<PAGE> 12
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE N. NET INVESTMENT INCOME -- AFC
The liquidation by AFC of its investments to fund the $250 million cash
dividend paid to its shareholder prior to the acquisition (see Note A) is
expected to reduce net investment income by $6 million (pretax) per year.
The liquidation of $25 million of short-term investments to fund
transaction and acquisition-related costs is expected to reduce interest income
by $1 million (pretax) per year.
Annual projected expense savings of $5 million, primarily associated with
centralizing AFC's investment management function at American General
immediately following the acquisition, are included in the pro forma
consolidated financial statements.
NOTE O. REALIZED INVESTMENT GAINS (LOSSES) -- AFC
Realized and unrealized investment losses of $31 million and gains of $1
million (pretax) on trading securities recorded by AFC in 1994 and January 1995,
respectively, are reversed since equity securities were assumed to be liquidated
prior to the acquisition to fund the cash dividend to AFC's shareholder (see
Note A). For purposes of the pro forma consolidated financial statements, the
dividend is assumed to occur on January 1, 1994.
Realized investment gains of $17 million (pretax) on fixed maturity
securities recorded by AFC in 1994 are reversed for purposes of the pro forma
consolidated financial statements, since they will not be a component of total
revenues in the future. The gains realized by AFC were indicative of the low
interest rate environment that prevailed in early 1994. Assuming the acquisition
occurred at January 1, 1994, these gains would not have been realized because
American General's purchased bases in the securities sold would have been
higher.
NOTE P. INSURANCE AND ANNUITY BENEFITS -- AFC
AFC's historical insurance and annuity benefits are increased primarily to
reflect the change in the pattern of reserving for future benefits, primarily
for AFC's participating life insurance contracts.
NOTE Q. AMORTIZATION EXPENSE -- DPAC, CIP, AND ACQUISITION-RELATED
GOODWILL -- AFC
The expense recorded on AFC's historical consolidated financial statements
for the amortization of DPAC, historical CIP, and acquisition-related goodwill
is reversed to reflect the elimination of the related intangible assets under
purchase accounting.
NOTE R. AMORTIZATION OF CIP -- AFC
CIP is amortized in relation to estimated profits on the policies purchased
with interest equal to the liability or contract rates (5% to 8%).
Expected net amortization of CIP for the next five years is $41 million,
$40 million, $39 million, $37 million, and $34 million (pretax), respectively.
12
<PAGE> 13
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE S. INTEREST EXPENSE -- AFC
Interest expense is increased to reflect the issuance of senior long-term
fixed-rate corporate debt and short-term floating-rate corporate debt assuming
the permanent financing of the AFC acquisition had been effective on January 1,
1994 (see Note A). The components of pretax interest expense for 1994, including
the amortization of settlement costs of derivative financial instruments related
to the senior long-term debt, are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) ANNUAL
AMOUNT INTEREST
TYPE OF ISSUE RATE OUTSTANDING EXPENSE
------------- --------- ----------- --------
<S> <C> <C> <C>
Short-term floating-rate corporate debt.............. 5.75% $150 $ 9
Senior debt due June 15, 2005........................ 6.75% 150 11
Senior debt due July 15, 2025........................ 7.50% 150 12
---- ---
$450 $32
==== ===
</TABLE>
Interest expense for the nine months ended September 30, 1995 is adjusted to
reflect the incremental decrease in interest expense assuming the permanent
financing of the AFC acquisition had been effective on January 1, 1994.
A 1% increase/decrease in the short-term floating rate would
increase/decrease the above pro forma annual interest expense by approximately
$2 million (pretax) per year.
NOTE T. NET DIVIDENDS ON NON-CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY -- AFC
Net dividends on non-convertible preferred securities of subsidiary,
assuming the permanent financing of the AFC acquisition had been effective on
January 1, 1994 (see Note A), are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) AMOUNT PRETAX TAX NET
RATE OUTSTANDING DIVIDENDS BENEFIT DIVIDENDS
---- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Non-convertible preferred securities of subsidiary
due June 5, 2025................................ 8.45% $288 $24 $ 8 $16
Non-convertible preferred securities of subsidiary
due September 30, 2025.......................... 8.125% 215 17 6 11
---- --- --- ---
$503 $41 $14 $27
==== === === ===
</TABLE>
Net dividends on non-convertible preferred securities of subsidiary for the nine
months ended September 30, 1995 are adjusted to reflect the incremental increase
assuming the permanent financing of the AFC acquisition had been effective on
January 1, 1994.
NOTE U. INTEREST EXPENSE AND NET INVESTMENT INCOME -- WNC
Interest expense is increased by $11 million (pretax), and net investment
income is reduced by $4 million (pretax), in 1994 to reflect the liquidation of
investments and the issuance of short-term debt to fund the acquisition of the
40% interest in WNC.
NOTE V. EQUITY IN EARNINGS OF WNC
The pro forma consolidated financial statements for 1994 are adjusted to
reflect American General's 40% equity in the earnings of WNC, after purchase
accounting and other pro forma adjustments. The equity in earnings of WNC is tax
effected by American General at 35%, less an estimated dividends received
deduction.
13
<PAGE> 14
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE W. AMORTIZATION OF PREMIUM ON FIXED MATURITY SECURITIES -- IIG
IIG's historical consolidated financial statements amortize the difference
between par value and amortized cost of fixed maturity securities on an
effective yield basis over the remaining lives of the individual fixed maturity
securities. The pro forma consolidated financial statements are adjusted to
reflect additional amortization of the difference, at the assumed acquisition
date, between amortized cost and fair value of these same fixed maturity
securities on a straight-line basis over an assumed period of 10 years.
Expected incremental amortization of the premium (see Note C), including
unrealized gains (losses) on available-for-sale fixed maturity securities, is $2
million (pretax) per year.
NOTE X. REALIZED INVESTMENT GAINS -- IIG
Realized investment gains of $4 million and losses of $2 million (pretax)
recorded by IIG in 1994 and 1995, respectively, are reversed for purposes of the
pro forma consolidated financial statements, since they will not be a component
of total revenues in the future.
NOTE Y. INSURANCE AND ANNUITY BENEFITS -- IIG
IIG's historical insurance and annuity benefits are decreased by $13
million and $9 million (pretax) in 1994 and 1995, respectively, primarily to
reflect the change in the pattern of reserving for future benefits, primarily
for IIG's life insurance contracts (see Note H).
NOTE Z. AMORTIZATION EXPENSE -- DPAC, CIP, AND ACQUISITION-RELATED
GOODWILL -- IIG
The expense recorded on IIG's historical consolidated financial statements
for the amortization of DPAC associated with long-duration life and accident &
health insurance policies, historical CIP, and acquisition-related goodwill is
reversed to reflect the elimination of the related intangible assets under
purchase accounting (see Note F).
NOTE AA. AMORTIZATION OF CIP -- IIG
CIP is amortized in relation to estimated profits on the policies
purchased, with accretion of interest based on an interest rate equal to the
liability rate of 6 1/2% (see Note G).
NOTE BB. INTEREST EXPENSE -- IIG
Interest expense is increased by $10 million (pretax) per year to reflect
the issuance of $181 million of short-term floating-rate corporate debt at a
rate of 5.75% assuming the IIG acquisition had been effective on January 1, 1994
(see Note I). A 1% increase/decrease in the short-term floating-rate would
increase/decrease pro forma interest expense by approximately $2 million
(pretax) per year.
NOTE CC. INCOME TAX EXPENSE
All of the applicable pro forma consolidated financial statement
adjustments, except goodwill amortization, are tax effected at an assumed
effective income tax rate of 36% for AFC and 35% for WNC and IIG.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN GENERAL CORPORATION
By: /s/ AUSTIN P. YOUNG
--------------------------------
Austin P. Young
Senior Vice President and
Chief Financial Officer
Dated: November 13, 1995
15
