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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 10, 1997
AMERICAN GENERAL CORPORATION
(Exact name of registrant as specified in charter)
Texas 1-7981 74-0483432
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
incorporation) Number)
2929 Allen Parkway, Houston, Texas 77019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 522-1111
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AMERICAN GENERAL CORPORATION
TABLE OF CONTENTS TO FORM 8-K
Page
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Item 5. Other Events.
Consolidated Financial Information of American General Corporation
Management's Discussion and Analysis for the three years ended
December 31, 1996................................................ 2
Consolidated Statement of Income for the three years ended
December 31, 1996................................................ 20
Consolidated Balance Sheet at December 31, 1996 and 1995............ 21
Consolidated Statement of Shareholders' Equity for the three
years ended December 31, 1996.................................... 22
Consolidated Statement of Common Stock Activity for the three
years ended December 31, 1996.................................... 23
Consolidated Statement of Cash Flows for the three years ended
December 31, 1996................................................ 24
Notes to Consolidated Financial Statements.......................... 25
Selected Financial Data............................................. 57
Schedule I - Summary of Investments - Other than Investments
in Affiliates.................................................... 58
Schedule II - Condensed Financial Information of Registrant......... 59
Schedule III - Supplementary Insurance Information.................. 62
Schedule IV - Reinsurance........................................... 63
Schedule V - Valuation and Qualifying Accounts...................... 64
Report of Independent Auditors...................................... 65
Item 7. Financial Statements, Pro Forma Financial Information, and Exhibits
(c) Exhibits........................................................ 66
Signature........................................................... 67
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Item 5. OTHER EVENTS.
On June 17, 1997, American General Corporation (American General)
completed the merger of USLIFE Corporation (USLIFE) in an all-stock transaction
valued at approximately $1.8 billion. The acquisition was accounted for using
the pooling of interests method and, accordingly, American General's
consolidated financial statements and notes, as well as related financial
schedules and exhibits, have been restated to include the results of operations,
financial position, and cash flows of USLIFE.
American General's consolidated balance sheets as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity, common stock activity, and cash flows, and Management's Discussion and
Analysis, for the three years ended December 31, 1996 are included on pages 2-56
herein. See the Table of Contents for a list of other information contained
herein.
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AMERICAN GENERAL CORPORATION
Management's Discussion and Analysis
For the three years ended December 31, 1996
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements and related notes beginning on page 20 herein.
Certain information included herein is forward looking and involves risks and
uncertainties that could significantly impact expected results. Readers are
directed to discussions of risks and uncertainties included in documents filed
by American General Corporation with the Securities and Exchange Commission.
OVERVIEW
American General Corporation (American General) is one of the nation's largest
diversified financial services organizations with assets of $74 billion and
shareholders' equity of $6.8 billion. American General reports the results of
its business operations in three segments: Retirement Services, Consumer
Finance, and Life Insurance.
On June 17, 1997, American General completed the merger of USLIFE Corporation
(USLIFE) in an all-stock transaction. American General issued 39.0 million
shares of common stock (with a market value of approximately $1.8 billion), or
1.1069 shares in exchange for each USLIFE common share. The exchange ratio was
based on the transaction price of $49 per USLIFE common share divided by an
average trading price of American General common stock for a period prior to
closing.
USLIFE provides financial services, primarily life insurance and annuities, to
over one million customers nationwide. Ultimate annual expense savings from this
merger are expected to be approximately $50 million.
The acquisition was accounted for using the pooling of interests method of
accounting and, accordingly, American General's consolidated financial
statements and notes have been restated to include the results of operations,
financial position, and cash flows of USLIFE.
American General and its subsidiaries (collectively, the company) reported net
income for the three years ended December 31, 1996 as follows:
(In millions) 1996 1995 1994
------ ------ ------
Net income $ 653 $ 650 $ 609
Net income per share 2.63 2.65 2.46
The following significant items affected year-to-year comparability of net
income:
. Results include the operations of The Independent Life and Accident
Insurance Company (Independent Life), acquired February 29, 1996, and The
Franklin Life Insurance Company (Franklin Life), acquired January 31, 1995.
. Net income for 1996 reflected aftertax charges of $125 million, consisting
of $93 million ($.37 per share) resulting from the company's decision to
offer for sale $875 million of non-strategic, underperforming finance
receivable portfolios, and $32 million ($.13 per share) related to the
write-down of USLIFE traditional indemnity group major medical business
based on revised assumptions reflecting current experience.
. Net income for 1995 included a fourth quarter aftertax charge of $140
million ($.57 per share) for an increase in the allowance for finance
receivable losses.
. In 1994, net income reflected net realized investment losses of $115 million
($.47 per share), primarily from the company's capital gains offset program.
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CORPORATE DEVELOPMENT
The life insurance industry is currently undergoing a period of extensive
consolidation. American General has participated in this consolidation through
selective acquisitions to enhance growth and shareholder value. Including the
USLIFE merger, American General has completed or announced five acquisitions
with total consideration of $4.4 billion since December 1994.
Independent Life
On February 29, 1996, American General acquired Independent Insurance Group,
Inc., the holding company of Independent Life, for $362 million, consisting of
cash (38%), common stock (38%), and convertible preferred stock (24%).
Independent Life complements the company's existing life insurance distribution
systems and further strengthens its position in households with modest incomes,
particularly in the Southeast. Management plans to complete consolidation of
Independent Life into the company's Nashville-based operations in 1997. The
ultimate annual expense savings from this consolidation are expected to be
approximately $75 million.
Franklin Life
On January 31, 1995, American General acquired American Franklin Company (AFC),
the holding company of Franklin Life, for $1.17 billion. The purchase price
consisted of $920 million cash paid at closing and a $250 million cash dividend
paid by AFC to its former parent prior to closing. Franklin Life complements
the company's existing life insurance distribution systems and further
strengthens its position in middle-income households, particularly in the
Midwest.
Western National
On December 23, 1994, American General acquired a 40% investment in Western
National Corporation (Western National), the holding company of Western National
Life Insurance Company, through the acquisition of 24.9 million shares of common
stock for $274 million cash. On September 17, 1996, American General increased
its investment to 46.2% on a fully diluted basis through the purchase of 7.3
million shares of participating convertible preferred stock for $126 million
cash. American General's aftertax equity in earnings of Western National was
$27 million in 1996 and $29 million in 1995.
Home Beneficial Life
On December 23, 1996, American General announced a definitive agreement to
acquire Home Beneficial Corporation, the holding company of Home Beneficial Life
Insurance Company (Home Beneficial Life), for $665 million, or $39 per share in
cash or American General common stock. The amount of cash will be limited to a
minimum of 25% and a maximum of 50% of the total consideration.
Home Beneficial Life sells individual life insurance in six mid-Atlantic states
and the District of Columbia. Home Beneficial Life will be consolidated into the
company's Nashville-based operations, resulting in approximately $20 million of
annual expense savings. The transaction, which is subject to approval by Home
Beneficial Corporation shareholders and to requisite regulatory approvals, is
expected to close by March 31, 1997.
BUSINESS SEGMENTS
To facilitate meaningful period-to-period comparisons, earnings of each business
segment include earnings from its business operations and earnings on that
amount of equity considered necessary to support its business, and exclude net
realized investment gains (losses) and other non-recurring items.
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Segment earnings were as follows:
(In millions) 1996 1995 1994
------ ------ ------
Retirement Services $ 225 $ 204 $ 187
Consumer Finance 128 85 245
Life Insurance 536 476 377
------- ------- -------
Segment earnings 889 765 809
Loss on assets held for sale (93) - -
Write-down of group business (32) - -
------ ------- -------
Total $ 764 $ 765 $ 809
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Segment earnings, presented above on an aftertax basis, differ from those
disclosed in Note 18.2 by the amount of income tax expense for each segment, the
loss on assets held for sale, and the write-down of group business.
Retirement Services
The Retirement Services segment offers retirement products and planning services
to employees of educational, health care, public sector, and other not-for-
profit organizations. Asset growth through sales and deposits, as well as
management of the investment spread and operating expenses, contribute to the
segment's profitability. Segment results were as follows:
(In millions) 1996 1995 1994
------ ------ ------
Segment earnings $ 225 $ 204 $ 187
Assets
Investments 22,146 21,933 18,260
Separate Accounts 7,134 4,541 2,507
Sales 1,324 1,112 891
Deposits
Fixed 1,587 1,720 1,657
Variable 1,310 835 573
Earnings. Segment earnings increased 10% in 1996 and 9% in 1995, reflecting
continued strong growth in assets. Asset growth, excluding the fair value
adjustment on securities, was 13% in 1996 and 17% in 1995 as a result of strong
sales and deposits in each of the segment's primary markets.
Sales and Deposits. Sales increased 19% in 1996 and 25% in 1995 primarily due
to the 1994 introduction of the Portfolio Director product series, which
provides numerous variable investment options. Variable deposits increased 57%
in 1996 and 46% during 1995, as a result of policyholders' demand for equity
investments due to the strong performance of the stock market. During 1996, the
company responded to this demand by introducing Portfolio Director/(R)/ 2, which
offers 20 investment options including 12 publicly traded mutual funds. The
segment's Separate Account assets, which relate to variable account options,
increased $2.6 billion in 1996 and $2.0 billion in 1995.
Investment Spread. Investment results and crediting rates on fixed accounts
were as follows:
(In millions) 1996 1995 1994
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Net investment income $ 1,652 $ 1,597 $ 1,492
Investment yield 8.03% 8.24% 8.37%
Average crediting rate 6.23 6.41 6.57
Investment spread 1.80 1.83 1.80
Net investment income, the primary component of segment revenues, increased in
1996 and 1995 as a result of growth in invested assets. Investment income
increased despite declines of 21 and 13 basis points in investment yields on
fixed accounts in 1996 and 1995, respectively. In response to these declining
yields, the company adjusted the rates credited to policyholders. Through
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such management of crediting rates, the company has maintained a stable
investment spread for the past three years.
Surrenders. The rate of policyholder surrenders of fixed accounts was 5.3% of
average reserves in 1996, compared to 4.3% in 1995 and 4.9% in 1994. The 1996
increase was due to competition from mutual funds and other financial
institutions, and the trend toward lower fixed interest crediting rates.
Operating Expenses. The ratio of operating expenses to average assets improved
to .52% in 1996, compared to .61% in 1995 and .57% in 1994. Operating expenses
for 1995 were adversely affected by a pretax charge of $19 million (.08% of
average assets) for estimated state guaranty fund assessments resulting from
past industry insolvencies.
Outlook. Through the development of new products and enhanced technology, the
company is well positioned to meet the retirement services needs of the
expanding middle-aged market. Segment earnings are expected to increase
primarily through expanded sales, asset growth, and management of the investment
spread.
Consumer Finance
The Consumer Finance segment provides consumer and home equity loans and other
credit-related products. Segment results are influenced by the amount and mix
of finance receivables, credit quality, borrowing cost, and operating expenses.
In 1996, this segment focused on its action program to improve credit quality.
Segment results were as follows:
(In millions) 1996 1995 1994
------ ------ ------
Segment earnings $ 128* $ 85 $ 245
Finance receivables 7,625 8,410 7,920
Yield on finance receivables 17.9% 18.0% 17.6%
Borrowing cost 6.9 7.0 6.6
Spread 11.0 11.0 11.0
* Excludes $93 million loss on assets held for sale.
Earnings. The decline in credit quality beginning in 1995 and management's
related actions have caused segment earnings to fluctuate over the past two
years. In fourth quarter 1995, the company increased the allowance for losses
on finance receivables by $216 million ($140 million aftertax). Efforts to
improve credit quality were also reflected in 1996 earnings through higher
operating expenses and lower finance charge revenues.
Action Program. As a result of the company's strategy in prior years of
emphasizing higher-yielding receivables, which are characterized by higher
credit risk, delinquencies and charge offs increased to higher than anticipated
levels beginning in third quarter 1995. The company responded by initiating an
action program to improve credit quality, beginning with a comprehensive review
of the consumer finance operations 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 losses. As a result, the company increased the
allowance for losses on finance receivables $216 million ($140 million aftertax)
in fourth quarter 1995.
Other components of the action program included raising underwriting standards,
increasing collection efforts, and rebalancing the finance receivable portfolio
to de-emphasize certain higher-risk portfolios and increase the proportion of
real estate-secured receivables. During 1996, the company purchased five
portfolios of real estate-secured receivables totaling $754 million, which
increased the proportion of these receivables to 49% at December 31, 1996,
compared to 35% and 34% at year-end 1995 and 1994, respectively.
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Assets Held For Sale. To increase its focus on core branch operations, the
company decided in fourth quarter 1996 to offer for sale two non-strategic,
under-performing finance receivable portfolios totaling $875 million. These
portfolios consisted of $520 million of bank credit card receivables and $355
million of private label loans issued in prior years to finance purchases of
home satellite dishes. At December 31, 1996, these receivables and an
associated allowance of $70 million were reclassified to assets held for sale.
The company has hired an outside advisor to market the portfolios. Based on
negotiations with prospective purchasers subsequent to year end, the company
determined that an aftertax write-down of $93 million was necessary to reduce
the carrying amount of the assets held for sale to net realizable value, after
considering related expenses.
Spread. Yield on finance receivables declined 17 basis points in 1996, compared
to an increase of 44 basis points during 1995. The 1996 decline reflects the
increased proportion of real estate-secured loans and higher levels of non-
accrual delinquent loans. Although the yield declined in 1996, the spread
between yield and borrowing cost has remained constant at 11% for the past three
years.
Credit Quality Data. The allowance for finance receivable losses,
delinquencies, and charge offs were as follows:
(In millions) 1996 1995 1994
------ ------ ------
Allowance for finance
receivable losses $ 395 $ 492 $ 226
% of finance receivables 5.18% 5.85% 2.86%
Delinquencies $ 317 $ 386 $ 252
% of finance receivables 3.83% 4.13% 2.89%
Charge offs $ 444 $ 308 $ 172
% of average finance receivables 5.47% 3.77% 2.45%
The 1996 decreases in the allowance and delinquency ratios were primarily due to
the increased proportion of real estate-secured receivables and the
reclassification of certain receivables to assets held for sale. Excluding the
portfolios held for sale, the delinquency ratios were 3.88% and 2.81% at year-
end 1995 and 1994, respectively.
The increases in charge offs in 1996 and 1995 were primarily attributable to
non-real estate-secured loans and the portfolios currently held for sale.
Excluding the portfolios held for sale, the charge off ratios were 4.72%, 3.26%,
and 2.19% in 1996, 1995, and 1994, respectively.
Operating Expenses. Operating expenses increased 10% in 1996 and 26% in 1995.
As a percentage of average finance receivables, operating expenses were 6.1%,
5.4%, and 5.0% in 1996, 1995, and 1994, respectively. The increase in operating
expenses reflected lower 1996 deferrals of loan origination costs, increased
collection efforts associated with higher levels of delinquent receivables, and
increased costs related to branch office growth that occurred in 1995 and 1994.
Outlook. Management believes that the planned sale of the non-strategic,
underperforming portfolios combined with the ongoing credit quality improvement
program will result in improved earnings. However, adverse changes in credit
fundamentals within the consumer finance market, including the current high
level of personal bankruptcies, could negatively impact expected results.
Life Insurance
The Life Insurance segment provides traditional and interest-sensitive life
insurance and annuities to three defined markets, based on household income and
product needs. Recent acquisitions of companies that strategically fit the
segment's existing markets and distribution systems have contributed to growth
and profitability. Segment profitability is a function of premiums, investment
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spread, mortality, and operating expenses. Segment results were as follows:
(In millions) 1996 1995 1994
------ ------ ------
Segment earnings $ 536* $ 476 $ 377
Assets 32,738 31,317 20,963
Premiums and other considerations 2,964 2,701 2,161
Net investment income 2,016 1,872 1,346
Insurance and annuity benefits 2,867 2,761 1,994
* Excludes $32 million write-down of USLIFE group business.
Earnings. Earnings increased primarily due to the acquisitions of Independent
Life on February 29, 1996 and Franklin Life on January 31, 1995. These
acquisitions contributed $146 million and $98 million to segment earnings in
1996 and 1995, respectively. The acquisitions were the primary reason for the
increases in each of the line items in the table above.
Premiums and Deposits. Premiums, sales, and deposits were as follows:
(In millions) 1996 1995 1994
------ ------ ------
Life insurance
Premiums $ 2,365 $ 2,156 $ 1,675
Sales 473 530 409
Deposits 1,057 1,004 866
Annuities
Sales $ 388 $ 686 $ 846
Deposits 461 746 839
Life insurance premiums increased by 10% in 1996 and 29% in 1995 primarily due
to new sales and the acquisitions of Independent Life and Franklin Life. Life
insurance sales were lower in 1996 due to competitive factors and disruptions
resulting from changes in field administration systems. The 1995 increase in
life insurance sales primarily related to the acquisition of Franklin Life.
Deposits for interest-sensitive life insurance increased 5% in 1996, compared to
an increase of 16% in 1995, which included high amounts of optional deposits in
excess of target premium on such contracts.
Annuity sales were lower in 1996 and 1995 due to market conditions that would
not support the segment's profitability objectives. Deposits for annuities
decreased 38% in 1996 and 11% in 1995 due to increased competition from other
equity-based investments.
During 1996, the company launched initiatives to increase sales, such as
strategic alliances with brokerage firms and mutual fund companies and the
development of new insurance and annuity products.
Investment Spread. Net investment income increased in 1996 and 1995 as a result
of the Independent Life and Franklin Life acquisitions. Investment yields
decreased, primarily due to lower interest rates on new investment purchases.
As a result, the spread between investment yield and the average rate credited
to policyholders also declined, but is still within product pricing assumptions.
Some large blocks of traditional in force business have crediting rates that
cannot be adjusted when investment yields fluctuate. At December 31, 1996,
approximately 63% of the segment's insurance and annuity liabilities were
subject to interest crediting rate adjustments.
Mortality. Death claims, included in insurance and annuity benefits, increased
10% in 1996 and 16% in 1995 due to the acquisitions of Independent Life and
Franklin Life. Overall, mortality experience was within pricing assumptions.
Operating Expenses. The ratio of operating expenses to direct premiums and
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deposits was 16.8%, 14.5%, and 13.7% in 1996, 1995, and 1994, respectively.
The increase in 1996 results from lower annuity deposits and Independent Life's
higher overall expense ratio, which does not completely reflect anticipated
savings from consolidation of operations. Lower sales resulted in a reduction
of the deferral of acquisition costs in 1996 compared to 1995.
Write-down of USLIFE Group Business. On January 29, 1996, USLIFE discontinued
new sales of its traditional indemnity group major medical and related products.
In subsequent months, the company experienced an unexpected deterioration in
persistency on this business, with lapse rates approaching 60%. Lapse rates on
all group business ranged from 23% to 35% for the years 1991 through 1995.
Additionally, the discontinued business did not lapse uniformly in terms of
quality. Healthier groups lapsed more rapidly, leading to an overall
deterioration in the quality of the block.
The experience on the discontinued business during the first half of 1996
resulted in a reevaluation of related deferred policy acquisition costs (DPAC)
and insurance liabilities. Based on this reevaluation, the company recorded a
pretax charge of $50 million consisting of a $37 million write-down of DPAC and
a $13 million increase in insurance and annuity liabilities.
Outlook. The company plans to continue the assimiliation of recently acquired
companies' operations in 1997. Additionally, product and distribution system
initiatives started during 1996 and the planned introduction of new variable and
indexed products in 1997 are expected to improve sales. Together, these
activities are expected to result in increased segment earnings.
INVESTMENTS
At year-end 1996, the company's $74 billion of assets included $51 billion of
investments, principally supporting insurance and annuity liabilities. Fixed
maturity securities and mortgage loans accounted for 94% of total investments.
Fair Value of Securities
An increase in interest rates and resulting decreases in bond values in 1996
caused a $1.6 billion decrease in the fair value adjustment to fixed maturity
securities and a related $669 million decrease in shareholders' equity. The
components of the adjustment to report fixed maturity and equity securities at
fair value at December 31, and the 1996 change, were as follows:
(In millions) 1996 1995 Change
-------- -------- --------
Fair value adjustment to fixed maturity
securities* $ 1,547 $ 3,164 $ (1,617)
Increase (decrease) in deferred policy
acquisition costs and cost of insurance
purchased (598) (1,208) 610
Decrease (increase) in deferred income
taxes (339) (691) 352
-------- -------- --------
Net unrealized gains (losses)
Fixed maturity securities 610 1,265 (655)
Equity securities 17 31 (14)
-------- -------- --------
Net unrealized gains (losses) on
securities $ 627 $ 1,296 $ (669)
======== ======== ========
* Includes $59 million and $93 million related to Western National for 1996
and 1995, respectively.
In contrast, the fair value adjustment at year-end 1995 resulted in a $4.8
billion increase in fixed maturity securities and a $2.5 billion increase in
shareholders' equity from year-end 1994.
Accounting rules do not permit adjustment to fair value of the insurance
liabilities supported by these securities, thereby creating volatility in
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shareholders' equity as interest rates change. Care should be exercised in
drawing conclusions based on balance sheets that are only partially adjusted to
fair value.
Fixed Maturity Securities
At year-end 1996, fixed maturity securities included $31.5 billion of corporate
bonds, $10.6 billion of mortgage-backed securities (MBSs), $2.1 billion of bonds
issued by governmental agencies, and $108 million of preferred stocks with
mandatory redemption provisions.
The average credit rating of the fixed maturity securities was A+ at year-end
1996 and 1995. Average ratings by category at December 31, 1996 were as
follows:
Average
(In millions) 1996 Rating
----------------- -------
Investment grade $ 31,986 72% A
Mortgage-backed 10,642 24 AAA
Below investment grade 1,727 4 BB-
-------- ---
Total fixed maturity securities $ 44,355 100% A+
======== ===
Investment Grade. Investment grade securities include bonds and preferred
stocks with mandatory redemption features that have credit ratings of BBB- or
higher.
Mortgage-Backed Securities. MBSs at December 31 were invested as follows:
(In millions) 1996 1995
-------- --------
CMOs $ 9,330 $ 10,466
Pass-through securities 1,053 1,061
Commercial MBSs 259 136
-------- --------
Total MBSs $ 10,642 $ 11,663
======== ========
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. The majority of the CMOs in the company's investment
portfolio have relatively low cash flow variability. In addition, virtually all
CMOs in the portfolio have minimal credit risk because the underlying collateral
is guaranteed by the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation, or the Government National Mortgage Association.
These CMOs are highly liquid and offer higher yields than corporate debt
securities of similar credit quality and expected average lives.
The principal risks inherent in holding CMOs (as well as pass-through securities
and other MBSs) are prepayment and extension risks arising from changes in
market interest rates. In declining interest rate environments, the mortgages
underlying the CMOs are prepaid more rapidly than anticipated, causing early
repayment of the CMOs. In rising interest rate environments, the underlying
mortgages are prepaid at a slower rate than anticipated, causing CMO principal
payments to be extended. Although early CMO repayments may result in
acceleration of income from recognition of any unamortized discount, the
proceeds typically are reinvested at lower current yields, resulting in a net
reduction of future investment income. Proceeds from repayments of MBSs
decreased from $1.8 billion in 1994 to $686 million in 1995 and $885 million in
1996. At current interest rate levels, repayments are expected to decrease
slightly in 1997.
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The company manages this prepayment and extension risk by investing in CMO
tranches that provide for greater stability of cash flows. The mix of CMO
tranches at December 31 was as follows:
(In millions) 1996 1995
-------- --------
Planned Amortization Class $ 5,172 $ 5,579
Sequential 2,967 3,268
Z (Accrual) 692 973
Target Amortization Class 493 638
Other 6 8
-------- --------
Total CMOs $ 9,330 $ 10,466
======== ========
The Planned Amortization Class (PAC) tranche is structured to provide more
certain cash flows to the investor and therefore is subject to less prepayment
and extension risk than other CMO tranches. PACs derive their stability from
two factors: (1) early repayments are applied first to other tranches to
preserve the PACs' originally scheduled cash flows as much as possible, and (2)
cash flows applicable to other tranches are applied first to the PACs if the
PACs' actual cash flows are received later than originally anticipated. PACs
accounted for 49% of total MBSs at December 31, 1996.
Sequentials allocate all principal payments to tranches based on maturity,
retiring the shortest maturity tranches first. The prepayment and extension
risk associated with a Sequential tranche can vary as interest rates fluctuate,
since Sequentials are not supported by other tranches. Sequentials include PACs
that effectively function as Sequentials due to excessive early repayment of the
underlying mortgages.
The majority of the company's CMO portfolio trades in the open market. As such,
the company obtains market prices from outside vendors. Any security price not
received from a vendor is obtained from the originating broker or, in rare
circumstances, is internally calculated.
Below Investment Grade. Below investment grade securities include bonds and
preferred stock with mandatory redemption provisions that have a credit rating
below BBB-. Below investment grade securities were 3% of invested assets at
year-end 1996 and 1995. This percentage compares to the life insurance industry
average of 4% at December 31, 1995, the latest date for which information is
available. Investment income from below investment grade securities was $161
million in 1996, $163 million in 1995, and $100 million in 1994. Realized
investment gains (losses) were immaterial.
Non-Performing. Bonds are deemed to be non-performing when the payment of
interest is sufficiently uncertain as to preclude the accrual of interest. Non-
performing bonds were less than 0.1% of total fixed maturity securities at year-
end 1996 and 1995.
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Mortgage Loans
Mortgage loans on real estate represented 6% of invested assets at year-end 1996
compared to 7% at year-end 1995. Mortgage loan statistics at December 31 were
as follows:
(In millions) 1996 1995
-------- --------
Commercial $ 3,307 $ 3,359
Residential 5 74
Allowance for losses (84) (96)
-------- --------
Total mortgage loans $ 3,228 $ 3,337
======== ========
Non-performing
Delinquent (60+ days) .7% 2.6%
Restructured 4.4 2.9
-------- --------
Total non-performing 5.1% 5.5%
======== ========
Allowance for losses 2.5% 2.8%
Yield on restructured loans 8.3% 8.3%
Foreclosures during the year $ 36 $ 78
Non-Performing. Non-performing mortgage loans include loans delinquent 60 days
or more and commercial loans that have been restructured and are currently
performing under the modified terms. Non-performing mortgage loans totaled $169
million at year-end 1996, compared to $189 million at year-end 1995. The
company's portfolio continues to outperform the life insurance industry averages
for non-performing commercial mortgage loans. The industry average was 10% at
September 30, 1996, the latest date for which information is available.
Watch List. Commercial mortgage loans are placed on the company's watch list if
(1) the loan is delinquent 30-59 days, (2) the borrower is in bankruptcy, or (3)
the loan is potentially undercollateralized. At year-end 1996, $286 million of
commercial mortgage loans were on the company's watch list, compared to $274
million at year-end 1995. The 1996 increase was primarily due to a single
borrower in bankruptcy. 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.
Investment Real Estate
Investment real estate consists of land development projects, income-producing
real estate, foreclosed real estate, and the American General Center, an office
complex in Houston. These assets represented less than 2% of invested assets at
year-end 1996 and 1995. Income-producing real estate increased $19 million in
1996, primarily due to the addition of Independent Life's home office building.
No other significant investments in real estate were made, except for
commitments on existing land development projects and foreclosures.
The company'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 (Losses)
Realized investment gains (losses) may vary significantly from year to year
since the decision to sell investments is determined principally by
considerations of investment timing and tax consequences. Realized investment
11
<PAGE>
gains (losses) also result from changes in write-downs and reserves. Realized
gains (losses) were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Sales and calls
Fixed maturity securities $ - $ 22 $ (131)
Equity securities 51 20 7
Write-downs/reserve increases (8) (59) (131)
Other 19 35 82
-------- -------- --------
Total realized investment
gains (losses) $ 62 $ 18 $ (173)
======== ======== ========
During 1994, the company initiated a program to realize capital losses for tax
purposes to offset prior period capital gains. In 1995, the company received a
tax refund of $46 million, generated by $126 million in net capital losses
realized in 1994 primarily through the sale of fixed maturity securities.
The majority of the 1995 write-downs and reserve increases related to mortgage
loans. Write-downs and reserve increases in 1994 primarily related to investment
real estate.
ASSET/LIABILITY MANAGEMENT
Objectives
Asset/liability management is performed on an ongoing basis for each operating
company as well as on an aggregate basis. The primary objective of the
company's asset/liability management program is to maintain a reasonable balance
in the durations of assets and liabilities, while achieving profitability
objectives.
Retirement Services and Life Insurance
The asset/liability management program of the Retirement Services and Life
Insurance segments is designed to maximize long-term profitability, subject to
pre-established risk constraints. These risk constraints include minimizing
exposure of the company's surplus to fluctuations in interest rates and ensuring
adequate liquidity to meet liability cash flow requirements.
Interest Rates. The company responds to fluctuations in interest rates through
periodic repricing of new products and adjustment of interest crediting rates on
existing products where possible. Despite declining yields due to lower
interest rates, management of interest crediting rates has maintained overall
margins on interest-sensitive products within product pricing assumptions.
The company's ability to manage interest crediting rates is largely due to the
nature of its insurance and annuity products. At December 31, 1996,
approximately 79% of the insurance and annuity liabilities were subject to
12
<PAGE>
interest crediting rate adjustments. Insurance and annuity liabilities at
December 31 were as follows:
(In millions) 1996 1995
-------- --------
Retirement annuities $ 21,067 $ 20,147
Traditional and participating life 9,824 8,959
Interest-sensitive life 5,646 5,096
Other annuities 7,391 7,550
Other 2,094 1,966
-------- --------
Total insurance and annuity
liabilities $ 46,022 $ 43,718
======== ========
Liquidity. The company's insurance reserves are supported by high-quality, low-
risk investments, including investment grade fixed maturity securities,
mortgage-backed securities, mortgage loans, and policy loans. The company
targets duration relationships by aligning new cash flows with specific duration
objectives and, to a lesser extent, through portfolio restructuring actions.
The most recent estimated duration of the company's insurance and annuity
liabilities was in the range of 4.7 to 5.7 years, while the estimated duration
of the assets supporting these liabilities was 5.3 years.
Cash flow testing of assets and liabilities is performed at least annually under
multiple interest rate scenarios to evaluate the appropriateness of the
company's investment portfolios relative to its insurance reserves. Cash flow
testing performed as of December 31, 1996 indicated that the company's insurance
subsidiaries would have sufficient cash flows to meet their insurance
obligations.
Consumer Finance
The company funds its finance receivables with equity and a combination of
fixed-rate debt, principally long-term, and floating-rate or short-term debt,
principally commercial paper. The company's mix of fixed-rate and floating-rate
debt is a management decision based in part on the nature of the receivables
being supported. The company limits its exposure to market interest rate
increases by fixing interest rates it pays for term periods.
Derivative Financial Instruments
The company's use of derivative financial instruments is generally limited to
interest rate and currency swap agreements. The company is neither a dealer nor
a trader in derivative financial instruments.
Investments. Interest rate swap agreements are occasionally used to effectively
convert specific investment securities from a floating to a fixed-rate basis, or
vice versa, and to hedge against the risk of rising prices on anticipated
security purchases. Currency swap agreements are infrequently used to
effectively convert cash flows from specific investment securities denominated
in foreign currencies into U.S. dollars at specified exchange rates, and to
hedge against currency rate fluctuations on anticipated security purchases.
Debt. Interest rate swap agreements on debt are used to effectively convert a
portion of floating-rate borrowings to a fixed rate and to hedge against the
risk of rising interest rates on anticipated debt issuances, primarily in the
Consumer Finance segment.
Risks. The company is exposed to credit risk in the event of non-performance
by counterparties to swap agreements. The company limits this exposure by
entering into swap agreements with counterparties having high credit ratings and
regularly monitoring the ratings.
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<PAGE>
The company's credit exposure on swaps is limited to the fair value of swap
agreements that are favorable to the company. The company does not expect any
counterparty to fail to meet its obligation; however, non-performance would not
have a material impact on the consolidated results of operations and financial
position.
The company's exposure to market risk is mitigated by the offsetting effects of
changes in the value of swap agreements and of the related debt and investment
securities.
CAPITAL RESOURCES
The company's overall financial strength is based on total equity of $8.1
billion and is confirmed by strong ratings for both debt-paying and claims-
paying ability. To facilitate analysis of capital resources, corporate capital
and the business segments are discussed separately below.
Corporate Capital
Total capital of the parent company is referred to as "corporate capital." Since
American General is a holding company, the level of corporate capital is
determined primarily by the required equity of its business segments, while the
mix of corporate capital between debt and equity is influenced by overall
corporate strategy and structure.
American General's target capital structure consists of 25% corporate debt, a
maximum 15% redeemable equity, and a minimum 60% shareholders' equity. At year-
end 1996, corporate capital totaling $9.5 billion, excluding the fair value
adjustment on securities, was comprised of $2.1 billion of corporate debt (22%),
$1.2 billion of redeemable equity (13%), and $6.2 billion of shareholders'
equity (65%).
Debt. The company's corporate debt ratings on February 14, 1997, which do not
reflect actions of rating agencies as a result of the USLIFE merger, were as
follows:
Standard & Poor's Duff & Phelps Moody's
----------------- ------------- ---------------
Commercial paper A-1+ (Highest) D-1+ (Highest) P-1 (Highest)
Long-term debt
American General AA- (Strong) AA- (Strong) A1 (Strong)
USLIFE A+ (Strong) A3 (Strong)
Redeemable Equity. In the last two years, the company issued redeemable equity
totaling $1.2 billion through two wholly owned subsidiaries and a subsidiary
trust. These securities are recorded on the consolidated balance sheet as
preferred securities within redeemable equity. In 1996, the company issued $500
million of 7.57% Capital Securities, Series A. Net proceeds of $495 million
were used to reduce short-term debt. During 1995, the company completed public
offerings of three issues of Monthly Income Preferred Securities totaling $752
million, with net proceeds of $729 million. Two of the issues, with net
proceeds of $485 million, were used to refinance a portion of the short-term
debt related to the Franklin Life acquisition. The third issue, with net
proceeds of $244 million, was used to refinance short-term real estate-related
debt. This issue is convertible into American General common stock.
The company receives a tax deduction for an amount equal to dividends paid on
preferred securities. A proposal is currently pending in Congress that could
eliminate this tax benefit for future issuances. This proposal, however, is not
expected to impact the tax status of previously issued preferred securities.
14
<PAGE>
Preferred Stock. In connection with the 1996 acquisition of Independent Life,
the company issued 2.3 million shares of American General 7% Convertible
Preferred Stock. This new issue of preferred stock increased shareholders'
equity by $85 million. The preferred stock is non-callable for four years, and
each share is mandatorily convertible during the fifth year into one share of
American General common stock.
Pending Acquisition. American General plans to issue up to 14 million shares of
common stock for the stock portion of the Home Beneficial Life purchase price.
The cash portion, which will be between $166 million and $333 million, will be
financed through short-term borrowings.
Retirement Services and Life Insurance Segments
Risk-Based Capital. The amount of statutory equity required to support the
business of the company's life insurance companies is principally a function of
four factors: (1) the quality of the assets invested to support insurance and
annuity reserves, (2) the mortality and other insurance-related risks, (3) the
interest-rate risk resulting from potential mismatching of asset and liability
durations, and (4) general business risks. Each of these items is a key factor
in the National Association of Insurance Commissioners' (NAIC) risk-based
capital (RBC) formula, used to evaluate the adequacy of a life insurance
company's statutory equity.
The RBC formula specifies weighting factors that are applied to financial
balances or levels of activity of each company, based on the perceived degree of
risk, to calculate RBC. The RBC ratio is determined by dividing a life
insurance company's total adjusted capital by its Authorized Control Level RBC.
The RBC requirements provide for four different levels of regulatory attention
depending on an insurance company's RBC ratio, the least severe of which is the
Company Action Level. At the Company Action Level, the company must submit a
comprehensive financial plan to the state insurance commissioner that discusses
proposed corrective actions to improve its capital position.
American General's target statutory equity for each of its life insurance
companies is 2.5 times the Company Action Level RBC (or 5.0 times the Authorized
Control Level RBC). At December 31, 1996, all of American General's principal
life insurance companies, except one company acquired in the USLIFE merger, had
statutory equity in excess of the target. The company falling below the target
had statutory equity of 2.1 times the Company Action Level RBC. The company
believes that its statutory equity is more than adequate to satisfy its
foreseeable financial obligations.
Ratings. Rating agencies use the NAIC approach as one of the factors in
determining an insurance company's claims-paying ability rating. The claims-
paying ability ratings of the company's principal life insurance companies on
15
<PAGE>
February 14, 1997, which do not reflect actions of rating agencies as a result
of the USLIFE merger, were as follows:
Standard Duff
A.M. Best & Poor's & Phelps Moody's
---------- ----------- --------- -----------
VALIC A++ AAA AAA Aa2
(Highest) (Highest) (Highest) (Excellent)
American General A++ AAA AAA Aa3
Life (Highest) (Highest) (Highest) (Excellent)
American General A++ AAA AAA
Life and Accident (Highest) (Highest) (Highest)
Franklin Life A++ AA+ AA+ Aa3
(Highest) (Excellent) (Strong) (Excellent)
United States Life A+ AA+ A1
(Superior) (Excellent) (Strong)
All American Life A+ AA+ A1
(Superior) (Excellent) (Strong)
Old Line Life A+ AA+ A1
(Superior) (Excellent) (Strong)
Consumer Finance Segment
The Consumer Finance segment's capital varies directly with the amount of
finance receivables outstanding. The capital mix of consumer finance debt and
equity is based primarily upon maintaining leverage at a level that supports
cost-effective funding.
Consumer finance capital of $8.8 billion at year-end 1996 included $7.6 billion
of consumer finance debt, which was not guaranteed by the parent company, and
$1.2 billion of equity. The ratio of debt to tangible net worth, a key measure
of financial risk in the consumer finance industry, was 8.4 to 1 for the
Consumer Finance segment at year-end 1996, compared to 7.5 to 1 for year-end
1995 and 1994. The 1996 ratio exceeded the target of 7.5 to 1 due to the $93
million aftertax loss on assets held for sale reported as of December 31, 1996.
The segment plans to return its debt to tangible net worth ratio to 7.5 to 1 in
first quarter 1997.
Ratings. The consumer finance debt ratings on February 14, 1997 were as
follows:
Standard & Poor's Duff & Phelps Moody's
----------------- ------------- ---------------
Commercial paper A-1 (Strong) D-1+ (Highest) P-1 (Highest)
Long-term debt A+ (Strong) A+ (Strong) A1 (Strong)
LIQUIDITY
The company's overall liquidity is based on cash flows from the business
segments and its ability to borrow in both the long-term and short-term markets
at competitive rates. The company believes that its overall sources of
liquidity will continue to be sufficient to satisfy its foreseeable financial
obligations.
Parent Company
Operating cash flow for the parent company includes dividends from the
16
<PAGE>
business segments, partially offset by interest and other expenses not allocated
to the segments. While the subsidiaries are restricted in the amount of
dividends they may pay to the parent company as discussed in Note 17.1, these
restrictions are not expected to affect the ability of American General to meet
its cash obligations in 1997.
During 1996, $429 million of operating cash flow was used to pay dividends to
pre-merger shareholders of American General, pay interest on corporate
debt, and to repurchase common stock.
Excluding common stock repurchases by USLIFE prior to the merger, American
General repurchased 4.9 million shares of its common stock at a cost of $178
million in 1996, compared to 1.2 million shares ($40 million) and 9.5 million
shares ($262 million) in 1995 and 1994, respectively. Since inception of the
share buyback program in 1987, 103 million American General common shares have
been repurchased for an aggregate cost of $2.1 billion. To meet pooling of
interests accounting requirements in connection with the USLIFE merger, American
General rescinded its share buyback program prior to consummating the merger and
is limited in its future repurchase of common shares.
Retirement Services and Life Insurance Segments
Principal sources of cash for the Retirement Services and Life Insurance
segments were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Operating activities $ 1,984 $ 1,984 $ 1,424
Fixed policyholder account deposits,
net of withdrawals 120 1,231 1,550
Variable account deposits, net
of withdrawals 1,767 1,194 837
Cash provided by operating activities increased in 1995 due to the Franklin Life
acquisition. In both 1996 and 1995, the decrease in net fixed policyholder
account deposits and the increase in net variable account deposits were the
result of policyholders seeking higher returns in equity-based investments,
including the company's Separate Accounts. Because the investment risk on
variable accounts lies solely with the policyholder, deposits and withdrawals
related to Separate Accounts are not included in the company's consolidated
statement of cash flows.
The major uses of cash were the net purchase of investments necessary to support
increases in insurance and annuity liabilities, and dividends paid to the parent
or an intermediate holding company. These segments paid dividends of $390
million in 1996, compared to $365 million in 1995 and $413 million in 1994. In
addition, Franklin Life loaned $116 million to a subsidiary of American General
in 1995, which was used to pay down short-term debt.
Consumer Finance Segment
Principal sources of cash for the Consumer Finance segment were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Operating activities $ 590 $ 658 $ 511
Increase in borrowings 155 376 1,243
Cash provided by operating activities decreased in 1996 primarily as a result of
lower finance charge revenues and higher operating expenses. Cash provided by
increased borrowings decreased in 1996 and 1995 due to lower growth in
receivables.
17
<PAGE>
The major uses of cash were to fund finance receivables and dividends paid to
the parent company. Net cash used to fund finance receivables was $453 million
in 1996, down from $859 million in 1995 and $1.5 billion in 1994. Dividends paid
to the parent company totaled $139 million in 1996, compared to $33 million in
1995 and $140 million in 1994. Dividend levels are adjusted to maintain the
ratio of debt to tangible net worth at a level that supports cost-effective
funding.
Operating cash flow and access to money and capital markets, resulting from
strong long-term debt and commercial paper ratings, are expected to satisfy 1997
cash requirements, including long-term debt maturities.
Credit Facilities
At December 31, 1996, committed and unused credit facilities totaled $3.5
billion with 51 domestic and foreign banks. While the principal purpose of
these facilities is to support the issuance of commercial paper, they also
provide an additional source of cash to American General and its subsidiaries.
In addition, at December 31, 1996, USLIFE maintained committed credit facilities
of $303 million with four domestic banks. Borrowings under these facilities were
$200 million at December 31, 1996. USLIFE also had outstanding letters of credit
totaling $122 million with three banks. These letters of credit represented
contingent obligations to fund various trusts, established in connection with
certain severance and supplemental retirement plans, in the event of a change in
control.
LEGAL AND OTHER FACTORS
Taxation
Tax laws affect not only the way the company is taxed but also the design of
many of its products. Changes in tax laws or regulations could adversely affect
operating results.
Regulation
Insurance regulators monitor market conduct, such as sales and advertising
practices, agent licensing and compensation, policyholder service, complaint
handling, underwriting, and claims practices. The company is not aware of any
existing or pending regulatory actions concerning market conduct that would
materially affect its operations. However, as a result of increased regulatory
scrutiny, market conduct compliance costs may increase for American General's
insurance and annuity subsidiaries.
Litigation
The company is party to various 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 will ultimately 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.
Certain of American General's subsidiaries are defendants in lawsuits filed as
purported class actions asserting claims related to sales practices of certain
18
<PAGE>
life insurance products. Because these cases are in the early stages of
litigation, it is premature to address their materiality. The claims are being
defended vigorously by the subsidiaries.
See Note 17.2 for specific legal proceedings involving the company.
19
<PAGE>
AMERICAN GENERAL CORPORATION
Consolidated Statement of Income
(In millions, except per share data)
For the years ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Revenues
Premiums and other considerations......... $3,244 $2,969 $2,374
Net investment income..................... 3,773 3,584 2,955
Finance charges........................... 1,450 1,492 1,248
Realized investment gains (losses)........ 62 18 (173)
Equity in earnings of Western National
Corporation.............................. 40 43 -
Other..................................... 125 130 88
------ ------ ------
Total revenues......................... 8,694 8,236 6,492
------ ------ ------
Benefits and expenses
Insurance and annuity benefits............ 4,218 4,085 3,229
Operating costs and expenses.............. 1,405 1,275 1,035
Commissions............................... 848 812 674
Change in deferred policy acquisition
costs and cost of insurance purchased.... (124) (235) (171)
Provision for finance receivable losses... 417 574 214
Loss on assets held for sale.............. 145 - -
Write-down of group business.............. 50 - -
Interest expense
Corporate............................... 162 197 146
Consumer Finance........................ 493 518 416
------ ------ ------
Total benefits and expenses............ 7,614 7,226 5,543
------ ------ ------
Earnings
Income before income tax expense.......... 1,080 1,010 949
Income tax expense........................ 387 341 340
------ ------ ------
Income before net dividends on preferred
securities of subsidiaries............... 693 669 609
Net dividends on preferred securities of
subsidiaries............................. 40 19 -
------ ------ ------
Net income............................. $ 653 $ 650 $ 609
====== ====== ======
Net income per share................... $ 2.63 $2.65 $2.46
====== ====== ======
See Notes to Financial Statements.
20
<PAGE>
AMERICAN GENERAL CORPORATION
Consolidated Balance Sheet
(In millions, except share data)
December 31,
------------------
1996 1995
-------- --------
Assets
Investments
Fixed maturity securities (amortized cost:
$42,867; $40,149)............................. $44,355 $43,220
Mortgage loans on real estate.................. 3,228 3,337
Equity securities (cost: $111; $144)........... 137 191
Policy loans................................... 2,011 1,887
Investment real estate......................... 626 607
Other long-term investments.................... 210 183
Short-term investments......................... 265 173
------- -------
Total investments............................ 50,832 49,598
------- -------
Cash............................................ 176 227
Finance receivables, net........................ 7,230 7,918
Investment in Western National Corporation...... 535 407
Deferred policy acquisition costs............... 2,954 2,343
Cost of insurance purchased..................... 755 504
Acquisition-related goodwill.................... 605 627
Assets held for sale............................ 667 -
Other assets.................................... 2,517 2,289
Assets held in Separate Accounts................ 7,863 5,170
------- -------
Total assets................................. $74,134 $69,083
======= =======
Liabilities
Insurance and annuity liabilities............... $46,022 $43,718
Debt (short-term)
Corporate ($631; $776)........................ 2,102 2,295
Consumer Finance ($3,131; $2,490)............. 7,630 7,470
Income tax liabilities.......................... 1,078 1,387
Other liabilities............................... 1,368 1,205
Liabilities related to Separate Accounts........ 7,863 5,170
------- -------
Total liabilities............................ 66,063 61,245
------- -------
Redeemable equity
Company-obligated mandatorily redeemable
preferred securities of subsidiaries holding
solely company subordinated notes
Non-convertible............................... 982 485
Convertible................................... 245 244
------- -------
Total redeemable equity...................... 1,227 729
------- -------
Shareholders' equity
Convertible preferred stock (shares issued and
outstanding: 2,323,722)........................ 85 -
Common stock (shares issued: 283,738,546;
283,734,425; outstanding: 241,170,903;
242,104,405)................................... 572 532
Net unrealized gains on securities.............. 627 1,296
Retained earnings............................... 6,420 6,071
Cost of treasury stock.......................... (860) (790)
------- -------
Total shareholders' equity................... 6,844 7,109
------- -------
Total liabilities and equity................. $74,134 $69,083
======= =======
See Notes to Financial Statements.
21
<PAGE>
AMERICAN GENERAL CORPORATION
Consolidated Statement of Shareholders' Equity
(In millions, except per share data)
For the years ended December 31,
--------------------------------
1996 1995 1994
------- ------- -------
Convertible preferred stock
Balance at beginning of year............... $ - $ - $ -
Issuance for acquisition................... 85 - -
------- ------- -------
Balance at end of year................... 85 - -
------- ------- -------
Common stock
Balance at beginning of year............... 532 528 527
Treasury shares issued for acquisition
and other................................. 40 4 1
------- ------- -------
Balance at end of year................... 572 532 528
------- ------- -------
Net unrealized gains (losses) on securities
Balance at beginning of year............... 1,296 (1,092) 880
Change during year......................... (669) 2,388 (1,972)
------- ------- -------
Balance at end of year................... 627 1,296 (1,092)
------- ------- -------
Retained earnings
Balance at beginning of year............... 6,071 5,705 5,370
Net income................................. 653 650 609
Cash dividends (per share, excluding USLIFE)
Preferred ($1.94)......................... (5) - -
Common ($1.30; $1.24; $1.16).............. (299) (285) (272)
Other...................................... - 1 (2)
------- ------- -------
Balance at end of year................... 6,420 6,071 5,705
------- ------- -------
Cost of treasury stock
Balance at beginning of year............... (790) (807) (506)
Share repurchases.......................... (187) (45) (270)
Issuance for acquisition................... 104 - -
Expiration (issuance) of put contracts..... - 47 (43)
Issuance under employee benefit plans...... 13 15 12
------- ------- -------
Balance at end of year................... (860) (790) (807)
------- ------- -------
Shareholders' equity
Balance at end of year................... $ 6,844 $ 7,109 $ 4,334
======= ======= =======
See Notes to Financial Statements.
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<PAGE>
AMERICAN GENERAL CORPORATION
Consolidated Statement of Common Stock Activity
(In thousands of shares)
For the years ended December 31,
---------------------------------
1996 1995 1994
------- ------- -------
Shares issued
Balance at beginning of year............... 283,734 283,731 283,729
Conversion of convertible preferred stock.. 5 3 2
------- ------- -------
Balance at end of year.................... 283,739 283,734 283,731
======= ======= =======
Treasury shares
Balance at beginning of year............... (41,630) (42,795) (31,863)
Share repurchases.......................... (5,273) (1,417) (9,778)
Issuance for acquisition................... 3,740 - -
Expiration (issuance) of put contracts..... - 1,700 (1,700)
Issuance under employee benefit plans...... 595 882 546
------- ------- -------
Balance at end of year.................... (42,568) (41,630) (42,795)
======= ======= =======
Outstanding shares
Balance at end of year..................... 241,171 242,104 240,936
======= ======= =======
See Notes to Financial Statements.
23
<PAGE>
AMERICAN GENERAL CORPORATION
Consolidated Statement of Cash Flows
(In millions)
For the years ended December 31,
--------------------------------
1996 1995 1994
-------- ------- -------
Operating activities
Net income.................................. $ 653 $ 650 $ 609
Reconciling adjustments
Insurance and annuity liabilities.......... 1,351 1,535 1,135
Deferred policy acquisition costs and
cost of insurance purchased............... (87) (235) (171)
Provision for finance receivable losses 417 574 214
Loss on assets held for sale............... 145 - -
Realized investment (gains) losses......... (64) (72) 50
Investment write-downs and reserves........ 2 54 123
Other, net................................. (138) (116) (281)
-------- ------- -------
Net cash provided by operating
activities.............................. 2,279 2,390 1,679
-------- ------- -------
Investing activities
Investment purchases........................ (10,678) (8,558) (8,766)
Investment dispositions and repayments...... 9,280 6,102 6,701
Finance receivable originations and
purchases.................................. (5,339) (5,786) (5,827)
Finance receivable principal payments
received................................... 4,886 4,927 4,323
Acquisitions................................ (106) (920) -
Investment in Western National Corporation (126) - (274)
Other, net.................................. (295) 75 (175)
-------- ------- -------
Net cash used for investing activities (2,378) (4,160) (4,018)
-------- ------- -------
Financing activities
Retirement Services and Life Insurance
Policyholder account deposits.............. 2,996 3,365 3,143
Policyholder account withdrawals........... (2,876) (2,134) (1,593)
-------- ------- -------
Total Retirement Services and Life
Insurance................................ 120 1,231 1,550
-------- ------- -------
Consumer Finance
Net increase (decrease) in short-term
debt...................................... 641 (287) 953
Long-term debt issuances................... 124 1,577 1,136
Long-term debt redemptions................. (610) (914) (846)
-------- ------- -------
Total Consumer Finance.................... 155 376 1,243
-------- ------- -------
Corporate
Net increase (decrease) in short-term
debt...................................... (145) (421) 403
Long-term debt issuances................... - 433 100
Long-term debt redemptions................. (50) (100) (347)
Issuance of preferred securities of
subsidiaries.............................. 495 729 -
Dividends on common and preferred stock (304) (285) (272)
Common stock repurchases................... (191) (40) (271)
Other, net................................. (32) (24) (36)
-------- ------- -------
Total Corporate........................... (227) 292 (423)
-------- ------- -------
Net cash provided by financing
activities.............................. 48 1,899 2,370
-------- ------- -------
Net increase (decrease) in cash............... (51) 129 31
Cash at beginning of year..................... 227 98 67
-------- ------- -------
Cash at end of year........................... $ 176 $ 227 $ 98
======== ======= =======
See Notes to Financial Statements.
24
<PAGE>
AMERICAN GENERAL CORPORATION
Notes to Financial Statements
1
SIGNIFICANT ACCOUNTING POLICIES
1.1 Preparation of Financial Statements
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) and include the accounts of
American General Corporation (American General) and its subsidiaries
(collectively, the company). All material intercompany transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements have been restated to include
the results of operations, financial position, and cash flows of USLIFE
Corporation (USLIFE) under the pooling of interests method of accounting in
conjunction with the acquisition of USLIFE (See Note 2.5).
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
disclosures of contingent assets and liabilities. Ultimate results could differ
from these estimates.
1.2 Investments
Fixed Maturity and Equity Securities. All fixed maturity and equity securities
are classified as available-for-sale and recorded at fair value. After
adjusting related balance sheet accounts as if unrealized gains (losses) had
been realized, the net adjustment is recorded in net unrealized gains (losses)
on securities within shareholders' equity. If the fair value of a security
classified as available-for-sale declines below its cost and this decline is
considered to be other than temporary, the security is reduced to its fair
value, and the reduction is recorded as a realized loss.
Mortgage Loans. Mortgage loans are reported at amortized cost, net of an
allowance for losses. The allowance for losses covers all non-performing loans
and loans for which management has a concern based on its assessment of risk
factors, such as potential non-payment or non-monetary default. The allowance
is based on a loan-specific review and a formula that reflects past results and
current trends.
Loans for which the company determines that collection of all amounts due under
the contractual terms is not probable are considered to be impaired. The
company generally looks to the underlying collateral for repayment of impaired
loans. Therefore, impaired loans are considered to be collateral dependent and
are reported at the lower of amortized cost or fair value of the underlying
collateral, less estimated cost to sell.
Policy Loans. Policy loans are reported at unpaid principal balance.
Investment Real Estate. Investment real estate is classified as held for
25
<PAGE>
investment or available for sale, depending on management's intent and the
property's stage of completion.
Real estate held for investment is carried at cost, less accumulated
depreciation and impairment write-downs. Impairment losses are recorded
whenever circumstances indicate that a property might be impaired and the
estimated undiscounted future cash flows of the property are less than its
carrying amount. In such event, the property is written down to fair value,
determined by market prices, third party appraisals, or expected future cash
flows discounted at market rates. Any write-down is recognized as a realized
loss, and a new cost basis is established.
Real estate available for sale is carried at the lower of cost (less accumulated
depreciation, if applicable) or fair value less cost to sell. Changes in
estimates of fair value less cost to sell are recognized as realized gains
(losses) through a valuation allowance.
Investment Income. Interest on fixed maturity securities and performing and
restructured mortgage loans is recorded as income when earned and is adjusted
for any amortization of premium or discount. Interest on delinquent mortgage
loans is recorded as income when received. Dividends are recorded as income on
ex-dividend dates.
Realized Investment Gains (Losses). Realized investment gains (losses) are
recognized using the specific identification method.
1.3 Finance Receivables
Finance Charges. Finance charges on discounted receivables and interest on
interest-bearing receivables are recognized as revenue using the interest
method. The accrual of revenue is suspended when contractual payments are not
received for four consecutive months for loans and retail sales contracts, and
for six months for private label receivables. Extension fees and late charges
are recognized as revenue when received.
Direct costs incurred to originate loans, net of non-refundable points and fees,
are deferred and included in the carrying amount of the related loans. The
amount deferred is recognized as an adjustment to finance charge revenues, using
the interest method over the lesser of the contractual term or the expected life
based on prepayment experience. If loans are prepaid before all related
deferred amounts are recognized, any remaining deferral is recognized at the
date of prepayment.
Losses on Finance Receivables. The company's policy is to charge off finance
receivables, except those secured by real estate, for which minimal or no
collections have been made for six months. For loans secured by real estate,
foreclosure proceedings are initiated when four monthly installments are past
due. At foreclosure, the carrying amount of a loan in excess of the fair value
of the underlying real estate is charged off.
The allowance for finance receivable losses is maintained at a level that is
considered adequate to absorb anticipated losses in the existing portfolio.
26
<PAGE>
Management considers numerous factors including economic conditions, portfolio
composition, and loss and delinquency experience in its periodic evaluations of
the portfolio.
1.4 Deferred Policy Acquisition Costs (DPAC)
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life contracts, insurance investment
contracts, and participating life insurance contracts is charged to expense in
relation to the estimated gross profits of those contracts. DPAC associated
with all other insurance contracts is charged to expense over the premium-paying
period or as the premiums are earned over the life of the contract.
DPAC is adjusted for the impact on estimated future gross profits as if net
unrealized gains (losses) on securities had been realized at the balance sheet
date. The impact of this adjustment is included in net unrealized gains
(losses) on securities within shareholders' equity.
The company reviews the carrying amount of DPAC on at least an annual basis.
Management considers estimated future gross profits or future premiums, expected
mortality, interest earned and credited rates, persistency, and expenses in
determining whether the carrying amount is recoverable.
1.5 Cost of Insurance Purchased (CIP)
The cost assigned to certain acquired subsidiaries' insurance contracts in force
at the acquisition date is reported as CIP. Interest is accreted on the
unamortized balance of CIP at rates of 6.0% to 8.5%. CIP is charged to expense
and adjusted for the impact of net unrealized gains (losses) on securities in
the same manner as DPAC. The company reviews the carrying amount of CIP on at
least an annual basis using the same methods used to evaluate DPAC.
1.6 Acquisition-Related Goodwill
Acquisition-related goodwill is charged to expense in equal amounts, generally
over 20 to 40 years. The carrying amount of goodwill is regularly reviewed for
indicators of impairment in value, which in the view of management are other
than temporary, including unexpected or adverse changes in the following: (1)
the economic or competitive environments in which the company operates, (2)
profitability analyses, (3) cash flow analyses, and (4) the fair value of the
relevant subsidiary. The company determines the subsidiary's fair value based
on an independent appraisal. If facts and circumstances suggest that a
subsidiary's goodwill is impaired, the company assesses the fair value of the
underlying business and reduces goodwill to an amount that results in the book
value of the subsidiary approximating fair value.
1.7 Separate Accounts
Separate Accounts are assets and liabilities associated with certain contracts,
principally annuities, for which the investment risk lies solely
27
<PAGE>
with the contract holder. Therefore, the company's liability for these accounts
equals the value of the account assets. Investment income, realized investment
gains (losses), and policyholder account deposits and withdrawals related to
Separate Accounts are excluded from the consolidated statements of income and
cash flows. Assets held in Separate Accounts are primarily shares in mutual
funds, which are carried at fair value, based on the quoted net asset value per
share.
1.8 Insurance and Annuity Liabilities
Substantially all of the company's insurance and annuity liabilities relate to
long-duration contracts. The contracts normally cannot be changed or canceled
by the company during the contract period.
For interest-sensitive life and insurance investment contracts, reserves equal
the sum of the policy account balance and deferred revenue charges. Reserves
for other contracts are based on estimates of the cost of future policy
benefits. Reserves are determined using the net level premium method. Interest
assumptions used to compute reserves ranged from 2.0% to 13.5% at
December 31, 1996.
1.9 Premium Recognition
Most receipts for annuities and interest-sensitive life insurance policies are
classified as deposits instead of revenues. Revenues for these contracts
consist of mortality, expense, and surrender charges. Policy charges that
compensate the company for future services are deferred and recognized over the
period earned, using the same assumptions used to amortize DPAC.
For limited-payment contracts, net premiums are recorded as revenue, and the
difference between the gross premium received and the net premium is deferred
and recognized in a constant relationship to insurance in force. For all other
contracts, premiums are recognized when due.
1.10 Participating Life Insurance
Participating life insurance accounted for 10% and 9% of life insurance in force
at December 31, 1996 and 1995, respectively, and 11% of premiums and other
considerations in 1996 and 1995. The company's participating life insurance
business was not significant prior to 1995.
The portion of earnings allocated to participating policyholders which cannot be
expected to inure to shareholders is excluded from net income and shareholders'
equity. Dividends to be paid on participating life insurance contracts are
determined annually based on estimates of the contracts' earnings. Policyholder
dividends were $94 million for 1996 and $92 million for 1995.
1.11 Reinsurance
The company limits its exposure to loss on any single insured to $1.5 million by
ceding additional risks through reinsurance contracts with other insurers.
28
<PAGE>
If the reinsurer could not meet its obligations, the company would reassume the
liability. The company diversifies its risk of reinsurance loss by using a
number of reinsurers that have strong claims-paying ability ratings. The
likelihood of a material reinsurance liability being reassumed by the company is
considered to be remote.
A receivable is recorded for benefits paid and insurance liabilities related to
contracts that have been reinsured. Reinsurance recoveries on ceded reinsurance
contracts were $166 million, $176 million, and $133 million during 1996, 1995,
and 1994, respectively. The cost of reinsurance is recognized over the life of
the reinsured policies using assumptions consistent with those used to account
for the underlying policies.
Reinsurance premiums included in premiums and other considerations were as
follows:
(In millions) 1996 1995 1994
-------- -------- --------
Direct premiums and other considerations $ 3,427 $ 3,107 $ 2,462
Reinsurance assumed 125 155 101
Reinsurance ceded (308) (293) (189)
-------- -------- --------
Premiums and other considerations $ 3,244 $ 2,969 $ 2,374
======== ======== ========
1.12 Derivatives Related to Investments and Debt
The company's use of derivative financial instruments is generally limited to
interest rate and currency swap agreements. The difference between amounts paid
and received on swap agreements is recorded on an accrual basis as an adjustment
to interest expense or investment income, as appropriate, over the periods
covered by the agreements. The related amount payable to or receivable from
counterparties is included in other liabilities or assets.
The fair values of swap agreements are recognized in the consolidated balance
sheet if they hedge investments carried at fair value or if they hedge
anticipated purchases of such investments. In this event, changes in the fair
value of a swap agreement are reported in net unrealized gains (losses) on
securities included in shareholders' equity, consistent with the treatment of
the related investment security. The fair values of swap agreements hedging
debt are not recognized in the consolidated balance sheet.
For swap agreements hedging anticipated debt issuances or investment purchases,
the net swap settlement amount or unrealized gain or loss is deferred and
included in the measurement of the anticipated transaction when it occurs.
Swap agreements generally have terms of two to ten years. Any gain or loss from
early termination of a swap agreement is deferred and amortized into income over
the remaining term of the related debt or investment. If the underlying debt or
investment is extinguished or sold, any related gain or loss on swap agreements
is recognized in income.
29
<PAGE>
1.13 Interest Capitalized or Paid
Essentially all interest incurred on land development projects is capitalized
until the property is substantially complete and ready for its intended use.
Interest capitalized was $12 million, $17 million, and $18 million in 1996,
1995, and 1994, respectively.
Interest paid, excluding interest capitalized, was as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Corporate $ 162 $ 186 $ 150
Consumer Finance 497 502 407
1.14 Stock-Based Compensation
The company's stock and incentive plans provide for the award of stock options,
restricted stock awards, performance awards, and incentive awards to key
employees and directors. Stock options constitute the majority of such awards.
Expense related to stock options is measured as the excess of the market price
of the stock at the measurement date over the exercise price. The measurement
date is the first date on which both the number of shares that the employee is
entitled to receive and the exercise price are known. Under the company's stock
option plans, no expense is recognized since the market price equals the
exercise price at the measurement date.
Under an alternative accounting method, compensation expense arising from stock-
based compensation plans would be measured at the estimated fair value of the
stock-based award at the date of grant. Use of this method would not have a
material impact on net income or earnings per share.
1.15 Income Taxes
Deferred tax assets and liabilities are established for temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities, at the enacted tax rates expected to be in effect when the
temporary differences reverse. The effect of a tax rate change is recognized in
income in the period of enactment. State income taxes are included in income
tax expense.
A valuation allowance for deferred tax assets is provided if some portion of the
deferred tax asset may not be realized. An increase or decrease in a valuation
allowance that results from a change in circumstances that causes a change in
judgment about the realizability of the related deferred tax asset is included
in income. A change related to fluctuations in fair value of available-for-sale
securities is included in net unrealized gains (losses) on securities in
shareholders' equity.
1.16 Earnings Per Share
Earnings per share is computed by dividing earnings available to common
shareholders by average common shares outstanding. Earnings available to common
shareholders is computed by increasing net income by the amount of net dividends
on convertible preferred securities of subsidiaries. Average common shares
outstanding includes common share equivalents from the assumed
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<PAGE>
conversion or exercise of convertible preferred securities, stock options, and
shares subject to put contracts.
Average common shares outstanding, including common share equivalents, used in
computing earnings per share were 252,218,161 in 1996; 247,403,757 in 1995; and
247,640,771 in 1994.
2
ACQUISITIONS
2.1 Independent Life
On February 29, 1996, American General acquired Independent Insurance Group,
Inc., the holding company of The Independent Life and Accident Insurance Company
(Independent Life) for $362 million. The purchase price consisted of $139
million cash, 3.7 million shares of American General common stock, and 2.3
million shares of American General 7% Convertible Preferred Stock. The
acquisition was accounted for using the purchase method, and the results of
operations of Independent Life are included in the consolidated statement of
income from the date of acquisition.
Non-cash activities related to the acquisition of Independent Life that are not
reflected in the consolidated statement of cash flows for the year ended
December 31, 1996 were as follows:
(In millions)
Fair value of assets acquired, excluding $33 million cash $ 1,358
Liabilities assumed (1,029)
Issuance of treasury shares (138)
Issuance of preferred stock (85)
---------
Net cash paid $ 106
=========
2.2 Franklin Life
On January 31, 1995, American General acquired American Franklin Company (AFC),
the holding company of The Franklin Life Insurance Company (Franklin Life), for
$1.17 billion. The purchase price consisted of $920 million cash and a $250
million cash dividend paid by AFC to its former parent prior to closing. The
permanent financing of this acquisition, including related issue costs,
consisted of $150 million of short-term debt, $300 million of senior long-term
fixed-rate debt, and $502 million of non-convertible preferred securities. The
acquisition was accounted for using the purchase method, and the results of
operations of Franklin Life are included in the consolidated statement of income
from the date of acquisition.
2.3 Western National
On December 23, 1994, American General acquired a 40% investment in Western
National Corporation (Western National), the holding company of Western National
Life Insurance Company, through the acquisition of 24.9 million shares of common
stock for $274 million cash. On September 17, 1996, American General increased
its equity ownership to 46.2% on a fully diluted basis
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<PAGE>
through the purchase of 7.3 million shares of participating convertible
preferred stock for $126 million cash. The acquisitions were recorded on an
equity basis, using the purchase method. The total purchase price was
approximately $162 million greater than the underlying net assets of Western
National. Substantially all of this difference is attributed to goodwill, which
will be amortized over 20 years. At December 31, 1996, the market value of the
shares held by American General was $620 million.
2.4 Home Beneficial Life
On December 23, 1996, American General announced a definitive agreement to
acquire Home Beneficial Corporation, the holding company of Home Beneficial Life
Insurance Company (Home Beneficial Life), for total consideration of $665
million, or $39 per share, in cash or American General common stock. The amount
of cash will be limited to a minimum of 25% and a maximum of 50% of the total
consideration. The acquisition will be accounted for using the purchase method.
The transaction, which is subject to approval by Home Beneficial Corporation
shareholders and to requisite regulatory approvals, is expected to close by
March 31, 1997.
2.5 USLIFE
On June 17, 1997, American General completed the merger of USLIFE in an all-
stock transaction. American General issued 39.0 million shares of common stock
(with a market value of approximately $1.8 billion), or 1.1069 shares in
exchange for each USLIFE common share. The exchange ratio was based on the
transaction price of $49 per USLIFE common share divided by an average trading
price of American General common stock for a period prior to closing.
The acquisition was accounted for using the pooling of interests method of
accounting and, accordingly, American General's consolidated financial
statements and notes have been restated to include the results of operations,
financial position, and cash flows of USLIFE. Assets, net unrealized gains
(losses) on securities, and shareholders' equity for the individual entities at
December 31 were as follows:
(In millions) 1996 1995
-------- --------
Assets
American General $ 66,254 $ 61,152
USLIFE 7,880 7,931
-------- --------
Total $ 74,134 $ 69,083
======== ========
Net unrealized gains (losses) on securities
American General $ 559 $ 1,100
USLIFE 68 196
-------- --------
Total $ 627 $ 1,296
======== ========
Shareholders' equity
American General $ 5,621 $ 5,801
USLIFE 1,223 1,308
-------- --------
Total $ 6,844 $ 7,109
======== ========
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Revenues and net income for the individual entities were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Revenues
American General $ 6,888 $ 6,496 $ 4,841
USLIFE 1,806 1,740 1,651
-------- -------- --------
Total $ 8,694 $ 8,236 $ 6,492
======== ======== ========
Net income
American General $ 577/(a)/ $ 545/(c)/ $ 513/(d)/
USLIFE 76/(b)/ 105 96
-------- -------- --------
Total $ 653 $ 650 $ 609
======== ======== ========
/(a)/ Includes aftertax charge of $93 million related to loss on assets held
for sale.
/(b)/ Includes aftertax charge of $32 million for write-down of group
business.
/(c)/ Includes aftertax charge of $140 million for adjustment to the allowance
for finance receivable losses.
/(d)/ Includes net realized investment losses and real estate reserves of
$115 million.
In connection with the merger, pretax merger-related costs reflecting change in
control costs, consisting primarily of severance and supplemental retirement
plan payments to USLIFE executives payable under various USLIFE plans in effect
prior to the merger ($179 million), and transaction costs including expenses for
investment bankers, attorneys, accountants, and proxy printing costs ($22
million) were identified and reported in second quarter 1997. At December 31,
1996, USLIFE had outstanding letters of credit with three banks totaling $122
million. These letters of credit represented contingent obligations to fund
certain of the severance and retirement plans in the event of a change in
control.
3
INVESTMENTS
3.1 Fixed Maturity and Equity Securities
Valuation. Amortized cost and fair value of fixed maturity and equity
securities at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
---------------- ------------ ------------- --------------
(In millions) 1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $ 28,770 $ 25,574 $ 1,209 $ 2,177 $ (153) $ (40) $ 29,826 $ 27,711
Below investment grade 1,655 1,584 56 76 (15) (10) 1,696 1,650
Mortgage-backed 10,401 11,019 315 650 (74) (6) 10,642 11,663
Foreign governments 863 854 80 104 (1) (1) 942 957
U.S. government 737 657 57 93 (3) - 791 750
States/political subdivisions 336 307 15 21 (1) - 350 328
Redeemable preferred stocks 105 154 4 8 (1) (1) 108 161
-------- -------- ------- ------- ------- ------- -------- --------
Total fixed maturity securities $ 42,867 $ 40,149 $ 1,736 $ 3,129 $ (248) $ (58) $ 44,355 $ 43,220
======== ======== ======= ======= ======= ======= ======== ========
Equity securities $ 111 $ 144 $ 27 $ 50 $ (1) $ (3) $ 137 $ 191
======== ======== ======= ======= ======= ======= ======== ========
</TABLE>
33
<PAGE>
Net Unrealized Gains (Losses). Net unrealized gains (losses) on fixed maturity
and equity securities included in shareholders' equity at December 31 were as
follows:
(In millions) 1996 1995
------- --------
Gross unrealized gains $ 1,763 $ 3,179
Gross unrealized losses (249) (61)
DPAC and CIP fair value adjustments (598) (1,208)
Deferred income taxes (348) (707)
Equity in Western National's net unrealized gains 59 93
------- --------
Net unrealized gains on securities $ 627 $ 1,296
======= ========
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<PAGE>
Maturities. The contractual maturities of fixed maturity securities at December
31, 1996 were as follows:
Amortized Fair
(In millions) Cost Value
--------- -------
Fixed maturity securities, excluding
mortgage-backed securities, due
In one year or less $ 724 $ 731
In years two through five 5,902 6,120
In years six through ten 14,214 14,689
After ten years 11,626 12,173
Mortgage-backed securities 10,401 10,642
-------- --------
Total fixed maturity securities $ 42,867 $ 44,355
======== ========
Actual maturities may differ from contractual maturities since borrowers may
have the right to call or prepay obligations. Corporate requirements and
investment strategies may result in the sale of investments before maturity.
3.2 Mortgage Loans on Real Estate
Diversification. Diversification of the geographic location and type of
property collateralizing mortgage loans reduces the concentration of credit
risk. For new loans, the company generally requires loan-to-value ratios of 75%
or less, based on management's credit assessment of the borrower. At December
31, the mortgage loan portfolio was distributed as follows:
(In millions) 1996 1995
-------- --------
Geographic distribution
Atlantic $ 1,393 $ 1,372
Pacific and Mountain 967 970
Central 952 1,091
Allowance for losses (84) (96)
-------- --------
Total mortgage loans $ 3,228 $ 3,337
======== ========
Property type
Retail $ 1,132 $ 1,146
Office 1,082 1,117
Industrial 539 552
Apartments 352 380
Other 207 238
Allowance for losses (84) (96)
-------- --------
Total mortgage loans $ 3,228 $ 3,337
======== ========
Allowance. The allowance for mortgage loan losses was as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Balance at January 1 $ 96 $ 101 $ 124
Net additions 2 28 11
Deductions (14) (33) (34)
-------- -------- --------
Balance at December 31 $ 84 $ 96 $ 101
======== ======== ========
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<PAGE>
Impaired Loans. Impaired mortgage loans on real estate and related interest
income were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Impaired loans
With allowance* $ 100 $ 104 $ 152
Without allowance 6 22 4
-------- -------- --------
Total impaired loans $ 106 $ 126 $ 156
======== ======== ========
Average investment $ 116 $ 141 $ 119
======== ======== ========
Interest income
Accrual basis loans $ 9 $ 3 $ 4
Cash basis loans - 7 3
-------- -------- --------
Total interest income $ 9 $ 10 $ 7
======== ======== ========
* Represents gross amounts before allowance for losses of $16 million, $29
million, and $42 million, respectively.
3.3 Investment Real Estate
The allowance for investment real estate losses was as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Balance at January 1 $ 55 $ 349 $ 273
Net additions 3 21 124
Deductions (24) (315)* (48)
-------- -------- --------
Balance at December 31 $ 34 $ 55 $ 349
======== ======== ========
* Includes $243 million reclassification to reduce cost basis.
3.4 Investment Income
Investment income was as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Fixed maturity securities $ 3,274 $ 3,093 $ 2,501
Mortgage loans on real estate 339 346 330
Other 260 225 221
-------- -------- --------
Gross investment income 3,873 3,664 3,052
-------- -------- --------
Investment expense - real estate 69 51 69
Investment expense - other 31 29 28
-------- -------- --------
Total investment expense 100 80 97
-------- -------- --------
Net investment income $ 3,773 $ 3,584 $ 2,955
======== ======== ========
The carrying amount of investments that produced no investment income during
1996 was less than 1% of total invested assets. The ultimate disposition of
these investments is not expected to have a material effect on the company's
consolidated results of operations and financial position.
Derivative financial instruments related to investment securities did not have a
material effect on net investment income in any of the three years ended
December 31, 1996.
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<PAGE>
3.5 Realized Investment Gains (Losses)
Realized investment gains (losses) were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Fixed maturity securities
Gross gains $ 107 $ 87 $ 77
Gross losses (107) (65) (208)
-------- -------- --------
Total fixed maturity
securities - 22 (131)
-------- -------- --------
Equity securities
Gross gains 53 21 14
Gross losses (2) (1) (7)
-------- -------- --------
Total equity securities 51 20 7
-------- -------- --------
Mortgage loans on real estate 5 (34) 10
Investment real estate 2 (11) (101)
Other 4 21 42
-------- -------- --------
Realized investment
gains (losses) $ 62 $ 18 $ (173)
======== ======== ========
3.6 Cash Flows from Investing Activities
Uses of cash for investment purchases were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Fixed maturity securities $ 10,118 $ 7,954 $ 8,516
Other 560 604 250
-------- -------- --------
Total $ 10,678 $ 8,558 $ 8,766
======== ======== ========
Sources of cash from investment dispositions and repayments were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Fixed maturity securities
Sales $ 6,164 $ 2,779 $ 2,731
Repayments of mortgage-backed
securities 885 686 1,833
Maturities 621 491 319
Calls 677 1,095 1,003
Mortgage loans 593 402 469
Equity securities 167 177 100
Other 173 472 246
-------- -------- --------
Total $ 9,280 $ 6,102 $ 6,701
======== ======== ========
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<PAGE>
4
FINANCE RECEIVABLES
4.1 Detail of Finance Receivables
Finance receivables, which are reported net of unearned finance charges, at
December 31 were as follows:
(In millions) 1996 1995
-------- --------
Consumer loans
Real estate $ 3,734 $ 2,904
Other 2,516 2,765
-------- --------
Total consumer loans 6,250 5,669
-------- --------
Retail sales finance
Retail sales contracts 998 1,240
Private label 377 943
-------- --------
Total retail sales finance 1,375 2,183
-------- --------
Credit cards - 558
-------- --------
Total finance receivables 7,625 8,410
Allowance for losses (395) (492)
-------- --------
Finance receivables, net $ 7,230 $ 7,918
======== ========
At December 31, 1996, 49% of finance receivables were secured by real estate.
4.2 Contractual Maturities and Collections
Contractual maturities of finance receivables at December 31, 1996 were as
follows:
After
(In millions) 1997 1998 1999 2000 2001 2001
------ ------ ------- ------- ------ ------
Maturities $2,406 $1,441 $ 892 $ 498 $ 312 $2,076
Contractual maturities are not a forecast of future cash collections. A
substantial portion of finance receivables may be renewed, converted, or repaid
prior to maturity.
Cash collections of principal and collections as a percentage of average finance
receivable balances were as follows:
(In millions) 1996 1995
-------- --------
Consumer loans
Cash collections $ 2,653 $ 2,588
% of average balances 47% 46%
Retail sales finance
Cash collections $ 1,777 $ 1,885
% of average balances 93% 86%
Credit cards
Cash collections $ 456 $ 454
% of average balances 86% 90%
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<PAGE>
4.3 Geographic Concentration
The geographic concentration of finance receivables at December 31 was as
follows:
(In millions) 1996 1995
-------- --------
California $ 698 $ 887
North Carolina 672 738
Florida 535 627
Ohio 454 440
Illinois 453 490
Indiana 398 455
Virginia 350 392
Georgia 312 373
Other 3,753 4,008
-------- --------
Total finance receivables $ 7,625 $ 8,410
======== ========
4.4 Assets Held for Sale
In fourth quarter 1996, the company reached a decision to offer for sale $875
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520 million of bank credit card receivables and $355 million of
private label loans issued in prior years to finance purchases of home satellite
dishes. Accordingly, these receivables and an associated allowance for losses
were reclassified to assets held for sale at December 31, 1996.
The company has hired an outside advisor to market the portfolios. Based on
negotiations with prospective purchasers subsequent to year end, the company
determined that a write-down of $145 million ($93 million aftertax) was
necessary to reduce the carrying amount of the assets held for sale to net
realizable value, after considering related expenses.
4.5 Allowance for Finance Receivable Losses
The allowance for finance receivable losses was as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Balance at January 1 $ 492 $ 226 $ 184
Provision for finance
receivable losses 417 574 214
Charge offs, net of recoveries (444) (308) (172)
Reclassified to assets held for
sale (70) - -
-------- -------- --------
Balance at December 31 $ 395 $ 492 $ 226
======== ======== ========
39
<PAGE>
5
DEFERRED POLICY ACQUISITION COSTS (DPAC)
DPAC at December 31, and the components of the change for the years then ended,
were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Balance at January 1 $ 2,343 $ 3,356 $ 2,193
Deferrals 604 646 544
Accretion of interest 130 193 181
Amortization (559)* (559) (535)
Effect of net unrealized gains
(losses) on securities 460 (1,302) 960
Other (24) 9 13
-------- -------- --------
Balance at December 31 $ 2,954 $ 2,343 $ 3,356
======== ======== ========
* Includes $37 million write-down of USLIFE group business.
On January 29, 1996, USLIFE discontinued new sales of its traditional indemnity
group major medical and related products. In subsequent months, the company
experienced an unexpected deterioration in persistency on this business, with
lapse rates approaching 60%. Lapse rates on all group business ranged from 23%
to 35% for the years 1991 through 1995. Additionally, the discontinued business
did not lapse uniformly in terms of quality. Healthier groups lapsed more
rapidly, leading to an overall deterioration in the quality of the block.
The experience on the discontinued business during the first half of 1996
resulted in a reevaluation of related DPAC and insurance liabilities. Based on
this reevaluation, the company recorded a pretax charge of $50 million,
consisting of a $37 million write-down of DPAC and a $13 million increase in
insurance and annuity liabilities.
6
COST OF INSURANCE PURCHASED (CIP)
CIP at December 31, and the components of the change for the years then ended,
were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Balance at January 1 $ 504 $ 168 $ 186
Additions from acquisitions 233 658 -
Accretion of interest 76 54 16
Amortization (178) (100) (34)
Effect of net unrealized gains
(losses) on securities 109 (270) -
Other 11 (6) -
-------- -------- --------
Balance at December 31 $ 755 $ 504 $ 168
======== ======== ========
CIP amortization, net of accretion, expected to be recorded in each of the next
five years is $82 million, $74 million, $67 million, $61 million, and $56
million.
7
DEBT
7.1 Long-Term Debt
Long-term debt at December 31 was as follows:
(In millions) 1996 1995
-------- --------
Corporate
6.3% - 10%, through 2025 $ 1,471 $ 1,519
Consumer Finance
4.7% - 10%, through 2009 4,499 4,980
Derivative financial instruments related to debt securities did not have a
material effect on the weighted-average borrowing rate or reported interest
expense in any of the three years ended December 31, 1996.
40
<PAGE>
7.2 Long-Term Debt Maturities
Scheduled maturities of long-term debt and sinking fund requirements for each of
the next five years are as follows:
(In millions) 1997 1998 1999 2000 2001
------ ----- ----- ----- -----
Corporate $ 133 $ 217 $ 100 $ 350 $ 5
Consumer Finance 1,220 825 594 938 42
Current maturities of long-term debt expected to be refinanced with short-term
debt are included in short-term debt.
One $150 million debt issue of the Consumer Finance segment that is scheduled to
mature after 2001 is redeemable in 1999 at par, at the option of the holders.
7.3 Short-Term Debt
The weighted-average interest rates on short-term borrowings at December 31 were
as follows:
1996 1995
---- ----
Corporate 5.9% 5.9%
Consumer Finance 5.6 5.8
7.4 Credit Facilities
American General and certain subsidiaries use commercial paper to meet short-
term funding requirements. Unsecured bank credit facilities are used to support
commercial paper borrowings.
At December 31, 1996, American General and certain of its subsidiaries
maintained unsecured committed credit facilities of $3.5 billion with a total of
51 domestic and foreign banks. Interest rates are based on a money market index,
and annual commitment fees range from five to nine basis points. There were no
borrowings under these facilities at December 31, 1996.
In addition, USLIFE maintained unsecured committed credit facilities of $303
million with four domestic banks at December 31, 1996. Interest rates are based
on a money market index, and annual commitment fees range from eight to twenty-
five basis points. Borrowings under these facilities were $200 million at
December 31, 1996.
41
<PAGE>
8
GUARANTY FUND ASSESSMENTS
Information about state guaranty fund assessments at December 31, and related
activity for the years then ended, were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Expense, included in operating
costs and expenses $ 14 $ 34 $ 19
Liability for anticipated
assessments 54 58 34
Receivable for expected recoveries
against future premium taxes 56 57 33
The 1996 liability was estimated by the company using the latest information
available from the National Organization of Life and Health Insurance Guaranty
Associations. Although the amount represents the company's best estimate of its
liability, this estimate may change in the future. Additionally, changes in
state laws could decrease the amount recoverable against future premium taxes.
9
INCOME TAXES
9.1 Tax Expense
Components of income tax expense were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Current
Federal $ 403 $ 353 $ 325
State 8 6 19
-------- -------- --------
Total current 411 359 344
Deferred (24) (18) (4)
-------- -------- --------
Income tax expense* $ 387 $ 341 $ 340
======== ======== ========
* Excludes tax benefit of $21 million in 1996 and $11 million in 1995 related to
preferred securities of subsidiaries.
A reconciliation between the federal income tax rate and the effective tax rate
follows:
(In millions) 1996 1995 1994
-------- -------- --------
Federal income tax rate 35% 35% 35%
Tax-exempt investment income (2) (2) (2)
State taxes, net 1 - 2
Acquisition-related goodwill 1 1 1
Other, net 1 - -
-------- -------- --------
Effective tax rate 36% 34% 36%
======== ======== ========
42
<PAGE>
9.2 Tax Liabilities
Income tax liabilities at December 31 were as follows:
(In millions) 1996 1995
-------- --------
Current tax receivable $ (14) $ (57)
-------- --------
Deferred, applicable to
Net income 745 736
Net unrealized gain (losses)
on securities 347 708
-------- --------
Net deferred tax liabilities 1,092 1,444
-------- --------
Income tax liabilities $ 1,078 $ 1,387
======== ========
Components of deferred tax liabilities and assets at December 31 were as
follows:
(In millions) 1996 1995
-------- --------
Deferred tax liabilities, applicable to
Basis differential of investments $ 514 $ 1,026
DPAC and CIP 984 815
Prepaid pension expense 81 73
Other 530 517
-------- --------
Total deferred tax liabilities 2,109 2,431
-------- --------
Deferred tax assets, applicable to
Policy reserves (542) (544)
Finance receivables (183) (138)
Other (338) (347)
-------- --------
Gross deferred tax assets (1,063) (1,029)
Valuation allowance 46 42
-------- --------
Total deferred assets, net (1,017) (987)
-------- --------
Net deferred tax liabilities $ 1,092 $ 1,444
======== ========
The deferred tax asset valuation allowance at December 31, 1996 and 1995 was
related to operating loss carryovers not expected to be utilized. At December
31, 1996, the company had operating loss carryovers for federal income tax
purposes of approximately $97 million which were available to offset future
taxable income through 2011. The operating loss carryovers are associated with
recent acquisitions and, therefore, their use is subject to separate return year
limitations.
A portion of life insurance income earned prior to 1984 is not taxable unless it
exceeds certain statutory limitations or is distributed as dividends. Such
income, accumulated in policyholders' surplus accounts, totaled $831 million at
December 31, 1996. At current corporate rates, the maximum amount of tax on
such income is approximately $291 million. Deferred income taxes on these
accumulations have not been recorded because no distributions are expected.
9.3 Tax Return Examinations
American General and the majority of its subsidiaries file a consolidated
federal income tax return. The Internal Revenue Service (IRS) has completed
examinations of the company's returns through 1987. In addition, the tax
returns of recently acquired companies are also being examined. All issues,
except the one being litigated as described in Note 17.2, have been settled
within the amounts previously provided in the consolidated financial statements.
The IRS is currently examining the company's tax returns for 1988 through 1992.
43
<PAGE>
9.4 Taxes Paid
Income taxes paid were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Federal $ 364 $ 325 $ 470
State 10 13 22
10
REDEEMABLE EQUITY
10.1 Preferred Securities of Subsidiaries
During 1996 and 1995, two wholly owned subsidiaries and a subsidiary trust of
American General (collectively, subsidiaries) were created for the purpose of
issuing preferred securities. The sole assets of these subsidiaries are Junior
Subordinated Debentures (Subordinated Debentures) issued by American General and
U.S. Treasury bonds. These subsidiaries have no independent operations. The
Subordinated Debentures are eliminated in the consolidated financial statements.
The interest terms and other payment dates of the company's Subordinated
Debentures held by the subsidiaries correspond to those of the subsidiaries'
preferred securities. American General's obligations under the Subordinated
Debentures and related agreements, when taken together, constitute a full and
unconditional guarantee of payments due on the preferred securities. The
Subordinated Debentures are redeemable at the option of the company. Upon such
event, the preferred securities are redeemable on a proportionate basis.
44
<PAGE>
Information about the preferred securities and the assets held by the issuing
subsidiaries at December 31, 1996 was as follows:
<TABLE>
<CAPTION>
American American American American
General General General General
Institutional Capital, Capital, Delaware,
(In millions, Capital A L.L.C. L.L.C. L.L.C.
except share data) -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Preferred securities
Securities issued and
outstanding 500,000 8,600,000 11,500,000 5,000,000
Par value $500 $215 $287 $250
Dividends paid - $17 $24 $15
Date issued 12/4/96 8/29/95 6/5/95 6/1/95
Earliest/mandatory
redemption dates 2045/2045 2000/2025/(a)/ 2000/2025/(a)/ 2003/(b)//2025
Assets of issuing subsidiary
Subordinated Debentures
Principal $516 $269 $360 $313
Interest rate 7.57% 8.125% 8.45% 6%
Mandatory redemption date 2045 2025/(a)/ 2025/(a)/ 2025
U.S. Treasury bonds - $3 $4 $3
</TABLE>
/(a)/ Subject to possible extension to 2044.
/(b)/ Under certain circumstances, may be redeemed in 2000.
The preferred securities issued by American General Delaware, L.L.C. are each
convertible into 1.2288 shares of American General common stock at any time at
the option of the holders. This conversion ratio is equivalent to a conversion
price of $40.69 per share of common stock. Beginning in 2000, the company has
the option to cause the conversion rights to expire, provided that American
General's common stock is trading above $49 per share and certain other
conditions are met.
10.2 Common Stock Subject to Put Contracts
During 1994, American General entered into put option contracts giving the
holders the right, but not the obligation, to sell to American General a total
of 1.7 million shares of its common stock at fixed prices ranging from $25.88 to
$29.25 per share. All such options expired during 1995, and the related
redeemable equity of $47 million was reclassified to shareholders' equity.
11
CAPITAL STOCK
11.1 Classes of Capital Stock
American General has two classes of capital stock: preferred stock ($1.50 par
value, 60 million shares authorized) that may be issued in series with rights to
be determined by the board of directors, and common stock ($.50 par value, 300
million shares authorized). The only series of preferred stock outstanding is
the 7% Convertible Preferred Stock. At December 31, 1996, approximately 13.1
million shares of common stock were reserved for issuance, related to the
conversion of convertible preferred securities and preferred stock and the
exercise of stock options.
45
<PAGE>
11.2 Convertible Preferred Stock
During 1996, American General issued 2.3 million shares of 7% Convertible
Preferred Stock in connection with the acquisition of Independent Life. 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.
Each preferred share is convertible into .8264 share of American General common
stock at any time at the option of the holder. Beginning in 2000, the company
may, at its option, convert the preferred stock into a minimum of .8264 share of
common stock. Each preferred share is mandatorily convertible into one share of
common stock in 2001.
11.3 Preferred Share Purchase Rights
One preferred share purchase right is attached to each share of common stock.
These rights will become exercisable only upon the occurrence of certain events
related to a change in control of American General. Each right will entitle the
holder to purchase 1/100 of a share of American General's Series A Junior
Participating Preferred Stock. All rights expire in 1999 unless extended or
redeemed.
12
STOCK AND INCENTIVE PLANS
Shares issuable under outstanding stock options at December 31, and the
components of the change for the years then ended, were as follows:
Average
(Shares in thousands) 1996 Exercise Price 1995 1994
------ ---------------- ------ ------
Balance at January 1 4,093 $24.11 3,957 3,288
Granted 1,115 33.85/(a)/ 811 981
Exercised/(b)/ (503) 24.12 (596) (207)
Forfeited (206) 32.67 (75) (62)
Expired (1) 32.00 (4) (43)
----- ------ ----- -----
Balance at December 31 4,498 $26.14 4,093 3,957
===== ====== ===== =====
Exercisable at December 31 3,116 $23.98 2,804 3,226
===== ====== ===== =====
/(a)/ Average fair value at grant date, estimated using the Black-Scholes option
valuation model, was $6.79.
/(b)/ Average exercise price of options exercised in 1995 and 1994 was $19.89
and $17.26, respectively.
Options may not be exercised within at least six months of, nor after 10 years
from, the date of grant. At December 31, 1996, the exercise price of all
options outstanding ranged from $14.45 to $37.50. The average remaining
contractual life of options outstanding is six years.
Shares available for issuance under American General's stock and incentive plans
at December 31, 1996, 1995, and 1994 totaled 5.7 million, 6.7 million, and 7.6
million, respectively.
46
<PAGE>
13
BENEFIT PLANS
13.1 Pension Plans
The company has non-contributory defined benefit pension plans covering most
employees. Pension benefits are based on the participant's compensation and
length of credited service. The company's funding policy is to contribute
annually no more than the maximum deductible for federal income tax purposes.
Equity and fixed maturity securities were 54% and 31%, respectively, of the
plans' assets at the plans' most recent balance sheet dates. Additionally, 11%
of plan assets were invested in the general investment account of an American
General subsidiary through a deposit administration insurance contract.
The pension plans have purchased annuity contracts from American General
subsidiaries to provide benefits for certain retirees. During 1996, 1995, and
1994, these contracts provided $49 million, $42 million, and $38 million,
respectively, for retiree benefits.
The components of pension expense and underlying assumptions were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Service cost (benefits earned) $ 22 $ 16 $ 19
Interest cost 46 37 30
Actual return on plan assets (128) (134) (9)
Net amortization and deferrals 56 63 (54)
-------- -------- --------
Pension expense (income) $ (4) $ (18) $ (14)
======== ======== ========
Weighted-average discount rates
on benefit obligation 7.50-7.60% 7.00-7.25% 8.25-8.50%
Rates of increase in
compensation levels 4.00-6.00 4.00-6.00 4.00-6.00
Expected long-term rates
of return on plan assets 7.50-10.00 7.50-10.00 7.50-10.00
The funded status of the plans and the prepaid pension expense included in other
assets at December 31 were as follows:
(In millions) 1996 1995
-------- --------
Accumulated benefit obligation* $ 591 $ 492
Effect of increase in
compensation levels 71 69
-------- --------
Projected benefit obligation 662 561
Plan assets at fair value 976 796
-------- --------
Plan assets at fair value in
excess of projected benefit
obligation 314 235
Other unrecognized items, net (139) (63)
-------- --------
Prepaid pension expense $ 175 $ 172
======== ========
* Over 88% vested.
47
<PAGE>
13.2 Postretirement Benefits Other Than Pensions
The company has life, medical, supplemental major medical, and dental plans for
certain retired employees and agents. Most plans are contributory, with retiree
contributions adjusted annually to limit employer contributions to predetermined
amounts. The company has reserved the right to change or eliminate these
benefits at any time.
The life plans are fully insured. A portion of the retiree medical and dental
plans are funded through a voluntary employees' beneficiary association (VEBA);
the remainder are unfunded and self-insured. All of the retiree medical and
dental plans' assets held in the VEBA were invested in readily marketable
securities at its most recent balance sheet date.
Postretirement benefit expense in 1996, 1995, and 1994 was $8 million, $7
million, and $6 million, respectively.
48
<PAGE>
The plans' combined funded status and the accrued postretirement benefit cost
included in other liabilities at December 31 were as follows:
(In millions) 1996 1995
--------- --------
Actuarial present value of
benefit obligation
Retirees $ 71 $ 56
Active plan participants 43 40
--------- --------
Accumulated postretirement
benefit obligation (APBO) 114 96
Plan assets at fair value 3 2
APBO in excess of plan assets
at fair value 111 94
Other unrecognized items, net 38 28
--------- --------
Accrued benefit expense $ 149 $ 122
========= ========
Weighted-average discount
rates on benefit obligation 7.50-7.60% 7.00-7.25%
49
<PAGE>
14
STATUTORY ACCOUNTING
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity of insurance companies. In
addition, state regulators may permit statutory accounting practices that differ
from prescribed practices. The use of such permitted practices by American
General's insurance subsidiaries did not have a material effect on their
statutory equity at December 31, 1996.
Statutory accounting practices differ from GAAP. Significant differences for
American General's insurance subsidiaries were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Statutory net income $ 677 $ 452 $ 539
Change in DPAC and CIP 110 234 169
Investment valuation differences 72 60 (77)
Policy reserve adjustments (42) (95) (85)
Other, net (36) 69 (1)
-------- -------- --------
GAAP net income $ 781 $ 720 $ 545
======== ======== ========
Statutory equity $ 2,921 $ 2,540 $ 2,254
Asset valuation reserve 566 517 357
Investment valuation differences* 1,258 2,787 (1,685)
DPAC and CIP 3,698 2,834 3,513
Deferred income taxes (1,133) (1,464) (726)
Policy reserve adjustments 409 344 621
Acquisition-related goodwill 292 303 315
Other, net 233 270 60
-------- -------- --------
GAAP equity $ 8,244 $ 8,131 $ 4,709
======== ======== ========
* Primarily GAAP unrealized gains (losses) on securities.
50
<PAGE>
15
DERIVATIVE FINANCIAL INSTRUMENTS
15.1 Related to Investment Securities
Derivative financial instruments related to investment securities at December 31
were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Interest rate swap agreements
to pay fixed rate
Notional amount $ 60 $ 45 -
Average receive rate 6.19% 5.82% -
Average pay rate 6.42 6.41 -
Interest rate swap agreements
to receive fixed rate
Notional amount $ 54 $ 24 $ 9
Average receive rate 7.00% 7.03% 6.92%
Average pay rate 5.91 6.82 6.96
Currency swap agreements
(receive U.S. $/pay Canadian $)
Notional amount (in U.S. $) $ 99 $ 72 -
Average exchange rate 1.57 1.62 -
15.2 Related to Debt
Derivative financial instruments related to debt at December 31 were as follows:
(In millions) 1996 1995 1994
-------- -------- --------
Swap agreements to pay fixed rate
Corporate
Notional amount - - $ 150
Average receive rate - - 6.10%
Average pay rate - - 7.54
Consumer Finance
Notional amount $ 540 $ 590 $ 390
Average receive rate 5.72% 6.10% 4.64%
Average pay rate 8.08 8.28 8.77
During 1995, swap agreements hedging anticipated debt issuances were terminated,
and related settlement costs were deferred and are being recognized as an
increase to interest expense over the terms of the related debt. At December
31, 1996, the remaining deferred costs were $12 million.
16
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and fair values for certain of the company's financial
instruments at December 31 are presented below. Care should be exercised in
drawing conclusions based on fair value, since (1) the fair values presented do
not include the value associated with all of the company's assets and
liabilities, and (2) the reporting of investments at fair value without a
corresponding
51
<PAGE>
revaluation of related policyholder liabilities can be misinterpreted.
<TABLE>
<CAPTION>
1996 1995
------------------------------ ------------------------------
(In millions) Fair Value Carrying Amount Fair Value Carrying Amount
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity and equity
securities $ 44,492 $ 44,492 $ 43,411 $ 43,411
Mortgage loans on real
estate 3,290 3,228 3,456 3,337
Policy loans 1,986 2,011 1,892 1,887
Finance receivables, net 7,230 7,230 7,918 7,918
Assets held for sale 667 667 - -
Liabilities
Insurance investment
contracts 26,876 28,331 27,129 27,508
Short-term debt 3,762 3,762 3,266 3,266
Long-term debt
Corporate 1,538 1,471 1,648 1,519
Consumer Finance 4,608 4,499 5,225 4,980
</TABLE>
The following methods and assumptions were used to estimate the fair value of
financial instruments.
Fixed Maturity and Equity Securities. Fair values of fixed maturity and equity
securities were based on quoted market prices, where available. For investments
not actively traded, fair values were estimated using values obtained from
independent pricing services or, in the case of some private placements, by
discounting expected future cash flows using a current market rate applicable to
yield, credit quality, and average life of the investments.
Mortgage Loans on Real Estate. Fair value of mortgage loans was estimated
primarily using discounted cash flows, based on contractual maturities and risk-
adjusted discount rates.
Policy Loans. Fair value of policy loans was estimated using discounted cash
flows and actuarially determined assumptions, incorporating market rates.
Finance Receivables, Net. Fair value of finance receivables, which approximated
carrying amount, was estimated using projected cash flows, discounted at the
weighted-average rates currently being offered for similar finance receivables.
Assets Held for Sale. Fair value of assets held for sale approximated the
carrying amount.
Insurance Investment Contracts. Fair value of insurance investment contracts
was estimated using cash flows discounted at market interest rates.
Debt. Fair value of short-term debt approximated the carrying amount. Fair
value of long-term debt was estimated using cash flows discounted at current
borrowing rates.
Off-Balance-Sheet Derivative Financial Instruments. Had the company elected to
52
<PAGE>
terminate its interest rate swap agreements related to debt at December 31, 1996
and 1995, it would have paid $30 million and $50 million, respectively. These
fair values were based on estimates obtained from the individual counterparties.
17
RESTRICTIONS AND CONTINGENCIES
17.1 Subsidiary Dividend Restrictions
American General's insurance subsidiaries are restricted by state insurance laws
as to the amounts they may pay as dividends without prior approval from their
respective state insurance departments. Certain non-insurance subsidiaries are
similarly restricted in the payment of dividends by long-term debt and credit
agreements. At December 31, 1996, the amount of dividends available to American
General from subsidiaries during 1997 not limited by such restrictions is
approximately $750 million.
17.2 Legal Proceedings
Two real estate subsidiaries of American General 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 million in compensatory damages and for
$189 million in punitive damages. On September 17, 1993, a Texas state district
court reduced the previously awarded punitive damages by $60 million, resulting
in a reduced judgment in the amount of $176 million plus post-judgment interest.
On January 29, 1996, the Texas First Court of Appeals rendered a decision that
affirmed the trial court judgment and held both companies liable to pay the
punitive damages. The company intends to continue 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 Statement of
Financial Accounting Standards 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 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 representative 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 9, 1996, for the portion of the contingency related
to the representative case. The government has appealed 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.
The company is party to various other lawsuits and proceedings arising in the
53
<PAGE>
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 will ultimately 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.
18
BUSINESS SEGMENTS
18.1 Nature of Operations
The company reports the results of its business operations in three segments.
Retirement Services. The Variable Annuity Life Insurance Company (VALIC)
provides tax-deferred retirement annuities and employer-sponsored retirement
plans to employees of educational, health care, public sector, and other not-
for-profit organizations. VALIC markets products nationwide through exclusive
sales representatives. VALIC holds the strongest claims-paying ability ratings
available in the life insurance industry from three rating agencies.
Consumer Finance. American General Finance, Inc. and its subsidiaries (AGF)
provide consumer and home equity loans and other credit-related products through
branch offices in 41 states, Puerto Rico, and the U.S. Virgin Islands. AGF also
operates financing programs through retail merchants. AGF holds debt ratings
that are among the strongest in the consumer finance industry.
Life Insurance. American General's life insurance companies provide life
insurance and annuity products throughout the United States. All American Life
Insurance Company, America General Life Insurance Company, Franklin Life
Insurance Company, Old Line Life Insurance Company, United States Life Insurance
Company, and USLIFE Credit Life Insurance Company offer a broad range of
insurance and annuity products to a variety of income levels through independent
producers and general agents. American General Life and Accident Insurance
Company concentrates on meeting the basic life insurance needs of individuals
with modest incomes through a career agency distribution system. These
companies hold claims-paying ability ratings that are among the strongest in the
life insurance industry.
18.2 Segment Results
Results of each segment include earnings from its business operations and
54
<PAGE>
earnings on that amount of equity considered necessary to support its business.
Business segment information was as follows:
<TABLE>
<CAPTION>
Revenues Income before Taxes Assets
-------------------------- ----------------------------------- -------------------
(In millions) 1996 1995 1994 1996 1995 1994 1996 1995
------- ------- ------- -------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retirement
Services $1,742 $ 1,655 $ 1,537 $ 341 $ 305 $ 282 $30,257 $ 27,084
Consumer Finance 1,726 1,790 1,491 55/(a)/ 115/(b)/ 392 9,440 9,466
Life Insurance 5,088 4,665 3,559 828/(c)/ 735 582 32,738 31,317
------- ------- ------- -------- ------- ------- ------- --------
Total business
segments 8,556 8,110 6,587 1,224 1,155 1,256 72,435 67,867
------- ------- ------- -------- ------- ------- ------- --------
Corporate 205 217 184 (156)/(d)/ (167)/(d)/ (134)/(d)/ 2,012 1,532
Realized
investment
gains (losses) 62 18 (173) 62 18 (173) - -
Intersegment
eliminations (129) (109) (106) (50) 4 - (313) (316)
------- ------- ------- -------- ------- ------- ------- --------
Consolidated $8,694 $8,236 $6,492 $ 1,080/(e)/ $ 1,010/(e)/ $ 949 $74,134 $ 69,083
======= ======= ======= ======== ======= ======= ======= ========
</TABLE>
/(a)/ Includes $145 million loss on assets held for sale.
/(b)/ Includes $266 million increase in allowance for finance receivable losses.
/(c)/ Includes $50 million write-down of USLIFE group business.
/(d)/ Primarily interest on corporate debt.
/(e)/ Before dividends on preferred securities of subsidiaries.
55
<PAGE>
19
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In millions, 1996 1995
except per share --------------------------------------- ----------------------------------
data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums and
other consider-
ations $ 820 $ 820 $ 824 $ 780 $ 768 $ 756 $ 752 $ 693
Net investment
income 961 943 945 924 928 920 894 842
Total revenues 2,190 2,177 2,180 2,147 2,123 2,106 2,070 1,937
Insurance and
annuity
benefits 1,057 1,052 1,057 1,052 1,073 1,038 1,032 942
Operating costs
and expenses 364 349 360 332 348 318 310 299
Provision for
finance
receivable
losses 116 90 102 109 313/(c)/ 114 75 72
Total benefits
and expenses 2,028/(a)/ 1,843 1,911/(b)/ 1,832 2,053 1,799 1,746 1,628
Net realized
investment gains
(losses) 3 17 2 18 4 5 1 2
Net income 95/(a)/ 199 163/(b)/ 196 37/(c)/ 207 206 200
Per common share
Net income $ .39/(a)/ $ .80 $ .65/(b)/ $ .79 $ .15/(c)/ $ .84 $ .84 $ .82
Dividends
paid/(e)/ .32 .33 .32 .33 .31 .31 .31 .31
Market price
High 41 3/4 38 3/4 37 5/8 37 7/8 39 1/8 38 7/8 35 1/2 33 1/4
Low 35 3/4 34 32 7/8 33 1/4 31 33 5/8 31 1/8 27 1/2
Close 40 7/8 37 3/4 36 3/8 34 1/2 34 7/8 37 3/8 33 3/4 32 1/4
</TABLE>
<TABLE>
<CAPTION>
(In millions, 1994
except per share --------------------------------------
data) 4th 3rd 2nd 1st
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums and
other consider-
ations $ 614 $ 594 $ 606 $ 560
Net investment
income 752 739 732 732
Total revenues 1,547 1,679 1,661 1,605
Insurance and
annuity
benefits 838 804 800 787
Operating costs
and expenses 264 266 254 251
Provision for
finance
receivable
losses 67 59 45 43
Total benefits
and expenses 1,457 1,395 1,376 1,315
Net realized
investment gains
(losses) (116)/(d)/ (1) 1 1
Net income 57 185 182 185
Per common share
Net income $ .24 $ .75 $ .74 $ .73
Dividends
paid/(e)/ .29 .29 .29 .29
Market price
High 28 7/8 30 1/2 29 3/8 29 5/8
Low 25 5/8 26 7/8 24 7/8 25 1/2
Close 28 1/4 27 1/8 27 5/8 27 7/8
</TABLE>
/(a)/ Includes $145 million pretax ($93 million aftertax or $.37 per share) loss
on assets held for sale.
/(b)/ Includes $50 million pretax ($32 million aftertax or $.13 per share)
write-down of USLIFE group business.
/(c)/ Includes $216 million pretax ($140 million aftertax or $.57 per share)
adjustment to the allowance for finance receivable losses.
/(d)/ Results primarily from capital gains offset program.
/(e)/ Excludes dividends paid by USLIFE prior to the merger.
56
<PAGE>
AMERICAN GENERAL CORPORATION
Selected Financial Data
The following selected financial data is derived from the consolidated financial
statements of the company. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included or incorporated by reference herein.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
(In millions, except per share data) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 8,694 $ 8,236 $ 6,492 $ 6,430 $ 6,131
Income before cumulative effect of
accounting changes 653/(a)/ 650/(b)/ 609/(c)/ 347/(d)/ 602
Income per common share before
cumulative effect of accounting changes 2.63/(a)/ 2.65/(b)/ 2.46/(c)/ 1.36/(d)/ 2.36
Assets 74,134/(e)/ 69,083/(e)/ 53,300/(e)/ 51,003/(e)/ 45,837
Debt
Corporate 2,102 2,295 2,381 2,200 2,514
Consumer Finance 7,630 7,470 7,090 5,843 5,484
Redeemable equity 1,227/(f)/ 729/(f)/ 47 - -
Shareholders' equity 6,844/(e)/ 7,109/(e)/ 4,334/(e)/ 6,274/(e)/ 5,630
Cash dividends per common share(g) 1.30 1.24 1.16 1.10 1.04
</TABLE>
- ---------------------------
/(a)/ Includes $93 million ($.37 per share) aftertax loss on consumer finance
assets held for sale and $32 million ($.13 per share) aftertax write-down
of USLIFE group business.
/(b)/ Includes $140 million ($.57 per share) aftertax adjustment to the
allowance for finance receivable losses.
/(c)/ Includes aftertax net realized investment losses of $115 million
($.47 per share). Net realized investment gains for 1996, 1995,
1993, and 1992 were immaterial.
/(d)/ Includes $300 million ($1.18 per share) write-down of goodwill and $30
million ($.12 per share) tax rate related adjustment.
/(e)/ Includes fair value adjustment related to securities. Additional
information is included in the section "Investments - Fair Value of
Securities" in Management's Discussion and Analysis included herein.
/(f)/ Includes convertible and non-convertible preferred securities of
subsidiaries. Additional information is included in Note 10.1 of
Notes to Financial Statements included herein.
/(g)/ Excludes dividends paid by USLIFE prior to the merger.
57
<PAGE>
AMERICAN GENERAL CORPORATION
Schedule I - Summary of Investments - Other than Investments in Affiliates
(In millions)
At December 31, 1996
--------------------------------
Amount
Cost Shown in
or Consolidated
Amortized Fair Balance
Type of Investment Cost Value Sheet
- ------------------ --------- -------- ------------
Fixed maturity securities
Bonds and notes
U.S. government obligations........ $ 737 $ 791 $ 791
States and political subdivisions.. 336 350 350
Foreign governments................ 863 942 942
Mortgage-backed securities......... 10,401 10,642 10,642
Public utilities................... 4,973 5,193 5,193
All other corporate................ 25,452 26,329 26,329
Redeemable preferred stocks......... 105 108 108
------- ------- -------
Total fixed maturity securities..... 42,867 44,355 44,355
------- ------- -------
Equity securities
Common stocks....................... 22 27 27
Perpetual preferred stocks.......... 89 110 110
------- ------- -------
Total equity securities........... 111 137 137
------- ------- -------
Mortgage loans on real estate*....... 3,228 3,228
Investment real estate*
Investment properties............... 515 515
Acquired in satisfaction of debt.... 111 111
Policy loans......................... 2,011 2,011
Other long-term investments*......... 210 210
Short-term investments............... 265 265
------- -------
Total investments................. $49,318 $50,832
======= =======
- --------------
* Net of applicable allowance for losses. See Schedule V included herein.
58
<PAGE>
AMERICAN GENERAL CORPORATION
Schedule II - Condensed Financial Information of Registrant
Statement of Income of American General Corporation (Parent Only)
(In millions)
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Revenues
Dividends - affiliated......................... $ 464 $ 445 $ 459
Interest income - affiliated................... 120 130 33
Net realized investment gains (losses)......... 1 (1) (3)
Other income
Affiliated.................................... 39 36 36
Other......................................... 2 6 3
----- ----- -----
Total revenues............................... 626 616 528
----- ----- -----
Expenses
Operating costs and expenses
Affiliated.................................... 10 7 8
Other......................................... 72 77 66
Interest expense
Affiliated*................................... 81 46 11
Other......................................... 123 156 110
----- ----- -----
Total expenses............................... 286 286 195
----- ----- -----
Income before income tax benefit and equity in
undistributed net income of subsidiaries....... 340 330 333
Income tax benefit.............................. 34 35 43
Equity in undistributed net income of
subsidiaries (net of dividends paid to parent). 279 285 233
----- ----- -----
Net income................................... $ 653 $ 650 $ 609
===== ===== =====
- ---------------
* Includes $71 million in 1996 and $36 million in 1995 related to subordinated
debentures issued in conjunction with the issuances of preferred securities
of subsidiaries. Additional information is included in Note 10.1 of Notes to
Financial Statements included herein.
59
<PAGE>
AMERICAN GENERAL CORPORATION
Schedule II - Condensed Financial Information of Registrant (Continued)
Balance Sheet of American General Corporation (Parent Only)
(In millions)
At December 31,
-----------------
1996 1995
---- ----
Assets
Investments
Subsidiaries, at equity........................... $8,181 $8,018
Other............................................. 8 35
Indebtedness from subsidiaries..................... 1,555 1,473
Cash............................................... - 1
Other.............................................. 90 115
------ ------
Total assets.................................... $9,834 $9,642
====== ======
Liabilities
Short-term debt.................................... $ 153 $ 240
Long-term debt/(a)/
Senior/(b)/....................................... 1,182 1,180
Subordinated, held by subsidiaries/(c)/........... 1,505 993
Indebtedness to subsidiaries....................... 21 23
Federal income taxes............................... 39 28
Other.............................................. 90 69
------ ------
Total liabilities............................... 2,990 2,533
------ ------
Shareholders' equity
Convertible preferred stock........................ 85 -
Common stock....................................... 572 532
Net unrealized gains(losses) on securities/(d)/.... 627 1,296
Retained earnings.................................. 6,420 6,071
Cost of treasury stock/(e)/........................ (860) (790)
------ ------
Total shareholders' equity...................... 6,844 7,109
------ ------
Total liabilities and equity.................... $9,834 $9,642
====== ======
- ---------------------
/(a)/ The five-year schedule of maturities of debt is as follows: 1997, $133
million; 1998, $71 million; 1999, $103 million; 2000, $203 million; and
2001, $8 million.
/(b)/ The principal amount of American General senior notes held by subsidiaries
was $10 million at December 31, 1996 and 1995.
/(c)/ Includes $1,458 million in 1996 and $943 million in 1995 of subordinated
debentures issued in conjunction with the issuances of preferred
securities of subsidiaries. Additional information is included in Note
10.1 of Notes to Financial Statements included herein.
/(d)/ Includes fair value adjustment related to securities. Additional
information is included in the section "Investments - Fair Value of
Securities" in Management's Discussion and Analysis included herein.
/(e)/ Includes 26,235,814 shares at a cost of $354 million in 1996 and
26,155,760 shares at a cost of $347 million in 1995 which are held by
subsidiaries.
60
<PAGE>
AMERICAN GENERAL CORPORATION
Schedule II - Condensed Financial Information of Registrant (Continued)
Statement of Cash Flows of American General Corporation (Parent Only)
(In millions)
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Operating activities
Net income ..................................... $ 653 $ 650 $ 609
Reconciling adjustments
Equity in undistributed net income of
subsidiaries (net of dividends paid to parent) (279) (285) (233)
Other, net..................................... 54 4 27
----- ------ -----
Net cash provided by operating activities..... 428 369 403
----- ------ -----
Investing activities
Net (increase) decrease in indebtedness from
subsidiaries................................... (82) (694) 1
Capital contributions to subsidiaries........... (311) (368) (91)
Return of capital from subsidiaries............. 53 113 7
Acquisition..................................... (106) - -
Net (increase) decrease in other investments ... 48 31 (34)
Net increase (decrease) in indebtedness to
subsidiaries................................... (2) (12) 8
Other, net...................................... (11) (4) (2)
----- ------ -----
Net cash used for investing activities........ (411) (934) (111)
----- ------ -----
Financing activities
Net increase (decrease) in short-term debt...... (90) (405) 324
Long-term debt issuances........................ 516 1,376 100
Long-term debt redemptions...................... - (100) (209)
Dividends on common and preferred stock......... (271) (254) (243)
Common stock repurchases........................ (181) (35) (264)
Other, net...................................... 8 (16) -
----- ------ -----
Net cash provided by (used for) financing
activities................................... (18) 566 (292)
----- ------ -----
Net increase (decrease) in cash.................. (1) 1 -
Cash at beginning of year........................ 1 - -
----- ------ -----
Cash at end of year........................... $ - $ 1 $ -
===== ====== =====
61
<PAGE>
AMERICAN GENERAL CORPORATION
Schedule III - Supplementary Insurance Information
(In millions)
<TABLE>
<CAPTION>
At December 31, For the Years Ended December 31,
-------------------------- --------------------------------------------------------------------
Amortization
Premiums of
Deferred Insurance and Insurance Deferred
Policy and Other Net and Policy Other
Acquisition Annuity Consider- Investment Annuity Acquisition Operating
Segment Costs /(a)(b)/ Liabilities/(c)/ tions Income/(d)/ Benefits Costs/(b)(e)/ Expenses
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Retirement Services $ 558 $21,067 $ 78 $1,652 $1,244 31 $ 126
Consumer Finance 11 463 202 66 103 9 11
Life Insurance 3,140 24,550 2,964 2,016 2,867/(g)/ 453/(g)/ 940
Other/(f)/ - (58) - 39 4 1 1,170
------ ------- ------ ------ ------ ---- ------
Consolidated $3,709 $46,022 $3,244 $3,773 $4,218 $494 $2,247
====== ======= ====== ====== ====== ==== ======
1995
Retirement Services $ 183 $20,147 $ 50 $1,597 $1,204 $ 17 $ 129
Consumer Finance 12 494 217 63 116 9 12
Life Insurance 2,652 23,139 2,701 1,872 2,761 386 783
Other/(f)/ - (62) 1 52 4 - 1,090
------ ------- ------ ------ ------ ---- ------
Consolidated $2,847 $43,718 $2,969 $3,584 $4,085 $412 $2,014
====== ======= ====== ====== ====== ==== ======
1994
Retirement Services $ 910 $18,656 $ 37 $1,492 $1,134 $ 13 $ 108
Consumer Finance 10 480 175 57 98 6 11
Life Insurance 2,602 15,975 2,161 1,346 1,994 353 630
Other/(f)/ 2 (63) 1 60 3 - 631
------ ------- ------ ------ ------ ---- ------
Consolidated $3,524 $35,048 $2,374 $2,955 $3,229 $372 $1,380
====== ======= ====== ====== ====== ==== ======
</TABLE>
- -----------------
/(a)/ Includes fair value adjustment related to securities. Additional
information is included in the section "Investments - Fair Value of
Securities" in Management's Discussion and Analysis included herein.
/(b)/ Includes cost of insurance purchased.
/(c)/ Includes unearned premiums, other policy claims and benefits payable, and
other policyholder funds, which are not significant relative to
insurance and annuity liabilities.
/(d)/ Represents earnings and related expenses on those investments considered
necessary to support the segment's business operations.
/(e)/ Net of accretion of interest.
/(f)/ Represents Consumer Finance non-insurance operations, Corporate
operations, and intersegment eliminations.
/(g)/ Insurance and annuity benefits and amortization of deferred policy
acquisition costs exclude $13 million and $37 million, respectively, for
write-down of USLIFE group business.
62
<PAGE>
AMERICAN GENERAL CORPORATION
Schedule IV - Reinsurance
(In millions)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Percentage
of
Ceded to Assumed Amount
Gross Other from Other Net Assumed
Description Amount Companies Companies Amount to Net
- -------------------------------------- --------- --------- ---------- --------- -------
1996
Life insurance in force at year end $310,567 $42,054 $23,663 $292,176 8.1%
Premiums for the year
Life insurance and annuities $ 1,802 $ 124 $ 68 $ 1,746 3.9%
Accident and health insurance 786 146 18 658 2.8
Property-liability insurance 106 18 40 128 31.0
-------- ------- ------- -------- ----
Total premiums $ 2,694 $ 288 $ 126 $ 2,532 5.0%
======== ======= ======= ======== ====
1995
Life insurance in force at year end $286,135 $30,660 $22,686 $278,161 8.2%
Premiums for the year
Life insurance and annuities $ 1,637 $ 106 $ 74 $ 1,605 4.6%
Accident and health insurance 770 169 44 645 6.8
Property-liability insurance 49 1 37 85 43.6
-------- ------- ------- -------- ----
Total premiums $ 2,456 $ 276 $ 155 $ 2,335 6.6%
======== ======= ======= ======== ====
1994
Life insurance in force at year end $228,527 $19,912 $17,906 $226,521 7.9%
Premiums for the year
Life insurance and annuities $ 1,143 $ 79 $ 63 $ 1,127 5.6%
Accident and health insurance 696 94 18 620 2.9
Property-liability insurance 52 1 20 71 28.5
-------- ------- ------- -------- ----
Total premiums $ 1,891 $ 174 $ 101 $ 1,818 5.6%
======== ======= ======= ======== ====
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
AMERICAN GENERAL CORPORATION
Schedule V - Valuation and Qualifying Accounts
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Additions
-------------------------------------
Charged
to Charged
Provision for to Charged Balance
Balance at Finance Realized to at
Beginning Receivable Investment Other Deduc- End of
Description of Year Losses Losses Accounts tions/(a)/ Year
- ---------------------------------- ----------- ------------- ---------- -------- ----------- --------
1996
Allowance for losses on:
Finance receivables $ 492 $ 417 $ - $ - $ 514/(b)/ $ 395
Mortgage loans on
real estate 96 - 2 - 14 84
Investment real estate 55 - 3 - 24 34
Other long-term
investments 48 - - 1 48 1
Valuation allowance on
deferred tax asset 42 - - 4 - 46
------ ----- ----- ----- ----- ------
Total $ 733 $ 417 $ 5 $ 5 $ 600 $ 560
====== ===== ===== ===== ===== ======
1995
Allowance for losses on:
Finance receivables $ 226 $ 574 $ - $ - $ 308 $ 492
Mortgage loans on
real estate 101 - 28 - 33 96
Investment real estate 349 - 21 - 315/(c)/ 55
Other long-term
investments 65 - 1 - 18 48
Valuation allowance on
deferred tax asset 331 - - 26/(d)/ 315 42
------ ----- ----- ----- ----- ------
Total $1,072 $ 574 $ 50 $ 26 $ 989 $ 733
====== ===== ===== ===== ===== ======
1994
Allowance for losses on:
Finance receivables $ 184 $ 214 $ - $ - $ 172 $ 226
Mortgage loans on
real estate 124 - 11 - 34 101
Investment real estate 273 - 124 - 48 349
Other long-term
investments 102 - 4 - 41 65
Valuation allowance on
deferred tax asset 16 - - 315/(e)/ - 331
------ ----- ----- ----- ----- ------
Total $ 699 $ 214 $ 139 $ 315 $ 295 $1,072
====== ===== ===== ===== ===== ======
</TABLE>
- --------------------------------
/(a)/ Resulting from write-offs of uncollectible receivables, mortgage loan
payoffs, sales of real estate, and foreclosures of real estate.
/(b)/ Includes $70 million reclassification to assets held for sale.
/(c)/ Includes $243 million reclassification to reduce cost basis.
/(d)/ Relates to operating loss carryovers not expected to be utilized charged
to deferred tax expense.
/(e)/ Relates to unrealized losses on securities charged to net unrealized
gains(losses) on securities.
64
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN GENERAL CORPORATION
We have audited the accompanying consolidated balance sheets of American General
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, common stock activity,
and cash flows for each of the three years in the period ended December 31,
1996. Our audits also included the financial statement schedules listed in the
Table of Contents at Item 5. These financial statements and schedules are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American General
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
February 14, 1997,
except for Note 2.5, as to which
the date is June 17, 1997
65
<PAGE>
Item 7. (c) Exhibits.
The following documents are filed as part of this Form 8-K.
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 21 Subsidiaries of American General Corporation
Exhibit 23 Consent of Ernst & Young LLP
66
<PAGE>
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
/s/ ELLEN H. MASTERSON
By: __________________________________
Ellen H. Masterson
Senior Vice President and
Chief Financial Officer
Dated: October 10, 1997
67
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- ----------------------------------------------------------------
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
21 Subsidiaries of American General Corporation
23 Consent of Ernst & Young LLP
68
<PAGE>
Exhibit 11
AMERICAN GENERAL CORPORATION
Computation of Earnings Per Share
(In millions, except share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Primary:
Net income available to common stock
Income before comulative effect of accounting changes $ 653 $ 650 $ 609 $ 347 $ 602
Cumulative effect of accounting changes - - - (169) -
----------- ----------- ----------- ----------- -----------
Net income available to common stock $ 653 $ 650 $ 609 $ 178 $ 602
=========== =========== =========== =========== ===========
Average shares outstanding
Common stock 242,853,420 242,797,805 247,023,309 253,611,181 254,315,022
Assumed conversion of convertible preferred stock 1,683,373 84,858 90,429 101,000 113,000
Assumed exercise of stock options 912,275 733,093 506,210 840,655 700,448
Assumed exercise of put contracts - - 3,394 - -
Assumed conversion of debentures - - - - 54,264
----------- ----------- ----------- ----------- -----------
Total 245,449,068 243,615,756 247,623,342 254,552,836 255,182,734
=========== =========== =========== =========== ===========
Earnings per share
Income before comulative effect of accounting changes $ 2.66 $ 2.67 $ 2.46 $ 1.36 $ 2.36
Cumulative effect of accounting changes - - - (0.66) -
----------- ----------- ----------- ----------- -----------
Net income available to common stock $ 2.66 $ 2.67 $ 2.46 $ 0.70 $ 2.36
=========== =========== =========== =========== ===========
Fully diluted:
Net income available to common stock
Income before comulative effect of accounting changes $ 653 $ 650 $ 609 $ 347 $ 602
Plus: Net dividends on convertible preferred securities 11 6 - - -
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of accounting changes
available to common stock 664 656 609 347 602
Cumulative effect of accounting changes - - - (169) -
----------- ----------- ----------- ----------- -----------
Net income available to common stock $ 664 $ 656 $ 609 $ 178 $ 602
=========== =========== =========== =========== ===========
Average shares outstanding
Common stock 242,853,420 242,797,805 247,023,309 253,611,181 254,315,022
Assumed conversion of convertible preferred securities
of subsidiary 6,144,016 3,602,245 - - -
Assumed conversion of convertible preferred stock 2,019,766 84,858 90,429 101,000 113,000
Assumed exercise of stock options 1,200,959 918,849 523,639 840,655 950,334
Assumed exercise of put contracts - - 3,394 - -
Assumed conversion of debentures - - - - 54,264
----------- ----------- ----------- ----------- -----------
Total 252,218,161 247,403,757 247,640,771 254,552,836 255,432,620
=========== =========== =========== =========== ===========
Earnings per share
Income before comulative effect of accounting changes $ 2.63 $ 2.65 $ 2.46 $ 1.36 $ 2.36
Cumulative effect of accounting changes - - - (0.66) -
----------- ----------- ----------- ----------- -----------
Net income available to common stock $ 2.63 $ 2.65 $ 2.46 $ 0.70 $ 2.36
=========== =========== =========== =========== ===========
</TABLE>
69
<PAGE>
Exhibit 12
AMERICAN GENERAL CORPORATION
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
($ in millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Consolidated operations:
Income before income tax expense and net dividends
on preferred securities................................... $1,080 $1,010 $ 949
Undistributed income of equity investee.................... (35) (39) -
Fixed charges deducted from income
Interest expense.......................................... 661 711 562
Implicit interest in rents................................ 21 21 19
------ ------ ------
Total fixed charges deducted from income................ 682 732 581
------ ------ ------
Earnings available for fixed charges................... $1,727 $1,703 $1,530
====== ====== ======
Fixed charges per above.................................... $ 682 $ 732 $ 581
Capitalized interest....................................... 12 17 18
------ ------ ------
Total fixed charges..................................... 694 749 599
Dividends on preferred stock and securities............. 68 30 -
------ ------ ------
Combined fixed charges and preferred stock dividends... $ 762 $ 779 $ 599
====== ====== ======
Ratio of earnings to fixed charges................... 2.49 2.27 2.56
====== ====== ======
Ratio of earnings to combined fixed charges
and preferred stock dividends...................... 2.26 2.19 2.56
====== ====== ======
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense and net dividends
on preferred securities of subsidiaries................... $1,080 $1,010 $ 949
Undistributed income of equity investee.................... (35) (39) -
Corporate fixed charges deducted from income -
corporate interest expense................................ 179 205 156
------ ------ ------
Earnings available for fixed charges................... $1,224 $1,176 $1,105
====== ====== ======
Total corporate fixed charges per above.................... $ 179 $ 205 $ 156
Capitalized interest related to real estate operations..... 11 16 18
------ ------ ------
Total corporate fixed charges........................... 190 221 174
Dividends on preferred stock and securities............. 68 30 -
------ ------ ------
Combined corporate fixed charges and preferred stock
dividends............................................. $ 258 $ 251 $ 174
====== ====== ======
Ratio of earnings to corporate fixed charges......... 6.45 5.32 6.34
====== ====== ======
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends......... 4.74 4.69 6.34
====== ====== ======
</TABLE>
70
<PAGE>
Exhibit 12 (continued)
AMERICAN GENERAL CORPORATION
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
($ in millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
American General Finance, Inc.:
Income before income tax expense........................... $ 54 $ 116 $ 392
Fixed charges deducted from income
Interest expense.......................................... 493 518 416
Implicit interest in rents................................ 12 13 11
------ ------ ------
Total fixed charges deducted from income................ 505 531 427
------ ------ ------
Earnings available for fixed charges................... $ 559 $ 647 $ 819
====== ====== ======
Ratio of earnings to fixed charges................... 1.11 1.22 1.92
====== ====== ======
</TABLE>
71
<PAGE>
Exhibit 12 (continued)
AMERICAN GENERAL CORPORATION
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
($ in millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1993 1992
----------- ----------
<S> <C> <C>
Consolidated operations:
Income before income tax expense, net dividends
on preferred securities, and cumulative effect
of accounting changes..................................... $ 753 $ 879
Undistributed income of equity investee.................... - -
Fixed charges deducted from income
Interest expense.......................................... 521 550
Implicit interest in rents................................ 19 17
------ ------
Total fixed charges deducted from income................ 540 567
------ ------
Earnings available for fixed charges................... $1,293 $1,446
====== ======
Fixed charges per above.................................... $ 540 $ 567
Capitalized interest....................................... 15 21
------ ------
Total fixed charges..................................... 555 588
Dividends on preferred stock and securities............. - -
------ ------
Combined fixed charges and preferred stock dividends... $ 555 $ 588
====== ======
Ratio of earnings to fixed charges................... 2.33 2.46
====== ======
Ratio of earnings to combined fixed charges
and preferred stock dividends...................... 2.33 2.46
====== ======
Consolidated operations, corporate fixed charges
and preferred stock dividends only:
Income before income tax expense, net dividends
on preferred securities of subsidiaries, and cumulative
effect of accounting changes.............................. $ 753 $ 879
Undistributed income of equity investee.................... - -
Corporate fixed charges deducted from income -
corporate interest expense................................ 159 168
------ ------
Earnings available for fixed charges................... $ 912 $1,047
====== ======
Total corporate fixed charges per above.................... $ 159 $ 168
Capitalized interest related to real estate operations..... 15 21
------ ------
Total corporate fixed charges........................... 174 189
Dividends on preferred stock and securities............. - -
------ ------
Combined corporate fixed charges and preferred stock
dividends............................................. $ 174 $ 189
====== ======
Ratio of earnings to corporate fixed charges......... 5.25 5.55
====== ======
Ratio of earnings to combined corporate
fixed charges and preferred stock dividends......... 5.25 5.55
====== ======
</TABLE>
72
<PAGE>
Exhibit 12 (continued)
AMERICAN GENERAL CORPORATION
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
($ in millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1993 1992
----------- ----------
<S> <C> <C>
American General Finance, Inc.:
Income before income tax expense........................... $ 337 $ 250
Fixed charges deducted from income
Interest expense.......................................... 380 398
Implicit interest in rents................................ 10 9
------ ------
Total fixed charges deducted from income................ 390 407
------ ------
Earnings available for fixed charges................... $ 727 $ 657
====== ======
Ratio of earnings to fixed charges................... 1.86 1.61
====== ======
</TABLE>
73
<PAGE>
AMERICAN GENERAL CORPORATION
Exhibit 21 - Subsidiaries of American General Corporation
The following list includes certain, but not all, of American General
Corporation's subsidiaries included in the consolidated financial statements as
of December 31, 1996. Subsidiaries of subsidiaries are indicated by
indentations.
Jurisdiction
Name of Incorporation
----------------
AGC Life Insurance Company ................................... Missouri
American General Life and Accident Insurance Company ........ Tennessee
American General Life Insurance Company ..................... Texas
American General Annuity Service Corporation .............. Texas
American General Life Insurance Company of New York ....... New York
American General Securities Incorporated .................. Texas
The Variable Annuity Life Insurance Company ............... Texas
VALIC Investment Services Company ....................... Texas
VALIC Retirement Services Company ....................... Texas
The Variable Annuity Marketing Company .................. Texas
The Franklin Life Insurance Company ......................... Illinois
The American Franklin Life Insurance Company .............. Illinois
Franklin Financial Services Corporation ................... Delaware
The Independent Life and Accident Insurance Company ......... Florida
Independent Fire Insurance Company ........................ Florida
Independent Fire Insurance Company of Florida............ Florida
Thomas Jefferson Insurance Company ...................... Florida
Allen Property Company ........................................ Delaware
American General Capital, L.L.C. .............................. Delaware
American General Capital Services, Inc. ....................... Delaware
American General Delaware, L.L.C. ............................. Delaware
American General Delaware Management Corporation .............. Delaware
American General Finance, Inc. ................................ Indiana
AGF Investment Corp. ........................................ Indiana
American General Auto Finance, Inc. ......................... Delaware
American General Finance Corporation ........................ Indiana
American General Finance Group, Inc. ...................... Delaware
American General Financial Services, Inc. ............... Delaware
The National Life and Accident Insurance Company ...... Texas
CommoLoCo, Inc. ..................................... Puerto Rico
Merit Life Insurance Co. .................................. Indiana
Yosemite Insurance Company ................................ California
American General Finance, Inc. .............................. Alabama
American General Financial Center............................ Utah
American General Mortgage and Land Development, Inc. .......... Delaware
American General Land Development, Inc. ..................... Delaware
American General Realty Advisors, Inc. ...................... Delaware
American General Property Insurance Company ................... Tennessee
American General Realty Investment Corporation ................ Texas
Bayou Property Company ........................................ Delaware
Financial Life Assurance Company of Canada .................... Canada
GPC Property Company .......................................... Delaware
Knickerbocker Corporation ..................................... Texas
USLIFE Corporation ............................................ New York
All American Life Insurance Company ......................... Illinois
The Old Line Life Insurance Company of America .............. Wisconsin
Security of America Life Insurance Company .................. Pennsylvania
The United States Life Insurance Company in the City of
New York ................................................... New York
USLIFE Advisers, Inc. ....................................... New York
74
<PAGE>
AMERICAN GENERAL CORPORATION
Exhibit 21 - Subsidiaries of American General Corporation
USLIFE Corporation (continued)
USLIFE Credit Life Insurance Company ........................ Illinois
USLIFE Equity Sales Corporation ............................. New York
USLIFE Financial Institution Marketing Group, Inc. .......... California
USLIFE Insurance Services Corporation ....................... Texas
USLIFE Realty Corporation ................................... Texas
USLIFE Systems Corporation .................................. Delaware
75
<PAGE>
EXHIBIT 23
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of American General Corporation of our report dated February 14, 1997
(except Note 2.5, as to which the date is June 17, 1997), with respect to the
consolidated financial statements and schedules of American General Corporation
included in this Current Report on Form 8-K dated October 10, 1997:
Registration
Statement
Number on Form
------------ -------
333-13407 S-8
33-39200 S-8
333-13401 S-8
33-39201 S-8
333-13395 S-8
333-23275 S-8
33-51973 S-8
2-98021 S-8
333-29383 S-8
333-29393 S-8
33-58317 S-3
33-58317-01 S-3
33-58317-02 S-3
33-51045 S-3
/s/ ERNST & YOUNG LLP
Houston, Texas
October 10, 1997
76
