AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 1-7981
American General Corporation
(Exact name of registrant as specified in its articles of incorporation)
Texas 74-0483432
(State of Incorporation) (I.R.S. Employer
Identification No.)
2929 Allen Parkway, Houston, Texas 77019-2155
(Address of principal executive offices) (Zip Code)
(713) 522-1111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
The number of shares outstanding of the registrant's common stock at October
31, 1995 was 204,790,596 (excluding shares held in treasury and by a
subsidiary).
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
INDEX TO FORM 10-Q
Page
Part I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Statement of Income for the nine months
and quarter ended September 30, 1995 and 1994 ...... 2
Consolidated Balance Sheet at September 30, 1995 and
December 31, 1994 .................................. 3
Consolidated Condensed Statement of Cash Flows for
the nine months ended September 30, 1995 and 1994 .. 4
Notes to Consolidated Financial Statements ........... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 12
Part II. OTHER INFORMATION.
Item 1. Legal Proceedings .................................... 28
Item 5. Other Information .................................... 28
Item 6. Exhibits and Reports on Form 8-K ..................... 28
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN GENERAL CORPORATION
Consolidated Statement of Income
(Unaudited)
(In millions, except share data)
Nine Months Ended Quarter Ended
September 30, September 30,
1995 1994 1995 1994
Revenues
Premiums and other considerations. $ 1,297 $ 891 $ 455 $ 304
Net investment income ............ 2,291 1,860 797 622
Finance charges .................. 1,113 907 384 324
Realized investment gains ........ 8 5 5 1
Equity in earnings of Western
National Corporation ............ 31 - 10 -
Other ............................ 78 48 22 14
Total revenues ............... 4,818 3,711 1,673 1,265
Benefits and expenses
Insurance and annuity benefits ... 2,173 1,642 757 554
Policyholder dividends ........... 66 5 25 1
Operating costs and expenses ..... 726 593 250 206
Commission expense ............... 388 295 128 100
Provision for finance receivable
losses .......................... 261 147 114 59
Change in deferred policy
acquisition costs and cost of
insurance purchased ............. (128) (98) (39) (35)
Interest expense
Corporate ....................... 123 82 40 28
Consumer Finance ................ 386 300 131 107
Total benefits and expenses .. 3,995 2,966 1,406 1,020
Earnings
Income before income tax expense.. 823 745 267 245
Income tax expense ............... 277 267 78 86
Income before net dividends on
preferred securities of
subsidiaries .................... 546 478 189 159
Net dividends on preferred
securities of subsidiaries ...... 10 - 8 -
Net income ................... $ 536 $ 478 $ 181 $ 159
Net income per share .............. $ 2.59 $ 2.27 $ .86 $ .77
Dividends paid per common share ... $ .93 $ .87 $ .31 $ .29
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Average fully diluted shares
outstanding (in thousands) ...... 208,168 210,711 211,825 208,691
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
(In millions, except share amounts)
September 30, December 31,
1995 1994
Assets
Investments
Fixed maturity securities (amortized cost:
$34,289; $27,087) ............................ $35,916 $25,700
Mortgage loans on real estate ................. 3,126 2,651
Equity securities (cost: $173; $202) .......... 227 224
Policy loans .................................. 1,592 1,197
Investment real estate ........................ 545 564
Other long-term investments ................... 205 152
Short-term investments ........................ 136 209
Total investments ........................... 41,747 30,697
Cash ........................................... 56 45
Finance receivables, net ....................... 8,139 7,694
Investment in Western National Corporation ..... 365 274
Deferred policy acquisition costs .............. 1,916 2,563
Cost of insurance purchased .................... 613 168
Acquisition-related goodwill ................... 582 597
Other assets ................................... 1,820 1,356
Assets held in Separate Accounts ............... 4,659 2,901
Total assets ................................ $59,897 $46,295
Liabilities
Insurance and annuity liabilities .............. $37,396 $29,623
Debt (short-term)
Corporate ($744; $1,000) ...................... 1,914 1,836
Consumer Finance ($2,591; $2,777) ............. 7,568 7,090
Income tax liabilities ......................... 1,169 721
Other liabilities .............................. 936 620
Liabilities related to Separate Accounts ....... 4,659 2,901
Total liabilities ........................... 53,642 42,791
Redeemable equity
Company-obligated mandatorily redeemable
non-convertible preferred securities of
subsidiary (shares issued and outstanding:
20,100,000) ................................... 485 -
Company-obligated mandatorily redeemable
convertible preferred securities of subsidiary
(shares issued and outstanding: 5,000,000) ... 244 -
Common stock subject to put contracts .......... 14 47
Total redeemable equity ..................... 743 47
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Shareholders' equity
Common stock (shares issued: 220,122,120;
outstanding: 204,499,096; 203,051,907) ....... 366 364
Net unrealized gains (losses) on securities .... 732 (935)
Retained earnings .............................. 4,842 4,495
Cost of treasury stock ......................... (428) (467)
Total shareholders' equity .................. 5,512 3,457
Total liabilities and equity ................ $59,897 $46,295
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended
September 30,
1995 1994
Operating activities
Net cash provided by operating activities ... $ 1,442 $ 1,072
Investing activities
Investment purchases .............................. (5,842) (5,348)
Investment calls, maturities, and sales ........... 4,026 3,956
Finance receivable originations or acquisitions ... (4,482) (4,081)
Finance receivable principal payments received .... 3,681 3,104
Finance receivables sold through securitization ... 100 -
Net decrease (increase) in short-term investments.. 96 (8)
Purchase of Franklin Life ......................... (920) -
Proceeds from sale of subsidiary .................. - 95
Other, net ........................................ (152) (29)
Net cash used for investing activities ...... (3,493) (2,311)
Financing activities
Retirement Annuities and Life Insurance
Policyholder account deposits ................... 2,319 1,847
Policyholder account withdrawals ................ (1,352) (956)
Total Retirement Annuities and Life Insurance. 967 891
Consumer Finance
Net increase (decrease) in short-term debt ...... (186) 488
Long-term debt issuances ........................ 1,503 737
Long-term debt redemptions ...................... (842) (439)
Total Consumer Finance ....................... 475 786
Corporate
Net decrease in short-term debt ................. (256) (30)
Long-term debt issuances ........................ 433 -
Long-term debt redemptions ...................... (100) (22)
Issuance of preferred securities of subsidiary,
net of commissions paid
Non-convertible ............................... 485 -
Convertible ................................... 244 -
Dividend payments ............................... (190) (184)
Common share purchases .......................... - (199)
Other, net ...................................... 4 2
Total Corporate .............................. 620 (433)
Net cash provided by financing activities ... 2,062 1,244
Net increase in cash ............................... 11 5
Cash at beginning of period ........................ 45 6
Cash at end of period .............................. $ 56 $ 11
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Supplemental disclosure of cash flow information:
Cash paid during the period for
Income taxes .................................... $ 166 $ 323
Interest
Corporate ..................................... 115 87
Consumer Finance .............................. 365 290
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1995
1. Accounting Policies. The accompanying unaudited consolidated financial
statements of American General Corporation ("American General" or "the
company") and its subsidiaries have been prepared in accordance with
generally accepted accounting principles for interim periods. In the
opinion of management, these statements include all adjustments,
consisting only of normal recurring accruals, that are necessary for a
fair presentation of the company's consolidated financial position at
September 30, 1995, the consolidated results of operations for the three
months and nine months ended September 30, 1995 and 1994, and
consolidated cash flows for the nine months ended September 30, 1995 and
1994.
To conform with the 1995 presentation, certain items in the prior period
have been reclassified.
2. New Accounting Standards.
SFAS 120. American General will adopt Statement of Financial Accounting
Standards (SFAS) 120, "Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts," and Statement of Position (SOP) 95-1,
"Accounting for Certain Insurance Activities of Mutual Life Insurance
Enterprises," during fourth quarter 1995. SOP 95-1 establishes
accounting for certain participating life insurance contracts. SFAS 120
permits, but does not require, stock life insurance companies to apply
the provisions of SOP 95-1.
The company's adoption of the statements will be concurrent with
finalization of the purchase price allocation for The Franklin Life
Insurance Company (Franklin Life), which was acquired January 31, 1995.
Application to Franklin Life as of the acquisition date would not
materially impact American General's previously reported consolidated net
income in the 1995 quarters. Since substantially all of American
General's participating business is written by Franklin Life, retroactive
application of the new statements would not materially impact interim
1995 or prior annual financial statements.
SFAS 121. American General will adopt SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," during fourth quarter 1995, effective January 1, 1995. This
statement establishes accounting standards for 1) the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used in the business, and 2) long-lived
assets and certain identifiable intangibles to be disposed of. Upon
adoption, the company will value certain investment real estate at fair
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
value, rather than at net realizable value as previously required.
Application of this statement will require recognition of immaterial
adjustments to investment real estate reserves, which would not
materially impact previously reported consolidated net income in the 1995
quarters.
Item 1. Financial Statements (continued).
3. Acquisitions.
Completed Acquisitions. 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 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. The permanent financing of this acquisition including
related issue costs, finalized in third quarter 1995, consisted of $150
million of short-term debt, $300 million of senior long-term fixed-rate
debt, and $503 million of non-convertible company-obligated mandatorily
redeemable preferred securities (non-convertible preferred securities).
See Notes 4 and 5.
The acquisition was accounted for using the purchase method, and the
results of operations of Franklin Life were included in the consolidated
statement of income from the date of acquisition. The assets and
liabilities of Franklin Life were reflected in American General's
consolidated balance sheet as of January 31, 1995, at management's best
estimate of their fair values. Evaluation of fair values for acquired
assets and liabilities, including investments, cost of insurance
purchased, and insurance and annuity liabilities, is continuing and
allocation of the purchase price may be adjusted.
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. For accounting purposes, the acquisition was recorded on an
equity basis, using the purchase method.
The following unaudited pro forma information presents the consolidated
results of operations of American General and AFC and reflects American
General's 40% equity in the earnings of WNC for the first nine months of
each year, as if the acquisitions had been effective at the beginning of
the periods presented, after giving effect to adjustments to reflect the
acquisitions and the permanent financing of the AFC acquisition.
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 1. Financial Statements (continued).
(In millions, except share data)
Pro Forma
Nine Months Ended
September 30,
1995 1994
Total revenues $4,898 $4,523
Income before income tax expense 841 864
Income before net dividends on
preferred securities of
subsidiaries 558 552
Net income 533 531
Net income per share $ 2.58 $ 2.52
Average fully diluted shares
outstanding (thousands) 208,168 210,711
Included in net income above are aftertax realized gains of $5 million
and $1 million for the nine months ended September 30, 1995 and 1994,
respectively.
The above unaudited pro forma information is intended for informational
purposes only and may not necessarily be indicative of American General's
future results of operations.
Pending Acquisition. On October 19, 1995, American General announced a
definitive agreement to acquire Independent Insurance Group, Inc.
(Independent), the holding company of Independent Life and Accident
Insurance Company, for a total consideration of $362 million.
Independent's shareholders may elect to receive from among cash, American
General common stock, or a new issue of American General 7% mandatorily
convertible preferred stock. The transaction, which is subject to
approval by Independent's shareholders and requisite regulatory
authorities, is expected to be completed in January 1996.
4. Long-Term Debt.
Corporate. In March 1995, the company issued $150 million of 7.75%
senior debt due April 1, 2005. Proceeds from this issuance were used to
repay short-term corporate debt. In June 1995, American General issued
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
$150 million of 6.75% senior debt due June 15, 2005. In July 1995,
American General issued $150 million of 7.5% senior debt due July 15,
2025. The proceeds from both issuances were used to refinance short-term
debt related to the Franklin Life acquisition.
Item 1. Financial Statements (continued).
Consumer Finance. During the nine months ended September 30, 1995,
American General Finance Corporation (AGFC) issued $1.5 billion of debt
with interest rates ranging from 5.87% to 8.42% and maturity dates
ranging from 1997 to 2005. Proceeds from all the issuances were used to
refinance consumer finance debt or support the growth in finance
receivables.
5. Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiaries (Preferred Securities). In June and August 1995, two
special purpose subsidiaries of the company completed the public offering
of three issues of preferred securities totaling $752.5 million, with net
proceeds of $729 million.
Convertible Preferred Securities of Subsidiary. On June 1, 1995,
American General Delaware, L.L.C. issued 5,000,000 shares, or $250
million, of convertible preferred securities. Net proceeds of $244
million were used to refinance short-term real estate debt. The
convertible preferred securities pay monthly cash dividends at an annual
rate of 6%. Each security is convertible at the option of the holder
into 1.2288 shares of American General common stock, based on a
conversion price of $40.69 per security. This issue is subject to
redemption at the option of American General Delaware, L.L.C. after eight
years at a redemption price of $50 per security plus accumulated and
unpaid dividends. The issue is mandatorily redeemable for cash on
May 31, 2025.
American General may cause American General Delaware, L.L.C. to defer the
payment of dividends for up to 60 months. During any such period,
dividends on the convertible preferred securities would compound monthly,
and American General could not declare or pay dividends on its common or
preferred stock. The failure to pay dividends on the convertible
preferred securities for 15 consecutive months would trigger the rights
of the holders of the convertible preferred securities to convert the
convertible preferred securities to American General Series A Preferred
Stock. The Series A Preferred Stock would have dividend, conversion, and
liquidation preference, optional redemption, and certain other terms
substantially similar to the terms of the convertible preferred
securities, except that the holders of the Series A Preferred Stock would
have the right to elect two additional directors of American General
whenever dividends are in arrears for 18 or more consecutive months and
the Series A Preferred Stock would not be subject to mandatory
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
redemption. American General has guaranteed, on a subordinated basis, to
pay the redemption price and any accumulated and unpaid dividends related
to the convertible preferred securities.
Item 1. Financial Statements (continued).
Non-Convertible Preferred Securities of Subsidiary. On June 5, 1995,
American General Capital, L.L.C. issued 11,500,000 shares, or $287.5
million, of non-convertible preferred securities. Net proceeds of $277
million were used to refinance short-term debt related to the Franklin
Life acquisition. The non-convertible preferred securities pay monthly
cash dividends at an annual rate of 8.45%. This issue is subject to
redemption at the option of American General Capital, L.L.C. after five
years at a redemption price equal to $25 per security plus accumulated
and unpaid dividends. Subject to possible extension up to June 5, 2044,
the issue is mandatorily redeemable for cash on June 30, 2025.
On August 29, 1995, American General Capital, L.L.C. issued 8,600,000
shares, or $215 million, of non-convertible preferred securities. Net
proceeds of $208 million were used to refinance short-term debt related
to the Franklin Life acquisition. The non-convertible preferred
securities pay monthly cash dividends at an annual rate of 8.125%. This
issue is subject to redemption at the option of American General Capital,
L.L.C. after five years at a redemption price equal to $25 per security
plus accumulated and unpaid dividends. Subject to possible extension up
to August 29, 2044, the issue is mandatorily redeemable for cash on
September 30, 2025.
American General may cause American General Capital, L.L.C. to defer the
payment of dividends for up to 60 months. During any such period,
dividends on the non-convertible preferred securities would compound
monthly, and American General could not declare or pay dividends on its
common or preferred stock. The failure to pay dividends on the non-
convertible preferred securities for 18 consecutive months would trigger
the rights of the holders of the non-convertible preferred securities to
appoint a special trustee to enforce the obligations to the holders of
the non-convertible preferred securities. American General has
guaranteed, on a subordinated basis, to pay the redemption price and any
accumulated and unpaid dividends related to both issues of non-
convertible preferred securities.
6. Derivative Financial Instruments. American General makes very limited
use of derivative financial instruments to manage the cost of debt and
investment transactions and does not use derivatives for speculative
purposes. The company uses interest rate swap agreements and currency
swap agreements to reduce its exposure to future fluctuations in interest
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
rates and foreign currency exchange rates. The company's use of swap
agreements did not have a material effect on the weighted-average
borrowing rate, reported interest expense, or net investment income in
the first nine months of 1995.
Item 1. Financial Statements (continued).
Related to Corporate Debt. In February 1995, the company entered into an
interest rate swap agreement with a notional amount of $100 million as an
anticipatory hedge of ten-year, fixed-rate debt. In June 1995, the
company issued $150 million of such debt and terminated the interest rate
swap agreement. The termination of the swap agreement resulted in
settlement costs of $10.9 million, which are being deferred and
recognized as an increase to interest expense over the ten-year term of
the debt.
In March 1995, the company issued $150 million of fixed-rate debt and
terminated two interest rate swap agreements with a total notional amount
of $150 million. Settlement costs of $.9 million are being deferred and
recognized as an increase to interest expense over the ten-year term of
the debt.
In June 1995, the company entered into a forward contract to hedge
interest rate risk associated with the anticipated issuance of $150
million of thirty-year, fixed-rate debt. In July 1995, the company
issued such debt and settled the forward contract in cash. Settlement
costs of $1.7 million are being deferred and recognized as an increase to
interest expense over the thirty-year term of the debt.
The company made cash payments to settle the swaps discussed above,
because interest rates declined in mid-1995 and the related debt was
issued at lower rates than anticipated.
Related to Consumer Finance Debt. During the nine months ended September
30, 1995, AGFC entered into five interest rate swap agreements with terms
of two to three years and with a total notional amount of $200 million.
These swap agreements effectively convert short-term and medium-term
floating-rate debt to a fixed-rate basis. At September 30, 1995,
outstanding interest rate swaps totaled $590 million of notional amount,
with an average fixed pay rate of 8.07% and an average floating receive
rate of 5.95%.
Related to Investment Securities. At September 30, 1995, insurance and
annuity subsidiaries of the company had swap agreements related to
investment securities with a total notional amount of $97 million and
forward interest rate swaps, which become effective in 1995 and 1996 to
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
hedge either duration risk or anticipated investment purchases, with a
total notional amount of $44 million. The swaps in effect at September
30, 1995, included various Canadian currency swap agreements, interest
rate swap agreements to receive a fixed rate and pay a floating rate or
vice versa, and one combination currency/interest rate swap. None of
these swaps had a material impact on unrealized gains or losses at
September 30, 1995.
Item 1. Financial Statements (continued).
7. Deferred Income Taxes. Lower market interest rates and resulting
increases in bond values resulted in a deferred tax liability related to
unrealized gains on fixed maturity securities of $383 million at
September 30, 1995 as compared to a deferred tax asset of $351 million at
December 31, 1994. The deferred tax asset at December 31, 1994 was
reduced by a valuation allowance of $315 million, recorded through
shareholders' equity. Due to the unrealized gains and resulting deferred
tax liability at September 30, 1995, no valuation allowance was required.
The elimination of the valuation allowance was recorded through
shareholders' equity.
8. Legal Contingencies. Two real estate subsidiaries of the company were
defendants in a lawsuit that alleged damages based on lost profits and
related claims arising from certain loans and joint venture contracts.
On July 16, 1993, a judgment was entered against the subsidiaries jointly
for $47.3 million in compensatory damages and against one of the
subsidiaries for $189.2 million in punitive damages. On September 17,
1993, a Texas state district court reduced the previously-awarded
punitive damages by $60.0 million, resulting in a reduced judgment in the
amount of $176.5 million plus post-judgment interest. An appeal on
numerous legal grounds has been filed. The company is continuing to
contest the matter vigorously through the appeals process; and the
company believes, based on advice of legal counsel, that plaintiffs'
claims are without merit. Accordingly, no provision has been made in the
consolidated financial statements related to this contingency.
In April 1992, the Internal Revenue Service (IRS) issued Notices of
Deficiency in the amount of $12.4 million for the 1977-1981 tax years of
certain insurance subsidiaries. The basis of the dispute was the tax
treatment of modified coinsurance agreements. The company elected to pay
all related assessments plus associated interest, totaling $59 million.
A claim for refund of tax and interest was disallowed by the IRS in
January 1993. On June 30, 1993, a suit for refund was filed in the Court
of Federal Claims. A decision is expected to be rendered during 1995.
The company believes that the IRS's claims are without merit and is
continuing to vigorously pursue refund of the amounts paid. Accordingly,
no provision has been made in the consolidated financial statements
related to this contingency.
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
American General and certain of its subsidiaries are defendants in
various other lawsuits and proceedings arising in the normal course of
business. Some of these lawsuits and proceedings arise in jurisdictions
such as Alabama that permit punitive damages disproportionate to the
actual damages alleged. Although no assurances can be given and no
determination can be made at this time as to the outcome of any
particular lawsuit or proceeding, American General and its subsidiaries
believe that there are meritorious defenses for all of these claims and
Item 1. Financial Statements (continued).
are defending them vigorously. The company also believes that the total
amounts that would ultimately be paid, if any, arising from these claims
would have no material effect on the company's consolidated results of
operations and financial position.
9. Status of Federal Tax Return Examinations. The company and its
subsidiaries file a consolidated federal income tax return. The IRS is
currently examining the company's tax returns for 1986 through 1992. One
issue from prior tax returns is currently being litigated, as described
in Note 8.
10. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends. The ratio of earnings to
fixed charges and the ratio of earnings to combined fixed charges and
preferred stock dividends were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
1995 1994 1995 1994
Ratio of Earnings to Fixed
Charges:
Consolidated operations .......... 2.52 2.80 2.48 2.67
Consolidated operations,
corporate fixed charges only .... 6.43 8.09 6.27 7.79
American General Finance, Inc. ... 1.65 1.93 1.45 1.92
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends:
Consolidated operations .......... 2.45 2.80 2.33 2.67
Consolidated operations,
corporate fixed charges and
preferred stock dividends only .. 5.84 8.09 5.07 7.79
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
This item presents specific comments on material changes to the company's
results of operations, capital resources, and liquidity for the periods
reflected in the interim financial statements filed with this report. The
reader is presumed to have read or have access to the company's 1994 Annual
Report to Shareholders, including the Management's Discussion and Analysis on
pages 16 through 25 thereof, and the company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1995 and June 30, 1995.
This analysis should be read in conjunction with the consolidated financial
statements and related notes on pages 2 through 12 of this Quarterly Report on
Form 10-Q.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
STATEMENT OF INCOME
Comparison of Nine Months Ended September 30, 1995 and September 30, 1994
Operating Revenues. Total revenues increased $1.1 billion, or 30%, for the
nine months ended September 30, 1995 compared to the same period in 1994,
primarily due to increases in premiums and other considerations, net
investment income, and finance charges. The increases in premiums and other
considerations of $406 million, or 45%, and in net investment income of $431
million, or 23%, are substantially due to the acquisition of Franklin Life.
Excluding Franklin Life, premiums and other considerations increased $78
million, or 9%, primarily due to the introduction of a new ordinary life
insurance product and higher credit insurance premiums in the Consumer Finance
segment. In addition, 1995 includes premiums of Financial Life Assurance
Company of Canada (Financial Life), which was excluded from segment reporting
for the first six months of 1994 and reported as held for sale.
Excluding Franklin Life, net investment income increased $100 million, or 5%,
reflecting growth in invested assets of 7% (excluding the effect of SFAS 115)
since September 30, 1994, partially offset by a decline in investment yield.
The decline in yield largely relates to maturities of higher yielding bonds
and prepayment of mortgage-backed securities, and investment of the proceeds
as well as new cash flows at lower interest rates.
The $206 million, or 23%, increase in finance charges resulted from higher
average finance receivables and a 53 basis point increase in yield on
receivables.
Realized Investment Gains. Realized investment gains for the nine months
ended September 30, 1995 included $17 million of gains due to early redemption
of fixed maturity securities at the election of the issuer (calls) and $23
million of net gains from sales of real estate joint ventures and investment
real estate. These gains were partially offset by $11 million of losses on
the sale of fixed maturity securities and $29 million of additions to reserves
for investment real estate and mortgage loans.
-16-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
In 1994, gains of $31 million on calls and $34 million from sales of real
estate joint ventures, investment real estate, and equity securities were
partially offset by $23 million of losses on the sale of fixed maturity
securities and a $39 million increase in reserves for investment real estate
and mortgage loans.
Equity in Earnings of WNC. Revenues for 1995 include the company's 40% equity
in earnings of WNC. This amount includes purchase accounting adjustments and
reflects a one quarter lag in reported earnings.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Other Revenues. Other revenues increased $30 million for the nine months
ended September 30, 1995 compared to the same period in 1994 due to the
acquisition of Franklin Life.
Insurance and Annuity Benefits. Insurance and annuity benefits increased $531
million, or 32%, for the first nine months of 1995 compared to the same period
in 1994, including $398 million due to the acquisition of Franklin Life.
Excluding Franklin Life, the increase primarily was due to higher total
interest credited to policyholders in the Retirement Annuities and Life
Insurance segments, growth in the Consumer Finance segment's insurance
business, and higher death claims in 1995.
Policyholder Dividends. Dividends paid to policyholders on participating life
insurance policies for the nine months ended September 30, 1995 increased $61
million compared to the same period of 1994 due to the acquisition of Franklin
Life.
Operating Costs and Expenses. Operating costs and expenses increased $133
million, or 23%, for the nine months ended September 30, 1995 compared to the
same period in 1994, primarily due to $65 million of operating expenses for
Franklin Life and a $61 million increase in expenses related to an increase in
the number of branch offices and level of finance receivables in the Consumer
Finance segment.
Commission Expense. Commission expense increased $93 million, or 31%, for
the first nine months of 1995 compared to the same period in 1994, of which
$80 million was due to the acquisition of Franklin Life. The remaining
increase relates to increased sales in the Retirement Annuities segment.
Provision for Finance Receivable Losses. The provision for finance receivable
losses increased $114 million, or 78%, for the nine months ended September 30,
1995 compared to the same period in 1994, and $55 million, or 95%, for the
third quarter of 1995 compared to 1994. The allowance for finance receivable
losses increased $47 million during the third quarter of 1995 and $80 million
since December 31, 1994. These increases reflect credit quality
deterioration, particularly during third quarter 1995, including higher levels
-17-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
of delinquencies and net charge offs, as well as provision for future losses
on the higher level of average finance receivables outstanding.
Change in Deferred Policy Acquisition Costs (DPAC) and Cost of Insurance
Purchased (CIP). The change reported in the income statement represents
capitalization of DPAC during the period, net of DPAC and CIP amortization.
The change in DPAC and CIP increased $30 million, or 31%, for the nine months
ended September 30, 1995 compared to the same period in 1994, primarily due to
the acquisition of Franklin Life and additional capitalized costs related to
higher Retirement Annuities segment sales.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Interest Expense. Interest expense on corporate debt increased $41 million,
or 50%, for the first nine months of 1995 compared to the first nine months of
1994, due to an increase in average borrowings resulting from the initial
financing of the Franklin Life acquisition and higher average short-term
interest rates.
Interest expense on consumer finance debt increased $86 million, or 29%, due
to higher average borrowings to support finance receivable growth and higher
short-term rates, partially offset by lower average long-term borrowing cost
during the first six months of 1995.
Income Tax Expense. Income tax expense in the third quarter of 1995 and the
effective tax rate for both the third quarter and first nine months of 1995
were lower than the same periods of 1994 due to a non-recurring state income
tax reduction of $25 million ($16 million net of federal tax effect)
recognized by the Consumer Finance segment in third quarter 1995. The tax
benefit primarily related to the utilization of a net operating loss
carryforward resulting from the resolution of a state tax audit.
-18-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
BUSINESS SEGMENTS
To facilitate meaningful period-to-period comparisons of business segment
results, operating earnings of each segment include income from its business
operations and earnings on that amount of equity considered necessary to
support its business, and exclude net realized investment gains, non-recurring
items, and the effect of accounting changes. Earnings on equity not allocated
to the business segments are included in earnings on corporate assets.
Nine Months Ended Quarter Ended
September 30, September 30,
1995 1994 1995 1994
(In millions)
Revenues
Retirement Annuities ............. $1,225 $1,144 $ 419 $ 385
Consumer Finance ................. 1,338 1,083 458 387
Life Insurance ................... 2,186 1,436 764 482
Total business segments ......... 4,749 3,663 1,641 1,254
Corporate Operations
Realized investment gains ....... 8 5 5 1
Equity in earnings of WNC ....... 31 - 10 -
Other ........................... 30 43 17 10
Total corporate operations ..... 69 48 32 11
Total consolidated revenues .. $4,818 $3,711 $1,673 $1,265
Policyholder Account Deposits
Retirement Annuities ............. $1,857 $1,634 $ 576 $ 485
Life Insurance ................... 1,105 815 352 271
Total deposits ............... $2,962 $2,449 $ 928 $ 756
Earnings
Retirement Annuities ............. $ 162 $ 150 $ 54 $ 47
Consumer Finance ................. 177 178 55 64
Life Insurance ................... 265 194 95 67
Total business segments ......... 604 522 204 178
Corporate Operations
Net interest on corporate debt .. (82) (56) (26) (19)
Net dividends on preferred
securities of subsidiaries .... (10) - (8) -
Expenses not allocated to
segments ...................... (29) (23) (12) (8)
Earnings on corporate assets .... 27 34 13 9
Net equity in earnings of WNC ... 21 - 7 -
Net realized investment gains ... 5 1 3 (1)
Total corporate operations ..... (68) (44) (23) (19)
Total consolidated net income. $ 536 $ 478 $ 181 $ 159
-19-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Retirement Annuities. Revenues for the first nine months of 1995 compared to
1994 increased $81 million, or 7%, primarily due to a 7% increase in net
investment income, reflecting growth in invested assets, partially offset by a
15 basis point decrease in the average investment yield. Invested assets
increased $1.6 billion (excluding the effect of SFAS 115), or 8%, from
September 30, 1994 to September 30, 1995, reflecting growth in policyholder
account balances. Segment earnings increased $12 million, or 8%, reflecting
the growth in margin between net investment income and interest credited to
policyholders.
The ratio of operating expenses to average assets decreased to .53% for the
nine months ended September 30, 1995 from .55% for the same period in 1994.
The ratio of policyholder surrenders to average deferred policy reserves
declined to 4.09% for the first nine months of 1995 compared to 5.22% for the
same period in 1994. The decline was primarily due to a free bailout
provision (surrender without charge) in first quarter 1994, a $75 million
surrender of one group account in third quarter 1994, and participants seeking
higher returns in equity-based investments. Customer preference for equity-
based investments has continued due to strong stock market performance during
1995, resulting in a $167 million increase in variable account deposits, while
fixed deposits increased $56 million in the first nine months of 1995 compared
to the same period of 1994.
Consumer Finance. Segment earnings for the first nine months of 1995
decreased $1 million, or 0.5%, from the same period in 1994 and decreased $9
million, or 14%, for third quarter 1995 compared to third quarter 1994.
Increased finance charge revenues, due to significant receivables growth and
higher yields, and a favorable third quarter 1995 state income tax adjustment
were more than offset by a higher provision for finance receivable losses, due
to declining credit quality, and increased operating expenses associated with
significant growth in the business during the past eighteen months.
Revenues increased $255 million, or 24%, for the nine months ended September
30, 1995 compared to the same period of 1994. Finance charges increased $206
million, or 23%, driven by a $1.0 billion growth in finance receivables,
resulting from business development efforts and the opening of 154 new branch
offices during the last twelve months. A 53 basis point improvement in
yields, primarily in the retail sales finance and credit card portfolios, also
contributed to the increase in finance charges; however, the net lending
spread remained essentially unchanged at 11.0% due to higher borrowing costs.
Strong insurance sales growth related to a new insurance product contributed
to a $37 million, or 30%, increase in associated revenues.
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<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
At September 30, 1995, delinquencies increased to 3.75% of receivables,
compared to 3.04% at June 30, 1995 and 2.77% at September 30, 1994. Charge
offs for third quarter 1995 were 3.22% of receivables, up from 2.94% for
second quarter 1995 and 2.49% for third quarter 1994. In response to higher
than anticipated delinquencies and charge offs experienced in third quarter
1995, the Consumer Finance segment increased the allowance for losses $47
million during third quarter 1995 to $306 million, or 3.62% of receivables, at
September 30, 1995. This compares to 3.07% at June 30, 1995 and 2.86% at
September 30, 1994. The additional reserve increased the allowance for losses
to the high end of the segment's historic 1.2 to 1.3 range for the ratio of
allowance to prior twelve months' charge offs. The third quarter 1995
provision for finance receivable losses increased $55 million, or 95%, over
the same period of 1994 to $114 million. For the year-to-date period, the
provision increased $114 million, or 78%, over the prior year period. The
company anticipates future increases in delinquencies and charge offs due to
lower credit quality associated with the substantial growth in finance
receivables in mid- to late- 1994. In response, the company is adopting an
action program for improving credit quality that includes raising underwriting
standards and slowing receivables growth, while stressing collections and
improved branch office training. Although no substantial improvement is
anticipated in the fourth quarter of 1995, management believes that the impact
of these corrective actions will be realized during 1996. A significant
deterioration in the U.S. economic climate, which is not currently
anticipated, could delay results of this corrective program.
Operating expenses increased $61 million, or 22%, for the nine months ended
September 30, 1995 compared to the same period of 1994. Operating expenses
for the third quarter of 1995 were $25 million, or 28%, higher than 1994.
These operating expense increases were due to the expansion in the number of
branches and accounts, which reflected 1,600 additional staff in 1995 to
support the segment's growth and to provide collection efforts for the
increased level of delinquent finance receivables. As a result, the ratio of
expenses to average receivables increased to 5.35% for the first nine months
of 1995 compared to 5.19% for the same period of 1994. Third quarter 1995
income tax expenses reflected a non-recurring state income tax reduction of
$25 million ($16 million net of the federal tax effect) primarily related to
utilization of a net operating loss carryforward resulting from the resolution
of a state tax audit.
Life Insurance. The Life Insurance segment includes eight months of results
of Franklin Life, acquired January 31, 1995. The acquisition increased
segment revenues $689 million, deposits $260 million, and earnings $71 million
in 1995.
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<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Excluding Franklin Life, revenues for the Life Insurance segment increased $61
million, or 4%, for the nine months ended September 30, 1995 compared to 1994,
primarily due to Financial Life, which was excluded from segment reporting for
the first six months of 1994, and higher investment income. The increase in
investment income resulted from growth in invested assets, partially offset by
lower yields. Higher revenues were offset by increased insurance and annuity
benefits, due in part to higher death claims in 1995, which resulted in flat
segment earnings, excluding Franklin Life, for the first nine months of 1995
compared to the same period of 1994. Excluding Franklin Life, deposits
increased $30 million, or 4%, due to the introduction of structured settlement
annuity products in 1995 and growth in interest-sensitive life deposits,
partially offset by decreases in other annuity deposits.
Corporate Operations. Corporate operations include net interest on corporate
debt, net dividends on preferred securities of subsidiaries, expenses not
allocated to the business segments, earnings on corporate assets, the net
equity in earnings of WNC, and net realized investment gains. For reporting
purposes, corporate assets include assets representing equity of the
subsidiaries not considered necessary to support their businesses. Corporate
debt is that debt incurred primarily to fund acquisitions, share purchases,
and capital needs of subsidiaries.
Net interest on corporate debt increased $26 million, or 45%, due to higher
debt during the first half of 1995 related to the initial financing of the
Franklin Life acquisition and higher short-term interest rates. Earnings on
corporate assets decreased $7 million for the nine months ended September 30,
1995 compared to 1994, primarily due to earnings of companies held for sale
reported in corporate operations for the first six months of 1994, and lower
real estate earnings. Included in 1995 were the net dividends on preferred
securities of subsidiaries issued to partially refinance short-term real
estate debt and short-term debt from the Franklin Life acquisition. The
company's 40% equity in the earnings of WNC, net of the company's related
deferred taxes, was also included in 1995.
Comparison of Quarters Ended September 30, 1995 and September 30, 1994
The nature of and reasons for any significant variations between the quarters
ended September 30, 1995 and 1994 are the same as those discussed above for
the respective nine month periods, except where otherwise noted herein.
BALANCE SHEET
Effect of SFAS 115. Declines in market interest rates and resulting increases
in bond values during 1995 caused a $1.6 billion increase in shareholders'
equity related to fixed maturity securities under SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," during the first nine
months of 1995.
-22-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
The components of the fair value adjustment to report securities in accordance
with SFAS 115 at September 30, 1995 and December 31, 1994 were as follows:
September 30, December 31,
1995 1994 Change
(In millions)
Fair value adjustment to fixed
maturity securities $ 1,627 $(1,387) $ 3,014
Adjusted by:
Increase (decrease) in DPAC/CIP (609) 401 (1,010)
Decrease (increase) in deferred
federal income taxes (383) 351 (734)
Valuation allowance on deferred
tax asset - (315) 315
Equity in WNC's unrealized gains 62 - 62
Net unrealized gains (losses) on
fixed maturity securities 697 (950) 1,647
Net unrealized gains on equity
securities 35 15 20
Net unrealized gains (losses)
on securities $ 732 $ (935) $ 1,667
SFAS 115 requires that the carrying value of most fixed maturity securities be
adjusted for changes in market value, primarily caused by interest rates.
However, the insurance liabilities supported by these securities are not
adjusted under SFAS 115, thereby creating volatility in shareholders' equity
as interest rates change. Therefore, care should be exercised in drawing
conclusions based on balance sheet amounts that include the SFAS 115 effect.
SFAS 115 does not affect results of operations.
Assets. At September 30, 1995, consolidated assets of $60 billion were
distributed as follows: 70% in investments, principally supporting insurance
and annuity liabilities, 14% in net finance receivables, 5% in intangible
assets, and 11% in other assets.
Investments. From December 31, 1994 to September 30, 1995, investments
increased $6.1 billion due to the acquisition of Franklin Life and $3
billion due to the effect of SFAS 115. For more information on the
investment portfolio at September 30, 1995, see "INVESTMENTS" beginning
on page 22.
Finance Receivables. Net finance receivables increased $445 million, or
6%, from December 31, 1994 to September 30, 1995, primarily due to growth
from business development efforts and branch expansion in the Consumer
-23-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Finance segment and a $50 million block purchase of credit card accounts
in the quarter ended September 30, 1995. This growth is net of a $100
million sale of credit card and private label finance receivables through
securitization, completed in second quarter 1995.
Deferred Policy Acquisition Costs (DPAC). The $647 million decrease in
DPAC was primarily due to an $801 million decline due to the effect of
SFAS 115 at September 30, 1995 compared to December 31, 1994 (see "Effect
of SFAS 115" on page 19) and amortization of DPAC, partially offset by
deferral of acquisition costs.
Cost of Insurance Purchased (CIP). The $445 million increase in CIP was
due to the acquisition of Franklin Life, net of a $209 million decrease
due to the effect of SFAS 115.
Other Assets. The $464 million increase in other assets was primarily
due to the acquisition of Franklin Life, the establishment of an IRS tax
bond to minimize the accrual of interest on disputed assessments, and an
increase in accrued investment income.
Separate Account Assets and Liabilities. The $1.8 billion increase in
assets and liabilities related to Separate Accounts from December 31,
1994 to September 30, 1995 reflects increased sales of variable annuity
products, primarily in the Retirement Annuities segment, the transfer of
a $218 million group account from fixed to variable, and $135 million due
to the acquisition of Franklin Life.
Liabilities and Equity. At September 30, 1995, consolidated liabilities and
equity were distributed as follows: 62% in insurance and annuity liabilities,
13% in consumer finance debt, 11% in equity (including redeemable equity), 3%
in corporate debt, and 11% in other liabilities.
Insurance and Annuity Liabilities. The $7.8 billion increase in
insurance and annuity liabilities from December 31, 1994 to September 30,
1995 was primarily due to the acquisition of Franklin Life, which added
$6.1 billion of insurance reserves, as well as fixed annuity deposits and
interest credited in the Retirement Annuities segment.
Corporate Debt. Corporate debt increased $78 million from December 31,
1994 to September 30, 1995 primarily due to a $920 million increase in
short-term debt to finance the Franklin Life acquisition. This increase
was partially offset by the issuance of $753 million of preferred
securities, of which $503 million was used to refinance a portion of the
Franklin Life short-term acquisition debt and $250 million was used to
refinance short-term real estate debt.
-24-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
As a result of the Franklin Life acquisition and subsequent financing
activities, the ratio of corporate debt (including real estate debt) to
corporate capital (excluding the effect of SFAS 115) was 25.6% at
September 30, 1995, compared to 29.5% at June 30, 1995, 37.2% at March
31, 1995, and 29.2% at December 31, 1994. Management expects to maintain
the ratio at or below its current level through year-end 1995.
Consumer Finance Debt. Consumer finance debt increased $478 million from
December 31, 1994 to September 30, 1995, to support the growth in finance
receivables.
Income Tax Liabilities. The liability for income taxes increased $448
million from December 31, 1994 to September 30, 1995, primarily due to
the change in the effect of SFAS 115, partially offset by the elimination
of a valuation allowance on deferred tax assets at December 31, 1994.
There was no SFAS 115-related deferred tax asset, and therefore no
valuation allowance, at September 30, 1995 due to the reversal in the
effect of SFAS 115 from an unrealized loss at December 31, 1994 to an
unrealized gain at September 30, 1995.
Other Liabilities. Other liabilities increased $316 million primarily
due to the acquisition of Franklin Life and increases in amounts due to
brokers for investment transactions.
Redeemable Equity. Redeemable equity increased from $47 million at
December 31, 1994 to $743 million at September 30, 1995, primarily due to
the net proceeds from the issuances of $250 million of convertible
preferred securities on June 1, 1995, and $287.5 million and $215 million
of non-convertible preferred securities on June 5, 1995 and August 29,
1995, respectively.
Shareholders' Equity. Shareholders' equity increased from $3.5 billion
at December 31, 1994 to $5.5 billion at September 30, 1995, primarily due
to the $1.7 billion increase in net unrealized gains. Due to the
requirements of SFAS 115, shareholders' equity will be subject to future
volatility from the effects of interest rate fluctuations on the fair
value of securities (see "Effect of SFAS 115" on page 19).
INVESTMENTS
Invested assets consist primarily of fixed maturity securities, mortgage loans
on real estate, and investment real estate, which are discussed below. The
company reviews invested assets on a regular basis and records write-downs for
declines in fair value below cost that are considered other than temporary.
-25-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Fixed Maturity Securities. Fixed maturity securities represented 86% of
invested assets at September 30, 1995. Fixed maturity securities are carried
at fair value in accordance with SFAS 115 (see "Effect of SFAS 115" on page
19). Information regarding the fixed maturity securities portfolio at
September 30, 1995, which included bonds and redeemable preferred stocks, was
as follows:
Average Credit
(In millions) Fair Value % Rating
Mortgage-backed $11,505 32% AAA
Other investment grade 23,116 64 A
Below investment grade 1,295 4 BB-
Total fixed maturities $35,916 100% AA-
Collateralized mortgage obligations (CMOs) are purchased to diversify the
portfolio risk characteristics from primarily corporate credit risk to a mix
of credit and cash flow risk. CMOs represented 91% and 92% of mortgage-backed
securities at September 30, 1995 and December 31, 1994, respectively.
At December 31, 1994, below investment grade fixed maturity securities, those
rated below BBB-, were $886 million, or 3%, of total fixed maturity
securities. The $409 million increase from December 31, 1994 to September 30,
1995 was primarily due to the purchase of $390 million of below investment
grade fixed maturity securities during the first nine months of 1995 and the
acquisition of Franklin Life, partially offset by sales of $245 million of
such securities. Net income from below investment grade fixed maturity
securities, including realized investment gains and losses, was $57 million
and $40 million for the first nine months of 1995 and 1994, respectively.
Non-performing fixed maturity securities, defined as securities for which
payment of interest is sufficiently uncertain as to preclude accrual of
interest, were $25 million at September 30, 1995 compared to $50 million at
December 31, 1994. These securities represented .1% and .2% of total fixed
maturity securities at September 30, 1995 and December 31, 1994, respectively.
Mortgage Loans. Mortgage loans on real estate totaled 7.5% of invested assets
at September 30, 1995. Information regarding the mortgage loan portfolio at
September 30, 1995 was as follows:
Book Non-Performing Loans
(In millions) Value Amount %
Commercial $3,142 $199 6.3%
Residential 73 4 5.4%
Allowance for losses (89) (41)
Total mortgage loans $3,126 $162
-26-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Non-performing (impaired) mortgage loans include loans delinquent 60 days or
more and commercial loans that have been restructured. These loans
represented 6.3% of total commercial loans at September 30, 1995, compared to
5.8% at December 31, 1994. The increase resulted primarily from watch list
loans becoming non-performing in second quarter 1995.
At September 30, 1995, $247 million of performing commercial mortgage loans
were included on the company's watch list because they were either delinquent
30-59 days, the borrower was in bankruptcy, or the loan was determined to be
under-collateralized. This amount compares to $239 million at year-end 1994.
The increase in the watch list amount was primarily due to additions of under-
collateralized loans resulting from the Franklin Life acquisition and a $30
million loan which was 30 days delinquent at September 30, 1995. This
increase was partially offset by the deletion of loans that became impaired or
were reinstated, refinanced, or repaid during the period. The company does
not anticipate a significant effect on operations, liquidity, or capital from
loans on the watch list.
Investment Real Estate. Investment real estate totaled 1.3% of invested
assets at September 30, 1995, compared to 1.8% at December 31, 1994. The
breakdown of investment real estate was as follows:
(In millions) September 30, December 31,
1995 1994
Land development projects $ 609 $ 613
American General Center, Houston 117 120
Income-producing real estate 58 96
Foreclosed real estate 48 56
Allowance for losses (287) (321)
Total investment real estate $ 545 $ 564
With the adoption of SFAS 121 (see Note 2 on page 5), the carrying value of
certain land development projects will be permanently reduced by the amount of
the related allowance for losses.
CASH FLOWS
Management believes that the overall sources of cash and liquidity available
to the company and its subsidiaries will continue to be sufficient to satisfy
its foreseeable financial obligations.
-27-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Cash Flows of the Parent Company. Net operating cash flows generated by the
parent company were $153 million and $430 million for the nine months ended
September 30, 1995 and 1994, respectively. The decrease related primarily to
lower dividends paid by operating subsidiaries. In addition, AGC Life, a
subsidiary of American General, retained $117 million of the dividends paid by
the operating subsidiaries in 1995. Dividends from subsidiaries are the
primary source of cash for operating requirements of the company and are used
to fund interest obligations, dividends to shareholders, and to buy back
common stock. The company's insurance subsidiaries are restricted by state
insurance laws as to the amounts they may pay as dividends without prior
notice to, or in some cases prior approval from, their respective state
insurance departments. Certain non-insurance subsidiaries are similarly
restricted by long-term debt agreements. These restrictions have not
affected, and are not expected to affect, the ability of the company to meet
its cash obligations.
During the first nine months of 1995, the companies in the Life Insurance and
Retirement Annuities segments paid cash dividends of $213 million to AGC Life
of which $117 million reduced intercompany borrowings and $96 million was paid
to American General. During the first nine months of 1994, the Life Insurance
and Retirement Annuities segments paid $367 million of dividends to American
General, including a $90 million dividend resulting from the sale of a
subsidiary in August 1994. Cash dividends paid to American General by the
Consumer Finance segment totaled $113 million in the first nine months of
1995, compared to $126 million for the same period of 1994, which included $48
million of dividends accrued in 1993.
Segment Cash Flows. Net cash flows generated by the Life Insurance and
Retirement Annuities segments in the first nine months of 1995 included $1.1
billion provided by operating activities and $967 million provided by the
increase in fixed policyholder account deposits, net of withdrawals. This
compared to $876 million and $891 million, respectively, during the first nine
months of 1994. The $260 million increase in cash provided by operating
activities was primarily due to cash flows of Franklin Life, and a $31 million
tax refund in 1995 from the 1994 capital gains offset program and a $32
million tax payment in first quarter 1994, both in the Retirement Annuities
segment. The increase in fixed policyholder account deposits, net of
withdrawals, was primarily due to increased flow premiums and capital
transfers in the Retirement Annuities segment, and deposits from Franklin
Life. Variable account deposits net of withdrawals related to Separate
Accounts, which are not included in the consolidated statement of cash flows,
increased to $846 million in the first nine months of 1995 from $550 million
in the same period of 1994.
-28-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
The Consumer Finance segment's operating cash flows were $492 million during
the first nine months of 1995, compared to $385 million during the first nine
months of 1994. This increase is due to the revenues generated by the $1
billion, or 14%, growth in finance receivables during the twelve months ended
September 30, 1995.
Consolidated Operating Activities. Net cash flows from operating activities
on a consolidated basis increased $370 million in the first nine months of
1995 compared to the same period in 1994, primarily due to the increases in
segment operating cash flows.
Investing Activities. The source of cash flow from investment calls,
maturities, and sales was as follows:
Nine Months Ended
(In millions) September 30,
1995 1994
Fixed maturity securities
Sales $2,087 $ 895
Calls 667 686
Repayments of mortgage-backed securities 454 1,642
Maturities 290 245
Mortgage loans 229 300
Equity securities 123 25
Other 176 163
Total $4,026 $3,956
Repayments of mortgage-backed securities in 1994 were unusually high due to
the low interest rate environment in the first half of 1994.
Credit Facilities. Committed credit facilities are maintained by American
General and certain of its subsidiaries to support the issuance of commercial
paper and to provide an additional source of cash for operating requirements.
On June 9, 1995, American General reduced unsecured committed bank credit
facilities by $1 billion. This reduction reflected the lower commercial paper
outstanding due to the net proceeds from issuances and expected issuances of
preferred securities and long-term debt, which totaled $752.5 million and $300
million, respectively, through September 30, 1995. At September 30, 1995,
committed credit facilities totaled $3.3 billion; there were no outstanding
borrowings under these facilities. Effective October 2, 1995, the company
completed the resyndication of two credit facilities totaling $2.4 billion,
reducing the total committed credit facilities to $2.9 billion.
-29-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Form S-3 Shelf Registration. In May 1995, a Form S-3 shelf registration
statement filed with the Securities and Exchange Commission by the company and
certain subsidiaries to register $1.25 billion of debt and equity securities
became effective. As of November 13, 1995, the company and certain
subsidiaries have issued a total of $1.05 billion of debt and preferred
securities under this shelf registration.
OTHER FACTORS
Environmental. American General's principal exposure to environmental
regulations arises from its ownership of investment real estate. Probable
costs related to environmental clean-up are estimated to be $1 million, and
appropriate liabilities have been recorded to reflect these costs. The
company is continuing to review these costs, as well as the cost of compliance
with federal, state, and local environmental laws and regulations.
Guaranty Associations. The company's life insurance and annuity subsidiaries
were assessed $14.9 million by state guaranty associations during the first
nine months of 1995, of which $7.2 million had been accrued at December 31,
1994. Assessments during the first nine months of 1994 were $9.7 million, of
which $4.8 million was accrued at December 31, 1993. The assessments for
1995 and 1994 were offset by $4.8 million and $3.6 million, respectively,
considered recoverable against future premium taxes. At September 30, 1995,
the accrued liability for anticipated unrecoverable assessments was $18
million, compared to $21 million at December 31, 1994. <PAGE>
-30-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Other than those lawsuits or proceedings disclosed previously, American
General and certain of its subsidiaries are defendants in various lawsuits and
proceedings arising in the normal course of business. Some of these lawsuits
and proceedings arise in jurisdictions such as Alabama that permit punitive
damages disproportionate to the actual damages alleged. Although no
assurances can be given and no determination can be made at this time as to
the outcome of any particular lawsuit or proceeding, American General and its
subsidiaries believe that there are meritorious defenses for all of these
claims and are defending them vigorously. The company also believes that the
total amounts that would ultimately be paid, if any, arising from these claims
would have no material effect on the company's consolidated results of
operations and financial position.
Item 5. Other Information.
The company's common stock buyback program was suspended and there were no
company purchases of shares in the nine months ended September 30, 1995. In
October 1995, the company resumed the program and purchased 387,600 shares for
$12.5 million through November 10, 1995.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 11 Computation of Earnings per Share.
Exhibit 12 Computation of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock
Dividends.
Exhibit 27 Financial Data Schedule.
b. Reports on Form 8-K.
1) Current Report on Form 8-K dated July 14, 1995, with respect to the
authorization of the issuance by the company in an underwritten
public offering of $150 million aggregate principal amount of 7 1/2%
Notes Due 2025.
2) Current Report on Form 8-K dated August 23, 1995, with respect to
the pro forma financial statements of the company including the
acquisition of AFC as of and for the six months ended June 30, 1995,
and for the year ended December 31, 1994.
-31-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
PART II. OTHER INFORMATION (continued)
3) Current Report on Form 8-K dated August 24, 1995, with respect to
the authorization of the issuance by American General Capital,
L.L.C. in a public offering of up to 9.2 million shares of 8 1/8%
Cumulative Monthly Income Preferred Securities, Series B.
4) Current Report on Form 8-K dated October 20, 1995, with respect to
the signing of a definitive agreement under which American General
will acquire Independent for a total consideration of $362 million,
or $27.50 per share, subject to approval by Independent's
shareholders and requisite regulatory authorities.
5) Current Report on Form 8-K dated October 26, 1995, with respect to
the issuance of a news release announcing the adoption by the
company's board of directors of a plan of succession for the Office
of the Chairman.
<PAGE>
-32-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN GENERAL CORPORATION
(Registrant)
By: PAMELA J. PENNY
Pamela J. Penny
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
Date: November 13, 1995
<PAGE>
-33-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
EXHIBIT INDEX
Exhibit
11 Computation of Earnings per Share.
12 Computation of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock
Dividends.
27 Financial Data Schedule.
<PAGE>
-34-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
($ in millions, except share data)
Nine Months Ended
September 30,
1995 1994
Primary:
Net income available to common stock ....... $ 536 $ 478
Average shares outstanding
Common shares ............................ 204,829,566 210,446,874
Assumed exercise of stock options ........ 417,716 264,408
Total .................................. 205,247,282 210,711,282
Net income per share ....................... $2.61 $2.27
Fully Diluted:
Net income ................................. $ 536 $ 478
Plus: Net dividends on convertible
preferred securities of subsidiary ....... 3 -
Net income available to common stock ... $ 539 $ 478
Average shares outstanding
Common shares ............................ 204,829,566 210,446,874
Assumed exercise of stock options ........ 593,235 264,408
Assumed conversion of preferred
securities of subsidiary ............... 2,745,677 -
Total .................................. 208,168,478 210,711,282
Net income per share ....................... $2.59 $2.27
<PAGE>
<PAGE>
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Unaudited)
($ in millions)
Nine Months Ended
September 30,
1995 1994
Consolidated operations:
Income before income tax expense and dividends on
preferred securities ............................. $ 823 $ 745
Fixed charges deducted from income
Interest expense ................................. 506 382
Implicit interest in rents ....................... 14 11
Total fixed charges deducted from income ..... 520 393
Earnings available for fixed charges........ $1,343 $1,138
Fixed charges per above ............................ $ 520 $ 393
Capitalized interest relating to real estate
operations ....................................... 13 13
Total fixed charges .............................. 533 406
Dividends on preferred securities ................ 15 -
Total fixed charges and dividends on
preferred securities ..................... $ 548 $ 406
Ratio of earnings to fixed charges ......... 2.52 2.80
Ratio of earnings to combined fixed charges
and preferred stock dividends ............ 2.45 2.80
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense and dividends on
preferred securities ............................. $ 823 $ 745
Corporate fixed charges deducted from income
Corporate interest expense ....................... 136 91
Earnings available for fixed charges ....... $ 959 $ 836
Total corporate fixed charges per above ............ $ 136 $ 91
Capitalized interest related to real estate
operations ....................................... 13 13
Total fixed charges .............................. 149 104
Dividends on preferred securities ................ 15 -
Total fixed charges and dividends on
preferred securities ..................... $ 164 $ 104
Ratio of earnings to corporate fixed charges 6.43 8.09
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends 5.84 8.09
American General Finance, Inc.:
Income before income tax expense ................... $ 255 $ 285
Fixed charges deducted from income
Interest expense ................................. 386 300
Implicit interest in rents ....................... 10 8
Total fixed charges .......................... 396 308
Earnings available for fixed charges ....... $ 651 $ 593
Ratio of earnings to fixed charges ......... 1.65 1.93
<PAGE>
Exhibit 12 (continued)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Unaudited)
($ in millions)
Quarter Ended
September 30,
1995 1994
Consolidated operations:
Income before income tax expense and dividends on
preferred securities ............................. $ 267 $ 245
Fixed charges deducted from income
Interest expense.................................. 167 136
Implicit interest in rents ....................... 5 3
Total fixed charges deducted from income ..... 172 139
Earnings available for fixed charges........ $ 439 $ 384
Fixed charges per above ............................ $ 172 $ 139
Capitalized interest relating to real estate
operations ....................................... 4 5
Total fixed charges .............................. 176 144
Dividends on preferred securities ................ 12 -
Total fixed charges and dividends on
preferred securities ..................... $ 188 $ 144
Ratio of earnings to fixed charges ......... 2.48 2.67
Ratio of earnings to combined fixed charges
and preferred stock dividends ............ 2.33 2.67
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense and dividends on
preferred securities ............................. $ 267 $ 245
Corporate fixed charges deducted from income
Corporate interest expense ....................... 45 31
Earnings available for fixed charges ....... $ 312 $ 276
Total corporate fixed charges per above ............ $ 45 $ 31
Capitalized interest relating to real estate
operations ....................................... 4 5
Total fixed charges .............................. 49 36
Dividends on preferred securities ................ 12 -
Total fixed charges and dividends on
preferred securities ..................... $ 61 $ 36
Ratio of earnings to corporate fixed charges 6.27 7.79
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends 5.07 7.79
American General Finance, Inc.:
Income before income tax expense ................... $ 60 $ 101
Fixed charges deducted from income
Interest expense ................................. 131 107
Implicit interest in rents ....................... 4 3
Total fixed charges .......................... 135 110
Earnings available for fixed charges ....... $ 195 $ 211
Ratio of earnings to fixed charges ......... 1.45 1.92
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATON EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 35,916<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 227
<MORTGAGE> 3,126
<REAL-ESTATE> 545
<TOTAL-INVEST> 41,747
<CASH> 56
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,529<F2>
<TOTAL-ASSETS> 59,897
<POLICY-LOSSES> 35,286<F3>
<UNEARNED-PREMIUMS> 164<F3>
<POLICY-OTHER> 169<F3>
<POLICY-HOLDER-FUNDS> 1,777<F3>
<NOTES-PAYABLE> 9,482
<COMMON> 366
729<F4>
0
<OTHER-SE> 5,146<F5>
<TOTAL-LIABILITY-AND-EQUITY> 59,897
1,297<F6>
<INVESTMENT-INCOME> 2,291
<INVESTMENT-GAINS> 8
<OTHER-INCOME> 1,222<F7>
<BENEFITS> 2,239
<UNDERWRITING-AMORTIZATION> 190<F8>
<UNDERWRITING-OTHER> (318)<F9>
<INCOME-PRETAX> 808<F10>
<INCOME-TAX> 272<F11>
<INCOME-CONTINUING> 536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 536
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.59
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> ALL FIXED MATURITY SECURITIES ARE CURRENTLY CLASSIFIED AS AVAILABLE-
FOR-SALE AND ARE RECORDED AT FAIR VALUE.
<F2> INCLUDES COST OF INSURANCE PURCHASED (CIP).
<F3> THE SUM OF POLICY LOSSES, UNEARNED PREMIUMS, POLICY-OTHER, AND
POLICYHOLDER FUNDS COMPRISES INSURANCE AND ANNUITY LIABILITIES.
<F4> CONSISTS OF NON-CONVERTIBLE AND CONVERTIBLE MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARIES.
<F5> CONSISTS OF NET OF THE FOLLOWING: NET UNREALIZED GAINS (LOSSES)
ON SECURITIES; RETAINED EARNINGS; AND COST OF TREASURY STOCK.
<F6> INCLUDES TOTAL INSURANCE CHARGES.
<F7> INCLUDES FINANCE CHARGES AND EQUITY IN EARNINGS OF WESTERN NATIONAL
CORPORATION.
<F8> CONSISTS OF THE FOLLOWING: AMORTIZATION OF POLICY ORIGINATION COSTS
AND AMORTIZATION OF CIP, NET.
<F9> CONSISTS OF THE FOLLOWING: CAPITALIZATION AND OTHER.
<F10> NET OF GROSS DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES.
<F11> NET OF TAX BENEFIT OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES.
</FN>
</TABLE>
