AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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 June 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 July 31,
1995 was 204,859,515 (excluding shares held in treasury and by a subsidiary).
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
INDEX TO FORM 10-Q
Page
Part I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Statement of Income for the six months
and quarter ended June 30, 1995 and 1994 ........... 2
Consolidated Balance Sheet at June 30, 1995 and
December 31, 1994 .................................. 3
Consolidated Condensed Statement of Cash Flows for
the six months ended June 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 .................................... 26
Item 4. Submission of Matters to a Vote of Security Holders .. 26
Item 5. Other Information .................................... 26
Item 6. Exhibits and Reports on Form 8-K ..................... 27
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN GENERAL CORPORATION
Consolidated Statement of Income
(Unaudited)
(In millions, except share data)
Six Months Ended Quarter Ended
June 30, June 30,
1995 1994 1995 1994
Revenues
Premiums and other considerations. $ 842 $ 587 $ 439 $ 298
Net investment income ............ 1,494 1,238 772 617
Finance charges .................. 729 583 370 302
Realized investment gains ........ 3 4 1 1
Equity in earnings of Western
National Corporation ............ 21 - 12 -
Other ............................ 56 34 33 14
Total revenues ............... 3,145 2,446 1,627 1,232
Benefits and expenses
Insurance and annuity benefits ... 1,416 1,088 739 551
Policyholder dividends ........... 41 4 25 2
Operating costs and expenses ..... 476 387 242 196
Commission expense ............... 260 195 134 99
Provision for finance receivable
losses .......................... 147 88 75 45
Change in deferred policy
acquisition costs and cost of
insurance purchased ............. (89) (63) (46) (34)
Interest expense
Corporate ....................... 83 54 44 26
Consumer Finance ................ 255 193 130 100
Total benefits and expenses .. 2,589 1,946 1,343 985
Earnings
Income before income tax expense.. 556 500 284 247
Income tax expense ............... 199 181 102 89
Income before net dividends on
preferred securities of
subsidiaries .................... 357 319 182 158
Net dividends on preferred
securities of subsidiaries ...... 2 - 2 -
Net income ................... $ 355 $ 319 $ 180 $ 158
Net income per share .............. $ 1.73 $ 1.50 $ .88 $ .75
Dividends paid per common share ... $ .62 $ .58 $ .31 $ .29
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Average fully diluted shares
outstanding (in thousands) ...... 206,279 211,810 207,363 210,312
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
(In millions, except share amounts)
June 30, December 31,
1995 1994
Assets
Investments
Fixed maturity securities (amortized cost:
$33,751; $27,087) ............................... $35,246 $25,700
Mortgage loans on real estate .................... 3,174 2,651
Equity securities (cost: $185; $202) ............. 233 224
Policy loans ..................................... 1,563 1,197
Investment real estate ........................... 554 564
Other long-term investments ...................... 173 152
Short-term investments ........................... 65 209
Total investments .............................. 41,008 30,697
Cash .............................................. 38 45
Finance receivables, net .......................... 8,079 7,694
Investment in Western National Corporation ........ 345 274
Deferred policy acquisition costs ................. 1,895 2,563
Cost of insurance purchased ....................... 639 168
Acquisition-related goodwill ...................... 587 597
Other assets ...................................... 1,759 1,356
Assets held in Separate Accounts .................. 4,074 2,901
Total assets ................................... $58,424 $46,295
Liabilities
Insurance and annuity liabilities ................. $36,827 $29,623
Debt (short-term)
Corporate ($1,167; $1,000) ....................... 2,190 1,836
Consumer Finance ($2,309; $2,777) ................ 7,445 7,090
Income tax liabilities ............................ 1,136 721
Other liabilities ................................. 898 620
Liabilities related to Separate Accounts .......... 4,074 2,901
Total liabilities .............................. 52,570 42,791
Redeemable equity
Company-obligated mandatorily redeemable
non-convertible preferred securities of subsidiary
(shares issued and outstanding: 11,500,000) ..... 277 -
Company-obligated mandatorily redeemable
convertible preferred securities of subsidiary
(shares issued and outstanding: 5,000,000) ...... 244 -
Common stock subject to put contracts ............. 25 47
Total redeemable equity ........................ 546 47
Shareholders' equity
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Common stock (shares issued: 220,122,120;
outstanding: 203,932,775; 203,051,907) .......... 365 364
Net unrealized gains (losses) on securities ....... 662 (935)
Retained earnings ................................. 4,724 4,495
Cost of treasury stock ............................ (443) (467)
Total shareholders' equity ..................... 5,308 3,457
Total liabilities and equity ................... $58,424 $46,295
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In millions)
Six Months Ended
June 30,
1995 1994
Operating activities
Net cash provided by operating activities ... $ 1,005 $ 664
Investing activities
Investment purchases .............................. (3,978) (3,727)
Investment calls, maturities, and sales ........... 2,560 2,992
Finance receivable originations or acquisitions ... (3,081) (2,762)
Finance receivable principal payments received .... 2,448 2,176
Finance receivables sold through securitization ... 100 -
Net decrease (increase) in short-term investments.. 168 (259)
Purchase of Franklin Life ......................... (920) -
Other, net ........................................ (95) 9
Net cash used for investing activities ...... (2,798) (1,571)
Financing activities
Retirement Annuities and Life Insurance
Policyholder account deposits ................... 1,626 1,262
Policyholder account withdrawals ................ (942) (597)
Total Retirement Annuities and Life Insurance. 684 665
Consumer Finance
Net increase (decrease) in short-term debt ...... (468) 30
Long-term debt issuances ........................ 1,340 645
Long-term debt redemptions ...................... (519) (210)
Total Consumer Finance ....................... 353 465
Corporate
Net increase in short-term debt ................. 167 68
Long-term debt issuances ........................ 286 -
Long-term debt redemptions ...................... (100) (11)
Issuance of preferred securities of subsidiary,
net of commissions paid
Non-convertible ............................... 277 -
Convertible ................................... 244 -
Common share purchases .......................... - (143)
Dividend payments ............................... (127) (123)
Other, net ...................................... 2 1
Total Corporate .............................. 749 (208)
Net cash provided by financing activities ... 1,786 922
Net increase (decrease) in cash .................... (7) 15
Cash at beginning of period ........................ 45 6
Cash at end of period .............................. $ 38 $ 21
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Supplemental disclosure of cash flow information:
Cash paid during the period for
Income taxes .................................... $ 91 $ 258
Interest
Corporate ..................................... 84 55
Consumer Finance .............................. 238 190
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Notes to Consolidated Financial Statements
June 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
June 30, 1995, the consolidated results of operations for the three
months and six months ended June 30, 1995 and 1994, and consolidated cash
flows for the six months ended June 30, 1995 and 1994.
To conform with the 1995 presentation, certain items in the prior period
have been reclassified.
2. New Accounting Standards. In January 1995, the Financial Accounting
Standards Board (FASB) issued 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 the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 95-1, "Accounting for
Certain Insurance Activities of Mutual Life Insurance Enterprises." 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. If adopted, the standards
must be implemented by March 31, 1996. American General has not
determined if, or when, the new standards would be adopted and has not
determined the effect on net income, liquidity, or capital related to
adoption of these standards.
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." 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. This
standard, which must be adopted by March 31, 1996, will require the
company to report certain investment real estate at fair value, rather
than at net realizable value as previously required. American General
has not determined when SFAS 121 will be adopted. The company does not
anticipate a material effect on net income, liquidity, or capital related
to adoption of this standard.
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 1. Financial Statements (continued).
3. 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 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. The permanent financing of this
acquisition will be finalized in 1995 and is expected to consist of a mix
of short-term debt, long-term debt, and company-obligated mandatorily
redeemable preferred securities. As of August 10, 1995, $287.5 million
of non-convertible company-obligated mandatorily redeemable preferred
securities (non-convertible preferred securities) and $300 million of
senior long-term fixed-rate debt, totaling $587.5 million, were issued to
refinance a portion of short-term debt relating to the acquisition (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 six 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 June 30, 1995
Item 1. Financial Statements (continued).
(In millions, except share data)
Pro Forma
Six Months Ended
June 30,
1995 1994
Total revenues $3,225 $2,956
Income before income tax expense 564 578
Income before net dividends on
preferred securities of
subsidiaries 362 368
Net income 353 360
Net income per share $ 1.71 $ 1.70
Average fully diluted shares
outstanding (thousands) 206,279 211,810
Included in net income above are net realized gains of $2 million for the
six months ended June 30, 1995 and 1994.
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.
4. Long-Term Debt.
Corporate. In March 1995, the company issued $150 million of senior
long-term debt due April 1, 2005, which pays interest at 7.75%. Proceeds
from this issuance were used to repay short-term corporate debt.
In June 1995, American General issued $150 million of senior long-term
debt due June 15, 2005, which pays interest at 6.75%. In July 1995,
American General issued $150 million of senior long-term debt due July
15, 2025, which pays interest at 7.5%. The proceeds from both issuances
were used to refinance short-term debt related to the Franklin Life
acquisition.
Consumer Finance. During the six months ended June 30, 1995, American
General Finance Corporation (AGFC) issued $1 billion of senior long-term
debt with interest rates ranging from 7.25% to 8.25% and maturity dates
ranging from 1998 to 2005. During the same period, AGFC also issued
$304.2 million of medium-term notes maturing from 1997 through 2000, with
interest rates ranging from 6.10% to 8.42%. Proceeds from all the
issuances were used to refinance consumer finance debt or support the
growth in finance receivables.
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 1. Financial Statements (continued).
5. Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiaries (Preferred Securities). In June 1995, two special purpose
subsidiaries of the company completed the public offering of two issues
of preferred securities totaling $537.5 million, with net proceeds of
$521 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
redemption.
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.
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 1. Financial Statements (continued).
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.
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. In the six months ended June 30, 1995, the company had no
significant derivative activity related to investment securities. During
that period, in anticipation of future debt issuances, the company
executed several interest rate swap agreements to reduce its exposure to
future increases in interest rates. Because interest rates declined in
mid-1995, the debt was subsequently issued at lower rates than
anticipated, and the company made cash payments to settle the swaps. The
company's use of swap agreements to effectively convert debt to a fixed
rate did not have a material effect on the weighted-average borrowing
rate or reported interest expense in the first six months of 1995.
Corporate Activity. 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. Total
settlement costs of $1.7 million will be recognized as an increase to
interest expense over the thirty-year term of the debt.
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AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 1. Financial Statements (continued).
Consumer Finance Activity. During the six months ended June 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- and medium-term floating-rate debt
to a fixed-rate basis. At June 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 6.14%.
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 $349 million at June 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 net of a valuation
allowance of $315 million, recorded through shareholders' equity. Due to
the unrealized gains and resulting deferred tax liability at June 30,
1995, no valuation allowance was required. The resulting reduction in
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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<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 1. Financial Statements (continued).
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
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:
Six Months Ended Quarter Ended
June 30, June 30,
1995 1994 1995 1994
Ratio of Earnings to Fixed
Charges:
Consolidated operations ......... 2.5X 2.9X 2.5X 2.8X
Consolidated operations,
corporate fixed charges only ... 6.3X 8.2X 6.0X 8.2X
American General Finance, Inc. .. 1.7X 1.9X 1.7X 2.0X
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends:
Consolidated operations ......... 2.5X 2.9X 2.5X 2.8X
Consolidated operations,
corporate fixed charges and
preferred stock dividends only.. 6.1X 8.2X 5.7X 8.2X
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<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 Report on Form 10-Q
for the quarter ended March 31, 1995.
This analysis should be read in conjunction with the consolidated financial
statements and related notes on pages 2 through 11 of this Quarterly Report on
Form 10-Q.
STATEMENT OF INCOME
Comparison of Six Months Ended June 30, 1995 and June 30, 1994
Operating Revenues. Total revenues increased $699 million, or 29%, for the
six months ended June 30, 1995 compared to the same period in 1994, due to
increases in premiums and other considerations, net investment income, and
finance charges. The increases in premiums and other considerations of $255
million, or 43%, and in net investment income of $256 million, or 21%, are
primarily due to the acquisition of Franklin Life.
Excluding Franklin Life, premiums and other considerations increased $61
million, or 10%, due to higher credit insurance premiums and the introduction
of a new life insurance product in the Consumer Finance segment, and due to
premiums of Financial Life Assurance Company of Canada (Financial Life), which
was excluded from segment reporting in 1994 and reported as held for sale.
Excluding Franklin Life, net investment income increased $49 million, or 4%,
reflecting growth in invested assets since June 30, 1994, partially offset by
a decline in investment yield. The decline in yield largely relates to the
prepayment of higher yielding bonds and mortgage-backed securities through
mid-1994 and subsequent reinvestment of the proceeds at lower interest rates.
The $146 million, or 25%, increase in finance charges resulted from an
increase in average finance receivables and higher yields on those
receivables.
Realized Investment Gains. Realized investment gains for the six months ended
June 30, 1995 included $9 million of gains due to early redemption of fixed
maturity securities at the election of the issuer (calls) and $14 million of
net gains from sales of real estate joint ventures and investment real estate,
partially offset by $13 million of losses on the sale of fixed maturity
securities and additions to reserves of $11 million, related primarily to
investment real estate.
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<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
For the same period in 1994, gains of $22 million on calls and $23 million
from sales of real estate joint ventures, investment real estate, and equity
securities were partially offset by $11 million of losses on the sale of fixed
maturity securities and a $31 million increase in reserves, primarily related
to investment real estate.
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 reporting.
Other Revenues. Other revenues increased $22 million for the six months ended
June 30, 1995 compared to the same period in 1994, primarily due to the
acquisition of Franklin Life.
Insurance and Annuity Benefits. Insurance and annuity benefits increased $328
million, or 30%, for the first six months of 1995 compared to the same period
in 1994, including $241 million due to the acquisition of Franklin Life.
Excluding Franklin Life, the increase was due to higher interest credited to
policyholders in the Retirement Annuities and Life Insurance segments, higher
than expected mortality in 1995 versus favorable mortality experience in 1994,
and the reporting of Financial Life as held for sale in 1994.
Policyholder Dividends. Dividends paid to policyholders on participating life
insurance policies increased $37 million due to the acquisition of Franklin
Life.
Operating Costs and Expenses. Operating costs and expenses increased $89
million, or 23%, for the six months ended June 30, 1995 compared to the same
period in 1994, primarily due to a $39 million increase in salaries and other
expenses related to an increase in the number of branch offices and customer
accounts in the Consumer Finance segment, and $42 million of operating
expenses for Franklin Life.
Commission Expense. Commission expense increased $65 million, or 34%, for
1995 compared to 1994, of which $53 million was due to the acquisition of
Franklin Life. The remaining increase was due to higher insurance product
sales in the Retirement Annuities segment.
Provision for Finance Receivable Losses. The provision for finance receivable
losses increased $59 million, or 66%, for the six months ended June 30, 1995
compared to the same period in 1994; the allowance for finance receivable
losses increased $30 million compared to December 31, 1994. These increases
reflect the higher level of finance receivables outstanding, higher levels of
delinquencies and net charge offs due to a change in the portfolio mix, and
the economic climate.
-16-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
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 $26 million, or 43%, for the six months
ended June 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.
Interest Expense. Interest expense on corporate debt increased $29 million,
or 53%, for the six months ended June 30, 1995 compared to the same period in
1994, due to an increase in average short-term borrowings primarily resulting
from financing the Franklin Life acquisition and higher average short-term
interest rates. The increase in interest expense on short-term debt was
partially offset by a decrease in interest expense on long-term debt resulting
from a decrease in average borrowings of long-term debt.
Interest expense on consumer finance debt increased $62 million, or 32%, due
to higher average borrowings to support finance receivable growth and higher
short-term rates, partially offset by lower long-term borrowing cost.
-17-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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.
Six Months Ended Quarter Ended
June 30, June 30,
1995 1994 1995 1994
(In millions)
Revenues
Retirement Annuities ............. $ 806 $ 759 $ 408 $ 380
Consumer Finance ................. 880 696 449 361
Life Insurance ................... 1,422 954 749 477
Total business segments ......... 3,108 2,409 1,606 1,218
Corporate Operations
Realized investment gains ....... 3 4 1 1
Equity in earnings of WNC ....... 21 - 12 -
Other ........................... 13 33 8 13
Total corporate operations ..... 37 37 21 14
Total consolidated revenues .. $3,145 $2,446 $1,627 $1,232
Policyholder Account Deposits
Retirement Annuities ............. $1,281 $1,149 $ 644 $ 562
Life Insurance ................... 753 544 392 277
Total deposits ............... $2,034 $1,693 $1,036 $ 839
Earnings
Retirement Annuities ............. $ 108 $ 103 $ 54 $ 50
Consumer Finance ................. 122 114 62 61
Life Insurance ................... 170 127 86 63
Total business segments ......... 400 344 202 174
Corporate Operations
Net interest on corporate debt .. (56) (37) (29) (18)
Net dividends on preferred
securities of subsidiaries .... (2) - (2) -
Expenses not allocated to
segments ...................... (17) (15) (8) (9)
Earnings on corporate assets .... 14 25 8 10
Net equity in earnings of WNC ... 14 - 8 -
Net realized investment gains ... 2 2 1 1
Total corporate operations ..... (45) (25) (22) (16)
Total consolidated net income. $ 355 $ 319 $ 180 $ 158
-18-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Retirement Annuities. Revenues for the first six months of 1995 compared to
1994 increased $47 million, or 6%, primarily due to a 6% increase in net
investment income, reflecting growth in invested assets, partially offset by a
decrease in the average investment yield. Invested assets increased $1.3
billion (excluding the effect of SFAS 115), or 7%, from June 30, 1994 to June
30, 1995, primarily due to fixed premium deposits and reinvestment of
investment income over the last twelve months. Segment earnings increased $5
million, or 5%, reflecting growth in net investment income which exceeded the
increase in interest credited to policyholders. The ratio of operating
expenses to average assets increased slightly to .53% for the six months ended
June 30, 1995 from .52% for the same period in 1994. The ratio of
policyholder surrenders to average deferred policy reserves declined to 3.99%
for the first six months of 1995 compared to 4.97% for the same period in
1994, primarily due to a free bailout provision (surrender without charge) on
certain accounts in first quarter 1994 and participants seeking higher returns
in equity-based investments, both due to low market interest rates in 1994.
While customer interest in equity-based investments has continued, resulting
in a $86 million increase in variable account deposits, fixed deposits
increased $46 million in the first six months of 1995 compared to the same
period of 1994, due to the higher interest rate environment in 1995.
Consumer Finance. Revenues for the first six months of 1995 compared to 1994
increased $184 million, or 26%, primarily from increased finance charges due
to growth in finance receivables, through business development efforts and
branch expansion, and improved yields. Yields improved due to increased
emphasis on non-real estate secured consumer loans and higher yields on the
expanded retail sales finance and credit card portfolios. Segment earnings
increased $8 million, or 7%, due to growth in average receivables and yield,
partially offset by increases in the provision for finance receivable losses,
cost of borrowings, and operating expenses. The charge off ratio increased to
2.9% for the first six months of 1995 from 2.2% for the same period of 1994,
and delinquencies increased to 3.0% at June 30, 1995 from 2.5% at June 30,
1994. The increase in charge offs and delinquencies resulted from rapid
growth in the finance receivables and the change in portfolio mix to emphasize
lower credit quality receivables with higher yields.
Life Insurance. The Life Insurance segment includes five months of activity
of Franklin Life, acquired January 31, 1995. The acquisition increased
segment revenues $423 million, deposits $181 million, and earnings $44 million
in the first six months of 1995.
-19-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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 $45
million, or 5%, for the six months ended June 30, 1995 compared to 1994,
primarily due to Financial Life, excluded from 1994 segment reporting, and
higher investment income. The increase in investment income resulted from
growth in invested assets, partially offset by lower yields. Excluding
Franklin Life, deposits increased 5% due to the introduction of structured
settlement annuity products and growth in interest-sensitive life deposits.
Segment earnings excluding Franklin Life decreased $1 million in the first six
months of 1995 compared to the same period of 1994, primarily due to higher
insurance and annuity benefit expenses, offset by increases in premiums and
net investment income.
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
$19 million, or 51%, due to higher short-term debt, resulting from the
acquisition of Franklin Life, and higher short-term interest rates, partially
offset by a decrease in average borrowings of long-term debt. Earnings on
corporate assets decreased $11 million for the six months ended June 30, 1995
compared to 1994, primarily due to operating earnings of companies held for
sale, reported in corporate operations during 1994. 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 June 30, 1995 and June 30, 1994
The nature of and reasons for any significant variations between the quarters
ended June 30, 1995 and 1994 are the same as those discussed above for the
respective six month periods, except where otherwise noted herein.
BALANCE SHEET
Effect of SFAS 115. Decreases in market interest rates and resulting
increases in bond values during 1995 caused the adjustment to shareholders'
equity related to fixed maturity securities under SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," to decrease from a net
unrealized loss of $950 million at December 31, 1994 to a net unrealized gain
of $631 million at June 30, 1995.
-20-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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 June 30, 1995 and December 31, 1994 were as follows:
June 30, December 31,
1995 1994 Change
(In millions)
Fair value adjustment to fixed
maturity securities $ 1,495 $(1,387) $ 2,882
Adjusted by:
Increase (decrease) in DPAC/CIP (566) 401 (967)
Decrease (increase) in
deferred income taxes (349) 351 (700)
Valuation allowance on deferred
tax asset - (315) 315
Equity in WNC's unrealized gains 51 - 51
Net unrealized gains (losses) on
fixed maturity securities 631 (950) 1,581
Net unrealized gains on equity
securities 31 15 16
Net unrealized gains (losses)
on securities $ 662 $ (935) $ 1,597
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 June 30, 1995, consolidated assets of $58 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 June 30, 1995, investments
increased $6.0 billion due to the acquisition of Franklin Life and $2.9
billion due to the effect of SFAS 115. For more information on the
investment portfolio at June 30, 1995, see "INVESTMENTS" beginning on
page 20.
Finance Receivables. Net finance receivables increased $385 million, or
5%, from December 31, 1994 to June 30, 1995, primarily due to growth
resulting from business development efforts and branch expansion in the
Consumer Finance segment. This growth is net of a $100 million sale of
credit card and private label finance receivables through securitization,
completed in the quarter ended June 30, 1995.
-21-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Deferred Policy Acquisition Costs (DPAC). The $668 million decrease in
DPAC was primarily due to a decline in the reinstatement of DPAC under
SFAS 115 at June 30, 1995 compared to December 31, 1994 (see "Effect of
SFAS 115" on page 17) and amortization of DPAC, partially offset by
deferral of acquisition costs.
Cost of Insurance Purchased (CIP). The $471 million increase in CIP was
due to the acquisition of Franklin Life, net of a $199 million decrease
due to the effect of SFAS 115.
Other Assets. The $403 million increase in other assets was primarily
due to the acquisition of Franklin Life, the establishment of an IRS tax
bond, an increase in due from brokers for investment transactions, and an
increase in accrued investment income.
Separate Account Assets and Liabilities. The $1.2 billion increase in
assets and liabilities related to Separate Accounts from December 31,
1994 to June 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 $120 million due
to the acquisition of Franklin Life.
Liabilities and Equity. At June 30, 1995, consolidated liabilities and equity
were distributed as follows: 63% in insurance and annuity liabilities, 13% in
consumer finance debt, 10% in equity (including redeemable equity), 4% in
corporate debt, and 10% in other liabilities.
Insurance and Annuity Liabilities. The $7.2 billion increase in
insurance and annuity liabilities from December 31, 1994 to June 30, 1995
was primarily due to the acquisition of Franklin Life, which added $6
billion of insurance reserves, as well as fixed annuity deposits and
interest credited in the Retirement Annuities segment.
Corporate Debt. Corporate debt increased $354 million from December 31,
1994 to June 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 $537.5 million of preferred
securities, of which $287.5 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.
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 29.5% at June
30, 1995, compared to 37.2% at March 31, 1995 and 29.2% at December 31,
1994. Management expects to decrease the ratio to approximately 25% by
year-end 1995, through the issuance of additional preferred securities
and/or through an increase in retained earnings.
-22-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Consumer Finance Debt. Consumer finance debt increased $355 million from
December 31, 1994 to June 30, 1995, to support the growth in finance
receivables.
Income Tax Liabilities. The liability for income taxes increased $415
million from December 31, 1994 to June 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 June 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
June 30, 1995.
Other Liabilities. Other liabilities increased $278 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 $546 million at June 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 of non-convertible
preferred securities on June 5, 1995.
Shareholders' Equity. Shareholders' equity increased from $3.5 billion
at December 31, 1994 to $5.3 billion at June 30, 1995, primarily due to
the $1.6 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 17).
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.
-23-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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 June 30, 1995. Fixed maturity securities are carried at
fair value in accordance with SFAS 115 (see "Effect of SFAS 115" on page 17).
Information regarding the fixed maturity securities portfolio at June 30,
1995, which included bonds and redeemable preferred stocks, was as follows:
Average Credit
(In millions) Fair Value % Rating
Mortgage-backed $11,461 32% AAA
Other investment grade 22,449 64 A
Below investment grade 1,336 4 BB-
Total fixed maturities $35,246 100% 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 92% of mortgage-backed
securities at June 30, 1995 and December 31, 1994.
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 $450 million increase from December 31, 1994 to June 30, 1995
was primarily due to the acquisition of Franklin Life and the purchase of $223
million of below investment grade fixed maturity securities during second
quarter 1995. Net income from below investment grade fixed maturity
securities, including realized investment gains and losses, was $35 million
and $24 million for the first six 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 $45 million at June 30, 1995 compared to $50 million at
December 31, 1994. These securities represented .1% and .2% of total fixed
maturity securities at June 30, 1995 and December 31, 1994, respectively.
Mortgage Loans. Mortgage loans on real estate totaled 8% of invested assets
at June 30, 1995. Information regarding the mortgage loan portfolio at June
30, 1995 was as follows:
Book Non-Performing Loans
(In millions) Value Amount %
Commercial $3,184 $213 6.7%
Residential 77 4 4.7%
Allowance for losses (87) (43)
Total mortgage loans $3,174 $174
-24-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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 6.7% of total commercial loans at June 30, 1995, compared to 5.8%
at December 31, 1994. The increase resulted primarily from watch list loans
becoming non-performing as of June 30, 1995.
At June 30, 1995, $207 million of performing commercial mortgage loans were
included on the company's watch list if they were 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
decrease in the watch list amount was primarily due to loans which became non-
performing during the first six months of 1995, partially offset by additions
of under-collateralized loans resulting from the Franklin Life acquisition.
The company does not anticipate a significant effect on operations, liquidity,
or capital from these loans.
Investment Real Estate. Investment real estate totaled 1.4% of invested
assets at June 30, 1995, compared to 1.8% at December 31, 1994. The breakdown
of investment real estate was as follows:
(In millions) June 30, December 31,
1995 1994
Land development projects $ 607 $ 613
American General Center, Houston 119 120
Income-producing real estate 93 96
Foreclosed real estate 49 56
Allowance for losses (314) (321)
Total investment real estate $ 554 $ 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.
-25-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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 $65 million and $189 million for the six months ended June
30, 1995 and 1994, respectively. The decrease related to lower dividends from
subsidiaries and increased interest expense due to the Franklin Life
acquisition, partially offset by higher interest income on intercompany
receivables. 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 six months of 1995, the companies in the Life Insurance and
Retirement Annuities segments paid cash dividends of $117 million to AGC Life
Insurance Company (AGC Life), a subsidiary of American General, to reduce
intercompany borrowings. During the first six months of 1994, the Life
Insurance and Retirement Annuities segments paid $152 million of dividends to
American General. Cash dividends paid to American General by the Consumer
Finance segment totaled $70 million in the first six months of 1995, compared
to $104 million for the same period of 1994, which included $48 million of
dividends accrued in 1993. Additionally, the real estate operations paid
dividends of $23 million to American General in second quarter 1995.
The increase in short-term debt during the first six months of 1995 primarily
resulted from financing the Franklin Life acquisition. A portion of this
short-term debt increase and $244 million of short-term real estate debt were
refinanced by issuances of $300 million of long-term debt and $537.5 million
of preferred securities as of June 30, 1995.
Segment Cash Flows. Net cash flows generated by the Life Insurance and
Retirement Annuities segments in the first six months of 1995 included $767
million provided by operating activities and $684 million provided by the
increase in fixed policyholder account deposits, net of withdrawals. This
compared to $541 million and $665 million, respectively, during the first six
months of 1994. The $226 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, capital transfers,
and deposits from the Franklin Life acquisition, partially offset by
-26-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
policyholders' increased demand for variable accounts. Variable account
deposits, related to Separate Accounts which are not included in the
consolidated statement of cash flows, increased to $555 million in the first
six months of 1995 from $386 million in the same period of 1994.
The Consumer Finance segment's operating cash flows were $377 million during
the first six months of 1995, compared to $281 million during the first six
months of 1994. This increase is due to $1.3 billion, or 18%, growth in
finance receivables during the twelve months ended June 30, 1995.
Consolidated Operating Activities. Net cash flows from operating activities
on a consolidated basis increased $341 million in the first six 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:
Six Months Ended
(In millions) June 30,
1995 1994
Fixed maturity securities
Sales $1,270 $ 558
Calls 396 596
Repayments of mortgage-backed securities 281 1,349
Maturities 206 167
Mortgage loans 174 207
Equity securities 105 15
Other 128 100
Total $2,560 $2,992
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 of preferred securities
totaling $537.5 million and expected issuances of long-term debt which totaled
$300 million through August 10, 1995. At June 30, 1995, committed credit
facilities totaled $3.3 billion; there were no outstanding borrowings under
these facilities.
-27-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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 August 10, 1995, the company and certain subsidiaries
have issued a total of $837.5 million 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 $3 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 $11.8 million by state guaranty associations during the first
six months of 1995, of which $6.0 million had been accrued at December 31,
1994. Assessments during the first six months of 1994 were $4.3 million, of
which $2.7 million was accrued at December 31, 1993. The assessments for
1995 and 1994 were offset by $4.0 million and $1.2 million, respectively,
considered recoverable against future premium taxes. At June 30, 1995, the
accrued liability for anticipated unrecoverable assessments was $19 million,
compared to $21 million at December 31, 1994. <PAGE>
-28-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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 4. Submission of Matters to a Vote of Security Holders.
Election of Directors. American General's Annual Meeting of Shareholders was
held on April 27, 1995. The following directors, constituting American
General's entire board, were elected to terms ending in 1996:
Number of Number of
Name Votes For Votes Withheld
J. Evans Attwell 179,504,951 1,064,518
Brady F. Carruth 180,170,251 399,218
W. Lipscomb Davis Jr. 180,090,351 479,118
Robert M. Devlin 179,603,786 965,683
Harold S. Hook 179,457,999 1,111,470
Larry D. Horner 180,126,311 443,158
Richard J. V. Johnson 180,196,835 372,634
Robert E. Smittcamp 180,187,579 381,890
Anne M. Tatlock 180,130,257 439,212
James R. Tuerff 179,510,639 1,058,830
Independent Auditors. The appointment of Ernst & Young LLP as Independent
Auditors was ratified with 179,808,328 votes for, 363,229 votes against, and
397,912 abstentions.
Item 5. Other Information.
The company's common stock buyback program is currently suspended, and there
were no company purchases of shares during second quarter 1995.
-29-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
PART II. OTHER INFORMATION (continued)
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 April 14, 1995, with respect to the
pro forma financial statements of the company including the
acquisition of American Franklin Company as of and for the year
ended December 31, 1994.
2) Current Report on Form 8-K dated May 9, 1995, with respect to the
pro forma financial statements of the company including the
acquisition of American Franklin Company as of and for the three
months ended March 31, 1995, and for the year ended December 31,
1994.
3) Current Report on Form 8-K dated June 21, 1995, with respect to the
authorization of issuance by the company of a public offering of
$150 million aggregate principal amount of 6-3/4% Notes Due 2005.
4) Current Report on Form 8-K dated July 14, 1995, with respect to the
authorization of issuance by the company of a public offering of
$150 million aggregate principal amount of 7-1/2% Notes Due 2025.
<PAGE>
-30-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN GENERAL CORPORATION
(Registrant)
By: PAMELA J. PENNY
Pamela J. Penny
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
Date: August 10, 1995
<PAGE>
-31-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
EXHIBIT INDEX
Exhibit
11 Computation of Earnings per Share.
12 Computation of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock
Dividends.
27 Financial Data Schedule.
<PAGE>
-32-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1995
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
($ in millions, except share data)
Six Months Ended
June 30,
1995 1994
Primary:
Net income available to common stock ....... $ 355 $ 319
Average shares outstanding
Common shares ............................ 204,797,065 211,497,388
Assumed exercise of stock options ........ 396,104 310,388
Total .................................. 205,193,169 211,807,776
Net income per share ....................... $1.73 $1.50
Fully Diluted:
Net income ................................. $ 355 $ 319
Plus: Net dividends on convertible
preferred securities of subsidiary ....... 1 -
Net income available to common stock ... $ 356 $ 319
Average shares outstanding
Common shares ............................ 204,797,065 211,497,388
Assumed exercise of stock options ........ 463,313 312,913
Assumed conversion of preferred
securities of subsidiary ............... 1,018,345 -
Total .................................. 206,278,723 211,810,301
Net income per share ....................... $1.73 $1.50
<PAGE>
<PAGE>
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Unaudited)
($ in millions)
Six Months Ended
June 30,
1995 1994
Consolidated operations:
Income before income tax expense and dividends on
preferred securities ............................. $ 556 $ 500
Fixed charges deducted from income
Interest expense ................................. 339 246
Implicit interest in rents ....................... 9 8
Total fixed charges deducted from income ..... 348 254
Earnings available for fixed charges........ $ 904 $ 754
Fixed charges per above ............................ $ 348 $ 254
Capitalized interest relating to real estate
operations ....................................... 9 8
Total fixed charges .............................. 357 262
Dividends on preferred securities ................ 3 -
Total fixed charges and dividends on
preferred securities ..................... $ 360 $ 262
Ratio of earnings to fixed charges ......... 2.5X 2.9X
Ratio of earnings to combined fixed charges
and preferred stock dividends ............ 2.5X 2.9X
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense and dividends on
preferred securities ............................. $ 556 $ 500
Corporate fixed charges deducted from income
Corporate interest expense ....................... 94 60
Earnings available for fixed charges ....... $ 650 $ 560
Total corporate fixed charges per above ............ $ 94 $ 60
Capitalized interest related to real estate
operations ....................................... 9 8
Total fixed charges .............................. 103 68
Dividends on preferred securities ................ 3 -
Total fixed charges and dividends on
preferred securities ..................... $ 106 $ 68
Ratio of earnings to corporate fixed charges 6.3X 8.2X
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends 6.1X 8.2X
American General Finance, Inc.:
Income before income tax expense ................... $ 195 $ 184
Fixed charges deducted from income
Interest expense ................................. 255 193
Implicit interest in rents ....................... 6 5
Total fixed charges .......................... 261 198
Earnings available for fixed charges ....... $ 456 $ 382
Ratio of earnings to fixed charges ......... 1.7X 1.9X
<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 June 30,
1995 1994
Consolidated operations:
Income before income tax expense and dividends on
preferred securities ............................. $ 284 $ 247
Fixed charges deducted from income
Interest expense.................................. 174 126
Implicit interest in rents ....................... 5 4
Total fixed charges deducted from income ..... 179 130
Earnings available for fixed charges........ $ 463 $ 377
Fixed charges per above ............................ $ 179 $ 130
Capitalized interest relating to real estate
operations ....................................... 4 4
Total fixed charges .............................. 183 134
Dividends on preferred securities ................ 3 -
Total fixed charges and dividends on
preferred securities ..................... $ 186 $ 134
Ratio of earnings to fixed charges ......... 2.5X 2.8X
Ratio of earnings to combined fixed charges
and preferred stock dividends ............ 2.5X 2.8X
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense and dividends on
preferred securities ............................. $ 283 $ 246
Corporate fixed charges deducted from income
Corporate interest expense ....................... 52 30
Earnings available for fixed charges ....... $ 335 $ 276
Total corporate fixed charges per above ............ $ 52 $ 30
Capitalized interest relating to real estate
operations ....................................... 4 4
Total fixed charges .............................. 56 34
Dividends on preferred securities ................ 3 -
Total fixed charges and dividends on
preferred securities ..................... $ 59 $ 34
Ratio of earnings to corporate fixed charges 6.0X 8.2X
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends 5.7X 8.2X
American General Finance, Inc.:
Income before income tax expense ................... $ 99 $ 98
Fixed charges deducted from income
Interest expense ................................. 130 100
Implicit interest in rents ....................... 3 2
Total fixed charges .......................... 133 102
Earnings available for fixed charges ....... $ 232 $ 200
Ratio of earnings to fixed charges ......... 1.7X 2.0X
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 35,246<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 233
<MORTGAGE> 3,174
<REAL-ESTATE> 554
<TOTAL-INVEST> 41,008
<CASH> 38
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,534<F2>
<TOTAL-ASSETS> 58,424
<POLICY-LOSSES> 34,727<F3>
<UNEARNED-PREMIUMS> 159<F3>
<POLICY-OTHER> 172<F3>
<POLICY-HOLDER-FUNDS> 1,769<F3>
<NOTES-PAYABLE> 9,635
<COMMON> 365
521<F4>
0
<OTHER-SE> 4,943<F5>
<TOTAL-LIABILITY-AND-EQUITY> 58,424
842<F6>
<INVESTMENT-INCOME> 1,494
<INVESTMENT-GAINS> 3
<OTHER-INCOME> 806<F7>
<BENEFITS> 1,457
<UNDERWRITING-AMORTIZATION> 121<F8>
<UNDERWRITING-OTHER> (210)<F9>
<INCOME-PRETAX> 553<F10>
<INCOME-TAX> 198<F11>
<INCOME-CONTINUING> 355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 355
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<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>
