AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
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, 1996
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 .
As of October 31, 1996, there were 203,365,331 shares (excluding shares held
in treasury and by a subsidiary) of American General's Common Stock and
2,317,701 shares of American General's 7% Convertible Preferred Stock
outstanding.
<PAGE>
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
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, 1996
and 1995 ......................................... 2
Consolidated Balance Sheet at September 30, 1996
and December 31, 1995 ............................ 3
Consolidated Condensed Statement of Cash Flows for
the nine months ended September 30, 1996
and 1995 ......................................... 4
Notes to Consolidated Financial Statements ......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 9
Part II. OTHER INFORMATION.
Item 1. Legal Proceedings .................................. 25
Item 6. Exhibits and Reports on Form 8-K ................... 25
<PAGE>
-1-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
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,
1996 1995 1996 1995
Revenues
Premiums and other considerations. $ 1,478 $ 1,297 $ 502 $ 455
Net investment income ............ 2,437 2,291 817 797
Finance charges .................. 1,093 1,113 359 384
Realized investment gains ........ 57 8 25 5
Equity in earnings of Western
National Corporation ............ 27 31 10 10
Other ............................ 65 78 12 22
Total revenues ............... 5,157 4,818 1,725 1,673
Benefits and expenses
Insurance and annuity benefits ... 2,302 2,173 764 757
Policyholder dividends ........... 68 66 23 25
Operating costs and expenses ..... 830 726 278 250
Commissions ...................... 401 388 138 128
Change in deferred policy
acquisition costs and cost of
insurance purchased ............. (49) (128) (13) (39)
Provision for finance receivable
losses .......................... 301 261 90 114
Interest expense
Corporate ....................... 92 123 31 40
Consumer Finance ................ 369 386 122 131
Total benefits and expenses .. 4,314 3,995 1,433 1,406
Earnings
Income before income tax expense.. 843 823 292 267
Income tax expense ............... 305 277 110 78
Income before net dividends on
preferred securities of
subsidiaries .................... 538 546 182 189
Net dividends on preferred
securities of subsidiaries ...... 29 10 10 8
Net income ................... $ 509 $ 536 $ 172 $ 181
Net income per share .............. $ 2.42 $ 2.59 $ .82 $ .86
Dividends paid per common share ... $ .98 $ .93 $ .33 $ .31
-2-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Average fully diluted shares
outstanding (in thousands) ...... 213,935 208,163 213,437 211,817
-3-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
(In millions, except share amounts)
September 30, December 31,
1996 1995
Assets
Investments
Fixed maturity securities (amortized cost:
$36,403; $34,590) ............................ $37,122 $37,213
Mortgage loans on real estate ................. 3,153 3,041
Equity securities (cost: $109; $138) .......... 133 186
Policy loans .................................. 1,705 1,605
Investment real estate ........................ 608 577
Other long-term investments ................... 180 179
Short-term investments ........................ 189 103
Total investments ......................... 43,090 42,904
Cash ........................................... 173 161
Finance receivables, net ....................... 7,743 7,918
Investment in Western National Corporation ..... 481 407
Deferred policy acquisition costs .............. 2,310 1,625
Cost of insurance purchased .................... 822 504
Acquisition-related goodwill ................... 562 577
Other assets ................................... 2,087 1,887
Assets held in Separate Accounts ............... 7,077 5,170
Total assets .............................. $64,345 $61,153
Liabilities
Insurance and annuity liabilities .............. $39,883 $37,983
Debt (short-term)
Corporate ($755; $553) ........................ 1,927 1,723
Consumer Finance ($2,701; $2,490) ............. 7,331 7,470
Income tax liabilities ......................... 898 1,268
Other liabilities .............................. 1,125 1,009
Liabilities related to Separate Accounts ....... 7,077 5,170
Total liabilities ......................... 58,241 54,623
Redeemable equity
Company-obligated mandatorily redeemable
preferred securities of subsidiaries
holding solely company subordinated notes
Non-convertible ............................. 486 485
Convertible ................................. 245 244
Total redeemable equity ................... 731 729
Shareholders' equity
Mandatorily convertible preferred stock
(shares issued and outstanding: 2,317,701) ... 85 -
-4-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Common stock (shares issued: 220,122,120;
outstanding: 203,624,209; 203,948,246) ....... 398 364
Net unrealized gains on securities ............. 290 1,100
Retained earnings .............................. 5,092 4,787
Cost of treasury stock ......................... (492) (450)
Total shareholders' equity ................ 5,373 5,801
Total liabilities and equity .............. $64,345 $61,153
-5-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended
September 30,
1996 1995
Operating activities
Net cash provided by operating activities ... $ 1,477 $ 1,432
Investing activities
Investment purchases .............................. (6,853) (5,842)
Investment calls, maturities, and sales ........... 6,150 4,026
Finance receivable originations or acquisitions ... (3,860) (4,482)
Finance receivable principal payments received .... 3,730 3,681
Finance receivables sold through securitization ... - 100
Net (increase) decrease in short-term investments . (83) 96
Investment in Western National Corporation ........ (126) -
Acquisition of Independent ........................ (106) -
Acquisition of Franklin Life ...................... - (920)
Other, net ........................................ (152) (152)
Net cash used for investing activities ...... (1,300) (3,493)
Financing activities
Retirement Services and Life Insurance
Policyholder account deposits ................... 1,934 2,241
Policyholder account withdrawals ................ (1,793) (1,264)
Total Retirement Services and Life Insurance 141 977
Consumer Finance
Net increase (decrease) in short-term debt ...... 211 (186)
Long-term debt issuances ........................ 73 1,503
Long-term debt redemptions ...................... (426) (842)
Total Consumer Finance ....................... (142) 475
Corporate
Net increase (decrease) in short-term debt ...... 202 (256)
Long-term debt issuances ........................ - 433
Long-term debt redemption ....................... - (100)
Issuance of preferred securities of subsidiaries,
net of commissions paid
Non-convertible ............................... - 485
Convertible ................................... - 244
Common stock dividend payments .................. (200) (190)
Preferred stock dividend payments ............... (3) -
Common stock purchases .......................... (152) -
Other, net ...................................... (11) 4
Total Corporate .............................. (164) 620
Net cash provided by (used for)
financing activities ....................... (165) 2,072
-6-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Net increase in cash ............................... 12 11
Cash at beginning of period ........................ 161 45
Cash at end of period .............................. $ 173 $ 56
Supplemental disclosure of cash flow information:
Cash paid during the period for
Income taxes .................................... $ 217 $ 166
Interest
Corporate ..................................... 96 115
Consumer Finance .............................. 369 365
Dividends on preferred securities of
subsidiaries ................................... 43 14
-7-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 1. Financial Statements (continued).
AMERICAN GENERAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1996
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, 1996, the consolidated results of operations for the three
months and nine months ended September 30, 1996 and 1995, and the
consolidated cash flows for the nine months ended September 30, 1996 and
1995.
To conform with the 1996 presentation, certain items in the prior period
have been reclassified.
2. New Accounting Standard. In June 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." This statement provides accounting
standards for determining whether transfers of financial assets are
treated as sales or secured borrowings. The statement must be applied
prospectively to all applicable transactions occurring after December 31,
1996; however, application of certain provisions may be delayed pending
approval by the FASB. Earlier or retroactive application is not
permitted. The company does not anticipate a material effect on
consolidated results of operations and financial position related to
adoption of this statement.
3. Acquisitions.
Western National Corporation. On September 17, 1996, American General
acquired 7.25 million shares of Western National Corporation (WNC) Series
A Participating Convertible Preferred Stock. AGC paid a net purchase
price of $126.1 million, which reflected an agreed-upon gross price of
$130 million, or $17.92 per share, less a 3% discount since WNC did not
incur customary stock issuance costs. The acquisition increased American
General's equity ownership in WNC from 40% to 46.2% on a fully diluted
basis. For accounting purposes, the acquisition was recorded on an
equity basis, using the purchase method. Allocation of the purchase
price to WNC's individual assets and liabilities, based on their fair
values as of the acquisition date, is in process.
-8-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 1. Financial Statements (continued).
Independent Insurance Group, Inc. On February 29, 1996, American
General, through its wholly-owned subsidiary, AGC Life Insurance Company
(AGC Life), acquired Independent Insurance Group, Inc. (Independent) for
$362 million. Prior to closing, Independent shareholders could elect to
exchange each share of Independent stock for $27.50 in cash, .7480 share
of American General common stock, or .7480 share of American General 7%
mandatorily convertible preferred stock. The exchange ratio of $36.725
per share was based on the average market price of American General
common stock during the ten trading days ending on and including the
fifth trading day prior to closing. The consideration at closing
consisted of: 1) $139 million of cash (38%), 2) 3.7 million shares of
common stock (38%), and 3) 2.3 million shares of preferred stock (24%).
The acquisition was accounted for using the purchase method, and the
results of operations of Independent were included in the company's
consolidated statement of income from the date of acquisition. The
acquired assets and liabilities were reflected in American General's
consolidated balance sheet as of February 29, 1996, at management's best
estimate of their fair values. Evaluation of fair values assigned to
Independent's assets and liabilities, primarily related to investment
real estate, insurance reserves, and litigation liabilities, is
continuing, and allocation of the purchase price may be adjusted when
additional information is available.
Noncash investing and financing activities related to the acquisition of
Independent that are not reflected in the consolidated condensed
statement of cash flows for the nine months ended September 30, 1996 were
as follows:
(In millions)
Fair value of assets acquired, excluding $34 million
of cash $ 1,358
Liabilities assumed (1,029)
Issuance of common treasury shares (138)
Issuance of mandatorily convertible preferred stock (85)
Net cash paid for acquisition of Independent $ 106
Franklin Life Insurance Company. On January 31, 1995, American General,
through AGC Life, acquired American Franklin Company (AFC), the holding
company of The Franklin Life Insurance Company (Franklin Life). The
following unaudited proforma information presents the consolidated
results of operations of the company and AFC for the nine months ended
September 30, 1995. The proforma information is presented as if the
acquisition and its permanent financing had been effective at January 1,
1995. This information is intended for informational purposes only and
may not necessarily be indicative of American General's future results of
operations.
-9-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 1. Financial Statements (continued).
Proforma
Nine Months Ended
September 30, 1995
(In millions, except share data)
Total revenues $ 4,898
Income before income tax expense $ 841
Income before net dividends on
preferred securities of subsidiaries $ 558
Net income $ 533
Net income per share $ 2.56
Average fully diluted shares
outstanding (thousands) 208,163
Included in net income above are aftertax realized gains of $5 million.
4. Mandatorily Convertible Preferred Stock. In connection with the
acquisition of Independent, American General issued 2.3 million shares,
or $85 million, of mandatorily convertible preferred stock. Holders of
the preferred stock are entitled to receive annual cumulative dividends
of 7% and have the right to vote, together with holders of American
General common stock, on the basis of four-fifths of one vote for each
share of preferred stock. The preferred stock is non-callable for four
years, and each share is mandatorily convertible into not more than one
share of American General common stock during the fifth year.
5. Derivative Financial Instruments. During the nine months ended September
30, 1996, the company entered into interest rate swap agreements with a
total notional amount of $44.5 million to convert specific investment
securities from a floating to a fixed-rate basis, or vice versa. No
other transactions involving derivative financial instruments were
entered into during the period. Derivative financial instruments related
to investment securities did not have a material effect on net investment
income during the nine months ended September 30, 1996 or 1995.
Derivative financial instruments related to debt securities did not have
a material effect on the weighted-average borrowing rate or reported
interest expense during the nine months ended September 30, 1996 or 1995.
6. 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 for
$47.3 million in compensatory damages and 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. On January 29, 1996, the Texas First Court of Appeals rendered
a two-to-one decision that affirmed the trial court judgment and held
-10-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 1. Financial Statements (continued).
both companies liable to pay the punitive damages. The company intends
to vigorously contest the matter through the appellate process. Although
substantial risks and uncertainties remain with respect to the ultimate
outcome, legal counsel has advised the company that it is not probable
within the meaning of SFAS 5, "Accounting for Contingencies," that the
company will ultimately incur a material liability in connection with
this matter. 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 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 United States Court of Federal Claims.
On February 7, 1996, the court ruled in favor of the company on all legal
issues related to this contingency, and a judgment was entered in favor
of the company on July 7, 1996. The government has notified the court
that it will appeal this judgment; however, the company intends to pursue
a full refund of the amounts paid. Accordingly, no provision has been
made in the consolidated financial statements related to this
contingency.
American General and certain of its subsidiaries are parties to various
other lawsuits and proceedings arising in the ordinary course of
business. Many of these lawsuits and proceedings arise in jurisdictions,
such as Alabama, that permit damage awards disproportionate to the actual
economic damages incurred. Based upon information presently available,
the company believes that the total amounts that ultimately will be paid,
if any, arising from these lawsuits and proceedings will have no material
adverse effect on the company's consolidated results of operations and
financial position. However, it should be noted that the frequency of
large damage awards, including large punitive damage awards, that bear
little or no relation to actual economic damages incurred by plaintiffs
in jurisdictions like Alabama continues to increase and creates the
potential for an unpredictable judgment in any given suit.
7. Status of Federal Tax Return Examinations. The company and the majority
of its subsidiaries file a consolidated federal income tax return. The
IRS is currently examining the company's tax returns for 1988 through
1992. One issue from prior tax returns has been the subject of
litigation, as described in Note 6.
-11-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 1. Financial Statements (continued).
8. 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,
1996 1995 1996 1995
Ratio of Earnings to Fixed
Charges:
Consolidated operations ......... 2.71 2.52 2.78 2.48
Consolidated operations,
corporate fixed charges only ... 8.39 6.74 8.52 7.04
American General Finance, Inc. .. 1.42 1.65 1.55 1.45
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends:
Consolidated operations ......... 2.46 2.45 2.52 2.33
Consolidated operations,
corporate fixed charges and
preferred stock dividends only . 5.87 6.09 5.91 5.53
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
consolidated 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 1995
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, 1996 and June 30, 1996.
This analysis should be read in conjunction with the consolidated financial
statements and related notes on pages 2 through 9 of this Quarterly Report on
Form 10-Q.
-12-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
CONSOLIDATED RESULTS OF OPERATIONS
Nine Months Ended Quarter Ended
(In millions, September 30, September 30,
except share data) 1996 1995 1996 1995
Net income $ 509 $ 536 $ 172 $ 181
Net income per share $2.42 $2.59 $ .82 $ .86
Net income for the nine months and quarter ended September 30, 1996 decreased
5% compared to the same periods in the prior year. This decrease was due to
lower earnings in the Consumer Finance segment, partially offset by the
contribution from two recently acquired subsidiaries in the Life Insurance
segment (Franklin Life in first quarter 1995 and Independent in first quarter
1996), as well as growth in the Retirement Services segment (formerly the
Retirement Annuities segment). Net income also included a $32 million
increase in net realized investment gains for the nine months ended September
30, 1996 compared to the same period in 1995, and a $13 million increase for
the quarters then ended. Additionally, net income reflected an $18 million
aftertax loss in the current quarter on certain assets held for sale, related
to a small life insurance subsidiary and a portfolio of commercial mortgage
loans.
Net income per share for the nine months and quarter ended September 30, 1996
decreased 7% and 5%, respectively, compared to the same periods of 1995. Net
income per share for the year-to-date period decreased to a greater degree
than net income, due to the issuances of convertible preferred securities of a
subsidiary in June 1995 and mandatorily convertible preferred stock in
February 1996.
BUSINESS SEGMENTS
The company reports its business operations in three segments. To facilitate
meaningful period-to-period comparisons of business segment results, 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.
-13-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Segment earnings were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
Retirement Services $ 175 $ 162 $ 57 $ 54
Consumer Finance 102 177 43 55
Life Insurance 296 265 105 95
Total segment earnings $ 573 $ 604 $ 205 $ 204
A discussion of each segment's results follows. The reasons for any
significant variations between the quarters ended September 30, 1996 and 1995
are the same as those discussed below for the respective nine month periods,
unless otherwise noted.
Retirement Services
Nine Months Ended Quarter Ended
September 30, September 30,
($ in millions) 1996 1995 1996 1995
Segment earnings $ 175 $ 162 $ 57 $ 54
Assets $29,078 $25,905 $29,078 $25,905
Deposits
Fixed $ 1,180 $ 1,279 $ 368 $ 374
Variable $ 917 $ 579 $ 324 $ 203
Net investment income $ 1,235 $ 1,184 $ 413 $ 405
Investment spread -
fixed accounts 1.82% 1.84% 1.78% 1.84%
Segment earnings for the nine months ended September 30, 1996, compared to the
same period of 1995, increased $13 million, or 8%, primarily due to an
increase in fixed investment margin (net investment income less interest
credited to policyholders), resulting from asset growth over the past twelve
months.
Assets (excluding the fair value adjustment related to fixed maturity
securities) increased $3.4 billion, or 13%, from September 30, 1995 to
September 30, 1996 and $2.5 billion, or 9%, from December 31, 1995, reflecting
strong sales and an increase in total deposits. The increase in deposits for
the first nine months of 1996 compared to the same period of 1995 reflects an
increase in variable account deposits, partially offset by a decrease in fixed
deposits, due to policyholders' preference for equity-based investments.
-14-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Assets and liabilities related to Separate Accounts increased $2.3 billion
from September 30, 1995 to September 30, 1996 and $1.8 billion from December
31, 1995, reflecting both increased sales and the accumulation of investment
returns due to the strong performance of the stock market.
Net investment income, the primary component of revenues, increased 4% for the
first nine months of 1996 compared to the same period of 1995, reflecting
growth in invested assets, partially offset by a decrease in investment yield.
Investment yield for the nine months ended September 30, 1996 decreased 17
basis points compared to the nine months ended September 30, 1995 (23 basis
points for the comparable quarters). A corresponding reduction of rates
credited to policyholders resulted in a decrease in investment spread of only
2 basis points for year-to-date 1996 compared to year-to-date 1995, and a
decrease of 6 basis points for the comparable quarters. The relatively stable
investment spread, combined with growth in invested assets, contributed to an
increase in fixed investment margin.
The ratio of operating expenses to average assets improved to .51% for the
nine months ended September 30, 1996 from .53% for the same period in 1995 due
to an increase in average assets, which more than offset a $10 million
increase in operating expenses related to growth in the business. The ratio
of policyholder surrenders to average fixed deferred annuity liabilities
increased to 5.20% for the first nine months of 1996 compared to 4.09% for the
same period in 1995. The surrender ratio decreased from 5.18% for second
quarter 1996 to 4.99% for third quarter 1996. The year-to-date increase was
primarily due to policyholders' increased preference for equity-based
investments, lower fixed interest crediting rates, and an increase in
systematic withdrawals.
Consumer Finance
Nine Months Ended Quarter Ended
September 30, September 30,
($ in millions) 1996 1995 1996 1995
Segment earnings $ 102 $ 177 $ 43 $ 55
Finance receivables $ 8,208 $ 8,445 $ 8,208 $ 8,445
Yield on finance receivables 18.02% 18.04% 17.80% 18.21%
Loss-adjusted yield on
finance receivables 12.62% 15.05% 12.43% 14.99%
Operating expenses $ 381 $ 337 $ 122 $ 118
Operating expense ratio 6.17% 5.35% 5.93% 5.62%
-15-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Segment earnings for the nine months ended September 30, 1996 decreased $75
million, or 42%, from the same period a year ago, due to increases in the
provision for finance receivable losses and operating expenses, as well as a
decrease in finance charge revenues. For third quarter 1996, segment earnings
decreased $12 million, or 21%, compared to third quarter 1995. The quarter
decline was primarily a result of decreased finance charge revenues and higher
income tax expense (due to a non-recurring favorable state income tax
adjustment in third quarter 1995), partially offset by a decrease in the
provision for finance receivable losses.
Total finance receivables at September 30, 1996 decreased $202 million from
December 31, 1995 and $237 million from September 30, 1995. All lines of
receivables, except for real estate-secured consumer loans, decreased compared
to December 31, 1995 and September 30, 1995, due to management's action
program to improve credit quality. Real estate-secured loans increased to
$3.4 billion at September 30, 1996 from $2.9 billion at December 31, 1995 and
September 30, 1995, primarily due to purchases of real estate-secured
receivable portfolios totaling $476 million in second and third quarter 1996.
Finance charge revenues decreased $20 million year-to-date and $25 million for
third quarter 1996, compared to the same periods in 1995. The decrease
resulted from lower average receivables combined with declines in yield on
finance receivables of 2 basis points and 41 basis points, respectively, for
the nine months and quarter ended September 30, 1996 compared to the same
periods of 1995. The yield declines reflected lower yields in all lines of
business, with the change in the portfolio mix to a higher proportion of real
estate-secured loans and an increase in finance receivables delinquent 90+
days for which accrual of finance charges has been suspended.
The Consumer Finance segment's strategy in recent years has emphasized
improvement of loss-adjusted yield (yield less net charge off percentage) by
extending credit to customers with risk characteristics somewhat higher than
those traditionally serviced by the company. As expected, growth in higher-
yielding finance receivables adversely affected credit quality; however,
delinquencies and charge offs sharply increased to greater than anticipated
levels beginning in third quarter 1995. As a result, loss-adjusted yield on
finance receivables decreased 243 basis points in the nine months ended
September 30, 1996, and 256 basis points in the quarter then ended, compared
to the same periods in 1995.
In response to this unanticipated increase in delinquencies and charge offs, a
comprehensive review of the loan portfolio was initiated in fourth quarter
1995. This review, which consisted of extensive internal analysis, together
with credit loss development projections supplied by outside credit
consultants, indicated a need for an increase in the allowance for finance
receivable losses. A $216 million increase was recorded in fourth quarter
-16-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
1995. In addition, the company adopted an action program for improving credit
quality that included raising underwriting standards, expanding the use of
credit scoring, slowing branch expansion, stressing collections, improving
branch office training, and rebalancing the finance receivable portfolio
credit risk. Strategies for rebalancing the portfolio credit risk include
slowing growth, de-emphasizing some higher-yielding loans, and increasing the
proportion of real estate-secured receivables.
Information regarding the provision for finance receivable losses and charge
offs was as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
($ in millions) 1996 1995 1996 1995
Provision for finance
receivable losses $ 301 $ 261 $ 90 $ 114
Charge offs, net of recoveries $ 328 $ 181 $ 107 $ 64
Net charge offs as percentage
of average finance receivables 5.40% 2.99% 5.37% 3.22%
Compared to the same periods of 1995, the provision for finance receivable
losses recorded in the income statement increased $40 million, or 16%, for the
nine months ended September 30, 1996 and decreased $24 million, or 20%, for
the quarter then ended. The $40 million increase was due to higher year-to-
date net charge offs, partially offset by a $27 million decrease in the
allowance provided for finance receivable losses in the nine months ended
September 30, 1996 compared to an $80 million increase during the same period
in 1995. The $24 million decrease for the quarter was due to a $17 million
decrease in the allowance provided for finance receivable losses in third
quarter 1996 versus a $50 million increase in third quarter 1995, partially
offset by the increase in net charge offs. Net charge offs of $107 million
for third quarter 1996 were flat compared to the quarter ended June 30, 1996,
while the ratio of net charge offs to average finance receivables was 5.37%
compared to 5.33% in second quarter 1996.
-17-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Information regarding delinquencies and the allowance for finance receivable
losses was as follows:
September 30, December 31, September 30,
($ in millions) 1996 1995 1995
Allowance for finance receivable
losses $ 465 $ 492 $ 306
Allowance as percentage of
finance receivables 5.67% 5.85% 3.62%
Delinquencies $ 380 $ 386 $ 351
Delinquencies as percentage of
finance receivables 4.28% 4.13% 3.75%
The allowance for finance receivable losses decreased $27 million from
December 31, 1995 to September 30, 1996, and decreased as a percentage of
finance receivables by 18 basis points. Delinquencies as a percentage of
finance receivables increased from 3.99% at June 30, 1996. In third quarter
1996, certain private label and credit card portfolios, which the company is
no longer marketing, had higher delinquency ratios. However, delinquency
ratios have remained relatively stable for real estate-secured loans, which
represented 42% of total finance receivables at September 30, 1996, compared
to 35% at December 31, 1995. Based on analysis of the receivables portfolio
and management's focus on rebalancing the portfolio's credit risk, management
believes that the allowance for finance receivable losses is adequate given
the current level of delinquencies and net charge offs.
Operating expenses increased $44 million, or 13%, for the nine months ended
September 30, 1996, compared to the same period in 1995, and increased 82
basis points, from 5.35% to 6.17%, as a percentage of average finance
receivables. The increase reflects lower deferrals of loan origination costs,
increased collection efforts associated with the higher levels of delinquent
receivables, and higher year-to-date expenses to support branch expansion and
account growth that occurred in 1994 and 1995. Operating expenses for the
nine months ended September 30, 1996 included $9 million of non-recurring
expenses related to marketing initiatives that have either been restructured
or discontinued based on the comprehensive review of operations. This review
and the decrease in finance receivables during 1996 resulted in a workforce
reduction of approximately 800 positions through third quarter 1996.
Management believes the improvement programs implemented in late 1995 and
throughout 1996, which emphasize continued improvements in underwriting,
intensified collections, increased emphasis on real estate-secured loans, and
investment in risk management technology, will address the overall credit
quality issues. However, delinquencies have remained at higher than expected
-18-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
levels, indicating that charge offs may continue above historical levels for
the near term, rather than moderating during fourth quarter 1996, as
previously expected. In addition, adverse changes in credit fundamentals
within the consumer finance market, including the recent increase in the level
of personal bankruptcies, could negatively impact expected results.
Life Insurance
Nine Months Ended Quarter Ended
September 30, September 30,
($ in millions) 1996 1995 1996 1995
Segment earnings $ 296 $ 265 $ 105 $ 95
Premiums $1,270 $1,098 $ 432 $ 386
Net investment income $1,146 $1,033 $ 387 $ 360
Insurance and annuity benefits $1,361 $1,255 $ 447 $ 443
Operating expense ratio 16.15% 12.84% 16.91% 12.58%
Results for the first nine months of 1996 for the Life Insurance segment
reflect the operations for Franklin Life, acquired January 31, 1995, and seven
months of operations for Independent, acquired February 29, 1996. Increases
in segment earnings of $31 million, or 12%, segment revenues (consisting
principally of premiums and net investment income) of $294 million, or 13%,
and insurance and annuity benefits of $106 million, or 8%, were primarily due
to the acquisitions.
The ratio of operating expenses to direct premiums and deposits for the nine
months and quarter ended September 30, 1996 increased compared to the same
periods of 1995, reflecting Independent's higher overall expense ratio and a
lower level of annuity deposits.
Information regarding sales and deposits was as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
Sales
Life insurance $ 228 $ 267 $ 75 $ 84
Annuities $ 238 $ 452 $ 75 $ 130
Deposits
Life insurance $ 506 $ 494 $ 167 $ 165
Annuities $ 330 $ 532 $ 103 $ 161
-19-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Life insurance sales for the first nine months of 1996 were 15% below
comparable 1995 sales due to price competition in higher-end products and
disruptions related to major changes in field administration systems. Annuity
sales for the nine months ended September 30, 1996 were 47% below comparable
prior year sales, primarily due to increasingly competitive market conditions.
The lower 1996 sales resulted in a reduction in the deferral of acquisition
costs for the nine months ended September 30, 1996 compared to the same period
in 1995. Annuity deposits for such periods decreased 38% due to the lower
sales.
Selected balance sheet information was as follows:
September 30, December 31,
(In millions) 1996 1995
Invested assets $ 19,809 $ 19,444
Cost of insurance purchased $ 822 $ 504
Insurance and annuity liabilities $ 18,702 $ 17,403
Excluding the fair value adjustment related to fixed maturity securities, the
Life Insurance segment's invested assets increased $1.3 billion, cost of
insurance purchased increased $175 million, and insurance and annuity
liabilities increased $1.3 billion from December 31, 1995 to September 30,
1996, primarily due to the acquisition of Independent.
Guaranty Associations. State guaranty fund expense included in operating
costs and expenses was $6 million and $4 million for the nine months ended
September 30, 1996 and 1995, respectively. Amounts assessed American
General's life insurance and annuity subsidiaries by state life and health
insurance guaranty funds resulting from past industry insolvencies were $9
million during the first nine months of 1996, compared to $15 million for the
same period in 1995. These assessments are expected to be partially recovered
against the payment of future premium taxes.
At September 30, 1996, the accrued liability for anticipated assessments was
$49 million, compared to $51 million at December 31, 1995. Receivables of $43
million and $44 million were recorded at September 30, 1996 and December 31,
1995, respectively, for expected recoveries against the payment of future
premium taxes.
INVESTMENTS
Invested assets consist primarily of fixed maturity securities, mortgage loans
on real estate, policy loans, and investment real estate. 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.
-20-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Fair Value of Securities (SFAS 115). An increase in market interest rates and
resulting decreases in bond values during the first nine months of 1996 caused
a $795 million decrease in shareholders' equity related to the fair value
adjustment to fixed maturity securities under SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," during 1996.
The components of the adjustment to report fixed maturity and equity
securities at fair value at September 30, 1996 and December 31, 1995, and the
change, were as follows:
September 30, December 31,
(In millions) 1996 1995 Change
Fair value adjustment to fixed
maturity securities $ 719 $ 2,623 $(1,904)
Adjusted by:
Decrease in DPAC/CIP (309) (1,061) 752
Increase in deferred income taxes (153) (586) 433
Equity in WNC's unrealized gains 17 93 (76)
Net unrealized gains on fixed
maturity securities 274 1,069 (795)
Net unrealized gains on equity
securities 16 31 (15)
Net unrealized gains on
securities $ 290 $ 1,100 $ (810)
Accounting rules do not permit adjustment to fair value of the insurance
liabilities supported by these securities, thereby creating volatility in
shareholders' equity as interest rates change. Care should be exercised in
drawing conclusions based on balance sheet amounts that are only partially
adjusted to fair value.
Fixed Maturity Securities. Fixed maturity securities represented 86% of
invested assets at September 30, 1996. Information regarding the fixed
maturity securities portfolio, which included bonds and redeemable preferred
stocks, at September 30, 1996 was as follows:
September 30, Average Credit
(In millions) 1996 % Rating
Investment grade $ 24,990 67% A
Mortgage-backed 10,661 29 AAA
Below investment grade 1,471 4 BB-
Total fixed maturities $ 37,122 100% AA-
-21-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
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 88% and 90% of mortgage-backed
securities at September 30, 1996 and December 31, 1995, respectively.
At September 30, 1996, below investment grade fixed maturity securities, those
rated below BBB-, were $1.5 billion compared to $1.4 billion at December 31,
1995. These investments represented 4% of total fixed maturity securities at
both balance sheet dates. Net income from below investment grade fixed
maturity securities, including realized investment gains and losses, was $69
million and $61 million for the first nine months of 1996 and 1995,
respectively.
Non-performing fixed maturity securities, defined as securities for which
payment of interest is sufficiently uncertain as to preclude accrual of
interest, represented .01% or less of total fixed maturity securities at
September 30, 1996 and December 31, 1995.
Mortgage Loans. Mortgage loans on real estate totaled 7% of invested assets
at September 30, 1996. Information regarding the mortgage loan portfolio at
September 30, 1996 was as follows:
September 30, Non-Performing Loans
(In millions) 1996 Amount %
Commercial $ 3,171 $ 179 5.6%
Residential 65 4 5.7
Allowance for losses (83) (25)
Total mortgage loans $ 3,153 $ 158
Non-performing mortgage loans include loans delinquent 60 days or more and
commercial loans that have been restructured. These loans represented 5.6% of
total commercial loans at September 30, 1996, compared to 5.5% at December 31,
1995. The increase in non-performing loans was a result of the Independent
acquisition.
At September 30, 1996, $298 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 potentially under-
collateralized. This amount compares to $251 million at June 30, 1996 and
$263 million at December 31, 1995. The increase in the watch list amount was
primarily due to the addition of a potentially under-collateralized loan for
$27 million and loans related to the Independent acquisition. While the watch
list loans may be predictive of higher non-performing loans in the future, the
company does not anticipate a significant effect on operations, liquidity, or
capital from these loans.
-22-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Investment Real Estate. Investment real estate totaled 1% of invested assets
at September 30, 1996 and December 31, 1995. The breakdown of investment real
estate was as follows:
September 30, December 31,
(In millions) 1996 1995
Land development projects $ 353 $ 366
American General Center, Houston 119 115
Income-producing real estate 69 56
Foreclosed real estate 90 75
Allowance for losses (23) (35)
Total investment real estate $ 608 $ 577
The decreases in land development projects and the allowance for losses were
due to sales. The American General Center, Houston balance increased due to a
land acquisition in third quarter 1996, while income-producing real estate
increased related to the acquisition of Independent. Foreclosed real estate
primarily increased due to foreclosures totaling $14 million in 1996,
partially offset by sales of foreclosed properties.
American General's principal exposure to environmental regulation arises from
its ownership of investment real estate. Probable costs related to
environmental cleanup are immaterial.
Realized Investment Gains. Realized investment gains (losses) were as follows:
Nine Months Ended Quarter Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
Sales of fixed maturity securities $ (24) $ (11) $ 10 $ -
Calls of fixed maturity securities 20 14 2 7
Sales of equity securities 34 2 - 2
Calls of equity securities 16 3 10 3
Write-downs/reserve increases (4) (29) 1 (17)
Other 15 29 2 10
Total realized investment gains $ 57 $ 8 $ 25 $ 5
Write-downs and reserve increases were primarily related to mortgage loans for
the nine months ended September 30, 1996 and to investment real estate and
mortgage loans in the comparable prior period.
-23-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
CAPITAL RESOURCES
Corporate Debt. Corporate debt is incurred primarily to fund acquisitions,
the share buyback program, and capital needs of subsidiaries. Corporate debt
increased $204 million from December 31, 1995 to September 30, 1996, primarily
due to short-term debt used to finance the purchase of additional shares of
Western National Corporation stock and the company's common stock under the
share buyback program. Interest expense on corporate debt decreased $31
million, or 25%, for the nine months ended September 30, 1996 compared to the
same period in 1995, primarily due to higher average short-term borrowings in
the first nine months of 1995 due to the initial financing of the Franklin
Life acquisition. The company issued preferred securities of subsidiaries in
1995 to refinance a portion of this and other short-term debt.
The ratio of corporate debt to corporate capital (excluding the fair value
adjustment related to fixed maturity securities) was 24.8% at September 30,
1996, compared to 24.0% at December 31, 1995. Management expects to maintain
the ratio at or below 25% during the remainder of 1996.
Consumer Finance Debt. The capital of American General's Consumer Finance
segment varies directly with the amount of finance receivables outstanding.
The mix of capital between debt and equity is based primarily on maintaining
leverage that supports cost-effective funding. Consumer finance debt
decreased $139 million from December 31, 1995 to September 30, 1996, due to
the decline in finance receivables, and increased $234 million from June 30,
1996, due to a $276 million finance receivable portfolio purchase. Interest
expense on Consumer Finance debt decreased $17 million, or 5%, for the nine
months ended September 30, 1996 compared to the same period in 1995, primarily
due to the lower average borrowings.
Shareholders' Equity. Shareholders' equity decreased from $5.8 billion at
December 31, 1995 to $5.4 billion at September 30, 1996, primarily due to the
$810 million decrease in net unrealized gains on securities, partially offset
by issuances of stock in connection with the acquisition of Independent. The
issuances consisted of 3.7 million shares of common stock from treasury, which
increased shareholders' equity by $138 million, and 2.3 million shares of
American General 7% mandatorily convertible preferred stock, which increased
shareholders' equity by $85 million.
Due to the requirements of certain accounting rules, shareholders equity will
be subject to future volatility from the effects of interest rate fluctuations
on the fair value of fixed maturity securities (see "Investments - Fair Value
of Securities (SFAS 115)" on page 18).
-24-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
LIQUIDITY
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.
Parent Company Cash Flows
Nine Months Ended
September 30,
(In millions) 1996 1995
Net cash provided by operating activities $ 404 $ 153
Dividends paid by Life Insurance and
Retirement Services segments $ 301 $ 96
Dividends paid by Consumer Finance segment $ 139 $ 113
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, acquisitions, and to buy back the company's 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 1996, the Life Insurance and Retirement
Services segments paid $321 million of cash dividends to AGC Life, a
subsidiary of American General. Of this amount, $20 million was used by AGC
Life to repay intercompany borrowings, and the remaining $301 million was
dividended to American General. During the first nine months of 1995, the
Life Insurance and Retirement Services segments paid $213 million of cash
dividends to AGC Life, of which $117 million was used to reduce intercompany
borrowings, and $96 million was paid to American General. The increase in
dividends paid by the Life Insurance and Retirement Services segments is
primarily attributable to cash dividends paid by Franklin Life in the first
nine months of 1996.
-25-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Segment Cash Flows
Nine Months Ended
September 30,
(In millions) 1996 1995
Life Insurance and Retirement Services
Net cash provided by operating activities $1,237 $1,126
Net cash provided by fixed policyholder
account deposits, net of withdrawals $ 141 $ 977
Variable account deposits, net of withdrawals $1,337 $ 846
Consumer Finance
Net cash provided by operating activities $ 477 $ 492
Net cash flows generated by the Life Insurance and Retirement Services
segments include cash provided by operating activities and cash provided by
fixed policyholder account deposits, net of withdrawals. The $111 million
increase in cash provided by operating activities was primarily due to an
increase in premiums and net investment income, partially offset by an
increase in insurance and annuity benefits and operating expenses. The
decrease of $836 million in cash provided by fixed policyholder account
deposits, net of withdrawals, was primarily due to policyholders' increased
demand for variable accounts. Variable account deposits, net of withdrawals,
related to Separate Accounts that are not included in the consolidated
condensed statement of cash flows, increased $491 million in the first nine
months of 1996 compared to the same period of 1995.
The Consumer Finance segment's cash provided by operating activities decreased
$15 million for the first nine months of 1996 compared to the first nine
months of 1995, primarily due to higher operating expenses.
Investing Activities. Cash flows related to investing activities were as
follows:
Calls, Maturities,
Purchases and Sales
Nine Months Ended Nine Months Ended
(In millions) September 30, September 30,
1996 1995 1996 1995
Fixed maturity securities $6,470 $5,619 $5,569 $3,498
Mortgage loans 311 147 313 229
Equity securities 1 21 160 123
Other 71 55 108 176
Total $6,853 $5,842 $6,150 $4,026
-26-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
Income Taxes Paid. In the first nine months of 1996, the company paid income
taxes of $217 million compared to $166 million for the same period in 1995.
The increase in income taxes paid primarily was due to a tax refund received
in 1995 resulting from the 1994 capital gains offset program.
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.
Effective September 26, 1996, the company completed the resyndication of two
credit facilities, increasing the facilities to $2.8 billion from $2.4
billion. At September 30, 1996, committed credit facilities totaled $3.5
billion; there were no outstanding borrowings under these facilities.
Share Buyback. During the first nine months of 1996, the company purchased
4.2 million shares of its common stock at a cost of $152 million, pursuant to
its share buyback program.
FORWARD-LOOKING STATEMENTS
The statements contained in this filing on Form 10-Q that are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. Actual results may differ materially from
those included in the forward-looking statements. These forward-looking
statements involve risks and uncertainties including, but not limited to, the
following: changes in general economic conditions, including the performance
of financial markets, interest rates, and the level of personal bankruptcies;
competitive, regulatory, or tax changes that affect the cost of or demand for
the company's products; adverse litigation results; and failure to achieve the
company's anticipated levels of expense savings from cost-saving initiatives.
The Consumer Finance segment's future results also could be adversely affected
if finance receivable volume is lower than anticipated or if, despite the
company's initiatives to improve credit quality, finance receivable
delinquencies and net charge offs increase or remain at current levels for a
longer period than anticipated by management. Investors are also directed to
other risks and uncertainties discussed in documents filed by the company with
the Securities and Exchange Commission.
-27-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In addition to those lawsuits or proceedings disclosed in the company's 1995
Form 10-K, American General and certain of its subsidiaries are parties to
various other lawsuits and proceedings arising in the ordinary course of
business. Many of these lawsuits and proceedings arise in jurisdictions, such
as Alabama, that permit damage awards disproportionate to the actual economic
damages incurred. Based upon information presently available, the company
believes that the total amounts that ultimately will be paid, if any, arising
from these lawsuits and proceedings will have no material adverse effect on
the company's consolidated results of operations and financial position.
However, it should be noted that the frequency of large damage awards,
including large punitive damage awards, that bear little or no relation to
actual economic damages incurred by plaintiffs in jurisdictions like Alabama
continues to increase and creates the potential for an unpredictable judgment
in any given suit.
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.
Current Report on Form 8-K dated October 24, 1996, with respect to the
issuance of a press release announcing implementation of the company's
plan of succession for the Office of the Chairman and election of an
additional director.
-28-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
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 14, 1996
-29-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
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.
-30-
<PAGE>
AMERICAN GENERAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1996
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
(In millions, except share data)
Nine Months Ended
September 30,
1996 1995
Primary:
Net income available to common stock ....... $ 509 $ 536
Average shares outstanding
Common stock ............................. 205,277,279 204,829,566
Assumed conversion of mandatorily
convertible preferred stock ............. 1,495,929 -
Assumed exercise of stock options ........ 616,869 412,194
Total .................................. 207,390,077 205,241,760
Net income per share ....................... $2.45 $2.61
Fully Diluted:
Net income ................................. $ 509 $ 536
Plus: Net dividends on convertible
preferred securities of subsidiary ........ 8 3
Net income available to common stock ... $ 517 $ 539
Average shares outstanding
Common stock ............................. 205,277,279 204,829,566
Assumed conversion of convertible
preferred securities of subsidiary ...... 6,144,016 2,745,677
Assumed conversion of mandatorily
convertible preferred stock ............. 1,810,175 -
Assumed exercise of stock options ........ 703,776 587,882
Total .................................. 213,935,246 208,163,125
Net income per share ....................... $2.42 $2.59
<PAGE>
<PAGE>
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Unaudited)
($ in millions)
Nine Months Ended
September 30,
1996 1995
Consolidated operations:
Income before income tax expense and net dividends
on preferred securities .......................... $ 843 $ 823
Fixed charges deducted from income
Interest expense ................................. 465 506
Implicit interest in rents ....................... 14 14
Total fixed charges deducted from income ....... 479 520
Earnings available for fixed charges.......... $1,322 $1,343
Fixed charges per above ............................ $ 479 $ 520
Capitalized interest ............................... 9 13
Total fixed charges ............................ 488 533
Dividends on preferred stock and securities .... 49 15
Combined fixed charges and preferred
stock dividends ............................ $ 537 $ 548
Ratio of earnings to fixed charges ......... 2.71 2.52
Ratio of earnings to combined fixed charges
and preferred stock dividends ............ 2.46 2.45
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense and net dividends
on preferred securities ........................ $ 843 $ 823
Corporate fixed charges deducted from income -
corporate interest expense ..................... 105 128
Earnings available for fixed charges ........... $ 948 $ 951
Total corporate fixed charges per above .......... $ 105 $ 128
Capitalized interest related to real estate
operations ..................................... 8 13
Total corporate fixed charges .................. 113 141
Dividends on preferred stock and securities .... 49 15
Combined corporate fixed charges and
preferred stock dividends .................. $ 162 $ 156
Ratio of earnings to corporate fixed charges 8.39 6.74
Ratio of earnings to combined corporate
fixed charges and preferred stock
dividends ................................ 5.87 6.09
American General Finance, Inc.:
Income before income tax expense ................... $ 160 $ 255
Fixed charges deducted from income
Interest expense ................................. 369 386
Implicit interest in rents ....................... 9 10
Total fixed charges deducted from income ....... 378 396
Earnings available for fixed charges ......... $ 538 $ 651
Ratio of earnings to fixed charges ......... 1.42 1.65
Exhibit 12 (continued)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
<PAGE>
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Unaudited)
($ in millions)
Quarter Ended
September 30,
1996 1995
Consolidated operations:
Income before income tax expense and net dividends
on preferred securities .......................... $ 292 $ 267
Fixed charges deducted from income
Interest expense ................................. 154 167
Implicit interest in rents ....................... 5 5
Total fixed charges deducted from income ....... 159 172
Earnings available for fixed charges.......... $ 451 $ 439
Fixed charges per above ............................ $ 159 $ 172
Capitalized interest ............................... 3 4
Total fixed charges ............................ 162 176
Dividends on preferred stock and securities .... 17 12
Combined fixed charges and preferred
stock dividends ............................ $ 179 $ 188
Ratio of earnings to fixed charges ......... 2.78 2.48
Ratio of earnings to combined fixed charges
and preferred stock dividends ............ 2.52 2.33
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense and net dividends
on preferred securities ........................ $ 292 $ 267
Corporate fixed charges deducted from income -
corporate interest expense ..................... 36 39
Earnings available for fixed charges ........... $ 328 $ 306
Total corporate fixed charges per above .......... $ 36 $ 39
Capitalized interest related to real estate
operations ..................................... 3 4
Total corporate fixed charges .................. 39 43
Dividends on preferred stock and securities .... 17 12
Combined corporate fixed charges and
preferred stock dividends .................. $ 56 $ 55
Ratio of earnings to corporate fixed charges 8.52 7.04
Ratio of earnings to combined corporate
fixed charges and preferred stock
dividends ................................ 5.91 5.53
American General Finance, Inc.:
Income before income tax expense ................... $ 68 $ 60
Fixed charges deducted from income
Interest expense ................................. 122 131
Implicit interest in rents ....................... 3 4
Total fixed charges deducted from income ....... 125 135
Earnings available for fixed charges ......... $ 193 $ 195
Ratio of earnings to fixed charges ......... 1.55 1.45
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 37,122<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 133
<MORTGAGE> 3,153
<REAL-ESTATE> 608
<TOTAL-INVEST> 43,090
<CASH> 173
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,132<F2>
<TOTAL-ASSETS> 64,345
<POLICY-LOSSES> 37,667<F3>
<UNEARNED-PREMIUMS> 222<F3>
<POLICY-OTHER> 186<F3>
<POLICY-HOLDER-FUNDS> 1,808<F3>
<NOTES-PAYABLE> 9,258
731<F4>
85<F5>
<COMMON> 398
<OTHER-SE> 4,890<F6>
<TOTAL-LIABILITY-AND-EQUITY> 64,345
1,478<F7>
<INVESTMENT-INCOME> 2,437
<INVESTMENT-GAINS> 57
<OTHER-INCOME> 1,185<F8>
<BENEFITS> 2,370
<UNDERWRITING-AMORTIZATION> 253<F9>
<UNDERWRITING-OTHER> (302)<F10>
<INCOME-PRETAX> 843<F11>
<INCOME-TAX> 305<F12>
<INCOME-CONTINUING> 509
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 509
<EPS-PRIMARY> 2.45
<EPS-DILUTED> 2.42
<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 MANDATORILY CONVERTIBLE PREFERRED STOCK.
<F6>CONSISTS OF NET OF THE FOLLOWING: NET UNREALIZED GAINS (LOSSES) ON
SECURITIES; RETAINED EARNINGS; AND COST OF TREASURY STOCK.
<F7>INCLUDES TOTAL INSURANCE CHARGES.
<F8>INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES.
<F9>CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF
ACCRETION OF INTEREST.
<F10>CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP.
<F11>EXCLUDES $44 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES
SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT.
<F12>EXCLUDES $15 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS ON PREFERRED
SECURITIES OF SUBSIDIARIES.
</FN>
</TABLE>
